United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ 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 incorporation (I.R.S. Employer or organization) Identification No.) 288 Union Street Rockland, Massachusetts 02370 - --------------------------------------------- -------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 878-6100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to section 12(g) of the Act: Common Stock, $.0l par value per share - -------------------------------------------------------------------------------- (Title of Class) Preferred Stock Purchase Rights - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether, the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of February 28, 2001, the aggregate market value of the 207,765,518 shares of Common Stock of the Registrant issued and outstanding on such date, excluding 1,960,961 shares held by all directors and executive officers of the Registrant as group, was $179,209,203. This figure is based on the closing sale price of $14.56 per share on February 28, 2001, as reported in The Wall Street Journal on March 1, 2001. Number of shares of Common Stock outstanding as of February 28, 2001: 14,267,160 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated: (1) Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 2000 are incorporated into Part II, Items 5-8 of this Form 10-K. (2) Portions of the Registrant's definitive proxy statement for its 2000 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K.
PART 1. Item 1. Business General. 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 is a community-oriented commercial bank. The community banking business consists of commercial banking, retail banking and trust services and is managed as a single strategic unit. The community banking business 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. Rockland offers a full range of community banking services through its network of 51 banking offices, nine commercial lending centers, and three asset management and trust services offices located in the Plymouth, Norfolk, Barnstable and Bristol Counties of Southeastern Massachusetts. At December 31, 2000, the Company had total assets of $1.95 billion, total deposits of $1.49 billion, stockholders' equity of $114.7 million, and 683 full-time equivalent employees. The conclusion of the year 2000 marked the end of a two-year period of substantial progress for the Company and the Bank. The highlight of this progress was the acquisition by Rockland on August 4, 2000 of 16 branches (including associated deposits and loans) that were formerly owned by Fleet National Bank and Sovereign Bank. This purchase increased the size of Rocklands branch network by 50%. The acquisition of these 16 branches included 14 on Cape Cod and two in Brockton. Rockland has long sought entry onto the Cape as an attractive source of stable core deposits, small businesses lending and asset management and trust services opportunities. In 1997, Independent Capital Trust I ("Trust I") was formed for the purpose of issuing trust preferred securities (the "Trust Preferred Securities") and investing the proceeds of the sale of these securities in $29.64 million of 9.28% junior subordinated debentures issued by the Company. A total of $28.75 million of 9.28% Trust Preferred Securities were issued by Trust I and are scheduled to mature in 2027 callable at the option of the Company after May 19, 2002. For further information on the Trust Preferred Securities, see Footnote 14 of the Notes to Consolidated Financial Statements included in the Company's 2000 Annual Report to Stockholders. On January 31, 2000, Independent Capital Trust II ("Trust II") was formed for the purpose of issuing trust preferred securities (the "Trust Preferred Securities") and investing the proceeds of the sale of these securities in $25.8 million of 11% junior subordinated debentures issued by the Company. A total of $25 million of 11% Trust Preferred Securities were issued by Trust II and are scheduled to mature in 2030, callable at the option of the Company after January 31, 2002. For further information on the Trust Preferred Securities, see Footnote 14 of the Notes to Consolidated Financial Statements included in the Company's 2000 Annual Report to Stockholders. For the year ended December 31, 2000, the Company recorded net income of $15.2 million, a decrease of 10.8% from 1999 earnings of $17.0 million. The 2000 results reflect a 16.7% increase in net interest income, an 11% increase in non-interest income and an increase of 30.6% in non-interest expenses including special charges. For the year ended December 31, 2000, excluding special charges,
the Company reported a 3.0% increase in operating earnings to $17.5 million. This increase in operating earnings was due to a $10.3 million or 16.7% increase in net interest income. Non-interest income increased $1.6 million, or 11.0%, and non-interest expenses increased $10.3 million, or 22.7%, from 1999 to 2000. Special charges for the year ended December 31, 2000 totaled $3.6 million. They were compromised of three items: system conversion charges of $1.3 million; expense of $1.3 million associated with the Fleet National Bank and Sovereign branch acquisition; and, as previously announced in April and recorded as a $1.0 million pre-tax charge in the second quarter of 2000, an unfavorable judgment was entered against the Bank in Plymouth Superior Court concerning a proposed commercial loan transaction that was never consummated. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956 ("BHCA"), as amended, and as such is subject to regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve"). Rockland is subject to regulation and examination by the Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner") and the Federal Deposit Insurance Corporation ("FDIC"). The majority of Rockland's deposit accounts are insured to the maximum extent permitted by law by the Bank Insurance Fund ("BIF") which is administered by the FDIC. In 1994, the Bank purchased the deposits of three branches of a failed savings and loan association from the Resolution Trust Corporation. These deposits are insured to the maximum extent permitted by law by the Savings Association Insurance Fund ("SAIF"). On August 4, 2000 the Company and the Bank acquired 12 Massachusetts branches from Fleet National Bank and 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 acquisition resulted from the divestiture of Fleet branches after its merger with BankBoston. This acquisition has been accounted for using the purchase method of accounting. Under purchase accounting, the acquired assets and liabilities 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 on August 4, 2000. The branches which opened as Rockland Trust offices on August 7, 2000 provide an expanded presence in Brockton and a powerful entrance into the Cape Cod market. In addition, the Company opened a de novo branch in Falmouth, Massachusetts on August 28, 2000, thereby achieving complete coverage of the major population centers on Cape Cod. In preparation for these transactions, Rockland Trust had converted its data processing systems and application software in June 2000. On October 6, 2000 the Bank's data processing functions relocated to Plymouth, the geographic center of the Company's expanded franchise. This new facility will provide improved technology, telecommunications, and working adjacencies. Lending Activities General. The Bank's gross loan portfolio amounted to $1.19 billion on December 31, 2000 or 60.8% of total assets on that date. The Bank classifies loans as commercial, real estate, or consumer. Commercial loans consist primarily of loans to businesses for working capital and other business related purposes and floor plan financing. Real estate loans are comprised of commercial mortgages that are secured by nonresidential properties, residential mortgages that are secured primarily by owner-occupied 2
residences and mortgages for the construction of commercial and residential properties. Consumer loans consist of installment obligations, the majority of which are automobile loans, home equity loans and other consumer loans. The Bank's borrowers consist of small-to-medium sized businesses and retail customers. The Bank's market area is generally comprised of Plymouth, Norfolk, Barnstable and Bristol Counties located in Southeastern Massachusetts. Substantially all of the Bank's commercial and consumer loan portfolios consist of loans made to residents of and businesses located in Southeastern Massachusetts. The majority of the real estate loans in the Bank's loan portfolio are secured by properties located within this market area. In accordance with governing banking statutes, Rockland is permitted, with certain exceptions, to make loans and commitments to any one borrower, including related entities, in the aggregate amount of not more than 20% of the Bank's stockholders' equity, or $32.9 million at December 31, 2000. Notwithstanding the foregoing, the Bank has established a more restrictive limit of not more than 75% of the Bank's legal lending limit, or $24.7 million at December 31, 2000, which may only be exceeded with the approval of the Board of Directors. There were no borrowers whose total indebtedness aggregated or exceeded $24.7 million as of December 31, 2000. The Bank's principal earning assets are its loans. Although the Bank judges its borrowers to be creditworthy, the risk of deterioration in borrowers' abilities to repay their loans in accordance with their existing loan agreements is inherent in any lending function. Participating as a lender in the credit markets requires a strict monitoring process to minimize credit risk. This process requires substantial analysis of the loan application, an evaluation of the customer's capacity to repay according to the loan's contractual terms, and an objective determination of the value of the collateral. The Bank also utilizes the services of an independent third-party consulting firm to provide loan review services, which consist of a variety of monitoring techniques performed after a loan becomes part of the Bank's portfolio. The Bank's Controlled Asset Department is responsible for the management and resolution of nonperforming assets. In the course of resolving nonperforming loans, the Bank may choose to restructure certain contractual provisions. In order to facilitate the disposition of other real estate owned (OREO), the Bank may finance the purchase of such properties at market rates, if the borrower qualifies under the Bank's standard underwriting guidelines. Loan Portfolio Composition and Maturity. The following table sets forth information concerning the composition of the Bank's loan portfolio by loan type at the dates indicated. <TABLE> <CAPTION> December 31, ---------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ------- ----------- ------- -------- ------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial 134,227 11.3% $ 126,815 12.4% $119,585 12.6% $130,793 15.3% $118,570 16.7% Real estate: Commercial 442,120 37.3 321,526 31.1 260,574 27.3 239,517 27.9 273,284 38.6 Residential 161,675 13.6 157,502 15.2 148,750 15.6 153,868 18.0 121,435 17.1 Construction 45,338 3.8 38,503 3.7 50,923 5.3 45,786 5.3 0 0.0 Consumer: Installment 327,161 27.6 332,248 32.1 326,065 34.1 238,401 27.8 132,367 18.7 Other 76,177 6.4 57,359 5.5 49,046 5.1 48,439 5.7 63,001 8.9 ---------- ----- ----------- ----- -------- ----- -------- ----- -------- ----- Gross Loans 1,186,698 100.0% 1,033,953 100.0% 954,943 100.0% 856,804 100.0% 708,657 100.0% ---------- ----- ----------- ----- -------- ----- -------- ----- -------- ----- Unearned Discount 1,934 5,443 13,831 28,671 13,251 Reserve for Possible Loan Losses 15,493 14,958 13,695 12,674 12,221 Net Loans $1,169,271 $ 1,013,552 $927,417 $815,458 $683,185 </TABLE> 3
The Company's outstanding loans grew by 15.2% in 2000, following a 9.3% increase in 1999. The Bank acquired $134.3 million in commercial, commercial real estate, and consumer loans from Fleet National Bank and Sovereign Bank as part of the branch acquisition. Excluding the loans acquired, total commercial and commercial real estate loans increased by $41.1 million, or 9.1%. The installment loan portfolio, however, decreased by $10.4 million, or 3.2% as a result of market conditions. Real estate loans comprised 54.7% of gross loans at December 31, 2000, as compared to 50.0% at December 31, 1999. Commercial real estate loans have reflected increases over the last two years of $120.6 million, or 37.5%, in 2000, and $61.0 million, or 23.4%, in 1999. The 2000 increases are primarily due to the acquisition. Residential real estate loans increased $4.2 million, or 2.6%, in 2000, and increased $8.8 million, or 5.9% in 1999. The majority of residential mortgage loans originated were sold in the secondary market. During 2000, the Bank sold $48.6 million of the current production of residential mortgages as part of its overall asset/liability management. Real estate construction loans increased $6.8 million, or 17.8%, in 2000, following a decrease of $12.4 million, or 24.4%, in 1999. Consumer installment loans, net of unearned discount, decreased $1.6 million, or 0.5%, in 2000 and increased $14.6 million, or 4.7%, during 1999. The decrease in 2000 is due to the decline in interest rates on indirect automobile lending to the point that, in management's opinion; the risk inherent was not adequately covered in the interest yield. As of December 31, 2000 and 1999, automobile loans represented 69.9% and 77.9%, respectively, of the Bank's consumer loan portfolio. Other consumer loans have consisted primarily of cash reserve loans. Introduced in 1992, cash reserve loans are designed to afford the Bank's customers overdraft protection. The balances of these loans increased $18.8 million, or 32.8%, in 2000 and $8.3 million, or 16.9%, in 1999. The following table sets forth the scheduled contractual amortization of the Bank's loan portfolio at December 31, 2000. Loans having no schedule of repayments or no stated maturity are reported as due in one year or less. The following table also sets forth the rate structure of loans scheduled to mature after one year. <TABLE> <CAPTION> Real Estate - Real Estate - Real Estate - Consumer - Consumer - Commercial Commercial Residential Construction Installment Other Total ------------------------------------------------------------------------------------------------------- (Dollars In Thousands) <S> <C> <C> <C> <C> <C> <C> <C> Amounts due in: One year or less $98,902 $107,017 $41,782 $29,991 $92,468 $58,639 $428,799 After one year through five years 33,353 248,224 62,954 8,673 209,018 12,427 574,649 Beyond five years 1,972 86,879 56,939 6,674 25,675 5,111 183,250 -------- -------- -------- ------- -------- ------- ---------- Total $134,227 $442,120 $161,675 $45,338 $327,161 $76,177 $1,186,698 -------- -------- -------- ------- -------- ------- ---------- Interest rates on amounts due after one year: Fixed Rate $35,325 $329,155 $107,106 $15,347 $234,693 17,538 $739,164 Adjustable Rate 0 5,948 12,787 0 0 0 18,735 </TABLE> 4
Generally, the actual maturity of loans is substantially less than their contractual maturity due to prepayments and, in the case of real estate loans, due-on-sale clauses, which generally gives the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage and the loan is not repaid. The average life of real estate loans tends to increase when current real estate loan rates are higher than rates on mortgages in the portfolio and, conversely, tends to decrease when rates on mortgages in the portfolio are higher than current real estate loan rates. Under the latter scenario, the weighted average yield on the portfolio tends to decrease as higher yielding loans are repaid or refinanced at lower rates. Due to the fact that the Bank may, consistent with industry practice, "roll over" a significant portion of commercial and commercial real estate loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period. In addition, a loan, or a portion of a loan, may not be repaid due to the borrower's inability to satisfy the contractual obligations of the loan. As of December 31, 2000, $0.5 million of loans scheduled to mature within one year were nonperforming. See "Lending Activities - Nonperforming Assets." Origination of Loans. Commercial loan applications are obtained through existing customers, solicitation by Bank loan officers, referrals from current or past customers, or walk-in customers. Commercial real estate loan applications are obtained primarily from previous borrowers, direct contacts with the Bank, or referrals. Applications for residential real estate loans and all types of consumer loans are taken at all of the Bank's full-service branch offices. Residential real estate loan applications primarily result from referrals by real estate brokers, homebuilders, and existing or walk-in customers. The Bank also maintains a staff of field originators who solicit and refer residential real estate loan applications to the Bank. These employees are compensated on a commission basis and provide convenient origination services during banking and non-banking hours. Consumer loan applications are directly obtained through existing or walk-in customers who have been made aware of the Bank's consumer loan services through advertising and other media, as well as indirectly through a network of automobile dealers. Commercial loans, commercial real estate loans, and construction loans may be approved by commercial loan officers up to their individually assigned lending limits, which are established and modified periodically to reflect the officer's expertise and experience. Commercial loans and commercial real estate loans in excess of a loan officer's assigned lending limit are approved by various levels of authority within the commercial lending division, depending on the loan amount, up to and including the Senior Loan Committee and ultimately the Executive Committee of the Board of Directors. Residential real estate loans and home equity loans follow a similar approval process within the retail lending division. Sale of Loans. The Bank's residential real estate loans are generally originated in compliance with terms, conditions and documentation which permit the sale of such loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("FNMA"), the Government National Mortgage Association ("GNMA"), and other investors in the secondary market. The majority of fixed rate, long term residential mortgages originated by the Bank are sold without recourse in the secondary market. Loan sales in the secondary market provide funds for additional lending and other banking activities. The Bank generally retains the servicing on the loans sold. As part 5
of its asset/liability management strategy, the Bank may retain a portion of adjustable-rate residential real estate loans or fixed-rate residential real estate loans. During 2000, the Bank originated $76.1 million in residential real estate loans of which $27.2 million was retained in its portfolio. The principal balance of loans serviced by the Bank for investors amounted to $259.7 million at December 31, 2000 and $256.8 million at December 31, 1999. Under its mortgage servicing arrangements, the Bank generally continues to collect payments on loans, to inspect the mortgaged property, to make insurance and tax advances on behalf of borrowers and to otherwise service the loans and receives a fee for performing these services. Net servicing fee income amounted to $520,000 and $918,000 for the years ended December 31, 2000 and 1999, respectively. The servicing release premium on sold loans was approximately $184,000 in 2000 and $124,000 in 1999. Loan origination fees that relate to loans sold by the Bank are recognized as non-interest income at the time of the loan sale. Under its sales agreements, the Bank pays the purchaser of mortgage loans a specified yield on the loans sold. The difference, after payment of any guarantee fee, is retained by the Bank and recognized as fee income over the life of the loan. In addition, loans may be sold at a premium or a discount with any resulting gain or loss recognized at the time of sale. Effective January 1, 1997 the Bank adopted SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of Financial Accounting Standards Board (FASB) Statement No. 125." This statement, which supercedes SFAS No.122, "Accounting for Mortgage Servicing Rights," provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. As of December 31, 2000, and 1999, the loan servicing asset was $1.4 million and $1.6 million, respectively. 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 SFAS 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 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. Commercial Loans. The Bank offers secured and unsecured commercial loans for business purposes, including issuing letters of credit. At December 31, 2000, $134.2 million, or 11.3%, of the Bank's gross loan portfolio consisted of commercial loans, compared to $126.8 million, or 12.4%, at December 31, 1999. Commercial loans are generally provided to small-to-medium-sized businesses located within the Company's market area. Commercial loans may be structured as term loans or as revolving lines of credit. Commercial term loans generally have a repayment schedule of five years or less and, although 6
the Bank occasionally originates some commercial term loans with interest rates which float in relation to the Rockland Base rate, the majority of commercial term loans have fixed rates of interest. Generally, Rockland's Base rate is determined by reference to the Prime rate published daily in the Wall Street Journal. The Bank's Base rate is monitored by the Executive Vice President - Commercial Lending Division, and revised when appropriate in accordance with guidelines established by the Asset/Liability Management Committee. The majority of commercial term loans are collateralized by equipment, machinery or other corporate assets. In addition, the Bank generally obtains personal guarantees from the principals of the borrower for virtually all of its commercial loans. The Bank's commercial revolving lines of credit generally are for the purpose of providing working capital to borrowers and may be secured or unsecured. Collateral for commercial revolving lines of credit may consist of accounts receivable, inventory or both, as well as other corporate assets. Generally, the Bank will lend up to 80% of accounts receivable, provided that such receivables have not aged more than 60 days and/or up to 20% to 40% of the value of raw materials and finished goods inventory securing the line. Commercial revolving lines of credit generally are reviewed on an annual basis and usually require substantial repayment of principal during the course of a year. At December 31, 2000, the Bank had $54.5 million outstanding under commercial revolving lines of credit and $73.3 million of unused commitments under such lines on that date. The Bank's standby letters of credit generally are secured, have terms of not more than one year, and are reviewed for renewal. As of December 31, 2000, the Bank had $6.5 million in outstanding commitments pursuant to standby letters of credit. The Commercial Lending Division manages these facilities. The Bank also provides automobile and, to a lesser extent, boat and other vehicle floor-plan financing. Floor-plan loans, which are secured by the automobiles, boats, or other vehicles constituting the dealer's inventory, amounted to $15.5 million as of December 31, 2000. Upon the sale of a floor-plan unit, the proceeds of the sale are applied to reduce the loan balance. In the event a unit financed under a floor-plan line of credit remains in the dealer's inventory for an extended period, the amount of the outstanding balance is reduced with respect to such unit. Bank personnel make unannounced periodic inspections of each dealer to review the value and condition of the underlying collateral. Real Estate Loans. The Bank's real estate loans consist of loans secured by commercial properties, loans secured by one-to-four family residential properties, and construction loans. As of December 31, 2000, the Bank's loan portfolio included $442.1 million in commercial real estate loans, $161.7 million in residential real estate loans and $45.3 million in construction loans. A significant portion of the Bank's commercial real estate portfolio consists of loans to finance the development of residential projects. These are categorized as commercial construction loans. As such, a number of commercial real estate loans are primarily secured by residential development tracts but, to a much greater extent, they are secured by owner-occupied commercial and industrial buildings and warehouses. Commercial real estate loans also include multi-family residential loans that are primarily secured by apartment buildings and, to a lesser extent, condominiums. The Bank has a very modest portfolio of loans secured by special purpose properties, such as hotels, motels, or restaurants. Although terms vary, commercial real estate loans generally have maturities of five years or less, amortization periods of 20 years, and interest rates that either float in accordance with a designated index 7
or have fixed rates of interest. The Bank's adjustable-rate commercial real estate loans generally are indexed to the Rockland Base rate. Loan-to-value ratios on commercial real estate loans generally do not exceed 80% (70% for special purpose properties) of the appraised value of the property. In addition, as part of the criteria for underwriting permanent commercial real estate loans, the Bank generally imposes a debt service coverage ratio of not less than 120%. It is also the Bank's policy to obtain personal guarantees from the principals of the borrower on commercial real estate loans and to obtain periodic financial statements from all commercial and multi-family borrowers on an annual basis and, in some cases, more frequently. Commercial real estate lending entails additional risks as compared to residential real estate lending. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers. Development of commercial real estate projects also may be subject to numerous land use and environmental issues. The payment experience on such loans is typically dependent on the successful operation of the real estate project, which can be significantly impacted by supply and demand conditions in the market for commercial and retail space. Rockland originates both fixed-rate and adjustable-rate residential real estate loans. The Bank will lend up to 100% of the lesser of the appraised value of the property securing the loan or the purchase price, and generally requires borrowers to obtain private mortgage insurance when the amount of the loan exceeds 80% of the value of the property. The rates of these loans are typically competitive with market rates. As previously noted, the Bank's residential real estate loans are generally originated only under terms, conditions and documentation, which permit sale in the secondary market. The Bank generally requires title insurance protecting the priority of its mortgage lien, as well as fire and extended coverage casualty insurance in order to protect the properties securing its residential and other real estate loans. Independent appraisers appraise properties securing all of the Bank's first mortgage real estate loans. Construction loans are intended to finance the construction of residential and commercial properties, including loans for the acquisition and development of land or rehabilitation of existing homes. Construction loans generally have terms of six months, but not more than two years. They usually do not provide for amortization of the loan balance during the term. The majority of the Bank's commercial construction loans have floating rates of interest based upon the Rockland Base rate or, in some cases, the prime rate published daily in the Wall Street Journal A significant portion of the Bank's construction lending is related to one-to-four family residential development within the Bank's market area. The Bank typically has focused its construction lending on relatively small projects and has developed and maintains a relationship with a significant number of homebuilders in Plymouth, Norfolk, and Bristol Counties. As of December 31, 2000, $10.9 million, or 24.1%, of total construction loans at such date were for the development of one-to-four family residential lots or the construction of one-to-four family residences. The Bank evaluates the feasibility of construction projects based upon appraisals of the project performed by independent appraisers. In addition, the Bank may obtain architects' or engineers' estimations of the cost of construction. The Bank generally requires the borrower to fund at least 20% of the project costs and generally does not provide for an interest reserve in its non-residential construction loans. The Bank's non-residential construction 8
loans generally do not exceed 80% of the lesser of the appraised value upon completion or the sales price. Land acquisition and development loans generally do not exceed the lesser of 70% of the appraised value (without improvements) or the purchase price. The Bank's loan policy requires that permanent mortgage financing be secured prior to extending any non-residential construction loans. In addition, the Bank generally requires that the units securing its residential construction loans be pre-sold. Loan proceeds are disbursed in stages after on-site inspections of the project indicate that the required work has been performed and that such disbursements are warranted. Construction loans are generally considered to present a higher degree of risk than permanent real estate loans. A borrower's ability to complete construction may be affected by a variety of factors such as adverse changes in interest rates and the borrower's ability to control costs and adhere to time schedules. The latter will depend upon the borrower's management capabilities, and may also be affected by strikes, adverse weather and other conditions beyond the borrower's control. Consumer Loans. The Bank makes loans for a wide variety of personal and consumer needs. Consumer loans primarily consist of installment loans and cash reserve loans. As of December 31, 2000, $403.3 million, or 34.0%, of the Bank's gross loan portfolio, consisted of consumer loans. The Bank's installment loans consist primarily of automobile loans, which amounted to $281.6 million at December 31, 2000. A substantial portion of the Bank's automobile loans are originated indirectly by a network of approximately 120 new and used automobile dealers located within the Bank's market area. Indirect automobile loans accounted for 80% and 88% of the Bank's total installment loan originations during 2000 and 1999, respectively. Although applications for such loans are taken by employees of the dealer, the loans are made pursuant to Rockland's underwriting standards using Rockland's documentation, and all indirect loans must be approved by a Rockland loan officer. In addition to indirect automobile lending, the Bank also originates automobile loans directly. The maximum term for the Bank's automobile loans is 72 months for a new car loan and 66 months with respect to a used car loan. The Bank will lend up to 110% of the purchase price of a new automobile or, with respect to used cars, up to 105% of the lesser of the purchase price or the National Automobile Dealer's Association book value. Loans on new automobiles are generally made without recourse to the dealer. The Bank requires all borrowers to maintain automobile insurance, including full collision, fire and theft, with a maximum allowable deductible and with the Bank listed as loss payee. The majority of the Bank's loans on used automobiles are made without recourse to the dealer. Some purchases from used car dealers are under a repurchase agreement. The dealer is required to pay off the loan (in return for the vehicle) as long as the bank picks up the vehicle and returns it to the dealer within 180 days of the most recent delinquency payment. In addition, in order to ameliorate the adverse effect on interest income caused by prepayments, all dealers are required to maintain a reserve, ranging from 0% to 3% of the outstanding balance of the indirect loans originated by them, which is rebated to the bank on a pro-rata basis in the event of repayment prior to maturity. The Bank's installment loans also include home equity, unsecured loans and loans secured by deposit accounts, loans to purchase motorcycles, recreational vehicles, motor homes, boats, or mobile homes. As of December 31, 2000, installment loans other than automobile loans amounted to $45.6 million. The Bank generally will lend up to 100% of the purchase price of vehicles other than 9
automobiles with terms of up to three years for motorcycles and up to fifteen years for recreational vehicles. Home equity loans may be made as a term loan or under a revolving line of credit secured by a second mortgage on the borrower's residence. The Bank will originate home equity loans in an amount up to 80% of the appraised value or, without appraisal, up to 80% of the tax assessed value, whichever is lower, reduced for any loans outstanding secured by such collateral. As of December 31, 2000, there was $55.0 million in unused commitments under revolving home equity lines of credit. Cash reserve loans are made pursuant to previously approved unsecured cash reserve lines of credit. The rate on these loans is subject to change due to market conditions. As of December 31, 2000, an additional $21.2 million had been committed to but was unused under cash reserve lines of credit. Nonperforming Assets. The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated. December 31, ---------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------- (Dollars in Thousands) Loans past due 90 days or more but still accruing $ 204 $ 316 $1,026 $ 737 $ 516 Loans accounted for on a nonaccrual basis (1) 4,210 3,338 4,330 5,154 3,946 ------ ------ ------ ------ ------ Total non performing loans 4,414 3,654 5,356 5,891 4,462 ------ ------ ------ ------ ------ Other real estate owned -- -- -- 2 271 Total nonperforming assets $4,414 $3,654 $5,356 $5,893 $4,733 ====== ====== ====== ====== ====== Restructured loans $ 657 $ 694 $1,037 $1,400 $1,658 ------ ------ ------ ------ ------ Nonperforming loans as a percent of gross loans 0.37% 0.35% 0.56% 0.69% 0.63% ------ ------ ------ ------ ------ Nonperforming assets as a percent of total assets 0.23% 0.23% 0.34% 0.43% 0.43% ====== ====== ====== ====== ====== (1) Includes $.1 million of restructured, nonaccruing loans at December 31, 1997 and 1996 respectively, which were included in nonaccrual loans as of such dates. There were no restructured, nonaccruing loans at December 31, 1998 and 1999. In 2000 there were $5.2 million of restructured, nonaccruing loans. Gross interest income that would have been recognized for the years ended December 31, 2000 and 1999 if nonperforming loans at the respective dates had been performing in accordance with their original terms approximated $346,000 and $375,000 respectively. The actual amount of interest that was collected on these loans during each of those periods and included in interest income was approximately $21,000 and $50,000, respectively. Through the Controlled Asset Department, the Bank strives to ensure that loans do not become nonperforming. In the case that they do, this department will restore nonperforming assets to performing status or, alternatively, dispose of such assets. On occasion, this effort may require the restructure of loan terms for certain nonperforming 10
loans. At this time, there are no commitments to lend additional funds to debtors whose loans are non-performing. Reserve 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. In 2000 the Bank established a separate "credit quality discount" reserve account that set aside $1.4 million of loan loss reserves which is not included in its existing reserve balance, rather it is recorded as a reduction of the loans acquired from Fleet National Bank and Sovereign Bank. Including this amount, the total reserve available for possible loan losses was $16.9 million at December 31, 2000. Determining an appropriate level of reserve for possible loan losses necessarily involves a high degree of judgment. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 hereof. The following table summarizes changes in the reserve for possible loan losses and other selected statistics for the periods presented. <TABLE> <CAPTION> Year Ending December 31, ------------------------------------------------------------ 2000 1999 1998 1997 1996 (Dollars In Thousands) <S> <C> <C> <C> <C> <C> Average loans, net of unearned discount $1,086,608 $ 991,319 $884,205 $757,877 $657,749 ---------- --------- -------- -------- -------- Reserve for Possible loan losses, beginning of year $ 14,958 $ 13,695 $ 12,674 $ 12,221 $ 12,088 Charged-off loans Commercial 207 415 1,206 1,140 1,252 Real estate - commercial -- -- -- 95 228 Real estate - residential 13 1 241 261 296 Real estate - construction -- -- -- -- -- Consumer - installment 2,078 3,060 2,108 771 430 Consumer - other 278 494 542 639 619 Total charged-off loans 2,576 3,970 4,097 2,906 2,825 ---------- --------- -------- -------- -------- Recoveries on loans previously charged off Commercial 265 522 630 546 573 Real estate - commercial 125 67 258 265 241 Real estate - residential 1 115 2 0 31 Real estate - construction -- -- -- -- -- Consumer - installment 445 603 266 137 171 Consumer - other 7 (1) 2 151 192 Total recoveries 843 1,306 1,158 1,099 1,208 ---------- --------- -------- -------- -------- Net loans charged-off 1,733 2,664 2,939 1,807 1,617 Provision for loan losses 2,268 3,927 3,960 2,260 1,750 ---------- --------- -------- -------- -------- Reserve for possible loan losses, end of period $ 15,493 $ 14,958 $ 13,695 $ 12,674 $ 12,221 ---------- --------- -------- -------- -------- Credit quality discount on acquired loans 1,375 -- -- -- -- ---------- --------- -------- -------- -------- Total reserves available for loan losses, end of year $ 16,868 $ 14,958 $ 13,695 $ 12,674 $ 12,221 Net loans charged-off as a percent of average loans, net of unearned discount 0.16% 0.27% 0.33% 0.24% 0.25% Reserve for possible loan losses as a percent of loans, net of unearned discount 1.31% 1.45% 1.46% 1.53% 1.76% Reserve for possible loan losses as a percent of nonperforming loans 351.00% 409.36% 255.69% 215.14% 273.89% Total reserves available for possible loan losses as a percentage of loans, net of unearned discount (including credit quality discount) 1.42% 1.45% 1.46% 1.53% 1.76% Total reserve for possible loan losses as a percent of nonperforming loans (including credit quality discount) 382.15% 409.36% 255.69% 215.14% 273.89% Net loans charged-off as a percent of reserve for possible loan losses 11.19% 17.81% 21.46% 14.26% 13.23% Recoveries as a percent of charge-offs 32.73% 32.90% 28.26% 37.82% 42.76% </TABLE> 11
The reserve for possible loan losses is allocated to various loan categories as part of the Bank's process for evaluating the adequacy of the reserve for possible loan losses. The following table sets forth-certain information concerning the allocation of the Bank's reserve for possible loan losses by loan categories at December 31, 2000. For information about the percent of loans in each category to total loans, see "Lending Activities - Loan Portfolio Composition and Maturity." <TABLE> <CAPTION> Allowance for Credit Quality Percent of Total Loan Losses Discount Total Loans by Category (Dollars In Thousands) <S> <C> <C> <C> <C> Commercial Loans $3,958 $273 $4,231 3.15% Real Estate Loans 8,913 879 9,792 1.51% Consumer Loans 2,622 223 2,845 0.71% ------- ------ ------- ---- Total Loans $15,493 $1,375 $16,868 1.42% </TABLE> As of December 31, 2000, the reserve for possible loan losses totaled $15.5 million. Based on the processes described above, management believes that the level of the reserve for possible loan losses at December 31, 2000 is adequate. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's reserve for possible loan losses. Federal Reserve regulators most recently examined the Company in the first quarter of 2000 and the Bank was most recently examined by the Federal Deposit Insurance Corporation, ("FDIC") in the third quarter of 2000. No additional provision for possible loan losses was required as a result of these examinations. Investment Activities The Bank's securities portfolio consists of U.S. Treasury and U.S. Government Agency securities, mortgage-backed securities, and debt securities issued by other institutions. Most of these securities are investment grade debt obligations with average maturities of five years and less. Government and government agency securities entail a lesser degree of risk than loans made by the Bank by virtue of the guarantees that back them, require less capital under risk-based capital rules than non-insured or non-guaranteed mortgage loans, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Bank. However, these securities are subject to prepayment risk, which could result in significantly less future income than would have been the case based on the contractual coupon rate and term. The Bank views its securities portfolio as a source of income and, with regard to maturing securities, liquidity. Interest and principal payments generated from securities also provide a source of liquidity to fund loans and meet short-term cash needs. The Bank's securities portfolio is managed in accordance with the Rockland Trust Company Investment Policy adopted by the Board of Directors. The Chief Executive Officer or the Chief Financial Officer may make investments with the approval of one additional member of the Asset/Liability Management Committee, subject to limits on the type, size and quality of all investments, which are specified in the Investment Policy. The Bank's Asset/Liability Management Committee, or its designee, is required to evaluate any proposed purchase from the standpoint of overall diversification of the portfolio. The investment portfolio includes securities which management intends to hold until maturity, securities available for sale and trading assets. This classification of the securities portfolio is required 12
by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain Investments in Debt and Equity Securities," which the Bank adopted effective January 1, 1994. Securities held to maturity as of December 31, 2000 are carried at their amortized cost of $195.4 million and exclude gross unrealized gains of $1.4 million and gross unrealized losses of $8.2 million. A year earlier, securities held to maturity totaled $229.0 million, excluding gross unrealized gains of $0.5 million and gross unrealized losses of $10.9 million. Securities available for sale are carried at fair market value and unrealized gains and losses, net of the related tax effect, are recognized as a separate component of stockholders' equity. The fair market value of securities available for sale at December 31, 2000 totaled $387.5 million, and net unrealized gains totaled $3.0 million. A year earlier, securities available for sale were $201.6 million, with net unrealized losses of $3.8 million. The Bank realized a gain of $106,000 and $34,000 on the sale of available-for-sale securities in 2000 and 1999, respectively. The Bank had investments in marketable equity securities at December 31, 2000 of $479,000 and $486,000 in 1999. The following table sets forth the amortized cost and percentage distribution of securities held to maturity at the dates indicated. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8 hereof. <TABLE> <CAPTION> At December 31, ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------ Amount Percent Amount Percent Amount Percent ------- ------- -------- ------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> U.S. treasury and Government agency Securities 21,712 11.1% $25,996 11.4% $29,197 10.3% Mortgage-backed securities 77,524 39.7% 101,081 44.1% 143,292 50.3% Collateralized mortgage obligations 3,563 1.8% 5,666 2.5.% 17,799 6.2% State. County, and municipal securities 38,284 19.6% 41,984 18.3% 40,365 14.2% Other investment securities 54,333 27.8% 54,316 23.7% 54,291 19.0% ------- ----- -------- ----- -------- ----- 195,416 100.0% $229,043 100.0% $284,944 100.0% ======= ===== ======== ===== ======== ===== </TABLE> The following table sets forth the fair market value and percentage distribution of securities available for sale at the dates indicated. For additional information, see Note 4 to the Consolidated Financial Statements included in Item 8 hereof. <TABLE> <CAPTION> At December 31, ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent ------- ------- -------- ------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> U.S Treasury and U.S Government Agency Securities $45,242 11.7% $8,467 4.2% $9,045 4.6% Mortgage-Backed Securities 265,278 68.5% 121,881 60.5% 137,410 70.4% Collateralized Mortgage Obligations 76,956 19.8% 71,266 35.3% 48,320 24.8% Other Securities 424 2% -------- ----- -------- ----- -------- ----- $387,476 100.0% $201,614 100.0% $195,199 100.0% ======== ===== ======== ===== ======== ===== </TABLE> 13
At December 31, 2000 and 1999, the Bank had no investments in obligations of individual states, counties or municipalities which exceeded 10% of stockholders' equity. In addition, there were no sales of these securities in 2000 or 1999. Sources of Funds Deposits. Deposits obtained through Rockland's branch banking network have traditionally been the principal source of the Bank's funds for use in lending and for other general business purposes. The Bank has built a stable base of in-market core deposits from the residents of and businesses located in Southeastern Massachusetts and Cape Cod. Rockland offers a range of demand deposits, interest checking, money market accounts, savings accounts and time certificates of deposit. Interest rates on deposits are based on factors that include loan demand, deposit maturities, and interest rates offered by competing financial institutions in the Bank's market area. The Bank believes it has been able to attract and maintain satisfactory levels of deposits based on the level of service it provides to its customers, the convenience of its banking locations, and its interest rates that are generally competitive with those of competing financial institutions. As of December 31, 2000, deposits of $1,489.2 million were $407.4 million, or 37.7% higher than the prior year-end. The acquired deposits represented $322.7 million of this improvement at December 31, 2000. Excluding the acquired deposits, deposits increased by $84.7 million, or 7.8%. Newly opened deposit accounts and a strong economy were the primary contributors to this improvement. The Bank has the ability to solicit brokered deposits as an alternative source of funds. On December 31, 2000 and 1999 Rockland had $30 million and $20 million respectively of brokered deposits. Rockland's branch locations are supplemented by the Bank's Trust/24 and debit cards which may be used to conduct various banking transactions at automated teller machines ("ATMs") maintained at each of the Bank's full-service offices and 6 additional locations. The Trust/24 and debit cards also allow customers access to the "NYCE" regional ATM network, as well as the "Cirrus" nationwide ATM network. In addition Rockland has joined the SUM network, which allows access to over 2,500 surcharge-free ATM's throughout New England. Most importantly for our customers, the City of Boston has over 80 ATM locations as part of SUM. These networks provide the Bank's customer's access to their accounts through ATMs located throughout Massachusetts, the United States, and the world. The following table sets forth the average balances of the Bank's deposits for the periods indicated. <TABLE> <CAPTION> 2000 1999 1998 ---------------------------------------------------------------------------------- (Dollars in Thousands) Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- <S> <C> <C> <C> <C> <C> <C> Demand deposits $277,777 22.1% $220,727 20.8% $195,583 19.9% Savings and Interest Checking 315,943 25.1% 280,441 26.5% 266,093 27.1% Money Market and Super Interest Checking accounts 148,469 11.8% 108,415 10.2% 107,956 11.0% Time deposits 514,673 41.0% 450,425 42.5% 411,801 42.0% ---------- ------ ---------- ----- -------- ----- Total $1,256,862 100.00% $1,060,008 100.0% $981,433 100.0% ========== ====== ========== ===== ======== ===== </TABLE> 14
The Bank's simple interest-bearing time certificates of deposit of $100,000 or more totaled $81.9 million at December 31, 2000. The maturity of these certificates are as follows: $72.8 million within three months; $5.1 million 3 to 6 months and $3.9 million 6 through 12 months. Borrowings. Borrowings consist of short-term and intermediate-term obligations. Short-term borrowings consist primarily of federal funds purchased; assets sold under repurchase agreements, and treasury tax and loan notes. The Bank has established two federal funds lines of $20 million. The Bank also obtains funds under repurchase agreements. In a repurchase agreement transaction, the Bank will generally sell a security agreeing to repurchase either the same or a substantially identical security on a specified later date at a price slightly greater than the original sales price. The difference in the sale price and purchase price is the cost of the proceeds. The securities underlying the agreements are delivered to the dealer who arranges the transactions as security for the repurchase obligation. Payments on such borrowings are interest only until the scheduled repurchase date, which generally occurs within a period of 30 days or less. Repurchase agreements represent a non-deposit funding source for the Bank. However, the Bank is subject to the risk that the lender may default at maturity and not return the collateral. In order to minimize this potential risk, the Bank only deals with established investment brokerage firms when entering into these transactions. The Bank has repurchase agreements with five major brokerage firms. Borrowings under these agreements are classified as assets sold under repurchase agreements. At December 31, 2000, the Bank had $19.7 million outstanding under repurchase agreements. The Bank also utilizes customer repurchase agreements as an additional source of funds. The balance outstanding was $51.8 million at December 31, 2000. In July 1994, Rockland became a member of the Federal Home Loan Bank ("FHLB") of Boston. Among the many advantages of this membership, this affiliation provides the Bank with access to approximately $479 million of short-to-medium term borrowing capacity as of December 31, 2000, based on the Bank's assets at that time. At December 31, 2000, the Bank had $191.2 million outstanding in FHLB borrowings with initial maturities ranging from 1 month to 10 years. While the Bank has not traditionally placed significant reliance on borrowings as a source of liquidity, it established the borrowing arrangements described above in order to provide management with greater flexibility in overall funds management. Management believes that the Bank has adequate liquidity available to respond to current and anticipated liquidity demands. See Notes 4 and 7 of the Notes to Consolidated Financial Statements, included in Item 8 hereof. The following table sets forth the Bank's borrowings at the dates indicated. At December 31, ------------------------------------ 2000 1999 1998 ------------------------------------ (in Thousands) Federal funds purchased $ 4,540 $ 6,170 $ 5,025 Assets sold under repurchase 71,485 87,196 77,351 agreements 7,794 9,877 471 Treasury tax and loan notes 191,224 256,224 313,724 -------- -------- -------- Federal Home Loan Bank borrowings $275,043 $359,467 $396,571 ======== ======== ======== 15
The following table presents certain information regarding the Bank's short-term borrowings at the dates and for the periods indicated. <TABLE> <CAPTION> At or For the Year Ended December 31, --------------------------------------- 2000 1999 1998 --------------------------------------- (Dollars in Thousands) <S> <C> <C> <C> Balance outstanding at end of year $ 83,819 $103,243 $82,847 Average daily balance outstanding 106,973 88,215 66,403 Maximum balance outstanding at any month-end 140,162 103,248 89,741 Weighted average interest rate for the year 5.26% 4.83% 5.39% Weighted average interest rate at end of year 5.15% 4.86% 4.72% </TABLE> Asset Management and Trust Services Rockland's Asset Management and Trust Services ("AM&TS") Division offers a variety of services, including assistance with investments, estate planning, custody services, employee benefit plans, and tax planning, which are provided primarily to individuals and small businesses located in Southeastern Massachusetts. In addition, the Bank acts as executor or administrator of estates and as trustee for various types of trusts. As of December 31, 2000, the AM&TS Division maintained approximately 1,500 trust/fiduciary accounts, with an aggregate market value of over $490.0 million on that date. Income from the AM&TS Division amounted to $4.5 million and $4.1 million, for 2000 and 1999, respectively. Accounts maintained by the AM&TS Division consist of "managed" and "non-managed" accounts. "Managed accounts" are those accounts for which Rockland has responsibility for administration and investment management and/or investment advice. "Non-managed" accounts are those accounts for which Rockland acts as a custodian. The Bank receives fees dependent upon the level and type of service(s) provided. The administration of trust and fiduciary accounts is monitored by the Trust Committee of the Bank's Board of Directors. The Trust Committee has delegated administrative responsibilities to two committees - one for investments and one for administration - comprised of Trust and Financial Services Division officers who meet not less than monthly. On March 1, 1999, the Bank entered into a two year agreement with Liberty Securities Corporation for the sale of mutual fund shares, unit investment trust shares, interests in direct participation programs, similar non-insurance investment products, and general securities brokerage services. Liberty Securities Corporation has placed their Registered Representatives on-site to sell these services to our customer base. Paid insurance fees for year 2000 were $293,030, paid security fees were $126,963 and total commissions earned by the bank 2000 were $419,993. 16
Forward-Looking Information The preceding Management's Discussion and Analysis and Notes to Consolidated Financial Statements of this Form 10-K may 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. Regulation The Company - General. The Company, as a federally registered bank holding company, is subject to regulation and supervision by the Federal Reserve. The Company is required to file an annual report of its operations with, and is subject to examination by, the Federal Reserve. Financial Services Modernization-Gramm-Leach-Bliley Act of 1999. On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act of 1999. The Act broadens the scope of the financial services that banks (and their affiliates) may offer to their customers. Among other things, the Act provides that a bank holding company meeting certain specified requirements may qualify as a financial holding company and provide a wider variety of services that are financial in nature, including, among other things, securities underwriting and dealing, merchant banking and insurance activities. The Act also makes certain changes in the regulatory framework for bank holding companies and their activities and provides consumers with new privacy protections with respect to the use of their nonpublic personal information by financial institutions. BHCA (The Bank Holding Company Act) - Activities and Other Limitations. The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve. No approval under the BHCA is required, however, for a bank holding company already owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank. The BHCA also prohibits a bank holding company from, with certain exceptions, acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve is authorized to 17
approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determination, the Federal Reserve is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has, by regulation, determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include, but are not limited to, operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing certain securities brokerage services; acting as an investment or financial adviser; acting as an insurance agent for certain types of credit-related insurance; engaging in insurance underwriting under certain limited circumstances; leasing personal property on a full-payout, nonoperating basis; providing tax planning and preparation services; operating a collection agency and a credit bureau; providing consumer financial counseling; and providing certain courier services. The Federal Reserve also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and, except under limited circumstances, underwriting of life insurance not related to credit transactions, are not closely related to banking and are not a proper incident thereto. The Gramm-Leach-Bliley Act of 1999, discussed above, permits financial holding companies (a new type of bank holding company) to engage in a broader range of financial activities than traditional bank holding companies, subject to the requirements of the Act. Interstate Banking Legislation. On September 24, 1994, President Clinton signed, and as of September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became effective. The Interstate Act facilitates interstate branching by permitting (i) bank holding companies that are adequately capitalized and adequately managed to acquire banks outside their home states regardless of whether such acquisitions are permissible under the laws of the target bank's home state; (ii) commencing June 1, 1997, interstate bank mergers regardless of state law, unless a state specifically "opts out" or "opts in" after September 29, 1994 and prior to June 1, 1997; (iii) banks to establish new branches on an interstate basis provided the state of the new branch specifically permits such activity; (iv) foreign banks to establish, with regulatory approval, foreign branches outside their home state to the same extent as if they were national or state banks; and (v) affiliates of banks in different states to receive deposits, renew time deposits, close loans, service loans, and receive loan payments on loans and other obligations as agents for each other. Massachusetts has "opted in" to the interstate branching provisions of the Interstate Act. See discussion under "Massachusetts Law" elsewhere in this section. In October, 1996, the banking regulators of the six New England states signed a New England Cooperative Agreement facilitating and addressing the regulation of state banks with multistate operations in New England. Capital Requirements. The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve's capital adequacy guidelines which generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier 1, or core, capital and up to one-half of that amount consisting of Tier 2, or supplementary, capital. Tier 1 capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock 18
(subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other intangible assets required to be deducted from capital. Tier 2 capital generally consists of perpetual preferred stock which is not eligible to be included as Tier 1 capital; hybrid capital instruments such as perpetual debt and mandatory convertible debt securities, and term subordinated debt and intermediate-term preferred stock; and, subject to limitations, the reserve for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the majority of assets which are typically held by a bank holding company, including commercial real estate loans, commercial loans and consumer loans. Single family residential first mortgage loans which are not 90 days or more past due or nonperforming and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighting system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans and certain multi-family housing loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve requires bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets or investments that the Federal Reserve determines should be deducted from Tier 1 capital. The Federal Reserve has announced that the 3.0% Tier 1 leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies (including the Company) are expected to maintain Tier 1 leverage capital ratios of at least 4.0% to 5.0% or more, depending on their overall condition. The Company currently is in compliance with the above-described regulatory capital requirements. At December 31, 2000, the Company had Tier 1 capital and total capital equal to 8.50% and 10.97% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 5.86% of total assets. As of such date, Rockland complied with the applicable federal regulatory capital requirements, with Tier 1 capital and total capital equal to 9.51% and 10.70% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 6.57% of total assets. Commitments to Affiliated Institutions. Under Federal Reserve policy, the Company is expected to act as a source of financial strength to Rockland and to commit resources to support Rockland in circumstances when it might not do so absent such policy. Limitations on Acquisitions of Common Stock. The federal Change in Bank Control Act ("CBCA") prohibits a person or group of persons from acquiring "control" of a bank holding company or bank unless the appropriate federal bank regulator has been given 60 days prior written notice of such proposed acquisition and within that time period such regulator has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. An acquisition may be made prior to expiration of the disapproval period if such regulator issues written notice of its intent not to disapprove the action. The acquisition of 25% or more of any class of voting securities constitutes the acquisition of control under the CBCA. In addition, under a rebuttable presumption established under the CBCA regulations, the acquisition of 10% or more of a class of voting stock of a bank holding company or a FDIC-insured bank, with a class of securities 19
registered under or subject to the requirements of Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any "company" would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the outstanding common stock of, or such lesser number of shares as constitute control over, the Company. Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company. Massachusetts Law. Massachusetts law requires all Massachusetts bank holding companies (those companies which control, own, or have the power to vote 25% or more of the stock of each of two or more Massachusetts based banks) to receive prior written approval of the Massachusetts Board of Bank Incorporation to, among other things, acquire all or substantially all of the assets of a banking institution located within the Commonwealth of Massachusetts or to merge or consolidate with a Massachusetts bank holding company. The Company owns no voting stock in any banking institution other than Rockland. In addition, prior approval of the Board of Bank Incorporation is required before any Massachusetts bank holding company owning 25% or more of the stock of two banking institutions may acquire additional voting stock in those banking institutions equal to 5% or more. Generally, no approval to acquire a banking institution, acquire additional shares in an institution, acquire substantially all the assets of a banking institution or merge or consolidate with another bank holding company may be given if the bank being acquired has been in existence for a period less than 3 years or, as a result, the bank holding company would control, in excess of 30%, of the total deposits of all state and federally chartered banks in Massachusetts, unless waived by the Commissioner. Similarly, no bank which is not a member of the Federal Reserve can merge or consolidate with any other insured depository institution or, either directly or indirectly, acquire the assets of or assume the liability to pay any deposits made in any other depository institution except with the prior written approval of the FDIC. As noted above, Massachusetts "opted in" to the Interstate Act in 1996. As such, any out-of-state bank may engage, with the written approval of the Commissioner, in a merger transaction with a Massachusetts bank to the fullest extent permitted by the Interstate Act, provided that the laws of the home state of such out-of-state bank permit, under conditions no more restrictive than those imposed by Massachusetts, interstate merger transactions with Massachusetts banks, and provided further that the Massachusetts bank has been in existence for at least three years and the resulting bank would not control in excess of 30% of the total deposits of all state and federally chartered depository institutions in Massachusetts. The Commissioner may waive the latter two conditions, in his discretion. Such a merger transaction may also involve the acquisition of one or more branches of a Massachusetts bank and not the entire institution. With the prior written approval of the Commissioner, Massachusetts also permits the establishment of de novo branches in Massachusetts to the fullest extent permitted by the Interstate Act, provided the laws of the home state of such out-of-state bank expressly authorize, under conditions no more restrictive than those of Massachusetts, Massachusetts banks to establish and operate de novo branches in such state. With the prior written approval of the Massachusetts Board of Bank Incorporation, a bank holding company (as defined under the BHCA) whose principal operations are located in a state other than Massachusetts may acquire more than 5% of the voting stock of a Massachusetts bank or may merge with a Massachusetts bank holding company or a Massachusetts bank, provided that 20
Massachusetts bank has been in existence for at least three years and the Massachusetts Board of Bank Incorporation is satisfied that the transaction will not result in the out-of-state bank holding company holding or controlling, more than 30% of the deposits of all state and federally chartered depository institutions in Massachusetts or such condition is affirmatively waived by the Board. Subsidiary Bank - General. Rockland is subject to extensive regulation and examination by the Commissioner and by the FDIC, which insures its deposits to the maximum extent permitted by law, and to certain requirements established by the Federal Reserve. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing Rockland generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. Deposit Insurance Premiums. Rockland currently pays deposit insurance premiums to the FDIC based on a single, uniform assessment rate established by the FDIC for all BIF-member institutions. The assessment rates range from 0% to 0.27%. Under the FDIC's risk-based assessment system, institutions are assigned to one of three capital groups which assignment is based solely on the level of an institution's capital - "well capitalized, " "adequately capitalized," and "undercapitalized" - which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging from 0% for well capitalized, healthy institutions to .27% for undercapitalized institutions with substantial supervisory concerns. Rockland is presently "well capitalized" and as a result, Rockland was not subject to any FDIC premium obligation as of January 1, 2001. The FDIC Board of Directors voted in 1996 to collect an assessment against BIF assessable deposits to be paid to the Financing Corporation (FICO). The actual assessment rates are approximately 8.28 basis points, on an annual basis, for BIF assessable deposits and SAIF assessable deposits. Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks, which, like Rockland, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the Federal Reserve regarding bank holding companies, as described above. The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage capital to total assets requirement for the most highly-rated state-chartered, nonmember banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, nonmember banks, which effectively will increase the minimum Tier 1 leverage capital ratio for such banks to 4.0% or 5.0% or more. Under the FDIC's regulations, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general which are considered strong banking organizations, rated composite 1 under the Uniform Financial Institutions Rating System. A bank having less than the minimum leverage capital requirement shall, within 45 days of the date as of which it receives notice or is deemed to have notice that it is undercapitalized, submit to its FDIC 21
regional director for review and approval a written capital restoration plan describing the means and timing by which the bank shall achieve its minimum leverage capital requirement. A bank which fails to file such plan with the FDIC is deemed to be operating in an unsafe and unsound manner, and could subject the bank to a cease and desist order from the FDIC. The FDIC's regulations also provide that any insured depository institution with a ratio of Tier 1 capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement proceeding thereunder solely on account of its capital ratios if it has entered into and is in compliance with a written agreement with the FDIC to increase its Tier 1 leverage capital ratio to such level as the FDIC deems appropriate and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The FDIC capital regulation also provides for, among other things, the issuance by the FDIC or its designee(s) of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital to restore its capital to the minimum leverage capital requirement within a specified time period. Such directive is enforceable in the same manner as a final cease and desist order. Pursuant to the requirements of the FDIA, each federal banking agency has adopted or proposed regulations relating to its review of and revisions to its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk and the risks of non-traditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. Prompt Corrective Action. Under Section 38 of the FDIA, as amended by the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), each federal banking agency has broad powers to implement a system of prompt corrective action to resolve problems of institutions which it regulates which are not adequately capitalized. Under FDICIA, a bank shall be deemed to be (i) "well capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, a Tier 1 leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8.0%, or a Tier 1 risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capital ratio of less than 4.0% (3.0% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0%, or a Tier 1 risk-based capital ratio that is less than 3.0%, or a Tier 1 leverage capital ratio that is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. FDICIA also specifies circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 2000, Rockland was deemed a "well-capitalized institution" for this purpose. Brokered Deposits. FDICIA restricts the use of brokered deposits by certain depository institutions. Well capitalized insured depository institutions may solicit and accept, renew or roll over any brokered deposit without restriction. Adequately capitalized insured depository institutions may not accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver of 22
this prohibition by the FDIC. Undercapitalized insured depository institutions may not (i) accept, renew or roll over any brokered deposit or (ii) solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution's normal market area or in the market area in which such deposits are being solicited. At December 31, 2000, the Bank's funding sources included brokered deposits of $30.0 million. Safety and Soundness. In August, 1995, the FDIC adopted regulations pursuant to FDICIA relating to operational and managerial safety and soundness standards for financial institutions relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees, and benefits. The standards are to serve as guidelines for institutions to help identify potential safety and soundness concerns. If an institution fails to meet any safety and soundness standard, the FDIC may require it to submit a written safety and soundness compliance plan within thirty (30) days following a request therefor, and if it fails to do so or fails to correct safety and soundness deficiencies, the FDIC may take administrative enforcement action against the institution, including assessing civil money penalties, issuing supervisory orders and other available remedies. Community Reinvestment Act ("CRA") Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of Massachusetts's law, regulatory authorities review the performance of the Company and Rockland in meeting the credit needs of the communities served by Rockland. The applicable regulatory authorities consider compliance with this law in connection with applications for, among other things, approval of branches, branch relocations, engaging in certain new financial activities under Gramm-Leach-Bliley Act of 1999, and acquisitions of banks and bank holding companies. Currently, the FDIC's CRA rating of Rockland is outstanding. The Massachusetts Commissioner currently has given Rockland a CRA rating of outstanding. Miscellaneous. Rockland is subject to certain restrictions on loans to the Company, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company. Rockland also is subject to certain restrictions on most types of transactions with the Company, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms. In addition under state law, there are certain conditions for and restrictions on the distribution of dividends to the Company by Rockland. In addition to the laws and regulations discussed above, regulations have been promulgated under FDICIA which increase the requirements for independent audits, set standards for real estate lending and increase lending restrictions with respect to bank officers and directors. FDICIA also contains provisions which amend various consumer banking laws, limit the ability of "undercapitalized banks" to borrow from the Federal Reserve Board's discount window, and require regulators to perform annual on-site bank examinations. Regulatory Enforcement Authority. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") included substantial enhancement to the enforcement powers available to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound 23
practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. FIRREA significantly increased the amount of and grounds for civil money penalties and requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies. The foregoing references to laws and regulations which are applicable to the Company and Rockland are brief summaries thereof which do not purport to be complete and which are qualified in their entirety by reference to such laws and regulations. Federal Taxation. The Company and its subsidiaries are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code (the "Code"). The Company is at a 35% incremental rate. The Company and its subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income. State Taxation. The Commonwealth of Massachusetts imposes a tax on the Massachusetts net income of banks at a rate of 10.5% as of December 31, 2000. In addition, the Company is subject to an excise tax at the rate of .26% of its net worth. The Bank's security corporation subsidiaries are, for state tax purposes, taxed at a rate of 1.32% of its gross income. Massachusetts net income for banks is generally similar to federal taxable income except deductions with respect to the following items are generally not allowed: (i) dividends received from non-affiliates, (ii) losses sustained in other taxable years, and (iii) income or franchise taxes imposed by other states. For additional information, see Note 9 of the Notes to Consolidated Financial Statements included in Item 8 hereof. Item 2. Properties At February 28, 2001, the Bank conducted its business from its headquarters and main office at 288 Union Street, Rockland, Massachusetts, and 50 other branch offices located in Southeastern Massachusetts in Plymouth County, Barnstable County, Bristol County and Norfolk County. In addition to its main office, the Bank owns eighteen of its branch offices and leases the remaining 32 offices. Of the branch offices which are leased by the Bank, 5 have remaining lease terms, including options renewable at the Bank's option, of five years or less, 12 have remaining lease terms of greater than five years and less than 10 years, and 15 have a remaining lease term of 10 years or more. The Bank's aggregate rental expense under such leases was $2.1 million in 2000. Certain of the Bank's branch offices are leased from companies with whom directors of the Company are affiliated. The Bank leases space for its AM&TS Division in a building in Hanover, Massachusetts developed by a joint venture consisting of the Bank and A. W. Perry, Inc., and in Attleboro. It also leases office space in two buildings in Rockland, Massachusetts for administrative purposes as well as space in four additional facilities used as lending centers. In the fourth quarter of 2000 the Bank purchased a property in Plymouth, Massachusetts to serve as the Bank's new Data Center. At December 31, 2000, the net book value of the property and leasehold improvements of the offices of the Bank amounted to $24.3 million. The Bank's properties that are not leased are owned free and clear of any mortgages. The Bank believes that all of its properties are well maintained and are suitable for their respective present needs and 24
operations. For additional information regarding the Bank's lease obligations, see Note 13 to the Consolidated Financial Statements, included in Item 8 hereof. Item 3. Legal Proceedings The Company is involved in routine legal proceedings that arise in the ordinary course of business. Management has reviewed these actions with legal counsel and has taken into consideration the view of counsel as to the outcome of the litigation. In the opinion of management, final disposition of these lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operation. Item 4. Submission of Matters to a Vote of Security Holders Not applicable PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information required herein is incorporated by reference from the Company's 2000 Annual Report to Stockholders ("Annual Report"), which is included herein as Exhibit 13. The Registrant did not sell any unregistered equity securities during the year-ended December 31, 2000. Item 6. Selected Financial Data The information required herein is incorporated by reference from the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required herein is incorporated by reference from the Annual Report. Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required herein are incorporated by reference from the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 25
PART III Item 10. Directors and Executive Officers of the Registrant The information required herein is incorporated by reference from the Company's definitive proxy statement (the "Proxy Statement") relating to its April 12, 2001, Annual Meeting of Stockholders filed with the Commission on March 9, 2001. Item 11. Executive Compensation The information required herein is incorporated by reference from the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required herein is incorporated by reference from the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required herein is incorporated by reference from the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) The following financial statements are incorporated herein by reference from the Annual Report Report of Independent Public Accountants Consolidated balance sheets as of December 31, 2000 and 1999. Consolidated statements of income for each of the years in the three-year period ended December 31, 2000 Consolidated statements of stockholder's equity for each of the years in the three-year period ended December 31, 2000 Consolidated statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2000 26
Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2000 Notes to Consolidated Financial Statements (a)(2) There are no financial statement schedules filed herewith. All information required by financial statement schedules is disclosed in Notes to Consolidated Financial Statements or is not applicable to the Company. (a)(3) The following exhibits are filed as part of this report. EXHIBIT INDEX No. Exhibit Footnote --- ------- -------- 3.(i) Restated Articles of Organization, as (6) amended to date 3.(ii) Bylaws of the Company, as amended (1) to date 4.1 Specimen Common Stock Certificate (5) 4.2 Specimen Preferred Stock Purchase (2) Rights Certificate 4.3 Amended and Restated Independent (7) Bank Corp. 1987 Incentive Stock Option Plan ("Stock Option Plan"). (Management contract under Item 601(10)(iii)(A). 4.4 Independent Bank Corp. 1996 (9) Non-Employee Directors' Stock Option Plan (Management contract under Item 901(10)(iii)(A)). 4.5 Independent Bank Corp. 1997 (10) Employee Stock Option Plan (Management contract under Item 601 (10)(iii)(A)). 4.6 Stockholders Rights Agreement, dated (2) January 24, 1991, between the Company and Rockland, as Rights Agent 4.7 Renewal Rights agreement noted as of (10) 27
September 14, 2000 between the Company and Rockland as Rights Agent (Exhibit to form 8-K filed on October 23,2000). 10.1 Amendment No. 1 to Third Amended and (8) Restated Employment Agreement between the Company, Rockland and Douglas H. Philipsen, dated June 25, 1997 ("Philipsen Employment Agreement"). (Management contract under Item 601(10)(iii)(A)). 10.2 Amendment No. 1 to Second Amended and (8) Restated Employment Agreement between Rockland Trust Company and Richard F. Driscoll, dated January 19, 1996 (the "Driscoll Agreement"). Employment Agreements between Rockland and Edward H.Seksay, Ferdinand T. Kelley, Denis Sheahan, and Raymond G. Fuerschbach are substantially similar to the Driscoll agreement.(Management contract under Item 601(10)(iii)(A)). 10.3 Independent Bank Corp. Deferred Compensation program for Directors (Restated as amended as of December 1, 2000). A copy of which is attached hereto. 10.4 Master Securities Repurchase (3) Agreement 10.5 Purchase and Assumption Agreement, (10) dated as of 9/27/99, between Rockland Trust Company and Fleet Financial Group, Inc. (Exhibit to form 8-K filed on 10/1/99.) 13 Annual Report to Stockholders 21 Subsidiaries of the Registrant (4) 23 Consent of Independent Public Accountants 28
27 Financial Data Schedule (Footnotes on next page) 29
Footnotes: (1) On September 14, 2000 Section 2 of the Company's By-Laws were amended so as to require an agreement of at least two-thirds (rather than a majority) of Shareholders to call a special shareholders meeting. A copy of the revised By- Laws is attached. (2) Exhibit is incorporated by reference to the Form 8-A Registration Statement (No. 0-19264) filed by the Company. (3) Exhibit is incorporated by reference to the Form S-1 Registration Statement (No. 33-52216) filed by the Company. (4) Exhibit is incorporated by reference to the Form S-3 Registration Statement (No. 33-89835) filed by the Company. (5) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31,1992. (6) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1994. (8) Incorporated by reference from the Company's report on Form 10-K for the year ended December 31, 1998. (9) Incorporated by reference from the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders filed with the Commission on March 19, 1996. (10) Incorporated by reference from the Company's definitive Proxy Statement for the 1997 Annual Meeting of Stockholders filed with the Commission on March 20, 1997. (b) Two reports on Form 8-K were filed by the Company in 2000; on August 18 related to the Companys August 4, 2000 acquisition of twelve bank branches from Fleet National Bank and the acquisition of four additional bank branches from Sovereign Bank; and, on October 23 related to a Renewal Rights Agreement adopted by the Company's Board of Directors on September 14, 2000. (c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index. (d) All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes. 30
SIGNATURES Pursuant to the requirements of Section 13 or 8(d) 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. /s/ Douglas H. Philipsen ---------------------------- Date: March 8, 2001 Douglas H. Philipsen, Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby makes, constitutes and appoints Douglas H. Philipsen and Denis K. Sheahan and each of them acting individually, his true and lawful attorneys, with full power to sign for such person and in such person's name and capacity indicated below any and all amendments to this Form 10-K, hereby ratifying and confirming such person's signature as it may be signed by said attorneys to any and all amendments. /s/ Richard S. Anderson - ---------------------------- Date: March 8, 2001 Richard S. Anderson Director /s/ W. Paul Clark - ---------------------------- Date: March 8, 2001 W. Paul Clark Director /s/ Robert L. Cushing - ---------------------------- Date: March 8, 2001 Robert L. Cushing Director 31
/s/ Alfred L. Donovan - ---------------------------- Date: March 8, 2001 Alfred L. Donovan Director /s/ Benjamin A. Gilmore, II - ---------------------------- Date: March 8, 2001 Benjamin A. Gilmore, II Director /s/ E. Winthrop Hall - ---------------------------- Date: March 8, 2001 E. Winthrop Hall Director /s/ Kevin J. Jones - ---------------------------- Date: March 8, 2001 Kevin J. Jones Director /s/ Lawrence M. Levinson - ---------------------------- Date: March 8, 2001 Lawrence M. Levinson Director /s/ Richard H. Sgarzi - ---------------------------- Date: March 8, 2001 Richard H. Sgarzi Director /s/ William J. Spence - ---------------------------- Date: March 8, 2001 William J. Spence Director /s/ John H. Spurr, Jr. - ---------------------------- Date: March 8, 2001 John H. Spurr, Jr. Director /s/ Robert D. Sullivan - ---------------------------- Date: March 8, 2001 Robert D. Sullivan Director /s/ Brian S. Tedeschi - ---------------------------- Date: March 8, 2001 Brian S. Tedeschi Director 32
/s/ Thomas J. Teuten - ---------------------------- Date: March 8, 2001 Thomas J. Teuten Director /s/ Denis K. Sheahan - ---------------------------- Date: March 8, 2001 Denis K. Sheahan Chief Financial Officer and Treasurer (principal financial and accounting officer) 33