SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number: 1-9047
Independent Bank Corp.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2870273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
As of May 1, 2001 there were 14,269,660 shares of the registrant's
common stock outstanding, par value $.01 per share.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000
Consolidated Statements of Income - Three months ended
March 31, 2001 and 2000
Consolidated Statements of Cash Flows - Three months ended
March 31, 2001 and 2000
Notes to Consolidated Financial Statements - March 31, 2001
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART 1 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - IN THOUSANDS)
--------------------------------------
MARCH 31, DECEMBER 31,
--------------------------------------
2001 2000
--------------------------------------
ASSETS
Cash and Due From Banks $68,014 $58,005
Federal Funds Sold 16 -
Trading Assets 439 479
Investments Available For Sale 505,600 404,512
Investments Held to Maturity 92,972 195,416
Loans, Net of Unearned Discount 1,193,237 1,184,764
Less: Reserve for Possible Loan Losses (15,643) (15,493)
- ------------------------------------------------------------------------------------------------------------
Net Loans 1,177,594 1,169,271
- ------------------------------------------------------------------------------------------------------------
Bank Premises and Equipment 30,437 30,367
Intangible Assets 38,360 39,068
Other Assets 57,706 52,858
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,971,138 $1,949,976
============================================================================================================
LIABILITIES
Deposits
Demand Deposits $320,450 $336,755
Savings and Interest Checking Accounts 376,902 356,504
Money Market and Super Interest Checking Accounts 202,180 200,831
Time Certificates of Deposit 553,165 595,132
- ------------------------------------------------------------------------------------------------------------
Total Deposits 1,452,697 1,489,222
- ------------------------------------------------------------------------------------------------------------
Federal Funds Purchased and Assets Sold Under Repurchase Agreements 58,745 76,025
Federal Home Loan Bank Borrowings 261,224 191,224
Treasury Tax and Loan Notes 1,032 7,794
- ------------------------------------------------------------------------------------------------------------
Total Borrowings 321,001 275,043
- ------------------------------------------------------------------------------------------------------------
Total Deposits and Borrowings 1,773,698 1,764,265
Other Liabilities 24,520 19,681
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 1,798,218 1,783,946
- ------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Corporation-obligated mandatorily redeemable trust preferred securities of
Subsidiary trust holding solely junior subordinated debentures of the
Corporation 51,346 51,318
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, Authorized: 30,000,000 Shares
Outstanding: 14,863,821 Shares at March 31, 2001 and at December 31, 2000 149 149
Treasury Stock: 596,661 Shares at March 31, 2001 and 608,952 Shares at
December 31, 2000 (9,302) (9,495)
Surplus 43,937 44,078
Retained Earnings 80,835 77,028
Other Accumulated Comprehensive Income, Net of Tax 5,955 2,952
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 121,574 114,712
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY $1,971,138 $1,949,976
============================================================================================================
3
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000
- -------------------------------------------------------------------------------------------
INTEREST INCOME
Interest on Federal Funds Sold
& Short Term Investments $150 $85
Interest and Dividends on Securities 10,333 7,937
Interest on Loans 25,225 21,266
- -------------------------------------------------------------------------------------------
Total Interest Income 35,708 29,288
- -------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 11,318 7,610
Interest on Borrowed Funds 4,092 5,140
- -------------------------------------------------------------------------------------------
Total Interest Expense 15,410 12,750
- -------------------------------------------------------------------------------------------
Net Interest Income 20,298 16,538
- -------------------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES 650 717
- -------------------------------------------------------------------------------------------
Net Interest Income After Provision
For Possible Loan Losses 19,648 15,821
- -------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 1,952 1,385
Asset Management and Trust Services Income 1,082 1,133
Mortgage Banking Income 475 313
BOLI Income 443 413
Other Non-Interest Income 489 338
- -------------------------------------------------------------------------------------------
Total Non-Interest Income 4,441 3,582
- -------------------------------------------------------------------------------------------
Realized Gain on Securities Sales, Net 1,149 51
- -------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Salaries and Employee Benefits 8,289 6,321
Occupancy and Equipment Expenses 2,413 1,910
Data Processing 945 1,287
Goodwill Amortization 708 69
Other Non-Interest Expenses 3,663 2,640
- -------------------------------------------------------------------------------------------
Total Non-Interest Expenses 16,018 12,227
- -------------------------------------------------------------------------------------------
MINORITY INTEREST EXPENSE 1,383 1,149
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 7,837 6,078
PROVISION FOR INCOME TAXES 2,460 1,847
- -------------------------------------------------------------------------------------------
NET INCOME $5,377 $ 4,231
===========================================================================================
BASIC EARNINGS PER SHARE $0.38 $0.30
===========================================================================================
DILUTED EARNINGS PER SHARE $0.37 $0.30
===========================================================================================
Weighted average common shares (Basic) 14,261,015 14,215,268
Common stock equivalents 108,016 76,053
- -------------------------------------------------------------------------------------------
Weighted average common shares (Diluted) 14,369,031 14,291,321
===========================================================================================
4
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $5,377 $4,231
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING ACTIVITIES
Depreciation and amortization 1,751 1,102
Provision for possible loan losses 650 717
Loans originated for resale (21,668) (5,767)
Proceeds from mortgage loan sales 21,484 5,722
Loss on sale of mortgages 184 45
Gain recorded from mortgage servicing rights (48) (62)
Changes in assets and liabilities
Increase in other assets (4,800) (7,393)
(Decrease)/increase in other liabilities 4,156 (6,497)
- -----------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 1,709 (12,133)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES 7,086 (7,902)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of Securities Held to Maturity 451 6,808
Proceeds from maturities and sales of Securities Available for Sale 131,217 11,588
Purchase of Held to Maturity Securities (830) (747)
Purchase of Available for Sale Securities (125,722) (39,750)
Net increase in Loans (8,973) 3,869
Investment in Bank Premises and Equipment (1,256) (791)
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,113) (19,023)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in Deposits (36,525) (11,391)
Net (decrease)/increase in Federal Funds Purchased
And Assets Sold Under Repurchase Agreements (17,279) 20,766
Net increase in FHLB Borrowings 70,000 10,612
Net (decrease)/increase in TT&L Notes (6,762) (9,210)
Net proceeds from issuance of corporation-obligated - 23,834
Mandatorily redeemable trust preferred securities of Subsidiary trusts
holding solely junior subordinated debentures Of the
Corporation
Dividends Paid (1,434) (1,413)
Proceeds from stock issuance 52 229
Payments for treasury stock purchase - -
- -----------------------------------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES 8,052 33,427
- -----------------------------------------------------------------------------------------------------------
NET INCREASE /( DECREASE) IN CASH AND CASH EQUIVALENTS 10,025 6,502
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE YEAR 58,005 57,668
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AS OF MARCH 31, $68,030 $64,170
- -----------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information
CASH PAID DURING THE YEAR FOR:
Interest on deposits and borrowings $ 14,318
Minority Interest 1,383
Income Taxes 2,692
NON-CASH TRANSACTIONS:
Increase in fair value of derivatives, net of tax $ 829
Transfer of securities from HTM to AFS $102,801
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Independent Bank Corp. (the "Company") is a state chartered, federally
registered bank holding company headquartered in Rockland, Massachusetts. The
Company is the sole stockholder of Rockland Trust Company ("Rockland" or "the
Bank"), a Massachusetts trust company chartered in 1907. The Company's other
subsidiaries are Independent Capital Trust I and Independent Capital Trust II.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required accounting principles generally excepted in the United States
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the financial statements,
primarily consisting of normal recurring adjustments, have been included.
Operating results for the three month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001 or any other interim period. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report filed with the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 2000.
ACQUISITION
On August 4, 2000, the Company and the Bank, acquired 16 Massachusetts
branches from Fleet Financial Group (including 4 branches and associated loans
and deposits from Sovereign Bank), which added $336 million in deposits, and
$134.3 million of commercial, commercial real estate and consumer loans. The
total purchase price of the acquisition was approximately $40 million and was
paid in cash. The acquisition resulted from the divestiture of Fleet branches
after its merger with BankBoston. This Acquisition is being accounted for on the
financial statements using the purchase method of accounting. Under purchase
accounting, the acquired assets and liabilities of Fleet Financial Group are
recognized at their fair value as of the date of the acquisition. Goodwill of
$38.3 million generated by this transaction is being amortized on a
straight-line basis over 15 years. Financial results of the acquired branches
have been included in the Company's operations beginning August 4, 2000.
These branches opened as Rockland Trust offices on August 7, 2000 and
provide an expanded presence in Brockton and a powerful entrance into the Cape
Cod market.
6
RECENT ACCOUNTING DEVELOPMENTS
Effective January 1, 2001, the Company adopted 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. If a derivative qualifies as a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in the fair value of assets,
liabilities, or firm commitments through earnings or are recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is to be
immediately recognized in earnings.
As of January 1, 2001, the Company had interest rate swaps that
qualified as derivatives under SFAS No. 133. Interest rate swaps are used
primarily by the Company to hedge certain operational ("cashflow" hedges) and
balance sheet ("fair value" hedges) exposures resulting from changes in interest
rates. Such exposures result from portions of the Company's assets and
liabilities that earn or pay interest at a fixed rate. In addition, the Company
had entered into commitments to fund residential mortgage loans with the
intention of selling them in the secondary markets. The Company had also entered
into forward sales agreements for certain funded loans and loan commitments.
Upon adoption, SFAS No. 133 allows for the one time reclassification of
securities from "held-to-maturity" to "available-for-sale." On January 1, 2001,
the Bank reclassified $102.8 million of treasury, agency and mortgage backed
securities from "held-to-maturity" to "available-for-sale."
The adoption of SFAS No. 133 resulted in an increase of $371,000 in
Other Comprehensive Income with no material cumulative effect on earnings as
of January 1, 2001. The increase in Other Comprehensive Income was made up of
two components. The fair value of the Company's swaps treated as "cashflow"
hedges net of tax ($467,000) and the impact of reclassifying securities from
"held-to-maturity" to "available-for-sale" (-$96,000). The change in fair
value of the swaps during the first quarter was $362,000 net of tax, also
recorded in comprehensive income.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", and rescinds FASB
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." SFAS No. 140 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001 and is effective
for recognition and reclassification of collateral and for disclosures
7
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The Company has quantified the impact of provisions
effective for 2000 and the adoption did not have a material impact on the
financial position or results of operations. The Company has not yet quantified
the remaining provisions effective in 2001, 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.
EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET INCOME WEIGHTED AVERAGE NET INCOME
SHARES PER SHARE
- ----------------------------------------------------------------------------------------------------------
For the three months ended March 31, 2001 2000 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Basic EPS $5,377 $4,231 14,261 14,215 $0.38 $0.30
Effect of dilutive securities 108 76
Diluted EPS $5,377 $4,231 14,369 14,291 $0.37 $0.30
- ----------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Comprehensive income is reported net of taxes, as follows:
For the Three
Months Ended
March 31,
2001 2000
--------------------
Net Income $5,377 $4,231
Other Comprehensive Income, Net of Tax
Unrealized gains/(losses) on securities available for sale 3,017 72
Cumulative effect of FAS 133 adoption
Fair value of derivatives 467
Reclassification of securities from HTM to AFS (96)
Change in fair value of derivatives 362
Unrealized holding gains/(losses) arising during the period - -
Less: reclassification adjustment for gains included in net income (747)
--------------------
Other Comprehensive Income 3,003 72
--------------------
Comprehensive Income $8,380 $4,303
====================
8
SEGMENT INFORMATION
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
whom it derives ten percent or more of its revenues and it 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, Independent Capital Trust I and Independent
Capital Trust II financial information.
Information about reportable segments and reconciliation of such
information to the consolidated financial statements as of and for the quarters
ended March 31, follows (in thousands):
RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION
Community Other Adjustments
Banking Other and Eliminations Consolidated
For Three Months Ended March 31, 2001
Total Assets 1,970,438 232,048 (231,348) 1,971,138
Net Interest Income 20,287 11 - 20,298
Total Non-Interest Income 5,590 6,422 (6,422) 5,590
Net Income $6,381 $5,418 ($6,422) $5,377
For Three Months Ended March 31, 2000
Total Assets 1,617,535 211,075 (209,135) 1,619,475
Net Interest Income 16,139 399 - 16,538
Total Non-Interest Income 3,633 5,062 (5,062) 3,633
Net Income $5,026 $4,267 $(5,062) $4,231
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.
9
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
The following discussion should be read in conjunction with the financial
statements, notes and tables included in the Company's Annual Report filed with
the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 2000. The discussion contains certain forward-looking statements
regarding the future performance of the Company. All forward-looking information
is inherently uncertain and actual results may differ materially from the
assumptions, estimates or expectations reflected or contained in the
forward-looking information. Please refer to "Cautionary Statement Regarding
Forward-looking Information" of this Form 10-Q for a further discussion.
SUMMARY
For the three months ended March 31, 2001, Independent Bank Corp. (the
Company) recorded net income of $4.6 million excluding after tax security gains
of $747,000. This represents an increase of 10.3% from the $4.2 million reported
for the same quarter last year. Diluted earnings per share were $0.32 and $0.29
for the three months ended March 31, 2001 and 2000, respectively, excluding
security gains. Net interest income increased $3.8 million, or 22.7%. The
provision for loan losses decreased to $650,000 for the first three months of
2001 compared with $717,000 for the same period last year. Non-interest income
increased $0.9 million, or 24.0%, while non-interest expense increased $3.8
million, or 31.0%, over the first three months of 2000.
During the first quarter of 2001 the Company recorded pre-tax security
gains of $1.1 million on the sale of approximately $100 million of mortgage
backed securities. Including these gains, net income for the quarter ended March
31, 2001 was $5.4 million, a 27.1% increase over the same quarter last year.
Diluted earnings per share including security gains, were $0.37 a 23.3% increase
over the $0.30 recorded a year earlier. Proceeds from the sale of these
securities were reinvested during the first quarter of 2001.
The annualized returns on average assets and average equity, excluding
security gains, for the three months ended March 31, 2001 were 0.94% and 15.87%,
respectively, versus 1.05% and 16.74% for the prior year. Including security
gains, returns on average assets and average equity were 1.10% and 18.43%,
respectively, versus 1.06% and 16.87% for the prior year.
10
As of March 31, 2001, total assets amounted to $2.0 billion, an
increase of $21.2 million, or 1.1%, from year-end 2000. Investments decreased
$1.4 million while loans increased by $8.5 million, or 0.7%. The growth in the
loan portfolio occurred primarily in the construction and home equity
categories. Non-performing assets totaled $4.0 million at March 31, 2001 (0.20%
of total assets), slightly lower than the $4.4 million (0.23% of total assets)
at December 31, 2000.
Total deposits decreased by $36.5 million, or 2.5%, since year-end
2000. However, core deposits improved by $5.5 million, or 0.6%, to $900
million from $894 million at year-end 2000. The time deposits category
decreased by $42.0 million or 7.1%, to $553.2 million from $595.1 million at
year-end 2000, primarily due to the maturity of jumbo and brokered
certificates of deposit. Management anticipates improved growth in deposits
due to normal seasonal forces; i.e. the increase in population and business
activity in Barnstable and Plymouth counties as the weather improves.
NET INTEREST INCOME
The discussion of net interest income, which follows, is presented on a
fully tax-equivalent basis. Net interest income for the three months ended March
31, 2001, amounted to $20.6 million, an increase of $3.7 million, or 22.2%, from
the comparable 2000 time frame. The Company's net interest margin for the first
three months of 2001 was 4.59%, compared to 4.50% for the comparable 2000 time
frame. 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 10 basis points to 3.79%.
The average balance of interest-earning assets for the first three
months of 2001 amounted to $1.79 billion, an increase of $294.4 million, or
19.7%, from the comparable 2000 time frame. Income from interest-earning assets
amounted to $36.0 million for the three months ended March 31, 2001, an increase
of $6.4 million, or 21.6%, from the first three months of 2000.
Interest income is impacted by the amount of non-performing loans.
Gross interest income that would have been recognized for the quarter ended
March 31, 2001 if non-performing loans at the respective dates had been
performing in accordance with their original terms approximated $98,000.
The average balance of interest-bearing liabilities for the first
three months of 2001 was $1.45 billion, or 19.8%, higher than the comparable
2000 time frame. Average interest bearing deposits increased by $297.2 million,
or 35.1%, for the first three months of 2001 over the same period last year. For
the three months ended March 31, 2001, average borrowings were $57.8 million, or
15.8%, lower than the first three months of 2000, primarily in FHLB borrowings
which decreased by $34.2 million. A portion of both the increase in average
interest bearing deposits and the decrease in average borrowings can be
attributed to the acquisition of deposits and net funds received from
FleetBoston Financial in the third quarter of 2000. Interest expense on deposits
increased by $3.7 million to $11.3 million in the first three months of 2001 and
interest expense on borrowings decreased by $1.0 million, or 20.4%, to $4.1
million as compared to the same period last year. The cost of these
interest-bearing liabilities increased from 4.21% in 2000 to 4.25% in 2001.
11
PROVISION FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses is maintained at a level that
management considers adequate to provide for potential loan losses based upon an
evaluation of known and inherent risks in the loan portfolio. The reserve is
increased by provisions for possible loan losses and by recoveries of loans
previously charged-off and reduced by loan charge-offs. Determining an
appropriate level of reserve for possible loan losses necessarily involves a
high degree of judgment.
An analysis of individual loans and the overall risk characteristics
and size of the different loan portfolios is conducted on an ongoing basis. In
addition, the Company considers industry trends, regional and national economic
conditions, past estimates of possible losses as compared to actual losses, and
historical loss patterns. Management assesses the adequacy of the reserve for
possible loan losses and reviews that assessment quarterly with the Board of
Directors.
For the three months ended March 31, 2001, the provision for possible
loan losses, consistent with the level of loan growth experienced, was $650,000
as compared to $717,000 for the same period last year. Loans charged-off, net of
recoveries of loans previously charged-off amounted to $0.5 million for the
first three months of 2001, as compared to $0.4 million for the comparable 2000
period.
As of March 31, 2001, the ratio of the reserve for possible loan losses
to loans, net of unearned discount, was 1.31%, consistent with the level at 2000
year-end. Purchase accounting requires that a separate credit quality discount
reserve be established specifically for acquired loans. This credit quality
discount represents management's estimate of inherent losses incurred on the
acquired portfolio, which will be used to offset actual losses on this portfolio
in future periods. The credit quality discount totaled $1.3 million at March 31,
2001. The Company's total reserves available for possible loan loss (including
the credit quality discount of $1.3 million) as a percentage of the loan
portfolio was 1.42% at March 31, 2001, unchanged from the 2000 year-end level.
The percentage of total reserves for possible loan losses (including the credit
quality discount) to non-performing loans was 424.81% at March 31, 2001, an
increase from 382.15% at year-end 2000. Non-performing assets totaled $4.0
million at March 31, 2001 (.20% of total assets), slightly lower than the $4.4
million at December 31, 2000 (.23% of total assets).
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2001
increased $0.9 million, or 24.0%, to $4.4 million, compared to $3.6 million
for the same period in 2000. Income from service charges on deposit accounts
increased by $0.6 million, or 40.9%, primarily due to the acquisition. Also,
mortgage-banking income increased by $162,000, or 51.8%, due to refinancing
activity fueled by the interest rate environment. Volatility in the equity
markets adversely impacted Asset Management & Trust Services income (which
decreaed by $51,000 or 4.5%) whose income is derived based on portfolio
values.
12
NON-INTEREST EXPENSES
Non-interest expenses totaled $16.0 million for the three months ended
March 31, 2001, a $3.8 million, or 31.0% increase from the comparable 2000
period. Salaries and employee benefits increased $2.0 million, or 31.1%,
attributable to the addition of approximately one hundred employees staffing the
acquired branches, additions to staff needed to support continued growth
(including the introduction of a Call Center and Internet banking), employees'
merit increases, and increases in medical insurance premiums. Occupancy and
equipment-related expenses increased by $0.5 million, or 26.3%, primarily
attributable to the addition of the 16 branches (previously mentioned) as well
as the opening of a de novo branch in Falmouth and a new Technology Center in
Plymouth, all in the latter part of 2000. Also impacting occupancy expenses were
increases in utility costs. Data processing and facilities management decreased
by $0.3 million, or 26.6%, reflecting the benefit of the systems conversion in
June 2000. Goodwill amortization increased $0.6 million as a result of the
acquisition. Other non-interest expenses for the first three months of 2001
increased by $1.0 million, or 38.8%, to $3.7 million from $2.6 million in the
first three months of 2000, which includes increases in: consulting ($126,000);
office supplies and printing ($93,000); telephone ($292,000); and the normal
operating expenses of 17 additional branches.
MINORITY INTEREST
In the second quarter of 1997, Independent Capital Trust I (the
"Trust I") was formed for the purpose of issuing trust preferred securities
(the "Trust I Preferred Securities") and investing the proceeds of the sale
of these securities in junior subordinated debentures issued by the Company.
A total of $28.75 million of 9.28% Trust I Preferred Securities were issued
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 I 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.
On January 31, 2000, Independent Capital Trust II (the "Trust II") was
formed for the purpose of issuing trust preferred securities (the "Trust II
Preferred Securities") and investing the proceeds of the sale of these
securities in junior subordinated debentures issued by the Company. A total of
$25 million of 11% Trust II Preferred Securities were issued 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, and such distributions can be
deferred at the option of the Company for up to five years. The Trust II
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.
The Trust I and Trust II 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 I and Trust II Preferred
Securities as minority interest expense in its consolidated statements of
income. The minority interest expense for the three months ended March 31,
2001 and March 31, 2000 was $1.4 million and $1.1 million respectively.
13
INCOME TAXES
The Company records income tax expense pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes". The
Company evaluates the deferred tax asset and the valuation reserve on a
quarterly basis. The Company's effective tax rates for the three months ended
March 31, 2001 and 2000 were 31.4% and 30.4% respectively.
ASSET/LIABILITY MANAGEMENT
The principal objective of the Company's asset/liability management
strategy is to reduce the vulnerability of the Company to changes in interest
rates. This is accomplished by managing the volume of assets and liabilities
maturing, or subject to repricing, and by adjusting rates in relation to market
conditions to influence volumes and spreads.
The effect of interest rate volatility on net interest income is
minimized when the interest sensitivity gap (the difference between assets and
liabilities that reprice within a given time period) is the smallest. Given the
inherent uncertainty of future interest rates, the Bank's Asset/Liability
Management Committee evaluates the interest sensitivity gap and executes
strategies, which may include off-balance sheet activities, in an effort to
minimize the Company's exposure to interest rate movements while providing
adequate earnings in the most plausible future interest rate environments.
INTEREST RATE RISK
Interest rate risk is the sensitivity of income to variations in
interest rates over both short-term and long-term horizons. The primary goal of
interest-rate risk management is to control this risk within limits approved by
the Board. These limits reflect the Company's tolerance for interest-rate risk
by identifying exposures, quantifying and hedging them as needed. The Company
quantifies its interest-rate exposures using net interest income 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 and interest rate swaps.
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 policy limit on interest rate risk specify that if
interest rates were to shift up or down 200 basis points, estimated net income
for the next 12 months should decline by less than 6%. The following table
reflects the Company's estimated exposure, as a percentage of estimated net
interest income for the next 12 months.
Rate Change Estimated Exposure as %
(Basis Points) of Net Interest Income
- --------------------------------------------------------------------------------
+200 0.01%
-200 0.48%
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.
14
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 on
the Company's Swap agreements were 7.82% and 7.81% at March 31, 2001 and
December 31, 2000 while the weighted average rates of variable interest payments
were 5.92% and 7.34% at March 31, 2001 and December 31, 2000. As a result of
these interest rate swaps, the Bank realized net income of $0.3 million for the
three months ended March 31, 2001 and $0.1 million for March 31, 2000 time
period.
Entering into interest rate swap agreements involves both the credit
risk dealing with counterparties and their ability to meet the terms of the
contracts and 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 periodic 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 $1.9 million and $1.6 million at March 31, 2001 and December 31, 2000.
LIQUIDITY AND CAPITAL
Liquidity, as it pertains to the Company, is the ability to generate
cash in the most economical way, in order to meet 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.
A strong source of liquidity is the Company's core deposits, those
deposits which management considers, based on experience, are not likely to be
withdrawn in the near term. The Company utilizes its extensive branch-banking
network to attract retail customers who provide a stable source of core
deposits. In addition, the Company has established five repurchase agreements
with major brokerage firms as potential sources of liquidity. On March 31, 2001,
the Company had no outstanding lines under these agreements. As an additional
source of funds, the Bank has entered into repurchase agreements with customers
totaling $53.1 million at March 31, 2001. In addition, as a member of the
Federal Home Loan Bank, Rockland has access to approximately $499 million of
borrowing capacity. At March 31, 2001, the Company had $261.2 million
outstanding under such lines. The Company actively manages its liquidity
position under the direction of the Bank's Asset/Liability Management Committee.
Periodic review under formal policies and procedures is intended to ensure that
the Company will maintain access to adequate levels of available funds. At March
31, 2001, the Company's liquidity position was well above policy guidelines and
was sufficient to meet its operating needs.
15
CAPITAL RESOURCES AND DIVIDENDS
The Company and Rockland are subject to capital requirements
established by the Federal Reserve Board and the FDIC, respectively. One key
measure of capital adequacy is the risk-based ratio for which the regulatory
agencies have established minimum requirements of 4.00% and 8.00% for Tier 1
risk-based capital and total risk-based capital, respectively. As of March 31,
2001, the Company had a Tier 1 risked-based capital ratio of 8.80% and a total
risked-based capital ratio of 11.14%. Rockland had a Tier 1 risked-based capital
ratio of 9.68% and a total risked-based capital ratio of 10.87% as of the same
date.
An additional capital requirement of a minimum 4.00% Tier 1 leverage
capital is mandated by the regulatory agencies for most banking organizations
and a 5.00% Tier 1 leverage capital ratio is required for a "well capitalized"
institution. As of March 31, 2001, the Company and the Bank had Tier 1 leverage
capital ratios of 6.02% and 6.62%, respectively.
In March, the Company's Board of Directors declared a cash dividend of
$0.11 per share to shareholders of record as of March 30, 2001. This dividend
was paid on April 13, 2001. On an annualized basis, the dividend payout ratio
amounted to 26% of the trailing four quarters earnings.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The preceding Management's Discussion and Analysis and Notes to
Consolidated Financial Statements of this Form 10-Q contain certain
forward-looking statements, including without limitation, statements regarding
(i) the level of reserve for possible loan losses, (ii) the rate of
delinquencies and amounts of charge-offs, and (iii) the rates of loan growth.
Moreover, the Company may from time to time, in both written reports and oral
statements by Company management, express its expectations regarding future
performance of the Company. These forward-looking statements are inherently
uncertain and actual results may differ from Company expectations. The following
factors which, among others, could impact current and future performance include
but are not limited to: (I) adverse changes in asset quality and resulting
credit risk-related losses and expenses; (ii) adverse changes in the economy of
the New England region, the Company's primary market, (iii) adverse changes in
the local real estate market, as most of the Company's loans are concentrated in
Southeastern Massachusetts and a substantial portion of these loans have real
estate as collateral; (iv) fluctuations in market rates and prices which can
negatively affect net interest margin asset valuations and expense expectations;
and (v) changes in regulatory requirements of federal and state agencies
applicable to banks and bank holding companies, such as the Company and
Rockland, which could have materially adverse effect on the Company's future
operating results. When relying on forward-looking statements to make decisions
with respect to the Company, investors and others are cautioned to consider
these and other risks and uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item 3 is included in Item 2 of Part I of
this Form 10-Q, entitled "Management's Discussion and Analysis."
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
The financial information detailed below is included
hereafter in this report:
Consolidated Statements of Changes in Stockholders' Equity
- Three months ended March 31, 2001 and the year
ended December 31, 2000
Consolidated Average Balance Sheet and Average Rate Data -
Three months ended March 31, 2001 and 2000.
Item 6. Exhibits and Reports on Form 8-K - None
17
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(UNAUDITED - IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $149 ($10,678) $44,950 $67,547 ($3,839) $98,129
Net Income 15,190 15,190
Dividends Declared ($.10 per share) (5,709) (5,709)
Proceeds from Exercise of Stock Options 1,183 (904) 279
Tax Benefit on Stock Option Exercise 32 32
Repurchase of Common Stock
Change in Unrealized Gain (Loss) on Investments
Available for Sale, Net of Tax 6,791 6,791
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $149 ($ 9,495) $44,078 $77,028 $2,952 $114,712
==================================================================================================================================
Balance, January 1, 2001 $149 ($9,495) $44,078 $77,028 $2,952 $114,712
Net Income 5,377 5,377
Dividends Declared ($.11 per share) (1,570) (1,570)
Cumulative Effect of FAS 133 adoption
Fair value of derivatives 467 467
Reclassification of securities from HTM (96) (96)
to AFS
Change in fair value of Derivatives 362 362
Proceeds from Exercise of Stock Options 193 (143) 50
Tax Benefit of Stock Option Exercise 2 2
Repurchase Common Stock
Change in Unrealized Gain on Investments
Available for Sale, Net of Tax
2,270 2,270
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $149 ($9,302) $43,937 $80,835 $5,955 $121,574
==================================================================================================================================
18
INDEPENDENT BANK CORP.
SUPPLEMENTAL FINANCIAL INFORMATION
CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA
(UNAUDITED - IN THOUSANDS)
AVERAGE INTEREST
OUTSTANDING EARNED/ AVERAGE
BALANCE PAID YIELD
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2001 2001
------------------- ----------------- --------------
Interest-Earning Assets
Taxable Investment Securities $555,457 $9,852 7.09%
Non-taxable Investment Securities 38,095 726 7.63%
Loans, net of Unearned Discount 1,185,591 25,236 8.51%
Federal Funds Sold and Assets Purchased Under Resale Agreements 10,895 150 5.50%
Trading Assets 479 2 1.60%
------------------- --------------------------------
Total Interest-Earning Assets $1,790,517 $35,966 8.03%
------------------- ================================
Cash and Due From Banks 66,554
Other Assets 105,235
-------------------
Total Assets $1,962,306
===================
Interest-Bearing Liabilities
Savings and Interest Checking Accounts $363,827 $2,007 2.21%
Money Market & Super Interest Checking Accounts 193,131 940 1.95%
Other Time Deposits 587,007 8,372 5.70%
Federal Funds Purchased and Assets
Sold Under Repurchase Agreements 70,223 798 4.55%
Federal Home Loan Bank Borrowings 233,263 3,247 5.57%
Treasury Tax and Loan Notes 4,196 46 4.39%
------------------- ----------------- --------------
Total Interest-Bearing Liabilities $1,451,647 $15,410 4.25%
=================== ================= ==============
Demand Deposits 321,285
Company-Obligated Mandatorily Redeemable Securities of Subsidiary
Holding Solely Parent Company Debentures 51,330
Other Liabilities 21,337
-------------------
Total Liabilities 1,845,599
-------------------
Stockholders' Equity 116,707
-------------------
Total Liabilities and Stockholders' Equity $1,962,306
===================
Net Interest Income $20,556
=================
Interest Rate Spread 3.79%
==============
Net Interest Margin 4.59%
==============
Interest income and yield are stated on a fully tax-equivalent basis. The
total amount of adjustment is $258 in 2001.
19
INDEPENDENT BANK CORP.
SUPPLEMENTAL FINANCIAL INFORMATION
CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA
(UNAUDITED - IN THOUSANDS)
AVERAGE INTEREST
OUTSTANDING EARNED/ AVERAGE
BALANCE PAID YIELD
FOR THE THREE MONTHS ENDED MARCH 31, 2000 2000 2000
--------------- -------------- -----------
Interest-Earning Assets
Taxable Investment Securities $420,377 $7,391 7.03%
Non-taxable Investment Securities 43,080 810 7.52%
Loans, net of Unearned Discount 1,026,125 21,281 8.30%
Federal Funds Sold and Assets Purchased Under Resale Agreements 6,024 85 5.64%
Trading Assets 485 1 .82%
---------------------------------------------
Total Interest-Earning Assets $1,496,091 $29,568 7.91%
=============================================
Cash and Due From Banks 42,755
Other Assets 56,639
---------------
Total Assets $1,595,485
===============
Interest-Bearing Liabilities
Savings and Interest Checking Accounts $284,994 $1,167 1.64%
Money Market & Super Interest Checking Accounts 108,380 651 2.40%
Other Time Deposits 453,378 5,793 5.11%
Federal Funds Purchased and Assets
Sold Under Repurchase Agreements 93,632 1,160 4.96%
Federal Home Loan Bank Borrowings 267,453 3,922 5.87%
Treasury Tax and Loan Notes 4,389 58 5.29%
---------------------------------------------
Total Interest-Bearing Liabilities $1,212,226 $12,751 4.21%
=============================================
Demand Deposits 224,077
Company-Obligated Mandatorily Redeemable Securities of Subsidiary Holding
Solely Parent Company Debentures 53,750
---------------
Other Liabilities 5,136
---------------
Total Liabilities 1,495,189
---------------
Stockholders' Equity 100,296
---------------
Total Liabilities and Stockholders' Equity $1,595,485
===============
Net Interest Income $16,817
==============
Interest Rate Spread 3.69%
===========
Net Interest Margin 4.50%
===========
Interest income and yield are stated on a fully tax-equivalent basis. The
total amount of adjustment is $279 in 2000.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDEPENDENT BANK CORP.
(registrant)
Date: May 14, 2001 /s/ Douglas H. Philipsen
Douglas H. Philipsen
President, Chairman of the Board and
Chief Executive Officer
Date: May 14, 2001 /s/ Denis K. Sheahan
Denis K. Sheahan
Chief Financial Officer
and Treasurer
21