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, 1997
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.
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(Exact name of registrant as specified in its charter)
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Massachusetts 04-2870273
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
288 Union Street
Rockland, Massachusetts 02370
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(Address of principal executive offices) (Zip Code)
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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, $.0l par value per share
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(Title of Class)
Preferred Stock Purchase Rights
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(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 28, 1998, the aggregate market value of the 12,836,794 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
2,007,402 shares held by all directors and executive officers of the Registrant
as group, was $226,248,494. This figure is based on the closing sale price of
$17.625 per share on February 28, 1998, as reported in The Wall Street Journal
on March 1, 1998.
Number of shares of Common Stock outstanding as of February 28, 1998: 14,844,196
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, 1997 are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1998 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
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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.
Rockland offers a full range of commercial and retail banking and trust services
through its network of 33 banking offices, eight commercial lending centers, and
two trust and financial services offices located in the Plymouth, Norfolk, and
Bristol Counties of Southeastern Massachusetts. At December 31, 1997, the
Company had total assets of $1,370.0 million, total deposits of $988.1 million,
stockholders' equity of $92.5 million, and 516 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
18.25% of the total deposits within Plymouth County as of June 30, 1997, the
most recent date for which such data is available, or almost 178% of the market
share of its nearest competitor. In addition, Rockland has been the leading
originator of residential mortgages in Plymouth County for the last five years.
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 13 of the Company's 1997 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 which 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
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capital base. These measures contributed to improved operating results for the
Company which recorded net income of $4.6 million, $8.1 million, $10.4 million
and $11.6 million for the years ended December 31, 1993, 1994, 1995 and 1996,
respectively. The improvement in 1996 earnings over 1995 was attributable to an
increase in net interest income, an increase in non-interest income, and a
decrease in non-interest expenses.
For the year ended December 31, 1997, the Company recorded net income
of $14.2 million, an increase of 22.1% over 1996 earnings. The improved 1997
results reflect a 16.3% increase in net interest income, a .5% increase in
non-interest income and a increase of 3.9% 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").
Lending Activities
General. The Bank's gross loan portfolio amounted to $856.8 million on
December 31, 1997, or 62.5% 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 which are secured by nonresidential properties, residential mortgages
which are secured primarily by owner-occupied residences, home equity loans, and
mortgages for the construction of commercial and residential properties.
Consumer loans consist of instalment 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 of the real estate loans in the Bank's loan
portfolio are secured by properties located within this market area.
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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
stockholders' equity, or $18.5 million at December 31, 1997. Notwithstanding the
foregoing, the Bank has established a more restrictive limit of not more than
15% of stockholders' equity, or $13.9 million at December 31, 1997, which limit
may be exceeded with the approval of the Board of Directors. There were no
borrowers whose total indebtedness aggregated or exceeded $13.9 million as of
December 31, 1997.
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.
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December 31,
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1997 1996 1995 1994 1993
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(Dollars in
Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial $138,541 16.2% $127,008 17.9% $121,679 19.1% $122,944 20.5% $117,332 23.8%
Real estate:
Commercial 238,930 27.9 205,256 29.0 187,608 29.4 169,693 28.4 142,619 29.0
Residential 207,555 24.2 202,031 28.5 187,652 29.4 184,958 30.9 155,182 31.5
Construction 34,227 4.0 31,633 4.5 27,863 4.4 28,892 4.8 20,147 4.1
Consumer:
Instalment 227,700 26.6 132,589 18.7 102,088 16.0 80,441 13.4 46,909 9.5
Other 9,849 1.1 10,140 1.4 11,076 1.7 11,882 2.0 10,415 2.1
-------- ---- -------- ---- -------- ---- ------- ---- ------- -----
Gross Loans 856,802 100.0% 708,657 100.0% 637,966 100.0% 598,810 100.0% 492,604 100.0%
-------- ---- -------- ---- -------- ---- ------- ---- ------- -----
Unearned Discount 28,670 13,251 9,825 8,121 5,020
Reserve for
Possible
Loan Losses 12,674 12,221 12,088 13,719 15,485
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Net Loans $815,458 $683,185 $616,053 $576,970 $472,099
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The Company's outstanding loans grew by 19.4% in 1997, following a
10.9% increase in 1996. This loan growth was primarily attributable to an
increase in the consumer loan portfolio with remaining growth in the commercial
loan and commercial real estate portfolios.
Commercial loans increased $11.5 million, or 9.1%, in 1997, following
an increase of $5.3 million, or 4.4%, in 1996.
Real estate loans comprised 56.1% of gross loans at December 31, 1997,
as compared to 62.0% at December 31, 1996. Commercial real estate loans have
reflected increases over the last two years of $33.7 million, or 16.4%, in 1997,
and $17.7 million, or 9.4%, in 1996. 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 $5.5 million, or 2.7%, in 1997, and
$14.4 million, or 7.7% in 1996. The majority of residential mortgage loans
originated were sold in the secondary market. During 1997, the Bank sold $43.2
million of the current production of residential mortgages as part of its
overall asset/liability management. Real estate construction loans increased
$2.6 million, or 8.2%, in 1997, following a increase of $3.8 million, or 13.5%,
in 1996.
Consumer instalment loans increased $95.1 million, or 71.7%, and $30.5
million, or 29.9%, during 1997 and 1996, 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 1997 and 1996. As of December 31, 1997 and
1996, automobile loans represented 76.4% and 78.2%, 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 increased $.5
million, or 22.0%, in 1997 following a decline of $.9 million, or 8.4%, in 1996.
The following table sets forth the scheduled contractual amortization
of the Bank's loan portfolio at December 31, 1997. 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.
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Real Real
Real Estate - Estate - Estate - Consumer - Consumer -
Commercial Commercial Residential Construction Instalment Other Total
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Amounts due in: (Thousands)
$
One year or less $71,540 $43,667 $167 $34,227 $5,178 --- $154,779
After one year through
five years 56,654 154,359 10,913 --- 221,349 9,849 453,124
Beyond five years 10,347 40,904 196,475 --- 1,173 --- 248,899
-------- ------- -------- ------- -------- ------- --------
Total $138,541 207,555 $207,555 $34,227 $227,700 $19,849 $856,802
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Interest rates on
amounts due after
one year:
Fixed Rate $36,804 $160,342 $78,439 $ --- $222,522 $9,849 $507,956
Adjustable Rate 30,197 34,921 128,949 --- --- --- 194,067
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Generally, the average actual maturity of loans is substantially less
than their average 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, 1997, $.6 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, home builders, 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
5
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and nonbanking 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 who are financed by the Bank.
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 owner-occupied 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 institutional
investors in the secondary market. 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 1997, the Bank originated
$80.5 million in residential real estate loans of which $37.3 million was
retained in its portfolio.
The principal balance of loans serviced by the Bank amounted to $263.2
million at December 31, 1997 and $252.2 million at December 31, 1996. 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
$800,000 and $741,000 for the years ended December 31, 1997 and 1996,
respectively. Loan origination fees which 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, 1996 the Bank adopted SFAS
No. 122 "Accounting for
6
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Mortgage Servicing Rights". For the years ended December 31, 1997, and 1996, the
Bank recognized net gains on the sales of mortgages including the impact of the
adoption of SFAS No. 122, of $224,000 and $360,000, respectively.
Commercial Loans. The Bank offers secured and unsecured commercial
loans for business purposes, including issuing letters of credit. The Bank's
commercial loans increased $11.5 million, or 9.1%, in 1997, following an
increase of $5.3 million, or 4.4%, in 1996. At December 31, 1997, $138.5
million, or 16.2%, of the Bank's gross loan portfolio consisted of commercial
loans, compared to $127.0 million, or 17.9%, at December 31, 1996.
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
does originate 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 Wall Street Journal prime rate. 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 the borrower 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 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 year. At
December 31, 1997, the Bank had $55.8 million outstanding under commercial
revolving lines of credit, and $69.4 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,
1997, the Bank had $1.0 million in outstanding commitments pursuant to standby
letters of credit. These facilities are managed by the Commercial Lending
Division.
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 $27.4 million as of
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December 31, 1997. 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 line is reduced with respect to such unit. Bank
personnel make unannounced monthly 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, 1997,
the Bank's loan portfolio included $238.9 million in commercial real estate
loans, $164.2 million in residential real estate loans, $43.4 million in home
equity loans, and $34.2 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 which are primarily secured by apartment
buildings and, to a lesser extent, condominiums. The Bank does not emphasize
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 which 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 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 95% of the lesser of the appraised
value of the property
8
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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. Properties securing all of the Bank's first mortgage real estate loans
are appraised by independent appraisers.
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,
1997, there was $34.6 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 Wall Street
Journal prime rate.
A significant portion of the Bank's construction lending has been
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 the Bank has developed and maintains a relationship with a
significant number of homebuilders in Plymouth, Norfolk, and Bristol Counties.
As of December 31, 1997, $14.1 million, or 41.2%, of total construction loans at
such date were for the acquisition and 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,
9
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the Bank generally requires that the units securing its residential construction
loans be pre-sold. Loan proceeds are disbursed in stages after 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 instalment loans and cash
reserve loans. As of December 31, 1997, $237.5 million, or 27.7%, of the Bank's
gross loan portfolio consisted of consumer loans.
The Bank's instalment loans consist primarily of automobile loans,
which amounted to $181.5 million at December 31, 1997. A substantial portion of
the Bank's automobile loans are originated indirectly by a network of 123 new
and used automobile dealers located within the Bank's market area. Indirect
automobile loans accounted for 86.7% and 78.3% of the Bank's total instalment
loan originations during 1997 and 1996, respectively. The increase in indirect
automobile loan originations in 1997 and 1996 reflects the effect of a focused
program undertaken by the Bank to improve business relationships with automobile
dealers within its market area. 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 48 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 with recourse to the dealer. Most 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 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 customer on a pro-rata basis in the event of repayment prior to maturity.
10
<PAGE>
The Bank's instalment loans also include loans secured by deposit
accounts, loans to purchase motorcycles, recreational vehicles, motor homes,
boats, or mobile homes. As of December 31, 1997, instalment loans other than
automobile loans amounted to $46.2 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, 1997, an additional $6.75 million had
been committed to but was unused under cash reserve lines of credit.
Nonperforming Assets. The following table sets forth information
regarding nonperforming assets held by the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------- ---- -------- ------ ------- ------ ------- ---- ---------
1997 1996 1995 1994 1993
------- ---- -------- ------ ------- ------ ------- ---- ---------
(Dollars in
Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90
days or more but
still accruing $737 $516 $553 $598 $1,042
Loans accounted for
on a nonaccrual basis
(1) 5,154 3,946 4,718 7,266 15,940
----- ----- ----- ----- ------
Total non performing
loans 5,891 4,462 5,271 7,864 16,982
----- ----- ----- ----- ------
Other real estate
owned 2 271 638 3,866 8,884
Total nonperforming
assets $5,893 $4,733 $5,909 $11,730 $25,866
====== ====== ====== ======= ========
Restructured loans $1,400 $1,658 $2,629 $2,898 $4,202
------ ------ ------ ------ ------
Nonperforming loans
as a percent of gross
loans 0.69% 0.63% .83% 1.31% 3.45%
----- ----- ---- ----- -----
Nonperforming assets
as a percent of total
assets 0.43% 0.43% 0.60% 1.26% 3.12%
====== ====== ====== ======= ========
</TABLE>
(1) Includes $1.4 million, $.1 million, $.6 million, $1.1 million, and $1.4
million of restructured loans at December 31, 1997, 1996, 1995, 1994, and
1993, respectively, which were included in nonaccrual loans as of such
dates.
Gross interest income that would have been recognized for the years
ended December 31, 1997 and 1996 if nonperforming loans at the respective dates
had been performing in accordance with their original terms approximated
$438,000 and $518,000, respectively. The actual amount of interest that was
collected on these loans during each of those periods and included in interest
income was approximately $55,000 and $44,000, 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
11
<PAGE>
occasion, this effort may require the restructure of loan terms for certain
nonperforming loans. The Bank works closely with independent real estate brokers
throughout its market area, and all of the Bank's other real estate owned is
listed with brokers who are members of a multiple listing service.
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.
The following table summarizes changes in the reserve for possible loan
losses and other selected statistics for the periods presented.
<TABLE>
<CAPTION>
Year Ending December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average loans, net of unearned discount $757,877 $657,749 $612,481 $534,052 $494,288
======== ======== ======== ======== ========
Reserve for Possible loan losses,
beginning of year $12,221 $12,088 $13,719 $15,485 $15,971
Charged-off loans
Commercial 1,140 1,252 2,097 2,396 3,568
Real estate - commercial 95 228 690 682 1,285
Real estate - residential 261 296 558 618 1,107
Real estate - construction -- -- -- 63 111
Consumer - instalment 771 430 273 188 587
Consumer - other 639 619 464 346 861
--- --- --- --- ---
Total charged-off loans 2,906 2,825 4,082 4,293 7,519
----- ----- ----- ----- -----
Recoveries on loans previously charged off
Commercial 546 573 436 890 1,232
Real estate - commercial 265 241 665 425 191
Real estate - residential 0 31 3 2 41
Real estate - construction -- -- -- -- 20
Consumer - instalment 137 171 169 133 182
Consumer - other 151 192 178 276 292
--- --- --- --- ---
Total recoveries 1,099 1,208 1,451 1,726 1,958
----- ----- ----- ----- -----
Net loans charged-off 1,807 1,617 2,631 2,567 5,561
Provision for loan losses 2,260 1,750 1,000 801 5,075
----- ----- ----- --- -----
Reserve for possible loan losses, end of
period $12,674 $12,221 $12,088 $13,719 $15,485
======= ======= ======= ======= =======
Net loans charged-off as a percent of
average loans, net of unearned discount 0.24% 0.25% 0.43% 0.48% 1.13%
Reserve for possible loan losses as a
percent of loans, net of unearned discount 1.67 1.76 1.92 2.32 3.18
Reserve for possible loan losses as a
percent of nonperforming loans 215.14 273.89 229.33 174.45 91.18
Net loans charged-off as a percent of
reserve for possible loan losses 14.26 13.23 21.77 18.71 35.91
Recoveries as a percent of charge-offs 37.82 42.76 35.55 40.20 26.04
</TABLE>
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.
12
<PAGE>
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,
1997. For information about the percent of loans in each category to total
loans, see "Lending Activities - Loan Portfolio Composition and Maturity."
Percent of Total
Amount Loans by Category
---------------- ---------------------------
(Dollars In Thousands)
Commercial Loans $ 3,268 2.36%
Real Estate Loans 7,256 1.51%
Consumer Loans 2,150 .91%
------- ----
Total Loans $12,674 1.53%
======= ====
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 above $25,000. 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 alternative to a general allocation by loan rating,
certain loans have specific allocations assigned to them because of greater
knowledge of their underling 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, 1997, the reserve for possible loan losses totaled
$12.7 million. Based on the processes described above, management believes that
the level of the reserve for possible loan losses at December 31, 1997 is
adequate. A review of the Bank's loan portfolio and its reserve for possible
loan losses as of September 30, 1997 was also conducted by the FDIC.
Notwithstanding the foregoing, since the level of the reserve is based on an
estimate of future events, ultimate loan losses may vary from current estimates.
13
<PAGE>
Investment Activities
The Bank's securities portfolio primarily consists of U.S. Treasury and
U.S. Government Agency securities, mortgage-backed securities, and, to a lesser
extent, securities issued by states, counties and municipalities. Most of these
securities are A-rated (or equivalent) debt obligations with average lives 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
$3,607,000 in private issue mortgage backed securities at December 31, 1997. The
Bank had no investments in marketable equity securities at December 31, 1997 or
1996, and by law, is legally prohibited from making such investments, with
certain limited exceptions. The Bank has no present intention to make
investments in such securities.
The Bank views its securities portfolio as a source of income and, with
regard to maturing securities, liquidity. Interest payments generated from
securities also provides 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.
Investments may be made by the Chief Executive Officer or the Chief Financial
Officer 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 and securities available for sale. 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.
Securities held to maturity as of December 31, 1997 are carried at
their amortized cost of $308.1 million and exclude gross unrealized gains of
$2.8 million and gross unrealized losses of $1.3 million. A year earlier,
securities held to maturity totaled $290.9 million, excluding gross unrealized
gains of $1.2 million and gross unrealized losses of $3.2 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, 1997 totaled $131.8 million, and net
unrealized gains totaled $1.4 million. A year earlier, securities available for
sale were $26.4 million, with net unrealized losses of
14
<PAGE>
$135,000. In 1997, the Bank realized a loss of $8,000 on the sale of an
available for sale security. There were no sales of securities in 1996.
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.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury and
government agency
securities $51,567 16.7% $71,104 24.4% $73,484 32.4%
Mortgage-backed
securities 199,245 64.7 193,854 66.7 128,361 56.6
Collateralized mortgage
obligations 34,515 11.2 19,526 6.7 17,473 7.7
State. county, and
municipal securities 21,385 6.9 5,410 1.9 6,578 2.9
Other investment
securities 1,400 0.5 1,000 0.3 1,000 0.4
-------- ----- -------- ----- -------- -----
$308,112 100.0% $290,894 100.0% $226,896 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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 3 to the Consolidated Financial Statements
included in Item 8 hereof.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1997 1996 1995
------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities $131,842 100.0% $24,796 93.8% $29,676 91.0%
Collateralized mortgage
obligations $1,653 6.2% $2,952 9.0%
-------- ----- ------- ------ ------- -----
$131,842 100.0% $26,449 100.0% $32,628 100.0%
======== ====== ======= ====== ======= ======
</TABLE>
At December 31, 1997 and 1996, the Bank had no investment in
obligations of individual states, counties or municipalities which exceeded 10%
of stockholders' equity. In addition, there were no sales of these securities in
1997, 1996, or 1995.
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 does not solicit nor accept brokered
deposits. 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 which include
15
<PAGE>
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 which are generally competitive with those of
competing financial institutions.
Rockland's branch locations are supplemented by the Bank's Trust/24
card 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 card also allows 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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------------ ----------------------
(Dollars in
Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amount Percent Amount Percent Amount Percent
Demand deposits $171,955 18.9% $161,475 18.9% $153,142 18.7%
Savings and Interest
Checking 225,069 24.8% 257,294 30.2% 261,302 32.0%
Money Market and Interest
Checking plus accounts 109,156 12.0% 105,706 12.4% 110,431 13.5%
Time deposits 402,346 44.3% 328,232 38.5% 292,206 35.8%
------- ---- ------- ---- ------- ----
Total $908,526 100.0% $852,707 100.0% $817,081 100.0%
-------- ------ -------- ------ -------- ------
</TABLE>
The Bank's interest-bearing time certificates of deposit of $100,000 or
more totaled $69.4 million at December 31, 1997. The maturity of these
certificates are as follows: $40.7 million within three months; $21.5 million
over three through 12 months; and $7.2 million thereafter.
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 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
16
<PAGE>
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, 1997, the Bank had
$36.4 million outstanding balances under 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 $428 million of
short-to-medium term borrowing capacity as of December 31, 1997, based on the
Bank's assets at that time. At December 31, 1997, the Bank had $207 million
outstanding in FHLB borrowings with initial maturities ranging from 1 month to 5
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 3 and 6 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,
-------------------------------------------------------
1997 1996 1995
-------------------------------------------------------
(in Thousands)
Federal funds purchased $845 $840 $4,060
Assets sold under
repurchase agreements 37,482 -- --
Treasury tax and loan notes 3,217 2,296 4,031
Federal Home Loan Bank
borrowings 206,724 78,000 20,000
-- -- 4,843
-------- ------- -------
Subordinated capital notes $248,268 $81,136 $32,934
-------- ======= =======
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,
-------------------------------------
1997 1996 1995
-------------------------------------
(Dollars in Thousands)
Balance outstanding at end of year $41,544 $ 3,136 $ 8,091
Average daily balance outstanding 48,869 26,534 18,995
Maximum balance outstanding at any
month-end 89,945 44,545 63,988
Weighted average interest rate for
the year 5.74% 5.36% 5.74%
Weighted average interest rate at end
of year 5.99% 5.35% 4.36%
17
<PAGE>
Trust and Financial Services
Rockland's Trust and Financial Services 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, 1997, the Trust and Financial
Services Division maintained approximately 1,776 trust/fiduciary accounts, with
an aggregate market value of over $536 million on that date. Income from the
Trust and Financial Services Division amounted to $3.1 million and $2.8 million,
for 1997 and 1996, respectively.
Accounts maintained by the Trust and Financial Services Division
consist of "managed" and "non-managed" accounts. "Managed accounts" are those
accounts under custody 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 no less than monthly.
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.
BHCA - 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
18
<PAGE>
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.
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
has 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.
19
<PAGE>
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 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, 1997, the Company had Tier 1
capital and total capital equal to 13.52% and 14.78% of total risk-adjusted
assets, respectively, and Tier 1 leverage capital equal to 8.64 % 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
9.98% and 11.23% of total risk-adjusted assets, respectively, and Tier 1
leverage capital equal to 6.36% 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
20
<PAGE>
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
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 of
centrum 3 years or, as a result, the bank holding company would control, until
July 1, 1998, excess of 28%, and after July 1, 1998 in excess of 30%, of the
total deposits of all state and federally chartered banks in
Massachusetts,unless waived by the Community. Similarly, no bank which is not a
member of the Federal Reserve can merge or consolidate with any other
21
<PAGE>
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
until July 1, 1998 in excess of 28% and after July 1, 1998 in exceed 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 do 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,
until July 1, 1998, more than 28% and after July 1, 1998, 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.
22
<PAGE>
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 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, 1998.
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 1.26 basis
points, on an annual basis, for BIF assessable deposits and approximately 6.28
basis points for 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,
23
<PAGE>
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 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
24
<PAGE>
undercapitalized institution as critically undercapitalized). As of December 31,
1997, 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. While Rockland can
solicit and accept brokered deposits, the Bank historically has not relied upon
brokered deposits as a source of funding and, at December 31, 1997, the Bank did
not have any brokered deposits. See "Sources of Funds - Deposits."
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 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.
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
25
<PAGE>
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 inaction's 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.
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 11.32% as of December 31, 1997.
As a result of legislation in 1995, the state tax rate for financial
institutions and their related corporations will be gradually reduced to 10.5%
by January 1, 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 8 of the Notes to Consolidated
Financial Statements included in Item 8 hereof.
26
<PAGE>
Item 2. Properties
At February 28, 1998, 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 four of its branch offices and leases the remaining 27 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, 15 have
remaining lease terms of greater than five years and less than 10 years, and 10
has a remaining lease term of 10 years or more. The Bank's aggregate rental
expense under such leases was $2.0 million in 1998. 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 Trust and Financial Services 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. At December 31,
1997, the net book value of the property and leasehold improvements of the
offices of the Bank amounted to $7.8 million. The Bank's properties which 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 12 to the Consolidated Financial Statements,
included in Item 8 hereof.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings which 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
27
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference from page
41 of the Company's 1997 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, 1997.
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page
5 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
6 through 19 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 20 through 40 of the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
28
<PAGE>
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
1998 Annual Meeting of Stockholders filed with the Commission on March 13, 1998.
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.
29
<PAGE>
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 20 through 39 of the Annual Report.
Report of Independent Public Accountants
Consolidated balance sheets as of December 31, 1997 and 1996
Consolidated statements of income for each of the years in the three
year period ended December 31, 1997
Consolidated statements of cash flows for each of the years in the
three year period ended December 31, 1997
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 (5)
amended to date
3.(ii) Bylaws of the Company, as amended (1)
to date
30
<PAGE>
4.1 Specimen Common Stock Certificate (4)
4.2 Specimen Preferred Stock Purchase (2)
Rights Certificate
4.3 Amended and Restated Independent (6)
Bank Corp. 1987 Incentive Stock
Option Plan ("Stock Option Plan").
(Management contract under Item
601(10)(iii)(A).
No. Exhibit Page
- ----------------- ----------------------------------- --------
4.4 Independent Bank Corp. 1996 (8)
Non-Employee Directors' Stock Option Plan
(Management contract under Item
901(10)(iii)(A)).
4.5 Independent Bank Corp. 1997 (9)
Employee Stock Option Plan
(Management contract under
Item 601 (10)(iii)(A)).
10.1 Third Amended and Restated E-36
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)).
10.2 Second amended and Restated (7)
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, Debra A. Charbonnet,
and Raymond G. Fuerschbach are
substantially similar to the Driscoll
agreement. (Management contract
under Item 601(10)(iii)(A)).
31
<PAGE>
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
13 Annual Report to Stockholders E - 37
21 Subsidiaries of the Registrant (3)
23.1 Consent of Independent Public E - 82
Accountants
27.1 Financial Data Schedule 1997 E - 84
27.2 Restated Financial Data Schedule E-85
Year End 1995, 1996 &
Q1, 2, & 3, 1996
27.3 Restated Financial Data Schedule E-86
Q1, 2, & 3, 1997
(Footnotes on next page)
32
<PAGE>
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) Incorporated by reference from the Company's report on Form 10-K for the
year ended December 31, 1992.
(5) Incorporated by reference from the Company's report on Form 10-K for the
year ended December 31, 1993.
(6) Incorporated by reference from the Company's report on Form 10-K for the
year ended December 31, 1994.
(7) Incorporated by reference from the Company's report on Form 10-K for the
year ended December 31, 1995.
(8) 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.
(9) 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) There were no reports on Form 8-K filed by the Company during the three
months ended December 31, 1997.
(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.
33
<PAGE>
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 12, 1998 John F. Spence, Jr.
Chairman of the Board and Chief
Executive Officer
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, John
F. Spence, Jr., 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 12, 1998
Richard S. Anderson
Director
/s/ Donald K. Atkins Date: March 12, 1998
Donald K. Atkins
Director
/s/ W. Paul Clark Date: March 12, 1998
W. Paul Clark
Director
/s/ Robert L. Cushing Date: March 12, 1998
Robert L. Cushing
Director
34
<PAGE>
/s/ Benjamin A Gilmore, II Date: March 12, 1998
Benjamin A. Gilmore, II
Director
/s/ Lawrence M. Levinson Date: March 12, 1998
Lawrence M. Levinson
Director
/s/ Douglas H. Philipsen Date: March 12, 1998
- ------------------------
Douglas H. Philipsen
Director and President
/s/ Richard H. Sgarzi Date: March 12, 1998
- ---------------------
Richard H. Sgarzi
Director
/s/ Robert J. Spence Date: March 12, 1998
- ---------------------------
Robert J. Spence
Director
/s/ William J. Spence Date: March 12, 1998
- ---------------------
William J. Spence
Director
/s/ Brian S. Tedeschi Date: March 12, 1998
- ---------------------
Brian S. Tedeschi
Director
/s/ Thomas J. Teuten Date: March 12, 1998
- --------------------
Thomas J. Teuten
Director
/s/ Richard J. Seaman Date: March 12, 1998
- ---------------------
Richard J. Seaman
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
EXHIBIT NO. 10.1
Third Amended and 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)).
<PAGE>
THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AGREEMENT, dated and effective as of December 12, 1991 by and between
Rockland Trust Company, a Massachusetts trust company (the "Company"), Douglas
H. Philipsen, of Duxbury, Massachusetts, (the "Executive"), and Independent Bank
Corp., a Massachusetts corporation ("IBC"), as amended by a certain Amendment to
Employment Agreement dated as of February 3, 1993 and as amended and restated as
of June 21, 1994, and as further amended by a certain Amendment No. 1 to Amended
and Restated Employment Agreement dated as of January 12, 1995, and as further
amended by Amendment No. 2 to Amended and Restated Employment Agreement dated as
of October 17, 1995 and as further amended and restated the Second Amended and
Restated Employment Agreement dated February 21, 1996 (the "Employment
Agreement") and as further amended and restated as of this 25 day of June, 1997.
W I T N E S S E T H:
WHEREAS, the Executive, the Company and IBC are desirous of amending
certain provisions of the Employment Agreement to provide an additional benefit
to the Executive relating to the Split Dollar Agreement; and
WHEREAS, the Executive, the Company and IBC are desirous of amending
the Employment Agreement as set forth above and restating for the third time the
amended Employment Agreement as herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Employment; Position and Duties; Exclusive Services.
(a) Employment. The Company and IBC agree to employ the Executive,
and the Executive agrees to be employed by the Company and IBC for the Term
provided in Section 2 below and upon the other terms and conditions hereinafter
provided.
(b) Position and Duties/Company. So long as the Executive is
employed by the Company, the Executive (i) agrees to serve as the President and
Chief Executive Officer of the Company and to perform such reasonable duties
consistent with such position as may be delineated in the By-Laws of the Company
and as may be assigned to him from time to time by the Board of Directors of the
Company (the "Board"), (ii) shall report, as President and Chief Executive
Officer of the Company, only to the
-1-
<PAGE>
Board and its duly appointed committees (iii) shall serve as a member of the
Board and of any executive or other committee thereof, if applicable, (iv) shall
be given such authority as is appropriate to carry out the duties described
above, it being understood that, in his capacities as President and Chief
Executive Officer of the Company, his duties shall be consistent in scope,
prestige and authority with the customary duties of a President and Chief
Executive Officer of a comparable corporation, and (v) agrees to serve, if
elected, at no additional compensation (if the other officers or directors who
are officers of the Company also serve at no additional compensation) in the
position of officer or director of any subsidiary or affiliate of the Company.
No other employee will hold the title of "Chief Operating Officer" without the
Executive's express permission.
(c) Position and Duties/IBC. So long as the Executive is employed by
the Company, the Executive agrees to serve as the President of IBC and to
perform such reasonable duties consistent with such position as may be
delineated in the By-Laws of IBC and as may be assigned to him from time to time
by the Board of Directors of IBC (the "IBC Board"). In the event at any time
during the term John F. Spence, Jr. shall cease to serve as Chief Executive
Officer of IBC, the Executive shall succeed to such position and shall serve in
such position during the remainder of the Term at no additional compensation. It
is acknowledged by the parties hereto that as President of IBC (and as Chief
Executive Officer, if such becomes the case), the Executive shall report only to
the IBC Board and its duly appointed committees and not to any other officer
regardless of title.
(d) Exclusive Services. So long as the Executive is employed by the
Company, and except for illness or incapacity, the Executive shall devote all of
his business time, attention, skill and efforts exclusively to the business and
affairs of the Company, IBC and its affiliates, shall not be engaged in any
other business activity, and shall perform and discharge well and faithfully the
duties which may be assigned to him from time to time by the Board and the IBC
Board; provided, however, that nothing in this Agreement shall preclude the
Executive from devoting reasonable time during reasonable periods required for
any or all of the following:
(i) serving, in accordance with the Company's policies and with
the prior approval of the Board, as a director or member of a committee of any
other company or organization involving no actual or potential conflict of
interest with the Company, IBC or any of their subsidiaries or affiliates;
-2-
<PAGE>
(ii) investing his personal assets in businesses in which his
participation is solely that of a passive investor in such form or manner as
will not require any services on the part of the Executive in the operation or
affairs of such businesses;
(iii) managing the commercial farming activities of the
Executive's Johnson, Vermont farm property, provided the scope of such
activities are consistent with current operations;
provided, however, that such activities in the aggregate shall not materially
and adversely affect or interfere with the performance of the Executive's duties
and obligations to the Company or IBC hereunder.
2. Term of Employment.
The Company hereby agrees to employ the Executive, and the Executive
hereby agrees to accept such employment in the capacity set forth herein, for a
period commencing December 16, 1991 ("Commencement Date") and ending thirty-six
(36) months from the date of termination or resignation (as defined in Section
6(a)(v) hereof). The term of this Agreement, as hereinabove defined shall
hereinafter be referred to as the "Term."
3. Cash Compensation.
Except as otherwise specifically provided herein, as compensation to
the Executive for all services to be rendered by him in any capacity hereunder,
the Company shall pay during the Term an annual base salary at the current rate
of Three Hundred Twenty Thousand Six Hundred and Sixty and no/100 Dollars
($320,660) per annum Salary"), payable no less frequently than bi-weekly. The
Board may from time to time at its discretion review the compensation provisions
of this Agreement and shall have the authority to pay an increased base salary,
and/or bonus and/or other additional compensation to the Executive, but in no
event shall any such compensation adjustment reduce the base salary below the
rate hereinabove specified.
4. INTENTIONALLY OMITTED
5. Benefits.
Except as otherwise specifically provided herein, so long as the
Executive is employed by the Company, the Executive shall be entitled to the
following benefits:
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(a) Travel and Business Related Expenses. Until the earlier of the
end of the Term or the Executive's purchase pursuant to Section 5(b)(i)(E)
hereof, the Executive shall be provided with a Company owned automobile and
reimbursed in accordance with the policies of the Company as in effect from time
to time for travel and other reasonable expenses incurred in the performance of
the business of the Company.
(b) Group Life Insurance. The Company agrees to include the
Executive under the Company's group term life insurance policy in accordance
with the policies of the Company as in effect from time to time. The Company
shall pay all premiums for such coverage.
(c) Sick Leave/Disability. The Executive will enjoy the same sick
leave and short term and long term disability coverage as employees of the
Company generally.
(d) Retirement Plans. The Executive will be eligible to participate
in the Company's retirement benefit plans (collectively the "Plans") each in
accordance with the terms of the Plans.
(e) Vacation/Holidays. The Executive will receive four (4) weeks
paid vacation, on an "as earned" basis each year and will receive ten (10)
holidays each year.
(f) Insurance. The Executive shall participate in all insurance
programs (medical, dental, surgical, hospital) adopted by the Company, including
dependent coverage, to the same extent as other executives of the Company.
(g) 401K Profit Sharing Plan and Other Incentive Compensation Plans.
The Executive will be eligible to participate in the Company's profit sharing
and other management incentive compensation plans each in accordance with their
respective terms.
(h) Taxes. Except as otherwise specifically provided herein, the
Executive recognizes that some or all of these benefits may give rise to a
federal and/or state income tax liability, and agrees to be responsible for such
liability.
(i) Split Dollar Agreement. Notwithstanding anything to the contrary
contained herein, the Company agrees to gross-up the compensation of the
Executive in an amount determined by the Company as necessary to reimburse the
Executive for (A) an amount equal to the sum of all applicable federal and state
income and employment tax incurred by the Executive and attributable to the
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value of the economic benefit provided to the Executive by the insurance policy
described under a certain Split Dollar Agreement dated as of December 23, 1994
by and between the Company and the Executive, as amended from time to time (the
"Split Dollar Agreement") less the amount contributed by the Executive toward
the premium payment relating to such policy, as measured by (I) the lower of (1)
the applicable then current P.S. - 58 rates published from time to time by the
U.S. government, and (2) the applicable then current premium rates published
from time to time by the insurer of such insurance policy for individual one
year term life insurance available to all standard risks, or (II) any other then
commonly accepted methodology for determining the value of such economic
benefit, (B) the cost of any insurance policy that the Executive purchases for
the waiver of premiums on the insurance policy described in the Split Dollar
Agreement in the event of his disability, and (C) the tax effect of the
reimbursements set forth in (A), (B) and (C) hereof, and to pay such amounts to
the Executive in a lump sum payment no later than three (3) business days prior
to the earliest date on which any such federal or state income and employment
taxes are due with respect to the economic benefit of such insurance policy
and/or the cost of waiver of premiums. The Company shall also promptly estimate
the amount necessary to fund its obligations under (A), (B) and (C) above for
the period following a termination of employment of the Executive (other than a
termination for Cause, as defined in this Agreement)(the "Post Termination
Period"). In determining such estimate, the Company may initially assume that
the Executive's employment shall terminate upon retirement at age 65, that the
Executive shall live until age 85, that current tax rates will apply in the
future, that current waiver of premium elections will apply, that the fund will
have net earnings at an annual rate of eight percent(8%) and may use such other
reasonable actuarial and other assumptions as are appropriate to provide
adequate funding. The Company shall secure its Post Termination Period payment
obligations hereunder by making contributions on an annual basis to the Rabbi
Trust under the Employment Agreement among Rockland Trust Company, Douglas H.
Philipsen and Independent Bank Corp.(the "Trust") in amounts such that level
annual payments commencing in December, 1997 and continuing in December of each
year until December, 2002, will provide sufficient funds to meet the Company's
obligations under (A), (B) and (C) above in the Post Termination Period. The
amounts to be contributed to the Trust each year will be adjusted to reflect the
investment performance of the funds in the Trust and such changes in the initial
actuarial and other assumptions as are necessary to reflect changes in tax rates
and other factors which would have been considered in the initial assumptions if
such facts had been known in December, 1997. In the event the Executive's
employment terminates prior to age 65
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and such termination is by reason other than for Cause, the Company shall
contribute, no later than ten (10) days following the date of termination, such
additional amounts as are necessary for the Company to be able to satisfy its
obligations hereunder in full in accordance with the then current funding
assumptions except that the actual date of termination shall be used instead of
age 65, if different. This clause (i) of Section 5 shall remain in full force
and effect and shall survive any termination of the Executive's service with the
Company and of this Agreement except a termination for Cause. Notwithstanding
the termination of the Executive's service with the Company and of this
Agreement except a termination for Cause, the Company shall thereafter continue
to review not less frequently than annually the adequacy of the amount in the
Trust to fund fully the Company's obligations under this clause (i) of Section 5
using then appropriate current funding assumptions and promptly make such
additional contributions as are appropriate to fund fully the Company's
obligations under this clause (i) of Section 5.
6. Termination of Employment.
(a) Termination for Cause; Resignation Without Good Reason.
(i) If the Executive is terminated by the Board for any reason
other than for Cause, as defined below in Section 6(a)(iii), such termination
shall be deemed to be without Cause, or if the Executive should resign for Good
Reason, as defined below in Section 6(a)(iv), prior to the expiration of the
Term, the Executive shall be entitled to the payments and benefits provided in
Section 6(b)(i). Notwithstanding anything to the contrary contained in this
Agreement, the Executive shall be entitled to the payments and benefits set
forth in Section 6(b)(i) hereof in all cases in the event the Executive ceases
to be an employee of the Company for any reason (other than death or disability
(as defined in Section 6(e) hereof)) at any time following a Change of Control.
(ii) If the Executive's employment is terminated by the Company
for Cause or if the Executive resigns from his employment for any reason other
than death, disability (as defined in Section 6(e) hereof) or for Good Reason,
as defined below in Section 6(a)(iv), prior to the expiration of the Term, the
Executive shall have no right to receive compensation or other benefits for any
period after such termination for Cause or resignation for any reason other than
death, disability or for Good Reason, except as may be required by law and
except that the Executive's rights to exercise his stock options in the event
his employment terminates shall be governed by the Independent Bank
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Corp. 1987 Incentive Stock Option Plan and/or any other relevant stock option
plans, as appropriate (the "Plans") and the relevant stock option agreement.
(iii) Termination for "Cause" shall mean action by the Board to
terminate the service of the Executive with the Company at any time because of:
(A) the Executive's conviction of, or plea of nolo contendre to, a felony or
crime involving moral turpitude; (B) activities involving the Executive's
personal profit as a result of his dishonesty, incompetence, willful misconduct,
willful violation of any law, rule, or regulation, or breach of fiduciary duty;
(C) the Executive's commission of an act involving gross negligence on the part
of the Executive in the conduct of his duties hereunder; (D) drug addiction on
the part of the Executive; or (E) the Executive's material breach of any
provision of this Agreement; provided, however, that, in the case of any
termination pursuant to clauses (C), (D), or (E) above, the Company shall give
the Executive thirty (30) business days' written notice thereof, an opportunity
to cure within such thirty (30) day period, and a reasonable opportunity to be
heard by the Board to show just cause for his actions, and to have the Board, in
its discretion, reverse or rescind the prior action of the Board under the
clause(s).
(iv) Resignation for "Good Reason" shall mean the resignation of
the Executive after (A) the Company or IBC, without the express written consent
of the Executive, materially breaches this Agreement to the substantial
detriment of the Executive; (B) the Board or the IBC Board, without Cause (as
defined in Section 6(a)(iii) above), substantially changes the Executive's core
duties or removes the Executive's responsibility for those core duties, so as to
effectively cause the Executive to no longer be performing the duties of Chief
Executive Officer and President of the Company and the President of IBC; (C) the
Board or the IBC Board, without Cause (as defined in Section 6(a)(iii) above)
places another executive above the Executive in the Company or IBC (except for
the current designation of John F. Spence, Jr. as Chief Executive Officer of
IBC); or (D) a Change of Control as defined in Section 6(c) below; provided,
however, that, in the case of resignation pursuant to clauses (A) through (C)
above, the Executive shall give the Company or IBC, as the case may be, 30
business days' written notice thereof and, during such 30 day period, an
opportunity to cure.
(v) The date of termination of employment by the Company
pursuant to Section 6(a) (or pursuant to Section 6(b) below) shall be the date
that the written notice of termination from the Company to the Executive is
written, and the Company agrees to use all good faith efforts to deliver the
written
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notice to the Executive as soon as possible after the notice is written. The
date of a resignation by the Executive pursuant to this Section 6(a) (or
pursuant to Section 6(b) below) shall be the date specified in the written
notice of resignation from the Executive to the Company.
(b) Termination Without Cause; Resignation for Good Reason.
(i) If the Executive's employment is terminated by the Company
for any reason other than death, disability (as defined in Section 6(e) hereof)
or for Cause, or, if the Executive should resign for Good Reason prior to the
expiration of the Term, he shall be entitled (A) to receive a lump sum severance
payment in an amount equal to the Executive's then current base salary for the
then remaining portion of the Term, plus (B) all amounts due to the Executive
under Section 5(i) above shall be accelerated and due and payable to the
Executive, to the extent not paid to the Executive as of the termination of this
Agreement, which payments shall be due immediately upon the termination or
resignation of the Executive's employment and, if not so paid, shall bear
interest at the rate of 15% per annum from such date until paid, and (C) (1) to
continue participation in the plans and arrangements described in clauses (b)
and (f) of Section 5 hereof (to the extent permissible by law and the terms of
such plans and arrangements) for the then remaining portion of the Term (the
"Benefits Period"), or (2) at the election of the Executive at any time
following termination of this Agreement and during the Benefits Period, to
receive a gross bonus payment in an amount which after payment therefrom of all
applicable federal and state income and employment taxes, will equal the cost to
the Company at the time of the Executive's election, attributable to the
Executive's participation in the plans and arrangements described in clauses (b)
and (f) of Section 5 hereof for the Benefits Period less any portion thereof
during which the Executive has continued his participation in such plans and
arrangements described in clause (b) and (f) of Section 5 hereof in accordance
with subsection 6(b)(i)(C)(1) above; which payment shall be due following
termination or resignation of the Executive's employment immediately upon the
Executive's delivery of written notice to the Company of his election pursuant
to subsection 6(b)(i)(C)(2), and if not so paid, shall bear interest at the rate
of 15% per annum for such date until paid, and (D) to have all stock options
which have been granted to the Executive to immediately become fully exercisable
for a period of three (3) months after the termination or resignation date (as
the case may be) in accordance with the terms of the Plans and the relevant
stock option agreement, and (E) to continue to have use of a Company owned
automobile and to receive all reimbursements
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associated therewith in accordance with the provisions of Section 5(a) hereof
for the balance of the Term, or upon his written notice to the Company at any
time within three months following the termination or resignation date (as the
case may be), to purchase his Company owned automobile at a purchase price equal
to the book value of said automobile as carried on the books and records of the
Company, plus all applicable excise taxes.
(ii) In the event of any dispute as to whether the Executive's
employment was terminated by the Company for a reason other than for Cause or
whether the Executive resigned for Good Reason, the Executive shall continue to
be provided with the health insurance benefits provided by the Company during
the arbitration proceedings provided for in Section 8 below. Further, any monies
which would be payable to the Executive pursuant to this Section 6(b) if the
Executive were to prevail in such arbitration proceedings shall be deposited
promptly into interest bearing escrow accounts to be established by the Company
in the name of the American Arbitration Association, as trustee, in a federally
insured depository institution (other than the Company or any affiliated entity)
for such purpose, and the accounts shall be established at separate institutions
in amounts such that the principal plus interest anticipated to accrue during
the course of arbitration proceedings shall not exceed the limit of federal
insurance applicable to each such account. The total of the escrowed amounts,
together with the accrued interest thereon, shall be paid to the Executive or
revert to the Company, as the case may be, in accordance with the final
resolution of the dispute pursuant to Section 8.
(c) Change of Control.
(i) A "Change of Control" shall be deemed to have occurred if,
subsequent to the Commencement Date, (A) any "person" (as such term is defined
in Section 13(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the beneficial owner, directly or indirectly, of either (x) a majority
of either the Company's outstanding common stock or IBC's outstanding common
stock, or (y) securities of the Company or IBC representing a majority of the
combined voting power of either the Company's then outstanding voting securities
or IBC's then outstanding voting securities, or (B) during any period of two
consecutive years, individuals who at the beginning
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of such period constitute the Board cease, at any time after the beginning of
such period, for any reason to constitute a majority of the Board unless the
election of each new director was nominated or approved by at least two-thirds
of the directors then still in office who were either directors at the beginning
of such two-year period or whose nomination for election was previously
approved.
(ii) In the event any amount payable as compensation to the
Executive under this Agreement when aggregated with any other amounts payable as
compensation to the Executive other than pursuant to this Agreement would
constitute a Parachute Payment (as hereinafter defined), the amount payable as
compensation under Section 6 (b)(i) of this Agreement shall be reduced (but not
below zero) to the largest amount which is not a Parachute Payment (as
hereinafter defined) when aggregated with any other amounts payable as
compensation to the Executive other than pursuant to this Agreement. For
purposes hereof, the term Parachute Payment shall have the meaning given to
parachute payments set out in Internal Revenue Code of 1986 ss.280G(b)(2)(A)
(relating to the quantification of parachute payments) as then in effect
determined without regard to the provisions of Internal Revenue Code of 1986
ss.280G(b)(4) (relating to the exclusion of reasonable compensation from
parachute payments) as then in effect. Notwithstanding the foregoing, if the
Executive proves to the satisfaction of the Compensation Committee of the Board
(if no such Compensation Committee then is in existence, then any other
committee of the Board of the Company then performing the functions of a
compensation committee) with clear and convincing evidence that all or any
portion of the amount of the reduction provided in the preceding sentence would
not constitute a parachute payment within the meaning of such term as defined in
Internal Revenue Code of 1986 ss.280G(b)(2)(A) as then in effect determined with
regard to the provisions of Internal Revenue Code of 1986 ss.280G(b)(4) as then
in effect and that the Company's tax reporting position in regard to the payment
is overwhelmingly likely to be sustained, then the reduction provided in the
preceding sentence shall be adjusted to permit payment of so much of such
reduction as the said Compensation Committee determines will result in the
largest amount which would not constitute a parachute payment within the meaning
of such term as defined in Internal Revenue Code of 1986 ss.280G(b)(2)(A) as
then in effect determined with regard to the provisions of Internal Revenue Code
of 1986 ss.280G(b)(4) as then in effect.
(d) Mitigation of Damages; Legal Fees. The Executive shall not be
required to mitigate the amount of any payment or benefit provided for in
Section 6(b) by seeking other employment or otherwise, nor shall the amount of
any payment or benefit provided for in Section 6(b) be reduced by any
compensation earned by the Executive as a result of self-employment or
employment by another employer, by retirement benefits or by offset against any
amount claimed to be owed by the Executive to the Company or otherwise.
Following a Change of Control, the
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Company agrees to pay, as incurred, all legal fees and expenses which the
Executive may reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement) plus in
each case interest on any delayed payment at the rate of fifteen percent (15%)
per annum.
(e) Termination by Reason of Death or Disability.
(i) Notwithstanding anything to the contrary contained herein,
in the event the Executive should die while he is employed by the Company, the
Executive's employment shall be automatically terminated and the Company shall
have no further obligations under this Agreement to pay compensation or benefits
to the Executive or his estate, except to the extent any compensation or
benefits are due to the Executive or his estate for any period prior to his
death, provided, however, that this Section 6(e)(i) shall not affect in any
manner any other benefits to which the Executive or his estate may be entitled
or which may vest or accrue upon his death under any arrangement, program or
plan with the Company (other than this Agreement), by law or otherwise.
(ii) Except as set forth in Section 5(i) hereof, notwithstanding
anything to the contrary contained herein, in the event the Executive should be
unable to perform his duties hereunder by reason of disability, whether by
reason of injury (physical or mental), illness (physical or mental) or
otherwise, incapacitating the Executive for a continuous period exceeding one
hundred and eighty (180) days, as certified by a physician selected by the
Company in good faith, the Executive's employment may be terminated by the
Company upon written notice to the Executive and upon such termination, the
Company's only obligations hereunder shall be to (A) pay to the Executive an
amount equal to fifty percent (50%) of the Executive's Base Salary on the date
of termination of employment for the then remaining portion of the Term at such
times as such Base Salary would have been payable if the Executive had not been
terminated, less any benefits which the Executive receives under any disability
insurance program provided by the Company and in effect at the date of such
termination, and (B) continue to permit the Executive to participate in the
plans and arrangements described in clause (b) and (f) of Section 5 hereof (to
the extent permissible by law and the terms of such plans and arrangements) for
the then remaining portion of the Term; provided, however, that if the Executive
dies following a
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termination pursuant to this Section 6(e)(ii), then the provisions of Section
6(e)(i) shall supersede this Section 6(e)(ii) from and after the date of death
of the Executive.
(iii) The Executive's right to exercise his stock options in the
event of his death or disability shall be governed by the terms of the Plans and
the relevant stock option agreement.
7. Confidentiality and Non Competition.
(a) Confidentiality. The Executive recognizes and acknowledges as an
employee of the Company, he will have access to, become acquainted with, and
obtain financial information and knowledge relating to the business, financial
condition, methods of operation and other aspects of the Company, its parent,
subsidiaries and affiliates ("Affiliated Companies") and their customers,
employees and suppliers, some of which information and knowledge is confidential
and proprietary and that the Executive could substantially detract from the
value and business prospects of the Affiliated Companies in the event, while
employed by the Company or any time thereafter, the Executive were to disclose
to any person not related to the Affiliated Companies or use such information
and knowledge for his or such other person's advantage. Accordingly, the
Executive hereby agrees that he will not disclose to any person, other than
directors, officers, employees, accountants, lawyers, consultants, advisors,
agents and representative of, or other persons related to, the Affiliated
Companies on a need to know basis in the course of carrying out his duties
hereunder, any knowledge or information of a confidential nature pertaining to
the Affiliated Companies, or their successors and assigns, including without
limitation, all unpublished matters relating to the business, properties,
accounts, books and records, business plan and customers of the said
corporations, or their successors and assigns, except with the prior written
approval of the Board of Directors of the Company, or except as may be required
by law.
(b) Equitable Relief. The Executive acknowledges and agrees (i) that
the provisions of this Section 7 are reasonable and necessary for the protection
of the Company, its subsidiaries and affiliates or its or their successors and
assigns, and (ii) that the remedy at law for any breach by him of the provisions
of this Section 7 will be inadequate and, accordingly, the Executive hereby
agrees that in the case of any such breach (i) the Company or its successors and
assigns shall be entitled to injunctive relief, in addition to any other remedy
they may have, and (ii) the Executive shall forfeit any future payments or
benefits to which he might be entitled hereunder.
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(c) Non-Solicitation/Non Competition. For a period of one (1) year
after the Executive receives any compensation pursuant to this Agreement he will
not (i) solicit, divert or take away, directly or indirectly, any Major Customer
of the Company, its parent, subsidiaries or affiliates, or its or their
successors and assigns, or (ii) directly or indirectly induce or attempt to
influence any employee of the Company, its parent or any of its subsidiaries or
affiliates, or their successors and assigns, to terminate his employment with
the Company, its parent or any of its subsidiaries or affiliates or their
successors or assigns. As used herein, "Major Customer" shall mean any customer
of the Company who has maintained an average deposit balance of at least
$100,000 during the last six months of the Term or who has maintained or
obtained a credit facility of at least $100,000 from the Company during the last
six months of the Term.
(d) Enforceability. The covenants on the part of the Executive
contained in this Section 7 shall be construed as an agreement independent of
any other provision in this Agreement, and the existence of any claim or cause
of action by the Executive against the Company or IBC, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of said covenants. This Section shall survive the termination of
this Agreement. The period, geographical area and the scope of the restrictions
on the Executive set forth herein are divisible so that if any provision of this
Section 7 is invalid, that provision shall be automatically modified to the
extent necessary to make it valid.
8. Disputes.
(a) Any dispute relating to this Agreement, or to the breach of this
Agreement, arising between the Executive and the Company, IBC or any of their
affiliates or subsidiaries shall be settled by arbitration in accordance with
the commercial arbitration rules of the American Arbitration Association
("AAA"). The arbitration proceeding, including the rendering of an award, shall
take place in Boston, Massachusetts, and shall be administered by the AAA.
(b) The arbitral tribunal shall be appointed within 30 days of the
notice of dispute, and shall consist of three arbitrators, one of whom shall be
appointed by the Company or IBC, one by the Executive, and the third by both the
Company or IBC and the Executive jointly; provided, however, if the Company or
IBC and the Executive do not select the third arbitrator within such 30 day
period, such third arbitrator shall be chosen
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by the AAA as soon as practicable following notice to the AAA by the parties of
their inability to choose such third arbitrator.
(c) The award of any such arbitral tribunal shall be final except as
otherwise provided by the laws of the Commonwealth of Massachusetts and the
Federal laws of the United States, to the extent applicable. Judgment upon such
award may be entered by the prevailing party in any state or federal court
sitting in Boston, Massachusetts.
(d) No arbitration proceedings hereunder shall be binding upon or in
any way affect the interests of any party other than the Company, IBC and the
Executive with respect to such arbitration.
9. Indemnification.
IBC and the Company shall indemnify the Executive to the fullest extent
permitted by the Massachusetts General Corporation Law. This indemnification
requires the advance of expenses to the Executive, as permitted by such law. The
parties to this Agreement further agree that this Agreement has been negotiated
by each in an arm's length transaction, and that each has been represented by
counsel in the negotiation and execution of the Agreement.
10. Tax Withholding and Excessive Payments.
(a) Payments to the Executive of all compensation contemplated under
this Agreement shall be subject to all applicable legal requirements with
respect to the withholding of taxes and other deductions required by law.
(b) In the event the sum of (A) the amount payable to the Executive
hereunder which is characterized as applicable employee remuneration for federal
income tax purposes under Internal Revenue Code of 1986, ss.162(m)(4) for any
tax year of the Company and (B) the aggregate of all other amounts which are
characterized as applicable employee remuneration under Internal Revenue Code of
1986, ss.162(m)(4) paid by the Company in respect to the Executive for such tax
year exceeds (C) $1,000,000 (or such greater or lesser sum as equals the maximum
amount allowable as a deduction to the Company for federal income tax purposes
under Internal Revenue Code of 1986, ss.162(m) in respect to applicable employee
remuneration to the Executive for such tax year), the amount payable hereunder
in respect to such year shall be reduced (but not below zero) to the amount
which shall result in the sum of (D) the amount payable hereunder which is
characterized as applicable employee remuneration under said
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ss.162(m)(4) and (E) all other remuneration paid by the Company in respect to
the Executive for such tax year which is characterized as applicable employee
remuneration under said ss.162(m)(4) equaling (F) $1,000,000 (or such greater or
lesser sum as equals the maximum amount allowable as a deduction to the Company
for federal income tax purposes under said ss.162(m) in respect to applicable
employee remuneration under said ss.162(m)(4) to the Executive for such tax
year. If, after the maximum reduction in the preceding sentence, any other
amounts remain payable otherwise than under this Agreement which would, if paid,
be applicable employee remuneration (as defined above) in excess of the amount
which is allowable as a deduction for the same under said ss.162(m), such
amounts shall be reduced to the maximum amount allowable as a deduction to the
Company for federal income tax purposes under said ss.162(m) in respect to
applicable employee remuneration to the Executive for such tax year. So much of
the amount of the reductions provided in the two preceding sentences as may be
paid in the tax year of the Company next succeeding without resulting in a
disallowance of a federal income tax deduction under said ss.162(m) in respect
to the portion of such reduction so paid shall be paid on the first business day
in such succeeding tax year. If the full amount of such reductions is not paid
in such tax year of the Company next succeeding, the remainder of such reduction
shall be paid in installments equal to the lesser of (G) the unpaid balance of
such reduction or (H) the amount which may be paid in each successive tax year
without resulting in a disallowance of a federal income tax deduction under said
ss.162(m) in respect to the portion of such reduction so paid until the full
amount of such reductions have been paid. References to sections of the Internal
Revenue Code of 1986 shall refer to the successors (to the sections cited as
presently constituted) which are in effect when applied.
11. Non-Assignability; Binding Agreement.
Neither this Agreement nor any right, duty, obligation or interest
hereunder shall be assignable or delegable by the Executive without the
Company's prior written consent; provided, however, that (i) nothing in this
Section shall preclude the Executive from designating any of his beneficiaries
to receive any benefits payable thereunder upon his death or disability, or his
executors, administrators, or other legal representatives, from assigning any
rights hereunder to the person or persons entitled thereto, and (ii) any
successor to the Company or IBC pursuant to any merger or consolidation
involving the Company or IBC, and any purchaser of all or substantially all the
assets of the Company or IBC, shall succeed to the rights and assume the
obligations of the Company or IBC under this Agreement, and the Company and IBC
covenant that they will not enter into or
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consummate any such transaction which does not make express provision for such
succession and assumption. Subject to the foregoing, this Agreement shall be
binding upon, and inure to the benefit of, the parties hereto, any successors to
or assigns of the Company and IBC, the Executive's heirs and the personal
representatives of the Executive's estate.
12. Amendment; Waiver.
This Agreement may not be modified, amended or waived in any manner
except by an instrument in writing signed by the parties hereto. The waiver by
any party of compliance with any provision of this Agreement by the other party
shall not operate or be construed as a waiver of any provision of this
Agreement.
13. Notices.
Any notice hereunder by either party to the other shall be given in
writing by personal delivery, telex, telecopy or certified mail, return receipt
requested, to the applicable address set forth below:
(i) To the Company or IBC: Rockland Trust Company
or Independent Bank Corp.
288 Union Street
Rockland, MA 02370
(ii) To the Executive: Douglas H. Philipsen
634 Chandler Street
Duxbury, MA 02332
(or such other address as may from time to time be designated by notice by
either party hereto for such purpose). Notice shall be deemed given, if by
personal delivery, on the date of such delivery or, if by telex or telecopy, on
the business day following receipt of answer back or telecopy confirmation or if
by certified mail, on the date shown on the applicable return receipt.
14. Governing Law.
This Agreement is to be governed by and interpreted in accordance with
the laws of the Commonwealth of Massachusetts. If, under such law, any portion
of this Agreement is at any time deemed to be in conflict with any applicable
statute, rule, regulation or ordinance, such portion shall be deemed to be
modified or altered to conform thereto or, if that is not possible, to be
omitted from this Agreement, and the invalidity
-16-
<PAGE>
of any such portion shall not affect the force, effect and validity of the
remaining portion thereof.
15. Supersedes Previous Agreements.
This Agreement and the Split Dollar Agreement and the related
collateral assignment, the Trust and other related documents as amended from
time to time, shall constitute the entire understanding between the Company, IBC
and the Executive relating to the employment of the Executive by the Company and
supersede and cancel all prior written and oral agreements and understandings
with respect to the subject matter of this Agreement. Except as otherwise
specifically provided herein, all amounts payable to the Executive or the
Company under the Split Dollar Agreement shall be exclusively governed by the
terms of the Split Dollar Agreement and related collateral assignment.
16. Counterparts.
This Agreement may be executed by the parties hereto in counterparts,
each of which shall be deemed to be an original, but such counterparts shall
together constitute one and the same instrument.
17. Joint and Several Liability.
The obligations and liability of IBC and the Company hereunder shall be
joint and several.
IN WITNESS WHEREOF, the parties have executed this Third Amended and
Restated Employment Agreement as of the date first above written.
ROCKLAND TRUST COMPANY
By:_____________________________
Its:____________________________
INDEPENDENT BANK CORP.
By:_____________________________
Its:____________________________
--------------------------------
DOUGLAS H. PHILIPSEN
A MANAGEMENT PERSPECTIVE
1997 was a very exciting year for Independent Bank Corp. Net income
increased by over 22%, assets grew by over 25%, the stock price increased by
75%, and your Board of Directors increased quarterly dividends twice, currently
at $.09 per share. In addition, the local economy remains healthy which
reinforces strong loan demand and franchise growth. In this letter, we would
like to review some of the key financial highlights of the year and then discuss
some critical items that will impact your company over the next three years.
FINANCIAL RESULTS
Financially, Independent Bank Corp. reported strong growth and
profitability. Net income increased to $14.2 million from $11.6 million the
previous year. This was a result of increased net interest income resulting from
growth in our loan and investment portfolios. Consumer loans continued to
increase at double digit rates as we benefit from our expertise in automobile
financing. In addition, the commercial loan and commercial mortgage portfolios
increased as a result of our ongoing calling efforts and the delivery of
superior service to our small business customers. Asset quality continues to be
strong with non-performing assets to total assets remaining flat compared to
1996 at 0.43%. In May, the Company completed a Trust Preferred debt offering
that increased our Tier 1 Capital by 37% without diluting our common
shareholders. A portion of this additional capital was utilized through a
balance sheet leveraging strategy. Investments were increased by $145 million,
funded by borrowings. The income from this strategy is accretive to earnings per
share and return on common equity, while it modestly reduced our return on
assets and net interest margin. We believe, however, that return on common
equity is the critical measure of our success from the perspective of the
shareholders.
Return on equity was very strong at 16.45% as compared to 15.20% last
year. Return on assets increased slightly to 1.15% from 1.13% the previous year.
The efficiency ratio also improved to 62.5% from 66.1% as the Company was able
to increase revenues relative to operating expenses, which included investments
in the infrastructure of our franchise.
TECHNOLOGY
As we reported a year ago, a critical component of ongoing success is
the Company's ability to utilize technology. Our strategic partnership with
Alltel, which provides data processing support, has been very successful. We
completed the first step toward expanding our technological capability by
converting to the Alltel systems in February 1997. The new systems provide us
with the tools and information to better analyze our customers' needs and to
structure services to meet their requirements more fully.
The next step in better utilizing technology is the implementation of a
Relationship Banking Program. While data collection is important, it is the
ability to make better decisions and develop service based on improved and
useable information that translates into higher profitability. In implementing
our Relationship Banking Program, the Company acquired, in coordination with
Alltel, a state-of-the-art Marketing Customer Information System (MCIF). This
technology (MCIF) allows us to accumulate
<PAGE>
information about our customers and markets and to analyze the extent to which
each customer utilizes our services. From this effort, we will establish service
and delivery enhancements to meet changing needs. We will also analyze and fine
tune the effectiveness of our delivery system including our branches, our ATM's,
and our involvement with the omnipresent Internet.
Our relationship with Alltel also provides us with tremendous benefit
in addressing the Year 2000 issue (Y2K). We believe that Y2K poses a significant
challenge to the business community. Literally billions of dollars are being
spent globally to ensure the year 2000 is not interpreted as 1900 in the
millions of programs running the thousands of systems that affect us, both as
individuals and/or business professionals. Within the Company, this challenge
has been segmented into four areas: mainframe computing, personal computing,
third-party vendors, and large business customers. Within every segment, we have
prioritized the component parts based on operational criticality ranging from
mission critical to not critical. Utilizing the expertise of Alltel and its
efforts with banking clients throughout the United States, we are confident of
our ability to manage the mainframe and personal computing issues. Our
third-party vendors have been contacted, and we are optimistic that their
systems will be Y2K compliant. Some third-party vendors, such as telephone
companies and public utilities, are certainly more problematic and difficult to
pin down. In addition, we have contacted our business customers to impress on
them the seriousness of Y2K and strongly recommend that everyone carefully
review their exposure. We will continue to monitor the activities relative to
the Y2K challenge of our largest business customers. We have established
December 31, 1998 as our internal Y2K compliance deadline leaving 1999 to
correct any possible lingering issues.
SOUTHEASTERN MASSACHUSETTS
There are a number of positive developments in our market area
southeast of Boston that provide us with ongoing and enhanced opportunity. Key
to this expansion is an improved transportation network to, from, and through
Southeastern Massachusetts. First, two of the Old Colony rail lines that connect
Plymouth County with Boston were re-opened in September 1997. The last time
trains ran on these lines was 1959. Second, three of the major highways through
our region are either being expanded or have been approved for expansion. Third,
the coastal ferry service to Boston and Logan Airport is continually being
improved. The benefits from better transportation are twofold. For our customers
who work in Boston, their commute will be much easier. Alternatively, and more
importantly for your Company, people and businesses in Boston will have easier
access to Plymouth County. This will allow businesses to move into our market
and take advantage of lower real estate costs and the high quality of life we
enjoy here. Since rapid population and business growth will strain the
infrastructure of the communities which we serve, your company is actively
involved in addressing these quality of life factors as well as ensuring that we
benefit from the growth.
COMPETITION
It is no surprise that increased competition accompanies prosperity.
The list of competitors continues to expand to include not only other community
banks, but the "big gorillas" from Boston, mutual funds, insurance companies,
Wall Street financial
<PAGE>
management firms, mortgage companies, foreign banks, and credit unions.
Competition in and of itself has never been a concern. The strength of this
franchise, sustained by the employees of Independent Bank Corp., is more than
capable of effectively competing. However, competition is not fair when one of
the competitors we face receives both a state and federal subsidy as is the case
with the non-taxable status of credit unions. We are not targeting for criticism
the smaller credit unions that have maintained their common bond, as was the
original intent of the credit union movement. Our concern is with the large
credit unions that are "bank look-alikes." These institutions are receiving a
subsidy from the state and federal government by not having to pay taxes. To put
it into perspective, eliminating taxes for your Company could mean over $7
million of increased net income for its shareholders. If it were available to
your company as it is to credit unions, that same $7 million could be utilized
for increased investment in the Company, lower rates for loans, higher rates for
deposits, lower fees or increased marketing. It is time to "level the playing
field," eliminate the subsidy, and establish fair competition.
CONCLUSION
We note with sadness the passing of Richard Spencer, former director of
Rockland Trust Company. Dick became a director of the Bank in 1966 and an
honorary director in 1988. He was employed by the Mutual Fire Inspection Bureau
prior to his service in the U.S. Army Air Corps during World War II. After that,
he moved to the Hingham Mutual Fire Insurance Company and became President and
Chairman of the Board of Directors. In his retirement, he spent time on the golf
course, a game he loved. Dick is remembered as a kind, friendly man who was
always ready to share with the Bank his common sense and quiet humor. His
presence and contributions will be missed. We are deeply appreciative of the
support of our shareholders who continue to show their confidence in our future.
We value our customers, both current and future, knowing that they have many
alternatives and have chosen Rockland Trust Company. We will strive to maintain
this trust. And, we thank our colleagues, both directors and employees, for
their flexibility in these changing times and commitment to excellence and
growth.
Selected Consolidated Financial information
& Other data
The selected consolidated financial information 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.
<PAGE>
<TABLE>
<CAPTION>
As of or For the Year Ended December 31, 1997 1996 1995 1994 1993
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Securities held to maturity $308,112 $290,894 $226,896 $256,785 $266,544
Securities available for sale 131,842 26,449 32,628 4,250 -
Loans, net of unearned discount 828,132 695,406 628,141 590,689 487,584
Reserve for possible loan losses 12,674 12,221 12,088 13,719 15,485
Total assets 1,370,007 1,092,793 987,589 929,194 829,681
Total deposits 988,148 918,572 871,085 796,612 743,385
Stockholders' equity 92,493 81,110 72,572 64,202 57,385
Nonperforming loans 5,891 4,462 5,271 7,864 16,982
Nonperforming assets 5,893 4,733 5,909 11,730 25,866
OPERATING DATA:
Interest Income $93,763 $77,211 $73,031 $63,487 $57,450
Interest Expense 41,578 32,354 29,143 22,029 22,920
Net interest income 52,185 44,857 43,888 41,458 34,530
Provision for possible loan losses 2,260 1,750 1,000 801 5,075
Non-interest income 12,770 12,709 11,480 11,470 12,995
Non-interest expenses 39,566 38,066 39,252 42,481 37,331
Minority interest expense 1,645 - - - -
Net income 14,158 11,597 10,387 8,113 4,636
PER SHARE DATA:
Net income - Basic $0.97 $0.80 $0.72 $0.56 $0.32
Net income - Diluted 0.95 0.79 0.71 0.56 0.32
Cash dividends declared 0.34 0.25 0.18 0.08 -
Book value, end of period 6.25 5.55 5.00 4.45 3.98
OPERATING RATIOS:
Return on average assets 1.15% 1.13% 1.10% 0.94% 0.59%
Return on average equity 16.45% 15.20% 15.28% 13.36% 8.48%
Net interest margin 4.52% 4.70% 4.99% 5.18% 4.74%
ASSET QUALITY RATIOS:
Nonperforming loans as a percent
of gross loans 0.69% 0.63% 0.83% 1.31% 3.45%
Nonperforming assets as a percent
of total assets 0.43% 0.43% 0.60% 1.26% 3.12%
Reserve for possible loan losses
as a percent of loans, net of
unearned discount 1.53% 1.76% 1.92% 2.32% 3.18%
Reserve for possible loan losses
as a percent of nonperforming loans 215.14% 273.89% 229.33% 174.45% 91.18%
CAPITAL RATIOS:
Tier 1 leverage capital ratio 8.64% 7.35% 7.24% 6.76% 6.83%
Tier 1 risk-based capital ratio 13.52% 10.89% 10.67% 10.05% 10.71%
Total risk-based capital ratio 14.78% 12.15% 11.92% 11.31% 11.98%
</TABLE>
<PAGE>
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
$1,370.0 million in 1997, compared with $1,092.8 million in 1996. The growth was
driven by an increase in loans of $132.7 million, centered in consumer loans and
commercial real estate. The securities portfolio increased to $456.0 million at
December 31, 1997, compared with $324.9 million at December 31, 1996. The growth
occurred in the securities available for sale portfolio which increased by
$105.4 million during 1997. This increase was due to an investment leverage
strategy that the Company implemented during the second and third quarter of
1997. In 1997, the Trust was formed for the purpose of issuing Trust Preferred
Securities. A total of $28.8 million of 9.28% Trust Preferred Securities were
issued on May 19, 1997. The proceeds of this offering in addition to an increase
in deposits of $69.6 million and increased borrowings of $167.1 million were
used to fund the noted growth.
The Company's total assets grew to $1,092.8 million as of December 31,
1996, an increase of $105.2 million, or 10.7%, over 1995 year-end assets. Loan
growth of $67.3 million in residential, commercial real estate and consumer
loans resulted from a relatively stable interest rate environment and an
improved regional economy. The securities portfolio increased by $64.0 million
during 1996 as a result of attractive yields in the bond market. An increase in
deposits of $47.5 million in addition to increased FHLB borrowings of $58
million funded this growth.
<PAGE>
Loan Portfolio. At December 31, 1997 the Bank's loan portfolio was
$828.1 million, an increase of $132.7 million, or 19.1%, from year end 1996.
This growth was primarily in the consumer loan portfolio which increased by
$79.4 million, or 61.3%. The remaining growth was in the commercial loan and
commercial real estate portfolios which also showed strong growth in 1997.
At December 31, 1996, the Bank's loan portfolio amounted to $695.4
million, an increase of $67.3 million, or 10.7%, from year-end 1995. This
increase was primarily centered in commercial real estate, residential real
estate and consumer loans. Commercial loan balances were relatively unchanged
over the year.
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 $12.7 million at December 31, 1997. The
ratio of the reserve for possible loan losses to non-performing loans was 215.1%
at December 31, 1997, lower than the 273.9% coverage 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 which 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, 1997, nonperforming assets
totaled $5.9 million, an increase of $1.2 million, or 24.5%, from the prior
year-end. Nonperforming assets represent 0.43% of total assets for both periods.
The following table sets forth information regarding nonperforming
loans and nonperforming assets on the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31, December 31, December 31,
1997 1997 1997 1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming Loans:
Loans past due 90 days or more
but still accruing $737 $758 $626 $557 $516 $553
Loans accounted for on a
nonaccrual basis 5,154 5,002 4,240 3,730 3,946 4,718
Total nonperforming loans 5,891 5,760 4,866 4,287 4,462 5,271
Other real estate owned 2 6 377 546 271 638
Total nonperforming assets $5,893 $5,766 $5,243 $4,833 $4,733 $5,909
Nonperforming loans as a
percent of gross loans 0.69% 0.71% 0.62% 0.59% 0.63% 0.83%
Nonperforming assets as a
percent of total assets 0.43% 0.43% 0.42% 0.43% 0.43% 0.60%
</TABLE>
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 accrual 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, or 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.
<TABLE>
<CAPTION>
December 31, 1997 1996
(In Thousands)
<S> <C> <C>
Loans past due 90 days or more but still accruing:
Real Estate - Residential Mortgage $112 $136
Consumer - Instalment 480 197
Consumer - Other 145 183
Total $737 $516
Loans accounted for on a nonaccrual basis:
Commercial $1,406 $1,090
Real Estate - Commercial Mortgage 1,027 1,038
Real Estate - Residential Mortgage 2,115 1,526
Consumer - Instalment 606 292
Total 5,154 3,946
Total Nonperforming Loans $5,891 $4,462
</TABLE>
<PAGE>
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, 1997, the Bank had $1.4
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.
The following table summarizes OREO activity during the periods indicated.
Activity Amount
(In Thousands)
Balance, December 31, 1995 $638
Properties Acquired 601
Sales and Rental Proceeds (968)
Balance, December 31, 1996 271
Properties Acquired 503
Sales and Rental Proceeds (903)
OREO Recoveries 131
Balance, December 31, 1997 $ 2
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.
Securities Portfolio. The Company's securities portfolio consists of
securities which management intends to hold until maturity, securities available
for sale 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, State, County and Municipal securities, as well as
mortgage-backed securities, including collateralized mortgage obligations.
Securities held to maturity as of December 31, 1997 are carried at their
amortized cost of $308.1 million and exclude gross unrealized gains of $2.8
million and gross unrealized losses of $1.3 million. A year earlier, securities
held to maturity totaled $290.9 million excluding gross unrealized gains of
$1.2 million and
<PAGE>
gross unrealized losses of $3.2 million. There were no sales of securities held
to maturity during 1997 or 1996.
Securities available for sale consist of certain mortgage-backed
securities, including collateralized mortgage 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 value of securities available for sale at December 31, 1997 totaled
$131.8 million and net unrealized gains totaled $1.4 million. A year earlier,
securities available for sale were $26.4 million with net unrealized losses of
$135,000. In 1997, the Bank realized a loss of $8,000 on the sale of an
available for sale security. There were no sales of securities in 1996.
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 during 1997 to maintain investment
levels required by FHLB guidelines.
Deposits. The Bank's branch system consists of 32 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, 1997, deposits of $988.1 million were $69.6 million,
or 7.6%, 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 $25.1 million, or 4.6%. Time deposits increased $44.5
million, or 11.8%.
Total deposits increased $47.5 million, or 5.5%, during the year ended
December 31, 1996. Core deposits decreased $8.1 million, or 1.5%, while time
deposits increased $55.5 million, or 17.3%. It should be noted that the 1995
year end core deposit balances were inflated by a $17 million deposit made on
the last day of the year which was subsequently withdrawn on the first business
day of January 1996.
Borrowings. The Bank's borrowings amounted to $248.3 million at
December 31, 1997, an increase of $167.1 million from year end 1996. At December
31, 1997 the Bank's borrowings consisted primarily of FHLB advances, $206.7
million, an increase of $128.7 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 $41.5
million at December 31, 1997, an increase of $38.4 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
<PAGE>
impact of federal and state income taxes, and the relative levels of interest
rates and economic activity.
For the year ended December 31, 1997, the Company reported a 22%
increase in net income to $14.2 million, or $.97 basic earnings per share. This
increase in net income was due to a $7.3 million, or 16.3%, increase in net
interest income. The provision for loan losses increased to $2.3 million
compared with $1.8 million last year. Non-interest income was relatively
unchanged while non-interest expense increased $1.5 million or 3.9%.
For the year ended December 31, 1996, the Company recorded net income
of $11.6 million, or $.80 basic earnings per share, compared to net income of
$10.4 million, or $.72 basic earnings per share in 1995. The improvement in the
results of operations in 1996 reflects a 2.2% increase in net interest income,
primarily due to a significant increase in the average outstanding balance of
loans, a 10.7% increase in non-interest income and a decrease of 3.0% in
non-interest expenses. 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 $52.7 million
in 1997, a 16.4% increase over 1996 net interest income of $45.2 million. Growth
in net interest income in 1997 compared with that of 1996 was primarily the
result of a 21.1% increase in average earning assets. The yield on earning
assets was 8.08% in 1997, compared with 8.06% in 1996. While the average balance
of loans, net of unearned discount increased by $100.1 million, or 15.2%, the
yield on loans remained strong at 8.82% in 1997 as compared to 8.83% in 1996.
The aforementioned investment leverage strategy increased average investments
for the year by $103.6 million, or 34.4%, to $404.5 million as compared to the
prior year. The yield on taxable securities increased to 6.71% in 1997 from
6.42% in 1996. During 1997, the average balance of interest-bearing liabilities
increased $163.5 million, or 21.1%, over 1996 average balances. The average cost
of these liabilities rose from 4.19% in 1996 to 4.44% in 1997 reflecting the
increase in the higher cost borrowing and consumer certificate categories. 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) decreased by 23 basis points. This is due to the
Company's decision to expand the securities portfolio, financed by borrowings,
repurchase agreements, and consumer certificates of deposit, to take advantage
of a strong capital position. While these funding and investment actions
increased net interest income, the net interest margin reflects the lower net
interest spread on such transactions.
The following table presents the Company's average balances, net
interest income, interest rate spread, and net interest margin for 1997, 1996,
and 1995. 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.
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE PAID YIELD BALANCE PAID YIELD BALANCE PAID YIELD
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Federal funds sold $3,474 $ 182 5.24% $3,822 $208 5.44% $16,666 $964 5.78%
Interest bearing
deposits - - - 127 7 5.51% 362 19 5.25%
Taxable securities 390,769 26,207 6.71% 293,516 18,857 6.42% 251,588 15,900 6.32%
Non-taxable
securities (1) 13,717 999 7.28% 7,411 431 5.82% 6,479 385 5.94%
Loans, net of
unearned
discount, (1) 757,877 66,868 8.82% 657,749 58,100 8.83% 612,481 56,138 9.17%
Total
interest-earning
assets $1,165,837 $94,256 8.08% $962,625 $77,603 8.06% $887,576 $73,406 8.27%
Cash and due from
banks 42,667 46,840 44,027
Other assets 18,862 15,574 14,367
Total Assets $1,227,366 $1,025,039 $945,970
Interest-bearing liabilities
Savings and
Interest Checking
accounts $255,069 $5,457 2.14% $257,294 $5,563 2.16% $261,302 $5,760 2.20%
Money Market &
Super Interest
Checking accounts 109,156 3,105 2.84% 105,706 2,944 2.79% 110,431 3,030 2.74%
Time deposits 402,346 23,136 5.75% 328,232 19,164 5.84% 292,206 17,252 5.90%
Federal funds
purchased and
assets sold
under repurchase
agreements 45,586 2,628 5.76% 23,418 1,284 5.48% 15,167 910 6.00%
Treasury tax and
loan notes 3,283 178 5.42% 3,115 139 4.46% 3,828 181 4.73%
Federal Home Loan
Bank borrowings 120,976 7,074 5.85% 51,382 2,885 5.61% 24,384 1,531 6.28%
Subordinated
capital notes - - - 3,805 375 9.86% 4,898 479 9.78%
Total
interest-bearing
liabilities $936,416 $41,578 4.44% $772,952 $32,354 4.19% $712,216 $29,143 4.09%
Demand deposits 171,955 161,475 153,142
Other liabilities 32,910 14,318 12,628
Total Liabilities 1,141,281 948,745 877,986
Stockholders'
Equity 86,085 76,294 67,984
Total Liabilities 6 9
and Stockholders'
Equity $1,227,366 $1,025,039 $945,970
Net Interest
Income $52,678 $45,249 $44,263
Interest Rate
Spread (2) 3.64% 3.87% 4.18%
Net Interest
Margin (2) 4.52% 4.70% 4.99%
</TABLE>
<PAGE>
(1) The total amount of adjustment to present interest income and yield on a
fully tax-equivalent basis is $493, $392 and $375 in 1997, 1996 and 1995,
respectively.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. Net interest margin represents net interest income
as a percent of average interest-earning assets.
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 changes in rate and changes in
volume. Changes which are attributable to both volume and rate have been
consistently allocated to change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 Compared To 1996 1996 Compared To 1995
Change Change Change Change
Due To Due To Total Due To Due To Total
Rate Volume Change Rate Volume Change
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income on interest-earning assets:
Federal funds sold ($7) ($19) ($26) ($14) ($742) ($756)
Interest bearing deposits - (7) (7) - (12) (12)
Taxable securities 1,106 6,244 7,350 307 2,650 2,957
Non-taxable securities (1) 201 367 568 (9) 55 46
Loans, net of unearned
discount (1) (73) 8,841 8,768 (2,189) 4,151 1,962
Total $1,227 $15,426 $16,653 ($1,905) $6,102 $4,197
Expense of interest-bearing
liabilities:
Savings and Interest
Checking accounts ($58) ($48) ($106) ($109) ($88) ($197)
Money Market and Super
Interest Checking accounts 65 96 161 43 (129) (86)
Time deposits (356) 4,328 3,972 (214) 2,126 1,912
Federal funds purchased and
assets sold under repurchase
agreements 129 1,215 1,344 (121) 495 374
Treasury tax and loan notes 32 7 39 (8) (34) (42)
Federal Home Loan Bank
borrowings 285 3,904 4,189 (341) 1,695 1,354
Subordinated capital notes - (375) (375) 3 (107) (104)
Total $97 $9,127 $9,224 ($747) $3,958 $3,211
Change in net interest income $1,130 $6,299 $7,429 ($1,158) $2,144 $986
</TABLE>
(1) Interest earned on non-taxable investment securities and loans is shown on a
fully tax-equivalent basis.
<PAGE>
Interest income increased by $16.7 million, or 21.5%, to $94.3 million
in 1997 as compared to the prior year end. Interest earned on loans increased by
$8.8 million, or 15.1%, reflecting an increase in average loans to $757.9
million in 1997 from $657.7 in 1996. Interest income from taxable securities
increased by $7.4 million, or 39.0%, to $26.2 million in 1997 as compared to the
prior year. The average yield on these investments improved by 29 basis points
to 6.71% in 1997.
Interest expense for the year ended December 31, 1997 increased to
$41.6 million from the $32.4 million recorded in 1996. Balance sheet growth was
funded primarily by increased borrowings. Interest expense for this category
increased by $5.2 million, or 111.0%, as the cost of FHLB borrowings increased
by 24 basis points to 5.85% in 1997. While interest expense on time deposits
increased by $4.0 million, or 20.7%, the cost of this deposit category decreased
to 5.75% in 1997 from 5.84% in 1996. The total cost of interest bearing
liabilities increased to 4.44% in 1997 from 4.19% in 1996.
Total interest income amounted to $77.6 million in 1996, an increase of
$4.2 million, or 5.7%, over 1995. This was due primarily to a rise of $3.0
million, or 18.6%, in interest earned on taxable securities, attributable to a
$41.9 million, or 16.7%, increase in the average balance of taxable securities
outstanding, as well as a 10 basis point increase in the average yield earned on
taxable securities. Interest earned on outstanding loans grew $2.0 million, or
3.5% due to a $45.3 million, or 7.4% increase in the average
<PAGE>
balance of loans outstanding, partially offset by a 34 basis point decline in
the average yield on loans.
Total interest expense for the year ended December 31, 1996 increased
$3.2 million, or 11.0%, over 1995. The increase was primarily due to a higher
balance of time deposit accounts. During 1996, the average balance of
interest-bearing deposit accounts increased $27.3 million, or 4.1% and the
average cost of interest bearing deposits rose 8 basis points. The average
balance of borrowings amounted to $81.7 million in 1996, as compared to $48.3
million in 1995. This increase in the average outstanding balance represents a
more frequent utilization of lower cost FHLB borrowings. The average cost of
borrowings decreased by 69 basis points from the prior year reflecting market
conditions.
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. 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 current and
prospective 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 increased in 1997 to $2.3 million,
compared with $1.8 million in 1996, reflecting higher loan originations. For the
year ended December 31, 1997, net loan charge-offs totaled $1.8 million, an
increase of $.2 million from the prior year. As of December 31, 1997, the
reserve for possible loan losses represented 1.53% of loans, net of unearned
discount, as compared to 1.76% at December 31, 1996. The reserve for possible
loan losses at December 31, 1997 represented 215.1% of nonperforming loans on
that date, as compared to coverage of 273.9% at the prior year-end.
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. 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, 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. The Company
was most recently examined by Federal Reserve regulators in the first quarter of
1996 and the Bank was most recently examined by the Federal Deposit Insurance
Corporation (FDIC) in the fourth quarter of 1997. No additional provision for
possible loan losses was required as a result of these examinations.
<PAGE>
Non-Interest Income. The following table sets forth information
regarding non-interest income for the periods shown.
Years Ended December 31, 1997 1996 1995
(In Thousands)
Service charges on deposit
accounts $5,654 $5,829 $5,648
Trust and financial
services income 3,082 2,790 2,424
Mortgage banking income 2,769 2,776 2,243
Other non-interest income 1,265 1,314 1,165
TOTAL $12,770 $12,709 $11,480
Non-interest income, which is generated by deposit account service
charges, fiduciary services, mortgage banking activities, and miscellaneous
other sources, amounted to $12.8 million in 1997.
Service charges on deposit accounts, which represents approximately one
half of non-interest income, decreased from $5.8 million in 1996 to $5.7 million
in 1997.
Trust and Financial Services revenue increased by 10.5% to $3.1 million
compared to $2.8 million in 1996. This improvement is due to an increase in
funds under management and a strong securities market.
Mortgage banking income, $2.8 million in 1997, equaled the prior year.
The Company's mortgage banking revenue consists primarily of points related to
loans sold, servicing income and gains and losses on the sale of loans
originated for sale. 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.
For the year ended December 31, 1996, total non-interest income
amounted to $12.7 million, an increase of $1.2 million, or 10.7%, from 1995.
Service charges on deposit accounts increased slightly from $5.6 million in 1995
to $5.8 million in 1996. Trust and Financial Services revenue increased by 15.1%
to $2.8 million compared to $2.4 million in 1995. Again, this improvement is due
to an increase in funds under management and a strong securities market.
Mortgage banking income increased to $2.8 million in 1996, up from $2.2
million in 1995. This increase represented strong commercial and residential
mortgage origination activity, in addition to an impact of $360,000 due to the
adoption of SFAS No. 122 as of January 1, 1996.
Non-Interest Expense. The following table sets forth information regarding
non-interest expense for the periods shown.
<PAGE>
Years Ended December 31, 1997 1996 1995
(In Thousands)
Salaries and employee benefits $20,566 $21,083 $22,143
Occupancy expenses 3,525 3,289 3,458
Equipment expenses 2,619 2,405 2,335
Advertising 679 838 710
Legal fees - loan collection 583 765 681
Legal fees - other 413 452 381
FDIC assessment 112 43 1,070
OREO expenses 66 137 599
Data processing facilities management 3,727 1,908 -
Other non-interest expenses 7,276 7,146 7,875
TOTAL $39,566 $38,066 $39,252
Non-interest expenses totaled $39.6 million for the year ended December
31, 1997, a $1.5 million increase from the comparable 1996 period.
Salaries and employee benefits decreased by $.5 million, or 2.5%. As
previously reported, in connection with a change in the Bank's pension plan
which was effective January 1, 1997, the Company recognized $.4 million of
previously accrued pension liability as a credit to salaries and benefits. As a
result of the change in the plan to a defined contribution plan, no pension
expense was recognized in 1997.
Occupancy and equipment expenses increased $.5 million, or 8%, in 1997
from 1996 as a result of the Company's commitment to improve facilities and to
take advantage of current technology.
The data processing facilities management fee, initiated in 1996,
increased by $1.8 million to $3.7 million in 1997. With the full completion of
the data processing conversion in the first quarter of 1997, the fee increased
as scheduled.
Non-interest expenses decreased by 3.0% to $38.1 million in 1996,
compared with $39.3 million in 1995.
Salaries and employee benefits decreased 4.8% to $21.1 million in 1996,
compared with $22.1 million in 1995, due to the transfer of sixty-nine employees
to the Bank's third party data processing provider, as a result of a facilities
management agreement. Deposit insurance expense decreased $1.0 million, or 96.0%
in 1996 compared with the prior year, due to the FDIC's declaration of a premium
moratorium. The Bank currently is assessed the lowest FDIC insurance premium
rate as a result of its strong financial condition. OREO-related expenses
decreased $614,000, or 81.8% in 1996, compared with the prior year, due to
continued improvement in the level of foreclosed properties. Other non-interest
expense decreased 9.3% to $7.1 million in 1996, compared with $7.9 million in
1995.
Minority Interest Expense. 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 a
minority interest expense totaling $1.6 million in 1997.
<PAGE>
Income Taxes. For the years ended December 31, 1997, 1996, and 1995,
the Company recorded combined federal and state income tax provisions of
$7,326,000, $6,153,000, and $4,729,000, respectively. These provisions reflect
effective income tax rates of 34.1%, 34.7%, and 31.3% in 1997, 1996, and 1995,
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. These benefits,
which amounted to $126,000, $101,000, and $1.6 million in 1997, 1996, and 1995,
respectively, reduced the valuation allowance which had been established prior
to 1993 due to the uncertainty of the realizability of the Company's net
deferred tax asset at that time.
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, to 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.
<PAGE>
At December 31, 1997, approximately 38% 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 was a negative $133.7
million, or 9.8% 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.
The Bank has entered into interest rate swap agreements with a total
notional value of $70 million at December 31, 1997. These swaps were arranged
through a large international financial institution and have initial maturities
ranging from three to four years. The Bank receives fixed-rate payments and pays
a variable rate of interest tied to 3-month LIBOR. At December 31, 1997, the
weighted average fixed-payment rate was 5.93% and the weighted average rate of
the variable interest payments was 5.92%. As a result of these interest rate
swaps, the Bank realized net interest income of $.1 million and $.2 million and
net interest expense of $.4 million for the years ended December 31, 1997, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
Within Over Three
Three To Twelve Over One
Months Months Year Total
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Federal funds sold $22,472 - - $22,472
Securities 55,787 67,036 333,166 455,989
Loans - fixed rate (2) 47,429 88,001 395,920 531,350
Loans - floating rate (2) 186,576 53,410 50,905 290,891
Total interest-earning assets 312,264 208,447 779,991 1,300,702
Interest-bearing liabilities:
Savings and Interest Checking accounts (3) 22,683 - 235,297 257,980
Money Market and Super Interest Checking accounts (3) 107,757 - 11,559 119,316
Time certificates of deposit over $100,000 40,762 21,457 7,205 69,424
Other time deposits 111,230 178,485 62,136 351,851
Borrowings 117,044 35,000 96,224 248,268
Total interest-bearing liabilities 399,476 234,942 412,421 1,046,839
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 (87,212) (26,495) 338,820 225,113
Cumulative gap (87,212) (113,707) 225,113 225,113
Effect of hedging activities (20,000) - 20,000 -
Cumulative hedged gap ($107,212) ($133,707) $225,113 $225,113
Interest-earning assets as a percent of interest-bearing
liabilities (cumulative) 78.17% 82.08% 124.25% 124.25%
Interest-earning assets as a percent of
total assets (cumulative) 22.79% 38.01% 94.94% 94.94%
Ratio of unhedged gap to total assets (6.37%) (1.93%) 24.73% 16.43%
Ratio of cumulative unhedged gap to total assets (6.37%) (8.30%) 16.43% 16.43%
Ratio of hedged gap to total assets (7.83%) (1.93%) 26.19% 16.43%
Ratio of cumulative hedged gap to total assets (7.83%) (9.76%) 16.43% 16.43%
</TABLE>
<PAGE>
(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 $5.9
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.
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.
<PAGE>
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%. 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 (1.90%)
-200 0.45%
See Management's 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, approximately $450 million of
potential funding, with major brokerage firms as potential sources of liquidity.
At December 31, 1997, the Bank had $36.4 million outstanding under these lines.
In addition, as a member of the Federal Home Loan Bank, Rockland has access to
approximately $400 million of borrowing capacity. On December 31, 1997, the Bank
had $206.7 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 $1.2 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
<PAGE>
procedures is intended to ensure that the Company will maintain adequate levels
of available funds. At December 31, 1997, the Company's liquidity position was
well above policy guidelines.
See Management's Discussion on Asset/Liability Management for further
details on how the Company manages its liquidity.
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, 1997, 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, 1997, the Tier 1 leverage capital ratio for the Company and the
Bank was 8.64% and 6.36%, respectively.
Capital ratios of the Company and the Bank are shown below for the last
two year-ends.
December 31, 1997 1996
The Company
Tier 1 leverage capital ratio 8.64% 7.35%
Tier 1 risk-based capital ratio 13.52% 10.89%
Total risk-based capital ratio 14.78% 12.15%
The Bank
Tier 1 leverage capital ratio 6.36% 7.23%
Tier 1 risk-based capital ratio 9.98% 10.73%
Total risk-based capital ratio 11.23% 11.99%
DIVIDENDS
The Company declared cash dividends of $.34 per share in 1997, this is
an increase of $.09 per share compared to the 1996 cash dividend of $.25 per
share. The 1997 ratio of dividends paid to earnings was 35.05%.
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
<PAGE>
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
The Company has developed plans to address the possible exposures
related to the impact on its computer systems and key service providers of the
Year 2000. Key financial and operational systems have been assessed and detailed
plans have been developed to address systems modifications required by December
31, 1999. Anticipated spending for these modifications will be expensed as
incurred.
In 1997, the Company converted its core operating system software to a
leading provider of data processing services, Alltel. As a consequence, Alltel
is leading the effort for ensuring Year 2000 compliance for all mainframe
application software. Management has overall responsibility for ensuring
compliant systems and is working closely with Alltel to ensure this compliance
by December 31, 1999. Costs related to this aspect of the Year 2000 effort are
the responsibility of Alltel. Management believes Alltel has the financial
resources to complete this effort.
The Company expects to incur Year 2000 costs to upgrade personal
computers and non mainframe software in 1998 and 1999. Management estimates this
cost to be $200,000 over the next two years.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
DECEMBER 31, 1997 1996
(Dollars In Thousands)
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $42,544 $52,836
FEDERAL FUNDS SOLD 22,472 650
SECURITIES HELD TO MATURITY (Notes 1 and 3)
(fair value $309,635 and $288,932) 308,112 290,894
SECURITIES AVAILABLE FOR SALE (Notes 1 and 3) 131,842 26,449
FEDERAL HOME LOAN BANK STOCK (Note 6) 16,035 7,558
LOANS, NET OF UNEARNED DISCOUNT (Notes 1 and 4) 828,132 695,406
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (12,674) (12,221)
Net Loans 815,458 683,185
BANK PREMISES AND EQUIPMENT (Notes 1 and 5) 12,776 10,642
OTHER REAL ESTATE OWNED (Note 1) 2 271
OTHER ASSETS (Notes 1 and 8) 20,766 20,308
TOTAL ASSETS $1,370,007 $1,092,793
LIABILITIES
DEPOSITS
Demand Deposits $189,577 $176,887
Savings and Interest Checking Accounts 257,980 257,819
Money Market and Super Interest Checking Accounts 119,316 107,084
Time Certificates of Deposit over $100,000 69,424 45,866
Other Time Deposits 351,851 330,916
Total Deposits 988,148 918,572
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER
REPURCHASE AGREEMENTS (Notes 3 and 6) 38,327 840
TREASURY TAX AND LOAN NOTES (Notes 3 and 6) 3,217 2,296
FEDERAL HOME LOAN BANK BORROWINGS (Note 6) 206,724 78,000
OTHER LIABILITIES 12,348 11,975
TOTAL LIABILITIES 1,248,764 1,011,683
Corporation-obligated mandatorily redeemable
trust preferred securities of subsidiary trust holding solely
junior subordinated debentures of the Corporation
Outstanding: 1,150,000 shares in 1997 (Note 13) 28,750 -
STOCKHOLDERS' EQUITY (Notes 1 and 11)
Preferred Stock, $.01 par value. Authorized: 1,000,000 Shares
Outstanding: No Shares in 1997 or 1996 - -
Common Stock, $.01 par value. Authorized: 30,000,000
Outstanding: 14,801,904 Shares in 1997 and 14,604,501 Shares
in 1996 148 146
Surplus 45,147 44,433
Retained Earnings 45,825 36,666
Unrealized Gain (Loss) on Securities Available For Sale, Net
of Tax (Note 3) 1,373 (135)
TOTAL STOCKHOLDERS' EQUITY 92,493 81,110
TOTAL LIABILITIES, MINORITY INTEREST IN
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $1,370,007 $1,092,793
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
(Dollars In Thousands, Except Share and Per Share Data)
<S> <C> <C> <C>
INTEREST INCOME
Interest on Loans (Notes 1 and 4) $66,682 $57,842 $55,870
Interest and Dividends on Securities (Note 3) 26,899 19,154 16,178
Interest on Federal Funds Sold 182 208 964
Interest on Interest Bearing Deposits - 7 19
Total Interest Income 93,763 77,211 73,031
INTEREST EXPENSE
Interest on Deposits 31,697 27,670 26,042
Interest on Borrowings (Note 1) 9,881 4,310 2,623
Interest on Subordinated Capital Notes - 374 478
Total Interest Expense 41,578 32,354 29,143
Net Interest Income 52,185 44,857 43,888
PROVISION FOR POSSIBLE LOAN LOSSES (Notes 1 and 4) 2,260 1,750 1,000
Net Interest Income After Provision For Possible Loan Losses 49,925 43,107 42,888
NON-INTEREST INCOME
Service Charges on Deposit Accounts 5,654 5,829 5,648
Trust and Financial Services Income 3,082 2,790 2,424
Mortgage Banking Income 2,769 2,776 2,243
Other Non-Interest Income 1,265 1,314 1,165
Total Non-Interest Income 12,770 12,709 11,480
NON-INTEREST EXPENSES
Salaries and Employee Benefits (Note 9) 20,566 21,083 22,143
Occupancy Expenses (Notes 5 and 12) 3,525 3,289 3,458
Equipment Expenses 2,619 2,405 2,335
Other Non-Interest Expenses (Note 10) 12,856 11,289 11,316
Total Non-Interest Expenses 39,566 38,066 39,252
Minority Interest Expense (Note 13) 1,645 - -
INCOME BEFORE INCOME TAXES 21,484 17,750 15,116
PROVISION FOR INCOME TAXES (Notes 1 and 8) 7,326 6,153 4,729
NET INCOME $14,158 $11,597 $10,387
BASIC EARNINGS PER SHARE $0.97 $0.80 $0.72
DILUTED EARNINGS PER SHARE $0.95 $0.79 $0.71
Weighted average common shares (Basic) (Notes 7 and 11) 14,666,420 14,556,481 14,475,279
Common stock equivalents 305,805 194,843 156,214
Weighted average common shares (Diluted) (Notes 7 and 11) 14,972,225 14,751,324 14,631,493
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
UNREALIZED
GAIN/(LOSS)
COMMON RETAINED ON SECURITIES
STOCK SURPLUS EARNINGS AVAIL. FOR SALE TOTAL
(In Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $144 $43,381 $20,931 ($254) $64,202
Net Income 10,387 10,387
Cash Dividends Declared ($.18 per share) (2,608) (2,608)
Proceeds From Exercise of Stock Options (Note 11) 44 44
Common Stock Sold Under Dividend Reinvestment
and Stock Purchase Plan (Note 11) 1 352 353
Change in Unrealized Loss on Securities
Available For Sale, Net of Tax (Note 3) 194 194
BALANCE DECEMBER 31, 1995 145 43,777 28,710 (60) 72,572
Net Income 11,597 11,597
Cash Dividends Declared ($.25 per share) (3,641) (3,641)
Proceeds From Exercise of Stock Options (Note 11) 105 105
Tax Benefit on Stock Option Exercises 54 54
Common Stock Sold Under Dividend Reinvestment
and Stock Purchase Plan (Note 11) 1 497 498
Change in Unrealized Loss on Securities
Available For Sale, Net of Tax (Note 3) (75) (75)
BALANCE DECEMBER 31, 1996 146 44,433 36,666 (135) 81,110
Net Income 14,158 14,158
Cash Dividends Declared ($.34 per share) (4,999) (4,999)
Proceeds From Exercise of Stock Options (Note 11) 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 3) 1,508 1,508
BALANCE DECEMBER 31, 1997 $148 $45,147 $45,825 $1,373 $92,493
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 1996 1995
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $14,158 $11,597 $10,387
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Depreciation and amortization 3,160 3,067 3,214
Provision for possible loan losses 2,260 1,750 1,000
Deferred income taxes 769 2,044 55
Loans originated for resale (42,850) (41,108) (47,472)
Proceeds from mortgage loan sales 42,793 41,108 47,490
Loss (gain) on sale of mortgages 57 - (18)
Gain recorded from mortgage servicing rights (423) (401) -
Other Real Estate Owned (recoveries)/write-downs (131) - 153
Changes in assets and liabilities:
Decrease (increase) in other assets (804) (2,208) 100
Increase (decrease) in other liabilities (403) (789) 2,736
TOTAL ADJUSTMENTS 4,428 3,463 7,258
NET CASH PROVIDED FROM OPERATING ACTIVITIES 18,586 15,060 17,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Interest Bearing Deposits - 296 206
Proceeds from maturities of Securities Held to Maturity 88,070 73,661 52,511
Proceeds from maturities of Securities Available For Sale 20,641 5,964 485
Purchase of Securities Held to Maturity (106,195) (138,710) (51,917)
Purchase of Securities Available For Sale (123,937) - -
Purchase of Federal Home Loan Bank Stock (8,477) (4,096) (362)
Net increase in Loans (135,036) (69,335) (42,178)
Proceeds from sale of Other Real Estate Owned 903 968 3,953
Investment in Bank Premises and Equipment (4,200) (3,678) (3,536)
NET CASH USED IN INVESTING ACTIVITIES (268,231) (134,930) (40,838)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Time Deposits 44,493 55,538 80,736
Net increase (decrease) in Other Deposits 25,083 (8,051) (6,263)
Net increase (decrease) in Federal Funds Purchased
and Assets Sold Under Repurchase Agreements 37,487 (3,220) (22,525)
Net increase (decrease) in Federal Home Loan Bank Borrowings 128,724 58,000 (5,000)
Net increase (decrease) in Treasury Tax & Loan Notes 921 (1,735) 229
Repayment of Capital Notes - (4,843) (122)
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 716 657 397
Dividends Paid (4,999) (3,344) (2,460)
NET CASH PROVIDED FROM FINANCING ACTIVITIES 261,175 93,002 44,992
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,530 (26,868) 21,799
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 53,486 80,354 58,555
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $65,016 $53,486 $80,354
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowings $45,453 $31,497 $28,862
Interest on Trust Preferred Securities 1,638 - -
Income taxes 6,110 5,978 3,999
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
OREO Properties Acquired 503 601 878
Securities transferred to Securities Available For Sale - - 28,619
</TABLE>
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. Generally, federal
funds are sold for up to two week periods.
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 accounts 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.
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 32 banking offices in southeastern Massachusetts.
The Company's primary source of income is from providing loans to individuals
and small-to-medium- sized businesses in its market area.
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.
SECURITIES
When securities are purchased, they are classified as securities held
to maturity if it is management's intent and ability to hold them until
maturity. These securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts, both computed by the effective yield
method. If it is management's intent at the time of purchase not to hold the
securities to maturity, these securities are classified as securities available
for sale and are carried at fair value with unrealized gains and losses
reported,
<PAGE>
net of the related tax effect, as a separate component of stockholders' equity.
When securities are sold, the adjusted cost of the specific security sold is
used to compute gain or loss on the sale.
LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
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.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors For Impairment of a Loan - Income Recognition and
Disclosures," as of January 1, 1995. SFAS No. 114 requires that certain impaired
loans be measured based on the present value of the expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance.
The Company had previously determined the adequacy of the reserve for
possible loan losses using methods similar to those prescribed in SFAS No. 114.
As a result of adopting these statements, no additional provision for possible
loan losses was required as of January 1, 1995.
The reserve for possible loan losses is funded by periodic charges to
expense and 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 based on estimates, and ultimate
losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, are reported in earnings in
the current period. When a loan, or any portion thereof, is considered to be
uncollectible, it is charged against the reserve for possible loan losses.
Subsequent recoveries are credited to the reserve.
BANK PREMISES AND EQUIPMENT
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.
<PAGE>
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is comprised of real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. OREO is
carried at the lower of the related 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. The carrying value
of other real estate owned is reviewed periodically. 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, 1997 is $1,180,000.
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, 1997 is $1,435,000.
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
The Company records income taxes using the liability method of
accounting for income taxes pursuant to SFAS No. 109, "Accounting For Income
Taxes." Under this method, deferred taxes are determined based upon the
difference between the financial statement and the tax bases of the assets and
liabilities using the statutory tax rates in effect in the years in which these
differences are expected to be settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
TRUST AND FINANCIAL 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.
DERIVATIVE AND OTHER OFF-BALANCE SHEET AGREEMENTS
The Bank has utilized interest rate swap agreements, caps, or floors as
hedging instruments for asset and liability management purposes. As such, these
instruments are accounted for under the accrual method. Income received from the
fixed rate payments and interest paid under variable rate obligations is
recorded on a net basis as interest income on loans. Gains or losses on the sale
of swap agreements are deferred and amortized into interest income over the
remainder of the original term of the swap. The Bank defers and amortizes the
purchase price of Caps and Floors over the original term of the instrument.
<PAGE>
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted SFAS No. 122 "Accounting for
Mortgage Servicing Rights." SFAS No. 122 requires entities that engage in
mortgage banking activities recognize the rights to service mortgage loans for
others, regardless of the manner in which the servicing rights are acquired, as
separate assets when the related loans are sold and the servicing rights are
retained. The amount capitalized is based on an allocation of the total cost of
the mortgage loans to the mortgage servicing rights and the loan (without the
mortgage servicing rights) based on their relative fair values. In addition,
capitalized mortgage servicing rights are required to be assessed for impairment
based on the fair value of those rights. Effective January 1, 1997, SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" superseded SFAS No. 122. SFAS No. 127 "Deferral
of the Effective Date of Provisions of FASB Statement No. 125" is effective for
transactions occurring after December 31, 1997.
On January 1, 1997, the Company adopted SFAS No. 125. SFAS No. 125
requires transfers of financial assets in which the Bank surrenders control over
those financial assets shall be accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. Each time the Bank undertakes an obligation to service
financial assets it shall recognize either a servicing asset or a servicing
liability for that contract, unless it securitizes the assets, retains all of
the resulting securities, and classifies them as debt securities
held-to-maturity. The implementation of these statements did not have a material
effect on the Company's results of operations or financial condition. The
carrying value of capitalized mortgage servicing rights as of December 31, 1997
and 1996 was $1,141,000 and $986,000, respectively.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for such plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the exercise price of the stock.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses and all other nonowner changes in equity).
This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid in capital in the equity section of a statement of
financial position. This statement will be effective for the Company's financial
statements issued for the fiscal year ending December 31, 1998. Reclassification
of financial statements for earlier periods provided for comparative purposes
are required.
<PAGE>
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This statement establishes standards
for reporting information about segments in annual and interim financial
statements. SFAS 131 introduces a new model for segment reporting, called the
"management approach." The management approach is based on the way the chief
operating decision-maker organizes segments within a company for making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure - any
manner in which management disaggregates a company. This statement is effective
and will be adopted for the Company's financial statements for the fiscal year
ending December 31, 1998 and requires the restatement of previously reported
segment information for all periods presented.
(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 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,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
FINANCIAL ASSETS (In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Cash and Due From Banks $42,544 $42,544 $52,836 $52,836(a)
Federal Funds Sold 22,472 22,472 650 650(a)
Securities Held To Maturity 308,112 309,635 290,894 288,932(b)
Securities Available For Sale 131,842 131,842 26,449 26,449(b)
Federal Home Loan Bank Stock 16,035 16,035 7,558 7,558(c)
Net Loans 815,458 815,572 683,185 683,749(d)
Mortgage Servicing Rights 1,141 1,141 986 986(f)
FINANCIAL LIABILITIES
Demand Deposits 189,577 189,577 176,887 176,887(e)
Savings and Interest Checking Accounts 257,980 257,980 257,819 257,819(e)
Money Market and Super Interest Checking
Accounts 119,316 119,316 107,084 107,084(e)
Time Deposits 421,275 420,562 376,782 375,556(f)
Federal Funds Purchased and Assets
Sold Under Repurchase Agreements 38,327 38,409 840 840(f)
Treasury Tax and Loan Notes 3,217 3,217 2,296 2,296(a)
Federal Home Loan Bank Borrowings 206,724 206,548 78,000 78,094(f)
Corporation-obligated mandatorily redeemable
trust preferred securities of subsidiary trust
holding solely junior subordinated debentures
of the Corporation 28,750 25,137(f)
UNRECOGNIZED FINANCIAL INSTRUMENTS
Standby Letters of Credit - 9 - 16(g)
Interest Rate Swap Agreements - 130 - 101(b)
</TABLE>
(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.
<PAGE>
(3) SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value
of securities held to maturity at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government Agency Securities $51,567 $201 ($691) $51,077
Mortgage-Backed Securities 199,245 2,136 (562) 200,819
Collateralized Mortgage Obligations 34,515 86 (49) 34,552
State, County, and Municipal Securities 21,385 408 (6) 21,787
Other Securities 1,400 - - 1,400
Total $308,112 $2,831 ($1,308) $309,635
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
U.S. Treasury and U.S. Government Agency Securities $71,104 $153 ($1,292) $69,965
Mortgage-Backed Securities 193,854 1,005 (1,699) 193,160
Collateralized Mortgage Obligations 19,526 21 (152) 19,395
State, County, and Municipal Securities 5,410 10 (8) 5,412
Other Securities 1,000 - - 1,000
Total $290,894 $1,189 ($3,151) $288,932
</TABLE>
The amortized cost, gross unrealized gains and losses, and fair value
of securities available for sale at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $129,761 $2,136 ($55) $131,842
Collateralized Mortgage Obligations - - - -
Total $129,761 $2,136 ($55) $131,842
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Mortgage-Backed Securities $24,992 - ($196) $24,796
Collateralized Mortgage Obligations 1,661 - (8) 1,653
Total $26,653 - ($204) $26,449
</TABLE>
In 1997, the Bank realized a loss of $8,000 on the sale of an available
for sale security. There were no sales of securities in 1996.
A schedule of the contractual maturities of securities held to maturity
and securities available for sale at December 31, 1997 is presented below:
<TABLE>
<CAPTION>
Held to maturity Available for sale
Amortized Fair Amortized Fair
Cost Value Cost Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $8,787 $8,509 $6,364 $6,358
Due from one year to five years 75,451 74,796 2,107 2,095
Due from five to ten years 6,688 6,836 2,163 2,135
Due after ten years 217,186 219,494 119,127 121,254
Total $308,112 $309,635 $129,761 $131,842
</TABLE>
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, 1997 and 1996, investment securities carried at
$87,978,000 and $28,595,000, 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. These securities were not under the
control of the Bank. At year end 1997 and 1996, the Company had no investments
in obligations of individual states, counties, or municipalities which exceeded
10% of stockholders' equity.
<PAGE>
(4) LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
composition of loans, net of unearned discount, at December 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
(In Thousands)
<S> <C> <C>
Commercial $138,541 $127,008
Real Estate - Commercial Mortgage 238,930 205,256
Real Estate - Residential Mortgage 207,555 202,031
Real Estate - Construction 34,227 31,633
Consumer - Instalment 227,700 132,589
Consumer - Other 9,849 10,140
Gross Loans 856,802 708,657
Unearned Discount 28,670 13,251
Loans, Net of Unearned Discount $828,132 $695,406
</TABLE>
In addition to the loans noted above, at December 31, 1997 and December
31, 1996, the Company serviced approximately $263,225,000 and $252,187,000,
respectively, of loans sold to investors in the secondary mortgage market and
other financial institutions.
Loans held for sale are valued at lower of the recorded balance or
market value. At December 31, 1997, and 1996, loans held for sale amounted to
approximately $4,500,000 and $4,100,000, respectively. No adjustments for
unrealized losses were required at December 31, 1997 and 1996.
As of December 31, 1997 and 1996 the Bank's recorded investment in
impaired loans and the related valuation allowance calculated under SFAS No. 114
was as follows:
<TABLE>
<CAPTION>
1997 1996
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
<S> <C> <C> <C> <C>
Impaired loans:
Valuation allowance Required $2,112 $585 $3,076 $797
No valuation
Allowance required 2,065 - 1,525 -
Total $4,177 $585 $4,601 $797
</TABLE>
The valuation allowance is included in the reserve for possible loan
losses on the balance sheet. The average recorded investment in impaired loans
for the years ended December 31, 1997 and 1996 was $4,200,000 and $5,400,000,
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 $190,000 and $225,000 for the years ended December 31, 1997 and
1996.
<PAGE>
The aggregate amount of loans in excess of $60,000 outstanding to
directors, principal officers, and principal security holders at December 31,
1997 and 1996 and for the years then ended is as follows (in thousands).
Balance, January 1, 1996 $11,573
New loans 6,472
Loan repayments (2,759)
Balance, December 31, 1996 15,286
New loans 6,286
Loan repayments (6,447)
Balance, December 31, 1997 $15,125
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, 1997 is as follows:
1997 1996 1995
(In Thousands)
Reserve, beginning of year $12,221 $12,088 $13,719
Loans charged off (2,906) (2,825) (4,082)
Recoveries on loans previously charged off 1,099 1,208 1,451
Net charge-offs (1,807) (1,617) (2,631)
Provision charged to expense 2,260 1,750 1,000
Reserve, end of year $12,674 $12,221 $12,088
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1997 and 1996 were as follows:
1997 1996
Cost: (In Thousands)
Land $335 $310
Bank Premises 8,907 6,694
Leasehold Improvements 6,542 5,743
Furniture and Equipment 17,467 16,441
Total Cost 33,251 29,188
Accumulated Depreciation 20,475 18,546
Net Bank Premises and Equipment $12,776 $10,642
<PAGE>
Depreciation and amortization expense related to bank premises and
equipment was $2,066,000 in 1997, $1,643,000 in 1996 and $1,721,000 in 1995. The
1995 expense includes $265,000 related to the writedowns of the book value of
certain buildings in response to actual and anticipated facility consolidations
and renovations. There were no such writedowns in 1997 or 1996.
(6) 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, 1997 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C>
Balance outstanding at end of year $41,544 $3,136 $8,091
Average daily balance Outstanding 48,869 26,534 18,995
Maximum balance outstanding at any month end 84,945 44,545 63,988
Weighted average interest rate for the year 5.74% 5.36% 5.74%
Weighted average interest rate at end of year 5.99% 5.35% 4.36%
</TABLE>
The Bank has established two federal funds lines of $20 million.
Borrowings under these lines are classified as federal funds purchased. In
addition to customer repurchase agreements, the Company has established five
repurchase agreement lines, approximately $450 million of potential funding,
with major brokerage firms. Borrowings under these agreements are classified as
assets sold under repurchase agreement. At December 31, 1997 the Bank had $36.4
million outstanding under these lines, while at December 31, 1996 the Bank had
no outstanding balances under these lines. 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 $400 million. A schedule
of the maturity distribution of FHLB advances with the weighted average interest
rates at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
Weighted Average Weighted Average
Amount Rate Amount Rate
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $140,500 5.73% $78,000 5.47%
Due from one year to
five years 66,224 6.25% - -
$206,724 5.47% $78,000 5.47%
</TABLE>
<PAGE>
(7) 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.
<TABLE>
<CAPTION>
Net Income Weighted Average Shares Net Income Per Share
1997 1996 1995 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $14,158 $11,597 $10,387 14,666 14,556 14,475 $0.97 $0.80 $0.72
Effect of dilutive securities - - - 306 195 156 0.02 0.01 0.01
Diluted EPS $14,158 $11,597 $10,387 14,972 14,751 14,631 $0.95 $0.79 $0.71
</TABLE>
Options to purchase 110,950 shares of common stock at $17.72 price per
share were outstanding during 1997 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. The effect of this accounting change on previously reported EPS data was
as follows:
1996 1995
Per share amounts:
Primary EPS as reported $0.79 $0.71
Effect of SFAS No. 128 0.01 0.01
Basic EPS as restated $0.80 $0.72
<PAGE>
(8) INCOME TAXES
The provision for income taxes is comprised of the following components:
YEARS ENDED DECEMBER 31, 1997 1996 1995
Current Provision (In Thousands)
Federal $6,129 $3,301 $3,616
State 428 808 1,058
TOTAL CURRENT PROVISION 6,557 4,109 4,674
Deferred Provision (Benefit)
Federal 508 1,639 965
State 387 506 715
Change in valuation allowance (126) (101) (1,625)
TOTAL DEFERRED PROVISION 769 2,044 55
TOTAL PROVISION $7,326 $6,153 $4,729
The income tax provision shown in the consolidated statements of income
differs from the expected amount, determined by applying the statutory federal
tax rate to income before income taxes. The following summary reconciles the
differences between these amounts.
YEARS ENDED DECEMBER 31, 1997 1996 1995
Dollars In Thousands)
Statutory rate 35% 35% 34%
Computed statutory federal income tax provision $7,519 $6,212 $5,139
Nontaxable interest, net (302) (266) (257)
State taxes, net of federal tax benefit 530 854 1,152
Low-income housing credits (215) (110) -
Change in valuation allowance (126) (101) (1,625)
Other, net (80) (436) 320
TOTAL PROVISION $7,326 $6,153 $4,729
<PAGE>
The net deferred tax asset which is included in other assets amounted
to approximately $1,452,000 and $2,906,000, at December 31, 1997 and 1996
respectively. The tax-effected components of the net deferred tax asset at
December 31, 1997 and 1996 are as follows:
YEARS ENDED DECEMBER 31, 1997 1996
(In Thousands)
Reserve for possible loan losses $4,436 $4,277
Tax depreciation 778 641
Write-down of OREO 112 -
Mark to market adjustment (3,968) (3,204)
Accrued expenses not deducted for tax purposes 569 782
Deferred income 126 120
State taxes 266 629
SFAS 115 adjustment (728) 71
Other, net (110) (243)
TOTAL DEFERRED TAX ASSET 1,481 3,073
Valuation allowance (29) (167)
NET DEFERRED TAX ASSET $1,452 $2,906
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. At
December 31, 1997, the valuation allowance relates to certain state deferred tax
assets that may expire prior to realization.
(9) EMPLOYEE BENEFIT PLANS RETIREMENT PLAN
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 of
$394,000 at December 31, 1996 was recognized as income in 1997. There was no
contribution requirement for 1997 and consequently no pension expense in 1997.
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.
Net pension cost for the Company for each of the two years in the
period ended December 31, 1996 included the following components:
1996 1995
(In Thousands)
Service cost - benefits earned during the period $ 877 $ 750
Interest cost on projected benefit obligation 1,073 938
Net amortization (deferral) (185) 1,358
Actual return on assets (1,110) (2,416)
Net pension cost $ 655 $ 630
Assumptions used in the measurement
of net pension cost were:
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 5.50% 5.50%
Expected long-term rate of return on assets 10.00% 8.25%
<PAGE>
The plan's assets were invested primarily in listed stocks, bonds, and mutual
funds. The following table sets forth the plan's funded status at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $11,365 in 1996 and $9,529 in 1995 $11,938 $ 9,863
Projected benefit obligation $16,037 $12,792
Plan assets at fair value $16,816 $14,524
Plan assets in excess of project benefit obligation $779 $1,732
Unrecognized net gain (1,790) (4,069)
Unrecognized prior service cost 903 1,109
Unrecognized net asset at transition (286) (327)
Accrued pension liability ($394) ($1,555)
</TABLE>
OTHER EMPLOYEE BENEFIT PLANS
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 $1,191,000, $970,000 and
$979,000 in 1997, 1996 and 1995, 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 1997, 1996 and 1995, the
expense for this plan amounted to $302,000, $307,000 and $305,000, respectively.
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.
Net periodic postretirement benefit cost at December 31, 1997 included
the following components:
1997
Plan assets at fair value $-
Accumulated postretirement benefit obligation in excess of plan assets (829)
Unrecognized transition obligation 491
Unrecognized net (gain) loss -
Accrued postretirement benefit cost ($338)
Service cost - benefits attributed to service during the period $13
Interest cost on accumulated postretirement benefit obligation 57
Amortization of transition obligation over 20 years 17
Postretirement benefit expense $87
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.0%. Postretirement benefit expense was $87,000,
$107,000 and $120,000 in 1997, 1996 and 1995 respectively. The total cost of all
postretirement benefits charged to income was $103,000, $160,000 and $192,000 in
1997, 1996, and 1995, 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.
<PAGE>
(10) OTHER NON-INTEREST EXPENSES
Included in other non-interest expenses for each of the three years in the
period ended December 31, 1997 were the following:
1997 1996 1995
(In Thousands)
Advertising $679 $838 $710
Legal fees - loan collection 583 765 681
Legal fees - other 413 452 381
FDIC assessment 112 43 1,070
OREO expenses 66 137 599
Data processing facilities Management 3,727 1,908 -
Other non-interest expenses 7,276 7,146 7,875
TOTAL $12,856 $11,289 $11,316
(11) COMMON STOCK PURCHASE AND OPTION PLANS
The Company maintains a Dividend Reinvestment and Common 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 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:
1997 1996 1995
Net Income:
As Reported (000's) $14,158 $11,597 $10,387
Pro Forma 14,068 1,507 10,387
Basic EPS:
As Reported $.97 $.80 $.72
Pro Forma $.96 $.79 $.72
Diluted EPS:
As Reported $.95 $.79 $.71
Pro Forma $.94 $.78 $.71
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 125,950, 101,000 and 638,075 shares, under the plans respectively,
through December 31, 1997. At December 31, 1997 no shares were available for
grant under the 1987 Plan due to the Plan's expiration. 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 1999 and 2007.
<PAGE>
A summary of the status of the Company's three stock option plans at
December 31,1997 and December 31, 1996 and changes during the years then ended
is presented in the table and narrative below:
<TABLE>
<CAPTION>
1997 1996
Wtd Avg Wtd Avg
Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C>
Balance, January 1 631,557 $5.81 482,866 $4.56
Granted 141,950 $16.50 180,425 $8.73
Exercised (197,403) $3.63 (31,734) $3.27
Canceled (5,430) $6.88 -
Balance, December 31 570,674 $9.22 631,557 $5.81
Exercisable at December 31 376,706 451,146
Weighted average fair value of options Granted $2.86 $1.27
</TABLE>
341,524 of the 570,674 options outstanding at December 31,1997 have
exercise prices between $3.19 and $8.00, with a weighted average exercise price
of $6.15 and a weighted average remaining contractual life of 5.7 years. 320,937
of these options are exercisable; their weighted exercise price is $6.07. The
remaining 229,150 options have exercise prices between $9.38 and $17.81, with a
weighted average exercise price of $13.79 and a weighted average remaining
contractual life of 9.5 years. 55,769 of these options are exercisable; their
weighted average exercise price is $9.63.
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, 1996 and 1987, plans respectively:
1997 Plan 1996 Plan 1987 Plan
Risk Free
Interest Rate
1997 5.69% 6.66%
1996 6.40% 6.06%
Expected
Dividend Yields
1997 2.15% 2.15%
1996 2.90% 2.90%
Expected Lives
1997 4 years 4 years
1996 4 years 4 years
Expected Volatility
1997 15% 15%
1996 10% 10%
<PAGE>
(12) 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, 1997 and 1996:
1997 1996
(In Thousands)
Commitments to extend credit:
Fixed Rate $1,990 $4,529
Adjustable Rate 10,100 1,274
Unused portion of existing credit lines 139,880 108,969
Unadvanced construction loans 11,436 13,232
Standby letters of credit 2,255 1,883
Interest rate swaps - notional value 70,000 90,000
Interest rate caps - notional value - 70,000
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.
<PAGE>
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 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 5.93% and 5.87% at December 31, 1997
and 1996, respectively, while the weighted average rates of variable interest
payments, based on the 3-month London Interbank Offering Rate (LIBOR), were
5.92% and 5.50% at December 31, 1997 and 1996, respectively. As a result of
these interest rate swaps, the Bank realized net interest income of $.1 million
and $.2 million for the years ended December 31, 1997 and 1996 and $.4 million
of net interest expense for the year ended December 31, 1995.
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. At December 31, 1997 and 1996, the Bank
had a net payable of $14,000 and a net receivable of $13,000, respectively, on
the interest rate swaps.
COMMITMENTS
LEASES
The Company leases equipment, office space and certain branch locations
under noncancelable operating leases.
The following is a schedule of minimum future lease commitments under such
leases as of December 31, 1997 (in thousands):
1998 $ 1,955
1999 1,632
2000 1,325
2001 1,151
2002 1,026
Thereafter 4,755
Total future minimum rentals $11,844
Rent expense incurred under operating leases was approximately
$2,287,000 in 1997, $2,304,000 in 1996, and $2,047,000 in 1995. Renewal options
ranging from 3 to 10 years exist for several of these leases.
<PAGE>
OTHER CONTINGENCIES
At December 31, 1997 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 $14.8 million and $21.7 million at December 31, 1997 and
1996, respectively
(13) CORPORATION-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
In the 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 1997 the Company paid $1.6 million of
trust preferred security distributions. The Company unconditionally guarantees
all of the Trust's obligations under the Trust Preferred Securities.
(14) Regulatory Capital Requirements
The Bank is 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, 1997 that the Company and the
Bank met all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Bank of Boston relating to the Company and from 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.
<PAGE>
The Company and the Bank's actual capital amounts and ratios are also
presented in the following tables.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ---------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Company: (consolidated)
Total capital (to $128,044 14.78% [greater than $69,321 [greater than 8.0% N/A N/A
risk weighted assets) or equal to] or equal to]
Tier 1 capital (to 117,191 13.52 [greater than 34,661 [greater than 4.0 N/A N/A
risk weighted assets) or equal to] or equal to]
Tier 1 capital (to 117,191 8.64 [greater than 54,266 [greater than 4.0 N/A N/A
average assets) or equal to] or equal to]
Bank:
Total capital (to risk $ 97,078 11.23% [greater than $69,145 [greater than 8.0% [greater than $86,431 [greater than 10.0%
weighted assets) or equal to] or equal to] or equal to] or equal to]
Tier 1 capital (to risk 86,259 9.98 [greater than 34,572 [greater than 4.0 [greater than 51,858 [greater than 6.0
weighted assets) or equal to] or equal to] or equal to] or equal to]
Tier 1 capital (to 86,259 6.36 [greater than 54,233 [greater than 4.0 [greater than 67,791 [greater than 5.0
average assets) or equal to] or equal to] or equal to] or equal to]
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ---------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Company: (consolidated)
Total capital (to $ 87,385 12.15% [greater than $57,541 [greater than 8.0% N/A N/A
risk weighted assets) or equal to] or equal to]
Tier 1 capital (to 78,354 10.89 [greater than 28,771 [greater than 4.0 N/A N/A
risk weighted assets) or equal to] or equal to]
Tier 1 capital (to 78,354 7.35 [greater than 42,628 [greater than 4.0 N/A N/A
average assets) or equal to] or equal to]
Bank:
Total capital (to risk $ 85,923 11.99% [greater than $57,349 [greater than 8.0% [greater than $71,687 [greater than 10.0%
weighted assets) or equal to] or equal to] or equal to] or equal to]
Tier 1 capital (to risk 76,922 10.73 [greater than 28,675 [greater than 4.0 [greater than 43,012 [greater than 6.0
weighted assets) or equal to] or equal to] or equal to] or equal to]
Tier 1 capital (to 76,922 7.23 [greater than 42,586 [greater than 4.0 [greater than 53,233 [greater than 5.0
average assets) or equal to] or equal to] or equal to] or equal to]
</TABLE>
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1997 1996 1997 1996 1997 1996 1997 1996
(Dollars In Thousands, Except Per Share and Average Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $20,626 $18,564 $22,151 $18,999 $24,924 $19,697 $26,062 $19,951
INTEREST EXPENSE 8,799 7,699 9,425 7,961 11,304 8,210 12,050 8,484
NET INTEREST INCOME $11,827 $10,865 $12,726 $11,038 $13,620 $11,487 $14,012 $11,467
PROVISION FOR POSSIBLE LOAN LOSSES 500 250 530 500 530 500 700 500
NON-INTEREST INCOME 3,157 3,143 3,314 3,490 3,103 3,111 3,196 2,965
NON-INTEREST EXPENSES 9,788 9,687 9,907 9,768 9,924 9,474 9,947 9,137
MINORITY INTEREST - - 311 - 667 - 667 -
PROVISION FOR INCOME TAXES 1,699 1,494 1,707 1,505 1,910 1,600 2,010 1,554
NET INCOME $2,997 $2,577 $3,585 $2,755 $3,692 $3,024 $3,884 $3,241
BASIC EARNINGS PER SHARE $0.21 $0.18 $0.25 $0.19 $0.25 $0.21 $0.26 $0.22
DILUTED EARNINGS PER SHARE $0.20 $0.18 $0.24 $0.19 $0.25 $0.20 $0.26 $0.22
Weighted average common shares
(Basic) 14,614,757 14,523,073 14,623,762 14,543,727 14,646,537 14,562,767 14,756,275 14,591,425
Common stock equivalents 272,384 164,987 281,849 187,914 323,365 196,220 296,646 230,249
Weighted average common shares
(Diluted) 14,887,141 14,688,060 14,905,611 14,731,641 14,969,902 14,758,987 15,052,921 14,821,674
</TABLE>
<PAGE>
(16) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information relative to the Company's balance
sheets at December 31, 1997 and 1996, and the related statements of income and
cash flows for the years ended December 31, 1997, 1996 and 1995 are presented
below.
BALANCE SHEETS
DECEMBER 31 1997 1996
(In Thousands)
Assets:
Cash $28,052 $ 376
Investments in subsidiaries 91,353 79,373
Other investments 1,400 1,000
Other assets 2,666 1,383
Total assets $123,471 $82,132
Liabilities and Stockholders' Equity:
Dividends Payable $1,331 $1,022
Junior Subordinated Debentures 29,647 -
Total liabilities 30,978 1,022
Stockholders' equity 92,493 81,110
Total liabilities and stockholders' equity $123,471 $82,132
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 1996 1995
(In Thousands)
Income:
Dividend received from Subsidiaries $ 5,707 $ 2,878 $ 2,152
Interest income 774 35 39
Other income -- 1 --
Total income 6,481 2,914 2,191
Expenses:
Interest expense 1,696 1 1
Other expenses 199 154 152
Total expenses 1,895 155 153
Income before income taxes and equity in
undistributed income of subsidiaries 4,586 2,759 2,038
Equity in undistributed
income of subsidiaries 9,572 8,838 8,349
Net income $14,158 $11,597 $10,387
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands)
<S> <C> <C> <C>
Net income $ 14,158 $ 11,597 $ 10,387
ADJUSTMENTS TO RECONCILE NET INCOME
TO CASH PROVIDED FROM OPERATING ACTIVITIES:
Amortization 194 148 148
Decrease (increase) in other assets (1,179) (54) 1
Increase in other liabilities 8 -- --
Equity in income of subsidiaries (9,572) (8,838) (8,349)
TOTAL ADJUSTMENTS (10,549) (8,744) (8,200)
NET CASH PROVIDED FROM OPERATING ACTIVITIES 3,609 2,853 2,187
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities (400) -- --
Capital Investment in subsidiary - Independent Capital Trust I (889) -- --
NET CASH NET CASH USED IN INVESTING ACTIVITIES (1,289) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issue and stock options exercised 716 105 60
Proceeds from dividend reinvestment and optional stock purchases -- 551 337
Issuance of junior subordinated debentures 29,639 -- --
Repayment of Capital Notes -- (9) --
Dividends paid (4,999) (3,344) (2,460)
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 25,356 (2,697) (2,063)
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,676 156 124
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 376 220 96
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 28,052 $ 376 $ 220
</TABLE>
<PAGE>
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 its subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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 subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 23, 1998
<PAGE>
Stockholder information
ANNUAL MEETING The Annual Meeting of Stockholders will be held at 3:30 p.m. on
Thursday, April 9, 1998 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
1997
4th Quarter $19.13 $13.88 $0.09
3rd Quarter 14.75 12.75 0.09
2nd Quarter 13.13 10.00 0.08
1st Quarter 11.50 9.75 0.08
1996
4th Quarter $10.63 $8.63 $0.07
3rd Quarter 8.88 7.50 0.06
2nd Quarter 8.13 7.50 0.06
1st Quarter 7.75 6.75 0.06
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 1997 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:
Boston EquiServe
P.O. Box 8200
Boston, MA 02266-8200
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated January 23, 1998, 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, 1997, into Independent Bank Corp.'s previously
filed Registration Statements File Numbers 33-13158, 33-27999, 33-50770,
333-04259, and 33327169.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 42,544
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 22,472
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,842
<INVESTMENTS-CARRYING> 324,147
<INVESTMENTS-MARKET> 325,670
<LOANS> 828,132
<ALLOWANCE> (12,674)
<TOTAL-ASSETS> 1,370,007
<DEPOSITS> 988,148
<SHORT-TERM> 41,544
<LIABILITIES-OTHER> 12,348
<LONG-TERM> 206,724
28,750
0
<COMMON> 148
<OTHER-SE> 92,345
<TOTAL-LIABILITIES-AND-EQUITY> 1,370,007
<INTEREST-LOAN> 66,682
<INTEREST-INVEST> 26,899
<INTEREST-OTHER> 182
<INTEREST-TOTAL> 93,763
<INTEREST-DEPOSIT> 31,697
<INTEREST-EXPENSE> 41,578
<INTEREST-INCOME-NET> 52,185
<LOAN-LOSSES> 2,260
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 39,566
<INCOME-PRETAX> 21,484
<INCOME-PRE-EXTRAORDINARY> 21,484
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,158
<EPS-PRIMARY> .95
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.08
<LOANS-NON> 5,154
<LOANS-PAST> 737
<LOANS-TROUBLED> 1,422
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,221
<CHARGE-OFFS> (2,906)
<RECOVERIES> 1,099
<ALLOWANCE-CLOSE> 12,674
<ALLOWANCE-DOMESTIC> 12,674
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<EXCHANGE-RATE> 1 1 1 1 1
<CASH> 67,354 52,836 40,968 56,170 55,430
<INT-BEARING-DEPOSITS> 296 0 296 0 0
<FED-FUNDS-SOLD> 13,000 650 0 0 6,740
<TRADING-ASSETS> 0 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 32,628 26,449 30,748 28,890 27,718
<INVESTMENTS-CARRYING> 230,358 290,894 262,756 284,780 281,449
<INVESTMENTS-MARKET> 230,871 288,932 260,176 280,027 0
<LOANS> 628,141 695,406 646,758 658,302 668,242
<ALLOWANCE> (12,088) (12,221) (11,978) (11,961) (12,020)
<TOTAL-ASSETS> 987,589 1,092,793 998,851 1,046,836 1,058,160
<DEPOSITS> 871,085 918,572 830,976 849,671 855,324
<SHORT-TERM> 8,091 3,136 7,374 41,106 44,545
<LIABILITIES-OTHER> 10,998 11,975 16,276 14,779 14,927
<LONG-TERM> 24,843 78,000 70,133 65,334 64,834
145 0 0 0 0
0 0 0 0 0
<COMMON> 0 146 145 145 146
<OTHER-SE> 72,427 80,964 73,947 75,801 78,384
<TOTAL-LIABILITIES-AND-EQUITY> 987,589 1,092,793 998,851 1,046,836 1,058,160
<INTEREST-LOAN> 55,870 57,842 14,157 28,435 43,084
<INTEREST-INVEST> 16,178 19,154 4,324 9,005 14,001
<INTEREST-OTHER> 983 215 83 123 175
<INTEREST-TOTAL> 73,031 77,211 18,564 37,563 57,260
<INTEREST-DEPOSIT> 26,042 27,670 6,879 13,739 20,425
<INTEREST-EXPENSE> 29,143 32,354 7,699 1,921 3,445
<INTEREST-INCOME-NET> 43,888 44,857 10,865 21,903 33,390
<LOAN-LOSSES> 1,000 1,750 250 750 1,250
<SECURITIES-GAINS> 0 0 0 0 0
<EXPENSE-OTHER> 39,252 38,066 9,687 19,455 28,929
<INCOME-PRETAX> 15,116 17,750 4,071 8,331 12,955
<INCOME-PRE-EXTRAORDINARY> 15,116 17,750 4,071 8,331 12,955
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 10,387 11,597 2,577 5,332 8,356
<EPS-PRIMARY> .71 .78 .18 .37 .57
<EPS-DILUTED> 0 0 0 0 0
<YIELD-ACTUAL> 8.27 8.06 8.15 8.07 8.09
<LOANS-NON> 4,718 3,946 5,641 5,979 5,491
<LOANS-PAST> 5,271 516 6,197 382 559
<LOANS-TROUBLED> 0 1,658 0 0 1,791
<LOANS-PROBLEM> 0 0 0 0 0
<ALLOWANCE-OPEN> 13,719 12,088 12,088 12,088 12,088
<CHARGE-OFFS> (4,082) (2,825) (489) (1,184) (2,041)
<RECOVERIES> 1,451 1,208 129 307 723
<ALLOWANCE-CLOSE> 12,088 12,221 11,978 11,961 12,020
<ALLOWANCE-DOMESTIC> 12,088 12,221 11,978 11,961 0
<ALLOWANCE-FOREIGN> 0 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 47,867 49,661 48,089
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 2,911 11,857 3,005
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 23,420 116,402 140,093
<INVESTMENTS-CARRYING> 301,182 288,738 329,846
<INVESTMENTS-MARKET> 296,118 286,762 330,400
<LOANS> 715,714 760,230 790,782
<ALLOWANCE> (12,146) (12,506) 12,624
<TOTAL-ASSETS> 1,118,767 1,260,751 1,347,423
<DEPOSITS> 909,370 958,011 955,109
<SHORT-TERM> 110,737 174,218 256,445
<LIABILITIES-OTHER> 15,752 13,729 17,875
<LONG-TERM> 0 0 0
0 28,750 28,750
0 0 0
<COMMON> 146 146 147
<OTHER-SE> 82,762 85,559 89,097
<TOTAL-LIABILITIES-AND-EQUITY> 1,118,767 1,260,751 1,347,423
<INTEREST-LOAN> 15,230 31,576 48,753
<INTEREST-INVEST> 5,369 11,201 18,948
<INTEREST-OTHER> 27 0 0
<INTEREST-TOTAL> 20,626 42,777 67,701
<INTEREST-DEPOSIT> 7,383 15,311 23,471
<INTEREST-EXPENSE> 8,799 18,224 29,528
<INTEREST-INCOME-NET> 11,827 24,553 38,173
<LOAN-LOSSES> 500 1,030 1,560
<SECURITIES-GAINS> (8) (8) (8)
<EXPENSE-OTHER> 9,780 19,687 29,627
<INCOME-PRETAX> 4,696 9,988 15,590
<INCOME-PRE-EXTRAORDINARY> 4,696 9,988 15,590
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,997 6,582 10,274
<EPS-PRIMARY> .20 .44 .69
<EPS-DILUTED> 0 0 0
<YIELD-ACTUAL> 8.00 8.08 8.10
<LOANS-NON> 3,730 4,240 5,002
<LOANS-PAST> 557 626 758
<LOANS-TROUBLED> 1,401 1,379 1,362
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 12,221 12,221 12,221
<CHARGE-OFFS> 749 1,257 1,916
<RECOVERIES> 175 512 759
<ALLOWANCE-CLOSE> 12,146 12,506 12,624
<ALLOWANCE-DOMESTIC> 12,146 12,506 12,624
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
