SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission File Number: 1-9047 Independent Bank Corp. (Exact name of registrant as specified in its charter) Massachusetts 04-2870273 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 288 Union Street, Rockland, Massachusetts 02370 (Address of principal executive offices, including zip code) (781) 878-6100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ As of August 1,1998 there were 14,858,821 shares of the issuer's common stock outstanding.
INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION <S> <C> Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 Consolidated Statements of Income - Six months and quarters ended June 30, 1998 and 1997 Consolidated Statements of Cash Flows - Six months ended June 30, 1998 and 1997 Notes to Consolidated Financial Statements - June 30, 1998 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K </TABLE>
PART 1 FINANCIAL INFORMATION Item 1. Financial Statements - ---------------------------- <TABLE> <CAPTION> INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31, (Unaudited - in thousands) 1998 1997 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and Due From Banks $ 45,941 $42,544 Federal Funds Sold 19,074 22,472 Securities Held To Maturity 307,162 308,112 Securities Available For Sale 164,801 131,842 Federal Home Loan Bank Stock 16,035 16,035 Loans, Net of Unearned Discount 896,982 828,132 Less: Reserve for Possible Loan Losses (13,531) (12,674) - ---------------------------------------------------------------------------------------------------------------- Net Loans 883,451 815,458 - ---------------------------------------------------------------------------------------------------------------- Bank Premises and Equipment 13,290 12,776 Other Real Estate Owned 4 2 Other Assets 19,648 20,766 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,469,406 $1,370,007 ================================================================================================================ LIABILITIES Deposits Demand Deposits $205,703 $189,577 Savings and Interest Checking Accounts 268,114 257,980 Money Market and Super Interest Checking Accounts 104,605 119,316 Time Certificates of Deposit over $100,000 73,354 69,424 Other Time Deposits 332,986 351,851 - ---------------------------------------------------------------------------------------------------------------- Total Deposits 984,762 988,148 - ---------------------------------------------------------------------------------------------------------------- Federal Funds Purchased and Assets Sold Under Repurchase Agreements 61,176 38,327 Federal Home Loan Bank Borrowings 276,224 206,724 Treasury Tax and Loan Notes 8,189 3,217 Other Liabilities 13,111 12,348 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities 1,343,462 1,248,764 - ---------------------------------------------------------------------------------------------------------------- Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of 28,750 28,750 Subsidiary Trust Holding Solely Junior Subordinated debentures of the Corporation - ---------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common Stock, $.01 par value, Authorized: 30,000,000 Shares Outstanding: 14,858,821 Shares at June 30, 1998 and 14,801,904 at December 31, 1997 149 148 Surplus 45,507 45,147 Retained Earnings 50,495 45,825 Accumulated Other Comprehensive Income 1,043 1,373 - ---------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 97,194 92,493 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $1,469,406 $1,370,007 ================================================================================================================ </TABLE>
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENT OF INCOME (Unaudited - in thousands) <TABLE> <CAPTION> SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> INTEREST INCOME Interest on Loans $37,253 $31,576 $18,920 $16,346 Interest and Dividends on Securities 14,766 11,118 7,244 5,749 Interest on Federal Funds Sold and Repurchase Agreements 331 83 208 56 - -------------------------------------------------------------------------------------------------------------------------------- Total Interest Income 52,350 42,777 26,372 22,151 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits 15,570 15,311 7,063 7,928 Interest on Borrowed Funds 7,846 2,913 4,694 1,497 - -------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 23,416 18,224 11,757 9,425 - -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 28,934 24,553 14,615 12,726 - -------------------------------------------------------------------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 1,814 1,030 907 530 - -------------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision For Possible Loan Losses 27,120 23,523 13,708 12,196 - -------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service Charges on Deposit Accounts 2,664 2,854 1,335 1,428 Trust and Investment Services Income 1,975 1,558 1,082 827 Mortgage Banking Income 1,787 1,416 1,041 749 Other Non-Interest Income 783 643 359 310 - -------------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 7,209 6,471 3,817 3,314 - -------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES Salaries and Employee Benefits 10,987 9,911 5,787 5,240 Occupancy Expenses 1,872 1,842 873 889 Equipment Expenses 1,443 1,434 713 750 Other Non-Interest Expenses 7,183 6,508 3,546 3,028 - -------------------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expenses 21,485 19,695 10,919 9,907 - -------------------------------------------------------------------------------------------------------------------------------- Minority Interest Expense 1,334 311 667 311 INCOME BEFORE INCOME TAXES 11,510 9,988 5,939 5,292 PROVISION FOR INCOME TAXES 3,857 3,406 1,991 1,707 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $7,653 $6,582 $3,948 $3,585 ================================================================================================================================ BASIC EARNINGS PER SHARE $0.52 $0.45 $0.27 $0.25 ================================================================================================================================ DILUTED EARNINGS PER SHARE $0.51 $0.44 $0.26 $0.24 ================================================================================================================================ Weighted average common shares (Basic) 14,841,026 14,618,884 14,854,477 14,623,762 Common stock equivalents 255,484 276,624 257,400 281,849 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares (Diluted) 15,096,510 14,895,508 15,111,877 14,905,611 ================================================================================================================================ </TABLE>
<TABLE> <CAPTION> INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, (Unaudited - in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $7,653 $6,582 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES Depreciation and amortization 1,999 1,898 Provision for loan losses 1,814 1,030 Loans originated for resale (40,036) (23,212) Proceeds from mortgage loan sales 39,943 23,194 Loss (gain) on sale of mortgages 93 18 Gain recorded from mortgage servicing rights (365) (221) Other Real Estate Owned recoveries (76) -- Changes in assets and liabilities: Decrease (increase) in other assets 1,483 (2,504) Increase in other liabilities 933 2,917 - --------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 5,788 3,120 - --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 13,441 9,702 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of Securities Held to Maturity 60,679 44,635 Proceeds from maturities of Securities Available for Sale 30,575 4,474 Purchase of Held to Maturity Securities (60,125) (42,973) Purchase of Available for Sale Securities (64,358) (93,545) Purchase of FHLB Stock -- (3,553) Net increase in Loans (69,892) (67,759) Proceeds from sale of OREO 159 299 Investment in Bank Premises and Equipment (1,793) (2,399) - --------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (104,755) (160,821) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in Deposits (3,386) 39,439 Net increase in Federal Funds Purchased and Assets Sold Under Repurchase Agreements 22,849 37,733 Net increase in FHLB Borrowings 69,500 50,000 Net increase in TT&L Notes 4,972 5,349 Issuance of corporation-obligated mandatorily Redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation -- 28,750 Dividends Paid (2,983) (2,200) Proceeds from stock issuance 361 80 - --------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 91,313 159,151 - --------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1) 8,032 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 65,016 53,486 - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AS OF JUNE 30, $65,015 $61,518 - --------------------------------------------------------------------------------------------------------------- </TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the three and six month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998 or any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in Independent Bank Corp.'s (the "Company") annual report on Form 10-K for the year ended December 31, 1997. RECENT ACCOUNTING DEVELOPMENTS In March, 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1). SOP 98-1 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met. The Company does not believe that adoption of SOP 98-1 will have a material impact on the Company's financial statements. In April, 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires all costs associated with pre-opening, pre-operating, and organization activities to be expensed as incurred. The Company will adopt SOP 98-5 beginning January 1, 1999. The Company believes that adoption of SOP 98-5 will have no material impact on the Company's financial statements. In June, 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement 133 cannot be applied retroactively. Statement 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company does not expect that the adoption of this statement will have a material impact on the Company's financial position or results of operation.
EARNINGS PER SHARE In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards Board (SFAS) No. 128, "Earnings per share." This statement was issued by the Financial Standards Accounting Board (FASB) in March 1997 and establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement replaces the presentation of primary EPS with a presentation of Basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerators and denominators of the basic and diluted EPS computations. This statement also requires a restatement of all prior period EPS data presented. <TABLE> <CAPTION> (In Thousands, except per share data) NET INCOME WEIGHTED AVERAGE NET INCOME SHARES PER SHARE - --------------------------------------------------------------------------------------------------------- For the six months ended June 30, 1998 1997 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $7,653 $6,582 14,841 14,619 $0.52 $0.45 Effect of dilutive securities 256 277 0.01 0.01 Diluted EPS $7,653 $6,582 15,097 14,896 $0.51 $0.44 - --------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> (In Thousands, except per share data) NET INCOME WEIGHTED AVERAGE NET INCOME SHARES PER SHARE - --------------------------------------------------------------------------------------------------------- For the three months ended June 30, 1998 1997 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $3,948 $3,585 14,854 14,624 $0.27 $0.25 Effect of dilutive securities 257 282 0.01 0.01 Diluted EPS $3,948 $3,585 15,111 14,906 $0.26 $0.24 - --------------------------------------------------------------------------------------------------------- </TABLE> COMPREHENSIVE INCOME In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses and all other nonowner changes in equity). This statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. Comprehensive income is reported net of taxes, as follows: <TABLE> <CAPTION> For the Six Months Ended For the Three Months Ended June 30, June 30, 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> Net Income $7,653 $6,582 $3,948 $3,585 Other Comprehensive Income, net of tax: Unrealized gain/(loss) on Securities Available for Sale (328) 612 (192) 709 Reclassification adjustment for (gains)/losses included in net income (2) 7 (2) -- -------------------------------------------------------- Other Comprehensive Income (330) 619 (194) 709 -------------------------------------------------------- Comprehensive Income $7,323 $7,201 $3,754 $4,294 -------------------------------------------------------- </TABLE>
SEGMENT INFORMATION In June, 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of and Enterprise and Related Information." This statement establishes standards for reporting information about segments in annual and interim financial statements. SFAS 131 introduces a new model for segment reporting, called the "management approach." The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operation decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure - - any manner in which management disaggregates a company. This statement is effective and will be adopted for the Company's financial statements for the fiscal year ending December 31, 1998 and requires the restatement of previously reported segment information for all periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 SUMMARY For the six months ended June 30, 1998, Independent Bank Corp. (the Company) recorded net income of $7.7 million compared with net income of $6.6 million for the same period last year. Diluted earnings per share were $.51 for the six months ended June 30, 1998 compared to $.44 per share for the prior year. Basic earnings per share, before the dilutive effect of stock options, were $.52 in 1998 compared to $.45 for the same period in 1997. Per share earnings have been calculated in accordance with SFAS No. 128, "Earnings per Share." This improvement in net income was due to a $4.4 million, or 17.8% increase in net interest income. The provision for loan losses increased to $1.8 million for the first six months of 1998 compared with $1.0 million for the same period last year. Non-interest income increased $738,000, or 11.0%, while non-interest expenses increased $1.8 million, or 9% over the first six months of 1997. The annualized consolidated returns on average equity and average assets for the first six months of 1998 were 15.96% and 1.11%, respectively. This compares to annualized consolidated returns on average equity and average assets for the first six months of 1997 of 15.84% and 1.17%, respectively. As of June 30, 1998, total assets amounted to $1.5 billion, an increase of $99.4 million over the 1997 year end balance. Investments increased $32 million, or 7.3% from $440.0 million at year-end 1997, primarily due to an investment leverage strategy that the Company has implemented during the second quarter of 1998. Loans, net of unearned discount, increased $68.8 million, or 8.3%, since year-end 1997 with strong growth in the commercial real estate portfolio and the installment loan portfolio. Deposit balances have decreased by $3.4 million, or 34 basis points. Borrowings increased by $97.3 million, or 39.2%, since year-end 1997. In the second quarter of 1997, Independent Capital Trust I (a subsidiary of the Company) was formed for the purpose of issuing Trust Preferred Securities. A total of $28.8 million of 9.28% Cumulative Trust Preferred Securities were issued on May 19, 1997. Net income for the six months ended June 30, 1998, reflects pre-tax minority interest expense of $1.3 million, while the period ended June 30,1997 reflected $311,000. Nonperforming assets totaled $5.1 million as of June 30, 1998 compared to $5.9 million at December 31, 1997. Nonperforming assets represented 35 and 43 basis points of total assets as of June 30, 1998 and December 31,1997, respectively.
NET INTEREST INCOME The discussion of net interest income, which follows, is presented on a fully tax-equivalent basis. Net interest income for the six months ended June 30, 1998, amounted to $29.3 million, an increase of $4.6 million, or 18.5%, from the comparable 1997 time frame. This is due to strong loan growth as well as an expanding securities portfolio, financed by borrowings, to take advantage of a strong capital position. While these funding and investment actions increased net interest income, the net interest margin ( net interest income as a percent of average interest earning assets) reflects the lower net interest spread on such transactions. The Company's net interest margin for the first six months of 1998 was 4.46%, compared to 4.65% for the comparable 1997 time frame. The Company's interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) decreased by 29 basis points to 3.56%. The average balance of interest-earning assets for the first six months of 1998 amounted to $1.3 billion, an increase of $251 million, or 23.7%, from the comparable 1997 time frame. Income from interest-earning assets amounted to $52.7 million for the six months ended June 30, 1998, an increase of $9.8 million, or 22.8%, from the first six months of 1997. The increase in interest income was the result of a $136.1 million, or 18.9% increase in the average balance of the loan portfolio, net of unearned discount, resulting from increases in the commercial real estate portfolio and indirect automobile lending, as well as a $106.0 million, or 31.2%, increase in the securities portfolio. Interest income is impacted by changes in market rates of interest due to variable and floating rate loans in the Company's portfolio. At June 30, 1998, loans having interest rates which adjust in accordance with changes in the Company's base lending rate or other market indices amounted to approximately $264.2 million, or 29.5% of loans, net of unearned discount. Interest income is also impacted by the amount of non-performing loans. The amount of interest due, but not recognized, on non-performing loans amounted to approximately $231,000 for the six months ended June 30, 1998 compared to $187,000 for the six months ended June 30, 1997. The average balance of interest-bearing liabilities for the first six months of 1998 was $190.1 million, or 22.1%, higher than the comparable 1997 time frame. Average interest bearing deposits increased by $21.4 million, or 2.8%, for the first six months of 1998 over the same period last year, primarily in the consumer certificate of deposit category. For the six months ended June 30, 1998, average borrowings were $168.7 million, or 159.1%, higher than the first six months of 1997, primarily in FHLB borrowings which increased by $149.0 million. Interest expense on deposits increased by $259,000, or 1.7%, to $15.6 million in the first six months of 1998 and interest expense on borrowings increased by $4.9 million, or 169.3%, to $7.8 million as compared to the same period last year. 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. The level of the reserve for possible loan losses is determined by management of the Company based upon known and anticipated circumstances and conditions. An analysis of individual loans and the overall risk characteristics and size of the different loan portfolios is conducted on an ongoing basis. In addition, the Company considers industry trends, regional and national economic conditions, past estimates of possible losses as compared to actual losses, and historical loss patterns. Management assesses the adequacy of the reserve for possible loan losses and reviews that assessment quarterly with the Board of Directors. For the six months ended June 30, 1998, management increased the provision for possible loan losses, consistent with the level of loan growth experienced, to $1.8 million as compared to
$1.0 million for the same period last year. For the first six months of 1998, loans charged-off, net of recoveries of loans previously charged-off, amounted to $957,000 as compared to $745,000 for the comparable 1997 time frame. As of June 30, 1998, the ratio of the reserve for possible loan losses to loans, net of unearned discount, was 1.50%, as compared to the 1997 year-end level of 1.53%. The ratio of the reserve for possible loan losses to non-performing loans was 264.43% at June 30, 1998, an increase over the 215.14% coverage recorded at year-end 1997. NON-INTEREST INCOME Non-interest income for the six months ended June 30, 1998 was $7.2 million, compared to $6.5 million for the same period in 1997. Income from Trust and Financial Services increased by $417,000, or 26.8%, due to an increase in funds under management and a strong securities market. Mortgage banking income increased by $371,000, or 26.2%, over the 1997 time frame due to a strong refinancing market. These increases were slightly offset by a decrease in service charge income of $190,000, or 6.7%, primarily in lower overdraft revenue. NON-INTEREST EXPENSES Non-interest expenses totaled $21.5 million for the six months ended June 30, 1998, a $1.8 million increase from the comparable 1997 period. Salaries and employee benefits increased $1.1 million, or 10.9%. As previously reported, in connection with a change in the Bank's pension plan which was effective January 1, 1997, the Company recognized $394,000 of previously accrued pension liability as a credit to salaries and benefits during the first quarter of 1997. Excluding this item, non-interest expenses increased by $1.4 million, or 7.1% and salaries and employee benefits increased $682,000, or 6.9% from the same period in 1997. Occupancy and equipment expenses for the first six months of 1998 increased $39,000, or less than 1%, from the comparable 1997 period. Other non-interest expenses for the first six months of 1998 increased $675,000 to $7.2 million from $6.5 million in the first six months of 1997. This increase was primarily due to a combination of increased collection expenses associated with the Bank's indirect automobile lending as well as a second quarter 1997 recovery of a fraudulent check loss. MINORITY INTEREST In the second quarter of 1997, Independent Capital Trust I (the "Trust") was formed for the purpose of issuing trust preferred securities (the "Trust Preferred Securities") and investing the proceeds of the sale of these securities in junior subordinated debentures issued by the Company. A total of $28.75 million of 9.28% Trust Preferred Securities were issued and are scheduled to mature in 2027, callable at the option of the Company after May 19, 2002. Distributions on these securities are payable quarterly in arrears on the last day of March, June, September and December, such distributions can be deferred at the option of the Company for up to five years. The Trust Preferred Securities can be prepaid in whole or in part on or after May 19, 2002 at a redemption price equal to $25 per Trust Preferred Security plus accumulated but unpaid distributions thereon to the date of the redemption. The Trust Preferred Securities are presented in the consolidated balance sheets of the Company entitled "Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation". The Company records distributions payable on the Trust Preferred Securities as minority interest expense in its consolidated statements of income. The minority interest expense for the six months ended June 30, 1998 was $1.3 million as compared to the $311,000 recorded as of June 30, 1997.
INCOME TAXES The Company records income tax expense pursuant to Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes". The Company evaluates the deferred tax asset and the valuation reserve on a quarterly basis. The Company's effective tax rates for the six months ended June 30, 1998 and 1997 were 33.5% and 34.1% respectively. The lower rate in 1998 reflects tax planning strategies enacted by the Company in 1997 and continued in 1998. ASSET/LIABILITY MANAGEMENT The principal objective of the Company's asset/liability management strategy is to reduce the vulnerability of the Company to changes in interest rates. This is accomplished by managing the volume of assets and liabilities maturing, or subject to repricing, and by adjusting rates in relation to market conditions to influence volumes and spreads. The effect of interest rate volatility on net interest income is minimized when the interest sensitivity gap (the difference between assets and liabilities that reprice within a given time period) is the smallest. Given the inherent uncertainty of future interest rates, Rockland Trust Company's (the Bank or Rockland) Asset/Liability Management Committee evaluates the interest sensitivity gap and executes strategies, which may include off-balance sheet activities, in an effort to minimize the Company's exposure to interest rate movements while providing adequate earnings in the most plausible future interest rate environments. Beginning in 1992, Rockland entered into interest rate swap agreements as a hedge against stable or declining interest rates. As of June 30, 1998, the Bank had one interest rate swap agreement with a notional value of $20 million. This swap as arranged through an international banking institution and has an initial maturity of three years. The Bank receives fixed rate payments and pays a variable rate of interest tied to 3-month LIBOR. INTEREST RATE RISK Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term horizons. The primary goal of interest-rate risk management is to control this risk within limits approved by the Board. These limits reflect the Company's tolerance for interest-rate risk by identifying exposures, quantifying and hedging them as needed. The Company quantifies its interest-rate exposures using net interest income simulation models, as well as simpler gap analyses. The Company manages its interest-rate exposure using a combination of on and off balance sheet instruments, primarily fixed rate portfolio securities, interest rate swaps, and options. The Company uses simulation analysis to measure the exposure of net interest income to changes in interest rates over a relatively short (i.e., less than 2 years) time horizon. Simulation analysis involves projecting future interest income and expense from the Company's asset, liabilities and off balance sheet positions under various scenarios. The Company's limits on interest rate risk specify that if interest rates were to shift up or down 200 basis points, estimated net income for the next 12 months should decline by less than 6%. The following table reflects the Company's estimated exposure, as a percentage of estimated net interest income for the next 12 months. Rate Change Estimated Exposure as % (Basis Points) of Net Interest Income - -------------------------------------------------------------------------------- +200 (1.38%) -200 1.08%
LIQUIDITY AND CAPITAL Liquidity, as it pertains to the Company, is the ability to generate cash in the most economical way, in order to meet ongoing obligations to pay deposit withdrawals and to fund loan commitments. The Company's primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and investments. A strong source of liquidity is the Company's core deposits, those deposits which management considers, based on experience, are not likely to be withdrawn in the near term. The Company utilizes its extensive branch banking network to attract retail customers who provide a stable source of core deposits. The Company has established five repurchase agreements with major brokerage firms as potential sources of liquidity. On June 30, 1998, the Company had $33.5 million outstanding under such lines classified on the Balance Sheet as "Federal Funds Purchased and Assets Sold Under Repurchase Agreements". As an additional source of funds, the Bank has entered into repurchase agreements with customers totaling $27.7 million at June 30, 1998. In addition, as a member of the Federal Home Loan Bank, Rockland has access to approximately $420 million of borrowing capacity. At June 30, 1998, the Company had $276.0 million outstanding under such lines. The Company actively manages its liquidity position under the direction of the Bank's Asset/Liability Management Committee. Periodic review under formal policies and procedures is intended to ensure that the Company will maintain access to adequate levels of available funds. At June 30, 1998, the Company's liquidity position was well above policy guidelines. CAPITAL RESOURCES AND DIVIDENDS The Company and Rockland are subject to capital requirements established by the Federal Reserve Board and the FDIC, respectively. One key measure of capital adequacy is the risk-based ratio for which the regulatory agencies have established minimum requirements of 4.00% and 8.00% for Tier 1 risk-based capital and total risk-based capital, respectively. As of June 30, 1998, the Company had a Tier 1 risked-based capital ratio of 12.49% and a total risked-based capital ratio of 13.74%. Rockland had a Tier 1 risked-based capital ratio of 9.31% and a total risked-based capital ratio of 10.57% as of the same date. An additional capital requirement of a minimum 4.00% Tier 1 leverage capital is mandated by the regulatory agencies for most banking organizations and a 5.00% Tier 1 leverage capital ratio is required for a "well capitalized" institution. As of June 30, 1998, the Company and the Bank had Tier 1 leverage capital ratios of 8.84% and 6.59%, respectively. The Company's capital ratios increased significantly in the second quarter of 1997 due to the issuance of $28.8 million of Trust Preferred Securities. In June, the Company's Board of Directors declared a cash dividend of $.10 per share to shareholders of record as of June 26, 1998. This dividend was paid on July 10, 1998. On an annualized basis, the dividend payout ratio amounted to 40.0% of the trailing four quarters earnings. On June 9, 1998, the Company announced that its Board of Directors approved a plan to buy back up to five percent, or approximately 742,000 shares of its outstanding common stock. The Company has 14,858,821 shares outstanding as of June 30,1998. The Company placed no deadline on the purchase plan but expects to make open market and/or privately negotiated purchases from time to time based on stock price and market conditions.
YEAR 2000 The Company has developed plans to address the possible exposure related to the impact on its computer systems and key service providers of the Year 2000. Key financial and operational systems have been assessed and detailed plans have been developed to address systems modifications required by December 31, 1999. Anticipated spending for these modifications will be expensed as incurred. In 1997, the Company converted its core operating system software to a leading provider of data processing services, Alltel. As a consequence, Alltel is leading the effort for ensuring Year 2000 compliance for all mainframe application software. Management has overall responsibility for ensuring compliant systems and is working closely with Alltel to ensure this compliance by December 31, 1999. Costs related to this aspect of the Year 2000 effort are the responsibility of Alltel. Management believes Alltel has the financial resources to complete this effort. The Company expects to incur Year 2000 costs to replace existing personal computer hardware and software, which will be capitalized and amortized in accordance with the Company's existing accounting policy. In addition to capitalizing hardware and software, the Company will incur expenses in 1998 and 1999, estimated to be $500,000, which represents the out of pocket costs to address the Year 2000 problem. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 SUMMARY For the three months ended June 30, 1998, Independent Bank Corp. (the Company) recorded net income of $3.9 million compared with net income of $3.6 million for the same period last year. Diluted earnings per share were $.26 for the three months ended June 30, 1998 versus $.24 per share for the same period in the prior year. Basic earnings per share, before the dilutive effect of stock options, were $.27 in 1998 compared with $.25 for the same period in 1997. Per share earnings have been calculated in accordance with SFAS No. 128, "Earnings per Share." This improvement in net income was due to a $1.9 million, or 14.8% increase in net interest income. The provision for loan losses increased to $907,000 for the second quarter of 1998 compared with $530,000 for the same period last year. Non-interest income increased $503,000, or 15.2%, while non-interest expenses increased $1.0 million, or 10.2% over the second quarter of 1997. The annualized consolidated returns on average equity and average assets for the second quarter of 1998 were 16.25% and 1.14%, respectively. This compares to annualized consolidated returns on average equity and average assets for the second quarter of 1997 of 17.12% and 1.24%, respectively. NET INTEREST INCOME The discussion of net interest income, which follows, is presented on a fully tax-equivalent basis. Net interest income for the three months ended June 30, 1998, amounted to $14.8 million, an increase of $2.0 million, or 15.5%, from the comparable 1997 time frame. The Company's interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) decreased by 30 basis points, to 3.55%. The Company's net interest margin for the second quarter of 1998 was 4.47%, compared to 4.71% for the comparable 1997 time frame.
The average balance of interest-earning assets for the second quarter of 1998 amounted to $1.3 billion an increase of $237.8 million, or 21.80%, over the comparable 1997 time frame. Income from interest-earning assets amounted to $26.6 million for the second quarter of 1998, an increase of $4.3 million, or 19.4%, from the second quarter of 1997. The increase in interest income was attributable to a $135.1 million, or 18.4% increase in the average balance of the loan portfolio, net of unearned discount, resulting from increases in the commercial real estate portfolio and indirect automobile lending. In addition, the securities portfolio increased by $91.6 million, or 26.2% which reflects the Company's strategy of leveraging its capital. The average balance of interest-bearing liabilities for the second quarter of 1998 was $181.1 million, or 20.7%, higher than the comparable 1997 time frame. Average interest bearing deposits increased by $5.3 million, or less than 1%, for the second quarter of 1998 over the same period last year, primarily in the savings and interest checking account category. For the three months ended June 30, 1998, average borrowings were $175.8 million, or 164.5%, higher than the second quarter of 1997. Interest expense on deposits decreased by $178,000 or 2.3%, while interest expense on borrowings increased by $2.5 million, or 167.7%. NON-INTEREST INCOME Non-interest income for the three months ended June 30, 1998 was $3.8 million, compared to $3.3 million for the same period in 1997. Income from Trust and Financial Services increased by $255,000, or 30.8%, due to an increase in funds under management and a strong securities market. Mortgage banking income also increased by $292,000, or 39.0%, over the 1997 time frame due to a strong refinancing market. NON-INTEREST EXPENSES Non-interest expenses totaled $10.9 million for the three months ended June 30, 1998, a $1.0 million increase from the comparable 1997 period. The increase in non-interest expense was due to a $547,000 increase in salaries and employee benefits, as well as a $518,000 increase in other non-interest expenses. Occupancy and equipment expenses decreased $53,000. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information required by this Item 3 is included in Item 2 of Part I of this Form 10-Q, entitled "Management's Discussion and Analysis."
<TABLE> <CAPTION> PART II. OTHER INFORMATION <S> <C> Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information </TABLE> The financial information detailed below is included hereafter in this report: Consolidated Statements of Changes in Stockholders' Equity - Three months ended June 30, 1998 and the year ended December 31, 1997 Consolidated Average Balance Sheet and Average Rate Data - Six months and three months ended June 30, 1998 and 1997. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No. Page 27 Financial Data Schedule E-1 (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 1998.
- --------------------------------------------------------------------------- INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited - in thousands) <TABLE> <CAPTION> UNREALIZED GAIN (LOSS) COMMON RETAINED INVESTMENTS STOCK SURPLUS EARNINGS AVAILABLE TOTAL - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Balance, January 1, 1997 $146 $44,433 $36,666 ($135) $81,110 - ------------------------------------------------------------------------------------------------------------------------------ Net Income 14,158 14,158 Dividends Declared (4,999) (4,999) Proceeds From Exercise of Stock Options 2 710 712 Tax Benefit of Stock Option Exercises 4 4 Change in Unrealized Gain (Loss) on Securities Available for Sale, Net of Tax 1,508 1,508 - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 148 45,147 45,825 1,373 92,493 - ------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1998 148 45,147 45,825 1,373 92,493 - ------------------------------------------------------------------------------------------------------------------------------ Net Income 7,653 7,653 Dividends Declared (2,983) (2,983) Proceeds From Exercise of Stock Options 1 360 361 Change in Unrealized Gain on Securities Available for Sale, Net of Tax (330) (330) - ------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 $149 $45,507 $50,495 $1,043 $97,194 ============================================================================================================================== </TABLE>
INDEPENDENT BANK CORP. SUPPLEMENTAL FINANCIAL INFORMATION CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA (Unaudited - in thousands) <TABLE> <CAPTION> AVERAGE INTEREST OUTSTANDING EARNED/ AVERAGE BALANCE PAID YIELD FOR THE SIX MONTHS ENDED JUNE 30, 1998 1998 1998 ------------------- ------------------- ----------------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $422,041 $14,170 6.71% Non-taxable Investment Securities 23,650 872 7.37% Loans, net of Unearned Discount 855,725 37,334 8.73% Federal Funds Sold and Assets Purchased Under Resale Agreements 12,307 331 5.38% ----------- -------- ------ Total Interest-Earning Assets $1,313,723 $52,707 8.02% ----------- ======== ====== Cash and Due From Banks 40,548 Other Assets 18,682 ----------- Total Assets $1,372,953 =========== Interest-Bearing Liabilities Savings and Interest Checking Accounts $260,637 $2,643 2.03% Money Market & Super Interest Checking Accounts 110,568 1,474 2.67% Other Time Deposits 404,225 11,453 5.67% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 48,558 1,375 5.66% Federal Home Loan Bank Borrowings 223,513 6,392 5.72% Treasury Tax and Loan Notes 2,735 79 5.78% ----------- -------- ------ Total Interest-Bearing Liabilities $1,050,236 $23,416 4.46% =========== ======== ====== Demand Deposits 185,453 Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated debentures of the Corporation 28,750 Other Liabilities 12,600 ----------- Total Liabilities 1,277,039 ----------- Stockholders' Equity 95,914 ----------- Total Liabilities and Stockholders' Equity $1,372,953 =========== Net Interest Income $29,291 ======== Interest Rate Spread 3.56% ====== Net Interest Margin 4.46% ====== Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $357 in 1998. </TABLE>
INDEPENDENT BANK CORP. SUPPLEMENTAL FINANCIAL INFORMATION CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA (Unaudited - in thousands) <TABLE> <CAPTION> AVERAGE INTEREST OUTSTANDING EARNED/ AVERAGE BALANCE PAID YIELD FOR THE SIX MONTHS ENDED JUNE 30, 1997 1997 1997 ------------------ -------------- ------------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $333,164 $10,961 6.58% Non-taxable Investment Securities 6,524 224 6.87% Loans, net of Unearned Discount 719,665 31,671 8.80% Federal Funds Sold and Assets Purchased Under Resale Agreements 3,113 83 5.33% ---------- ------- ----- Total Interest-Earning Assets 1,062,466 $42,939 8.08% ---------- ------- ----- Cash and Due From Banks 45,695 Other Assets 18,185 ---------- Total Assets 1,126,346 ---------- Interest-Bearing Liabilities Savings and Interest Checking Accounts $253,245 $2,698 2.13% Money Market & Super Interest Checking Accounts 108,508 1,519 2.80% Other Time Deposits 392,303 11,094 5.66% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 27,491 750 5.46% Federal Home Loan Bank Borrowings 74,464 2,074 5.57% Treasury Tax and Loan Notes 4,114 89 4.33% ---------- ------- ----- Total Interest-Bearing Liabilities 860,125 $18,224 4.24% ---------- ------- ----- Demand Deposits 162,613 Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated debentures of the Corporation 7,526 Other Liabilities 12,996 ---------- Total Liabilities $1,043,260 ---------- Stockholders' Equity $83,086 Total Liabilities and Stockholders' Equity $1,126,346 ========== Net Interest Income $24,715 ======= Interest Rate Spread 3.85% ====== Net Interest Margin 4.65% ====== Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $162 in 1997. </TABLE>
INDEPENDENT BANK CORP. SUPPLEMENTAL FINANCIAL INFORMATION CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA (Unaudited - in thousands) <TABLE> <CAPTION> AVERAGE INTEREST OUTSTANDING EARNED/ AVERAGE BALANCE PAID YIELD FOR THE THREE MONTHS ENDED JUNE 30, 1998 1998 1998 ------------------ -------------- ------------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $417,165 $6,941 6.66% Non-taxable Investment Securities 23,868 441 7.39% Loans, net of Unearned Discount 871,066 18,962 8.71% Federal Funds Sold and Assets Purchased Under Resale Agreements 15,191 208 5.48% ---------- ======= ===== Total Interest-Earning Assets 1,327,290 $26,552 8.00% ---------- ======= ===== Cash and Due From Banks 42,246 Other Assets 18,059 ---------- Total Assets 1,387,595 ========== Interest-Bearing Liabilities Savings and Interest Checking Accounts $264,348 $1,308 1.98% Money Market & Super Interest Checking Accounts 109,721 746 2.72% Other Time Deposits 399,553 5,696 5.70% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 58,485 811 5.55% Federal Home Loan Bank Borrowings 220,787 3,153 5.71% Treasury Tax and Loan Notes 3,432 43 5.01% ---------- ------- ----- Total Interest-Bearing Liabilities $1,056,326 $11,757 4.45% ========== ======= ===== Demand Deposits 192,986 Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated debentures of the Corporation 28,750 Other Liabilities 12,363 ---------- Total Liabilities 1,290,425 ---------- Stockholders' Equity 97,170 ---------- Total Liabilities and Stockholders' Equity $1,387,595 ========== Net Interest Income $14,795 ======= Interest Rate Spread 3.55% ===== Net Interest Margin 4.47% ===== Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $180 in 1998. </TABLE>
INDEPENDENT BANK CORP. SUPPLEMENTAL FINANCIAL INFORMATION CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA (Unaudited - in thousands) <TABLE> <CAPTION> AVERAGE INTEREST OUTSTANDING EARNED/ AVERAGE BALANCE PAID YIELD FOR THE THREE MONTHS ENDED JUNE 30, 1997 1997 1997 --------------------- --------------- ------------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $342,378 $ 5,650 6.60% Non-taxable Investment Securities 7,019 138 7.86% Loans, net of Unearned Discount 736,012 16,389 8.91% Federal Funds Sold and Assets Purchased Under Resale Agreements 4,112 56 5.45% ---------- ------- ----- Total Interest-Earning Assets 1,089,521 $22,233 8.16% ---------- ======= ===== Cash and Due From Banks 46,939 Other Assets 18,086 ---------- Total Assets 1,154,546 ========== Interest-Bearing Liabilities Savings and NOW Accounts $254,016 $1,355 2.13% Money Market & Super NOW Accounts 112,300 809 2.88% Other Time Deposits 401,980 5,764 5.74% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 23,231 326 5.61% Federal Home Loan Bank Borrowings 78,984 1,117 5.66% Treasury Tax and Loan Notes 4,684 54 4.61% ---------- ------- ----- Total Interest-Bearing Liabilities 875,195 $9,425 4.31% ========== ======= ===== Demand Deposits 167,577 Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated debentures of the Corporation 15,972 Other Liabilities 12,044 ---------- Total Liabilities $1,070,788 ---------- Stockholders' Equity $83,758 ---------- Total Liabilities and Stockholders' Equity $1,154,546 ========== Net Interest Income $12,808 ======= Interest Rate Spread 3.85% ===== Net Interest Margin 4.71% ===== Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $82 in 1997. </TABLE>
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INDEPENDENT BANK CORP. (registrant) Date: August 13, 1998 /s/ Douglas H. Philipsen ---------------------------------------- Douglas H. Philipsen President, Chairman of the Board and Chief Executive Officer Date: August 13, 1998 /s/ Richard J. Seaman ------------------------------------ Richard J. Seaman Chief Financial Officer and Treasurer