SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Independent Bank Corp.

(Exact name of registrant as specified in its charter)

Massachusetts (State or other jurisdiction of incorporation or organization)		04-2870273 (I.R.S. Employer Identification No.)

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

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

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

Yes þ No o

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

Yes þ No o

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

o Yes þ No

     As of November 1, 2005, there were 15,400,166 shares of the issuer’s common stock outstanding, par value $0.01 per share.

 

 

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) -			3
September 30, 2005 and December 31, 2004
Consolidated Statements of Income (unaudited) -			4
Three and nine months ended September 30, 2005 and 2004
Consolidated Statements of Stockholders’ Equity (unaudited) -			5
Nine months ended September 30, 2005 and for the year ended December 31, 2004
Consolidated Statements of Cash Flows (unaudited) -			6
Nine months ended September 30, 2005 and 2004
Condensed Notes to Consolidated Financial Statements — September 30, 2005
Note 1 — Basis of Presentation			7
Note 2 — Stock Based Compensation			7
Note 3 — Recent Accounting Developments			11
Note 4 — Earnings Per Share			13
Note 5 — Employee Benefits			15
Note 6 — Repurchase Agreements			16
Note 7 — Comprehensive Income (Loss)			16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Table 1 — Summary of Delinquency Information			23
Table 2 — Nonperforming Assets / Loans			24
Table 3 — Summary of Changes in the Allowance for Loan Losses			27
Table 4 — Summary of Allocation of the Allowance for Loan Losses			28
Table 5 — Average Balance, Interest Earned/Paid & Average Yields — Three months ended September 30, 2005 and 2004			32
Table 6 — Average Balance, Interest Earned/Paid & Average Yields — Nine months ended September 30, 2005 and 2004			33
Table 7 — Volume Rate Analysis			35
Table 8 — Interest Rate Sensitivity			40
Table 9 — Contractual Obligations, Commitments and Off-Balance Sheet Financial Instruments by Maturity			43
Item 3. Quantitative and Qualitative Disclosures About Market Risk			43
Item 4. Controls and Procedures			43
PART II. OTHER INFORMATION			44
Item 1. Legal Proceedings			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			45
Item 4. Submission of Matters to a Vote of Security Holders			45
Item 5. Other Information			45
Item 6. Exhibits			45
Signatures			48
Exhibit 31.1 – Certification 302			49
Exhibit 31.2 – Certification 302			51
Exhibit 32.1 – Certification 906			53
Exhibit 32.2 – Certification 906			54

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
(Unaudited — Dollars in Thousands, Except Share and Per Share Amounts)

		September 30,				December 31,
		2005				2004
ASSETS
CASH AND DUE FROM BANKS		$	71,487			$	62,961
FEDERAL FUNDS SOLD AND ASSETS PURCHASED UNDER RESALE AGREEMENT & SHORT TERM INVESTMENTS
SECURITIES			1,203				2,735
Trading Assets			1,556				1,572
Securities Available for Sale			604,878				680,286
Securities Held to Maturity (fair value $108,067 and $112,159)			104,831				107,967
Federal Home Loan Bank Stock			29,287				28,413
TOTAL SECURITIES			740,552				818,238
LOANS
Commercial and Industrial			163,276				156,260
Commercial Real Estate			662,383				613,300
Commercial Construction			127,936				126,632
Business Banking			50,080				43,673
Residential Real Estate			419,713				427,556
Residential Construction			11,392				7,316
Residential Loans Held for Sale			7,216				10,933
Consumer — Home Equity			245,293				194,647
Consumer — Auto			275,776				283,964
Consumer — Other			56,055				52,077
TOTAL LOANS			2,019,120				1,916,358
LESS: ALLOWANCE FOR LOAN LOSSES			(26,455	)			(25,197	)
NET LOANS			1,992,665				1,891,161
BANK PREMISES AND EQUIPMENT, Net			36,670				36,449
GOODWILL			55,078				55,185
CORE DEPOSIT INTANGIBLE			1,861				2,103
MORTGAGE SERVICING RIGHTS			2,966				3,291
BANK OWNED LIFE INSURANCE			44,242				42,664
OTHER ASSETS			36,899				29,139
TOTAL ASSETS		$	2,983,623			$	2,943,926
LIABILITIES
DEPOSITS
Demand Deposits		$	529,820			$	495,500
Savings and Interest Checking Accounts			617,437				614,481
Money Market			504,038				501,065
Time Certificates of Deposit over $100,000			165,357				117,258
Other Time Certificates of Deposits			355,838				331,931
TOTAL DEPOSITS			2,172,490				2,060,235
FEDERAL HOME LOAN BANK BORROWINGS			423,505				537,919
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER REPURCHASE AGREEMENTS			90,349				61,533
JUNIOR SUBORDINATED DEBENTURES			51,546				51,546
TREASURY TAX AND LOAN NOTES			1,443				4,163
TOTAL BORROWINGS			566,843				655,161
OTHER LIABILITIES			20,985				17,787
TOTAL LIABILITIES		$	2,760,318			$	2,733,183
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
PREFERRED STOCK, $0.01 par value. Authorized: 1,000,000 Shares Outstanding: None			—				—
COMMON STOCK, $0.01 par value. Authorized: 30,000,000 Issued: 15,450,724 Shares at September 30, 2005 and at December 31, 2004.			155				155
TREASURY STOCK: 54,137 Shares at September 30, 2005 and 124,488 Shares at December 31, 2004.			(846	)			(1,946	)
TREASURY STOCK SHARES HELD IN RABBI TRUST AT COST			(1,538	)			(1,428	)
DEFERRED COMPENSATION OBLIGATION			1,538				1,428
ADDITIONAL PAID IN CAPITAL			59,648				59,470
RETAINED EARNINGS			169,850				152,130
ACCUMULATED OTHER COMPREHENSIVE(LOSS)/ INCOME, NET OF TAX			(5,502	)			934
TOTAL STOCKHOLDERS’ EQUITY			223,305				210,743
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,983,623			$	2,943,926

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

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

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2005				2004				2005				2004
INTEREST INCOME
Interest on Loans		$	30,994			$	25,931			$	88,891			$	72,750
Taxable Interest and Dividends on Securities			7,492				8,336				23,792				23,293
Non-taxable Interest and Dividends on Securities			668				665				2,007				2,106
Interest on Federal Funds Sold and Short-Term Investments			71				9				137				9
Total Interest Income			39,225				34,941				114,827				98,158
INTEREST EXPENSE
Interest on Deposits			6,616				5,207				17,949				14,092
Interest on Borrowings			5,890				4,704				17,946				12,631
Total Interest Expense			12,506				9,911				35,895				26,723
Net Interest Income			26,719				25,030				78,932				71,435
PROVISION FOR LOAN LOSSES			1,070				761				3,105				2,249
Net Interest Income After Provision For Loan Losses			25,649				24,269				75,827				69,186
NON-INTEREST INCOME
Service Charges on Deposit Accounts			3,462				3,179				9,611				9,141
Investment Management Services Income			1,348				1,206				3,999				3,535
Mortgage Banking Income			1,068				708				2,580				2,300
BOLI Income			462				419				1,360				1,389
Net Gain on Sales of Securities			—				461				616				1,458
Other Non-Interest Income			764				721				2,233				2,583
Total Non-Interest Income			7,104				6,694				20,399				20,406
NON-INTEREST EXPENSE
Salaries and Employee Benefits			11,804				11,214				35,758				32,156
Occupancy and Equipment Expenses			2,273				2,094				7,465				6,592
Data Processing and Facilities Management			1,070				1,180				3,023				3,390
Merger & Acquisition Expense			—				463				—				684
Other Non-Interest Expense			5,062				4,071				14,089				14,057
Total Non-Interest Expense			20,209				19,022				60,335				56,879
Minority Interest Expense			—				—				—				1,072
INCOME BEFORE INCOME TAXES			12,544				11,941				35,891				31,641
PROVISION FOR INCOME TAXES			3,857				3,679				11,249				10,058
NET INCOME		$	8,687			$	8,262			$	24,642			$	21,583
BASIC EARNINGS PER SHARE		$	0.56			$	0.55			$	1.60			$	1.45
DILUTED EARNINGS PER SHARE		$	0.56			$	0.54			$	1.59			$	1.44
Weighted average common shares (Basic)			15,391,937				15,142,272				15,370,226				14,856,722
Common stock equivalents			145,684				178,821				147,813				183,034
Weighted average common shares (Diluted)			15,537,621				15,321,093				15,518,039				15,039,756

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

INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

										TREASURY																ACCUMULATED
										STOCK																OTHER
										HELD IN				DEFERRED				ADDITIONAL								COMPREHENSIVE
		COMMON				TREASURY				RABBI				COMPENSATION				PAID-IN				RETAINED				(LOSS)
		STOCK				STOCK				TRUST				OBLIGATION				CAPITAL				EARNINGS				INCOME				TOTAL
BALANCE DECEMBER 31, 2003		$	149				($3,685	)			($1,281	)		$	1,281			$	42,292			$	129,760			$	3,331			$	171,847
Net Income																							30,767								30,767
Cash Dividends Declared ($0.56 per share)																							(8,397	)							(8,397	)
Proceeds From Exercise of Stock Options							1,739												69												1,808
Tax Benefit on Stock Option Exercise																			247												247
Common Stock Issued for Acquisition			6																16,862												16,868
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains																											(135	)			(135	)
Deferred Compensation Obligation											(147	)			147																—
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains																											(2,262	)			(2,262	)
BALANCE DECEMBER 31, 2004		$	155				($1,946	)			($1,428	)		$	1,428			$	59,470			$	152,130			$	934			$	210,743
Net Income																							24,642								24,642
Cash Dividends Declared ($0.45 per share)																							(6,922	)							(6,922	)
Proceeds From Exercise of Stock Options							1,100												(28	)											1,072
Tax Benefit on Stock Option Exercise																			206												206
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains																											696				696
Deferred Compensation Obligation											(110	)			110																—
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains																											(7,132	)			(7,132	)
BALANCE SEPTEMBER 30, 2005		$	155				($846	)			($1,538	)		$	1,538			$	59,648			$	169,850				($5,502	)		$	223,305

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

INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	24,642			$	21,583
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Depreciation and amortization			4,517				4,264
Provision for loan losses			3,105				2,249
Deferred income tax (expense) benefit			(5,079	)			33
Loans originated for resale			(149,935	)			(102,556	)
Proceeds from mortgage loan sales			154,844				98,131
Gain on sale of mortgages			(1,192	)			(510	)
Gain on sale of investments			(616	)			(1,458	)
Gain recorded from mortgage servicing rights, net of amortization			325				268
Changes in assets and liabilities:
Decrease (Increase) in other assets			972				(3,111	)
Increase (decrease) in other liabilities			3,035				(2,386	)
TOTAL ADJUSTMENTS			9,976				(5,076	)
NET CASH PROVIDED FROM OPERATING ACTIVITIES			34,618				16,507
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from maturities and principal repayments of Securities Held to Maturity			3,023				13,618
Proceeds from maturities and principal repayments and sales of Securities Available For Sale			185,260				160,521
Purchase of Securities Held to Maturity			—				(1,000	)
Purchase of Securities Available For Sale			(121,418	)			(309,370	)
Purchase of Federal Home Loan Bank Stock			(874	)			(2,442	)
Net increase in Loans			(108,326	)			(194,738	)
Investment in Bank Premises and Equipment			(3,541	)			(4,107	)
Cash used for Merger and Acquisition, net of cash acquired			—				32,006
NET CASH USED IN INVESTING ACTIVITIES			(45,876	)			(305,512	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Time Deposits			72,006				(12,659	)
Net increase in Other Deposits			40,249				223,674
Net increase in Federal Funds Purchased and Assets Sold Under Repurchase Agreements			28,816				20,428
Net (decrease) increase in Federal Home Loan Bank Borrowings			(114,414	)			57,001
Net decrease in Treasury Tax and Loan Notes			(2,720	)			(781	)
Proceeds from exercise of stock options			1,072				1,204
Dividends paid			(6,757	)			(6,013	)
NET CASH PROVIDED FROM FINANCING ACTIVITIES			18,252				282,854
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS			6,994				(6,151	)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD			65,696				75,495
CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30,		$	72,690			$	69,344
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest on deposits and borrowings		$	33,919			$	24,905
Interest on shares subject to mandatory redemption			—				3,188
Income taxes			(10,245	)			11,289
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in fair value of cash flow derivatives, net of tax and realized gains			696				(218	)
Change in fair value of securities available for sale, net of tax and realized gains			(7,132	)			(1,528	)
Issuance of shares from Treasury Stock for the exercise of stock options			1,100				1,178
In conjunction with the purchase acquisition of Falmouth Bancorp, Inc. on July 16, 2004 assets were acquired and liabilities were assumed as follows:
Fair value of assets acquired			—				158,331
Fair value of liabilities assumed			—				141,463

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

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

     Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts incorporated in 1986. The Company is the sole stockholder of Rockland Trust Company (“Rockland” or “the Bank”), a Massachusetts trust company chartered in 1907. The Company also owns 100% of the common stock of Independent Capital Trust III (“Trust III”) and Independent Capital Trust IV (“Trust IV”), each of which have issued trust preferred securities to the public. As of March 31, 2004, Trust III and Trust IV are no longer included in the Company’s consolidated financial statements (see FIN No. 46 discussion within Recent Accounting Pronouncements Note 3 below). The Bank’s subsidiaries consist of: three Massachusetts securities corporations, RTC Securities Corp. I, RTC Securities Corp. X, and Taunton Avenue Securities Corp.; Taunton Avenue Inc.; Rockland Trust Community Development LLC (“RTC CDE I”) and Rockland Trust Community Development Corporation II (“RTC CDE II”). Taunton Avenue Inc. was formed in May 2003 to hold loans, industrial development bonds and other assets. RTC CDE I and RTC CDE II were formed in August 2003 and August 2005, respectively, to make loans and to provide financial assistance to qualified businesses and individuals in low-income communities in accordance with the U.S. Treasury’s New Markets Tax Credit Program criteria. All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005 or any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission.

NOTE 2 — STOCK BASED COMPENSATION

     The Company measures compensation cost for stock-based compensation plans as the excess, if any, of the fair market value of the Company’s stock at the date of grant over the exercise price of options granted. The Company discloses pro forma net income and earnings per share in the notes to its consolidated financial statements as if compensation was measured at the date of grant based on the fair value of the award and recognized over the service period. Beginning January 1, 2006, the Company will adopt Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment (See discussion which follows in recent accounting pronouncements),” which will require the Company to record compensation measured at the date of grant based on the fair value of the awards and recognized over its requisite service period.

     The Company has four stock option plans: the Amended and Restated 1987 Incentive Stock Option Plan (“The 1987 Plan”), the 1996 Non-employee Directors’ Stock Option Plan (“The 1996 Plan”), the 1997 Employee Stock Option Plan (“The 1997 Plan”), and the 2005 Employee Stock Option Plan (“The 2005 Plan”). All four plans were approved by the Company’s Board of Directors and shareholders. The 2005 Plan was approved by the Company’s Board of Directors on February 10, 2005 and ratified by the Company’s shareholders on April 21, 2005. The 2005 Plan was approved to allow issuance of either stock options or restricted stock awards for up to 800,000 shares of common stock. No awards have been granted from the 2005 Plan to date.

     Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” encourages, but does not require, adoption of a fair-value based method of accounting for employee stock-based compensation plans, where compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period. An entity may continue to apply Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, and related interpretations, whereby compensation cost is the excess, if any, of the fair market value of the Company’s stock at the date of grant over the exercise price of options granted, provided the entity discloses the pro forma net income and earnings per share as if the fair-value method had been applied. The Company measures compensation cost for stock-based compensation plans as the excess, if any, of the fair market value of the Company’s stock at the date of grant over the exercise price of options granted. Compensation cost is not recognized as the exercise price has historically equaled the grant date fair value of the underlying stock. Had the Company recognized compensation cost for these plans determined as the fair market value of the Company’s stock at the grant date and recognized over the service period, as determined using the Black-Scholes option-pricing model, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts:

Three Months Ended September 30,						2005				2004
Net Income:				As Reported (000’s)		$	8,687			$	8,262
				Pro Forma (000’s)		$	8,454			$	8,120
Basic EPS:				As Reported		$	0.56			$	0.55
				Pro Forma		$	0.55			$	0.54
Diluted EPS:				As Reported		$	0.56			$	0.54
				Pro Forma		$	0.54			$	0.53

Nine Months Ended September 30,						2005				2004
Net Income:				As Reported (000’s)		$	24,642			$	21,583
				Pro Forma (000’s)		$	23,968			$	21,143
Basic EPS:				As Reported		$	1.60			$	1.45
				Pro Forma		$	1.56			$	1.42
Diluted EPS:				As Reported		$	1.59			$	1.44
				Pro Forma		$	1.54			$	1.41

     The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants under the 1997 Plan and the 1996 Plan:

		1997 Plan				1996 Plan
Risk Free Interest Rate
September 30, 2005			3.53%-3.80	%(1)			3.93	%(2)
Fiscal Year 2004			3.35	%(3)
			2.64%-3.49	%(4)			3.19	%(5)
Expected Dividend Yield
September 30, 2005			1.91%-1.95	%(1)			2.21	%(2)
			1.91	%(1)			—
Fiscal Year 2004			1.64	%(3)
			1.71%-2.09	%(4)			2.02	%(5)
Expected Life
September 30, 2005		3.5 - 4 years(1)				4.5 years(2)
Fiscal Year 2004		4 years(3)
		3.5 years(4)				4 years(5)
Expected Volatility
September 30, 2005			26	%(1)			27	%(2)
Fiscal Year 2004			28	%(3)
			28-30	%(4)			28	%(5)

(1) On January 13, 2005, 34,500 options were granted from the 1997 Plan to certain First Vice Presidents and Vice Presidents of the Company. Also on January 13, 2005, 5,000 options were granted to the Senior Vice President and Director of Marketing, Strategy and Analysis. The risk free rate, expected dividend yield, expected life and expected volatility for these grants were determined on January 13, 2005. On September 1, 2005, another 500 options were granted to a Vice President of the Company. The risk free rate, expected dividend yield, expected life and expected volatility for these grants were determined on September 1, 2005.

(2) On April 26, 2005, 11,000 options were granted from the 1996 Plan to the Company’s Board of Directors. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on April 26, 2005.

(3) On December 9, 2004, 175,500 options were granted from the 1997 Plan to the Company’s members of Senior Management. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on December 9, 2004.

(4) On both January 8, 2004 and June 10, 2004, 5,000 options were granted from the 1997 Plan to the Company’s Managing Director of Business Banking. The risk free rate, expected dividend yield, expected life and expected volatility for these grants were determined on the respective grant dates. On both July 19, 2004 and October 20, 2004, 10,000 options were granted from the 1997 Plan to the Company’s Executive Vice President of Retail Banking and Corporate Marketing. The risk free rate, expected dividend yield, expected life and expected volatility for these grants were determined on the respective grant dates.

(5) On April 27, 2004, 11,000 options were granted from the 1996 Plan to the Company’s Board of Directors. The risk free rate, expected dividend yield, expected life and expected volatility for this grant were determined on April 27, 2004.

NOTE 3 — RECENT ACCOUNTING DEVELOPMENTS

     SFAS No. 123 (revised 2004) (“SFAS 123R”) , “Share-Based Payment” In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004). SFAS No. 123R replaces SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”. SFAS No. 123R will require that the compensation cost relating to share-based payment transactions be recognized in the Company’s financial statements, eliminating pro forma disclosure as an alternative. That cost will be measured based on the grant-date fair value of the equity or liability instruments issued. On April 14, 2005, the SEC issued a press release deferring the compliance date of SFAS 123R, which had an original effective date of the first interim or annual period beginning after June 15, 2005, until the beginning of a company’s next fiscal year for calendar-year companies. For the Company, implementation would therefore be required beginning January 1, 2006. The impact of the Company adopting such accounting can be seen in Note 2, Stock-Based Compensation of the Notes to Consolidated Financial Statements included in Item 1 hereof. The Company estimates the 2006 compensation expense related to share-based payment transactions to be recognized will be approximately $800,000 before tax for the year ending December 31, 2006 for options granted to date upon adoption of SFAS 123R using the Black-Scholes valuation method. Management has not yet decided the transition method or valuation method it will use upon adoption of SFAS 123R nor has it decided the amount or type of share-based compensation to be issued for the remainder of 2005 and beyond.

     FIN No. 46 “Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletin No. 51” In January 2003, the FASB issued FIN No. 46. FIN 46 established accounting guidance for consolidation of variable interest entities (“VIE”) that function to support the activities of the primary beneficiary. The primary beneficiary of a VIE is the entity that absorbs a majority of the VIE’s expected losses, receives a majority of the VIE’s expected residual returns, or both, as a result of ownership, controlling interest, contractual relationship or other business relationship with a VIE. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The Company adopted FIN No. 46 as of February 1, 2003 for all arrangements entered into after January 31, 2003.

     In December 2003, the FASB issued a revised FIN No. 46 (“FIN 46R”), which, in part, addressed limited purpose trusts formed to issue trust preferred securities. 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 trusts was that trust 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 no longer is 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 net interest margin of the consolidated company, negatively impacting the net interest margin by approximately 0.19% on an annualized basis. There is no impact to 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 borrowings expense offset by the dividend income on the subsidiary trusts common stock that is recognized in other non-interest income. Prior periods were not restated to reflect the changes made by FIN 46R.

     On March 1, 2005, the Board of Governors of the Federal Reserve issued a final ruling amending its risk-based capital standards for bank holding companies to allow continued inclusion of outstanding and prospective issuances of trust preferred securities in Tier 1 capital for regulatory capital purposes subject to quantitative limits applied in the aggregate amount of trust preferred securities and certain other capital elements and qualitative standards. After a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25 percent of Tier 1 capital elements, net of goodwill less any associated deferred tax liability. The amount of trust preferred securities and certain other elements in excess of the core capital limit generally will be includable in Tier 2 capital.

     For all other arrangements entered into subsequent to January 31, 2003, the Company adopted FIN 46R as of December 31, 2003. There was no material impact on the Company’s financial position or results of operations.

     Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 105 — “Application of Accounting Principles to Loan Commitments” In March 2004, the SEC issued SAB No. 105. SAB No. 105 summarizes the views of the SEC regarding the application of Generally Accepted Accounting Principles (“GAAP”) to loan commitments for mortgage loans that will be held for sale accounted for as derivatives. The guidance requires the measurement at fair value of such loan commitments include only the differences between the guaranteed interest rate in the loan commitment and a market interest rate; future cash flows related to servicing the loan or the customer relationship should not be recorded as a part of the loan commitment derivative. SAB No. 105 is effective for said loan commitments accounted for as derivatives entered into beginning April 1, 2004. The Company adopted this SAB on April 1, 2004. The adoption of SAB No. 105 did not have a material impact on the Company as the Company was valuing loan commitments to be accounted for as derivatives consistent with this guidance.

     FASB Staff Position (“FSP”) 106-2: “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” In May 2004, the FASB issued FSP 106-2. FSP 106-2 provides guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) for employers that sponsor postretirement health care plans that provide prescription drug benefits that are “actuarially equivalent” to Medicare Part D. It also requires certain disclosures regarding the effect of the Federal subsidy provided by the Act. FSP 106-2 is effective for interim or annual periods beginning after June 15, 2004. The Company does not believe that the benefits provided by Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) apply to the Company’s post retirement benefit plans and therefore have no impact to the Company’s financial statements.

     FASB Emerging Issues Task Force (“EITF”) Issue 03-1: “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” In November 2003 and March 2004, the FASB’s EITF issued a consensus on EITF Issue 03-1. EITF 03-1 contains new guidance on other-than-temporary impairments of investment securities. The guidance dictates when impairment is deemed to exist, provides guidance on determining if impairment is other than temporary, and directs how to calculate impairment loss. Issue 03-1 also details expanded annual disclosure rules. In September 2004, the FASB issued FSP EITF

Issue No. 03-1-1 “Effective Date of Paragraphs 10-20 of EITF Issue 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1 to be concurrent with the final issuance of FSP EITF 03-1-a “Implementation Guidance for the Application of Paragraph 16 of EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”.

     On June 29, 2005, the FASB met and decided not to provide additional guidance on the meaning of other-than-temporary impairment. The FASB will issue the proposed FSP EITF 03-1-a as final and the final FSP will supersede EITF Issue No. 03-1 and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value,” and will replace guidance set forth in paragraphs 10-18 of EITF Issue No. 03-1 with references to existing other-than-temporary impairment guidance. When issued, the final FSP will be titled, “FSP FAS 115-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The new FSP will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The adoption of the original EITF 03-1 (excluding paragraphs 10-20) did not have a material impact on the Company’s financial position or results of operations nor does the Company believe that the adoption of FSP FAS 115-1 will have a material impact on the Company’s financial position.

     Statement of Position 03-3 (“SOP 03-3”): “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued SOP 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The yield that may be accreted is limited to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows over the investor’s initial investment in the loan. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow are recognized as a valuation allowance and expensed immediately. Valuation allowances can not be created nor “carried over” in the initial accounting for loans acquired in a transfer of loans with evidence of deterioration of credit quality since origination. However, valuation allowances for non-impaired loans acquired in a business combination can be carried over. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company’s financial position or results of operations.

NOTE 4 — EARNINGS PER SHARE

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

     Earnings per share consisted of the following components for the three and nine months ended September 30, 2005 and 2004:

		Net Income
For the Three Months Ended September 30,		2005				2004
		(Dollars in Thousands)
Net Income		$	8,687			$	8,262

		Weighted Average
			Shares
		2005				2004
Basic EPS			15,391,937				15,142,272
Effect of dilutive securities			145,684				178,821
Diluted EPS			15,537,621				15,321,093

		Net Income
		Per Share
		2005				2004
Basic EPS		$	0.56			$	0.55
Effect of dilutive securities		$	0.00			$	0.01
Diluted EPS		$	0.56			$	0.54

		Net Income
For the Nine Months Ended September 30,		2005				2004
		(Dollars in Thousands)
Net Income		$	24,642			$	21,583

		Weighted Average
			Shares
		2005				2004
Basic EPS			15,370,226				14,856,722
Effect of dilutive securities			147,813				183,034
Diluted EPS			15,518,039				15,039,756

		Net Income
		Per Share
		2005				2004
Basic EPS		$	1.60			$	1.45
Effect of dilutive securities		$	0.01			$	0.01
Diluted EPS		$	1.59			$	1.44

     Options to purchase common stock with an exercise price greater than the average market price of common shares for the period are excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be anti-dilutive. For the three and nine months ended September 30, 2005 there were 328,295 and 329,927 shares, respectively, excluded from the calculation of diluted earnings per share. For the three and nine months ended September 30, 2004 there were 117,800 and 127,517, respectively, of shares excluded from the calculation of diluted earnings per share.

NOTE 5- EMPLOYEE BENEFITS

POST RETIREMENT BENEFITS AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

     The following table illustrates the status of the post-retirement benefit plan and supplemental executive retirement plans (“SERPs”) as of September 30, for the periods presented:

     Components of Net Periodic Benefit Cost

		Post Retirement Benefits								SERPs
		Three months ended September 30,
		2005				2004				2005				2004
						(Unaudited — Dollars in Thousands)
Service cost		$	23			$	20			$	44			$	35
Interest cost			18				18				32				31
Amortization of transition obligation			8				9				—				—
Amortization of prior service cost			3				3				11				39
Net periodic benefit cost		$	52			$	50			$	87			$	105

     Components of Net Periodic Benefit Cost

		Post Retirement Benefits								SERPs
		Nine months ended September 30,
		2005				2004				2005				2004
						(Unaudited — Dollars in Thousands)
Service cost		$	69			$	60			$	132			$	104
Interest cost			54				52				96				92
Amortization of transition obligation			26				27				—				—
Amortization of prior service cost			9				9				34				118
Net periodic benefit cost		$	158			$	148			$	262			$	314

     The Company previously disclosed in its financial statements for the fiscal year ended December 31, 2004 that it expected to contribute $65,000 to its post retirement benefit plan and $124,000 to its SERPs in 2005 and presently anticipates making these contributions. For the three months ended September 30, 2005, $12,000 and $28,000 of contributions have been made to the post retirement benefit plan and the SERPs, respectively, and for the nine months ended September 30, 2005, $56,000 and $85,000 of contributions have been made to the post retirement benefit plan and the SERPs, respectively.

     Not included in the above summary are the components of net periodic benefit cost for the noncontributory defined benefit pension plan administered by Pentegra (“the Fund”). The Fund does not segregate the assets or liabilities of all participating employers and, accordingly, disclosure of accumulated vested and non-vested benefits is not possible. The pension plan year is July 1st through June 30th. The Company anticipates that contributions paid in 2005 to the defined benefit pension plan related to the 2005-2006 plan year will be $3.0 million, of which $513,000 was paid in third quarter of 2005 and the remaining $2.5 million is expected to be paid in the fourth quarter of 2005. Contributions for the 2004-2005 plan years were all paid in 2004. Pension expense was $1.8 million for the year 2004 and is expected to be $2.5

million for the full year 2005 of which $513,000 has been recognized and paid during the three months ended September 30, 2005 and $1.6 million has been recognized year to date.

NOTE 6 — REPURCHASE AGREEMENTS

     Both wholesale and retail repurchase agreements are collateralized by mortgage-backed securities and U.S. Government obligations. At September 30, 2005, the Company had $25.0 million securities of repurchase agreements outstanding with third party brokers and $65.3 million of customer repurchase agreements outstanding. The related securities are included in the securities available for sale.

NOTE 7 — COMPREHENSIVE INCOME (LOSS)

     Information on the Company’s comprehensive income (loss), presented net of taxes, is set forth below for the three and nine months ended September 30, 2005 .

Comprehensive income (loss) is reported net of taxes, as follows:
(Unaudited — Dollars in Thousands)

		FOR THE THREE								FOR THE NINE
		MONTHS ENDED								MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2005				2004				2005				2004
Net Income		$	8,687			$	8,262			$	24,642			$	21,583
Other Comprehensive (Loss) Income, Net of Tax:
(Decrease)/Increase in unrealized gains on
securities available for sale, net of tax of
$2,878 and $3,392 for the three months ended
September 30, 2005 and 2004, respectively, and
$4,045 and $572 for the nine months ending
September 30, 2005 and 2004, respectively.			(4,827	)			5,740				(6,746	)			(873	)
Less: reclassification adjustment for
realized gains included in net earnings, net
of tax of $0 for the three months ending both
September 30, 2005 and 2004, and $230 and
$370 for the nine months ending September 30,
2005 and 2004.			—				—				(386	)			(655	)
Net change in unrealized gains/(losses) on
securities available for sale, net of tax of
$2,878 and $3,392 for the three months ending
September 30, 2005 and 2004, respectively,
and $4,275 and $942 for the nine months
ending September 30, 2005 and 2004,
respectively.			(4,827	)			5,740				(7,132	)			(1,528	)
Increase/(Decrease) in fair value of
derivatives, net of tax of $854 and $233 for the
three months ending September 30, 2005 and 2004,
respectively, and $994 and $341 for the nine
months ending September 30, 2005 and 2004,
respectively.			1,174				(322	)			1,229				744
Less: reclassification of realized gains on
derivatives, net of tax of $189 and $222 for
the three months ending September 30, 2005
and 2004, respectively, and $387 and $697,
for the nine months ending September 30, 2005
and 2004, respectively.			(261	)			(306	)			(533	)			(962	)
Net change in fair value of derivatives, net
of tax of $665 and $455 for the three months
ending September 30, 2005 and 2004,
respectively, and $607 and $356, for the nine
months ending September 30, 2005 and 2004,
respectively.			913				(628	)			696				(218	)
Other Comprehensive (Loss) Income, Net of Tax:			(3,914	)			5,112				(6,436	)			(1,746	)
Comprehensive Income		$	4,773			$	13,374			$	18,206			$	19,837

     The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

	•		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 Company’s credit or fee-based products and services;
	•		adverse changes in the local real estate market, as most of the Company’s loans are concentrated in southeastern Massachusetts and Cape Cod and a substantial portion of these loans have real estate as collateral, could result in a deterioration of credit quality and an increase in the allowance for loan loss;
	•		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 Company’s business environment or affect the Company’s operations;
	•		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 Company’s tax provision and its financial results;

	•		inflation, interest rate, market and monetary fluctuations could reduce net interest income and could increase credit losses;
	•		adverse changes in asset quality could result in increasing credit risk-related losses and expenses;
	•		competitive pressures could intensify and affect the Company’s profitability, including as a result of continued industry consolidation, the increased financial services from non-banks and banking reform;
	•		a deterioration in the conditions of the securities markets could adversely affect the value or credit quality of the Company’s assets, the availability and terms of funding necessary to meet the Company’s liquidity needs and the Company’s ability to originate loans;
	•		the potential to adapt to changes in information technology could adversely impact the Company’s operations and require increased capital spending;
	•		changes in consumer spending and savings habits could negatively impact the Company’s financial results; and
	•		future acquisitions may not produce results at levels or within time frames originally anticipated and may result in unforeseen integration issues.

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

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

EXECUTIVE LEVEL OVERVIEW

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

     The Company reported earnings of $8.7 million, representing growth of 5.1%, for the quarter ended September 30, 2005 from the same period last year. Earnings growth from the comparable quarter was primarily the result of net interest margin expansion, targeted earning assets growth, increases in demand deposits and deposit service charges as well as improved mortgage banking revenue. Partially offsetting these items was an increase in salaries and benefits driven by strategic additions to staff, performance based incentive compensation, annual merit increases and increased medical and post retirement benefits. Also detracting

from the current quarters results were costs related to the conversion of the Company’s ATM system service provider.

     Management continues to focus balance sheet growth on the commercial and home equity lending categories. Emphasis on the securities portfolio has decreased on both a relative basis (as a percent of earning assets) as well as on an actual basis reflecting good loan growth and the current flat yield curve environment. Loan growth has focused primarily on commercial and variable rate home equity lending, while indirect auto loan origination and portfolio residential lending has been somewhat de-emphasized.

     The following pie charts present earning assets by type as a percent of total earning assets for the time period indicated below:

     There was good deposit growth of $112.3 million, or 5.5%, during 2005 despite the strong competitive pricing in the Company’s market area. The majority of the growth was experienced in time deposits of $72.0 million, or 16.0%, and demand deposits of $34.3 million, or 6.9%. The company remains committed to deposit generation, with careful management of deposit pricing and selective deposit promotion in an effort to control the Company’s cost of funds.

     While changes in the prevailing interest rate environment (Historical Treasury Yield Curve graph below) have and will continue to have an impact on the level of the Company’s earnings, management strives to mitigate volatility in net interest income resulting from changes in benchmark interest rates by adjustable rate asset generation, effective liability management and utilization of off-balance sheet interest rate derivatives. (For a discussion of interest rate derivatives see Table 8 – Interest Rate Sensitivity and the discussion to follow within the Market Risk section of the management discussion and analysis.)

     Looking ahead to the last quarter of 2005, the Company expects the quarterly net interest margin to be maintained in the 3.90% range, with deposit pricing being a key determinant. Competition for deposit generation in the Company’s footprint remains strong.

     Asset quality continues to be a highlight for the Company and is not anticipated to change significantly in the near term.

     Management plans to continue to grow earnings through prudent asset growth, increasing deposit originations, generating growth in non-interest income, and non-interest expense control. As previously reported, there are a number of initiatives that are expected to continue to contribute to the remainder of 2005 and beyond. The Company’s continued future success will be predicated upon the disciplined execution and the careful monitoring of the Strategic Plan.

A number of the strategic objectives are:

	o		Significantly improve and expand our business development across all business units and channels.
	o		Improve the customer experience through:

	o		The development, measurement and continuous improvement upon service standards
	o		Improved product offerings
	o		Improving the appearance of the branch network

	o		Enhance our colleague capital through training and development.
	o		Build and leverage an enhanced information infrastructure and analysis capability designed to better understand:

o

Customer and product contribution

	o		The effectiveness of direct mail campaigns
	o		Consumer credit losses

	o		Improve the efficiency and effectiveness with which we operate by leveraging the additional functionality of our core system provider and examining the efficiency of our branch network.
	o		Continued focus on compliance and risk management.

     Management believes that its commitment and execution of the objectives outlined above will be critical to continuing to deliver strong financial performance.

FINANCIAL POSITION

     Loan Portfolio Total loans increased by $102.8 million, or 5.4%, during the nine months ended September 30, 2005. The increases were mainly in commercial loans which increased $57.4 million, or 6.4%, in total with commercial real estate representing the largest growth of $49.1 million, or 8.0%. Commercial and industrial loans increased by $7.0 million, or 4.5%, and commercial construction loans increased $1.3 million, or 1.0%. Consumer loans increased $46.4 million, or 8.8%, primarily due to growth in variable home equity lending. The consumer-auto loan portfolio decreased by $8.2 million, or 2.9%, during the nine months ended September 30, 2005 as this segment of the loan portfolio has been de-emphasized due to narrowing spreads. Business banking loans totaled $50.1 million, representing growth of 14.7% during the nine months ending September 30, 2005. Residential loans decreased $7.5 million, or 1.7% during the first nine months.

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

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

     On loans secured by one-to-four family owner-occupied properties, the Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure action. If such efforts do not result in a satisfactory arrangement, the loan is referred to legal

counsel to initiate foreclosure proceedings. At any time prior to a sale of the property at foreclosure, the Bank may and will terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan. On loans secured by commercial real estate or other business assets, the Bank similarly seeks to reach a satisfactory payment plan so as to avoid foreclosure or liquidation.

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

Table 1 — Summary of Delinquency Information

		At September 30, 2005																				At December 31, 2004
		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
														(Unaudited — Dollars in Thousands)
Real Estate Loans:
Residential			1			$	334				2			$	677				3			$	764				4			$	173
Residential Construction			—				—				—				—				—				—				—				—
Commercial			2				103				2				252				1				188				2				227
Commercial Construction			—				—				—				—				—				—				—				—
Commercial and Industrial Loans			1				96				1				1				1				130				4				207
Business Banking			—				—				1				8				1				11				4				167
Consumer — Home Equity			—				—				1				49				—				—				—				—
Consumer — Auto (1)			72				514				59				512				N/A				N/A				N/A				N/A
Consumer — Other			16				191				18				130				76				626				95				459
Total			92			$	1,238				84			$	1,629				82			$	1,719				109			$	1,233

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

     Nonperforming Assets Nonperforming assets are comprised of nonperforming loans, nonperforming securities and other real estate owned (“OREO”). Nonperforming loans consist of nonaccrual loans and loans that are more than 90 days past due but still accruing interest. OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure. Nonperforming assets totaled $2.5 million at September 30, 2005 (0.08% of total assets), as compared to the $2.7 million (0.09% of total assets) reported at December 31, 2004. The Company’s allowance for loan losses as a percent of nonperforming loans is 1,074.53% as compared to 932.53% at December 31, 2004 and the Company maintained an allowance to loan ratio of 1.31% at both September 30, 2005 and December 31, 2004. The Bank held one OREO property on September 30, 2005 amounting to $5,000 and none on December 31, 2004 and all securities were performing for both periods.

     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 $644,000,

$703,000 and $679,000 for the periods ending September 30, 2005, December 31, 2004, and September 30, 2004, respectively.

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

Table 2 — Nonperforming Assets / Loans (Unaudited — Dollars in Thousands)

		As of				As of				As of
		September 30,				December 31,				September 30,
		2005				2004				2004
Loans past due 90 days or more but still accruing
Home Equity		$	49			$	—			$	73
Consumer — Auto (2)			88				—				—
Consumer — Other			95				245				306
Total		$	232			$	245			$	379
Loans accounted for on a nonaccrual basis (1)
Commercial and Industrial		$	1			$	334			$	1,401
Business Banking (3)			8				N/A				N/A
Real Estate — Commercial Mortgage			252				227				564
Real Estate — Residential Mortgage			1,238				1,193				1,001
Consumer — Auto (2)			644				703				—
Consumer — Other			87				—				679
Total		$	2,230			$	2,457			$	3,645
Total nonperforming loans		$	2,462			$	2,702			$	4,024
Other real estate owned		$	5			$	—			$	—
Total nonperforming assets		$	2,467			$	2,702			$	4,024
Restructured loans		$	388			$	416			$	426
Nonperforming loans as a percent of gross loans			0.12	%			0.14	%			0.21	%
Nonperforming assets as a percent of total assets			0.08	%			0.09	%			0.14	%

     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 the current financial status. It is the Bank’s policy to maintain restructured loans on nonaccrual status for approximately six months before management considers a return to accrual status. At September 30, 2005 and December 31, 2005 the Bank had $388,000 and $416,000, respectively, of restructured loans. At September 30, 2005 and December 31, 2004, the Bank also had 38 and 15 potential problem loans, respectively, which were not included in nonperforming loans with an outstanding balance of $21.4 million and $10.7 million, respectively. Potential problem loans are any loans, which are not included in nonaccrual or non-performing loans and which are not considered troubled debt restructures, where known information about possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present loan repayment terms. At September 30, 2005, problem loans continued to perform and the Company's management actively monitors these loans to minimize any possible adverse impact to the Bank.

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

     Interest income that would have been recognized for the three months ended September 30, 2005 and September 30, 2004, if nonperforming loans at the respective dates had been performing in accordance with their original terms, approximated $70,000 and $82,000, respectively. Interest income that would have been recognized for the nine months ended September 30, 2005 and September 30, 2004, if nonperforming loans at the respective dates had been performing in accordance with their original terms, approximated $193,000 and $240,000, respectively. The actual amount of interest that was collected on nonaccrual and restructured loans during the three months ended September 30, 2005 and September 30, 2004 and included in interest income was $16,000 and $36,000, respectively. The actual amount of interest that was collected on nonaccrual and restructured loans during the nine months ended September 30, 2005 and September 30, 2004 and included in interest income was $70,000 and $155,000, respectively.

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

     Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer or residential loans for impairment disclosures. At September 30, 2005, impaired loans include all commercial real estate loans and commercial and industrial loans on nonaccrual status, restructured loans and certain potential problem loans for which a collateral deficit exists and a specific allocation of allowance for loan loss has been assigned. Total impaired loans at September 30, 2005 and December 31, 2004 were $1.6 million and $2.6 million, respectively.

     Allowance For Loan Losses While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, or for other reasons. Various regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses. Federal Deposit Insurance Corporation (“FDIC”) regulators examined the Company during the first quarter of 2005.

     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. Additionally, in 2004 the Bank’s allowance increased by $869,000 upon acquisition of Falmouth Bancorp, Inc. This increase represents management’s estimate of potential inherent losses in the acquired portfolio.

     As of September 30, 2005, the allowance for loan losses totaled $26.5 million, or 1.31%, of total loans as compared to $25.2 million, or 1.31%, of total loans at December 31, 2004. Based on the analyses described herein, management believes that the level of the allowance for loan losses at September 30, 2005 is adequate.

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

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

		Quarter to Date
		September 30,				June 30,				March 31,				December 31,				September 30,
		2005				2005				2005				2004				2004
						(Unaudited — Dollars in Thousands)
Average loans		$	2,004,389			$	1,958,097			$	1,932,768			$	1,898,874			$	1,814,143
Allowance for loan losses, beginning of period		$	26,050			$	25,505			$	25,197			$	25,253			$	23,931
Charged-off loans:
Commercial and Industrial			120				—				—				153				—
Business Banking (1)			196				48				151				78				—
Real Estate — Commercial			—				—				—				—				—
Real Estate — Residential			—				—				—				—				—
Real Estate — Construction			—				—				—				—				—
Home Equity			—				—				—				—				—
Consumer — Auto (2)			333				421				426				—				—
Consumer — Other			285				283				181				720				498
Total charged-off loans			934				752				758				951				498
Recoveries on loans previously charged-off:
Commercial and Industrial			15				51				6				11				52
Business Banking (1)			2				9				2				78				—
Real Estate — Commercial			127				—				—				—				1
Real Estate — Residential			—				—				—				—				30
Real Estate — Construction			—				—				—				—				—
Home Equity			—				—				20				—				—
Consumer — Auto (2)			91				105				65				—				—
Consumer — Other			34				27				43				36				107
Total recoveries			269				192				136				125				190
Net loans charged-off			665				560				622				826				308
Addition due to acquisition			—				—				—				—				870
Provision for loan losses			1,070				1,105				930				770				760
Total allowance for loan losses, end of period		$	26,455			$	26,050			$	25,505			$	25,197			$	25,253
Net loans charged-off as a percent of average total loans			0.03	%			0.03	%			0.03	%			0.04	%			0.02	%
Total allowance for loan losses as a percent of total loans			1.31	%			1.30	%			1.31	%			1.31	%			1.35	%
Total allowance for loan losses as a percent of nonperforming loans			1,074.53	%			1,241.07	%			917.12	%			932.53	%			627.56	%
Net loans charged-off as a percent of allowance for loan losses			2.51	%			2.15	%			2.44	%			3.28	%			1.22	%
Recoveries as a percent of charge-offs			28.80	%			25.53	%			17.94	%			13.14	%			38.15	%