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 September 30, 1997 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 November 1,1997 there were 14,780,054 shares of the issuer's common stock outstanding.
INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 Consolidated Statements of Income - Nine months and quarters ended September 30, 1997 and 1996 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 Notes to Consolidated Financial Statements - September 30, 1997 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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> <CAPTION> PART 1: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, (Unaudited - in thousands) 1997 1996 <S> <C> <C> ASSETS Cash and Due From Banks $48,089 $52,836 Federal Funds Sold and Assets Purchased Under Resale Agreements 3,005 650 Securities Held To Maturity 329,846 290,894 Securities Available For Sale 140,693 26,449 Federal Home Loan Bank Stock 14,887 7,558 Loans, Net of Unearned Discount 790,782 695,406 Less: Reserve for Possible Loan Losses (12,624) (12,221) - ------------------------------------------------------------------------------------------------------------ Net Loans 778,158 683,185 - ------------------------------------------------------------------------------------------------------------ Bank Premises and Equipment 11,802 10,642 Other Real Estate Owned 6 271 Other Assets 20,937 20,308 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,347,423 $1,092,793 ============================================================================================================ LIABILITIES Deposits Demand Deposits $190,131 $176,887 Savings and NOW Accounts 251,950 257,819 Money Market and Super NOW Accounts 108,066 107,084 Time Certificates of Deposit over $100,000 55,446 45,866 Other Time Deposits 349,516 330,916 - ------------------------------------------------------------------------------------------------------------ Total Deposits 955,109 918,572 - ------------------------------------------------------------------------------------------------------------ Federal Funds Purchased and Assets Sold Under Repurchase Agreements 79,986 840 Federal Home Loan Bank Borrowings 171,500 78,000 Treasury Tax and Loan Notes 4,959 2,296 Other Liabilities 17,875 11,975 Subordinated Capital Notes - - - ------------------------------------------------------------------------------------------------------------ Total Liabilities 1,229,429 1,011,683 - ------------------------------------------------------------------------------------------------------------ Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation 28,750 - - ------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Common Stock, $.01 par value Authorized: 30,000,000 Shares Outstanding: 14,653,087 Shares at September 30, 1997 and 14,604,501 at December 31, 1996 147 146 Surplus 44,637 44,433 Retained Earnings 43,272 36,666 Unrealized Gain (Loss) on Securities Available For Sale, Net of Tax 1,188 (135) - ------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 89,244 81,110 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND STOCKHOLDERS' EQUITY $1,347,423 $1,092,793 ============================================================================================================ </TABLE>
<TABLE> <CAPTION> INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited - in thousands) NINE MONTHS ENDED QUARTER ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 1997 1996 1997 1996 <S> <C> <C> <C> <C> INTEREST INCOME Interest on Loans $48,753 $43,084 $17,177 $14,649 Interest and Dividends on Securities 18,816 14,001 7,698 4,996 Interest on Federal Funds Sold and Repurchase Agreements 132 168 49 52 Interest on Interest Bearing Deposits - 7 - - ---------------------------------- ---------------------------------- Total Interest Income 67,701 57,260 24,924 19,697 ---------------------------------- ---------------------------------- INTEREST EXPENSE Interest on Deposits 23,471 20,425 8,160 6,686 Interest on Borrowed Funds 6,057 3,445 3,144 1,524 ---------------------------------- ---------------------------------- Total Interest Expense 29,528 23,870 11,304 8,210 ---------------------------------- ---------------------------------- Net Interest Income 38,173 33,390 13,620 11,487 ---------------------------------- ---------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 1,560 1,250 530 500 ---------------------------------- ---------------------------------- Net Interest Income After Provision ---------------------------------- ---------------------------------- Possible For Loan Losses 36,613 32,140 13,090 10,987 ---------------------------------- ---------------------------------- NON-INTEREST INCOME Service Charges on Deposit Accounts 4,255 4,365 1,401 1,461 Trust and Investment Services Income 2,284 2,114 726 700 Mortgage Banking Income 2,083 2,247 667 659 Other Non-Interest Income 952 1,018 309 291 ---------------------------------- ---------------------------------- Total Non-Interest Income 9,574 9,744 3,103 3,111 ---------------------------------- ---------------------------------- NON-INTEREST EXPENSES Salaries and Employee Benefits 15,129 15,908 5,218 5,088 Occupancy Expenses 2,692 2,479 850 805 Equipment Expenses 2,080 1,847 646 596 Other Non-Interest Expenses 9,718 8,695 3,210 2,985 ---------------------------------- ---------------------------------- Total Non-Interest Expenses 29,619 28,929 9,924 9,474 ---------------------------------- ---------------------------------- MINORITY INTEREST EXPENSE 978 - 667 - INCOME BEFORE INCOME TAXES 15,590 12,955 5,602 4,624 PROVISION FOR INCOME TAXES 5,316 4,599 1,910 1,600 ---------------------------------- ---------------------------------- NET INCOME $10,274 $8,356 $3,692 $3,024 ================================== ================================== NET INCOME PER SHARE $0.69 $0.57 $0.25 $0.20 ================================== ================================== Weighted average common and common equivalent shares outstanding 14,921,678 14,724,745 14,969,902 14,758,987 ================================== ================================== </TABLE>
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - in thousands) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $10,274 $8,356 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES: Depreciation and amortization 2,860 2,441 Provision for possible loan losses 1,560 1,250 Loans originated for resale (33,539) (33,181) Proceeds from mortgage loan sales 33,497 33,192 Loss (gain) on sale of mortgages 42 (11) Other Real Estate Owned write-downs (recoveries) (110) - Changes in assets and liabilities: Increase in other assets (1,459) (713) Increase in other liabilities 6,656 2,516 - ---------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 9,507 5,494 - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 19,781 13,850 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in Interest Bearing Deposits - 296 Proceeds from maturities of Securities Held to Maturity 59,318 117,599 Proceeds from maturities of Securities Available for Sale 11,577 4,565 Purchase of Held to Maturity Securities (99,009) (166,120) Purchase of Available for Sale Securities (123,937) - Purchase of FHLB Stock (7,329) (3,369) Net increase in Loans (97,724) (41,440) Proceeds from sale of Other Real Estate Owned 404 601 Investment in Bank Premises and Equipment (2,903) (2,777) - ---------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (259,603) (90,645) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in Deposits 36,537 (15,762) Net increase in Federal Funds Purchased and Assets Sold Under Repurchase Agreements 79,146 34,782 Net increase in Federal Home Loan Bank Borrowings 93,500 40,000 Net increase in Treasury Tax & Loan Notes 2,663 1,673 Net decrease in Capital Notes - (9) Issuance of corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 28,750 - Dividends Paid (3,371) (2,470) Proceeds from stock issuance 205 397 - ---------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 237,430 58,611 - ---------------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (2,392) (18,184) - ---------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 53,486 80,354 - ---------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30, $51,094 $62,170 - ---------------------------------------------------------------------------------------------------------------- </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 nine month periods ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997 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, 1996. RECENT ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board (FASB) issued Statement 128, Earnings per Share (EPS) in the first quarter of 1997. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Statement 128 simplifies the calculation of EPS and replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported earnings available to common stockholders by the weighted average shares outstanding. Fully diluted EPS has been modified and replaced with diluted EPS. Early application is prohibited, although the footnote disclosure of pro forma EPS amounts computed under the new Statement is permitted. The pro forma impact of Statement 128 is shown below: Quarter Ended September 30 1997 1996 -------------- -------------- Net Income $3,692 $3,024 Primary: Weighted average shares (Basic) 14,646,537 14,562,767 Common stock equivalents 323,365 196,220 -------------- -------------- Primary weighted average shares 14,969,902 14,758,987 ============== ============== Primary earnings per share reported $0.25 $0.20 Proforma basic earnings per share $0.25 $0.21 Proforma diluted earnings per share $0.25 $0.20
CORPORATION-OBLIGATED MANDATORILY REDEEMABLE TRUST - -------------------------------------------------- PREFERRED SECURITIES - -------------------- In the second quarter of 1997, Independent Capital Trust I (the "Trust) was formed for the exclusive purpose of issuing cumulative 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. The Company is the owner of all of the beneficial interest of the Trust, represented by common stock. 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 will be subject to mandatory redemption, in whole or in part, on or after May 19, 2002, contemporaneously with the optional prepayment by the Corporation of all or part of the Junior Subordinated Debentures, in each case, at a redemption price equal to $25 per Trust Preferred Security plus the accrued and unpaid Distributions on the Trust preferred Securities so redeemed to the Redemption Date. The Trust Preferred Securities are presented in the consolidated balance sheets of the Company entitled " Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation". The Company records distributions payable on the Trust Preferred Securities as a minority interest expense in its consolidated statements of income. The Company has unconditionally guaranteed all of the Trust's obligations under the Trust Preferred Securities. DERIVATIVE ACCOUNTING POLICY - ---------------------------- The Bank has utilized interest rate swap agreements, caps, and 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 derivatives are deferred and amortized into interest income over the remainder of the original term of the swap.
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 NINE MONTHS ENDED SEPTEMBER 30, 1997 SUMMARY For the nine months ended September 30, 1997, Independent Bank Corp. (the Company) recorded net income of $10.3 million, or $0.69 per share, compared with net income of $8.4 million, or $0.57 per share, for the same period last year. This improvement in net income was due to a $4.8 million, or 14.3% increase in net interest income. The provision for loan losses increased to $1.6 million for the first nine months of 1997 compared with $1.3 million for the same period last year. Non-interest income was relatively unchanged while non interest expense increased by $690,000, or 2.4 % over the same period last year. The annualized consolidated returns on average equity and average assets for the first nine months of 1997 were 16.21% and 1.16%, respectively. This compares to annualized consolidated returns on average equity and average assets for the first nine months of 1996 of 14.83% and 1.10%, respectively. As of September 30, 1997, total assets amounted to $1.3 billion, an increase of $254.6 million over the 1996 year end balance. Investments increased $162.9 million, or 50.0% from $325.6 million at year end 1996, primarily due to an investment leverage strategy that the Company has implemented during the second and third quarter of 1997. Loans, net of unearned discount, increased $95.4 million, or 13.7%, since year end 1996 with strong growth in the commercial real estate and the installment loan portfolios. Deposit balances have increased by $36.5 million, or 4.0%, and borrowings have increased by $175.3 million, or 216.1%, since year end 1996. In the second quarter of 1997, Independent Capital Trust I was formed for the purpose of issuing Trust Preferred Securities. A total of $28.8 million of 9.28% Trust Preferred Securities were issued on May 19, 1997. Net income for the first nine months of 1997 reflects minority interest expense of $978,000. Nonperforming assets totaled $5.8 million as of September 30, 1997 compared to $4.7 million at December 31, 1996. Nonperforming assets represented 43 basis points of total assets as of September 30, 1997 and December 31,1996.
NET INTEREST INCOME The discussion of net interest income which follows is presented on a fully tax-equivalent basis. Net interest income for the nine months ended September 30, 1997, amounted to $38.5 million, an increase of $4.8 million, or 14.3%, from the comparable 1996 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 17 basis points to 3.74%. This is due to the Company's decision to expand the 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 nine months of 1997 was 4.58%, compared to 4.74% for the comparable 1996 time frame. The average balance of interest-earning assets for the first nine months of 1997 amounted to $1.1 billion, an increase of $172.1 million, or 18.1%, from the comparable 1996 time frame. Income from interest-earning assets amounted to $68.0 million for the nine months ended September 30, 1997, an increase of $10.5 million, or 18.2%, from the first nine months of 1996. The increase in interest income was due to a $89.0 million, or 13.7% increase in the average balance of loan portfolio, net of unearned discount, resulting from increases in the commercial real estate portfolio and indirect automobile lending, as well as a $83.1 million, or 27.8%, 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 September 30, 1997, loans having interest rates which adjust in accordance with changes in the Company's base lending rate or other market indices amounted to approximately $269.7 million, or 34.1% 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 $263,000 for the nine months ended September 30, 1997, compared to $370,000 for the nine months ended September 30, 1996. The average balance of interest-bearing liabilities for the first nine months of 1997 was $142.0 million, or 18.7%, higher than the comparable 1996 time frame. This increase in interest-bearing liabilities funded the loan and investment growth mentioned above. Average interest bearing deposits increased by $80.4 million, or 11.8%, for the first nine months of 1997 over the same period last year, primarily in the consumer certificate of deposit category. For the nine months ended September 30, 1997, average borrowings were $61.7 million, or 77.7%, higher than the first nine months of 1996, primarily in FHLB borrowings which increased by $52.1 million. Interest expense on deposits increased by $3.0 million, or 14.9%, to $23.5 million in the first nine months of 1997 and interest expense on borrowings increased by $2.6 million, or 75.8%, to $6.1 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 nine months ended September 30, 1997, management increased the provision for possible loan losses, consistent with the level of loan growth experienced, to $1.6 million as compared to $1.3 million for the same period last year. For the first nine months of 1997, loans charged-off, net of recoveries of loans previously charged-off, amounted to $1.2 million as compared to $1.3 million for the comparable 1996 time frame. As of September 30, 1997, the ratio of the reserve for possible loan losses to loans, net of unearned discount, was 1.60%, as compared to the 1996 year-end level of 1.76%. The ratio of the reserve for possible loan losses to non-performing loans was 219.17% at September 30, 1997, lower than the 273.89% coverage recorded at year end 1996. NON-INTEREST INCOME Non-interest income for the nine months ended September 30, 1997 was $9.6 million, compared to $9.7 million for the same period in 1996. Income from Trust and Financial Services increased by $170,000, or 8.0%, due to an increase in funds under management and a strong securities market. This increase was offset by a decrease in mortgage banking income of $164,000, or 7.3%, resulting from lower loan origination. NON-INTEREST EXPENSES Non-interest expenses totaled $29.6 million for the nine months ended September 30, 1997, a $690,000 increase from the comparable 1996 period. Salaries and employee benefits decreased by $779,000, or 4.9%. 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. As a result of the change from a pension plan to a defined contribution plan, no pension expense was recognized in the first nine months of 1997. The remainder of the decrease in salaries and employee benefits is due to the transfer of sixty-nine employees to the Company's third party data processing provider, as a result of a facilities management agreement enacted in the first quarter last year.
Occupancy and equipment expenses for the first nine months of 1997 increased $446,000, or 10.3%, from the comparable 1996 period as a result of the Company's commitment to improve facilities and take advantage of current technology. Other non-interest expenses for the first nine months of 1997 increased $1.0 million to $9.7 million from $8.7 million in the first nine months of 1996. This increase is associated with the data processing conversion, completed in the first quarter of 1997 and to a combination of conversion costs and the data processing facilities management fee in 1997. In addition, consulting fees have increased by $374,000 due to the cost of implementing tax planning strategies and other business initiatives. 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 nine months ended September 30, 1997 and 1996 were 34.1% and 35.5% respectively. The lower rate in 1997 reflects certain tax planning strategies enacted by the Company in 1997. 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 September 30, 1997, the Bank had interest rate swap agreements with a total notional value of $70 million. These swaps were arranged through two international banking institutions 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.
LIQUIDITY AND CAPITAL Liquidity, as it pertains to the Company, is the ability to generate cash in order to meet ongoing obligations to pay deposit withdrawals and to fund loan commitments. The Company's primary sources of liquidity 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 September 30, 1997 the Company had $80.0 million outstanding under such lines classified on the Balance Sheet as "Federal Funds Purchased and Assets Sold Under Repurchase Agreements". In addition, as a member of the Federal Home Loan Bank, Rockland has access to approximately $400 million of borrowing capacity. At September 30, 1997, the Company had $171.5 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 September 30, 1997, the Company's liquidity position was well above its internal policy guidelines. CAPITAL RESOURCES AND DIVIDENDS The Company and Rockland are subject to capital requirements established by the Federal Reserve Board and the FDIC. 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 September 30, 1997, the Company had a Tier 1 risked-based capital ratio of 13.91% and a total risked-based capital ratio of 15.16%. As of the same date, Rockland had a Tier 1 risked-based capital ratio of 10.16% and a total risked-based capital ratio of 11.41% as of the same date. An additional capital requirement of a minimum 4.00% Tier 1 leverage capital is mandated by the regulatory agencies. As of September 30, 1997, the Company and the Bank had Tier 1 leverage capital ratios of 8.82% and 6.48%, respectively. The Company's capital ratios increased significantly due to the issuance of $28.8 million of Trust Preferred Securities in the second quarter of 1997. In September, the Company's Board of Directors declared a cash dividend of $.09 per share to shareholders of record as of September 26, 1997. This dividend was paid on October 10, 1997. On an annualized basis, the dividend payout ratio amounted to 41.9% of the trailing four quarters earnings.
YEAR 2000 The Company has developed preliminary plans to address the possible exposures related to impact on its computer systems of the Year 2000. Key financial, information and operational systems have been assessed and detailed plans have been developed to address systems modifications required by December 31, 1999. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 SUMMARY For the three months ended September 30, 1997, the Company recorded net income of $3.7 million, or $0.25 per share, compared with net income of $3.0 million, or $0.20 per share, for the same period last year. This increase was due to increased net interest income of $2.1 million, or 18.6% . The provision for loan losses increased to $530,000 for the third quarter of 1997 compared with $500,000 for the same period last year. Non-interest income was relatively unchanged while non-interest expense increased by $450,000 or 4.7 % when compared to third quarter 1996. Net income for the third quarter of 1997 also reflects minority interest expense of $667,000. The annualized consolidated returns on average equity and average assets for the third quarter of 1997 were 16.91% and 1.14%, respectively. This compares to annualized consolidated returns on average equity and average assets for the third quarter of 1996 of 15.69% and 1.16%, 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 September 30, 1997, amounted to $13.8 million, an increase of $2.2 million, or 19.0%, from the comparable 1996 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 43 basis points to 3.55%. The Company's net interest margin for the third quarter of 1997 was 4.47%, compared to 4.77% for the comparable 1996 time frame. This decrease in the net interest margin is due to a planned increase in the Company's investment portfolio financed primarily with borrowed funds. The average balance of interest-earning assets for the third quarter of 1997 amounted to $1.2 billion, an increase of $263.3 million, or 27.1%, over the comparable 1996 time frame. Income from interest-earning assets amounted to $25.1 million for the third quarter of 1997, an increase of $5.3 million, or 26.8%, from the third quarter of 1996. The increase in interest income was attributable to a $114.3 million, or 17.3% 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 $149.0 million, or 47.8% which reflects the Company's strategy of leveraging its capital.
The average balance of interest-bearing liabilities for the third quarter of 1997 was $200.4 million, or 25.4%, higher than the comparable 1996 time frame. Average interest bearing deposits increased by $95.3 million, or 14.0%, for the third quarter of 1997 over the same period last year, primarily in the consumer certificate of deposit category. For the three months ended September 30, 1997, average borrowings were $105.1 million, or 99.2%, higher than the third quarter of 1996. Interest expense on deposits increased by $1.5 million, or 22.0%, while interest expense on borrowings increased by $1.6 million or 106.3%. NON-INTEREST INCOME Non-interest income for the three months ended September 30, 1997 and September 30, 1996 was $3.1 million. NON-INTEREST EXPENSES Non-interest expenses totaled $9.9 million for the three months ended September 30, 1997, a $450,000 increase from the comparable 1996 period. The increase in non-interest expense was mostly due to a $225,000 increase in other non-interest expenses, attributable to consulting fees, due to the cost of implementing tax planning strategies and other business initiatives. Also impacting this increase was a $130,000, or a 2.6% increase in salary and employee benefit expenses, primarily representing the normal annual salary increases.
PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information The financial information detailed below is included hereafter in this report: Consolidated Statements of Changes in Stockholders' Equity Three months ended September 30, 1997 and the year ended December 31, 1996 Consolidated Average Balance Sheet and Average Rate Data - Nine months and three months ended September 30, 1997 and 1996. 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 September 30, 1997.
<TABLE> <CAPTION> INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY UNREALIZED (Unaudited - in thousands) GAIN (LOSS) COMMON RETAINED INVESTMENTS STOCK SURPLUS EARNINGS AVAILABLE TOTAL <S> <C> <C> <C> <C> <C> - -------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1996 $145 $43,777 $28,710 ($60) $72,572 - -------------------------------------------------------------------------------------------------------------------------------- Net Income 11,597 11,597 Dividends Declared (3,641) (3,641) Common Stock Sold Under Dividend Reinvestment & Stock Purchase Plan 1 497 498 Proceeds From Exercise of Stock Options 105 105 Tax Benefit of Stock Option Exercises 54 54 Change in Unrealized Loss on Securities Available for Sale, Net of Tax (75) (75) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 146 44,433 36,666 (135) 81,110 - -------------------------------------------------------------------------------------------------------------------------------- Net Income 10,274 10,274 Dividends Declared (3,668) (3,668) Proceeds From Exercise of Stock Options 1 204 205 Change in Unrealized Loss on Securities Available for Sale, Net of Tax 1,323 1,323 - -------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 $147 $44,637 $43,272 $1,188 $89,244 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE>
INDEPENDENT BANK CORP. SUPPLEMENTAL FINANCIAL INFORMATION CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA (Unaudited - in thousands) <TABLE> <CAPTION> AVERAGE OUTSTANDING INTEREST EARNED/ BALANCE PAID FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 1997 1996 <S> <C> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $367,768 $287,349 $18,400 $13,775 Non-taxable Investment Securities 11,110 7,429 600 325 Loans, net of Unearned Discount 738,293 649,314 48,895 43,287 Federal Funds Sold and Assets Purchased Under Resale Agreements 3,267 4,091 132 168 Interest Bearing Deposits - 171 - 7 ---------------- --------------- ------------ ------------ Total Interest-Earning Assets $1,120,438 $948,354 $68,027 $57,562 ---------------- --------------- ------------ ------------ Cash and Due From Banks 43,724 46,633 Other Assets 18,908 15,533 ---------------- --------------- Total Assets $1,183,070 $1,010,520 ================ =============== Interest-Bearing Liabilities Savings and NOW Accounts $254,419 $257,527 $4,079 $4,175 Money Market & Super NOW Accounts 108,450 105,688 2,279 2,206 Other Time Deposits 399,158 318,450 17,113 14,044 Federal Funds Purchased and Assets Sold Under Repurchase Agreements 39,890 25,991 1,695 1,071 Federal Home Loan Bank Borrowings 97,473 45,380 4,221 1,916 Treasury Tax and Loan Notes 3,704 3,185 141 102 Subordinated Capital Notes - 4,836 - 356 ---------------- --------------- ------------ ------------ Total Interest-Bearing Liabilities $903,094 $761,057 $29,528 $23,870 ---------------- --------------- ------------ ------------ Demand Deposits 167,062 160,157 Other Liabilities 28,417 14,168 ---------------- --------------- Total Liabilities 1,098,573 935,382 ---------------- --------------- Stockholders' Equity 84,497 75,138 ---------------- --------------- Total Liabilities and Stockholders' Equity 1,183,070 1,010,520 ================ =============== ------------ ------------ Net Interest Income $38,499 $33,692 ============ ============ Interest Rate Spread Net Interest Margin </TABLE> <TABLE> <CAPTION> AVERAGE YIELD FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 <S> <C> <C> Interest-Earning Assets Taxable Investment Securities 6.67% 6.39% Non-taxable Investment Securities 7.20% 5.83% Loans, net of Unearned Discount 8.83% 8.89% Federal Funds Sold and Assets Purchased Under Resale Agreements 5.39% 5.48% Interest Bearing Deposits 0.00% 5.46% ----------- ------------- Total Interest-Earning Assets 8.10% 8.09% ----------- ------------- Cash and Due From Banks Other Assets Total Assets Interest-Bearing Liabilities Savings and NOW Accounts 2.14% 2.16% Money Market & Super NOW Accounts 2.80% 2.78% Other Time Deposits 5.72% 5.88% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 5.67% 5.49% Federal Home Loan Bank Borrowings 5.77% 5.63% Treasury Tax and Loan Notes 5.08% 4.27% Subordinated Capital Notes 0.00% 9.82% ----------- ------------- Total Interest-Bearing Liabilities 4.36% 4.18% ----------- ------------- Demand Deposits Other Liabilities Total Liabilities Stockholders' Equity Total Liabilities and Stockholders' Equity Net Interest Income ----------- ------------- Interest Rate Spread 3.74% 3.91% ----------- ------------- Net Interest Margin 4.58% 4.74% =========== ============= Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $326 and $302 in 1997 and 1996, respectively. </TABLE>
INDEPENDENT BANK CORP. SUPPLEMENTAL FINANCIAL INFORMATION CONSOLIDATED AVERAGE BALANCE SHEET AND AVERAGE RATE DATA (Unaudited - in thousands) <TABLE> <CAPTION> AVERAGE OUTSTANDING INTEREST EARNED/ BALANCE PAID FOR THE QUARTER ENDED SEPTEMBER 30, 1997 1996 1997 1996 <S> <C> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $436,976 $300,123 $7,439 $4,914 Non-taxable Investment Securities 20,282 7,849 376 115 Loans, net of Unearned Discount 775,549 661,296 17,224 14,712 Federal Funds Sold and Assets Purchased Under Resale Agreements 3,575 3,855 49 52 Interest Bearing Deposits - - - - --------------- --------------- ------------- ------------ Total Interest-Earning Assets $1,236,382 $973,123 $25,088 $19,793 --------------- --------------- ------------- ------------ Cash and Due From Banks 39,782 47,503 Other Assets 20,354 21,991 --------------- --------------- Total Assets $1,296,518 $1,042,617 =============== =============== Interest-Bearing Liabilities Savings and NOW Accounts 256,767 259,473 1,381 1,410 Money Market & Super NOW Accounts 108,334 104,030 760 728 Other Time Deposits 412,868 319,186 6,019 4,548 Federal Funds Purchased and Assets Sold Under Repurchase Agreements 64,688 33,129 945 461 Federal Home Loan Bank Borrowings 143,491 64,162 2,147 901 Treasury Tax and Loan Notes 2,884 3,823 52 43 Subordinated Capital Notes - 4,836 - 119 --------------- --------------- ------------- ------------ Total Interest-Bearing Liabilities $989,032 $788,639 $11,304 $8,210 --------------- --------------- ------------- ------------ Demand Deposits 175,960 163,318 Other Liabilities 44,207 13,590 --------------- --------------- Total Liabilities 1,209,199 965,547 --------------- --------------- Stockholders' Equity 87,319 77,070 --------------- --------------- Total Liabilities and Stockholders' Equity 1,296,518 1,042,617 =============== =============== ------------- ------------ Net Interest Income $13,784 $11,583 ============= ============ - Interest Rate Spread Net Interest Margin </TABLE> <TABLE> <CAPTION> AVERAGE YIELD FOR THE QUARTER ENDED SEPTEMBER 30, 1997 1996 <S> <C> <C> Interest-Earning Assets Taxable Investment Securities 6.81% 6.55% Non-taxable Investment Securities 7.42% 5.86% Loans, net of Unearned Discount 8.88% 8.90% Federal Funds Sold and Assets Purchased Under Resale Agreements 5.48% 5.40% Interest Bearing Deposits - - ------------ ------------- Total Interest-Earning Assets 8.12% 8.14% ------------ ------------- Cash and Due From Banks Other Assets Total Assets Interest-Bearing Liabilities Savings and NOW Accounts 2.15% 2.17% Money Market & Super NOW Accounts 2.81% 2.80% Other Time Deposits 5.83% 5.70% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 5.84% 5.57% Federal Home Loan Bank Borrowings 5.99% 5.62% Treasury Tax and Loan Notes 7.21% 4.50% Subordinated Capital Notes - 9.84% ------------ ------------- Total Interest-Bearing Liabilities 4.57% 4.16% ------------ ------------- Demand Deposits Other Liabilities Total Liabilities Stockholders' Equity Total Liabilities and Stockholders' Equity Net Interest Income ------------ ------------- Interest Rate Spread 3.55% 3.98% ------------ ------------- Net Interest Margin 4.47% 4.77% ============ ============= Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $164 and $96 in 1997 and 1996, respectively. </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: November 14, 1997 /s/ John F. Spence, Jr. John F. Spence, Jr. Chairman of the Board and Chief Executive Officer Date: November 14, 1997 /s/ Richard J. Seaman Richard J. Seaman Chief Financial Officer and Treasurer