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, 2001 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, 2001 there were 14,269,660 shares of the registrant's common stock outstanding, par value $.01 per share.
INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 Consolidated Statements of Income - Three months ended March 31, 2001 and 2000 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 Notes to Consolidated Financial Statements - March 31, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures
PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> INDEPENDENT BANK CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED - IN THOUSANDS) <S> <C> <C> -------------------------------------- MARCH 31, DECEMBER 31, -------------------------------------- 2001 2000 -------------------------------------- ASSETS Cash and Due From Banks $68,014 $58,005 Federal Funds Sold 16 - Trading Assets 439 479 Investments Available For Sale 505,600 404,512 Investments Held to Maturity 92,972 195,416 Loans, Net of Unearned Discount 1,193,237 1,184,764 Less: Reserve for Possible Loan Losses (15,643) (15,493) - ------------------------------------------------------------------------------------------------------------ Net Loans 1,177,594 1,169,271 - ------------------------------------------------------------------------------------------------------------ Bank Premises and Equipment 30,437 30,367 Intangible Assets 38,360 39,068 Other Assets 57,706 52,858 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $1,971,138 $1,949,976 ============================================================================================================ LIABILITIES Deposits Demand Deposits $320,450 $336,755 Savings and Interest Checking Accounts 376,902 356,504 Money Market and Super Interest Checking Accounts 202,180 200,831 Time Certificates of Deposit 553,165 595,132 - ------------------------------------------------------------------------------------------------------------ Total Deposits 1,452,697 1,489,222 - ------------------------------------------------------------------------------------------------------------ Federal Funds Purchased and Assets Sold Under Repurchase Agreements 58,745 76,025 Federal Home Loan Bank Borrowings 261,224 191,224 Treasury Tax and Loan Notes 1,032 7,794 - ------------------------------------------------------------------------------------------------------------ Total Borrowings 321,001 275,043 - ------------------------------------------------------------------------------------------------------------ Total Deposits and Borrowings 1,773,698 1,764,265 Other Liabilities 24,520 19,681 - ------------------------------------------------------------------------------------------------------------ Total Liabilities 1,798,218 1,783,946 - ------------------------------------------------------------------------------------------------------------ Commitments and Contingencies Corporation-obligated mandatorily redeemable trust preferred securities of Subsidiary trust holding solely junior subordinated debentures of the Corporation 51,346 51,318 STOCKHOLDERS' EQUITY Common Stock, $.01 par value, Authorized: 30,000,000 Shares Outstanding: 14,863,821 Shares at March 31, 2001 and at December 31, 2000 149 149 Treasury Stock: 596,661 Shares at March 31, 2001 and 608,952 Shares at December 31, 2000 (9,302) (9,495) Surplus 43,937 44,078 Retained Earnings 80,835 77,028 Other Accumulated Comprehensive Income, Net of Tax 5,955 2,952 - ------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 121,574 114,712 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY $1,971,138 $1,949,976 ============================================================================================================ </TABLE> 3
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 - ------------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME Interest on Federal Funds Sold & Short Term Investments $150 $85 Interest and Dividends on Securities 10,333 7,937 Interest on Loans 25,225 21,266 - ------------------------------------------------------------------------------------------- Total Interest Income 35,708 29,288 - ------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits 11,318 7,610 Interest on Borrowed Funds 4,092 5,140 - ------------------------------------------------------------------------------------------- Total Interest Expense 15,410 12,750 - ------------------------------------------------------------------------------------------- Net Interest Income 20,298 16,538 - ------------------------------------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES 650 717 - ------------------------------------------------------------------------------------------- Net Interest Income After Provision For Possible Loan Losses 19,648 15,821 - ------------------------------------------------------------------------------------------- NON-INTEREST INCOME Service Charges on Deposit Accounts 1,952 1,385 Asset Management and Trust Services Income 1,082 1,133 Mortgage Banking Income 475 313 BOLI Income 443 413 Other Non-Interest Income 489 338 - ------------------------------------------------------------------------------------------- Total Non-Interest Income 4,441 3,582 - ------------------------------------------------------------------------------------------- Realized Gain on Securities Sales, Net 1,149 51 - ------------------------------------------------------------------------------------------- NON-INTEREST EXPENSES Salaries and Employee Benefits 8,289 6,321 Occupancy and Equipment Expenses 2,413 1,910 Data Processing 945 1,287 Goodwill Amortization 708 69 Other Non-Interest Expenses 3,663 2,640 - ------------------------------------------------------------------------------------------- Total Non-Interest Expenses 16,018 12,227 - ------------------------------------------------------------------------------------------- MINORITY INTEREST EXPENSE 1,383 1,149 - ------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 7,837 6,078 PROVISION FOR INCOME TAXES 2,460 1,847 - ------------------------------------------------------------------------------------------- NET INCOME $5,377 $ 4,231 =========================================================================================== BASIC EARNINGS PER SHARE $0.38 $0.30 =========================================================================================== DILUTED EARNINGS PER SHARE $0.37 $0.30 =========================================================================================== Weighted average common shares (Basic) 14,261,015 14,215,268 Common stock equivalents 108,016 76,053 - ------------------------------------------------------------------------------------------- Weighted average common shares (Diluted) 14,369,031 14,291,321 =========================================================================================== </TABLE> 4
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $5,377 $4,231 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES Depreciation and amortization 1,751 1,102 Provision for possible loan losses 650 717 Loans originated for resale (21,668) (5,767) Proceeds from mortgage loan sales 21,484 5,722 Loss on sale of mortgages 184 45 Gain recorded from mortgage servicing rights (48) (62) Changes in assets and liabilities Increase in other assets (4,800) (7,393) (Decrease)/increase in other liabilities 4,156 (6,497) - ----------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 1,709 (12,133) - ----------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES 7,086 (7,902) - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of Securities Held to Maturity 451 6,808 Proceeds from maturities and sales of Securities Available for Sale 131,217 11,588 Purchase of Held to Maturity Securities (830) (747) Purchase of Available for Sale Securities (125,722) (39,750) Net increase in Loans (8,973) 3,869 Investment in Bank Premises and Equipment (1,256) (791) - ----------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,113) (19,023) - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) in Deposits (36,525) (11,391) Net (decrease)/increase in Federal Funds Purchased And Assets Sold Under Repurchase Agreements (17,279) 20,766 Net increase in FHLB Borrowings 70,000 10,612 Net (decrease)/increase in TT&L Notes (6,762) (9,210) Net proceeds from issuance of corporation-obligated - 23,834 Mandatorily redeemable trust preferred securities of Subsidiary trusts holding solely junior subordinated debentures Of the Corporation Dividends Paid (1,434) (1,413) Proceeds from stock issuance 52 229 Payments for treasury stock purchase - - - ----------------------------------------------------------------------------------------------------------- CASH USED IN FINANCING ACTIVITIES 8,052 33,427 - ----------------------------------------------------------------------------------------------------------- NET INCREASE /( DECREASE) IN CASH AND CASH EQUIVALENTS 10,025 6,502 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 58,005 57,668 - ----------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AS OF MARCH 31, $68,030 $64,170 - ----------------------------------------------------------------------------------------------------------- Supplemental Cash Flow Information CASH PAID DURING THE YEAR FOR: Interest on deposits and borrowings $ 14,318 Minority Interest 1,383 Income Taxes 2,692 NON-CASH TRANSACTIONS: Increase in fair value of derivatives, net of tax $ 829 Transfer of securities from HTM to AFS $102,801 </TABLE> 5
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 Company's other subsidiaries are Independent Capital Trust I and Independent Capital Trust II. 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 accounting principles generally excepted in the United States 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, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001 or any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2000. ACQUISITION On August 4, 2000, the Company and the Bank, acquired 16 Massachusetts branches from Fleet Financial Group (including 4 branches and associated loans and deposits from Sovereign Bank), which added $336 million in deposits, and $134.3 million of commercial, commercial real estate and consumer loans. The total purchase price of the acquisition was approximately $40 million and was paid in cash. The acquisition resulted from the divestiture of Fleet branches after its merger with BankBoston. This Acquisition is being accounted for on the financial statements using the purchase method of accounting. Under purchase accounting, the acquired assets and liabilities of Fleet Financial Group are recognized at their fair value as of the date of the acquisition. Goodwill of $38.3 million generated by this transaction is being amortized on a straight-line basis over 15 years. Financial results of the acquired branches have been included in the Company's operations beginning August 4, 2000. These branches opened as Rockland Trust offices on August 7, 2000 and provide an expanded presence in Brockton and a powerful entrance into the Cape Cod market. 6
RECENT ACCOUNTING DEVELOPMENTS Effective January 1, 2001, the Company adopted 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. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in the fair value of assets, liabilities, or firm commitments through earnings or are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is to be immediately recognized in earnings. As of January 1, 2001, the Company had interest rate swaps that qualified as derivatives under SFAS No. 133. Interest rate swaps are used primarily by the Company to hedge certain operational ("cashflow" hedges) and balance sheet ("fair value" hedges) exposures resulting from changes in interest rates. Such exposures result from portions of the Company's assets and liabilities that earn or pay interest at a fixed rate. In addition, the Company had entered into commitments to fund residential mortgage loans with the intention of selling them in the secondary markets. The Company had also entered into forward sales agreements for certain funded loans and loan commitments. Upon adoption, SFAS No. 133 allows for the one time reclassification of securities from "held-to-maturity" to "available-for-sale." On January 1, 2001, the Bank reclassified $102.8 million of treasury, agency and mortgage backed securities from "held-to-maturity" to "available-for-sale." The adoption of SFAS No. 133 resulted in an increase of $371,000 in Other Comprehensive Income with no material cumulative effect on earnings as of January 1, 2001. The increase in Other Comprehensive Income was made up of two components. The fair value of the Company's swaps treated as "cashflow" hedges net of tax ($467,000) and the impact of reclassifying securities from "held-to-maturity" to "available-for-sale" (-$96,000). The change in fair value of the swaps during the first quarter was $362,000 net of tax, also recorded in comprehensive income. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This Statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and rescinds FASB Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures 7
relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company has quantified the impact of provisions effective for 2000 and the adoption did not have a material impact on the financial position or results of operations. The Company has not yet quantified the remaining provisions effective in 2001, 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. EARNINGS PER SHARE <TABLE> <CAPTION> (IN THOUSANDS, EXCEPT PER SHARE DATA) NET INCOME WEIGHTED AVERAGE NET INCOME SHARES PER SHARE - ---------------------------------------------------------------------------------------------------------- For the three months ended March 31, 2001 2000 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic EPS $5,377 $4,231 14,261 14,215 $0.38 $0.30 Effect of dilutive securities 108 76 Diluted EPS $5,377 $4,231 14,369 14,291 $0.37 $0.30 - ---------------------------------------------------------------------------------------------------------- </TABLE> COMPREHENSIVE INCOME Comprehensive income is reported net of taxes, as follows: <TABLE> <CAPTION> For the Three Months Ended March 31, 2001 2000 -------------------- <S> <C> <C> Net Income $5,377 $4,231 Other Comprehensive Income, Net of Tax Unrealized gains/(losses) on securities available for sale 3,017 72 Cumulative effect of FAS 133 adoption Fair value of derivatives 467 Reclassification of securities from HTM to AFS (96) Change in fair value of derivatives 362 Unrealized holding gains/(losses) arising during the period - - Less: reclassification adjustment for gains included in net income (747) -------------------- Other Comprehensive Income 3,003 72 -------------------- Comprehensive Income $8,380 $4,303 ==================== </TABLE> 8
SEGMENT INFORMATION 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 its 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. The Company does not have a single external customer from whom it derives ten percent or more of its revenues and it operates in the New England area of the United States. 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, Independent Capital Trust I and Independent Capital Trust II financial information. Information about reportable segments and reconciliation of such information to the consolidated financial statements as of and for the quarters ended March 31, follows (in thousands): RECONCILIATION TO CONSOLIDATED FINANCIAL INFORMATION <TABLE> <CAPTION> Community Other Adjustments Banking Other and Eliminations Consolidated <S> <C> <C> <C> <C> For Three Months Ended March 31, 2001 Total Assets 1,970,438 232,048 (231,348) 1,971,138 Net Interest Income 20,287 11 - 20,298 Total Non-Interest Income 5,590 6,422 (6,422) 5,590 Net Income $6,381 $5,418 ($6,422) $5,377 For Three Months Ended March 31, 2000 Total Assets 1,617,535 211,075 (209,135) 1,619,475 Net Interest Income 16,139 399 - 16,538 Total Non-Interest Income 3,633 5,062 (5,062) 3,633 Net Income $5,026 $4,267 $(5,062) $4,231 </TABLE> The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before income taxes, not including nonrecurring gains or losses. 9
The Company derives a majority of its revenues from interest income and the chief operating decision maker relies primarily on net interest revenue to assess the performance of the segments and make decisions about resources to be allocated to the segment. Therefore, the segments are reported above using net interest income. 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 THREE MONTHS ENDED MARCH 31, 2001 The following discussion should be read in conjunction with the financial statements, notes and tables included in the Company's Annual Report filed with the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2000. The discussion contains 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. Please refer to "Cautionary Statement Regarding Forward-looking Information" of this Form 10-Q for a further discussion. SUMMARY For the three months ended March 31, 2001, Independent Bank Corp. (the Company) recorded net income of $4.6 million excluding after tax security gains of $747,000. This represents an increase of 10.3% from the $4.2 million reported for the same quarter last year. Diluted earnings per share were $0.32 and $0.29 for the three months ended March 31, 2001 and 2000, respectively, excluding security gains. Net interest income increased $3.8 million, or 22.7%. The provision for loan losses decreased to $650,000 for the first three months of 2001 compared with $717,000 for the same period last year. Non-interest income increased $0.9 million, or 24.0%, while non-interest expense increased $3.8 million, or 31.0%, over the first three months of 2000. During the first quarter of 2001 the Company recorded pre-tax security gains of $1.1 million on the sale of approximately $100 million of mortgage backed securities. Including these gains, net income for the quarter ended March 31, 2001 was $5.4 million, a 27.1% increase over the same quarter last year. Diluted earnings per share including security gains, were $0.37 a 23.3% increase over the $0.30 recorded a year earlier. Proceeds from the sale of these securities were reinvested during the first quarter of 2001. The annualized returns on average assets and average equity, excluding security gains, for the three months ended March 31, 2001 were 0.94% and 15.87%, respectively, versus 1.05% and 16.74% for the prior year. Including security gains, returns on average assets and average equity were 1.10% and 18.43%, respectively, versus 1.06% and 16.87% for the prior year. 10
As of March 31, 2001, total assets amounted to $2.0 billion, an increase of $21.2 million, or 1.1%, from year-end 2000. Investments decreased $1.4 million while loans increased by $8.5 million, or 0.7%. The growth in the loan portfolio occurred primarily in the construction and home equity categories. Non-performing assets totaled $4.0 million at March 31, 2001 (0.20% of total assets), slightly lower than the $4.4 million (0.23% of total assets) at December 31, 2000. Total deposits decreased by $36.5 million, or 2.5%, since year-end 2000. However, core deposits improved by $5.5 million, or 0.6%, to $900 million from $894 million at year-end 2000. The time deposits category decreased by $42.0 million or 7.1%, to $553.2 million from $595.1 million at year-end 2000, primarily due to the maturity of jumbo and brokered certificates of deposit. Management anticipates improved growth in deposits due to normal seasonal forces; i.e. the increase in population and business activity in Barnstable and Plymouth counties as the weather improves. NET INTEREST INCOME The discussion of net interest income, which follows, is presented on a fully tax-equivalent basis. Net interest income for the three months ended March 31, 2001, amounted to $20.6 million, an increase of $3.7 million, or 22.2%, from the comparable 2000 time frame. The Company's net interest margin for the first three months of 2001 was 4.59%, compared to 4.50% for the comparable 2000 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) increased by 10 basis points to 3.79%. The average balance of interest-earning assets for the first three months of 2001 amounted to $1.79 billion, an increase of $294.4 million, or 19.7%, from the comparable 2000 time frame. Income from interest-earning assets amounted to $36.0 million for the three months ended March 31, 2001, an increase of $6.4 million, or 21.6%, from the first three months of 2000. Interest income is impacted by the amount of non-performing loans. Gross interest income that would have been recognized for the quarter ended March 31, 2001 if non-performing loans at the respective dates had been performing in accordance with their original terms approximated $98,000. The average balance of interest-bearing liabilities for the first three months of 2001 was $1.45 billion, or 19.8%, higher than the comparable 2000 time frame. Average interest bearing deposits increased by $297.2 million, or 35.1%, for the first three months of 2001 over the same period last year. For the three months ended March 31, 2001, average borrowings were $57.8 million, or 15.8%, lower than the first three months of 2000, primarily in FHLB borrowings which decreased by $34.2 million. A portion of both the increase in average interest bearing deposits and the decrease in average borrowings can be attributed to the acquisition of deposits and net funds received from FleetBoston Financial in the third quarter of 2000. Interest expense on deposits increased by $3.7 million to $11.3 million in the first three months of 2001 and interest expense on borrowings decreased by $1.0 million, or 20.4%, to $4.1 million as compared to the same period last year. The cost of these interest-bearing liabilities increased from 4.21% in 2000 to 4.25% in 2001. 11
PROVISION FOR POSSIBLE LOAN LOSSES The reserve for possible 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 reserve is increased by provisions for possible loan losses and by recoveries of loans previously charged-off and reduced by loan charge-offs. Determining an appropriate level of reserve for possible loan losses necessarily involves a high degree of judgment. 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, 2001, the provision for possible loan losses, consistent with the level of loan growth experienced, was $650,000 as compared to $717,000 for the same period last year. Loans charged-off, net of recoveries of loans previously charged-off amounted to $0.5 million for the first three months of 2001, as compared to $0.4 million for the comparable 2000 period. As of March 31, 2001, the ratio of the reserve for possible loan losses to loans, net of unearned discount, was 1.31%, consistent with the level at 2000 year-end. Purchase accounting requires that a separate credit quality discount reserve be established specifically for acquired loans. This credit quality discount represents management's estimate of inherent losses incurred on the acquired portfolio, which will be used to offset actual losses on this portfolio in future periods. The credit quality discount totaled $1.3 million at March 31, 2001. The Company's total reserves available for possible loan loss (including the credit quality discount of $1.3 million) as a percentage of the loan portfolio was 1.42% at March 31, 2001, unchanged from the 2000 year-end level. The percentage of total reserves for possible loan losses (including the credit quality discount) to non-performing loans was 424.81% at March 31, 2001, an increase from 382.15% at year-end 2000. Non-performing assets totaled $4.0 million at March 31, 2001 (.20% of total assets), slightly lower than the $4.4 million at December 31, 2000 (.23% of total assets). NON-INTEREST INCOME Non-interest income for the three months ended March 31, 2001 increased $0.9 million, or 24.0%, to $4.4 million, compared to $3.6 million for the same period in 2000. Income from service charges on deposit accounts increased by $0.6 million, or 40.9%, primarily due to the acquisition. Also, mortgage-banking income increased by $162,000, or 51.8%, due to refinancing activity fueled by the interest rate environment. Volatility in the equity markets adversely impacted Asset Management & Trust Services income (which decreaed by $51,000 or 4.5%) whose income is derived based on portfolio values. 12
NON-INTEREST EXPENSES Non-interest expenses totaled $16.0 million for the three months ended March 31, 2001, a $3.8 million, or 31.0% increase from the comparable 2000 period. Salaries and employee benefits increased $2.0 million, or 31.1%, attributable to the addition of approximately one hundred employees staffing the acquired branches, additions to staff needed to support continued growth (including the introduction of a Call Center and Internet banking), employees' merit increases, and increases in medical insurance premiums. Occupancy and equipment-related expenses increased by $0.5 million, or 26.3%, primarily attributable to the addition of the 16 branches (previously mentioned) as well as the opening of a de novo branch in Falmouth and a new Technology Center in Plymouth, all in the latter part of 2000. Also impacting occupancy expenses were increases in utility costs. Data processing and facilities management decreased by $0.3 million, or 26.6%, reflecting the benefit of the systems conversion in June 2000. Goodwill amortization increased $0.6 million as a result of the acquisition. Other non-interest expenses for the first three months of 2001 increased by $1.0 million, or 38.8%, to $3.7 million from $2.6 million in the first three months of 2000, which includes increases in: consulting ($126,000); office supplies and printing ($93,000); telephone ($292,000); and the normal operating expenses of 17 additional branches. MINORITY INTEREST In the second quarter of 1997, Independent Capital Trust I (the "Trust I") was formed for the purpose of issuing trust preferred securities (the "Trust I 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 I 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 I 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. On January 31, 2000, Independent Capital Trust II (the "Trust II") was formed for the purpose of issuing trust preferred securities (the "Trust II Preferred Securities") and investing the proceeds of the sale of these securities in junior subordinated debentures issued by the Company. A total of $25 million of 11% Trust II Preferred Securities were issued and are scheduled to mature in 2030, callable at the option of the Company after January 31, 2002. Distributions on these securities are payable quarterly in arrears on the last day of March, June, September and December, and such distributions can be deferred at the option of the Company for up to five years. The Trust II Preferred Securities can be prepaid in whole or in part on or after January 31, 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 I and Trust II 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 I and Trust II Preferred Securities as minority interest expense in its consolidated statements of income. The minority interest expense for the three months ended March 31, 2001 and March 31, 2000 was $1.4 million and $1.1 million respectively. 13
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, 2001 and 2000 were 31.4% and 30.4% 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 plausible future interest rate environments. INTEREST RATE RISK Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term horizons. The primary goal of interest-rate risk management is to control this risk within limits approved by the Board. These limits reflect the Company's tolerance for interest-rate risk by identifying exposures, quantifying and hedging them as needed. The Company quantifies its interest-rate exposures using net interest income simulation models, as well as simpler gap analyses. The Company manages its interest-rate exposure using a combination of on and off balance sheet instruments, primarily fixed rate portfolio securities and interest rate swaps. 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 assets, liabilities and off balance sheet positions under various scenarios. The Company's policy limit 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 0.01% -200 0.48% </TABLE> As a component of its asset/liability management activities intended to control interest rate exposure, the Bank has entered into certain off-balance sheet hedging transactions. 14
Interest rate swap agreements represent transactions which involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The weighted average fixed payment rates on the Company's Swap agreements were 7.82% and 7.81% at March 31, 2001 and December 31, 2000 while the weighted average rates of variable interest payments were 5.92% and 7.34% at March 31, 2001 and December 31, 2000. As a result of these interest rate swaps, the Bank realized net income of $0.3 million for the three months ended March 31, 2001 and $0.1 million for March 31, 2000 time period. Entering into interest rate swap agreements involves both the credit risk dealing with counterparties and their ability to meet the terms of the contracts and interest rate risk. While notional principal amounts are generally used to express the volume of these transactions, the amounts potentially subject to credit risk are small due to the structure of the agreements. The Bank is a direct party to these agreements, which provide for net settlement between the Bank and the counterparty on a periodic basis. Should the counterparty fail to honor the agreement, the Bank's credit exposure is limited to the net settlement amount. The Bank had net receivables on the interest rate swaps of $1.9 million and $1.6 million at March 31, 2001 and December 31, 2000. LIQUIDITY AND CAPITAL Liquidity, as it pertains to the Company, is the ability to generate cash in the most economical way, in order to meet ongoing obligations to pay deposit withdrawals and to fund loan commitments. The Company's primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and investments. A strong source of liquidity is the Company's core deposits, those deposits which management considers, based on experience, are not likely to be withdrawn in the near term. The Company utilizes its extensive branch-banking network to attract retail customers who provide a stable source of core deposits. In addition, the Company has established five repurchase agreements with major brokerage firms as potential sources of liquidity. On March 31, 2001, the Company had no outstanding lines under these agreements. As an additional source of funds, the Bank has entered into repurchase agreements with customers totaling $53.1 million at March 31, 2001. In addition, as a member of the Federal Home Loan Bank, Rockland has access to approximately $499 million of borrowing capacity. At March 31, 2001, the Company had $261.2 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, 2001, the Company's liquidity position was well above policy guidelines and was sufficient to meet its operating needs. 15
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, 2001, the Company had a Tier 1 risked-based capital ratio of 8.80% and a total risked-based capital ratio of 11.14%. Rockland had a Tier 1 risked-based capital ratio of 9.68% and a total risked-based capital ratio of 10.87% as of the same date. An additional capital requirement of a minimum 4.00% Tier 1 leverage capital is mandated by the regulatory agencies for most banking organizations and a 5.00% Tier 1 leverage capital ratio is required for a "well capitalized" institution. As of March 31, 2001, the Company and the Bank had Tier 1 leverage capital ratios of 6.02% and 6.62%, respectively. In March, the Company's Board of Directors declared a cash dividend of $0.11 per share to shareholders of record as of March 30, 2001. This dividend was paid on April 13, 2001. On an annualized basis, the dividend payout ratio amounted to 26% of the trailing four quarters earnings. 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, and (iii) the rates of loan growth. 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." 16
PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information The financial information detailed below is included hereafter in this report: Consolidated Statements of Changes in Stockholders' Equity - Three months ended March 31, 2001 and the year ended December 31, 2000 Consolidated Average Balance Sheet and Average Rate Data - Three months ended March 31, 2001 and 2000. Item 6. Exhibits and Reports on Form 8-K - None 17
INDEPENDENT BANK CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED - IN THOUSANDS EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> OTHER COMMON TREASURY RETAINED COMPREHENSIVE STOCK STOCK SURPLUS EARNINGS INCOME TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2000 $149 ($10,678) $44,950 $67,547 ($3,839) $98,129 Net Income 15,190 15,190 Dividends Declared ($.10 per share) (5,709) (5,709) Proceeds from Exercise of Stock Options 1,183 (904) 279 Tax Benefit on Stock Option Exercise 32 32 Repurchase of Common Stock Change in Unrealized Gain (Loss) on Investments Available for Sale, Net of Tax 6,791 6,791 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 $149 ($ 9,495) $44,078 $77,028 $2,952 $114,712 ================================================================================================================================== Balance, January 1, 2001 $149 ($9,495) $44,078 $77,028 $2,952 $114,712 Net Income 5,377 5,377 Dividends Declared ($.11 per share) (1,570) (1,570) Cumulative Effect of FAS 133 adoption Fair value of derivatives 467 467 Reclassification of securities from HTM (96) (96) to AFS Change in fair value of Derivatives 362 362 Proceeds from Exercise of Stock Options 193 (143) 50 Tax Benefit of Stock Option Exercise 2 2 Repurchase Common Stock Change in Unrealized Gain on Investments Available for Sale, Net of Tax 2,270 2,270 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2001 $149 ($9,302) $43,937 $80,835 $5,955 $121,574 ================================================================================================================================== </TABLE> 18
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, 2001 2001 2001 ------------------- ----------------- -------------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $555,457 $9,852 7.09% Non-taxable Investment Securities 38,095 726 7.63% Loans, net of Unearned Discount 1,185,591 25,236 8.51% Federal Funds Sold and Assets Purchased Under Resale Agreements 10,895 150 5.50% Trading Assets 479 2 1.60% ------------------- -------------------------------- Total Interest-Earning Assets $1,790,517 $35,966 8.03% ------------------- ================================ Cash and Due From Banks 66,554 Other Assets 105,235 ------------------- Total Assets $1,962,306 =================== Interest-Bearing Liabilities Savings and Interest Checking Accounts $363,827 $2,007 2.21% Money Market & Super Interest Checking Accounts 193,131 940 1.95% Other Time Deposits 587,007 8,372 5.70% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 70,223 798 4.55% Federal Home Loan Bank Borrowings 233,263 3,247 5.57% Treasury Tax and Loan Notes 4,196 46 4.39% ------------------- ----------------- -------------- Total Interest-Bearing Liabilities $1,451,647 $15,410 4.25% =================== ================= ============== Demand Deposits 321,285 Company-Obligated Mandatorily Redeemable Securities of Subsidiary Holding Solely Parent Company Debentures 51,330 Other Liabilities 21,337 ------------------- Total Liabilities 1,845,599 ------------------- Stockholders' Equity 116,707 ------------------- Total Liabilities and Stockholders' Equity $1,962,306 =================== Net Interest Income $20,556 ================= Interest Rate Spread 3.79% ============== Net Interest Margin 4.59% ============== Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $258 in 2001. </TABLE> 19
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, 2000 2000 2000 --------------- -------------- ----------- <S> <C> <C> <C> Interest-Earning Assets Taxable Investment Securities $420,377 $7,391 7.03% Non-taxable Investment Securities 43,080 810 7.52% Loans, net of Unearned Discount 1,026,125 21,281 8.30% Federal Funds Sold and Assets Purchased Under Resale Agreements 6,024 85 5.64% Trading Assets 485 1 .82% --------------------------------------------- Total Interest-Earning Assets $1,496,091 $29,568 7.91% ============================================= Cash and Due From Banks 42,755 Other Assets 56,639 --------------- Total Assets $1,595,485 =============== Interest-Bearing Liabilities Savings and Interest Checking Accounts $284,994 $1,167 1.64% Money Market & Super Interest Checking Accounts 108,380 651 2.40% Other Time Deposits 453,378 5,793 5.11% Federal Funds Purchased and Assets Sold Under Repurchase Agreements 93,632 1,160 4.96% Federal Home Loan Bank Borrowings 267,453 3,922 5.87% Treasury Tax and Loan Notes 4,389 58 5.29% --------------------------------------------- Total Interest-Bearing Liabilities $1,212,226 $12,751 4.21% ============================================= Demand Deposits 224,077 Company-Obligated Mandatorily Redeemable Securities of Subsidiary Holding Solely Parent Company Debentures 53,750 --------------- Other Liabilities 5,136 --------------- Total Liabilities 1,495,189 --------------- Stockholders' Equity 100,296 --------------- Total Liabilities and Stockholders' Equity $1,595,485 =============== Net Interest Income $16,817 ============== Interest Rate Spread 3.69% =========== Net Interest Margin 4.50% =========== Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $279 in 2000. </TABLE> 20
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, 2001 /s/ Douglas H. Philipsen Douglas H. Philipsen President, Chairman of the Board and Chief Executive Officer Date: May 14, 2001 /s/ Denis K. Sheahan Denis K. Sheahan Chief Financial Officer and Treasurer 21