INDEPENDENT BANK CORP.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
& OTHER DATA
The selected consolidated financial and other data of the Company set forth
below does not purport to be complete and should be read in conjunction with,
and is qualified in its entirety by, the more detailed information, including
the Consolidated Financial Statements and related notes, appearing elsewhere
herein.
As of or For the Year Ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
FINANCIAL CONDITION DATA:
Securities held to maturity $ 229,043 $ 284,944 $ 308,112 $ 290,894 $ 226,896
Securities available for sale 201,614 195,199 131,842 26,449 32,628
Loans, net of unearned discount 1,028,510 941,112 828,132 695,406 628,141
Reserve for possible loan losses 14,958 13,695 12,674 12,221 12,088
Total assets 1,590,056 1,575,069 1,370,007 1,092,793 987,589
Total deposits 1,081,806 1,043,317 988,148 918,572 871,085
Stockholders' equity 98,129 95,848 92,493 81,110 72,572
Nonperforming loans 3,654 5,356 5,891 4,462 5,271
Nonperforming assets 3,654 5,356 5,893 4,733 5,909
OPERATING DATA:
Interest income $ 112,006 $ 108,712 $ 93,820 $ 77,424 $ 72,918
Interest expense 50,178 49,569 41,578 32,354 29,143
Net interest income 61,828 59,143 52,242 45,070 43,775
Provision for possible loan losses 3,927 3,960 2,260 1,750 1,000
Non-interest income 14,793 13,125 11,742 11,381 10,341
Non-interest expenses 45,450 41,697 38,595 36,951 38,000
Minority interest expense 2,668 2,668 1,645 - -
Net income 17,031 16,139 14,158 11,597 10,387
PER SHARE DATA:
Net income - Basic $ 1.20 $ 1.10 $ 0.97 $ 0.80 $ 0.72
Net income - Diluted 1.19 1.08 0.95 0.79 0.71
Cash dividends declared 0.40 0.40 0.34 0.25 0.18
Book value, end of period 6.92 6.63 6.25 5.55 5.00
OPERATING RATIOS:
Return on average assets 1.09% 1.12% 1.15% 1.13% 1.10%
Return on average equity 17.57% 16.71% 16.45% 15.20% 15.28%
Net interest margin 4.30% 4.36% 4.52% 4.72% 4.97%
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of gross loans 0.35% 0.56% 0.69% 0.63% 0.83%
Nonperforming assets as a percent of total assets 0.23% 0.34% 0.43% 0.43% 0.60%
Reserve for possible loan losses as a percent of
loans, net of unearned discount 1.45% 1.46% 1.53% 1.76% 1.92%
Reserve for possible loan losses as a percent of
nonperforming loans 409.36% 255.69% 215.14% 273.89% 229.33%
CAPITAL RATIOS:
Tier 1 leverage capital ratio 8.15% 7.91% 8.64% 7.35% 7.24%
Tier 1 risk-based capital ratio 11.14% 11.38% 13.52% 10.89% 10.67%
Total risk-based capital ratio 12.39% 12.63% 14.78% 12.15% 11.92%
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The condensed financial review which follows presents management's
discussion and analysis of the consolidated financial condition and operating
results of Independent Bank Corp. (the Company) and its subsidiaries, Rockland
Trust Company (Rockland or the Bank) and Independent Capital Trust I (the
Trust). It should be read in conjunction with the Consolidated Financial
Statements and related notes thereto.
FINANCIAL CONDITION
Summary of Financial Condition. The Company's assets increased to $1.59
billion in 1999, compared with $1.58 billion in 1998.
This increase amounted to $15.0 million or 1.0% over year-end 1998. The
growth was driven by an increase in loans of $87.4 million, centered in
commercial real estate loans and consumer loans. The securities portfolio
decreased to $447.7 million at December 31, 1999 compared with $496.2 million at
December 31, 1998. The change occurred in the securities held to maturity
portfolio, which decreased by $55.9 million.
The Company's total assets grew to $1.58 billion as of December 31, 1998,
an increase of $205.1 million, or 15%, over 1997 year-end assets. Loan growth of
$113 million was primarily in the consumer and commercial real estate and
construction loan categories. The securities portfolio increased to $496.2
million at December 31, 1998 compared with $456.0 million at December 31, 1997.
The growth occurred in the securities available for sale portfolio, which
increased by $63.4 million during 1998.
Loan Portfolio At December 31, 1999, the Bank's loan portfolio was $1.03
billion, an increase of $87.4 million, or 9.3%, from year-end 1998. This growth
was primarily in the commercial real estate portfolio, which increased by $59.4
million, or 22.7%. The remaining growth was in the consumer loan portfolio,
which also showed strong growth in 1999.
At December 31, 1998, the Bank's loan portfolio amounted to $941.1 million,
an increase of $113.0 million, or 13.6%, from year-end 1997. This increase was
primarily in the consumer loan portfolio, which increased by $101.4 million or
48.5%.
The reserve for possible loan losses is maintained at a level that
management of the Bank considers adequate based upon relevant circumstances. The
reserve for possible loan losses was $15.0 million at December 31, 1999. The
ratio of the reserve for possible loan losses to nonperforming loans was 409.4%
at December 31, 1999, an increase over the coverage of 255.7% recorded a year
earlier.
The Bank provides its customers with access to capital by providing a broad
range of credit services. The Bank's commercial customers consist of
small-to-medium-sized businesses, which utilize demand, time, and term loans, as
well as funding guaranteed by the Small Business Administration, to finance
their businesses. The Bank's retail customers can choose from a variety of
mortgage and consumer loan products. The Bank's principal lending market
provides attractive lending opportunities for commercial, real estate, and
consumer loans.
The Bank's loan committee consists of the Bank's President, the Executive
Vice President of the Commercial Lending Division, the Senior Credit Policy
Officer, and the Commercial Loan Regional Managers. The committee considers a
variety of policy issues, including underwriting and credit standards, and
reviews loan proposals that exceed the individual loan officer's lending
authority.
Asset Quality The Bank's principal earning assets are its loans. Although
the Bank judges its borrowers to be creditworthy, the risk of deterioration in
borrowers' ability to repay their loans in accordance with the terms of their
existing loan agreements is inherent in any lending function. Participating as a
lender in the credit markets requires a strict monitoring process to minimize
credit risk. This process requires substantial analysis of the loan application,
the customer's capacity to repay according to the loan's contractual terms, and
an objective determination of the value of the collateral.
Nonperforming assets are comprised of nonperforming loans and Other Real
Estate Owned (OREO). Nonperforming loans consist of loans that are more than 90
days past due but still accruing interest and nonaccrual loans. OREO includes
properties held by the Bank as a result of foreclosure or by acceptance of a
deed in lieu of foreclosure. As of December 31, 1999, nonperforming assets
totaled $3.7 million, a decrease of $1.7 million, or a reduction of 31.5%, from
the prior year-end. Nonperforming assets represented 0.23% and 0.34% of total
assets for the years ending December 31, 1999 and 1998 respectively.
The following table sets forth information regarding nonperforming loans
and nonperforming assets on the dates indicated.
5
INDEPENDENT BANK CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
December 31, September 30, June 30, March 31, December 31, December 31,
1999 1999 1999 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Nonperforming Loans:
Loans past due 90 days or more
but still accruing $ 316 $ 423 $ 475 $ 680 $1,026 $ 737
Loans accounted for on a nonaccrual basis 3,338 3,506 3,620 4,514 4,330 5,154
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,654 3,929 4,095 5,194 5,356 5,891
- ---------------------------------------------------------------------------------------------------------------------------------
Other real estate owned -- 126 126 126 -- 2
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,654 $4,055 $4,221 $5,320 $5,356 $5,893
=================================================================================================================================
Nonperforming loans as a percent of
gross loans 0.35% 0.38% 0.41% 0.53% 0.56% 0.69%
=================================================================================================================================
Nonperforming assets as a percent of
total assets 0.23% 0.26% 0.27% 0.34% 0.34% 0.43%
=================================================================================================================================
As permitted by banking regulations, consumer loans and home equity loans
past due 90 days or more continue to accrue interest. In addition, certain
commercial and real estate loans that are more than 90 days past due may be kept
on an accruing status if the loan is well secured and in the process of
collection. As a general rule, a commercial or real estate loan more than 90
days past due with respect to principal or interest is classified as a
nonaccrual loan. Income accruals are suspended on all nonaccrual loans and all
previously accrued and uncollected interest is reversed against current income.
A loan remains on nonaccrual status until it becomes current with respect to
principal and interest, when the loan is liquidated, or when the loan is
determined to be uncollectible and is charged-off against the reserve for
possible loan losses.
The following table sets forth the Bank's nonperforming loans by loan
category on the dates indicated.
December 31, 1999 1998
- ------------------------------------------------------------
(In Thousands)
Loans past due 90 days or more
but still accruing
Real Estate-Residential Mortgage $ 31 $ 41
Consumer-Installment 229 819
Consumer-Other 56 166
- ------------------------------------------------------------
Total $ 316 $1,026
- ------------------------------------------------------------
Loans accounted for on a nonaccrual basis:
Commercial $ 141 $ 579
Real Estate-Commercial Mortgage 326 140
Real Estate-Residential Mortgage 2,186 2,455
Consumer-Installment 685 1,156
- ------------------------------------------------------------
Total $3,338 $4,330
- ------------------------------------------------------------
Total Nonperforming Loans $3,654 $5,356
============================================================
In the course of resolving nonperforming loans, the Bank may choose to
restructure the contractual terms of certain commercial and real estate loans.
Terms may be modified to fit the ability of the borrower to repay in line with
its current financial status. It is the Bank's policy to maintain restructured
loans on nonaccrual status for approximately six months before management
considers its return to accrual status. At December 31, 1999, the Bank had $0.69
million of restructured loans.
Real estate acquired by the Bank through foreclosure proceedings or the
acceptance of a deed in lieu of foreclosure is classified as OREO. When property
is acquired, it is recorded at the lesser of the loan's remaining principal
balance or the estimated fair value of the property acquired, less estimated
costs to sell. Any loan balance in excess of the estimated fair value on the
date of transfer is charged to the reserve for possible loan losses on that
date. All costs incurred thereafter in maintaining the property, as well as
subsequent declines in fair value are charged to non-interest expense.
In order to facilitate the disposition of OREO, the Bank may finance the
purchase of such properties at market rates if the borrower qualifies under the
Bank's standard underwriting guidelines. The Bank had no OREO properties at
December 31, 1999.
Securities Portfolio The Company's securities portfolio consists of
securities which management intends to hold until maturity, securities available
for sale, trading assets, and Federal Home Loan Bank (FHLB) stock. Securities
which management intends to hold until maturity consist of U. S. Treasury and U.
S. Government Agency obligations, mortgage-backed securities, including
collateralized mortgage obligations, state, county, and municipal securities as
well as other securities. Securities held to maturity as of December 31, 1999
are carried at their amortized cost of $229.0 million and exclude gross
unrealized gains of $0.47 million and gross unrealized losses of $10.9 million.
A year earlier, securities held to maturity totaled $284.9 million excluding
gross unrealized gains of $3.9 million and gross unrealized losses of $1.3
million. There were no sales of securities held to maturity during 1999 or 1998.
Securities available for sale consist of certain mortgage-backed
securities, including collateralized mortgage obligations and U.S. Government
Agency obligations. These securities are carried at fair market value and
unrealized gains and losses, net of applicable income taxes, are recognized as a
separate component of stockholders' equity. The fair market value of securities
available for sale at December 31, 1999 totaled $201.6 million and net
unrealized losses totaled $3.8 million. A year earlier, securities available for
sale were $195.2 million
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
with net unrealized gains of $764,000. The Bank realized a gain of $34,000 and
$27,000 on the sale of available for sale securities in 1999 and 1998,
respectively.
Trading assets consist of equity securities carried at fair value. Changes
in fair value are recognized in non-interest income. The fair value of trading
assets at December 31, 1999 totaled $486,000.
The investment in the stock of the Federal Home Loan Bank is related to the
admission of Rockland as a member of the Federal Home Loan Bank of Boston in
July 1994. This investment was increased by $1.0 million during 1999 to maintain
investment levels required by FHLB guidelines.
Deposits The Bank's branch system consists of 34 locations. Each
full-service branch operates as a retail sales and services outlet offering a
complete line of deposit and loan products.
As of December 31, 1999, deposits of $1,081.8 million were $38.5 million,
or 3.7%, higher than the prior year-end. An expanding customer base, extensive
branch network, and competitive market rates were responsible for this increase.
Core deposits, consisting of demand, interest checking, savings, and money
market accounts, increased $5.0 million, or 0.81%. Time deposits increased $33.5
million, or 7.76%.
Total deposits increased $55.2 million, or 5.6%, during the year ended
December 31, 1998. Core deposits increased $44.3 million, or 7.8%, while time
deposits increased $10.8 million, or 2.6%.
Borrowings The Bank's borrowings amounted to $359.5 million at December 31,
1999, a decrease of $37.1 million from year-end 1998. At December 31, 1999, the
Bank's borrowings consisted primarily of FHLB advances totaling $256.2 million,
a decrease of $57.5 million from the prior year-end. The remaining borrowings
consisted of federal funds purchased, assets sold under repurchase agreements,
and treasury tax and loan notes. These borrowings totaled $103.2 million at
December 31, 1999, an increase of $20.4 million from the prior year-end.
RESULTS OF OPERATIONS
Summary of Results of Operations The Company's results of operations are
largely dependent on net interest income, which is the difference between the
interest earned on loans and investments and interest paid on deposits and
borrowings. Net interest income is affected by the interest rate spread, which
is the difference between the yields earned on loans and investments and the
rates of interest paid on deposits and borrowings. The results of operations are
also affected by the level of income from loan, deposit, and mortgage banking
fees, operating expenses, the provision for possible loan losses, the impact of
federal and state income taxes, and the relative levels of interest rates and
economic activity.
For the year ended December 31, 1999, the Company reported a 5.59% increase
in net income to $17.0 million, or $1.19 Diluted earnings per share. This
increase in net income was due to a $2.7 million, or 4.54% increase in net
interest income. The provision for loan losses decreased to $3.9 million
compared with $4.0 million for the same period last year. Non-interest income
increased $1.7 million, or 12.7%, and non-interest expenses increased $3.8
million, or 9.0%, from 1998 to 1999.
For the year ended December 31, 1998, the Company reported a 14.0% increase
in net income to $16.1 million, or $1.08 Diluted earnings per share. This
increase in net income was due to a $6.9 million, or 13.2%, increase in net
interest income. The provision for loan losses increased to $4.0 million,
compared with $2.3 million for the same period a year earlier. Non-interest
income increased $1.4 million, or 11.8%, and non-interest expenses increased
$3.1 million, or 8.0%, from 1997 to 1998. Each of these components is discussed
in detail below. Net Interest Income The amount of net interest income is
affected by changes in interest rates and by the volume, mix, and interest rate
sensitivity of interest-earning assets and interest-bearing liabilities.
On a fully tax-equivalent basis, net interest income was $62.9 million in
1999, a 4.8% increase over 1998 net interest income of $60.0 million. Growth in
net interest income in 1999, compared with that of 1998, was primarily the
result of a 6.25% increase in average earning assets. The yield on earning
assets was 7.73% in 1999, compared with 7.96% in 1998. While the average balance
of loans, net of unearned discount increased by $107.1 million, or 12.1%, the
yield on loans decreased by 45 basis points to 8.21% at December 31, 1999,
compared to 8.66% at December 31, 1998. This decrease in loan yield was due to a
flat yield curve and competitive downward rate pressure. The yield on taxable
securities remained strong at 6.70% in 1999 compared to 6.69% in 1998, while the
yield on non-taxable securities increased 4 basis points to 7.54% at December
31, 1999, compared to 7.50% a year earlier. During 1999, the average balance of
interest-bearing liabilities increased by $96.2 million, or 8.67%, over 1998
average balances. The average cost of these liabilities decreased 31 basis
points in 1999, amounting to 4.16%, compared to 4.47% in 1998. The Company's
interest rate spread (the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities) increased by 8 basis points in 1999. This is due to the decreased
cost of interest-bearing liabilities as discussed above.
The following table presents the Company's average balances, net interest
income, interest rate spread, and net interest margin for 1999, 1998, and 1997.
Non-taxable income from loans and securities is presented on a fully
tax-equivalent basis whereby tax-exempt income is adjusted upward by an amount
equivalent to the prevailing federal income taxes that would have been paid if
the income had been fully taxable. The assumed tax rate was 35% in these years.
7
INDEPENDENT BANK CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
1999 1998 1997
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE PAID YIELD BALANCE PAID YIELD BALANCE PAID YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Interest-earning assets:
Federal funds sold and assets
purchased under resale agreements $ 12,207 $579 4.74% $ 15,003 $ 800 5.33% $ 3,474 $ 182 5.24%
Trading Assets 439 5 1.14% - - - - - -
Taxable securities 418,010 28,002 6.70% 446,890 29,902 6.69% 390,769 26,207 6.71%
Non-taxable securities (1) 41,881 3,157 7.54% 31,586 2,370 7.50% 13,717 999 7.28%
Loans, net of unearned discount (1) 991,319 81,356 8.21% 884,205 76,539 8.66% 757,877 66,925 8.83%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $1,463,856 $113,099 7.73% $1,377,684 $109,611 7.96% $ 1,165,837 $94,313 8.09%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 47,051 42,806 42,667
Other assets 54,424 23,137 18,862
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,565,331 $1,443,627 $1,227,366
====================================================================================================================================
Interest-bearing liabilities:
Savings and Interest Checking accounts $ 280,441 $ 4,837 1.72% $ 266,093 $ 5,306 1.99% $ 255,069 $ 5,457 2.14%
Money Market & Super Interest
Checking accounts 108,415 2,637 2.43% 107,956 2,833 2.62% 109,156 3,105 2.84%
Time deposits 450,425 23,194 5.15% 411,801 23,293 5.66% 402,346 23,136 5.75%
Federal funds purchased and assets sold
under repurchase agreements 84,809 4,077 4.81% 63,228 3,390 5.36% 45,586 2,628 5.76%
Treasury tax and loan notes 3,407 184 5.40% 3,175 192 6.05% 3,283 178 5.42%
Federal Home Loan Bank borrowings 278,613 15,249 5.47% 257,681 14,555 5.65% 120,976 7,074 5.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $1,206,110 $ 50,178 4.16% $1,109,934 $ 49,569 4.47% $ 936,416 $41,578 4.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits 220,727 195,583 171,955
Corporation-obligated mandatorily
redeemable trust preferred securities
of subsidiary trust holding solely
junior subordinated debentures of
the Corporation 28,750 28,750 17,801
Other liabilities 12,830 12,805 15,109
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,468,417 1,347,072 1,141,281
Stockholders' Equity 96,914 96,555 86,085
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $1,565,331 $1,443,627 $1,227,366
====================================================================================================================================
Net Interest Income $ 62,921 $ 60,042 $52,735
======== ======== =======
Interest Rate Spread (2) 3.57% 3.49% 3.65%
===== ===== =====
Net Interest Margin (2) 4.30% 4.36% 4.52%
===== ===== =====
(1) The total amount of adjustment to present interest income and yield on a
fully tax-equivalent basis is $1,093, $899, and $493 in 1999, 1998 and
1997, respectively.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average costs of
interest-bearing liabilities. Net interest margin represents net interest
income as a percent of average interest-earning assets.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table presents certain information regarding changes in
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided with respect to changes attributable to both volume and
rate, have been consistently allocated to change due to rate.
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1999 Compared To 1998 1998 Compared To 1997
--------------------------------------------------------------------
Change Change Change Change
Due To Due To Total Due To Due To Total
Rate Volume Change Rate Volume Change
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
Income on interest-earning assets:
Federal funds sold ($ 72) ($ 149) ($ 221) $ 14 $ 604 $ 618
Taxable securities 32 (1,932) (1,900) (71) 3,766 3,695
Non-taxable securities (1) 15 772 787 70 1,301 1,371
Trading assets -- 5 5 -- -- --
Loans, net of unearned discount(1) (4,459) 9,276 4,817 (1,541) 11,155 9,614
- ----------------------------------------------------------------------------------------------------------------
Total ($ 4,484) $ 7,972 $ 3,488 ($ 1,528) $ 16,826 $ 15,298
================================================================================================================
Expense of interest-bearing liabilities:
Savings and Interest Checking accounts ($ 755) $ 286 ($ 469) ($ 387) $ 236 ($ 151)
Money Market and Super Interest
Checking accounts (208) 12 (196) (238) (34) (272)
Time deposits (2,285) 2,186 (99) (387) 544 157
Federal funds purchased and assets sold
under repurchase agreements (470) 1,157 687 (254) 1,016 762
Treasury tax and loan notes (22) 14 (8) 20 (6) 14
Federal Home Loan Bank borrowings (489) 1,183 694 (516) 7,997 7,481
- ----------------------------------------------------------------------------------------------------------------
Total ($ 4,229) $ 4,838 $ 609 ($ 1,762) $ 9,753 $ 7,991
================================================================================================================
Change in net interest income ($ 255) $ 3,134 $ 2,879 $ 234 $ 7,073 $ 7,307
================================================================================================================
(1) Interest earned on non-taxable investment securities and loans is shown on
a fully tax equivalent basis
Interest income increased by $3.5 million, or 3.2%, to $113.1 million in
1999 as compared to the prior year-end. Interest earned on loans increased by
$4.8 million, or 6.3%, reflecting an increase in average loans to $991.3 million
in 1999 from $884.2 in 1998. Interest income from taxable securities decreased
by $1.9 million, or 6.35%, to $28.0 million in 1999 as compared to the prior
year.
Interest expense for the year ended December 31, 1999 increased to $50.2
million from the $49.6 million recorded in 1998. Interest expense increased
by $4.8 million, or 9.8%, due to an increase in the average balance of
interest-bearing liabilities to $1,206.1 million. Borrowings increased $42.7
million, or 13.2%, from the 1998 balance, and interest-bearing deposits
increased $53.4 million or 6.8%. The cost of borrowings decreased to 5.32% in
1999, down 28 basis points from the 1998 cost of 5.60%. The average cost of
interest-bearing deposits decreased 35 basis points to 3.65% in 1999.
Total interest income amounted to $109.6 million in 1998, an increase of
$15.3 million, or 16.2%, over 1997. This improvement was due to increases in
loan and security income.
Interest income on loans increased $9.6 million, or 14.4%, to $76.5 million
in 1998 from $66.9 million a year prior. While the yield on loans decreased
slightly, the average balance increased $126.3 million, or 16.6%, to $884.2
million in 1998. Interest income on taxable investment securities amounted to
$29.9 million in 1998, compared to $26.2 million in 1997. This increase amounts
to $3.7 million, or 14.1%, comparing 1998 to 1997. The increase resulted from
average balances growing $56.1 million to $446.9 million in 1998 from $390.8
million in 1997.
Total interest expense for the year ended December 31, 1998 increased $8.0
million, or 19.2%, over 1997. While interest expense on time deposits increased
by $157,000, or 0.67%, the cost of this deposit category decreased to 5.66% in
1998 from 5.75% in 1997. The total cost of interest-bearing liabilities
increased to 4.47% in 1998 from 4.44% in 1997.
Provision for Possible Loan Losses. The provision for possible loan losses
represents the charge to expense that is required to fund the reserve for
possible loan losses. Adequacy of the allowance is determined using a consistent
systematic methodology which analyzes the size and risk of the loan portfolio at
each reporting date by allocating specific
9
INDEPENDENT BANK CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
reserves for adversly classified loans and general loss allocations for segments
of the loan portfolio which have similar attributes. Management's periodic
evaluation of the adequacy of the reserve considers past loan loss experience,
known and inherent risks in the loan portfolio, adverse situations which may
affect the borrowers' ability to repay, the estimated value of the underlying
collateral, if any, and economic conditions. A substantial portion of the
Company's loans are secured by real estate in Massachusetts. Accordingly, the
ultimate collectibility of a substantial portion of the Company's loan portfolio
is susceptible to changes in property values.
The provision for loan losses remained consistent in 1999 at $3.93 million,
compared with $3.96 million in 1998. For the year ended December 31, 1999, net
loan charge-offs totaled $2.7 million, a decrease of $0.2 million from the prior
year. As of December 31, 1999, the reserve for possible loan losses represented
1.45% of loans, net of unearned discount, as compared to 1.46% at December 31,
1998. The reserve for possible loan losses at December 31, 1999 represented
409.4% of nonperforming loans on that date, as compared to coverage of 255.7% at
the prior year-end. This was a result of a decrease in nonperforming loans of
$1.7 million or 31.8% during 1999.
The provision for loan losses is based upon management's evaluation of the
level of the reserve for possible loan losses required in relation to the
estimate of loss exposure in the loan portfolio. An analysis of individual loans
and the overall risk characteristics and size of the different loan portfolios
is conducted on an ongoing basis. This managerial evaluation is reviewed
periodically by the Company's independent public accountants as well as by a
third-party loan review consultant. As adjustments are identified, they are
reported in the earnings of the period in which they become known.
Management believes that the reserve for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the reserve may be necessary based on increases in nonperforming
loans, changes in economic conditions, changes in the risk profile of the
portfolio, or for other reasons. Various regulatory agencies, as an integral
part of their examination process, periodically review the Company's reserve for
possible loan losses. Federal Reserve regulators most recently examined the
Company in the first quarter of 2000, and the Bank was most recently examined by
the Federal Deposit Insurance Corporation (FDIC) in the third quarter of 1999.
No additional provision for possible loan losses was required as a result of
these examinations.
Non-Interest Income The following table sets forth information regarding
non-interest income for the periods shown.
Years Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------
(In Thousands)
Service charges on deposit accounts $ 5,409 $ 5,356 $ 5,654
Asset Management & Trust Services
income 4,108 3,763 3,082
Mortgage banking income 1,779 2,354 1,713
Bank Owned Life Insurance 1,609 166 --
Other non-interest income 1,888 1,486 1,293
- -----------------------------------------------------------------
TOTAL $14,793 $13,125 $11,742
=================================================================
Non-interest income, which is generated by deposit account service charges,
fiduciary services, mortgage banking activities, and miscellaneous other
sources, amounted to $14.8 million in 1999.
Service charges on deposit accounts, which represent 36.6% of total
non-interest income, increased from $5.36 million in 1998 to $5.41 million in
1999. Asset Management & Trust Services revenue increased by 9.2% to $4.1
million, compared to $3.8 million in 1998. This improvement is due to a strong
securities market as well as a change in the fee structure.
Mortgage banking income, $1.8 million in 1999, was a decrease of 24.4% over
1998 income of $2.4 million. The Company's mortgage banking revenue consists
primarily of application fees and origination fees on sold loans, servicing
income, and gains and losses on the sale of loans. Residential mortgage loans
are originated as necessary to meet consumer demand. Sales of such loans in the
secondary market occur to lend balance to the Company's interest rate
sensitivity. Such sales generate gain or loss at the time of sale, produce
future servicing income, and provide funds for additional lending and other
purposes. Typically, loans are sold with the Bank retaining responsibility for
collecting and remitting loan payments, inspecting properties, making certain
insurance and tax payments on behalf of the borrowers, and otherwise servicing
the loans and receiving a fee for performing these services.
In the fourth quarter of 1998 the Bank purchased Bank Owned Life Insurance
and this contributed $1.6 million to non-interest income in 1999.
For the year ended December 31, 1998, total non-interest income amounted to
$13.1 million, an increase of $1.4 million, or 11.8%, from 1997. Service charges
on deposit accounts decreased slightly from $5.7 million in 1997 to $5.4 million
in 1998. Asset Management and Trust Services revenue increased by 22.1% to $3.8
million compared to $3.1 million in 1997. This improvement was due to an
increase in funds under management and a strong securities market. Mortgage
banking income increased to $2.4 million in 1998, up from $1.7 million in 1997.
Non-Interest Expense The following table sets forth information regarding
non-interest expense for the periods shown.
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------
(In Thousands)
Salaries and employee benefits $23,716 $21,071 $19,464
Occupancy expenses 3,613 3,681 3,525
Equipment expenses 3,203 2,970 2,619
Advertising 1,197 775 679
Consulting fees 732 629 925
Legal fees- loan collection 357 299 583
Legal fees- other 284 531 413
FDIC assessment 140 132 112
Office supplies and printing 457 582 460
Data processing facilities management 4,337 4,166 3,727
Postage expense 679 694 674
Telephone expense 785 728 776
Other non-interest expenses 5,950 5,439 4,638
- -------------------------------------------------------------------
TOTAL $45,450 $41,697 $38,595
===================================================================
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Non-interest expenses totaled $45.5 million for the year ended December 31,
1999, a $3.8 million increase from the comparable 1998 period.
Salaries and employee benefits increased $2.6 million, or 12.6%, due in
part to the transfer of the Personal Computing and Networking department
personnel from Alltel, our data processing partner, to the Bank. Wage inflation
resulting from a tight labor market was also a significant contributor to the
increase.
Occupancy and equipment expenses increased $0.17 million in 1999 to $6.8
million. In 1999, the Bank expanded into the town of Stoughton by opening a new
full-service branch. The data processing facilities management fee increased by
$0.2 million to $4.3 million in 1999. All other non-interest expenses increased
$0.77 million, or 7.9%, to $10.6 million in 1999, compared to $9.8 million in
1998.
Non-interest expenses increased by $3.1 million, or 8.0%, to $41.7 million
in 1998 compared with $38.6 million in 1997.
Salaries and employee benefits increased $1.6 million, or 8.3%, to $21.1
million in 1998, compared with $19.5 million in 1997. This increase was due to
merit increases, additional staffing, and a tight labor market.
Performance-based compensation awards also contributed to this increase.
Occupancy and equipment expense increased $0.5 million, or 8.3%, from 1997
to 1998, again demonstrating the Company's commitment to continually improve
facilities and technology for customers and employees.
The data processing facilities management fee, initiated in 1996, increased
by $0.4 million to $4.2 million in 1998, compared to $3.7 million in 1997.
Minority Interest In 1997, Independent Capital Trust I was formed for the
purpose of issuing Trust Preferred Securities. A total of $28.8 million of 9.28%
Trust Preferred Securities were issued by the Trust. The Company recorded
distributions payable on the Trust Preferred Securities as minority interest
expense totaling $2.7 million in 1999 and 1998.
Income Taxes For the years ended December 31, 1999, 1998 and 1997, the
Company recorded combined federal and state income tax provisions of $7.5
million, $7.8 million and $7.3 million, respectively. These provisions reflect
effective income tax rates of 30.7%, 32.6%, and 34.1%, in 1999, 1998, and 1997,
respectively, which are less than the Company's combined statutory tax rate of
42%. The lower effective income tax rates are attributable to certain
non-taxable investments and dividends and to benefits recorded in these years in
compliance with Statement of Financial Standards (SFAS) No. 109.
The tax effects of all income and expense transactions are recognized by
the Company in each year's consolidated statements of income regardless of the
year in which the transactions are reported for income tax purposes.
ASSET/LIABILITY MANAGEMENT
The Bank's asset/liability management process monitors and manages, among
other things, the interest rate sensitivity of the balance sheet, the
composition of the securities portfolio, funding needs and sources, and the
liquidity position. All of these factors, as well as projected asset growth,
current and potential pricing actions, competitive influences, national monetary
and fiscal policy, and the regional economic environment are considered in the
asset/liability management process.
The Asset/Liability Management Committee, whose members comprise the Bank's
senior management, develops procedures, consistent with policies established by
the Board of Directors, which monitor and coordinate the Company's interest rate
sensitivity and the sources, uses, and pricing of funds. Interest rate
sensitivity refers to the Company's exposure to fluctuations in interest rates
and its effect on earnings. If assets and liabilities do not reprice
simultaneously and in equal volume, the potential for interest rate exposure
exists. It is management's objective to maintain stability in the growth of net
interest income through the maintenance of an appropriate mix of
interest-earning assets and interest-bearing liabilities and, when necessary,
within prudent limits, through the use of off-balance sheet hedging instruments
such as interest rate swaps. The Committee employs simulation analyses in an
attempt to quantify, evaluate, and manage the impact of changes in interest
rates on the Bank's net interest income. In addition, the Company engages an
independent consultant to render advice with respect to asset and liability
management strategy.
The Bank is careful to increase deposits without adversely impacting the
weighted average cost of those monies. Accordingly, management has implemented
funding strategies that include FHLB advances and repurchase agreement lines.
These non-deposit funds are also viewed as a contingent source of liquidity and,
when profitable lending and investment opportunities exist, access to such funds
provides a means to leverage the balance sheet.
At December 31, 1999, approximately 29% of the Company's total assets
consisted of assets which will reprice or mature within one year. As of that
date, the amount of the Company's cumulative hedged gap on assets which will
reprice or mature within one year was a negative $422.4 million, or 26.6% of
total assets.
From time to time, the Company has utilized interest rate swap agreements
as hedging instruments against stable or declining interest rates. An interest
rate swap is an agreement whereby one party agrees to pay a floating rate of
interest on a notional principal amount in exchange for receiving a fixed rate
of interest on the same notional amount for a predetermined period of time from
a second party. The assets relating to the notional principal amount are not
actually exchanged.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Bank had entered into interest rate swap agreements with a total
notional value of $55 million at December 31, 1999 and $20 million at December
31, 1998. These swaps were arranged through a large international financial
institution and have initial maturities ranging from nine months to five years.
The Bank receives fixed rate payments and pays a variable rate of interest tied
to either 3-month LIBOR or Prime. At December 31, 1999, the weighted average
fixed payment rate was 7.65% and the weighted average rate of the variable
interest payments was 7.22%. As a result of these interest rate swaps, the Bank
realized net interest income of $0.1 million in 1999, 1998 and 1997.
The selected consolidated financial and other data of the Company set
forth below does not purport to be complete and should be read in conjunction
with, and is qualified in its entirety by, the more detailed information,
including the Consolidated Financial Statements and related notes, appearing
elsewhere herein.
Amounts Maturing or Repricing
------------------------------------------------------
Within Over Three
Three To Twelve Over One
Months Months Year Total
----------- ------------- ---------- ----------
Interest-earning assets (1):
Federal funds sold $ 8,719 -- -- $ 8,719
Securities 29,859 46,158 377,850 453,867
Loans - fixed rate (2) 52,260 111,370 604,890 768,520
Loans - floating rate (2) 172,861 37,082 43,151 253,094
----------- ------------- ---------- ----------
Total interest-earning assets 263,699 194,610 1,025,891 1,484,200
----------- ------------- ---------- ----------
Bank Owned Life Insurance -- -- 31,719 31,719
----------- ------------- ---------- ----------
Interest-bearing liabilities:
Savings and Interest Checking accounts (3) 65,807 -- 251,382 317,189
Money Market and Super Interest Checking
accounts (3) 88,213 1,336 11,694 101,243
Time certificates of deposit over $100,000 58,335 6,300 -- 64,635
Other time deposits 117,010 235,439 44,327 396,776
Borrowings 183,243 100,000 76,224 359,467
----------- ------------- ---------- ----------
Total interest-bearing liabilities 512,608 343,075 383,627 1,239,310
----------- ------------- ---------- ----------
Corporation-obligated mandatorily redeemable
trust preferred securities of subsidiary trust
holding solely junior subordinated debentures
of the Corporation -- -- 28,750 28,750
=========== ============= =========== ==========
Net interest sensitivity gap during the period (248,909) (148,465) 645,233 247,859
=========== ============= =========== ==========
Cumulative gap (248,909) (397,374) 247,859 247,859
=========== ============= =========== ==========
Effect of hedging activities (55,000) 30,000 25,000 --
=========== ============= =========== ==========
Cumulative hedged gap ($ 303,909) (422,374) 247,859 $ 247,859
=========== ============= =========== ==========
Interest-earning assets as a percent of
interest-bearing liabilities (cumulative) 51.44% 53.56% 119.76% 119.76%
Interest-earning assets as a percent of
total assets (cumulative) 16.58% 28.82% 93.34% 93.34%
Ratio of unhedged gap to total assets -15.65% -9.34% 40.58% 15.59%
Ratio of cumulative unhedged gap to total assets -15.65% -24.99% 15.59% 15.59%
Ratio of hedged gap to total assets -19.11% -7.45% 42.15% 15.59%
Ratio of cumulative hedged gap to total assets -19.11% -26.56% 15.59% 15.59%
(1) Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate loans are included in the periods in
which they are scheduled to be repaid.
(2) Balances have been reduced for nonperforming loans which amounted to $3.6
million at the same date.
(3) Although the Bank's regular savings accounts generally are subject to
immediate withdrawal, management considers most of these accounts to be
core deposits having significantly longer effective maturities based on the
Bank's experience of retention of such deposits in changing interest rate
environments.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
INTEREST RATE RISK
Interest rate risk is the sensitivity of income to variations in interest
rates over both short-term and long-term horizons. The primary goal of interest
rate risk management is to control this risk within limits approved by the Board
and narrower guidelines approved by the Asset/Liability Management Committee.
These limits and guidelines reflect the Company's tolerance for interest rate
risk by identifying exposures, quantifying and hedging them. The Company
quantifies its interest rate exposures using simulation models, as well as
simpler gap analyses. The Company manages its interest rate exposure using a
combination of on and off balance sheet instruments, primarily fixed rate
portfolio securities, interest rate swaps, and options.
The Company uses simulation analysis to measure the exposure of net
interest income to changes in interest rates over a relatively short (i.e. less
than 2 years) time horizon. Simulation analysis involves projecting future
interest income and expense from the Company's assets, liabilities and
off-balance sheet positions under various scenarios.
The Company's limits on interest rate risk specify that if interest rates
were to shift up or down 200 basis points, estimated net interest income for the
next 12 months should decline by less than 6.0%. The following table reflects
the Company's estimated exposure, as a percentage of estimated net interest
income for the next 12 months:
Rate Change Estimated Exposure as %
(Basis Points) of Net Interest Income
-------------- ------------------------
+200 (2.25%)
-200 2.79%
See Managements' discussion on Asset/Liability Management for further
details on how the Company manages its market and interest rate risk.
LIQUIDITY
Liquidity, as it pertains to the Company, is the ability to generate cash
in the most economical way for the institution to meet its ongoing obligations
to pay deposit withdrawals and to fund loan commitments. The Company's primary
sources of funds are deposits, borrowings, and the amortization, prepayment, and
maturities of loans and investments.
The Bank utilizes its extensive branch network to access retail customers
who provide a stable base of in-market core deposits. These funds are
principally comprised of demand deposits, interest checking accounts, savings
accounts, and money market accounts. Deposit levels are greatly influenced by
interest rates, economic conditions, and competitive factors. The Bank has also
established five repurchase agreement lines with major brokerage firms as
potential sources of liquidity. At December 31, 1999, the Company had $39.6
million outstanding under these lines. In addition to these lines, the Bank also
had customer repurchase agreements outstanding amounting to $47.6 million at
December 31, 1999. As a member of the Federal Home Loan Bank, Rockland has
access to approximately $323 million of borrowing capacity. On December 31,
1999, the Company had $256.2 million outstanding in FHLB borrowings.
The Parent Company, as a separately incorporated bank holding company, has
no significant operations other than serving as the sole stockholder of the
Bank. On an unconsolidated basis, the Parent Company's assets include its
investment in the Bank, $1.4 million of other investments, and $0.9 million of
goodwill. In addition, the Parent Company issued $29.64 million of Junior
Subordinated Debentures in conjunction with the issuance of Trust Preferred
Securities by a direct subsidiary, Independent Capital Trust I. The proceeds of
this offering, net of issuance costs, are maintained in an interest bearing
checking account at the Bank. The Parent Company has no employees and no
significant liabilities or sources of income. Expenses incurred by the Parent
Company relate to its reporting obligations under the Securities Exchange Act of
1934, as amended, and related expenses as a publicly traded company. The Parent
Company is directly reimbursed by the Bank for virtually all such expenses.
The Company actively manages its liquidity position under the direction of
the Asset/Liability Management Committee. Periodic review under prescribed
policies and procedures is intended to ensure that the Company will maintain
adequate levels of available funds. At December 31, 1999, the Company's
liquidity position was well above policy guidelines.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
CAPITAL RESOURCES
The Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation
(FDIC), and other regulatory agencies have established capital guidelines for
banks and bank holding companies. Risk-based capital guidelines issued by the
federal regulatory agencies require banks to meet a minimum Tier 1 risk-based
capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At December
31, 1999, the Company and the Bank substantially exceeded the minimum
requirements for Tier 1 risk-based and total risk-based capital.
A minimum requirement of 4.0% Tier 1 leverage capital is also mandated. On
December 31, 1999, the Tier 1 leverage capital ratio for the Company and the
Bank was 8.15% and 6.86%, respectively.
Capital ratios of the Company and the Bank are shown below for the last two
year-ends.
DECEMBER 31, 1999 1998
- ------------ ------- ---------
THE COMPANY
Tier 1 leverage capital ratio 8.15% 7.91%
Tier 1 risk-based capital ratio 11.14% 11.38%
Total risk-based capital ratio 12.39% 12.63%
THE BANK
Tier 1 leverage capital ratio 6.86% 6.32%
Tier 1 risk-based capital ratio 9.35% 9.09%
Total risk-based capital ratio 10.60% 10.34%
DIVIDENDS
The Company declared cash dividends of $.40 per share in 1999 and 1998. The
1999 ratio of dividends paid to earnings was 33.50%.
Payment of dividends by the Company on its common stock is subject to
various regulatory restrictions. The Company is regulated by the Federal
Reserve Bank and, as such, is subject to its regulations and guidelines with
respect to the payment of dividends. Since substantially all of the funds
available for the payment of dividends are derived from the Bank, future
dividends will depend on the earnings of the Bank, its financial condition,
its need for funds, applicable governmental policies and regulations, and
other such matters as the Board of Directors deems appropriate. Management
believes that the Bank will continue to generate adequate earnings to
continue to pay dividends.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
The financial nature of the Company's consolidated financial statements is
more clearly affected by changes in interest rates than by inflation. Interest
rates do not necessarily fluctuate in the same direction or in the same
magnitude as the prices of goods and services. However, inflation does affect
the Company because, as prices increase, the money supply grows and interest
rates are affected by inflationary expectations. The impact on the Company is a
noted increase in the size of loan requests with resulting growth in total
assets. In addition, operating expenses may increase without a corresponding
increase in productivity. There is no precise method, however, to measure the
effects of inflation on the Company's consolidated financial statements.
Accordingly, any examination or analysis of the financial statements should take
into consideration the possible effects of inflation.
YEAR 2000 READINESS DISCLOSURE
The Company developed plans to address the possible exposure related to the
impact of the Year 2000 problem ("Y2K") on its computer systems and key service
providers. Senior management and the Board of Directors approved these plans.
The Company aggressively monitored the transition of its computer systems
into 2000 and is pleased with the results. Minor exceptions were noted and
corrected quickly. Management will continue to monitor computer systems
throughout 2000 as a normal course of business, paying particular attention to
the remaining critical Y2K dates.
The Company estimated out of pocket costs in 1999 and 1998 to address the
Y2K problem at $500,000. These costs totaled $211,000 and $131,000 in 1999 and
1998, respectively.
14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of Independent Bank Corp.:
We have audited the consolidated balance sheets of Independent Bank Corp.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Independent
Bank Corp. and its subsidiary as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
-------------------------------
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 2000>
15
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 1998
------------ -------------
(Dollars In Thousands)
ASSETS
CASH AND DUE FROM BANKS $ 48,949 $ 47,755
FEDERAL FUNDS SOLD 8,719 38,443
TRADING ASSETS (Note 3) 486 --
SECURITIES HELD TO MATURITY (Notes 1 and 4)
(market value $218,588 and $287,542) 229,043 284,944
SECURITIES AVAILABLE FOR SALE (Notes 1 and 4) 201,614 195,199
FEDERAL HOME LOAN BANK STOCK (Note 7) 17,036 16,035
LOANS, NET OF UNEARNED DISCOUNT (Notes 1 and 5) 1,028,510 941,112
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (14,958) (13,695)
------------ -------------
Net Loans 1,013,552 927,417
------------ -------------
BANK PREMISES AND EQUIPMENT (Notes 1 and 6) 14,268 15,200
OTHER ASSETS (Notes 1 and 9) 56,389 50,076
------------ -------------
TOTAL ASSETS $ 1,590,056 $ 1,575,069
============ =============
LIABILITIES
DEPOSITS
Demand Deposits $ 226,044 $ 219,090
Savings and Interest Checking Accounts 282,516 278,306
Money Market and Super Interest Checking Accounts 107,624 113,811
Time Certificates of Deposit over $100,000 113,832 95,706
Other Time Deposits 351,790 336,404
------------ -------------
TOTAL DEPOSITS 1,081,806 1,043,317
------------ -------------
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER
REPURCHASE AGREEMENTS (Notes 4 and 7) 93,366 82,376
TREASURY TAX AND LOAN NOTES (Notes 4 and 7) 9,877 471
FEDERAL HOME LOAN BANK BORROWINGS (Note 7) 256,224 313,724
OTHER LIABILITIES 21,904 10,583
------------ -------------
TOTAL LIABILITIES $ 1,463,177 $ 1,450,471
------------ -------------
Corporation-obligated mandatorily redeemable trust preferred
securities of subsidiary trust holding solely junior subordinated
debentures of the Corporation
Outstanding: 1,150,000 shares (Note 14) $ 28,750 $ 28,750
------------ -------------
STOCKHOLDERS' EQUITY (Notes 1 and 12)
Preferred Stock, $.01 par value. Authorized: 1,000,000 Shares
Outstanding: None -- --
Common Stock, $.01 par value. Authorized: 30,000,000
Outstanding: 14,863,821 Shares in 1999 and 14,863,821 Shares in 1998 149 149
Treasury Stock: 684,463 Shares in 1999 and 406,638 Shares in 1998 (10,678) (6,431)
Surplus 44,950 45,303
Retained Earnings 67,547 56,063
Other Accumulated Comprehensive Income, Net of Tax (Note 4) (3,839) 764
TOTAL STOCKHOLDERS' EQUITY 98,129 95,848
------------ -------------
TOTAL LIABILITIES, MINORITY INTEREST IN
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $ 1,590,056 $ 1,575,069
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
16
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------- ----------- ------------------
(Dollars In Thousands, Except Share and Per Share Data)
INTEREST INCOME
Interest on Loans (Notes 1 and 5) $ 81,296 $ 76,404 $ 66,739
Interest and Dividends on Securities (Note 4) 30,127 31,508 26,899
Interest on Federal Funds Sold and Repurchase Agreements 578 800 182
Interest on Interest Bearing Deposits 5 -- --
------------------- ----------- ------------------
Total Interest Income 112,006 108,712 93,820
------------------- ----------- ------------------
INTEREST EXPENSE
Interest on Deposits 30,668 31,432 31,697
Interest on Borrowings (Notes 1 and 7) 19,510 18,137 9,881
------------------- ----------- ------------------
Total Interest Expense 50,178 49,569 41,578
------------------- ----------- ------------------
Net Interest Income 61,828 59,143 52,242
------------------- ----------- ------------------
PROVISION FOR POSSIBLE LOAN LOSSES (Notes 1 and 5) 3,927 3,960 2,260
------------------- ----------- ------------------
Net Interest Income After Provision For Possible Loan Losses 57,901 55,183 49,982
------------------- ----------- ------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 5,409 5,356 5,654
Asset Management & Trust Services Income 4,108 3,763 3,082
Mortgage Banking Income 1,779 2,354 1,713
Other Non-Interest Income 3,497 1,652 1,293
------------------- ----------- ------------------
Total Non-Interest Income 14,793 13,125 11,742
------------------- ----------- ------------------
NON-INTEREST EXPENSES
Salaries and Employee Benefits (Note 10) 23,716 21,071 19,464
Occupancy Expenses (Notes 6 and 13) 3,613 3,681 3,525
Equipment Expenses 3,203 2,970 2,619
Other Non-Interest Expenses (Note 11) 14,918 13,975 12,987
------------------- ----------- ------------------
Total Non-Interest Expenses 45,450 41,697 38,595
------------------- ----------- ------------------
Minority Interest 2,668 2,668 1,645
------------------- ----------- ------------------
INCOME BEFORE INCOME TAXES 24,576 23,943 21,484
PROVISION FOR INCOME TAXES (Notes 1 and 9) 7,545 7,804 7,326
------------------- ----------- ------------------
NET INCOME $ 17,031 $ 16,139 $ 14,158
=================== =========== ==================
BASIC EARNINGS PER SHARE $ 1.20 $ 1.10 $ 0.97
=================== =========== ==================
DILUTED EARNINGS PER SHARE $ 1.19 $ 1.08 $ 0.95
=================== =========== ==================
Weighted average common shares (Basic) (Notes 1 and 12) 14,213,390 14,730,193 14,666,420
Common stock equivalents 152,266 215,526 305,805
------------------- ----------- ------------------
Weighted average common shares (Diluted) (Notes 1 and 12) 14,365,656 14,945,719 14,972,225
=================== =========== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
17
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars In Thousands, Except Share and Per Share Data)
OTHER
ACCUMULATED
COMMON TREASURY RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS INCOME TOTAL
--------- -------- --------- ---------- ------------- -------
BALANCE DECEMBER 31, 1996 $ 146 -- $ 44,433 $ 36,666 $ (135) $ 81,110
--------- -------- --------- ---------- ------------- -------
Net Income 14,158 14,158
Cash Dividends Declared ($.34 per share) (4,999) (4,999)
Proceeds From Exercise of Stock
Options (Note 12) 2 710 712
Tax Benefit on Stock Option Exercises 4 4
Change in Unrealized Gain (Loss) on Securities
Available For Sale, Net of Tax (Note 4) 1,508 1,508
--------- -------- --------- ---------- ------------- -------
BALANCE DECEMBER 31, 1997 148 -- 45,147 45,825 1,373 92,493
--------- -------- --------- ---------- ------------- -------
Net Income 16,139 16,139
Cash Dividends Declared ($.40 per share) (5,901) (5,901)
Proceeds From Exercise of Stock
Options (Note 12) 1 409 156 566
Treasury Stock Repurchase, 433,338 shares (6,840) (6,840)
Change in Unrealized Gain on Securities
Available For Sale, Net of Tax (Note 4) (609) (609)
--------- -------- --------- ---------- ------------- -------
BALANCE DECEMBER 31, 1998 149 (6,431) 45,303 56,063 764 95,848
--------- -------- --------- ---------- ------------- -------
Net Income 17,031 17,031
Cash Dividends Declared ($.40 per share) (5,547) (5,547)
Proceeds From Exercise of Stock
Options (Note 12) 589 (353) 236
Treasury Stock Repurchase, 315,355 shares (4,836) (4,836)
Change in Unrealized Gain on Securities
Available For Sale, Net of Tax (Note 4) (4,603) (4,603)
--------- -------- --------- ---------- ------------- -------
BALANCE DECEMBER 31, 1999 $ 149 ($10,678) $ 44,950 $ 67,547 ($ 3,839) $ 98,129
--------- -------- --------- ---------- ------------- -------
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- ---------
(In Thousands)
Net Income $ 17,031 $ 16,139 $ 14,158
Other Comprehensive Income, Net of Tax
Unrealized holding gains (losses) arising during period (4,581) (591) 1,503
Reclassification adjustments for (gains) losses included in net earnings (22) (18) 5
-------- -------- ---------
Other Comprehensive Income (4,603) (609) 1,508
-------- -------- ---------
Comprehensive Income $ 12,428 $ 15,530 $ 15,666
======== ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997
--------- ---------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,031 $ 16,139 $ 14,158
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Depreciation and amortization 4,544 4,202 3,160
Provision for possible loan losses 3,927 3,960 2,260
Deferred income taxes 75 65 769
Loans originated for resale (51,208) (76,223) (42,850)
Proceeds from mortgage loan sales 51,005 76,028 42,793
Loss (gain) on sale of mortgages 203 195 57
Loss (gain) on sale of investments (34) (27) 8
Gain recorded from mortgage servicing rights (560) (748) (423)
Other Real Estate Owned recoveries (12) (188) (131)
Changes in assets and liabilities:
(Increase) Decrease in other assets (5,753) 1,318 (1,111)
(Decrease) Increase in other liabilities 13,928 (1,497) (403)
--------- ---------- ---------
TOTAL ADJUSTMENTS 16,115 7,085 4,129
--------- ---------- ---------
NET CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES 33,146 23,224 18,287
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of Securities Held to Maturity 77,286 106,545 88,070
Proceeds from maturities of Securities Available-For-Sale 43,855 68,702 20,641
Purchase of Securities Held to Maturity (22,045) (84,211) (106,195)
Purchase of Securities Available For Sale (58,555) (133,688) (123,937)
Purchase of Federal Home Loan Bank Stock (1,001) -- (8,477)
Net increase in Loans (90,188) (116,004) (134,533)
Purchase of Bank Owned Life Insurance -- (30,000) --
Proceeds from sale of Other Real Estate Owned 138 244 400
Investment in Bank Premises and Equipment (2,245) (5,041) (4,200)
--------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (52,755) (193,453) (268,231)
--------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Time Deposits 33,512 10,835 44,493
Net increase (decrease) in Other Deposits 4,977 44,334 25,083
Net increase (decrease) in Federal Funds Purchased
and Assets Sold Under Repurchase Agreements 10,990 44,049 37,487
Net increase (decrease) in Federal Home Loan Bank Borrowings (57,500) 107,000 128,724
Net increase (decrease) in Treasury Tax & Loan Notes 9,406 (2,746) 921
Issuance of corporation-obligated mandatorily redeemable
trust preferred securities of subsidiary trust
holding solely junior subordinated debentures of the
Corporation -- -- 28,750
Proceeds from stock issuance 236 566 716
Payments for Treasury stock purchase (4,836) (6,840) --
Dividends Paid (5,706) (5,787) (4,700)
--------- ---------- ---------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (8,921) 191,411 261,474
--------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,530) 21,182 11,530
--------- ---------- ---------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 86,198 65,016 53,486
--------- ---------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 57,668 $ 86,198 $ 65,016
========= ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowings $ 50,083 $ 51,212 $ 45,453
Minority Interest 2,668 2,668 1,638
Income taxes 8,094 7,303 6,110
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Loans transferred to OREO 126 85 503
Assets transferred to trading from Available-For-Sale 486 -- --
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold and assets purchased under
resale agreements. Generally, federal funds are sold for up to two-week periods.
The accompanying notes are an integral part of these consolidated
financial statements.
19
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Independent Bank Corp. (the Company) and its subsidiaries, Rockland Trust
Company (Rockland or The Bank) and Independent Capital Trust I. All material
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in prior year financial statements have been reclassified to
conform to the current year's presentation.
USES OF ESTIMATES IN THE PREPARATION OF
FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could vary from these estimates. Material
estimates that are particularly susceptible to significant changes in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate, deferred tax assets and trading activities.
NATURE OF OPERATIONS
Independent Bank Corp. is a one-bank holding company whose primary asset is
its investment in Rockland Trust Company. Rockland is a state-chartered
commercial bank which operates 34 banking offices in southeastern Massachusetts.
The Bank's primary source of income is from providing loans to individuals and
small-to-medium-sized businesses in its market area.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's activities are with customers located within
Massachusetts. Notes 3 and 4 discuss the types of securities that the Bank
invests in. Note 5 discusses the types of lending that the Bank engages in. The
Bank does not have any significant concentrations in any one industry or
customer.
CASH AND CASH
EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and balances due from banks, federal funds sold and
securities purchased under repurchase agreements, all of which mature within 90
days.
TRADING ACTIVITIES
Securities that are held principally for resale in the near term are
recorded in the trading assets account at fair value with changes in fair value
recorded in earnings. Interest and dividends are included in net interest
income. Derivatives are carried at fair value with changes in fair value
recorded in earnings, and are classified as trading assets when there is a
positive fair value and trading liabilities when there is a negative fair value.
Quoted market prices, when available, are used to determine the fair value of
trading instruments. If quoted market prices are not available, then fair values
are estimated using pricing models, quoted prices of instruments with similar
characteristics, or discounted cash flows.
SECURITIES
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held-to-maturity" and recorded at amortized cost.
Securities not classified as held-to-maturity or trading, including equity
securities with readily determinable fair values, are classified as
"available-for-sale" and recorded at fair value, net of the related tax effect,
with unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
effective yield method over the terms of the securities. Declines in the fair
value of held-to-maturity and available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses.
When securities are sold, the adjusted cost of the specific security sold
is used to compute gain or loss on the sale. Neither the Company nor the Bank
engages in the trading of investment securities.
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
LOANS
Loans are stated at their principal balance outstanding. Interest income
for commercial, real estate, and consumer loans is accrued based upon the daily
principal amount outstanding except for loans on nonaccrual status. Interest
income on instalment loans is generally recorded based upon the level-yield
method.
Interest accruals are generally suspended on commercial or real estate
loans more than 90 days past due with respect to principal or interest. When a
loan is placed on nonaccrual status, all previously accrued and uncollected
interest is reversed against current income. Interest income on nonaccrual loans
is recognized on a cash basis when the ultimate collectibility of principal is
no longer considered doubtful.
Loan fees in excess of certain direct origination costs are deferred and
amortized into interest income over the expected term of the loan using the
level-yield method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's systematic periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by manage-
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ment in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment disclosures.
LOAN SERVICING
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing
rights are reported in other assets and are amortized into non-interest income
in proportion to, and over the period of, the estimated future net servicing
income of the underlying financial assets. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Impairment is
recognized through a valuation allowance for an individual stratum, to the
extent that fair value is less than the capitalized amount for the stratum.
LOAN ORIGINATION FEES
Loan origination and commitment fees and certain related costs are deferred
and amortized over the lives of the underlying loans. Net deferred fees included
in loans at December 31, 1999 and 1998 were $830,000 and $267,000, respectively.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the lease terms or the estimated useful lives of
the improvements.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is comprised of real estate acquired through
loan foreclosure or acceptance of a deed in lieu of foreclosure. OREO is
initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Any loan balance in excess of the estimated fair value
on the date of transfer is charged to the reserve for possible loan losses on
that date. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets. Subsequent
declines in value are charged to other non-interest expense.
INTANGIBLE ASSETS
In connection with the acquisition of Middleborough Trust Company in
January 1986, the Company allocated $2,951,000 of the purchase price to
goodwill. This amount is being amortized over a 20-year period using the
straight-line method. The balance at December 31, 1999 is $885,000.
In March 1994, Rockland purchased $21.6 million of deposits from the
Resolution Trust Corporation. In May 1994, Rockland purchased approximately $50
million of trust assets from Pawtucket Trust Company. The Bank allocated
$1,923,000 of the purchase price of these transactions to intangible assets,
which is being amortized over a 15-year period using the straight-line method.
The balance at December 31, 1999 is $1,179,000. The Company periodically
evaluates intangible assets for impairment on the basis of whether these assets
are recoverable from projected undiscounted net cash flows of the related
acquired entity.
INCOME TAXES
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet assets
and liabilities and gives current recognition to changes in tax rates and laws.
ASSET MANAGEMENT & TRUST SERVICES
Assets held in a fiduciary or agency capacity for customers are not
included in the accompanying consolidated balance sheets, as such assets are not
assets of the Company. Trust and Financial Services income is recorded on an
accrual basis.
FINANCIAL INSTRUMENTS
CREDIT RELATED FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Bank enters into commitments to extend credit. These financial instruments
are recorded when they are funded.
DERIVATIVE FINANCIAL INSTRUMENTS - As part of asset/liability management,
the Bank utilizes interest rate swap agreements, caps, or floors to hedge
various exposures or to modify interest rate characteristics of various balance
sheet accounts.
Swaps are accounted for on the "accrual" method. The interest component
associated with the contract is recognized over the life of the contract in net
interest income.
When a contract is terminated, the resulting gain or loss is deferred and
amortized into net interest income based upon the life of the contract.
The Bank uses written put and call option strategies in which it receives a
cash premium for entering into options on investment securities. These options
are derivative financial instruments and are marked to fair value through
non-interest income and included in Other Liabilities in the accompanying
consolidated statement of financial condition. In 1999 and 1998, the Bank
recognized option income of $30,000 and $81,000 respectively.
21
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales when control over
the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value-based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees , whereby compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date (or other measurement date) over the
amount an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date, and under
Opinion No. 25 no compensation cost is recognized for them. The Company has
elected to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per share
and other disclosures, as if the fair value-based method of accounting had been
applied. The pro forma disclosures include the effects of all awards granted on
or after January 1, 1995. (See Note 12.)
COMPREHENSIVE INCOME
The Company adopted SFAS 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS 130 had no effect on
the Company's net income or shareholders' equity. Comprehensive income is
reported in this financial statement.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
computer software costs associated with internal-use software to be expensed as
incurred until certain capitalization criteria are met. The Company adopted SOP
98-1 on January 1, 1999 and the adoption did not have a material impact on its
financial statements.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires all costs associated with pre-opening and
organization activities to be expensed as incurred. The Company adopted SOP 98-5
beginning January 1, 1999. The adoption of SOP 98-5 did not have a material
impact on its financial statements.
In February 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 132, "Employer's Disclosure about Pensions and Other Post-retirement
Benefits" - an amendment to FASB Statements Nos. 87, 88 and 106. This statement
revises employer's disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans but
standardizes the disclosure requirement. This statement suggests combined
formats for presentation of pension and other postretirement benefit disclosure.
Restatement of disclosures for earlier periods is required. This statement is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 did not have a material effect on the Company's primary financial
statement, but did affect the disclosure of employee benefits contained
elsewhere herein (Note 10).
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in income unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the statement of income and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 as amended by SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133" shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. A company may also implement the statement
as of the beginning of any fiscal quarter after issuance (that is, financial
quarters beginning June 16, 1999 and thereafter). SFAS No. 133 cannot be applied
retroactively. SFAS No. 133, as amended must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired or substantively modified after December 31, 1997 or
December 31, 1998 (and, at the Company's election, before January 1, 1998). The
Company has not yet quantified the impact of adopting SFAS No. 133 on its
consolidated financial statements and has not determined the timing nor method
of its adoption of the statement. However, the Company does not expect that the
adoption of this statement will have a material impact on its financial position
or results of operations.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value Of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value, whether or not recognized on the
balance sheet. In cases where quoted market values are not available, fair
values are based upon estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The carrying amount reported on the balance sheet
for cash, federal funds sold and assets purchased under resale agreements, and
interest bearing deposits approximates those assets' fair values. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The following table
reflects the book and fair values of financial instruments, including on-balance
sheet and off-balance sheet instruments as of December 31, 1999 and 1998.
1999 1998
----------------------- -------------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------- ------
(In Thousands) (In Thousands)
FINANCIAL ASSETS
- ----------------
Cash and Due From Banks $ 48,949 $ 48,949 $ 47,755 $ 47,755 (a)
Federal Funds Sold 9,205 9,205 38,443 38,443 (a)
Securities Held To Maturity 229,043 218,588 284,944 287,542 (b)
Securities Available For Sale 201,614 201,614 195,199 195,199 (b)
Trading assets 486 486 -- -- (b)
Federal Home Loan Bank Stock 17,036 17,036 16,035 16,035 (c)
Net Loans 1,012,052 1,010,337 927,417 931,059 (d)
Loans held for sale 1,500 1,500 5,600 5,600 (b)
Mortgage Servicing Rights 1,417 1,417 1,145 1,145 (f)
Bank-owned Life Insurance 31,720 31,720 30,111 30,111 (b)
FINANCIAL LIABILITIES
- ---------------------
Demand Deposits 226,044 226,044 219,090 219,090 (e)
Savings and Interest Checking Accounts 282,515 282,515 278,306 278,306 (e)
Money Market and Super Interest Checking Accounts 107,624 107,624 113,811 113,811 (e)
Time Deposits 465,622 466,553 432,110 433,623 (f)
Federal Funds Purchased and Assets
Sold Under Repurchase Agreements 93,366 92,832 82,376 83,125 (f)
Treasury Tax and Loan Notes 9,877 9,877 471 471 (a)
Federal Home Loan Bank Borrowings 256,224 250,175 313,724 308,239 (f)
Corporation-obligated mandatorily redeemable trust
preferred securities of subsidiary trust holding solely
junior subordinated debentures of the Corporation 28,750 24,869 28,750 29,756 (f)
UNRECOGNIZED FINANCIAL INSTRUMENTS
- ----------------------------------
Standby Letters of Credit -- 9 -- 13 (g)
Interest Rate Swap Agreements -- 291 -- 131 (b)
(a) Book value approximates fair value due to short term nature of these
instruments.
(b) Fair value was determined based on market prices or dealer quotes.
(c) Federal Home Loan Bank stock is redeemable at cost
(d) The fair value of loans was estimated by discounting anticipated future
cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
(e) Fair value is presented as equaling book value. SFAS No. 107 requires that
deposits which can be withdrawn without penalty at any time be presented at
such amount without regard to the inherent value of such deposits and the
Bank's relationship with such depositors.
(f) The fair value of these instruments is estimated by discounting anticipated
future cash payments using rates currently available for instruments with
similar remaining maturities.
(g) The fair value of these instruments was estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of customers.
23
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) TRADING ASSETS Trading assets, at fair value, consist of the following:
1999
--------------
Fair Value
--------------
(In Thousands)
Cash equivalents $ 21
Marketable equity securities 465
--------------
Total $486
==============
The Company realized a loss on trading activities of $15,000 in 1999.
(4) SECURITIES
The amortized cost, gross unrealized gains and losses, and fair market
value of securities held to maturity at December 31, 1999 and 1998 were as
follows:
1999 1998
------------------------------------------ ------------------------------------------
Gross Gross Fair Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ------- --------- ---------- ---------- --------
(In Thousands) (In Thousands)
U.S. Treasury and U.S.
Government Agency Securities $ 25,996 -- ($ 1,386) $ 24,610 $ 29,197 $ 191 ($ 419) $ 28,969
Mortgage-Backed Securities 101,081 84 (2,229) 98,936 143,292 1,916 (293) 144,915
Collateralized Mortgage Obligations 5,666 -- (61) 5,605 17,799 89 (71) 17,817
State, County, and Municipal Securities 41,984 25 (2,841) 39,168 40,365 820 (52) 41,133
Other Securities 54,316 361 (4,408) 50,269 54,291 835 (418) 54,708
--------- ---------- ---------- ------- --------- ---------- ---------- --------
Total $229,043 $ 470 ($10,925) $218,588 $284,944 $ 3,851 ($ 1,253) $287,542
========= ========== ========== ======= ========= ========== ========== ========
The amortized cost, gross unrealized gains and losses, and fair market
value of securities available for sale at December 31, 1999 and 1998 were as
follows:
1999 1998
------------------------------------------ ------------------------------------------
Gross Gross Fair Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ----------- ---------- -------
(In Thousands) (In Thousands)
U.S. Treasury and U.S.
Government Agency Securities $ 8,999 -- ($ 532) $ 8,467 $ 8,999 $ 46 -- $ 9,045
Mortgage-Backed Securities 125,115 -- (3,234) 121,881 136,014 1,527 (131) 137,410
Collateralized Mortgage Obligations 73,316 250 (2,300) 71,266 48,677 19 (376) 48,320
Other Securities -- -- -- 350 74 424
--------- ---------- ---------- --------- --------- ----------- ---------- -------
Total $207,430 $ 250 ($ 6,066) $201,614 $194,040 $ 1,666 ($507) $195,199
========= ========== ========== ========= ========= =========== ========== =======
The Bank realized a gain of $34,000 and $27,000 on the sale of
available-for-sale securities in 1999 and 1998, respectively.
A schedule of the contractual maturities of securities held-to-maturity and
securities available-for-sale at December 31, 1999 is presented below:
Held to maturity Available for sale
---------------------- ----------------------
Amortized Fair Amortized Fair
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
(In Thousands) (In Thousands)
Due in one year or less $ 14,288 $ 14,123 $ 1,099 $ 1,055
Due from one year to five years 17,340 16,929 -- --
Due from five to ten years 50,197 49,263 17,387 16,562
Due after ten years 147,218 138,273 188,945 183,997
--------- ------------ --------- ------------
Total $229,043 $218,588 $207,431 $201,614
========= ============ ========= ============
The actual maturities of mortgage-backed securities and collateralized
mortgage obligations will differ from the contractual maturities due to the
ability of the borrowers to prepay underlying mortgage obligations.
On December 31, 1999 and 1998, investment securities carried at
$136,236,000 and $110,579,000, respectively, were pledged to secure public
deposits, assets sold under repurchase agreements, treasury tax and loan notes,
and for other purposes as required by law. At year end 1999 and 1998, the
Company had no investments in obligations of individual states, counties, or
municipalities which exceeded 10% of stockholders' equity.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
The composition of loans, net of unearned discount, at December 31, 1999
and 1998 were as follows:
1999 1998
---------- ----------
(In Thousands)
Commercial $ 137,108 $ 127,019
Real Estate - Commercial Mortgage 320,713 261,332
Real Estate - Residential Mortgage 208,066 197,807
Real Estate - Construction 38,034 44,710
Consumer - Instalment 322,266 315,419
Consumer - Other 7,766 8,656
---------- ----------
Gross Loans 1,033,953 954,943
---------- ----------
Unearned Discount 5,443 13,831
---------- ----------
Loans, Net of Unearned Discount $1,028,510 $ 941,112
========== ==========
In addition to the loans noted above, at December 31, 1999 and December 31,
1998, the Company serviced approximately $256,833,000 and $256,289,000,
respectively, of loans sold to investors in the secondary mortgage market and
other financial institutions. All of the loans sold at December 31, 1999 and
1998, were sold without recourse.
Loans held for sale are valued at lower of the recorded balance or market
value. At December 31, 1999, and 1998, loans held for sale amounted to
approximately $1,500,000 and $5,600,000, respectively. No adjustments for
unrealized losses were required at December 31, 1999 and 1998.
As of December 31, 1999 and 1998 the Bank's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 was as
follows:
1999 1998
------------------------- ------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- ---------- ---------- ----------
Impaired loans: (In Thousands)
Valuation allowance
required $ 790 $ 353 $1,479 $ 422
No valuation
allowance required 434 -- 476 --
---------- ---------- ---------- ----------
Total $1,224 $ 353 $1,955 $ 422
========== ========== ========== ==========
The valuation allowance is included in the reserve for possible loans
losses on the balance sheet. The average recorded investment in impaired loans
for the years ended December 31, 1999 and 1998 was $1,900,000 and $3,500,000,
respectively. Interest payments received on impaired loans are recorded as
interest income unless collection of the remaining recorded investment is
doubtful at which time payments received are recorded as reductions of
principal. The Bank recognized interest income on impaired loans of
approximately $56,000 and $159,000 for the years ended December 31, 1999 and
1998.
The aggregate amount of loans in excess of $60,000 outstanding to
directors, principal officers, and principal security holders at December 31,
1999 and 1998 and for the years then ended is as follows (in thousands):
Balance, January 1, 1998 $ 15,125
---------
New loans 1,694
Loan repayments (5,250)
---------
Balance, December 31, 1998 $ 11,569
---------
New loans 7,060
Loan repayments (5,907)
---------
Balance, December 31, 1999 $ 12,722
=========
All such loans were made in the ordinary course of business on
substantially the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other persons, and do
not involve more than the normal risk of collectibility or present other
unfavorable features.
An analysis of the reserve for possible loan losses for each of the three
years in the period ended December 31, 1999 is as follows:
1999 1998 1997
--------- ---------- ---------
(In Thousands)
Reserve, beginning of year $ 13,695 $ 12,674 $ 12,221
Loans charged off (3,970) (4,097) (2,906)
Recoveries on loans previously
charged off 1,306 1,158 1,099
--------- ---------- ---------
Net charge-offs (2,664) (2,939) (1,807)
Provision charged to expense 3,927 3,960 2,260
--------- ---------- ---------
Reserve, end of year $ 14,958 $ 13,695 $ 12,674
========= ========== =========
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1999 and 1998 were as follows:
1999 1998
--------- ---------
Cost: (In Thousands)
Land $ 335 $ 335
Bank Premises 10,420 10,342
Leasehold Improvements 7,308 7,029
Furniture and Equipment 22,202 20,436
--------- ---------
Total Cost 40,265 38,142
--------- ---------
Accumulated Depreciation (25,997) (22,942)
--------- ---------
Net Bank Premises and Equipment $ 14,268 $ 15,200
========= =========
Depreciation and amortization expense related to bank premises and
equipment was $3,177,000 in 1999, $2,617,000 in 1998 and $2,066,000 in 1997.
25
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) BORROWINGS
Short-term borrowings consist of federal funds purchased, assets sold under
repurchase agreements, and treasury tax and loan notes. Information on the
amounts outstanding and interest rates of short term borrowings for each of the
three years in the period ended December 31, 1999 is as follows:
1999 1998 1997
--------- --------- ---------
(Dollars In Thousands)
Balance outstanding at
end of year $103,243 $ 82,847 $ 41,544
Average daily balance
outstanding 88,215 66,403 48,869
Maximum balance outstanding
at any month end 103,248 89,741 84,945
Weighted average interest rate
for the year 4.83% 5.39% 5.74%
Weighted average interest rate
at end of year 4.86% 4.72% 5.99%
The Bank has established two federal funds lines of $20 million.
Borrowings under these lines are classified as federal funds purchased. The
Company has established five repurchase agreements with major brokerage
firms. Borrowings under these agreements are classified as assets sold under
repurchase agreements. At December 31, 1999, the Bank had $40.0 million
outstanding under these lines, while at December 31, 1998, there was $30.0
million outstanding. The Bank also utilizes customer repurchase agreements as
an additional source of funds. The balance outstanding was $47.6 million and
$47.4 million at December 31, 1999 and 1998 respectively.
Federal Home Loan Bank (FHLB) borrowings are collateralized by a blanket
pledge agreement on the Bank's FHLB stock, certain qualified investment
securities, deposits at the Federal Home Loan Bank, and residential mortgages
held in the Bank's portfolio. The borrowing capacity at the Federal Home Loan
Bank is approximately $323 million. A schedule of the maturity distribution of
FHLB advances with the weighted average interest rates at December 31, 1999 and
1998 follows:
1999 1998
---------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ---------- ---------- -----------
(Dollars In Thousands)
Due in
one year or less $185,000 5.69% $107,500 5.22%
Due from one year
to five years 71,224 5.60% 206,224 5.44%
---------- ---------- ---------- -----------
$256,224 5.66% $313,724 5.36%
========== ========== ========== ===========
(8) EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, Earnings Per
Share. This statement was issued by the FASB in March 1997 and establishes
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock. This
statement replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerators and denominators of the basic and
diluted EPS computations. This statement also requires a restatement of all
prior period EPS data presented.
Net Income Weighted Average Shares Net Income Per Share
--------------------------- -------------------------- ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- ------- -------- -------- ------ -------- ------ ------
Basic EPS $17,031 $16,139 $14,158 14,214 14,730 14,666 $ 1.2 $ 1.10 $ 0.97
Effect of dilutive securities -- -- -- 152 216 306 0.01 0.02 0.02
-------- -------- ------- -------- -------- ------ -------- ------ ------
Diluted EPS $17,031 $16,139 $14,158 14,366 14,946 14,972 $ 1.19 $ 1.08 $ 0.95
-------- -------- ------- -------- -------- ------ -------- ------ ------
Options to purchase 248,395 shares of common stock were outstanding during
the year but were not included in the computation of diluted EPS because the
options' exercise price was greater than the average market price of the common
shares.
Basic EPS was computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES
The provision for income taxes is comprised of the following components:
YEARS ENDED DECEMBER 31, 1999 1998 1997
-------- -------- --------
Current Provision (In Thousands)
Federal $ 6,419 $ 7,509 $ 6,129
State 1,051 230 428
-------- -------- --------
TOTAL CURRENT
PROVISION 7,470 7,739 6,557
-------- -------- --------
Deferred Provision (Benefit)
Federal 391 49 508
State (285) 14 387
Change in Valuation Allowance (31) 2 (126)
-------- -------- --------
TOTAL DEFERRED
PROVISION 75 65 769
-------- -------- --------
TOTAL PROVISION $ 7,545 $ 7,804 $ 7,326
======== ======== ========
The income tax provision shown in the consolidated statements of income differs
from the expected amount, determined by applying the statutory federal tax rate
of 35% to income before income taxes. The following summary reconciles the
differences between these amounts.
YEARS ENDED DECEMBER 31, 1999 1998 1997
-------- --------- ---------
(In Thousands)
Computed statutory federal
income tax provision $ 8,602 $ 8,380 $ 7,519
Nontaxable interest, net (662) (541) (302)
State taxes, net of federal tax benefit 498 160 404
Low-income housing credits (161) (215) (215)
Bank-owned life insurance (563) (39) --
Change in valuation allowance (31) 2 (126)
Other, net (138) 57 46
-------- --------- ---------
TOTAL PROVISION $ 7,545 $ 7,804 $ 7,326
======== ========= =========
The net deferred tax asset which is included in other assets amounted to
approximately $4,057,000 and $1,718,000, at December 31, 1999 and 1998
respectively. The tax-effected components of the net deferred tax asset at
December 31, 1999 and 1998 are as follows:
YEARS ENDED DECEMBER 31, 1999 1998
-------- --------
(In Thousands)
Reserve for possible loan losses $ 5,106 $ 4,664
Tax depreciation 895 539
Write-down of OREO -- 66
Mark to market adjustment (4,613) (4,009)
Accrued expenses not deducted
for tax purposes 405 498
Deferred income 36 91
State taxes 597 312
SFAS 115 adjustment 2,036 (379)
Other, net (405) (33)
-------- --------
TOTAL DEFERRED TAX ASSET 4,057 1,749
Valuation allowance -- (31)
-------- --------
NET DEFERRED TAX ASSET $ 4,057 $ 1,718
======== ========
The valuation allowance is provided when it is more likely than not that some
portion of the net deferred tax asset will not be realized.
(10) EMPLOYEE BENEFITS
PENSION AND POSTRETIREMENT BENEFITS
PENSION
Effective January 1997, the Bank's pension plan joined a multiple employer
structure under the Financial Institutions Retirement Fund. All plan assets were
contributed to the Fund. This transaction qualified for accounting purposes as a
plan termination. The accrued pension liability at December 31, 1996 was
recognized as income in 1997.
There was no contribution requirement for 1999, 1998 or 1997 and
consequently no pension expense was recognized.
The Bank's noncontributory pension plan covers substantially all employees
of the Bank. The plan provides pension benefits that are based upon the
employee's highest base annual salary during five consecutive years of
employment. The Company's funding policy, prior to January 1, 1997, was to
contribute an amount within the range permitted by applicable regulations on an
annual basis.
POSTRETIREMENT BENEFITS
Employees retiring from the Bank on or after attaining age 65 and who have
rendered at least 10 years of continuous service to the Company are entitled to
postretirement health care benefits. These benefits are subject to deductibles,
copayment provisions and other limitations. The Company may amend or change
these benefits periodically.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting For Postretirement Benefits Other Than Pensions," which requires the
recognition of postretirement benefits over the service lives of the employees
rather than on a cash basis. The Company elected to recognize its accumulated
benefit obligation of approximately $678,000 at January 1, 1993 prospectively on
a straight-line basis over the average life expectancy of current retirees,
which is anticipated to be less than 20 years.
Postretirement benefit expense was $107,000, $106,000 and $87,000 in 1999,
1998 and 1997 respectively. The total cost of all postretirement benefits
charged to income was $73,000, $126,000, and $103,000 in 1999, 1998, and 1997,
respectively.
The Bank continues to evaluate ways in which it can better manage these
benefits and control the costs. Any changes in the plan or revisions to
assumptions that affect the amount of expected future benefits may have a
significant effect on the amount of the reported obligation and annual expense.
The following table illustrates the status of the postretirement benefit
plan at December 31 for the years presented:
Postretirement Benefits
1999 1998 1997
------ ------- -------
Change in benefit obligation
Benefit obligation at
beginning of year $ 774 $ 824 $ 840
Service cost 14 14 13
Interest cost 53 56 52
Other -- (10) --
Benefits paid (71) (110) (81)
------ ------- -------
Benefit obligation at end of year 770 774 824
------ ------- -------
27
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits
1999 1998 1997
-------- --------- --------
Funded status (770) (774) (824)
Unrecognized net actuarial loss -- -- --
Unrecognized net transition
liability (asset) 390 451 491
Unrecognized prior service cost -- -- --
-------- --------- --------
Accrued benefit cost $(380) $(323) $(333)
======== ========= ========
Weighted-average assumptions
as of December 31
Discount rate 7.00% 7.00% 7.00%
Components of net periodic benefit cost
Service cost $ 14 $ 14 $ 13
Interest cost 53 56 57
Amortization of transition obligation 40 36 17
-------- --------- --------
Net periodic benefit cost $ 107 $ 106 $ 87
======== ========= ========
OTHER EMPLOYEE BENEFITS
In 1994, the Bank implemented an incentive compensation plan in which
senior management, officers, and non-officer employees are eligible to
participate at varying levels. The plan provides for awards based upon the
attainment of a combination of Bank, divisional, and individual performance
objectives. The expense for this plan amounted to $1,420,000, $1,366,000 and
$1,191,000 in 1999, 1998 and 1997, respectively.
Also, in 1994, the Bank amended its Profit Sharing Plan by converting it to
an Employee Savings Plan that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under the Employee Savings Plan,
participating employees may defer a portion of their pre-tax earnings, not to
exceed the Internal Revenue Service annual contribution limits. The Bank matches
50% of each employee's contributions up to 6% of the employee's earnings. In
1999, 1998 and 1997, the expense for this plan amounted to $393,000, $346,000
and $302,000, respectively.
In 1998 and 1999 the Bank entered into agreements to provide postretirement
benefits to two executive officers. The Bank has established rabbi trust funds
to aid in its accumulation of amounts necessary to satisfy the contractual
liability to pay such benefits. These agreements provide for the Bank to pay all
benefits thereunder from its general assets, and the establishment of these
trust funds does not reduce or otherwise affect the Bank's continuing liability
to pay benefits from such assets except that the Bank's liability shall be
offset by actual benefit payments made from the Trust. The related trust assets
totaled $486,000 and $424,000 at December 31, 1999 and 1998, respectively. The
liability is being recorded over the remaining service period of the executive
officers. The amount of expense recognized related to this plan amounted to
$92,000 and $25,000 in 1999 and 1998, respectively.
The Bank maintains a supplemental retirement plan for five executive
officers. In connection with funding this plan, the Bank has purchased life
insurance policies for each of the individuals. The cash surrender value of the
insurance policies as of December 31, 1999 and 1998 was $1.6 million and $1.1
million respectively. The impact of this plan on the income statement was a
benefit of $57,000 and $5,000 for 1999 and 1998, respectively, and an expense of
$18,000 in 1997.
In 1998, the Bank purchased $30.0 million of bank owned life insurance. The
value of this life insurance was $31.7 million and $30.1 million at December 31,
1999 and 1998, respectively.
(11) OTHER NON-INTEREST EXPENSES
Included in other non-interest expenses for each of the three years in the
period ended December 31, 1999 were the following:
1999 1998 1997
------- ------- --------
(In Thousands)
Advertising $ 1,197 $ 775 $ 679
Consulting fees 732 629 925
Legal fees - loan collection 357 299 583
Legal fees - other 284 531 413
FDIC assessment 140 132 112
Office supplies and printing 457 582 460
Data processing facilities management 4,337 4,166 3,727
Postage expense 679 694 674
Telephone expense 785 728 776
Other non-interest expenses 5,950 5,439 4,638
------- ------- --------
TOTAL $14,918 $13,975 $12,987
======= ======= ========
(12) Common Stock Purchase and Option Plans
The Company maintains a Dividend Reinvestment and Stock Purchase Plan.
Under the terms of the plan, stockholders may elect to have cash dividends
reinvested in newly issued shares of common stock at a 5% discount from the
market price on the date of the dividend payment. Stockholders also have the
option of purchasing additional new shares, at the full market price, up to the
aggregate amount of dividends payable to the stockholder during the calendar
year.
The Company has three stock option plans, the Amended and Restated 1987
Incentive Stock Option Plan ("The 1987 Plan"), the 1996 Non-Employee Directors
Stock Option Plan ("The 1996 Plan") and the 1997 Employee Stock Option Plan
("The 1997 Plan") The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost for
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
these plans been determined consistent with FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
1999 1998 1997
------- ------- -------
Net Income: As Reported (000's) $17,031 $16,139 $14,158
Pro Forma $16,809 $15,925 $14,068
Basic EPS: As Reported $1.20 $1.10 $.97
Pro Forma $1.18 $1.08 $.96
Diluted EPS: As Reported $1.19 $1.08 $.95
Pro Forma $1.17 $1.07 $.94
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The Company may grant options for up to 500,000, 300,000 and 800,000 shares
under the 1997, 1996 and 1987 Plans respectively. The Company has granted
options on 376,600, 140,000 and 638,075 shares, respectively, through December
31, 1999. At December 31, 1999 no shares were available for grant under the 1987
Plan due to the Plan's expiration in 1997. Under each Plan the option exercise
price equals the market price on date of grant. All options vest between six
months and two years and all expire between 2000 and 2009.
A summary of the status of the Company's three stock option plans at
December 31,1999 and December 31, 1998 and changes during the years then ended
is presented in the table and narrative below:
1999 1998
Wtd Avg Wtd Avg
Shares Ex. Price Shares Ex. Price
-------- --------- -------- ---------
Balance, January 1 610,457 $11.40 570,674 $9.22
Granted 152,000 $12.55 137,650 $17.52
Exercised (37,530) $6.27 (88,617) $6.39
Canceled (41,366) $14.76 (9,250) $15.73
------- -------
Balance, December 31 683,561 $11.73 610,457 $11.40
======= =======
Exercisable at
December 31 466,192 405,965
======= =======
Weighted average fair value
of options granted $2.70 $2.68
442,586 of the 683,561 options outstanding at December 31,1999 have
exercise prices between $4.44 and $12.41, with a weighted average exercise price
of $8.71 and a weighted average remaining contractual life of 6.3 years. 310,586
of these options are exercisable; their weighted average exercise price is
$7.14. The remaining 240,975 options have exercise prices between $13.38 and
$19.25, with a weighted average exercise price of $17.30 and a weighted average
remaining contractual life of 8.5 years. 155,606 of these options are
exercisable; their weighted average exercise price is $17.28.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants under the 1997 and 1996 plans:
1997 Plan 1996 Plan
Risk Free Interest Rate
1999 6.33% 5.02%
1998 4.67% 5.56%
Expected Dividend Yields
1999 3.22% 2.99%
1998 2.31% 1.87%
Expected Lives
1999 4 years 4 years
1998 4 years 4 years
Expected Volatility
1999 25% 25%
1998 15% 15%
(13) COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of amounts recognized in the consolidated balance
sheets. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. Off-balance
sheet financial instruments whose contractual amounts present credit risk
include the following at December 31, 1999 and 1998:
1999 1998
-------- --------
(In Thousands)
Commitments to extend credit:
Fixed Rate $ 20,249 $ 33,077
Adjustable Rate 7,163 7,034
Unused portion of existing credit lines 123,625 133,038
Unadvanced construction loans 31,169 20,958
Standby letters of credit 694 1,463
Interest rate swaps - notional value 55,000 20,000
The Company's exposure to credit loss in the event of non-performance by
the other party for commitments to extend credit and standby letters of credit
is represented by the contractual amounts of those instruments. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. The Bank evaluates each
customer's creditworthiness on an individual basis. The amount of collateral
obtained upon extension of the credit is based upon management's credit
evaluation of the customer. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial real estate. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing
29
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers. The
collateral supporting those commitments is essentially the same as for other
commitments. Most guarantees extend for one year. As a component of its
asset/liability management activities intended to control interest rate
exposure, the Bank has entered into certain off-balance sheet hedging
transactions. Interest rate swap agreements represent transactions which involve
the exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. The weighted average fixed payment
rates were 7.65% and 6.52% at December 31, 1999 and 1998, respectively, while
the weighted average rates of variable interest payments were 7.22% and 5.25% at
December 31, 1999 and 1998, respectively. As a result of these interest rate
swaps, the Bank realized net income of $.1 million for the years ended December
31, 1999 and 1998 respectively.
Entering into interest rate swap agreements involves both the credit risk
of dealing with counterparties and their ability to meet the terms of the
contracts and an interest rate risk. While notional principal amounts are
generally used to express the volume of these transactions, the amounts
potentially subject to credit risk are small due to the structure of the
agreements. The Bank is a direct party to these agreements which provide for net
settlement between the Bank and the counterparty on a semiannual basis. Should
the counterparty fail to honor the agreement, the Bank's credit exposure is
limited to the net settlement amount. The Bank had net receivables on the
interest rate swaps of $450,000 and $19,000 at December 31, 1999 and 1998,
respectively.
LEASES
The Company leases equipment, office space and certain branch locations
under noncancellable operating leases. The following is a schedule of minimum
future lease commitments under such leases as of December 31, 1999 (in
thousands):
2000 1,618
2001 1,440
2002 1,271
2003 1,205
2004 1,042
Thereafter 2,363
------
Total future minimum rentals $8,939
======
Rent expense incurred under operating leases was approximately $1.7 million
in 1999, $2.0 million in 1998, and $2.3 million in 1997. Renewal options ranging
from 3 to 10 years exist for several of these leases.
OTHER CONTINGENCIES
At December 31, 1999 there were lawsuits pending which arose in the
ordinary course of business. Management has reviewed these actions with legal
counsel and has taken into consideration the view of counsel as to the outcome
of the litigation. In the opinion of management, final disposition of these
lawsuits is not expected to have a material adverse effect on the Company's
financial position or results of operations.
The Bank is required to maintain certain reserve requirements of vault cash
and/or deposits with the Federal Reserve Bank of Boston. The amount of this
reserve requirement, included in cash and due from banks was $18.7 million and
$16.7 million at December 31, 1999 and 1998, respectively.
In 1999 and 1998, the Company invested a total of $.8 million in Zero Stage
Capital Associates VI, LLC, a Massachusetts limited liability company. The
Company's remaining commitment is $.7 million over the next three years. On
October 22, 1999 and June 1, 1999, the Company entered into master commitments
to deliver or sell $30.0 million (all of which is optional) and $40.0 million
(of which $20.0 million is mandatory) of residential mortgage loans to federal
agencies on or before April 30, 2000 and May 31, 2000 respectively. As of
December 31, 1999, the unfulfilled portion that remained to be delivered under
the $30.0 million commitment was approximately $28.1 million, the unfulfilled
portion under the $40.0 million was approximately $23.1 million.
(14) CORPORATION-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
In 1997, Independent Capital Trust I (the "Trust") was formed for the
purpose of issuing trust preferred securities (the "Trust Preferred Securities")
and investing the proceeds of the sale of these securities in $29.64 million of
9.28% junior subordinated debentures issued by the Company. A total of $28.75
million of 9.28% Trust Preferred Securities were issued by the Trust and are
scheduled to mature in 2027, callable at the option of the Company after May 19,
2002. Distributions on these securities are payable quarterly in arrears on the
last day of March, June, September and December, such distributions can be
deferred at the option of the Company for up to five years.
The Trust Preferred Securities can be prepaid in whole or in part on or
after May 19, 2002 at a redemption price equal to $25 per Trust Preferred
Security plus accumulated but unpaid distributions thereon to the date of the
redemption. In 1997, the Trust also issued $.89 million in common stock to the
Company. The Trust Preferred Securities are presented in the consolidated
balance sheets of the Company entitled "Corporation-Obligated Mandatorily
Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation." The Company records distributions
payable on the Trust Preferred Securities as a Minority Interest Expense in its
consolidated statements of income. In 1999 and 1998 the Company paid $2.7
million, respectively, of trust preferred security distributions. The cost of
issuance of the Trust Preferred Securities totaled $1.4 million and is being
amortized over the life of the Securities on a straight-line basis. The balance
at December 31, 1999 and 1998 was $1.3 million respectively. Amortization of
these issuance costs was $72,000 in 1999 and $74,000 in 1998.
The Company unconditionally guarantees all of the Trust's obligations under
the Trust Preferred Securities.
On January 31, 2000, Independent Capital Trust II (the "Trust II") was
formed for the purpose of issuing trust preferred securities (the "Trust
Preferred Securities") and investing the proceeds of the sale of these
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
securities in $25.8 million of 11% junior subordinated debentures issued by the
Company. A total of $25 million of 11% Trust Preferred Securities were issued by
the Trust and are scheduled to mature in 2030, callable at the option of the
Company after January 31, 2002. Distributions on these securities are payable
quarterly in arrears on the last day of March, June, September and December,
such distributions can be deferred at the option of the Company for up to five
years. The Trust Preferred Securities can be prepaid in whole or in part on or
after January 31, 2002 at a redemption price equal to $25 per Trust Preferred
Security plus accumulated but unpaid distributions thereon to the date of the
redemption. On January 31, 2000, the Trust II also issued $0.8 million in common
stock to the Company.
The cost of issuance of the Trust Preferred Securities is estimated at $1
million and will be amortized over the life of the Securities on a straight-line
basis.
The Company unconditionally guarantees all of the Trust II's obligations
under the Trust Preferred Securities.
(15) REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1999 that the Company and the Bank met
all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank of Boston relating to the Company and from the Federal Deposit
Insurance Corporation and the Commonwealth of Massachusetts relating to the
Bank, categorized both the Company and the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized an insured depository institution must maintain minimum Total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Company's and the Bank's category.
The Company and the Bank's actual capital amounts and ratios are also
presented in the following table.
For Capital
Actual Adequacy Purposes
------------------- ----------------------------------
Amount Ratio Amount Ratio
-------- ------- ---------- --------
As of December 31, 1999: (Dollars In Thousands)
Company: (consolidated)
greater than greater than
Total capital (to risk weighted assets) $143,058 12.39% and equal to $ 92,370 and equal to 8.0%
greater than greater than
Tier 1 capital (to risk weighted assets) 128,616 11.14 and equal to 46,223 and equal to 4.0
greater than greater than
Tier 1 capital (to average assets) 128,616 8.15 and equal to 63,124 and equal to 4.0
Bank
greater than greater than
Total capital (to risk weighted assets) $122,590 10.60% and equal to $ 95,521 and equal to 8.0%
greater than greater than
Tier 1 capital (to risk weighted assets) 108,133 9.35 and equal to 46,260 and equal to 4.0
greater than greater than
Tier 1 capital (to average assets) 108,133 6.86 and equal to 63,051 and equal to 4.0
As of December 31, 1998:
Company: (consolidated)
greater than greater than
Total capital (to risk weighted assets) $134,865 12.63% and equal to $ 85,406 and equal to 8.0%
greater than greater than
Tier 1 capital (to risk weighted assets) 121,484 11.38 and equal to 42,703 and equal to 4.0
greater than greater than
Tier 1 capital (to average assets) 121,484 7.91 and equal to 61,433 and equal to 4.0
Bank:
greater than greater than
Total capital (to risk weighted assets) $110,219 10.34% and equal to $ 85,286 and equal to 8.0%
greater than greater than
Tier 1 capital (to risk weighted assets) 96,857 9.09 and equal to 42,643 and equal to 4.0
greater than greater than
Tier 1 capital (to average assets) 96,857 6.32 and equal to 61,326 and equal to 4.0
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
---------------------------------------
Amount Ratio
----------- ------------
As of December 31, 1999: (Dollars In Thousands)
Company: (consolidated)
Total capital (to risk weighted assets) N/A N/A
Tier 1 capital (to risk weighted assets) N/A N/A
Tier 1 capital (to average assets) N/A N/A
Bank
greater than greater than
Total capital (to risk weighted assets) and equal to $115,651 and equal to 10.0%
greater than greater than
Tier 1 capital (to risk weighted assets) and equal to 69,390 and equal to 6.0
greater than greater than
Tier 1 capital (to average assets) and equal to 78,814 and equal to 5.0
As of December 31, 1998:
Company: (consolidated)
Total capital (to risk weighted assets) N/A N/A
Tier 1 capital (to risk weighted assets) N/A N/A
Tier 1 capital (to average assets) N/A N/A
Bank:
greater than greater than
Total capital (to risk weighted assets) and equal to $106,607 and equal to 10.0%
greater than greater than
Tier 1 capital (to risk weighted assets) and equal to 63,964 and equal to 6.0
greater than greater than
Tier 1 capital (to average assets) and equal to 76,657 and equal to 5.0
31
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) SEGMENT REPORTING
The Company has identified its reportable operating business segment as
Community Banking, based on how the business is strategically managed. The
Company's community banking business segment consists of commercial banking,
retail banking and trust services. The community banking business segment is
managed as a single strategic unit which derives its revenues from a wide range
of banking services, including lending activities, acceptance of demand, savings
and time deposits, trust and investment management, and mortgage servicing
income from investors. The Company does not have a single external customer from
which it derives ten percent or more of its revenues and operates in the New
England area of the United States.
Non reportable operating segments of the Company's operations, which do not
have similar characteristics to the community banking operations and do not meet
the quantitative thresholds requiring disclosure, are included in the Other
category in the disclosure of business segments below. These non-reportable
segments include Parent Company and Independent Capital Trust I financial
information (Note 18).
Information about reportable segments and reconciliation of such
information to the consolidated financial statements as of and for the years
ended December 31, follows (in thousands):
RECONCILIATION TO CONSOLIDATED FINANCIAL
INFORMATION
Community
Banking Other Eliminations Consolidated
----------- ----------- ------------ --------------
DECEMBER 31, 1999
Net Interest Income $ 61,086 $ 742 -- $ 61,828
Non-Interest Income 14,792 18,890 (18,889) 14,793
Depreciation and
Amortization 4,324 220 -- 4,544
Provisions for Possible
Loan Losses 3,927 -- -- 3,927
Net Income 18,806 17,114 (18,889) 17,031
Total Assets 1,586,797 158,841 (155,582) 1,590,056
Investment in Bank
Premises & Equipment 2,245 -- -- 2,245
Community
Banking Other Eliminations Consolidated
------------- ---------- ------------ --------------
DECEMBER 31, 1998
Net Interest Income $ 58,060 $ 1,083 -- $ 59,143
Non-Interest Income 13,125 18,042 (18,042) 13,125
Depreciation and
Amortization 3,981 221 -- 4,202
Provisions for Possible
Loan Losses 3,960 -- -- 3,960
Net Income 17,959 16,222 (18,042) 16,139
Total Assets 1,571,270 156,588 (152,789) 1,575,069
Investment in Bank
Premises & Equipment 5,041 -- -- 5,041
Community
Banking Other Eliminations Consolidated
------------ ----------- ------------ ------------
DECEMBER 31, 1997
Net Interest Income $ 51,468 $ 774 -- $ 52,242
Non-Interest Income 11,742 15,279 (15,279) 11,742
Depreciation and
Amortization 2,966 194 -- 3,160
Provisions for Possible
Loan Losses 2,260 -- -- 2,260
Net Income 15,228 14,209 (15,279) 14,158
Total Assets 1,365,953 153,118 (149,064) 1,370,007
Investment in Bank
Premises & Equipment 4,200 -- -- 4,200
Non-eliminating amounts included in the "Other" column are as follows:
1999 1998 1997
--------- --------- ---------
Parent Company $ (2,009) $ (1,668) $ (922)
Independent Capital Trust I 2,751 2,751 1,696
-------- -------- --------
Net Interest Income $ 742 $ 1,083 $ 774
Parent Company operating expenses, 18,634 17,807 15,080
net of miscellaneous income
Income Taxes not allocated
to segments
Parent Company (406) -- --
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes, not
including nonrecurring gains or losses.
The Company derives a majority of its revenues from interest income and the
chief operating decision maker relies primarily on net interest revenue to
assess the performance of the segments and make decisions about resources to be
allocated to the segment. Therefore, the segments are reported above using net
interest income.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) SELECTED QUARTERLY FINANCIAL DATA
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
1999 1998 1999 1998 1999 1998
----------- ----------- ----------- ----------- ----------- -----------
INTEREST INCOME $ 27,607 $ 26,085 $ 27,694 $ 26,547 $ 28,085 $ 28,186
INTEREST EXPENSE 12,745 11,659 12,583 11,757 12,292 13,064
---------------------------------------------------------------------------------
NET INTEREST INCOME $ 14,862 $ 14,426 $ 15,111 $ 14,790 $ 15,793 $ 15,122
---------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES 981 907 982 907 982 907
NON-INTEREST INCOME 3,425 3,087 3,881 3,398 3,601 3,260
NON-INTEREST EXPENSES 11,109 10,368 11,437 10,675 11,372 10,785
MINORITY INTEREST 667 667 667 667 667 667
PROVISION FOR INCOME TAXES 1,684 1,866 1,798 1,991 1,941 1,928
---------------------------------------------------------------------------------
NET INCOME $ 3,846 $ 3,705 $ 4,108 $ 3,948 $ 4,432 $ 4,095
=================================================================================
BASIC EARNINGS PER SHARE $ 0.27 $ 0.25 $ 0.29 $ 0.27 $ 0.31 $ 0.28
=================================================================================
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.25 $ 0.29 $ 0.26 $ 0.31 $ 0.27
=================================================================================
WEIGHTED AVERAGE
COMMON SHARES (BASIC) 14,312,093 14,828,992 14,164,975 14,854,477 14,167,691 14,774,324
COMMON STOCK EQUIVALENTS 169,506 253,334 155,506 257,400 149,887 209,022
WEIGHTED AVERAGE
COMMON SHARES (DILUTED) 14,481,599 15,082,236 14,320,481 15,111,877 14,317,578 14,983,346
=================================================================================
FOURTH
QUARTER
1999 1998
----------- -----------
INTEREST INCOME $ 28,620 $ 27,894
INTEREST EXPENSE 12,558 13,089
-------------------------
NET INTEREST INCOME $ 16,062 $ 14,805
-------------------------
PROVISION FOR POSSIBLE LOAN LOSSES 982 1,239
NON-INTEREST INCOME 3,886 3,380
NON-INTEREST EXPENSES 11,532 9,869
MINORITY INTEREST 667 667
PROVISION FOR INCOME TAXES 2,122 2,019
-------------------------
NET INCOME $ 4,645 $ 4,391
=========================
BASIC EARNINGS PER SHARE $ 0.33 $ 0.30
=========================
DILUTED EARNINGS PER SHARE $ 0.32 $ 0.30
=========================
WEIGHTED AVERAGE
COMMON SHARES (BASIC) 14,173,925 14,494,995
COMMON STOCK EQUIVALENTS 136,090 187,782
WEIGHTED AVERAGE
COMMON SHARES (DILUTED) 14,310,015 14,682,777
=========================
(18) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information relative to the Company's balance sheets at
December 31, 1999 and 1998, and the related statements of income and cash flows
for the years ended December 31, 1999, 1998, and 1997 are presented below.
BALANCE SHEETS
DECEMBER 31, 1999 1998
- ----------------------------------- -------- --------
Assets: (In Thousands)
Cash* $ 19,528 $ 21,861
Investments in subsidiaries* 106,400 101,273
Other investments 1,400 1,400
Other assets 1,865 2,406
-------- --------
Total assets $129,193 $126,940
======== ========
Liabilities and Stockholders' Equity:
Dividends Payable $ 1,417 $ 1,446
Junior Subordinated Debt 29,647 29,646
-------- --------
Total liabilities 31,064 31,092
Stockholders' equity 98,129 95,848
-------- --------
Total liabilities and stockholders' equity $129,193 $126,940
======== ========
*eliminated in consolidation
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------- ------- ------- -------
Income: (In Thousands)
Dividend received from subsidiaries $ 9,279 $ 7,593 $ 5,707
Interest income 743 1,083 774
------- ------- -------
Total income 10,022 8,676 6,481
------- ------- -------
Expenses:
Interest expense 2,751 2,751 1,696
Other expenses 255 235 199
------- ------- -------
Total expenses 3,006 2,986 1,895
------- ------- -------
Income before income taxes and
equity in undistributed income
of subsidiary 7,016 5,690 4,586
Equity in undistributed income
of subsidiaries 9,609 10,449 9,572
Income Tax Benefit 406 -- --
------- ------- -------
Net income $17,031 $16,139 $14,158
======= ======= =======
33
INDEPENDENT BANK CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 1997
- --------------------------------------------------- -------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands)
Net income $ 17,031 $ 16,139 $ 14,158
ADJUSTMENTS TO RECONCILE NET INCOME
TO CASH PROVIDED FROM OPERATING ACTIVITIES:
Amortization 220 221 194
(Increase) Decrease in other assets (22) (42) (1,478)
(Increase) Decrease in other liabilities 353 1 8
Equity in income of subsidiaries (9,609) (10,449) (9,572)
-------- --------- --------
TOTAL ADJUSTMENTS (9,058) (10,269) (10,848)
-------- --------- --------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 7,973 5,870 3,310
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities -- -- (400)
Capital Investment in subsidiary - Independent Capital Trust I -- -- (889)
-------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES -- -- (1,289)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issue and stock options exercised 236 566 716
Issuance of junior subordinated debentures -- -- 29,639
Treasury Stock Repurchase (4,836) (6,840) --
Dividends paid (5,706) (5,787) (4,700)
-------- --------- --------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (10,306) (12,061) 25,655
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,333) (6,191) 27,676
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 21,861 28,052 376
-------- --------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 19,528 $ 21,861 $ 28,052
======== ========= ========
19) RECENT EVENTS
In the third quarter of 1999, the Company and the Bank entered into a
Purchase and Assumption Agreement with Fleet Financial Group to acquire 12
Massachusetts branches, including ten throughout Cape Cod and two additional
branches in Brockton, totaling $269 million in deposits and $37 million in
consumer and SBA loans. In addition, the Company will purchase approximately
$100 million of loans at par from BankBoston's small business commercial real
estate portfolio. The acquisitions result from the divestiture of Fleet branches
after its merger with BankBoston. This transaction has received regulatory
approval and is contingent upon raising total risk-based (Tier 2) capital.
These branches will continue to operate as Fleet offices until they are
converted to Rockland Trust in late summer of 2000. All current Fleet employees
will be retained by Rockland Trust, and a special notification will be sent to
customers prior to the conversion.
On January 31, 2000, Independent Capital Trust II (the "Trust II") was
formed for the purpose of issuing trust preferred securities. A total of $25
million of 11% Trust Preferred Securities were issued by Trust II and are
scheduled to mature in 2030, callable at the option of the Company after January
31, 2002. The proceeds of this offering will satisfy the capital requirement
resulting from the acquisition as well as provide capital support for other
corporate initiatives. For further information see Note 14.
34
DIRECTORS OF INDEPENDENT BANK CORP.
Richard S. Anderson Robert L. Cushing ***Kevin J. Jones **Robert J. Spence
PRESIDENT AND TREASURER PRESIDENT TREASURER PRESIDENT
ANDERSON-CUSHING HANNAH B.G. SHAW HOME PLUMBERS' SUPPLY COMPANY ALBERT CULVER COMPANY
INSURANCE AGENCY, INC. FOR THE AGED, INC.
*Donald K. Atkins ***Alfred L. Donovan Lawrence M. Levinson William J. Spence
RETIRED, FORMER PRESIDENT INDEPENDENT CONSULTANT PARTNER PRESIDENT
AND CHIEF EXECUTIVE OFFICER BURNS & LEVINSON LLP MASSACHUSETTS BAY LINES,
WINTHROP - ATKINS CO., INC. Benjamin A. Gilmore, II INC.
TREASURER - HANNAH B.G. OWNER AND PRESIDENT Douglas H. Philipsen
SHAW HOME FOR THE AGED, INC. GILMORE CRANBERRY CO., INC. CHAIRMAN, PRESIDENT AND *** John H. Spurr, Jr.
CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT
W. Paul Clark ***E. Winthrop Hall AND TREASURER
PRESIDENT AND GENERAL CHAIRMAN AND PRESIDENT Richard H. Sgarzi A.W. PERRY, INC.
MANAGER F.L. & J.C. CODMAN PRESIDENT AND TREASURER
PAUL CLARK, INC. COMPANY BLACK CAT CRANBERRY CORP. ***Robert D. Sullivan
PRESIDENT
SULLIVAN TIRE COMPANY, INC.
Brian S. Tedeschi
CHAIRMAN
TEDESCHI REALTY CORP.
Thomas J. Teuten
PRESIDENT
A. W. PERRY, INC.
* Retired from Board
EFFECTIVE JANUARY 12, 2000
** Retires from Board
EFFECTIVE APRIL 1, 2000
*** Elected to Board
JANUARY 13, 2000
OFFICERS OF INDEPENDENT BANK CORP.
Douglas H. Philipsen Richard J. Seaman Linda M. Campion Tara M. Villanova
CHAIRMAN, PRESIDENT AND CHIEF FINANCIAL OFFICER AND CLERK ASSISTANT CLERK
CHIEF EXECUTIVE OFFICER TREASURER
DIRECTORS OF ROCKLAND TRUST COMPANY
Richard S. Anderson W. Paul Clark *Donald A. Greenlaw *Nathan Shulman
PRESIDENT AND TREASURER PRESIDENT AND GENERAL MANAGER RETIRED, FORMER PRESIDENT RETIRED, FORMER PRESIDENT
ANDERSON-CUSHING PAUL CLARK, INC. ROCKLAND TRUST COMPANY BEST CHEVROLET, INC.
INSURANCE AGENCY, INC.
E. Winthrop Hall *John F. Spence, Jr.
*John B. Arnold *Robert L. Cushing CHAIRMAN AND PRESIDENT RETIRED, FORMER CHAIRMAN
RETIRED, FORMER PRESIDENT PRESIDENT F.L. & J.C. CODMAN COMPANY OF THE BOARD
AND TREASURER HANNAH B.G. SHAW HOME ROCKLAND TRUST COMPANY
H.H. ARNOLD CO., INC. FOR THE AGED, INC. Kevin J. Jones
TREASURER ***Robert J. Spence
**Donald K. Atkins *H. Thomas Davis PLUMBERS' SUPPLY COMPANY PRESIDENT
RETIRED, FORMER PRESIDENT RETIRED, FORMER CHAIRMAN ALBERT CULVER COMPANY
AND CHIEF EXECUTIVE OFFICER CLIPPER ABRASIVES, INC. *Lawrence M. Levinson
WINTHROP-ATKINS CO., INC. PARTNER William J. Spence
TREASURER - HANNAH B.G. Alfred L. Donovan BURNS & LEVINSON LLP PRESIDENT
SHAW HOME FOR THE AGED, INC. INDEPENDENT CONSULTANT MASSACHUSETTS BAY LINES,
Douglas H. Philipsen INC.
*Theresa J. Bailey *Ann M. Fitzgibbons CHAIRMAN, PRESIDENT AND
RETIRED, FORMER SENIOR VOLUNTEER CHIEF EXECUTIVE OFFICER John H. Spurr, Jr.
VICE PRESIDENT AND CLERK EXECUTIVE VICE PRESIDENT
ROCKLAND TRUST COMPANY Benjamin A. Gilmore, II Richard H. Sgarzi AND TREASURER
OWNER AND PRESIDENT PRESIDENT AND TREASURER A.W. PERRY, INC.
GILMORE CRANBERRY CO., INC. BLACK CAT CRANBERRY CORP.
Robert D. Sullivan
PRESIDENT
SULLIVAN TIRE COMPANY, INC.
Brian S. Tedeschi
CHAIRMAN
TEDESCHI REALTY CORP.
Thomas J. Teuten
PRESIDENT
A.W. PERRY, INC.
* Honorary Director
** Honorary Director
EFFECTIVE JANUARY 12, 2000
*** Honorary Director
EFFECTIVE APRIL 1, 2000
OFFICERS OF ROCKLAND TRUST COMPANY
Douglas H. Philipsen Richard F. Driscoll Raymond G. Fuerschbach Linda M. Campion
CHAIRMAN, PRESIDENT AND EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT CLERK
CHIEF EXECUTIVE OFFICER RETAIL AND OPERATIONS HUMAN RESOURCES
Richard J. Seaman Ferdinand T. Kelley Russell N. Viau Tara M. Villanova
CHIEF FINANCIAL OFFICER EXECUTIVE VICE PRESIDENT VICE PRESIDENT AND ASSISTANT CLERK
AND TREASURER COMMERCIAL LENDING CHIEF INTERNAL AUDITOR
AND ASSET MANAGEMENT
& TRUST SERVICES
35
INDEPENDENT BANK CORP.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3:30 p.m. on Thursday,
April 13, 2000 at the Plimoth Plantation, Plymouth, Massachusetts.
COMMON STOCK
The Common Stock of the Company is traded over the counter through the
NASDAQ National Market System under the symbol of INDB.
PRICE RANGE OF COMMON STOCK
HIGH LOW DIVIDEND
------ ------ --------
1999
4th Quarter $14.25 $11.88 $0.10
3rd Quarter 15.88 12.19 0.10
2nd Quarter 16.00 12.75 0.10
1st Quarter 17.31 13.69 0.10
1998
4th Quarter $17.50 $14.00 $0.10
3rd Quarter 19.63 13.13 0.10
2nd Quarter 24.25 17.75 0.10
1st Quarter 20.00 14.75 0.10
STOCKHOLDER RELATIONS
Inquiries should be directed to:
Richard J. Seaman, Chief Financial Officer and Treasurer, or
Tina M. Hart, Shareholder Relations
Independent Bank Corp.
288 Union Street
Rockland, MA 02370
(781) 878-6100
FORM 10-K
A copy of the Annual Report on Form 10-K filed with the Securities and
Exchange Commission for fiscal 1999 is available without charge by writing
to:
Tina M. Hart, Shareholder Relations
Independent Bank Corp.
288 Union Street
Rockland, MA 02370
TRANSFER AGENT AND REGISTRAR
Transfer Agent and Registrar for the Company is:
State Street Bank and Trust Co.
c/o EquiServe Limited Partnership
P. O. Box 8200
Boston, MA. 02266-8200
1-800-426-5523
36