e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
Number: 1-9047
Independent Bank
Corp.
(Exact name of registrant as
specified in its charter)
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Massachusetts
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04-2870273
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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288 Union Street
Rockland, Massachusetts
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02370
(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(781) 878-6100
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.0l par value per share
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NASDAQ Global Select Market
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Preferred Stock Purchase Rights
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NASDAQ Global Select Market
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Securities
registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 (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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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
The aggregate market value of the voting common stock held by
non-affiliates of the registrant, computed by reference to the
closing price of such stock on June 30, 2008, was
approximately $369,636,816.
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date. January 31, 2009 16,285,455
DOCUMENTS
INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the Part of the
Form 10-K
(e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders;
(2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under
the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended
December 24, 1980).
Portions of the Registrants definitive proxy statement for
its 2009 Annual Meeting of Stockholders are incorporated into
Part III,
Items 10-13
of this
Form 10-K.
INDEPENDENT
BANK CORP.
2008
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
1
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
A number of the presentations and disclosures in this
Form 10-K,
including, without limitation, statements regarding the level of
allowance for loan losses, the rate of delinquencies and amounts
of charge-offs, and the rates of loan growth, and any statements
preceded by, followed by, or which include the words
may, could, should,
will, would, hope,
might, believe, expect,
anticipate, estimate,
intend, plan, assume or
similar expressions constitute forward-looking statements within
the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements, implicitly and explicitly,
include the assumptions underlying the statements and other
information with respect to Independent Bank Corp.s (the
Company) beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions, financial
condition, results of operations, future performance and
business, including the Companys expectations and
estimates with respect to the Companys 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 Companys 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 Companys control). The following
factors, among others, could cause the Companys financial
performance to differ materially from the Companys goals,
plans, objectives, intentions, expectations and other
forward-looking statements:
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a weakening in the strength of the United States economy in
general and the strength of the regional and local economies
within the New England region and Massachusetts which could
result in a deterioration of credit quality, a change in the
allowance for loan losses or a reduced demand for the
Companys credit or fee-based products and services;
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adverse changes in the local real estate market, could result in
a deterioration of credit quality and an increase in the
allowance for loan loss, as most of the Companys loans are
concentrated in southeastern Massachusetts, including Cape Cod
and Rhode Island and a substantial portion of these loans have
real estate as collateral;
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the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the Board
of Governors of the Federal Reserve System, could affect the
Companys business environment or affect the Companys
operations;
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the effects of, any changes in, and any failure by the Company
to comply with tax laws generally and requirements of the
federal New Markets Tax Credit program in particular could
adversely affect the Companys tax provision and its
financial results;
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inflation, interest rate, market and monetary fluctuations could
reduce net interest income and could increase credit losses;
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adverse changes in asset quality could result in increasing
credit risk-related losses and expenses;
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competitive pressures could intensify and affect the
Companys profitability, including as a result of continued
industry consolidation, the increased financial services
provided by non-banks and banking reform;
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a deterioration in the conditions of the securities markets
could adversely affect the value or credit quality of the
Companys assets, the availability and terms of funding
necessary to meet the Companys liquidity needs and the
Companys ability to originate loans;
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the potential to adapt to changes in information technology
could adversely impact the Companys operations and require
increased capital spending;
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changes in consumer spending and savings habits could negatively
impact the Companys financial results;
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acquisitions may not produce results at levels or within time
frames originally anticipated and may result in unforeseen
integration issues or impairment of goodwill
and/or other
intangibles;
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adverse conditions in the securities markets could lead to
impairment in the value of securities in the Companys
investment portfolios and consequently have an adverse effect on
the Companys earnings; and
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laws and programs designed to address capital and liquidity
issues in the banking system, including, but not limited to, the
Federal Deposit Insurance Corporations Temporary Liquidity
Guaranty Program and the U.S. Treasury Departments
Capital Purchase Program and Troubled Asset Relief Program may
have significant effects on the financial services industry, the
exact nature and extent of which cannot be determined at this
time.
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If one or more of the factors affecting the Companys
forward-looking information and statements proves incorrect,
then the Companys 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-K.
Therefore, the Company cautions you not to place undue reliance
on the Companys forward-looking information and statements.
The Company does not intend to update the Companys
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.
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PART I.
General
Independent Bank Corp. (the Company) is a state
chartered, federally registered bank holding company
headquartered in Rockland, Massachusetts that was incorporated
under Massachusetts law in 1985. The Company is the sole
stockholder of Rockland Trust Company (Rockland
or the Bank), a Massachusetts trust company
chartered in 1907. Rockland is a community-oriented commercial
bank. The community banking business, the Companys only
reportable operating segment, consists of commercial banking,
retail banking, wealth management services, retail investments
and insurance sales 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, wealth
management, retail investments and insurance services, and
mortgage banking income. At December 31, 2008, the Company
had total assets of $3.6 billion, total deposits of
$2.6 billion, stockholders equity of
$305.3 million, and 827 full-time equivalent employees.
On March 1, 2008, the Company successfully completed its
acquisition of Slades Ferry Bancorp. (Slades),
parent of Slades Bank. In accordance with Statement of Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets the acquisition was accounted for under
the purchase method of accounting and, as such, will be included
in the results of operations from the date of acquisition. The
Company issued 2,492,854 shares of common stock in
connection with the acquisition. The value of the common stock,
$30.59 was determined based on the average closing price of the
Companys shares over a five day period including the two
days preceding the announcement date of the acquisition, the
announcement date of the acquisition and the two days subsequent
to the announcement date of the acquisition. The Company also
paid cash of $25.9 million, for total consideration of
$102 million.
On November 9, 2008, the Company announced its intention to
acquire Benjamin Franklin Bancorp, Inc., a bank with
$1.0 billion in assets, located in the western suburbs of
Boston. The acquisition is expected to close in the second
quarter of 2009.
Market
Area and Competition
The Bank contends with considerable competition both in
generating loans and attracting deposits. The Banks
competition for loans is primarily from other commercial banks,
savings banks, credit unions, mortgage banking companies,
insurance companies, finance companies, and other institutional
lenders. Competitive factors considered for loan generation
include interest rates and terms offered, loan fees charged,
loan products offered, service provided, and geographic
locations.
In attracting deposits, the Banks primary competitors are
savings banks, commercial and co-operative banks, credit unions,
internet banks, as well as other non-bank institutions that
offer financial alternatives such as brokerage firms and
insurance companies. Competitive factors considered in
attracting and retaining deposits include deposit and investment
products and their respective rates of return, liquidity, and
risk, among other factors, such as convenient branch locations
and hours of operation, personalized customer service, online
access to accounts, and automated teller machines.
The Banks market area is attractive and entry into the
market by financial institutions previously not competing in the
market area may continue to occur which could impact the
Banks growth or profitability.
Lending
Activities
The Banks gross loan portfolio (loans before allowance for
loan losses) amounted to $2.7 billion on December 31,
2008, or 73.3% of total assets, on that date. The Bank
classifies loans as commercial, small business, real estate, or
consumer. Commercial loans consist primarily of loans to
businesses with credit needs in excess of $250,000 and revenue
in excess of $2.5 million for working capital and other
business-related purposes and floor plan financing. Small
business loans consist primarily of loans to businesses with
commercial credit needs of less than or equal to $250,000 and
revenues of less than $2.5 million. Real estate loans are
comprised of
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commercial mortgages that are secured by non-residential
properties, residential mortgages that are secured primarily by
owner-occupied residences and mortgages for the construction of
commercial and residential properties. Consumer loans consist
primarily of home equity loans and lines and automobile loans.
The Banks borrowers consist of small-to-medium sized
businesses and retail customers. The Banks market area is
generally comprised of southern Massachusetts, including Cape
Cod and to a lesser extent, Rhode Island. Substantially all of
the Banks commercial, small business and consumer loan
portfolios consist of loans made to residents of and businesses
located in the Banks market area. The majority of the real
estate loans in the Banks loan portfolio are secured by
properties located within this market area.
Interest rates charged on loans may be fixed or variable and
vary with the degree of risk, loan term, underwriting and
servicing costs, loan amount and the extent of other banking
relationships maintained with customers. Rates are further
subject to competitive pressures, the current interest rate
environment, availability of funds and government regulations.
The Banks 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
market requires a strict underwriting and monitoring process to
minimize credit risk. This process requires substantial analysis
of the loan application, an evaluation of the customers
capacity to repay according to the loans 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 Banks portfolio.
The Banks Controlled Asset and Consumer Collections
Departments are 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. 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 loans no longer accruing interest. In the course of
resolving nonperforming loans, the Bank may choose to
restructure the contractual terms of certain loans. Terms may be
modified to fit the ability of the borrower to repay in line
with the borrowers current financial status. It is the
Banks policy to maintain restructured nonaccrual loans on
nonaccrual status for approximately six months before management
considers its return to accrual status. OREO includes properties
held by the Bank as a result of foreclosure or by acceptance of
a deed in lieu of foreclosure. In order to facilitate the
disposition of OREO, the Bank may finance the purchase of such
properties at market rates if the borrower qualifies under the
Banks standard underwriting guidelines. The Bank had seven
and three properties held as OREO for the periods ending
December 31, 2008 and December 31, 2007, respectively.
Origination of Loans Commercial and industrial
and commercial real estate loan applications are obtained
through existing customers, solicitation by Bank personnel,
referrals from current or past customers, or walk-in customers.
Small business loan applications are typically originated by the
Banks retail staff, through a dedicated team of business
officers, by referrals from other areas of the Bank, referrals
from current or past customers, or through walk-in customers.
Customers for residential real estate loans are referred to
Mortgage Loan Officers who will meet with the borrowers at the
borrowers convenience. 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. The loans are underwritten and closed in the
name of the Bank. Volume generated by these third party
originators was less than 10% of total originations in 2008.
Consumer loan applications are directly obtained through
existing or walk-in customers who have been made aware of the
Banks consumer loan services through advertising and other
media, as well as indirectly through a network of automobile
dealers.
Commercial and industrial loans, commercial real estate loans,
and construction loans may be approved by commercial loan
lenders up to their individually assigned lending limits, which
are established and modified periodically by management, with
ratification by the Board of Directors, to reflect the
officers expertise and experience. Any of those types of
loans which are in excess of a commercial loan officers
assigned lending
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authority must be 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.
Small business loans may be approved by small business
underwriters up to their individually assigned lending limits
which are established and modified periodically by the Director
of Consumer and Small Business Banking and ratified by the Board
of Directors to reflect the officers expertise and
experience. Any loan which is in excess of the small business
banking officers assigned lending authority must be
approved by the Director of Consumer and Small Business Banking.
The Director of Consumer and Small Business Bankings
lending limit is approved by the Board of Directors.
Residential real estate and construction loans may be approved
by residential underwriters and residential loan analysts up to
their individually assigned lending limits, which are
established and modified periodically by management, with
ratification by the Board of Directors, to reflect the
underwriters and analysts expertise and experience.
Any loan which is in excess of the residential
underwriters and residential analysts assigned
residential lending authority must be approved by various levels
of authority within the Residential 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.
Consumer loans may be approved by consumer lenders up to their
individually assigned lending limits which are established and
modified periodically by the Director of Consumer and Small
Business Banking to reflect the officers expertise and
experience. Any loan which is in excess of the consumer
lenders assigned lending authority must be approved by the
Director of Consumer and Small Business Banking.
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 Banks
stockholders equity, which is the Banks legal
lending limit or $74.3 million at December 31,
2008. Notwithstanding the foregoing, the Bank has established a
more restrictive limit of not more than 75% of the Banks
legal lending limit, or $55.7 million at December 31,
2008, which may only be exceeded with the approval of the Board
of Directors. There were no borrowers whose total indebtedness
in aggregate exceeded $55.7 million as of December 31,
2008.
Sale of Loans The Banks 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), Fannie Mae (FNMA), the
Government National Mortgage Association (GNMA), and
other investors in the secondary market. Loan sales in the
secondary market provide funds for additional lending and other
banking activities. The Bank sells the servicing on a majority
of the sold loans for a servicing released premium, simultaneous
with the sale of the loan. As part of its asset/liability
management strategy, the Bank may retain a portion of the
adjustable rate and fixed rate residential real estate loan
originations for its portfolio. During 2008, the Bank originated
$288.9 million in residential real estate loans of which
$61.8 million were retained in its portfolio, comprised
primarily of adjustable rate loans.
Commercial and Industrial Loans The Bank
offers secured and unsecured commercial loans for business
purposes, including issuing letters of credit. At
December 31, 2008, $270.8 million, or 10.2%, of the
Banks gross loan portfolio consisted of commercial and
industrial loans. Commercial and industrial loans generated
8.3%, 8.6%, and 8.0% of total interest income for the fiscal
years ending 2008, 2007 and 2006, respectively.
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 the Bank
occasionally originates some commercial term loans with interest
rates which float in accordance with a designated index rate,
the majority of commercial term loans have fixed rates of
interest. 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. At December 31, 2008, there were
$117.8 million of term loans in the commercial loan
portfolio.
Collateral for commercial revolving lines of credit may consist
of accounts receivable, inventory or both, as well as other
business assets. Commercial revolving lines of credit generally
are reviewed on an annual basis and
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usually require substantial repayment of principal during the
course of a year. The vast majority of these revolving lines of
credit have variable rates of interest. At December 31,
2008, there were $153.0 million of revolving lines of
credit in the commercial loan portfolio.
The Banks standby letters of credit generally are secured,
generally have terms of not more than one year, and are reviewed
for renewal in general on an annualized basis. At
December 31, 2008, the Bank had $18.9 million of
commercial and standby letters of credit.
The Bank also provides automobile and, to a lesser extent, boat
and other vehicle floor plan financing. Floor plan loans are
secured by the automobiles, boats, or other vehicles, which
constitute the dealers inventory. 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 dealers inventory for an
extended period, the Bank requires the dealer to pay-down the
outstanding balance associated with such unit. Bank personnel
make unannounced periodic inspections of each dealer to review
the value and condition of the underlying collateral. At
December 31, 2008, there were $13.4 million in floor
plan loans, all of which have variable rates of interest.
Small Business Loans Small business lending
caters to all of the banking needs of businesses with commercial
credit requirements and revenues typically less than or equal to
$250,000 and $2.5 million, respectively, using partially
automated loan underwriting capabilities and deposit products.
Small business loans totaled $86.7 million at
December 31, 2008, or 3.3% of the Banks gross loan
portfolio. Small business loans generated 3.3%, 3.6%, and 2.9%
of total interest income for the fiscal years ending 2008, 2007
and 2006, respectively.
Small business loans may be structured as term loans, lines of
credit including overdraft protection, owner and non-owner
occupied commercial mortgages and standby letters of credit.
Small business generally obtains personal guarantees from the
principals of the borrower for virtually all of its loan
products.
Small business term loans generally have an amortization
schedule of five years or less and, although small business
occasionally originates some term loans with interest rates that
float in accordance with the prime rate, the majority of small
business term loans have fixed rates of interest. The majority
of small business term loans are collateralized by machinery,
equipment and other corporate assets. At December 31, 2008,
there were $23.5 million of term loans in the small
business loan portfolio.
Small business lines of credit and overdraft protection may be
offered on an unsecured basis to qualified applicants.
Collateral for secured lines of credit and overdraft protection
typically consists of accounts receivable and inventory as well
as other business assets. Small business lines of credit and
overdraft protection are reviewed on a periodic basis based upon
the total amount of exposure to the customer and is typically
written on a demand basis. The vast majority of these lines of
credit and overdraft protection have variable rates of interest.
At December 31, 2008, there were $39.9 million of
lines of credit and overdraft protection in the small business
loan portfolio.
Both small business owner and non-owner occupied commercial
mortgages typically have an amortization schedule of twenty
years or less but are written with a five year maturity. The
majority of small business commercial mortgages have fixed rates
of interest that are adjusted typically every three to five
years. The majority of small business owner-occupied commercial
mortgages are collateralized by first or second mortgages on
commercial real estate. At December 31, 2008, there were
$19.0 million of owner-occupied commercial mortgages in the
small business loan portfolio.
Small business standby letters of credit generally are secured,
have expirations of not more than one year, and are reviewed
periodically for renewal. The small business team makes use of
the Banks authority as a preferred lender with the
U.S. Small Business Administration. At December 31,
2008, there were $6.3 million of U.S. Small Business
Administration guaranteed loans in the small business loan
portfolio.
Real Estate Loans The Banks 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, 2008, the
Banks loan portfolio included $1.1 billion in
commercial real estate loans, $421.4 million in residential
real estate loans, $172.0 million in commercial
construction loans, and $11.0 million in residential
construction loans, altogether
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totaling 65.0% of the Banks gross loan portfolio. Real
estate loans generated an aggregate of 56.0%, 50.1%, and 48.2%
of total interest income for the fiscal years ending
December 31, 2008, 2007 and 2006, respectively.
The Banks commercial real estate portfolio, the largest
loan type concentration, 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 condominiums. The following
pie chart shows the diversification of the commercial real
estate portfolio as of December 31, 2008.
Commercial
Real Estate Portfolio by Property Type as of 12/31/08
Although terms vary, commercial real estate loans generally have
maturities of five years or less, or rate resets every five
years for longer duration loans, amortization periods of 20 to
25 years, and have interest rates that float in accordance
with a designated index or that are fixed during the origination
process. It is the Banks policy to obtain personal
guarantees from the principals of the borrower on commercial
real estate loans and to obtain financial statements at least
annually from all actively managed commercial and multi-family
borrowers.
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 within the markets for commercial,
retail, office, industrial/warehouse and multi-family tenancy.
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 properties. Non-permanent construction loans generally
have terms of at least 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 Banks commercial
construction loans have floating rates of interest based upon
the Rockland base rate or the Prime or LIBOR rates published
daily in the Wall Street Journal.
A significant portion of the Banks construction lending is
related to residential development within the Banks market
area. The Bank typically has focused its construction lending on
relatively small projects and has developed and maintains
relationships with developers and operative homebuilders in the
Plymouth, Norfolk, Barnstable and Bristol Counties of
southeastern Massachusetts and Cape Cod and, to a lesser extent,
in the state of Rhode Island.
Construction loans are generally considered to present a higher
degree of risk than permanent real estate loans and may be
affected by a variety of factors, such as adverse changes in
interest rates and the borrowers ability to control costs
and adhere to time schedules. Other construction-related risks
may include market risk, that is, the risk that
for-sale or for-lease units may or may
not be absorbed by the market within a developers
anticipated time-
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frame or at a developers anticipated price. Certain
construction borrowers within the portfolio may maintain an
interest reserve account for specific projects. Management
actively tracks and monitors these accounts.
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 residential 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. The
Banks 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, extended
coverage casualty and flood insurance, when necessary, in order
to protect the properties securing its residential and other
real estate loans. Independent appraisers appraise properties
securing all of the Banks first mortgage real estate
loans, as required by regulatory standards.
Consumer Loans The Bank makes loans for a wide
variety of personal needs. Consumer loans primarily consist of
installment loans, home equity loans and lines, and overdraft
protection. As of December 31, 2008, $572.8 million,
or 21.5%, of the Banks gross loan portfolio consisted of
consumer loans. Consumer loans generated 18.1%, 22.5% and 22.2%
of total interest income for the fiscal years ending
December 31, 2008, 2007, and 2006, respectively.
The Banks consumer loans also include home equity,
unsecured loans, loans secured by deposit accounts, loans to
purchase motorcycles, recreational vehicles, or boats. During
2008 the lending policy was modified from lending 100% to up to
80% of the purchase price of vehicles other than automobiles
with terms of up to three years for motorcycles and up to
fifteen years for recreational vehicles.
Home equity loans and lines may be made as a fixed rate term
loan or under a variable rate revolving line of credit secured
by a first or second mortgage on the borrowers residence
or second home. At December 31, 2008, $121.9 million,
or 30.0%, of the home equity portfolio was term loans and
$284.3 million, or 70.0%, of the home equity portfolio was
comprised of revolving lines of credit. The Bank will originate
home equity loans and lines in an amount up to 89.9% of the
appraised value or on-line valuation, reduced for any loans
outstanding which are secured by such collateral. Home equity
loans and lines are underwritten in accordance with the
Banks loan policy which includes a combination of credit
score, loan-to-value ratio, employment history and
debt-to-income ratio. Home equity lines of credit at
December 31, 2008, had a weighted average
FICO1
score of 758 and a weighted average combined
loan-to-value2
ratio of 62.0%. The average FICO scores are based upon re-scores
available from November 2008 and actual score data for loans
booked between December 1 and December 31, 2008 and the
loan-to-value ratios are based on updated automated valuation as
of November 30, 2008 where available. Use of re-score data
enables the Bank to better understand the current credit risk
associated with these loans.
Cash reserve loans are made pursuant to previously approved
unsecured cash reserve lines of credit. The rate on these loans
is tied to the prime rate.
The Banks installment loans consist primarily of
automobile loans, which totaled $128.0 million, at
December 31, 2008, or 4.8% of loans, a decrease from 7.6%
of loans at year-end 2007. A substantial portion of the
Banks automobile loans are originated indirectly by a
network of approximately 134 active new and used automobile
dealers located within the Banks market area. Although
employees of the dealer take applications for such loans, the
loans are made pursuant to Rocklands underwriting
standards using Rocklands documentation. A Rockland
consumer lender must approve all indirect loans. In addition to
indirect automobile lending, the Bank also originates automobile
loans directly.
1 FICO
represents a credit score determined by the Fair Isaac
Corporation, with data provided by the three major credit
repositories (Trans Union, Experian, and Equifax). This score
predicts the likelihood of loan default. The lower the score,
the more likely an individual is to default. The actual FICO
scores range from 300 to 850 (fairissaac.com).
2 Loan-to-Value
is the ratio of the total potential exposure on a loan to the
fair market value of the collateral. The higher the
Loan-to-Value, the higher the loss risk in the event of default.
10
The maximum term for the Banks automobile loans is
72 months. Loans on new and used 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. In addition, in order to
mitigate the adverse effect on interest income caused by
prepayments, dealers are required to maintain a reserve of up to
3% of the outstanding balance of the indirect loans originated
by them under Reserve option A. Reserve option
A allows the Bank to be rebated the prepaid dealer
reserve on a pro-rata basis in the event of prepayment prior to
maturity. Reserve option B allows the dealer to
share the reserve with the Bank, split 75/25, however for the
Banks receipt of 25%, no rebates are applied to the
account after 90 days from date of first payment. Indirect
automobile loans at December 31, 2008, had a weighted
average FICO score of 694 and a weighted average combined
loan-to-value ratio of 96.4%. The average FICO scores are based
upon re-scores available from November 2008 and actual score
data for loans booked between December 1 and December 31,
2008. Use of re-score data enables the Bank to better understand
the current credit risk associated with these loans.
Investment
Activities
The Banks securities portfolio consists of
U.S. Treasury and U.S. Government agency obligations,
state, county and municipal securities, mortgage-backed
securities, collateralized mortgage obligations, Federal Home
Loan Bank (FHLB) stock, corporate debt securities,
equity securities held for the purpose of funding supplemental
executive retirement plan obligations, and equity securities
comprised of an investment in a community development and
affordable housing open-ended mutual fund. The majority of these
securities are investment grade debt obligations with average
lives of five years or less. U.S. Treasury and Government
Sponsored Enterprises 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. The Bank views its
securities portfolio as a source of income and liquidity.
Interest and principal payments generated from securities
provide a source of liquidity to fund loans and meet short-term
cash needs. The Banks 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 Banks Asset/Liability Management
Committee, or its appointee, is required to evaluate any
proposed purchase from the standpoint of overall diversification
of the portfolio. At December 31, 2008, securities totaled
$660.4 million. Total securities generated interest and
dividends of 14.2%, 14.3%, and 17.8% of total interest income
for the fiscal years ended 2008, 2007 and 2006, respectively.
The chart below shows the level of securities versus assets for
the year end 2006, 2007 and 2008.
Level of
Securities/Total Assets
(Dollars in thousands)
Sources
of Funds
Deposits Deposits obtained through
Rocklands branch banking network have traditionally been
the principal source of the Banks funds for use in lending
and for other general business purposes. The Bank has built a
stable base of in-market core deposits from consumers,
businesses, and municipalities located in southeastern
11
Massachusetts, including Cape Cod. Rockland offers a range of
demand deposits, interest checking, money market accounts,
savings accounts, and time certificates of deposit. The Bank
also offers services as a Qualified Intermediary, holding
deposits for customers executing like-kind exchanges pursuant to
section 1031 of the Internal Revenue Code. Interest rates
on deposits are based on factors that include loan demand,
deposit maturities, alternative costs of funds, and interest
rates offered by competing financial institutions in the
Banks 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. Rockland Trust also participates in the
Certificate of Deposit Registry Service (CDARS)
program, allowing the Bank to provide easy access to
multi-million dollar Federal Deposit Insurance Corporation
(FDIC) insurance protection on Certificate of
Deposit (CD) investments for consumers, businesses
and public entities. The economic downturn and subsequent flight
to safety makes a fully insured deposit product such as CDARS an
attractive alternative and as of December 31, 2008, CDARS
deposits totaled $81.8 million. Rockland has a municipal
banking department that focuses on providing depository services
to local municipalities. At December 31, 2008, municipal
deposits totaled $207.0 million.
The Emergency Economic Stabilization Act of 2008 (the
EESA) introduced the Temporary Liquidity Guarantee
Program (TLGP) effective November 2008. One of the
TLGPs main components resulted in a temporary increase
through December 2009, of deposit insurance coverage from
$100,000 to $250,000, per depositor. Additionally, the Company
elected to participate in the portion of this program which
fully guarantees non-interest and certain interest bearing
deposit accounts through the same period.
Rockland Trusts branch locations are supplemented by the
Banks internet banking services as well as automated
teller machine (ATM) cards and debit cards which may
be used to conduct various banking transactions at ATMs
maintained at each of the Banks full-service offices and
four additional remote ATM locations. The ATM cards and debit
cards also allow customers access to the NYCE
regional ATM network, as well as the Cirrus
international ATM network. In addition, Rockland Trust is a
member of the SUM network, which allows access to
approximately 2,900 participating ATM machines throughout the
United States and Puerto Rico free of surcharge. The debit card
also can be used at any place that accepts MasterCard worldwide.
As of December 31, 2008, total deposits were
$2.6 billion.
Borrowings Borrowings consist of short-term
and intermediate-term obligations. Short-term borrowings may
consist of FHLB advances, federal funds purchased, treasury tax
and loan notes and assets sold under repurchase agreements.
In July 1994, Rockland became a member of the FHLB of Boston.
Among the many advantages of this membership, this affiliation
provides the Bank with access to short-to-medium term borrowing
capacity. At December 31, 2008, the Bank had
$429.6 million outstanding in FHLB borrowings with initial
maturities ranging from 3 months to 20 years. In
addition, the Bank had $471.8 million of borrowing capacity
remaining with the FHLB at December 31, 2008.
Subsequent to year end, the FHLB Boston (FHLBB) announced that
it has indefinitely suspended its dividend payment beginning in
the first quarter of 2009, and will continue the moratorium, put
into effect during the fourth quarter of 2008, on all excess
stock repurchases in an effort to help preserve capital. A
significant portion of the Banks liquidity needs are
satisfied through its access to funding pursuant to its
membership in the FHLBB. Should the FHLBB experience further
deterioration in its capital, it may restrict the FHLBBs
ability to meet the funding needs of its members, and as result,
may have an adverse affect on the Banks liquidity position.
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 recorded as interest expense. 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 and the Bank is
subject to the risk that the purchaser 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
12
when entering into these transactions. On December 31,
2008, the Bank had $50.0 million outstanding under these
repurchase agreements with investment brokerage firms. In
addition to agreements with brokers, the Bank has entered into
similar agreements with its customers. At December 31,
2008, the Bank had $120.9 million of customer repurchase
agreements outstanding.
Also included in borrowings at December 31, 2008 were
$61.8 million of junior subordinated debentures, of which
$51.5 million were issued to an unconsolidated subsidiary,
Independent Capital Trust V, in connection with the
issuance of variable rate (LIBOR plus 1.48%) capital securities
due in 2037. The Company has locked in a fixed rate of interest
of 6.52%, for 10 years, through an interest rate swap. The
Company also has $10.3 million of outstanding junior
subordinated debentures issued to an unconsolidated subsidiary,
Slades Ferry Trust I, in connection with the issuance
of variable rate (LIBOR plus 2.79%) capital securities due in
2034.
On August 27, 2008, Rockland Trust Company issued
$30.0 million of subordinated debt to USB Capital Resources
Inc., a wholly-owned subsidiary of U.S. Bank National
Association. The subordinated debt, which qualifies as
Tier 2 capital under FDIC rules and regulations, was issued
to support growth and for other corporate purposes. The
subordinated debt matures on August 27, 2018. Rockland
Trust may, with regulatory approval, redeem the subordinated
debt without penalty at any time on or after August 27,
2013. The interest rate for the subordinated debt is fixed at
7.02% until August 27, 2013. After that point the
subordinated debt, if not redeemed, will have a floating
interest rate determined, at the option of Rockland Trust, at
either the then current London Inter-Bank Offered Rate plus
3.00% or the U.S. Bank base rate plus 1.25%.
As previously mentioned, the Company is participating in the
TLGP. The second main component of this program is the Debt
Guarantee Program, by which the FDIC will guarantee the payment
of certain newly issued senior unsecured debt, in a total amount
up to 125% of the par or face value of the senior unsecured debt
outstanding, excluding debt extended to affiliates. As of
December 31, 2008, the Company had no senior unsecured debt
outstanding. If an insured depository institution had no senior
unsecured debt, or only had Federal funds purchased, the
Companys limit for coverage under the TLGP Debt Guarantee
Program would be 2% of the Companys consolidated total
liabilities as of September 30, 2008.
As of December 31, 2008, total borrowings were
$695.3 million.
See Note 8, Borrowings within Notes to the
Consolidated Financial Statements included in Item 8 hereof
for more information regarding borrowings.
Wealth
Management
Investment Management The Rockland
Trust Investment Management Group provides investment
management and trust services to individuals, small businesses,
and charitable institutions throughout southeastern
Massachusetts, including Cape Cod, and northern Rhode Island.
Accounts maintained by the Rockland Trust Investment
Management Group consist of managed and
non-managed accounts. Managed accounts
are those for which the Bank is responsible for administration
and investment management
and/or
investment advice. Non-managed accounts are those
for which the Bank acts solely as a custodian or directed
trustee. The Bank receives fees dependent upon the level and
type of service(s) provided. For the year ended
December 31, 2008, the Investment Management Group
generated gross fee revenues of $9.9 million. Total assets
under management as of December 31, 2008, were
$1.1 billion, a decrease of $165.1 million, or 12.8%,
from December 31, 2007. This decrease is due to the
difficult stock market downturn experienced in the latter part
of 2008.
The administration of trust and fiduciary accounts is monitored
by the Trust Committee of the Banks Board of
Directors. The Trust Committee has delegated administrative
responsibilities to three committees, one for investments, one
for administration, and one for operations, all of which are
comprised of Investment Management Group officers who meet not
less than monthly.
Retail Wealth Management The Bank has an
agreement with Linsco/Private Ledger Corp. (LPL) and
their insurance subsidiary Private Ledger Insurance Services of
Massachusetts, Inc. to offer the sale of mutual fund shares,
unit investment trust shares, general securities, fixed and
variable annuities and life insurance. Registered
13
representatives who are employed by both the Bank and LPL are
onsite to offer these products to the Banks customer base.
In 2005, the Bank entered into an agreement with Savings Bank
Life Insurance of Massachusetts (SBLI) to enable
appropriately licensed Bank employees to offer SBLIs fixed
annuities and life insurance to the Banks customer base.
For the year ended December 31, 2008, the retail
investments and insurance group generated gross fee revenues of
$1.2 million.
Regulation
The following discussion sets forth certain of the material
elements of the regulatory framework applicable to bank holding
companies and their subsidiaries and provides certain specific
information relevant to the Company. To the extent that the
following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. A change in
applicable statutes, regulations or regulatory policy, may have
a material effect on our business. The laws and regulations
governing the Company and Rockland generally have been
promulgated to protect depositors and not for the purpose of
protecting stockholders.
General 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 FDIC. The majority of Rocklands deposit accounts are
insured to the maximum extent permitted by law by the Deposit
Insurance Fund (DIF) which is administered by the
FDIC.
The Bank Holding Company Act BHCA prohibits
the Company from acquiring direct or indirect ownership or
control of more than 5% of any class of voting shares of any
bank, or increasing such ownership or control of any bank,
without prior approval of the Federal Reserve. The BHCA also
prohibits the Company from, with certain exceptions, acquiring
more than 5% of any class of 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 approve the
ownership by the Company of shares 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. The Federal Reserve has, by
regulation, determined that some 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 data processing
operations; providing some securities brokerage services; acting
as an investment or financial adviser; acting as an insurance
agent for types of credit-related insurance; engaging in
insurance underwriting under limited circumstances; leasing
personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a
collection agency and a credit bureau; providing consumer
financial counseling and courier services. The Federal Reserve
also has determined that 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.
Interstate Banking Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the
Interstate Banking Act), bank holding companies may
acquire banks in states other than their home state without
regard to the permissibility of such acquisitions under state
law, but subject to any state requirement that the bank has been
organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the bank holding
company, after the proposed acquisition, controls no more than
10 percent of the total amount of deposits of insured
depository institutions in the United States and no more than
30 percent or such lesser or greater amount set by state
law of such deposits in that state.
Pursuant to Massachusetts law, no approval to acquire a banking
institution, acquire additional shares in a banking 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 three 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. With the prior written
approval of
14
the Commissioner, Massachusetts also permits the establishment
of de novo branches in Massachusetts to the full extent
permitted by the Interstate Banking 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.
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 Reserves 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 (subject
in the latter case to limitations on the kind and amount of such
stocks which may be included as Tier 1 capital), less net
unrealized gains and losses on available for sale securities and
on cash flow hedges, post retirement adjustments recorded in
accumulated other comprehensive income, and 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 allowance 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 certain 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 do 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, 2008, the
Company had Tier 1 capital and total capital equal to 9.50%
and 11.85% of total risk-adjusted assets, respectively, and
Tier 1 leverage capital equal to 7.55% of total assets. As
of such date, Rockland complied with the applicable bank federal
regulatory risked based capital requirements, with Tier 1
capital and total capital equal to 9.49% and 11.83% of total
risk-adjusted assets, respectively, and Tier 1 leverage
capital equal to 7.56% of total assets.
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 FDICs capital regulations
establish a minimum 3.0% Tier 1 leverage capital to total
assets requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to
200 basis points for all other state-chartered, non-member
banks, which effectively will increase the minimum Tier 1
leverage capital ratio for such banks to 4.0% or 5.0% or more.
Each federal banking agency has broad powers to implement a
system of prompt corrective action to resolve problems of
financial institutions, that it regulates, which are not
adequately capitalized. A bank shall be deemed to be
(i) well capitalized if it has a total
risk-based capital ratio 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
15
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%. As of December 31, 2008, Rockland was
deemed a well-capitalized institution for this
purpose.
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. This support may be required at times when
the Company may not be able to provide such support. Similarly,
under the cross-guarantee provisions of the Federal Deposit
Insurance Act, in the event of a loss suffered or anticipated by
the FDIC either as a result of default of a banking
or thrift subsidiary of a bank/financial holding company such as
the Company or related to FDIC assistance provided to a
subsidiary in danger of default the other banking
subsidiaries of such bank/financial holding company may be
assessed for the FDICs loss, subject to certain exceptions.
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. The acquisition of 25% or more of any
class of voting securities constitutes the acquisition of
control under the CBCA. In addition, under a rebuttal
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 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.
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. The Company does not own
more than 5% voting stock in any banking institution.
Deposit Insurance Premiums The FDIC approved
new deposit insurance assessment rates that took effect on
January 1, 2007. During 2007, the Banks assessment
rate under the new FDIC system was the minimum 5 basis
points on total deposits. Additionally, the Federal Deposit
Insurance Reform Act of 2005 allowed eligible insured depository
institutions to share in a one-time assessment credit pool of
approximately $4.7 billion, effectively reducing the amount
these institutions are required to submit as an overall
assessment. The Banks one-time assessment credit was
approximately $1.3 million, of which $556,000 was remaining
at December 31, 2007. During 2008, the Company had
exhausted the remaining $556,000 of the assessment credit.
The Emergency Economic Stabilization Act of 2008 (the
EESA) introduced the Temporary Liquidity Guarantee
Program (TLGP) effective November 2008 which
resulted in a temporary increase, through December 2009, of
deposit insurance coverage from $100,000 to $250,000 per
depositor. Additionally, the Company has elected to participate
in the portion of the program that provides a full guarantee on
non-interest and certain interest bearing deposit accounts
through the same period. The associated additional premium is
approximately 9 basis points on total deposits, which will be
assessed as of April 1, 2009.
On February 27, 2009, the FDIC voted on a proposal to
increase the deposit insurance assessments and rebuild the
Deposit Insurance Fund (DIF). To ensure that the DIF remains
positive, the FDIC proposed imposing a special assessment on
insured institutions of 20 basis points on June 30, 2009
which would be collected on September 30, 2009. Under the
interim rule, which will be open for comment for 30 days
after its publication in the Federal
16
Register, the FDIC could also impose an emergency special
assessment after June 30, 2009, of up to 10 basis points if
necessary to maintain public confidence in federal deposit
insurance.
Community Reinvestment Act
(CRA) Pursuant to the CRA and similar
provisions of Massachusetts 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 new branches, branch relocations, engaging in
certain new financial activities under the Gramm-Leach-Bliley
Act of 1999 (GLB), as discussed below, and
acquisitions of banks and bank holding companies. The FDIC and
the Massachusetts Division of Banks has assigned the Bank a CRA
rating of outstanding as of the latest examination.
Bank Secrecy Act The Bank Secrecy Act requires
financial institutions to keep records and file reports that are
determined to have a high degree of usefulness in criminal, tax
and regulatory matters, and to implement counter-money
laundering programs and compliance procedures.
USA Patriot Act of 2001 In October 2001, the
USA Patriot Act of 2001 was enacted in response to the terrorist
attacks in New York, Pennsylvania and Washington D.C. which
occurred on September 11, 2001. The Patriot Act is intended
to strengthen U.S. law enforcements and the
intelligence communities abilities to work cohesively to
combat terrorism on a variety of fronts. The impact of the
Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and
imposes various regulations, including standards for verifying
client identification at account opening, and rules to promote
cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved
in terrorism or money laundering.
Financial Services Modernization
Legislation In November 1999, the GLB was
enacted. The GLB repeals provisions of the Glass-Steagall Act
which restricted the affiliation of Federal Reserve member banks
with firms engaged principally in specified
securities activities, and which restricted officer, director or
employee interlocks between a member bank and any company or
person primarily engaged in specified securities
activities.
In addition, the GLB also contains provisions that expressly
preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect
of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies,
securities firms and other financial service providers, by
revising and expanding the BHCA framework to permit a holding
company to engage in a full range of financial activities
through a new entity known as a financial holding
company. Financial activities is broadly
defined to include not only banking, insurance and securities
activities, but also merchant banking and additional activities
that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature,
incidental to such financial activities or complementary
activities that do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system
generally.
The GLB also permits national banks to engage in expanded
activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity
authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant
banking, which may only be conducted through a subsidiary of a
financial holding company. Financial activities include all
activities permitted under new sections of the BHCA or permitted
by regulation.
To the extent that the GLB permits banks, securities firms and
insurance companies to affiliate, the financial services
industry may experience further consolidation. The GLB is
intended to grant to community banks certain powers as a matter
of right that larger institutions have accumulated on an ad hoc
basis and which unitary savings and loan holding companies
already possess. Nevertheless, the GLB may have the result of
increasing the amount of competition that the Company faces from
larger institutions and other types of companies offering
financial products, many of which may have substantially more
financial resources than the Company.
Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley
Act (SOA) of 2002 includes very specific disclosure
requirements and corporate governance rules, and the Securities
and Exchange Commission (SEC) and securities
exchanges have adopted extensive disclosure, corporate
governance and other related rules, due to the SOA. The Company
has incurred additional expenses in complying with the
provisions of the SOA and the resulting regulations. As the SEC
provides any new requirements under the SOA, management will
review those rules,
17
comply as required and may incur more expenses. However,
management does not expect that such compliance will have a
material impact on our results of operation or financial
condition.
Regulation W Transactions between a bank
and its affiliates are quantitatively and
qualitatively restricted under the Federal Reserve Act. The
Federal Deposit Insurance Act applies Sections 23A and 23B
to insured nonmember banks in the same manner and to the same
extent as if they were members of the Federal Reserve System.
The Federal Reserve Board has also issued Regulation W,
which codifies prior regulations under Sections 23A and 23B
of the Federal Reserve Act and interpretative guidance with
respect to affiliate transactions. Regulation W
incorporates the exemption from the affiliate transaction rules,
but expands the exemption to cover the purchase of any type of
loan or extension of credit from an affiliate. Affiliates of a
bank include, among other entities, the banks holding
company and companies that are under common control with the
bank. The Company is considered to be an affiliate of the Bank.
In general, subject to certain specified exemptions, a bank and
its subsidiaries are limited in their ability to engage in
covered transactions with affiliates:
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to an amount equal to 10% of the banks capital and
surplus, in the case of covered transactions with any one
affiliate; and
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to an amount equal to 20% of the banks capital and
surplus, in the case of covered transactions with all affiliates.
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In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and
under circumstances that are substantially the same, or at least
as favorable to the bank or its subsidiary, as those prevailing
at the time for comparable transactions with nonaffiliated
companies. A covered transaction includes:
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a loan or extension of credit to an affiliate;
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a purchase of, or an investment in, securities issued by an
affiliate;
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a purchase of assets from an affiliate, with some exceptions;
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the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any
party; and
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the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate.
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In addition, under Regulation W:
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a bank and its subsidiaries may not purchase a low-quality asset
from an affiliate;
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covered transactions and other specified transactions between a
bank or its subsidiaries and an affiliate must be on terms and
conditions that are consistent with safe and sound banking
practices; and
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with some exceptions, each loan or extension of credit by a bank
to an affiliate must be secured by collateral with a market
value ranging from 100% to 130%, depending on the type of
collateral, of the amount of the loan or extension of credit.
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Regulation W generally excludes all non-bank and
non-savings association subsidiaries of banks from treatment as
affiliates, except to the extent that the Federal Reserve Board
decides to treat these subsidiaries as affiliates.
Emergency Economic Stabilization Act of
2008 In response to the financial crisis
affecting the banking and financial markets, in October 2008,
the Emergency Economic Stabilization Act of 2008 (the
EESA) was signed into law. Pursuant to the EESA, the
U.S. Treasury (the Treasury) has the authority
to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other
financial instruments from financial institutions for the
purpose of stabilizing and providing liquidity to the
U.S. financial markets.
The Treasury was authorized to purchase equity stakes in
U.S. financial institutions. Under this program, known as
the Troubled Asset Relief Program Capital Purchase Program (the
CPP), from the $700 billion authorized by the
EESA, the Treasury is making $250 billion of capital
available to U.S. financial institutions through the
purchase of preferred stock or subordinated debentures by the
Treasury. In conjunction with the
18
purchase of preferred stock from publicly-held financial
institutions, the Treasury is receiving warrants to purchase
common stock with an aggregate market price equal to 15% of the
total amount of the preferred investment. Participating
financial institutions are required to adopt the Treasurys
standards for executive compensation and corporate governance
for the period during which the Treasury holds equity issued
under the CPP and are restricted from increasing dividends to
common shareholders or repurchasing common stock for three years
without the consent of the Treasury.
The Company has elected to participate in the CPP. For further
details, see Managements Discussion and Analysis of
Financial Condition and Results of Operations
Capital Purchase Program in Item 7 hereof.
Employees As of December 31, 2008, the
Bank had 827 full time equivalent employees. None of the
Companys employees are represented by a labor union and
management considers relations with its employees to be good.
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.
The regulatory information referenced briefly summarizes certain
material statutes and regulations affecting the Company and the
Bank and is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
Statistical
Disclosure by Bank Holding Companies
For additional information regarding borrowings, see
Note 8, Borrowings within Notes to the
Consolidated Financial Statements included in Item 8
hereof, which includes information regarding short-term
borrowings.
For additional information regarding the Companys business
and operations, see Selected Financial Data in
Item 6 hereof, Managements Discussion and Analysis
of Financial Condition and Results of Operations in
Item 7 hereof and the Consolidated Financial Statements
in Item 8 hereof and incorporated by reference herein.
Securities
and Exchange Commission Availability of Filings on Company Web
Site
Under the Securities Exchange Act of 1934 Sections 13 and
15(d), periodic and current reports must be filed with the SEC.
The public may read and copy any materials filed with the SEC at
the SECs Public Reference Room at 100 F Street,
NE, Washington, DC
20549-0213.
The public may obtain information on the operation of the Public
Reference Room by calling the Public Reference Room at
1-800-SEC-0330.
The Company electronically files the following reports with the
SEC:
Form 10-K
(Annual Report),
Form 10-Q
(Quarterly Report),
Form 11-K
(Annual Report for Employees Savings, Profit Sharing and
Stock Ownership Plan),
Form 8-K
(Report of Unscheduled Material Events),
Forms S-4,
S-3 and
8-A
(Registration Statements), and Form DEF 14A (Proxy
Statement). The Company may file additional forms. The SEC
maintains an internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC, at www.sec.gov, in
which all forms filed electronically may be accessed.
Additionally, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
filed with the SEC and additional shareholder information are
available free of charge on the Companys website:
www.RocklandTrust.com (within the investor relations
tab). Information contained on our website and the SEC website
is not incorporated by reference into this
Form 10-K.
We have included our web address and the SEC website address
only as inactive textual references and do not intend them to be
active links to our website or the SEC website. The
Companys Code of Ethics and other Corporate Governance
documents are also available on the Companys website in
the Investor Relations section of the website.
19
Changes in interest rates could adversely impact the
Companys financial condition and results of
operations. The Companys ability to make a
profit, like that of most financial institutions, substantially
depends upon its net interest income, which is the difference
between the interest income earned on interest earning assets,
such as loans and investment securities, and the interest
expense paid on interest-bearing liabilities, such as deposits
and borrowings. However, certain assets and liabilities may
react differently to changes in market interest rates. Further,
interest rates on some types of assets and liabilities may
fluctuate prior to changes in broader market interest rates,
while rates on other types of assets may lag behind.
Additionally, some assets such as adjustable-rate mortgages have
features, and rate caps, which restrict changes in their
interest rates.
Factors such as inflation, recession, unemployment, money
supply, global disorder such as that experienced as a result of
the terrorist activity on September 11, 2001, instability
in domestic and foreign financial markets, and other factors
beyond the Companys control, may affect interest rates.
Changes in market interest rates will also affect the level of
voluntary prepayments on loans and the receipt of payments on
mortgage-backed securities, resulting in the receipt of proceeds
that may have to be reinvested at a lower rate than the loan or
mortgage-backed security being prepaid. Although the Company
pursues an asset-liability management strategy designed to
control its risk from changes in market interest rates, changes
in interest rates can still have a material adverse effect on
the Companys profitability.
In 2008, there was considerable disruption and volatility in the
financial and credit markets that began with the fallout
associated with rising defaults within many sub-prime
mortgage-backed structured investment vehicles
(SIVs) held by banks and other investors. A
major consequence of these changes in market conditions has been
significant tightening in the availability of credit. These
conditions have been exacerbated further by the continuation of
a correction in real estate market prices and sales activity and
rising foreclosure rates, resulting in increases in loan losses
and loan-related investment losses incurred by many lending
institutions.
The present state of the financial and credit markets has
severely impacted the global and domestic economies and has led
to a significantly tighter environment in terms of liquidity and
availability of credit during 2008. In addition, economic growth
has slowed down both nationally and globally, and, as a result,
many economists and market observers have concluded that the
national economy is in a deep economic recession. Market
disruption, government and central bank policy actions intended
to counteract the effects of recession, changes in investor
expectations regarding compensation for market risk, credit risk
and liquidity risk and changing economic data could continue to
have dramatic effects on both the volatility of and the
magnitude of the directional movements of interest rates.
Although the Company pursues an asset-liability management
strategy designed to control its risk from changes in interest
rates, changes in market interest rates can have a material
adverse effect on the Companys profitability.
If the Company has higher loan losses than it has modeled,
its earnings could materially decrease. The
Companys loan customers may not repay loans according to
their terms, and the collateral securing the payment of loans
may be insufficient to assure repayment. The Company may
therefore experience significant credit losses which could have
a material adverse effect on its operating results. The Company
makes various assumptions and judgments about the collectibility
of its loan portfolio, including the creditworthiness of
borrowers and the value of the real estate and other assets
serving as collateral for the repayment of loans. In determining
the size of the allowance for loan losses, the Company relies on
its experience and its evaluation of economic conditions. If its
assumptions prove to be incorrect, its current allowance for
loan losses may not be sufficient to cover losses inherent in
its loan portfolio and an adjustment may be necessary to allow
for different economic conditions or adverse developments in its
loan portfolio. Consequently, a problem with one or more loans
could require the Company to significantly increase the level of
its provision for loan losses. In addition, federal and state
regulators periodically review the Companys allowance for
loan losses and may require it to increase its provision for
loan losses or recognize further loan charge-offs. Material
additions to the allowance would materially decrease the
Companys net income.
A significant amount of the Companys loans are
concentrated in Massachusetts, and adverse conditions in this
area could negatively impact its
operations. Substantially all of the loans the
Company originates are secured by properties located in or are
made to businesses which operate in Massachusetts. Because of
the current
20
concentration of the Companys loan origination activities
in Massachusetts, in the event of continued adverse economic
conditions, continued downward pressure on housing prices,
political or business developments or natural hazards that may
affect Massachusetts and the ability of property owners and
businesses in Massachusetts to make payments of principal and
interest on the underlying loans, the Company would likely
experience higher rates of loss and delinquency on its loans
than if its loans were more geographically diversified, which
could have an adverse effect on its results of operations or
financial condition.
The Company operates in a highly regulated environment and
may be adversely impacted by changes in law and
regulations. The Company is subject to extensive
regulation, supervision and examination. See
Regulation in Item 1 hereof, Business.
Any change in the laws or regulations and failure by the
Company to comply with applicable law and regulation, or a
change in regulators supervisory policies or examination
procedures, whether by the Massachusetts Commissioner of Banks,
the FDIC, the Federal Reserve Board, other state or federal
regulators, the United States Congress, or the Massachusetts
legislature could have a material adverse effect on the
Companys business, financial condition, results of
operations, and cash flows.
The Company has strong competition within its market area
which may limit the Companys growth and
profitability. The Company faces significant
competition both in attracting deposits and in the origination
of loans. See Market Area and Competition in
Item 1 hereof, Business. Commercial banks, credit
unions, savings banks, savings and loan associations operating
in our primary market area have historically provided most of
our competition for deposits. Competition for the origination of
real estate and other loans come from other commercial banks,
thrift institutions, insurance companies, finance companies,
other institutional lenders and mortgage companies.
The success of the Company is dependent on hiring and
retaining certain key personnel. The Companys
performance is largely dependent on the talents and efforts of
highly skilled individuals. The Company relies on key personnel
to manage and operate its business, including major revenue
generating functions such as loan and deposit generation. The
loss of key staff may adversely affect the Companys
ability to maintain and manage these functions effectively,
which could negatively affect the Companys revenues. In
addition, loss of key personnel could result in increased
recruiting and hiring expenses, which could cause a decrease in
the Companys net income. The Companys continued
ability to compete effectively depends on its ability to attract
new employees and to retain and motivate its existing employees.
The Companys business strategy of growth in part
through acquisitions could have an impact on its earnings and
results of operations that may negatively impact the value of
the Companys stock. In recent years, the
Company has focused, in part, on growth through acquisitions. In
March 2008, the Company completed the acquisition of
Slades Ferry Bancorp., headquartered in Somerset,
Massachusetts. The Company also anticipates completing the
acquisition of Benjamin Franklin Bancorp, Inc. in the second
quarter of 2009.
From time to time in the ordinary course of business, the
Company engages in preliminary discussions with potential
acquisition targets. The consummation of any future acquisitions
may dilute stockholder value.
Although the Companys business strategy emphasizes organic
expansion combined with acquisitions, there can be no assurance
that, in the future, the Company will successfully identify
suitable acquisition candidates, complete acquisitions and
successfully integrate acquired operations into our existing
operations or expand into new markets. There can be no assurance
that acquisitions will not have an adverse effect upon the
Companys operating results while the operations of the
acquired business are being integrated into the Companys
operations. In addition, once integrated, acquired operations
may not achieve levels of profitability comparable to those
achieved by the Companys existing operations, or otherwise
perform as expected. Further, transaction-related expenses may
adversely affect the Companys earnings. These adverse
effects on the Companys earnings and results of operations
may have a negative impact on the value of the Companys
stock.
The Companys participation in the
U.S. Treasurys Capital Purchase Program
(CPP), which requires preferred dividend payments,
may hinder the Companys ability to pay common
dividends. Under the CPP, the Company issued
preferred shares to the United States Treasury. Under this
agreement, dividends on these preferred shares are paid on a
quarterly basis. Preferred dividends are superior to common
dividends and as a result, must be paid prior to any common
dividends being paid. Adverse changes in earnings, capital
levels and other factors as well
21
as the subordinate position of the common stock relative to the
preferred shares, may preclude the payment of common dividends
in the future.
Difficult market conditions have adversely affected the
industry in which the Company operates. Dramatic
declines in the housing market over the past year, with falling
home prices and increasing foreclosures, and unemployment, have
negatively impacted the credit performance of mortgage loans and
resulted in significant write-downs of asset values by financial
institutions, including Government-Sponsored Entities as well as
major commercial and investment banks. These write-downs,
initially of mortgage-backed securities but spreading to credit
default swaps and other derivative and cash securities, in turn,
have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases to fail. Reflecting concern about the stability of
the financial markets generally and the strength of
counterparties, many lenders and institutional investors have
reduced or ceased providing funding to borrowers, including to
other financial institutions. This market turmoil and tightening
of credit have led to an increased level of commercial and
consumer delinquencies, lack of consumer confidence, increased
market volatility and widespread reduction of business activity
generally. The resulting economic pressure on consumers and lack
of confidence in the financial markets could materially affect
the Companys business, financial condition and results of
operations. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market
conditions on the Company and others in the financial services
industry. In particular, the Company may face the following
risks in connection with these events:
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The Company may expect to face increased regulation of its
industry. Compliance with such regulation may increase its costs
and limit its ability to pursue business opportunities.
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Market developments may affect customer confidence levels and
may cause increases in loan delinquencies and default rates,
which the Company expects could impact its loan charge-offs and
provision for loan losses.
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Continued illiquidity in the capital markets for certain types
of investment securities may cause additional
other-than-temporary impairment charges to the Companys
income statement.
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The Companys ability to borrow from other financial
institutions or to access the debt or equity capital markets on
favorable terms or at all could be adversely affected by further
disruptions in the capital markets or other events, including
actions by rating agencies and deteriorating investor
expectations.
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Competition in the industry could intensify as a result of the
increasing consolidation of financial services companies in
connection with current market conditions.
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The Company may be required to pay significantly higher FDIC
premiums because market developments have significantly depleted
the insurance fund of the FDIC and reduced the ratio of reserves
to insured deposits.
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The Companys securities portfolio performance in
difficult market conditions could have adverse effects on the
Companys results of operations. Under
Generally Accepted Accounting Principles, the Company is
required to review the Companys investment portfolio
periodically for the presence of other-than-temporary impairment
of its securities, taking into consideration current market
conditions, the extent and nature of change in fair value,
issuer rating changes and trends, volatility of earnings,
current analysts evaluations, the Companys ability
and intent to hold investments until a recovery of fair value,
as well as other factors. Adverse developments with respect to
one or more of the foregoing factors may require us to deem
particular securities to be other-than-temporarily impaired,
with the reduction in the value recognized as a charge to the
Companys earnings. Recent market volatility has made it
extremely difficult to value certain of the Companys
securities. Subsequent valuations, in light of factors
prevailing at that time, may result in significant changes in
the values of these securities in future periods. Any of these
factors could require the Company to recognize further
impairments in the value of the Companys securities
portfolio, which may have an adverse effect on the Company
results of operations in future periods.
There can be no assurance that recent action by governmental
agencies and regulators, as well as recently enacted legislation
authorizing the U.S. government to invest in, and purchase
large amounts of illiquid assets from, financial institutions
will help stabilize the U.S. financial
system. In 2008 and early 2009 the
U.S. Government has
22
taken steps to stabilize and stimulate the financial services
industry and overall U.S. economy, including the enrollment
of the Emergency Economic Stabilization Act of 2008 (the
EESA) and the American Recovery and Reinvestment Act
of 2009 (the ARRA). These enrollments reflect an
initial legislative response to the financial crises affecting
the banking system and financial markets and going concern
threats to financial institutions. Pursuant to the EESA, the
U.S. Treasury will have the authority to, among other
things, purchase up to $700 billion of mortgages,
mortgage-backed securities and certain other financial
instruments for financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial
markets. The ARRA represents a further effort by the
U.S. government to stabilize and stimulate the
U.S. economy. At this time the effects of the ESSA and the
ARRA are unknown. The failure of the EESA to help stabilize the
financial markets and a continuation or worsening of current
financial market conditions could materially and adversely
affect the Companys business, financial condition, results
of operations, access to credit or the trading price of its
common stock. As an initial program, the U.S. Treasury is
exercising its authority to purchase an aggregate of
$250 billion of capital instruments from the financial
entities throughout the United States. There can be no
assurance, however, as to the actual impact that the EESA will
have on the financial markets, including the extreme levels of
volatility and limited credit availability currently being
experienced.
Impairment of goodwill
and/or
intangible assets could require charges to earnings, which could
result in a negative impact on our results of
operations. Goodwill arises when a business is
purchased for an amount greater than the net fair value of its
assets. We have recognized goodwill as an asset on our balance
sheet in connection with several recent acquisitions (see
Note 10 Goodwill and Identifiable Intangible
Assets of the Notes to the Consolidated Financial
Statements in Item 8 hereof). When an intangible asset is
determined to have an indefinite useful life, it shall not be
amortized, and instead is evaluated for impairment. The Company
evaluates goodwill and intangibles for impairment at least
annually by comparing fair value to carrying amount. Although
the Company determined that goodwill and other intangible assets
were not impaired during 2008, a significant and sustained
decline in our stock price and market capitalization, a
significant decline in our expected future cash flows, a
significant adverse change in the business climate, slower
growth rates or other factors could result in impairment of
goodwill or other intangible assets. If the Company were to
conclude that a future write-down of our goodwill or intangible
assets are necessary, then the Company would record the
appropriate charge to earnings, which could be materially
adverse to our results of operations and financial position.
Deterioration in the Federal Home Loan Bank Bostons
(FHLBB) capital might restrict the FHLBBs
ability to meet the funding needs of its members, cause the
suspension of its dividend to continue and cause its stock to be
determined to be impaired. Significant components
of the Banks liquidity needs are met through its access to
funding pursuant to its membership in the Federal Home Loan Bank
of Boston (FHLBB). The FHLBB is a cooperative that
provides services to its member banking institutions. The
primary reason for joining the FHLBB is to obtain funding from
the FHLBB. The purchase of stock in the FHLBB is a requirement
for a member to gain access to funding.
In February 2009, FHLBB announced that it has indefinitely
suspended its dividend payment beginning in the first quarter of
2009, and will continue the moratorium, put into effect during
the fourth quarter of 2008, on all excess stock repurchases in
an effort to help preserve capital. As a significant portion of
the Banks liquidity needs are satisfied through its access
to funding pursuant to its membership in the FHLBB, should the
FHLBB experience further deterioration in its capital, it may
restrict the FHLBBs ability to meet the funding needs of
its members, and as result, may have an adverse affect on the
Banks liquidity position. Further, as a FHLBB stockholder,
the Banks net income will be adversely impacted by the
suspension of the dividend and would be further adversely
impacted should the stock be determined to be impaired.
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Item 1B.
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Unresolved
Staff Comments
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None
23
At December 31, 2008, the Bank conducted its business from
its main office located at 288 Union Street, Rockland,
Massachusetts and sixty banking offices located within
Barnstable, Bristol, Norfolk and Plymouth Counties in
Southeastern Massachusetts and Cape Cod. In addition to its main
office, the Bank leased forty-five of its branches and owned the
remaining fifteen branches. In addition to these branch
locations, the Bank had four remote ATM locations all of which
were leased. On February 1, 2008, the Bank closed its
branch located at 336 Route 28, Harwichport, MA. This branch was
consolidated into the branch located at 932 Route 28, West
Dennis, MA. On March 3, 2008 the Bank completed the
conversion of Slades and opened nine new Rockland Trust branches
in the Bristol County communities of Assonet, Fairhaven, Fall
River (2), New Bedford, Seekonk, Somerset (2) and Swansea.
On May 1, 2008 the Bank completed a sale/leaseback
transaction on seventeen properties including the main office at
288 Union Street, Rockland, MA. The properties are located in
the Barnstable County communities of Centerville, Chatham,
Hyannis, Orleans, South Yarmouth and West Dennis; the Norfolk
County community of Randolph and the Plymouth County communities
of Brockton, Duxbury, Hanover, Hull, Middleboro (2), Pembroke,
Plymouth, Rockland and Scituate. Sixteen of the locations are
branch offices and one is the Banks Technology Center in
Plymouth, MA. Each location has a lease term ranging from ten to
fifteen years with four, five year lease renewal options. On
November 24, 2008, the bank purchased the Mashpee Branch
property.
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Banking
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Remote
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Massachusetts County
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Offices
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ATM
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Deposits
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(Dollars in thousands)
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Barnstable
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14
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$
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534,389
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Bristol
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12
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1
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456,195
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Norfolk
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6
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1
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200,417
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Plymouth
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29
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2
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|
|
1,388,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
61
|
|
|
|
4
|
|
|
$
|
2,579,080
|
|
The Banks administrative and operations locations are
generally housed in four main campuses:
|
|
|
|
|
Corporate offices in Hanover, Massachusetts.
|
|
|
|
Technology and deposit services in Plymouth, Massachusetts.
|
|
|
|
Loan operations in Middleboro, Massachusetts.
|
|
|
|
Commercial lending administration in Brockton, Massachusetts.
|
There are a number of additional sales offices not associated
with a branch location throughout the Banks footprint. The
table below shows administrative offices by county at
December 31, 2008:
|
|
|
|
|
County
|
|
Administrative Offices
|
|
|
Barnstable (Massachusetts)
|
|
|
1
|
|
Bristol (Massachusetts)
|
|
|
2
|
|
Middlesex (Massachusetts)
|
|
|
1
|
|
Norfolk (Massachusetts)
|
|
|
1
|
|
Plymouth (Massachusetts)
|
|
|
6
|
|
Providence (Rhode Island)
|
|
|
1
|
|
|
|
|
|
|
Total
|
|
|
12
|
|
|
|
|
|
|
For additional information regarding our premises and equipment
and lease obligations, see Notes 6, Bank Premises
and Equipment and 18, Commitments and
Contingencies, respectively, to the Consolidated Financial
Statements included in Item 8 hereof.
24
|
|
Item 3.
|
Legal
Proceedings
|
As previously disclosed, Rockland Trust was the plaintiff in the
federal court case commonly known as Rockland
Trust Company v. Computer Associates International,
Inc. n/k/a CA, Inc., United States District Court for the
District of Massachusetts Civil Action
No. 95-11683-DPW
(the CA Case). The CA Case, which was filed in 1995,
arose from disputes over a contract signed in 1991 for software
that CA sold to Rockland Trust.
On August 31, 2007 the judge in the CA Case issued a
decision which directed the Clerk to enter judgment for CA
in the amount of $1,089,113.73 together with prejudgment
interest in the amount of $272,278 for a total of
$1,361,392. On September 5, 2007 Rockland Trust paid
that judgment from an accrual established on June 30, 2007.
On August 1, 2008 the judge in the CA Case issued a
decision which stated that CA has a right to recover
attorneys fees and expenses in this litigation. On
August 4, 2008 the Company established a $1.5 million
reserve for potential liability associated with the
August 1, 2008 decision, effective as of June 30,
2008. On September 26, 2008 Rockland Trust and CA signed a
Settlement Agreement that finally resolved all matters
pertaining to the CA Case including, but not limited to,
CAs claim for attorney fees and costs. On
September 26, 2008 Rockland Trust made a $750,000 payment
to CA pursuant to the Settlement Agreement from the
$1.5 million reserve established on August 4, 2008.
The Company has reversed the $750,000 remaining reserve balance.
Rockland Trust is not otherwise involved in any legal
proceedings other than routine legal proceedings occurring in
the ordinary course of business. Management believes that those
routine legal proceedings involve, in the aggregate, amounts
that are immaterial to the Companys financial condition
and results of operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no matters submitted to a vote of security holders in
the fourth quarter of 2008.
25
PART II
|
|
Item 5.
|
Market
for Independent Bank Corp.s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
(a.) Independent Bank Corp.s common stock trades on the
National Association of Securities Dealers Automated Quotation
System (NASDAQ) under the symbol INDB. The Company
declared cash dividends of $0.72 per share in 2008 and $0.68 per
share in 2007. The ratio of dividends paid to earnings in 2008
and 2007 was 48.95% and 33.41%, respectively.
Payment of dividends by the Company on its common stock is
subject to various regulatory restrictions and guidelines. Since
substantially all of the funds available for the payment of
dividends are derived from the Bank, future dividends will
depend on the earnings of the Bank, its financial condition, its
need for funds, applicable governmental policies and
regulations, and other such matters as the Board of Directors
deem appropriate. The Companys participation in CPP
subsequent to year end requires the payment of a dividend on
preferred shares, prior to any common dividends being paid.
While participating in this program, the Company will need to
obtain the U.S. Treasurys consent for any increase in
common dividends per share for the first three years of
participation. Management believes that the Bank will continue
to generate adequate earnings to continue to pay preferred and
common dividends on a quarterly basis.
The following schedule summarizes the closing price range of
common stock and the cash dividends paid for the fiscal years
2008 and 2007.
Table
1 Price Range of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
4th Quarter
|
|
$
|
31.97
|
|
|
$
|
19.02
|
|
|
$
|
0.18
|
|
3rd Quarter
|
|
|
39.17
|
|
|
|
20.12
|
|
|
|
0.18
|
|
2nd Quarter
|
|
|
31.77
|
|
|
|
23.83
|
|
|
|
0.18
|
|
1st Quarter
|
|
|
31.91
|
|
|
|
24.00
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
4th Quarter
|
|
$
|
31.17
|
|
|
$
|
26.86
|
|
|
$
|
0.17
|
|
3rd Quarter
|
|
|
31.30
|
|
|
|
26.60
|
|
|
|
0.17
|
|
2nd Quarter
|
|
|
32.95
|
|
|
|
28.75
|
|
|
|
0.17
|
|
1st Quarter
|
|
|
36.01
|
|
|
|
30.09
|
|
|
|
0.17
|
|
As of December 31, 2008 there were 16,285,455 shares
of common stock outstanding which were held by approximately
2,201 holders of record. The closing price of the Companys
stock on December 31, 2008 was $26.16. The number of record
holders may not reflect the number of persons or entities
holding stock in nominee name through banks, brokerage firms and
other nominees.
The information required by S-K Item 201 (d) is
incorporated by reference from Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters hereof.
26
Comparative
Stock Performance Graph
The stock performance graph below and associated table compare
the cumulative total shareholder return of the Companys
common stock from December 31, 2003 to December 31,
2008 with the cumulative total return of the NASDAQ Composite
Index (U.S. Companies) and the SNL Bank NASDAQ Index. The
lines in the graph and the numbers in the table below represent
monthly index levels derived from compounded daily returns that
include reinvestment or retention of all dividends. If the
monthly interval, based on the last day of fiscal year, was not
a trading day, the preceding trading day was used. The index
value for all of the series was set to 100.00 on
December 31, 2003 (which assumes that $100.00 was invested
in each of the series on December 31, 2003).
Independent
Bank Corp.
Total Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
12/31/03
|
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
Independent Bank Corp.
|
|
|
100.00
|
|
|
|
121.44
|
|
|
|
104.79
|
|
|
|
134.91
|
|
|
|
104.27
|
|
|
|
102.87
|
|
NASDAQ Composite Index
|
|
|
100.00
|
|
|
|
109.15
|
|
|
|
111.47
|
|
|
|
123.04
|
|
|
|
136.15
|
|
|
|
81.72
|
|
SNL Bank NASDAQ Index
|
|
|
100.00
|
|
|
|
114.61
|
|
|
|
111.12
|
|
|
|
124.75
|
|
|
|
97.94
|
|
|
|
71.13
|
|
(b.) Not applicable
(c.) Not applicable
27
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial and other data of the
Company set forth below does not purport to be complete and
should be read in conjunction with, and is qualified in its
entirety by, the more detailed information, including the
Consolidated Financial Statements and related notes, appearing
elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
FINANCIAL CONDITION DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
$
|
600,291
|
|
|
$
|
444,258
|
|
|
$
|
417,088
|
|
|
$
|
581,516
|
|
|
$
|
680,286
|
|
Securities held to maturity
|
|
|
32,789
|
|
|
|
45,265
|
|
|
|
76,747
|
|
|
|
104,268
|
|
|
|
107,967
|
|
Loans
|
|
|
2,660,887
|
|
|
|
2,042,952
|
|
|
|
2,024,909
|
|
|
|
2,040,808
|
|
|
|
1,916,358
|
|
Allowance for loan losses
|
|
|
37,049
|
|
|
|
26,831
|
|
|
|
26,815
|
|
|
|
26,639
|
|
|
|
25,197
|
|
Total assets
|
|
|
3,628,469
|
|
|
|
2,768,413
|
|
|
|
2,828,919
|
|
|
|
3,041,685
|
|
|
|
2,943,926
|
|
Total deposits
|
|
|
2,579,080
|
|
|
|
2,026,610
|
|
|
|
2,090,344
|
|
|
|
2,205,494
|
|
|
|
2,060,235
|
|
Total borrowings(1)
|
|
|
695,317
|
|
|
|
504,344
|
|
|
|
493,649
|
|
|
|
587,810
|
|
|
|
655,161
|
|
Stockholders equity
|
|
|
305,274
|
|
|
|
220,465
|
|
|
|
229,783
|
|
|
|
228,152
|
|
|
|
210,743
|
|
Non-performing loans
|
|
|
26,933
|
|
|
|
7,644
|
|
|
|
6,979
|
|
|
|
3,339
|
|
|
|
2,702
|
|
Non-performing assets
|
|
|
29,883
|
|
|
|
8,325
|
|
|
|
7,169
|
|
|
|
3,339
|
|
|
|
2,702
|
|
OPERATING DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
176,388
|
|
|
$
|
159,738
|
|
|
$
|
167,693
|
|
|
$
|
155,661
|
|
|
$
|
134,613
|
|
Interest expense(1)
|
|
|
58,926
|
|
|
|
63,555
|
|
|
|
65,038
|
|
|
|
49,818
|
|
|
|
36,797
|
|
Net interest income
|
|
|
117,462
|
|
|
|
96,183
|
|
|
|
102,655
|
|
|
|
105,843
|
|
|
|
97,816
|
|
Provision for loan losses
|
|
|
10,888
|
|
|
|
3,130
|
|
|
|
2,335
|
|
|
|
4,175
|
|
|
|
3,018
|
|
Non-interest income
|
|
|
28,084
|
|
|
|
32,051
|
|
|
|
26,644
|
|
|
|
27,273
|
|
|
|
28,355
|
|
Non-interest expenses
|
|
|
104,143
|
|
|
|
87,932
|
|
|
|
79,354
|
|
|
|
80,615
|
|
|
|
77,691
|
|
Minority interest expense(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,072
|
|
Net income
|
|
|
23,964
|
|
|
|
28,381
|
|
|
|
32,851
|
|
|
|
33,205
|
|
|
|
30,767
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income Basic
|
|
$
|
1.53
|
|
|
$
|
2.02
|
|
|
$
|
2.20
|
|
|
$
|
2.16
|
|
|
$
|
2.06
|
|
Net income Diluted
|
|
|
1.52
|
|
|
|
2.00
|
|
|
|
2.17
|
|
|
|
2.14
|
|
|
|
2.03
|
|
Cash dividends declared
|
|
|
0.72
|
|
|
|
0.68
|
|
|
|
0.64
|
|
|
|
0.60
|
|
|
|
0.56
|
|
Book value(2)
|
|
|
18.75
|
|
|
|
16.04
|
|
|
|
15.65
|
|
|
|
14.81
|
|
|
|
13.75
|
|
Tangible book value per share(3)
|
|
|
11.03
|
|
|
|
11.64
|
|
|
|
11.80
|
|
|
|
11.12
|
|
|
|
10.01
|
|
OPERATING RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.73
|
%
|
|
|
1.05
|
%
|
|
|
1.12
|
%
|
|
|
1.11
|
%
|
|
|
1.13
|
%
|
Return on average equity
|
|
|
8.20
|
%
|
|
|
12.93
|
%
|
|
|
14.60
|
%
|
|
|
15.10
|
%
|
|
|
16.27
|
%
|
Net interest margin (on a fully tax equivalent basis)
|
|
|
3.95
|
%
|
|
|
3.90
|
%
|
|
|
3.85
|
%
|
|
|
3.88
|
%
|
|
|
3.95
|
%
|
Equity to assets
|
|
|
8.41
|
%
|
|
|
7.96
|
%
|
|
|
8.12
|
%
|
|
|
7.50
|
%
|
|
|
7.16
|
%
|
Dividend payout ratio
|
|
|
48.95
|
%
|
|
|
33.41
|
%
|
|
|
29.10
|
%
|
|
|
27.79
|
%
|
|
|
27.23
|
%
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSET QUALITY RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans as a percent of gross loans
|
|
|
1.01
|
%
|
|
|
0.37
|
%
|
|
|
0.34
|
%
|
|
|
0.16
|
%
|
|
|
0.14
|
%
|
Non-performing assets as a percent of total assets
|
|
|
0.82
|
%
|
|
|
0.30
|
%
|
|
|
0.25
|
%
|
|
|
0.11
|
%
|
|
|
0.09
|
%
|
Allowance for loan losses as a percent of total loans
|
|
|
1.39
|
%
|
|
|
1.31
|
%
|
|
|
1.32
|
%
|
|
|
1.31
|
%
|
|
|
1.31
|
%
|
Allowance for loan losses as a percent of non-performing loans
|
|
|
137.56
|
%
|
|
|
351.01
|
%
|
|
|
384.22
|
%
|
|
|
797.81
|
%
|
|
|
932.53
|
%
|
CAPITAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage capital ratio
|
|
|
7.55
|
%
|
|
|
8.02
|
%
|
|
|
8.05
|
%
|
|
|
7.71
|
%
|
|
|
7.06
|
%
|
Tier 1 risk-based capital ratio
|
|
|
9.50
|
%
|
|
|
10.27
|
%
|
|
|
11.05
|
%
|
|
|
10.74
|
%
|
|
|
10.19
|
%
|
Total risk-based capital ratio
|
|
|
11.85
|
%
|
|
|
11.52
|
%
|
|
|
12.30
|
%
|
|
|
11.99
|
%
|
|
|
11.44
|
%
|
|
|
|
(1) |
|
Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 46 Revised,
Consolidation of Variable Interest Entities an
Interpretation of Accounting Research
Bulletin No. 51 (FIN 46R)
required the Company to deconsolidate its two subsidiary trusts
(Independent Capital Trust III and Independent Capital
Trust IV) on March 31, 2004. The result of
deconsolidating these subsidiary trusts is that preferred
securities of the trusts, which were classified between
liabilities and equity on the balance sheet (mezzanine section),
no longer appear on the consolidated balance sheet of the
Company. The related minority interest expense also is no longer
included in the consolidated statement of income. Due to
FIN 46R, the junior subordinated debentures of the parent
company that were previously eliminated in consolidation are now
included on the consolidated balance sheet within total
borrowings. The interest expense on the junior subordinated
debentures is included in the calculation of net interest margin
of the consolidated company, negatively impacting the net
interest margin by approximately 0.13% for the twelve months
ending December 31, 2004 on an annualized basis. There is
no impact on net income as the amount of interest previously
recognized as minority interest is equal to the amount of
interest expense that is recognized currently in the net
interest margin offset by the dividend income on the subsidiary
trusts common stock recognized in other non-interest income. |
|
(2) |
|
Calculated by dividing total stockholders equity by the
total outstanding shares as of the end of each period. |
|
(3) |
|
Calculated by dividing stockholders equity less goodwill
and intangible assets by the net outstanding shares as of the
end of each period. Beginning in 2008, goodwill and intangible
assets are subtracted from equity net of any related deferred
taxes. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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 Trust or the
Bank), a Massachusetts trust company chartered in
1907.
The Company is currently the sponsor of Independent Capital
Trust V (Trust V) and Slades Ferry
Statutory Trust I (Slades Ferry
Trust I) a Connecticut statutory trust, each of which
were formed to issue trust preferred securities.
Slades Ferry Trust I was an existing statutory trust
of Slades Ferry Bancorp. (Slades), which was
acquired by the Company effective March 1, 2008 (see
Note 11, Acquisition within Notes to the
Consolidated Financial Statements included in Item 8 hereof
for more information). Trust V and Slades Ferry
Trust I are not included in the Companys consolidated
financial statements in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 46R
(FIN 46R).
29
During the year ended December 31, 2008, the Company merged
subsidiaries which were acquired as part of the Slades
Ferry Bancorp. acquisition, namely Slades Ferry Securities
Corporation, Slades Ferry Security Corporation II, and
Slades Ferry Realty Trust, with and into Rockland Trust
with Rockland Trust as the surviving entity. As of
December 31, 2008 the Bank had the following corporate
subsidiaries, all of which were wholly-owned by the Bank and
were included in the Companys consolidated financial
statements:
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Four Massachusetts security corporations, namely Rockland
Borrowing Collateral Securities Corp., Rockland IMG Collateral
Securities Corp., Rockland Deposit Collateral Securities Corp.,
and Taunton Avenue Securities Corp., which hold securities,
industrial development bonds, and other qualifying assets;
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Rockland Trust Community Development Corporation (the
Parent CDE) which, in turn, has three wholly-owned
corporate subsidiaries named Rockland Trust Community
Development LLC (RTC CDE I), Rockland
Trust Community Development Corporation II (RTC
CDE II), and Rockland Trust Community Development
Corporation III (RTC CDE III), which was formed
during 2008. The Parent CDE, CDE I, CDE II, and CDE III
were all formed to qualify as community development entities
under federal New Markets Tax Credit Program criteria; and
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Compass Exchange Advisors LLC (CEA LLC) which
provides like-kind exchange services pursuant to
section 1031 of the Internal Revenue Code.
|
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 years presentation. The following
should be read in conjunction with the Consolidated Financial
Statements and related notes thereto.
Executive
Level Overview
The Companys results of operations are largely dependent
on net interest income, which is the difference between the
interest earned on loans and securities and the 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 wealth 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.
Effective March 1, 2008, the Company completed its
acquisition of Slades Ferry Bancorp., parent of Slades
Bank. This acquisition had a significant impact on comparative
period results and will be discussed throughout the document as
it applies (see Note 11, Acquisition, within
Notes to the Consolidated Financial Statements included in
Item 8 for more information).
During 2008, management continued to implement its strategy to
alter the overall composition of the Companys earning
assets in order to focus resources in higher return segments.
This strategy encompasses a focus on commercial lending, a
strong core deposit franchise and growth in fee revenue,
particularly in the wealth management area. The Company reported
diluted earnings per share of $1.52 for the year ending
December 31, 2008, representing a decrease of 24.0% from
the same period in the prior year.
The Company recorded other-than-temporary impairment
(OTTI) on certain investment grade pooled trust
preferred securities, resulting in a negative charge to
non-interest income of approximately $7.2 million, for the
year ended December 31, 2008. The Company routinely reviews
its investment securities for OTTI and during its review noted
that certain issuers had as contractually
permitted deferred interest payments. Upon
consideration of the deferred interest payments and other
factors, including the severity and duration of the unrealized
loss positions, the Company recorded a loss for the year ended
December 31, 2008.
The Company reported net income of $24.0 million for the
twelve months ending December 31, 2008, a decrease of
15.6%, as compared to the same period in 2007. Excluding certain
non-core items mentioned below, net operating earnings were
$25.3 million for the year ended December 31, 2008,
down 16.0% from the same period in the prior year.
30
The following tables summarizes the impact of non-core items
recorded for the time periods indicated below:
RECONCILIATION
TABLE NON-GAAP FINANCIAL INFORMATION
Year to Date Ending December 31,
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Diluted
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Pretax Earnings
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Net Income
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Earnings per Share
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2008
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2007
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2008
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2007
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2008
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2007
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(Dollars in thousands, except per share amounts)
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AS REPORTED (GAAP)
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$
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30,515
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|
$
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37,172
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$
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23,964
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$
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28,381
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$
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1.52
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$
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2.00
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IMPACT OF NON-CORE ITEMS
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Net Interest Income Components
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Write-Off of Debt Issuance Cost, net of tax
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907
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590
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0.04
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Non-Interest Income Components
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Net Loss on Sale of Securities
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|
609
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396
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0.03
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Non-Interest Expense Components
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Executive Early Retirement Costs
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406
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264
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0.02
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Litigation Reserve/Recovery
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750
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1,361
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488
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885
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0.03
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0.07
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WorldCom Bond Loss Recovery
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(418
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)
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(272
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)
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(0.02
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)
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Merger & Acquisition Expenses
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1,120
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728
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0.05
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TOTAL IMPACT OF NON-CORE ITEMS
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2,061
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2,674
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1,340
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1,739
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0.09
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0.13
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AS ADJUSTED (NON-GAAP)
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$
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32,576
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$
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39,846
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$
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25,304
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$
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30,120
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$
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1.61
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$
|
2.13
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Certain non-core items are included in the computation of
earnings in accordance with generally accepted accounting
principles (GAAP) in the United States of America in
both 2008 and 2007 as indicated by the table above. In an effort
to provide investors information regarding the Companys
results, the Company has disclosed in the table above certain
non-GAAP information, which management believes provides useful
information to the investor. This information should not be
viewed as a substitute for operating results determined in
accordance with GAAP, nor is it necessarily comparable to
non-GAAP information which may be presented by other
companies.
A key determinant in the Companys profitability is the net
interest margin which represents the difference between the
yield on interest earning assets and the cost of liabilities.
The Companys net interest margin has been effectively
managed within a tight range during this volatile interest rate
environment. The Companys net interest margin was 3.95%
and 3.90% for the years ended December 31, 2008 and
December 31, 2007, respectively.
31
The following graph shows the trend in the Companys net
interest margin versus the Federal Funds Rate for nine quarters
beginning with the quarter ended December 31, 2006 and
ending with the quarter ended December 31, 2008:
Net
Interest Margin (FTE) vs. Federal Funds Rate
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*
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The Q4 2006 Net Interest Margin is
normalized for the impact of the write-off of $995,000 of
issuance costs in interest expense associated with the
refinancing of higher rate trust preferred securities during the
fourth quarter of 2006.
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**
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The Q2 2007 Net Interest Margin is
normalized for the impact of the write-off of $907,000 of
issuance costs in interest expense associated with the
refinancing of higher rate trust preferred securities during the
second quarter of 2007.
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While changes in the prevailing interest rate environment (see
Historical U.S. Treasury Yield Curve graph below) have, and
will continue to have, an impact on the Companys 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 23 Derivatives Positions,
and Market Risk section, Table 25 Interest
Rate Sensitivity within the Managements
Discussion and Analysis of Financial Condition and Results of
Operations hereof.)
Below is a graph showing the historical U.S. Treasury yield
curve for the past four years for periods ending
December 31.
32
Historical
U.S. Treasury 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
The Companys return on average assets and return on
average equity were 0.73% and 8.20%, respectively, for the year
ended December 31, 2008. The Companys return on
average assets and return on average equity were 1.05% and
12.93%, respectively, for the year ended December 31, 2007.
Non-interest income decreased by 12.4%, for the year ended
December 31, 2008 compared to the year ended
December 31, 2007. Excluding the losses on the sale of
securities and the loss on the write-down of investments to fair
value recognized during the year ended December 31, 2008,
non-interest income increased $3.9 million, or 12.0%, when
compared to 2007. See the table below for a reconciliation of
non-interest income as adjusted.
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Twelve Months Ended
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December 31,
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2008
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2007
|
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|
$ Variance
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% Variance
|
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|
(Dollars in thousands)
|
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|
|
|
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|
Non-Interest Income GAAP
|
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$
|
28,084
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|
$
|
32,051
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|
$
|
(3,967
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)
|
|
|
(12.4
|
)%
|
Add Net Loss on Sale of Securities
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|
|
609
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|
609
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|
n/a
|
|
Add Loss on Write-Down of Investments to Fair Value
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|
|
7,216
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7,216
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|
n/a
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|
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|
|
|
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|
Non-Interest Income as Adjusted
|
|
$
|
35,909
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|
|
$
|
32,051
|
|
|
$
|
3,858
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|
|
|
12.0
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%
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The Companys Wealth Management product set had aggregate
revenues of $11.1, which have grown by 37.3% for the year ended
December 31, 2008 as compared to the same period in 2007.
Assets under management amounted to $1.1 billion, a
decrease of $165.1 million, or 12.8%, as compared to the
assets under management at
1 The
Free Dictionary.com
2 Investopedia.com
33
December 31, 2007. This decrease is due to the difficult
stock market downturn experienced in the latter part of 2008.
The table below shows the assets under management since year-end
2004:
Wealth
Management
Assets Under Management as of December 31,
(Dollars in millions)
Non-interest expense has grown by 18.4% for the twelve month
period ended December 31, 2008, as compared to the same
period in the prior year. When adjusting the reported level of
non-interest expense for merger and acquisition expenses, a
litigation reserve, and a recovery on WorldCom bonds, in 2008,
non-interest expense increased $16.5 million, or 19.2%, for
the twelve months ending December 31, 2008, as compared to
the same period in 2007, which excluded expenses associated with
a litigation reserve and costs associated with the early
retirement of an executive. See the table below for a
reconciliation of non-interest expense as adjusted.
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|
|
|
|
|
|
Twelve Months Ended
|
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|
|
|
|
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|
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|
December 31,
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|
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|
|
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|
2008
|
|
|
2007
|
|
|
$ Variance
|
|
|
% Variance
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Non-Interest Expense GAAP
|
|
$
|
104,143
|
|
|
$
|
87,932
|
|
|
$
|
16,211
|
|
|
|
18.4
|
%
|
Less Executive Early Retirement Costs
|
|
|
|
|
|
|
(406
|
)
|
|
|
406
|
|
|
|
n/a
|
|
Less Merger & Acquisition Expenses
|
|
|
(1,120
|
)
|
|
|
|
|
|
|
(1,120
|
)
|
|
|
n/a
|
|
Less Litigation Reserve
|
|
|
(750
|
)
|
|
|
(1,361
|
)
|
|
|
611
|
|
|
|
(44.9
|
)%
|
Add WorldCom Bond Loss Recovery
|
|
|
418
|
|
|
|
|
|
|
|
418
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expense as Adjusted
|
|
$
|
102,691
|
|
|
$
|
86,165
|
|
|
$
|
16,526
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in expenses is primarily attributable to the Slades
acquisition which closed in the first quarter of 2008.
As the interest rate environment during the past couple of years
had not been conducive to maintaining or increasing the
securities portfolio, the Company had permitted the securities
portfolio to run-off causing it to decrease on both a relative
basis (as a percent of earning assets) and an actual basis.
However, during 2008, as the yield curve steepened and as the
balance sheet grew, the Company decided to maintain the relative
size of the securities portfolio.
During 2008, the Company sold $50.0 million in agency
securities resulting in a gain on sale of $133,000 and sold the
majority of Slades investment securities portfolio
incurring a net loss of $742,000.
34
The following graph shows the level of the Companys
securities portfolio from December 2005 through December 2008:
Total
Average Securities
(Dollars in millions)
Total deposits of $2.6 billion at December 31, 2008
increased $552.5 million, or 27.3%, compared to
December 31, 2007. Of the increases, $410.8 million is
a result of the Slades acquisition. The Company remains
committed to deposit generation, with careful management of
deposit pricing and selective deposit promotion, in an effort to
control the Companys 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.
Net loan charge-offs were higher for the year ended December
2008 than in December 2007, amounting to an annual rate of
24 basis points of average loans. The allowance for loan
losses as a percentage of total loans was 1.39% at
December 31, 2008 compared to 1.29% at September 30,
2008, and 1.31% at December 31, 2007, maintaining the
allowance for loan losses at a level that management considers
adequate to provide for probable loan losses based upon an
evaluation of known and inherent risks in the loan portfolio.
Nonperforming assets were 0.82% of assets at December 31,
2008, and 0.30% of assets at December 31, 2007. (See Table
6 of Nonperforming Assets/ Loans for detail on nonperforming
assets.) Provision for loan losses were $5.6 million and
$10.9 million for the quarter and year to date periods,
respectively, an increase of $4.2 million and
$7.8 million from the respective year ago periods. The
increase in provision is mainly driven by growth in the loan
portfolio, increased levels of loan delinquency, and
non-performing loans.
35
The following graph depicts the Companys non-performing
assets to total assets at the periods indicated:
Non-Performing
Assets
(Dollars in millions)
Non-performing assets were 0.82% of total assets at
December 31, 2008, as compared to 0.51% at
September 30, 2008. Increases on a linked quarter basis
were primarily in commercial and commercial real estate
combined, which were up about $7.4 million, and residential
real estate up $2.7 million. Due to the current economic
environment, residential non-performing assets are taking longer
to resolve as they enter non-performing status and head through
the Companys modification pipeline. As a result, the
Company anticipates that residential non-performing assets will
increase for a period of time.
Some of the Companys other highlights for the year ended
December 31, 2008 included:
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|
|
Effective March 1, 2008, the Company completed the
acquisition of Slades, parent of Slades Ferry
Trust Company doing business as Slades Bank. Slades Bank
had 9 branches located in the south coast of Massachusetts and
along the Rhode Island border and $663 million in total
assets of which $466 million are attributable to the loan
portfolio, and $586.4 million in total liabilities, of
which $410.8 million is attributable to total deposits. The
transaction was valued at approximately $102 million.
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|
|
During the second quarter of 2008, Rockland Trust completed a
sale and leaseback transaction consisting of 17 branch
properties and various individual office buildings. In total the
Company sold and concurrently leased back $27.6 million in
land and buildings with associated accumulated depreciation of
$9.4 million. Net proceeds were $32.2 million,
resulting in a gain of $13.2 million, net of transaction
costs of $753,000. The gain was deferred and is being amortized
ratably over the lease terms of the individual buildings, which
terms are either 10 or 15 years, through rent expense as a
part of occupancy and equipment. The transaction was immediately
accretive to 2008 earnings.
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|
|
Rockland issued $30 million of subordinated debt to USB
Capital Resources Inc., a wholly-owned subsidiary of
U.S. Bank National Association. Rockland has received the
$30 million derived from the sale of the subordinated debt
and intends to use the proceeds to support growth and for other
corporate purposes. The subordinated debt, which qualifies as
Tier 2 regulatory capital, has a 10 year maturity and
may be called at the option of the Company after five years. The
subordinated debt is priced at a fixed rate of 7.02% for the
first five year period.
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|
|
|
The Company made a $6.8 million capital contribution during
the first quarter of 2008 into Rockland Trust Community
Development Corporation II (RTC CDE II) to
complete the implementation of a $45 million tax credit
allocation authority awarded under the New Markets Tax Credit
Program.
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|
|
The quarterly dividend increased 5.9% to $0.18 per share
effective the first quarter of 2008.
|
36
|
|
|
|
|
In the fourth quarter of 2008 the Company announced its
intention to acquire Benjamin Franklin Bancorp, Inc., a
$1.0 billion savings bank located in the western suburbs of
Boston. The contiguous acquisition will allow the Company to
continue to expand into attractive markets.
|
Critical
Accounting Policies
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could
potentially result in materially different results under
different assumptions and conditions. The Company believes that
the Companys most critical accounting policies upon which
the Companys financial condition depends, and which
involve the most complex or subjective decisions or assessments
are as follows:
Allowance for Loan Losses: The Companys
allowance for loan losses provides for probable losses based
upon evaluations of known and inherent risks in the loan
portfolio. Arriving at an appropriate amount of allowance for
loan losses involves a high degree of judgment.
The Company makes use of two types of allowances for loan
losses: specific and general. A specific allowance may be
assigned to a loan that is considered to be impaired. Certain
loans are evaluated individually for impairment 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. Judgment
is required with respect to designating a loan as impaired and
determining the amount of the required specific allowance.
Managements judgment is based upon its assessment of
probability of default, loss given default, and exposure at
default. Changes in these estimates could be due to a number of
circumstances which may have a direct impact on the provision
for loan losses and may result in changes to the amount of
allowance.
The general allowance is determined based upon the application
of the Companys methodology for assessing the adequacy of
the allowance for loan losses, which considers historical and
expected loss factors, loan portfolio composition and other
relevant indicators. This methodology involves managements
judgment regarding the application and use of such factors
including the effects of changes to the prevailing economic
environment in its estimate of the required amounts of general
allowance.
The allowance is increased by provisions for loan losses and by
recoveries of loans previously charged-off and is reduced by
loans charged-off. For a full discussion of the Companys
methodology of assessing the adequacy of the allowance for loan
losses, see the Allowance for Loan Losses and
Provision for Loan Losses sections within this
section, Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Income Taxes: The Company accounts for income
taxes in accordance with SFAS No. 109,
Accounting for Income Taxes as interpreted by
FIN 48, Accounting for Uncertainty in Income
Taxes, resulting in two components of income tax expense,
current and deferred. Taxes are discussed in more detail in
Note 12, Income Taxes within Notes to the
Consolidated Financial Statements included in Item 8
hereof. Accrued taxes represent the net estimated amount due to
or to be received from taxing authorities in the current year.
In estimating accrued taxes, management assesses the relative
merits and risks of the appropriate tax treatment of
transactions taking into account statutory, judicial, and
regulatory guidance in the context of our tax position. Deferred
tax assets/liabilities represent differences between when a tax
benefit or expense is recognized for book purposes and on the
Companys tax return. Future tax assets are assessed for
recoverability. The Company would record a valuation allowance
if it believes based on available evidence, that it is more
likely than not that the future tax assets recognized will not
be realized before their expiration. The amount of the future
income tax asset recognized and considered realizable could be
reduced if projected income is not achieved due to various
factors such as unfavorable business conditions. If projected
income is not expected to be achieved, the Company would record
a valuation allowance to reduce its future tax assets to the
amount that it believes can be realized in its future tax
returns. The Company had no recorded tax valuation allowance as
of December 31, 2008. Additionally, deferred tax
assets/liabilities are calculated based on tax rates expected to
be in effect in future periods. Previously recorded tax assets
and liabilities need to be adjusted when the expected date of
the future event is revised based upon current information. The
Company may record a liability for unrecognized tax benefits
related to uncertain tax positions taken by the Company on its
tax returns for which there is less than a 50% likelihood of
being recognized upon a tax examination. All movements in
unrecognized tax benefits are recognized through the provision
for income taxes. At December 31, 2008, the Company had a
$211,000 liability for uncertain tax benefits.
37
Valuation of Goodwill/Intangible Assets and Analysis for
Impairment: The Company has increased its market
share through the acquisition of entire financial institutions
accounted for under the purchase method of accounting, as well
as from the acquisition of branches (not the entire institution)
and other non-banking entities. For acquisitions accounted for
under the purchase method and the acquisition of branches, the
Company is required to record assets acquired and liabilities
assumed at their fair value which is an estimate determined by
the use of internal or other valuation techniques. These
valuation estimates result in goodwill and other intangible
assets. Goodwill is subject to ongoing periodic impairment tests
and is evaluated using a two step impairment approach. Step one
of the impairment testing compares book value to the market
value of the Companys stock, or to the fair value of the
reporting unit. If test one is failed a more detailed analysis
is performed, which involves measuring the excess of the fair
value of the reporting unit, as determined in step one, over the
aggregate fair value of the individual assets, liabilities, and
identifiable intangibles as if the reporting unit was being
acquired in a business combination. During 2008 the Company
passed step one and no further analysis was required. As a
result of such impairment testing, the Company determined
goodwill was not impaired. The Companys intangible assets
are also subject to ongoing periodic impairment testing. The
Company tests each of the intangibles by comparing the carrying
value of the intangible to the sum of the undiscounted cash
flows expected to result from the use and eventual disposition
of the asset. The Company performs undiscounted cash flow
analyses to determine if impairment exists.
Valuation of Securities for
Impairment: Securities that the Company has the
ability and intent to hold until maturity are classified as
securities held-to-maturity and are accounted for using
historical cost, adjusted for amortization of premium and
accretion of discount. Trading securities are carried at fair
value, with unrealized gains and losses recorded in other
non-interest income. All other securities are classified as
securities available-for-sale and are carried at fair market
value. The fair values of securities are based on either quoted
market prices, third party pricing services, or third party
valuation specialists. Unrealized gains and losses on securities
available-for-sale are reported, on an after-tax basis, as a
separate component of stockholders equity in accumulated
other comprehensive income.
The cost of securities sold is based on the specific
identification method. On a quarterly basis, the Company makes
an assessment to determine whether there have been any events or
circumstances to indicate that a security for which there is an
unrealized loss is impaired on an other-than-temporary basis.
The Company considers many factors including the severity and
duration of the impairment; the intent and ability of the
Company to hold the security for a period of time sufficient for
a recovery in value; recent events specific to the issuer or
industry; and for debt securities, external credit ratings and
recent downgrades. The term other-than-temporary is not intended
to indicate that the decline is permanent. It indicates that the
prospects for near-term recovery are not necessarily favorable
or that there is a lack of evidence to support fair values
greater than or equal to the carrying value of the investment.
Securities for which there are unrealized losses that are deemed
to be other-than-temporary are written down to fair value with
the write-down recorded as a recognized loss and included in
non-interest income in the Consolidated Financial Statements.
Financial
Position
The Companys total assets increased by
$860.1 million, or 31.1%, to $3.6 billion at
December 31, 2008. Total securities increased
$152.9 million, or 30.1%, and loans increased by
$617.9 million, or 30.3%, during 2008. Total deposits
increased by $552.5 million, or 27.3%, and total borrowings
increased by $191.0 million, or 37.9%, during the same
period. Stockholders equity increased by
$84.8 million in 2008. The increases in the Companys
balance sheet are primarily a result of the Slades acquisition
which closed in March 2008 as well as organic growth. The
acquisition had a significant impact on comparative period
results and will be discussed throughout as it applies.
Loan Portfolio Management has focused on
changing the overall composition of the balance sheet by
emphasizing the commercial and home equity lending categories
while placing less emphasis on indirect auto lending and
portfolio residential lending. While changing the composition of
the Companys loan portfolio has led to a slower growth
rate, management believes the change to be prudent in the
prevailing interest rate and economic environment. At
December 31, 2008, the Banks loan portfolio amounted
to $2.7 billion, an increase of $617.9 million, or
30.3%, from year-end 2007. Total commercial loans increased by
$447.8 million, or 40.0%, with commercial real estate
comprising most of the change with an increase of
$328.9 million, or 41.2%. Small
38
business loans totaled $86.7 million at December 31,
2008, an increase of $16.7 million, or 23.9%, from
December 31, 2007. Home equity loans increased
$97.5 million, or 31.6%, during the year ended
December 31, 2008. Consumer auto loans decreased
$28.1 million, or 18.0%, and total residential real estate
loans increased $91.2 million, or 26.7%, during the year
ended December 31, 2008, mainly due to the Slades
acquisition.
The following table sets forth information concerning the
composition of the Banks loan portfolio by loan type at
the dates indicated.
Table
2 Loan Portfolio Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and Industrial
|
|
$
|
270,832
|
|
|
|
10.2
|
%
|
|
$
|
190,522
|
|
|
|
9.3
|
%
|
|
$
|
174,356
|
|
|
|
8.6
|
%
|
|
$
|
155,081
|
|
|
|
7.6
|
%
|
|
$
|
156,260
|
|
|
|
8.2
|
%
|
Commercial Real Estate
|
|
|
1,126,295
|
|
|
|
42.3
|
%
|
|
|
797,416
|
|
|
|
39.0
|
%
|
|
|
740,517
|
|
|
|
36.5
|
%
|
|
|
683,240
|
|
|
|
33.5
|
%
|
|
|
613,300
|
|
|
|
32.0
|
%
|
Commercial Construction
|
|
|
171,955
|
|
|
|
6.5
|
%
|
|
|
133,372
|
|
|
|
6.5
|
%
|
|
|
119,685
|
|
|
|
5.9
|
%
|
|
|
140,643
|
|
|
|
6.9
|
%
|
|
|
126,632
|
|
|
|
6.6
|
%
|
Small Business
|
|
|
86,670
|
|
|
|
3.3
|
%
|
|
|
69,977
|
|
|
|
3.4
|
%
|
|
|
59,910
|
|
|
|
3.0
|
%
|
|
|
51,373
|
|
|
|
2.5
|
%
|
|
|
43,673
|
|
|
|
2.3
|
%
|
Residential Real Estate
|
|
|
413,024
|
|
|
|
15.5
|
%
|
|
|
323,847
|
|
|
|
16.0
|
%
|
|
|
378,368
|
|
|
|
18.7
|
%
|
|
|
428,343
|
|
|
|
21.0
|
%
|
|
|
427,556
|
|
|
|
22.3
|
%
|
Residential Construction
|
|
|
10,950
|
|
|
|
0.4
|
%
|
|
|
6,115
|
|
|
|
0.3
|
%
|
|
|
7,277
|
|
|
|
0.4
|
%
|
|
|
8,316
|
|
|
|
0.4
|
%
|
|
|
7,316
|
|
|
|
0.4
|
%
|
Residential Loans Held for Sale
|
|
|
8,351
|
|
|
|
0.3
|
%
|
|
|
11,128
|
|
|
|
0.5
|
%
|
|
|
11,859
|
|
|
|
0.6
|
%
|
|
|
5,021
|
|
|
|
0.2
|
%
|
|
|
10,933
|
|
|
|
0.6
|
%
|
Consumer Home Equity
|
|
|
406,240
|
|
|
|
15.2
|
%
|
|
|
308,744
|
|
|
|
15.1
|
%
|
|
|
277,015
|
|
|
|
13.7
|
%
|
|
|
251,852
|
|
|
|
12.4
|
%
|
|
|
194,647
|
|
|
|
10.2
|
%
|
Consumer Auto
|
|
|
127,956
|
|
|
|
4.8
|
%
|
|
|
156,006
|
|
|
|
7.6
|
%
|
|
|
206,845
|
|
|
|
10.2
|
%
|
|
|
263,179
|
|
|
|
12.9
|
%
|
|
|
283,964
|
|
|
|
14.8
|
%
|
Consumer Other
|
|
|
38,614
|
|
|
|
1.5
|
%
|
|
|
45,825
|
|
|
|
2.3
|
%
|
|
|
49,077
|
|
|
|
2.4
|
%
|
|
|
53,760
|
|
|
|
2.6
|
%
|
|
|
52,077
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
2,660,887
|
|
|
|
100.0
|
%
|
|
|
2,042,952
|
|
|
|
100.0
|
%
|
|
|
2,024,909
|
|
|
|
100.0
|
%
|
|
|
2,040,808
|
|
|
|
100.0
|
%
|
|
|
1,916,358
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
|
|
|
37,049
|
|
|
|
|
|
|
|
26,831
|
|
|
|
|
|
|
|
26,815
|
|
|
|
|
|
|
|
26,639
|
|
|
|
|
|
|
|
25,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
2,623,838
|
|
|
|
|
|
|
$
|
2,016,121
|
|
|
|
|
|
|
$
|
1,998,094
|
|
|
|
|
|
|
$
|
2,014,169
|
|
|
|
|
|
|
$
|
1,891,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled contractual
amortization of the Banks loan portfolio at
December 31, 2008. Loans having no schedule of repayments
or no stated maturity are reported as due in one year or less.
Adjustable rate mortgages are included in the adjustable rate
category.
The following table also sets forth the rate structure of loans
scheduled to mature after one year.
Table
3 Scheduled Contractual Loan Amortization At
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
|
|
|
Small
|
|
|
Residential
|
|
|
Residential
|
|
|
Residential
|
|
|
Consumer
|
|
|
Consumer
|
|
|
Consumer
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Business
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Held for Sale
|
|
|
Home Equity
|
|
|
Auto
|
|
|
Other
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Amounts due in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
144,394
|
|
|
$
|
186,093
|
|
|
$
|
72,395
|
|
|
$
|
31,842
|
|
|
$
|
17,782
|
|
|
$
|
10,950
|
|
|
$
|
8,351
|
|
|
$
|
42,544
|
|
|
$
|
42,175
|
|
|
$
|
13,321
|
|
|
$
|
569,847
|
|
After one year through five years
|
|
|
85,316
|
|
|
|
584,111
|
|
|
|
58,150
|
|
|
|
46,556
|
|
|
|
76,358
|
|
|
|
|
|
|
|
|
|
|
|
103,747
|
|
|
|
83,537
|
|
|
|
14,635
|
|
|
|
1,052,410
|
|
Beyond five years
|
|
|
41,122
|
|
|
|
356,091
|
|
|
|
41,409
|
|
|
|
8,272
|
|
|
|
318,884
|
|
|
|
|
|
|
|
|
|
|
|
259,950
|
|
|
|
2,244
|
|
|
|
10,658
|
|
|
|
1,038,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,832
|
|
|
$
|
1,126,295
|
|
|
$
|
171,955
|
(1)
|
|
$
|
86,670
|
|
|
$
|
413,024
|
|
|
$
|
10,950
|
|
|
$
|
8,351
|
|
|
$
|
406,240
|
|
|
$
|
127,956
|
|
|
$
|
38,614
|
|
|
$
|
2,660,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate terms on amounts due after one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
$
|
51,154
|
|
|
$
|
856,384
|
|
|
$
|
49,459
|
|
|
$
|
37,504
|
|
|
$
|
203,252
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
114,479
|
|
|
$
|
85,781
|
|
|
$
|
25,293
|
|
|
$
|
1,423,306
|
|
Adjustable Rate
|
|
|
75,284
|
|
|
|
83,818
|
|
|
|
50,100
|
|
|
|
17,324
|
|
|
|
191,990
|
|
|
|
|
|
|
|
|
|
|
|
249,218
|
|
|
|
|
|
|
|
|
|
|
|
667,734
|
|
|
|
|
(1)
|
|
Includes certain construction loans
that convert to commercial mortgages. These loans are
reclassified to commercial real estate after the construction
phase.
|
As of December 31, 2008, $3.4 million of loans
scheduled to mature within one year were nonperforming.
Generally, the actual maturity of loans is substantially shorter
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
39
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
borrowers inability to satisfy the contractual obligations
of the loan.
Residential mortgage loans originated for sale are classified as
held for sale. These loans are specifically identified and
carried at the lower of aggregate cost or estimated market
value. Forward commitments to sell residential real estate
mortgages are contracts that the Bank enters into for the
purpose of reducing the market risk associated with originating
loans for sale should interest rates change. Forward commitments
to sell as well as commitments to originate rate-locked loans
intended for sale are recorded at fair value.
During 2008 and 2007, the Bank originated residential loans with
the intention of selling these loans in the secondary market.
Loans are sold both with servicing rights released and servicing
rights retained. The amounts of loans originated and sold with
servicing rights released were $219.7 million and
$205.4 million in 2008 and 2007, respectively. The amounts
of loans originated and sold with servicing rights retained were
$8.7 million and $3.9 million in 2008 and 2007,
respectively.
The principal balance of loans serviced by the Bank on behalf of
investors amounted to $250.5 million at December 31,
2008 and $255.2 million at December 31, 2007. The fair
value of the servicing rights associated with these loans was
$1.5 million and $2.1 million as of December 31,
2008 and 2007, respectively.
Asset Quality The Bank actively manages all
delinquent loans in accordance with formally drafted policies
and established procedures. In addition, the Banks Board
of Directors reviews delinquency statistics, by loan type, on a
monthly basis.
Delinquency The Banks philosophy toward managing
its loan portfolios is predicated upon careful monitoring which
stresses early detection and response to delinquent and default
situations. The Bank seeks to make arrangements to resolve any
delinquent or default situation over the shortest possible time
frame. Generally, the Bank requires that a delinquency notice be
mailed to a borrower upon expiration of a grace period
(typically no longer than 15 days beyond the due date).
Reminder notices and telephone calls may be issued prior to the
expiration of the grace period. If the delinquent status is not
resolved within a reasonable time frame following the mailing of
a delinquency notice, the Banks personnel charged with
managing its loan portfolios, contacts the borrower to ascertain
the reasons for delinquency and the prospects for payment. Any
subsequent actions taken to resolve the delinquency will depend
upon the nature of the loan and the length of time that the loan
has been delinquent. The borrowers needs are considered as
much as reasonably possible without jeopardizing the Banks
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.
Any loans that are modified are reviewed by the Bank to identify
if a troubled debt restructuring has occurred. A troubled debt
restructuring is when, for economic or legal reasons related to
a borrowers financial difficulties, the Bank grants a
concession to the borrower that it would not otherwise consider.
The restructuring of the loan may include the transfer of assets
from the borrower to satisfy the debt, a modification of loan
terms, or a combination of the two. As of December 31, 2008
there were 16 loans that were listed as troubled debt
restructures and at December 31, 2007 there were no
troubled debt restructured loans. If such efforts by the Bank do
not result in a satisfactory arrangement, the loan is referred
to legal counsel whereupon counsel initiates foreclosure
proceedings. At any time prior to a sale of the property at
foreclosure, the Bank may and will terminate foreclosure
proceedings if the borrower is able to work out a satisfactory
payment plan. On loans secured by commercial real estate or
other business assets, the Bank similarly seeks to reach a
satisfactory payment plan so as to avoid foreclosure or
liquidation. Due to current economic conditions the Company
anticipates an increase in delinquencies in the future.
40
The following table sets forth a summary of certain delinquency
information as of the dates indicated:
Table
4 Summary of Delinquency Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
At December 31, 2007
|
|
|
|
60-89 days
|
|
|
90 days or more
|
|
|
60-89 days
|
|
|
90 days or more
|
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
Number
|
|
|
Principal
|
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
of Loans
|
|
|
Balance
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and Industrial
|
|
|
8
|
|
|
$
|
1,672
|
|
|
|
9
|
|
|
$
|
1,790
|
|
|
|
5
|
|
|
$
|
191
|
|
|
|
5
|
|
|
$
|
280
|
|
Commercial Real Estate
|
|
|
8
|
|
|
|
2,649
|
|
|
|
9
|
|
|
|
3,051
|
|
|
|
5
|
|
|
|
1,218
|
|
|
|
9
|
|
|
|
1,761
|
|
Commercial Construction
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
2,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small Business
|
|
|
12
|
|
|
|
303
|
|
|
|
32
|
|
|
|
1,025
|
|
|
|
9
|
|
|
|
212
|
|
|
|
15
|
|
|
|
332
|
|
Residential Real Estate
|
|
|
8
|
|
|
|
3,076
|
|
|
|
26
|
|
|
|
5,767
|
|
|
|
3
|
|
|
|
574
|
|
|
|
5
|
|
|
|
1,199
|
|
Residential Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Home Equity
|
|
|
9
|
|
|
|
1,221
|
|
|
|
11
|
|
|
|
749
|
|
|
|
7
|
|
|
|
379
|
|
|
|
9
|
|
|
|
786
|
|
Consumer Auto
|
|
|
94
|
|
|
|
869
|
|
|
|
75
|
|
|
|
552
|
|
|
|
55
|
|
|
|
530
|
|
|
|
78
|
|
|
|
676
|
|
Consumer Other
|
|
|
44
|
|
|
|
256
|
|
|
|
42
|
|
|
|
205
|
|
|
|
51
|
|
|
|
272
|
|
|
|
31
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
183
|
|
|
$
|
10,046
|
|
|
|
210
|
|
|
$
|
15,452
|
|
|
|
135
|
|
|
$
|
3,376
|
|
|
|
152
|
|
|
$
|
5,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans As permitted by banking
regulations, certain consumer loans past due 90 days or
more continue to accrue interest. In addition, certain
commercial and real estate loans that are more than 90 days
past due may be kept on an accruing status if the loan is well
secured and in the process of collection. As a general rule,
within the commercial and real estate categories, or home equity
loans more than 90 days past due with respect to principal
or interest are classified as a nonaccrual loan. Income accruals
are suspended on all nonaccrual loans and all previously accrued
and uncollected interest is reversed against current income. A
loan remains on nonaccrual status until it becomes current with
respect to principal and interest (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
it is charged-off against the allowance for loan losses.
Nonperforming Assets Nonperforming assets are
comprised of nonperforming loans, nonperforming securities,
Other Real Estate Owned (OREO) and other assets.
Nonperforming loans consist of loans that are more than
90 days past due but still accruing interest and
non-accrual loans. Nonperforming securities consist of
securities that are on non-accrual status. OREO includes
properties held by the Bank as a result of foreclosure or by
acceptance of a deed in lieu of foreclosure. As of
December 31, 2008, nonperforming assets totaled
$29.9 million, an increase of $21.6 million from the
prior year-end. The increase in nonperforming assets is
attributable mainly to increases in nonperforming loans, with
increases in the commercial and residential real estate
categories and, to a lesser extent, in the commercial and
industrial categories. Nonperforming assets represented 0.82% of
total assets at December 31, 2008, as compared to 0.30% at
December 31, 2007. The Bank had seven properties totaling
$1.8 million and three properties totaling $681,000 held as
OREO as of December 31, 2008 and December 31, 2007,
respectively.
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 $642,000 and $455,000 for the periods ending
December 31, 2008, and December 31, 2007, respectively.
41
The following table sets forth information regarding
nonperforming assets held by the Bank at the dates indicated.
Table
5 Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Loans past due 90 days or more but still accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Auto
|
|
$
|
170
|
|
|
$
|
378
|
|
|
$
|
252
|
|
|
$
|
165
|
|
|
$
|
72
|
|
Consumer Other
|
|
|
105
|
|
|
|
122
|
|
|
|
137
|
|
|
|
62
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
275
|
|
|
$
|
500
|
|
|
$
|
389
|
|
|
$
|
227
|
|
|
$
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans accounted for on a nonaccrual basis (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
1,942
|
|
|
$
|
306
|
|
|
$
|
872
|
|
|
$
|
245
|
|
|
$
|
334
|
|
Small Business(2)
|
|
|
1,111
|
|
|
|
439
|
|
|
|
74
|
|
|
|
47
|
|
|
|
N/A
|
|
Commercial Real Estate
|
|
|
12,370
|
|
|
|
2,568
|
|
|
|
2,346
|
|
|
|
313
|
|
|
|
227
|
|
Residential Real Estate
|
|
|
9,394
|
|
|
|
2,380
|
|
|
|
2,318
|
|
|
|
1,876
|
|
|
|
1,193
|
|
Consumer Home Equity
|
|
|
1,090
|
|
|
|
872
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
Consumer Auto
|
|
|
642
|
|
|
|
455
|
|
|
|
451
|
|
|
|
509
|
|
|
|
594
|
|
Consumer Other
|
|
|
109
|
|
|
|
124
|
|
|
|
171
|
|
|
|
122
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,658
|
|
|
$
|
7,144
|
|
|
$
|
6,590
|
|
|
$
|
3,112
|
|
|
$
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
26,933
|
|
|
$
|
7,644
|
|
|
$
|
6,979
|
|
|
$
|
3,339
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual securities
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets in possession
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
1,809
|
|
|
|
681
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
29,883
|
|
|
$
|
8,325
|
|
|
$
|
7,169
|
|
|
$
|
3,339
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of gross loans
|
|
|
1.01
|
%
|
|
|
0.37
|
%
|
|
|
0.34
|
%
|
|
|
0.16
|
%
|
|
|
0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percent of total assets
|
|
|
0.82
|
%
|
|
|
0.30
|
%
|
|
|
0.25
|
%
|
|
|
0.11
|
%
|
|
|
0.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing restructured loans
|
|
$
|
1,063
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
377
|
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
There were $74,000 restructured, nonaccruing loans at
December 31, 2008, and none at December 31, 2007,
2006, 2005 and 2004. |
|
(2) |
|
For the periods prior to December 31, 2005, Small Business
loans are included in Commercial and Industrial and
Consumer Other. |
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 Banks policy to have any
restructured loans which are on nonaccrual status prior to being
modified, remain on nonaccrual status for approximately six
months before management considers its return to accrual status.
If the restructured loan is not on nonaccrual status prior to
being modified, it is reviewed to determine if the modified loan
should remain on accrual status.
Potential problem loans are any loans, which are not included in
non-accrual 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 both December 31, 2008 and
2007, the Bank had forty-five and fifteen potential problem loan
relationships, respectively, which are not included in
nonperforming loans with an outstanding balance of
$78.7 million and $21.9 million, respectively. At
December 31, 2008, these potential problem loans continued
42
to perform with respect to payments. Management actively
monitors these loans and strives to minimize any possible
adverse impact to the Bank.
See the table below for interest income that was recognized or
collected on the nonaccrual loans as of the dates indicated.
Table
6 Interest Income Recognized/Collected on Nonaccrual
/ Troubled Debt Restructured Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income that would have been recognized, if nonaccruing
loans at their respective dates had been performing
|
|
$
|
890
|
|
|
$
|
634
|
|
|
$
|
146
|
|
Interest income recognized, on troubled debt restructured
accruing loans at their respective dates(1)
|
|
|
21
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Interest collected on these nonaccrual and restructured loans
and included in interest income(1)
|
|
|
198
|
|
|
|
120
|
|
|
|
225
|
|
|
|
|
(1) |
|
There were no restructured loans at December 31, 2007 and
2006. |
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 borrowers 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 categories by either
the present value of expected future cash flows discounted at
the loans effective interest rate, the loans
obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
At December 31, 2008, impaired loans included all
commercial real estate loans and commercial and industrial loans
on nonaccrual status, troubled debt restructures, and other
loans that have been categorized as impaired. Total impaired
loans at December 31, 2008 and 2007 were $15.6 million
and $3.9 million, respectively.
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 loans 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.
The Company holds three collateralized debt obligation
securities (CDOs) comprised of pools of trust
preferred securities issued by banks and insurance companies,
which are currently deferring interest payments on certain
tranches within the bonds structures including the
tranches held by the Company. The bonds are anticipated to
continue to defer interest until cash flows are sufficient to
satisfy certain collateralization levels designed to protect
more senior tranches. As a result the Company has placed the
three securities on nonaccrual status and has reversed any
previously accrued income related to these securities.
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.
43
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. Additionally, various
regulatory agencies, as an integral part of the Banks
examination process, periodically review the allowance for loan
losses for adequacy.
As of December 31, 2008, the allowance for loan losses
totaled $37.0 million, or 1.39%, of total loans as compared
to $26.8 million, or 1.31%, of total loans at
December 31, 2007. The increase in the amount of the
allowance for loan losses was due to a combination of factors
including changes in asset quality in light of the current
economic environment, the acquisition of the former Slades
Ferry Bancorp. loan portfolio and organic loan growth. Based on
managements analysis, management believes that the level
of the allowance for loan losses at December 31, 2008 is
adequate.
The following table summarizes changes in the allowance for loan
losses and other selected statistics for the periods presented:
Table
7 Summary of Changes in the Allowance for Loan
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Average total loans
|
|
$
|
2,489,028
|
|
|
$
|
1,994,273
|
|
|
$
|
2,041,098
|
|
|
$
|
1,987,591
|
|
|
$
|
1,743,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, beginning of year
|
|
$
|
26,831
|
|
|
$
|
26,815
|
|
|
$
|
26,639
|
|
|
$
|
25,197
|
|
|
$
|
23,163
|
|
Charged-off loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
595
|
|
|
|
498
|
|
|
|
185
|
|
|
|
120
|
|
|
|
181
|
|
Small Business(1)
|
|
|
1,350
|
|
|
|
789
|
|
|
|
401
|
|
|
|
505
|
|
|
|
N/A
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Home Equity
|
|
|
1,200
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Auto
|
|
|
2,078
|
|
|
|
1,456
|
|
|
|
1,713
|
|
|
|
1,772
|
|
|
|
2,089
|
|
Consumer Other
|
|
|
1,553
|
|
|
|
1,003
|
|
|
|
881
|
|
|
|
1,077
|
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charged-off loans
|
|
|
7,138
|
|
|
|
3,868
|
|
|
|
3,180
|
|
|
|
3,474
|
|
|
|
2,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries on loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
168
|
|
|
|
63
|
|
|
|
219
|
|
|
|
85
|
|
|
|
214
|
|
Small Business(1)
|
|
|
159
|
|
|
|
26
|
|
|
|
92
|
|
|
|
14
|
|
|
|
N/A
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
128
|
|
|
|
2
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Commercial Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Home Equity
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
Consumer Auto
|
|
|
434
|
|
|
|
425
|
|
|
|
516
|
|
|
|
350
|
|
|
|
372
|
|
Consumer Other
|
|
|
178
|
|
|
|
240
|
|
|
|
193
|
|
|
|
144
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
944
|
|
|
|
754
|
|
|
|
1,021
|
|
|
|
741
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
6,194
|
|
|
|
3,114
|
|
|
|
2,159
|
|
|
|
2,733
|
|
|
|
1,854
|
|
Allowance related to business combinations
|
|
|
5,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
870
|
|
Provision for loan losses
|
|
|
10,888
|
|
|
|
3,130
|
|
|
|
2,335
|
|
|
|
4,175
|
|
|
|
3,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowances for loan losses, end of year
|
|
$
|
37,049
|
|
|
$
|
26,831
|
|
|
$
|
26,815
|
|
|
$
|
26,639
|
|
|
$
|
25,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off as a percent of average total loans
|
|
|
0.24
|
%
|
|
|
0.16
|
%
|
|
|
0.11
|
%
|
|
|
0.14
|
%
|
|
|
0.11
|
%
|
Allowance for loan losses as a percent of total loans
|
|
|
1.39
|
%
|
|
|
1.31
|
%
|
|
|
1.32
|
%
|
|
|
1.31
|
%
|
|
|
1.31
|
%
|
Allowance for loan losses as a percent of nonperforming loans
|
|
|
137.56
|
%
|
|
|
351.01
|
%
|
|
|
384.22
|
%
|
|
|
797.81
|
%
|
|
|
932.53
|
%
|
Net loans charged-off as a percent of allowance for loan losses
|
|
|
16.72
|
%
|
|
|
11.61
|
%
|
|
|
8.05
|
%
|
|
|
10.26
|
%
|
|
|
7.36
|
%
|
Recoveries as a percent of charge-offs
|
|
|
13.22
|
%
|
|
|
19.49
|
%
|
|
|
32.11
|
%
|
|
|
21.33
|
%
|
|
|
28.66
|
%
|
|
|
|
(1) |
|
For periods prior to December 31, 2005, Small Business
loans are included in Commercial and Industrial and
Consumer-Other. |
44
The allowance for loan losses is allocated to various loan
categories as part of the Banks process of evaluating the
adequacy of the allowance for loan losses. Allocated allowance
amounts increased by approximately $10.2 million to
$37.0 million at December 31, 2008. Commencing in
2007, management has allocated certain amounts of the allowance
to the various loan categories representing a margin for
imprecision, which may not be fully captured in its
formula-based estimation of loan losses due to the imprecise
nature of loan loss estimation techniques. In prior periods,
amounts designated as imprecision were not allocated
to specific loan categories. Prior to 2007, these amounts were
maintained as a separate, non-specific allowance item identified
as the imprecision allowance.
The following table sets forth the allocation of the allowance
for loan losses by loan category at the dates indicated. The
allocation is made to each loan category using the analytical
techniques and estimation methods described herein. While these
amounts represent managements best estimate of the
distribution of expected losses at the evaluation dates, they
are not necessarily indicative of either the categories in which
actual losses may occur or the extent of such actual losses that
may be recognized within each category. The total allowance is
available to absorb losses from any segment of the loan
portfolio.
Table
8 Summary of Allocation of Allowance for Loan
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
|
|
Loans
|
|
|
|
Allowance
|
|
|
In Category
|
|
|
Allowance
|
|
|
In Category
|
|
|
Allowance
|
|
|
In Category
|
|
|
Allowance
|
|
|
In Category
|
|
|
Allowance
|
|
|
In Category
|
|
|
|
Amount
|
|
|
To Total Loans
|
|
|
Amount
|
|
|
To Total Loans
|
|
|
Amount
|
|
|
To Total Loans
|
|
|
Amount
|
|
|
To Total Loans
|
|
|
Amount
|
|
|
To Total Loans
|
|
|
|
(Dollars In thousands)
|
|
|
Allocated Allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
5,532
|
|
|
|
10.2
|
%
|
|
$
|
3,850
|
|
|
|
9.3
|
%
|
|
$
|
3,615
|
|
|
|
8.6
|
%
|
|
$
|
3,134
|
|
|
|
7.6
|
%
|
|
$
|
3,387
|
|
|
|
8.2
|
%
|
Small Business
|
|
|
2,170
|
|
|
|
3.3
|
%
|
|
|
1,265
|
|
|
|
3.4
|
%
|
|
|
1,340
|
|
|
|
3.0
|
%
|
|
|
1,193
|
|
|
|
2.5
|
%
|
|
|
1,022
|
|
|
|
2.3
|
%
|
Commercial Real Estate
|
|
|
15,942
|
|
|
|
42.3
|
%
|
|
|
13,939
|
|
|
|
39.0
|
%
|
|
|
13,136
|
|
|
|
36.5
|
%
|
|
|
11,554
|
|
|
|
33.5
|
%
|
|
|
10,346
|
|
|
|
32.0
|
%
|
Real Estate Construction
|
|
|
4,203
|
|
|
|
6.9
|
%
|
|
|
3,408
|
|
|
|
6.8
|
%
|
|
|
2,955
|
|
|
|
6.3
|
%
|
|
|
3,474
|
|
|
|
7.3
|
%
|
|
|
2,905
|
|
|
|
7.0
|
%
|
Residential Real Estate
|
|
|
2,447
|
|
|
|
15.8
|
%
|
|
|
741
|
|
|
|
16.5
|
%
|
|
|
566
|
|
|
|
19.3
|
%
|
|
|
650
|
|
|
|
21.2
|
%
|
|
|
659
|
|
|
|
22.9
|
%
|
Consumer Home Equity
|
|
|
3,091
|
|
|
|
15.2
|
%
|
|
|
1,326
|
|
|
|
15.1
|
%
|
|
|
1,024
|
|
|
|
13.7
|
%
|
|
|
755
|
|
|
|
12.4
|
%
|
|
|
583
|
|
|
|
10.1
|
%
|
Consumer Auto
|
|
|
2,122
|
|
|
|
4.8
|
%
|
|
|
1,609
|
|
|
|
7.6
|
%
|
|
|
2,066
|
|
|
|
10.2
|
%
|
|
|
2,629
|
|
|
|
12.9
|
%
|
|
|
2,839
|
|
|
|
14.8
|
%
|
Consumer Other
|
|
|
1,542
|
|
|
|
1.5
|
%
|
|
|
693
|
|
|
|
2.3
|
%
|
|
|
652
|
|
|
|
2.4
|
%
|
|
|
757
|
|
|
|
2.6
|
%
|
|
|
667
|
|
|
|
2.7
|
%
|
Imprecision Allowance
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
N/A
|
|
|
|
1,461
|
|
|
|
N/A
|
|
|
|
2,493
|
|
|
|
N/A
|
|
|
|
2,789
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Allowance for Loan Losses
|
|
$
|
37,049
|
|
|
|
100.0
|
%
|
|
$
|
26,831
|
|
|
|
100.0
|
%
|
|
$
|
26,815
|
|
|
|
100.0
|
%
|
|
$
|
26,639
|
|
|
|
100.0
|
%
|
|
$
|
25,197
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The allowance for loan losses is allocated to loan types using
both a formula-based approach applied to groups of loans and an
analysis of certain individual loans for impairment. The
formula-based approach has been updated, with greater emphasis
on loss factors derived from actual historical portfolio loss
rates which are combined with an assessment of certain
qualitative factors for allocating allowance amounts to the
various loan categories.
Management has identified certain qualitative risk factors which
impact the inherent risk of loss within the portfolio
represented by historic measures. 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 Banks loan
portfolio. Market risk factors consist of changes to general
economic and business conditions that impact the Banks
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 impact the inherent risk of loss in the loan
portfolio resulting from economic events which the Bank may not
be able to fully diversify out of its portfolios.
The formula-based approach evaluates groups of loans with common
characteristics, which consist of similar loan types with
similar terms and conditions, to determine the allocation
appropriate within each portfolio section. This approach
incorporates qualitative adjustments based upon
managements assessment of various market and portfolio
specific risk factors into its formula-based estimate.
The allowance for loan loss also includes a component as an
addition to the amount of allowance determined to be required
using the formula-based estimation techniques described herein.
This component is maintained as a margin for imprecision to
account for the inherent subjectivity and imprecise nature of
the analytical processes
45
employed. Due to the imprecise nature of the loan loss
estimation process and ever changing conditions, the qualitative
risk attributes may not adequately capture amounts of incurred
loss in the formula-based loan loss components used to determine
allocations in the Banks analysis of the adequacy of the
allowance for loan losses. As noted above, this component is
allocated to the various loan types.
Amounts of allowance may also be assigned 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, loan
modifications meeting the definition of a troubled debt
restructure, or non-accrual status. A specific allowance amount
is allocated to an individual loan when such loan has been
deemed impaired and when the amount of a probable loss is able
to be estimated on the basis of: (a) the present value of
anticipated future cash flows or on the loans observable
fair market value, or (b) the fair value of collateral, if
the loan is collateral dependent. Loans evaluated individually
for impairment and the amount of specific allowance assigned to
such loans totaled $15.6 million and $2.1 million
respectively, at December 31, 2008 and $3.9 million
and $14,000, respectively, at December 31, 2007.
At December 31, 2008 and December 31, 2007, the
allowance for loan losses totaled $37.0 million and
$26.8 million, respectively. Based on the analyses
described above, management believes that the level of the
allowance for loan losses at December 31, 2008 is adequate.
Securities Portfolio The Companys
securities portfolio consists of trading assets, securities
available for sale, securities which management intends to hold
until maturity, and Federal Home Loan Bank (FHLB)
stock. Equity securities which are held for the purpose of
funding Rabbi Trust obligations (see Note 14
Employee Benefits Pension within Notes to
Consolidated Financial Statements in Item 8 hereof) are
classified as trading assets. Additionally, the Company has a
$1.2 million equities portfolio which was acquired as part
of the Slades acquisition that is included in trading assets.
The Slades portfolio is entirely comprised of an open-end mutual
fund whose investment objective is to invest in geographically
specific private placement debt securities designed to support
underlining economic activities such as community development
and affordable housing. Trading assets are recorded at fair
value with changes in fair value recorded in earnings. Trading
assets were $2.7 million at December 31, 2008 and
$1.7 million at December 31, 2007.
The following table sets forth the amortized cost and percentage
distribution of securities held to maturity at the dates
indicated.
Table
9 Amortized Cost of Securities Held to
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury and Government Sponsored Enterprises
|
|
$
|
|
|
|
|
|
|
|
$
|
699
|
|
|
|
1.5
|
%
|
|
$
|
|
|
|
|
|
|
U. S. Agency Mortgage-Backed Securities
|
|
|
3,470
|
|
|
|
10.6
|
%
|
|
|
4,488
|
|
|
|
9.9
|
%
|
|
|
5,526
|
|
|
|
7.2
|
%
|
State, County and Municipal Securities
|
|
|
19,517
|
|
|
|
59.5
|
%
|
|
|
30,245
|
|
|
|
66.9
|
%
|
|
|
35,046
|
|
|
|
45.7
|
%
|
Trust Preferred Securities Issued by Banks and Insurers
|
|
|
9,803
|
|
|
|
29.9
|
%
|
|
|
9,833
|
|
|
|
21.7
|
%
|
|
|
36,175
|
|
|
|
47.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,790
|
|
|
|
100.0
|
%
|
|
$
|
45,265
|
|
|
|
100.0
|
%
|
|
$
|
76,747
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
The following table sets forth the fair value and percentage
distribution of securities available for sale at the dates
indicated.
Table
10 Fair Value of Securities Available for
Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury and Government Sponsored Enterprises
|
|
$
|
710
|
|
|
|
0.1
|
%
|
|
$
|
69,663
|
|
|
|
15.7
|
%
|
|
$
|
87,853
|
|
|
|
21.1
|
%
|
U. S. Agency Mortgage-Backed Securities
|
|
|
475,083
|
|
|
|
79.1
|
%
|
|
|
237,816
|
|
|
|
53.6
|
%
|
|
|
213,355
|
|
|
|
51.2
|
%
|
Temporary Liquidity Guarantee Bonds
|
|
|
25,852
|
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Collateralized Mortgage Obligations
|
|
|
15,513
|
|
|
|
2.6
|
%
|
|
|
24,803
|
|
|
|
5.6
|
%
|
|
|
148
|
|
|
|
|
|
U. S. Agency Collateralized Mortgage Obligations
|
|
|
56,784
|
|
|
|
9.5
|
%
|
|
|
72,082
|
|
|
|
16.2
|
%
|
|
|
88,390
|
|
|
|
21.2
|
%
|
State, County and Municipal Securities
|
|
|
18,954
|
|
|
|
3.2
|
%
|
|
|
18,814
|
|
|
|
4.2
|
%
|
|
|
18,817
|
|
|
|
4.5
|
%
|
Trust Preferred Securities Issued by Banks and Insurers
|
|
|
7,395
|
|
|
|
1.2
|
%
|
|
|
21,080
|
|
|
|
4.7
|
%
|
|
|
8,525
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
600,291
|
|
|
|
100.0
|
%
|
|
$
|
444,258
|
|
|
|
100.0
|
%
|
|
$
|
417,088
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Company recorded other-than-temporary
impairment (OTTI) on certain investment grade pooled
trust preferred securities amounting to $7.2 million
pre-tax for the year ended December 31, 2008. See table
below for details regarding the Companys trust preferred
securities and related OTTI charges as of December 31, 2008.
Table
11 Trust Preferred Securities Detail as of
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
After
|
|
|
|
|
|
|
Cost
|
|
|
OTTI
|
|
|
Impairment
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
Pooled Trust Preferred Securities
|
|
$
|
18,677
|
|
|
$
|
7,216
|
|
|
$
|
11,461
|
|
|
$
|
5,194
|
|
Single Issuer Trust Preferred Securities
|
|
|
14,803
|
|
|
|
|
|
|
|
14,803
|
|
|
|
9,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Trust Preferred Securities
|
|
$
|
33,480
|
|
|
$
|
7,216
|
|
|
$
|
26,264
|
|
|
$
|
14,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the OTTI charge, BBB rated and certain A rated
pooled trust preferred securities held by the Company were
written down to average prices of approximately 13% and 24% per
dollar, respectively.
The Company reviews investment securities for the presence of
other-than-temporary impairment, taking into consideration
current market conditions, extent and nature of change in fair
value, issuer rating changes and trends, volatility of earnings,
current analysts evaluations, the Companys ability
and intent to hold investments until a recovery of fair value,
which may be maturity, as well as other factors. The term
other-than-temporary is not intended to indicate
that the decline is permanent, but indicates that the prospects
for a near-term recovery of value is not necessarily favorable,
or that there is a lack of evidence to support a realizable
value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be
other-than-temporary, the value of the security is reduced and a
corresponding charge to earnings is recognized. The investments
for which the impairment charge has been recognized are pooled
trust preferred securities issued by banks and insurers which
are classified as available for sale. The decision on whether to
deem these securities other-than-temporarily impaired was based
on near-term
financial prospects for each pooled trust preferred security, a
specific analysis of the structure of each security, and an
evaluation of the underlying information and industry knowledge
available to the
47
Company. Due to the current economic conditions, the Company
will continue to monitor the investment securities closely.
Future reviews for other-than-temporary impairment will consider
the particular facts and circumstances during the reporting
period under review.
The following two tables set forth contractual maturities of the
Banks securities portfolio at December 31, 2008.
Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Table
12 Amortized Cost of Securities Held to Maturity
Amounts Maturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
Weighted
|
|
|
One Year
|
|
|
|
|
|
Weighted
|
|
|
Five
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
One
|
|
|
% of
|
|
|
Average
|
|
|
to Five
|
|
|
% of
|
|
|
Average
|
|
|
Years to
|
|
|
% of
|
|
|
Average
|
|
|
Over Ten
|
|
|
% of
|
|
|
Average
|
|
|
|
|
|
% of
|
|
|
Average
|
|
|
|
Year
|
|
|
Total
|
|
|
Yield
|
|
|
Years
|
|
|
Total
|
|
|
Yield
|
|
|
Ten Years
|
|
|
Total
|
|
|
Yield
|
|
|
Years
|
|
|
Total
|
|
|
Yield
|
|
|
Total
|
|
|
Total
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
U. S. Treasury and Government Sponsored Enterprises
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Mortgage-Backed Securities
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
3,470
|
|
|
|
10.6
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
3,470
|
|
|
|
10.6
|
%
|
|
|
5.4
|
%
|
State, County and Municipal Securities
|
|
|
13
|
|
|
|
0.0
|
%
|
|
|
4.8
|
%
|
|
|
8,042
|
|
|
|
24.5
|
%
|
|
|
4.1
|
%
|
|
|
9,335
|
|
|
|
28.6
|
%
|
|
|
4.6
|
%
|
|
|
2,127
|
|
|
|
6.5
|
%
|
|
|
5.0
|
%
|
|
|
19,517
|
|
|
|
59.6
|
%
|
|
|
4.6
|
%
|
Trust Preferred Securities Issued by Banks and Insurers
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
9,803
|
|
|
|
29.9
|
%
|
|
|
7.6
|
%
|
|
|
9,803
|
|
|
|
29.9
|
%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13
|
|
|
|
0.0
|
%
|
|
|
4.8
|
%
|
|
$
|
8,042
|
|
|
|
24.5
|
%
|
|
|
4.1
|
%
|
|
$
|
12,805
|
|
|
|
39.1
|
%
|
|
|
4.8
|
%
|
|
$
|
11,930
|
|
|
|
36.4
|
%
|
|
|
7.1
|
%
|
|
$
|
32,790
|
|
|
|
100.0
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
13 Fair Value of Securities Available for Sale
Amounts Maturing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
|
|
|
|
|
|
|
|
|
Five
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
|
|
|
Weighted
|
|
|
Year to
|
|
|
|
|
|
Weighted
|
|
|
Years to
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
One
|
|
|
% of
|
|
|
Average
|
|
|
Five
|
|
|
% of
|
|
|
Average
|
|
|
Ten
|
|
|
% of
|
|
|
Average
|
|
|
Over Ten
|
|
|
% of
|
|
|
Average
|
|
|
|
|
|
% of
|
|
|
Average
|
|
|
|
Year
|
|
|
Total
|
|
|
Yield
|
|
|
Years
|
|
|
Total
|
|
|
Yield
|
|
|
Years
|
|
|
Total
|
|
|
Yield
|
|
|
Years
|
|
|
Total
|
|
|
Yield
|
|
|
Total
|
|
|
Total
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
U. S. Treasury and Government Sponsored Enterprises
|
|
$
|
710
|
|
|
|
0.1
|
%
|
|
|
2.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
$
|
710
|
|
|
|
0.1
|
%
|
|
|
2.0
|
%
|
Mortgage-Backed Securities
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
19,314
|
|
|
|
3.2
|
%
|
|
|
3.8
|
%
|
|
|
86,547
|
|
|
|
14.4
|
%
|
|
|
4.4
|
%
|
|
|
369,221
|
|
|
|
61.5
|
%
|
|
|
5.2
|
%
|
|
|
475,083
|
|
|
|
79.1
|
%
|
|
|
5.0
|
%
|
Collateralized Mortgage Obligations
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
50,624
|
|
|
|
8.4
|
%
|
|
|
4.0
|
%
|
|
|
21,673
|
|
|
|
3.6
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
72,297
|
|
|
|
12.0
|
%
|
|
|
4.4
|
%
|
State, County and Municipal Securities
|
|
|
3,452
|
|
|
|
0.6
|
%
|
|
|
2.4
|
%
|
|
|
15,503
|
|
|
|
2.6
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
18,954
|
|
|
|
3.2
|
%
|
|
|
3.1
|
%
|
Corporate Debt Securities
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
25,852
|
|
|
|
4.3
|
%
|
|
|
3.1
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
25,852
|
|
|
|
4.3
|
%
|
|
|
3.1
|
%
|
Trust Preferred Securities Issued by Banks and Insurers
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
7,395
|
|
|
|
1.2
|
%
|
|
|
4.1
|
%
|
|
|
7,395
|
|
|
|
1.2
|
%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,161
|
|
|
|
0.7
|
%
|
|
|
2.3
|
%
|
|
$
|
111,293
|
|
|
|
18.5
|
%
|
|
|
3.6
|
%
|
|
$
|
108,220
|
|
|
|
18.0
|
%
|
|
|
4.6
|
%
|
|
$
|
376,616
|
|
|
|
62.7
|
%
|
|
|
5.1
|
%
|
|
$
|
600,291
|
|
|
|
100.0
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, 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 state, county or municipal securities in
2008 or 2007.
Bank Owned Life Insurance The bank holds Bank
Owned Life Insurance (BOLI) for the purpose of
offsetting the Banks future obligations to its employees
under its retirement and benefits plans. The value of BOLI was
$65.0 and $49.4 million at December 31, 2008 and
December 31, 2007, respectively. The increase in the BOLI
value in 2008 was mainly due to the Slades acquisition on
March 1, 2008. On the date of the acquisition, Slades
BOLI portfolio was valued at $12.7 million. Also as part of
this acquisition, the Company assumed split-dollar bank owned
insurance arrangements, whereby the policy benefits will be
split between the employer and the employee. Under
EITF 06-4
Accounting for Deferred Compensation and Post Retirement
Benefit Aspects of Endorsement
48
Split-Dollar Life Insurance Arrangements, a liability for
the portion of anticipated policy benefits that will be paid to
the employee must be recorded as a liability, and accordingly,
the Companys balance sheet includes a $1.3 million
related liability. The bank recorded income from BOLI of
$2.6 million in 2008, $2.0 million in 2007, and
$3.3 million in 2006. In the first quarter of 2006, the
Company recognized a tax exempt gain of $1.3 million
associated with death benefits received under the BOLI program.
Deposits As of December 31, 2008,
deposits of $2.6 billion were $552.5 million, or
27.3%, higher than the prior year-end. Core deposits increased
by $238.6 million, or 16.0%.
The following table summarizes deposit growth during the year
ending December 31, 2008:
Table
14 Components of Deposit Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Slades
|
|
|
Organic
|
|
|
|
2008
|
|
|
2007
|
|
|
Acquisition
|
|
|
Growth/(Decline)
|
|
|
|
(Dollars in thousands)
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
$
|
519,326
|
|
|
$
|
471,164
|
|
|
$
|
74,584
|
|
|
$
|
(26,422
|
)
|
Savings and Interest Checking Accounts
|
|
|
725,313
|
|
|
|
587,474
|
|
|
|
119,908
|
|
|
|
17,931
|
|
Money Market
|
|
|
488,345
|
|
|
|
435,792
|
|
|
|
38,668
|
|
|
|
13,885
|
|
Time Certificates of Deposit
|
|
|
846,096
|
|
|
|
532,180
|
|
|
|
177,609
|
|
|
|
136,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
2,579,080
|
|
|
$
|
2,026,610
|
|
|
$
|
410,769
|
|
|
$
|
141,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the average balances of the
Banks deposits for the periods indicated.
Table
15 Average Balances of Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Demand Deposits
|
|
$
|
533,543
|
|
|
|
21.9
|
%
|
|
$
|
485,922
|
|
|
|
23.7
|
%
|
|
$
|
495,958
|
|
|
|
23.1
|
%
|
Savings and Interest Checking
|
|
|
688,336
|
|
|
|
28.3
|
%
|
|
|
575,269
|
|
|
|
28.0
|
%
|
|
|
563,615
|
|
|
|
26.3
|
%
|
Money Market
|
|
|
472,065
|
|
|
|
19.4
|
%
|
|
|
462,434
|
|
|
|
22.5
|
%
|
|
|
524,265
|
|
|
|
24.4
|
%
|
Time Certificates of Deposits
|
|
|
740,779
|
|
|
|
30.4
|
%
|
|
|
531,016
|
|
|
|
25.8
|
%
|
|
|
563,212
|
|
|
|
26.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,434,723
|
|
|
|
100.0
|
%
|
|
$
|
2,054,641
|
|
|
|
100.0
|
%
|
|
$
|
2,147,050
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Banks time certificates of deposit of $100,000 or more
totaled $285.4 million at December 31, 2008. The
maturity of these certificates is as follows:
Table
16 Maturities of Time Certificate of Deposits Over
$100,000
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Percentage
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
1 to 3 months
|
|
$
|
137,314
|
|
|
|
48.1
|
%
|
4 to 6 months
|
|
|
59,406
|
|
|
|
20.8
|
%
|
7 to 12 months
|
|
|
36,417
|
|
|
|
12.8
|
%
|
Over 12 months
|
|
|
52,273
|
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
285,410
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The Bank also participates in the Certificate of Deposit
Registry Service (CDARS) program, allowing the Bank to provide
easy access to multi-million dollar FDIC deposit insurance
protection on certificate of deposits
49
investments for consumers, businesses and public entities. The
economic downturn and subsequent flight to safety makes CDARS an
attractive alternative and as of December 31, 2008, CDARS
deposits totaled $81.8 million.
Borrowings The Companys borrowings
amounted to $695.3 million at December 31, 2008, an
increase of $191.0 million from year-end 2007, attributable
to the Slades acquisition and organic growth. At
December 31, 2008, the Banks borrowings consisted
primarily of FHLB borrowings totaling $429.6 million, an
increase of $118.5 million from the prior year-end.
Additionally, the Company issued $30.0 million of
subordinated debt during the year ended December 31, 2008,
which will be used to support additional loan growth,
particularly in commercial lending. The subordinated debt, which
qualifies as Tier 2 regulatory capital, has a 10 year
maturity and may be called at the option of the Company after
five years and is priced at a fixed rate of 7.02% for the first
five year period.
The remaining borrowings consisted of federal funds purchased,
assets sold under repurchase agreements, junior subordinated
debentures and other borrowings. These borrowings totaled
$235.7 million at December 31, 2008, an increase of
$42.5 million from the prior year-end. See Note 8,
Borrowings within Notes to Consolidated Financial
Statements included in Item 8 hereof for a schedule of
borrowings outstanding, their interest rates, other information
related to the Companys borrowings and for further
information regarding the trust preferred securities and junior
subordinated debentures of Trust V and Slades Ferry Trust I.
Subordinated Debentures On August 27,
2008 Rockland Trust Company issued $30 million of
subordinated debt to USB Capital Resources Inc., a wholly-owned
subsidiary of U.S. Bank National Association. Rockland
Trust has received the $30 million derived from the sale of
the subordinated debenture and intends to use the proceeds to
support balance sheet growth.
The subordinated debt, which qualifies as Tier 2 capital
under FDIC rules and regulations, was issued and sold through a
private placement pursuant to a subordinated debt purchase
agreement which includes customary representations, warranties,
covenants, and events of default. The subordinated debt matures
on August 27, 2018. Rockland Trust may, with regulatory
approval, redeem the subordinated debt without penalty at any
time on or after August 27, 2013. The interest rate for the
subordinated debt is fixed at 7.02% until August 27, 2013.
After that point the subordinated debt, if not redeemed, will
have a floating interest rate determined, at the option of
Rockland Trust, at either the then current: London Inter-Bank
Offered Rate (LIBOR) plus 3.00%; or, the
U.S. Bank base rate plus 1.25%. Costs associated with the
issuance of the subordinated debt are being amortized ratably
over the term of the debt as an adjustment to the associated
interest expense.
Unamortized issuance costs are included in other assets and were
$307,000 at December 31, 2008. Interest expense on the
subordinated debt, reported in interest expense on borrowings,
which includes the amortization of the issuance cost, was
$750,000 at December 31, 2008.
Junior Subordinated Debentures Junior
subordinated debentures issued by the Company were
$61.8 million and $51.5 million at December 31,
2008 and 2007, respectively. An additional $10.3 million of
outstanding junior subordinated debentures were acquired as part
of the Slades acquisition. The unamortized issuance costs are
included in other assets. Unamortized issuance costs were
$190,000 and $68,000 in 2008 and 2007, respectively.
Interest expense on the junior subordinated debentures, reported
in interest on borrowings, which includes the amortization of
the issuance cost, net of interest associated with interest rate
swap hedging, was $3.8 million in 2008, $5.0 million
in 2007, and $5.5 million in 2006.
See Note 8, Borrowings within the Notes to
Consolidated Financial Statements included in Item 8
hereof for further information regarding the trust preferred
securities and junior subordinated debentures of Trusts V and
Slades Ferry Trust I.
Capital Purchase Program On January 9,
2009, as part of the Capital Purchase Program established by the
U.S. Department of Treasury (Treasury) under
the Emergency Economic Stabilization Act of 2008, the Company
entered into a Letter Agreement with Treasury pursuant to which
the Company issued and sold to Treasury 78,158 shares of
the Companys Fixed Rate Cumulative Perpetual Preferred
Stock, Series C, par value $0.01 per share, having a
liquidation preference of $1,000 per share and a ten-year
warrant to purchase up to 481,664 shares of the
Companys common stock, par value $0.01 per share, at an
initial exercise price of $24.34 per share, for an
50
aggregate purchase price of $78,158,000 in cash. All of the
proceeds for the sale of the Series C Preferred Stock will
be treated as Tier 1 capital for regulatory purposes.
Management anticipates using CPP funds to expand lending to
creditworthy consumers and businesses and, when appropriate, to
modify residential mortgages.
Wealth
Management
Investment Management As of December 31,
2008, the Rockland Trust Investment Management Group had
assets under management of $1.1 billion which represents
approximately 2,756 trust, fiduciary, and agency accounts. At
December 31, 2007, assets under management were
$1.3 billion, representing approximately 2,500 trust,
fiduciary, and agency accounts. Income from the Investment
Management Group amounted to $9.9 million,
$7.0 million, and $5.5 million for 2008, 2007, and
2006, respectively.
Retail Investments and Insurance For the years
ending December 31, 2008, 2007 and 2006 retail investments
and insurance income was $1.2 million, $1.1 million,
and $593,000, respectively. Retail investments and insurance
includes revenue from Linsco/Private Ledger (LPL),
Private Ledger Insurance Services of Massachusetts, Savings Bank
Life Insurance of Massachusetts (SBLI), Independent
Financial Market Group, Inc. (IFMG) and their
insurance subsidiary IFS Agencies, Inc. (IFS).
RESULTS
OF OPERATIONS
Summary of Results of Operations Net income
was $24.0 million for the year ended December 31,
2008, compared to $28.4 million for the year ended
December 31, 2007. Diluted earnings per share were $1.52
and $2.00 for the years ended 2008 and 2007, respectively.
The primary reasons for the decrease in net income and earnings
per share were securities impairment charges amounting to
$7.2 million, as well as a year-over-year increase in the
provision for loan losses of $7.8 million.
Return on average assets and return on average equity were 0.73%
and 8.20%, respectively, for the year ending December 31,
2008 as compared to 1.05% and 12.93%, respectively, for the year
ending December 31, 2007. Stockholders equity as a
percentage of assets was 8.4% as of December 31, 2008,
compared to 8.0% for the same period last year.
Net Interest Income The amount of net interest
income is affected by changes in interest rates and by the
volume, mix, and interest rate sensitivity of interest-earning
assets and interest-bearing liabilities.
On a fully tax-equivalent basis, net interest income was
$118.8 million in 2008, a 21.5% increase from 2007 net
interest income of $97.8 million.
51
The following table presents the Companys average
balances, net interest income, interest rate spread, and net
interest margin for 2008, 2007, and 2006. Non-taxable income
from loans and securities is presented on a fully
tax-equivalent
basis whereby tax-exempt income is adjusted upward by an amount
equivalent to the prevailing federal income taxes that would
have been paid if the income had been fully taxable.
Table
17 Average Balance, Interest Earned/Paid &
Average Yields
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Earned/
|
|
|
Average
|
|
|
Average
|
|
|
Earned/
|
|
|
Average
|
|
|
Average
|
|
|
Earned/
|
|
|
Average
|
|
|
|
Balance
|
|
|
Paid
|
|
|
Yield
|
|
|
Balance
|
|
|
Paid
|
|
|
Yield
|
|
|
Balance
|
|
|
Paid
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Sold, Assets Purchased Under Resale Agreement and
Short Term Investments
|
|
$
|
5,908
|
|
|
$
|
148
|
|
|
|
2.51
|
%
|
|
$
|
26,630
|
|
|
$
|
1,468
|
|
|
|
5.51
|
%
|
|
$
|
29,464
|
|
|
$
|
1,514
|
|
|
|
5.14
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Assets
|
|
|
3,060
|
|
|
|
140
|
|
|
|
4.58
|
%
|
|
|
1,692
|
|
|
|
48
|
|
|
|
2.84
|
%
|
|
|
1,570
|
|
|
|
42
|
|
|
|
2.68
|
%
|
Taxable Investment Securities
|
|
|
470,668
|
|
|
|
23,307
|
|
|
|
4.95
|
%
|
|
|
433,186
|
|
|
|
20,694
|
|
|
|
4.78
|
%
|
|
|
581,372
|
|
|
|
27,229
|
|
|
|
4.68
|
%
|
Non-Taxable Investment Securities(1)
|
|
|
41,203
|
|
|
|
2,597
|
|
|
|
6.30
|
%
|
|
|
51,181
|
|
|
|
3,288
|
|
|
|
6.42
|
%
|
|
|
57,725
|
|
|
|
3,879
|
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
|
514,931
|
|
|
|
26,044
|
|
|
|
5.06
|
%
|
|
|
486,059
|
|
|
|
24,030
|
|
|
|
4.94
|
%
|
|
|
640,667
|
|
|
|
31,150
|
|
|
|
4.86
|
%
|
Loans(2)
|
|
|
2,489,028
|
|
|
|
151,572
|
|
|
|
6.09
|
%
|
|
|
1,994,273
|
|
|
|
135,874
|
|
|
|
6.81
|
%
|
|
|
2,041,098
|
|
|
|
136,802
|
|
|
|
6.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Earning Assets
|
|
$
|
3,009,867
|
|
|
$
|
177,764
|
|
|
|
5.91
|
%
|
|
$
|
2,506,962
|
|
|
$
|
161,372
|
|
|
|
6.44
|
%
|
|
$
|
2,711,229
|
|
|
$
|
169,466
|
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Due from Banks
|
|
|
65,992
|
|
|
|
|
|
|
|
|
|
|
|
59,009
|
|
|
|
|
|
|
|
|
|
|
|
59,834
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
219,517
|
|
|
|
|
|
|
|
|
|
|
|
148,494
|
|
|
|
|
|
|
|
|
|
|
|
151,295
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,295,376
|
|
|
|
|
|
|
|
|
|
|
$
|
2,714,465
|
|
|
|
|
|
|
|
|
|
|
$
|
2,922,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and Interest Checking Accounts
|
|
$
|
688,336
|
|
|
$
|
6,229
|
|
|
|
0.90
|
%
|
|
$
|
575,269
|
|
|
$
|
7,731
|
|
|
|
1.34
|
%
|
|
$
|
563,615
|
|
|
$
|
4,810
|
|
|
|
0.85
|
%
|
Money Market
|
|
|
472,065
|
|
|
|
9,182
|
|
|
|
1.95
|
%
|
|
|
462,434
|
|
|
|
13,789
|
|
|
|
2.98
|
%
|
|
|
524,265
|
|
|
|
14,872
|
|
|
|
2.84
|
%
|
Time Certificates of Deposits
|
|
|
740,779
|
|
|
|
23,485
|
|
|
|
3.17
|
%
|
|
|
531,016
|
|
|
|
22,119
|
|
|
|
4.17
|
%
|
|
|
563,212
|
|
|
|
21,111
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Deposits
|
|
|
1,901,180
|
|
|
|
38,896
|
|
|
|
2.05
|
%
|
|
|
1,568,719
|
|
|
|
43,639
|
|
|
|
2.78
|
%
|
|
|
1,651,092
|
|
|
|
40,793
|
|
|
|
2.47
|
%
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Borrowings
|
|
|
312,451
|
|
|
|
10,714
|
|
|
|
3.43
|
%
|
|
|
254,516
|
|
|
|
11,316
|
|
|
|
4.45
|
%
|
|
|
365,597
|
|
|
|
15,524
|
|
|
|
4.25
|
%
|
Federal Funds Purchased and Assets Sold Under Repurchase
Agreements
|
|
|
154,440
|
|
|
|
4,663
|
|
|
|
3.02
|
%
|
|
|
109,344
|
|
|
|
3,395
|
|
|
|
3.10
|
%
|
|
|
113,448
|
|
|
|
3,171
|
|
|
|
2.80
|
%
|
Junior Subordinated Debentures
|
|
|
60,166
|
|
|
|
3,842
|
|
|
|
6.39
|
%
|
|
|
59,950
|
|
|
|
5,048
|
|
|
|
8.42
|
%(5)
|
|
|
51,899
|
|
|
|
5,504
|
|
|
|
10.61
|
%(5)
|
Subordinated Debt
|
|
|
10,410
|
|
|
|
750
|
|
|
|
7.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Borrowings
|
|
|
2,381
|
|
|
|
61
|
|
|
|
2.56
|
%
|
|
|
2,627
|
|
|
|
157
|
|
|
|
5.98
|
%
|
|
|
1,081
|
|
|
|
46
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
|
|
|
539,848
|
|
|
|
20,030
|
|
|
|
3.71
|
%
|
|
|
426,437
|
|
|
|
19,916
|
|
|
|
4.67
|
%
|
|
|
532,025
|
|
|
|
24,245
|
|
|
|
4.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Liabilities
|
|
$
|
2,441,028
|
|
|
$
|
58,926
|
|
|
|
2.41
|
%
|
|
$
|
1,995,156
|
|
|
$
|
63,555
|
|
|
|
3.19
|
%
|
|
$
|
2,183,117
|
|
|
$
|
65,038
|
|
|
|
2.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
|
533,543
|
|
|
|
|
|
|
|
|
|
|
|
485,922
|
|
|
|
|
|
|
|
|
|
|
|
495,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
28,692
|
|
|
|
|
|
|
|
|
|
|
|
13,914
|
|
|
|
|
|
|
|
|
|
|
|
18,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
3,003,263
|
|
|
|
|
|
|
|
|
|
|
$
|
2,494,992
|
|
|
|
|
|
|
|
|
|
|
$
|
2,697,361
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
292,113
|
|
|
|
|
|
|
|
|
|
|
|
219,473
|
|
|
|
|
|
|
|
|
|
|
|
224,997
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
3,295,376
|
|
|
|
|
|
|
|
|
|
|
$
|
2,714,465
|
|
|
|
|
|
|
|
|
|
|
$
|
2,922,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income(1)
|
|
|
|
|
|
$
|
118,838
|
|
|
|
|
|
|
|
|
|
|
$
|
97,817
|
|
|
|
|
|
|
|
|
|
|
$
|
104,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Spread(3)
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
3.25
|
%(5)
|
|
|
|
|
|
|
|
|
|
|
3.27
|
%(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Margin(4)
|
|
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
3.90
|
%(5)
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits, Including Demand Deposits
|
|
$
|
2,434,723
|
|
|
$
|
38,896
|
|
|
|
|
|
|
$
|
2,054,641
|
|
|
$
|
43,639
|
|
|
|
|
|
|
$
|
2,147,050
|
|
|
$
|
40,793
|
|
|
|
|
|
Cost of Total Deposits
|
|
|
|
|
|
|
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
2.12
|
%
|
|
|
|
|
|
|
|
|
|
|
1.90
|
%
|
Total Funding Liabilities, Including Demand Deposits
|
|
$
|
2,974,571
|
|
|
$
|
58,926
|
|
|
|
|
|
|
$
|
2,481,078
|
|
|
$
|
63,555
|
|
|
|
|
|
|
$
|
2,679,075
|
|
|
$
|
65,038
|
|
|
|
|
|
Cost of Total Funding Liabilities
|
|
|
|
|
|
|
|
|
|
|
1.98
|
%
|
|
|
|
|
|
|
|
|
|
|
2.56
|
%
|
|
|
|
|
|
|
|
|
|
|
2.43
|
%
|
|
|
|
(1) |
|
The total amount of adjustment to present interest income and
yield on a fully tax-equivalent basis is $1,376, $1,634 and
$1,773 in 2008, 2007 and 2006, respectively. |
|
(2) |
|
Average nonaccruing loans are included in loans. |
52
|
|
|
(3) |
|
Interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the
weighted average costs of interest-bearing liabilities. |
|
(4) |
|
Net interest margin represents net interest income as a
percentage of average interest-earning assets. |
|
(5) |
|
In 2007, the yield on junior subordinated debentures, the
interest rate spread and the net interest margin include the
write-off of $907,000 of unamortized issuance costs related to
refinancing of $25.7 million of junior subordinated
debentures. The yield on junior subordinated debentures, the
interest rate spread, and the net interest margin excluding the
write-off, would have been 6.91%, 3.30%, and 3.94%. In 2006, the
yield on junior subordinated debentures, the interest rate
spread and the net interest margin excluding the write-off of
$995,000 of unamortized issuance costs related to the
refinancing of $25.8 million of junior subordinated
debentures. The yield on junior subordinated debentures, the
interest rate spread, and the net interest margin would have
been 8.69%, 3.32%, and 3.89%, respectively. |
Economic conditions and the Federal Reserves monetary
policy influence interest rates as shown by the changes
reflected in the following graph:
The following table summarizes loan growth during the year
ending December 31, 2008:
Table
18 Components of Loan Growth/Decline
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Slades
|
|
|
Organic
|
|
|
|
2008
|
|
|
2007
|
|
|
Acquisition
|
|
|
Growth/(Decline)
|
|
|
|
(Dollars in thousands)
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Commercial Real Estate Loans
|
|
$
|
1,569,082
|
|
|
$
|
1,121,310
|
|
|
$
|
306,824
|
|
|
$
|
140,948
|
|
Small Business
|
|
|
86,670
|
|
|
|
69,977
|
|
|
|
9,257
|
|
|
|
7,436
|
|
Residential Real Estate
|
|
|
432,325
|
|
|
|
341,090
|
|
|
|
114,432
|
|
|
|
(23,197
|
)
|
Consumer Home Equity
|
|
|
406,240
|
|
|
|
308,744
|
|
|
|
38,723
|
|
|
|
58,773
|
|
Consumer Other
|
|
|
166,570
|
|
|
|
201,831
|
|
|
|
2,009
|
|
|
|
(37,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
$
|
2,660,887
|
|
|
$
|
2,042,952
|
|
|
$
|
471,245
|
|
|
$
|
146,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
The following table presents certain information on a fully-tax
equivalent basis regarding changes in the Companys
interest income and interest expense for the periods indicated.
For each category of interest-earning assets and
interest-bearing liabilities, information is provided with
respect to changes attributable to (1) changes in rate
(change in rate multiplied by prior year volume),
(2) changes in volume (change in volume multiplied by prior
year rate) and (3) changes in volume/rate (change in rate
multiplied by change in volume).
Table
19 Volume Rate Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008 Compared To 2007
|
|
|
2007 Compared To 2006
|
|
|
2006 Compared To 2005
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
Due to
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
Due to
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
Due to
|
|
|
|
|
|
|
Due to
|
|
|
Due to
|
|
|
Volume/
|
|
|
Total
|
|
|
Due to
|
|
|
Due to
|
|
|
Volume/
|
|
|
Total
|
|
|
Due to
|
|
|
Due to
|
|
|
Volume/
|
|
|
Total
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Income on Interest-Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Sold, Assets Purchased Under Resale Agreement and
Short Term Investments
|
|
$
|
(801
|
)
|
|
$
|
(1,142
|
)
|
|
$
|
623
|
|
|
$
|
(1,320
|
)
|
|
$
|
110
|
|
|
$
|
(145
|
)
|
|
$
|
(11
|
)
|
|
$
|
(46
|
)
|
|
$
|
206
|
|
|
$
|
567
|
|
|
$
|
226
|
|
|
$
|
999
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Assets
|
|
|
29
|
|
|
|
39
|
|
|
|
24
|
|
|
|
92
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
6
|
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
|
|
6
|
|
Taxable Securities
|
|
|
757
|
|
|
|
1,791
|
|
|
|
65
|
|
|
|
2,613
|
|
|
|
544
|
|
|
|
(6,940
|
)
|
|
|
(139
|
)
|
|
|
(6,535
|
)
|
|
|
1,974
|
|
|
|
(5,580
|
)
|
|
|
(353
|
)
|
|
|
(3,959
|
)
|
Non-Taxable Securities(1)
|
|
|
(62
|
)
|
|
|
(641
|
)
|
|
|
12
|
|
|
|
(691
|
)
|
|
|
(171
|
)
|
|
|
(439
|
)
|
|
|
19
|
|
|
|
(591
|
)
|
|
|
92
|
|
|
|
(332
|
)
|
|
|
(7
|
)
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities:
|
|
|
724
|
|
|
|
1,189
|
|
|
|
101
|
|
|
|
2,014
|
|
|
|
376
|
|
|
|
(7,376
|
)
|
|
|
(120
|
)
|
|
|
(7,120
|
)
|
|
|
2,071
|
|
|
|
(5,911
|
)
|
|
|
(360
|
)
|
|
|
(4,200
|
)
|
Loans(1)(2)
|
|
|
(14,431
|
)
|
|
|
33,709
|
|
|
|
(3,580
|
)
|
|
|
15,698
|
|
|
|
2,262
|
|
|
|
(3,138
|
)
|
|
|
(52
|
)
|
|
|
(928
|
)
|
|
|
11,611
|
|
|
|
3,274
|
|
|
|
312
|
|
|
|
15,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(14,508
|
)
|
|
$
|
33,756
|
|
|
$
|
(2,856
|
)
|
|
$
|
16,392
|
|
|
$
|
2,748
|
|
|
$
|
(10,659
|
)
|
|
$
|
(183
|
)
|
|
$
|
(8,094
|
)
|
|
$
|
13,888
|
|
|
$
|
(2,070
|
)
|
|
$
|
178
|
|
|
$
|
11,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense of Interest-Bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and Interest Checking Accounts
|
|
$
|
(2,525
|
)
|
|
$
|
1,519
|
|
|
$
|
(496
|
)
|
|
$
|
(1,502
|
)
|
|
$
|
2,765
|
|
|
$
|
99
|
|
|
$
|
57
|
|
|
$
|
2,921
|
|
|
$
|
2,082
|
|
|
$
|
(183
|
)
|
|
$
|
(126
|
)
|
|
$
|
1,773
|
|
Money Market
|
|
|
(4,794
|
)
|
|
|
287
|
|
|
|
(100
|
)
|
|
|
(4,607
|
)
|
|
|
761
|
|
|
|
(1,754
|
)
|
|
|
(90
|
)
|
|
|
(1,083
|
)
|
|
|
5,187
|
|
|
|
88
|
|
|
|
48
|
|
|
|
5,323
|
|
Time Certificates of Deposits
|
|
|
(5,284
|
)
|
|
|
8,737
|
|
|
|
(2,087
|
)
|
|
|
1,366
|
|
|
|
2,349
|
|
|
|
(1,207
|
)
|
|
|
(134
|
)
|
|
|
1,008
|
|
|
|
5,967
|
|
|
|
1,357
|
|
|
|
615
|
|
|
|
7,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-Bearing Deposits:
|
|
|
(12,603
|
)
|
|
|
10,543
|
|
|
|
(2,683
|
)
|
|
|
(4,743
|
)
|
|
|
5,875
|
|
|
|
(2,862
|
)
|
|
|
(167
|
)
|
|
|
2,846
|
|
|
|
13,236
|
|
|
|
1,262
|
|
|
|
537
|
|
|
|
15,035
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Borrowings
|
|
|
(2,589
|
)
|
|
|
2,576
|
|
|
|
(589
|
)
|
|
|
(602
|
)
|
|
|
731
|
|
|
|
(4,717
|
)
|
|
|
(222
|
)
|
|
|
(4,208
|
)
|
|
|
1,745
|
|
|
|
(3,999
|
)
|
|
|
(384
|
)
|
|
|
(2,638
|
)
|
Federal Funds Purchased and Assets Sold Under Repurchase
Agreements
|
|
|
(94
|
)
|
|
|
1,400
|
|
|
|
(38
|
)
|
|
|
1,268
|
|
|
|
352
|
|
|
|
(115
|
)
|
|
|
(13
|
)
|
|
|
224
|
|
|
|
849
|
|
|
|
579
|
|
|
|
354
|
|
|
|
1,782
|
|
Junior Subordinated Debentures
|
|
|
(1,220
|
)
|
|
|
18
|
|
|
|
(4
|
)
|
|
|
(1,206
|
)
|
|
|
(1,134
|
)
|
|
|
854
|
|
|
|
(176
|
)
|
|
|
(456
|
)
|
|
|
998
|
(3)
|
|
|
31
|
|
|
|
6
|
|
|
|
1,035
|
|
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Borrowings
|
|
|
(90
|
)
|
|
|
(15
|
)
|
|
|
9
|
|
|
|
(96
|
)
|
|
|
18
|
|
|
|
66
|
|
|
|
27
|
|
|
|
111
|
|
|
|
30
|
|
|
|
(14
|
)
|
|
|
(10
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Borrowings
|
|
|
(3,993
|
)
|
|
|
3,979
|
|
|
|
128
|
|
|
|
114
|
|
|
|
(33
|
)
|
|
|
(3,912
|
)
|
|
|
(384
|
)
|
|
|
(4,329
|
)
|
|
|
3,622
|
|
|
|
(3,403
|
)
|
|
|
(34
|
)
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(16,596
|
)
|
|
$
|
14,522
|
|
|
$
|
(2,555
|
)
|
|
$
|
(4,629
|
)
|
|
$
|
5,842
|
|
|
$
|
(6,774
|
)
|
|
$
|
(551
|
)
|
|
$
|
(1,483
|
)
|
|
$
|
16,858
|
|
|
$
|
(2,141
|
)
|
|
$
|
503
|
|
|
$
|
15,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Interest Income
|
|
$
|
2,088
|
|
|
$
|
19,234
|
|
|
$
|
(301
|
)
|
|
$
|
21,021
|
|
|
$
|
(3,094
|
)
|
|
$
|
(3,885
|
)
|
|
$
|
368
|
|
|
$
|
(6,611
|
)
|
|
$
|
(2,970
|
)
|
|
$
|
71
|
|
|
$
|
(325
|
)
|
|
$
|
(3,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total amount of adjustment to present interest income and
yield on a fully tax-equivalent basis is $1,376, $1,634 and
$1,773 in 2008, 2007 and 2006, respectively. |
|
(2) |
|
Loans include portfolio loans, loans held for sale and
nonaccrual loans, however unpaid interest on nonperforming loans
has not been included for purposes of determining interest
income. |
|
(3) |
|
In 2007, the yield on junior subordinated debentures, the
interest rate spread and the net interest margin includes the
write-off of $907,000 of unamortized issuance costs related to
refinancing $25.7 million of junior subordinated
debentures. The yield on junior subordinated debentures, the
interest rate spread, and the net interest margin, excluding the
write-off, would have been 6.91%, 3.30%, and 3.94%. In 2006, the
yield on junior subordinated debentures, the interest rate
spread and the net interest margin includes the write-off of
$995,000 of unamortized issuance costs related to the
refinancing of $25.8 million of junior subordinated
debentures. The yield on junior subordinated debentures, the
interest rate spread, and the net interest margin, excluding the
write-off, would have been 8.69%, 3.32%, and 3.89%, respectively. |
54
Net interest income on a fully tax-equivalent basis increased by
$21.0 million in 2008 compared to 2007. Interest income on
a fully tax-equivalent basis increased by $16.4 million, or
10.2%, to $177.8 million in 2008 as compared to the prior
year primarily due to increases in the Companys loan
portfolio. Interest income on the loan portfolio increased
$15.7 million in 2008. Interest income from taxable
securities increased by $2.6 million, or 12.6%, to
$23.3 million in 2008 as compared to the prior year. The
overall yield on interest earning assets decreased by
53 basis points to 5.91% in 2008 as compared to 6.44% in
2007.
Interest expense for the year ended December 31, 2008
decreased to $58.9 million from the $63.6 million
recorded in 2007, a decrease of $4.6 million, or 7.3%, of
which $12.6 million is due to the decrease in rates on
deposits partially offset by $10.5 million of additional
expense associated with the growth in deposit balances. The
total cost of funds decreased 58 basis points to 1.98% for
2008 as compared to 2.56% for 2007. Average interest-bearing
deposits increased $332.5 million, or 21.2%, over the prior
year while the cost of these deposits decreased from 2.78% to
2.05% primarily attributable to a lower rate environment.
Average borrowings increased in 2008 by $113.4 million, or
26.6%, from the 2007 average balance. The majority of this
increase is attributable to the Slades acquisition and organic
loan growth. Additionally, the Company issued $30.0 million
of subordinated debt during the year ended December 31,
2008, which will be used to support additional loan growth,
particularly in commercial lending. The subordinated debt, which
qualifies as Tier 2 regulatory capital, has a 10 year
maturity and may be called at the option of the Company after
five years, and is priced at a fixed rate of 7.02% for the first
five year period. The average cost of borrowings decreased to
3.71% from 4.67%.
Provision For Loan Losses The provision for
loan losses represents the charge to expense that is required to
maintain an adequate level of allowance for loan losses. The
provision for loan losses totaled $10.9 million in 2008,
compared with $3.1 million in 2007, an increase of
$7.8 million. The Companys allowance for loan losses,
as a percentage of total loans, was 1.39%, as compared to 1.31%
at December 31, 2007. For the year ended December 31,
2008, net loan charge-offs totaled $6.2 million, an
increase of $3.1 million from the prior year.
The increase in the amount of the provision for loan losses is
the result of a combination of factors including: shifting
growth rates among various components of the Banks loan
portfolio with differing facets of risk; higher levels of net
loan charge-offs in 2008; and changing expectations with respect
to the economic environment, increases in specific allocations
for impaired loans, and the level of loan delinquencies and
non-performing loans. While the total loan portfolio increased
by 30.3% for the year ended December 31, 2008, as compared
to 0.9% for 2007, growth among the commercial components of the
loan portfolio outpaced growth among those consumer components,
which exhibit different credit risk characteristics.
Regional and local general economic conditions deteriorated
during the fourth quarter of 2008, as measured in terms of
employment levels, statewide economic activity, and current and
leading indicators of economic confidence. Additionally,
continued weakening market fundamentals were observed in
residential real estate markets. These observations, when
combined with financial market fallout from the sub prime
mortgage crisis, have raised concern that, moving forward into
2009, general economic conditions may continue to deteriorate.
Managements periodic evaluation of the adequacy of the
allowance for loan losses considers past loan loss experience,
known and inherent risks in the loan portfolio, adverse
situations which may affect the borrowers ability to
repay, the estimated value of the underlying collateral, if any,
and current and prospective economic conditions. Substantial
portions of the Banks loans are secured by real estate in
Massachusetts. Accordingly, the ultimate collectibility of a
substantial portion of the Banks loan portfolio is
susceptible to changes in property values within the state.
55
Non-Interest Income The following table sets
forth information regarding non-interest income for the periods
shown.
Table
20 Non-Interest Income
|
|
|
|
|
|
|
|
|
|
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Years Ended December 31,
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2008
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2007
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2006
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(Dollars in thousands)
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Service charges on deposit accounts
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$
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15,595
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