EXHIBIT NO. 13
Annual Report to Stockholders
[IBC logo]
SELECTED CONSOLIDATED FINANCIAL INFORMATION
& OTHER DATA
The selected consolidated financial information and other data of the Company
set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Consolidated Financial Statements and related notes,
appearing elsewhere herein.
As of or For the Year Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data)
FINANCIAL CONDITION DATA:
Securities held to maturity $290,894 $226,896 $256,785 $266,544 $194,635
Securities available for sale 26,449 32,628 4,250 - -
Loans, net of unearned discount 695,406 628,141 590,689 487,584 499,052
Reserve for possible loan losses 12,221 12,088 13,719 15,485 15,971
Total assets 1,092,793 987,589 929,194 829,681 807,146
Total deposits 918,572 871,085 796,612 743,385 729,020
Stockholders' equity 81,110 72,572 64,202 57,385 52,746
Nonperforming loans 4,462 5,271 7,864 16,982 28,802
Nonperforming assets 4,733 5,909 11,730 25,866 44,714
OPERATING DATA:
Interest income $77,211 $73,031 $63,487 $57,450 $63,055
Interest expense 32,354 29,143 22,029 22,920 29,127
Net interest income 44,857 43,888 41,458 34,530 33,928
Provision for possible loan losses 1,750 1,000 801 5,075 11,014
Non-interest income 12,709 11,480 11,470 12,995 17,059
Non-interest expenses 38,066 39,252 42,481 37,331 39,583
Net income 11,597 10,387 8,113 4,636 175
PER SHARE DATA:
Net income $0.79 $0.71 $0.56 $0.32 $0.03
Cash dividends declared 0.25 0.18 0.08 - -
Book value, end of period 5.55 5.00 4.45 3.98 3.66
OPERATING RATIOS:
Return on average assets 1.13% 1.10% 0.94% 0.59% 0.02%
Return on average equity 15.20% 15.28% 13.36% 8.48% 0.56%
Net interest margin 4.70% 4.99% 5.18% 4.74% 4.74%
ASSET QUALITY RATIOS:
Nonperforming loans as a percent of
gross loans 0.63% 0.83% 1.31% 3.45% 5.71%
Nonperforming assets as a percent of
total assets 0.43% 0.60% 1.26% 3.12% 5.54%
Reserve for possible loan losses as a
percent of loans, net of unearned discount 1.76% 1.92% 2.32% 3.18% 3.20%
Reserve for possible loan losses as a
percent of nonperforming loans 273.89% 229.33% 174.45% 91.18% 55.45%
CAPITAL RATIOS:
Tier 1 leverage capital ratio 7.35% 7.24% 6.76% 6.83% 6.50%
Tier 1 risk-based capital ratio 10.89% 10.67% 10.05% 10.71% 9.67%
Total risk-based capital ratio 12.15% 11.92% 11.31% 11.98% 10.94%
5
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INDEPENDENT BANK CORP.
======================
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 subsidiary, Rockland Trust Company
(Rockland or the Bank). 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 $1,092.8
million in 1996, compared with $987.6 million in 1995. The growth was driven by
an increase in loans of $67.3 million, centered in residential real estate,
commercial real estate and consumer loans. The securities portfolio increased to
$324.9 million at December 31, 1996, compared with $263.3 million at December
31, 1995. The growth occurred in the securities held to maturity portfolio which
increased by $64.0 million during 1996. This increase was primarily the result
of the bank taking advantage of attractive yields in the bond market and
continuing to invest in the local communities through tax-advantaged securities.
An increase in deposits of $47.5 million and increased FHLB borrowings of $58.0
million were used to fund the noted growth.
The Company's total assets grew to $987.6 million as of December 31, 1995, an
increase of $58.4 million, or 6.3%, over 1994 year-end assets. Loan growth
resulting from a relatively stable interest rate environment and an improved
regional economy were the primary contributing factors. An increase in deposits
of $74.5 million was used to fund loan growth. Also note that year end deposit
balances were inflated by a $17 million deposit made on the last day of 1995,
which was subsequently withdrawn on the first business day of 1996.
Loan Portfolio. At December 31, 1996, the Bank's loan portfolio amounted to
$695.4 million, an increase of $67.3 million, or 10.7%, from year-end 1995. This
increase was primarily centered in commercial real estate, residential real
estate and consumer loans. Commercial loan outstandings were relatively
unchanged over the year.
The reserve for possible loan losses is maintained at a level that management
of the Bank considers adequate based upon relevant circumstances. The reserve
for possible loan losses was $12.2 million at December 31, 1996. The ratio of
the reserve for possible loan losses to non-performing loans was 273.9% at
December 31, 1996, an improvement in coverage from the level of 229.3% recorded
a year earlier.
At December 31, 1995, the bank's loan portfolio amounted to $628.1 million,
an increase of $37.5 million, or 6.3%, from year-end 1994. This increase was
primarily reflected in commercial mortgages and consumer loans. Commercial loan
balances were relatively unchanged over the year.
The Bank provides its customers with access to capital by providing a broad
range of credit services. The Bank's commercial customers consist of
small-to-medium-sized businesses which utilize demand, time, and term loans, as
well as funding guaranteed by the Small Business Administration, to finance
their businesses. The Bank's retail customers can choose from a variety of
mortgage and consumer loan products. The Bank's principal lending market
provides attractive lending opportunities for commercial, real estate, and
consumer loans.
The Bank's loan committee consists of the Bank's President, the Executive
Vice President of the Commercial Lending Division, the Senior Credit Policy
Officer, and the Commercial Loan Regional Managers. The committee considers a
variety of policy issues, including underwriting and credit standards, and
reviews loan proposals which exceed the individual loan officer's lending
authority.
Asset Quality. The Bank's principal earning assets are its loans. Although
the Bank judges its borrowers to be creditworthy, the risk of deterioration in
borrowers' abilities to repay their loans in accordance with their existing loan
agreements is inherent in any lending function. Participating as a lender in the
credit markets requires a strict monitoring process to minimize credit risk.
This process requires substantial analysis of the loan application, the
customer's capacity to repay according to the loan's contractual terms, and an
objective determination of the value of the collateral.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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, 1996, nonperforming assets
totaled $4.7 million, a reduction of $1.2 million, or 19.9%, from the prior
year-end. Nonperforming assets have declined to 0.43% of total assets as
compared to 0.60% at the end of the preceding year. Management believes that the
current level of nonperforming assets has reached an inherent base level, given
the risks in the industry and in the environment within which the Bank operates.
The following table sets forth information regarding nonperforming loans and
nonperforming assets on the dates indicated.
December 31, September 30, June 30, March 31, December 31, December 31,
1996 1996 1996 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Nonperforming Loans:
Loans past due 90 days or more
but still accruing $516 $559 $383 $556 $553 $598
Loans accounted for on a nonaccrual
basis 3,946 5,491 5,979 5,641 4,718 7,266
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Total nonperforming loans 4,462 6,050 6,362 6,197 5,271 7,864
- ----------------------------------------------------------------------------------------------------------------
Other real estate owned 271 345 10 450 638 3,866
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Total nonperforming assets $4,733 $6,395 $6,372 $6,647 $5,909 $11,730
================================================================================================================
Nonperforming loans as a percent of
gross loans 0.63% 0.89% 0.95% 0.94% 0.83% 1.31%
================================================================================================================
Nonperforming assets as a percent of
total assets 0.43% 0.60% 0.61% 0.67% 0.60% 1.26%
================================================================================================================
7
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INDEPENDENT BANK CORP.
======================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
As permitted by banking regulations, consumer loans and home equity loans
past due 90 days or more continue to accrue interest. In addition, certain
commercial and real estate loans that are more than 90 days past due may be kept
on an accruing status if the loan is well secured and in the process of
collection. As a general rule, a commercial or real estate loan more than 90
days past due with respect to principal or interest is classified as a
nonaccrual loan. Income accruals are suspended on all nonaccrual loans and all
previously accrued and uncollected interest is reversed against current income.
A loan remains on nonaccrual status until it becomes current with respect to
principal and interest, or when the loan is liquidated, or when the loan is
determined to be uncollectible and is charged-off against the reserve for
possible loan losses.
The following table sets forth the Bank's nonperforming loans by loan
category on the dates indicated.
December 31, 1996 1995
- ------------------------------------------------------------
(In Thousands)
Loans past due 90 days or more
but still accruing:
Real Estate - Residential $136 $333
Consumer - Instalment 197 67
Consumer - Other 183 153
- ------------------------------------------------------------
Total $516 $553
- ------------------------------------------------------------
Loans accounted for on a
nonaccrual basis:
Commercial $1,090 $1,350
Real Estate - Commercial 1,038 1,208
Real Estate - Residential 1,526 2,017
Consumer - Installment 292 143
- ------------------------------------------------------------
Total 3,946 4,718
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Total Nonperforming Loans $4,462 $5,271
============================================================
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
their current financial status. It is the Bank's policy to maintain a
restructured loan on nonaccrual status for approximately six months before
management considers its return to accrual status.
Real estate acquired by the Bank through foreclosure proceedings or the
acceptance of a deed in lieu of foreclosure is classified as OREO. When property
is acquired, it is recorded at the lesser of the loan's remaining principal
balance or the estimated fair value of the property acquired, less estimated
costs to sell. Any loan balance in excess of the estimated fair value on the
date of transfer is charged to the reserve for possible loan losses on that
date. All costs incurred thereafter in maintaining the property, as well as
subsequent declines in fair value, are charged to non-interest expense. The
following table summarizes OREO activity during the periods indicated.
Activity Amount
- ------------------------------------------------
(In Thousands)
Balance, December 31, 1994 $3,866
Properties Acquired 878
Sales and Rental Proceeds (3,953)
OREO Write-Downs (153)
- ------------------------------------------------
Balance, December 31, 1995 638
- ------------------------------------------------
Properties Acquired 601
Sales and Rental Proceeds (968)
OREO Write-Downs -
- ------------------------------------------------
Balance, December 31, 1996 271
================================================
The following table sets forth the types of properties, all of which are
located in the Bank's market area, which comprise the Bank's OREO as of December
31, 1996.
Type of Properties Amount
- ---------------------------------------------------
(In Thousands)
Residential Condominiums 55
Commercial/Office/Rental Properties 56
Single-family Properties 160
- ---------------------------------------------------
Total 271
===================================================
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.
8
[IBC logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Securities Portfolio. The Company's securities portfolio consists of
securities which management intends to hold until maturity, securities available
for sale, and Federal Home Loan Bank (FHLB) stock. Securities which management
intends to hold until maturity consist of U.S.Treasury and U. S. Government
Agency obligations, mortgage-backed securities, including collateralized
mortgage obligations, as well as municipal securities. Securities held to
maturity as of December 31, 1996 are carried at their amortized cost of $290.9
million and exclude gross unrealized gains of $1.2 million and gross unrealized
losses of $3.2 million. A year earlier, securities held to maturity totaled
$226.9 million excluding gross unrealized gains of $2.1 million and gross
unrealized losses of $1.6 million.There were no sales of securities held to
maturity during 1996 or 1995.
Securities available for sale consist of certain mortgage-backed securities,
including collateralized mortgage obligations. These securities are carried at
fair market value and unrealized gains and losses, net of applicable income
taxes, are recognized as a separate component of stockholders' equity. The fair
market value of securities available for sale at December 31, 1996 totaled $26.4
million and net unrealized losses totaled $135,000. A year earlier, securities
available for sale were $32.6 million with net unrealized losses of $60,000.
There were no sales of securities available for sale during 1996 or 1995.
The investment in the stock of the Federal Home Loan Bank is related to the
admission of Rockland as a member of the Federal Home Loan Bank of Boston in
July 1994. This investment was increased during 1996 to maintain investment
levels required by FHLB guidelines.
Deposits. Including three new branches opened in 1996, the Bank's branch
system consists of 32 locations, in addition to the main office of its
subsidiary. 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, 1996, deposits of $918.6 million were $47.5 million, or
5.5%, 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, NOW, savings, and money market accounts,
decreased $8.1 million, or 1.5%. It should be noted that the 1995 year-end
balances were inflated by a $17 million deposit made on the last day of the year
which was subsequently withdrawn on the first business day of January, 1996.
Time deposits increased $55.5 million, or 17.3%, primarily as a result of a one
year certificate promotion in the latter half of 1996.
Total deposits increased $74.5 million, or 9.3%, during the year ended
December 31, 1995. Core deposits decreased $6.3 million, or 1.1%, while time
deposits increased $80.7 million, or 33.6%.
Borrowings. Short term borrowings, consisting of federal funds purchased,
assets sold under repurchase agreements, and treasury tax and loan notes,
amounted to $3.1 million on December 31, 1996, a decrease of $5.0 million from
year-end 1995. At December 31, 1996, the Bank did not have any borrowings under
repurchase agreements. In addition to short term borrowings, the Bank had
borrowings of $78.0 million from the FHLB at year-end 1996, an increase of $58.0
million from December 31, 1995. The initial maturities of the current FHLB
borrowings range from 2 to 9 months.
9
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INDEPENDENT BANK CORP.
======================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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, 1996, the Company recorded net income of
$11.6 million, or $.79 per share, compared to net income of $10.4 million, or
$.71 per share in 1995. The improvement in the results of operations in 1996
reflects a 2.2% increase in net interest income, a 10.7% increase in
non-interest income, and a decrease of 3.0% in non-interest expenses. Each of
these components are discussed in detail below.
For the year ended December 31, 1995, the Company recorded net income of
$10.4 million, or $.71 per share, compared to net income of $8.1 million, or
$.56 per share in 1994. The improvement in the results of operations in 1995 was
due to a 5.9% increase in net interest income and 7.6% decrease in non-interest
expenses. Non-interest income was virtually the same as 1994.
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 $45.2 million in
1996, a 2.2% increase over 1995 net interest income of $44.3 million. Growth in
net interest income in 1996 compared with that of 1995 was primarily the result
of an 8.5% increase in average earning assets, partially offset by the effect of
lower interest rates. The yield on earning assets was 8.06% in 1996, compared
with 8.27% in 1995, due to a combination of lower interest rates on loans and a
change in the mix of earning assets. Also note that a recovery of $700,000 in
December 1995 was recorded as interest income, as required by the Financial
Accounting Standards Board (FASB). During 1996, the average balance of
interest-bearing liabilities increased $60.7 million, or 8.5%, over 1995 average
balances. The average cost of these liabilities rose from 4.09% in 1995 to 4.19%
in 1996 reflecting the increase in the higher cost of borrowing and consumer
certificate categories. The Company's interest rate spread (the difference
between the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities) decreased by 31 basis points. This
is due to the above mentioned recovery, as well as the Company's decision to
expand the securities portfolio, financed by borrowings, repurchase agreements,
and consumer certificates of deposit, to take advantage of a strong capital
position. While these funding and investment actions increased net interest
income, the net interest margin reflects the lower net interest spread on such
transactions.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table presents the Company's average balances, net interest
income, interest rate spread, and net interest margin for 1996, 1995, and 1994.
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.
1996 1995 1994
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 $3,822 $208 5.44% $16,666 $964 5.78% $7,841 $330 4.21%
Interest bearing deposits 127 7 5.51% 362 19 5.25% 563 21 3.73%
Taxable securities 293,516 18,857 6.42% 251,588 15,900 6.32% 257,663 15,939 6.19%
Non-taxable securities (1) 7,411 431 5.82% 6,479 385 5.94% 5,890 293 4.97%
Loans, net of unearned
discount (1) 657,749 58,100 8.83% 612,481 56,138 9.17% 534,052 47,205 8.84%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $962,625 $77,603 8.06% $887,576 $73,406 8.27% $806,009 $63,788 7.91%
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 46,840 44,027 41,053
Other assets 15,574 14,367 17,637
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $1,025,039 $945,970 $864,699
============================================================================================================================
Interest-bearing liabilities
Savings and NOW accounts $257,294 $5,563 2.16% $261,302 $5,760 2.20% $290,719 $6,562 2.26%
Money Market & Super NOW
accounts 105,706 2,944 2.79% 110,431 3,030 2.74% 119,347 2,944 2.47%
Time deposits 328,232 19,164 5.84% 292,206 17,252 5.90% 214,780 10,960 5.10%
Federal funds purchased and
assets sold under repurchase
agreements 23,418 1,284 5.48% 15,167 910 6.00% 14,417 603 4.18%
Treasury tax and loan notes 3,115 139 4.46% 3,828 181 4.73% 3,617 122 3.37%
Federal Home Loan Bank
borrowings 51,382 2,885 5.61% 24,384 1,531 6.28% 5,918 352 5.95%
Subordinated capital notes 3,805 375 9.86% 4,898 479 9.78% 4,965 486 9.79%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $772,952 $32,354 4.19% $712,216 $29,143 4.09% $653,763 $22,029 3.37%
- ----------------------------------------------------------------------------------------------------------------------------
Demand deposits 161,475 153,142 141,533
Other liabilities 14,318 12,628 8,661
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 948,745 877,986 803,957
Stockholders' equity 76,294 67,984 60,742
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $1,025,039 $945,970 $864,699
============================================================================================================================
Net Interest Income $45,249 $44,263 $41,759
======= ======= =======
Interest Rate Spread (2) 3.87% 4.18% 4.54%
==== ==== ====
Net Interest Margin (2) 4.70% 4.99% 5.18%
==== ==== ====
(1) The total amount of adjustment to present interest income and yield on a
fully tax-equivalent basis is $392, $375 and $301 in 1996, 1995 and 1994,
respectively.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities. Net interest margin represents net interest
income as a percent of average interest-earning assets.
11
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INDEPENDENT BANK CORP.
======================
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 changes in rate
and changes in volume. Changes which are attributable to both volume and rate
have been consistently allocated to change due to rate.
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------
1996 Compared To 1995 1995 Compared To 1994
- -----------------------------------------------------------------------------------------------------
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 ($14) ($742) ($756) $262 $372 $634
Interest bearing deposits - (12) (12) 6 (8) (2)
Taxable securities 307 2,650 2,957 337 (376) (39)
Non-taxable securities (1) (9) 55 46 63 29 92
Loans, net of unearned
discount (1) (2,189) 4,151 1,962 2,000 6,933 8,933
- -------------------------------------------------------------------------------------------------------
Total ($1,905) $6,102 $4,197 $2,668 $6,950 $9,618
=======================================================================================================
Expense of interest-bearing
liabilities:
Savings and NOW accounts ($109) ($88) ($197) ($137) ($665) (802)
Money Market and Super NOW
accounts 43 (129) (86) 306 (220) 86
Time deposits (214) 2,126 1,912 2,343 3,949 6,292
Federal funds purchased and
assets sold under repurchase
agreements (121) 495 374 276 31 307
Treasury tax and loan notes (8) (34) (42) 52 7 59
Federal Home Loan Bank
borrowings (341) 1,695 1,354 80 1,099 1,179
Subordinated capital notes 3 (107) (104) - (7) (7)
- -------------------------------------------------------------------------------------------------------
Total ($747) $3,958 $3,211 $2,920 $4,194 7,114
=======================================================================================================
Change in net interest income ($1,158) $2,144 $986 ($252) $2,756 $2,504
=======================================================================================================
(1) Interest earned on non-taxable securities and loans is shown on a fully tax
equivalent basis.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Total interest income amounted to $77.6 million in 1996, an increase of $4.2
million, or 5.7%, over 1995. This was due primarily to a rise of $3.0 million,
or 18.6%, in interest earned on taxable securities, attributable to a $41.9
million, or 16.7%, increase in the average balance of taxable securities
outstanding, as well as a 10 basis point increase in the average yield earned on
taxable securities. Interest earned on outstanding loans grew $2.0 million, or
3.5% due to a $45.3 million, or 7.4% increase in the average balance of loans
outstanding, partially offset by a 34 basis point decline in the average yield
on loans.
Total interest expense for the year ended December 31, 1996 increased $3.2
million, or 11.0%, over 1995. The increase was primarily due to a higher balance
of time deposit accounts. During 1996, the average balance of interest-bearing
deposit accounts increased $27.3 million, or 4.1% and the average cost of
interest bearing deposits rose 8 basis points. The average balance of borrowings
amounted to $81.7 million in 1996, as compared to $48.3 million in 1995. This
increase in the average outstanding balance represents a more frequent
utilization of lower cost FHLB borrowings. The average cost of borrowings
decreased by 69 basis points from the prior year reflecting market conditions.
Total interest income amounted to $73.4 million in 1995, an increase of $9.6
million, or 15.1%, over 1994. This was due primarily to a rise of $8.9 million,
or 18.9%, in interest earned on loans, attributable to a $78.4 million, or
14.7%, increase in the average balance of loans outstanding, as well as a 33
basis point increase in the average yield earned on loans. Interest earned on
federal funds sold increased almost 200% due to higher average balances and
increased yields. Total income from the securities portfolio was $53,000 higher
than in 1994. A decline in the average balance of securities was offset by a
slight increase in the yield earned on the portfolio.
Total interest expense for the year ended December 31, 1995 increased $7.1
million, or 32.3%, over 1994. The increase was primarily due to a substantially
higher balance of time deposit accounts. During 1995, the average balance of
interest-bearing deposit accounts increased $39.1 million, or 6.3%. During the
same period, the average cost of interest bearing deposits rose 64 basis points.
Provision for Possible Loan Losses.The provision for possible loan losses
represents the charge to expense that is required to fund the reserve for
possible loan losses. Management's periodic evaluation of the adequacy of the
reserve considers past loan loss experience, known and inherent risks in the
loan portfolio, adverse situations which may affect the borrowers' ability to
repay, the estimated value of the underlying collateral, if any, and current and
prospective economic conditions. A substantial portion of the Company's loans
are secured by real estate in Massachusetts. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio is
susceptible to changes in property values.
The provision for loan losses increased in 1996 to $1.8 million, compared
with $1.0 million in 1995, reflecting higher loan originations. For the year
ended December 31, 1996, net loan charge-offs totaled $1.6 million, a decrease
of $1.0 million from the prior year. As of December 31, 1996, the reserve for
possible loan losses represented 1.76% of loans, net of unearned discount, as
compared to 1.92% at December 31, 1995. Substantial improvement in the coverage
of nonperforming loans was noted as the reserve for possible loan losses at
December 31, 1996 represented 273.9% of nonperforming loans on that date, as
compared to coverage of 229.3% at the prior year-end.
For the year ended December 31, 1995, the provision for possible loan losses
amounted to $1.0 million, an increase of $199,000 from the 1994 provision and
net loan charge-offs totaled $2.6 million, which was the same as the prior year.
At December 31, 1995, the reserve balance represented 1.92% of loans, net of
unearned discount, as compared to 2.32% in 1994. The coverage of non performing
loans at December 31, 1995 improved to 229.3%, as compared to 174.5% at the
prior year-end.
The provision for loan losses is based upon management's evaluation of the
level of the reserve for possible loan losses required in relation to the
estimate of loss exposure in the loan portfolio. An analysis of individual loans
and the overall risk characteristics and size of the different loan portfolios
is conducted on an ongoing basis. This managerial evaluation is reviewed
periodically by the Company's independent public accountants as well as by a
third-party loan review consultant. As adjustments are identified, they are
reported in the earnings of the period in which they become known.
13
- ----------------------
INDEPENDENT BANK CORP.
======================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Management believes that the reserve for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the reserve may be necessary based on increases in nonperforming
loans, changes in economic conditions, or for other reasons. Various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's reserve for possible loan losses. The Company was most recently
examined by Federal Reserve regulators in the first quarter of 1996 and the Bank
was most recently examined by the Commonwealth of Massachusetts, Division of
Banks, in the second quarter of 1996. No additional provision for possible loan
losses was required as a result of these examinations.
Non-Interest Income. The following table sets forth information regarding
non-interest income for the periods shown.
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------
(In Thousands)
Service charges on deposit
accounts $ 5,829 $ 5,648 $ 5,709
Trust and financial services
income 2,790 2,424 2,151
Mortgage banking income 2,776 2,243 2,046
Other non-interest income 1,314 1,165 1,564
- ---------------------------------------------------------
TOTAL $12,709 $11,480 $11,470
==========================================================
Non-interest income, which is generated by deposit account service charges,
fiduciary services, mortgage banking activities, and miscellaneous other
sources, amounted to $12.7 million in 1996.
Service charges on deposit accounts, which represents approximately one half
of non-interest income, increased from $5.6 million in 1995 to $5.8 million in
1996.
Trust and Financial Services revenue increased by 15.1% to $2.8 million
compared to $2.4 in 1995. This improvement is due to an increase in funds under
management and a strong securities market.
Mortgage banking income increased to $2.8 million in 1996, up from $2.2
million in 1995. This increase represents strong commercial and residential
mortgage origination activity, in addition to an impact of $360,000 due to the
adoption of SFAS No. 122 as of January 1, 1996. The Company's mortgage banking
revenue consists primarily of application fees and points related to sold loans,
servicing income, and losses on the sale of loans originated for sale.
Residential mortgage loans are originated as necessary to meet consumer demand.
Sales of such loans in the secondary market are managed by the Bank to maintain
acceptable levels of interest rate sensitivity. Such sales generate a 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 servicing, or the responsibility for collecting and remitting loan
payments, inspecting properties, and making certain insurance and tax payments
on behalf of the borrowers. The Bank receives a fee for performing these
services.
For the year ended December 31, 1995, total non-interest income amounted to
$11.5 million, virtually unchanged from 1994. Service charges on deposit
accounts declined slightly from $5.7 million in 1994 to $5.6 million in 1995.
This is attributed to an increase in the credit applied against customer service
charges based on U. S. Treasury Bill rates which were slightly higher than 1994.
The Trust and Financial Services Division generated revenues of $2.4 million in
1995 compared with $2.2 million in 1994. This increased revenue is primarily
attributed to the first full year of operating the trust satellite office
located in Attleboro and an increase in managed assets. Mortgage banking income
increased to $2.2 million in 1995, up from $2.0 million in 1994. Other
non-interest income for 1995 declined $399,000 from 1994 primarily due to lower
data processing fees and miscellaneous other income.
14
[IBC logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Non-Interest Expense. The following table sets forth information regarding
non-interest expense for the periods shown.
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------
(In Thousands)
Salaries and employee
benefits $21,083 $22,143 $20,802
Occupancy expenses 3,289 3,458 4,726
Equipment expenses 2,405 2,335 2,005
Advertising 838 710 814
Legal fees - loan collection 765 681 1,610
Legal fees - other 452 381 320
FDIC assessment 43 1,070 1,863
OREO expenses 137 599 1,182
OREO write-downs - 152 929
Data processing facilities
management 1,908 -- --
Other non-interest expenses 7,146 7,723 8,230
- -----------------------------------------------------------------
TOTAL $38,066 $39,252 $42,481
=================================================================
Non-interest expenses decreased by 3.0% to $38.1 million in 1996, compared
with $39.3 million in 1995.
Salaries and employee benefits decreased 4.8% to $21.1 million in 1996,
compared with $22.1 million in 1995, due to the transfer of sixty-nine employees
to our third party data processing provider, as a result of a facilities
management agreement. Deposit insurance expense decreased $1.0 million, or 96.0%
in 1996 compared with the prior year, due to the FDIC's declaration of a premium
moratorium. The Bank currently is assessed the lowest FDIC insurance premium
rate as a result of its strong financial condition. OREO-related expenses
decreased $614,000, or 81.8% in 1996, compared with the prior year, due to
continued improvement in the level of foreclosed properties. Other non-interest
expense decreased 7.5% to $7.1 million in 1996, compared with $7.7 million in
1995.
For the year ended December 31, 1995, non-interest expenses decreased by 7.6%
to $39.3, compared with $42.5 in 1994. Salaries and employee benefits increased
$1.3 million, or 6.4%, due to merit increases, higher funding of the 401(k) and
the performance-based incentive compensation plans, and a rise in medical
insurance premiums and pension costs. Occupancy expenses decreased by $1.3
million, or 26.8%, due to write-downs in 1994 related to facility consolidations
and renovations. Equipment expenses increased $330,000, or 16.5% due to an
increase in equipment rental charges. Legal fees, related to loan collections,
decreased $929,000, or 57.7% due to the declining portfolio of troubled loans.
The FDIC insurance premium decreased $793,000, or 42.6% due to a reduced
risk-based assessment and a refund from the Bank Insurance Fund. OREO-related
expenses decreased by 64.4%, due to a low level of foreclosed properties. Other
non-interest expenses decreased by 6.2% to $7.7 million in 1995, compared with
$8.2 million in 1994, despite the recording of $439,000 of expenses related to
the write down of certain data processing software.
Income Taxes. For the years ended December 31, 1996, 1995, and 1994, the
Company recorded combined federal and state income tax provisions of $6,153,000,
$4,729,000, and $1,533,000, respectively. These provisions reflect effective
income tax rates of 34.7%, 31.3%, and 15.9% in 1996, 1995, and 1994,
respectively, which are less than the Company's combined statutory tax rate of
42%. The lower effective income tax rates are attributable to certain
non-taxable investments and dividends and to benefits recorded in these years in
compliance with Statement of Financial Standards (SFAS) No. 109. These benefits,
which amounted to $101,000, $1.6 million, and $2.6 million in 1996, 1995, and
1994, respectively, reduced the valuation allowance which had been established
prior to 1993 due to the uncertainty of the realizability of the Company's net
deferred tax asset at that time.
The tax effects of all income and expense transactions are recognized by the
Company in each year's consolidated statements of income regardless of the year
in which the transactions are reported for income tax purposes.
15
- ----------------------
INDEPENDENT BANK CORP.
======================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 has implemented a funding strategy in an effort to maintain a low
average cost of funds. Accordingly, management utilizes strategies that include
FHLB advances and repurchase agreements. 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 fund growth.
At December 31, 1996, approximately 43.7% of the Company's total assets
consisted of assets which will reprice or mature within one year. As of that
date, the amount of the Company's cumulative hedged gap was a negative $80.6
million, or 7.4% of total assets.
The Company has utilized interest rate swap agreements as hedging instruments
against stable or declining interest rates. An interest rate swap is an
agreement whereby one party agrees to pay a floating rate of interest on a
notional principal amount in exchange for receiving a fixed rate of interest on
the same notional amount for a predetermined period of time from a second party.
The assets relating to the notional principal amount are not actually exchanged.
The Bank had entered into interest rate swap agreements with a total notional
value of $90 million at December 31, 1996. These swaps were arranged through a
large international financial institution and have initial maturities ranging
from three to five years. The Bank receives fixed rate payments and pays a
variable rate of interest tied to 3-month LIBOR. At December 31, 1996, the
weighted average fixed payment rate was 5.87% and the weighted average rate of
the variable interest payments was 5.50%. As a result of these interest rate
swaps, the Bank realized net interest income of $.2 million, net interest
expense of $.4 million and net interest income of $1.5 million for the years
ended December 31, 1996, 1995 and 1994, respectively.
Rockland also purchased two 2-year interest rate caps with a total notional
value of $70 million in May 1995. The caps will pay the Bank the difference
between LIBOR and the cap level if LIBOR exceeds the cap level (7.00% and 6.50%)
at any of the quarterly reset dates. If LIBOR remains below the cap level, no
payment is made to the Bank.
The following table presents the expected maturities or repricing
opportunities of interest-earning assets and interest-bearing liabilities at
December 31, 1996 based on the information and the assumptions set forth in the
notes below.
16
[IBC logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Amounts Maturing or Repricing
- -----------------------------------------------------------------------------------------------------
Within Over Three
Three To Twelve Over One
Months Months Year Total
- -----------------------------------------------------------------------------------------------------
Interest-earning assets (1):
Federal funds sold $650 - - $650
Securities 44,535 62,143 218,222 324,900
Loans - fixed rate (2) 41,472 83,912 259,403 384,787
Loans - floating rate (2) 193,790 50,809 61,558 306,157
- -----------------------------------------------------------------------------------------------------
Total interest-earning assets 280,447 196,864 539,183 1,016,494
- -----------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings and NOW accounts (3) 56,096 - 201,723 257,819
Money Market and Super NOW
accounts (3) 95,752 - 11,332 107,084
Time certificates of deposit
over $100,000 20,284 14,755 10,827 45,866
Other time deposits 48,938 170,946 111,032 330,916
Borrowings 33,136 48,000 - 81,136
- -----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 254,206 233,701 334,914 822,821
- -----------------------------------------------------------------------------------------------------
Net interest sensitivity gap during
the period 26,241 (36,837) 204,269 193,673
=====================================================================================================
Cumulative gap 26,241 (10,596) 193,673 193,673
- -----------------------------------------------------------------------------------------------------
Effect of hedging activities (90,000) 20,000 70,000 -
=====================================================================================================
Cumulative hedged gap ($63,759) ($80,596) $193,673 $193,673
=====================================================================================================
Interest-earning assets as a percent of
interest-bearing liabilities
(cumulative) 110.32% 97.83% 123.54% 123.54%
Interest-earning assets as a percent of
total assets (cumulative) 25.66% 43.68% 93.02% 93.02%
Ratio of unhedged gap to total assets 2.40% (3.37%) 18.69% 17.72%
Ratio of cumulative unhedged gap to
total assets 2.40% (0.97%) 17.72% 17.72%
Ratio of hedged gap to total assets (5.83%) (1.54%) 25.10% 17.72%
Ratio of cumulative hedged gap to
total assets (5.83%) (7.38%) 17.72% 17.72%
(1) Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate loans are included in the periods in
which they are scheduled to be repaid.
(2) Balances have been reduced for nonperforming loans which amounted to $4.5
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.
17
- ----------------------
INDEPENDENT BANK CORP.
======================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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, NOW and Super NOW accounts, savings accounts, and
money market accounts. Deposit levels are influenced by interest rates, economic
conditions, and competitive factors. The Bank has also established five
repurchase agreements with major brokerage firms as potential sources of
liquidity. At December 31, 1996, the Company had no repurchase agreements
outstanding. In addition, as a member of the Federal Home Loan Bank, Rockland
has access to approximately $400 million of borrowing capacity. On December 31,
1996, the Company had $78 million outstanding in FHLB borrowings, with initial
maturities of 2 to 9 months.
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, $1.0 million of other investments, and $1.3 million of goodwill.
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, 1996, the Company's
liquidity position was well above policy guidelines.
CAPITAL RESOURCES
The Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation
(FDIC), and other regulatory agencies have established capital guidelines for
banks and bank holding companies. Risk-based capital guidelines issued by the
federal regulatory agencies require banks to meet a minimum Tier 1 risk-based
capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At December
31, 1996, the Company and the Bank substantially exceeded the minimum
requirements for Tier 1 risk-based and total risk-based capital.
An additional requirement of 4.0% Tier 1 leverage capital is mandated. On
December 31, 1996, the Tier 1 leverage capital ratio for the Company and the
Bank was 7.35% and 7.23%, respectively.
Capital ratios of the Company and the Bank are shown below for the last two
year-ends.
December 31, 1996 1995
- ------------------------------------------------------------
The Company
Tier 1 leverage capital ratio 7.35% 7.24%
Tier 1 risk-based capital ratio 10.89% 10.67%
Total risk-based capital ratio 12.15% 11.92%
The Bank
Tier 1 leverage capital ratio 7.23% 7.13%
Tier 1 risk-based capital ratio 10.73% 10.54%
Total risk-based capital ratio 11.99% 11.80%
18
[IBC logo]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DIVIDENDS
The Company declared cash dividends of $.25 per share in 1996. This is an
increase of $.07 per share compared to the 1995 cash dividend of $.18 per share.
The 1996 ratio of dividends paid to earnings was 31.7%.
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 along with the
corporate laws of Massachusetts 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 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.
19
- ----------------------
INDEPENDENT BANK CORP.
======================
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
ASSETS
CASH AND DUE FROM BANKS $ 52,836 $ 67,354
FEDERAL FUNDS SOLD 650 13,000
INTEREST BEARING DEPOSITS -- 296
SECURITIES AVAILABLE FOR SALE (Notes 1 and 3) 26,449 32,628
SECURITIES HELD TO MATURITY (Notes 1 and 3)
(fair value $288,932 and $227,409) 290,894 226,896
FEDERAL HOME LOAN BANK STOCK (Note 6) 7,558 3,462
LOANS, NET OF UNEARNED DISCOUNT (Notes 1 and 4) 695,406 628,141
LESS: RESERVE FOR POSSIBLE LOAN LOSSES (12,221) (12,088)
- --------------------------------------------------------------------------------------------------
Net Loans 683,185 616,053
- --------------------------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT (Notes 1 and 5) 10,642 8,903
OTHER REAL ESTATE OWNED (Note 1) 271 638
OTHER ASSETS (Notes 1 and 8) 20,308 18,359
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,092,793 $987,589
==================================================================================================
LIABILITIES
- -----------
DEPOSITS
Demand Deposits $ 176,887 $166,453
Savings and NOW Accounts 257,819 259,729
Money Market and Super NOW Accounts 107,084 123,659
Time Certificates of Deposit over $100,000 45,866 30,086
Other Time Deposits 330,916 291,158
- --------------------------------------------------------------------------------------------------
Total Deposits 918,572 871,085
- --------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER
REPURCHASE AGREEMENTS (Notes 3 and 6) 840 4,060
TREASURY TAX AND LOAN NOTES (Notes 3 and 6) 2,296 4,031
FEDERAL HOME LOAN BANK BORROWINGS (Note 6) 78,000 20,000
OTHER LIABILITIES 11,975 10,998
SUBORDINATED CAPITAL NOTES (Note 7) -- 4,843
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,011,683 915,017
- --------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 1 and 11)
Preferred Stock, $.01 par value. Authorized: 1,000,000 Shares
Outstanding: No Shares in 1996 or 1995 -- --
Common Stock, $.01 par value. Authorized: 30,000,000 Shares
Outstanding: 14,604,501 Shares in 1996 and
14,507,925 Shares in 1995 146 145
Surplus 44,433 43,777
Retained Earnings 36,666 28,710
Unrealized Loss on Securities Available For Sale, Net of Tax (Note 3) (135) (60)
- --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 81,110 72,572
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,092,793 $987,589
==================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
20
[IBC logo]
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Share and Per Share Data)
INTEREST INCOME
Interest on Loans (Notes 1 and 4) $57,842 $55,870 $46,981
Interest and Dividends on Securities (Note 3) 19,154 16,178 16,155
Interest on Federal Funds Sold and Repurchase Agreements 208 964 330
Interest on Interest Bearing Deposits 7 19 21
- ------------------------------------------------------------------------------------------------------
Total Interest Income 77,211 73,031 63,487
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 27,670 26,042 20,467
Interest on Borrowings (Notes 1 and 6) 4,310 2,623 1,076
Interest on Subordinated Capital Notes (Note 7) 374 478 486
- ------------------------------------------------------------------------------------------------------
Total Interest Expense 32,354 29,143 22,029
- ------------------------------------------------------------------------------------------------------
Net Interest Income 44,857 43,888 41,458
- ------------------------------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES (Notes 1 and 4) 1,750 1,000 801
- ------------------------------------------------------------------------------------------------------
Net Interest Income After Provision For Possible
Loan Losses 43,107 42,888 40,657
- ------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service Charges on Deposit Accounts 5,829 5,648 5,709
Trust and Financial Services Income 2,790 2,424 2,151
Mortgage Banking Income 2,776 2,243 2,046
Other Non-Interest Income 1,314 1,165 1,564
- ------------------------------------------------------------------------------------------------------
Total Non-Interest Income 12,709 11,480 11,470
- ------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Salaries and Employee Benefits (Note 9) 21,083 22,143 20,802
Occupancy Expenses (Notes 5 and 12) 3,289 3,458 4,726
Equipment Expenses 2,405 2,335 2,005
Other Non-Interest Expenses (Note 10) 11,289 11,316 14,948
- ------------------------------------------------------------------------------------------------------
Total Non-Interest Expenses 38,066 39,252 42,481
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 17,750 15,116 9,646
PROVISION FOR INCOME TAXES (Notes 1 and 8) 6,153 4,729 1,533
- ------------------------------------------------------------------------------------------------------
NET INCOME $11,597 $10,387 $8,113
======================================================================================================
NET INCOME PER SHARE $0.79 $0.71 $0.56
======================================================================================================
Weighted average common and common equivalent shares
outstanding (Notes 1 and 11) 14,751,324 14,631,493 14,415,443
======================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
21
- ----------------------
INDEPENDENT BANK CORP.
======================
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
UNREALIZED LOSS
COMMON RETAINED ON SECURITIES
STOCK SURPLUS EARNINGS AVAIL. FOR SALE TOTAL
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands)
BALANCE, DECEMBER 31, 1993 $ 144 $43,269 $13,972 $ -- $57,385
- -----------------------------------------------------------------------------------------------------------------------
Cumulative Effect of Adoption of SFAS No. 115,
Net of Tax (Notes 1 and 3) (44) (44)
Net Income 8,113 8,113
Cash Dividends Declared ($.08 per share) (1,154) (1,154)
Proceeds From Exercise of Stock Options (Note 11) 39 39
Common Stock Sold Under Dividend Reinvestment
and Stock Purchase Plan (Note 11) 73 73
Change in Unrealized Loss on Securities Available For
Sale, Net of Tax (Note 3) (210) (210)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 144 43,381 20,931 (254) 64,202
- -----------------------------------------------------------------------------------------------------------------------
Net Income 10,387 10,387
Cash Dividends Declared ($.18 per share) (2,608) (2,608)
Proceeds From Exercise of Stock Options (Note 11) 44 44
Common Stock Sold Under Dividend Reinvestment
and Stock Purchase Plan (Note 11) 1 352 353
Change in Unrealized Loss on Securities Available For
Sale, Net of Tax (Note 3) 194 194
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 145 43,777 28,710 (60) 72,572
- -----------------------------------------------------------------------------------------------------------------------
Net Income 11,597 11,597
Cash Dividends Declared ($.25 per share) (3,641) (3,641)
Proceeds From Exercise of Stock Options (Note 11) 105 105
Tax Benefit on Stock Option Exercises 54 54
Common Stock Sold Under Dividend Reinvestment
and Stock Purchase Plan (Note 11) 1 497 498
Change in Unrealized Loss on Securities Available
For Sale, Net of Tax (Note 3) (75) (75)
- -----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 146 $44,433 $36,666 ($135) $81,110
=======================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
22
[IBC logo]
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $11,597 $10,387 $8,113
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Depreciation and amortization 3,067 3,214 5,406
Provision for possible loan losses 1,750 1,000 801
Deferred (Prepaid) income taxes 2,044 55 (2,013)
Loans originated for resale (41,108) (47,472) (30,148)
Proceeds from mortgage loan sales 41,108 47,490 30,177
Gain on sale of mortgages - (18) (29)
Gain recorded from mortgage servicing rights (FAS 122) (401) - -
Other Real Estate Owned write-downs - 153 929
Changes in assets and liabilities:
Decrease (increase) in other assets (2,208) 100 4,271
Increase (decrease) in other liabilities (789) 2,736 2,382
- --------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 3,463 7,258 11,776
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 15,060 17,645 19,889
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in Interest Bearing Deposits 296 206 200
Proceeds from maturities of Securities Held to Maturity 73,661 52,511 53,036
Proceeds from maturities of Securities Available For Sale 5,964 485 797
Purchase of Securities Held to Maturity (138,710) (51,917) (49,565)
Purchase of Federal Home Loan Bank Stock (4,096) (362) (3,100)
Net increase in Loans (69,335) (42,178) (113,720)
Proceeds from sale of Other Real Estate Owned 968 3,953 8,289
Investment in Bank Premises and Equipment (3,678) (3,536) (2,480)
Premium Paid for Plymouth Fed deposits & Pawtucket
Trust assets - - (1,923)
- --------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (134,930) (40,838) (108,466)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquired Deposits - - 21,574
Net increase in Time Deposits 55,538 80,736 21,618
Net increase (decrease) in Other Deposits (8,051) (6,263) 10,035
Net increase (decrease) in Federal Funds Purchased
and Assets Sold Under Repurchase Agreements (3,220) (22,525) 14,657
Net increase (decrease) in Federal Home Loan
Bank Borrowings 58,000 (5,000) 25,000
Net increase (decrease) in Treasury Tax & Loan Notes (1,735) 229 (3,148)
Repayment of Capital Notes (4,843) (122) -
Proceeds from stock issuance 657 397 112
Dividends Paid (3,344) (2,460) (576)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 93,002 44,992 89,272
- --------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,868) 21,799 695
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 80,354 58,555 57,860
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $53,486 $80,354 $58,555
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $31,497 $28,862 $21,398
Income taxes 5,978 3,999 2,359
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
OREO Properties Acquired 601 878 4,200
Securities transferred to Securities Available For Sale - 28,619 -
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are sold for up to two week periods.
The accompanying notes are an integral part of these consolidated
financial statements.
23
- ----------------------
INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Independent Bank Corp. (the Company) and its wholly-owned subsidiary, Rockland
Trust Company (Rockland or the Bank). All material intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts in prior
year financial statements have been reclassified to conform to the current
year's presentation.
NATURE OF OPERATIONS
Independent Bank Corp. is a one-bank holding company whose primary asset is
its investment in Rockland Trust Company. Rockland is a state-chartered
commercial bank which operates 33 banking offices in southeastern Massachusetts.
The Company's primary source of income is from providing loans to individuals
and small-to-medium-sized businesses in its market area.
USES OF ESTIMATES IN THE PREPARATION
OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could vary from these estimates.
SECURITIES
On January 1, 1994, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This statement addresses the accounting and reporting for all
investments in debt securities and for investments in equity securities that
have readily determinable fair values.
When securities are purchased, they are classified as securities held to
maturity if it is management's intent and ability to hold them until maturity.
These securities are carried at cost, adjusted for amortization of premiums and
accretion of discounts, both computed by the effective yield method. If it is
management's intent at the time of purchase not to hold the securities to
maturity, these securities are classified as securities available for sale and
are carried at fair value with unrealized gains and losses reported, net of the
related tax effect, as a separate component of stockholders' equity. When
securities are sold, the adjusted cost of the specific security sold is used to
compute gain or loss on the sale. There were no sales of securities in 1996,
1995, or 1994.
LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
Loans are stated at their principal balance outstanding. Interest income for
commercial, real estate, and consumer loans is accrued based upon the daily
principal amount outstanding except for loans on nonaccrual status. Interest
income on installment 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 net of certain direct origination costs are deferred and amortized
into interest income over the expected term of the loan using the level-yield
method.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," and SFAS No. 118, "Accounting by Creditors For Impairment of a Loan -
Income Recognition and Disclosures," as of January 1, 1995. SFAS No. 114
requires that certain impaired loans be measured based on the present value of
the expected future cash flows discounted at the loan's original effective
interest rate or the collateral value. When the measure of the impaired loan is
less than the recorded investment in the loan, the impairment is recorded
through a valuation allowance.
The Company had previously determined the adequacy of the reserve for
possible loan losses using methods similar to those prescribed in SFAS No. 114.
As a result of adopting these statements, no additional provision for possible
loan losses was required as of January 1, 1995.
The reserve for possible loan losses is funded by periodic charges against
expense and is maintained at a level that management considers adequate to
provide for potential loan losses based upon an evaluation of known and inherent
risks in the loan portfolio. The reserve is based on estimates, and ultimate
losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, are reported in earnings in
the current period. When a loan, or any portion thereof, is considered to be
uncollectible, it is charged against the reserve for possible loan losses.
Subsequent recoveries are credited to the reserve.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of
24
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the assets. Leasehold improvements are amortized over the shorter of the lease
terms or the estimated useful lives of the improvements.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is comprised of real estate acquired through
foreclosure or acceptance of a deed in lieu of foreclosure. OREO is carried at
the lower of the related loan's remaining principal balance or the estimated
fair value of the property acquired, less estimated costs to sell. Any loan
balance in excess of the estimated fair value on the date of transfer is charged
to the reserve for possible loan losses on that date. The carrying value of
other real estate owned is reviewed periodically. Subsequent declines in value
are charged to other non-interest expense.
INTANGIBLE ASSETS
In connection with the acquisition of Middleborough Trust Company in January
1986, the Company allocated $2,951,000 of the purchase price to goodwill. This
amount is being amortized over a 20 year period using the straight-line method.
The balance at December 31, 1996 is $1,328,500.
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, 1996 is $1,563,000.
The Company periodically evaluates intangible assets for impairment on the
basis of whether these assets are recoverable from projected undiscounted net
cash flows of the related acquired entity.
INCOME TAXES
The Company records income taxes using the liability method of accounting for
income taxes pursuant to SFAS No. 109, "Accounting For Income Taxes." Under this
method, deferred taxes are determined based upon the difference between the
financial statement and the tax bases of the assets and liabilities using the
statutory tax rates in effect in the years in which these differences are
expected to be settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for income taxes.
TRUST AND FINANCIAL SERVICES
Assets held in a fiduciary or agency capacity for customers are not included
in the accompanying consolidated balance sheets, as such assets are not assets
of the Company. Trust and Financial Services income is recorded on the cash
basis, the results of which approximate the accrual basis of accounting for such
fees.
NET INCOME PER SHARE
Income per share amounts are based on the weighted average number of common
and common equivalent shares outstanding each year.
OFF-BALANCE SHEET AGREEMENTS
The Bank has utilized interest rate swap agreements, caps, or floors as
hedging instruments for asset and liability management purposes. As such, these
instruments are accounted for under the accrual method. Income received from the
fixed rate payments and interest paid under variable rate obligations is
recorded on a net basis as interest income on loans. Gains or losses on the sale
of swap agreements are deferred and amortized into interest income over the
remainder of the original term of the swap.
MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Company adopted SFAS No. 122 "Accounting for Mortgage
Servicing Rights." SFAS No. 122 requires that a bank recognize the rights to
service mortgage loans for others, regardless of the manner in which the
servicing rights are acquired, as separate assets when the related loans are
sold and the servicing rights are retained. The amount capitalized is based on
an allocation of the total cost of the mortgage loans to the mortgage servicing
rights and the loan (without the mortgage servicing rights) based on their
relative fair values. In addition, capitalized mortgage servicing rights are
required to be assessed for impairment based on the fair value of those rights.
The carrying value of capitalized mortgage servicing rights as of December 31,
1996 was $360,000.
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinquishments of Liabilities," which
superseded SFAS No. 122 without changing its major provisions and SFAS No. 127
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," which become effective for transactions occurring after December 31, 1996.
Under these new statements, transfers of financial assets in which the Bank
surrenders control over those financial assets shall be accounted for as a sale
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. Each time the Bank undertakes an
obligation to service financial assets it shall recognize either a servicing
asset or a servicing liability for that contract, unless it securitizes the
assets, retains all of the resulting securities, and classifies them as debt
securities held-to-maturity. The implementation of these statements is not
expected to have a material effect on the Company's results of operations or
financial condition.
25
- ----------------------
INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for such plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25. Accordingly compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the exercise price of the stock.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments for
which it is practicable to estimate that value, whether or not recognized on the
balance sheet. In cases where quoted market values are not available, fair
values are based upon estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument.
The carrying amount reported on the balance sheet for cash, federal funds
sold, and interest bearing deposits approximates those assets' fair values. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following table reflects the book and fair values of financial
instruments, including on balance sheet and off balance sheet instruments as of
December 31, 1996 and 1995.
1996 1995
- -----------------------------------------------------------------------------------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------
FINANCIAL ASSETS (In Thousands) (In Thousands)
Cash and Due From Banks $52,836 $52,836 $67,354 $67,354 (a)
Federal Funds Sold 650 650 13,000 13,000 (a)
Interest Bearing Deposits - - 296 296 (a)
Securities Held To Maturity 290,894 288,932 226,896 227,409 (b)
Securities Available For Sale 26,449 26,449 32,628 32,628 (b)
Federal Home Loan Bank Stock 7,558 7,558 3,462 3,462 (c)
Net Loans 683,185 683,749 616,053 615,772 (d)
Originated Mortgage Servicing Rights 360 360 - - (f)
FINANCIAL LIABILITIES
Demand Deposits 176,887 176,887 166,453 166,453 (e)
Savings and Now Accounts 257,819 257,819 259,729 259,729 (e)
Money Market and Super NOW Accounts 107,084 107,084 123,659 123,659 (e)
Time Deposits 376,782 375,556 321,244 319,886 (f)
Federal Funds Purchased and Assets
Sold Under Repurchase Agreements 840 840 4,060 4,060 (a)
Treasury Tax and Loan Notes 2,296 2,296 4,031 4,031 (a)
Federal Home Loan Bank Borrowings 78,000 78,094 20,000 20,079 (f)
Subordinated Capital Notes - - 4,843 5,026 (f)
UNRECOGNIZED FINANCIAL INSTRUMENTS
Standby Letters of Credit - 16 - 17 (g)
Commitments to Extend Credit - - - - (a)
Interest Rate Swap Agreements - 101 - 481 (b)
Interest Rate Caps - - - 500 (b)
26
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(a) Book value approximates fair value due to short term nature of these
instruments.
(b) Fair value was determined based on market prices or dealer quotes.
(c) Federal Home Loan Bank stock is redeemable at cost
(d) The fair value of loans was estimated by discounting anticipated future cash
flows using current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
(e) Fair value is presented as equaling book value. SFAS No. 107 requires that
deposits which can be withdrawn without penalty at any time be presented at
such amount without regard to the inherent value of such deposits and the
Bank's relationship with such depositors.
(f) The fair value of these instruments was estimated by discounting anticipated
future cash payments using rates currently available for instruments with
similar remaining maturities.
(g) The fair value of these instruments was estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of customers.
(3) SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
securities held to maturity at December 31, 1996 and 1995 were as follows:
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
U.S. Treasury and U.S.
Government Agency Securities $71,104 $153 ($1,292) $69,965 $73,484 $559 ($789) $73,254
Mortgage-Backed Securities 193,854 1,005 (1,699) 193,160 128,361 1,377 (749) 128,989
Collateralized Mortgage
Obligations 19,526 21 (152) 19,395 17,473 152 (54) 17,571
State, County, and Municipal
Securities 5,410 10 (8) 5,412 6,578 20 (3) 6,595
Other Securities 1,000 - - 1,000 1,000 - - 1,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total $290,894 $1,189 ($3,151) $288,932 $226,896 $2,108 ($1,595) $227,409
==================================================================================================================================
27
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INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost, gross unrealized gains and losses, and fair value of
securities available for sale at December 31, 1996 and 1995 were as follows:
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
Mortgage-Backed Securities $24,992 - ($196) $24,796 $29,751 $38 ($113) $29,676
Collateralized Mortgage Obligations 1,661 - (8) 1,653 2,968 - (16) 2,952
- -----------------------------------------------------------------------------------------------------------------------------
Total $26,653 - ($204) $26,449 $32,719 $38 ($129) $32,628
=============================================================================================================================
Securities totalling $28,619,000 were reclassified from held to maturity to
available for sale in December 1995 in accordance with the "FASB Special Report,
A Guide to the Implementation of Statement 115." On the date of transfer, the
net unrealized loss on these securities was $31,312.
A schedule of the contractual maturities of securities held to maturity and
securities available for sale at December 31, 1996 is presented below:
Held to maturity Available for sale
- -----------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------
(In Thousands) (In Thousands)
Due in one year or less $ 13,131 $ 13,010 $ 10,446 $ 10,406
Due from one year to five years 68,850 67,640 11,102 11,015
Due from five to ten years 48,164 47,753 1,655 1,647
Due after ten years 160,749 160,529 3,450 3,381
- ------------------------------------------------------------------------------
Total $290,894 $288,932 $ 26,653 $ 26,449
==============================================================================
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, 1996 and 1995, investment securities carried at $28,595,000
and $33,253,000, 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 1996 and 1995, the Company had no
investments in obligations of individual states, counties, or municipalities
which exceeded 10% of stockholders' equity.
28
[IBC logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) LOANS AND RESERVE FOR POSSIBLE
LOAN LOSSES
The loan composition, net of unearned discount, at December 31, 1996 and 1995
was as follows:
1996 1995
- ---------------------------------------------------
(In Thousands)
Commercial $127,008 $121,679
Real Estate - Commercial 205,256 187,608
Real Estate - Residential 202,031 187,652
Real Estate - Construction 31,633 27,863
Consumer - Installment 132,589 102,088
Consumer - Other 10,140 11,076
- ---------------------------------------------------
Gross Loans 708,657 637,966
- ---------------------------------------------------
Unearned Discount 13,251 9,825
- ---------------------------------------------------
Loans, Net of Unearned
Discount $695,406 $628,141
===================================================
In addition to the loans noted above, at December 31, 1996 and December 31,
1995, the Bank serviced approximately $252,187,000 and $246,569,000,
respectively, of loans sold to investors in the secondary mortgage market and
other financial institutions. Of the loans serviced at December 31, 1996,
$5,594,000 were sold with recourse. All loans sold during 1996 were sold without
recourse.
Loans held for sale are valued at lower of the recorded balance or market
value. At December 31, 1996, and 1995, loans held for sale amounted to
approximately $4,100,000 and $3,600,000, respectively. No adjustments for
unrealized losses were required at December 31, 1996 and 1995.
As of December 31, 1996 and 1995 the Bank's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114 was as
follows.
1996 1995
- -----------------------------------------------------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
- -----------------------------------------------------------------------------
Impaired loans:
Valuation allowance
required $797 $797 $3,401 $1,269
No valuation
allowance required 3,804 - 1,321 -
- -----------------------------------------------------------------------------
Total $4,601 $797 $4,722 $1,269
=============================================================================
The valuation allowance is included in the reserve for possible loan losses
on the balance sheet. The average recorded investment in impaired loans for the
years ended December 31, 1996 and 1995 was $5,400,000 and $3,700,000,
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 $225,000 and $169,000 for the years ended December 31, 1996 and
1995.
The aggregate amount of loans in excess of $60,000 outstanding to directors,
principal officers, and principal security holders at December 31, 1996 and 1995
and for the years then ended is as follows (in thousands).
Balance, January 1, 1995 $18,058
- ---------------------------------------------------
New loans 601
Loan repayments (7,086)
- ---------------------------------------------------
Balance, December 31, 1995 $11,573
- ---------------------------------------------------
New loans 6,472
Loan repayments (2,759)
- ---------------------------------------------------
Balance, December 31, 1996 $15,286
===================================================
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, 1996 is as follows.
1996 1995 1994
- ----------------------------------------------------------------
(In Thousands)
Reserve, beginning of year $12,088 $13,719 $15,485
Loans charged off (2,825) (4,082) (4,293)
Recoveries on loans previously
charged off 1,208 1,451 1,726
- ----------------------------------------------------------------
Net charge-offs (1,617) (2,631) (2,567)
Provision charged to expense 1,750 1,000 801
- ----------------------------------------------------------------
Reserve, end of year $12,221 $12,088 $13,719
================================================================
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1996 and 1995 were as follows:
1996 1995
- ---------------------------------------------------
Cost: (In Thousands)
Land $310 $356
Bank Premises 6,694 6,661
Leasehold Improvements 5,743 4,724
Furniture and Equipment 16,441 14,741
- ---------------------------------------------------
Total Cost 29,188 26,482
- ---------------------------------------------------
Accumulated Depreciation (18,546) (17,579)
- ---------------------------------------------------
Net Bank Premises and Equipment $10,642 $8,903
===================================================
Depreciation and amortization expense related to bank premises and equipment
was $1,643,000 in 1996, $1,721,000 in 1995, and $3,193,000 in 1994. The 1995 and
1994 expense includes $265,000 and $1,800,000,
29
- ----------------------
INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
respectively, related to the writedowns of the book value of certain buildings
in response to actual and anticipated facility consolidations and renovations.
There were no such writedowns in 1996.
(6) BORROWINGS
Short-term borrowings consist of federal funds purchased, assets sold under
repurchase agreements, and treasury tax and loan notes. Information on the
amounts outstanding and interest rates of short term borrowings for each of the
three years in the period ended December 31, 1996 is as follows:
1996 1995 1994
- ----------------------------------------------------------
(Dollars In Thousands)
Balance outstanding at
end of year $3,136 $8,091 $30,387
Average daily balance
outstanding 26,534 18,995 18,034
Maximum balance outstanding
at any month end 44,545 63,988 30,387
Weighted average interest rate
for the year 5.36% 5.74% 4.03%
Weighted average interest rate
at end of year 5.35% 4.36% 5.74%
The Bank has established two federal funds lines of $20 million. Borrowings
under these lines are classified as federal funds purchased. The Company has
also established five repurchase agreements with major brokerage firms.
Borrowings under these agreements are classified as assets sold under repurchase
agreements. At December 31, 1996 and 1995 the Company had no repurchase
agreements outstanding.
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 $386 million. All FHLB advances outstanding at December
31, 1996 and 1995 had maturities of one year or less and had a weighted average
interest rate of 5.47% and 6.28%, respectively.
(7) SUBORDINATED CAPITAL NOTES
The following table summarizes the Company's outstanding subordinated capital
notes at December 31, 1996 and 1995:
INTEREST YEAR OF
RATE MATURITY 1996 1995
- --------------------------------------------------
(In Thousands)
9.50% 1996 $ - $2,102
10.00% 1996 - 2,732
14.00% 1996 - 9
- --------------------------------------------------
TOTAL - $4,843
==================================================
(8) INCOME TAXES
The provision for income taxes is comprised of the following components:
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------
Current Provision (In Thousands)
Federal $3,301 $3,616 $2,760
State 808 1,058 786
- -----------------------------------------------------
TOTAL CURRENT
PROVISION 4,109 4,674 3,546
- -----------------------------------------------------
Deferred Provision (Benefit)
Federal 1,639 965 460
State 506 715 81
Change in Valuation
Allowance (101) (1,625) (2,554)
=====================================================
TOTAL DEFERRED
PROVISION (BENEFIT) 2,044 55 (2,013)
- -----------------------------------------------------
TOTAL PROVISION $6,153 $4,729 $1,533
=====================================================
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, 1996 1995 1994
- ----------------------------------------------------
(In Thousands)
Computed statutory federal
income tax provision $6,212 $5,139 $3,279
Nontaxable interest, net (266) (257) (223)
State taxes, net of federal
tax benefit 854 1,152 572
Low-income housing credits (110) - -
Change in valuation allowance (101) (1,625) (2,554)
Other, net (436) 320 459
- ----------------------------------------------------
TOTAL PROVISION $6,153 $4,729 $1,533
====================================================
The net deferred tax asset which is included in other assets amounted to
approximately $2,906,000 and $4,950,000 at December 31, 1996 and 1995,
respectively. The tax-effected components of the net deferred tax asset at
December 31, 1996 and 1995 are as follows:
30
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 1995
- -------------------------------------------------------------
(In Thousands)
Reserve for possible loan losses $4,277 $4,231
Tax depreciation 641 546
Write-down of OREO - 205
Mark to market adjustment (3,204) (1,986)
Accrued expenses not deducted
for tax purposes 782 1,179
Deferred income 120 123
State taxes 629 1,063
Other, net (172) (143)
- -------------------------------------------------------------
TOTAL DEFERRED TAX ASSET 3,073 5,218
Valuation allowance (167) (268)
- -------------------------------------------------------------
NET DEFERRED TAX ASSET $2,906 $4,950
=============================================================
The valuation allowance is provided when it is more likely than not that some
portion of the net deferred tax asset will not be realized. At December 31,
1996, the valuation allowance relates to certain state deferred tax assets that
may expire prior to realization.
(9) EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
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 is to contribute an amount within the range permitted
by applicable regulations on an annual basis.
Net pension cost for the Company for each of the three years in the period
ended December 31, 1996 included the following components:
1996 1995 1994
- -----------------------------------------------------------------
(In Thousands)
Service cost - benefits earned
during the period $ 877 $ 750 $ 620
Interest cost on projected
benefit obligation 1,073 938 821
Net amortization (deferral) (185) 1,358 (1,053)
Actual loss (return) on assets (1,110) (2,416) 36
- -----------------------------------------------------------------
Net pension cost $ 655 $ 630 $ 424
=================================================================
Assumptions used in the
measurement of net
pension cost were:
Discount rate 7.00% 7.75% 7.00%
Rate of increase in
compensation levels 5.50% 5.50% 5.50%
Expected long-term rate
of return on assets 10.00% 8.25% 8.25%
=================================================================
The plan's assets are invested primarily in listed stocks, bonds, and mutual
funds. The following table sets forth the the plan's funded status at December
31, 1996 and 1995:
1996 1995
- ------------------------------------------------------------
(In Thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$11,365 in 1996 and $9,529
in 1995 $11,938 $ 9,863
============================================================
Projected benefit obligation $16,037 $12,792
============================================================
Plan assets at fair value $16,816 $14,524
============================================================
Plan assets in excess of
projected benefit obligation$ 779 $ 1,732
Unrecognized net gain (1,790) (4,069)
Unrecognized prior service cost 903 1,109
Unrecognized net asset at transition (286) (327)
- ------------------------------------------------------------
Accrued pension liability $ (394) $(1,555)
============================================================
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. As this transaction qualifies for accounting purposes
as a plan termination, the accrued pension liability at December 31, 1996 will
be recognized as income in 1997.
31
- ----------------------
INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER EMPLOYEE BENEFIT PLANS
In 1994, the Bank implemented an incentive compensation plan in which senior
management, officers, and non-officer employees are eligible to participate at
varying levels. The plan provides for awards based upon the attainment of a
combination of Bank, divisional, and individual performance objectives. The
expense for this plan amounted to $970,000, $979,000 and $954,000 in 1996, 1995
and 1994, 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
1996, 1995 and 1994, the expense for this plan amounted to $307,000, $305,000
and $284,000, respectively.
POSTRETIREMENT BENEFITS
Employees retiring from the Bank on or after attaining age 65 and who have
rendered at least 10 years of continuous service to the Company are entitled to
postretirement health care benefits. These benefits are subject to deductibles,
copayment provisions and other limitations. The Company may amend or change
these benefits periodically.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting For Postretirement Benefits Other Than Pensions," which requires the
recognition of postretirement benefits over the service lives of the employees
rather than on a cash basis. The Company elected to recognize its accumulated
benefit obligation of approximately $597,000 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. The postretirement benefit
expense recorded in 1996, 1995, and 1994 in accordance with this standard was
approximately $107,000, $120,000 and $100,000, respectively. This includes the
amortization of the accumulated benefit obligation and service and interest
costs. The total cost of all post-retirement benefits charged to income was
$160,000, $192,000, and $175,000 in 1996, 1995, and 1994, 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.
(10) OTHER NON-INTEREST EXPENSES
Included in other non-interest expenses for each of the three years in the
period ended December 31, 1996 were the following:
1996 1995 1994
- -------------------------------------------------------
(In Thousands)
Advertising $838 $710 $814
Legal fees - loan collection 765 681 1,610
Legal fees - other 452 381 320
FDIC assessment 43 1,070 1,863
OREO expenses 137 599 1,182
OREO write-downs - 153 929
Data processing facilities
management 1,908 - -
Other non-interest expenses 7,146 7,722 8,230
- -------------------------------------------------------
TOTAL $11,289 $11,316 $14,948
=======================================================
(11) COMMON STOCK PURCHASE AND OPTION PLANS
The Company maintains a Dividend Reinvestment and Common Stock Purchase Plan.
Under the terms of the plan, stockholders may elect to have cash dividends
reinvested in newly issued shares of common stock at a 5% discount from the
market price on the date of the dividend payment. Stockholders also have the
option of purchasing additional new shares, at the full market price, up to the
aggregate amount of dividends payable to the stockholder during the calendar
year.
The Company has two stock option plans, the Amended and Restated 1987
Incentive Stock Option Plan ("The 1987 Plan") and the 1996 Non-Employee
Directors Stock Option Plan ("The 1996 Plan"). Had compensation cost for these
plans been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts:
1996 1995
- -----------------------------------------------------------
Net Income: As Reported (000's) $11,597 $10,387
Pro Forma 11,507 10,387
Primary EPS: As Reported $.79 $.71
Pro Forma $.78 $.71
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 in 1996 and 1995, respectively: risk free interest
rates of 6.06 and 5.36 percent for the 1987 Plan options and 6.40 percent for
the 1996 Plan options; expected dividend yields of 2.90 and 2.78 percent;
expected lives of 4 years for the 1987 Plan options and 2.90 percent and 4 years
for the 1996 Plan options; expected volatility of .10.
32
[IBC logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The Company may grant options for up to 800,000 shares under the 1987 Plan
and 300,000 shares under the 1996 Plan. The Company has granted options on
638,075 and 85,000 shares, respectively, through December 31, 1996. The 1987
Plan option exercise price equals the mean of the high and low market price on
the date preceding the grant. The 1996 Plan option exercise price equals the
mean of the high and low market price on the date of grant. The 1987 and 1996
Plan options vest after two years and six months or as determined by the Stock
Option Committee of the Board of Directors, respectively, and all expire between
1998 and 2006.
A summary of the status of the Company's two stock option plans at December
31,1996 and December 31, 1995 and changes during the years then ended is
presented in the table and narrative below:
1996 1995
Wtd Avg Wtd Avg
Shares Ex. Price Shares Ex. Price
- --------------------------------------------------------------------
Balance,
beginning of year 482,866 $4.56 410,950 $3.86
Granted 180,425 $8.73 91,950 $7.31
Exercised (31,734) $3.27 (20,034) $3.01
Canceled - -
-------- -------
Balance, end of year 631,557 $5.81 482,866 $4.56
======== =======
Exercisable
at end of year 451,146 281,124
======== =======
Weighted average
fair value of
options granted $1.27 $0.79
349,682 of the 631,557 options outstanding at December 31,1996 have exercise
prices between $2 and $5.19, with a weighted average exercise price of $3.91 and
a weighted average remaining contractual life of 3.7 years. 314,757 of these
options are exercisable; their weighted exercise price is $3.77. The remaining
281,875 options have exercise prices between $6.06 and $9.38, with a weighted
average exercise price of $8.17 and a weighted average remaining contractual
life of 9.3 years. 136,389 of these options are exercisable; their weighted
average exercise price is $7.65.
(12) COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of amounts recognized in the consolidated balance
sheets. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Off-balance-sheet financial instruments whose contractual amounts present
credit risk include the following at December 31, 1996 and 1995:
1996 1995
- ----------------------------------------------------
(In Thousands)
Commitments to extend credit:
Fixed Rate $4,529 $2,915
Adjustable Rate 1,274 3,596
Unused portion of existing
credit lines 108,969 103,720
Unadvanced construction
loans 13,232 7,704
Standby letters of credit 1,883 2,419
Interest rate swaps -
notional value 90,000 90,000
Interest rate caps -
notional value 70,000 70,000
The Company's exposure to credit loss in the event of non-performance by the
other party for commitments to extend credit and standby letters of credit is
represented by the contractual amounts of those instruments. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. The Bank evaluates each
customer's creditworthiness on an individual basis. The amount of collateral
obtained upon extension of the credit is based upon management's credit
evaluation of the customer. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial real estate. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since some of the
commitments may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially
33
- ----------------------
INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the same as that involved in extending loans to customers. The collateral
supporting those commitments is essentially the same as for other commitments.
Most guarantees extend for one year.
As a component of its asset/liability management activities intended to
control interest rate exposure, the Bank has entered into certain off-balance
sheet hedging transactions. Interest rate swap agreements represent transactions
which involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying principal amounts. The
weighted average fixed payment rates were 5.87% and 5.88% at December 31, 1996
and 1995, respectively, while the weighted average rates of variable interest
payments, based on the 3-month London Interbank Offering Rate (LIBOR), were
5.50% and 5.84% at December 31, 1996 and 1995, respectively. As a result of
these interest rate swaps, the Bank realized net interest income of $.2 million,
net interest expense of $.4 million and net interest income of $1.5 million for
the years ended December 31, 1996, 1995, and 1994, 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. At December 31, 1996 and 1995, the Bank had a net receivable of $13,000
and a net payable of $57,000, respectively, on the interest rate swaps.
Rockland also purchased two 2-year interest rate caps with a total notional
value of $70 million in May 1995. The caps will pay the Bank the difference
between LIBOR and the cap level if LIBOR exceeds the cap level (7.00% and 6.50%)
at any of the quarterly reset dates. If LIBOR remains below the cap level, no
payment is made to the Bank. The transaction fees for these instruments are
being amortized over the term of the agreements.
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, 1996 (in thousands):
1997 2,303
1998 1,782
1999 1,516
2000 1,156
2001 1,032
Thereafter 4,684
------------------------------------------
Total future minimum rentals $12,473
==========================================
Rent expense incurred under operating leases was approximately $2,304,000 in
1996, $2,047,000 in 1995, and $1,526,000 in 1994. Renewal options ranging from 3
to 10 years exist for several of these leases.
OTHER COMMITMENTS
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 $21.7 million and
$20.4 million at December 31, 1996 and 1995, respectively.
OTHER CONTINGENCIES
At December 31, 1996 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.
34
[IBC logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(13) REGULATORY CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory-and possibly
additional discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Company and the Bank met all capital adequacy requirements to which they are
subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank of Boston relating to the Company and from the Commonwealth of
Massachusetts relating to the Bank, both the Company and the Bank were
categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, an insured depository
institution must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since these notifications that management believes have changed the Company's or
the Bank's category. The Company and the Bank's actual capital amounts and
ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996: (Dollars In Thousands)
Company: (consolidated)
Total capital
(to risk weighted [Greater [Greater
assets) $87,385 12.15% than or $57,541 than or 8.0% N/A N/A
equal to] equal to]
Tier 1 capital
(to risk weighted [Greater [Greater
assets) 78,354 10.89 than or 28,771 than or 4.0 N/A N/A
equal to] equal to]
Tier 1 capital
(to average [Greater [Greater
assets) 78,354 7.35 than or 42,628 than or 4.0 N/A N/A
equal to] equal to]
Bank:
Total capital
(to risk weighted [Greater [Greater [Greater [Greater
assets) $85,923 11.99% than or $57,349 than or 8.0% than or $71,687 than or 10.0%
equal to] equal to] equal to] equal to]
Tier 1 capital
(to risk weighted [Greater [Greater [Greater [Greater
assets) 76,922 10.73 than or 28,675 than or 4.0 than or 43,012 than or 6.0
equal to] equal to] equal to] equal to]
Tier 1 capital
(to average [Greater [Greater [Greater [Greater
assets) 76,922 7.23 than or 42,586 than or 4.0 than or 53,233 than or 5.0
equal to] equal to] equal to] equal to]
(14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1996 1995 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share and Average Share Data)
INTEREST INCOME $18,564 $17,467 $18,999 $17,907 $19,697 $18,502 $19,951 $19,155
INTEREST EXPENSE 7,699 6,568 7,961 7,195 8,210 7,686 8,484 7,694
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $10,865 $10,899 $11,038 $10,712 $11,487 $10,816 $11,467 $11,461
- --------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR POSSIBLE
LOAN LOSSES 250 250 500 250 500 250 500 250
NON-INTEREST INCOME 3,143 2,755 3,490 3,002 3,111 2,957 2,965 2,766
NON-INTEREST EXPENSES 9,687 9,915 9,768 9,635 9,474 9,658 9,137 10,044
PROVISION FOR INCOME TAXES 1,494 1,099 1,505 1,207 1,600 1,192 1,554 1,231
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $2,577 $2,390 $2,755 $2,622 $3,024 $2,673 $3,241 $2,702
================================================================================================================================
NET INCOME PER SHARE $0.18 $0.17 $0.19 $0.18 $0.20 $0.18 $0.22 $0.18
================================================================================================================================
WEIGHTED AVERAGE
SHARES OUTSTANDING 14,688,060 14,449,892 14,731,641 14,631,050 14,758,987 14,658,788 14,821,674 14,699,643
================================================================================================================================
35
- ----------------------
INDEPENDENT BANK CORP.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(15) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information relative to the Company's balance sheets at
December 31, 1996 and 1995, and the related statements of income and cash flows
for the years ended December 31, 1996, 1995, and 1994 are presented below.
BALANCE SHEET
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------
Assets: (In Thousands)
Cash * $376 $220
Investments in subsidiary* 79,373 70,609
Other investments 1,000 1,000
Other assets 1,383 1,477
- ----------------------------------------------------------------
Total assets $82,132 $73,306
================================================================
Liabilities and Stockholders' Equity:
Dividends Payable $1,022 $725
Subordinated capital notes - 9
- ----------------------------------------------------------------
Total liabilities 1,022 734
Stockholders' equity 81,110 72,572
- ----------------------------------------------------------------
Total liabilities and
stockholders' equity $82,132 $73,306
================================================================
* Eliminated in consolidation.
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------
Income: (In Thousands)
Dividend received from
subsidiary bank * $2,878 $2,152 $514
Interest income 35 39 28
Other income 1 - -
- --------------------------------------------------------------------
Total income 2,914 2,191 542
- --------------------------------------------------------------------
Expenses:
Interest expense 1 1 1
Other expenses 154 152 149
- --------------------------------------------------------------------
Total expenses 155 153 150
- --------------------------------------------------------------------
Income before income taxes
and equity in undistributed
income of subsidiary 2,759 2,038 392
Equity in undistributed income
of subsidiary* 8,838 8,349 7,721
- --------------------------------------------------------------------
Net income $11,597 $10,387 $8,113
====================================================================
*Eliminated in consolidation.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (In Thousands)
Net income $11,597 $10,387 $8,113
ADJUSTMENTS TO RECONCILE NET INCOME
TO CASH PROVIDED FROM OPERATING ACTIVITIES:
Amortization 148 148 147
Decrease (increase) in other assets (54) 1 (4)
Equity in income of subsidiary* (8,838) (8,349) (7,721)
- -------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (8,744) (8,200) (7,578)
- -------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 2,853 2,187 535
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issue and
stock options exercised 105 60 73
Proceeds from dividend reinvestment
and optional stock purchases 551 337 39
Repayment of Capital Notes (9) - -
Dividends paid (3,344) (2,460) (576)
- -------------------------------------------------------------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (2,697) (2,063) (464)
- -------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 156 124 71
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE YEAR* 220 96 25
- -------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT THE END OF THE YEAR* $376 $220 $96
===========================================================================================
* Eliminated in consolidation.
36
[IBC logo]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors of Independent Bank Corp.:
We have audited the consolidated balance sheets of Independent Bank Corp. and
its subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As explained in Note 1 to the financial statements, effective January 1,
1996, the Company changed its method of accounting for originated mortgage
servicing rights.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 21, 1997
37
- ----------------------
INDEPENDENT BANK CORP.
======================
DIRECTORS OF INDEPENDENT BANK CORP. OFFICERS OF INDEPENDENT BANK CORP.
Richard S. Anderson John F. Spence, Jr.
President and Treasurer Chairman of the Board
Anderson-Cushing and Chief Executive Officer
Insurance Agency, Inc.
Douglas H. Philipsen
Donald K. Atkins President
Retired, Former President
and Chief Executive Officer Linda M. Campion
Winthrop - Atkins Co., Inc. Clerk
W. Paul Clark Richard J. Seaman
President and General Manager Chief Financial Officer and
Paul Clark, Inc. Treasurer
Robert L. Cushing Tara M. Villanova
Owner Assistant Clerk
Robert L. Cushing Insurance
Benjamin A. Gilmore, II
Owner and President
Gilmore Cranberry Co.
Lawrence M. Levinson
Partner
Burns & Levinson
Douglas H. Philipsen
President and Chief Executive Officer
Rockland Trust Company
Richard H. Sgarzi
President and Treasurer
Black Cat Cranberry Corp.
John F. Spence, Jr.
Chairman of the Board
Rockland Trust Company
Robert J. Spence
President
Albert Culver Co.
William J. Spence
President
Mass. Bay Lines, Inc.
Brian S. Tedeschi
President
Tedeschi Realty Corp.
Thomas J. Teuten
Executive Vice President
A. W. Perry, Inc.
38
[IBC logo]
DIRECTORS OF ROCKLAND TRUST COMPANY OFFICERS OF ROCKLAND TRUST COMPANY
Richard S. Anderson John F. Spence, Jr.
President and Treasurer Chairman of the Board
Anderson-Cushing
Insurance Agency, Inc. Douglas H. Philipsen
President and
*John B. Arnold Chief Executive Officer
President and Treasurer
H.H. Arnold Co., Inc. Richard J. Seaman
Chief Financial Officer
Donald K. Atkins and Treasurer
Retired, Former President
and Chief Executive Officer Richard F. Driscoll
Winthrop-Atkins Co., Inc. Executive Vice President
Retail and Operations Division
Theresa J. Bailey
Retired, Former Senior Vice President Ferdinand T. Kelley
and Clerk, Rockland Trust Company Executive Vice President
Commercial Lending Division
W. Paul Clark
President and General Manager S. Lee Miller
Paul Clark, Inc. Executive Vice President
Trust and Investment
*Robert L. Cushing Services Division
Owner
Robert L. Cushing Insurance Raymond G. Fuerschbach
Senior Vice President
*H. Thomas Davis Human Resources
Retired, Former Chairman
Clipper Abrasives, Inc. Russell N. Viau
Vice President and
Alfred L. Donovan Chief Internal Auditor
Consultant
Linda M. Campion
*Ann M. Fitzgibbons Clerk
Volunteer
Tara M. Villanova
Benjamin A. Gilmore, II Assistant Clerk
Owner and President
Gilmore Cranberry Co.
*Donald A. Greenlaw
Retired, Former President
Rockland Trust Company
E. Winthrop Hall
Chairman and President
F.L. and J.C. Codman Company
*Lawrence M. Levinson
Partner
Burns & Levinson
Douglas H. Philipsen
President and Chief Executive Officer
Rockland Trust Company
Richard H. Sgarzi
President and Treasurer
Black Cat Cranberry Corp.
*Nathan Shulman
Retired, Former President
Best Chevrolet, Inc.
John F. Spence, Jr.
Chairman of the Board
Rockland Trust Company
Robert J. Spence
President
Albert Culver Co.
William J. Spence
President
Mass. Bay Lines, Inc.
*Richard A. Spencer
Retired, Former Chairman of
the Board, Hingham Mutual Fire
Insurance Co.
John H. Spurr, Jr.
Senior Vice President and Treasurer
A.W. Perry, Inc.
Robert D. Sullivan
President
Sullivan Tire Company, Inc.
Brian S. Tedeschi
President
Tedeschi Realty Corp.
*Ralph D. Tedeschi
Consultant, Former Chairman,
Angelo's Supermarkets, Inc.
Thomas J. Teuten
Executive Vice President
A.W. Perry, Inc.
*Honorary Director
39
- ----------------------
INDEPENDENT BANK CORP.
======================
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 3:30 P. M. on Thursday,
April 10, 1997 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
- ----------------------------------------------------
1996
4th Quarter $10.63 $8.63 $0.07
3rd Quarter 8.88 7.50 0.06
2nd Quarter 7.88 7.50 0.06
1st Quarter 7.75 6.75 0.06
1995
4th Quarter $7.50 $6.63 $0.05
3rd Quarter 7.63 6.63 0.05
2nd Quarter 7.50 6.25 0.04
1st Quarter 6.63 5.13 0.04
STOCKHOLDER RELATIONS Inquiries should be directed to:
Richard J. Seaman, Chief Financial Officer and Treasurer, or
Jeanne Govoni, Shareholder Relations
Independent Bank Corp.
288 Union Street
Rockland, MA 02370
(617) 878-6100
FORM 10-K
A copy of the Annual Report on Form 10-K filed with the Securities and
Exchange Commission for fiscal 1996 is available without charge by writing
to:
Jeanne Govoni, Shareholder Relations
Independent Bank Corp.
288 Union Street
Rockland, MA 02370
TRANSFER AGENT AND REGISTRAR
Transfer Agent and Registrar for the Company is:
Boston EquiServe
P. O. Box 8200
Boston, MA 02266-8200
40