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, 1998
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)
<TABLE>
<CAPTION>
Massachusetts 04-2870273
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<S> <C>
(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)
</TABLE>
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
- - --------------------------------------------------------------------------------
(Title of Class)
Preferred Stock Purchase Rights
- - --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether, the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
- - --- ---
X Yes No
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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, 1999, the aggregate market value of the 12,100,781 shares of
Common Stock of the Registrant issued and outstanding on such date, excluding
2,109,297 shares held by all directors and executive officers of the Registrant
as group, was $182,268,014. This figure is based on the closing sale price of
$15.0625 per share on February 28, 1999, as reported in The Wall Street Journal
on March 1, 1999.
Number of shares of Common Stock outstanding as of February 28, 1999: 14,210,078
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, 1998 are incorporated into Part II, Items 5-8 of
this Form 10-K.
(2) Portions of the Registrant's definitive proxy statement for its 1999 Annual
Meeting of Stockholders are incorporated into Part III, Items 10-13 of this
Form 10-K.
================================================================================
<PAGE>
PART 1.
Item 1. Business
General. Independent Bank Corp. (the "Company") is a state chartered,
federally registered bank holding company headquartered in Rockland,
Massachusetts. The Company is the sole stockholder of Rockland Trust Company
("Rockland" or "the Bank"), a Massachusetts trust company chartered in 1907. The
Company is a community oriented commercial bank. The community banking business
consists of commercial banking, retail banking and trust services and is managed
as a single strategic unit. The community banking business derives its revenues
from a wide range of banking services, including lending activities, acceptance
of demand, savings and time deposits, trust and investment management, and
mortgage servicing income from investors. Rockland offers a full range of
community banking services through its network of 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, 1998, the Company had total assets of $1,575.1 million, total
deposits of $1,043.3 million, stockholders' equity of $95.8 million, and 519
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 22.36% of
the total deposits within Plymouth County as of June 30, 1998, the most recent
date for which such data is available, or approximately 178% of the market share
of its nearest competitor. Due to the continuing consolidation within the
financial services industry, Rockland is the only remaining locally based
commercial bank in Plymouth County.
In 1997, Independent Capital Trust I (the "Trust") was formed for the
purpose of issuing trust preferred securities (the "Trust Preferred
Securities"). A total of $28.75 million of 9.28% Trust Preferred Securities were
issued by the Trust and are scheduled to mature in 2027, callable at the option
of the company after May 19, 2002. For further information on the Trust
Preferred Securities, see footnote 13 of the Company's 1998 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 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.
<PAGE>
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, 1998, the Company recorded net income of
$16.1 million, an increase of 14.0% over 1997 earnings of $14.2 million. The
improved 1998 results reflect a 13.2% increase in net interest income, an 11.8%
increase in non-interest income and an increase of 8.0% in non-interest
expenses.
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956 ("BHCA"), as amended, and as such is subject to regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve").
Rockland is subject to regulation and examination by the Commissioner of Banks
of the Commonwealth of Massachusetts (the "Commissioner") and the Federal
Deposit Insurance Corporation ("FDIC"). The majority of Rockland's deposit
accounts are insured to the maximum extent permitted by law by the Bank
Insurance Fund ("BIF") which is administered by the FDIC. In 1994, the Bank
purchased the deposits of three branches of a failed savings and loan
association from the Resolution Trust Corporation. These deposits are insured to
the maximum extent permitted by law by the Savings Association Insurance Fund
("SAIF").
Lending Activities
General. The Bank's gross loan portfolio amounted to $954.9 million on
December 31, 1998, or 60.6% 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.
In accordance with governing banking statutes, Rockland is permitted, with
certain exceptions, to make loans and commitments to any one borrower, including
related entities, in the aggregate amount of not more than 20% of the Bank's
stockholders' equity, or $19.8 million at December 31, 1998. Notwithstanding the
foregoing, the Bank has established a more restrictive limit of not more than
15% of stockholders' equity, or $14.8 million at December 31, 1998, which limit
may be exceeded with the approval of the Board of Directors. There were no
borrowers whose total indebtedness aggregated or exceeded $14.8 million as of
December 31, 1998.
2
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------- ------------------ -------------------
(Dollars in
Thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $127,019 13.3% $138,541 16.2% $127,008 17.9% $121,679 19.1% $122,944 20.5%
Real estate:
Commercial 261,332 27.4 238,930 27.9 205,256 29.0 187,608 29.4 169,693 28.4
Residential 197,807 20.7 207,555 24.2 202,031 28.5 187,652 29.4 184,958 30.9
Construction 44,710 4.7 34,227 4.0 31,633 4.5 27,863 4.4 28,892 4.8
Consumer:
Instalment 315,419 33.0 227,700 26.6 132,589 18.7 102,088 16.0 80,441 13.4
Other 8,656 0.9 9,849 1.1 10,140 1.4 11,076 1.7 11,882 2.0
-------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Gross Loans 954,943 100.0% 856,802 100.0% 708,657 100.0% 637,966 100.0% 598,810 100.0%
-------- ----- -------- ----- ------- ----- -------- ----- ------- -----
Unearned Discount 13,831 28,670 13,251 9,825 8,121
Reserve for
Possible
Loan Losses
13,695 12,674 12,221 12,088 13,719
-------- -------- -------- -------- --------
Net Loans $927,417 $815,458 $683,185 $616,053 $576,970
======== ======== ======== ======== ========
</TABLE>
The Company's outstanding loans grew by 13.6% in 1998, following a 19.1%
increase in 1997. This loan growth, in 1997, was primarily attributable to an
increase in the consumer loan portfolio, with the remaining growth in the
construction loan and commercial real estate portfolios.
Commercial loans, primarily floorplan, decreased $11.5 million, or 8.3%, in
1998, following an increase of $11.5 million, or 9.1%, in 1997.
Real estate loans comprised 52.8% of gross loans at December 31, 1998, as
compared to 56.1% at December 31, 1997. Commercial real estate loans have
reflected increases over the last two years of $22.4 million, or 9.4%, in 1998,
and $33.7 million, or 16.4%, in 1997. These increases are indicative of the
sound prospects for small and medium sized businesses in the Bank's market area.
Residential real estate loans decreased $9.7 million, or 4.7%, in 1998, and
increased $5.5 million, or 2.7% in 1997. The majority of residential mortgage
loans originated were sold in the secondary market. During 1998, the Bank sold
$87.9 million of the current production of residential mortgages as part of its
overall
3
<PAGE>
asset/liability management. Real estate construction loans increased $10.5
million, or 30.6%, in 1998, following an increase of $2.6 million, or 8.2%, in
1997.
Consumer instalment loans, net of unearned discount, increased $102.6
million, or 51.5%, and $79.7 million, or 66.8%, during 1998 and 1997,
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 1998
and 1997. As of December 31, 1998 and 1997, automobile loans represented 89.2%
and 76.4%, respectively, of the Bank's consumer loan portfolio. Since the sale
of the Bank's credit card portfolio during 1991 and 1992, other consumer loans
have consisted primarily of cash reserve loans. Introduced in 1992, cash reserve
loans are designed to afford the Bank's customers overdraft protection. The
balances of these loans decreased $1.2 million, or 12.1%, in 1998 and $298,000
or 2.9% in 1997.
The following table sets forth the scheduled contractual amortization of
the Bank's loan portfolio at December 31, 1998. 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.
<TABLE>
<CAPTION>
Real Real
Real Estate Estate - Estate - Consumer - Consumer -
Commercial Commercial Residential Construction Instalment Other Total
------------ -------------- ------------ ------------ ------------ ------------ -------------
(Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $91,186 $ 81,910 $88,862 $35,928 $ 71,788 $8,656 $378,330
After one year
through five years 27,928 152,707 79,540 7,511 235,638 --- 503,324
Beyond five years 7,905 26,715 29,405 1,271 7,993 --- 73,289
-------- -------- -------- ------- -------- ------ --------
Total $127,019 $261,332 $197,807 $44,710 $315,419 $8,656 $954,943
======== ======== ======== ======= ======== ====== ========
Interest rates on
amounts due after
one year:
Fixed Rate $ 29,419 $166,152 $ 83,516 $ 8,735 $242,330 --- $530,151
Adjustable Rate 6,257 12,378 24,981 --- --- --- 43,616
</TABLE>
Generally, the actual maturity of loans is substantially less than their
contractual maturity due to prepayments and, in the case of real estate loans,
due-on-sale clauses, which generally gives the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells the property subject to the mortgage and the loan is not repaid. The
average life of real estate loans tends to increase when current real estate
loan rates are higher than rates on mortgages in the portfolio and, conversely,
tends to decrease when rates on mortgages in the portfolio
4
<PAGE>
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, 1998, $.1 million of loans scheduled to mature within one year were
nonperforming. See "Lending Activities - Nonperforming Assets."
Origination of Loans. Commercial loan applications are obtained through
existing customers, solicitation by Bank loan officers, referrals from current
or past customers, or walk-in customers. Commercial real estate loan
applications are obtained primarily from previous borrowers, direct contacts
with the Bank, or referrals. Applications for residential real estate loans and
all types of consumer loans are taken at all of the Bank's full-service branch
offices. Residential real estate loan applications primarily result from
referrals by real estate brokers, 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 and non-banking hours. Consumer loan applications are directly
obtained through existing or walk-in customers who have been made aware of the
Bank's consumer loan services through advertising and other media, as well as
indirectly through a network of automobile dealers.
Commercial loans, commercial real estate loans, and construction loans may
be approved by commercial loan officers up to their individually assigned
lending limits which are established and modified periodically to reflect the
officer's expertise and experience. Commercial loans and commercial real estate
loans in excess of a loan officer's assigned lending limit are approved by
various levels of authority within the commercial lending division, depending on
the loan amount, up to and including the Senior Loan Committee and ultimately
the Executive Committee of the Board of Directors.
Residential real estate loans and home equity loans follow a similar
approval process within the retail lending division.
Sale of Loans. The Bank's residential real estate loans are generally
originated in compliance with terms, conditions and documentation which permit
the sale of such loans to the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Federal National Mortgage Association ("FNMA"), the Government National
Mortgage Association ("GNMA"), and other 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 1998, the Bank originated $149.1 million
in residential real estate loans of which $55.6 million was retained in its
portfolio.
The principal balance of loans serviced by the Bank for investors amounted
to $256.3 million at December 31, 1998 and $263.2 million at December 31, 1997.
Under its mortgage servicing
5
<PAGE>
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 $652,000 and $800,000 for
the years ended December 31, 1998 and 1997, 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, 1997 the Bank adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
as amended by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of Financial Accounting Standards Board (FASB) Statement No. 125."
This statement, which supercedes SFAS No.122, "Accounting for Mortgage Servicing
Rights," provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. As of December 31, 1998,
and 1997, the loan servicing asset was $1.1 million and $.6 million,
respectively.
Commercial Loans. The Bank offers secured and unsecured commercial loans
for business purposes, including issuing letters of credit. At December 31,
1998, $127.0 million, or 13.3%, of the Bank's gross loan portfolio consisted of
commercial loans, compared to $138.5 million, or 16.2%, at December 31, 1997.
The increase in 1997 and subsequent decrease in 1998 was primarily as a result
of one automobile dealer relationship. This relationship was gained in 1997 and
refinanced to another institution in 1998.
Commercial loans are generally provided to small-to-medium-sized businesses
located within the Company's market area. Commercial loans may be structured as
term loans or as revolving lines of credit. Commercial term loans generally have
a repayment schedule of five years or less, and although the Bank 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, 1998, the Bank had $44.1 million outstanding under commercial
revolving lines of credit, and $56.7 million of unused commitments under such
lines on that date.
6
<PAGE>
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, 1998,
the Bank had $1.5 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 $20.4 million as of December 31, 1998. Upon the sale of a floor-plan
unit, the proceeds of the sale are applied to reduce the loan balance. In the
event a unit financed under a floor-plan line of credit remains in the dealer's
inventory for an extended period, the amount of the outstanding balance is
reduced with respect to such unit. Bank personnel make unannounced 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, 1998, the Bank's loan
portfolio included $261.3 million in commercial real estate loans, $158.3
million in residential real estate loans, $39.5 million in home equity loans,
and $44.7 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.
7
<PAGE>
Rockland originates both fixed-rate and adjustable-rate residential real
estate loans. The Bank will lend up to 97% of the lesser of the appraised value
of the property securing the loan or the purchase price, and generally requires
borrowers to obtain private mortgage insurance when the amount of the loan
exceeds 80% of the value of the property. The rates of these loans are typically
competitive with market rates. As previously noted, the Bank's residential real
estate loans are generally originated only under terms, conditions and
documentation which permit sale in the secondary market.
The Bank generally requires title insurance protecting the priority of its
mortgage lien, as well as fire and extended coverage casualty insurance in order
to protect the properties securing its residential and other real estate loans.
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,
1998, there was $35.2 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, 1998, $16.0 million, or 35.9%, 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, 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
8
<PAGE>
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, 1998, $324.1 million, or 33.9%, of the Bank's
gross loan portfolio consisted of consumer loans.
The Bank's instalment loans consist primarily of automobile loans, which
amounted to $289.0 million at December 31, 1998. A substantial portion of the
Bank's automobile loans are originated indirectly by a network of approximately
120 new and used automobile dealers located within the Bank's market area.
Indirect automobile loans accounted for 92.0% and 86.7% of the Bank's total
instalment loan originations during 1998 and 1997, respectively. The increase in
indirect automobile loan originations in 1998 and 1997 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 66 months with respect to a used car loan. The Bank will lend up to
110% of the purchase price of a new automobile or, with respect to used cars, up
to 105% of the lesser of the purchase price or the National Automobile Dealer's
Association book value. Loans on new automobiles are generally made without
recourse to the dealer. The Bank requires all borrowers to maintain automobile
insurance, including full collision, fire and theft, with a maximum allowable
deductible and with the Bank listed as loss payee. The majority of the Bank's
loans on used automobiles are made without recourse to the dealer. Some
purchases from used car dealers are under a repurchase agreement. The dealer is
required to pay off the loan (in return for the vehicle) as long as the bank
picks up the vehicle and returns it to the dealer within 180 days of the most
recent delinquency payment. In addition, in order to ameliorate the adverse
effect on interest income caused by prepayments, all dealers are required to
maintain a reserve, ranging from 0% to 3% of the outstanding balance of the
indirect loans originated by them, which is rebated to the bank on a pro-rata
basis in the event of repayment prior to maturity.
The Bank's instalment loans also include unsecured loans and loans secured
by deposit accounts, loans to purchase motorcycles, recreational vehicles, motor
homes, boats, or mobile homes. As of December 31, 1998, instalment loans other
than automobile loans amounted to $26.4 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, 1998, an additional $15.9 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.
9
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or
more but still accruing $1,026 $737 $516 $553 $598
Loans accounted for
on a nonaccrual basis (1) 4,330 5,154 3,946 4,718 7,266
----- ----- ----- ----- -----
Total non performing loans 5,356 5,891 4,462 5,271 7,864
----- ----- ----- ----- -----
Other real estate owned - 2 271 638 3,866
Total nonperforming assets $5,356 $5,893 $4,733 $5,909 $11,730
====== ====== ====== ====== =======
Restructured loans $1,037 $1,400 $1,658 $2,629 $2,898
------ ------ ------ ------ ------
Nonperforming loans
as a percent of gross loans 0.56% 0.69% 0.63% 0.83% 1.31%
------ ----- ----- ----- -----
Nonperforming assets as a
percent of total assets 0.34% 0.43% 0.43% 0.60% 1.26%
====== ===== ===== ===== =====
</TABLE>
(1) Includes $.1 million, $.1 million, $.6 million, and $1.1 million of
restructured loans at December 31, 1997, 1996, 1995, and 1994 respectively,
which were included in nonaccrual loans as of such dates. There were no
restructured, nonaccruing loans at December 31, 1998.
Gross interest income that would have been recognized for the years ended
December 31, 1998 and 1997 if nonperforming loans at the respective dates had
been performing in accordance with their original terms approximated $496,000
and $438,000, respectively. The actual amount of interest that was collected on
these loans during each of those periods and included in interest income was
approximately 66,000 and $55,000, respectively.
Through the Controlled Asset Department, the Bank strives to ensure that
loans do not become nonperforming. In the case that they do, this department
will restore nonperforming assets to performing status or, alternatively,
dispose of such assets. On occasion, this effort may require the restructure of
loan terms for certain nonperforming loans. 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.
10
<PAGE>
<TABLE>
<CAPTION>
Year Ending December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Average loans, net of unearned discount $884,205 $757,877 $657,749 $612,481 $534,052
======== ======== ======== ======== ========
Reserve for Possible loan losses,
beginning of year $12,674 $12,221 $12,088 $13,719 $15,485
Charged-off loans
Commercial 1,206 1,140 1,252 2,097 2,396
Real estate - commercial -- 95 228 690 682
Real estate - residential 241 261 296 558 618
Real estate - construction -- -- -- -- 63
Consumer - instalment 2108 771 430 273 188
Consumer - other 542 639 619 464 346
--- --- --- --- ---
Total charged-off loans 4,097 2,906 2,825 4,082 4,293
----- ----- ----- ----- -----
Recoveries on loans previously charged off
Commercial 630 546 573 436 890
Real estate - commercial 258 265 241 665 425
Real estate - residential 2 0 31 3 2
Real estate - construction -- -- -- -- --
Consumer - instalment 266 137 171 169 133
Consumer - other 2 151 192 178 276
- --- --- --- ---
Total recoveries 1,158 1,099 1,208 1,451 1,726
----- ----- ----- ----- -----
Net loans charged-off 2,939 1,807 1,617 2,631 2,567
Provision for loan losses 3,960 2,260 1,750 1,000 801
----- ----- ----- ----- ---
Reserve for possible loan losses, end of
period $13,695 $12,674 $12,221 $12,088 $13,719
======= ======= ======= ======= =======
Net loans charged-off as a percent of
average loans, net of unearned discount 0.33% 0.24% 0.25% 0.43% 0.48%
Reserve for possible loan losses as a
percent of loans, net of unearned discount 1.46% 1.67% 1.76% 1.92% 2.32%
Reserve for possible loan losses as a
percent of nonperforming loans 255.69% 215.14% 273.89% 229.33% 174.45%
Net loans charged-off as a percent of
reserve for possible loan losses 21.46% 14.26% 13.23% 21.77% 18.71%
Recoveries as a percent of charge-offs 28.26% 37.82% 42.76% 35.55% 40.20%
</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. 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, 1998. For information about the
percent of loans in each category to total loans, see "Lending Activities - Loan
Portfolio Composition and Maturity."
<TABLE>
<CAPTION>
Percent of Total
Amount Loans by Category
---------------- -------------------
(Dollars In Thousands)
<S> <C> <C>
Commercial Loans $2,912 2.29%
Real Estate Loans 7,118 1.41%
Consumer Loans 3,665 1.18%
----- ----
Total Loans $13,695 1.46%
====== ====
</TABLE>
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 relationships 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 underlying collateral's value. In conjunction with
its review, management considers both internal and external factors which may
affect the adequacy of the reserve for possible loan losses. Such factors may
include, but are not limited to, industry trends, regional and national economic
conditions, past estimates of possible loan losses as compared to actual losses,
and historical loan losses. Management assesses the adequacy of the reserve for
possible loan losses, and reviews that assessment quarterly, with the Board of
Directors. Management's assessment of the
11
<PAGE>
adequacy of the reserve for possible loan losses is reviewed periodically by the
Company's independent public accountants.
As of December 31, 1998, the reserve for possible loan losses totaled $13.7
million. Based on the processes described above, management believes that the
level of the reserve for possible loan losses at December 31, 1998 is adequate.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Company's reserve for possible loan losses.
Federal Reserve regulators most recently examined the Company in the second
quarter of 1998. The Bank was most recently examined by the fourth quarter of
1997 and by the Commonwealth of Massachusetts Division of Banks in the first
quarter of 1996. No additional provision for possible loan losses was required
as a result of these examinations.
Investment Activities
The Bank's securities portfolio consists of U.S. Treasury and U.S.
Government Agency securities, mortgage-backed securities, and debt securities
issued by other institutions. Most of these securities are investment grade debt
obligations with average maturities of less than five years. Government and
government agency securities entail a lesser degree of risk than loans made by
the Bank by virtue of the guarantees that back them, require less capital under
risk-based capital rules than non-insured or non-guaranteed mortgage loans, are
more liquid than individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Bank. However, these securities are
subject to prepayment risk which could result in significantly less future
income than would have been the case based on the contractual coupon rate and
term. In addition the Bank had $18.7 million, in private issue mortgage backed
securities at December 31, 1998. The Bank had investments in marketable equity
securities at December 31, 1998 of $350,000 and no like investments in 1997.
The Bank views its securities portfolio as a source of income and, with
regard to maturing securities, liquidity. Interest payments generated from
securities also provide a source of liquidity to fund loans and meet short-term
cash needs. The Bank's securities portfolio is managed in accordance with the
Rockland Trust Company Investment Policy adopted by the Board of Directors.
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.
12
<PAGE>
Securities held to maturity as of December 31, 1998 are carried at their
amortized cost of $284.9 million and exclude gross unrealized gains of $3.9
million and gross unrealized losses of $1.3 million. A year earlier, securities
held to maturity totaled $308.1 million, excluding gross unrealized gains of
$2.8 million and gross unrealized losses of $1.3 million.
Securities available for sale are carried at fair market value and
unrealized gains and losses, net of the related tax effect, are recognized as a
separate component of stockholders' equity. The fair market value of securities
available for sale at December 31, 1998 totaled $195.2 million, and net
unrealized gains totaled $0.8 million. A year earlier, securities available for
sale were $131.8 million, with net unrealized gains of $1.4 million. In 1998,
the Bank realized a net gain of $27,000 on the sale of two available for sale
securities. In 1997, the Bank realized a loss of $8,000 on the sale of an
available for sale security.
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,
------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. treasury and
Government agency
Securities $ 29,197 10.3% $ 51,567 16.7% $ 71,104 24.4%
Mortgage-backed securities 143,292 50.3% 199,245 64.7% 193,854 66.7%
Collateralized mortgage
obligations 17,799 6.2% 34,515 11.2% 19,526 6.7%
State. County, and
municipal secirotoes 40,365 14.2% 21,385 6.9% 5,410 1.9%
Other investment
securities 54,291 19.0% 1,400 0.5% 1,000 0.3%
-------- ------ -------- ------ -------- ------
$284,944 100.0% $308,112 100.0% $290,894 100.0%
======== ====== ======== ====== ======== ======
</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,
-----------------------------------------------------------
1998 1997 1996
------------------- -------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S Treasury and U.S
Government Agency $9,045 4.6%
Securities
Mortgage-Backed 137,410 70.4% $131,842 100.0% $24,796 93.8%
Securities
Collateralized Mortgage 48,320 24.8% $1,653 6.2%
Obligations
Other Securities 424 .2%
------- --- -------- ------- ------
$195,199 100.0% $131,842 100.0% $26,449 100.0%
======== ====== ======== ====== ======= ======
</TABLE>
At December 31, 1998 and 1997, the Bank had no investments in obligations
of individual states, counties or municipalities which exceeded 10% of
stockholders' equity. In addition, there were no sales of these securities in
1998, 1997 or 1996.
13
<PAGE>
Sources of Funds
Deposits. Deposits obtained through Rockland's branch banking network have
traditionally been the principal source of the Bank's funds for use in lending
and for other general business purposes. The Bank has built a stable base of
in-market core deposits from the residents of and businesses located in
Southeastern Massachusetts. The Bank has the ability to solicit brokered
deposits. Rockland did not have any brokered deposits at December 31,1998.
During the first quarter of 1999, Rockland acquired $20 million of brokered
deposits as an alternative source of funds. Rockland offers a range of demand
deposits, interest checking, money market accounts, savings accounts and time
certificates of deposit. Interest rates on deposits are based on factors which
include loan demand, deposit maturities, and interest rates offered by competing
financial institutions in the Bank's market area. The Bank believes it has been
able to attract and maintain satisfactory levels of deposits based on the level
of service it provides to its customers, the convenience of its banking
locations, and its interest rates which are generally competitive with those of
competing financial institutions.
Rockland's branch locations are supplemented by the Bank's Trust/24 and
debit cards which may be used to conduct various banking transactions at
automated teller machines ("ATMs") maintained at each of the Bank's full-service
offices and three additional locations. The Trust/24 and debit cards also allow
customers access to the "NYCE" regional ATM network, as well as the "Cirrus"
nationwide ATM network. These networks provide the Bank's customers access to
their accounts through ATMs located throughout Massachusetts, the United States,
and the world.
The following table sets forth the average balances of the Bank's deposits
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------------ ----------------------
(Dollars in Thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $195,583 19.9% $171,955 18.9% $161,475 18.9%
Savings and Interest
Checking 266,093 27.1% 225,069 24.8% 257,294 30.2%
Money Market and Super
Interest Checking
account 107,956 11.0% 109,156 12.0% 105,706 12.4%
Time deposits 411,801 42.0% 402,346 44.3% 328,232 38.5%
------- ---- ------- ---- ------- ----
Total $981,433 100.0% $908,526 100.0% $852,707 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The Bank's interest-bearing time certificates of deposit of $100,000 or
more totaled $95.7 million at December 31, 1998. The maturity of these
certificates are as follows: $69.0 million within three months; $20.9 million
over three through 12 months; and $5.8 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
14
<PAGE>
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 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, 1998, the Bank had $30.0 million
outstanding under repurchase agreements and $47.4 million outstanding in
Customer Repurchase Agreement.
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 $375 million of
short-to-medium term borrowing capacity as of December 31, 1998, based on the
Bank's assets at that time. At December 31, 1998, the Bank had $313.7 million
outstanding in FHLB borrowings with initial maturities ranging from 1 month to
10 years.
While the Bank has not traditionally placed significant reliance on
borrowings as a source of liquidity, it established the borrowing arrangements
described above in order to provide management with greater flexibility in
overall funds management.
Management believes that the Bank has adequate liquidity available to
respond to current and anticipated liquidity demands. See Notes 3 and 6 of the
Notes to Consolidated Financial Statements, included in Item 8 hereof.
15
<PAGE>
The following table sets forth the Bank's borrowings at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
(in Thousands)
<S> <C> <C> <C>
Federal funds purchased $5,025 $845 $840
Assets sold under
repurchase agreements 77,351 37,482 --
Treasury tax and loan notes 471 3,217 2,296
Federal Home Loan Bank
borrowings 313,724 206,724 78,000
-------- -------- -------
$396,571 $248,268 $81,136
======== ======== =======
</TABLE>
The following table presents certain information regarding the Bank's
short-term borrowings at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance outstanding at end of year $82,847 $41,544 $ 3,136
Average daily balance outstanding 66,403 48,869 26,534
Maximum balance outstanding at any 89,741 84,945 44,545
month-end Weighted average interest
rate for the year 5.39% 5.74% 5.36%
Weighted average interest rate at end
of year 4.72% 5.99% 5.35%
</TABLE>
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, 1998, the Trust and Financial
Services Division maintained approximately 1,804 trust/fiduciary accounts, with
an aggregate market value of over $562 million on that date. Income from the
Trust and Financial Services Division amounted to $3.8 million and $3.1 million,
for 1998 and 1997, respectively.
Accounts maintained by the Trust and Financial Services Division consist of
"managed" and "non-managed" accounts. "Managed accounts" are those accounts for
which Rockland has responsibility for administration and investment management
and/or investment advice. "Non-managed" accounts are those accounts for which
Rockland acts as a custodian. The Bank receives fees dependent upon the level
and type of service(s) provided.
The administration of trust and fiduciary accounts is monitored by the
Trust Committee of the Bank's Board of Directors. The Trust Committee has
delegated administrative responsibilities to two committees - one for
investments and one for administration - comprised of Trust and Financial
Services Division officers who meet not less than monthly.
16
<PAGE>
Forward-Looking Information
The preceding Management's Discussion and Analysis and Notes to
Consolidated Financial Statements of this Form 10-K contain certain
forward-looking statements, including without limitation, statements regarding
(i) the level of reserve for possible loan losses, (ii) the rate of
delinquencies and amounts of charge-offs, (iii) the rates of loan growth, and
(iv) the Company's ability to minimize any detrimental effects of the Year 2000
problem and associated expenses. Moreover, the Company may from time to time, in
both written reports and oral statements by Company management, express its
expectations regarding future performance of the Company. These forward-looking
statements are inherently uncertain and actual results may differ from Company
expectations. The following factors which, among others, could impact current
and future performance include but are not limited to: (i) adverse changes in
asset quality and resulting credit risk-related losses and expenses; (ii)
adverse changes in the economy of the New England region, the Company's primary
market, (iii) adverse changes in the local real estate market, as most of the
Company's loans are concentrated in Southeastern Massachusetts and a substantial
portion of these loans have real estate as collateral; (iv) fluctuations in
market rates and prices which can negatively affect net interest margin asset
valuations and expense expectations; and (v) changes in regulatory requirements
of federal and state agencies applicable to banks and bank holding companies,
such as the Company and Rockland, which could have materially adverse effect on
the Company's future operating results. When relying on forward-looking
statements to make decisions with respect to the Company, investors and others
are cautioned to consider these and other risks and uncertainties.
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 (the Bank Holding Company Act) - Activities and Other Limitations. The
BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or
increasing such ownership or control of any bank, without prior approval of the
Federal Reserve. No approval under the BHCA is required, however, for a bank
holding company already owning or controlling 50% of the voting shares of a bank
to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company from, with certain
exceptions, acquiring more than 5% of the voting shares of any company that is
not a bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve is authorized to approve
the ownership of shares by a bank holding company in any company, the activities
of which the Federal Reserve has determined to be so closely related to banking
or to managing or controlling banks as to be a proper incident thereto. In
making such determination, the Federal Reserve is required to weigh the expected
benefit to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
The Federal Reserve has, by regulation, determined that certain activities
are closely related to banking within the meaning of the BHCA. These activities
include, but are not limited to, operating a mortgage company, finance company,
credit card company, factoring company, trust company or savings association;
performing certain data processing operations; providing certain securities
brokerage services; acting as an investment or financial adviser; acting as an
insurance agent for certain types of
17
<PAGE>
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. 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.
18
<PAGE>
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, 1998, the Company had Tier 1 capital and
total capital equal to 11.38% and 12.63% of total risk-adjusted assets,
respectively, and Tier 1 leverage capital equal to 7.91% 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 9.09% and 10.34% of
total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to
6.32% of total assets.
Commitments to Affiliated Institutions. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength to Rockland and to
commit resources to support Rockland in circumstances when it might not do so
absent such policy.
Limitations on Acquisitions of Common Stock. The federal Change in Bank
Control Act ("CBCA") prohibits a person or group of persons from acquiring
"control" of a bank holding company or bank unless the appropriate federal bank
regulator has been given 60 days prior written notice of such proposed
acquisition and within that time period such regulator has not issued a notice
disapproving the proposed acquisition or extending for up to another 30 days the
period during which such a disapproval may be issued. An acquisition may be made
prior to expiration of the disapproval period if such regulator issues written
notice of its intent not to disapprove the action. The acquisition of 25% or
more of any class of voting securities constitutes the acquisition of control
under the CBCA. In addition, under a rebuttable presumption established under
the CBCA regulations, the acquisition of 10% or more of a class of voting stock
of a bank holding company or a FDIC-insured bank, with a class of securities
registered under or subject to the requirements of Section 12 of the Securities
Exchange Act of 1934 would, under the circumstances set forth in the
presumption, constitute the acquisition of control.
In addition, any "company" would be required to obtain the approval of the
Federal Reserve under the BHCA before acquiring 25% (5% in the case of an
acquirer that is a bank holding company) or more of the outstanding common stock
of, or such lesser number of shares as constitute control over, the Company.
Such approval would be contingent upon, among other things, the acquirer
registering as a bank holding company, divesting all impermissible holdings and
ceasing any activities not permissible for a bank holding company.
Massachusetts Law. Massachusetts law requires all Massachusetts bank
holding companies (those companies which control, own, or have the power to vote
25% or more of the stock of each of two or more Massachusetts based banks) to
receive prior written approval of the Massachusetts Board of Bank Incorporation
to, among other things, acquire all or substantially all of the assets of a
banking institution located within the Commonwealth of Massachusetts or to merge
or consolidate with a Massachusetts bank holding company. The Company owns no
voting stock in any banking institution
19
<PAGE>
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, 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 insured depository institution
or, either directly or indirectly, acquire the assets of or assume the liability
to pay any deposits made in any other depository institution except with the
prior written approval of the FDIC.
As noted above, Massachusetts "opted in" to the Interstate Act in 1996. As
such, any out-of-state bank may engage, with the written approval of the
Commissioner, in a merger transaction with a Massachusetts bank to the fullest
extent permitted by the Interstate Act, provided that the laws of the home state
of such out-of-state bank permit, under conditions no more restrictive than
those imposed by Massachusetts, interstate merger transactions with
Massachusetts banks, and provided further that the Massachusetts bank has been
in existence for at least three years and the resulting bank would not control
in excess of 30% of the total deposits of all state and federally chartered
depository institutions in Massachusetts. The Commissioner may waive the latter
two conditions, in his discretion. Such a merger transaction may also involve
the acquisition of one or more branches of a Massachusetts bank and not the
entire institution. With the prior written approval of the Commissioner,
Massachusetts also permits the establishment of de novo branches in
Massachusetts to the fullest extent permitted by the Interstate Act, provided
the laws of the home state of such out-of-state bank expressly authorize, under
conditions no more restrictive than those of Massachusetts, Massachusetts banks
to establish and operate 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, 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.
20
<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, 1999.
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 1.22 basis points, on an
annual basis, for BIF assessable deposits and approximately 6.10 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, 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
21
<PAGE>
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 undercapitalized institution as critically undercapitalized). As
of December 31, 1998, Rockland was deemed a "well-capitalized institution" for
this purpose.
Brokered Deposits. FDICIA restricts the use of brokered deposits by certain
depository institutions. Well capitalized insured depository institutions may
solicit and accept, renew or roll over any brokered deposit without restriction.
Adequately capitalized insured depository institutions may not accept, renew or
roll over any brokered deposit unless they have applied for and been granted a
waiver of this prohibition by the FDIC. Undercapitalized insured depository
institutions may not (i) accept, renew or roll over any brokered deposit or (ii)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. At December 31, 1998, the Bank did not have
any brokered deposits. During the first quarter of 1999, the Bank expanded its
funding sources to include brokered deposits of $20 million.
22
<PAGE>
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 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.
23
<PAGE>
State Taxation. The Commonwealth of Massachusetts imposes a tax on the
Massachusetts net income of banks at a rate of 10.91% as of December 31, 1998.
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.
Item 2. Properties
At February 28, 1999, the Bank conducted its business from its headquarters
and main office at 288 Union Street, Rockland, Massachusetts, and 32 other
branch offices located in Southeastern Massachusetts in Plymouth County, Bristol
County and Norfolk County. In addition to its main office, the Bank owns five of
its branch offices and leases the remaining 27 offices. Of the branch offices
which are leased by the Bank, 6 have remaining lease terms, including options
renewable at the Bank's option, of five years or less, 10 have remaining lease
terms of greater than five years and less than 10 years, and 11 have a remaining
lease term of 10 years or more. The Bank's aggregate rental expense under such
leases was $1.6 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,
1998, the net book value of the property and leasehold improvements of the
offices of the Bank amounted to $8.9 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.
24
<PAGE>
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
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required herein is incorporated by reference from page 39
of the Company's 1998 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, 1998.
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page 1 of
the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required herein is incorporated by reference from pages 2
through 15 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 16 through 38 of the Annual Report.
25
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
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 5, 1999.
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.
26
<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 16 through 38 of the Annual Report.
Report of Independent Public Accountants
Consolidated balance sheets as of December 31, 1998 and 1997
Consolidated statements of income for each of the years in the three year
period ended December 31, 1998
Consolidated statements of stockholder's equity for each of the years in
the three year period ended 12/31/98
Consolidated statements of Comprehensive Income for each of the years in
the three year period ended December 31, 1998
Consolidated statements of cash flows for each of the years in the three
year period ended December 31, 1998
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.
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Exhibit Footnote
- - --------- ----------------------------------- -------
<S> <C> <C>
3.(i) Restated Articles of Organization, as (5)
amended to date
3.(ii) Bylaws of the Company, as amended (1)
to date
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).
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 Amendment No. 1 to Third Amended and E-44
Restated Employment Agreement between the
Company, Rockland and Douglas H.
Philipsen, dated July 8, 1998
("Philipsen Employment Agreement").
(Management contract under Item
601(10)(iii)(A)).
10.3 Amendment No. 1 to Second Amended and E-48
Restated Employment Agreement between
Rockland Trust Company and Richard
F. Driscoll, dated July 8, 1998
(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)).
28
<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 Consent of Independent Public E - 52
Accountants
27 Financial Data Schedule E - 53
</TABLE>
(Footnotes on next page)
29
<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, 1998.
(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.
30
<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 11, 1999 /s/ Douglas H. Philipsen,
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the followings persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each person whose signature
appears below hereby makes, constitutes and appoints Douglas H. Philipsen and
Richard Seaman and each of them acting individually, his true and lawful
attorneys, with full power to sign for such person and in such person's name and
capacity indicated below any and all amendments to this Form 10-K, hereby
ratifying and confirming such person's signature as it may be signed by said
attorneys to any and all amendments.
/s/ Richard S. Anderson Date: March 11, 1999
Richard S. Anderson
Director
/s/ Donald K. Atkins Date: March 11, 1999
Donald K. Atkins
Director
/s/ W. Paul Clark Date: March 11, 1999
W. Paul Clark
Director
/s/ Robert L. Cushing Date: March 11, 1999
Robert L. Cushing
Director
/s/ Benjamin A Gilmore, II Date: March 11, 1999
Benjamin A. Gilmore, II
Director
31
<PAGE>
/s/ Lawrence M. Levinson Date: March 11, 1999
Lawrence M. Levinson
Director
/s/ Richard H. Sgarzi Date: March 11, 1999
- - ---------------------
Richard H. Sgarzi
Director
/s/ Robert J. Spence Date: March 11, 1999
- - ---------------------------
Robert J. Spence
Director
/s/ William J. Spence Date: March 11, 1999
- - ---------------------
William J. Spence
Director
/s/ Brian S. Tedeschi Date: March 11, 1999
- - ---------------------
Brian S. Tedeschi
Director
/s/ Thomas J. Teuten Date: March 11, 1999
- - --------------------
Thomas J. Teuten
Director
/s/ Richard J. Seaman Date: March 11, 1999
- - ---------------------
Richard J. Seaman
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
EXHIBIT NO. 10.1
Amendment No. 1 to Third Amended and Restated Employment Agreement between
the Company, Rockland and Douglas H. Philipsen, dated June 25, 1997 ("Philipsen
Employment Agreement").
-1-
<PAGE>
AMENDMENT NO. 1 TO THIRD AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
Reference is made to the Agreement dated and effective as of December 12,
1991 by and between Rockland Trust Company, a Massachusetts trust company (the
"Company") and Douglas H. Philipsen of Duxbury, Massachusetts (the "Executive"),
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 by the Second Amended and Restated Employment dated
February 21, 1996, and as further amended and restated by the Third Amended and
Restated Employment Agreement dated June 25, 1997. (the "Employment Agreement").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Employment Agreement.
W I T N E S S E T H
WHEREAS, the Executive and the Company are desirous of amending certain
provisions of the Employment Agreement to provide that certain additional
benefits be paid to the Executive upon the termination of the Executive's
employment without cause or the Executive's resignation with good reason as such
terms are defined in the Employment Agreement;
WHEREAS, the Executive and the Company are desirous of amending the
Employment Agreement as set forth above.
NOW THEREFORE, in consideration of mutual covenants herein contained, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Section 6(b)(i) of the Employment Agreement is hereby amended and
restated to read as follows:
(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
-2-
<PAGE>
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 an amount equal to three (3) times the aggregate amount of
payments made to the Executive during the twelve (12) months preceding such
termination pursuant to any bonus or incentive compensation plan, including,
without limitation, the Rockland Trust Company Officer and Executive Incentive
Compensation Plan, as amended from time to time, 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 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
-3-
<PAGE>
to the book value of said automobile as carried on the books and records of the
Company, plus all applicable excise taxes.
2. Ratification.
All other provisions of the Employment Agreement shall remain unchanged and
in full force and effect, and are hereby ratified and confirmed by the parties
hereto.
3. 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.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to
Second Amended and Restated Employment Agreement as of July __, 1998.
ROCKLAND TRUST COMPANY
By:___________________________
Its:__________________________
INDEPENDENT BANK CORP.
By:___________________________
Its:__________________________
------------------------------
DOUGLAS H. PHILIPSEN
-4-
EXHIBIT NO. 10.3
Amendment No. 1 to Second Amended and Restated Employment Agreement between
the Company, Rockland and Richard F. Driscoll, dated January 19, 1996 (the
"Driscoll Employment 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)).
-1-
<PAGE>
AMENDMENT NO. 1 TO SECOND AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
Reference is made to the Agreement dated and effective as of March 4, 1992
by and between Rockland Trust Company, a Massachusetts trust company (the
"Company") and Richard F. Driscoll of Plymouth, Massachusetts (the "Executive"),
as amended by a certain amendment dated and effective as of February 3, 1993, as
amended and restated as of October 31, 1994 and as further amended and restated
as of January 19, 1996 (the "Employment Agreement"). Capitalized terms used
herein and not otherwise defined shall have the meanings ascribed to such terms
in the Employment Agreement.
W I T N E S S E T H
WHEREAS, the Executive and the Company are desirous of amending certain
provisions of the Employment Agreement to provide that certain additional
benefits be paid to the Executive upon the occurrence of a change of control of
Independent Bank Corp. ("IBC"), the parent bank holding company of the Company,
where such occurrence is followed by a termination of the Executive's employment
without cause or the Executive's resignation with good reason as such terms are
defined in the Employment Agreement;
WHEREAS, the Executive and the Company are desirous of amending the
Employment Agreement as set forth above.
NOW THEREFORE, in consideration of mutual covenants herein contained, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Section 5(c)(i) of the Employment Agreement is hereby amended and
restated to read as follows:
(c) Change in Control.
(i) If during the term of this Agreement, any of the events
constituting a Change of Control (as such term is defined in Section 5(c)(ii)
hereof), shall be deemed to have occurred, and following such Change of Control,
either (A) the Executive's employment with the Company and/or any of its parent,
-2-
<PAGE>
subsidiaries, affiliates, or successors by merger or otherwise as a result of
the Change of Control, is terminated for any reason other than death, disability
(as defined in Section 5(e) hereof) or for Cause (as such term is defined in
Section 5(a)(ii) hereof), or (B) the Executive resigns for Good Reason (as such
term is defined in Section 5(a)(iii) hereof) from employment with the Company
and/or any of its parent, subsidiaries, affiliates, or successors by merger or
otherwise as a result of the Change of Control, the Executive shall be entitled
(C)(x) to receive his then current Base Salary for a period of twenty four (24)
months from the date of termination of this Agreement without Cause or
resignation for Good Reason and to receive an amount equal to two (2) times the
greater of (a) the aggregate amount of payments made to the Executive during the
twelve (12) months preceding the date of termination of this Agreement without
Cause or resignation for Good Reason, or (b) the aggregate amount of payments
made to the Executive during the twelve (12) months preceding the Change of
Control, in each case pursuant to any bonus or incentive compensation plan,
including without limitation, the Rockland Trust Company Officer and Executive
Incentive Compensation Plan, as amended from time to time, in each case payable
in a lump sum cash payment immediately following such termination, and (C)(y)(1)
to continue participation in the plans and arrangements described in clauses (b)
and (f) of Section 4 hereof (to the extent permissible by law and the terms of
such plans and arrangements) for the period of twenty four (24) months after
such termination or resignation (the "Benefits Period"), or (C)(y)(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 4 hereof for the
Benefits Period less any portion thereof in which the Executive has continued
his participation in such plans and arrangements described in clauses (b) and
(f) of Section 4 hereof in accordance with subsection 5(c)(i)(C)(y)(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 5(c)(i)(C)(y)(2),
and (C)(z) to have all stock options which have been granted to the Executive to
immediately become fully exercisable and to remain 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 Plan and the relevant stock option
agreement, and (C) (zz) upon his written
-3-
<PAGE>
notice to the Company during a period of 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.
2. Ratification.
All other provisions of the Employment Agreement shall remain unchanged and
in full force and effect, and are hereby ratified and confirmed by the parties
hereto.
3. 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.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to
Second Amended and Restated Employment Agreement as of July __, 1998.
ROCKLAND TRUST COMPANY
By:___________________________
Its:__________________________
INDEPENDENT BANK CORP.
By:___________________________
Its:__________________________
------------------------------
RICHARD F. DRISCOLL
-4-
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.
<TABLE>
<CAPTION>
As of or For the Year Ended December 31, 1998 1997 1996 1995 1994
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Securities held to maturity $ 284,944 $ 308,112 $ 290,894 $ 226,896 $ 256,785
Securities available for sale 195,199 131,842 26,449 32,628 4,250
Loans, net of unearned discount 941,112 828,132 695,406 628,141 590,689
Reserve for possible loan losses 13,695 12,674 12,221 12,088 13,719
Total assets 1,575,069 1,370,007 1,092,793 987,589 929,194
Total deposits 1,043,317 988,148 918,572 871,085 796,612
Stockholders' equity 95,848 92,493 81,110 72,572 64,202
Nonperforming loans 5,356 5,891 4,462 5,271 7,864
Nonperforming assets 5,356 5,893 4,733 5,909 11,730
OPERATING DATA:
Interest income $ 108,712 $ 93,820 $ 77,424 $ 72,918 $ 63,540
Interest expense 49,569 41,578 32,354 29,143 22,029
Net interest income 59,143 52,242 45,070 43,775 41,511
Provision for possible loan losses 3,960 2,260 1,750 1,000 801
Non-interest income 13,125 11,742 11,381 10,341 10,005
Non-interest expenses 41,697 38,595 36,951 38,000 41,069
Minority interest expense 2,668 1,645 -- -- --
Net income 16,139 14,158 11,597 10,387 8,113
PER SHARE DATA:
Net income - Basic $ 1.10 $ 0.97 $ 0.80 $ 0.72 $ 0.56
Net Income - Diluted $ 1.08 $ 0.95 $ 0.79 $ 0.71 $ 0.56
Cash dividends declared 0.40 0.34 0.25 0.18 0.08
Book value, end of period 6.63 6.25 5.55 5.00 4.45
OPERATING RATIOS:
Return on average assets 1.12% 1.15% 1.13% 1.10% 0.94%
Return on average equity 16.71% 16.45% 15.20% 15.28% 13.36%
Net interest margin 4.36% 4.52% 4.72% 4.97% 5.19%
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of gross loans 0.56% 0.69% 0.63% 0.83% 1.31%
Nonperforming assets as a percent of total assets 0.34% 0.43% 0.43% 0.60% 1.26%
Reserve for possible loan losses as a percent of
loans, net of unearned discount 1.46% 1.53% 1.76% 1.92% 2.32%
Reserve for possible loan losses as a percent of
nonperforming loans 255.69% 215.14% 273.89% 229.33% 174.45%
CAPITAL RATIOS:
Tier 1 leverage capital ratio 7.91% 8.64% 7.35% 7.24% 6.76%
Tier 1 risk-based capital ratio 11.38% 13.52% 10.89% 10.67% 10.05%
Total risk-based capital ratio 12.63% 14.78% 12.15% 11.92% 11.31%
</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 $1,575.1
million in 1998, compared with $1,370.0 million in 1997. This increase amounted
to $205.1 million or 15% over year-end 1997. The growth was driven by an
increase in loans of $113.0 million, centered in consumer loans, commercial real
estate and construction loans. The securities portfolio increased to $496.2
million at December 31, 1998 compared with $456.0 million at December 31, 1997.
The growth occurred in the securities available for sale portfolio, which
increased by $63.4 million during 1998.
The Company's total assets grew to $1,370.0 million as of December 31, 1997, an
increase of $277.2 million, or 25.4%, over 1996 year-end assets. Loan growth of
$132.7 million was primarily in the commercial real estate and consumer loan
categories. The securities portfolio increased by $131.1 million during 1997 as
a result of an investment strategy that the Company implemented during the
second and third quarters of 1997. 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 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.
Loan Portfolio. At December 31, 1998, the Bank's loan portfolio was $941.1
million, an increase of $113.0 million, or 13.6%, from year-end 1997. This
growth was primarily in the consumer loan portfolio, which increased by $101.4
million, or 48.5%. The remaining growth was in the commercial real estate and
construction portfolios, which also showed strong growth in 1998.
At December 31, 1997, the Bank's loan portfolio amounted to $828.1 million, an
increase of $132.7 million, or 19.1%, from year-end 1996. This increase was
primarily in the consumer loan portfolio, which increased by $79.4 million or
61.3%.
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 $13.7 million at December 31, 1998. The ratio of the
reserve for possible loan losses to non-performing loans was 255.7% at December
31, 1998, an increase over the coverage of 215.1% recorded a year earlier.
The Bank provides its customers with access to capital by providing a broad
range of credit services. The Bank's commercial customers consist of
small-to-medium-sized businesses, which utilize demand, time, and term loans, as
well as funding guaranteed by the Small Business Administration, to finance
their businesses. The Bank's retail customers can choose from a variety of
mortgage and consumer loan products. The Bank's principal lending market
provides attractive lending opportunities for commercial, real estate, and
consumer loans.
The Bank's loan committee consists of the Bank's President, the Executive Vice
President of the Commercial Lending Division, the Senior Credit Policy Officer,
and the Commercial Loan Regional Managers. The committee considers a variety of
policy issues, including underwriting and credit standards, and reviews loan
proposals that exceed the individual loan officer's lending authority.
Asset Quality The Bank's principal earning assets are its loans. Although the
Bank judges its borrowers to be creditworthy, the risk of deterioration in
borrowers' ability to repay their loans in accordance with the terms of their
existing loan agreements is inherent in any lending function. Participating as a
lender in the credit markets requires a strict monitoring process to minimize
credit risk. This process requires substantial analysis of the loan application,
the customer's capacity to repay according to the loan's contractual terms, and
an objective determination of the value of the collateral.
Nonperforming assets are comprised of nonperforming loans and Other Real Estate
Owned (OREO). Nonperforming loans consist of loans that are more than 90 days
past due but still accruing interest and nonaccrual loans. OREO includes
properties held by the Bank as a result of foreclosure or by acceptance of a
deed in lieu of foreclosure. As of December 31, 1998, nonperforming assets
totaled $5.4 million, a decrease of $537,000, or 9.1%, from the prior
<PAGE>
year-end. Nonperforming assets represented 0.34% and 0.43% of total assets for
the years ending December 31, 1998 and 1997 respectively.
The following table sets forth information regarding nonperforming loans and
nonperforming assets on the dates indicated.
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31, December 31, December 31,
1998 1998 1998 1998 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming Loans:
Loans past due 90 days
or more but still accruing $1,026 $ 935 $ 490 $ 693 $ 737 $ 516
Loans accounted for on
a nonaccrual basis 4,330 4,663 4,627 5,198 5,154 3,946
Total nonperforming loans 5,356 5,598 5,117 5,891 5,891 4,462
Other real estate owned -- -- 4 4 2 271
Total nonperforming assets $5,356 $5,598 $5,121 $5,895 $5,893 $4,733
Nonperforming loans as
a percent of gross loans 0.56% 0.60% 0.56% 0.67% 0.69% 0.63%
Nonperforming assets as
a percent of total assets 0.34% 0.37% 0.35% 0.43% 0.43% 0.43%
</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 an
accruing status if the loan is well secured and in the process of collection. As
a general rule, a commercial or real estate loan more than 90 days past due with
respect to principal or interest is classified as a nonaccrual loan. Income
accruals are suspended on all nonaccrual loans and all previously accrued and
uncollected interest is reversed against current income. A loan remains on
nonaccrual status until it becomes current with respect to principal and
interest, 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, 1998 1997
(In Thousands)
<S> <C> <C>
Loans past due 90 days or more but still accruing:
Real Estate - Residential Mortgage $ 41 $ 112
Consumer - Installment 819 480
Consumer - Other 166 145
Total $1,026 $ 737
Loans accounted for on a nonaccrual basis:
Commercial $ 579 $1,406
Real Estate - Commercial Mortgage 140 1,027
Real Estate - Residential Mortgage 2,455 2,115
Consumer - Installment 1,156 606
Total 4,330 5,154
Total Nonperforming Loans $5,356 $5,891
</TABLE>
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, 1998, the Bank had $1.0 million of restructured loans.
Real estate acquired by the Bank through foreclosure proceedings or the
acceptance of a deed in lieu of foreclosure is classified as OREO. When property
is acquired, it is recorded at the lesser of the loan's remaining principal
balance or the estimated fair value of the property acquired, less estimated
costs to sell. Any loan balance in excess of the estimated fair value on the
date of transfer is charged to the reserve for possible loan losses on that
date. All costs incurred thereafter in maintaining the property, as well as
subsequent declines in fair value are charged to non-interest expense.
In order to facilitate the disposition of OREO, the Bank may finance the
purchase of such properties at market rates if the borrower qualifies under the
Bank's standard underwriting guidelines. The Bank had no OREO properties at
December 31, 1998.
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,
<PAGE>
mortgage-backed securities, including collateralized mortgage obligations, state
county and municipal securities as well as other securities. Securities held to
maturity as of December 31, 1998 are carried at their amortized cost of $284.9
million and exclude gross unrealized gains of $3.9 million and gross unrealized
losses of $1.3 million. A year earlier, securities held to maturity totaled
$308.1 million excluding gross unrealized gains of $2.8 million and gross
unrealized losses of $1.3 million. There were no sales of securities held to
maturity during 1998 or 1997. Securities available for sale consist of certain
mortgage-backed securities, including collateralized mortgage obligations and
U.S. Government Agency obligations. These securities are carried at fair market
value and unrealized gains and losses, net of applicable income taxes, are
recognized as "other accumulated comprehensive income" in stockholders' equity.
The fair market value of securities available for sale at December 31, 1998
totaled $195.2 million and net unrealized gains totaled $764,000. A year
earlier, securities available for sale were $131.8 million with net unrealized
gains of $1.4 million. The Bank sold two securities available for sale in 1998,
resulting in net security gains of $27,000. In 1997, the Bank realized a loss of
$8,000 on the sale of an available for sale security. 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;
no increase was required in 1998.
Deposits The Bank's branch system consists of 33 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, 1998, deposits of $1,043.3 million were $55.2 million, or
5.6%, 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 $44.3 million, or 7.8%. Time deposits increased $10.8
million, or 2.6%.
Total deposits increased $69.6 million, or 7.6%, during the year ended December
31, 1997. Core deposits increased $25.1 million, or 4.6%, while time deposits
increased $44.5 million, or 11.8%.
Borrowings The Bank's borrowings amounted to $396.6 million at December 31,
1998, an increase of $148.3 million from year-end 1997. At December 31, 1998,
the Bank's borrowings consisted primarily of FHLB advances totaling $313.7
million an increase of $107.0 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 $82.8
million at December 31, 1998, an increase of $41.3 million from the prior
year-end.
RESULTS OF OPERATIONS
Summary of Results of Operations The Company's results of operations are largely
dependent on net interest income, which is the difference between the interest
earned on loans and investments and interest paid on deposits and borrowings.
Net interest income is affected by the interest rate spread, which is the
difference between the yields earned on loans and investments and the rates of
interest paid on deposits and borrowings. The results of operations are also
affected by the level of income from loan, deposit, and mortgage banking fees,
operating expenses, the provision for possible loan losses, the impact of
federal and state income taxes, and the relative levels of interest rates and
economic activity.
For the year ended December 31, 1998, the Company reported a 14.0% increase in
net income to $16.1 million, or $1.10 basic earnings per share. This increase in
net income was due to a $6.9 million, or 13.2%, increase in net interest income.
The provision for loan losses increased to $4.0 million compared with $2.3
million for the same period last year. Non-interest income increased $1.4
million, or 11.8%, and non-interest expenses increased $3.1 million or 8.0% from
1997 to 1998.
For the year ended December 31, 1997, the Company recorded net income of $14.2
million, or $.97 basic earnings per share, compared to net income of $11.6
million, or $.80 basic earnings per share in 1996. The improvement in the
results of operations in 1997 reflects a 15.9% increase in net interest income,
primarily due to an increase in the average balance of outstanding loans and
securities as well as a 3.2% increase in non-interest income. 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 $60.0 million in 1998,
a 13.9% increase over 1997 net interest income of $52.7 million. Growth in net
interest income in 1998 as compared to that of 1997 was primarily the result of
an 18.2% increase in average earning assets. The yield on earning assets was
7.96% in 1998, compared with 8.09% in 1997. While the average balance of loans,
net of unearned discount increased by $126.3 million, or 16.7%, the yield on
loans decreased by 17 basis points to 8.66% at December 31, 1998 compared to
8.83% at December 31, 1997. This decrease in loan yield was due to competitive
downward rate pressure, coupled with three decreases in the prime-lending rate
in the fourth quarter of 1998. The yield on taxable securities remained strong
at 6.69% in 1998 compared to 6.71% in 1997, while the yield on non taxable
securities increased 22 basis points to 7.50% at December 31, 1998 compared to
7.28% a year earlier. During 1998, the average balance of interest-bearing
<PAGE>
liabilities increased by $173.5 million, or 18.5%, over 1997 average balances.
The average cost of these liabilities remained relatively the same in 1998,
amounting to 4.47% compared to 4.44% in 1997. 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 16
basis points. This is due to the decreased yield on interest earning assets as
discussed above.
The following table presents the Company's average balances, net interest
income, interest rate spread, and net interest margin for 1998, 1997, and 1996.
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.
<TABLE>
<CAPTION>
1998
INTEREST
FOR THE TWELVE MONTHS AVERAGE EARNED/ AVERAGE
ENDED DECEMBER 31, BALANCE PAID YIELD
- - --------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 15,003 $ 800 5.33%
Interest Bearing Deposits -- -- --
Taxable securities 446,890 29,902 6.69%
Non-taxable securities (1) 31,586 2,370 7.50%
Loans, net of unearned discount, (1) 884,205 76,539 8.66%
- - --------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,377,684 $109,611 7.96%
- - --------------------------------------------------------------------------------------------
Cash and Due From Banks 42,806
Other Assets 23,137
- - --------------------------------------------------------------------------------------------
Total Assets $1,443,627
============================================================================================
Interest-Bearing Liabilities
Savings and Interest Checking accounts $266,093 $5,306 1.99%
Money Market & Super Interest Checking
accounts 107,956 2,833 2.62%
Time deposits 411,801 23,293 5.66%
Federal funds purchased and
assets sold under repurchase agreements 63,228 3,390 5.36%
Treasury tax and loan notes 3,175 192 6.05%
Federal Home Loan Bank borrowings 257,681 14,555 5.65%
Subordinated Capital Notes
-- -- --
- - --------------------------------------------------------------------------------------------
Total interest-bearing liabilities $1,109,934 $49,569 4.47%
- - --------------------------------------------------------------------------------------------
Demand deposits 195,583
Corporation-obligated mandatorily
redeemable trust preferred securities
of subsidiary trust holding solely
junior subordinated debentures of the
Corporation 28,750
Other liabilities 12,805
- - --------------------------------------------------------------------------------------------
Total Liabilities 1,347,072
Stockholders' Equity 96,555
- - --------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $1,443,627
============================================================================================
Net Interest Income $60,042
==============
Interest Rate Spread (2) 3.49%
===============
Net Interest Margin (2) 4.36%
===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
INTEREST
FOR THE TWELVE MONTHS AVERAGE EARNED/ AVERAGE
ENDED DECEMBER 31, BALANCE PAID YIELD
- - --------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $3,474 $182 5.24%
Interest Bearing Deposits -- -- --
Taxable securities 390,769 26,207 6.71%
Non-taxable securities (1) 13,717 999 7.28%
Loans, net of unearned discount (1) 757,877 66,925 8.83%
- - --------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,165,837 $94,313 8.09%
- - --------------------------------------------------------------------------------------------
Cash and Due From Banks 42,667
Other Assets 18,862
- - --------------------------------------------------------------------------------------------
Total Assets $1,227,366
============================================================================================
Interest-Bearing Liabilities
Savings and Interest Checking accounts $255,069 $5,457 2.14%
Money Market & Super Interest
Checking accounts 109,156 3,105 2.84%
Time deposits 402,346 23,136 5.75%
Federal funds purchased and assets sold
under repurchase agreements 45,586 2,628 5.76%
Treasury tax and loan notes 3,283 178 5.42%
Federal Home Loan Bank borrowings 120,976 7,074 5.85%
Subordinated Capital Notes -- -- --
- - --------------------------------------------------------------------------------------------
Total interest-bearing liabilities $936,416 $41,578 4.44%
- - --------------------------------------------------------------------------------------------
Demand deposits 171,955
Corporation-obligated mandatorily redeemable
trust preferred securities of
subsidiary trust holding solely
junior subordinated debentures of
the Corporation 17,801
Other liabilities 15,109
- - --------------------------------------------------------------------------------------------
Total Liabilities 1,141,281
Stockholders' Equity 86,085
- - --------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $1,227,366
============================================================================================
Net Interest Income $52,735
==============
Interest Rate Spread (2) 3.65%
===============
Net Interest Margin (2) 4.52%
===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996
INTEREST
FOR THE TWELVE MONTHS AVERAGE EARNED/ AVERAGE
ENDED DECEMBER 31, BALANCE PAID YIELD
- - --------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $3,822 $208 5.44%
Interest Bearing Deposits 127 7 5.51%
Taxable securities 293,516 18,857 6.42%
Non-taxable securities (1) 7,411 431 5.82%
Loans, net of unearned discount, (1) 657,749 58,313 8.87%
- - --------------------------------------------------------------------------------------------
Total Interest-Earning Assets $962,625 $77,816 8.08%
- - --------------------------------------------------------------------------------------------
Cash and Due From Banks 46,840
Other Assets 15,574
- - --------------------------------------------------------------------------------------------
Total Assets $1,025,039
============================================================================================
Interest-Bearing Liabilities
Savings and Interest $257,294 $5,563 2.16%
Checking accounts
Money Market & Super 105,706 2,944 2.79%
Interest Checking accounts
Time deposits 328,232 19,164 5.84%
Federal funds purchased and assets
sold under repurchase agreements 23,418 1,284 5.48%
Treasury tax and loan notes 3,115 139 4.46%
Federal Home Loan Bank borrowings 51,382 2,885 5.61%
Subordinated Capital Notes 3,805 375 9.86%
- - --------------------------------------------------------------------------------------------
Total interest-bearing liabilities $772,952 $32,354 4.19%
- - --------------------------------------------------------------------------------------------
Demand deposits 161,475
Corporation-obligated mandatorily redeemable
trust preferred securities of subsidiary
trust holding solely junior subordinated
debentures of the Corporation --
Other liabilities 14,318
- - -------------------------------------------------------------- -------------- ---------------
Total Liabilities 948,745
Stockholders' Equity 76,294
- - --------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $1,025,039
============================================================================================
Net Interest Income $45,462
==============
Interest Rate Spread (2) 3.89%
===============
Net Interest Margin (2) 4.72%
===============
</TABLE>
(1) The total amount of adjustment to present interest income and yield on a
fully tax-equivalent basis is $899, $493, and $392 in 1998, 1997 and 1996,
respectively.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average costs of
interest-bearing liabilities. Net interest margin represents net interest income
as a percent of average interest-earning assets.
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.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 Compared To 1997 1997 Compared To 1996
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 $ 14 $ 604 $ 618 ($7) ($19) ($26)
Interest bearing deposits -- -- -- -- (7) (7)
Taxable securities (71) 3,766 3,695 1,106 6,244 7,350
Non-taxable securities (1) 70 1,301 1,371 201 367 568
Loans, net of unearned discount (1) (1,541) 11,155 9,614 (269) 8,881 8,612
Total ($1,528) $ 16,826 $ 15,298 $ 1,031 $ 15,466 $ 16,497
Expense of interest-bearing liabilities:
Savings and Interest Checking accounts ($387) $ 236 ($151) ($ 58) ($48) ($106)
Money Market and Super Interest
Checking accounts (238) (34) (272) 65 96 161
Time deposits (387) 544 157 (356) 4,328 3,972
Federal funds purchased and assets sold
under repurchase agreements (254) 1,016 762 129 1,215 1,344
Treasury tax and loan notes 20 (6) 14 32 7 39
Federal Home Loan Bank borrowings (516) 7,997 7,481 285 3,904 4,189
Subordinated capital notes (375) (375)
Total ($1,762) $ 9,753 $ 7,991 $ 97 $ 9,127 $ 9,224
Change in net interest income $ 234 $ 7,073 $ 7,307 $ 934 $ 6,339 $ 7,273
</TABLE>
(1) Interest earned on non-taxable investment securities and loans is shown on
a fully tax equivalent basis.
Interest income increased by $15.3 million, or 16.2%, to $109.6 million in 1998
as compared to the prior year-end. Interest earned on loans increased by $9.6
million, or 14.4%, reflecting an increase in average loans to $884.2 million in
1998 from $757.9 in 1997. Interest income from taxable securities increased by
$3.7 million, or 14.1%, to $29.9 million in 1998 as compared to the prior year.
Interest expense for the year ended December 31, 1998 increased to $49.6 million
from the $41.6 million recorded in 1997. Balance sheet growth was funded
primarily by increased borrowings. Interest expense on borrowings increased by
$8.3 million, or 83.6% due to an increase in the average balance of borrowings
to $324.1 million, an increase of $154.2 million or 90.8%, from the 1997
balance. The cost of these borrowings decreased to 5.60% in 1998, down 22 basis
points from the 1997 cost of 5.82%. While the average balance of interest
bearing deposits increased $19.3 million, or 2.5%, to $785.9 million, the cost
of these deposits decreased $266,000 to $31.4 million from a year earlier. The
average cost of these funds decreased 14 basis points to 4.00% in 1998. This
improvement in the cost of deposits is a reflection of active pricing management
by the Bank.
Total interest income amounted to $94.3 million in 1997, an increase of $16.5
million, or 21.2%, over 1996. This improvement was due to increases in loan and
security income.
Interest income on loans increased $8.6 million, or 14.8%, to $66.9 million in
1997 from $58.3 million a year prior. While the yield on loans decreased
slightly, the average balance increased $100.1 million, or 15.2% to $757.9
million in 1997. Interest income on taxable investment securities amounted to
$26.2 million in 1997 compared to $18.9 million in 1996. This increase amounts
to $7.4 million or 39.0% comparing 1997 to 1996. The increase resulted from
average balances growing $97.3 million to $390.8 million in 1997 from $293.5
million in 1996. Total interest expense for the year ended December 31, 1997
increased $9.2 million, or 28.5%, over 1996. 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.
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 1998 to $4.0 million, compared with
$2.3 million in 1997, reflecting higher loan originations. For the year ended
December 31, 1998, net loan charge-offs totaled $2.9 million, an increase of
$1.1 million from the prior year. As of December 31, 1998, the reserve for
<PAGE>
possible loan losses represented 1.46% of loans, net of unearned discount, as
compared to 1.53% at December 31, 1997. The reserve for possible loan losses at
December 31, 1998 represented 255.7% of nonperforming loans on that date, as
compared to coverage of 215.1% 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. This managerial evaluation is reviewed
periodically by the Company's independent public accountants as well as by a
third-party loan review consultant. As adjustments are identified, they are
reported in the earnings of the period in which they become known.
Management believes that the reserve for possible loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the reserve may be necessary based on increases in nonperforming
loans, changes in economic conditions, or for other reasons. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's reserve for possible loan losses. Federal Reserve regulators most
recently examined the Company in the second quarter of 1998. The Bank was most
recently examined by the Federal Deposit Insurance Corporation, "FDIC," in the
fourth quarter of 1997 and by the Commonwealth of Massachusetts Division of
Banks in the first quarter of 1996. No additional provision for possible loan
losses was required as a result of these examinations.
Non-Interest Income. The following table sets forth information regarding
non-interest income for the periods shown.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Service charges on deposit accounts $ 5,356 $ 5,654 $ 5,829
Trust and financial services income 3,76 3,082 2,790
Mortgage banking income 2,354 1,713 1,508
Other non-interest income 1,652 1,293 1,254
TOTAL $13,125 $11,742 $11,381
</TABLE>
Non-interest income, which is generated by deposit account service charges,
fiduciary services, mortgage banking activities, and miscellaneous other
sources, amounted to $13.1 million in 1998.
Service charges on deposit accounts, which represent 41% of total non-interest
income, decreased from $5.7 million in 1997 to $5.4 million in 1998.
Trust and Financial Services revenue increased by 22.1% to $3.8 million compared
to $3.1 million in 1997. This improvement is due to an increase in funds under
management and a strong securities market.
Mortgage banking income, $2.4 million in 1998, increased by 37.4% over 1997
income of $1.7 million. The Company's mortgage banking revenue consists
primarily of application fees and origination fees on sold loans, servicing
income and gains and losses on the sale of loans. Sales of residential mortgage
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, 1997, total non-interest income amounted to $11.7 million, an
increase of $361,000, or 3.2%, from 1996. Service charges on deposit accounts
decreased slightly 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. Again, this improvement is due to an increase in funds under
management and a strong securities market. Mortgage banking income increased
slightly to $1.7 million in 1997, up from $1.5 million in 1996.
<PAGE>
Non-Interest Expense. The following table sets forth information regarding
non-interest expense for the periods shown.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Salaries and employee benefits $21,071 $19,464 $19,968
Occupancy expenses 3,681 3,525 3,289
Equipment expenses 2,970 2,619 2,405
Advertising 775 679 838
Consulting fees 629 925 383
Legal fees - loan collection 299 583 765
Legal fees - other 531 413 452
FDIC assessment 132 112 43
Office Supplies and Printing 582 460 619
Data processing facilities management 4,166 3,727 1,908
Postage expense 694 674 767
Telephone expense 728 776 631
Other non-interest expenses 5,439 4,638 4,883
TOTAL $41,697 $38,595 $36,951
</TABLE>
Non-interest expenses totaled $41.7 million for the year ended December 31,
1998, a $3.1 million increase from the comparable 1997 period.
Salaries and employee benefits increased $1.6 million, or 8.3%, due to merit
increases, additional staffing and a tight labor market. Performance based
compensation awards also contributed to this increase.
Occupancy and equipment expenses increased $.5 million, or 8.3%, in 1998 from
1997 as a result of the Company's commitment to improve facilities and invest in
current technology. In 1998, the Bank expanded into the town of Randolph by
opening a new full service branch and built a new branch at our Hanover
location. The data processing facilities management fee increased by $.4 million
to $4.2 million in 1998. All other non-interest expenses increased $1.0 million,
or 7.6%, to $14.0 million in 1998 compared to $13.0 in 1997.
Non-interest expenses increased by $1.6 million or 4.4% to $38.6 million in 1997
compared with $37.0 million in 1996.
Salaries and employee benefits decreased $.5 million or 2.5%, to $19.5 million
in 1997, compared with $20.0 million in 1996. 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 expense increased $.5 million, or 7.9%, from 1996 to
1997, again demonstrating the Company's commitment to continually improve
facilities and technology for customers and employees. The data processing
facilities management fee, initiated in 1996, increased by $1.8 million to $3.7
million in 1997. With the full completion of the data conversion in the first
quarter of 1997, the fee increased as scheduled.
Minority Interest In 1997, Independent Capital Trust I was formed for the
purpose of issuing Trust Preferred Securities. A total of $28.8 million of 9.28%
Trust Preferred Securities were issued by the Trust. The Company recorded
distributions payable on the Trust Preferred Securities as minority interest
expense totaling $1.6 million in 1997 and $2.7 million in 1998. This increase of
$1.0 million reflects the full year impact of the Trust Preferred Securities.
The cost of issuance of the Trust Preferred Securities totaled $1.4 million and
is being amortized over the life of the Securities on a straight line basis. The
balance at December 31, 1998 and 1997 was $1.3 million and $1.4 million,
respectively.
Income Taxes For the years ended December 31, 1998 1997 and 1996 the Company
recorded combined federal and state income tax provisions of $7,804,000,
$7,326,000, and $6,153,000, respectively. These provisions reflect effective
income tax rates of 32.6%, 34.1%, and 34.7% in 1998, 1997, and 1996,
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, and $101,000 in 1997, and 1996, 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.
<PAGE>
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability management process monitors and manages, among other
things, the interest rate sensitivity of the balance sheet, the composition of
the securities portfolio, funding needs and sources, and the liquidity position.
All of these factors, as well as projected asset growth, current and potential
pricing actions, competitive influences, national monetary and fiscal policy,
and the regional economic environment are considered in the asset/liability
management process.
The Asset/Liability Management Committee, whose members comprise the Bank's
senior management, develops procedures, consistent with policies established by
the Board of Directors, which monitor and coordinate the Company's interest rate
sensitivity and the sources, uses, and pricing of funds. Interest rate
sensitivity refers to the Company's exposure to fluctuations in interest rates
and its effect on earnings. If assets and liabilities do not reprice
simultaneously and in equal volume, the potential for interest rate exposure
exists. It is management's objective to maintain stability in the growth of net
interest income through the maintenance of an appropriate mix of
interest-earning assets and interest-bearing liabilities and, when necessary,
within prudent limits, through the use of off-balance sheet hedging instruments
such as interest rate swaps. The Committee employs simulation analyses in an
attempt to quantify, evaluate, and manage the impact of changes in interest
rates on the Bank's net interest income. In addition, the Company engages an
independent consultant to render advice with respect to asset and liability
management strategy.
The Bank is careful to increase deposits without adversely impacting the
weighted average cost of those monies. Accordingly, management has implemented
funding strategies that include FHLB advances and repurchase agreement lines.
These non-deposit funds are also viewed as a contingent source of liquidity and,
when profitable lending and investment opportunities exist, access to such funds
provides a means to leverage the balance sheet. At December 31, 1998,
approximately 33% 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 $136.7 million, or 8.7% 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 had entered into interest rate swap agreements with a total notional
value of $20 million at December 31, 1998 and $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, 1998, the weighted average fixed payment rate was 6.52% and the
weighted average rate of the variable interest payments was 5.25%. As a result
of these interest rate swaps, the Bank realized net interest income of $.1
million in both 1998 and 1997 and $.2 million for the year ended December 31,
1996.
<PAGE>
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
Within Over Three
Three To Twelve Over One
Months Months Year Total
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Federal funds sold $ 38,443 -- -- $ 38,443
Securities 42,200 100,082 353,896 496,178
Loans - fixed rate (2) 40,583 111,181 530,151 681,915
Loans - floating rate (2) 185,340 25,911 43,616 254,867
Total interest-earning assets 306,566 237,174 927,663 1,471,403
Bank Owned Life Insurance -- -- 30,111 30,111
Interest-bearing liabilities:
Savings and Interest Checking accounts (3) 31,915 -- 246,391 278,306
Money Market and Super Interest
Checking accounts (3) 102,148 -- 11,663 113,811
Time certificates of deposit over $100,000 68,966 20,930 5,810 95,706
Other time deposits 88,424 182,749 65,231 336,404
Borrowings 125,347 60,000 211,224 396,571
Total interest-bearing liabilities 416,800 263,679 540,319 1,220,798
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 (110,234) (26,505) 388,705 251,966
Cumulative gap (110,234) (136,739) 251,966 251,966
Effect of hedging activities (20,000) 20,000 -- --
Cumulative hedged gap ($130,234) ($136,739) $ 251,966 $ 251,966
Interest-earning assets as a percent of
interest-bearing liabilities (cumulative) 73.55% 79.91% 120.53% 120.53%
Interest-earning assets as a percent of
total assets (cumulative) 19.46% 34.52% 93.42% 93.42%
Ratio of unhedged gap to total assets -7.00% -1.68% 24.68% 16.00%
Ratio of cumulative unhedged gap to total assets -7.00% 8.68% 16.00% 16.00%
Ratio of hedged gap to total assets -8.27% -0.41% 24.68% 16.00%
Ratio of cumulative hedged gap to total assets -8.27% -8.68% 16.00% 16.00%
</TABLE>
(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 $4.3
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
year) time horizon. Simulation analysis involves projecting future interest
income and expense from the Company's assets, liabilities and off balance sheet
positions under various scenarios. The Company's limits on interest rate risk
specify that if interest rates were to shift up or down 200 basis points,
estimated net interest income for the next 12 months should decline or increase
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:
<TABLE>
<CAPTION>
Rate Change Estimated Exposure as %
(Basis Points) of Net Interest Income
<S> <C> <C>
+200 (1.50%)
-200 1.15%
</TABLE>
See Managements' discussion on Asset/Liability management for further details on
how the Company manages its market and interest rate risk.
<PAGE>
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 established two
federal funds lines of $20.0 million. At December 31, 1998, the outstanding
balance of these lines was $5.0 million. The Bank has also established five
repurchase agreements with major brokerage firms as potential sources of
liquidity. At December 31, 1998, the Company had $30.0 million outstanding under
these agreements. In addition to these agreements, the Bank also had customer
repurchase agreements outstanding amounting to $47.4 million at December 31,
1998. As a member of the Federal Home Loan Bank, Rockland has access to
approximately $375 million of borrowing capacity. On December 31, 1998, the
Company had $313.7 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 $1.0 million of goodwill. In
addition, the Parent Company issued $29.64 million of Junior Subordinated
Debentures in conjunction with the issuance of Trust Preferred Securities by a
direct subsidiary, Independent Capital Trust I. The proceeds of this offering,
net of issuance costs, are maintained in an interest bearing checking account at
the Bank. The Parent Company has no employees and no significant liabilities or
sources of income. Expenses incurred by the Parent Company relate to its
reporting obligations under the Securities Exchange Act of 1934, as amended, and
related expenses as a publicly traded company. The Parent Company is directly
reimbursed by the Bank for virtually all such expenses. The Company actively
manages its liquidity position under the direction of the Asset/Liability
Management Committee. Periodic review under prescribed policies and procedures
is intended to ensure that the Company will maintain adequate levels of
available funds. At December 31, 1998, the Company's liquidity position was well
above policy guidelines.
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, 1998, 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,
1998, the Tier 1 leverage capital ratio for the Company and the Bank was 7.91%
and 6.32%, respectively. Capital ratios of the Company and the Bank are shown
below for the last two year-ends.
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C> <C>
The Company
Tier 1 leverage capital ratio 7.91% 8.64%
Tier 1 risk-based capital ratio 11.38% 13.52%
Total risk-based capital ratio 12.63% 14.78%
The Bank
Tier 1 leverage capital ratio 6.32% 6.36%
Tier 1 risk-based capital ratio 9.09% 9.98%
Total risk-based capital ratio 10.34% 11.23%
</TABLE>
DIVIDENDS
The Company declared cash dividends of $.40 per share in 1998, this is an
increase of $.06 per share compared to the 1997 cash dividend of $.34 per share.
The 1998 ratio of dividends paid to earnings was 35.86%. Payment of dividends by
the Company on its common stock is subject to various regulatory restrictions.
The Company is regulated by the Federal Reserve Bank and, as such, is subject to
its regulations and guidelines with respect to the payment of dividends. Since
substantially all of the funds available for the payment of dividends are
derived from the Bank, future dividends will depend on the earnings of the Bank,
its financial condition, its need for funds, applicable governmental policies
and regulations, and other such matters as the Board of Directors deems
appropriate. Management believes that the Bank will continue to generate
adequate earnings to continue to pay dividends.
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
The financial nature of the Company's consolidated financial statements is more
clearly affected by changes in interest rates than by inflation. Interest rates
do not necessarily fluctuate in the same direction or in the same magnitude as
the prices of goods and services. However, inflation does affect the Company
because, as prices increase, the money supply grows and interest rates are
affected by inflationary expectations. The impact on the Company is a noted
increase in the size of loan requests with resulting growth in total assets. In
addition, operating expenses may increase without a corresponding increase in
productivity. There is no precise method, however, to measure the effects of
inflation on the Company's consolidated financial statements. Accordingly, any
examination or analysis of the financial statements should take into
consideration the possible effects of inflation.
YEAR 2000 READINESS DISCLOSURE
The Company's State of Readiness The Company has developed plans to address the
possible exposure related to the impact of the Year 2000 on its computer systems
and key service providers. Senior Management and the Board of Directors approved
these plans. The following five phases were identified as critical to the
success of the Company's Year 2000 plan:
<TABLE>
<CAPTION>
Phase Description Progress/Anticipated Completion
<S> <C> <C>
Awareness Process that identifies the Year 2000 Complete.
problem, establishes a project team
and develops a plan to rectify.
Assessment Inventory of Information Technology Complete. Assessments need continual update based
(IT) and Non-IT systems, vendors. on changes to inventory i.e., new vendor relationship,
Assign priorities based upon level of additional equipment purchases.
risk. Establish continual monitoring
process.
Renovation Code enhancements, hardware, See Note (1). The Company has been advised by its key
software upgrades third party software vendors that software renovation is
complete. Management performed comprehensive tests
to ensure compliance.
Validation Process where upgraded hardware, The Company's testing program for mission critical systems
software etc. is tested. began in September 1998 and is expected to conclude
successfully in March 1999. This allows the rest of 1999
for additional system renovation and testing, if the need
should arise.
Implementation Systems should be certified as Year 2000 This phase will be completed in 1999.
compliant and put into production.
</TABLE>
Notes:
(1) The Company relies upon third party vendors to provide the Bank with various
products and services that are fundamental to the delivery of products and
services to customers. These third party vendors are responsible for the
renovations and replacements necessary to achieve Year 2000 compliance for their
products and services. We have established a process that will continually
monitor and test these vendors' abilities to achieve Year 2000 compliance.
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 Costs To Address The Company's Year 2000
Issues The Company expects to incur costs to replace existing personal computer
hardware and software, which will be capitalized and amortized in accordance
with the Company's existing accounting policy. The replacement of this hardware
and software is, with few exceptions, a component of the Company's existing
technology plan and not as a result of Year 2000 deficiencies. In addition to
capitalizing hardware and software, the Company will incur expenses in 1998 and
1999, estimated to be $500,000, which represents the out of pocket costs to
address the Year 2000 problem. These costs totaled $131,000 in 1998. This cost
estimate does not include the existing cost of the Data Processing Facilities
Management Agreement with Alltel. A large part of the resources associated with
this agreement are dedicated to the Year 2000 Project.
<PAGE>
Under other circumstances, these resources could be employed in improving
customer services and the introduction of new products. It is difficult to
estimate this lost opportunity cost.
The Risks Of The Company's Year 2000 Issues All financial institutions are
heavily dependent on technology and the services of third party vendors in the
delivery of products and services. An interruption in these services would
severely hamper the Company's ability to provide products and services to its
customers. For example, without telephone, power, or mainframe computer access
in 2000 the Company would have to resort to manual processing in order to serve
customers. This type of scenario could not continue indefinitely without severe
erosion in service levels and consequently earnings.
An additional type of risk that banks face is customer risk. Specifically, large
corporate borrowers face many of the Year 2000 issues that the Bank faces. To
the extent that many of these issues are not resolved and the viability of the
borrower organization is compromised, a credit risk issue could be created for
the Bank. Management has initiated a process to monitor and manage the customer
risk posed in this type of scenario.
Bank regulatory agencies have issued guidance as to the standards they will use
when assessing Year 2000 readiness. The failure of a financial institution, such
as the Company, to take appropriate steps to address deficiencies in its Year
2000 project management process may result in regulatory enforcement actions
which could have material adverse effect on the institution, result in the
imposition of civil money penalties, or result in the delay (or receipt of an
unfavorable or critical evaluation of the management of a financial institution
in connection with regulatory review) of applications seeking to acquire other
entities or otherwise expand the institution's activities.
The Company's Contingency Plans The Company has developed contingency plans in
response to the Year 2000 challenge:
Remediation Plan. This plan is designed to mitigate the risks associated with
the failure to successfully complete renovation, validation, and implementation
of mission-critical systems. The plan would be invoked in the event of
unsuccessful testing of a mission critical system and includes the designation
of alternate vendors that would essentially constitute replacement of the
existing vendor with a new one.
Business Interruption Plan This plan of action ensures the ability of the Bank
to continue functioning as a business entity in the event of unanticipated
systems failures at critical dates prior to, on and after the Year 2000. The
base assumptions of this plan are:
- Regional utility and telecommunication outages
- Spotty utility and telecommunication outages
- Failure of the Company's software applications to function in
the Year 2000.
The Company has developed a strategy to deal with each of the assumptions,
including but not limited to manual workarounds, limited hours of operation and
backup item processing support.
<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
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 27, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
(Dollars In Thousands)
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 47,755 $ 42,544
FEDERAL FUNDS SOLD 38,443 22,472
SECURITIES HELD TO MATURITY (Notes 1 and 3)
(fair value $287,542 and $309,635) 284,944 308,112
SECURITIES AVAILABLE FOR SALE (Notes 1 and 3) 195,199 131,842
(amortized cost $194,040 and $129,761)
FEDERAL HOME LOAN BANK STOCK (Note 6) 16,035 16,035
LOANS, NET OF UNEARNED DISCOUNT (Notes 1 and 4) 941,112 828,132
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (13,695) (12,674)
Net Loans 927,417 815,458
BANK PREMISES AND EQUIPMENT (Notes 1 and 5) 15,200 12,776
OTHER REAL ESTATE OWNED (Note 1) -- 2
OTHER ASSETS (Notes 1 and 8) 50,076 20,766
TOTAL ASSETS $ 1,575,069 $ 1,370,007
LIABILITIES
DEPOSITS
Demand Deposits $ 219,090 $ 189,577
Savings and Interest Checking Accounts 278,306 257,980
Money Market and Super Interest Checking Accounts 113,811 119,316
Time Certificates of Deposit over $100,000 95,706 69,424
Other Time Deposits 336,404 351,851
Total Deposits 1,043,317 988,148
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER
REPURCHASE AGREEMENTS (Notes 3 and 6) 82,376 38,327
TREASURY TAX AND LOAN NOTES (Notes 3 and 6) 471 3,217
FEDERAL HOME LOAN BANK BORROWINGS (Note 6) 313,724 206,724
OTHER LIABILITIES 10,583 12,348
TOTAL LIABILITIES $ 1,450,471 $ 1,248,764
Corporation-obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation
Outstanding: 1,150,000 shares in 1998 and 1997 (Note 13) 28,750 28,750
STOCKHOLDERS' EQUITY (Notes 1 and 11)
Preferred Stock, $.01 par value. Authorized: 1,000,000 Shares
Outstanding: No Shares in 1998 or 1997 -- --
Common Stock, $.01 par value. Authorized: 30,000,000
Outstanding: 14,863,821 Shares in 1998 and
14,801,904 Shares in 1997 149 148
Treasury Stock: 406,638 Shares in 1998
and No Shares in 1997 (6,431) --
Surplus 45,303 45,147
Retained Earnings 56,063 45,825
Other Accumulated Comprehensive Income, Net of Tax (Note 3) 764 1,373
TOTAL STOCKHOLDERS' EQUITY 95,848 92,493
TOTAL LIABILITIES, MINORITY INTEREST IN
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $ 1,575,069 1,370,007
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
(Dollars In Thousands, Except Share and Per Share Data)
INTEREST INCOME
<S> <C> <C> <C>
Interest on Loans (Notes 1 and 4) $ 76,404 $ 66,739 $ 58,055
Interest and Dividends on Securities (Note 3) 31,508 26,899 19,154
Interest on Federal Funds Sold 800 182 208
Interest on Interest Bearing Deposits -- -- 7
Total Interest Income 108,712 93,820 77,424
INTEREST EXPENSE
Interest on Deposits 31,432 31,697 27,670
Interest on Borrowings (Notes 1 and 6) 18,137 9,881 4,310
Interest on Subordinated Capital Notes -- -- 374
Total Interest Expense 49,569 41,578 32,354
Net Interest Income 59,143 52,242 45,070
PROVISION FOR POSSIBLE LOAN
LOSSES (Notes 1 and 4) 3,960 2,260 1,750
Net Interest Income After Provision
For Possible Loan Losses 55,183 49,982 43,320
NON-INTEREST INCOME
Service Charges on Deposit Accounts 5,356 5,654 5,829
Trust and Financial Services Income 3,763 3,082 2,790
Mortgage Banking Income 2,354 1,713 1,508
Other Non-Interest Income 1,652 1,293 1,254
Total Non-Interest Income 13,125 11,742 11,381
NON-INTEREST EXPENSES
Salaries and Employee Benefits (Note 9) 21,071 19,464 19,968
Occupancy Expenses (Notes 5 and 12) 3,681 3,525 3,289
Equipment Expenses 2,970 2,619 2,405
Other Non-Interest Expenses (Note 10) 13,975 12,987 11,289
Total Non-Interest Expenses 41,697 38,595 36,951
Minority Interest 2,668 1,645 --
INCOME BEFORE INCOME TAXES 23,943 21,484 17,750
PROVISION FOR INCOME TAXES (Notes 1 and 8) 7,804 7,326 6,153
NET INCOME $ 16,139 $ 14,158 $ 11,597
BASIC EARNINGS PER SHARE $ 1.10 $ 0.97 $ 0.80
DILUTED EARNINGS PER SHARE $ 1.08 $ 0.95 $ 0.79
Weighted average common shares (Basic) (Notes 1 and 11) 14,730,193 14,666,420 14,556,481
Common stock equivalents 215,526 305,805 194,813
Weighted average common shares (Diluted) (Notes 1 and 11) 14,945,719 14,972,225 14,751,294
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER
ACCUMULATED
COMMON TREASURY RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS INCOME TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 145 -- $ 43,777 $ 28,710 ($60) $ 72,572
Net Income 11,597 11,597
Cash Dividends Declared ($.25 per share) (3,641) (3,641)
Proceeds From Exercise of Stock
Options (Note 11) 105 105
Tax Benefit on Stock Option Exercises 54 54
Common Stock Sold Under Dividend Reinvestment
and Stock Purchase Plan (Note 11) 1 497 498
Change in Unrealized Loss on Securities
Available For Sale, Net of Tax (Note 3) (75) (75)
BALANCE DECEMBER 31, 1996 146 -- 44,43 36,666 (135) 81,110
Net Income 14,158 14,158
Cash Dividends Declared ($.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 -- 45,14 45,825 1,373 92,493
Net Income 16,139 16,139
Cash Dividends Declared ($.40 per share) (5,901) (5,901)
Proceeds From Exercise of Stock
Options (Note 11) 1 409 156 566
Treasury Stock Repurchase, 433,338 Shares (6,840) (6,840)
Change in Unrealized Gain on Securities
Available For Sale, Net of Tax (Note 3) (609) (609)
BALANCE DECEMBER 31, 1998 $ 149 ($ 6,431) $ 45,303 $ 56,063 $ 764 $ 95,848
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Net Income $ 16,139 $ 14,158 $ 11,597
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on securities available for sale -
Unrealized holding gains (losses) arising during period (591) 1,503 (75)
Less: reclassification adjustments for gains (losses)
included in net income (18) 5 --
Other Comprehensive Income (609) 1,508 (75)
Comprehensive Income $ 15,530 $ 15,666 $ 11,522
</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, 1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 16,139 $ 14,158 $ 11,597
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Depreciation and amortization 4,202 3,160 3,067
Provision for possible loan losses 3,960 2,260 1,750
Deferred income taxes 65 76 2,044
Loans originated for resale (76,223) (42,850) (41,108)
Proceeds from mortgage loan sales 76,028 42,793 41,108
Loss (gain) on sale of mortgages 195 57 --
Loss (gain) on sale of investments (27) 8 --
Gain recorded from mortgage servicing rights (748) (423) (401)
Other Real Estate Owned recoveries (188) (131) --
Changes in assets and liabilities:
Increase in other assets (28,682) (1,111 (2,208)
Decrease in other liabilities (1,497) (40 (789)
TOTAL ADJUSTMENTS (22,915) 4,129 3,463
NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES (6,776) 18,287 15,060
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Interest Bearing Deposit Investment -- -- 296
Proceeds from maturities of Securities Held to Maturity 106,545 88,070 73,661
Proceeds from maturities/sales of Securities Available For Sale 68,702 20,641 5,964
Purchase of Securities Held to Maturity (84,211) (106,195) (138,710)
Purchase of Securities Available For Sale (133,688) (123,937) --
Purchase of Federal Home Loan Bank Stock -- (8,477) (4,096)
Net increase in Loans (116,004) (134,533) (69,335)
Proceeds from sale of Other Real Estate Owned 244 40 968
Investment in Bank Premises and Equipment (5,041) (4,200) (3,678)
NET CASH USED IN INVESTING ACTIVITIES (163,453) (268,231) (134,930)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Time Deposits 10,835 44,493 55,538
Net increase (decrease) in Other Deposits 44,334 25,083 (8,051)
Net increase (decrease) in Federal Funds Purchased
and Assets Sold Under Repurchase Agreements 44,049 37,487 (3,220)
Net increase in Federal Home Loan Bank Borrowings 107,000 128,724 58,000
Net increase (decrease) in Treasury Tax & Loan Notes (2,746) 921 (1,735)
Repayment of Capital Notes -- -- (4,843)
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 566 716 657
Payments for Treasury stock purchase (6,840) -- --
Dividends Paid (5,787) (4,700) (3,344)
NET CASH PROVIDED FROM FINANCING ACTIVITIES 191,411 261,474 93,002
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,182 11,530 (26,868)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 65,016 53,486 80,354
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 86,198 $ 65,016 $ 53,486
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowings $ 51,212 $ 45,453 $ 31,497
Minority Interest 2,668 1,638 --
Income taxes 7,303 6,110 5,978
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
OREO Properties Acquired 85 503 601
</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 and assets purchased under
resale agreements. Generally, federal funds are sold for up to two week periods.
The accompanying notes are an integral part of these consolidated financial
statements.
<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 33 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.
CASH
Cash and cash equivalents include cash, cash items, due from banks and federal
funds sold having original maturities of less than 90 days.
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, 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. Neither the Company nor the Bank engages in
the trading of investment securities.
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 against 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.
<PAGE>
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.
LOAN ORIGINATION FEES
Loan origination and commitment fees and certain related costs are deferred and
amortized over the lives of the underlying loans. Net deferred fees included in
loans at December 31, 1998 and 1997 were $267,000 and $242,000 respectively.
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.
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, 1998 is $1,033,000.
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, 1998 is $1,307,000. 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.
MORTGAGE SERVICING RIGHTS
Effective January 1, 1997, the Bank adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
as amended by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of Financial Accounting Standards Board (FASB) Statement No. 125."
This statement, which supersedes SFAS No. 122, "Accounting for Mortgage
Servicing Rights," provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The standards
are based on consistent application of a financial components approach that
focuses on control. After a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides
<PAGE>
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The adoption of this statement
did not have a material impact on the Bank's financial position or results of
operations.
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 (APB) 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 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) in a full set
of general purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. 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. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Comprehensive income is reported in this financial statement.
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 has
been 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.
RECENT PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires computer
software costs associated with internal-use software to be expensed as incurred
until certain capitalization criteria are met. The Company will adopt SOP 98-1
on January 1, 1999 and does not believe that the adoption will have a material
impact on its financial statements.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires all costs associated with pre-opening and
organization activities to be expensed as incurred.
The Company will adopt SOP 98-5 beginning January 1, 1999. The Company believes
that the adoption of SOP 98-5 will have no material impact on its financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosure about
Pensions and Other Postretirement Benefits" - an amendment to FASB Statements
Nos. 87, 88 and 106. This statement revises employer's disclosures about pension
and other postretirement benefit plans. It does not change the measurement or
recognition of those plans but standardizes the disclosure requirement. This
statement suggests combined formats for presentation of pension and other
postretirement benefit disclosure. Restatement of disclosures for earlier
periods is required. This statement is effective for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 132 did not have a material
effect on the Company's primary financial statement, but did affect the
disclosure of employee benefits contained elsewhere herein (Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in income unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the statement of income and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. A company may also
<PAGE>
implement the statement as of the beginning of any fiscal quarter after issuance
(that is, financial quarters beginning June 16, 1998 and thereafter). SFAS No.
133 cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998). The Company
has not yet quantified the impact of adopting SFAS No. 133 on its consolidated
financial statements and has not determined the timing nor method of its
adoption of the statement. However, the Company does not expect that the
adoption of this statement will have a material impact on its financial position
or results of operations. In October 1998, the FASB issued SFAS No. 134,
"Accounting for Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. This statement shall be effective for
the first fiscal quarter beginning after December 15, 1998, and is not expected
to have a material impact on the Company's financial position.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value Of Financial Instruments," requires
disclosure of fair value information about financial instruments for which it is
practicable to estimate that value, whether or not recognized on the balance
sheet. In cases where quoted market values are not available, fair values are
based upon estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. The carrying amount reported on the balance sheet for cash, federal
funds sold and assets purchased under resale agreements, and interest bearing
deposits approximates those assets' fair values. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following table reflects the
book and fair values of financial instruments, including on-balance sheet and
off-balance sheet instruments as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and Due From Banks $ 47,755 $ 47,755 $ 42,544 $ 42,544 (a)
Federal Funds Sold 38,443 38,443 22,472 22,472 (a)
Securities Held To Maturity 284,944 287,542 308,112 309,635 (b)
Securities Available For Sale 195,199 195,199 131,842 131,842 (b)
Federal Home Loan Bank Stock 16,035 16,035 16,035 16,035 (c)
Net Loans 927,417 931,059 815,458 815,572 (d)
Mortgage Servicing Rights 1,145 1,145 641 641 (f)
FINANCIAL LIABILITIES
Demand Deposits 219,090 219,090 189,577 189,577 (e)
Savings and Now Accounts 278,306 278,306 257,980 257,980 (e)
Money Market and Super Interest
Checking Accounts 113,811 113,811 119,316 119,316 (e)
Time Deposits 432,110 433,623 421,275 420,562 (f)
Federal Funds Purchased and Assets
Sold Under Repurchase Agreements 82,376 83,125 38,327 38,409 (f)
Treasury Tax and Loan Notes 471 471 3,217 3,217 (a)
Federal Home Loan Bank Borrowings 313,724 308,239 206,724 206,548 (f)
Corporation-obligated Mandatorily
Redeemable Trust Preferred Securities
of Subsidiary Trust Holding Solely
Junior Subordinated Debentures of
the Corporation 28,750 29,756 28,750 30,188 (f)
UNRECOGNIZED FINANCIAL INSTRUMENTS
Standby Letters of Credit -- 13 -- 9 (g)
Interest Rate Swap Agreements -- 131 -- 130 (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 was estimated by discounting anticipated
future cash payments using rates currently available for instruments with
similar remaining maturities.
<PAGE>
(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.
(3) SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
securities held to maturity at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government Agency
Securities $ 29,197 $ 191 ($419) $ 28,969 $ 51,567 $ 201 ($691) ($51,077)
Mortgage-Backed
Securities 143,292 1,916 (293 144,915 199,245 2,136 (562) 200,819
Collateralized Mortgage
Obligations 17,799 89 (7 17,817 34,515 86 (49) 34,552
State, County, and
Municipal Securities 40,365 820 (52 41,133 21,385 408 (6) 21,787
Other Securities 54,291 835 (418) 54,708 1,400 -- -- 1,400
Total $284,944 $ 3,851 ($1,253) $287,542 $308,112 $ 2,831 ($1,308) $309,635
</TABLE>
The amortized cost, gross unrealized gains and losses, and fair value of
securities available for sale at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government Agency
Securities $ 8,999 $ 46 -- $ 9,045 -- -- -- --
Mortgage-Backed
Securities $ 136,014 1,527 (131) 137,410 129,761 2,136 (55) $131,842
Collateralized Mortgage
Obligations 48,677 19 (376) 48,320 -- -- -- --
Equity Securities 35 74 -- 424 -- -- -- --
Total $ 194,040 $ 1,666 ($507) $ 195,199 $129,761 $2,136 ($55) $131,842
</TABLE>
In 1998, the Bank realized a net gain for $27,000 on the sales of two available
for sale securities. In 1997, the Bank recognized a loss of $8,000 on the sale
of an available for sale security.
A schedule of the contractual maturities of securities held to maturity and
securities available for sale at December 31, 1998 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 $ 15,004 $ 15,031 -- --
Due from one year to five years 29,502 29,402 1,752 1,749
Due from five to ten years 53,350 54,118 18,761 18,767
Due after ten years 187,088 188,991 173,177 174,259
Total $284,944 $287,542 $193,690 $194,775
</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, 1998
and 1997, investment securities carried at $110,579,000 and $87,978,000,
respectively, were pledged to secure public deposits, assets sold under
repurchase agreements, treasury tax and loan notes, and for other purposes as
required by law. At year end 1998 and 1997, 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
The loan composition, net of unearned discount, at December 31, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
1998 1997
(In Thousands)
<S> <C> <C>
Commercial $127,019 $138,541
Real Estate - Commercial Mortgage 261,332 238,930
Real Estate - Residential Mortgage 197,807 207,555
Real Estate - Construction 44,710 34,227
Consumer - Installment 315,419 227,700
Consumer - Other 8,656 9,849
Gross Loans 954,943 856,802
Unearned Discount 13,831 28,670
Loans, Net of Unearned Discount $941,112 $828,132
</TABLE>
In addition to the loans noted above, at December 31, 1998 and December 31,
1997, the Bank serviced approximately $256,289,000 and $263,225,000,
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, 1998, and 1997, loans held for sale amounted to approximately
$5,600,000 and $4,500,000, respectively. No adjustments for unrealized losses
were required at December 31, 1998 and 1997.
As of December 31, 1998 and 1997 the Bank's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 was as
follows:
<TABLE>
<CAPTION>
1998 1997
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired loans:
<S> <C> <C> <C> <C>
Valuation allowance required $1,479 $ 422 $2,112 $ 585
No valuation
allowance required 476 -- 2,065 --
Total $1,955 $ 422 $4,177 $ 585
</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, 1998 and 1997 was $3,500,000 and $4,200,000,
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 $159,000 and $190,000 for the years ended December 31, 1998 and
1997.
The aggregate amount of loans in excess of $60,000 outstanding to directors,
principal officers, and principal security holders at December 31, 1998 and 1997
and for the years then ended is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance, January 1, 1997 $15,286
New loans 6,286
Loan repayments (6,447)
Balance, December 31, 1997 $15,125
New loans 1,694
Loan repayments (5,250)
Balance, December 31, 1998 $11,569
</TABLE>
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, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Reserve, beginning of year $ 12,674 $ 12,221 $ 12,088
Loans charged off (4,097) (2,906) (2,825)
Recoveries on loans previously
charged off 1,158 1,099 1,208
Net charge-offs (2,939) (1,807) (1,617)
Provision charged to expense 3,960 2,260 1,750
Reserve, end of year $ 13,695 $ 12,674 $ 12,221
</TABLE>
<PAGE>
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
Cost: (In Thousands)
<S> <C> <C>
Land $ 335 $ 335
Bank Premises 10,342 8,907
Leasehold Improvements 7,029 6,542
Furniture and Equipment 20,436 17,467
Total Cost 38,142 33,251
Accumulated Depreciation (22,942) (20,475)
Net Bank Premises and Equipment $ 15,200 $ 12,776
</TABLE>
Depreciation and amortization expense related to bank premises and equipment was
$2,617,000 in 1998, $2,066,000 in 1997, and $1,643,000 in 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, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars In Thousands)
<S> <C> <C> <C>
Balance outstanding at
end of year $82,847 $41,544 $ 3,136
Average daily balance
outstanding 66,403 48,869 26,534
Maximum balance outstanding
at any month end 89,741 84,945 44,545
Weighted average interest rate
for the year 5.39% 5.74% 5.36%
Weighted average interest rate
at end of year 4.72% 5.99% 5.35%
</TABLE>
The Bank has established two federal funds lines of $20 million. Borrowings
under these lines are classified as federal funds purchased. The Company has
established five repurchase agreements with major brokerage firms. Borrowings
under these agreements are classified as assets sold under repurchase
agreements. At December 31, 1998, the Bank had $30.0 million outstanding under
these lines, while at December 31, 1997, there was $36.4 million outstanding.
The Bank also utilizes customer repurchase agreements as an additional source of
funds. The balance outstanding was $47.4 million and $1.0 million at December
31, 1998 and 1997 respectively. Federal Home Loan Bank (FHLB) borrowings are
collateralized by a blanket pledge agreement on the Bank's FHLB stock, certain
qualified investment securities, deposits at the Federal Home Loan Bank, and
residential mortgages held in the Bank's portfolio. The borrowing capacity at
the Federal Home Loan Bank is approximately $375 million. A schedule of the
maturity distribution of FHLB advances with the weighted average interest rates
at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $107,500 5.22% $140,500 5.73%
Due from one year to five years 206,224 5.44% 66,224 6.25%
$313,724 5.36% $206,724 5.90%
</TABLE>
(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.
<PAGE>
<TABLE>
<CAPTION>
Net Income Weighted Average Shares Net Income Per Share
1998 1997 1996 1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $16,139 $14,158 $11,597 $14,730 $14,666 $14,556 $1.10 $0.97 $0.80
Effect of dilutive securities -- -- -- 216 306 195 0.02 0.02 0.01
Effect of dilutive securities $16,139 $14,158 $11,597 $14,946 $14,972 $14,751 $1.08 $0.95 $0.79
</TABLE>
Options to purchase 126,000 shares of common stock were outstanding during the
year but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares.
Basic EPS was computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. The effect of this
accounting change on previously reported EPS data was as follows:
<TABLE>
<CAPTION>
Per share amounts: 1996
<S> <C>
Primary EPS as reported $0.79
Effect of SFAS No. 128 0.01
Basic EPS as restated $0.80
</TABLE>
(8) INCOME TAXES
The provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
Current Provision (In Thousands)
<S> <C> <C> <C>
Federal $ 7,509 $ 6,129 $ 3,301
State 230 428 808
TOTAL CURRENT
PROVISION 7,739 6,557 4,109
Deferred Provision (Benefit)
Federal 49 508 1,639
State 14 387 506
Change in Valuation Allowance 2 (126) (101)
TOTAL DEFERRED
PROVISION 65 769 2,044
TOTAL PROVISION $ 7,804 $ 7,326 $ 6,153
</TABLE>
The income tax provision shown in the consolidated statements of income differs
from the expected amount, determined by applying the statutory federal tax rate
of 35% to income before income taxes. The following summary reconciles the
differences between these amounts.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Computed statutory federal
income tax provision $ 8,380 $ 7,519 $ 6,212
Nontaxable interest, net (541) (302) (266)
State taxes, net of federal tax benefit 160 404 854
Low-income housing credits (215) (215) (110)
Interest on Bank-owned life insurance (39) -- --
Change in valuation allowance 2 (126) (101)
Other, net 57 46 (436)
TOTAL PROVISION $ 7,804 $ 7,326 $ 6,153
</TABLE>
<PAGE>
The net deferred tax asset which is included in other assets amounted to
approximately $1,718,000 and $1,452,000 at December 31, 1998 and 1997,
respectively. The tax-effected components of the net deferred tax asset at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997
(In Thousands)
<S> <C> <C>
Reserve for possible loan losses $ 4,664 $ 4,436
Tax depreciation 539 778
Write-down of OREO 66 112
Mark to market adjustment (4,009) (3,968)
Accrued expenses not deducted
for tax purposes 498 569
Deferred income 91 126
State taxes 312 266
SFAS 115 adjustment (379) (728)
Other, net (33) (110)
TOTAL DEFERRED TAX ASSET 1,749 1,481
Valuation allowance (31) (29)
NET DEFERRED TAX ASSET $ 1,718 $ 1,452
</TABLE>
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,
1998, the valuation allowance relates to certain state deferred tax assets that
may expire prior to realization.
(9) EMPLOYEE BENEFITS PENSION AND POSTRETIREMENT BENEFITS PENSION
Effective January 1997, the Bank's pension plan joined a multiple employer
structure under the Financial Institutions Retirement Fund. All plan assets were
contributed to the Fund. This transaction qualified for accounting purposes as a
plan termination. The accrued pension liability at December 31, 1996 was
recognized as income in 1997. There was no contribution requirement for 1998 or
1997 and consequently no pension expense was recognized in either year.
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 regulation on an annual basis.
POSTRETIREMENT BENEFITS
Employees retiring from the Bank on or after attaining age 65 and who have
rendered at least 10 years of continuous service to the Company are entitled to
postretirement health care benefits. These benefits are subject to deductibles,
copayment provisions and other limitations. The Company may amend or change
these benefits periodically. Effective January 1, 1993, the Company adopted SFAS
No. 106, "Employers' Accounting For Postretirement Benefits Other Than
Pensions," which requires the recognition of postretirement benefits over the
service lives of the employees rather than on a cash basis. The Company elected
to recognize its accumulated benefit obligation of approximately $678,000 at
January 1, 1993 prospectively on a straight-line basis over the average life
expectancy of current retirees, which is anticipated to be less than 20 years.
Postretirement benefit expense was $106,000, $87,000 and $107,000 in 1998, 1997
and 1996 respectively. The total cost of all postretirement benefits charged to
income was $126,000, $103,000, and $160,000 in 1998, 1997, and 1996,
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>
The following table illustrates the status of the pension and postretirement
benefit plans at December 31 for the years presented:
<TABLE>
<CAPTION>
Postretirement
Pension Benefits
1996 1998 1997
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 12,792 $ 824 $ 840
Service cost 877 14 13
Interest cost 1,073 56 52
Actuarial gain 1,914 -- --
Benefits paid (619) (110) (81)
Benefit obligation at end of year $ 16,037 $ 784 $ 824
Change in plan assets
Fair value of plan assets at
beginning of year $ 14,524 -- --
Actual return on plan assets 1,710 -- --
Employer contribution 1,201 -- --
Benefits paid (619) -- --
Fair value of plan assets at
end of year $ 16,816 $ 784 $ 824
</TABLE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits
1996 1998 1997
<S> <C> <C> <C>
Funded status $ 779 (784) (824)
Unrecognized net actuarial loss (1,790) -- --
Unrecognized net
transition liability (asset) (286) 451 491
Unrecognized prior service cost 903 -- --
Prepaid (accrued) benefit cost ($ 394) ($333) ($ 333)
Weighted-average assumptions
as of December 31
Discount rate 7.00% 7.00% 7.00%
Expected return on plan assets 10.00% -- --
Rate of compensation increase 5.50% -- --
Components of net periodic benefit cost
Service cost $ 877 $ 14 $ 13
Interest cost 1,073 56 57
Expected return on plan assets (1,110) -- --
Amortization of transition obligation -- 36 17
Amortization of prior service cost 33 -- --
Recognized net actuarial loss (219) -- --
Net periodic benefit cost $ 654 $ 106 $ 87
</TABLE>
OTHER EMPLOYEE BENEFITS
In 1994, the Bank implemented an incentive compensation plan in which senior
management, officers, and non-officer employees are eligible to participate at
varying levels. The plan provides for awards based upon the attainment of a
combination of Bank, divisional, and individual performance objectives. The
expense for this plan amounted to $1,366,000, $1,191,000 and $970,000 in 1998,
1997 and 1996, 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
1998, 1997 and 1996, the expense for this plan amounted to $346,000, $302,000
and $307,000, respectively.
In 1998 the Bank entered into an agreement to provide postretirement benefits to
an executive officer. The Bank has established rabbi trust funds to aid in its
accumulation of amounts necessary to satisfy the contractual liability to pay
such benefits. This agreement provides for the Bank to pay all benefits
thereunder from its general assets, and the establishment of these trust funds
does not reduce or otherwise affect the Bank's continuing liability to pay
benefits from such assets except that the Bank's liability shall be offset by
actual benefit payments made from such rabbi
<PAGE>
trust. The related trust assets totaled $424,000 at December 31, 1998. The
liability is being recorded over the remaining service period of the executive
officer. For 1998, the amount of expense recognized related to this plan was
approximately $25,000.
The Bank maintains a supplemental retirement plan for six executive officers. In
connection with funding this plan, the Bank has purchased life insurance
policies for each of the individuals. The cash surrender value of the insurance
policies as of December 31, 1998 and 1997 was $1.1 million and $800,000
respectively. For 1998 and 1997, the impact of this plan on the income statement
was a benefit of $5,000 and an expense of $18,000, respectively. In 1998, the
Bank purchased $30.0 million of bank owned life insurance. The value of this
life insurance at December 31, 1998 was $30.1 million.
(10) OTHER NON-INTEREST EXPENSES
Included in other non-interest expenses for each of the three years in the
period ended December 31, 1998 were the following:
<TABLE>
<CAPTION>
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Advertising $ 775 $ 679 $ 838
Consulting fees 629 925 383
Legal fees - loan collection 299 583 765
Legal fees - other 531 413 452
FDIC assessment 132 112 43
Office Supplies and Printing 582 460 619
Data processing facilities management 4,166 3,727 1,908
Postage Expense 694 674 767
Telephone Expense 728 776 631
Other non-interest expenses 5,439 4,638 4,883
TOTAL $13,975 $12,987 $11,289
</TABLE>
(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:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net Income: As Reported (000's) $16,139 $14,158 $11,597
Pro Forma 15,925 14,068 11,507
Basic EPS: As Reported $1.10 $.97 $.80
Pro Forma $1.08 $.96 $.79
Diluted EPS: As Reported $1.08 $.95 $.79
Pro Forma $1.07 $.94 $.78
</TABLE>
Because the SFAS No. 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 241,600, 123,000
and 638,075 shares, respectively, through December 31, 1998. At December 31 1998
no shares were available for grant under the 1987 Plan due to the Plan's
expiration in 1997. Under each Plan the option exercise price equals the market
price on date of grant. All options vest between six months and two years and
all expire between 1999 and 2008.
<PAGE>
A summary of the status of the Company's three stock option plans at December
31,1998 and December 31, 1997 and changes during the years then ended is
presented in the table and narrative below:
<TABLE>
<CAPTION>
1998 1997
Wtd Avg Wtd Avg
Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C>
Balance, January 1 570,674 $ 9.22 631,557 $ 5.81
Granted 137,650 $17.52 141,950 $16.50
Exercised (88,617) $ 6.39 (197,403) $ 3.63
Canceled (9,250) $15.73 (5,430) $ 6.88
Balance, December 31 610,457 $11.40 570,674 $ 9.22
Exercisable
at December 31 405,965 376,706
Weighted average fair value
of options granted $ 2.68 $ 2.86
</TABLE>
337,907 of the 610,457 options outstanding at December 31,1998 have exercise
prices between $3.19 and $9.38, with a weighted average exercise price of $6.90
and a weighted average remaining contractual life of 5.5 years. 316,394 of these
options are exercisable; their weighted average exercise price is $6.73. The
remaining 272,550 options have exercise prices between $10.25 and $19.25, with a
weighted average exercise price of $16.98 and a weighted average remaining
contractual life of 9.4 years. 89,571 of these options are exercisable; their
weighted average exercise price is $16.49.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants under the 1997 and 1996 plans:
<TABLE>
<CAPTION>
1997 Plan 1996 Plan
<S> <C> <C>
Risk Free Interest Rate
1998 4.67 5.56
1997 5.69 6.66
Expected Dividend Yields
1998 2.31 1.87
1997 2.15 2.15
Expected Lives
1998 4 years 4 years
1997 4 years 4 years
Expected Volatility
1998 15% 15%
1997 15% 15%
</TABLE>
(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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
(In Thousands)
Commitments to extend credit:
<S> <C> <C>
Fixed Rate $ 33,077 $ 1,990
Adjustable Rate 7,034 10,100
Unused portion of existing credit lines 133,038 139,880
Unadvanced construction loans 20,958 11,436
Standby letters of credit 1,463 2,255
Interest rate swaps - notional value 20,000 70,000
</TABLE>
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
<PAGE>
established in the contract. The Bank evaluates each customer's creditworthiness
on an individual basis. The amount of collateral obtained upon extension of the
credit is based upon management's credit evaluation of the customer. Collateral
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial real estate. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since some of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing 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 6.521% and 5.93% at December 31, 1998 and 1997,
respectively, while the weighted average rates of variable interest payments,
based on the 3-month London Interbank Offering Rate (LIBOR), were 5.25% and
5.920% at December 31, 1998 and 1997, respectively. As a result of these
interest rate swaps, the Bank realized net interest income of $.1 million for
the years ended December 31, 1998 and 1997 respectively and $.2 million for the
year ended December 31, 1996. 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,
1998 the Bank had a net receivable of $19,000 and a net payable of $14,000 at
December 31, 1997, on the interest rate swaps.
LEASES
The Company leases equipment, office space and certain branch locations under
noncancellable operating leases. The following is a schedule of minimum future
lease commitments under such leases as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1,619
2000 1,403
2001 1,287
2002 1,077
2003 994
Thereafter 3,286
Total future minimum rentals $9,666
</TABLE>
Rent expense incurred under operating leases was approximately $2.0 million in
1998, $2.3 million in 1997, and $2.3 million in 1996. Renewal options ranging
from 3 to 10 years exist for several of these leases.
OTHER CONTINGENCIES
At December 31, 1998 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 $16.7 million and
$14.8 million at December 31, 1998 and 1997, respectively.
In June 1998, the Company invested $.4 million in Zero Stage Capital Associates
VI, LLC, a Massachusetts limited liability company. The Company's remaining
commitment is $1.1 million over the next four years.
On May 1, 1998 and August 12, 1998, the Company entered into master commitments
to deliver or sell $20.0 million and $50.0 million of residential mortgage loans
to federal agencies on or before April 30, 1999 and March 31, 1999,
respectively. As of December 31, 1998, the unfulfilled portion that remained to
be delivered under the $50.0 million commitment was approximately $26.4 million.
The $20 million commitment has been filled.
(13) CORPORATION-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
In 1997, Independent Capital Trust I (the "Trust") was formed for the purpose of
issuing trust preferred securities (the "Trust Preferred Securities") and
investing the proceeds of the sale of these securities in $29.64 million of
9.28% junior subordinated debentures issued by the Company. A total of $28.75
million of 9.28% Trust Preferred
<PAGE>
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 1998 and 1997 the Company paid $2.7 million and $1.6
million of trust preferred security distributions, respectively. The cost of
issuance of the Trust Preferred Securities totaled $1.4 million and is being
amortized over the life of the Securities on a straight-line basis. The balance
at December 31, 1998 and 1997 was $1.3 million and $1.4 million respectively.
Amortization of these issuance costs was $74,000 in 1998 and $47,000 in 1997.
The Company unconditionally guarantees all of the Trust's obligations under the
Trust Preferred Securities.
(14) REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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, 1998, that the
Company and the Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notification from the Federal Reserve
Bank of Boston relating to the Company and from the Federal Deposit Insurance
Corp. relating to the Bank, both the Company and the Bank were categorized 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 these
notifications that management believes have changed the Company's or the Bank's
category. The Company and the Bank's actual capital amounts and ratios are also
presented in the following table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
As of December 31, 1998: (Dollars In Thousands)
Company: (consolidated)
Total capital (to risk weighted assets) $134,865 12.63% greater than or equal to $85,406 greater than or equal to 8.0%
Tier 1 capital (to risk weighted assets) 121,484 11.38 greater than or equal to 42,703 greater than or equal to 4.0
Tier 1 capital (to average assets) 121,484 7.91 greater than or equal to 61,433 greater than or equal to 4.0
Bank:
Total capital (to risk weighted assets) $110,219 10.34% greater than or equal to $85,286 greater than or equal to 8.0%
Tier 1 capital (to risk weighted assets) 96,857 9.09 greater than or equal to 42,643 greater than or equal to 4.0
Tier 1 capital (to average assets) 96,857 6.32 greater than or equal to 61,326 greater than or equal to 4.0
As of December 31, 1997:
Company: (consolidated)
Total capital (to risk weighted assets) $128,044 14.78% greater than or equal to $69,321 greater than or equal to 8.0%
Tier 1 capital (to risk weighted assets) 117,191 13.52 greater than or equal to 34,661 greater than or equal to 4.0
Tier 1 capital (to average assets 117,191 8.64 greater than or equal to 54,266 greater than or equal to 4.0
Bank:
Total capital (to risk weighted assets) $97,078 11.23% greater than or equal to $69,145 greater than or equal to 8.0%
Tier 1 capital (to risk weighted assets) 86,259 9.98 greater than or equal to 34,572 greater than or equal to 4.0
Tier 1 capital (to average assets) 86,259 6.36 greater than or equal to 54,233 greater than or equal to 4.0
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
<S> <C> <C>
As of December 31, 1998:
Company: (consolidated)
Total capital (to risk weighted assets) N/A N/A
Tier 1 capital (to risk weighted assets) N/A N/A
Tier 1 capital (to average assets) N/A N/A
Bank:
Total capital (to risk weighted assets) greater than or equal to $106,607 greater than or equal to 10.0%
Tier 1 capital (to risk weighted assets) greater than or equal to 63,964 greater than or equal to 6.0
Tier 1 capital (to average assets) greater than or equal to 76,657 greater than or equal to 5.0
As of December 31, 1997:
Company: (consolidated)
Total capital (to risk weighted assets) N/A N/A
Tier 1 capital (to risk weighted assets) greater than or equal to N/A N/A
Tier 1 capital (to average assets greater than or equal to N/A N/A
Bank:
Total capital (to risk weighted assets) greater than or equal to $ 86,431 greater than or equal to 10.0%
Tier 1 capital (to risk weighted assets) greater than or equal to 51,858 greater than or equal to 6.0
Tier 1 capital (to average assets) greater than or equal to 67,791 greater than or equal to 5.0
</TABLE>
<PAGE>
(15) BUSINESS SEGMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments of a
business enterprise. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are
components of an enterprise which are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
The Company's chief operating decision maker is the President, Chief Executive
Officer and Chairman of the Board of the Company. The adoption of SFAS No. 131
did not have a material effect on the Company's primary financial statements,
but did result in the disclosure of segment information contained herein. The
Company has identified its reportable operating business segment as Community
Banking, based on how the business is strategically managed. The Company's
community banking business segment consisting of commercial banking, retail
banking and trust services. The community banking business segments is managed
as a single strategic unit which derives it's revenues from a wide range of
banking services, including lending activities, acceptance of demand, savings
and time deposits, trust and investment management, and mortgage servicing
income from investors. There is no major customer and the Company operates
within a single geographic area (United States).
Non reportable operating segments of the Company's operations which do not have
similar characteristics to the community banking operations and do not meet the
quantitative thresholds requiring disclosure, are included in the Other category
in the disclosure of business segments below. These non reportable segments
include Parent Company and Independent Capital Trust I financial information
(Note 17).
The accounting policies used in the disclosure of business segments are the same
as those described in the summary of significant accounting policies. The
consolidation adjustments reflects certain eliminations of inter-segment
revenue, cash and Parent Company investments in subsidiaries.
REPORTABLE SEGMENT SPECIFIC INFORMATION
<TABLE>
<CAPTION>
Community Banking
1998 1997 1996
(In Thousands)
<S> <C> <C> <C>
Investment in Bank Premises and Equipment 5,041 4,200 3,678
Depreciation and Amortization 3,981 2,966 2,919
Investment Balances in Equity Method Investments 1,741 1,712 1,854
Provision for Income Taxes 7,804 7,326 6,153
Interest Income Interest on Loans $ 76,404 $ 66,739 $ 58,055
Interest and Dividends on Securities 31,387 26,805 19,119
Interest on Federal Funds Sold 800 182 208
Interest on Interest Bearing Deposits -- -- 7
Total Interest Income 108,591 93,726 77,389
Interest Expense
Interest on Deposits 32,394 32,377 27,670
Interest on Borrowings 18,137 9,881 4,310
Interest on Subordinated Capital Notes -- -- 374
Total Interest Expense 50,531 42,258 32,354
Non-Interest Income
Service Charges on Deposit Accounts 5,356 5,654 5,829
Trust and Financial Services Income 3,763 3,082 2,790
Mortgage Banking Income 2,354 1,713 1,508
Other Non-Interest Income 1,652 1,293 1,254
Total Non-Interest Income 13,125 11,742 11,381
Non-Interest Expenses
Salaries and Employee Benefits 21,071 19,464 19,968
Occupancy Expenses 3,681 3,525 3,289
Equipment Expenses 2,970 2,619 2,405
Other Non-Interest Expenses 13,740 12,788 11,135
Total Non-Interest Expense 41,462 38,396 36,797
Net Income $ 17,959 $ 15,228 $ 11,716
</TABLE>
<PAGE>
RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Other
Adjustments
Community Other and
Banking Eliminations Consolidated
<S> <C> <C> <C> <C>
December 31, 1998
Securities, Available
for Sale and Held
to Maturity $ 494,778 $ 1,400 -- $ 496,178
Net Loans 927,417 -- -- 927,417
Total Assets 1,571,270 156,588 (152,789) 1,575,069
Total Deposits 1,065,178 -- (21,861) 1,043,317
Federal Home Loan
Bank Borrowings 313,724 -- -- 313,724
Total Liabilities 1,472,333 31,100 (52,962) 1,450,471
Total Interest Income 108,591 3,834 (3,713) 108,712
Total Interest Expense 50,531 2,751 (3,713) 49,569
Net Interest Income 58,060 1,083 -- 59,143
Provisions for Possible
Loan Losses 3,960 -- -- 3,960
Total Non-Interest Income 13,125 18,042 (18,042) 13,125
Total Non-Interest Expense 41,462 235 -- 41,697
Net Income $ 17,959 $ 16,222 ($18,042) $ 16,139
December 31, 1997
Securities, Available for
Sale and Held to Maturity $ 454,589 $ 1,400 -- $ 455,989
Net Loans 815,458 -- -- 815,458
Total Assets 1,365,953 153,118 (149,064) 1,370,007
Total Deposits 1,016,201 -- (28,053) 988,148
Federal Home Loan
Bank Borrowings 206,724 -- -- 206,724
Total Liabilities 1,276,822 30,985 (59,043) 1,248,764
Total Interest Income 93,726 2,470 (2,376) 93,820
Total Interest Expense 42,258 1,696 (2,376) 41,578
Net Interest Income 51,468 774 -- 52,242
Provisions for Possible
Loan Losses 2,260 -- -- 2,260
Total Non-Interest Income 11,742 15,279 (15,279) 11,742
Total Non-Interest Expense 38,396 199 -- 38,595
Net Income $ 15,228 $ 14,209 ($ 15,279) $ 14,158
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other
Adjustments
Community Other and
Banking Eliminations Consolidated
<S> <C> <C> <C> <C>
December 31, 1996
Securities, Available for Sale
and Held to Maturity $ 323,901 $ 1,000 -- $ 324,901
Net Loans 83,185 -- -- 683,185
Total Assets 1,090,409 82,132 (79,748) 1,092,793
Total Deposits 918,948 -- (376) 918,572
Federal Home Loan
Bank Borrowings 78,000 -- -- 78,000
Total Liabilities 1,012,059 1,022 (1,398) 1,011,683
Total Interest Income 77,389 35 -- 77,424
Total Interest Expense 32,354 -- -- 32,354
Net Interest Income 45,035 35 -- 45,070
Provisions for Possible
Loan Losses 1,750 -- -- 1,750
Total Non-Interest Income 11,381 11,716 (11,716) 11,381
Total Non-Interest Expense 36,797 153 -- 36,950
Net Income $ 11,716 $ 11,597 ($11,716) $ 11,597
</TABLE>
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
1998 1997 1998 1997 1998 1997
(Dollars In Thousands, Except Per Share and Average Share Data)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME $ 26,085 $ 20,668 $ 26,547 $ 22,193 $ 28,186 $ 24,892
INTEREST EXPENSE 11,659 8,799 11,757 9,425 13,064 11,304
NET INTEREST INCOME $ 14,426 $ 11,869 $ 14,790 $ 12,768 $ 15,122 $ 13,588
PROVISION FOR POSSIBLE
LOAN LOSSES 907 500 907 530 907 530
NON-INTEREST INCOME 3,087 2,884 3,398 3,006 3,260 2,946
NON-INTEREST EXPENSES 10,368 9,557 10,675 9,641 10,785 9,735
MINORITY INTEREST 667 -- 667 311 667 667
PROVISION FOR INCOME TAXES 1,866 1,699 1,991 1,707 1,928 1,910
NET INCOME $ 3,705 $ 2,997 $ 3,948 $ 3,585 $ 4,095 $ 3,692
BASIC EARNINGS PER SHARE $ 0.25 $ 0.21 $ 0.27 $ 0.25 $ 0.28 $ 0.25
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.20 $ 0.26 $ 0.24 $ 0.27 $ 0.25
WEIGHTED AVERAGE
COMMON SHARES (Basic) 14,828,992 14,614,757 14,854,477 14,623,762 14,774,324 14,646,537
Common Stock EQUIVALENTS 253,334 272,384 257,400 281,849 209,022 323,365
WEIGHTED AVERAGE COMMON
SHARES (Diluted) 15,082,326 14,887,141 15,111,877 14,905,611 14,983,346 14,969,902
</TABLE>
<TABLE>
<CAPTION>
FOURTH
QUARTER
1998 1997
<S> <C> <C>
INTEREST INCOME $ 27,894 $ 26,067
INTEREST EXPENSE 13,089 12,050
NET INTEREST INCOME $ 14,805 $ 14,017
PROVISION FOR POSSIBLE
LOAN LOSSES 1,239 700
NON-INTEREST INCOME 3,380 2,906
NON-INTEREST EXPENSES 9,869 9,662
MINORITY INTEREST 667 667
PROVISION FOR INCOME TAXES 2,019 2,010
NET INCOME $ 4,391 $ 3,884
BASIC EARNINGS PER SHARE $ 0.30 $ 0.26
DILUTED EARNINGS PER SHARE $ 0.30 $ 0.26
WEIGHTED AVERAGE
COMMON SHARES (Basic) 14,494,995 14,756,275
Common Stock EQUIVALENTS 187,782 296,646
WEIGHTED AVERAGE COMMON
SHARES (Diluted) 14,682,777 15,052,921
</TABLE>
(17) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information relative to the Company's balance sheets at
December 31, 1998 and 1997, and the related statements of income and cash flows
for the years ended December 31, 1998, 1997, and 1996 are presented below.
<TABLE>
<CAPTION>
BALANCE SHEET
DECEMBER 31, 1998 1997
<S> <C> <C>
Assets: (In Thousands)
Cash* $ 21,861 $ 28,052
Investments in subsidiary* 101,273 91,353
Other investments 1,400 1,400
Other assets 2,406 2,666
Total assets $126,940 $123,471
Liabilities and Stockholders' Equity:
Dividends Payable $ 1,446 $ 1,331
Junior Subordinated Debt 29,646 29,647
Total liabilities 31,092 30,978
Stockholders' equity 95,848 92,493
Total liabilities and stockholders' equity $126,940 $123,471
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
Income: (In Thousands)
Dividend received from subsidiaries $ 7,593 $ 5,707 $ 2,878
Interest income 1,083 774 35
Other income -- -- 1
Total income 8,676 6,481 2,914
Expenses:
Interest expense 2,751 1,696 1
Other expenses 235 199 154
Total expenses 2,986 1,895 155
Income before income taxes and equity in
undistributed income of subsidiary 5,690 4,586 2,759
Equity in undistributed income of subsidiaries 10,449 9,572 8,838
Net income $16,139 $14,158 $11,597
*Eliminated in consolidation
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands)
<S> <C> <C> <C>
Net income $ 16,139 $ 14,158 $ 11,597
ADJUSTMENTS TO RECONCILE NET INCOME
TO CASH PROVIDED FROM OPERATING ACTIVITIES:
Amortization 221 194 148
Increase in other assets (42) (1,478) (54)
Decrease in other liabilities 1 8 --
Equity in income of subsidiaries (10,449) (9,572) (8,838)
TOTAL ADJUSTMENTS (10,269) (10,848) (8,744)
NET CASH PROVIDED FROM OPERATING ACTIVITIES 5,870 3,310 2,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities -- (400) --
Capital investment in subsidiary - Independent Capital Trust I -- (889) --
NET CASH USED IN INVESTING ACTIVITIES -- (1,289) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issue and stock options exercised 566 716 105
Proceeds from dividend reinvestment and optional stock purchases -- -- 551
Issuance of junior subordinated debentures -- 29,639 --
Treasury Stock Repurchase, 433,338 shares (6,840) -- --
Repayment of Capital Notes -- -- (9)
Dividends paid (5,787) (4,700) (3,344)
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (12,061) 25,655 (2,697)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,191) 27,676 156
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 28,052 376 220
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 21,861 $ 28,052 $ 376
</TABLE>
<PAGE>
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3:30 p.m.
on Thursday, April 8, 1999 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.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
HIGH LOW DIVIDEND
- - ----------------------------------------------------------
<S> <C> <C> <C>
1998
4th Quarter $17.50 $14.00 $0.10
3rd Quarter 19.63 13.13 0.10
2nd Quarter 24.25 17.75 0.10
1st Quarter 20.00 14.75 0.10
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
</TABLE>
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 1998 is
available without charge by writing to:
Tina M. Hart, Shareholder Relations
Independent Bank Corp.
288 Union Street
Rockland, MA 02370
TRANSFER AGENT AND REGISTRAR
Transfer Agent and Registrar for the Company is:
State Street Bank and Trust Co.
c/o EquiServe
P.O. Box 8200
Boston, MA 02266-8200
<PAGE>
DIRECTORS OF INDEPENDENT BANK CORP.
Richard S. Anderson
President and Treasurer
Anderson-Cushing
Insurance Agency, Inc.
Donald K. Atkins
Retired, Former President
and Chief Executive Officer
Winthrop - Atkins Co., Inc.
Treasurer - Hannah B.G. Shaw Home for the Aged, Inc.
W. Paul Clark
President and General Manager
Paul Clark, Inc.
Robert L. Cushing
President
Hannah B.G. Shaw Home
for the Aged, Inc.
<PAGE>
Benjamin A. Gilmore, II
Owner and President
Gilmore Cranberry Co., Inc.
Lawrence M. Levinson
Partner
Burns & Levinson LLP
Douglas H. Philipsen
Chairman, President and
Chief Executive Officer
Richard H. Sgarzi
President and Treasurer
Black Cat Cranberry Corp.
Robert J. Spence
President
Albert Culver Company
William J. Spence
President
Mass. Bay Lines, Inc.
Brian S. Tedeschi
Chairman of the Board
Tedeschi Realty Corp.
Thomas J. Teuten
President
A. W. Perry, Inc.
OFFICERS OF INDEPENDENT BANK CORP.
Douglas H. Philipsen
Chairman, President and
Chief Executive Officer
Richard J. Seaman
Chief Financial Officer and
Treasurer
Linda M. Campion
Clerk
Tara M. Villanova
Assistant Clerk
Directors of Rockland Trust Company
Richard S. Anderson
President and Treasurer
Anderson-Cushing
Insurance Agency, Inc.
*John B. Arnold
Retired, Former President
and Treasurer
H.H. Arnold Co., Inc.
<PAGE>
Donald K. Atkins
Retired, Former President
and Chief Executive Officer
Winthrop-Atkins Co., Inc.
Treasurer - Hannah B.G. Shaw Home for the Aged, Inc.
Theresa J. Bailey
Retired, Former Senior
Vice President and Clerk
Rockland Trust Company
W. Paul Clark
President and General Manager
Paul Clark, Inc.
*Robert L. Cushing
President
Hannah B.G. Shaw Home
for the Aged, Inc.
*H. Thomas Davis
Retired, Former Chairman
Clipper Abrasives, Inc.
Alfred L. Donovan
Senior Associate
O'Conor, Wright Wyman, Inc.
*Ann M. Fitzgibbons
Volunteer
Benjamin A. Gilmore, II
Owner and President
Gilmore Cranberry Co., Inc.
*Donald A. Greenlaw
Retired, Former President
Rockland Trust Company
E. Winthrop Hall
Chairman and President
F.L. & J.C. Codman Company
Kevin J. Jones
Treasurer
Plumbers Supply Company
*Lawrence M. Levinson
Partner
Burns & Levinson LLP
Douglas H. Philipsen
Chairman, President and
Chief Executive Officer
Richard H. Sgarzi
President and Treasurer
Black Cat Cranberry Corp.
<PAGE>
*Nathan Shulman
Retired, Former President
Best Chevrolet, Inc.
*John F. Spence, Jr.
Retired, Former Chairman
of the Board
Rockland Trust Company
Robert J. Spence
President
Albert Culver Company
William J. Spence
President
Mass. Bay Lines, Inc.
John H. Spurr, Jr.
Executive Vice President and Treasurer
A.W. Perry, Inc.
Robert D. Sullivan
President
Sullivan Tire Company, Inc.
Brian S. Tedeschi
Chairman of the Board
Tedeschi Realty Corp.
Thomas J. Teuten
President
A.W. Perry, Inc.
*Honorary Director
OFFICERS OF ROCKLAND TRUST COMPANY
Douglas H. Philipsen
Chairman, President and
Chief Executive Officer
Richard J. Seaman
Chief Financial Officer
and Treasurer
Debra A. Charbonnet
Executive Vice President
Trust and Investment
Services Division
Richard F. Driscoll
Executive Vice President
Retail and Operations Division
Ferdinand T. Kelley
Executive Vice President
Commercial Lending Division
Raymond G. Fuerschbach
Senior Vice President
Human Resources
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated January 27, 1999, 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, 1998, into Independent Bank Corp.'s previously
filed S-3 Registration Statements File Numbers 33-27999, 333-25999 and S-8
Registration Statements File Numbers 33-13158, 33-50770, 33-65114, 33-75530,
33-60293, 33-04259, 333-27169 and 333-31107.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 47,755
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 38,443
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 195,199
<INVESTMENTS-CARRYING> 284,944
<INVESTMENTS-MARKET> 287,542
<LOANS> 941,112
<ALLOWANCE> (13,695)
<TOTAL-ASSETS> 1,575,069
<DEPOSITS> 1,043,317
<SHORT-TERM> 82,847
<LIABILITIES-OTHER> 10,583
<LONG-TERM> 0
28,750
0
<COMMON> 149
<OTHER-SE> 95,699
<TOTAL-LIABILITIES-AND-EQUITY> 1,575,069
<INTEREST-LOAN> 76,404
<INTEREST-INVEST> 31,508
<INTEREST-OTHER> 800
<INTEREST-TOTAL> 108,712
<INTEREST-DEPOSIT> 31,432
<INTEREST-EXPENSE> 49,569
<INTEREST-INCOME-NET> 59,143
<LOAN-LOSSES> 3,960
<SECURITIES-GAINS> 27
<EXPENSE-OTHER> 41,697
<INCOME-PRETAX> 23,943
<INCOME-PRE-EXTRAORDINARY> 23,943
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,139
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 7.96
<LOANS-NON> 4,330
<LOANS-PAST> 1,026
<LOANS-TROUBLED> 1,037
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,674
<CHARGE-OFFS> (4,097)
<RECOVERIES> 1,158
<ALLOWANCE-CLOSE> 13,695
<ALLOWANCE-DOMESTIC> 13,695
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
