-----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, PYGPWdbWKxh30ZB71plCzagHsLEHr6JI2h9dOt33KhVH/4nYWuxmQMOtpnSKdcap zKHiTLn7oYahJ23GBQIVjg== 0000912057-00-014462.txt : 20000411 0000912057-00-014462.hdr.sgml : 20000411 ACCESSION NUMBER: 0000912057-00-014462 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT BANK CORP CENTRAL INDEX KEY: 0000776901 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042870273 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09047 FILM NUMBER: 583409 BUSINESS ADDRESS: STREET 1: 230 WEST MAIN ST CITY: IONIA STATE: MI ZIP: 48846 BUSINESS PHONE: 6165279450 MAIL ADDRESS: STREET 1: 230 WEST MAIN ST CITY: IONIA STATE: MI ZIP: 48846 10-K 1 FORM 10-K United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 or / / 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: 1-9047 INDEPENDENT BANK CORP. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2870273 - ---------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 288 Union Street ROCKLAND, MASSACHUSETTS 02370 - ---------------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 878-6100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None
Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE - -------------------------------------------------------------------------------- (Title of Class) PREFERRED STOCK PURCHASE RIGHTS - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether, the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of February 29, 2000, the aggregate market value of the 11,989,067 shares of Common Stock of the Registrant issued and outstanding on such date, excluding 2,241,003 shares held by all directors and executive officers of the Registrant as group, was $125,885,204. This figure is based on the closing sale price of $10.50 per share on February 29, 2000, as reported in The Wall Street Journal on March 1, 2000. Number of shares of Common Stock outstanding as of February 29, 2000: 14,230,070 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated: (1) Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1999 are incorporated into Part II, Items 5-8 of this Form 10-K. (2) Portions of the Registrant's definitive proxy statement for its 1999 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K. ================================================================================ PART 1. ITEM 1. BUSINESS GENERAL. Independent Bank Corp. (the "Company") is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts. The Company is the sole stockholder of Rockland Trust Company ("Rockland" or "the Bank"), a Massachusetts trust company chartered in 1907. The Company is a community-oriented commercial bank. The community banking business consists of commercial banking, retail banking and trust services and is managed as a single strategic unit. The community banking business derives its revenues from a wide range of banking services, including lending activities, acceptance of demand, savings and time deposits, trust and investment management, and mortgage servicing income from investors. Rockland offers a full range of community banking services through its network of 34 banking offices, eight commercial lending centers, and two asset management and trust services offices located in the Plymouth, Norfolk, and Bristol Counties of Southeastern Massachusetts. At December 31, 1999, the Company had total assets of $1.6 billion, total deposits of $1.1 billion, stockholders' equity of $98.1 million, and 531 full-time equivalent employees. Rockland has a deep-rooted history as a community oriented commercial bank. As a result of its strong commitment to the local business community, the Bank has become one of the prominent financial institutions in Plymouth County, which represents the majority of its market area. The Bank had approximately 17.37% of the total deposits within Plymouth County as of June 30, 1999, the most recent date for which such data is available, or approximately 180% of the market share of its nearest competitor. Due to the continuing consolidation within the financial services industry, Rockland is the only remaining locally based commercial bank in Plymouth County. In 1997, Independent Capital Trust I (the "Trust") was formed for the purpose of issuing trust preferred securities (the "Trust Preferred Securities"). A total of $28.75 million of 9.28% Trust Preferred Securities were issued by the Trust and are scheduled to mature in 2027, callable at the option of the company after May 19, 2002. For further information on the Trust Preferred Securities, see footnote 14 of the Company's 1999 Annual Report to Stockholders. On January 31, 2000, Independent Capital Trust II ("the Trust II") was formed for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in $25.8 million of 11% junior subordinated debentures issued by the Company. A total of $25 million of 11% Trust Preferred Securities were issued by the Trust and are scheduled to mature in 2030, callable at the option of the Company after January 31, 2002. For further information on the Trust Preferred Securities, see Footnote 14 of the Company's 1999 Annual Report to Stockholders. The Company experienced significant growth and profitability during the early and mid-1980's as the New England economy prospered. Total assets surpassed the $1 billion level and earnings reached record levels. However, with the onset of an economic recession in New England in the late 1980's, and a resulting significant decline in local real estate values, the Company experienced serious financial problems. The quality of the loan portfolio declined sharply as nonperforming assets rose to over 10% of total assets. This deterioration required significant loan loss provisions that resulted in the Company reporting substantial losses in 1990 and 1991. After implementing a number of managerial, operational, and financial changes during 1991 and 1992, the Company returned to profitability in 1992. In December of that year, the Company issued 9.2 million shares of common stock, strengthening its capital base. For the year ended December 31, 1999, the Company recorded net income of $17.0 million, an increase of 5.6% over 1998 earnings of $16.1 million. The improved 1999 results reflect a 4.5% increase in net interest income, a 12.7% increase in non-interest income and an increase of 9.0% in non-interest expenses. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956 ("BHCA"), as amended, and as such is subject to regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve"). Rockland is subject to regulation and examination by the Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner") and the Federal Deposit Insurance Corporation ("FDIC"). The majority of Rockland's deposit accounts are insured to the maximum extent permitted by law by the Bank Insurance Fund ("BIF") which is administered by the FDIC. In 1994, the Bank purchased the deposits of three branches of a failed savings and loan association from the Resolution Trust Corporation. These deposits are insured to the maximum extent permitted by law by the Savings Association Insurance Fund ("SAIF"). In September 1999, we entered into an agreement with Fleet Financial Group, Inc., Fleet National Bank and BankBoston, N.A. to acquire 12 branches, two of which are located in Brockton, Massachusetts, which is within our primary market area, and ten of which are located on Cape Cod, Massachusetts in Barnstable County, a market contiguous to where we presently operate. The 12 branches to be acquired presently have total deposits aggregating approximately $269 million. In connection with the acquisition, we expect to acquire approximately $137 million of commercial and consumer loans. Following the acquisition, we will have approximately $1.8 billion in assets, $1.3 billion in deposits and 46 retail branches. We expect to pay a core deposit premium of approximately $32 million in connection with the acquisition. We expect that the transaction will close during the third quarter of 2000. LENDING ACTIVITIES GENERAL. The Bank's gross loan portfolio amounted to $1.0 billion on December 31, 1999, or 65.0% of total assets on that date. The Bank classifies loans as commercial, real estate, or consumer. Commercial loans consist primarily of loans to businesses for working capital and other business related purposes and floor plan financing. Real estate loans are comprised of commercial mortgages that are secured by nonresidential properties, residential mortgages that are secured primarily by owner-occupied residences, home equity loans, and mortgages for the construction of commercial and residential properties. Consumer loans consist of installment obligations, the majority of which are automobile loans, and other consumer loans. The Bank's borrowers consist of small-to-medium sized businesses and retail customers. The Bank's market area is generally comprised of Plymouth, Norfolk, and Bristol Counties located in Southeastern Massachusetts. Substantially all of the Bank's commercial and consumer loan portfolios consist of loans made to residents of and businesses located in Southeastern Massachusetts. Virtually all 2 of the real estate loans in the Bank's loan portfolio are secured by properties located within this market area. In accordance with governing banking statutes, Rockland is permitted, with certain exceptions, to make loans and commitments to any one borrower, including related entities, in the aggregate amount of not more than 20% of the Bank's stockholders' equity, or $21.1 million at December 31, 1999. Notwithstanding the foregoing, the Bank has established a more restrictive limit of not more than 15% of stockholders' equity, or $15.8 million at December 31, 1999, which limit may be exceeded with the approval of the Board of Directors. There were no borrowers whose total indebtedness aggregated or exceeded $15.8 million as of December 31, 1999. The Bank's principal earning assets are its loans. Although the Bank judges its borrowers to be creditworthy, the risk of deterioration in borrowers' abilities to repay their loans in accordance with their existing loan agreements is inherent in any lending function. Participating as a lender in the credit markets requires a strict monitoring process to minimize credit risk. This process requires substantial analysis of the loan application, an evaluation of the customer's capacity to repay according to the loan's contractual terms, and an objective determination of the value of the collateral. The Bank also utilizes the services of an independent third-party consulting firm to provide loan review services, which consist of a variety of monitoring techniques performed after a loan becomes part of the Bank's portfolio. The Bank's Controlled Asset Department is responsible for the management and resolution of nonperforming assets. In the course of resolving nonperforming loans, the Bank may choose to restructure certain contractual provisions. In order to facilitate the disposition of other real estate owned (OREO), the Bank may finance the purchase of such properties at market rates, if the borrower qualifies under the Bank's standard underwriting guidelines. LOAN PORTFOLIO COMPOSITION AND MATURITY. The following table sets forth information concerning the composition of the Bank's loan portfolio by loan type at the dates indicated.
December 31, -------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------------------------- (Dollars in Thousands) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Commercial ........ $ 137,108 13.3% $127,019 13.3% $138,541 16.2% $127,008 17.9% $121,679 19.1% Real estate: Commercial ..... 320,713 31.0 261,332 27.4 238,930 27.9 205,256 29.0 187,608 29.4 Residential .... 208,066 20.1 197,807 20.7 207,555 24.2 202,031 28.5 187,652 29.4 Construction ... 38,034 3.7 44,710 4.7 34,227 4.0 31,633 4.5 27,863 4.4 Consumer: Installment .... 322,266 31.2 315,419 33.0 227,700 26.6 132,589 18.7 102,088 16.0 Other .......... 7,766 0.7 8,656 0.9 9,849 1.1 10,140 1.4 11,076 1.7 --------- ------- -------- ------ -------- ------- -------- ------- -------- ------ Gross Loans ....... 1,033,953 100.0% 954,943 100.0% 856,802 100.0% 708,657 100.0% 637,966 100.0% --------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Unearned Discount .. 5,443 13,831 28,670 13,251 9,825 Reserve for Possible Loan Losses ..... 14,958 13,695 12,674 12,221 12,088 ------ -------- -------- -------- -------- Net Loans ......... $1,013,552 $927,417 $815,458 $683,185 $616,053 ========== ======== ======== ======== ========
3 The Company's outstanding loans grew by 9.3% in 1999, following a 13.7% increase in 1998. This loan growth, in 1999, was primarily attributable to an increase in the commercial real estate portfolio, with the remaining growth in the residential real estate and commercial portfolios. Commercial loans, increased $10.1 million, or 7.9%, in 1999, following a decrease of $11.5 million, or 8.3%, in 1998. Real estate loans comprised 54.8% of gross loans at December 31, 1999, as compared to 52.8% at December 31, 1998. Commercial real estate loans have reflected increases over the last two years of $59.4 million, or 22.7%, in 1999, and $22.4 million, or 9.4%, in 1998. These increases are indicative of the sound prospects for small and medium sized businesses in the Bank's market area. Residential real estate loans increased $10.3 million, or 5.2%, in 1999, and decreased $9.7 million, or 4.7% in 1998. The majority of residential mortgage loans originated were sold in the secondary market. During 1999, the Bank sold $51.2 million of the current production of residential mortgages as part of its overall asset/liability management. Real estate construction loans decreased $6.7 million, or 14.9%, in 1999, following an increase of $10.5 million, or 30.6, in 1998. Consumer installment loans, net of unearned discount, increased $15.2 million, or 5.1%, and $102.6 million, or 51.5%, during 1999 and 1998, respectively. The increases over the past two years are attributed to a focused effort directed at expanding banking relationships with new and used automobile dealers within the market area. As a result, strong growth was reported in 1999 and 1998. The decline in the growth rate in 1999 is due to the decline in interest rates on indirect automobile lending to the point that, in management's opinion, the risk inherent was not adequately covered in the interest yield. As of December 31, 1999 and 1998, automobile loans represented 89.4% and 89.2%, respectively, of the Bank's consumer loan portfolio. Since the sale of the Bank's credit card portfolio during 1991 and 1992, other consumer loans have consisted primarily of cash reserve loans. Introduced in 1992, cash reserve loans are designed to afford the Bank's customers overdraft protection. The balances of these loans decreased $0.89 million, or 10.3%, in 1999 and 1.2 million or 12.1% in 1998. The following table sets forth the scheduled contractual amortization of the Bank's loan portfolio at December 31, 1999. Loans having no schedule of repayments or no stated maturity are reported as due in one year or less. The following table also sets forth the rate structure of loans scheduled to mature after one year.
Real Estate - Real Real Consumer - Consumer - Commercial Commercial Estate - Estate - Installment Other Total Residential Construction ------------ -------------- ------------ ------------ ------------ ------------ ------------- (Dollars In Thousands) Amounts due in: One year or less .... $107,444 $65,075 $87,503 $30,499 $87,628 $7,766 $385,915 After one year through five years .. 27,812 209,894 67,016 3,289 228,568 -- 536,579 Beyond five years ... 1,852 45,744 53,547 4,246 6,070 -- 111,459 ----- ------ ------ ----- ----- ----- ------- Total ............... $137,108 $320,713 $208,066 $38,034 $322,266 $7,766 $1,033,953 ======== ======== ======== ======= ======== ====== ========== Interest rates on amounts due after one year: Fixed Rate .......... $28,358 $225,097 $109,261 $7,535 $234,638 -- $604,889 Adjustable Rate ..... 1,306 30,541 11,302 -- -- -- 43,149
4 Generally, the actual maturity of loans is substantially less than their contractual maturity due to prepayments and, in the case of real estate loans, due-on-sale clauses, which generally gives the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage and the loan is not repaid. The average life of real estate loans tends to increase when current real estate loan rates are higher than rates on mortgages in the portfolio and, conversely, tends to decrease when rates on mortgages in the portfolio are higher than current real estate loan rates. Under the latter scenario, the weighted average yield on the portfolio tends to decrease as higher yielding loans are repaid or refinanced at lower rates. Due to the fact that the Bank may, consistent with industry practice, "roll over" a significant portion of commercial and commercial real estate loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period. In addition, a loan, or a portion of a loan, may not be repaid due to the borrower's inability to satisfy the contractual obligations of the loan. As of December 31, 1999, $.1 million of loans scheduled to mature within one year were nonperforming. See "Lending Activities Nonperforming Assets." ORIGINATION OF LOANS. Commercial loan applications are obtained through existing customers, solicitation by Bank loan officers, referrals from current or past customers, or walk-in customers. Commercial real estate loan applications are obtained primarily from previous borrowers, direct contacts with the Bank, or referrals. Applications for residential real estate loans and all types of consumer loans are taken at all of the Bank's full-service branch offices. Residential real estate loan applications primarily result from referrals by real estate brokers, homebuilders, and existing or walk-in customers. The Bank also maintains a staff of field originators who solicit and refer residential real estate loan applications to the Bank. These employees are compensated on a commission basis and provide convenient origination services during banking and non-banking hours. Consumer loan applications are directly obtained through existing or walk-in customers who have been made aware of the Bank's consumer loan services through advertising and other media, as well as indirectly through a network of automobile dealers. Commercial loans, commercial real estate loans, and construction loans may be approved by commercial loan officers up to their individually assigned lending limits, which are established and modified periodically to reflect the officer's expertise and experience. Commercial loans and commercial real estate loans in excess of a loan officer's assigned lending limit are approved by various levels of authority within the commercial lending division, depending on the loan amount, up to and including the Senior Loan Committee and ultimately the Executive Committee of the Board of Directors. Residential real estate loans and home equity loans follow a similar approval process within the retail lending division. SALE OF LOANS. The Bank's residential real estate loans are generally originated in compliance with terms, conditions and documentation which permit the sale of such loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), the Government National Mortgage Association ("GNMA"), and other investors in the secondary market. 5 The majority of fixed rate, long term residential mortgages originated by the Bank are sold without recourse in the secondary market. Loan sales in the secondary market provide funds for additional lending and other banking activities. The Bank generally retains the servicing on the loans sold. As part of its asset/liability management strategy, the Bank may retain a portion of adjustable rate residential real estate loans or fixed-rate residential real estate loans. During 1999, the Bank originated $109 million in residential real estate loans of which $48 million was retained in its portfolio. The principal balance of loans serviced by the Bank for investors amounted to $256.8 million at December 31, 1999 and $256.3 million at December 31, 1998. Under its mortgage servicing arrangements, the Bank generally continues to collect payments on loans, to inspect the mortgaged property, to make insurance and tax advances on behalf of borrowers and to otherwise service the loans and receives a fee for performing these services. Net servicing fee income amounted to $918,000 and $1,156,000 for the years ended December 31, 1999 and 1998, respectively. Loan origination fees that relate to loans sold by the Bank are recognized as non-interest income at the time of the loan sale. Under its sales agreements, the Bank pays the purchaser of mortgage loans a specified yield on the loans sold. The difference, after payment of any guarantee fee, is retained by the Bank and recognized as fee income over the life of the loan. In addition, loans may be sold at a premium or a discount with any resulting gain or loss recognized at the time of sale. Effective January 1, 1997 the Bank adopted SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of Financial Accounting Standards Board (FASB) Statement No. 125." This statement, which supercedes SFAS No.122, "Accounting for Mortgage Servicing Rights," provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. As of December 31, 1999, and 1998, the loan servicing asset was $1.6 million and $1.4 million, respectively. COMMERCIAL LOANS. The Bank offers secured and unsecured commercial loans for business purposes, including issuing letters of credit. At December 31, 1999, $137.1 million, or 13.3%, of the Bank's gross loan portfolio consisted of commercial loans, compared to $127.0 million, or 13.3%, at December 31, 1998. Commercial loans are generally provided to small-to-medium-sized businesses located within the Company's market area. Commercial loans may be structured as term loans or as revolving lines of credit. Commercial term loans generally have a repayment schedule of five years or less and, although the Bank occasionally originates some commercial term loans with interest rates which float in relation to the Rockland Base rate, the majority of commercial term loans have fixed rates of interest. Generally, Rockland's Base rate is determined by reference to the Prime rate published daily in the Wall Street Journal. The Bank's Base rate is monitored by the Executive Vice President - Commercial Lending Division, and revised when appropriate in accordance with guidelines established by the Asset/Liability Management Committee. The majority of commercial term loans are collateralized by equipment, machinery or other corporate assets. In addition, the Bank generally obtains personal guarantees from the principals of the borrower for virtually all of its commercial loans. The Bank's commercial revolving lines of credit generally are for the purpose of providing working capital to borrowers and may be secured or unsecured. Collateral for commercial revolving lines of credit may consist of accounts receivable, inventory or both, as well as other corporate assets. Generally, the Bank will lend up to 80% of accounts receivable, provided that such receivables have not 6 aged more than 60 days and/or up to 20% to 40% of the value of raw materials and finished goods inventory securing the line. Commercial revolving lines of credit generally are reviewed on an annual basis and usually require substantial repayment of principal during the course of a year. At December 31, 1999, the Bank had $50.3 million outstanding under commercial revolving lines of credit and $60.1 million of unused commitments under such lines on that date. The Bank's standby letters of credit generally are secured, have terms of not more than one year, and are reviewed for renewal. As of December 31, 1999, the Bank had $1 million in outstanding commitments pursuant to standby letters of credit. The Commercial Lending Division manages these facilities. The Bank also provides automobile and, to a lesser extent, boat and other vehicle floor-plan financing. Floor-plan loans, which are secured by the automobiles, boats, or other vehicles constituting the dealer's inventory, amounted to $18.7 million as of December 31, 1999. Upon the sale of a floor-plan unit, the proceeds of the sale are applied to reduce the loan balance. In the event a unit financed under a floor-plan line of credit remains in the dealer's inventory for an extended period, the amount of the outstanding balance is reduced with respect to such unit. Bank personnel make unannounced periodic inspections of each dealer to review the value and condition of the underlying collateral. REAL ESTATE LOANS. The Bank's real estate loans consist of loans secured by commercial properties, loans secured by 1-4 unit residential properties, home equity loans, and construction loans. As of December 31, 1999, the Bank's loan portfolio included $320.7 million in commercial real estate loans, $208.1 million in residential real estate loans including $38.9 million in home equity loans, and $38.0 million in construction loans. A significant portion of the Bank's commercial real estate portfolio consists of loans to finance the development of residential projects. These are categorized as commercial construction loans. As such, a number of commercial real estate loans are primarily secured by residential development tracts but, to a much greater extent, they are secured by owner-occupied commercial and industrial buildings and warehouses. Commercial real estate loans also include multi-family residential loans that are primarily secured by apartment buildings and, to a lesser extent, condominiums. The Bank has a very modest portfolio of loans secured by special purpose properties, such as hotels, motels, or restaurants. Although terms vary, commercial real estate loans generally have maturities of five years or less, amortization periods of 20 years, and interest rates that either float in accordance with a designated index or have fixed rates of interest. The Bank's adjustable-rate commercial real estate loans generally are indexed to the Rockland Base rate. Loan-to-value ratios on commercial real estate loans generally do not exceed 80% (70% for special purpose properties) of the appraised value of the property. In addition, as part of the criteria for underwriting permanent commercial real estate loans, the Bank generally imposes a debt service coverage ratio of not less than 120%. It is also the Bank's policy to obtain personal guarantees from the principals of the borrower on commercial real estate loans and to obtain periodic financial statements from all commercial and multi-family borrowers on an annual basis and, in some cases, more frequently. Commercial real estate lending entails additional risks as compared to residential real estate lending. Commercial real estate loans typically involve larger loan balances to single borrowers or 7 groups of related borrowers. Development of commercial real estate projects also may be subject to numerous land use and environmental issues. The payment experience on such loans is typically dependent on the successful operation of the real estate project, which can be significantly impacted by supply and demand conditions in the market for commercial and retail space. Rockland originates both fixed-rate and adjustable-rate residential real estate loans. The Bank will lend up to 97% of the lesser of the appraised value of the property securing the loan or the purchase price, and generally requires borrowers to obtain private mortgage insurance when the amount of the loan exceeds 80% of the value of the property. The rates of these loans are typically competitive with market rates. As previously noted, the Bank's residential real estate loans are generally originated only under terms, conditions and documentation, which permit sale in the secondary market. The Bank generally requires title insurance protecting the priority of its mortgage lien, as well as fire and extended coverage casualty insurance in order to protect the properties securing its residential and other real estate loans. Independent appraisers appraise properties securing all of the Bank's first mortgage real estate loans. Home equity loans may be made as a term loan or under a revolving line of credit secured by a second mortgage on the borrower's residence. The Bank will originate home equity loans in an amount up to 80% of the appraised value or, without appraisal, up to 80% of the tax assessed value, whichever is lower, reduced for any loans outstanding secured by such collateral. As of December 31, 1999, there was $6.5 million in unused commitments under revolving home equity lines of credit. Construction loans are intended to finance the construction of residential and commercial properties, including loans for the acquisition and development of land or rehabilitation of existing homes. Construction loans generally have terms of six months, but not more than two years. They usually do not provide for amortization of the loan balance during the term. The majority of the Bank's commercial construction loans have floating rates of interest based upon the Rockland Base rate or, in some cases, the prime rate published daily in the Wall Street Journal A significant portion of the Bank's construction lending is related to one-to-four family residential development within the Bank's market area. The Bank typically has focused its construction lending on relatively small projects and has developed and maintains a relationship with a significant number of homebuilders in Plymouth, Norfolk, and Bristol Counties. As of December 31, 1999, $12.3 million, or 53.4%, of total construction loans at such date were for the development of one-to-four family residential lots or the construction of one-to-four family residences. The Bank evaluates the feasibility of construction projects based upon appraisals of the project performed by independent appraisers. In addition, the Bank may obtain architects' or engineers' estimations of the cost of construction. The Bank generally requires the borrower to fund at least 20% of the project costs and generally does not provide for an interest reserve in its non-residential construction loans. The Bank's non-residential construction loans generally do not exceed 80% of the lesser of the appraised value upon completion or the sales price. Land acquisition and development loans generally do not exceed the lesser of 70% of the appraised value (without improvements) or the purchase price. The Bank's loan policy requires that permanent mortgage financing be secured prior to extending any non-residential construction loans. In addition, the Bank generally requires that the units 8 securing its residential construction loans be pre-sold. Loan proceeds are disbursed in stages after on-site inspections of the project indicate that the required work has been performed and that such disbursements are warranted. Construction loans are generally considered to present a higher degree of risk than permanent real estate loans. A borrower's ability to complete construction may be affected by a variety of factors such as adverse changes in interest rates and the borrower's ability to control costs and adhere to time schedules. The latter will depend upon the borrower's management capabilities, and may also be affected by strikes, adverse weather and other conditions beyond the borrower's control. CONSUMER LOANS. The Bank makes loans for a wide variety of personal and consumer needs. Consumer loans primarily consist of installment loans and cash reserve loans. As of December 31, 1999, $328.7 million, or 31.9%, of the Bank's gross loan portfolio consisted of consumer loans. The Bank's installment loans consist primarily of automobile loans, which amounted to $290.0 million at December 31, 1999. A substantial portion of the Bank's automobile loans are originated indirectly by a network of approximately 120 new and used automobile dealers located within the Bank's market area. Indirect automobile loans accounted for 88% and 92% of the Bank's total installment loan originations during 1999 and 1998, respectively. Although applications for such loans are taken by employees of the dealer, the loans are made pursuant to Rockland's underwriting standards using Rockland's documentation, and all indirect loans must be approved by a Rockland loan officer. In addition to indirect automobile lending, the Bank also originates automobile loans directly. The maximum term for the Bank's automobile loans is 72 months for a new car loan and 66 months with respect to a used car loan. The Bank will lend up to 110% of the purchase price of a new automobile or, with respect to used cars, up to 105% of the lesser of the purchase price or the National Automobile Dealer's Association book value. Loans on new automobiles are generally made without recourse to the dealer. The Bank requires all borrowers to maintain automobile insurance, including full collision, fire and theft, with a maximum allowable deductible and with the Bank listed as loss payee. The majority of the Bank's loans on used automobiles are made without recourse to the dealer. Some purchases from used car dealers are under a repurchase agreement. The dealer is required to pay off the loan (in return for the vehicle) as long as the bank picks up the vehicle and returns it to the dealer within 180 days of the most recent delinquency payment. In addition, in order to ameliorate the adverse effect on interest income caused by prepayments, all dealers are required to maintain a reserve, ranging from 0% to 3% of the outstanding balance of the indirect loans originated by them, which is rebated to the bank on a pro-rata basis in the event of repayment prior to maturity. The Bank's installment loans also include unsecured loans and loans secured by deposit accounts, loans to purchase motorcycles, recreational vehicles, motor homes, boats, or mobile homes. As of December 31, 1999, installment loans other than automobile loans amounted to $32.3 million. The Bank generally will lend up to 100% of the purchase price of vehicles other than automobiles with terms of up to three years for motorcycles and up to fifteen years for recreational vehicles. Cash reserve loans are made pursuant to previously approved unsecured cash reserve lines of credit. The rate on these loans is subject to change due to market conditions. As of December 31, 1999, an additional $15.8 million had been committed to but was unused under cash reserve lines of credit. 9 NONPERFORMING ASSETS. The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated.
December 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------ (Dollars in Thousands) Loans past due 90 days or more but still accruing $316 $1,026 $737 $516 $553 Loans accounted for on a nonaccrual basis (1) ...... 3,338 4,330 5,154 3,946 4,718 ----- ----- ----- ----- ----- Total non performing loans ....................... 3,654 5,356 5,891 4,462 5,271 ----- ----- ----- ----- ----- Other real estate owned ..... -- 2 271 271 638 Total nonperforming assets ...................... $3,654 $5,356 $5,893 $4,733 $5,909 ====== ====== ====== ====== ====== Restructured loans .......... $694 $1,037 $1,400 $1,658 $2,629 ------ ------ ------ ------ ------ Nonperforming loans as a percent of gross loans .... 0.35% 0.56% 0.69% 0.63% 0.83% ------ ------ ------ ------ ------ Nonperforming assets as a percent of total assets ...................... 0.23% 0.34% 0.43% 0.43% 0.60% ------ ------ ------ ------ ------
(1) Includes $.1 million, $.1 million, and $.6 million of restructured loans at December 31, 1997, 1996 and 1995 respectively, which were included in nonaccrual loans as of such dates. There were no restructured, nonaccruing loans at December 31, 1998 and 1999. Gross interest income that would have been recognized for the years ended December 31, 1999 and 1998 if nonperforming loans at the respective dates had been performing in accordance with their original terms approximated $375,000 and $496,000 respectively. The actual amount of interest that was collected on these loans during each of those periods and included in interest income was approximately $50,000 and $66,000, respectively. Through the Controlled Asset Department, the Bank strives to ensure that loans do not become nonperforming. In the case that they do, this department will restore nonperforming assets to performing status or, alternatively, dispose of such assets. On occasion, this effort may require the restructure of loan terms for certain nonperforming loans. At this time, there are no commitments to lend additional funds to debtors whose loans are non-performing. RESERVE FOR POSSIBLE LOAN LOSSES. The reserve for possible loan losses is maintained at a level that management considers adequate to provide for potential loan losses based upon an evaluation of known and inherent risks in the loan portfolio. The reserve is increased by provisions for possible loan losses and by recoveries of loans previously charged-off and reduced by loan charge-offs. Determining an appropriate level of reserve for possible loan losses necessarily involves a high degree of judgment. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 hereof. 10 The following table summarizes changes in the reserve for possible loan losses and other selected statistics for the periods presented.
Year Ending December 31, ---------------------------------------------------------------- 1999 1996 1995 1998 1997 (Dollars In Thousands) Average loans, net of unearned discount ..... $991,319 $884,205 $757,877 $657,749 $612,481 ======== ======== ======== ======== ======== Reserve for Possible loan losses, beginning of year $13,695 $12,674 $12,221 $12,088 $13,719 Charged-off loans Commercial .............................. 415 1,206 1,140 1,252 2,097 Real estate - commercial ................ -- -- 95 228 690 Real estate - residential ............... 1 241 261 296 558 Real estate - construction .............. -- -- -- -- -- Consumer - installment .................. 3,060 2108 771 430 273 Consumer - other ........................ 494 542 639 619 464 --- --- --- --- --- Total charged-off loans ............. 3,970 4,097 2,906 2,825 4,082 ----- ----- ----- ----- ----- Recoveries on loans previously charged off Commercial .............................. 522 630 546 573 436 Real estate - commercial ................ 67 258 265 241 665 Real estate - residential ............... 115 2 0 31 3 Real estate - construction .............. -- -- -- -- -- Consumer - installment .................. 603 266 137 171 169 Consumer - other ........................ (1) 2 151 192 178 --- - --- --- --- Total recoveries .................... 1,306 1,158 1,099 1,208 1,451 ----- ----- ----- ----- ----- Net loans charged-off ....................... 2,664 2,939 1,807 1,617 2,631 Provision for loan losses ................... 3,927 3,960 2,260 1,750 1,000 ----- ----- ----- ----- ----- Reserve for possible loan losses, end of period ............................ $14,958 $13,695 $12,674 $12,221 $12,088 ======= ======= ======= ======= ======= Net loans charged-off as a percent of average loans, net of unearned discount ..... 0.27% 0.33% 0.24% 0.25% 0.43% Reserve for possible loan losses as a percent of loans, net of unearned discount .. 1.45% 1.46% 1.67% 1.76% 1.92% Reserve for possible loan losses as a percent of nonperforming loans .............. 409.36% 255.69% 215.14% 273.89% 229.33% Net loans charged-off as a percent of reserve for possible loan losses ............ 17.81% 21.46% 14.26% 13.23% 21.77% Recoveries as a percent of charge-offs ...... 32.90% 28.26% 37.82% 42.76% 35.55%
The reserve for possible loan losses is allocated to various loan categories as part of the Bank's process for evaluating the adequacy of the reserve for possible loan losses. The following table sets forth certain information concerning the allocation of the Bank's reserve for possible loan losses by loan categories at December 31, 1999. For information about the percent of loans in each category to total loans, see "Lending Activities - Loan Portfolio Composition and Maturity."
Percent of Amount Total Loans by Category ------------------------------------ (Dollars In Thousands) Commercial Loans ......... $2,853 2.08% Real Estate Loans ........ 8,167 1.44% Consumer Loans ........... 3,938 1.21% ----- ---- Total Loans $14,958 1.45% ====== ====
The Bank determines the level of the reserve for possible loan losses based on a number of factors. A specific loan grade or rating is assigned to any commercial, commercial real estate, or construction loan relationship above $50,000. A portion of the reserve is allocated as a general reserve for those classes of loans by the level of loan rating. The better rated loans receive a lower allocation, but each rated loan class will have an allocation placed against the amount outstanding. As an 11 alternative to a general allocation by loan rating, certain loans have specific allocations assigned to them because of greater knowledge of their underlying collateral's value. In conjunction with its review, management considers both internal and external factors, which may affect the adequacy of the reserve for possible loan losses. Such factors may include, but are not limited to, industry trends, regional and national economic conditions, past estimates of possible loan losses as compared to actual losses, and historical loan losses. Management assesses the adequacy of the reserve for possible loan losses, and reviews that assessment quarterly, with the Board of Directors. Management's assessment of the adequacy of the reserve for possible loan losses is reviewed periodically by the Company's independent public accountants. As of December 31, 1999, the reserve for possible loan losses totaled $14.96 million. Based on the processes described above, management believes that the level of the reserve for possible loan losses at December 31, 1999 is adequate. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's reserve for possible loan losses. Federal Reserve regulators most recently examined the Company based on financial data as of September 30, 1999. The Bank was most recently examined by the FDIC and by the Commonwealth of Massachusetts Division of Banks in the third quarter of 1999. No additional provision for possible loan losses was required as a result of these examinations. INVESTMENT ACTIVITIES The Bank's securities portfolio consists of U.S. Treasury and U.S. Government Agency securities, mortgage-backed securities, and debt securities issued by other institutions. Most of these securities are investment grade debt obligations with average maturities of less than five years. Government and government agency securities entail a lesser degree of risk than loans made by the Bank by virtue of the guarantees that back them, require less capital under risk-based capital rules than non-insured or non-guaranteed mortgage loans, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Bank. However, these securities are subject to prepayment risk, which could result in significantly less future income than would have been the case based on the contractual coupon rate and term. In addition the Bank had $47.6 million, in private issue mortgage backed securities at December 31, 1999. The Bank had investments in marketable equity securities at December 31, 1999 of $465,000 and $350,000 in 1998. The Bank views its securities portfolio as a source of income and, with regard to maturing securities, liquidity. Interest payments generated from securities also provide a source of liquidity to fund loans and meet short-term cash needs. The Bank's securities portfolio is managed in accordance with the Rockland Trust Company Investment Policy adopted by the Board of Directors. The Chief Executive Officer or the Chief Financial Officer may make investments with the approval of one additional member of the Asset/Liability Management Committee, subject to limits on the type, size and quality of all investments, which are specified in the Investment Policy. The Bank's Asset/Liability Management Committee, or its designee, is required to evaluate any proposed purchase from the standpoint of overall diversification of the portfolio. The investment portfolio includes securities which management intends to hold until maturity, securities available for sale and trading assets. This classification of the securities portfolio is required by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain Investments in Debt and Equity Securities," which the Bank adopted effective January 1, 1994. 12 Securities held to maturity as of December 31, 1999 are carried at their amortized cost of $229.0 million and exclude gross unrealized gains of $.47 million and gross unrealized losses of $10.9 million. A year earlier, securities held to maturity totaled $284.9 million, excluding gross unrealized gains of $3.9 million and gross unrealized losses of $1.3 million. Securities available for sale are carried at fair market value and unrealized gains and losses, net of the related tax effect, are recognized as a separate component of stockholders' equity. The fair market value of securities available for sale at December 31, 1999 totaled $201.6 million, and net unrealized losses totaled $5.8 million. A year earlier, securities available for sale were $195.2 million, with net unrealized gains of $1.2 million. The Bank realized a gain of $34,000 and $27,000 on the sale of available-for-sale securities in 1999 and 1998, respectively. The following table sets forth the amortized cost and percentage distribution of securities held to maturity at the dates indicated. For additional information, see Note 3 to the Consolidated Financial Statements included in Item 8 hereof.
At December 31, -------------------------------------------------------------- 1999 1998 1997 ------------------- -------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT (Dollars in Thousands) U.S. treasury and Government agency Securities ............. $ 25,996 11.4% $ 29,197 10.3% $ 51,567 16.7% Mortgage-backed securities.. 101,081 44.1% 143,292 50.3% 199,245 64.7% Collateralized mortgage obligations ............ 5,666 2.5% 17,799 6.2% 34,515 11.2% State. County, and municipal securities ....... 41,984 18.3% 40,365 14.2% 21,385 6.9% Other investment securities .............. 54,316 23.7% 54,291 19.0% 1,400 0.5% ------ ----- ------ ----- ----- ---- $229,043 100.0% $284,944 100.0% $308,112 100.0% ======== ======== ======== ======== ======== ======
The following table sets forth the fair market value and percentage distribution of securities available for sale at the dates indicated. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8 hereof.
At December 31, -------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT (Dollars in Thousands) U.S Treasury and U.S Government Agency ........... $8,467 4.2% $9,045 4.6% Securities Mortgage-Backed Securities .. 121,881 60.5% 137,410 70.4% $131,842 100.0% Collateralized Mortgage ..... 71,266 35.3% 48,320 24.8% Obligations Other Securities ............ 424 .2% -------- ------ -------- ------ -------- ----- $201,614 100.0% $195,199 100.0% $131,842 100.0% ======== ====== ======== ====== ======== =====
At December 31, 1999 and 1998, the Bank had no investments in obligations of individual states, counties or municipalities which exceeded 10% of stockholders' equity. In addition, there were no sales of these securities in 1999 or 1998. 13 SOURCES OF FUNDS DEPOSITS. Deposits obtained through Rockland's branch banking network have traditionally been the principal source of the Bank's funds for use in lending and for other general business purposes. The Bank has built a stable base of in-market core deposits from the residents of and businesses located in Southeastern Massachusetts. The Bank has the ability to solicit brokered deposits. Rockland did not have any brokered deposits at December 31, 1998. During the first quarter of 1999, Rockland acquired $20 million of brokered deposits as an alternative source of funds. Rockland offers a range of demand deposits, interest checking, money market accounts, savings accounts and time certificates of deposit. Interest rates on deposits are based on factors that include loan demand, deposit maturities, and interest rates offered by competing financial institutions in the Bank's market area. The Bank believes it has been able to attract and maintain satisfactory levels of deposits based on the level of service it provides to its customers, the convenience of its banking locations, and its interest rates that are generally competitive with those of competing financial institutions. Rockland's branch locations are supplemented by the Bank's Trust/24 and debit cards which may be used to conduct various banking transactions at automated teller machines ("ATMs") maintained at each of the Bank's full-service offices and three additional locations. The Trust/24 and debit cards also allow customers access to the "NYCE" regional ATM network, as well as the "Cirrus" nationwide ATM network. These networks provide the Bank's customers access to their accounts through ATMs located throughout Massachusetts, the United States, and the world. The following table sets forth the average balances of the Bank's deposits for the periods indicated.
Year Ended December 31, ---------------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------------- (DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- Demand deposits ......... $ 220,727 20.8% $195,583 19.9% $171,955 18.9% Savings and Interest Checking ................ 280,441 26.5% 266,093 27.1% 225,069 24.8% Money Market and Super Interest Checking accounts ................ 108,415 10.2% 107,956 11.0% 109,156 12.0% Time deposits ........... 450,425 42.5% 411,801 42.0% 402,346 44.3% ------- ---- ------- ---- ------- ---- Total ................... $1,060,008 100.0% $981,433 100.0% $908,526 100.0% ========== ====== ======== ====== ======= ======
The Bank's interest-bearing time certificates of deposit of $100,000 or more totaled $64.6 million at December 31, 1999. The maturity of these certificates are as follows: $58.3 million within three months; $3.5 million 3 to 6 months and 2.8 million 6 through 12 months. BORROWINGS. Borrowings consist of short-term and intermediate-term obligations. Short-term borrowings consist primarily of federal funds purchased; assets sold under repurchase agreements, and treasury tax and loan notes. The Bank has established two unsecured federal funds lines totaling $20 million with Boston-based banks. The Bank also obtains funds under repurchase agreements. In a repurchase agreement transaction, the Bank will generally sell a security agreeing to repurchase either the same or a substantially identical security on a specified later date at a price slightly greater than the original sales price. The difference in the sale price and purchase price is the cost of the proceeds. The securities underlying the agreements are delivered to the dealer who arranges the transactions as security 14 for the repurchase obligation. Payments on such borrowings are interest only until the scheduled repurchase date, which generally occurs within a period of 30 days or less. Repurchase agreements represent a non-deposit funding source for the Bank. However, the Bank is subject to the risk that the lender may default at maturity and not return the collateral. In order to minimize this potential risk, the Bank only deals with established investment brokerage firms when entering into these transactions. The Bank has repurchase agreements with five major brokerage firms. At December 31, 1999, the Bank had $39.6 million outstanding under repurchase agreements and $47.6 million outstanding in Customer Repurchase Agreements. In July 1994, Rockland became a member of the Federal Home Loan Bank ("FHLB") of Boston. Among the many advantages of this membership, this affiliation provides the Bank with access to approximately $323 million of short-to-medium term borrowing capacity as of December 31, 1999, based on the Bank's assets at that time. At December 31, 1999, the Bank had $256.2 million outstanding in FHLB borrowings with initial maturities ranging from 1 month to 10 years. While the Bank has not traditionally placed significant reliance on borrowings as a source of liquidity, it established the borrowing arrangements described above in order to provide management with greater flexibility in overall funds management. Management believes that the Bank has adequate liquidity available to respond to current and anticipated liquidity demands. See Notes 4 and 7 of the Notes to Consolidated Financial Statements, included in Item 8 hereof. The following table sets forth the Bank's borrowings at the dates indicated.
AT DECEMBER 31, 1999 1998 1997 ----------------------------------------------------------------------- (in Thousands) Federal funds purchased ...... $ 6,170 $ 5,025 $ 845 Assets sold under repurchase agreements ................ 87,196 77,351 37,482 Treasury tax and loan notes .. 9,877 471 3,217 Federal Home Loan Bank borrowings ................ 256,224 313,724 206,724 ------- ------- ------- $359,467 $396,571 $248,268 ======== ======== ========
The following table presents certain information regarding the Bank's short-term borrowings at the dates and for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 ----------------------------------------------------- (Dollars in Thousands) Balance outstanding at end of year .... $103,243 $82,847 $41,544 Average daily balance outstanding ..... 88,215 66,403 48,869 Maximum balance outstanding at any month-end .......................... 103,248 89,741 84,945 Weighted average interest rate for the year ....................... 4.83% 5.39% 5.74% Weighted average interest rate at end of year ..................... 4.86% 4.72% 5.99%
15 ASSET MANAGEMENT AND TRUST SERVICES Rockland's Asset Management and Trust Services ("AM&TS") Division offers a variety of services, including assistance with investments, estate planning, custody services, employee benefit plans, and tax planning, which are provided primarily to individuals and small businesses located in Southeastern Massachusetts. In addition, the Bank acts as executor or administrator of estates and as trustee for various types of trusts. As of December 31, 1999, the AM&TS Division maintained approximately 1,697 trust/fiduciary accounts, with an aggregate market value of over $461 million on that date. Income from the AM&TS Division amounted to $4.1 million and $3.8 million, for 1999 and 1998, respectively. Accounts maintained by the AM&FS Division consist of "managed" and "non-managed" accounts. "Managed accounts" are those accounts for which Rockland has responsibility for administration and investment management and/or investment advice. "Non-managed" accounts are those accounts for which Rockland acts as a custodian. The Bank receives fees dependent upon the level and type of service(s) provided. The administration of trust and fiduciary accounts is monitored by the Trust Committee of the Bank's Board of Directors. The Trust Committee has delegated administrative responsibilities to two committees - one for investments and one for administration - comprised of Trust and Financial Services Division officers who meet not less than monthly. FORWARD-LOOKING INFORMATION The preceding Management's Discussion and Analysis and Notes to Consolidated Financial Statements of this Form 10-K contain certain forward-looking statements, including without limitation, statements regarding (i) the level of reserve for possible loan losses, (ii) the rate of delinquencies and amounts of charge-offs and (iii) the rates of loan growth. Moreover, the Company may from time to time, in both written reports and oral statements by Company management, express its expectations regarding future performance of the Company. These forward-looking statements are inherently uncertain and actual results may differ from Company expectations. The following factors which, among others, could impact current and future performance include but are not limited to: (i) adverse changes in asset quality and resulting credit risk-related losses and expenses; (ii) adverse changes in the economy of the New England region, the Company's primary market, (iii) adverse changes in the local real estate market, as most of the Company's loans are concentrated in Southeastern Massachusetts and a substantial portion of these loans have real estate as collateral; (iv) fluctuations in market rates and prices which can negatively affect net interest margin asset valuations and expense expectations; and (v) changes in regulatory requirements of federal and state agencies applicable to banks and bank holding companies, such as the Company and Rockland, which could have materially adverse effect on the Company's future operating results. When relying on forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties. 16 REGULATION THE COMPANY - GENERAL. The Company, as a federally registered bank holding company, is subject to regulation and supervision by the Federal Reserve. The Company is required to file an annual report of its operations with, and is subject to examination by, the Federal Reserve. FINANCIAL SERVICES MODERNIZATION-GRAMM-LEACH-BLILEY ACT OF 1999. On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act of 1999. The Act broadens the scope of the financial services that banks (and their affiliates) may offer to their customers. Among other things, the Act provides that a bank holding company meeting certain specified requirements may qualify as a financial holding company and provide a wider variety of services that are financial in nature, including, among other things, securities underwriting and dealing, merchant banking and insurance activities. The Act also makes certain changes in the regulatory framework for bank holding companies and their activities and provides consumers with new privacy protections with respect to the use of their nonpublic personal information by financial institutions. BHCA (THE BANK HOLDING COMPANY ACT) - ACTIVITIES AND OTHER LIMITATIONS. The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve. No approval under the BHCA is required, however, for a bank holding company already owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank. The BHCA also prohibits a bank holding company from, with certain exceptions, acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determination, the Federal Reserve is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has, by regulation, determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include, but are not limited to, operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing certain securities brokerage services; acting as an investment or financial adviser; acting as an insurance agent for certain types of credit-related insurance; engaging in insurance underwriting under certain limited circumstances; leasing personal property on a full-payout, nonoperating basis; providing tax planning and preparation services; operating a collection agency and a credit bureau; providing consumer financial counseling; and providing certain courier services. The Federal Reserve also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and, except under limited circumstances, underwriting of life insurance not related to credit transactions, are not closely related to banking and are not a proper incident thereto. 17 The Gramm-Leach-Bliley Act of 1999, discussed above, permits financial holding companies(a new type of bank holding company) to engage in a broader range of financial activities than traditional bank holding companies, subject to the requirements of the Act. INTERSTATE BANKING LEGISLATION. On September 24, 1994, President Clinton signed, and as of September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became effective. The Interstate Act facilitates interstate branching by permitting (i) bank holding companies that are adequately capitalized and adequately managed to acquire banks outside their home states regardless of whether such acquisitions are permissible under the laws of the target bank's home state; (ii) commencing June 1, 1997, interstate bank mergers regardless of state law, unless a state specifically "opts out" or "opts in" after September 29, 1994 and prior to June 1, 1997; (iii) banks to establish new branches on an interstate basis provided the state of the new branch specifically permits such activity; (iv) foreign banks to establish, with regulatory approval, foreign branches outside their home state to the same extent as if they were national or state banks; and (v) affiliates of banks in different states to receive deposits, renew time deposits, close loans, service loans, and receive loan payments on loans and other obligations as agents for each other. Massachusetts has "opted in" to the interstate branching provisions of the Interstate Act. See discussion under "Massachusetts Law" elsewhere in this section. In October, 1996, the banking regulators of the six New England states signed a New England Cooperative Agreement facilitating and addressing the regulation of state banks with multistate operations in New England. CAPITAL REQUIREMENTS. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve's capital adequacy guidelines which generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier 1, or core, capital and up to one-half of that amount consisting of Tier 2, or supplementary, capital. Tier 1 capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other intangible assets required to be deducted from capital. Tier 2 capital generally consists of perpetual preferred stock which is not eligible to be included as Tier 1 capital; hybrid capital instruments such as perpetual debt and mandatory convertible debt securities, and term subordinated debt and intermediate-term preferred stock; and, subject to limitations, the reserve for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the majority of assets which are typically held by a bank holding company, including commercial real estate loans, commercial loans and consumer loans. Single family residential first mortgage loans which are not 90 days or more past due or nonperforming and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighting system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans and certain multi-family housing loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve requires bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets or investments that the 18 Federal Reserve determines should be deducted from Tier 1 capital. The Federal Reserve has announced that the 3.0% Tier 1 leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies (including the Company) are expected to maintain Tier 1 leverage capital ratios of at least 4.0% to 5.0% or more, depending on their overall condition. The Company currently is in compliance with the above-described regulatory capital requirements. At December 31, 1999, the Company had Tier 1 capital and total capital equal to 11.14% and 12.39% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 8.15% of total assets. As of such date, Rockland complied with the applicable federal regulatory capital requirements, with Tier 1 capital and total capital equal to 9.35% and 10.60% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 6.86% of total assets. COMMITMENTS TO AFFILIATED INSTITUTIONS. Under Federal Reserve policy, the Company is expected to act as a source of financial strength to Rockland and to commit resources to support Rockland in circumstances when it might not do so absent such policy. LIMITATIONS ON ACQUISITIONS OF COMMON STOCK. The federal Change in Bank Control Act ("CBCA") prohibits a person or group of persons from acquiring "control" of a bank holding company or bank unless the appropriate federal bank regulator has been given 60 days prior written notice of such proposed acquisition and within that time period such regulator has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to expiration of the disapproval period if such regulator issues written notice of its intent not to disapprove the action. The acquisition of 25% or more of any class of voting securities constitutes the acquisition of control under the CBCA. In addition, under a rebuttable presumption established under the CBCA regulations, the acquisition of 10% or more of a class of voting stock of a bank holding company or a FDIC-insured bank, with a class of securities registered under or subject to the requirements of Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any "company" would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common stock of, or such lesser number of shares as constitute control over, the Company. Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company. MASSACHUSETTS LAW. Massachusetts law requires all Massachusetts bank holding companies (those companies which control, own, or have the power to vote 25% or more of the stock of each of two or more Massachusetts based banks) to receive prior written approval of the Massachusetts Board of Bank Incorporation to, among other things, acquire all or substantially all of the assets of a banking institution located within the Commonwealth of Massachusetts or to merge or consolidate with a Massachusetts bank holding company. The Company owns no voting stock in any banking institution other than Rockland. In addition, prior approval of the Board of Bank Incorporation is required before any Massachusetts bank holding company owning 25% or more of the stock of two banking institutions 19 may acquire additional voting stock in those banking institutions equal to 5% or more. Generally, no approval to acquire a banking institution, acquire additional shares in an institution, acquire substantially all the assets of a banking institution or merge or consolidate with another bank holding company may be given if the bank being acquired has been in existence for a period less than 3 years or, as a result, the bank holding company would control, in excess of 30%, of the total deposits of all state and federally chartered banks in Massachusetts, unless waived by the Commissioner. Similarly, no bank which is not a member of the Federal Reserve can merge or consolidate with any other insured depository institution or, either directly or indirectly, acquire the assets of or assume the liability to pay any deposits made in any other depository institution except with the prior written approval of the FDIC. As noted above, Massachusetts "opted in" to the Interstate Act in 1996. As such, any out-of-state bank may engage, with the written approval of the Commissioner, in a merger transaction with a Massachusetts bank to the fullest extent permitted by the Interstate Act, provided that the laws of the home state of such out-of-state bank permit, under conditions no more restrictive than those imposed by Massachusetts, interstate merger transactions with Massachusetts banks, and provided further that the Massachusetts bank has been in existence for at least three years and the resulting bank would not control in excess of 30% of the total deposits of all state and federally chartered depository institutions in Massachusetts. The Commissioner may waive the latter two conditions, in his discretion. Such a merger transaction may also involve the acquisition of one or more branches of a Massachusetts bank and not the entire institution. With the prior written approval of the Commissioner, Massachusetts also permits the establishment of de novo branches in Massachusetts to the fullest extent permitted by the Interstate Act, provided the laws of the home state of such out-of-state bank expressly authorize, under conditions no more restrictive than those of Massachusetts, Massachusetts banks to establish and operate de novo branches in such state. With the prior written approval of the Massachusetts Board of Bank Incorporation, a bank holding company (as defined under the BHCA) whose principal operations are located in a state other than Massachusetts may acquire more than 5% of the voting stock of a Massachusetts bank or may merge with a Massachusetts bank holding company or a Massachusetts bank, provided that Massachusetts bank has been in existence for at least three years and the Massachusetts Board of Bank Incorporation is satisfied that the transaction will not result in the out-of-state bank holding company holding or controlling, more than 30% of the deposits of all state and federally chartered depository institutions in Massachusetts or such condition is affirmatively waived by the Board. SUBSIDIARY BANK - GENERAL. Rockland is subject to extensive regulation and examination by the Commissioner and by the FDIC, which insures its deposits to the maximum extent permitted by law, and to certain requirements established by the Federal Reserve. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing Rockland generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. DEPOSIT INSURANCE PREMIUMS. Rockland currently pays deposit insurance premiums to the FDIC based on a single, uniform assessment rate established by the FDIC for all BIF-member institutions. The assessment rates range from 0% to .27%. Under the FDIC's risk-based assessment 20 system, institutions are assigned to one of three capital groups which assignment is based solely on the level of an institution's capital - "well capitalized, " "adequately capitalized," and "undercapitalized" which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging from 0% for well capitalized, healthy institutions to .27% for undercapitalized institutions with substantial supervisory concerns. Rockland is presently "well capitalized" and as a result, Rockland was not subject to any FDIC premium obligation as of January 1, 2000. The FDIC Board of Directors voted in 1996 to collect an assessment against BIF assessable deposits to be paid to the Financing Corporation (FICO). The Board stipulated that the FICO assessment rate that is applied to BIF assessable deposits must equal one-fifth of the rate that is applied to SAIF assessable deposits. The actual assessment rates are approximately 8.48 basis points, on an annual basis, for BIF assessable deposits and SAIF assessable deposits. CAPITAL REQUIREMENTS. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks, which, like Rockland, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the Federal Reserve regarding bank holding companies, as described above. The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage capital to total assets requirement for the most highly-rated state-chartered, nonmember banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, nonmember banks, which effectively will increase the minimum Tier 1 leverage capital ratio for such banks to 4.0% or 5.0% or more. Under the FDIC's regulations, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general which are considered strong banking organizations, rated composite 1 under the Uniform Financial Institutions Rating System. A bank having less than the minimum leverage capital requirement shall, within 45 days of the date as of which it receives notice or is deemed to have notice that it is undercapitalized, submit to its FDIC regional director for review and approval a written capital restoration plan describing the means and timing by which the bank shall achieve its minimum leverage capital requirement. A bank which fails to file such plan with the FDIC is deemed to be operating in an unsafe and unsound manner, and could subject the bank to a cease and desist order from the FDIC. The FDIC's regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement proceeding thereunder solely on account of its capital ratios if it has entered into and is in compliance with a written agreement with the FDIC to increase its Tier 1 leverage capital ratio to such level as the FDIC deems appropriate and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The FDIC capital regulation also provides for, among other things, the issuance by the FDIC or its designee(s) of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital to restore its capital to the minimum leverage capital 21 requirement within a specified time period. Such directive is enforceable in the same manner as a final cease and desist order. Pursuant to the requirements of the FDIA, each federal banking agency has adopted or proposed regulations relating to its review of and revisions to its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk and the risks of non-traditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each federal banking agency has broad powers to implement a system of prompt corrective action to resolve problems of institutions which it regulates which are not adequately capitalized. Under FDICIA, a bank shall be deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, or a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio of less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, or a Tier 1 risk-based capital ratio that is less than 3.0%, or a Tier 1 leverage capital ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. FDICIA also specifies circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 1999, Rockland was deemed a "well-capitalized institution" for this purpose. BROKERED DEPOSITS. FDICIA restricts the use of brokered deposits by certain depository institutions. Well capitalized insured depository institutions may solicit and accept, renew or roll over any brokered deposit without restriction. Adequately capitalized insured depository institutions may not accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver of this prohibition by the FDIC. Undercapitalized insured depository institutions may not (i) accept, renew or roll over any brokered deposit or (ii) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution's normal market area or in the market area in which such deposits are being solicited. At December 31, 1999, the Bank's funding sources included brokered deposits of $20 million. SAFETY AND SOUNDNESS. In August, 1995, the FDIC adopted regulations pursuant to FDICIA relating to operational and managerial safety and soundness standards for financial institutions relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees, and benefits. The standards are to serve as guidelines for institutions to help identify potential safety and soundness concerns. If an institution fails to meet any safety and soundness standard, the FDIC may require it to submit a written 22 safety and soundness compliance plan within thirty (30) days following a request therefor, and if it fails to do so or fails to correct safety and soundness deficiencies, the FDIC may take administrative enforcement action against the institution, including assessing civil money penalties, issuing supervisory orders and other available remedies. COMMUNITY REINVESTMENT ACT ("CRA") Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of Massachusetts law, regulatory authorities review the performance of the Company and Rockland in meeting the credit needs of the communities served by Rockland. The applicable regulatory authorities consider compliance with this law in connection with applications for, among other things, approval of branches, branch relocations, engaging in certain new financial activities under Gramm-Leach-Bliley Act of 1999, and acquisitions of banks and bank holding companies. Currently, the FDIC's CRA rating of Rockland is outstanding. The Massachusetts Commissioner currently has given Rockland a CRA rating of outstanding. MISCELLANEOUS. Rockland is subject to certain restrictions on loans to the Company, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company. Rockland also is subject to certain restrictions on most types of transactions with the Company, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms. In addition under state law, there are certain conditions for and restrictions on the distribution of dividends to the Company by Rockland. In addition to the laws and regulations discussed above, regulations have been promulgated under FDICIA which increase the requirements for independent audits, set standards for real estate lending and increase lending restrictions with respect to bank officers and directors. FDICIA also contains provisions which amend various consumer banking laws, limit the ability of "undercapitalized banks" to borrow from the Federal Reserve Board's discount window, and require regulators to perform annual on-site bank examinations. REGULATORY ENFORCEMENT AUTHORITY. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial enhancement to the enforcement powers available to federal banking regulators, This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. FIRREA significantly increased the amount of and grounds for civil money penalties and requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies. The foregoing references to laws and regulations which are applicable to the Company and Rockland are brief summaries thereof which do not purport to be complete and which are qualified in their entirety by reference to such laws and regulations. 23 FEDERAL TAXATION. The Company and its subsidiaries are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code (the "Code"). The Company and its subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income. STATE TAXATION. The Commonwealth of Massachusetts imposes a tax on the Massachusetts net income of banks at a rate of 10.5% as of December 31, 1999. In addition, the Company is subject to an excise tax at the rate of .26% of its net worth. The Bank's security corporation subsidiaries are, for state tax purposes, taxed at a rate of 1.32% of its gross income. Massachusetts net income for banks is generally similar to federal taxable income except deductions with respect to the following items are generally not allowed: (i) dividends received, (ii) losses sustained in other taxable years, and (iii) income or franchise taxes imposed by other states. The Company is permitted to carry a percentage of its losses forward for not more than five years, while Rockland is not permitted to carry its losses forward or back for Massachusetts tax purposes. For additional information, see Note 9 of the Notes to Consolidated Financial Statements included in Item 8 hereof. ITEM 2. PROPERTIES At February 29, 2000, the Bank conducted its business from its headquarters and main office at 288 Union Street, Rockland, Massachusetts, and 33 other branch offices located in Southeastern Massachusetts in Plymouth County, Bristol County and Norfolk County. In addition to its main office, the Bank owns five of its branch offices and leases the remaining 28 offices. Of the branch offices which are leased by the Bank, 2 have remaining lease terms, including options renewable at the Bank's option, of five years or less, 12 have remaining lease terms of greater than five years and less than 10 years, and 14 have a remaining lease term of 10 years or more. The Bank's aggregate rental expense under such leases was $1.6 million in 1999. Certain of the Bank's branch offices are leased from companies with whom directors of the Company are affiliated. The Bank leases space for its AM&TS Division in a building in Hanover, Massachusetts developed by a joint venture consisting of the Bank and A. W. Perry, Inc., and in Attleboro. It also leases office space in two buildings in Rockland, Massachusetts for administrative purposes as well as space in four additional facilities used as lending centers. In the first quarter of 2000 the Bank agreed to lease a property in Plymouth, Massachusetts that will become the Bank's new Data Center. At December 31, 1999, the net book value of the property and leasehold improvements of the offices of the Bank amounted to $8.5 million. The Bank's properties that are not leased are owned free and clear of any mortgages. The Bank believes that all of its properties are well maintained and are suitable for their respective present needs and operations. For additional information regarding the Bank's lease obligations, see Note 13 to the Consolidated Financial Statements, included in Item 8 hereof. 24 ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine legal proceedings that arise in the ordinary course of business. Management has reviewed these actions with legal counsel and has taken into consideration the view of counsel as to the outcome of the litigation. In the opinion of management, final disposition of these lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required herein is incorporated by reference from page 33 of the Company's 1999 Annual Report to Stockholders ("Annual Report"), which is included herein as Exhibit 13. The Registrant did not sell any unregistered equity securities during the year-ended December 31, 1999. ITEM 6. SELECTED FINANCIAL DATA The information required herein is incorporated by reference from page 1 of the Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required herein is incorporated by reference from pages 2 through 11 of the Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required herein are incorporated by reference from pages 12 through 32 of the Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required herein is incorporated by reference from the Company's definitive proxy statement (the "Proxy Statement") relating to its 1999 Annual Meeting of Stockholders filed with the Commission on March 20, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required herein is incorporated by reference from the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required herein is incorporated by reference from the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required herein is incorporated by reference from the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements are incorporated herein by reference from pages 12 through 32 of the Annual Report. Report of Independent Public Accountants Consolidated balance sheets as of December 31, 1999 and 1998. Consolidated statements of income for each of the years in the three year period ended December 31, 1999 Consolidated statements of stockholder's equity for each of the years in the three year period ended 12/31/99 Consolidated statements of Comprehensive Income for each of the years in the three year period ended December 31, 1999 Consolidated statements of cash flows for each of the years in the three year period ended December 31, 1999 26 Notes to Consolidated Financial Statements (a)(2) There are no financial statement schedules filed herewith. All information required by financial statement schedules is disclosed in Notes to Consolidated Financial Statements or is not applicable to the Company. (a)(3) The following exhibits are filed as part of this report. EXHIBIT INDEX
NO. EXHIBIT FOOTNOTE ---------- ----------------------------------- --------- 3.(i) Restated Articles of Organization, as (6) amended to date 3.(ii) Bylaws of the Company, as amended (1) to date 4.1 Specimen Common Stock Certificate (5) 4.2 Specimen Preferred Stock Purchase (2) Rights Certificate 4.3 Amended and Restated Independent (7) Bank Corp. 1987 Incentive Stock Option Plan ("Stock Option Plan"). (Management contract under Item 601(10)(iii)(A). 4.4 Independent Bank Corp. 1996 (9) Non-Employee Directors' Stock Option Plan (Management contract under Item 901(10)(iii)(A)). 4.5 Independent Bank Corp. 1997 (10) Employee Stock Option Plan (Management contract under Item 601 (10)(iii)(A)). 10.1 Amendment No. 1 to Third Amended and (8) Restated Employment Agreement between the Company, Rockland and Douglas H. Philipsen, dated June 25, 1997 ("Philipsen Employment Agreement"). (Management contract under Item 601(10)(iii)(A)).
27
NO. EXHIBIT FOOTNOTE ---------- ----------------------------------- --------- 10.2 Amendment No. 1 to Second Amended and (8) Restated Employment Agreement between Rockland Trust Company and Richard F. Driscoll, dated January 19, 1996 (the "Driscoll Agreement"). Employment Agreements between Rockland and Richard J. Seaman, Ferdinand T. Kelley, and Raymond G. Fuerschbach are substantially similar to the Driscoll agreement. (Management contract under Item 601(10)(iii)(A)). 10.3 Rockland Trust Company Deferred (3) Compensation Plan for Directors, as Amended and Restated dated September 1992. (Management contract under Item 601(10)(iii)(A)). 10.4 Stockholders Rights Agreement, dated (2) January 24, 1991, between the Company and Rockland, as Rights Agent 10.5 Master Securities Repurchase (3) Agreement 10.6 Purchase and Assumption Agreement dated as of 9/27/99, between Rockland Trust Company and Fleet Financial Group, Inc. (Exhibit to Form 8-K filed on 10/1/99) 13 Annual Report to Stockholders 21 Subsidiaries of the Registrant (3) 23 Consent of Independent Public Accountants 27 Financial Data Schedule
(FOOTNOTES ON NEXT PAGE) 28 Footnotes: (1) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1990. (2) Exhibit is incorporated by reference to the Form 8-A Registration Statement (No. 0-19264) filed by the Company. (3) Exhibit is incorporated by reference to the Form S-1 Registration Statement (No. 33-52216) filed by the Company. (4) Exhibit is incorporated by reference to the Form S-3 Registration Statement (No. 333-89835) filed by the Company. (5) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1992. (6) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1994. (8) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998. (9) Incorporated by reference from the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders filed with the Commission on March 19, 1996. (10) Incorporated by reference from the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders filed with the Commission on March 20, 1997. (b) One report on Form 8-K was filed by the Company on 10/1/99 related to the Purchase and Assumption Agreement, dated as of 9/27/99 between Rockland Trust Company and Fleet Financial Group, Inc. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. INDEPENDENT BANK CORP. Date: March 9, 2000 /s/ Douglas H. Philipsen, Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the followings persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby makes, constitutes and appoints Douglas H. Philipsen and Richard Seaman and each of them acting individually, his true and lawful attorneys, with full power to sign for such person and in such person's name and capacity indicated below any and all amendments to this Form 10-K, hereby ratifying and confirming such person's signature as it may be signed by said attorneys to any and all amendments. /s/ Richard S. Anderson Date: March 9, 2000 Richard S. Anderson Director /s/ W. Paul Clark Date: March 9, 2000 W. Paul Clark Director /s/ Robert L. Cushing Date: March 9, 2000 Robert L. Cushing Director /s/ Alfred L. Donovan Date: March 9, 2000 Alfred L. Donovan Director
30 /s/ Benjamin A Gilmore, II Date: March 9, 2000 Benjamin A. Gilmore, II Director /s/ Lawrence M. Levinson Date: March 9, 2000 Lawrence M. Levinson Director /s/ Richard H. Sgarzi Date: March 9, 2000 Richard H. Sgarzi Director /s/ Robert J. Spence Date: March 9, 2000 Robert J. Spence Director /s/ William J. Spence Date: March 9, 2000 William J. Spence Director /s/ John H. Spurr, Jr. Date: March 9, 2000 John H. Spurr, Jr. Director /s/ Robert D. Sullivan Date: March 9, 2000 Robert D. Sullivan Director /s/ Brian S. Tedeschi Date: March 9, 2000 Brian S. Tedeschi Director /s/ Thomas J. Teuten Date: March 9, 2000 Thomas J. Teuten Director
31 /s/ Richard J. Seaman Date: March 9, 2000 Richard J. Seaman Chief Financial Officer and Treasurer (principal financial and accounting officer)
32 EX-13 2 EXHIBIT 13 INDEPENDENT BANK CORP. SELECTED CONSOLIDATED FINANCIAL INFORMATION & OTHER DATA The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere herein.
As of or For the Year Ended December 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands, Except Per Share Data) FINANCIAL CONDITION DATA: Securities held to maturity $ 229,043 $ 284,944 $ 308,112 $ 290,894 $ 226,896 Securities available for sale 201,614 195,199 131,842 26,449 32,628 Loans, net of unearned discount 1,028,510 941,112 828,132 695,406 628,141 Reserve for possible loan losses 14,958 13,695 12,674 12,221 12,088 Total assets 1,590,056 1,575,069 1,370,007 1,092,793 987,589 Total deposits 1,081,806 1,043,317 988,148 918,572 871,085 Stockholders' equity 98,129 95,848 92,493 81,110 72,572 Nonperforming loans 3,654 5,356 5,891 4,462 5,271 Nonperforming assets 3,654 5,356 5,893 4,733 5,909 OPERATING DATA: Interest income $ 112,006 $ 108,712 $ 93,820 $ 77,424 $ 72,918 Interest expense 50,178 49,569 41,578 32,354 29,143 Net interest income 61,828 59,143 52,242 45,070 43,775 Provision for possible loan losses 3,927 3,960 2,260 1,750 1,000 Non-interest income 14,793 13,125 11,742 11,381 10,341 Non-interest expenses 45,450 41,697 38,595 36,951 38,000 Minority interest expense 2,668 2,668 1,645 - - Net income 17,031 16,139 14,158 11,597 10,387 PER SHARE DATA: Net income - Basic $ 1.20 $ 1.10 $ 0.97 $ 0.80 $ 0.72 Net income - Diluted 1.19 1.08 0.95 0.79 0.71 Cash dividends declared 0.40 0.40 0.34 0.25 0.18 Book value, end of period 6.92 6.63 6.25 5.55 5.00 OPERATING RATIOS: Return on average assets 1.09% 1.12% 1.15% 1.13% 1.10% Return on average equity 17.57% 16.71% 16.45% 15.20% 15.28% Net interest margin 4.30% 4.36% 4.52% 4.72% 4.97% ASSET QUALITY RATIOS: Nonperforming loans as a percent of gross loans 0.35% 0.56% 0.69% 0.63% 0.83% Nonperforming assets as a percent of total assets 0.23% 0.34% 0.43% 0.43% 0.60% Reserve for possible loan losses as a percent of loans, net of unearned discount 1.45% 1.46% 1.53% 1.76% 1.92% Reserve for possible loan losses as a percent of nonperforming loans 409.36% 255.69% 215.14% 273.89% 229.33% CAPITAL RATIOS: Tier 1 leverage capital ratio 8.15% 7.91% 8.64% 7.35% 7.24% Tier 1 risk-based capital ratio 11.14% 11.38% 13.52% 10.89% 10.67% Total risk-based capital ratio 12.39% 12.63% 14.78% 12.15% 11.92%
4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The condensed financial review which follows presents management's discussion and analysis of the consolidated financial condition and operating results of Independent Bank Corp. (the Company) and its subsidiaries, Rockland Trust Company (Rockland or the Bank) and Independent Capital Trust I (the Trust). It should be read in conjunction with the Consolidated Financial Statements and related notes thereto. FINANCIAL CONDITION Summary of Financial Condition. The Company's assets increased to $1.59 billion in 1999, compared with $1.58 billion in 1998. This increase amounted to $15.0 million or 1.0% over year-end 1998. The growth was driven by an increase in loans of $87.4 million, centered in commercial real estate loans and consumer loans. The securities portfolio decreased to $447.7 million at December 31, 1999 compared with $496.2 million at December 31, 1998. The change occurred in the securities held to maturity portfolio, which decreased by $55.9 million. The Company's total assets grew to $1.58 billion as of December 31, 1998, an increase of $205.1 million, or 15%, over 1997 year-end assets. Loan growth of $113 million was primarily in the consumer and commercial real estate and construction loan categories. The securities portfolio increased to $496.2 million at December 31, 1998 compared with $456.0 million at December 31, 1997. The growth occurred in the securities available for sale portfolio, which increased by $63.4 million during 1998. Loan Portfolio At December 31, 1999, the Bank's loan portfolio was $1.03 billion, an increase of $87.4 million, or 9.3%, from year-end 1998. This growth was primarily in the commercial real estate portfolio, which increased by $59.4 million, or 22.7%. The remaining growth was in the consumer loan portfolio, which also showed strong growth in 1999. At December 31, 1998, the Bank's loan portfolio amounted to $941.1 million, an increase of $113.0 million, or 13.6%, from year-end 1997. This increase was primarily in the consumer loan portfolio, which increased by $101.4 million or 48.5%. The reserve for possible loan losses is maintained at a level that management of the Bank considers adequate based upon relevant circumstances. The reserve for possible loan losses was $15.0 million at December 31, 1999. The ratio of the reserve for possible loan losses to nonperforming loans was 409.4% at December 31, 1999, an increase over the coverage of 255.7% recorded a year earlier. The Bank provides its customers with access to capital by providing a broad range of credit services. The Bank's commercial customers consist of small-to-medium-sized businesses, which utilize demand, time, and term loans, as well as funding guaranteed by the Small Business Administration, to finance their businesses. The Bank's retail customers can choose from a variety of mortgage and consumer loan products. The Bank's principal lending market provides attractive lending opportunities for commercial, real estate, and consumer loans. The Bank's loan committee consists of the Bank's President, the Executive Vice President of the Commercial Lending Division, the Senior Credit Policy Officer, and the Commercial Loan Regional Managers. The committee considers a variety of policy issues, including underwriting and credit standards, and reviews loan proposals that exceed the individual loan officer's lending authority. Asset Quality The Bank's principal earning assets are its loans. Although the Bank judges its borrowers to be creditworthy, the risk of deterioration in borrowers' ability to repay their loans in accordance with the terms of their existing loan agreements is inherent in any lending function. Participating as a lender in the credit markets requires a strict monitoring process to minimize credit risk. This process requires substantial analysis of the loan application, the customer's capacity to repay according to the loan's contractual terms, and an objective determination of the value of the collateral. Nonperforming assets are comprised of nonperforming loans and Other Real Estate Owned (OREO). Nonperforming loans consist of loans that are more than 90 days past due but still accruing interest and nonaccrual loans. OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure. As of December 31, 1999, nonperforming assets totaled $3.7 million, a decrease of $1.7 million, or a reduction of 31.5%, from the prior year-end. Nonperforming assets represented 0.23% and 0.34% of total assets for the years ending December 31, 1999 and 1998 respectively. The following table sets forth information regarding nonperforming loans and nonperforming assets on the dates indicated. 5 INDEPENDENT BANK CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
December 31, September 30, June 30, March 31, December 31, December 31, 1999 1999 1999 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Nonperforming Loans: Loans past due 90 days or more but still accruing $ 316 $ 423 $ 475 $ 680 $1,026 $ 737 Loans accounted for on a nonaccrual basis 3,338 3,506 3,620 4,514 4,330 5,154 - --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 3,654 3,929 4,095 5,194 5,356 5,891 - --------------------------------------------------------------------------------------------------------------------------------- Other real estate owned -- 126 126 126 -- 2 - --------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $3,654 $4,055 $4,221 $5,320 $5,356 $5,893 ================================================================================================================================= Nonperforming loans as a percent of gross loans 0.35% 0.38% 0.41% 0.53% 0.56% 0.69% ================================================================================================================================= Nonperforming assets as a percent of total assets 0.23% 0.26% 0.27% 0.34% 0.34% 0.43% =================================================================================================================================
As permitted by banking regulations, consumer loans and home equity loans past due 90 days or more continue to accrue interest. In addition, certain commercial and real estate loans that are more than 90 days past due may be kept on an accruing status if the loan is well secured and in the process of collection. As a general rule, a commercial or real estate loan more than 90 days past due with respect to principal or interest is classified as a nonaccrual loan. Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with respect to principal and interest, when the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the reserve for possible loan losses. The following table sets forth the Bank's nonperforming loans by loan category on the dates indicated.
December 31, 1999 1998 - ------------------------------------------------------------ (In Thousands) Loans past due 90 days or more but still accruing Real Estate-Residential Mortgage $ 31 $ 41 Consumer-Installment 229 819 Consumer-Other 56 166 - ------------------------------------------------------------ Total $ 316 $1,026 - ------------------------------------------------------------ Loans accounted for on a nonaccrual basis: Commercial $ 141 $ 579 Real Estate-Commercial Mortgage 326 140 Real Estate-Residential Mortgage 2,186 2,455 Consumer-Installment 685 1,156 - ------------------------------------------------------------ Total $3,338 $4,330 - ------------------------------------------------------------ Total Nonperforming Loans $3,654 $5,356 ============================================================
In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain commercial and real estate loans. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. It is the Bank's policy to maintain restructured loans on nonaccrual status for approximately six months before management considers its return to accrual status. At December 31, 1999, the Bank had $0.69 million of restructured loans. Real estate acquired by the Bank through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO. When property is acquired, it is recorded at the lesser of the loan's remaining principal balance or the estimated fair value of the property acquired, less estimated costs to sell. Any loan balance in excess of the estimated fair value on the date of transfer is charged to the reserve for possible loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense. In order to facilitate the disposition of OREO, the Bank may finance the purchase of such properties at market rates if the borrower qualifies under the Bank's standard underwriting guidelines. The Bank had no OREO properties at December 31, 1999. Securities Portfolio The Company's securities portfolio consists of securities which management intends to hold until maturity, securities available for sale, trading assets, and Federal Home Loan Bank (FHLB) stock. Securities which management intends to hold until maturity consist of U. S. Treasury and U. S. Government Agency obligations, mortgage-backed securities, including collateralized mortgage obligations, state, county, and municipal securities as well as other securities. Securities held to maturity as of December 31, 1999 are carried at their amortized cost of $229.0 million and exclude gross unrealized gains of $0.47 million and gross unrealized losses of $10.9 million. A year earlier, securities held to maturity totaled $284.9 million excluding gross unrealized gains of $3.9 million and gross unrealized losses of $1.3 million. There were no sales of securities held to maturity during 1999 or 1998. Securities available for sale consist of certain mortgage-backed securities, including collateralized mortgage obligations and U.S. Government Agency obligations. These securities are carried at fair market value and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders' equity. The fair market value of securities available for sale at December 31, 1999 totaled $201.6 million and net unrealized losses totaled $3.8 million. A year earlier, securities available for sale were $195.2 million 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) with net unrealized gains of $764,000. The Bank realized a gain of $34,000 and $27,000 on the sale of available for sale securities in 1999 and 1998, respectively. Trading assets consist of equity securities carried at fair value. Changes in fair value are recognized in non-interest income. The fair value of trading assets at December 31, 1999 totaled $486,000. The investment in the stock of the Federal Home Loan Bank is related to the admission of Rockland as a member of the Federal Home Loan Bank of Boston in July 1994. This investment was increased by $1.0 million during 1999 to maintain investment levels required by FHLB guidelines. Deposits The Bank's branch system consists of 34 locations. Each full-service branch operates as a retail sales and services outlet offering a complete line of deposit and loan products. As of December 31, 1999, deposits of $1,081.8 million were $38.5 million, or 3.7%, higher than the prior year-end. An expanding customer base, extensive branch network, and competitive market rates were responsible for this increase. Core deposits, consisting of demand, interest checking, savings, and money market accounts, increased $5.0 million, or 0.81%. Time deposits increased $33.5 million, or 7.76%. Total deposits increased $55.2 million, or 5.6%, during the year ended December 31, 1998. Core deposits increased $44.3 million, or 7.8%, while time deposits increased $10.8 million, or 2.6%. Borrowings The Bank's borrowings amounted to $359.5 million at December 31, 1999, a decrease of $37.1 million from year-end 1998. At December 31, 1999, the Bank's borrowings consisted primarily of FHLB advances totaling $256.2 million, a decrease of $57.5 million from the prior year-end. The remaining borrowings consisted of federal funds purchased, assets sold under repurchase agreements, and treasury tax and loan notes. These borrowings totaled $103.2 million at December 31, 1999, an increase of $20.4 million from the prior year-end. RESULTS OF OPERATIONS Summary of Results of Operations The Company's results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and investments and interest paid on deposits and borrowings. Net interest income is affected by the interest rate spread, which is the difference between the yields earned on loans and investments and the rates of interest paid on deposits and borrowings. The results of operations are also affected by the level of income from loan, deposit, and mortgage banking fees, operating expenses, the provision for possible loan losses, the impact of federal and state income taxes, and the relative levels of interest rates and economic activity. For the year ended December 31, 1999, the Company reported a 5.59% increase in net income to $17.0 million, or $1.19 Diluted earnings per share. This increase in net income was due to a $2.7 million, or 4.54% increase in net interest income. The provision for loan losses decreased to $3.9 million compared with $4.0 million for the same period last year. Non-interest income increased $1.7 million, or 12.7%, and non-interest expenses increased $3.8 million, or 9.0%, from 1998 to 1999. For the year ended December 31, 1998, the Company reported a 14.0% increase in net income to $16.1 million, or $1.08 Diluted earnings per share. This increase in net income was due to a $6.9 million, or 13.2%, increase in net interest income. The provision for loan losses increased to $4.0 million, compared with $2.3 million for the same period a year earlier. Non-interest income increased $1.4 million, or 11.8%, and non-interest expenses increased $3.1 million, or 8.0%, from 1997 to 1998. Each of these components is discussed in detail below. Net Interest Income The amount of net interest income is affected by changes in interest rates and by the volume, mix, and interest rate sensitivity of interest-earning assets and interest-bearing liabilities. On a fully tax-equivalent basis, net interest income was $62.9 million in 1999, a 4.8% increase over 1998 net interest income of $60.0 million. Growth in net interest income in 1999, compared with that of 1998, was primarily the result of a 6.25% increase in average earning assets. The yield on earning assets was 7.73% in 1999, compared with 7.96% in 1998. While the average balance of loans, net of unearned discount increased by $107.1 million, or 12.1%, the yield on loans decreased by 45 basis points to 8.21% at December 31, 1999, compared to 8.66% at December 31, 1998. This decrease in loan yield was due to a flat yield curve and competitive downward rate pressure. The yield on taxable securities remained strong at 6.70% in 1999 compared to 6.69% in 1998, while the yield on non-taxable securities increased 4 basis points to 7.54% at December 31, 1999, compared to 7.50% a year earlier. During 1999, the average balance of interest-bearing liabilities increased by $96.2 million, or 8.67%, over 1998 average balances. The average cost of these liabilities decreased 31 basis points in 1999, amounting to 4.16%, compared to 4.47% in 1998. The Company's interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) increased by 8 basis points in 1999. This is due to the decreased cost of interest-bearing liabilities as discussed above. The following table presents the Company's average balances, net interest income, interest rate spread, and net interest margin for 1999, 1998, and 1997. Non-taxable income from loans and securities is presented on a fully tax-equivalent basis whereby tax-exempt income is adjusted upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable. The assumed tax rate was 35% in these years. 7 INDEPENDENT BANK CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
1999 1998 1997 INTEREST INTEREST INTEREST AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE BALANCE PAID YIELD BALANCE PAID YIELD BALANCE PAID YIELD - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars In Thousands) Interest-earning assets: Federal funds sold and assets purchased under resale agreements $ 12,207 $579 4.74% $ 15,003 $ 800 5.33% $ 3,474 $ 182 5.24% Trading Assets 439 5 1.14% - - - - - - Taxable securities 418,010 28,002 6.70% 446,890 29,902 6.69% 390,769 26,207 6.71% Non-taxable securities (1) 41,881 3,157 7.54% 31,586 2,370 7.50% 13,717 999 7.28% Loans, net of unearned discount (1) 991,319 81,356 8.21% 884,205 76,539 8.66% 757,877 66,925 8.83% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets $1,463,856 $113,099 7.73% $1,377,684 $109,611 7.96% $ 1,165,837 $94,313 8.09% - ------------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks 47,051 42,806 42,667 Other assets 54,424 23,137 18,862 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $1,565,331 $1,443,627 $1,227,366 ==================================================================================================================================== Interest-bearing liabilities: Savings and Interest Checking accounts $ 280,441 $ 4,837 1.72% $ 266,093 $ 5,306 1.99% $ 255,069 $ 5,457 2.14% Money Market & Super Interest Checking accounts 108,415 2,637 2.43% 107,956 2,833 2.62% 109,156 3,105 2.84% Time deposits 450,425 23,194 5.15% 411,801 23,293 5.66% 402,346 23,136 5.75% Federal funds purchased and assets sold under repurchase agreements 84,809 4,077 4.81% 63,228 3,390 5.36% 45,586 2,628 5.76% Treasury tax and loan notes 3,407 184 5.40% 3,175 192 6.05% 3,283 178 5.42% Federal Home Loan Bank borrowings 278,613 15,249 5.47% 257,681 14,555 5.65% 120,976 7,074 5.85% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities $1,206,110 $ 50,178 4.16% $1,109,934 $ 49,569 4.47% $ 936,416 $41,578 4.44% - ------------------------------------------------------------------------------------------------------------------------------------ Demand deposits 220,727 195,583 171,955 Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 28,750 28,750 17,801 Other liabilities 12,830 12,805 15,109 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 1,468,417 1,347,072 1,141,281 Stockholders' Equity 96,914 96,555 86,085 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $1,565,331 $1,443,627 $1,227,366 ==================================================================================================================================== Net Interest Income $ 62,921 $ 60,042 $52,735 ======== ======== ======= Interest Rate Spread (2) 3.57% 3.49% 3.65% ===== ===== ===== Net Interest Margin (2) 4.30% 4.36% 4.52% ===== ===== =====
(1) The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,093, $899, and $493 in 1999, 1998 and 1997, respectively. (2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average costs of interest-bearing liabilities. Net interest margin represents net interest income as a percent of average interest-earning assets. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The following table presents certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to both volume and rate, have been consistently allocated to change due to rate.
Year Ended December 31, - ---------------------------------------------------------------------------------------------------------------- 1999 Compared To 1998 1998 Compared To 1997 -------------------------------------------------------------------- Change Change Change Change Due To Due To Total Due To Due To Total Rate Volume Change Rate Volume Change - ---------------------------------------------------------------------------------------------------------------- (In Thousands) Income on interest-earning assets: Federal funds sold ($ 72) ($ 149) ($ 221) $ 14 $ 604 $ 618 Taxable securities 32 (1,932) (1,900) (71) 3,766 3,695 Non-taxable securities (1) 15 772 787 70 1,301 1,371 Trading assets -- 5 5 -- -- -- Loans, net of unearned discount(1) (4,459) 9,276 4,817 (1,541) 11,155 9,614 - ---------------------------------------------------------------------------------------------------------------- Total ($ 4,484) $ 7,972 $ 3,488 ($ 1,528) $ 16,826 $ 15,298 ================================================================================================================ Expense of interest-bearing liabilities: Savings and Interest Checking accounts ($ 755) $ 286 ($ 469) ($ 387) $ 236 ($ 151) Money Market and Super Interest Checking accounts (208) 12 (196) (238) (34) (272) Time deposits (2,285) 2,186 (99) (387) 544 157 Federal funds purchased and assets sold under repurchase agreements (470) 1,157 687 (254) 1,016 762 Treasury tax and loan notes (22) 14 (8) 20 (6) 14 Federal Home Loan Bank borrowings (489) 1,183 694 (516) 7,997 7,481 - ---------------------------------------------------------------------------------------------------------------- Total ($ 4,229) $ 4,838 $ 609 ($ 1,762) $ 9,753 $ 7,991 ================================================================================================================ Change in net interest income ($ 255) $ 3,134 $ 2,879 $ 234 $ 7,073 $ 7,307 ================================================================================================================
(1) Interest earned on non-taxable investment securities and loans is shown on a fully tax equivalent basis Interest income increased by $3.5 million, or 3.2%, to $113.1 million in 1999 as compared to the prior year-end. Interest earned on loans increased by $4.8 million, or 6.3%, reflecting an increase in average loans to $991.3 million in 1999 from $884.2 in 1998. Interest income from taxable securities decreased by $1.9 million, or 6.35%, to $28.0 million in 1999 as compared to the prior year. Interest expense for the year ended December 31, 1999 increased to $50.2 million from the $49.6 million recorded in 1998. Interest expense increased by $4.8 million, or 9.8%, due to an increase in the average balance of interest-bearing liabilities to $1,206.1 million. Borrowings increased $42.7 million, or 13.2%, from the 1998 balance, and interest-bearing deposits increased $53.4 million or 6.8%. The cost of borrowings decreased to 5.32% in 1999, down 28 basis points from the 1998 cost of 5.60%. The average cost of interest-bearing deposits decreased 35 basis points to 3.65% in 1999. Total interest income amounted to $109.6 million in 1998, an increase of $15.3 million, or 16.2%, over 1997. This improvement was due to increases in loan and security income. Interest income on loans increased $9.6 million, or 14.4%, to $76.5 million in 1998 from $66.9 million a year prior. While the yield on loans decreased slightly, the average balance increased $126.3 million, or 16.6%, to $884.2 million in 1998. Interest income on taxable investment securities amounted to $29.9 million in 1998, compared to $26.2 million in 1997. This increase amounts to $3.7 million, or 14.1%, comparing 1998 to 1997. The increase resulted from average balances growing $56.1 million to $446.9 million in 1998 from $390.8 million in 1997. Total interest expense for the year ended December 31, 1998 increased $8.0 million, or 19.2%, over 1997. While interest expense on time deposits increased by $157,000, or 0.67%, the cost of this deposit category decreased to 5.66% in 1998 from 5.75% in 1997. The total cost of interest-bearing liabilities increased to 4.47% in 1998 from 4.44% in 1997. Provision for Possible Loan Losses. The provision for possible loan losses represents the charge to expense that is required to fund the reserve for possible loan losses. Adequacy of the allowance is determined using a consistent systematic methodology which analyzes the size and risk of the loan portfolio at each reporting date by allocating specific 9 INDEPENDENT BANK CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) reserves for adversly classified loans and general loss allocations for segments of the loan portfolio which have similar attributes. Management's periodic evaluation of the adequacy of the reserve considers past loan loss experience, known and inherent risks in the loan portfolio, adverse situations which may affect the borrowers' ability to repay, the estimated value of the underlying collateral, if any, and economic conditions. A substantial portion of the Company's loans are secured by real estate in Massachusetts. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in property values. The provision for loan losses remained consistent in 1999 at $3.93 million, compared with $3.96 million in 1998. For the year ended December 31, 1999, net loan charge-offs totaled $2.7 million, a decrease of $0.2 million from the prior year. As of December 31, 1999, the reserve for possible loan losses represented 1.45% of loans, net of unearned discount, as compared to 1.46% at December 31, 1998. The reserve for possible loan losses at December 31, 1999 represented 409.4% of nonperforming loans on that date, as compared to coverage of 255.7% at the prior year-end. This was a result of a decrease in nonperforming loans of $1.7 million or 31.8% during 1999. The provision for loan losses is based upon management's evaluation of the level of the reserve for possible loan losses required in relation to the estimate of loss exposure in the loan portfolio. An analysis of individual loans and the overall risk characteristics and size of the different loan portfolios is conducted on an ongoing basis. This managerial evaluation is reviewed periodically by the Company's independent public accountants as well as by a third-party loan review consultant. As adjustments are identified, they are reported in the earnings of the period in which they become known. Management believes that the reserve for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the reserve may be necessary based on increases in nonperforming loans, changes in economic conditions, changes in the risk profile of the portfolio, or for other reasons. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's reserve for possible loan losses. Federal Reserve regulators most recently examined the Company in the first quarter of 2000, and the Bank was most recently examined by the Federal Deposit Insurance Corporation (FDIC) in the third quarter of 1999. No additional provision for possible loan losses was required as a result of these examinations. Non-Interest Income The following table sets forth information regarding non-interest income for the periods shown.
Years Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------- (In Thousands) Service charges on deposit accounts $ 5,409 $ 5,356 $ 5,654 Asset Management & Trust Services income 4,108 3,763 3,082 Mortgage banking income 1,779 2,354 1,713 Bank Owned Life Insurance 1,609 166 -- Other non-interest income 1,888 1,486 1,293 - ----------------------------------------------------------------- TOTAL $14,793 $13,125 $11,742 =================================================================
Non-interest income, which is generated by deposit account service charges, fiduciary services, mortgage banking activities, and miscellaneous other sources, amounted to $14.8 million in 1999. Service charges on deposit accounts, which represent 36.6% of total non-interest income, increased from $5.36 million in 1998 to $5.41 million in 1999. Asset Management & Trust Services revenue increased by 9.2% to $4.1 million, compared to $3.8 million in 1998. This improvement is due to a strong securities market as well as a change in the fee structure. Mortgage banking income, $1.8 million in 1999, was a decrease of 24.4% over 1998 income of $2.4 million. The Company's mortgage banking revenue consists primarily of application fees and origination fees on sold loans, servicing income, and gains and losses on the sale of loans. Residential mortgage loans are originated as necessary to meet consumer demand. Sales of such loans in the secondary market occur to lend balance to the Company's interest rate sensitivity. Such sales generate gain or loss at the time of sale, produce future servicing income, and provide funds for additional lending and other purposes. Typically, loans are sold with the Bank retaining responsibility for collecting and remitting loan payments, inspecting properties, making certain insurance and tax payments on behalf of the borrowers, and otherwise servicing the loans and receiving a fee for performing these services. In the fourth quarter of 1998 the Bank purchased Bank Owned Life Insurance and this contributed $1.6 million to non-interest income in 1999. For the year ended December 31, 1998, total non-interest income amounted to $13.1 million, an increase of $1.4 million, or 11.8%, from 1997. Service charges on deposit accounts decreased slightly from $5.7 million in 1997 to $5.4 million in 1998. Asset Management and Trust Services revenue increased by 22.1% to $3.8 million compared to $3.1 million in 1997. This improvement was due to an increase in funds under management and a strong securities market. Mortgage banking income increased to $2.4 million in 1998, up from $1.7 million in 1997. Non-Interest Expense The following table sets forth information regarding non-interest expense for the periods shown.
Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------- (In Thousands) Salaries and employee benefits $23,716 $21,071 $19,464 Occupancy expenses 3,613 3,681 3,525 Equipment expenses 3,203 2,970 2,619 Advertising 1,197 775 679 Consulting fees 732 629 925 Legal fees- loan collection 357 299 583 Legal fees- other 284 531 413 FDIC assessment 140 132 112 Office supplies and printing 457 582 460 Data processing facilities management 4,337 4,166 3,727 Postage expense 679 694 674 Telephone expense 785 728 776 Other non-interest expenses 5,950 5,439 4,638 - ------------------------------------------------------------------- TOTAL $45,450 $41,697 $38,595 ===================================================================
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Non-interest expenses totaled $45.5 million for the year ended December 31, 1999, a $3.8 million increase from the comparable 1998 period. Salaries and employee benefits increased $2.6 million, or 12.6%, due in part to the transfer of the Personal Computing and Networking department personnel from Alltel, our data processing partner, to the Bank. Wage inflation resulting from a tight labor market was also a significant contributor to the increase. Occupancy and equipment expenses increased $0.17 million in 1999 to $6.8 million. In 1999, the Bank expanded into the town of Stoughton by opening a new full-service branch. The data processing facilities management fee increased by $0.2 million to $4.3 million in 1999. All other non-interest expenses increased $0.77 million, or 7.9%, to $10.6 million in 1999, compared to $9.8 million in 1998. Non-interest expenses increased by $3.1 million, or 8.0%, to $41.7 million in 1998 compared with $38.6 million in 1997. Salaries and employee benefits increased $1.6 million, or 8.3%, to $21.1 million in 1998, compared with $19.5 million in 1997. This increase was due to merit increases, additional staffing, and a tight labor market. Performance-based compensation awards also contributed to this increase. Occupancy and equipment expense increased $0.5 million, or 8.3%, from 1997 to 1998, again demonstrating the Company's commitment to continually improve facilities and technology for customers and employees. The data processing facilities management fee, initiated in 1996, increased by $0.4 million to $4.2 million in 1998, compared to $3.7 million in 1997. Minority Interest In 1997, Independent Capital Trust I was formed for the purpose of issuing Trust Preferred Securities. A total of $28.8 million of 9.28% Trust Preferred Securities were issued by the Trust. The Company recorded distributions payable on the Trust Preferred Securities as minority interest expense totaling $2.7 million in 1999 and 1998. Income Taxes For the years ended December 31, 1999, 1998 and 1997, the Company recorded combined federal and state income tax provisions of $7.5 million, $7.8 million and $7.3 million, respectively. These provisions reflect effective income tax rates of 30.7%, 32.6%, and 34.1%, in 1999, 1998, and 1997, respectively, which are less than the Company's combined statutory tax rate of 42%. The lower effective income tax rates are attributable to certain non-taxable investments and dividends and to benefits recorded in these years in compliance with Statement of Financial Standards (SFAS) No. 109. The tax effects of all income and expense transactions are recognized by the Company in each year's consolidated statements of income regardless of the year in which the transactions are reported for income tax purposes. ASSET/LIABILITY MANAGEMENT The Bank's asset/liability management process monitors and manages, among other things, the interest rate sensitivity of the balance sheet, the composition of the securities portfolio, funding needs and sources, and the liquidity position. All of these factors, as well as projected asset growth, current and potential pricing actions, competitive influences, national monetary and fiscal policy, and the regional economic environment are considered in the asset/liability management process. The Asset/Liability Management Committee, whose members comprise the Bank's senior management, develops procedures, consistent with policies established by the Board of Directors, which monitor and coordinate the Company's interest rate sensitivity and the sources, uses, and pricing of funds. Interest rate sensitivity refers to the Company's exposure to fluctuations in interest rates and its effect on earnings. If assets and liabilities do not reprice simultaneously and in equal volume, the potential for interest rate exposure exists. It is management's objective to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary, within prudent limits, through the use of off-balance sheet hedging instruments such as interest rate swaps. The Committee employs simulation analyses in an attempt to quantify, evaluate, and manage the impact of changes in interest rates on the Bank's net interest income. In addition, the Company engages an independent consultant to render advice with respect to asset and liability management strategy. The Bank is careful to increase deposits without adversely impacting the weighted average cost of those monies. Accordingly, management has implemented funding strategies that include FHLB advances and repurchase agreement lines. These non-deposit funds are also viewed as a contingent source of liquidity and, when profitable lending and investment opportunities exist, access to such funds provides a means to leverage the balance sheet. At December 31, 1999, approximately 29% of the Company's total assets consisted of assets which will reprice or mature within one year. As of that date, the amount of the Company's cumulative hedged gap on assets which will reprice or mature within one year was a negative $422.4 million, or 26.6% of total assets. From time to time, the Company has utilized interest rate swap agreements as hedging instruments against stable or declining interest rates. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount for a predetermined period of time from a second party. The assets relating to the notional principal amount are not actually exchanged. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Bank had entered into interest rate swap agreements with a total notional value of $55 million at December 31, 1999 and $20 million at December 31, 1998. These swaps were arranged through a large international financial institution and have initial maturities ranging from nine months to five years. The Bank receives fixed rate payments and pays a variable rate of interest tied to either 3-month LIBOR or Prime. At December 31, 1999, the weighted average fixed payment rate was 7.65% and the weighted average rate of the variable interest payments was 7.22%. As a result of these interest rate swaps, the Bank realized net interest income of $0.1 million in 1999, 1998 and 1997. The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere herein.
Amounts Maturing or Repricing ------------------------------------------------------ Within Over Three Three To Twelve Over One Months Months Year Total ----------- ------------- ---------- ---------- Interest-earning assets (1): Federal funds sold $ 8,719 -- -- $ 8,719 Securities 29,859 46,158 377,850 453,867 Loans - fixed rate (2) 52,260 111,370 604,890 768,520 Loans - floating rate (2) 172,861 37,082 43,151 253,094 ----------- ------------- ---------- ---------- Total interest-earning assets 263,699 194,610 1,025,891 1,484,200 ----------- ------------- ---------- ---------- Bank Owned Life Insurance -- -- 31,719 31,719 ----------- ------------- ---------- ---------- Interest-bearing liabilities: Savings and Interest Checking accounts (3) 65,807 -- 251,382 317,189 Money Market and Super Interest Checking accounts (3) 88,213 1,336 11,694 101,243 Time certificates of deposit over $100,000 58,335 6,300 -- 64,635 Other time deposits 117,010 235,439 44,327 396,776 Borrowings 183,243 100,000 76,224 359,467 ----------- ------------- ---------- ---------- Total interest-bearing liabilities 512,608 343,075 383,627 1,239,310 ----------- ------------- ---------- ---------- Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation -- -- 28,750 28,750 =========== ============= =========== ========== Net interest sensitivity gap during the period (248,909) (148,465) 645,233 247,859 =========== ============= =========== ========== Cumulative gap (248,909) (397,374) 247,859 247,859 =========== ============= =========== ========== Effect of hedging activities (55,000) 30,000 25,000 -- =========== ============= =========== ========== Cumulative hedged gap ($ 303,909) (422,374) 247,859 $ 247,859 =========== ============= =========== ========== Interest-earning assets as a percent of interest-bearing liabilities (cumulative) 51.44% 53.56% 119.76% 119.76% Interest-earning assets as a percent of total assets (cumulative) 16.58% 28.82% 93.34% 93.34% Ratio of unhedged gap to total assets -15.65% -9.34% 40.58% 15.59% Ratio of cumulative unhedged gap to total assets -15.65% -24.99% 15.59% 15.59% Ratio of hedged gap to total assets -19.11% -7.45% 42.15% 15.59% Ratio of cumulative hedged gap to total assets -19.11% -26.56% 15.59% 15.59%
(1) Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans are included in the periods in which they are scheduled to be repaid. (2) Balances have been reduced for nonperforming loans which amounted to $3.6 million at the same date. (3) Although the Bank's regular savings accounts generally are subject to immediate withdrawal, management considers most of these accounts to be core deposits having significantly longer effective maturities based on the Bank's experience of retention of such deposits in changing interest rate environments. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTEREST RATE RISK Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term horizons. The primary goal of interest rate risk management is to control this risk within limits approved by the Board and narrower guidelines approved by the Asset/Liability Management Committee. These limits and guidelines reflect the Company's tolerance for interest rate risk by identifying exposures, quantifying and hedging them. The Company quantifies its interest rate exposures using simulation models, as well as simpler gap analyses. The Company manages its interest rate exposure using a combination of on and off balance sheet instruments, primarily fixed rate portfolio securities, interest rate swaps, and options. The Company uses simulation analysis to measure the exposure of net interest income to changes in interest rates over a relatively short (i.e. less than 2 years) time horizon. Simulation analysis involves projecting future interest income and expense from the Company's assets, liabilities and off-balance sheet positions under various scenarios. The Company's limits on interest rate risk specify that if interest rates were to shift up or down 200 basis points, estimated net interest income for the next 12 months should decline by less than 6.0%. The following table reflects the Company's estimated exposure, as a percentage of estimated net interest income for the next 12 months:
Rate Change Estimated Exposure as % (Basis Points) of Net Interest Income -------------- ------------------------ +200 (2.25%) -200 2.79%
See Managements' discussion on Asset/Liability Management for further details on how the Company manages its market and interest rate risk. LIQUIDITY Liquidity, as it pertains to the Company, is the ability to generate cash in the most economical way for the institution to meet its ongoing obligations to pay deposit withdrawals and to fund loan commitments. The Company's primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and investments. The Bank utilizes its extensive branch network to access retail customers who provide a stable base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors. The Bank has also established five repurchase agreement lines with major brokerage firms as potential sources of liquidity. At December 31, 1999, the Company had $39.6 million outstanding under these lines. In addition to these lines, the Bank also had customer repurchase agreements outstanding amounting to $47.6 million at December 31, 1999. As a member of the Federal Home Loan Bank, Rockland has access to approximately $323 million of borrowing capacity. On December 31, 1999, the Company had $256.2 million outstanding in FHLB borrowings. The Parent Company, as a separately incorporated bank holding company, has no significant operations other than serving as the sole stockholder of the Bank. On an unconsolidated basis, the Parent Company's assets include its investment in the Bank, $1.4 million of other investments, and $0.9 million of goodwill. In addition, the Parent Company issued $29.64 million of Junior Subordinated Debentures in conjunction with the issuance of Trust Preferred Securities by a direct subsidiary, Independent Capital Trust I. The proceeds of this offering, net of issuance costs, are maintained in an interest bearing checking account at the Bank. The Parent Company has no employees and no significant liabilities or sources of income. Expenses incurred by the Parent Company relate to its reporting obligations under the Securities Exchange Act of 1934, as amended, and related expenses as a publicly traded company. The Parent Company is directly reimbursed by the Bank for virtually all such expenses. The Company actively manages its liquidity position under the direction of the Asset/Liability Management Committee. Periodic review under prescribed policies and procedures is intended to ensure that the Company will maintain adequate levels of available funds. At December 31, 1999, the Company's liquidity position was well above policy guidelines. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES The Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and other regulatory agencies have established capital guidelines for banks and bank holding companies. Risk-based capital guidelines issued by the federal regulatory agencies require banks to meet a minimum Tier 1 risk-based capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At December 31, 1999, the Company and the Bank substantially exceeded the minimum requirements for Tier 1 risk-based and total risk-based capital. A minimum requirement of 4.0% Tier 1 leverage capital is also mandated. On December 31, 1999, the Tier 1 leverage capital ratio for the Company and the Bank was 8.15% and 6.86%, respectively. Capital ratios of the Company and the Bank are shown below for the last two year-ends.
DECEMBER 31, 1999 1998 - ------------ ------- --------- THE COMPANY Tier 1 leverage capital ratio 8.15% 7.91% Tier 1 risk-based capital ratio 11.14% 11.38% Total risk-based capital ratio 12.39% 12.63% THE BANK Tier 1 leverage capital ratio 6.86% 6.32% Tier 1 risk-based capital ratio 9.35% 9.09% Total risk-based capital ratio 10.60% 10.34%
DIVIDENDS The Company declared cash dividends of $.40 per share in 1999 and 1998. The 1999 ratio of dividends paid to earnings was 33.50%. Payment of dividends by the Company on its common stock is subject to various regulatory restrictions. The Company is regulated by the Federal Reserve Bank and, as such, is subject to its regulations and guidelines with respect to the payment of dividends. Since substantially all of the funds available for the payment of dividends are derived from the Bank, future dividends will depend on the earnings of the Bank, its financial condition, its need for funds, applicable governmental policies and regulations, and other such matters as the Board of Directors deems appropriate. Management believes that the Bank will continue to generate adequate earnings to continue to pay dividends. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The financial nature of the Company's consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect the Company because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. The impact on the Company is a noted increase in the size of loan requests with resulting growth in total assets. In addition, operating expenses may increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on the Company's consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. YEAR 2000 READINESS DISCLOSURE The Company developed plans to address the possible exposure related to the impact of the Year 2000 problem ("Y2K") on its computer systems and key service providers. Senior management and the Board of Directors approved these plans. The Company aggressively monitored the transition of its computer systems into 2000 and is pleased with the results. Minor exceptions were noted and corrected quickly. Management will continue to monitor computer systems throughout 2000 as a normal course of business, paying particular attention to the remaining critical Y2K dates. The Company estimated out of pocket costs in 1999 and 1998 to address the Y2K problem at $500,000. These costs totaled $211,000 and $131,000 in 1999 and 1998, respectively. 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of Independent Bank Corp.: We have audited the consolidated balance sheets of Independent Bank Corp. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Bank Corp. and its subsidiary as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ------------------------------- ARTHUR ANDERSEN LLP Boston, Massachusetts January 26, 2000> 15 INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 1998 ------------ ------------- (Dollars In Thousands) ASSETS CASH AND DUE FROM BANKS $ 48,949 $ 47,755 FEDERAL FUNDS SOLD 8,719 38,443 TRADING ASSETS (Note 3) 486 -- SECURITIES HELD TO MATURITY (Notes 1 and 4) (market value $218,588 and $287,542) 229,043 284,944 SECURITIES AVAILABLE FOR SALE (Notes 1 and 4) 201,614 195,199 FEDERAL HOME LOAN BANK STOCK (Note 7) 17,036 16,035 LOANS, NET OF UNEARNED DISCOUNT (Notes 1 and 5) 1,028,510 941,112 LESS: RESERVE FOR POSSIBLE LOAN LOSSES (14,958) (13,695) ------------ ------------- Net Loans 1,013,552 927,417 ------------ ------------- BANK PREMISES AND EQUIPMENT (Notes 1 and 6) 14,268 15,200 OTHER ASSETS (Notes 1 and 9) 56,389 50,076 ------------ ------------- TOTAL ASSETS $ 1,590,056 $ 1,575,069 ============ ============= LIABILITIES DEPOSITS Demand Deposits $ 226,044 $ 219,090 Savings and Interest Checking Accounts 282,516 278,306 Money Market and Super Interest Checking Accounts 107,624 113,811 Time Certificates of Deposit over $100,000 113,832 95,706 Other Time Deposits 351,790 336,404 ------------ ------------- TOTAL DEPOSITS 1,081,806 1,043,317 ------------ ------------- FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER REPURCHASE AGREEMENTS (Notes 4 and 7) 93,366 82,376 TREASURY TAX AND LOAN NOTES (Notes 4 and 7) 9,877 471 FEDERAL HOME LOAN BANK BORROWINGS (Note 7) 256,224 313,724 OTHER LIABILITIES 21,904 10,583 ------------ ------------- TOTAL LIABILITIES $ 1,463,177 $ 1,450,471 ------------ ------------- Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation Outstanding: 1,150,000 shares (Note 14) $ 28,750 $ 28,750 ------------ ------------- STOCKHOLDERS' EQUITY (Notes 1 and 12) Preferred Stock, $.01 par value. Authorized: 1,000,000 Shares Outstanding: None -- -- Common Stock, $.01 par value. Authorized: 30,000,000 Outstanding: 14,863,821 Shares in 1999 and 14,863,821 Shares in 1998 149 149 Treasury Stock: 684,463 Shares in 1999 and 406,638 Shares in 1998 (10,678) (6,431) Surplus 44,950 45,303 Retained Earnings 67,547 56,063 Other Accumulated Comprehensive Income, Net of Tax (Note 4) (3,839) 764 TOTAL STOCKHOLDERS' EQUITY 98,129 95,848 ------------ ------------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $ 1,590,056 $ 1,575,069 ============ =============
The accompanying notes are an integral part of these consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 1998 1997 ------------------- ----------- ------------------ (Dollars In Thousands, Except Share and Per Share Data) INTEREST INCOME Interest on Loans (Notes 1 and 5) $ 81,296 $ 76,404 $ 66,739 Interest and Dividends on Securities (Note 4) 30,127 31,508 26,899 Interest on Federal Funds Sold and Repurchase Agreements 578 800 182 Interest on Interest Bearing Deposits 5 -- -- ------------------- ----------- ------------------ Total Interest Income 112,006 108,712 93,820 ------------------- ----------- ------------------ INTEREST EXPENSE Interest on Deposits 30,668 31,432 31,697 Interest on Borrowings (Notes 1 and 7) 19,510 18,137 9,881 ------------------- ----------- ------------------ Total Interest Expense 50,178 49,569 41,578 ------------------- ----------- ------------------ Net Interest Income 61,828 59,143 52,242 ------------------- ----------- ------------------ PROVISION FOR POSSIBLE LOAN LOSSES (Notes 1 and 5) 3,927 3,960 2,260 ------------------- ----------- ------------------ Net Interest Income After Provision For Possible Loan Losses 57,901 55,183 49,982 ------------------- ----------- ------------------ NON-INTEREST INCOME Service Charges on Deposit Accounts 5,409 5,356 5,654 Asset Management & Trust Services Income 4,108 3,763 3,082 Mortgage Banking Income 1,779 2,354 1,713 Other Non-Interest Income 3,497 1,652 1,293 ------------------- ----------- ------------------ Total Non-Interest Income 14,793 13,125 11,742 ------------------- ----------- ------------------ NON-INTEREST EXPENSES Salaries and Employee Benefits (Note 10) 23,716 21,071 19,464 Occupancy Expenses (Notes 6 and 13) 3,613 3,681 3,525 Equipment Expenses 3,203 2,970 2,619 Other Non-Interest Expenses (Note 11) 14,918 13,975 12,987 ------------------- ----------- ------------------ Total Non-Interest Expenses 45,450 41,697 38,595 ------------------- ----------- ------------------ Minority Interest 2,668 2,668 1,645 ------------------- ----------- ------------------ INCOME BEFORE INCOME TAXES 24,576 23,943 21,484 PROVISION FOR INCOME TAXES (Notes 1 and 9) 7,545 7,804 7,326 ------------------- ----------- ------------------ NET INCOME $ 17,031 $ 16,139 $ 14,158 =================== =========== ================== BASIC EARNINGS PER SHARE $ 1.20 $ 1.10 $ 0.97 =================== =========== ================== DILUTED EARNINGS PER SHARE $ 1.19 $ 1.08 $ 0.95 =================== =========== ================== Weighted average common shares (Basic) (Notes 1 and 12) 14,213,390 14,730,193 14,666,420 Common stock equivalents 152,266 215,526 305,805 ------------------- ----------- ------------------ Weighted average common shares (Diluted) (Notes 1 and 12) 14,365,656 14,945,719 14,972,225 =================== =========== ==================
The accompanying notes are an integral part of these consolidated financial statements. 17 INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars In Thousands, Except Share and Per Share Data)
OTHER ACCUMULATED COMMON TREASURY RETAINED COMPREHENSIVE STOCK STOCK SURPLUS EARNINGS INCOME TOTAL --------- -------- --------- ---------- ------------- ------- BALANCE DECEMBER 31, 1996 $ 146 -- $ 44,433 $ 36,666 $ (135) $ 81,110 --------- -------- --------- ---------- ------------- ------- Net Income 14,158 14,158 Cash Dividends Declared ($.34 per share) (4,999) (4,999) Proceeds From Exercise of Stock Options (Note 12) 2 710 712 Tax Benefit on Stock Option Exercises 4 4 Change in Unrealized Gain (Loss) on Securities Available For Sale, Net of Tax (Note 4) 1,508 1,508 --------- -------- --------- ---------- ------------- ------- BALANCE DECEMBER 31, 1997 148 -- 45,147 45,825 1,373 92,493 --------- -------- --------- ---------- ------------- ------- Net Income 16,139 16,139 Cash Dividends Declared ($.40 per share) (5,901) (5,901) Proceeds From Exercise of Stock Options (Note 12) 1 409 156 566 Treasury Stock Repurchase, 433,338 shares (6,840) (6,840) Change in Unrealized Gain on Securities Available For Sale, Net of Tax (Note 4) (609) (609) --------- -------- --------- ---------- ------------- ------- BALANCE DECEMBER 31, 1998 149 (6,431) 45,303 56,063 764 95,848 --------- -------- --------- ---------- ------------- ------- Net Income 17,031 17,031 Cash Dividends Declared ($.40 per share) (5,547) (5,547) Proceeds From Exercise of Stock Options (Note 12) 589 (353) 236 Treasury Stock Repurchase, 315,355 shares (4,836) (4,836) Change in Unrealized Gain on Securities Available For Sale, Net of Tax (Note 4) (4,603) (4,603) --------- -------- --------- ---------- ------------- ------- BALANCE DECEMBER 31, 1999 $ 149 ($10,678) $ 44,950 $ 67,547 ($ 3,839) $ 98,129 --------- -------- --------- ---------- ------------- -------
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 -------- -------- --------- (In Thousands) Net Income $ 17,031 $ 16,139 $ 14,158 Other Comprehensive Income, Net of Tax Unrealized holding gains (losses) arising during period (4,581) (591) 1,503 Reclassification adjustments for (gains) losses included in net earnings (22) (18) 5 -------- -------- --------- Other Comprehensive Income (4,603) (609) 1,508 -------- -------- --------- Comprehensive Income $ 12,428 $ 15,530 $ 15,666 ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997 --------- ---------- --------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 17,031 $ 16,139 $ 14,158 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES: Depreciation and amortization 4,544 4,202 3,160 Provision for possible loan losses 3,927 3,960 2,260 Deferred income taxes 75 65 769 Loans originated for resale (51,208) (76,223) (42,850) Proceeds from mortgage loan sales 51,005 76,028 42,793 Loss (gain) on sale of mortgages 203 195 57 Loss (gain) on sale of investments (34) (27) 8 Gain recorded from mortgage servicing rights (560) (748) (423) Other Real Estate Owned recoveries (12) (188) (131) Changes in assets and liabilities: (Increase) Decrease in other assets (5,753) 1,318 (1,111) (Decrease) Increase in other liabilities 13,928 (1,497) (403) --------- ---------- --------- TOTAL ADJUSTMENTS 16,115 7,085 4,129 --------- ---------- --------- NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES 33,146 23,224 18,287 --------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of Securities Held to Maturity 77,286 106,545 88,070 Proceeds from maturities of Securities Available-For-Sale 43,855 68,702 20,641 Purchase of Securities Held to Maturity (22,045) (84,211) (106,195) Purchase of Securities Available For Sale (58,555) (133,688) (123,937) Purchase of Federal Home Loan Bank Stock (1,001) -- (8,477) Net increase in Loans (90,188) (116,004) (134,533) Purchase of Bank Owned Life Insurance -- (30,000) -- Proceeds from sale of Other Real Estate Owned 138 244 400 Investment in Bank Premises and Equipment (2,245) (5,041) (4,200) --------- ---------- --------- NET CASH USED IN INVESTING ACTIVITIES (52,755) (193,453) (268,231) --------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in Time Deposits 33,512 10,835 44,493 Net increase (decrease) in Other Deposits 4,977 44,334 25,083 Net increase (decrease) in Federal Funds Purchased and Assets Sold Under Repurchase Agreements 10,990 44,049 37,487 Net increase (decrease) in Federal Home Loan Bank Borrowings (57,500) 107,000 128,724 Net increase (decrease) in Treasury Tax & Loan Notes 9,406 (2,746) 921 Issuance of corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation -- -- 28,750 Proceeds from stock issuance 236 566 716 Payments for Treasury stock purchase (4,836) (6,840) -- Dividends Paid (5,706) (5,787) (4,700) --------- ---------- --------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (8,921) 191,411 261,474 --------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,530) 21,182 11,530 --------- ---------- --------- CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 86,198 65,016 53,486 --------- ---------- --------- CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 57,668 $ 86,198 $ 65,016 ========= ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest on deposits and borrowings $ 50,083 $ 51,212 $ 45,453 Minority Interest 2,668 2,668 1,638 Income taxes 8,094 7,303 6,110 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Loans transferred to OREO 126 85 503 Assets transferred to trading from Available-For-Sale 486 -- --
DISCLOSURE OF ACCOUNTING POLICY: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold and assets purchased under resale agreements. Generally, federal funds are sold for up to two-week periods. The accompanying notes are an integral part of these consolidated financial statements. 19 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION The accompanying consolidated financial statements include the accounts of Independent Bank Corp. (the Company) and its subsidiaries, Rockland Trust Company (Rockland or The Bank) and Independent Capital Trust I. All material intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior year financial statements have been reclassified to conform to the current year's presentation. USES OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could vary from these estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, and the valuation of foreclosed real estate, deferred tax assets and trading activities. NATURE OF OPERATIONS Independent Bank Corp. is a one-bank holding company whose primary asset is its investment in Rockland Trust Company. Rockland is a state-chartered commercial bank which operates 34 banking offices in southeastern Massachusetts. The Bank's primary source of income is from providing loans to individuals and small-to-medium-sized businesses in its market area. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Bank's activities are with customers located within Massachusetts. Notes 3 and 4 discuss the types of securities that the Bank invests in. Note 5 discusses the types of lending that the Bank engages in. The Bank does not have any significant concentrations in any one industry or customer. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, federal funds sold and securities purchased under repurchase agreements, all of which mature within 90 days. TRADING ACTIVITIES Securities that are held principally for resale in the near term are recorded in the trading assets account at fair value with changes in fair value recorded in earnings. Interest and dividends are included in net interest income. Derivatives are carried at fair value with changes in fair value recorded in earnings, and are classified as trading assets when there is a positive fair value and trading liabilities when there is a negative fair value. Quoted market prices, when available, are used to determine the fair value of trading instruments. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of instruments with similar characteristics, or discounted cash flows. SECURITIES Debt securities that management has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and recorded at amortized cost. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as "available-for-sale" and recorded at fair value, net of the related tax effect, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the effective yield method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. When securities are sold, the adjusted cost of the specific security sold is used to compute gain or loss on the sale. Neither the Company nor the Bank engages in the trading of investment securities. LOANS HELD FOR SALE Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. LOANS Loans are stated at their principal balance outstanding. Interest income for commercial, real estate, and consumer loans is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status. Interest income on instalment loans is generally recorded based upon the level-yield method. Interest accruals are generally suspended on commercial or real estate loans more than 90 days past due with respect to principal or interest. When a loan is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income. Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectibility of principal is no longer considered doubtful. Loan fees in excess of certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's systematic periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by manage- 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ment in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. LOAN SERVICING Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. LOAN ORIGINATION FEES Loan origination and commitment fees and certain related costs are deferred and amortized over the lives of the underlying loans. Net deferred fees included in loans at December 31, 1999 and 1998 were $830,000 and $267,000, respectively. BANK PREMISES AND EQUIPMENT Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives of the improvements. OTHER REAL ESTATE OWNED Other real estate owned (OREO) is comprised of real estate acquired through loan foreclosure or acceptance of a deed in lieu of foreclosure. OREO is initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Any loan balance in excess of the estimated fair value on the date of transfer is charged to the reserve for possible loan losses on that date. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. Subsequent declines in value are charged to other non-interest expense. INTANGIBLE ASSETS In connection with the acquisition of Middleborough Trust Company in January 1986, the Company allocated $2,951,000 of the purchase price to goodwill. This amount is being amortized over a 20-year period using the straight-line method. The balance at December 31, 1999 is $885,000. In March 1994, Rockland purchased $21.6 million of deposits from the Resolution Trust Corporation. In May 1994, Rockland purchased approximately $50 million of trust assets from Pawtucket Trust Company. The Bank allocated $1,923,000 of the purchase price of these transactions to intangible assets, which is being amortized over a 15-year period using the straight-line method. The balance at December 31, 1999 is $1,179,000. The Company periodically evaluates intangible assets for impairment on the basis of whether these assets are recoverable from projected undiscounted net cash flows of the related acquired entity. INCOME TAXES Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. ASSET MANAGEMENT & TRUST SERVICES Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets, as such assets are not assets of the Company. Trust and Financial Services income is recorded on an accrual basis. FINANCIAL INSTRUMENTS CREDIT RELATED FINANCIAL INSTRUMENTS - In the ordinary course of business, the Bank enters into commitments to extend credit. These financial instruments are recorded when they are funded. DERIVATIVE FINANCIAL INSTRUMENTS - As part of asset/liability management, the Bank utilizes interest rate swap agreements, caps, or floors to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Swaps are accounted for on the "accrual" method. The interest component associated with the contract is recognized over the life of the contract in net interest income. When a contract is terminated, the resulting gain or loss is deferred and amortized into net interest income based upon the life of the contract. The Bank uses written put and call option strategies in which it receives a cash premium for entering into options on investment securities. These options are derivative financial instruments and are marked to fair value through non-interest income and included in Other Liabilities in the accompanying consolidated statement of financial condition. In 1999 and 1998, the Bank recognized option income of $30,000 and $81,000 respectively. 21 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) TRANSFERS OF FINANCIAL ASSETS Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value-based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value-based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. (See Note 12.) COMPREHENSIVE INCOME The Company adopted SFAS 130, "Reporting Comprehensive Income," as of January 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The adoption of SFAS 130 had no effect on the Company's net income or shareholders' equity. Comprehensive income is reported in this financial statement. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires computer software costs associated with internal-use software to be expensed as incurred until certain capitalization criteria are met. The Company adopted SOP 98-1 on January 1, 1999 and the adoption did not have a material impact on its financial statements. In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires all costs associated with pre-opening and organization activities to be expensed as incurred. The Company adopted SOP 98-5 beginning January 1, 1999. The adoption of SOP 98-5 did not have a material impact on its financial statements. In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employer's Disclosure about Pensions and Other Post-retirement Benefits" - an amendment to FASB Statements Nos. 87, 88 and 106. This statement revises employer's disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans but standardizes the disclosure requirement. This statement suggests combined formats for presentation of pension and other postretirement benefit disclosure. Restatement of disclosures for earlier periods is required. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 132 did not have a material effect on the Company's primary financial statement, but did affect the disclosure of employee benefits contained elsewhere herein (Note 10). In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in income unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 as amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133" shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, financial quarters beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133, as amended must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 or December 31, 1998 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impact of adopting SFAS No. 133 on its consolidated financial statements and has not determined the timing nor method of its adoption of the statement. However, the Company does not expect that the adoption of this statement will have a material impact on its financial position or results of operations. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value Of Financial Instruments," requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted market values are not available, fair values are based upon estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The carrying amount reported on the balance sheet for cash, federal funds sold and assets purchased under resale agreements, and interest bearing deposits approximates those assets' fair values. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following table reflects the book and fair values of financial instruments, including on-balance sheet and off-balance sheet instruments as of December 31, 1999 and 1998.
1999 1998 ----------------------- ------------------------------- BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ----------- ------ (In Thousands) (In Thousands) FINANCIAL ASSETS - ---------------- Cash and Due From Banks $ 48,949 $ 48,949 $ 47,755 $ 47,755 (a) Federal Funds Sold 9,205 9,205 38,443 38,443 (a) Securities Held To Maturity 229,043 218,588 284,944 287,542 (b) Securities Available For Sale 201,614 201,614 195,199 195,199 (b) Trading assets 486 486 -- -- (b) Federal Home Loan Bank Stock 17,036 17,036 16,035 16,035 (c) Net Loans 1,012,052 1,010,337 927,417 931,059 (d) Loans held for sale 1,500 1,500 5,600 5,600 (b) Mortgage Servicing Rights 1,417 1,417 1,145 1,145 (f) Bank-owned Life Insurance 31,720 31,720 30,111 30,111 (b) FINANCIAL LIABILITIES - --------------------- Demand Deposits 226,044 226,044 219,090 219,090 (e) Savings and Interest Checking Accounts 282,515 282,515 278,306 278,306 (e) Money Market and Super Interest Checking Accounts 107,624 107,624 113,811 113,811 (e) Time Deposits 465,622 466,553 432,110 433,623 (f) Federal Funds Purchased and Assets Sold Under Repurchase Agreements 93,366 92,832 82,376 83,125 (f) Treasury Tax and Loan Notes 9,877 9,877 471 471 (a) Federal Home Loan Bank Borrowings 256,224 250,175 313,724 308,239 (f) Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 28,750 24,869 28,750 29,756 (f) UNRECOGNIZED FINANCIAL INSTRUMENTS - ---------------------------------- Standby Letters of Credit -- 9 -- 13 (g) Interest Rate Swap Agreements -- 291 -- 131 (b)
(a) Book value approximates fair value due to short term nature of these instruments. (b) Fair value was determined based on market prices or dealer quotes. (c) Federal Home Loan Bank stock is redeemable at cost (d) The fair value of loans was estimated by discounting anticipated future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. (e) Fair value is presented as equaling book value. SFAS No. 107 requires that deposits which can be withdrawn without penalty at any time be presented at such amount without regard to the inherent value of such deposits and the Bank's relationship with such depositors. (f) The fair value of these instruments is estimated by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities. (g) The fair value of these instruments was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of customers. 23 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) TRADING ASSETS Trading assets, at fair value, consist of the following:
1999 -------------- Fair Value -------------- (In Thousands) Cash equivalents $ 21 Marketable equity securities 465 -------------- Total $486 ==============
The Company realized a loss on trading activities of $15,000 in 1999. (4) SECURITIES The amortized cost, gross unrealized gains and losses, and fair market value of securities held to maturity at December 31, 1999 and 1998 were as follows:
1999 1998 ------------------------------------------ ------------------------------------------ Gross Gross Fair Gross Gross Fair Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- ------- --------- ---------- ---------- -------- (In Thousands) (In Thousands) U.S. Treasury and U.S. Government Agency Securities $ 25,996 -- ($ 1,386) $ 24,610 $ 29,197 $ 191 ($ 419) $ 28,969 Mortgage-Backed Securities 101,081 84 (2,229) 98,936 143,292 1,916 (293) 144,915 Collateralized Mortgage Obligations 5,666 -- (61) 5,605 17,799 89 (71) 17,817 State, County, and Municipal Securities 41,984 25 (2,841) 39,168 40,365 820 (52) 41,133 Other Securities 54,316 361 (4,408) 50,269 54,291 835 (418) 54,708 --------- ---------- ---------- ------- --------- ---------- ---------- -------- Total $229,043 $ 470 ($10,925) $218,588 $284,944 $ 3,851 ($ 1,253) $287,542 ========= ========== ========== ======= ========= ========== ========== ========
The amortized cost, gross unrealized gains and losses, and fair market value of securities available for sale at December 31, 1999 and 1998 were as follows:
1999 1998 ------------------------------------------ ------------------------------------------ Gross Gross Fair Gross Gross Fair Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- --------- --------- ----------- ---------- ------- (In Thousands) (In Thousands) U.S. Treasury and U.S. Government Agency Securities $ 8,999 -- ($ 532) $ 8,467 $ 8,999 $ 46 -- $ 9,045 Mortgage-Backed Securities 125,115 -- (3,234) 121,881 136,014 1,527 (131) 137,410 Collateralized Mortgage Obligations 73,316 250 (2,300) 71,266 48,677 19 (376) 48,320 Other Securities -- -- -- 350 74 424 --------- ---------- ---------- --------- --------- ----------- ---------- ------- Total $207,430 $ 250 ($ 6,066) $201,614 $194,040 $ 1,666 ($507) $195,199 ========= ========== ========== ========= ========= =========== ========== =======
The Bank realized a gain of $34,000 and $27,000 on the sale of available-for-sale securities in 1999 and 1998, respectively. A schedule of the contractual maturities of securities held-to-maturity and securities available-for-sale at December 31, 1999 is presented below:
Held to maturity Available for sale ---------------------- ---------------------- Amortized Fair Amortized Fair Cost Market Value Cost Market Value --------- ------------ --------- ------------ (In Thousands) (In Thousands) Due in one year or less $ 14,288 $ 14,123 $ 1,099 $ 1,055 Due from one year to five years 17,340 16,929 -- -- Due from five to ten years 50,197 49,263 17,387 16,562 Due after ten years 147,218 138,273 188,945 183,997 --------- ------------ --------- ------------ Total $229,043 $218,588 $207,431 $201,614 ========= ============ ========= ============
The actual maturities of mortgage-backed securities and collateralized mortgage obligations will differ from the contractual maturities due to the ability of the borrowers to prepay underlying mortgage obligations. On December 31, 1999 and 1998, investment securities carried at $136,236,000 and $110,579,000, respectively, were pledged to secure public deposits, assets sold under repurchase agreements, treasury tax and loan notes, and for other purposes as required by law. At year end 1999 and 1998, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of stockholders' equity. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES The composition of loans, net of unearned discount, at December 31, 1999 and 1998 were as follows:
1999 1998 ---------- ---------- (In Thousands) Commercial $ 137,108 $ 127,019 Real Estate - Commercial Mortgage 320,713 261,332 Real Estate - Residential Mortgage 208,066 197,807 Real Estate - Construction 38,034 44,710 Consumer - Instalment 322,266 315,419 Consumer - Other 7,766 8,656 ---------- ---------- Gross Loans 1,033,953 954,943 ---------- ---------- Unearned Discount 5,443 13,831 ---------- ---------- Loans, Net of Unearned Discount $1,028,510 $ 941,112 ========== ==========
In addition to the loans noted above, at December 31, 1999 and December 31, 1998, the Company serviced approximately $256,833,000 and $256,289,000, respectively, of loans sold to investors in the secondary mortgage market and other financial institutions. All of the loans sold at December 31, 1999 and 1998, were sold without recourse. Loans held for sale are valued at lower of the recorded balance or market value. At December 31, 1999, and 1998, loans held for sale amounted to approximately $1,500,000 and $5,600,000, respectively. No adjustments for unrealized losses were required at December 31, 1999 and 1998. As of December 31, 1999 and 1998 the Bank's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 was as follows:
1999 1998 ------------------------- ------------------------ Recorded Valuation Recorded Valuation Investment Allowance Investment Allowance ---------- ---------- ---------- ---------- Impaired loans: (In Thousands) Valuation allowance required $ 790 $ 353 $1,479 $ 422 No valuation allowance required 434 -- 476 -- ---------- ---------- ---------- ---------- Total $1,224 $ 353 $1,955 $ 422 ========== ========== ========== ==========
The valuation allowance is included in the reserve for possible loans losses on the balance sheet. The average recorded investment in impaired loans for the years ended December 31, 1999 and 1998 was $1,900,000 and $3,500,000, respectively. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful at which time payments received are recorded as reductions of principal. The Bank recognized interest income on impaired loans of approximately $56,000 and $159,000 for the years ended December 31, 1999 and 1998. The aggregate amount of loans in excess of $60,000 outstanding to directors, principal officers, and principal security holders at December 31, 1999 and 1998 and for the years then ended is as follows (in thousands):
Balance, January 1, 1998 $ 15,125 --------- New loans 1,694 Loan repayments (5,250) --------- Balance, December 31, 1998 $ 11,569 --------- New loans 7,060 Loan repayments (5,907) --------- Balance, December 31, 1999 $ 12,722 =========
All such loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectibility or present other unfavorable features. An analysis of the reserve for possible loan losses for each of the three years in the period ended December 31, 1999 is as follows:
1999 1998 1997 --------- ---------- --------- (In Thousands) Reserve, beginning of year $ 13,695 $ 12,674 $ 12,221 Loans charged off (3,970) (4,097) (2,906) Recoveries on loans previously charged off 1,306 1,158 1,099 --------- ---------- --------- Net charge-offs (2,664) (2,939) (1,807) Provision charged to expense 3,927 3,960 2,260 --------- ---------- --------- Reserve, end of year $ 14,958 $ 13,695 $ 12,674 ========= ========== =========
(6) BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31, 1999 and 1998 were as follows:
1999 1998 --------- --------- Cost: (In Thousands) Land $ 335 $ 335 Bank Premises 10,420 10,342 Leasehold Improvements 7,308 7,029 Furniture and Equipment 22,202 20,436 --------- --------- Total Cost 40,265 38,142 --------- --------- Accumulated Depreciation (25,997) (22,942) --------- --------- Net Bank Premises and Equipment $ 14,268 $ 15,200 ========= =========
Depreciation and amortization expense related to bank premises and equipment was $3,177,000 in 1999, $2,617,000 in 1998 and $2,066,000 in 1997. 25 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) BORROWINGS Short-term borrowings consist of federal funds purchased, assets sold under repurchase agreements, and treasury tax and loan notes. Information on the amounts outstanding and interest rates of short term borrowings for each of the three years in the period ended December 31, 1999 is as follows:
1999 1998 1997 --------- --------- --------- (Dollars In Thousands) Balance outstanding at end of year $103,243 $ 82,847 $ 41,544 Average daily balance outstanding 88,215 66,403 48,869 Maximum balance outstanding at any month end 103,248 89,741 84,945 Weighted average interest rate for the year 4.83% 5.39% 5.74% Weighted average interest rate at end of year 4.86% 4.72% 5.99%
The Bank has established two federal funds lines of $20 million. Borrowings under these lines are classified as federal funds purchased. The Company has established five repurchase agreements with major brokerage firms. Borrowings under these agreements are classified as assets sold under repurchase agreements. At December 31, 1999, the Bank had $40.0 million outstanding under these lines, while at December 31, 1998, there was $30.0 million outstanding. The Bank also utilizes customer repurchase agreements as an additional source of funds. The balance outstanding was $47.6 million and $47.4 million at December 31, 1999 and 1998 respectively. Federal Home Loan Bank (FHLB) borrowings are collateralized by a blanket pledge agreement on the Bank's FHLB stock, certain qualified investment securities, deposits at the Federal Home Loan Bank, and residential mortgages held in the Bank's portfolio. The borrowing capacity at the Federal Home Loan Bank is approximately $323 million. A schedule of the maturity distribution of FHLB advances with the weighted average interest rates at December 31, 1999 and 1998 follows:
1999 1998 ---------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate ---------- ---------- ---------- ----------- (Dollars In Thousands) Due in one year or less $185,000 5.69% $107,500 5.22% Due from one year to five years 71,224 5.60% 206,224 5.44% ---------- ---------- ---------- ----------- $256,224 5.66% $313,724 5.36% ========== ========== ========== ===========
(8) EARNINGS PER SHARE In 1997, the Company adopted the provisions of SFAS No. 128, Earnings Per Share. This statement was issued by the FASB in March 1997 and establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerators and denominators of the basic and diluted EPS computations. This statement also requires a restatement of all prior period EPS data presented.
Net Income Weighted Average Shares Net Income Per Share --------------------------- -------------------------- ------------------------ 1999 1998 1997 1999 1998 1997 1999 1998 1997 -------- -------- ------- -------- -------- ------ -------- ------ ------ Basic EPS $17,031 $16,139 $14,158 14,214 14,730 14,666 $ 1.2 $ 1.10 $ 0.97 Effect of dilutive securities -- -- -- 152 216 306 0.01 0.02 0.02 -------- -------- ------- -------- -------- ------ -------- ------ ------ Diluted EPS $17,031 $16,139 $14,158 14,366 14,946 14,972 $ 1.19 $ 1.08 $ 0.95 -------- -------- ------- -------- -------- ------ -------- ------ ------
Options to purchase 248,395 shares of common stock were outstanding during the year but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. Basic EPS was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) INCOME TAXES The provision for income taxes is comprised of the following components:
YEARS ENDED DECEMBER 31, 1999 1998 1997 -------- -------- -------- Current Provision (In Thousands) Federal $ 6,419 $ 7,509 $ 6,129 State 1,051 230 428 -------- -------- -------- TOTAL CURRENT PROVISION 7,470 7,739 6,557 -------- -------- -------- Deferred Provision (Benefit) Federal 391 49 508 State (285) 14 387 Change in Valuation Allowance (31) 2 (126) -------- -------- -------- TOTAL DEFERRED PROVISION 75 65 769 -------- -------- -------- TOTAL PROVISION $ 7,545 $ 7,804 $ 7,326 ======== ======== ========
The income tax provision shown in the consolidated statements of income differs from the expected amount, determined by applying the statutory federal tax rate of 35% to income before income taxes. The following summary reconciles the differences between these amounts.
YEARS ENDED DECEMBER 31, 1999 1998 1997 -------- --------- --------- (In Thousands) Computed statutory federal income tax provision $ 8,602 $ 8,380 $ 7,519 Nontaxable interest, net (662) (541) (302) State taxes, net of federal tax benefit 498 160 404 Low-income housing credits (161) (215) (215) Bank-owned life insurance (563) (39) -- Change in valuation allowance (31) 2 (126) Other, net (138) 57 46 -------- --------- --------- TOTAL PROVISION $ 7,545 $ 7,804 $ 7,326 ======== ========= =========
The net deferred tax asset which is included in other assets amounted to approximately $4,057,000 and $1,718,000, at December 31, 1999 and 1998 respectively. The tax-effected components of the net deferred tax asset at December 31, 1999 and 1998 are as follows:
YEARS ENDED DECEMBER 31, 1999 1998 -------- -------- (In Thousands) Reserve for possible loan losses $ 5,106 $ 4,664 Tax depreciation 895 539 Write-down of OREO -- 66 Mark to market adjustment (4,613) (4,009) Accrued expenses not deducted for tax purposes 405 498 Deferred income 36 91 State taxes 597 312 SFAS 115 adjustment 2,036 (379) Other, net (405) (33) -------- -------- TOTAL DEFERRED TAX ASSET 4,057 1,749 Valuation allowance -- (31) -------- -------- NET DEFERRED TAX ASSET $ 4,057 $ 1,718 ======== ========
The valuation allowance is provided when it is more likely than not that some portion of the net deferred tax asset will not be realized. (10) EMPLOYEE BENEFITS PENSION AND POSTRETIREMENT BENEFITS PENSION Effective January 1997, the Bank's pension plan joined a multiple employer structure under the Financial Institutions Retirement Fund. All plan assets were contributed to the Fund. This transaction qualified for accounting purposes as a plan termination. The accrued pension liability at December 31, 1996 was recognized as income in 1997. There was no contribution requirement for 1999, 1998 or 1997 and consequently no pension expense was recognized. The Bank's noncontributory pension plan covers substantially all employees of the Bank. The plan provides pension benefits that are based upon the employee's highest base annual salary during five consecutive years of employment. The Company's funding policy, prior to January 1, 1997, was to contribute an amount within the range permitted by applicable regulations on an annual basis. POSTRETIREMENT BENEFITS Employees retiring from the Bank on or after attaining age 65 and who have rendered at least 10 years of continuous service to the Company are entitled to postretirement health care benefits. These benefits are subject to deductibles, copayment provisions and other limitations. The Company may amend or change these benefits periodically. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting For Postretirement Benefits Other Than Pensions," which requires the recognition of postretirement benefits over the service lives of the employees rather than on a cash basis. The Company elected to recognize its accumulated benefit obligation of approximately $678,000 at January 1, 1993 prospectively on a straight-line basis over the average life expectancy of current retirees, which is anticipated to be less than 20 years. Postretirement benefit expense was $107,000, $106,000 and $87,000 in 1999, 1998 and 1997 respectively. The total cost of all postretirement benefits charged to income was $73,000, $126,000, and $103,000 in 1999, 1998, and 1997, respectively. The Bank continues to evaluate ways in which it can better manage these benefits and control the costs. Any changes in the plan or revisions to assumptions that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and annual expense. The following table illustrates the status of the postretirement benefit plan at December 31 for the years presented:
Postretirement Benefits 1999 1998 1997 ------ ------- ------- Change in benefit obligation Benefit obligation at beginning of year $ 774 $ 824 $ 840 Service cost 14 14 13 Interest cost 53 56 52 Other -- (10) -- Benefits paid (71) (110) (81) ------ ------- ------- Benefit obligation at end of year 770 774 824 ------ ------- -------
27 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits 1999 1998 1997 -------- --------- -------- Funded status (770) (774) (824) Unrecognized net actuarial loss -- -- -- Unrecognized net transition liability (asset) 390 451 491 Unrecognized prior service cost -- -- -- -------- --------- -------- Accrued benefit cost $(380) $(323) $(333) ======== ========= ======== Weighted-average assumptions as of December 31 Discount rate 7.00% 7.00% 7.00% Components of net periodic benefit cost Service cost $ 14 $ 14 $ 13 Interest cost 53 56 57 Amortization of transition obligation 40 36 17 -------- --------- -------- Net periodic benefit cost $ 107 $ 106 $ 87 ======== ========= ========
OTHER EMPLOYEE BENEFITS In 1994, the Bank implemented an incentive compensation plan in which senior management, officers, and non-officer employees are eligible to participate at varying levels. The plan provides for awards based upon the attainment of a combination of Bank, divisional, and individual performance objectives. The expense for this plan amounted to $1,420,000, $1,366,000 and $1,191,000 in 1999, 1998 and 1997, respectively. Also, in 1994, the Bank amended its Profit Sharing Plan by converting it to an Employee Savings Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Employee Savings Plan, participating employees may defer a portion of their pre-tax earnings, not to exceed the Internal Revenue Service annual contribution limits. The Bank matches 50% of each employee's contributions up to 6% of the employee's earnings. In 1999, 1998 and 1997, the expense for this plan amounted to $393,000, $346,000 and $302,000, respectively. In 1998 and 1999 the Bank entered into agreements to provide postretirement benefits to two executive officers. The Bank has established rabbi trust funds to aid in its accumulation of amounts necessary to satisfy the contractual liability to pay such benefits. These agreements provide for the Bank to pay all benefits thereunder from its general assets, and the establishment of these trust funds does not reduce or otherwise affect the Bank's continuing liability to pay benefits from such assets except that the Bank's liability shall be offset by actual benefit payments made from the Trust. The related trust assets totaled $486,000 and $424,000 at December 31, 1999 and 1998, respectively. The liability is being recorded over the remaining service period of the executive officers. The amount of expense recognized related to this plan amounted to $92,000 and $25,000 in 1999 and 1998, respectively. The Bank maintains a supplemental retirement plan for five executive officers. In connection with funding this plan, the Bank has purchased life insurance policies for each of the individuals. The cash surrender value of the insurance policies as of December 31, 1999 and 1998 was $1.6 million and $1.1 million respectively. The impact of this plan on the income statement was a benefit of $57,000 and $5,000 for 1999 and 1998, respectively, and an expense of $18,000 in 1997. In 1998, the Bank purchased $30.0 million of bank owned life insurance. The value of this life insurance was $31.7 million and $30.1 million at December 31, 1999 and 1998, respectively. (11) OTHER NON-INTEREST EXPENSES Included in other non-interest expenses for each of the three years in the period ended December 31, 1999 were the following:
1999 1998 1997 ------- ------- -------- (In Thousands) Advertising $ 1,197 $ 775 $ 679 Consulting fees 732 629 925 Legal fees - loan collection 357 299 583 Legal fees - other 284 531 413 FDIC assessment 140 132 112 Office supplies and printing 457 582 460 Data processing facilities management 4,337 4,166 3,727 Postage expense 679 694 674 Telephone expense 785 728 776 Other non-interest expenses 5,950 5,439 4,638 ------- ------- -------- TOTAL $14,918 $13,975 $12,987 ======= ======= ========
(12) Common Stock Purchase and Option Plans The Company maintains a Dividend Reinvestment and Stock Purchase Plan. Under the terms of the plan, stockholders may elect to have cash dividends reinvested in newly issued shares of common stock at a 5% discount from the market price on the date of the dividend payment. Stockholders also have the option of purchasing additional new shares, at the full market price, up to the aggregate amount of dividends payable to the stockholder during the calendar year. The Company has three stock option plans, the Amended and Restated 1987 Incentive Stock Option Plan ("The 1987 Plan"), the 1996 Non-Employee Directors Stock Option Plan ("The 1996 Plan") and the 1997 Employee Stock Option Plan ("The 1997 Plan") The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1999 1998 1997 ------- ------- ------- Net Income: As Reported (000's) $17,031 $16,139 $14,158 Pro Forma $16,809 $15,925 $14,068 Basic EPS: As Reported $1.20 $1.10 $.97 Pro Forma $1.18 $1.08 $.96 Diluted EPS: As Reported $1.19 $1.08 $.95 Pro Forma $1.17 $1.07 $.94
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The Company may grant options for up to 500,000, 300,000 and 800,000 shares under the 1997, 1996 and 1987 Plans respectively. The Company has granted options on 376,600, 140,000 and 638,075 shares, respectively, through December 31, 1999. At December 31, 1999 no shares were available for grant under the 1987 Plan due to the Plan's expiration in 1997. Under each Plan the option exercise price equals the market price on date of grant. All options vest between six months and two years and all expire between 2000 and 2009. A summary of the status of the Company's three stock option plans at December 31,1999 and December 31, 1998 and changes during the years then ended is presented in the table and narrative below:
1999 1998 Wtd Avg Wtd Avg Shares Ex. Price Shares Ex. Price -------- --------- -------- --------- Balance, January 1 610,457 $11.40 570,674 $9.22 Granted 152,000 $12.55 137,650 $17.52 Exercised (37,530) $6.27 (88,617) $6.39 Canceled (41,366) $14.76 (9,250) $15.73 ------- ------- Balance, December 31 683,561 $11.73 610,457 $11.40 ======= ======= Exercisable at December 31 466,192 405,965 ======= ======= Weighted average fair value of options granted $2.70 $2.68
442,586 of the 683,561 options outstanding at December 31,1999 have exercise prices between $4.44 and $12.41, with a weighted average exercise price of $8.71 and a weighted average remaining contractual life of 6.3 years. 310,586 of these options are exercisable; their weighted average exercise price is $7.14. The remaining 240,975 options have exercise prices between $13.38 and $19.25, with a weighted average exercise price of $17.30 and a weighted average remaining contractual life of 8.5 years. 155,606 of these options are exercisable; their weighted average exercise price is $17.28. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants under the 1997 and 1996 plans:
1997 Plan 1996 Plan Risk Free Interest Rate 1999 6.33% 5.02% 1998 4.67% 5.56% Expected Dividend Yields 1999 3.22% 2.99% 1998 2.31% 1.87% Expected Lives 1999 4 years 4 years 1998 4 years 4 years Expected Volatility 1999 25% 25% 1998 15% 15%
(13) COMMITMENTS AND CONTINGENCIES FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Off-balance sheet financial instruments whose contractual amounts present credit risk include the following at December 31, 1999 and 1998:
1999 1998 -------- -------- (In Thousands) Commitments to extend credit: Fixed Rate $ 20,249 $ 33,077 Adjustable Rate 7,163 7,034 Unused portion of existing credit lines 123,625 133,038 Unadvanced construction loans 31,169 20,958 Standby letters of credit 694 1,463 Interest rate swaps - notional value 55,000 20,000
The Company's exposure to credit loss in the event of non-performance by the other party for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank evaluates each customer's creditworthiness on an individual basis. The amount of collateral obtained upon extension of the credit is based upon management's credit evaluation of the customer. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial real estate. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing 29 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most guarantees extend for one year. As a component of its asset/liability management activities intended to control interest rate exposure, the Bank has entered into certain off-balance sheet hedging transactions. Interest rate swap agreements represent transactions which involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The weighted average fixed payment rates were 7.65% and 6.52% at December 31, 1999 and 1998, respectively, while the weighted average rates of variable interest payments were 7.22% and 5.25% at December 31, 1999 and 1998, respectively. As a result of these interest rate swaps, the Bank realized net income of $.1 million for the years ended December 31, 1999 and 1998 respectively. Entering into interest rate swap agreements involves both the credit risk of dealing with counterparties and their ability to meet the terms of the contracts and an interest rate risk. While notional principal amounts are generally used to express the volume of these transactions, the amounts potentially subject to credit risk are small due to the structure of the agreements. The Bank is a direct party to these agreements which provide for net settlement between the Bank and the counterparty on a semiannual basis. Should the counterparty fail to honor the agreement, the Bank's credit exposure is limited to the net settlement amount. The Bank had net receivables on the interest rate swaps of $450,000 and $19,000 at December 31, 1999 and 1998, respectively. LEASES The Company leases equipment, office space and certain branch locations under noncancellable operating leases. The following is a schedule of minimum future lease commitments under such leases as of December 31, 1999 (in thousands):
2000 1,618 2001 1,440 2002 1,271 2003 1,205 2004 1,042 Thereafter 2,363 ------ Total future minimum rentals $8,939 ======
Rent expense incurred under operating leases was approximately $1.7 million in 1999, $2.0 million in 1998, and $2.3 million in 1997. Renewal options ranging from 3 to 10 years exist for several of these leases. OTHER CONTINGENCIES At December 31, 1999 there were lawsuits pending which arose in the ordinary course of business. Management has reviewed these actions with legal counsel and has taken into consideration the view of counsel as to the outcome of the litigation. In the opinion of management, final disposition of these lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operations. The Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement, included in cash and due from banks was $18.7 million and $16.7 million at December 31, 1999 and 1998, respectively. In 1999 and 1998, the Company invested a total of $.8 million in Zero Stage Capital Associates VI, LLC, a Massachusetts limited liability company. The Company's remaining commitment is $.7 million over the next three years. On October 22, 1999 and June 1, 1999, the Company entered into master commitments to deliver or sell $30.0 million (all of which is optional) and $40.0 million (of which $20.0 million is mandatory) of residential mortgage loans to federal agencies on or before April 30, 2000 and May 31, 2000 respectively. As of December 31, 1999, the unfulfilled portion that remained to be delivered under the $30.0 million commitment was approximately $28.1 million, the unfulfilled portion under the $40.0 million was approximately $23.1 million. (14) CORPORATION-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES In 1997, Independent Capital Trust I (the "Trust") was formed for the purpose of issuing trust preferred securities (the "Trust Preferred Securities") and investing the proceeds of the sale of these securities in $29.64 million of 9.28% junior subordinated debentures issued by the Company. A total of $28.75 million of 9.28% Trust Preferred Securities were issued by the Trust and are scheduled to mature in 2027, callable at the option of the Company after May 19, 2002. Distributions on these securities are payable quarterly in arrears on the last day of March, June, September and December, such distributions can be deferred at the option of the Company for up to five years. The Trust Preferred Securities can be prepaid in whole or in part on or after May 19, 2002 at a redemption price equal to $25 per Trust Preferred Security plus accumulated but unpaid distributions thereon to the date of the redemption. In 1997, the Trust also issued $.89 million in common stock to the Company. The Trust Preferred Securities are presented in the consolidated balance sheets of the Company entitled "Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation." The Company records distributions payable on the Trust Preferred Securities as a Minority Interest Expense in its consolidated statements of income. In 1999 and 1998 the Company paid $2.7 million, respectively, of trust preferred security distributions. The cost of issuance of the Trust Preferred Securities totaled $1.4 million and is being amortized over the life of the Securities on a straight-line basis. The balance at December 31, 1999 and 1998 was $1.3 million respectively. Amortization of these issuance costs was $72,000 in 1999 and $74,000 in 1998. The Company unconditionally guarantees all of the Trust's obligations under the Trust Preferred Securities. On January 31, 2000, Independent Capital Trust II (the "Trust II") was formed for the purpose of issuing trust preferred securities (the "Trust Preferred Securities") and investing the proceeds of the sale of these 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) securities in $25.8 million of 11% junior subordinated debentures issued by the Company. A total of $25 million of 11% Trust Preferred Securities were issued by the Trust and are scheduled to mature in 2030, callable at the option of the Company after January 31, 2002. Distributions on these securities are payable quarterly in arrears on the last day of March, June, September and December, such distributions can be deferred at the option of the Company for up to five years. The Trust Preferred Securities can be prepaid in whole or in part on or after January 31, 2002 at a redemption price equal to $25 per Trust Preferred Security plus accumulated but unpaid distributions thereon to the date of the redemption. On January 31, 2000, the Trust II also issued $0.8 million in common stock to the Company. The cost of issuance of the Trust Preferred Securities is estimated at $1 million and will be amortized over the life of the Securities on a straight-line basis. The Company unconditionally guarantees all of the Trust II's obligations under the Trust Preferred Securities. (15) REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999 that the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the Federal Reserve Bank of Boston relating to the Company and from the Federal Deposit Insurance Corporation and the Commonwealth of Massachusetts relating to the Bank, categorized both the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an insured depository institution must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's and the Bank's category. The Company and the Bank's actual capital amounts and ratios are also presented in the following table.
For Capital Actual Adequacy Purposes ------------------- ---------------------------------- Amount Ratio Amount Ratio -------- ------- ---------- -------- As of December 31, 1999: (Dollars In Thousands) Company: (consolidated) greater than greater than Total capital (to risk weighted assets) $143,058 12.39% and equal to $ 92,370 and equal to 8.0% greater than greater than Tier 1 capital (to risk weighted assets) 128,616 11.14 and equal to 46,223 and equal to 4.0 greater than greater than Tier 1 capital (to average assets) 128,616 8.15 and equal to 63,124 and equal to 4.0 Bank greater than greater than Total capital (to risk weighted assets) $122,590 10.60% and equal to $ 95,521 and equal to 8.0% greater than greater than Tier 1 capital (to risk weighted assets) 108,133 9.35 and equal to 46,260 and equal to 4.0 greater than greater than Tier 1 capital (to average assets) 108,133 6.86 and equal to 63,051 and equal to 4.0 As of December 31, 1998: Company: (consolidated) greater than greater than Total capital (to risk weighted assets) $134,865 12.63% and equal to $ 85,406 and equal to 8.0% greater than greater than Tier 1 capital (to risk weighted assets) 121,484 11.38 and equal to 42,703 and equal to 4.0 greater than greater than Tier 1 capital (to average assets) 121,484 7.91 and equal to 61,433 and equal to 4.0 Bank: greater than greater than Total capital (to risk weighted assets) $110,219 10.34% and equal to $ 85,286 and equal to 8.0% greater than greater than Tier 1 capital (to risk weighted assets) 96,857 9.09 and equal to 42,643 and equal to 4.0 greater than greater than Tier 1 capital (to average assets) 96,857 6.32 and equal to 61,326 and equal to 4.0
To Be Well Capitalized Under Prompt Corrective Action Provisions --------------------------------------- Amount Ratio ----------- ------------ As of December 31, 1999: (Dollars In Thousands) Company: (consolidated) Total capital (to risk weighted assets) N/A N/A Tier 1 capital (to risk weighted assets) N/A N/A Tier 1 capital (to average assets) N/A N/A Bank greater than greater than Total capital (to risk weighted assets) and equal to $115,651 and equal to 10.0% greater than greater than Tier 1 capital (to risk weighted assets) and equal to 69,390 and equal to 6.0 greater than greater than Tier 1 capital (to average assets) and equal to 78,814 and equal to 5.0 As of December 31, 1998: Company: (consolidated) Total capital (to risk weighted assets) N/A N/A Tier 1 capital (to risk weighted assets) N/A N/A Tier 1 capital (to average assets) N/A N/A Bank: greater than greater than Total capital (to risk weighted assets) and equal to $106,607 and equal to 10.0% greater than greater than Tier 1 capital (to risk weighted assets) and equal to 63,964 and equal to 6.0 greater than greater than Tier 1 capital (to average assets) and equal to 76,657 and equal to 5.0
31 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (16) SEGMENT REPORTING The Company has identified its reportable operating business segment as Community Banking, based on how the business is strategically managed. The Company's community banking business segment consists of commercial banking, retail banking and trust services. The community banking business segment is managed as a single strategic unit which derives its revenues from a wide range of banking services, including lending activities, acceptance of demand, savings and time deposits, trust and investment management, and mortgage servicing income from investors. The Company does not have a single external customer from which it derives ten percent or more of its revenues and operates in the New England area of the United States. Non reportable operating segments of the Company's operations, which do not have similar characteristics to the community banking operations and do not meet the quantitative thresholds requiring disclosure, are included in the Other category in the disclosure of business segments below. These non-reportable segments include Parent Company and Independent Capital Trust I financial information (Note 18). Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, follows (in thousands): RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION
Community Banking Other Eliminations Consolidated ----------- ----------- ------------ -------------- DECEMBER 31, 1999 Net Interest Income $ 61,086 $ 742 -- $ 61,828 Non-Interest Income 14,792 18,890 (18,889) 14,793 Depreciation and Amortization 4,324 220 -- 4,544 Provisions for Possible Loan Losses 3,927 -- -- 3,927 Net Income 18,806 17,114 (18,889) 17,031 Total Assets 1,586,797 158,841 (155,582) 1,590,056 Investment in Bank Premises & Equipment 2,245 -- -- 2,245
Community Banking Other Eliminations Consolidated ------------- ---------- ------------ -------------- DECEMBER 31, 1998 Net Interest Income $ 58,060 $ 1,083 -- $ 59,143 Non-Interest Income 13,125 18,042 (18,042) 13,125 Depreciation and Amortization 3,981 221 -- 4,202 Provisions for Possible Loan Losses 3,960 -- -- 3,960 Net Income 17,959 16,222 (18,042) 16,139 Total Assets 1,571,270 156,588 (152,789) 1,575,069 Investment in Bank Premises & Equipment 5,041 -- -- 5,041
Community Banking Other Eliminations Consolidated ------------ ----------- ------------ ------------ DECEMBER 31, 1997 Net Interest Income $ 51,468 $ 774 -- $ 52,242 Non-Interest Income 11,742 15,279 (15,279) 11,742 Depreciation and Amortization 2,966 194 -- 3,160 Provisions for Possible Loan Losses 2,260 -- -- 2,260 Net Income 15,228 14,209 (15,279) 14,158 Total Assets 1,365,953 153,118 (149,064) 1,370,007 Investment in Bank Premises & Equipment 4,200 -- -- 4,200
Non-eliminating amounts included in the "Other" column are as follows:
1999 1998 1997 --------- --------- --------- Parent Company $ (2,009) $ (1,668) $ (922) Independent Capital Trust I 2,751 2,751 1,696 -------- -------- -------- Net Interest Income $ 742 $ 1,083 $ 774 Parent Company operating expenses, 18,634 17,807 15,080 net of miscellaneous income Income Taxes not allocated to segments Parent Company (406) -- --
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses. The Company derives a majority of its revenues from interest income and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segments and make decisions about resources to be allocated to the segment. Therefore, the segments are reported above using net interest income. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (17) SELECTED QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD QUARTER QUARTER QUARTER 1999 1998 1999 1998 1999 1998 ----------- ----------- ----------- ----------- ----------- ----------- INTEREST INCOME $ 27,607 $ 26,085 $ 27,694 $ 26,547 $ 28,085 $ 28,186 INTEREST EXPENSE 12,745 11,659 12,583 11,757 12,292 13,064 --------------------------------------------------------------------------------- NET INTEREST INCOME $ 14,862 $ 14,426 $ 15,111 $ 14,790 $ 15,793 $ 15,122 --------------------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 981 907 982 907 982 907 NON-INTEREST INCOME 3,425 3,087 3,881 3,398 3,601 3,260 NON-INTEREST EXPENSES 11,109 10,368 11,437 10,675 11,372 10,785 MINORITY INTEREST 667 667 667 667 667 667 PROVISION FOR INCOME TAXES 1,684 1,866 1,798 1,991 1,941 1,928 --------------------------------------------------------------------------------- NET INCOME $ 3,846 $ 3,705 $ 4,108 $ 3,948 $ 4,432 $ 4,095 ================================================================================= BASIC EARNINGS PER SHARE $ 0.27 $ 0.25 $ 0.29 $ 0.27 $ 0.31 $ 0.28 ================================================================================= DILUTED EARNINGS PER SHARE $ 0.27 $ 0.25 $ 0.29 $ 0.26 $ 0.31 $ 0.27 ================================================================================= WEIGHTED AVERAGE COMMON SHARES (BASIC) 14,312,093 14,828,992 14,164,975 14,854,477 14,167,691 14,774,324 COMMON STOCK EQUIVALENTS 169,506 253,334 155,506 257,400 149,887 209,022 WEIGHTED AVERAGE COMMON SHARES (DILUTED) 14,481,599 15,082,236 14,320,481 15,111,877 14,317,578 14,983,346 =================================================================================
FOURTH QUARTER 1999 1998 ----------- ----------- INTEREST INCOME $ 28,620 $ 27,894 INTEREST EXPENSE 12,558 13,089 ------------------------- NET INTEREST INCOME $ 16,062 $ 14,805 ------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 982 1,239 NON-INTEREST INCOME 3,886 3,380 NON-INTEREST EXPENSES 11,532 9,869 MINORITY INTEREST 667 667 PROVISION FOR INCOME TAXES 2,122 2,019 ------------------------- NET INCOME $ 4,645 $ 4,391 ========================= BASIC EARNINGS PER SHARE $ 0.33 $ 0.30 ========================= DILUTED EARNINGS PER SHARE $ 0.32 $ 0.30 ========================= WEIGHTED AVERAGE COMMON SHARES (BASIC) 14,173,925 14,494,995 COMMON STOCK EQUIVALENTS 136,090 187,782 WEIGHTED AVERAGE COMMON SHARES (DILUTED) 14,310,015 14,682,777 =========================
(18) PARENT COMPANY FINANCIAL STATEMENTS Condensed financial information relative to the Company's balance sheets at December 31, 1999 and 1998, and the related statements of income and cash flows for the years ended December 31, 1999, 1998, and 1997 are presented below. BALANCE SHEETS
DECEMBER 31, 1999 1998 - ----------------------------------- -------- -------- Assets: (In Thousands) Cash* $ 19,528 $ 21,861 Investments in subsidiaries* 106,400 101,273 Other investments 1,400 1,400 Other assets 1,865 2,406 -------- -------- Total assets $129,193 $126,940 ======== ======== Liabilities and Stockholders' Equity: Dividends Payable $ 1,417 $ 1,446 Junior Subordinated Debt 29,647 29,646 -------- -------- Total liabilities 31,064 31,092 Stockholders' equity 98,129 95,848 -------- -------- Total liabilities and stockholders' equity $129,193 $126,940 ======== ========
*eliminated in consolidation STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------- ------- ------- ------- Income: (In Thousands) Dividend received from subsidiaries $ 9,279 $ 7,593 $ 5,707 Interest income 743 1,083 774 ------- ------- ------- Total income 10,022 8,676 6,481 ------- ------- ------- Expenses: Interest expense 2,751 2,751 1,696 Other expenses 255 235 199 ------- ------- ------- Total expenses 3,006 2,986 1,895 ------- ------- ------- Income before income taxes and equity in undistributed income of subsidiary 7,016 5,690 4,586 Equity in undistributed income of subsidiaries 9,609 10,449 9,572 Income Tax Benefit 406 -- -- ------- ------- ------- Net income $17,031 $16,139 $14,158 ======= ======= =======
33 INDEPENDENT BANK CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------- -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands) Net income $ 17,031 $ 16,139 $ 14,158 ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED FROM OPERATING ACTIVITIES: Amortization 220 221 194 (Increase) Decrease in other assets (22) (42) (1,478) (Increase) Decrease in other liabilities 353 1 8 Equity in income of subsidiaries (9,609) (10,449) (9,572) -------- --------- -------- TOTAL ADJUSTMENTS (9,058) (10,269) (10,848) -------- --------- -------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 7,973 5,870 3,310 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities -- -- (400) Capital Investment in subsidiary - Independent Capital Trust I -- -- (889) -------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES -- -- (1,289) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock issue and stock options exercised 236 566 716 Issuance of junior subordinated debentures -- -- 29,639 Treasury Stock Repurchase (4,836) (6,840) -- Dividends paid (5,706) (5,787) (4,700) -------- --------- -------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (10,306) (12,061) 25,655 -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,333) (6,191) 27,676 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 21,861 28,052 376 -------- --------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 19,528 $ 21,861 $ 28,052 ======== ========= ========
19) RECENT EVENTS In the third quarter of 1999, the Company and the Bank entered into a Purchase and Assumption Agreement with Fleet Financial Group to acquire 12 Massachusetts branches, including ten throughout Cape Cod and two additional branches in Brockton, totaling $269 million in deposits and $37 million in consumer and SBA loans. In addition, the Company will purchase approximately $100 million of loans at par from BankBoston's small business commercial real estate portfolio. The acquisitions result from the divestiture of Fleet branches after its merger with BankBoston. This transaction has received regulatory approval and is contingent upon raising total risk-based (Tier 2) capital. These branches will continue to operate as Fleet offices until they are converted to Rockland Trust in late summer of 2000. All current Fleet employees will be retained by Rockland Trust, and a special notification will be sent to customers prior to the conversion. On January 31, 2000, Independent Capital Trust II (the "Trust II") was formed for the purpose of issuing trust preferred securities. A total of $25 million of 11% Trust Preferred Securities were issued by Trust II and are scheduled to mature in 2030, callable at the option of the Company after January 31, 2002. The proceeds of this offering will satisfy the capital requirement resulting from the acquisition as well as provide capital support for other corporate initiatives. For further information see Note 14. 34
DIRECTORS OF INDEPENDENT BANK CORP. Richard S. Anderson Robert L. Cushing ***Kevin J. Jones **Robert J. Spence PRESIDENT AND TREASURER PRESIDENT TREASURER PRESIDENT ANDERSON-CUSHING HANNAH B.G. SHAW HOME PLUMBERS' SUPPLY COMPANY ALBERT CULVER COMPANY INSURANCE AGENCY, INC. FOR THE AGED, INC. *Donald K. Atkins ***Alfred L. Donovan Lawrence M. Levinson William J. Spence RETIRED, FORMER PRESIDENT INDEPENDENT CONSULTANT PARTNER PRESIDENT AND CHIEF EXECUTIVE OFFICER BURNS & LEVINSON LLP MASSACHUSETTS BAY LINES, WINTHROP - ATKINS CO., INC. Benjamin A. Gilmore, II INC. TREASURER - HANNAH B.G. OWNER AND PRESIDENT Douglas H. Philipsen SHAW HOME FOR THE AGED, INC. GILMORE CRANBERRY CO., INC. CHAIRMAN, PRESIDENT AND *** John H. Spurr, Jr. CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT W. Paul Clark ***E. Winthrop Hall AND TREASURER PRESIDENT AND GENERAL CHAIRMAN AND PRESIDENT Richard H. Sgarzi A.W. PERRY, INC. MANAGER F.L. & J.C. CODMAN PRESIDENT AND TREASURER PAUL CLARK, INC. COMPANY BLACK CAT CRANBERRY CORP. ***Robert D. Sullivan PRESIDENT SULLIVAN TIRE COMPANY, INC. Brian S. Tedeschi CHAIRMAN TEDESCHI REALTY CORP. Thomas J. Teuten PRESIDENT A. W. PERRY, INC. * Retired from Board EFFECTIVE JANUARY 12, 2000 ** Retires from Board EFFECTIVE APRIL 1, 2000 *** Elected to Board JANUARY 13, 2000
OFFICERS OF INDEPENDENT BANK CORP. Douglas H. Philipsen Richard J. Seaman Linda M. Campion Tara M. Villanova CHAIRMAN, PRESIDENT AND CHIEF FINANCIAL OFFICER AND CLERK ASSISTANT CLERK CHIEF EXECUTIVE OFFICER TREASURER
DIRECTORS OF ROCKLAND TRUST COMPANY Richard S. Anderson W. Paul Clark *Donald A. Greenlaw *Nathan Shulman PRESIDENT AND TREASURER PRESIDENT AND GENERAL MANAGER RETIRED, FORMER PRESIDENT RETIRED, FORMER PRESIDENT ANDERSON-CUSHING PAUL CLARK, INC. ROCKLAND TRUST COMPANY BEST CHEVROLET, INC. INSURANCE AGENCY, INC. E. Winthrop Hall *John F. Spence, Jr. *John B. Arnold *Robert L. Cushing CHAIRMAN AND PRESIDENT RETIRED, FORMER CHAIRMAN RETIRED, FORMER PRESIDENT PRESIDENT F.L. & J.C. CODMAN COMPANY OF THE BOARD AND TREASURER HANNAH B.G. SHAW HOME ROCKLAND TRUST COMPANY H.H. ARNOLD CO., INC. FOR THE AGED, INC. Kevin J. Jones TREASURER ***Robert J. Spence **Donald K. Atkins *H. Thomas Davis PLUMBERS' SUPPLY COMPANY PRESIDENT RETIRED, FORMER PRESIDENT RETIRED, FORMER CHAIRMAN ALBERT CULVER COMPANY AND CHIEF EXECUTIVE OFFICER CLIPPER ABRASIVES, INC. *Lawrence M. Levinson WINTHROP-ATKINS CO., INC. PARTNER William J. Spence TREASURER - HANNAH B.G. Alfred L. Donovan BURNS & LEVINSON LLP PRESIDENT SHAW HOME FOR THE AGED, INC. INDEPENDENT CONSULTANT MASSACHUSETTS BAY LINES, Douglas H. Philipsen INC. *Theresa J. Bailey *Ann M. Fitzgibbons CHAIRMAN, PRESIDENT AND RETIRED, FORMER SENIOR VOLUNTEER CHIEF EXECUTIVE OFFICER John H. Spurr, Jr. VICE PRESIDENT AND CLERK EXECUTIVE VICE PRESIDENT ROCKLAND TRUST COMPANY Benjamin A. Gilmore, II Richard H. Sgarzi AND TREASURER OWNER AND PRESIDENT PRESIDENT AND TREASURER A.W. PERRY, INC. GILMORE CRANBERRY CO., INC. BLACK CAT CRANBERRY CORP. Robert D. Sullivan PRESIDENT SULLIVAN TIRE COMPANY, INC. Brian S. Tedeschi CHAIRMAN TEDESCHI REALTY CORP. Thomas J. Teuten PRESIDENT A.W. PERRY, INC. * Honorary Director ** Honorary Director EFFECTIVE JANUARY 12, 2000 *** Honorary Director EFFECTIVE APRIL 1, 2000
OFFICERS OF ROCKLAND TRUST COMPANY Douglas H. Philipsen Richard F. Driscoll Raymond G. Fuerschbach Linda M. Campion CHAIRMAN, PRESIDENT AND EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT CLERK CHIEF EXECUTIVE OFFICER RETAIL AND OPERATIONS HUMAN RESOURCES Richard J. Seaman Ferdinand T. Kelley Russell N. Viau Tara M. Villanova CHIEF FINANCIAL OFFICER EXECUTIVE VICE PRESIDENT VICE PRESIDENT AND ASSISTANT CLERK AND TREASURER COMMERCIAL LENDING CHIEF INTERNAL AUDITOR AND ASSET MANAGEMENT & TRUST SERVICES
35 INDEPENDENT BANK CORP. ANNUAL MEETING The Annual Meeting of Stockholders will be held at 3:30 p.m. on Thursday, April 13, 2000 at the Plimoth Plantation, Plymouth, Massachusetts. COMMON STOCK The Common Stock of the Company is traded over the counter through the NASDAQ National Market System under the symbol of INDB. PRICE RANGE OF COMMON STOCK
HIGH LOW DIVIDEND ------ ------ -------- 1999 4th Quarter $14.25 $11.88 $0.10 3rd Quarter 15.88 12.19 0.10 2nd Quarter 16.00 12.75 0.10 1st Quarter 17.31 13.69 0.10 1998 4th Quarter $17.50 $14.00 $0.10 3rd Quarter 19.63 13.13 0.10 2nd Quarter 24.25 17.75 0.10 1st Quarter 20.00 14.75 0.10
STOCKHOLDER RELATIONS Inquiries should be directed to: Richard J. Seaman, Chief Financial Officer and Treasurer, or Tina M. Hart, Shareholder Relations Independent Bank Corp. 288 Union Street Rockland, MA 02370 (781) 878-6100 FORM 10-K A copy of the Annual Report on Form 10-K filed with the Securities and Exchange Commission for fiscal 1999 is available without charge by writing to: Tina M. Hart, Shareholder Relations Independent Bank Corp. 288 Union Street Rockland, MA 02370 TRANSFER AGENT AND REGISTRAR Transfer Agent and Registrar for the Company is: State Street Bank and Trust Co. c/o EquiServe Limited Partnership P. O. Box 8200 Boston, MA. 02266-8200 1-800-426-5523 36 EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, dated January 26, 2000, with respect to the consolidated financial statements of Independent Bank Corp. incorporated by reference in this Form 10-K for the year ended December 31, 1999, into Independent Bank Corp.'s previously filed Registration Statements File Numbers. S-3 Registration Statements File Numbers 33-27999, 333-25999, and 333-89835 and S-8 Registration Statements File Numbers 33-13158, 33-50770, 33-65114, 33-75530, 33-60293, 33-04259, 333-27169 and 333-31107. ARTHUR ANDERSEN LLP Boston, Massachusetts March 24, 2000 EX-27.1 4 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S DOLLARS 12-MOS DEC-31-1999 DEC-31-1999 1 48,949 0 8,719 0 201,614 229,043 218,586 1,028,510 (14,958) 1,590,056 1,081,806 103,243 21,904 0 28,750 0 149 97,980 1,590,056 81,296 30,127 578 112,006 30,668 50,178 61,828 3,927 34 45,450 24,576 24,576 0 0 17,031 1.20 1.19 7.73 3,338 316 1,224 0 13,695 (3,970) 1,306 14,958 14,958 0 0
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