Independent Bank Corp. - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

288 Union Street, Rockland, Massachusetts 02370
(Address of principal executive offices, including zip code)

(781) 878-6100
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ    No o

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

Large Accelerated Filer o    Accelerated Filer þ    Non-accelerated Filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

     As of May 1, 2007, there were 14,197,943 shares of the issuer’s common stock outstanding, par value $0.01 per share.

 

 

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

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited — Dollars in Thousands, Except Share and Per Share Data)

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

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

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

     Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland” or the “Bank”), a Massachusetts trust company chartered in 1907. The Company is also the sponsor of Delaware statutory trusts named Independent Capital Trust III (“Trust III”), Independent Capital Trust IV (“Trust IV”), and Independent Capital Trust V (“Trust V”), each of which were formed to issue trust preferred securities.

     The proceeds which the Company derived from Trust V were used on December 31, 2006 to redeem all of the outstanding trust preferred securities of Trust III, which has since been dissolved. The Company also intends to use the proceeds derived from Trust V to redeem all of the outstanding trust preferred securities of Trust IV when they are first callable on April 30, 2007. Trust III, Trust IV, and Trust V are not included in the Company’s consolidated financial statements.

     As of March 31, 2007 the Bank had the following corporate subsidiaries, all of which were wholly-owned by the Bank and were included in the Company’s consolidated financial statements:

     All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been

included. Operating results for the quarter ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007 or any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.

     On February 15, 2007 the Company awarded options to acquire 133,000 shares of the Company’s common stock from the 2005 Employee Stock Plan to certain officers of the Company and/or the Bank. The expected volatility, expected life, expected dividend yield, and expected risk free interest rate for this grant to determine their fair value were determined on February 15, 2007 and were 30%, 6.5 years, 1.95%, and 4.68%, respectively. The options have been determined to have a fair value of $10.51. There were no restricted stock awards granted during the first quarter of 2007.

     There were no stock options or restricted stock awards granted during the first quarter of 2006.

     FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” In June 2006, the FASB issued FIN 48, an interpretation of SFAS No. 109, “Accounting for Income Taxes,” in order to add clarity to the accounting for uncertainty in income taxes recognized in a Company’s financial statements. The interpretation requires that only tax positions that are more likely than not to be sustained upon a tax examination are to be recognized in a Company’s financial statements to the extent that the benefit has a greater than 50% likelihood of being recognized. The differences that arise between the amounts recognized in the financial statements and the amounts recognized in the tax return will lead to an increase or decrease in current taxes, an increase or decrease to the deferred tax asset or deferred tax liability, respectively, or both. FIN 48 is effective for fiscal years beginning after December 15, 2006 with early application encouraged if interim financial statements have not yet been issued. Upon the adoption of FIN 48 the Company recognized a $177,000 decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007, balance of retained earnings.

     SFAS No. 157 (“SFAS 157”), “Fair Value Measurements” In September 2006, the FASB issued SFAS 157. SFAS 157 was issued to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities. The effective date is for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

The Company is currently evaluating if the adoption of SFAS 157 will have a material impact on the Company’s financial position or results of operations.

     SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities” In February 2007, the FASB issued SFAS 159. SFAS 159 allows entities to choose to measure financial instruments and certain other items at fair value. By doing so, companies can mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting. The fair value option can be applied on an instrument by instrument basis (with some exceptions), is irrevocable unless a new election date occurs, and is applied only to entire instruments and not to portions of instruments. The effective date is as of the beginning of the first fiscal year beginning after November, 15, 2007. Early adoption is permissible as of the beginning of the fiscal year that begins before November 17, 2007 provided that SFAS No. 157, Fair Value Measurements, is adopted as well. The Company plans to adopt SFAS 159 as of January 1, 2008. The Company has not yet determined the impact of the adoption of SFAS 159 to the Company’s statement of financial position or results of operations.

     Emerging Issues Task Force (“EITF”) 06-10 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements”In March 2007, the FASB ratified the consensus reached by the EITF on EITF 06-10. EITF 06-10 will require employers to recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement if the employer remains subject to the risks or rewards associated with the underlying insurance contract (in the postretirement period) that collateralizes the employer’s asset. Additionally, an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement by assessing what future cash flows the employer is entitled to, if any, as well as the employee’s obligation and ability to repay the employer. The employer’s asset should be limited to the amount of the cash surrender value of the insurance policy unless the arrangement requires the employee (or retiree) to repay the employer irrespective of the amount of the cash surrender value of the insurance policy (and assuming the employee (or retiree) is an adequate credit risk), then the employer should recognize the value of the loan (including accrued interest, if applicable). EITF 06-10 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. Entities should recognize the effects of applying EITF 06-10 through either a change in accounting principle through a cumulative-effect adjustment to retained earnings in the statement of financial position as of the beginning of the year of adoption or through a change in accounting principle through retrospective application to all prior periods. The Company has not yet determined the impact of EITF 06-10 to the Company’s consolidated financial statements or results of operations.

     Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding before any dilution during the period. Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options) were issued during the period, computed using the treasury stock method.

     Earnings per share consisted of the following components for the three months ended March 31, 2007 and 2006:

     For the three months ended March 31, 2007, there were 221,600 options to purchase common stock and no shares of restricted stock excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three months ended March 31, 2006, there were 313,315 options to purchase common stock excluded from the calculation of diluted earnings per share because they were anti-dilutive. There were no restricted stock awards outstanding during the three months ended March 31, 2006.

     On January 19, 2006, the Company’s Board of Directors approved a common stock repurchase program. Under the program, the Company was authorized to repurchase up to 800,000 shares, or approximately 5% of the Company’s outstanding common stock. During the quarter ended September 30, 2006, the Company completed its repurchase plan with a total of 800,000 shares of common stock repurchased at a weighted average share price of $31.04.

     On December 14, 2006, the Company’s Board of Directors approved another common stock repurchase program. Under the program, which was effective immediately, the Company is authorized to repurchase up to 1,000,000 shares, or approximately 7% of the Company’s outstanding common stock. The Company placed no deadline on the repurchase program, but expects to make open market or privately negotiated purchases from time to time. The timing and amount of stock repurchases will depend upon market conditions, securities law limitations, and other corporate considerations. The repurchase program may be modified, suspended, or terminated by the Board of Directors at any time. During the quarter ended March 31, 2007, the Company repurchased 411,847 shares of common stock repurchased at a weighted average share price of $32.45.

     The following table illustrates the status of the post-retirement benefit plan and supplemental executive retirement plans (“SERPs”) as of March 31, for the periods presented:

     Included in the SERP net periodic benefit cost above is an additional $60,000 accrued for executive early retirement costs.

     The Company previously disclosed in its financial statements for the fiscal year ended December 31, 2006 that it expected to contribute $59,000 to its post retirement benefit plan and $113,000 to its SERPs in 2007 and presently anticipates making these contributions. For the three months ended March 31, 2007, $11,000 and $32,000 of contributions have been made to the post retirement benefit plan and the SERPs, respectively.

     Not included in the above summary are the components of net periodic benefit cost for the noncontributory defined benefit pension plan administered by Pentegra (“the Fund”). The Fund does not segregate the assets or liabilities of all participating employers and, accordingly, disclosure of accumulated vested and non-vested benefits is not possible. The pension plan year is July 1st through June 30th. Contributions for the 2006-2007 plan year were all paid in 2005. It has not yet been determined what pension expense is expected to be related to the 2007-2008 plan year. $354,000 of pension expense has been recognized during the three months ended March 31, 2007 for the 2006-2007 plan year.

     Both wholesale and retail repurchase agreements are collateralized by mortgage-backed securities and U.S. Government enterprises. At March 31, 2007, the Company had $25.0 million securities of repurchase agreements outstanding with third party brokers and $83.7 million of customer repurchase agreements outstanding. The related securities are included in the securities available for sale portfolio.

     Information on the Company’s comprehensive income, presented net of taxes, is set forth below for the three months ended March 31, 2007 and 2006.

     The Company adopted FASB Interpretation No. 48 (“FIN No. 48), “Accounting for Uncertainty in Income Taxes” on January 1, 2007. As a result of the implementation of FIN No. 48, the Company recognized a $177,000 decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007, balance of retained earnings.

     At January 1, 2007, after implementation of FIN No. 48, the Company had unrecognized tax benefits of approximately $760,000 largely related to certain deductions of interest expense. All of which if recognized would be recorded as a component of income tax expense therefore affecting the effective tax rate.

     The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in the state of Massachusetts and various other states as required. The Company is subject to U.S. federal, state and local income tax examinations by tax authorities for the years 2003 forward.

     Upon filing the 2006 returns in September of 2007 the income tax returns for 2003 will no longer be subject to income tax examinations and therefore the related uncertainties in income taxes will be realized.

     The Company recognizes interest accrued and penalties related to unrecognized tax benefits as income taxes. As of the adoption date of FIN No. 48, the Company had approximately $79,000 accrued for the payment of potential interest and penalties.

     The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission.

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

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

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

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

     The Company does not intend to update the Company’s forward-looking information and statements, whether written or oral, to reflect change. All forward-looking statements attributable to the Company are expressly qualified by these cautionary statements.

     The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans, deposits, mortgage banking, and investment management activities,

as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes, and the relative levels of interest rates and economic activity.

     The first quarter financial results and balance sheet composition reflect a continuation of management’s strategy to alter the overall composition of the Company’s earning assets in order to enhance long term growth prospects. The Company’s earnings per share on a diluted basis and net income for the first quarter of 2007 decreased when compared to the same period in 2006. Earnings per share on a diluted basis were $0.45 for the first quarter of 2007, down $0.06, or 11.8%, as compared to the same period in 2006. Net income for the quarter was $6.6 million, a decrease of 16.2% from the $7.9 million reported for the quarter ended March 31, 2006.

     The Company’s return on average assets, return on average equity and net interest margin were 0.96%, 11.73% and 3.84%, respectively, for the three month period ending March 31, 2007. The Company’s return on average assets, return on average equity and net interest margin were 1.07%, 13.74% and 3.88%, respectively, for the three month period ending March 31, 2006.

     Below is a graph showing the historical U.S. Treasury yield curve for the past four years for the period ending March 31. As the graph illustrates, the shape of the yield curve has changed dramatically over the past four years from a normal yield curve, to a flat yield curve, and then to the current inverted yield curve.

     “A yield curve is a graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates.” ¹ “A flat yield curve is one in which there is little difference between short-term and long-term rates for bonds of the same credit quality. When short- and long-term bonds are offering equivalent yields, there is usually little benefit in holding the longer-term instruments — that is, the investor does not gain any excess compensation for the risks associated with holding longer-term securities. For example, a flat yield curve on U.S. Treasury Securities would be one in which the yield on a two-year bond is 5% and the yield on a 30-year bond is 5.1%.” ²

     Management continues to focus on earning asset growth in the commercial and home equity lending segments, while deemphasizing indirect auto, portfolio residential lending, and the securities portfolio. As the current interest rate environment is not conducive to maintaining, and particularly not increasing its securities portfolio the Company is permitting the securities portfolio to run-off and thereby decrease on both a relative basis (as a percent of earning assets) as well as on an actual basis.

     The recent de-emphasis of indirect automobile and portfolio residential real estate lending continues into 2007. Commercial lending particularly the construction category slowed in the first quarter of 2007, due to a general market slowdown, and provided negative commercial loan growth for the quarter. Management remains focused on continued commercial loan growth and expects growth of 3% in this loan category for the year. While home equity and small business lending are likely to continue to grow in 2007, management expects total loan growth to be flat and earning assets to decrease slightly.

     The following pie charts depict the continuing shift in the composition of earning assets into the commercial, home equity, and small business banking lending as of March 31, 2007, 2006, and 2005.

     The following graph shows the decline in the Company’s securities portfolio on both an actual and relative basis from December 2005 into 2007:

     Management is also focused on other opportunities. Below are examples of such efforts:

     Total deposits of $2.1 billion at March 31, 2007 decreased $7.4 million, or 0.4%, compared to December 31, 2006, due in part to the competitive pricing environment. The Company remains committed to deposit generation, with careful management of deposit pricing and selective deposit promotion, in an effort to control the Company’s cost of funds. In

the current interest rate environment the Company is focused on pricing deposits for customer retention as well as core deposit growth and does not feel a need to aggressively grow non-core deposits to fund balance sheet growth.

     Despite the inverted yield curve environment and decrease in size of the balance sheet, the net interest margin was 3.84% for the first quarter of 2007. The Company’s net interest margin has remained in the 3.8% to 3.9% range since 2004, an indication of the Bank’s interest rate risk management strategy.

     The following graph shows the trend in the net interest margin versus the Fed Funds Rate for each quarter end beginning December 31, 2004 through March 31, 2007:

     While changes in the prevailing interest rate environment (see Historical U.S. Treasury Yield Curve graph above) have and will continue to have an impact on the Company’s earnings, management strives to mitigate volatility in net interest income resulting from changes in benchmark interest rates through adjustable rate asset generation, effective liability management, and utilization of off-balance sheet interest rate derivatives. (For a discussion of interest rate derivatives and interest rate sensitivity see the Asset/Liability Management section, Table 8 – “Interest Rate Derivatives”, and Market Risk section, Table 10 – “Interest Rate Sensitivity” within the Management’s Discussion and Analysis of Financial Condition and Results of Operations hereof.)

     While loan net charge-offs were higher in the first quarter of 2007 as compared to the same period in 2006, they were still very low at an annualized rate of 18 basis points of average loans. Net charge-offs were 13 basis points of average loans on annualized basis at March 31, 2006. The Company provided for loan losses equivalent to the level of net charge-offs and the allowance for loan losses increased to 1.34% of loans as compared to 1.32% at December 31, 2006. Nonperforming assets were $7.4 million at March 31, 2007, an increase of $185,000 from December 31, 2006. There were no real estate foreclosures at the end of the quarter. See Table 2- Nonperforming Assets/ Loans for detail on nonperforming assets.

     The following graph depicts the Company’s non-performing assets to total assets at the periods indicated:

     Some of the Company’s other highlights for the first three months of 2007 included:

     Loan Portfolio Total loans decreased by $27.7 million, or 1.4%, during the three months ended March 31, 2007. The decreases were mainly in residential real estate which decreased in total by $16.7 million, or 4.2%, the consumer-auto portfolio, which decreased by $14.8 million, or 7.2%, and the total commercial portfolio, which decreased by $8.1 million, or 0.8%. Partially offsetting these decreases were increases in both the consumer-home equity portfolio of $8.4 million, or 3.0%, and in small business banking loans of $4.7 million, or 7.8%.

     The Bank’s commercial real estate portfolio is well-diversified with loans secured by a variety of property types, such as owner-occupied and non-owner-occupied commercial, retail, office, industrial, warehouse and other special purpose properties, such as hotels, motels, restaurants, and golf courses. Commercial real estate also includes loans secured by certain residential-related property types including multi-family apartment buildings, residential development tracts and, to a lesser extent, condominiums. The following pie chart shows the diversification of the commercial real estate portfolio as of March 31, 2007.

     The Bank considers a concentration of credit to a particular industry to exist when the aggregate credit exposure to a borrower, an affiliated group of borrowers or a non-affiliated group of borrowers engaged in one industry exceeds 10% of the Bank’s loan portfolio which includes direct, indirect or contingent obligations. As of March 31, 2007, loans made by the Company to the industry concentration of lessors of non-residential buildings were 12.9% of the Company’s total loan portfolio of which $159,000, or 0.06% are on non-accrual status.

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

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

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

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

     The Company’s total loan delinquency improved to 0.62% of total loans outstanding at March 31, 2007, as compared to 0.72% at December 31, 2006. Increases shown above in the 90 day category are contained primarily in the commercial real estate category. Management believes these loans to be adequately collateralized.

     Nonaccrual Loans As permitted by banking regulations, consumer loans past due 90 days or more may continue to accrue interest. In addition, certain commercial, business banking, or real estate loans including consumer home equity loans that are generally more than 90 days past due may be kept on an accruing status if the loan is well secured and in the process of collection. As a general rule, a commercial, business banking, or real estate loan including consumer home equity loans more than 90 days past due with respect to

principal or interest is classified as a nonaccrual loan. Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. Generally, a loan remains on nonaccrual status until it becomes current with respect to principal and interest (and in certain instances remains current for up to three months), when the loan is liquidated, or when the loan is determined to be uncollectible and it is charged-off against the allowance for loan losses.

     Nonperforming Assets Nonperforming assets are comprised of nonperforming loans, nonperforming securities and Other Real Estate Owned (“OREO”). Nonperforming loans consist of loans that are more than 90 days past due but still accruing interest and nonaccrual loans. OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure. As of March 31, 2007, nonperforming assets totaled $7.4 million, an increase of $185,000, or 2.6%, compared to December 31, 2006. The overall increase in nonperforming assets is attributable mainly to increases in nonperforming loans shown in the commercial mortgage loan category and, to a lesser extent, in the business banking category. Nonperforming assets represented 0.27% of total assets at March 31, 2007 and 0.25% at December 31, 2006. The Bank had no property held as OREO or nonperforming securities for the period ending March 31, 2007.

     Repossessed automobile loan balances continue to be classified as nonperforming loans, and not as other assets, because the borrower has the potential to satisfy the obligation within twenty days from the date of repossession (before the Bank can schedule disposal of the collateral). The borrower can redeem the property by payment in full at any time prior to the disposal of it by the Bank. Repossessed automobile loan balances amounted to $347,000 $451,000 and $370,000 as of March 31, 2007, December 31, 2006, and March 31, 2006, respectively.

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

     In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain commercial and real estate loans. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. It is the Bank’s policy to maintain restructured loans on nonaccrual status for approximately six months before management considers its return to accrual status. At March 31, 2007, December 31, 2006 and March 31, 2006 the Bank had no restructured loans.

     Potential problem loans are any loans, which are not included in nonaccrual or non-performing loans and which are not considered troubled debt restructures, where known information about possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present loan repayment terms. At March 31, 2007 the Bank had fifteen potential problem loan relationships and at December 31, 2006 the Bank had fifteen potential problem loan relationships, which are not included in nonperforming loans. Outstanding balances on these loans totaled $22.7 million and $21.8 million at March 31, 2007 and December 31, 2006, respectively. At March 31, 2007, these problem loans continued to perform and the Company’s management actively monitors these loans and strives to minimize any possible adverse impact to the Bank.

     Real estate acquired by the Bank through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO. When property is acquired, it is recorded at the lesser of the loan’s remaining principal balance or the estimated fair value of the

property acquired, less estimated costs to sell. Any loan balance in excess of the estimated fair value less estimated cost to sell on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.

     Interest income that would have been recognized for both the three months ended March 31, 2007, and 2006, if nonperforming loans at the respective dates had been performing in accordance with their original terms approximated $89,000 and $29,000 respectively. The actual amount of interest that was collected on these nonaccrual and restructured loans during the three months ended March 31, 2007 and 2006 and included in interest income was approximately $64,000 and $4,000, respectively.

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

     Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction, and selectively, for certain consumer, residential or home equity loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. As such, the Bank does not typically identify individual loans within these groupings for impairment evaluation and disclosure.

     At March 31, 2007, impaired loans include all commercial real estate loans and commercial and industrial loans on nonaccrual status. Total impaired loans at March 31, 2007 and December 31, 2006 were $4.3 million and $3.6 million, respectively.

     Allowance For Loan Losses While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on increases in nonperforming loans, changes in economic conditions, or for other reasons. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses.

     The allowance for loan losses is maintained at a level that management considers adequate to provide for probable loan losses based upon evaluation of known and inherent risks in the loan portfolio. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and is reduced by loans charged-off.

     As of March 31, 2007, the allowance for loan losses totaled $26.8 million, or 1.34%, of total loans as compared to $26.8 million, or 1.32%, of total loans at December 31, 2006. Based on managements analysis, management believes that the level of the allowance for loan losses at March 31, 2007 is adequate.

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

     The allowance for loan losses is allocated to various loan categories as part of the Bank’s process of evaluating its adequacy. The amount of allowance allocated to these loan categories was $24.2 million at March 31, 2007, compared to $25.4 million at December 31, 2006. The distribution of allowances allocated among the various loan categories as of March 31, 2007 was categorically similar to the distribution as of December 31, 2006. Increases or decreases in the amounts allocated to each category, as compared to those shown as of

December 31, 2006, generally, reflect changes in portfolio balances outstanding due to new loan originations, loans re-paid, changes in levels of credit line usage and the results of ongoing credit risk assessments of the loan portfolio.

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

     Allocated allowances for loan losses are determined using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment.

     The formula-based approach evaluates groups of loans to determine the allocation appropriate within each portfolio section. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio sections are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. The level of allowance allocable to each group of risk-rated loans is then determined by management applying a loss factor that estimates the amount of probable loss inherent in each category. The assigned loss factor for each risk rating is a formula-based assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions, past experience and management’s analysis of considerations of probable loan loss based on these factors.

     Allocations for business banking, residential real estate and other consumer loan categories are principally determined by applying loss factors that represent management’s estimate of probable or expected losses inherent in those categories. In each section, inherent losses are estimated, based on a formula-based assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions, past loan loss experience and management’s considerations of probable loan loss based on these factors.

     The other method used to allocate allowances for loan losses entails the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Bank will not collect all of the contractual interest and principal payments as scheduled

in the loan agreement. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or non-accrual status. A specific allowance amount is allocated to an impaired loan on the basis of: (a) the present value of anticipated future cash flows or on the loan’s observable fair market value or (b) the fair value of collateral if the loan is collateral dependent. Loans with a specific allowance and the amount of such allowance totaled $4.4 million and $132,000, respectively, at March 31, 2007 and $3.6 million and $414,000, respectively, at December 31, 2006. In addition, at March 31, 2007, there were $1.2 million of residential loans that were evaluated individually and assigned a specific allowance of $194,000.

     A portion of the allowance for loan losses is not allocated to any specific section of the loan portfolio. This unallocated allowance is maintained for two primary reasons: (a) there exists an inherent subjectivity and imprecision to the analytical processes employed and (b) the prevailing business environment, as it is affected by changing economic conditions and various external factors, may impact the portfolio. Moreover, management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: (a) market risk factors, such as the effects of economic variability on the entire portfolio, and (b) unique portfolio risk factors that are inherent characteristics of the Bank’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Bank’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry concentration or covariant industry concentrations, geographic concentrations or trends that may exacerbate losses resulting from economic events which the Bank may not be able to fully diversify out of its portfolio.

     Due to the imprecise nature of the loan loss estimation process and ever changing conditions, these risk attributes may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in the Bank’s analysis of the adequacy of the allowance for loan losses. Management, therefore, has established and maintains an unallocated allowance for loan losses reflecting the uncertainty of economic conditions within the Bank’s market area. The amount of the unallocated allowance was $2.6 million, $1.5 million, and $2.5 million at March 31, 2007, December 31, 2006, and December 31, 2005, respectively. The unallocated allowance was reduced at December 31, 2006 due to the shifting of incrementally higher amounts of allocated allowance towards the commercial loan portfolio as a result of the recognition of incrementally higher credit risk among certain credit relationships identified as classified loans by management during the third quarter of 2006. In light of the recognition of the incremental increase in risk classifications for certain of these credit relationships, management elected to pursue its available options to exit these relationships during the latter half of 2006. Accordingly, as management was actively seeking to exit out of these relationships through its portfolio management practices, the unallocated allowance was reduced during the third and fourth quarters of 2006 due to improving expectations related to these relationships. In the first quarter of 2007, substantive amounts of these higher risk loan relationships were resolved, as anticipated, and removed from their respective risk categories. With the resolution of these items, the amount of unallocated allowance was increased to $2.6 million, a level consistent with the unallocated allowance at December 31, 2005.

     Management has deemed the current unallocated allowance level adequate based on a careful analysis of national and local economic conditions. Slower productivity growth combined with higher costs, weakness in business investment, and the continued housing slump are factors that could temper economic growth in 2007. Additionally, the first quarter of 2007 has exhibited higher energy costs and declining consumer confidence, factors which tend to compound economic uncertainty. In general, local economic trends mirror those of the national economy, with the exception of employment. Massachusetts has experienced slower employment growth as compared to the national average and the unemployment rate has increased steadily over the past 12 months even as the national rate has declined. Unforeseen changes in the economy can impact the risk characteristics of the Bank’s loan portfolio.

     Goodwill and Core Deposit Intangibles Goodwill and Core Deposit Intangibles (“CDI”) increased $2.0 million, or 3.5%, to $58.5 million at March 31, 2007 from December 31, 2006. Goodwill increased $2.1 million as a result of the asset acquisition of Compass Exchange Advisors LLC completed on January 2, 2007. In connection with that acquisition the Bank established a wholly-owned subsidiary known as Compass Exchange Advisors LLC (“CEA”). CEA offers qualified intermediary like-kind exchange services pursuant to Internal Revenue Code Section 1031 to corporate, institutional, and individual property owners.

     Core deposit intangibles decreased $81,000 due to normal amortization.

     Securities Securities decreased by $31.6 million, or 6.1%, during the three months ending March 31, 2007. This decrease resulted mainly from the call of $13.4 million in corporate trust preferred securities and normal year to date runoff in the portfolio. The ratio of securities to total assets as of March 31, 2007 was 17.7%, as compared to 18.3% at December 31, 2006 and 22.5% at March 31, 2006.

     Deposits Total deposits of $2.1 billion at March 31, 2007 decreased $7.4 million, or 0.4%, compared to December 31, 2006. The Company experienced an increase in core deposits of $20.4 million, or 1.3%, offset by a decrease in time deposits of $27.8 million, or 4.9%.

     Borrowings Total borrowings decreased $76.3 million, or 15.5%, to $417.3 million at March 31, 2007 from December 31, 2006, as excess cash flow from the securities portfolio and certain loan categories were used to decrease wholesale borrowings.

     Also included in borrowings is $25.7 million of 8.375% million junior subordinated debentures issued by the Company to Independent Capital Trust IV which will be called on April 30, 2007. The Company will use the remaining $25.7 million of funds received from the issuance of junior subordinated debentures to Independent Capital Trust V to redeem the 8.375% debentures.

     Stockholders’ Equity Stockholders’ equity as of March 31, 2007 totaled $221.5 million, as compared to $229.8 million at December 31, 2006. Equity decreased due to stock repurchases of $13.3 million, dividends declared of $2.4 million, and the net change in the fair value of derivatives of $539,000, offset by net income of $6.6 million, a net decrease in unrealized losses on securities of $743,000, and stock option exercise proceeds of $384,000.

     Equity to Assets Ratio The ratio of equity to assets was 8.1% at March 31, 2007 and at December 31, 2006.

     Summary of Results of Operations The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income/fees from loans, deposits, mortgage banking, and investment management activities, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes, and the relative levels of interest rates and economic activity.

     The Company reported net income of $6.6 million, a $1.3 million, or 16.2% decrease, for the first quarter of 2007 over the first quarter of 2006. Diluted earnings per share were $0.45 for the three months ended March 31, 2007, compared to $0.51 for the three months ended March 31, 2006.

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

     On a fully tax equivalent basis, net interest income for the first quarter of 2007 decreased $2.4 million, or 8.8%, to $24.4 million, as compared to the first quarter of 2006. The Company’s net interest margin was 3.84% for the quarter ended March 31, 2007 as compared to 3.88% for the quarter ended March 31, 2006. The Company’s interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) was 3.21% for the first quarter of 2007, 18 basis points less than the comparable period in the prior year.

     The following table presents the Company’s daily average balances, net interest income, interest rate spread, and net interest margin for the three months ending March 31, 2007 and 2006. For purposes of the table and the following discussion, income from interest-earning assets and net interest income are presented on a fully-taxable equivalent basis by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of the Company’s securities to make them equivalent to income and yields on fully-taxable investments, assuming a federal income tax rate of 35%.