SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 Commission File Number: 1-9047 Independent Bank Corp. (Exact name of registrant as specified in its charter) Massachusetts 04-2870273 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 288 Union Street, Rockland, Massachusetts 02370 (Address of principal executive offices, including zip code) (781) 878-6100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 1,1999 there were 14,164,241 shares of the issuer's common stock outstanding.
INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 Notes to Consolidated Financial Statements - March 31, 1999 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure 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
PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED - IN THOUSANDS) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 1999 1998 ---------------------------- <S> <C> <C> ASSETS Cash and Due From Banks $ 43,945 $ 47,755 Federal Funds Sold 11,522 38,443 Securities Held To Maturity 264,480 284,944 Securities Available For Sale 200,705 195,199 Federal Home Loan Bank Stock 17,036 16,035 Loans, Net of Unearned Discount 973,211 941,112 Less: Reserve for Possible Loan Losses (13,896) (13,695) - ------------------------------------------------------------------------------------------------------- Net Loans 959,315 927,417 - ------------------------------------------------------------------------------------------------------- Bank Premises and Equipment 15,454 15,200 Other Real Estate Owned 126 - Other Assets 51,273 50,076 - ------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,563,856 $ 1,575,069 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- LIABILITIES Deposits Demand Deposits $ 205,603 $ 219,090 Savings and Interest Checking Accounts 275,968 278,306 Money Market and Super Interest Checking Accounts 108,251 113,811 Time Certificates of Deposit over $100,000 94,065 95,706 Other Time Deposits 349,546 336,404 - ------------------------------------------------------------------------------------------------------- Total Deposits 1,033,433 1,043,317 - ------------------------------------------------------------------------------------------------------- Federal Funds Purchased and Assets Sold Under Repurchase Agreements 80,812 82,376 Federal Home Loan Bank Borrowings 311,224 313,724 Treasury Tax and Loan Notes 1,555 471 Other Liabilities 14,534 10,583 - ------------------------------------------------------------------------------------------------------- Total Liabilities 1,441,558 1,450,471 - ------------------------------------------------------------------------------------------------------- Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 28,750 28,750 STOCKHOLDERS' EQUITY Common Stock, $.01 par value Authorized: 30,000,000 Shares Outstanding: 14,863,821 Shares at March 31, 1999 and 14,863,821 at December 31, 1998 149 149 Treasury Stock: 701,043 Shares at March 31, 1999 and 406,638 Shares at December 31, 1998 (10,936) (6,431) Surplus 45,119 45,303 Retained Earnings 58,620 56,063 Other Accumulated Comprehensive Income, Net of Tax 596 764 - ------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 93,548 95,848 - ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES, MINORITY INTEREST & STOCKHOLDERS' EQUITY $ 1,563,856 $ 1,575,069 - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- </TABLE>
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, MARCH 31, 1999 1998 - --------------------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME Interest on Loans $19,556 $18,440 Interest and Dividends on Securities 7,886 7,522 Interest on Federal Funds Sold 165 123 - --------------------------------------------------------------------------------------------------- Total Interest Income 27,607 26,085 - --------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits 7,472 7,819 Interest on Borrowed Funds 5,273 3,840 - --------------------------------------------------------------------------------------------------- Total Interest Expense 12,745 11,659 - --------------------------------------------------------------------------------------------------- Net Interest Income 14,862 14,426 - --------------------------------------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 981 907 - --------------------------------------------------------------------------------------------------- Net Interest Income After Provision For Possible Loan Losses 13,881 13,519 - --------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service Charges on Deposit Accounts 1,271 1,329 Trust and Investment Services Income 917 893 Mortgage Banking Income 501 468 Other Non-Interest Income 736 397 - --------------------------------------------------------------------------------------------------- Total Non-Interest Income 3,425 3,087 - --------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES Salaries and Employee Benefits 5,662 5,001 Occupancy Expenses 961 999 Equipment Expenses 767 730 Other Non-Interest Expenses 3,719 3,638 - --------------------------------------------------------------------------------------------------- Total Non-Interest Expenses 11,109 10,368 - --------------------------------------------------------------------------------------------------- Minority Interest 667 667 INCOME BEFORE INCOME TAXES 5,530 5,571 PROVISION FOR INCOME TAXES 1,684 1,866 - --------------------------------------------------------------------------------------------------- NET INCOME $3,846 $3,705 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $0.27 $0.25 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $0.27 $0.25 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Weighted average common shares (Basic) 14,312,093 14,828,992 Common stock equivalents 169,506 253,334 - --------------------------------------------------------------------------------------------------- Weighted average common shares (Diluted) 14,481,599 15,082,326 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- </TABLE>
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1999 1998 ---------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 3,846 $ 3,705 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES: Depreciation and amortization 1,270 953 Provision for loan losses 981 907 Loans originated for resale (16,793) (17,461) Proceeds from mortgage loan sales 16,730 17,429 Loss on sale of mortgages 63 32 Gain on mortgage servicing rights (97) (155) Other Real Estate Owned recoveries - (77) Changes in assets and liabilities: Decrease / (Increase) in other assets (1,100) 1,290 Increase in other liabilities 4,063 3,096 - -------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 5,117 6,014 - -------------------------------------------------------------------------------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 8,963 9,719 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of Investment Securities 36,108 33,538 Purchase of Investment Securities (22,874) (15,917) Net increase in Loans (33,005) (24,104) Proceeds from sale of Other Real Estate Owned - 159 Investment in Bank Premises and Equipment (1,055) (314) - -------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (20,826) (6,638) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in Deposits (9,884) (38,945) Net increase / (decrease) in Federal Funds Purchased and Assets Sold Under Repurchase Agreements (1,564) 10,313 Net increase / (decrease) in FHLB Borrowings (2,500) 12,000 Net increase / (decrease) in TT&L Notes 1,084 (212) Dividends Paid (1,315) (1,484) Purchase of Treasury Shares (4,787) - Proceeds from stock issuance 98 304 - -------------------------------------------------------------------------------- NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (18,868) (18,024) - -------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (30,731) (14,943) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 86,198 65,016 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AS OF MARCH 31, $ 55,467 $ 50,073 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- </TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION Independent Bank Corp. (the "Company") is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts. The Company is the sole stockholder of Rockland Trust Company ("Rockland" or "the Bank"), a Massachusetts trust company chartered in 1907. The 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 month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999 or any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. RECENT ACCOUNTING DEVELOPMENTS 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 income unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 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, financial quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 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 has not yet quantified the impact of adopting SFAS No. 133 on its consolidated financial statements and has not determined the timing nor method of its adoption of the statement. However, the Company does not expect that the adoption of this statement will have a material impact on its financial position or results of operations. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires computer software costs associated with internal-use software to be expensed as incurred until
certain capitalization criteria are met. This statement was adopted January 1, 1999 and did not have a material impact on the Company's financial position. In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires all costs associated with pre-opening and organization activities to be expensed as incurred. This statement was adopted January 1, 1999 and did not have a material impact on the Company's financial position. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement requires that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This statement was adopted January 1, 1999 and did not have a material impact on the Company's financial position. EARNINGS PER SHARE In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards Board No. 128, "Earnings per Share." This statement was issued by the Financial Accounting Standards Board 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> NET INCOME WEIGHTED AVERAGE SHARES NET INCOME PER SHARE March 31, March 31, March 31, March 31, March 31, March 31, 1999 1998 1999 1998 1999 1998 --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $3,846 $3,705 14,312 14,829 $0.27 $0.25 Effect of dilutive securities - - 170 253 - - --------------------------------------------------------------------------------------------- Diluted EPS $3,846 $3,705 14,482 15,082 $0.27 $0.25 --------------------------------------------------------------------------------------------- </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> March 31, 1999 1998 <S> <C> <C> Net Income $3,846 $3,705 Change in unrealized gain/(loss) on securities available for sale (168) (138) Less: reclassification adjustment for losses included in net income - - --------------------- Comprehensive Income $3,678 $3,567 --------------------- </TABLE> SEGMENT INFORMATION On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting operating segments of a business enterprise. The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their operating segments in financial statements. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-maker is the President, Chief Executive Officer and Chairman of the Board of the Company. The adoption of SFAS No. 131 did not have a material effect on the Company's primary financial statements, but did result in the disclosure of segment information contained herein. The Company has identified its reportable operating business segment as Community Banking, based on how the business is strategically managed. The Company's community banking business segment consists of commercial banking, retail banking and trust services. The community banking business segment is managed as a single strategic unit which derives it's revenues from a wide range of banking services, including lending activities, acceptance of demand, savings and time deposits, trust and investment management, and mortgage servicing income from investors. Non reportable operating segments of the Company's operations which do not have similar characteristics to the community banking operations and do not meet the quantitative thresholds requiring disclosure, are included in the Other category in the disclosure of business segments below. These non-reportable segments include parent company financial information. Consolidation adjustments are also included in the Other category. The accounting policies used in the disclosure of business segments are the same as those described in Note 1 "Summary of significant accounting policies" of the Company's "1998 Annual Report" included in Form 10K. The consolidation adjustments reflect certain eliminations of inter-segment revenue, cash and Parent Company investments in subsidiaries. <TABLE> <CAPTION> RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION Community Other Adjustments Banking Other and Eliminations Consolidated <S> <C> <C> <C> <C> March 31, 1999 Securities, Available for Sale $480,821 $1,400 $0 $482,221 and Held to Maturity Total Assets 1,560,106 154,262 (150,512) 1,563,856 Total Deposits 1,052,049 - (18,616) 1,033,433 Total Liabilities $1,458,752 $ 31,074 $ (48,268) $1,441,558 Total Interest Income 27,578 866 (837) 27,607 Total Interest Expense 12,894 688 (837) 12,745 Net Interest Income 14,684 178 - 14,862 </TABLE>
<TABLE> <S> <C> <C> <C> <C> Provisions for Possible Loan Losses 981 - - 981 Total Non-Interest Income 3,424 4,411 (4,410) 3,425 Total Non-Interest Expense 11,054 55 - 11,109 Net Income $ 4,389 $ 3,867 $(4,410) $ 3,846 March 31, 1998 Securities, Available for Sale $ 436,446 $ 1,400 $ 0 $ 437,846 and Held to Maturity Total Assets 1,354,532 155,658 (151,615) 1,358,575 Total Deposits 977,544 - (28,341) 949,203 Total Liabilities 1,263,291 31,138 (59,484) 1,234,945 Total Interest Income 26,056 987 (958) 26,085 Total Interest Expense 11,929 688 (958) 11,659 Net Interest Income 14,127 299 - 14,426 Provisions for Possible Loan Losses 907 - - 907 Total Non-Interest Income 3,086 4,151 (4,150) 3,087 Total Non-Interest Expense 10,310 58 - 10,368 Net Income $ 4,130 $ 3,726 ($ 4,151) $ 3,705 </TABLE>
REPORTABLE SEGMENT SPECIFIC INFORMATION <TABLE> <CAPTION> Community Banking March 31, 1999 1998 <S> <C> <C> Interest Income Interest on Loans $19,556 $18,440 Interest and Dividends on Securities 7,857 7,493 Interest on Federal Funds Sold 165 123 Total Interest Income 27,578 26,056 Interest Expense Interest on Deposits 7,621 8,089 Interest on Borrowings 5,273 3,840 Total Interest Expense 12,894 11,929 Non-Interest Income Service Charges on Deposit Accounts 1,271 1,329 Trust and Financial Services Income 917 893 Mortgage Banking Income 501 468 Other Non-Interest Income 735 396 Total Non-Interest Income 3,424 3,086 Non-Interest Expenses Salaries and Employee Benefits 5,662 5,001 Occupancy Expenses 961 999 Equipment Expenses 767 730 Other Non-Interest Expenses 3,664 3,580 Total Non-Interest Expense 11,054 10,310 Net Income $ 4,389 $ 4,130 </TABLE>
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 QUARTER ENDED MARCH 31, 1999 SUMMARY For the three months ended March 31, 1999, Independent Bank Corp. (the Company) recorded net income of $3.85 million, compared with net income of $3.71 million for the same period last year. Diluted and Basic earnings per share were $.27 for the quarter ended March 31, 1999 versus $.25 per share for the prior year. Per share earnings have been calculated in accordance with SFAS No. 128, "Earnings per Share." This improvement in 1999 is primarily due to increased net interest income. Interest income associated with loan growth and a higher securities portfolio, net of funding costs, contributed to an increase in net interest income of $.5 million (to $14.9 million in 1999 from $14.4 million) in 1998. The provision for loan losses increased to $981,000 for the first three months of 1999 compared with $907,000 for the same period last year consistent with loan growth. Non-interest income and non-interest expenses increased 10.95% and 7.15% respectively from the same period last year. The annualized consolidated returns on average equity and average assets for the first three months of 1999 were 16.13% and .99%, respectively. This compares to annualized consolidated returns on average equity and average assets for the first three months of 1998 of 15.66% and 1.09%, respectively. As of March 31, 1999, total assets amounted to $1.6 billion, a decrease of $11.2 million or less than 1.00% over the 1998 year end balance. Loans, net of unearned discount, increased $32.1 million, or 3.4%, since year-end 1998 due to strong commercial loan originations. Investments decreased by $14.0 million, or 2.8% from year-end 1998, primarily due to prepayments. Deposit balances have decreased by $9.9 million since year-end 1998, reflecting normal seasonal fluctuations, while borrowings have decreased by $3.0 million, or less than 1.0%. Nonperforming assets totaled $5.3 million as of March 31, 1999 down from $5.4 million on December 31, 1998. Nonperforming assets for both periods represented 34 basis points of total assets. NET INTEREST INCOME The discussion of net interest income that follows is presented on a fully tax-equivalent basis. Net interest income for the three months ended March 31, 1999, amounted to $15.1 million, an increase of $.5 million, or 3.6%, from the comparable 1998 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. This reflects the current pressure on interest rates in the market. The average balance of interest-earning assets for the first three months of 1999 was $159.9 million, or 12.3%, higher than the comparable 1998 time frame, while the average balance of interest-bearing liabilities was $171.3 million, or 16.4% higher. The Company's net interest margin for the first three months of 1999 was 4.15% as compared to 4.49% for the comparable 1998 time frame. The Bank purchased $30 million of bank-owned life insurance ("BOLI") in the fourth quarter of 1998. The funding for the BOLI is reflected in net interest income and is a component of the decrease in
the net interest margin. The pre-tax benefit of BOLI is captured in non-interest income. Another contributing factor to the drop in margin is the continued downward pressure on interest rates. The prime lending rate has dropped 0.75% since this time last year. Income from interest-earning assets amounted to $27.9 million for the three months ended March 31, 1999, an increase of $1.6 million, or 6.16%, from the first three months of 1998. The average balance of taxable investment securities increased by $22.2 million, or 5.2% and the average balance of loans, net of unearned discount, increased $114.4 million, or 13.6% resulting from increases in both the commercial real estate portfolio and indirect automobile lending. Interest income is impacted by changes in market rates of interest due to variable and floating rate loans in the Company's portfolio. At March 31, 1999, loans having interest rates which adjust in accordance with changes in the Company's base lending rate or other market indices amounted to approximately $246.2 million, or 25.3% 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 $108,000 for the three months ended March 31, 1999, compared to $115,000 for the three months ended March 31, 1998. The growth in interest earning assets was funded primarily by borrowings. Average interest bearing deposits increased by $33.9 million, or 4.4%, for the first three months of 1999 over the same period last year, primarily in the consumer certificate of deposit category. For the three months ended March 31, 1999, average borrowings were $137.3 million, or 51.5%, higher than the first three months of 1998. Interest expense on deposits and borrowings increased by $1.09 million, or 9.3%, to $12.7 million in the first quarter of 1999 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. Management of the Company, based upon known and anticipated circumstances and conditions, determines the level of the reserve for possible loan losses. An analysis of individual loans and the overall risk characteristics and size of the different loan portfolios is conducted on an ongoing basis. In addition, the Company considers industry trends, regional and national economic conditions, past estimates of possible losses as compared to actual losses, and historical loss patterns. Management assesses the adequacy of the reserve for possible loan losses and reviews that assessment quarterly with the Board of Directors. For the three months ended March 31, 1999, Management increased the provision for possible loan losses, consistent with the level of loan growth experienced, to $981,000 as compared to $907,000 for the same period last year. For the first three months of 1999, loans charged-off, net of recoveries of loans previously charged-off, amounted to $780,000 as compared to $246,000 for the comparable 1998 time frame. As of March 31, 1999, the ratio of the reserve for possible loan losses to loans, net of unearned discount, was 1.43%, as compared to the 1998 year-end level of 1.46%. The ratio of the reserve for possible loan losses to non-performing loans was 267.5% at March 31, 1999, higher than the 255.7% coverage recorded at year-end.
NON-INTEREST INCOME Non-interest income for the three months ended March 31, 1999 was $3.4 million, compared to $3.1 million for the same period in 1998. Income from Trust and Financial Services increased by $24,000, or 2.7%. The March 1998 quarter included a non-recurring recovery of $77,000 associated with a former real estate owned property. As mentioned above, the Bank purchased $30 million of BOLI in the fourth quarter of 1998. The pre-tax benefit of BOLI, $393,000 in the first quarter of 1999, is reflected in non-interest income. NON-INTEREST EXPENSES Non-interest expenses totaled $11.1 million for the three months ended March 31, 1999, a $741,000 increase from the comparable 1998 period. Salaries and employee benefits increased by $661,000, or 13.2%, due to the fact that the personal computer and networking department was transferred to the Bank from Alltel, the Bank's data processing partner. Wage inflation, resulting from the tight labor market, was also a significant contributor to that increase. Occupancy and equipment expenses were flat and other non-interest expense reflects a modest 2.2% or $81,000 increase year over year. 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 three months ended March 31, 1999 and March 31, 1998 was $667,000. INCOME TAXES The Company records income tax expense pursuant to Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes". The Company evaluates the deferred tax asset and the valuation reserve on a quarterly basis. The Company's effective tax rates for the three months ended March 31, 1999 and 1998 were 30.5% and 33.5% respectively. ASSET/LIABILITY MANAGEMENT The principal objective of the Company's asset/liability management strategy is to reduce the vulnerability of the Company to changes in interest rates. This is accomplished by managing the volume of assets and liabilities maturing, or subject to
repricing, and by adjusting rates in relation to market conditions to influence volumes and spreads. The effect of interest rate volatility on net interest income is minimized when the interest sensitivity gap (the difference between assets and liabilities that reprice within a given time period) is the smallest. Given the inherent uncertainty of future interest rates, the Bank's Asset/Liability Management Committee evaluates the interest sensitivity gap and executes strategies, which may include off-balance sheet activities, in an effort to minimize the Company's exposure to interest rate movements while providing adequate earnings in the most likely 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 March 31, 1999, the Bank had one interest rate swap agreement with a total notional value of $20 million. This swap was arranged through an international banking institution and matures in June 1999. 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 and narrower guidelines approved by the Asset/Liability Management Committee. These limits and guidelines reflect the Company's tolerance for interest-rate risk by identifying exposures and quantifying and hedging them. The Company quantifies its interest-rate exposures using simulation models, as well as simpler gap analyses. The Company manages its interest-rate exposure using a combination of on and off balance sheet instruments, primarily fixed-rate portfolio securities, interest rate swaps and options. The Company uses simulation analysis to measure the exposure of net interest income to changes in interest rates over a relatively short (i.e., less than 2 years) time horizon. Simulation analysis involves projecting future interest income and expense from the Company's 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. <TABLE> <CAPTION> Rate Change Estimated Exposure as % (Basis Points) of Net Interest Income - -------------------------------------------------------------------------------- <S> <C> +200 (1.72%) -200 1.30% </TABLE> 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, 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 March 31, 1999 the Company had $35.6 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 $45.3 million at March 31, 1999. As a member of the Federal Home Loan Bank, Rockland has access to approximately $358.7 million of borrowing capacity. At March 31, 1999, the Bank had $311.2 million outstanding under such lines. The Company actively manages its liquidity position under the direction of the Bank's Asset/Liability Management Committee. Periodic review under formal policies and procedures is intended to ensure that the Company will maintain access to adequate levels of available funds. At March 31, 1999, 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 March 31, 1999, the Company had a Tier 1 risked-based capital ratio of 10.97% and a total risked-based capital ratio of 12.13%. Rockland had a Tier 1 risked-based capital ratio of 9.06% and a total risked-based capital ratio of 10.31% 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 March 31, 1999, the Company and the Bank had Tier 1 leverage capital ratios of 7.69% and 6.42%, respectively. In March, the Company's Board of Directors declared a cash dividend of $.10 per share to shareholders of record as of March 26, 1999. This dividend was paid on April 9, 1999. On an annualized basis, the dividend payout ratio amounted to 36.4% of the trailing four quarters earnings. YEAR 2000 READINESS DISCLOSURE THE COMPANY'S STATE OF READINESS The Company has developed plans to address the possible exposure related to the impact of the Year 2000 on its computer systems and key service providers. Senior Management and the Board of Directors approved these plans. The following five phases were identified as critical to the success of the Company's Year 2000 plan: <TABLE> <CAPTION> PHASE DESCRIPTION PROGRESS/ANTICIPATED COMPLETION <S> <C> <C> Awareness Process that identifies the Year 2000 Complete. (Y2K) problem, establishes a project team and develops a plan to rectify. Assessment Inventory of Information Technology Complete. Assessments need continual update based (IT) and Non-IT systems, vendors. on changes to inventory i.e., new vendor relationships, Assign priorities based upon level of additional equipment purchases. risk. Establish continual monitoring process. Renovation Code enhancements, hardware, See Note (1). The Company has been advised by its key software upgrades third party software vendors that software renovation is complete. Management performed comprehensive tests to ensure compliance. Validation Process where upgraded hardware, The Company's testing program for mission critical systems </TABLE>
<TABLE> <S> <C> <C> software etc. is tested. began in September 1998 and concluded successfully in March 1999. This allows the rest of 1999 for additional system renovation and testing, if the need should arise. Implementation Systems should be certified as Year The Y2K ready versions of critical mainframe software applications 2000 (Y2K) compliant and put into were put into production in February 1999. Many of the Company's production. P.C. applications are already Y2K compliant. The remaining P.C. applications will be converted to a Y2K compliant version throughout 1999. </TABLE> NOTES: (1) The Company relies upon third party vendors to provide the Bank with various products and services that are fundamental to its delivery of products and services to customers. These third party vendors are responsible for the renovations and replacements necessary to achieve Year 2000 compliance for their products and services. The Bank has established a process that will continually monitor and test these vendors' abilities to achieve Year 2000 compliance. 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 COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The Company expects to incur costs to replace existing personal computer hardware and software, which will be capitalized and amortized in accordance with the Company's existing accounting policy. The replacement of this hardware and software is, with few exceptions, a component of the Company's existing technology plan and not as a result of Year 2000 deficiencies. 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. These costs totaled $131,000 for the year ended 1998 and $50,000 for the three months ended March 31, 1999. This cost estimate does not include the existing cost of the Data Processing Facilities Management Agreement with Alltel. A large part of the resources associated with this agreement are dedicated to the Year 2000 Project. Under other circumstances, these resources could be employed in improving customer services and the introduction of new products. It is difficult to estimate this lost opportunity cost. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES All financial institutions are heavily dependent on technology and the services of third party vendors in the delivery of products and services. An interruption in these services would severely hamper the Company's ability to provide products and services to its customers. For example, without telephone, power, or mainframe computer access in 2000 the Company would have to resort to manual processing in order to serve customers. This type of scenario could not continue indefinitely without severe erosion in service levels and consequently earnings. An additional type of risk that banks face is customer risk. Specifically, large corporate borrowers face many of the Year 2000 issues that the Bank faces. To the extent that many of these issues are not resolved and the viability of the borrower organization is
compromised, a credit risk issue could be created for the Bank. Management has initiated a process to monitor and manage the customer risk posed in this type of scenario. Bank regulatory agencies have issued guidance as to the standards they will use when assessing Year 2000 readiness. The failure of a financial institution, such as the Company, to take appropriate steps to address deficiencies in its Year 2000 project management process may result in regulatory enforcement actions which could have material adverse effect on the institution, result in the imposition of civil money penalties, or result in the delay (or receipt of an unfavorable or critical evaluation of the management of a financial institution in connection with regulatory review) of applications seeking to acquire other entities or otherwise expand the institution's activities. THE COMPANY'S CONTINGENCY PLANS The Company has developed contingency plans in response to the Year 2000 challenge: REMEDIATION PLAN. This plan is designed to mitigate the risks associated with the failure to successfully complete renovation, validation, and implementation of mission-critical systems. The plan would be invoked in the event of unsuccessful testing of a mission critical system and includes the designation of alternate vendors that would essentially constitute replacement of the existing vendor with a new one. BUSINESS INTERRUPTION PLAN This plan of action ensures the ability of the Bank to continue functioning as a business entity in the event of unanticipated systems failures at critical dates prior to, on and after the Year 2000. The base assumptions of this plan are: - Regional utility and telecommunication outages - Spotty utility and telecommunication outages - Failure of the Company's software applications to function in the Year 2000. The Company has developed a strategy to deal with each of the assumptions, including but not limited to; manual workarounds, limited hours of operation and the possibility of backup item processing support. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The preceding Management's Discussion and Analysis and Notes to Consolidated Financial Statements of this Form 10-Q contain certain forward-looking statements, including without limitation, statements regarding (i) the level of reserve for possible loan losses, (ii) the rate of delinquencies and amounts of charge-offs, (iii) the rates of loan growth, and (iv) the Company's ability to minimize any detrimental effects of the Year 2000 problem and associated expenses. Moreover, the Company may from time to time, in both written reports and oral statements by Company management, express its expectations regarding future performance of the Company. These forward-looking statements are inherently uncertain and actual results may differ from Company expectations. The following factors which, among others, could impact current and future performance include but are not limited to: (I) adverse changes in asset quality and resulting credit risk-related losses and expenses; (ii) adverse changes in the economy of the New England region, the Company's primary market, (iii) adverse changes in the local real estate market, as most of the Company's loans are concentrated in Southeastern Massachusetts and a substantial portion of these loans
have real estate as collateral; (iv) fluctuations in market rates and prices which can negatively affect net interest margin asset valuations and expense expectations; and (v) changes in regulatory requirements of federal and state agencies applicable to banks and bank holding companies, such as the Company and Rockland, which could have materially adverse effect on the Company's future operating results. When relying on forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information required by this Item 3 is included in Item 2 of Part I of this Form 10-Q, entitled "Management's Discussion and Analysis."
PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information The financial information detailed below is included hereafter in this report: Consolidated Statements of Changes in Stockholders' Equity Three months ended March 31, 1999 and the year ended December 31, 1998 Consolidated Average Balance Sheet and Average Rate Data - Three months ended March 31, 1999 and 1998. 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 March 31, 1999.
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED - IN THOUSANDS) <TABLE> <CAPTION> OTHER COMMON TREASURY RETAINED COMPREHENSIVE STOCK STOCK SURPLUS EARNINGS INCOME TOTAL - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 1998 $148 - $45,147 $45,825 $ 1,373 $92,493 Net Income 16,139 16,139 Cash Dividends Declared ($.34 per share) (5,901) (5,901) Proceeds from Exercise of Stock Options 1 409 156 566 Repurchase Common Stock (6,840) (6,840) Change in Unrealized Gain (Loss) on Investments (609) Available for Sale, Net of Tax (609) - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 149 (6,431) 45,303 56,063 764 95,848 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1999 149 45,303 56,063 764 95,848 Net Income 3,846 3,846 Dividends Declared ($.10 per share) (1,289) (1,289) Proceeds from Exercise of Stock Options 282 (184) 98 Repurchase Common Stock (4,787) (4,787) Change in Unrealized Gain on Investments Available for Sale, Net of Tax (168) (168) - --------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 1999 $149 (10,936) $45,119 $58,620 $596 $93,548 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- </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 MARCH 31, 1999 1999 1999 ----------- -------- ------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $ 449,080 $ 7,355 6.55% Non-taxable Investment Securities 41,768 789 7.56% Loans, net of Unearned Discount 954,764 19,572 8.20% Federal Funds Sold 14,486 165 4.56% ---------- ------- ----- Total Interest-Earning Assets $1,460,098 $27,881 7.64% ---------- ------- ----- ------- ----- Cash and Due From Banks 44,464 Other Assets 49,945 ---------- Total Assets $1,554,507 ---------- ---------- Interest-Bearing Liabilities Savings and Interest Checking Accounts $ 273,394 $ 1,210 1.77% Money Market & Super Interest Checking Accounts 106,695 644 2.41% Time Deposits 431,092 5,618 5.21% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 80,884 957 4.73% Federal Home Loan Bank Borrowings 321,326 4,277 5.32% Treasury Tax and Loan Notes 2,039 39 7.65% ---------- ------- ----- Total Interest-Bearing Liabilities $1,215,430 $12,745 4.19% ---------- ------- ----- ------- ----- Demand Deposits 204,933 Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated 28,750 debentures of the Corporation Other Liabilities 10,015 ---------- Total Liabilities 1,459,128 ---------- Stockholders' Equity 95,379 ---------- Total Liabilities and Stockholders' Equity $1,554,507 ---------- ---------- Net Interest Income $15,136 -------- -------- Interest Rate Spread 3.44% ----- ----- Net Interest Margin 4.15% ----- ----- Interest income and yield are stated on a fully tax-equivalent basis The total amount of adjustment is $274 in 1999 </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 MARCH 31, 1998 1998 1998 ------------ --------- --------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $ 426,917 $ 7,229 6.77% Non-taxable Investment Securities 23,432 431 7.36% Loans, net of Unearned Discount 840,384 18,480 8.80% Federal Funds Sold 9,423 123 5.22% ----------- ------- ----- Total Interest-Earning Assets 1,300,156 $26,263 8.08% ----------- ------- ----- ------- ----- Cash and Due From Banks 38,850 Other Assets 19,305 ----------- Total Assets 1,358,311 ----------- ----------- Interest-Bearing Liabilities Savings and Interest Checking Accounts $ 256,926 $ 1,335 2.08% Money Market & Super Interest Checking Accounts 111,415 728 2.61% Time Deposits 408,897 5,757 5.63% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 38,631 564 5.84% Federal Home Loan Bank Borrowings 226,239 3,239 5.73% Treasury Tax and Loan Notes 2,038 36 7.07% ----------- ------- ----- Total Interest-Bearing Liabilities $1,044,146 $11,659 4.47% ----------- ------- ----- ------- ----- Demand Deposits 177,920 Corporation-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 28,750 Other Liabilities 12,837 ----------- Total Liabilities 1,263,653 ----------- Stockholders' Equity 94,658 ----------- Total Liabilities and Stockholders' Equity $1,358,311 ----------- ----------- Net Interest Income $14,604 ------- ------- Interest Rate Spread 3.61% ----- ----- Net Interest Margin 4.49% ----- ----- Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $177 in 1998. </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: May 14, 1999 /s/ Douglas H. Philipsen -------------------------------- Douglas H. Philipsen Chairman of the Board, President and Chief Executive Officer Date: May 14, 1999 /s/ Richard J. Seaman -------------------------------- Richard J. Seaman Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer)