SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission File Number: 1-9047

Independent Bank Corp.

(Exact name of registrant as specified in its charter)

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   ý              No   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý             No   o

As of August 1, 2003, there were 14,585,248 shares of the issuer’s common stock outstanding, par value $.01 per share.

INDEX

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PART 1. FINANCIAL INFORMATION

Item 1.  FinancialStatements

INDEPENDENT BANK CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited, Dollars In Thousands, Except Share Amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, Dollars In Thousands, Except  Per Share Data)

(1)  Reflects the restatement of the six and three months ended June 30, 2002 for the nonamortization of goodwill in accordance with SFAS No. 147.

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited - - Dollars in Thousands, Except Per Share Data)

(1)  Reflects the restatement of the six months ended June 30, 2002 for the nonamotization of goodwill in accordance with SFAS No. 147.

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited- In Thousands)

(1)  Reflects the restatement of the six months ended June 30, 2003 for the nonamortization of goodwill in accordance with SFAS No. 147.

The accompanying notes are an integral part of these consolidated financial statements.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -  BASIS OF PRESENTATION

Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts.  The Company is the sole stockholder of Rockland Trust Company (“Rockland” or “the Bank”), a Massachusetts trust company chartered in 1907.    The Company’s other subsidiaries are Independent Capital Trust III and Independent Capital Trust IV, each of which have issued trust preferred securities to the public.  Independent Capital Trust I and II were liquidated in 2002 upon redemption of their trust preferred securities.  The Bank’s subsidiaries consist of two Massachusetts securities corporations; RTC Securities Corp. and RTC Securities Corp. X, and Taunton Avenue Inc.   Taunton Avenue Inc. is a new subsidiary that was formed in May 2003 to hold loans, industrial development bonds and other assets.  South Shore Holdings, Ltd. (“South Shore Holdings”), a holding Company for Rockland Preferred Capital Corporation was liquidated along with Rockland Preferred Capital Corporation in June 2003.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 six month period and quarter ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003 or any other interim period.  All significant inter-company balances and transactions have been eliminated in consolidation.  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, 2002 filed with the Securities and Exchange Commission.

NOTE 2 -  STOCK BASED COMPENSATION

The Company has three stock option plans; the Amended and Restated 1987 Incentive Stock Option Plan (“The 1987 Plan”), the 1996 Non-employee Directors’ Stock Option Plan (“The 1996 Plan”) and the 1997 Employee Stock Option Plan (“The 1997 Plan”).  All three plans were approved by the Company’s board of directors. The Company measures compensation cost for stock-based compensation plans as the excess, if any, of the exercise price of options granted over the fair market value of the Company’s stock at the grant date. Compensation cost is not recognized as the exercise price has historically equaled the grant date fair value of the underlying stock; however, the Company discloses pro forma net income and earnings per share in the notes to its consolidated financial statements as if compensation was measured at the date of grant based on the fair value, as determined using the Black Scholes model, of the award and recognized over the service period.

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Had the Company recognized compensation cost for these plans determined as the fair market value of the Company’s stock at the grant date and recognized over the service period, the Company’s net income available to common stockholders and earnings per share would have been reduced to the following pro forma amounts:

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The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.  Annual grant dates for the 1997 plan are in December, consequently full year 2002 assumptions are shown below for the 1997 plan.  On an exception basis, grants are made to new employees that meet plan specifications.  The following weighted average assumptions were used for grants under the 1997 and 1996 plans:

(1)  On January 9, 2003, 50,000 options were granted from the 1997 plan to the new President and Chief Executive Officer.  The risk free rate, the expected dividend yield, expected life and expected volatility for this grant was determined on January 9, 2003. The normal annual grant of 1997 Plan options is expected to occur in December of 2003 upon which a risk free interest rate, expected dividend yield, expected life and expected volatility will be determined for those grants.

(2)  On April 15, 2003, 11,000 options were granted from the 1996 plan to the Company's Board of Directors.  The risk free rate, the expected dividend yield, expected life and expected volatility for this grant was determined on April 15, 2003.

NOTE 3 – RECENT ACCOUNTING DEVELOPMENTS

Statement of Financial Accounting Standards (“SFAS”) No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure.” In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, which amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  Companies are able to eliminate a “ramp-up” effect that the SFAS No. 123 transition rule creates in the year of adoption and allows companies to elect a method that will provide for comparability amongst years reported.  In addition, SFAS No. 148 amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company is currently considering the adoption of fair value based method of accounting for stock-based employee compensation,

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and if the Company does elect to adopt such accounting, the historical impact can be seen within Note 2; “Stock Based Compensation.”

FASB issued Interpretation ("FIN") No. 46 "Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletin No. 51."  In No. 46 "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51", establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary.  The primary beneficiary of a VIE entity is the entity that absorbs a majority of the VIE's expected losses, receives a majority of the VIE's expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE.  Prior to the implementation of FIN 46, VIE's were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity.  The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after June 15, 2003.

The Company adopted FIN 46 on July 1, 2003.  In its current form, FIN 46 may require the Company to deconsolidate its investment in Capital Trust III and IV in future financial statements.  The potential de-consolidation of subsidiary trust of bank holding companies formed in connection with the issuance of trust preferred securities appears to be an unintended consequence of FIN 46.  It is currently unknown if, or when, the Financial Accounting Standards Board will address this issue.  In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary.  The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance.  There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes.  [As of June 30, 2003, assuming the Company was not allowed to include the $50.0 million in trust preferred securities issued by Capital Trust III and Capital Trust IV in Tier I capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes.]  If the trust preferred securities were no longer allowed to be included in Tier I capital, the Company would also be permitted to redeem the capital securities, which bear interest at 8.625% and 8.375%, respectively, without penalty.

SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  In April 2003, the FASB issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”  resulting in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively.  Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. The Company does not believe the adoption of this statement will have a material impact on the Company’s financial position or results of operations.

SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  In May 2003, the FASB issued SFAS No. 150, which establishes standards for how certain financial instruments with characteristics of both liabilities and equity should be measured and classified. Certain financial instruments with characteristics of both liabilities and equity will be required to be classified as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and July 1, 2003 for all other financial instruments. On July 1, 2003, the Company adopted SFAS No. 150 which results in the Company reclassifying its Corporation-Obligation Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation to borrowings. The unamortized portion of the issuance costs was separated from the value of these securities and reclassified into Other Assets. At June 30, 2003, the trust preferred securities, or junior subordinated debentures, are classified as a separate line item between total liabilities and stockholders’ equity, the mezzanine section, on the consolidated balance sheet.   Prior period financial statements will not be restated, therefore, all prior periods presented will have these securities net of the related issuance costs classified in the mezzanine section.  The Company does not anticipate a material fair value impact upon adoption.  Additionally, the interest cost on the trust preferred securities, which through June 30, 2003 is considered minority interest on the consolidated statement of income, will become interest on borrowings.  The minority interest recognized in prior periods will not be reclassified to interest cost upon transition, it will remain as minority interest.  The

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reclassification of the interest cost into borrowings will have an impact of 0.20% on an annualized basis to the net interest margin. There will be no impact to earnings.

NOTE 4 -  GOODWILL AND INTANGIBLES

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.”  This statement addresses the method of identifying goodwill and other intangible assets acquired in a business combination and eliminated further amortization of non-SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” goodwill, subject to an annual evaluation of goodwill balances for impairment, or more often in certain circumstances. The Company has total goodwill that meets the criteria of SFAS No. 142 of $761,000 at June 30, 2003 from the acquisitions of Middleboro Trust Company in January 1986 and Pawtucket Trust Company in May 1994.

On October 1, 2002, the FASB released SFAS No. 147, “Acquisitions of Certain Financial Institutions.” The statement allows for financial institutions that have certain unidentifiable intangible assets that arose from business combinations where the fair value of liabilities assumed exceeded the fair value of assets acquired (or SFAS No. 72 assets) to reclassify these assets to goodwill as of the later of the date of acquisition or the application date of SFAS No. 142, January 1, 2002. The reclassified goodwill is accounted for and reported prospectively as goodwill under SFAS No.142. Any previously recognized amortization of such reclassified unidentified intangible asset that was recorded subsequent to the adoption of SFAS No. 142 is restated to the application date of SFAS No. 142, January 1, 2002.  The reclassified goodwill is subject to the impairment provisions of SFAS No. 142.

NOTE 5 -  SETTLEMENT OF REAL ESTATE INVESTMENT TRUST (“REIT”) RETROACTIVE TAXATION DISPUTE

In June of 2003, two of the Company’s subsidiaries settled a state tax dispute with the Department of Revenue (“DOR”).  Under the settlement approximately $3.2 million, prior to federal deduction, was paid to the Massachusetts DOR on June 23, 2003 on behalf of the Company’s two subsidiaries.

In the first quarter of 2003 the Company recorded a $4.1 million charge to earnings due to the state tax dispute between its subsidiaries and the DOR.  As a result of the settlement, the Company recognized a credit of approximately $2.1 million to income in the second quarter.  Both the $4.1 million charge and the $2.1 million credit were computed including interest, and net of applicable tax benefits.

The settlement entered into in June of 2003 between the Company’s subsidiaries and the DOR arises from a negotiation with the DOR on behalf of a group of approximately 50 to 60 banks.  The dispute that led to the settlement began in approximately June 2002, when the DOR began assessing additional state taxes against Massachusetts’ banks that have a REIT, in their corporate structure.  The dispute between the DOR and banks was exacerbated on March 5, 2003, when the Governor of Massachusetts signed legislation that declared that the dividends which banks received from a REIT subsidiary are subject to state taxation, retroactive to 1999.

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NOTE 6 -  EARNINGS PER SHARE

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that share in the earnings of the entity.

During the six months ending June 30, 2002, the Company wrote-off $1.5 million, net of tax, of stock issuance costs associated with Independent Capital Trust I and II upon their liquidation.  During the three months ending June 30, 2002, the Company wrote-off $767,000, net of tax, of the above amount related to the Independent Capital Trust I liquidation.  These costs were directly charged to equity in accordance with Generally Accepted Accounting Principles (“GAAP”).  Although these amounts did not impact net income, they are included in the calculation of EPS.  Therefore, the calculation of EPS in 2002 is determined by dividing net income available to common stockholders, which includes the write-off of stock issuance costs, by the weighted average number of common shares outstanding for the period.

Earnings per share consisted of the following components for the six months and the quarter ended June 30, 2003 and 2002:

(1)  Reflects the restatement of the six months and quarter ended June 30, 2002 for the nonamortization of goodwill in accordance with SFAS No. 147.

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Options to purchase common stock with an exercise price greater than the average market price of common shares for the period are excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be antidilutive.  For the three and six months ended June 30, 2003, there were 187,155 and 185,278, respectively, of shares excluded from the calculation of diluted earnings per share.   For the three and six months ended June 30, 2002 there were 11,640 and 5,788, respectively, of shares excluded from the calculation of diluted earnings per share.

NOTE 7 -  REDEMPTION/ISSUANCE OF TRUST PREFERRED SECURITIES

On December 11, 2001, the Company issued, through Independent Capital Trust III, 1,000,000 shares of 8.625% Trust Preferred Securities, $25 face value, due December 31, 2031 but callable at the option of the Company on or after December 31, 2006.  On January 31, 2002, the Company used the net proceeds from the transaction to call the 1,000,000 shares of 11% Trust Preferred Securities issued by Independent Capital Trust II.  Upon redemption of the 11% Trust Preferred Securities, the Company wrote-off the associated unamortized issuance costs ($738,000, net of tax) through a charge to equity. This charge, which did not impact net income, is included in the calculation of earnings per share available to common stockholders. The Company expects the refinancing of the 11% Trust Preferred Security issuance to reduce annual pre-tax minority interest expense by approximately $594,000.

On April 12, 2002, the Company issued, through Independent Capital Trust IV, 1,000,000 shares of 8.375% Trust Preferred Securities, $25 face value, due April 30, 2032 but callable at the option of the Company on or after April 30, 2007. On May 20, 2002, the Company used the net proceeds from the transaction to call the 1,150,000 shares of 9.28% Trust Preferred Securities issued by Independent Capital Trust I. Upon redemption of the 9.28% Trust Preferred Securities, the Company wrote-off the associated unamortized issuance cost of $767,000, net of tax, through a direct charge to equity. The write-off of these unamortized costs is included in the calculation of earnings per share. The Company expects the refinancing of the 9.28% Trust Preferred Security issuance to reduce annual pre-tax minority interest expense by approximately $574,000.

See Footnote 3, Recent Accounting Developments, for the impact of adoption of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”

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NOTE 8 -  COMPREHENSIVE INCOME

Information on the Company’s comprehensive income, presented net of taxes, is set forth below for the six months and quarter ended June 30, 2003 and 2002.

Comprehensive income is reported net of taxes, as follows:

(unaudited,  In Thousands)

(1)  Reflects the restatement of the six months and three months ended June 30,  2002 for the nonamortization of goodwill in accordance with SFAS No. 147.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the Securities and Exchange Commission.  The discussion may contain certain forward-looking statements regarding the future performance of the Company.  All forward-looking information is inherently uncertain and actual results may differ materially from the assumptions, estimates or expectations reflected or contained in the forward-looking information.

Cautionary Statement Regarding Forward-Looking Statements

A number of the presentations and disclosures in this Form 10-Q, including, without limitation, statements regarding the level of allowance for loan losses, the rate of delinquencies and amounts of charge-offs, and the rates of loan growth, and any statements preceded by, followed by or which include the words “may,” “could,” “should,” “will,” “would,” “hope,” “might,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions constitute forward-looking statements.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business, including our expectations and estimates with respect to our revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors (some of which are beyond our control).  The following factors, among others, could cause our financial performance to differ materially from our goals, plans, objectives, intentions, expectations and other forward-looking statements:

•                                          the strength of the United States economy in general and the strength of the regional and local economies within the New England region and Massachusetts;

•                                          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;

•                                          the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

•                                          inflation, interest rate, market and monetary fluctuations;

•                                          adverse changes in asset quality and the resulting credit risk-related losses and expenses;

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•                                          our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors;

•                                          the willingness of users to substitute competitors’ products and services for our products and services;

•                                          the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

•                                          technological changes;

•                                          changes in consumer spending and savings habits; and

•                                          regulatory or judicial proceedings.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q.  Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

We do not intend to update our forward-looking information and statements, whether written or oral, to reflect change.  All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

OVERVIEW

The Company’s total assets increased $142.7 million, or 6.2%, from December 31, 2002 to a total of $2.4 billion at June 30, 2003. The investment portfolio increased by $46.2 million, or 6.9%, to $715.2 million at June 30, 2003 as compared to fiscal year-end 2002. Loans increased $91.3 million, or 6.4%, during the six months ending 2003. At June 30, 2003, total deposits increased slightly as compared to December 31, 2002 to $1.8 billion from $1.7 billion; however, the mix of deposits changed with an increase in core deposits of $89.0 million, or 7.3%, and a decrease in the more expensive time deposit category of $14.0 million, or 3.0%.

Net income for the three months ended June 30, 2003 was $9.2 million, an increase of $4.9 million, or 117.0%, compared to the three months ended June 30, 2002. Diluted earnings per share were $0.63, a 162.5% increase compared to $0.24 for the same period last year.   The second quarter 2003 results reflect a decrease in net interest income of $805,000, or 3.2%, an increase in non-interest income of $2.8 million, or 51.5%, and a decrease in non-interest expense of $2.1 million, or 9.3%.

Two items, one during the current quarter and one during the same period last year, are the primary reasons why there are significant increases in earnings and earnings per share when the second quarter of 2003 is compared to the same period in 2002.   A favorable item occurred during the current quarter, namely the Company’s recognition of a $2.1 million credit, net of applicable tax benefits, to the provision for income taxes due to settlement of a state tax dispute.  (See Footnote 5, “Settlement of Real Estate Investment Trust (“REIT”) Retroactive

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Taxation Dispute,” to the Condensed Notes to Consolidated Financial Statements.) In the same quarter of 2002, the Company experienced a $2.5 million charge, net of tax, for a write-down of WorldCom Bonds within non-interest expense.

Net income for the six months ended June 30, 2003 was $11.6 million, an increase of $532,000, or 4.8%, compared to the six months ended June 30, 2002. Diluted earnings per share were $0.79, a 21.5% increase compared to $0.65 for the same period last year.

The six months ended June 30, 2003 results also reflect a decrease in net interest income of $1.4 million, or 2.8%, an increase in non-interest income of $3.1 million, or 27.1%, and an decrease in non-interest expense of $1.1 million, or 2.9%.

Provision for loan losses decreased by $270,000 to $930,000 from $1.2 million for the three months ended June 30, 2003 compared to June 30, 2002, as a result of continued strength in loan quality.

The Company’s effective income tax rate was 12.95% compared to 28.12%, for the quarters ending June 30, 2003 and June 30, 2002, respectively, with the majority of the change reflective of the aforementioned settlement with the Massachusetts DOR.

FINANCIAL POSITION

Loan Portfolio  Total loans increased by $91.3 million, or 6.4%, during the six months ended June 30, 2003 compared to the balance at December 31, 2002.  The increases were mainly in commercial real estate, residential real estate and commercial and industrial loans, which increased $34.1 million, or 6.7%, $33.7 million, or 12.0%, and $19.7 million, or 13.0%, respectively.  Consumer loans decreased $1.6 million, or 0.4%, primarily due to a decrease in indirect auto loans but was somewhat offset by the growth in home equity lines of $22.4 million.

Asset Quality   Rockland Trust Company actively manages all delinquent loans in accordance with formally drafted policies and established procedures.  In addition, Rockland Trust Company’s Board of Directors reviews delinquency statistics, by loan type, on a monthly basis.

Delinquency  The Bank’s philosophy toward managing its loan portfolios is predicated upon careful monitoring which stresses early detection and response to delinquent and default situations.  The Bank seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.  Generally, the Bank requires that a delinquency notice be mailed to a borrower upon expiration of a grace period (typically no longer than 15 days beyond the due date).  Reminder notices and telephone calls may be issued prior to the expiration of the grace period.   If the delinquent status is not resolved within a reasonable time frame following the mailing of a delinquency notice, the Bank’s personnel charged with managing its loan portfolios, contacts a borrower to ascertain the reasons for delinquency and the prospects for payment. Any subsequent actions taken to resolve the delinquency will depend upon the nature of the loan and the length of time that the loan has been delinquent. The borrower’s needs are considered as is much as reasonably possible without jeopardizing the Bank’s position. A late charge is usually assessed on loans upon expiration of the grace period. 

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On loans secured by one-to-four family, owner-occupied properties, the Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure action.  If such efforts do not result in a satisfactory arrangement, the loan is referred to legal counsel whereupon counsel initiates foreclosure proceedings.  At any time prior to a sale of the property at foreclosure, the Bank may and will terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.  On loans secured by commercial real estate or other business assets, the Bank similarly seeks to reach a satisfactory payment plan so as to avoid foreclosure or liquidation.

The following table sets forth a summary of certain delinquency information as of the dates indicated:

Table 1  - Summary of Delinquency Information

Nonaccrual Loans  As a general rule, a commercial or real estate loan more than 90 days past due with respect to principal or interest is classified as a nonaccrual loan.  Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income.  A loan remains on nonaccrual status until it becomes current with respect to principal and interest, when the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.  As permitted by banking regulations, consumer loans and home equity loans past due 90 days or more continue to accrue interest.  In addition, certain commercial and real estate loans that are more than 90 days past due may be kept on an accruing status if the loan is well secured and in the process of collection.

Nonperforming Assets  Nonperforming assets are comprised of nonperforming loans, other real estate owned (“OREO”) and nonperforming investment securities.  Nonperforming loans consist of nonaccrual loans and loans that are more than 90 days past due but still accruing interest.  OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure.  Nonperforming investment securities consist of investments that have been identified as other than temporarily impaired and are no longer accruing interest.  The Company’s strong underwriting guidelines, prudent investment practices, and the resilient local economy continue to result in very strong asset quality.   Nonperforming assets totaled $3.0 million at June 30, 2003 (0.12% of total assets), as compared to the $3.1 million (0.13% of total assets) reported at December 31, 2002.  The Company’s total allowance for loan losses (including the credit quality discount of $0.4 million at June 30, 2003 and $0.5 million at December 31, 2002, which is discussed under “Allowance for Loan Losses” below),represented, as a percentage of the total loan portfolio, 1.50% of

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those totals at June 30, 2003 and 1.53% at December 31, 2002.  The Bank held $227,000 in OREO property on June 30, 2003 and all investment securities were performing.

Repossessed automobiles loan balances continue to be classified as nonperforming loans because the borrower has the potential capacity to satisfy the obligation within twenty days from the date of repossession (before the Bank can schedule disposal of the collateral).  The borrower can redeem the property by payment in full at anytime prior to the disposal of it by the Bank.  Repossessed automobiles loan balances amounted to $560,000, $663,000, and $416,000 for the periods ending June 30, 2003, December 31, 2002, and June 30, 2002, respectively.

The following table sets forth information regarding nonperforming assets held by the Company at the dates indicated.

Table 2  - - Nonperforming Assets / Loans

(Dollars In Thousands)

(1)  There were no restructured nonaccruing loans at June 30, 2003 and December 31, 2002 and $0.1 million restructured nonaccruing loans at June 30, 2002.

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In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain commercial and real estate loans.  Terms may be modified to fit the capacity of the borrower to repay in line with the current financial status of the borrower. It is the Bank’s policy to maintain restructured loans on nonaccrual status for approximately six months before management considers a return to accrual status.  At June 30, 2003, the Bank had $477,000 of restructured loans.  At June 30, 2003, the Bank also had three potential problem loans which were not included in nonperforming loans with an outstanding balance of $2.6 million.

Real estate acquired by the Bank through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO.  When property is acquired, it is recorded at the lesser of the loan’s remaining principal balance or the estimated fair value of the property acquired, less estimated costs to sell.  Any loan balance in excess of the estimated fair value (less estimated costs to sell on the date of transfer) is charged to the allowance for loan losses on that date.  All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value, are charged to non-interest expense.

Interest income that would have been recognized for the three months ended June 30, 2003 and June 30, 2002, if nonperforming loans at the respective dates had been performing in accordance with their original terms, approximated $59,000 and $42,000, respectively.  Interest income that would have been recognized for the six months ended June 30, 2003 and June 30, 2002, if nonperforming loans at the respective dates had been performing in accordance with their original terms, approximated $116,000 and $106,000, respectively. The actual amount of interest that was collected on nonaccrual and restructured loans during the three months ended June 30, 2003 and June 30, 2002 and included in interest income was approximately $71,000 and $39,000, respectively.  The actual amount of interest that was collected on nonaccrual and restructured loans during the six months ended June 30, 2003 and June 30, 2002 and included in interest income was approximately $183,000 and $57,000, respectively.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual, consumer, or residential loans for impairment disclosures.  At June 30, 2003 and December 31, 2002, impaired loans were $1.7 million and $2.1 million, respectively, which include all commercial real estate loans and commercial and industrial loans on nonaccrual status and restructured loans.

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Allowance For Loan Losses While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on increases in nonperforming loans, changes in economic conditions, or for other reasons.  Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses.  Federal Reserve regulators examined the Company in the first quarter of 2002 and the Bank was most recently examined by the Federal Deposit Insurance Corporation, (“FDIC”), in the first quarter of 2003.  No additional provision for loan losses was required as a result of these examinations.  As of June 30, 2003, the allowance for loan losses totaled $22.5 million as compared to $21.4 million at December 31, 2002.  Based on the analyses described above, management believes that the level of the allowance for loan losses at June 30, 2003 is adequate.

The allowance for loan losses is maintained at a level that management considers adequate to provide for potential loan losses based upon an evaluation of known and inherent risks in the loan portfolio.  The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.  In 2000, the Bank established a separate “credit quality discount” as a reduction of the loan balances acquired from FleetBoston Financial. The credit quality discount is a separate allowance that was established for the acquired loan balances.  This credit quality discount represents inherent losses in the acquired loan portfolio.  The credit quality discount is amortized over the remaining average life of the loans purchased and amortized into interest income proportionately with the loan balances. The level of credit quality discount was $0.4 million at June 30, 2003 and $0.5 million at December 31, 2002.

Including the credit quality discount, the total allowances for loan losses was $22.9 million at June 30, 2003 compared to $21.9 million at December 31, 2002.

As of June 30, 2003, the allowance for loan losses as a percentage of total loans was 1.48% as compared to 1.49% at December 31, 2002.   As of June 30, 2003, the total allowance for loan losses (including the credit quality discount described above) represented 1.50% of loans, as compared to 1.53% at December 31, 2002.

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The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented:

Table 3  -  Summary of Changes in the Allowance for Loan Losses

The allowance for loan losses is allocated to various loan categories as part of the Bank’s process of evaluating its adequacy. The allocated amount of allowance was $17.9 million at June 30, 2003, up from $17.0 million at December 31, 2002.  The distribution of allowances allocated among the various loan categories was comparable to the distribution as of December 31, 2002.  Increases in the amounts allocated were observed in all loan type categories except Consumer – Installment and Real Estate – Construction, which exhibited

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decreases. These changes are attributed to changes in portfolio balances outstanding and the results of recent assessments of the loan portfolio.

The following table summarizes the allocation of the allowance for loan losses for the dates indicated:

Table 4  -  Summary of Allocation of the Allowance for Loan Losses

(Dollars - In Thousands)

A portion of the allowance for loan losses is not allocated to any specific segment of the loan portfolio.  This non-specific allowance is maintained for two primary reasons:  (a.) there exists an inherent subjectivity and imprecision to the analytical processes employed and (b.) the prevailing business environment, as it is affected by changing economic conditions and various exogenous factors, may impact the portfolio in ways currently unforeseen.

Moreover, management has identified certain risk factors, which are not readily quantifiable, but which could still impact the degree of loss sustained within the portfolio.  These include: (a.) market risk factors, such as the effects of economic variability on the entire portfolio, and (b.) unique portfolio risk factors that are inherent characteristics of the Bank’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Bank’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral.  Unique portfolio risk factors may include industry concentration or covariant industry concentrations, geographic concentrations, or trends that may exacerbate losses resulting from economic events which the Bank may not be able to fully diversify out of its portfolio.

Due to the imprecise nature of the loan loss estimation process and ever changing conditions, these risk attributes may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in the Bank’s analysis of the adequacy of the allowance for loan losses.  Management, therefore, has established and maintains a non-specific allowance for loan losses.  The amount of non-specific allowance was $4.6 million at June 30, 2003, compared to $4.4 million at December 31, 2002.

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Management increased the measurement imprecision allocation primarily based on concerns regarding how the overall weakening of the national economy may affect borrowers in its loan portfolio. Through the fiscal year ending 2002 and through the second quarter ending June 30, 2003, the general state of the U.S. economy has exhibited well publicized weaknesses such as lackluster growth and rising rates of unemployment. National economic conditions notwithstanding, the reported slowdown of economic activity has not yet had a significant effect on the overall credit quality or incidence of default within the Bank’s loan portfolio. Management, nonetheless, increased the measurement imprecision allocation of loan loss allowance by $194,000 during the six months ended June 30, 2003 based upon its belief that some of the Bank’s customer base may lag behind larger national firms with respect to the effects of a recession.

Investments  Total investments increased $46.2 million, or 6.9%, to $715.2 million at June 30, 2003 from December 31, 2002, attributable to increases in the available for sale portfolio.  Purchases were concentrated in mortgage backed securities collateralized by 10 and 15 year mortgages, and to a lesser extent government agency securities. Also during the second quarter ending June 30, 2003, the Company sold $20.0 million of investment securities recognizing a gain on the sale of securities of $2.0 million. The sale of the securities was part of an effort to improve the Company’s overall interest rate risk position as well as to offset compression in the net interest margin. In connection with the sale of the securities, the Company prepaid $31.5 million of fixed, high-rate borrowings, incurring a prepayment penalty of $1.9 million, recorded in non-interest expense.  Increases in the available for sale portfolio were partially offset by a decrease in the held to maturity portfolio due to maturities and pay-downs.

Deposits  Total deposits of $1.8 billion at June 30, 2003 increased $74.9 million since year-end 2002.  Core deposits increased by $89.0 million, or 7.3%, which enabled the Company to reduce the balance of more expensive time deposits by $14.0 million, or 3.0%, contributing to a reduction in its overall cost of funds from 2.26% to 1.96% from the fourth quarter 2002 to the second quarter 2003.

Borrowings  Total borrowings increased $68.0 million, or 18.8%, to $430.2 million at June 30, 2003 from December 31, 2002.  As discussed above within Investments, as part of an effort to improve the Company’s interest rate risk position and to offset compression in the net interest margin, the Company prepaid $31.5 million of fixed rate, 4.9% borrowings incurring a prepayment penalty of $1.9 million.  Short term borrowings were increased to fund asset growth.

Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities  In December 2001, the Company issued trust preferred securities through Independent Captial Trust III (“Trust III”), the proceeds of which were used to redeem in full on January 31, 2002, higher rate securities issued through Independent Capital Trust II (“Trust II”). As the low interest rate environment continued into 2002, the Company issued trust preferred securities through Independent Capital Trust IV (“Trust IV”) on April 12, 2002, the proceeds of which were used to redeem in full on May 20, 2002, the higher rate securities issued through Independent Capital Trust I (“Trust I”). Therefore, Trust I and II were liquidated in 2002.  The remaining issuance costs related to the issuance of Trust I and Trust II of $767,000, net of tax, and $ 738,000, net of tax, respectively, were written-off as a direct charge to equity. The Company expects the refinancing of the Trust Preferred Security issuances of Trust II and Trust I to reduce the Company’s annual pre-tax minority interest expense by approximately $594,000 and $574,000, respectively.

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The interest expense associated with the trust preferred securities is reported as minority interest expense on the Consolidated Statements of Income and were $1.1 million and $1.4 million for the quarters ending June 30, 2003 and 2002, respectively.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” effective on July 1, 2003 for existing financial instruments. The statement establishes standards for issuers’ classification of liabilities in the statement of financial position of financial instruments that have characteristics of both liabilities and equity. As a result of this statement, the Company will be required to reclassify its Corporation-Obligation Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation to borrowings. The unamortized portion of the issuance costs will be separated from the value of these securities and be reclassified into Other Assets. Currently, the trust preferred securities, or junior subordinated debentures, are classified as a separate line item between total liabilities and stockholders’ equity on the consolidated balance sheet.  Prior period financial statements will not be restated, therefore, all prior periods presented will have these securities net of the related issuance costs classified in the mezzanine section.  The Company does not anticipate a material fair value impact upon adoption.  In addition, the interest cost on the trust preferred securities, which is currently considered minority interest on the consolidated statement of income, will become interest on borrowings.  The minority interest recognized in prior periods will not be reclassified to interest cost upon transition, it will remain as minority interest.  The reclassification of the interest cost into borrowings will have an impact of 0.20% on an annualized basis to the net interest margin. There will be no impact to earnings.

Stockholders’ Equity   Stockholders’ equity as of June 30, 2003 totaled $164.7 million as compared to $161.2 million at December 31, 2002.

Equity to Assets Ratio  The ratio of equity to assets was 6.8% at June 30, 2003 compared to 7.1% at December 31, 2002.

RESULTS OF OPERATIONS

Summary of Results of Operations  The Company reported net income of $9.2 million for the second quarter 2003 as compared with net income of $4.2 million for the second quarter of 2002.  Diluted earnings per share were $0.63 for the three months ended June 30, 2003, compared to $0.24 per share for the prior year’s quarter.  Two items, one during the current quarter and one during the same period last year, are the primary reasons why there are significant increases in earnings and earnings per share when the second quarter of 2003 is compared to the same period in 2002.  A favorable item occurred during the current quarter, namely the Company’s recognition of a $2.1 million credit, net of applicable tax benefits, to the provision for income taxes due to settlement of a state tax dispute.  (See footnote 5 to the Condensed Notes to Consolidated Financial Statements.)  In the same quarter of 2002, the Company experienced a $2.5 million charge, net of tax, for the write-down of WorldCom Bonds.

Net income for the six months ended June 30, 2003 was $11.6 million compared to $11.1 million for the same period last year.  Diluted earnings per share were $0.79 and $0.65 for the six months ended June 30, 2003 and June 30, 2002, respectively.

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Earnings per share for the three and six months ending June 30, 2002 was also impacted by a direct charge to equity for the write-off of issuance costs associated with the redemption of the trust preferred securities of $767,000 and $1.5 million, respectively. The charge, although not included in net income, is included in the calculation of earnings per share.

Net Interest Income  The amount of net interest income is affected by changes in interest rates and by the volume and mix of interest earning assets and interest bearing liabilities.

On a fully taxable equivalent basis, net interest income for the second quarter of 2003 decreased $731,000, or 2.9%, to $24.8 million, as compared to the second quarter of 2002.  The Company’s net interest margin decreased to 4.47% for the second quarter of 2003 from 4.90% in the second quarter of 2002.  The compression in the net interest margin can be attributed to the repricing of assets at historically low levels without a proportional decrease in rates paid on deposits and borrowings.  The Company’s interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) decreased by 30 basis points to 4.03% during the second quarter of 2003 as compared to the second quarter of 2002.   Management anticipates that the net interest margin and interest rate spread will continue to contract in the coming months as the uncertainty of global events and a weak economy continue to suppress interest rates.

The Company’s fully tax equivalent net interest income for the six months ended June 30, 2003 amounted to $48.9 million, a decrease of $1.3 million, or 2.5%, from the comparable six months in 2002.  The net interest margin decreased from 4.90% to 4.49% for the six months ended June 30, 2003 as compared to the same period last year.

Management continues its focus on long-term earnings growth and maintains a disciplined approach to asset generation in this low rate environment.  Loan generation has focused on adjustable rate or short-term fixed rate products and investment purchases are generally short-term in nature with limited extension risk.

The following tables presents the Company’s average balances, net interest income, interest rate spread, and net interest margin for the three and six months ending June 30, 2003 and June 30, 2002.  Non-taxable income from loans and securities is presented on a fully tax equivalent basis, whereby tax exempt income is adjusted upward by an amount equivalent to the prevailing federal income taxes that would have been paid if income had been fully taxable.

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Table 5 -  Average Balance, Interest Earned/Paid & Average Yields

(Unaudited - Dollars in Thousands)