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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2005
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from           to          
 
Commission File Number: 1-9047
Independent Bank Corp.
(Exact name of registrant as specified in its charter)
 
     
Massachusetts   04-2870273
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
288 Union Street
Rockland, Massachusetts
(Address of principal executive offices)
  02370
(Zip Code)
 
Registrant’s telephone number, including area code:
(781) 878-6100
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
None   None
 
Securities registered pursuant to section 12(g) of the Act:
 
Common Stock, $.0l par value per share
(Title of Class)
 
Preferred Stock Purchase Rights
(Title of Class)
 
Indicate by check mark 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated filer o     Accelerated filer þ     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
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, 2005, was approximately $412,672,609.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. January 31, 2006: 15,395,347
 
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).
 
(1)  Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2005 are incorporated into Part II, Items 5-8 of this Form 10-K.
 
(2)  Portions of the Registrant’s definitive proxy statement for its 2006 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K.
 


Table of Contents

 
INDEPENDENT BANK CORP.
 
2005 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS
 
             
        Page
 
  Business   4
    General   4
    Market Area and Competition   4
    Lending Activities   4
    Investment Activities   9
    Sources of Funds   10
    Investment Management, Retail Investments and Insurance   11
    Regulation   11
    Statistical Disclosure by Bank Holding Companies   17
    Securities and Exchange Commission Availability of Filings on Company Website   17
  Risk Factors   17
  Unresolved Staff Comments   19
  Properties   19
  Legal Proceedings   19
  Submission of Matters to a Vote of Security Holders   20
 
  Market for Independent Bank Corp.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   21
      Table 1 — Price Range of Common Stock   21
  Selected Financial Data   22
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
      Table 2 — Loan Portfolio Composition   30
      Table 3 — Scheduled Contractual Loan Amortization   31
      Table 4 — Summary of Delinquency Information   33
      Table 5 — Nonperforming Assets   34
      Table 6 — Summary of Changes in the Allowance for Loan Losses   36
      Table 7 — Summary of Allocation of Allowance for Loan Losses   38
      Table 8 — Amortized Cost of Securities Held to Maturity   40
      Table 9 — Fair Value of Securities Available for Sale   40
      Table 10 — Amortized Cost of Securities Held to Maturity — Amounts Maturing   40
      Table 11 — Fair Value of Securities Available for Sale — Amounts Maturing   41
      Table 12 — Average Balances of Deposits   41
      Table 13 — Maturities of Time Certificates of Deposits Over $100,000   42
      Table 14 — Average Balance, Interest Earned/Paid & Average Yields   44
      Table 15 — Volume Rate Analysis   45
      Table 16 — Non-Interest Income   47
      Table 17 — Non-Interest Expense   48
      Table 18 — New Markets Tax Credit Recognition Schedule   49
      Table 19 — Interest Rate Sensitivity   53


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        Page
 
      Table 20 —  Expected Maturities of Long Term Debt and Interest Rate Derivatives   54
      Table 21 — Capital Ratios for the Company and the Bank   55
      56
  Quantitative and Qualitative Disclosures About Market Risk   60
  Financial Statements and Supplementary Data   61
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   104
  Controls and Procedures   104
  Other Information   106
           
    Part III    
  Directors and Executive Officers of Independent Bank Corp.    106
  Executive Compensation   106
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   106
  Certain Relationships and Related Transactions   106
  Principal Accounting Fees and Services   106
           
    Part IV    
  Exhibits, Financial Statement Schedules   106
  109
Exhibit 31.1 — Certification 302
  112
Exhibit 31.2 — Certification 302
  113
Exhibit 32.1 — Certification 906
  114
Exhibit 32.2 — Certification 906
  115


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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 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 on 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 provided by 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-K. 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.


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PART I.
 
Item 1.   Business
 
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 1986. The Company is the sole stockholder of Rockland Trust Company (“Rockland” or the “Bank”), a Massachusetts trust company chartered in 1907. The Company is a community-oriented commercial bank. The community banking business, the Company’s only reportable operating segment, consists of commercial banking, retail banking, investment 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, trust investment management services, retail investments and insurance services, and mortgage banking income. Rockland offers a full range of community banking services through its network of 52 banking offices (including 50 full-service branches), nine commercial banking centers, three investment management group offices, and four residential lending centers, which are located in the Plymouth, Norfolk, Barnstable and Bristol counties of southeastern Massachusetts and Cape Cod. At December 31, 2005, the Company had total assets of $3.0 billion, total deposits of $2.2 billion, stockholders’ equity of $228.2 million, and 722 full-time equivalent employees.
 
Market Area and Competition
 
The Bank contends with considerable competition both in generating loans and attracting deposits. The Bank’s 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 Bank’s primary competitors are savings banks, commercial and co-operative banks, credit unions, 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 Bank’s market area is attractive and entry into the market by financial institutions previously not competing in the market area may continue to occur. The entry into the market area by these institutions, and other non-bank institutions that offer financial alternatives could impact the Bank’s growth or profitability.
 
Lending Activities
 
The Bank’s gross loan portfolio (loans before allowance for loan losses) amounted to $2.0 billion on December 31, 2005 or 67.1% of total assets on that date. The Bank classifies loans as commercial, business banking, 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. Business banking loans consist primarily of loans to businesses with commercial credit needs of less than $250,000 and revenues of less than $2.5 million. Real estate loans are comprised of 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 automobile loans and home equity loans.
 
The Bank’s borrowers consist of small-to-medium sized businesses and retail customers. The Bank’s market area is generally comprised of the Plymouth, Norfolk, Barnstable and Bristol Counties located in southeastern Massachusetts and Cape Cod. Substantially all of the Bank’s commercial, business banking and consumer loan portfolios consist of loans made to residents of and businesses located in southeastern Massachusetts and Cape Cod


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with the primary exception being the origination of certain indirect auto loans in Rhode Island. The majority of the real estate loans in the Bank’s 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 Bank’s principal earning assets are its loans. Although the Bank judges its borrowers to be creditworthy, the risk of deterioration in borrowers’ abilities to repay their loans in accordance with their existing loan agreements is inherent in any lending function. Participating as a lender in the credit markets requires a strict monitoring process to minimize credit risk. This process requires substantial analysis of the loan application, an evaluation of the customer’s capacity to repay according to the loan’s contractual terms, and an objective determination of the value of the collateral. The Bank also utilizes the services of an independent third-party consulting firm to provide loan review services, which consist of a variety of monitoring techniques performed after a loan becomes part of the Bank’s portfolio.
 
The Bank’s Controlled Asset Department is responsible for the management and resolution of nonperforming assets. In the course of resolving nonperforming loans, the Bank may choose to restructure certain contractual provisions. Nonperforming assets are comprised of nonperforming loans, nonperforming securities and Other Real Estate Owned (“OREO”). Nonperforming loans consist of loans that are more than 90 days past due but still accruing interest and nonaccrual loans. OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure. 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 Bank’s standard underwriting guidelines. The Bank had one property held as OREO for the period ending December 31, 2005 and did not hold any OREO for the period ending December 31, 2004.
 
Origination of Loans  Commercial and industrial loan applications are obtained through existing customers, solicitation by Bank personnel, referrals from current or past customers, or walk-in customers. Commercial real estate loan applications are obtained primarily from previous borrowers, direct contact with the Bank, or referrals. Business banking loan applications are typically originated by the Bank’s retail staff, through a dedicated team of business banking officers, by referrals from other areas of the Bank, referrals from current or past customers or through walk-in customers. Applications for residential real estate loans and all types of consumer loans are taken at all of the Bank’s full-service branch offices. Beginning in November 2005, customers can now obtain residential applications and pre-approvals through Federal National Mortgage Association (“F.N.M.A.”) via a link from the Bank’s website. 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 Company uses a select group of third party originators to generate additional real estate loan volume. The loans are underwritten and closed in the name of the Bank. Volume generated by these third party originators was less than 6% of total origination in 2005. Consumer loan applications are directly obtained through existing or walk-in customers who have been made aware of the Bank’s consumer loan services through advertising and other media, as well as indirectly through a network of automobile, recreational vehicle, and boat dealers.
 
Commercial and industrial loans, commercial real estate loans, and construction loans may be approved by commercial loan officers up to their individually assigned lending limits, which are established and modified periodically by management, with ratification by the Board of Directors, to reflect the officer’s expertise and experience. Any of those types of loans which are in excess of a commercial loan officer’s assigned lending 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.
 
Business banking loans may be approved by business banking officers up to their individually assigned lending limits which are established and modified periodically by the Director of Consumer and Business Banking to reflect the officer’s expertise and experience. The Director of Consumer and Business Banking’s lending limit is


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recommended by the Chief Financial Officer (“CFO”) and ratified by the Board of Directors. Any loan which is in excess of the business banking officer’s assigned lending authority must be approved by the Director of Consumer and Business Banking.
 
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 underwriter’s and analyst’s expertise and experience. Any loan which is in excess of the residential underwriter’s and residential analyst’s 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 Consumer Loan Administrator and the Director of Consumer and Business Banking to reflect the officer’s expertise and experience. The Director of Consumer and Business Banking’s lending limit is recommended by the CFO and ratified by the Board of Directors. Any loan which is in excess of the consumer lender’s assigned lending authority must be approved by the Consumer Loan Administrator or the Director of Consumer and 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 Bank’s stockholders’ equity, or $52.7 million at December 31, 2005. Notwithstanding the foregoing, the Bank has established a more restrictive limit of not more than 75% of the Bank’s legal lending limit, or $39.5 million at December 31, 2005, which may only be exceeded with the approval of the Board of Directors. There were no borrowers whose total indebtedness in aggregate exceeded $39.5 million as of December 31, 2005.
 
Sale of Loans  The Bank’s residential real estate loans are generally originated in compliance with terms, conditions and documentation which permit the sale of such loans to the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”), the Government National Mortgage Association (“GNMA”), and other investors in the secondary market. Loan sales in the secondary market provide funds for additional lending and other banking activities. The Bank may retain the servicing on the loans sold. As part of its asset/liability management strategy, the Bank may retain a portion of the adjustable and fixed rate residential real estate loan originations for its portfolio. During 2005, the Bank originated $287.8 million in residential real estate loans of which $101.9 million was 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, 2005, $155.1 million, or 7.6% of the Bank’s gross loan portfolio consisted of commercial and industrial loans. Commercial and industrial loans generated 7.2%, 6.9%, and 7.2% of total interest income for the fiscal years ending 2005, 2004 and 2003, 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, 2005, there were $56.0 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 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, 2005, there were $97.0 million of revolving lines of credit in the commercial loan portfolio.
 
The Bank’s standby letters of credit generally are secured, have terms of not more than one year, and are reviewed for renewal. At December 31, 2005, the Bank had $8.9 million of standby letters of credit.


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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 dealer’s 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 dealer’s 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, 2005, there were $14.2 million floor plan loans, all of which have variable rates of interest.
 
Business Banking Loans  During the first quarter of 2005, the Company reclassified certain commercial and consumer loans to a new business banking loan category associated with the Company’s business banking initiative. The business banking initiative was announced in 2004 and caters to all of the banking needs of businesses with commercial credit requirements and revenues typically less then $250,000 and $2.5 million respectively, with automated loan underwriting capabilities and new loan and deposit products. Business banking loans totaled $51.4 million, representing growth of 17.6% during the year ended December 31, 2005, compared to the same period last year. Business banking loans represented 2.5% of the Bank’s gross loan portfolio. Business banking loans generated 2.4%, 1.3%, and 1.2% of total interest income for the fiscal years ending 2005, 2004 and 2003, respectively.
 
Business banking loans may be structured as term loans, lines of credit including overdraft protection, owner occupied commercial mortgages and standby letters of credit. Business banking generally obtains personal guarantees from the principals of the borrower for virtually all of its loan products. Business banking term loans generally have an amortization schedule of five years or less and, although business banking occasionally originates some term loans with interest rates that float in accordance with the prime rate, the majority of business banking term loans have fixed rates of interest. The majority of business banking term loans are collateralized by machinery, equipment and other corporate assets. At December 31, 2005, there were $16.0 million of term loans in the business banking loan portfolio.
 
Business banking 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. Business banking lines of credit and overdraft protection are reviewed on a periodic basis based upon the total amount of exposure to the customer and are 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, 2005, there were $31.5 million of lines of credit and overdraft protection in the business banking loan portfolio.
 
Business banking 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 business banking owner occupied commercial mortgages have fixed rates of interest that are adjusted typically every three to five years. The majority of business banking owner occupied commercial mortgages are collateralized by first or second mortgages on owner occupied commercial real estate. At December 31, 2005, there were $2.8 million of owner occupied commercial mortgages in the business banking loan portfolio.
 
Business banking’s standby letters of credit generally are secured, have expirations of not more than one year, and are reviewed periodically for renewal. The business banking team makes use of the Bank’s authority as a preferred lender with the U.S. Small Business Administration. At December 31, 2005, there were $992,000 of U.S. Small Business Administration loans in the business banking loan portfolio.
 
Real Estate Loans  The Bank’s real estate loans consist of loans secured by commercial properties, loans secured by one-to-four family residential properties, and construction loans. As of December 31, 2005, the Bank’s loan portfolio included $683.2 million in commercial real estate loans, $433.4 million in residential real estate loans, $140.6 million in commercial construction loans and $8.3 million in residential construction loans, altogether totaling 62.0% of the Bank’s gross loan portfolio. Real estate loans generated an aggregate of 47.5%, 46.2%, and 45.6% of total interest income for the fiscal years ending December 31, 2005, 2004 and 2003, respectively.
 
A significant portion of the Bank’s commercial real estate portfolio consists of loans secured by owner occupied commercial and industrial buildings and warehouses while a number of loans are secured by residential


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development tracts. Commercial real estate loans also include multi-family residential loans that are primarily secured by apartment buildings and, to a lesser extent, condominiums. The Bank has a modest portfolio of loans secured by special purpose properties, such as hotels, motels, restaurants, and golf courses.
 
Although terms vary, commercial real estate loans generally have maturities of five years or less, amortization periods of 20 years, and interest rates that either float in accordance with a designated index or have fixed rates of interest. It is also the Bank’s policy to obtain personal guarantees from the principals of the borrower on commercial real estate loans and to obtain financial statements at least annually from all 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 in the market for commercial and retail space.
 
Rockland originates both fixed-rate and adjustable-rate residential real estate loans. The Bank will lend up to 100% of the lesser of the appraised value of the 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 Bank’s residential real estate loans are generally originated only under terms, conditions and documentation, which permit sale in the secondary market.
 
The Bank generally requires title insurance protecting the priority of its mortgage lien, as well as fire, 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 Bank’s first mortgage real estate loans.
 
Construction loans are intended to finance the construction of residential and commercial properties, including loans for the acquisition and development of land or rehabilitation of existing homes. Construction loans generally have terms of six months, but not more than two years. They usually do not provide for amortization of the loan balance during the term. The majority of the Bank’s commercial construction loans have floating rates of interest based upon the Rockland base rate or the prime rate published daily in the Wall Street Journal.
 
A significant portion of the Bank’s construction lending is related to one-to-four family residential development within the Bank’s market area. The Bank typically has focused its construction lending on relatively small projects and has developed and maintains a relationship with a significant number of homebuilders in the Plymouth, Norfolk, Barnstable and Bristol Counties of southeastern Massachusetts and Cape Cod.
 
Construction loans are generally considered to present a higher degree of risk than permanent real estate loans. A borrower’s ability to complete construction may be affected by a variety of factors such as adverse changes in interest rates and the borrower’s ability to control costs and adhere to time schedules. The latter will depend upon the borrower’s management capabilities, and may also be affected by strikes, adverse weather and other conditions beyond the borrower’s control.
 
Consumer Loans  The Bank makes loans for a wide variety of personal and consumer needs. Consumer loans primarily consist of installment loans, home equity loans, overdraft protection, and personal lines of credit. As of December 31, 2005, $568.8 million, or 27.9%, of the Bank’s gross loan portfolio consisted of consumer loans. Consumer loans generated 20.8%, 20.1% and 20.6% of total interest income for the fiscal years ending December 31, 2005, 2004, and 2003, respectively.
 
The Bank’s installment loans consist primarily of automobile loans, which totaled $263.2 million, at December 31, 2005, or 12.9% of loans, a decrease from 14.8% of loans at year-end 2004. A substantial portion of the Bank’s automobile loans are originated indirectly by a network of approximately 230 new and used automobile dealers located within the Bank’s market area. Although employees of the dealer take applications for such loans, the loans are made pursuant to Rockland’s underwriting standards using Rockland’s documentation, and


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a Rockland loan officer must approve all indirect loans. In addition to indirect automobile lending, the Bank also originates automobile loans directly.
 
The maximum term for the Bank’s automobile loans is 84 months for a new car loan and 72 months with respect to a used car loan. 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. Some purchases from used car dealers are under a repurchase agreement. The dealer is required to pay off the loan (in return for the vehicle) as long as the Bank obtains the vehicle and returns it to the dealer within 180 days of the most recent delinquency payment. In addition, in order to mitigate the adverse effect on interest income caused by prepayments, all 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 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 Bank’s receipt of 25%, no rebates are applied to the account after 90 days from date of first payment.
 
The Bank’s consumer loans also include home equity, unsecured loans and loans secured by deposit accounts, loans to purchase motorcycles, recreational vehicles, motor homes, boats, or mobile homes. The Bank generally will lend up to 100% 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 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 borrower’s residence or second home. At December 31, 2005, $41.4 million, or 16.4%, of the home equity portfolio were term loans and $210.5 million, or 83.6%, of the home equity portfolio were revolving lines of credit. The Bank will originate home equity loans in an amount up to 89.99% of the appraised value or on-line valuation, reduced for any loans outstanding secured by such collateral. Home equity loans are underwritten in accordance with the Bank’s loan policy which includes a combination of credit score, loan to value ratio1, employment history and debt to income ratio. Home equity lines of credit at December 31, 2005, had a weighted average FICO2 score of 746 and a weighted average loan to value ratio of 59.0%. Home equity loans at December 31, 2005, had a weighted average FICO score of 730 and a weighted average loan to value ratio of 51.0%.
 
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.
 
Investment Activities
 
The Bank’s 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 and equity securities held for the purpose of funding supplemental executive retirement plan obligations through a Rabbi Trust. Most of these securities are investment grade debt obligations with average lives of five years or less. U.S. Treasury and U.S. Government agency securities entail a lesser degree of risk than loans made by the Bank by virtue of the guarantees that back them, require less capital under risk-based capital rules than non-insured or non-guaranteed mortgage loans, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Bank. 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 Bank’s securities portfolio is managed in accordance with the Rockland Trust Company Investment Policy adopted by the Board of Directors.
 
 
1 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.
2 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 relevant range of the score is 450 to 800.


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The Chief Executive Officer or the Chief Financial Officer may make investments with the approval of one additional member of the Asset/Liability Management Committee, subject to limits on the type, size and quality of all investments, which are specified in the Investment Policy. The Bank’s Asset/Liability Management Committee, or its appointee, is required to evaluate any proposed purchase from the standpoint of overall diversification of the portfolio. At December 31, 2005, securities totaled $716.6 million. Total securities generated interest and dividends on securities of 21.8%, 25.5%, and 25.4% of total interest income for the fiscal years ended 2005, 2004 and 2003, respectively.
 
Sources of Funds
 
Deposits  Deposits obtained through Rockland’s branch banking network have traditionally been the principal source of the Bank’s funds for use in lending and for other general business purposes. The Bank has built a stable base of in-market core deposits from consumers, businesses, and municipalities located in southeastern Massachusetts and Cape Cod. Rockland offers a range of demand deposits, interest checking, money market accounts, savings accounts, and time certificates of deposit. Interest rates on deposits are based on factors that include loan demand, deposit maturities, alternative costs of funds, and interest rates offered by competing financial institutions in the Bank’s market area. The Bank believes it has been able to attract and maintain satisfactory levels of deposits based on the level of service it provides to its customers, the convenience of its banking locations, and its interest rates that are generally competitive with those of competing financial institutions. Rockland has a municipal department that focuses on providing service to local municipalities. At December 31, 2005, there were municipal deposits from customers of $147.4 million which are included in total deposits. As of December 31, 2005, total deposits were $2.2 billion.
 
Rockland’s branch locations are supplemented by the Bank’s 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 Bank’s full-service offices and three 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” nationwide ATM network. In addition, Rockland is a member of the “SUM” network, which allows access to 2,708 participating ATM machines free of surcharge. In Massachusetts there are 322 participating institutions and more than 1,770 ATMs. These networks provide the Bank’s customers access to their accounts through ATMs located throughout Massachusetts, the United States, and the world. The debit card also can be used at any place that accepts MasterCard worldwide.
 
Borrowings  Borrowings consist of short-term and intermediate-term obligations. Short-term borrowings can consist of FHLB advances, federal funds purchased, treasury tax and loan notes and assets sold under repurchase agreements. In a repurchase agreement transaction, the Bank will generally sell a security agreeing to repurchase either the same or a substantially identical security on a specified later date at a price slightly greater than the original sales price. The difference in the sale price and purchase price is the cost of the proceeds 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 lender may default at maturity and not return the collateral. In order to minimize this potential risk, the Bank only deals with established investment brokerage firms when entering into these transactions. On December 31, 2005, the Bank had $25.0 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, 2005, the Bank had $88.3 million of customer repurchase agreements outstanding.
 
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, 2005, the Bank had $417.5 million outstanding in FHLB borrowings with initial maturities ranging from 3 months to 20 years. In addition, the Bank has $325.6 million of borrowing capacity remaining with the FHLB.


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Also included in borrowings are junior subordinated debentures payable to the Company’s unconsolidated special purpose entities (Independent Capital Trust III (“Trust III”) and Independent Capital Trust IV (“Trust IV”)) that issued trust preferred securities to the public. The Company pays interest of 8.625% and 8.375% on $25.8 million of junior subordinated debentures issued by each Trust III and Trust IV, respectively, on a quarterly basis in arrears. The debentures have a stated maturity date of December 31, 2031, and April 30, 2032, for amounts due to Trust III and Trust IV, respectively, and callable at the option of the Company on or after December 31, 2006 and April 30, 2007 for amounts due to Trust III and Trust IV, respectively.
 
Investment Management, Retail Investments and Insurance
 
Investment Management  The Rockland Trust Investment Management Group provides investment and trust services to individuals, small businesses, and charitable institutions throughout southeastern Massachusetts and Cape Cod. In addition, the Bank serves as executor or administrator of estates.
 
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, 2005, the Investment Management Group generated gross fee revenues of $4.9 million. Total assets under administration as of December 31, 2005, were $680.1 million, an increase of $116.1 million, or 20.6%, from December 31, 2004.
 
The administration of trust and fiduciary accounts is monitored by the Trust Committee of the Bank’s Board of Directors. The Trust Committee has delegated administrative responsibilities to 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 Investments and Insurance  In 1999, the Bank entered into an agreement with Independent Financial Marketing Group, Inc. (“IFMG”) and their insurance subsidiary IFS Agencies, Inc. (“IFS”) for the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance. IFMG has placed their registered representatives onsite to market these products to the Bank’s 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 SBLI’s fixed annuities and life insurance to the Bank’s customer base.
 
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 Federal Deposit Insurance Corporation (“FDIC”). The majority of Rockland’s deposit accounts are insured to the maximum extent permitted by law by the Bank Insurance Fund (“BIF”) which is administered by the FDIC. In 1994, the Bank purchased the deposits of three branches of a failed savings and loan association from the Resolution Trust Corporation. These deposits are insured to the maximum extent permitted by law by the Savings Association Insurance Fund (“SAIF”).
 
The Bank Holding Company Act (“BHCA”)  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,


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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 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 Reserve’s capital adequacy guidelines which generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier 1, or core capital and up to one-half of that amount consisting of Tier 2, or supplementary capital. Tier 1 capital for bank holding companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less net unrealized gains on available for sale securities and on cash flow hedges, 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 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.


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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, 2005, the Company had Tier 1 capital and total capital equal to 10.74% and 11.99% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 7.71% of total assets. As of such date, Rockland complied with the applicable federal regulatory capital requirements, with Tier 1 capital and total capital equal to 10.07% and 11.32% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 7.22% 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 FDIC’s 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. Under the FDIC’s regulations, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general which are considered strong banking organizations, rated composite 1 under the Uniform Financial Institutions Rating System.
 
Each federal banking agency has broad powers to implement a system of prompt corrective action to resolve problems of institutions, which it regulates, which are not adequately capitalized. 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 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, 2005, 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 FDIC’s 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


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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 owns no voting stock in any banking institution that would require approval of the Federal Reserve.
 
Deposit Insurance Premiums  Rockland currently pays deposit insurance premiums to the FDIC based on a single, uniform assessment rate established by the FDIC for all BIF-member institutions. The assessment rates range from 0% to 0.27%. Under the FDIC’s risk-based assessment system, institutions are assigned to one of three capital groups which assignment is based solely on the level of an institution’s capital — “well capitalized,” “adequately capitalized,” and “undercapitalized” — which are defined in the same manner as the regulations establishing the prompt corrective action system under the Federal Deposit Insurance Act (“FDIA”). Rockland is presently “well capitalized” and as a result, Rockland is currently not subject to any FDIC premium obligation.
 
Community Reinvestment Act (“CRA”)  Pursuant to the Community Reinvestment Act (“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, 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 examinations.
 
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 enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential 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 Gramm-Leach-Bliley Act (“GLB”) of 1999, 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 Bank Holding Company Act 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


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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 Bank Holding Company Act 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  On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act (“SOA”) of 2002. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.
 
The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the Securities and Exchange Commission (“SEC”) and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC and the Comptroller General.
 
The SOA’s principal legislation includes:
 
  •  auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients;
 
  •  additional corporate governance and responsibility measures, including the requirement of certification of financial statements by the chief executive officer and the chief financial officer;
 
  •  the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;
 
  •  an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with the Company’s independent auditor;
 
  •  requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer;
 
  •  requirement that companies disclose whether at least one member of the audit committee is a “financial expert” (as such term will be defined by the SEC) and if not, why not;
 
  •  expanded disclosure requirements for corporate insiders, including a prohibition on insider trading during pension plan black out periods;
 
  •  expedited filing requirements for Forms 4’s;
 
  •  disclosure of off-balance sheet transactions;
 
  •  a prohibition on personal loans to directors and officers, except certain loans made to insured financial institutions;
 
  •  disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;
 
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  •  the formation of an independent public company accounting oversight board;
 
  •  mandatory disclosure by analysts of potential conflicts of interest; and
 
  •  various increased criminal penalties for violations of securities laws.
 
The SEC has been delegated the task of enacting rules to implement various provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act. 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, we will review those rules, 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 recently 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 bank’s 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 or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:
 
  •  to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and
 
  •  to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates.
 
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:
 
  •  a loan or extension of credit to an affiliate;
 
  •  a purchase of, or an investment in, securities issued by an affiliate;
 
  •  a purchase of assets from an affiliate, with some exceptions;
 
  •  the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and
 
  •  the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
 
In addition, under Regulation W:
 
  •  a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
 
  •  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
 
  •  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.
 
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.


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Employees  As of December 31, 2005, the Bank had 722 full time equivalent employees. None of the Company’s 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
 
The following information, included under Items 6, 7, and 8 of this report are incorporated by reference herein.
 
Note 8, “Borrowings” within Notes to the Consolidated Financial Statements which includes information regarding short-term borrowings and is included in Item 8 hereof.
 
For additional information regarding the Company’s business and operations, see Selected Financial Data in Item 6 hereof, Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 hereof and the Consolidated Financial Statements in Item 8 hereof.
 
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 SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. 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’ Stock Purchase and Savings Plans), 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 Company’s website: www.RocklandTrust.com. 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 Company’s Code of Ethics and other Corporate Governance documents are also available on the Company’s website in the Investor Relations section of the website.
 
Item 1A.   Risk Factors
 
Changes in interest rates could adversely impact the Company’s financial condition and results of operations.  The Company’s 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.


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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 Company’s 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 Company’s profitability.
 
If the Company has higher loan losses than it has allowed for, its earnings could materially decrease.  The Company’s 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 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 Company’s 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 Company’s net income.
 
A significant amount of the Company’s 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 concentration of the Company’s loan origination activities in Massachusetts, in the event of adverse economic conditions, potential 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 Company’s business, financial condition, results of operations, and cash flows.
 
The Company has strong competition within its market area which may limit the Company’s 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 Company’s 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 Company’s ability to maintain and manage these functions effectively, which could negatively effect the Company’s revenues. In addition, loss of key personnel


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could result in increased recruiting and hiring expenses, which could cause a decrease in the Company’s net income. The Company’s continued ability to compete effectively depends on its ability to attract new employees and to retain and motivate its existing employees.
 
Item 1B.   Unresolved Staff Comments
 
None
 
Item 2.   Properties
 
At December 31, 2005, the Bank conducted its business from its headquarters and main office located at 288 Union Street, Rockland, Massachusetts and an additional fifty-one banking offices located within Barnstable, Bristol, Norfolk and Plymouth Counties in southeastern Massachusetts and Cape Cod. In addition to its main office, the Bank owned twenty-one of its branches and leased the remaining thirty branches. All of the Bank’s properties are considered to be in good condition and adequate for the purposes for which they are used. In addition to these branch locations, the Bank had three remote ATM locations all of which were leased.
 
                         
County
  Banking Offices     ATM     Deposits  
                (Dollars in thousands)  
 
Barnstable
    15           $ 554,477  
Bristol
    3             83,738  
Norfolk
    5             192,303  
Plymouth
    29       3       1,374,976  
                         
Total
    52       3     $ 2,205,494  
 
The Bank conducted business in nine administrative locations. These locations housed executive, administrative, investment management, mortgage, consumer lending, commercial lending and back office support staff offices and warehouse space. The bank owned three of its administrative offices and leased the remaining six offices.
 
         
County
  Administrative Offices  
 
Barnstable
    1  
Bristol
    1  
Norfolk
    2  
Plymouth
    5  
         
Total
    9  
 
For additional information regarding our premises and equipment and lease obligations, see Notes 6 and 16, respectively, to the Consolidated Financial Statements included in Item 8 hereof.
 
Item 3.   Legal Proceedings
 
The Company expects that the federal judge presiding over the pending case known as Rockland Trust Company v. Computer Associates International, Inc., United States District Court for the District of Massachusetts Civil Action No. 95-11683-DPW, will issue a final trial court decision, in the form of Findings Of Fact and Conclusions Of Law, sometime soon. The case arises from a 1991 License Agreement (the “Agreement”) between the Bank and Computer Associates International, Inc. (“CA”) for an integrated system of banking software products.
 
In July 1995 the Bank filed a Complaint against CA in federal court in Boston which asserted claims for breach of the Agreement, breach of express warranty, breach of the implied covenant of good faith and fair dealing, fraud, and for unfair and deceptive practices in violation of section 11 of Chapter 93A of the Massachusetts General Laws (the “93A Claim”). The Bank is seeking damages of at least $1.23 million from CA. If the Bank prevails on the 93A Claim, it shall be entitled to recover its attorney fees and costs and may also recover double or triple damages. CA asserted a Counterclaim against the Bank for breach of the Agreement. CA seeks to recover damages of at least $1.1 million from the Bank.


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The non-jury trial of the case was conducted in January 2001. The trial concluded with post-trial submissions to and argument before the Court in February 2001. In September 2002 the court, in response to a joint inquiry from counsel for the Bank and counsel for CA, indicated that the judge is “actively working” on the case and anticipated, at that time, rendering a decision sometime in the fall of 2002. The court, however, has not yet rendered a decision.
 
The Company has considered the potential impact of this case, and all cases pending in the normal course of business, when preparing its financial statements. While the trial court decision may affect the Company’s operating results for the quarter in which the decision is rendered in either a favorable or unfavorable manner, the final outcome of this case will not likely have any material, long-term impact on the Company’s financial condition.
 
In addition to the foregoing, the Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by us to be immaterial to our 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 our security holders in the fourth quarter of 2005.


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PART II
 
Item 5.   Market for Independent Bank Corp.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Independent Bank Corp.’s common stock trades on the NASDAQ National Market under the symbol INDB. The Company declared cash dividends of $0.60 per share in 2005 and $0.56 per share in 2004. The ratio of dividends paid to earnings in 2005 and 2004 was 27.8% and 27.2%, 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. Management believes that the Bank will continue to generate adequate earnings to continue to pay dividends on a quarterly basis.
 
The following schedule summarizes the price range of common stock and the cash dividends paid for the fiscal years ended 2005 and 2004.
 
Table 1 — Price Range of Common Stock
 
                         
    High     Low     Dividend  
 
2005
                       
4th Quarter
  $ 30.20     $ 26.98     $ 0.15  
3rd Quarter
    31.53       28.20       0.15  
2nd Quarter
    29.52       25.31       0.15  
1st Quarter
    33.20       28.34       0.15  
 
                         
    High     Low     Dividend  
 
2004
                       
4th Quarter
  $ 36.15     $ 30.96     $ 0.14  
3rd Quarter
    31.43       26.60       0.14  
2nd Quarter
    31.11       25.52       0.14  
1st Quarter
    32.27       27.50       0.14  
 
As of December 31, 2005 there were 15,413,841 shares of common stock outstanding which were held by approximately 1,572 holders of record. The closing price of the Company’s stock on December 31, 2005 was $28.53. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.
 
During the three months ended December 31, 2005 the Company did not repurchase any of its common stock.
 
On January 19, 2006 the Company’s Board of Directors approved a common stock repurchase program. Under the program, which is effective immediately, the Company is authorized to repurchase up to 800,000 shares, or approximately 5% of the Company’s outstanding common stock. The Company placed no deadline on the repurchase program, but expects to make open market or privately negotiated purchases from time to time. The timing and amount of stock repurchases will depend upon market conditions, securities law limitations, and other corporate considerations. The repurchase program may be modified, suspended, or terminated by the Board of Directors at any time.


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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,  
    2005     2004     2003     2002     2001  
    (Dollars in thousands, except per share data)  
 
Financial Condition Data:
                                       
Securities available for sale
  $ 581,516     $ 680,286     $ 527,507     $ 501,828     $ 569,288  
Securities held to maturity
    104,268       107,967       121,894       149,071       132,754  
Loans
    2,040,808       1,916,358       1,581,135       1,431,602       1,298,938  
Allowance for loan losses
    26,639       25,197       23,163       21,387       18,190  
Total assets
    3,041,685       2,943,926       2,436,755       2,285,372       2,199,188  
Total deposits
    2,205,494       2,060,235       1,783,338       1,688,732       1,581,618  
Total borrowings
    587,810       655,161       415,369       362,155       387,077  
Corporation-obligated manditorily redeemable Trust Preferred Securities
                47,857       47,774       75,329  
Stockholders’ equity
    228,152       210,743       171,847       161,242       133,261  
Non-performing loans
    3,339       2,702       3,514       3,077       3,015  
Non-performing assets
    3,339       2,702       3,514       3,077       3,015  
Operating Data:
                                       
Interest income
  $ 155,661     $ 134,613     $ 128,306     $ 140,825     $ 145,069  
Interest expense
    49,818       36,797       32,533       40,794       54,478  
Net interest income
    105,843       97,816       95,773       100,031       90,591  
Provision for loan losses
    4,175       3,018       3,420       4,650       4,619  
Non-interest income
    27,150       28,355       27,794       22,644       20,760  
Non-interest expenses
    80,492       77,691       73,827       75,625       68,529  
Minority interest expense
          1,072       4,353       5,041       5,666  
Net income
    33,205       30,767       26,431       25,066       22,052  
Net income available to common shareholders
    33,205       30,767       26,431       23,561       22,052  
Per Share Data:
                                       
Net income — Basic
  $ 2.16     $ 2.06     $ 1.82     $ 1.63     $ 1.54  
Net income — Diluted
    2.14       2.03       1.79       1.61       1.53  
Cash dividends declared
    0.60       0.56       0.52       0.48       0.44  
Book value(1)
    14.80       13.75       11.75       11.15       9.30  
Tangible book value per share(2)
    11.11       10.01       9.27       8.64       6.77  
Operating Ratios:
                                       
Return on average assets(3)
    1.11 %     1.13 %     1.11 %     1.12 %     1.07 %
Return on average equity(3)
    15.10 %     16.27 %     15.89 %     17.26 %     17.42 %
Net interest margin (on a fully tax equivalent basis)
    3.88 %     3.95 %     4.40 %     4.88 %     4.84 %
Equity to assets
    7.50 %     7.16 %     7.05 %     7.06 %     6.06 %
Dividend payout ratio
    27.79 %     27.23 %     28.64 %     27.67 %     28.57 %


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    As of or For the Years Ended December 31,  
    2005     2004     2003     2002     2001  
    (Dollars in thousands, except per share data)  
 
Asset Quality Ratios:
                                       
Nonperforming loans as a percent of gross loans
    0.16 %     0.14 %     0.22 %     0.21 %     0.23 %
Nonperforming assets as a percent of total assets
    0.11 %     0.09 %     0.14 %     0.13 %     0.14 %
Allowance for loan losses as a percent of total loans
    1.31 %     1.31 %     1.46 %     1.49 %     1.40 %
Allowance for loan losses as a percent of nonperforming loans
    797.81 %     932.53 %     659.16 %     695.06 %     603.32 %
Total allowance for loan losses as a percent of total loans(4)
    1.31 %     1.31 %     1.46 %     1.53 %     1.46 %
Total allowance for loan losses as a percent of nonperforming loans(4)
    797.81 %     932.53 %     659.16 %     711.89 %     630.18 %
Capital Ratios:
                                       
Tier 1 leverage capital ratio
    7.71 %     7.06 %     7.60 %     7.10 %     6.31 %
Tier 1 risk-based capital ratio
    10.74 %     10.19 %     11.00 %     10.37 %     9.24 %
Total risk-based capital ratio
    11.99 %     11.44 %     12.25 %     11.68 %     12.96 %
 
 
(1) Calculated by dividing total stockholders’ equity by the net outstanding shares as of the end of each period.
 
(2) Calculated by dividing stockholders’ equity less goodwill and core deposit intangible by the net outstanding shares as of the end of each period.
 
(3) Calculated using net income which excludes the write-off of trust preferred issuance costs in 2002.
 
(4) Including credit quality discount for the years 2001 through 2002.
 
See Item 8. Financial Statements and Supplementary Data, Consolidated Financial Statements, Note 1 “Summary of Significant Accounting Policies,” Goodwill and Core Deposit Intangibles and Note 10 “Goodwill and Core Deposit Intangibles, for information related to the Company’s acquisitions and adoption of Statement of Financial Accounting Standards (“SFAS”) No. 147 “Acquisitions of Certain Financial Institutions”, and Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51” for information related to the Company’s adoption of Fin No. 46R which affects the comparability of the information reflected in the selected financial data.
 
Item 7.   Management’s 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 that was incorporated under Massachusetts law 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 are formed under Delaware law and 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 discussion in Recent Accounting Pronouncements, Fin No. 46, within Item 7 hereof). 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.; and, Rockland Trust Community Development LLC (“RTC CDE I”) and Rockland Trust Community Development Corporation II (“RTC CDE II”). All of the Bank’s subsidiaries are incorporated or formed under Massachusetts law. 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

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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 following should be read in conjunction with the Consolidated Financial Statements and related notes thereto.
 
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. We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are as follows:
 
Allowance for Loan Losses:  The Company’s 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. Loan impairment is determined based upon management’s identification and evaluation of problem loans and is recognized when the Company deems that the timely collection of all principal and/or interest payments that are contractually due is no longer assured. Judgment is required as to the timing of designating a loan as impaired and the amount of the required specific allowance. Management’s 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 management’s judgment and its amount is dependent upon the prevailing business environment; as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen, as well as historical and expected loss information, loan portfolio composition and other relevant indicators. 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 Company’s methodology of assessing the adequacy of the allowance for loan losses, see the Allowance for Loan Loss and Provision for Loan Loss sections within the Management’s Discussion and Analysis of Financial Condition and Results of Operation to follow.
 
Income Taxes:  The Company estimates income tax expense based on the amount it expects to owe various tax authorities. Taxes are discussed in more detail in Note 11, “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 Company’s 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 has no recorded tax valuation allowance as of December 31, 2005. 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.
 
Valuation of Goodwill/Intangible Assets and Analysis for Impairment:  Independent Bank Corp. in part 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 financial institution’s branches (not the entire institution). For acquisitions accounted for under the purchase method and the acquisition of financial institution 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 various fair value techniques including multiples of price/equity and price/earnings ratios. As a result of such impairment testing conducted in 2005 the Company determined goodwill was not impaired.


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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 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 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 $33.2 million for the year ended December 31, 2005 representing growth of 7.9% from the same period last year. Earnings growth in 2005 was primarily due to targeted loan growth funded with strong growth in deposits. The Company also experienced growth in the core non-interest income categories of deposit service charges, mortgage banking revenue, and improved revenue from our wealth management business due to growth in managed assets. The Company’s net interest margin remained stable in 2005 due to a number of management initiatives. Non-interest expense increased by 3.6% primarily due to normal increases in salaries and benefits as well as expenses associated with two new branch locations and the full year impact of the Falmouth Bancorp, Inc. acquisition.
 
Management has focused on earning asset growth in the high value segments of commercial lending and variable rate home equity lines of credit, while placing less emphasis on indirect auto, portfolio residential lending and the securities portfolio. While this strategy has slowed balance sheet growth, management believes it is prudent in the current interest rate environment. 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 (see definition below) which management believes not to be conducive to growing the securities portfolio.
 
The following graph depicts the historical U.S. Treasury yield curve as of December 31, for the years 2003 — 2005.
 
Historical U.S. Treasury Yield Curve
 
(LINE GRAPH)
 
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.3 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%.4
 
 
3 The Free Dictionary.com
4 Investopedia.com


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The following pie charts present earning assets by type as a percent of total earning assets for the time period indicated below:
 
Earning Asset Profile
 
(PIE GRAPH)
 
The following graph presents the decline in the securities portfolio throughout 2005:
 
Total Securities
(Dollars in Millions)
 
(PERFORMANCE GRAPH)


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Deposit growth of $145.3 million, or 7.1%, was strong in 2005 despite the intense competitive pricing in the Company’s market area. The majority of deposit growth was experienced in time deposits which grew by $79.9 million, or 17.8%, and money market deposits which grew by $49.6 million, or 9.9%. 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.
 
Deposits
(Dollars in Millions)
 
(PERFORMANCE GRAPH)
 
While changes in the prevailing interest rate environment 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 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 section and Market Risk section and Table 19 — “Interest Rate Sensitivity” within the Market Risk section of the Management Discussion and Analysis of Financial Condition and Results of Operations hereof.)
 
In 2006, assuming a similar interest rate environment, the Company expects the net interest margin to gradually expand to the 4.00% level from the 3.88% experienced during 2005, with deposit pricing being a key determinant. Competition for deposit generation in the Company’s footprint is expected to remain strong.
 
Asset quality continues to be a highlight for the Company and is not anticipated to change significantly in the near term. Non-performing assets at December 31, 2005 were $3.3 million, or 0.11%, of total assets, as compared to $2.7 million, or 0.09%, of total assets at December 31, 2004.


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The following graph depicts the Company’s non-performing assets and the ratio of non-performing assets to total assets at the periods indicated.
 
Asset Quality Highlights
(Dollars in Millions)
 
(PERFORMANCE GRAPH)
 
2005 was a year of many accomplishments. Management is confident that these accomplishments will serve to enhance the Company’s performance in 2006 and beyond.
 
2005 Significant Accomplishments
 
  •  Improved and expanded business development across all business units and channels.
 
  •  Extended bank branch hours across our network, and added Sunday hours in busy retail markets. By increasing convenience and offering customers the products and services that they need, the Company was able to increase both core consumer checking households and core business checking customers.
 
  •  Introduced a market-leading Remote Deposit Capture product, enabling business customers to scan and deposit checks into their Rockland Trust Company account directly from their place of business.
 
  •  Implemented a new service model in the Bank’s Investment Management Group that increased client satisfaction and the Company’s productivity. Assets under management at the end of 2005 reached $680.1 million, an increase of $116.1 million, or 20.6%, from 2004.
 
  •  Made capital contributions to Rockland Trust Community Development LLC, a community development subsidiary, during 2005 to the full extent of its award under the federal New Markets Tax Credit program. Making this contribution allowed the Company to recognize the full amount of the New Market Tax Credit for the year of $1.5 million, and will make the Company eligible to realize additional tax credits totaling $9.5 million between 2006 and 2011. By year-end that contribution had been used to make almost $20.0 million in commercial loans, on favorable terms and conditions, to qualified borrowers in severely economically distressed areas throughout southeastern Massachusetts.
 
  •  Developed and opened the Rockland Trust eMortgageCenter (www.RocklandTrust.Com/Mortgage), enabling customers to get on-line residential loan pre-approval within minutes.
 
  •  Implemented a new credit rating methodology that increases loan rating categories, thus allowing the Company to have an even better understanding of the performance of our commercial portfolio.
 
Management plans to continue to grow earnings through prudent balance sheet management. Asset growth will focus upon commercial and home equity lending, and the securities portfolio will be deemphasized. Deposit origination will focus upon core household checking account generation. Management also intends to continue the growth of primary non-interest income lines, and to maintain its persistent attentiveness to non-interest expense control.


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Financial Position
 
The Company’s total assets increased by $97.8 million, or 3.3%, from $2.9 billion at December 31, 2004 to $3.0 billion at December 31, 2005. Total average assets were $3.0 billion and $2.7 billion in 2005 and 2004, respectively. These increases were primarily due to growth in loans. Total liabilities and stockholders’ equity increased by $97.8 million in 2005, primarily due to growth in money market and time certificates of deposits. During 2004, the Company completed the acquisition of Falmouth Bancorp, Inc., parent of Falmouth Co-Operative Bank (“Falmouth”) resulting in total assets acquired of $158.4 million, total liabilities assumed of $141.6 million, or $16.8 million of net assets.
 
Loan Portfolio   Management is focusing on earning asset growth in the high value sections of commercial lending and variable rate home equity lines of credit, while placing less emphasis on indirect auto and portfolio residential lending and the securities portfolio. While this strategy has slowed balance sheet growth, management believes it is prudent in the current interest rate environment. At December 31, 2005, the Bank’s loan portfolio amounted to $2.0 billion, an increase of $124.5 million, or 6.5%, from year-end 2004. This increase was primarily in commercial real estate and construction loans, which increased $84.0 million, or 11.3%, and consumer home equity lines which increased $57.2 million, or 29.4%. Consumer auto loans decreased $20.8 million, or 7.3%, and the consumer other category increased $1.7 million, or 3.2%. Business banking loans increased $7.7 million, or 17.6%. Residential real estate loans decreased $4.1 million, or 0.9% and commercial and industrial loans decreased $1.2 million, or 0.8%.
 
In accordance with governing banking statutes, Rockland is permitted, with certain exceptions, to make loans and commitments to any one borrower, including related entities, in the aggregate amount of not more than 20% of the Bank’s stockholders’ equity, or $52.7 million at December 31, 2005. Notwithstanding the foregoing, the Bank has established a more restrictive limit of not more than 75% of the Bank’s legal lending limit, or $39.5 million at December 31, 2005, which may only be exceeded with the approval of the Board of Directors. There were no borrowers whose total indebtedness in aggregate exceeded $39.5 million as of December 31, 2005.


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The following table sets forth information concerning the composition of the Bank’s loan portfolio by loan type at the dates indicated.
 
Table 2 — Loan Portfolio Composition
 
                                                                                 
    At December 31,  
    2005     2004     2003     2002     2001  
    Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
Commercial and Industrial
  $ 155,081       7.6 %   $ 156,260       8.2 %   $ 161,675       10.2 %   $ 143,074       10.0 %   $ 141,581       10.9 %
Commercial Real Estate
    683,240       33.5 %     613,300       32.0 %     564,890       35.7 %     511,102       35.7 %     463,052       35.6 %
Commercial Construction
    140,643       6.9 %     126,632       6.6 %     75,380       4.8 %     49,113       3.4 %     39,707       3.1 %
Business Banking
    51,373       2.5 %     43,673       2.3 %     27,807       1.8 %     22,717       1.6 %     22,037       1.7 %
Residential Real Estate
    428,343       21.0 %     427,556       22.3 %     324,052       20.5 %     281,452       19.7 %     229,123       17.6 %
Residential Construction
    8,316       0.4 %     7,316       0.4 %     9,633       0.6 %     10,258       0.7 %     7,501       0.6 %
Residential Loans Held for Sale(1)
    5,021       0.2 %     10,933       0.6 %     1,471       0.1 %           0.0 %           0.0 %
Consumer — Home Equity
    251,852       12.4 %     194,647       10.2 %     132,629       8.4 %     109,122       7.6 %     93,492       7.2 %
Consumer — Auto
    263,179       12.9 %     283,964       14.8 %     240,504       15.2 %     265,690       18.6 %     268,614       20.7 %
Consumer — Other
    53,760       2.6 %     52,077       2.7 %     43,094       2.7 %     39,074       2.7 %     33,831       2.6 %
                                                                                 
                     
                     
Gross Loans
    2,040,808       100.0 %     1,916,358       100.0 %     1,581,135       100.0 %     1,431,602       100.0 %     1,298,938       100.0 %
                                                                                 
Allowance for Loan Losses
    26,639               25,197               23,163               21,387               18,190          
                                                                                 
Net Loans
  $ 2,014,169             $ 1,891,161             $ 1,557,972             $ 1,410,215             $ 1,280,748          
                                                                                 
 
 
(1) 2002 — 2001 Residential Loans Held for Sale are classified within Residential Real Estate.
 
At December 31, 2005, $155.1 million, or 7.6%, of the Bank’s gross loan portfolio consisted of commercial and industrial loans, compared to $156.3 million, or 8.2%, at December 31, 2004. The Bank’s commercial revolving lines of credit generally are for the purpose of providing working capital to borrowers and may be secured or unsecured. At December 31, 2005, the Bank had $81.9 million outstanding under commercial revolving lines of credit compared to $87.7 million at December 31, 2004, and $160.2 million of unused commitments under such lines at December 31, 2005 compared to $126.6 million in the prior year. As of December 31, 2005, the Bank had $8.9 million in outstanding commitments pursuant to standby letters of credit compared to $7.1 million at December 31, 2004. Floor plan loans, which are included in commercial and industrial loans, and are secured by the automobiles, boats, or other vehicles constituting the dealer’s inventory, amounted to $14.2 million as of December 31, 2005 compared to $17.1 million at the prior year-end.
 
During the first quarter of 2005 the Company reclassified certain commercial and consumer loans associated with the Company’s business banking initiative to a new business banking loan category. The business banking initiative was announced in 2004 and caters to the banking needs of businesses with commercial credit needs of less than $250,000 and revenues of less than $2.5 million. Business banking loans totaled $51.4 million, representing 2.5% of the total loan portfolio during the year ended December 31, 2005, compared to $43.7 million, or 2.3% at December 31, 2004. The Bank had unused business lines of credit of $35.3 million at December 31, 2005 compared to $30.0 million at December 31, 2004.
 
Real estate loans totaling $1.3 billion comprised 62.0% of gross loans at December 31, 2005, as compared to $1.2 billion, or 61.9%, of gross loans at December 31, 2004. The Bank’s real estate loan portfolio included


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$683.2 million in commercial real estate loans at December 31, 2005. This category reflected increases over last year of $69.9 million, or 11.4%. Commercial construction of $140.6 million increased by $14.0 million, or 11.1% compared to year-end 2004. Residential real estate loans, including residential construction and residential loans held for sale, which were $8.3 million and $5.0 million, respectively, at year-end 2005, decreased $4.1 million, or 0.9%, in 2005. During 2005, the Bank sold $191.4 million of the current production of residential mortgages as part of its overall asset/liability management.
 
Consumer loans primarily consist of automobile, home equity, and other consumer loans. As of December 31, 2005, $568.8 million, or 27.9%, of the Bank’s gross loan portfolio, consisted of consumer loans compared to $530.7 million, or 27.6%, of the Bank’s gross loans at December 31, 2004. Home equity loans may be made as a term loan or under a revolving line of credit secured by a first or second mortgage on the borrower’s residence. Consumer home equity loans of $251.9 million, increased $57.2 million, or 29.4%, in 2005 and represented 44.3% of the total consumer loan portfolio. As of December 31, 2005, there were $199.3 million in unused commitments under revolving home equity lines of credit compared to $162.9 million at December 31, 2004. As of December 31, 2005 and 2004, automobile loans were $263.2 million, representing 46.3%, and $284.0 million, representing 53.5%, respectively, of the Bank’s consumer loan portfolio. As of December 31, 2005, other consumer loans amounted to $53.8 million compared to $52.1 million as of December 31, 2004. These loans largely consisted of loans secured by recreational vehicles, motor homes, boats, mobile homes, and motorcycles and cash reserve loans. Cash reserve loans are designed to afford the Bank’s customers overdraft protection. Cash reserve loans are made pursuant to previously approved unsecured cash reserve lines of credit and the rate on these loans is subject to change due to market conditions. As of December 31, 2005 and 2004, $19.5 million and $20.6 million, respectively, had been committed to but was unused under cash reserve lines of credit.
 
The following table sets forth the scheduled contractual amortization of the Bank’s loan portfolio at December 31, 2005. 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, 2005
 
                                                                                         
          Commercial
                Residential
          Residential
    Consumer
                   
          Real
    Commercial
    Business
    Real
    Residential
    Held
    Home
    Consumer
    Consumer
       
    Commercial     Estate     Construction     Banking     Estate     Construction     for Sale     Equity     Auto     Other     Total  
                            (Dollars in thousands)                          
 
Amounts due in:
                                                                                       
One year or less
  $ 103,562     $ 99,630     $ 66,720     $ 36,905     $ 15,708     $ 475     $ 5,021     $ 3,809     $ 76,114     $ 16,917     $ 424,861  
After one year through five years
    46,318       443,862       54,991       13,525       69,212                   13,770       182,317       18,388       842,383  
Beyond five years
    5,201       139,748       18,932       943       343,423       7,841             234,273       4,748       18,455       773,564  
                                                                                         
Total
  $ 155,081     $ 683,240     $ 140,643     $ 51,373     $ 428,343     $ 8,316     $ 5,021     $ 251,852     $ 263,179     $ 53,760     $ 2,040,808  
                                                                                         
Interest rate terms on amounts due after one year:
                                                                                       
Fixed Rate
  $ 31,995     $ 501,704     $ 22,362     $ 14,468     $ 142,817     $     $     $ 37,854     $ 187,065     $ 36,843     $ 975,108  
Adjustable Rate
    19,524       81,906       51,561             269,818       7,841             210,189                   640,839  
 
As of December 31, 2005, $174,000 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 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


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the amounts contractually due in any particular period. In addition, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual obligations of the loan.
 
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 2005 and 2004, 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. Loans originated and sold with servicing rights released were $171.3 million and $110.4 million in 2005 and 2004, respectively. Loans originated and sold with servicing rights retained were $20.1 million and $34.6 million in 2005 and 2004, respectively.
 
The principal balance of loans serviced by the Bank on behalf of investors amounted to $336.5 million at December 31, 2005 and $392.0 million at December 31, 2004. The fair value of the servicing rights associated with these loans was $2.9 million and $3.3 million as of December 31, 2005 and 2004, respectively.
 
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 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 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 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.


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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, 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  
                      (Dollars in thousands)                    
 
Commercial and Industrial
    2     $ 24       4     $ 209       1     $ 130       4     $ 207  
Commercial Real Estate
    3       2,892       2       288       1       188       2       227  
Commercial Construction
                                               
Business Banking
    5       97       3       47       1       11       7       311  
Residential Real Estate
    4       1,337       2       373       3       764       4       173  
Residential Construction
                                               
Consumer — Home Equity
                                               
Consumer — Auto(1)
    65       597       61       572       N/A       N/A       N/A       N/A  
Consumer — Other
    18       112       17       110       76       626       92       315  
                                                                 
Total
    97     $ 5,059       89     $ 1,599       82     $ 1,719       109     $ 1,233  
                                                                 
 
 
(1) For periods prior to December 31, 2005, Consumer-Auto loans are included in Consumer-Other.
 
Delinquencies have increased year over year mainly due to two commercial real estate credits and one residential real estate loan, all of which the Company believes to be adequately collateralized. The increase in consumer delinquency is generally a result of the recent changes in bankruptcy laws.
 
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 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 and Other Real Estate Owned (“OREO”). Nonperforming loans consist of loans that are more than 90 days past due but still accruing interest and nonaccrual loans. OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure. As of December 31, 2005, nonperforming assets totaled $3.3 million, an increase of $637,000 or 23.6%, from the prior year-end. Nonperforming assets represented 0.11% of total assets for the year ending December 31, 2005 and 0.09% for the year ending December 31, 2004. The Bank had one property held as OREO for the period ending December 31, 2005 and did not hold any OREO for the period ending December 31, 2004.
 
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 $509,000 and $594,000 for the periods ending December 31, 2005, and December 31, 2004, respectively.


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The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated.
 
Table 5 — Nonperforming Assets
 
                                         
    At December 31,  
    2005     2004     2003     2002     2001  
    (Dollars in thousands)  
 
Loans past due 90 days or more but still accruing
                                       
Consumer — Home Equity
  $     $     $     $     $ 292  
Consumer — Auto
    165       72       128       220       167  
Consumer — Other
    62       173       28       41       49  
                                         
Total
  $ 227     $ 245     $ 156     $ 261     $ 508  
                                         
Loans accounted for on a nonaccrual basis(1)
                                       
Commercial and Industrial
  $ 245     $ 334     $ 971     $ 300     $ 505  
Business Banking(2)
    47       N/A       N/A       N/A       N/A  
Commercial Real Estate
    313       227       691       1,320       618  
Residential Real Estate
    1,876       1,193       926       533       848  
Consumer — Auto
    509       594       714       656       487  
Consumer — Other
    122       109       56       7       49  
                                         
Total
  $ 3,112     $ 2,457     $ 3,358     $ 2,816     $ 2,507  
                                         
Total nonperforming loans
  $ 3,339     $ 2,702     $ 3,514     $ 3,077     $ 3,015  
                                         
Total nonperforming assets
  $ 3,339     $ 2,702     $ 3,514     $ 3,077     $ 3,015  
                                         
Restructured loans
  $ 377     $ 416     $ 453     $ 497     $ 503  
                                         
Nonperforming loans as a percent of gross loans
    0.16 %     0.14 %     0.22 %     0.21 %     0.23 %
                                         
Nonperforming assets as a percent of total assets
    0.11 %     0.09 %     0.14 %     0.13 %     0.14 %
                                         
 
 
(1) There were no restructured, nonaccruing loans at December 31, 2005, 2004, 2003 and 2002. In 2001 there were $0.1 million of restructured nonaccruing loans.
 
(2) For the periods prior to December 31, 2005, Business Banking 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 Bank’s policy to maintain restructured loans on nonaccrual status for approximately six months before management considers its return to accrual status. At December 31, 2005 and 2004, the Bank had $377,000 and $416,000, respectively, of restructured loans.
 
Potential problem loans are any loans, which are not included in nonaccrual or non-performing loans and which are not considered troubled debt restructures, where known information about possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present loan repayment terms. At December 31, 2005 and 2004, the Bank had nine and four potential problem loan relationships, respectively, which are not included in nonperforming loans with an outstanding balance of $30.3 million and $10.7 million, respectively. At December 31, 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


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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 years ended December 31, 2005, 2004 and 2003, if nonperforming loans at the respective dates had been performing in accordance with their original terms approximated $282,000, $312,000, and $210,000, respectively. The actual amount of interest that was collected on these nonaccrual and restructured loans during each of those periods and included in interest income was approximately $103,000, $140,000, and $261,000, 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 December 31, 2005, impaired loans include all commercial real estate loans and commercial and industrial loans on nonaccrual status and 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 December 31, 2005 and 2004 were $935,000 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 nonperforming loans, changes in economic conditions, or for other reasons. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Federal Reserve regulators examined the Company in the third quarter of 2004 and the Bank was most recently examined by the Federal Deposit Insurance Corporation, “FDIC”, in the first quarter of 2005. No additional provision for loan losses was required as a result of these examinations.
 
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 reduced by loans charged-off. Additionally, in 2004 the Bank’s allowance increased by $870,000 upon acquisition of Falmouth Bancorp, Inc. This increase represents management’s estimate of potential inherent losses in the acquired portfolio.
 
The Bank’s total allowances for loan losses as of December 31, 2005 was $26.6 million, or 1.31%, of total loans as compared to $25.2 million, or 1.31% of total loans at December 31, 2004.


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The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented:
 
Table 6 — Summary of Changes in the Allowance for Loan Losses
 
                                         
    Year Ending December 31,  
    2005     2004     2003     2002     2001  
    (Dollars in thousands)  
 
Average total loans
  $ 1,987,591     $ 1,743,844     $ 1,512,997     $ 1,345,720     $ 1,237,230  
                                         
Allowance for loan losses, beginning of year
  $ 25,197     $ 23,163     $ 21,387     $ 18,190     $ 15,493  
Charged-off loans:
                                       
Commercial and Industrial
    120       181       195       134       144  
Business Banking(1)
    505       N/A       N/A       N/A       N/A  
Commercial Real Estate
                             
Residential Real Estate
                            63  
Commercial Construction
                             
Residential Construction
                             
Consumer — Home Equity
                             
Consumer — Auto
    1,772       2,089       1,938       1,958       2,115  
Consumer — Other
    1,077       329       196       373       404  
                                         
Total charged-off loans
    3,474       2,599       2,329       2,465       2,726  
                                         
Recoveries on loans previously charged-off:
                                       
Commercial and Industrial
    85       214       283       628       194  
Business Banking(1)
    14       N/A       N/A       N/A       N/A  
Commercial Real Estate
    128       2       2       2       71  
Residential Real Estate
          30                    
Commercial Construction
                             
Residential Construction
                             
Consumer — Home Equity
    20                          
Consumer — Auto
    350       372       321       286       447  
Consumer — Other
    144       127       79       96       92  
                                         
Total recoveries
    741       745       685       1,012       804  
                                         
Net loans charged-off
    2,733       1,854       1,644       1,453       1,922  
Allowance related to business combinations
          870                    
Provision for loan losses
    4,175       3,018       3,420       4,650       4,619  
                                         
Allowance for loan losses, end of period
  $ 26,639     $ 25,197     $ 23,163     $ 21,387     $ 18,190  
                                         
Credit quality discount on acquired loans(2)
                      518       810  
Total allowances for loan losses, end of year
  $ 26,639     $ 25,197     $ 23,163     $ 21,905     $ 19,000  
                                         
Net loans charged-off as a percent of average total loans
    0.14 %     0.11 %     0.11 %     0.11 %     0.16 %
Allowance for loan losses as a percent of total loans
    1.31 %     1.31 %     1.46 %     1.49 %     1.40 %
Allowance for loan losses as a percent of nonperforming loans
    797.81 %     932.53 %     659.16 %     695.06 %     603.32 %
Total allowances for loan losses as a percent of total loans (including credit quality discount)
    1.31 %     1.31 %     1.46 %     1.53 %     1.46 %
Total allowance for loan losses as a percent of nonperforming loans (including credit quality discount)
    797.81 %     932.53 %     659.16 %     711.89 %     630.18 %
Net loans charged-off as a percent of allowance for loan losses
    10.26 %     7.36 %     7.10 %     6.79 %     10.57 %
Recoveries as a percent of charge-offs
    21.33 %     28.66 %     29.41 %     41.05 %     29.49 %
 
 
(1) For periods prior to December 31, 2005, Business Banking loans are included in Commercial and Industrial and Consumer-Other.
 
(2) The Bank established a separate credit quality discount in 2000 as a reduction of the loan balances acquired from FleetBoston Financial. The credit quality discount was fully utilized by 2003.


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The allowance for loan losses is allocated to various loan categories as part of the Bank’s process of evaluating the adequacy of the allowance for loan losses. Allocated allowances increased by approximately $1.7 million to $24.1 million at December 31, 2005. Increased amounts of allowance were allocated to five major loan categories: commercial real estate, business banking, real estate construction, consumer home equity, and consumer other. The increased amounts allocated to these loan categories represented substantially all of the increase in the allocated allowance amounts, as compared to December 31, 2004. Decreased allowances were posted in commercial & industrial, residential real estate, and consumer auto, due mainly to a lower level of outstanding loan balances from the end of 2004.
 
The decrease of 7.5% in allowance allocated to the commercial and industrial category is attributed to the risk rating changes of certain loan balances and to portfolio turnover. Additionally, those loan balances in certain commercial and industrial loan groupings that have been repaid were replaced by newly originated loan balances that have been placed into other loan groupings within this loan category that require different levels of allocated allowance based upon the ascertainable risk characteristics of those loans.
 
The decrease in the amount of allowance allocated to the consumer auto loan category of 7.4% reflects a 7.3% decrease in loan balances, from December 31, 2004 to December 31, 2005.
 
The increase in the amount of allowance allocated to the commercial real estate category is due to loan balance growth within this loan category attributed to new loan origination and risk rating changes of certain loan balances. Loan balances outstanding in this portfolio, at December 31, 2005, increased by 11.4%, while the amount of allowance allocated to this portfolio grew by 11.7%, as compared to December 31, 2004. The amount of allowance allocated reflects increases in loan balances distributed among certain loan types within commercial real estate that require different levels of allocated allowance based upon the ascertainable risk characteristics of those loans.
 
The increase in the amount of allowance allocated to the real estate construction portfolio is due to loan balance growth within this portfolio attributed to new loan origination and the risk rating changes of certain loan balances. Loan balances outstanding in this portfolio component, at December 31, 2005, increased by 11.2%, while the corresponding amount of allowance allocated increased by 19.6%, as compared to December 31, 2004. The amount of allowance allocated within the real estate — construction portfolio reflects loan balance growth distributed among certain loan groupings within this portfolio that require different levels of allocated allowance based upon the ascertainable risk characteristics of those loans.
 
The increase in the amount of allowance allocated to the consumer-home equity portfolio is due to growth in this loan portfolio attributed to new loan origination. Outstanding balances at December 31, 2005 grew by 29.4% as compared to the amount shown at December 31, 2004, while the corresponding amount of allowance allocated increased by 29.5%, as compared to December 31, 2004.
 
The increase in the amount of allowance allocated to the consumer-other loan portfolio reflects 3.2% growth in loan balances as compared to December 31, 2004. Consumer-other is comprised of other consumer loan product types including non-auto installment loans, overdraft lines and other credit line facilities.
 
The increase in the amount of allowance allocated to the business banking portfolio component resulted from a 17.6% increase in loan balances as compared to December 31, 2004.


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The following table summarizes the allocation of the allowance for loan losses for the years indicated:
 
Table 7 — Summary of Allocation of Allowance for Loan Losses
 
                                                                                                 
    At December 31,  
    2005     2004     2003     2002     2001  
          Percent of
          Percent of
          Percent of
                Percent of
                Percent of
 
          Loans In
          Loans In
          Loans In
                Loans In
                Loans In
 
          Category
          Category
          Category
          Credit
    Category
          Credit
    Category
 
    Allowance
    To Total
    Allowance
    To Total
    Allowance
    To Total
    Allowance
    Quality
    To Total
    Allowance
    Quality
    To Total
 
    Amount     Loans     Amount     Loans     Amount     Loans     Amount     Discount     Loans     Amount     Discount     Loans  
    (Dollars in thousands)  
 
Allocated Allowance:
                                                                                               
Commercial and Industrial
  $ 3,134       7.6 %   $ 3,387       8.2 %   $ 4,653       10.8 %   $ 3,435     $ 10       10.6 %   $ 3,036     $ 27       11.6 %
Business Banking (1)
    1,193       2.5 %     1,022       2.3 %     N/A       N/A       N/A       N/A       N/A       N/A       N/A       N/A  
Commercial Real Estate
    11,554       33.5 %     10,346       32.0 %     9,604       35.7 %     7,906       419       35.7 %     6,751       635       35.7 %
Real Estate Construction
    3,474       7.3 %     2,905       7.0 %     1,389       5.4 %     1,196             4.1 %     1,152             3.6 %
Residential Real Estate
    650       21.2 %     659       22.9 %     488       20.6 %     422             19.7 %     343             17.6 %
Consumer — Home Equity
    755       12.4 %     583       10.1 %     398       8.4 %     304       63       7.6 %     247       106       7.2 %
Consumer — Auto
    2,629       12.9 %     2,839       14.8 %     2,399       15.2 %     2,623       22       18.6 %     2,638       38       20.7 %
Consumer — Other
    757       2.6 %     667       2.7 %     1,244       3.9 %     1,073       4       3.7 %     983       6       3.6 %
Imprecision Allowance
    2,493       N/A       2,789       N/A       2,988       N/A       4,428             N/A       3,040             N/A  
                                                                                                 
Total Allowance for Loan Losses
  $ 26,639       100.0 %   $ 25,197       100.0 %   $ 23,163       100.0 %   $ 21,387     $ 518       100.0 %   $ 18,190     $ 810       100.0 %
                                                                                                 
 
 
(1) For the periods prior to December 31, 2004, Business Banking loans are included in Commercial and Industrial and Consumer — Other.
 
Allocated allowance for loan losses are determined using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment.
 
The formula-based approach evaluates groups of loans to determine the allocation appropriate within each portfolio section. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio sections are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. The level of allowance allocable to each group of risk-rated loans is then determined by management applying a loss factor that estimates the amount of probable loss inherent in each category. The assigned loss factor for each risk rating is a formula-based assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions, past experience and management’s analysis of considerations of probable loan loss based on these factors.
 
During the quarter-ended March 31, 2005, enhancements to the Bank’s internal risk-rating framework were implemented. These enhancements refine the definitional detail of the risk attributes and characteristics that compose each risk grouping and add granularity to the assessment of credit risk across those defined risk groupings.
 
Allocations for business banking, residential real estate and other consumer loan categories are principally determined by applying loss factors that represent management’s estimate of probable or expected losses inherent in those categories. In each section, inherent losses are estimated, based on a formula-based assessment of historical loss data, portfolio characteristics, economic trends, overall market conditions, past loan loss experience and management’s considerations of probable loan loss based on these factors.
 
The other method used to allocate allowances for loan losses entails the assignment of allowance amounts to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when management believes it is probable that the Bank will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based


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upon a change in internal risk rating, occurrence of delinquency, loan classification 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 loan’s observable fair market value or (b) the fair value of collateral if the loan is collateral dependent. Loans with a specific allowance and the amount of such allowance totaled $558,000 and $1,000, respectively, at December 31, 2005 and $1.1 million and $400,000, respectively, at December 31, 2004.
 
A portion of the allowance for loan loss is not allocated to any specific section of the loan portfolio. This non-specific allowance is maintained for two primary reasons: (a.) there exists an inherent subjectivity and imprecision to the analytical processes employed and (b.) the prevailing business environment, as it is affected by changing economic conditions and various external factors, may impact the portfolio in ways currently unforeseen. Moreover, management has identified certain risk factors, which could impact the degree of loss sustained within the portfolio. These include: (a.) market risk factors, such as the effects of economic variability on the entire portfolio, and (b.) unique portfolio risk factors that are inherent characteristics of the Bank’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions that may impact the Bank’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include industry concentration or covariant industry concentrations, geographic concentrations or trends that may exacerbate losses resulting from economic events which the Bank may not be able to fully diversify out of its portfolio.
 
Due to the imprecise nature of the loan loss estimation process and ever changing conditions, these risk attributes may not be adequately captured in data related to the formula-based loan loss components used to determine allocations in the Bank’s analysis of the adequacy of the allowance for loan losses. Management, therefore, has established and maintains an imprecision allowance for loan losses reflecting the uncertainty of future economic conditions within the Bank’s market area. The amount of this measurement imprecision allocation was $2.5 million at December 31, 2005.
 
Inflationary concerns resulting from higher energy and commodity prices, potential downward pressure on housing prices, fluctuating interest rates, and changes in the level of employment are just some of the drivers that could impact local and regional economic growth and the banking environment in the near term. Unforeseen changes in the economy can impact the risk characteristics of the Bank’s loan portfolio. As such, management maintains the imprecision allowance based on its analysis of regional and local economic conditions.
 
As of December 31, 2005, the allowance for loan losses totaled $26.6 million as compared to $25.2 million at December 31, 2004. Based on the processes described above, management believes that the level of the allowance for possible loan losses at December 31, 2005 is adequate.
 
Securities Portfolio  The Company’s 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 13 “Employee Benefits” of the Notes to Consolidated Financial Statements in Item 8 hereof). are classified as trading assets. Trading assets are recorded at fair value with changes in fair value recorded in earnings. Trading assets were $1.6 million at December 31, 2005 and 2004.
 
Securities which management intends to hold until maturity consist of mortgage-backed securities, state, county and municipal securities and corporate debt securities. Securities held to maturity as of December 31, 2005 are carried at their amortized cost of $104.3 million and exclude gross unrealized gains of $2.7 million and gross unrealized losses of $230,000. A year earlier, securities held to maturity totaled $108.0 million excluding gross unrealized gains of $4.6 million and gross unrealized losses of $370,000.
 
Securities available for sale consist of certain, U.S. Treasury and U.S. Government agency obligations, mortgage-backed securities, collateralized mortgage obligations, and state, county and municipal securities. These securities are carried at fair value and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available for sale at December 31, 2005 totaled $581.5 million including the associated pre-tax net unrealized loss totaled $14.4 million. A year earlier, securities available for sale were $680.3 million including a pre-tax net unrealized loss of $327,000. In 2005 and


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2004, the Company recognized $616,000 and $1.5 million, respectively of net gains on the sale of available for sale securities.
 
The following table sets forth the amortized cost and percentage distribution of securities held to maturity at the dates indicated.
 
Table 8 — Amortized Cost of Securities Held to Maturity
 
                                                 
    At December 31,  
    2005     2004     2003  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
Mortgage-Backed Securities
  $ 6,936       6.7 %   $ 8,971       8.3 %   $ 13,156       10.8 %
State, County and Municipal Securities
    41,628       39.9 %     43,084       39.9 %     47,266       38.8 %
Corporate Debt Securities
    55,704       53.4 %     55,912       51.8 %     61,472       50.4 %
                                                 
Total
  $ 104,268       100.0 %   $ 107,967       100.0 %   $ 121,894       100.0 %
                                                 
 
The following table sets forth the fair value and percentage distribution of securities available for sale at the dates indicated.
 
Table 9 — Fair Value of Securities Available for Sale
 
                                                 
    At December 31,  
    2005     2004     2003  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
U.S. Treasury and U.S. Government Agency Securities
  $ 151,253       26.0 %   $ 140,356       20.6 %   $ 146,576       27.8 %
Mortgage-Backed Securities
    257,532       44.3 %     349,716       51.4 %     181,983       34.5 %
Collateralized Mortgage Obligations
    150,322       25.8 %     170,661       25.1 %     178,000       33.7 %
State, County and Municipal Securities
    22,409       3.9 %     19,553       2.9 %     20,948       4.0 %
                                                 
Total
  $ 581,516       100.0 %   $ 680,286       100.0 %   $ 527,507       100.0 %
                                                 
 
The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2005. 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 10 — 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)                    
 
Mortgage Backed Securities
  $       0.0 %         $       0.0 %         $       0.0 %           6,936       6.7 %     5.5 %     6,936       6.7 %     5.5 %        
State, County and Municipal Securities
    38       0.0 %     5.0 %     654       0.6 %     4.1 %     13,761       13.2 %     4.3 %     27,175       26.1 %     5.0 %     41,628       39.9 %     4.8 %        
Corporate Debt Securities
          0.0 %     0.0 %           0.0 %                 0.0 %           55,704       53.4 %     7.9 %     55,704       53.4 %     7.9 %        
                                                                                                                                 
Total
  $ 38       0.0 %     5.0 %   $ 654       0.6 %     4.1 %   $ 13,761       13.2 %     4.3 %   $ 89,815       86.2 %     6.9 %   $ 104,268       100.0 %     6.5 %        
                                                                                                                                 


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Table 11 —  Fair Value of Securities Available for Sale
 
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 U.S. Government Agency Securities
  $       0.0 %     0.0 %   $ 151,253       26.0 %     3.7 %   $       0.0 %     0.0 %   $       0.0 %     0.0 %   $ 151,253       26.0 %     3.7 %        
Mortgage Backed Securities
          0.0 %     0.0 %     240       0.0 %     8.0 %     78,847       13.6 %     4.5 %     178,445       30.7 %     4.7 %     257,532       44.3 %     4.6 %        
Collateralized Mortgage Obligations
          0.0 %     0.0 %           0.0 %     0.0 %           0.0 %     0.0 %     150,322       25.9 %     4.0 %     150,322       25.9 %     4.0 %        
State, County and Municipal Securities
    3,400       0.6 %     3.2 %     15,749       2.7 %     4.4 %     3,260       0.5 %     5.5 %           0.0 %     0.0 %     22,409       3.8 %     4.4 %        
                                                                                                                                 
Total
  $ 3,400       0.6 %     3.2 %   $ 167,242       28.7 %     3.7 %   $ 82,107       14.1 %     4.5 %   $ 328,767       56.6 %     4.4 %   $ 581,516       100.0 %     4.2 %        
                                                                                                                                 
 
At December 31, 2005 and 2004, 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 2005 or 2004.
 
Bank Owned Life Insurance  In 1998, the Bank purchased $30.0 million of Bank Owned Life Insurance (“BOLI”). The Bank purchased these policies for the purpose of protecting itself against the cost/loss due to the death of key employees and to offset the Bank’s future obligations to its employees under its retirement and benefit plans. During 2003, certain split dollar life policies with shared ownership between the Bank and certain executives were reassigned in total to the Bank in response to new legislation that considers any payments by a company to a split dollar life policy to be a prohibited loan (see Note 13 “Employee Benefits” of the Notes to Consolidated Financial Statements in Item 8 hereof). The original insurance policies totaling $1.4 million, are now included within the Bank’s BOLI portfolio and will be used to fund future obligations to its employees under its retirement and benefits plan. The value of BOLI was $44.8 million and $42.7 million at December 31, 2005 and 2004, respectively. The Bank recorded income from BOLI of $1.8 million in 2005 and $1.9 million in both 2004, and 2003, respectively.
 
Deposits  As of December 31, 2005, deposits of $2.2 billion were $145.3 million, or 7.1%, higher than the prior year-end. Core deposits increased by $65.4 million, or 4.1%. Core deposits consist of demand deposits, savings and interest checking deposits and money market deposits. The time deposits category increased by $79.9 million, or 17.8%, to $529.1 million at December 31, 2005.
 
The following table sets forth the average balances of the Bank’s deposits for the periods indicated.
 
Table 12 — Average Balances of Deposits
 
                                                 
    2005     2004     2003  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Dollars in thousands)  
 
Demand Deposits
  $ 514,611       24.0 %   $ 478,073       24.1 %   $ 428,396       24.7 %
Savings and Interest Checking
    599,797       28.0 %     570,661       28.8 %     494,498       28.5 %
Money Market
    519,461       24.2 %     456,970       23.0 %     350,118       20.2 %
Time Certificates of Deposits
    510,611       23.8 %     478,037       24.1 %     462,453       26.6 %
                                                 
Total
  $ 2,144,480       100.0 %   $ 1,983,741       100.0 %   $ 1,735,465       100.0 %
                                                 


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The Bank’s time certificates of deposit of $100,000 or more totaled $167.2 million at December 31, 2005. The maturity of these certificates is as follows:
 
Table 13 —  Maturities of Time Certificate of Deposits Over $100,000
 
                 
    Balance     Percentage  
    (In thousands)        
 
1 to 3 months
  $ 89,706       53.6 %
4 to 6 months
    31,223       18.7 %
7 to 12 months
    33,218       19.9 %
Over 12 months
    13,095       7.8 %
                 
Total
  $ 167,242       100.0 %
                 
 
Borrowings  The Bank’s borrowings amounted to $587.8 million at December 31, 2005, a decrease of $67.4 million from year-end 2004. At December 31, 2005, the Bank’s borrowings consisted primarily of FHLB borrowings totaling $417.5 million, a decrease of $120.4 million from the prior year-end. The decrease in FHLB borrowings is due to strong deposit growth and the Company’s ability to obtain lower cost of funds through federal funds purchased and assets sold under repurchase agreements as well as a reduction in the Company’s securities portfolio.
 
The remaining borrowings consisted of federal funds purchased; assets sold under repurchase agreements, junior subordinated debentures and treasury tax and loan notes. These borrowings totaled $170.3 million at December 31, 2005, an increase of $53.1 million from the prior year-end. See Note 8 “Borrowings” of the Notes to Consolidated Financial Statements included in Item 8 hereof for a schedule of borrowings outstanding and their interest rates and other information related to the Company’s borrowings.
 
Junior Subordinated Debentures  The Company formed Independent Capital Trust III (“Trust III”) and Independent Capital Trust IV (“Trust IV”) in 2001 and 2002, respectively, for the purposes of issuing Corporation-Obligated Mandatory Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation (“trust preferred securities”) and investing the proceeds in junior subordinated securities issued by the Company (the “Junior Subordinated Debentures”). Additionally, Trust III and Trust IV issued $0.8 million in common securities to the Company. These proceeds were then used to redeem previously issued trust preferred securities issued at higher rates. The Company initially raised this capital for the purposes of supporting asset growth. Under regulatory capital requirements, within certain limitations, the Junior Subordinated Debentures qualify as Tier I and Tier II capital.
 
Effective March 31, 2004, the Company no longer consolidates its investment in Capital Trust III and Capital Trust IV previously, recorded in the mezzanine section of the balance sheet between liabilities and equity as Corporation-Obligated Mandatory Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation, due to the adoption of FIN No. 46R (See FIN No. 46 “Consolidation of Variable Interest Entities” within Recent Accounting Pronouncements included in Item 7, hereof). Rather, the Company now classifies its obligation to the trusts within borrowings as Junior Subordinated Debentures. Additionally, the distributions payable on these securities and the amortization of the issuance costs are no longer reported as Minority Interest. The interest expense on the debentures, which includes the amortization of the issuance costs, is now captured as borrowings expense.
 
Junior Subordinated Debentures were $51.5 million at both December 31, 2005 and 2004. The unamortized issuance costs are included in other assets. Unamortized issuance costs were $2.0 million and $2.1 million in 2005 and 2004, respectively.
 
Minority Interest expense was $1.1 million, and $4.4 million, in 2004, and 2003, respectively. Interest expense on the junior subordinated debentures, reported in borrowings expense, which includes the amortization of the issuance cost, was $4.5 million in 2005 and $3.3 million in 2004.


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The Company unconditionally guarantees all Trust III and Trust IV obligations under the trust preferred securities.
 
In December, the Trustees of Trust III and Trust IV declared a cash dividend of $0.54 and $0.52 per share to stockholders of record of Trust III and Trust IV, respectively, as of the close of business on December 29, 2005. The dividend was paid on December 30, 2005. The Company has paid on all scheduled dividends.
 
Investment Management  As of December 31, 2005, the Rockland Trust Investment Management Group had assets under management of $680.1 million which represents approximately 1,340 trust, fiduciary, and agency accounts. At December 31, 2004, assets under management were $563.9 million representing approximately 1,215 trust, fiduciary, and agency accounts. Income from the Investment Management Group amounted to $4.9 million, $4.2 million, and $3.8 million for 2005, 2004, and 2003, respectively, and is reported on an accrual basis.
 
Retail Investments and Insurance  For the year ending December 31, 2005, 2004 and 2003 retail investments and insurance income was $404,000, $517,000, and $566,000, respectively. Retail investments and insurance, previously titled mutual fund sales, now includes revenue generated through Independent Financial Market Group (“IFMG”), a Sun Life Financial Company, IFMG’s insurance subsidiary IFS Agencies, Inc. (“IFS”), and Savings Bank Life Insurance of Massachusetts (“SBLI”).
 
RESULTS OF OPERATIONS
 
Summary of Results of Operations  Net income was $33.2 million for the year ended December 31, 2005, compared to $30.8 million for the year ended December 31, 2004. Diluted earnings per share were $2.14 and $2.03 for the years ended 2005 and 2004, respectively.
 
In 2005 the Company realized $616,000 of security gains as compared to $1.5 million of security gains in 2004. In 2004, the Company also realized a gain on the sale of a branch of $1.8 million, and merger and acquisition expense of $684,000.
 
Return on average assets and return on average equity was 1.11% and 15.10%, respectively, for the year ending December 31, 2005 as compared to 1.13% and 16.27%, respectively, for the year ending December 31, 2004. Equity to assets was 7.50% as of December 31, 2005 compared to 7.16% 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 $107.7 million in 2005, an 8.0% increase from 2004 net interest income of $99.6 million reported in 2004. This growth comes despite contraction in the net interest margin of 7 basis points from the 3.95% recorded in 2004 to 3.88% in 2005.
 
Growth in net interest income in 2005 compared with that of 2004 was primarily the result of a 14.0% increase in the average balance of the loan portfolio in 2005 as compared to 2004. The yield on earning assets was 5.68% in 2005, compared with 5.41% in 2004. The average balance of securities decreased by $6.0 million, or 0.8%, as compared with the prior year. The average balance of loans increased by $243.7 million, or 14.0%, and the yield on loans increased by 35 basis points to 6.12% in 2005, compared to 5.77% in 2004. This increase in the yield on earning assets was due to the higher interest rate environment in 2005 than during 2004 and growth in earning assets. During 2005, the average balance of interest-bearing liabilities increased by $215.2 million, or 10.7%, over 2004 average balances. The average cost of these liabilities increased to 2.23% compared to 1.82% in 2004.


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The following table presents the Company’s average balances, net interest income, interest rate spread, and net interest margin for 2005, 2004, and 2003. 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 14 — Average Balance, Interest Earned/Paid & Average Yields
 
                                                                         
    Years Ended December 31,  
    2005     2004     2003  
          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
  $ 14,023     $ 515       3.67 %   $ 750     $ 17       2.27 %   $ 34     $       0.00 %
Securities:
                                                                       
Trading Assets
    1,548       36       2.33 %     1,507       48       3.19 %     1,116       36       3.23 %
Taxable Investment Securities
    708,043       31,188       4.40 %     712,663       31,549       4.43 %     639,361       29,724       4.65 %
Non-Taxable Investment Securities(1)
    62,771       4,126       6.57 %     64,215       4,261       6.64 %     64,967       4,416       6.80 %
                                                                         
Total Securities
    772,362       35,350       4.58 %     778,385       35,858       4.61 %     705,444       34,176       4.84 %
Loans(1)
    1,987,591       121,605       6.12 %     1,743,844       100,560       5.77 %     1,512,997       95,994       6.34 %
                                                                         
Total Interest-Earning Assets
  $ 2,773,976     $ 157,470       5.68 %   $ 2,522,979     $ 136,435       5.41 %   $ 2,218,475     $ 130,170       5.87 %
                                                                         
Cash and Due from Banks
    65,703                       68,024                       64,529                  
Other Assets
    144,747                       120,550                       100,618                  
                                                                         
Total Assets
  $ 2,984,426                     $ 2,711,553                     $ 2,383,622                  
                                                                         
Interest-Bearing Liabilities:
                                                                       
Deposits:
                                                                       
Savings and Interest Checking Accounts
  $ 599,797     $ 3,037       0.51 %   $ 570,661     $ 2,800       0.49 %   $ 494,498     $ 2,302       0.47 %
Money Market
    519,461       9,549       1.84 %     456,970       5,871       1.28 %     350,118       4,278       1.22 %
Time Certificates of Deposits
    510,611       13,172       2.58 %     478,037       10,254       2.15 %     462,453       11,222       2.43 %
                                                                         
Total Interest Bearing Deposits
    1,629,869       25,758       1.58 %     1,505,668       18,925       1.26 %     1,307,069       17,802       1.36 %
Borrowings:
                                                                       
Federal Home Loan Bank Borrowings
    468,821       18,162       3.87 %     407,836       13,900       3.41 %     356,152       14,236       4.00 %
Federal Funds Purchased and Assets Sold Under Repurchase Agreements
    80,074       1,389       1.73 %     61,199       589       0.96 %     51,803       482       0.93 %
Junior Subordinated Debentures
    51,546       4,469       8.67 %     38,871       3,364       8.65 %                  
Treasury Tax and Loan Notes
    1,653       40       2.42 %     3,154       19       0.60 %     2,764       13       0.47 %
                                                                         
Total Borrowings
    602,094       24,060       4.00 %     511,060       17,872       3.50 %     410,719       14,731       3.59 %
                                                                         
Total Interest-Bearing Liabilities
  $ 2,231,963     $ 49,818       2.23 %   $ 2,016,728     $ 36,797       1.82 %   $ 1,717,788     $ 32,533       1.89 %
                                                                         
Demand Deposits
    514,611                       478,073                       428,396                  
Corporation-Obligated Mandatorily Redeemable Securities of Subsidiary Holding Solely Parent Company Debentures
                          11,769                       47,814                  
Other Liabilities
    17,897                       15,849                       23,256                  
                                                                         
Total Liabilities
  $ 2,764,471                     $ 2,522,419                     $ 2,217,254                  
Stockholders’ Equity
    219,955                       189,134                       166,368                  
                                                                         
Total Liabilities and Stockholders’ Equity
  $ 2,984,426                     $ 2,711,553                     $ 2,383,622                  
                                                                         
Net Interest Income(1)
          $ 107,652                     $ 99,638                     $ 97,637          
                                                                         
Interest Rate Spread(2)
                    3.45 %                     3.59 %                     3.98 %
                                                                         
Net Interest Margin(3)
                    3.88 %                     3.95 %                     4.40 %
                                                                         
Supplemental Information:
                                                                       
Total Deposits, Including Demand Deposits
  $ 2,144,480     $ 25,758             $ 1,983,741     $ 18,925             $ 1,735,465     $ 17,802          
Cost of Total Deposits
                    1.20 %                     0.95 %                     1.03 %
Total Funding Liabilities, Including Demand Deposits
  $ 2,746,574     $ 49,818             $ 2,494,801     $ 36,797             $ 2,146,184     $ 32,533          
Cost of Total Funding Liabilities
                    1.81 %                     1.47 %                     1.52 %
 
 
(1) The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,809, $1,822 and $1,864 in 2005, 2004 and 2003, respectively.
 
(2) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average costs of interest-bearing liabilities.


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(3) Net interest margin represents net interest income as a percentage of average interest-earning assets.
 
The following table presents certain information on a fully-tax equivalent basis regarding changes in the Company’s 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 15 — Volume Rate Analysis
 
                                                                                                 
    Year Ended December 31,  
    2005 Compared To 2004     2004 Compared To 2003     2003 Compared To 2002  
                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  
    (In thousands)  
 
Income on Interest-Earning Assets:
                                                                                               
Federal Funds Sold Assets Purchased Under Resale Agreement and Short Term Investments
  $ 10     $ 301     $ 187     $ 498     $ 1     $ 0     $ 16     $ 17     $ (378 )   $ (378 )   $ 378     $ (378 )
Securities:
                                                                                               
Trading Assets
    (13 )     1             (12 )           12             12       10                   10  
Taxable Securities
    (157 )     (205 )     1       (361 )     (1,420 )     3,408       (163 )     1,825       (8,588 )     (1,126 )     247       (9,467 )
Non-Taxable Securities(1)
    (40 )     (96 )     1       (135 )     (105 )     (51 )     1       (155 )     (119 )     671       (20 )     532  
                                                                                                 
Total Securities:
    (210 )     (300 )     2       (508 )     (1,525 )     3,369       (162 )     1,682       (8,697 )     (455 )     227       (8,925 )
Loans(1) (2)
    6,132       14,056       857       21,045       (8,746 )     14,646       (1,334 )     4,566       (13,569 )     12,300       (1,687 )     (2,956 )
                                                                                                 
Total
  $ 5,932     $ 14,057     $ 1,046     $ 21,035     $ (10,270 )   $ 18,015     $ (1,480 )   $ 6,265     $ (22,644 )   $ 11,467     $ (1,082 )   $ (12,259 )
                                                                                                 
Expense of Interest-Bearing Liabilities:
                                                                                               
Deposits:
                                                                                               
Savings and Interest Checking Accounts
  $ 89     $ 143     $ 5     $ 237     $ 124     $ 355     $ 19     $ 498     $ (1,011 )   $ 481     $ (162 )   $ (692 )
Money Market
    2,529       803       346       3,678       220       1,306       67       1,593       (1,653 )     478       (141 )     (1,316 )
Time Certificates of Deposits
    2,077       699       142       2,918       (1,302 )     378       (44 )     (968 )     (4,161 )     (1,207 )     309       (5,059 )
                                                                                                 
Total Interest-Bearing Deposits:
    4,695       1,645       493       6,833       (958 )     2,039       42       1,123       (6,825 )     (248 )     6       (7,067 )
Borrowings:
                                                                                               
Federal Home Loan Bank Borrowings
    1,899       2,079       284       4,262       (2,099 )     2,067       (305 )     (337 )     (3,180 )     2,955       (625 )     (850 )
Federal Funds Purchased and Assets Sold Under Repurchase Agreements
    472       182       146       800       17       87       3       107       (155 )     (196 )     38       (313 )
Junior Subordinated Debentures
    6       1,097       2       1,105                   3,364       3,364                          
Treasury Tax and Loan Notes
    57       (9 )     (27 )     21       4       1       1       6       (24 )     (15 )     8       (31 )
                                                                                                 
Total Borrowings
    2,434       3,349       405       6,188       (2,078 )     2,155       3,063       3,140       (3,359 )     2,744       (579 )     (1,194 )
                                                                                                 
Total
  $ 7,129     $ 4,994     $ 898     $ 13,021     $ (3,036 )   $ 4,194     $ 3,105     $ 4,263     $ (10,184 )   $ 2,496     $ (573 )   $ (8,261 )
                                                                                                 
Change in Net Interest Income
  $ (1,197 )   $ 9,063     $ 148     $ 8,014     $ (7,234 )   $ 13,821     $ (4,585 )   $ 2,002     $ (12,460 )   $ 8,971     $ (509 )   $ (3,998 )
                                                                                                 
 
 
(1) The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,809, $1,822 and $1,864 in 2005, 2004 and 2003, 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.


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Net interest income on a fully tax-equivalent basis increased by $8.0 million in 2005 compared to 2004. Interest income on a fully tax-equivalent basis increased by $21.0 million, or 15.4%, to $157.5 million in 2005 as compared to the prior year-end primarily contributable to the growth in the average loan portfolio of $243.7 million to $2.0 billion during 2005. Based upon loan volume growth alone (not considering the impact of rate change and mix), interest income increased $14.1 million in 2005. Interest income from taxable securities decreased by $361,000, or 1.1%, to $31.2 million in 2005 as compared to the prior year. The overall yield on interest earning assets increased by 5.0% to 5.68% in 2005 as compared to 5.41% in 2004.
 
Interest expense for the year ended December 31, 2005 increased to $49.8 million from the $36.8 million recorded in 2004, an increase of $13.0 million, or 35.4%, of which $7.1 million is due to the increase in rates on deposits and borrowings. The total cost of funds increased 23.1% to 1.81% for 2005 as compared to 1.47% for 2004. Helping to offset some of the increase in the total cost of funds was a $36.5 million, or 7.6%, increase in non-interest bearing demand deposit balances. Average interest-bearing deposits increased $124.2 million, or 8.2% over prior year along with the cost of these deposits from 1.26%, to 1.58% attributable to both a higher rate environment and increases in higher yielding deposit categories.
 
Average borrowings increased by $91.0 million, or 17.8%, from the 2004 average balance. The majority of this increase is attributable to an increase in Federal Home Loan Bank borrowings of $61.0 million with an additional $12.7 million of the increase resulting from the inclusion of junior subordinated debentures in borrowings beginning in March of 2004 (see Junior Subordinated Debentures in Item 7 hereof.) The average cost of borrowings increased to 4.00% from 3.50%.
 
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. Management’s periodic evaluation of the adequacy of the allowance 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 Bank’s loans are secured by real estate in Massachusetts. Accordingly, the ultimate collectibility of a substantial portion of the Bank’s loan portfolio is susceptible to changes in property values within the state.
 
The provision for loan losses increased in 2005 to $4.2 million, compared with $3.0 million in 2004. Provision for loan losses increased by $1.2 million as compared to last year maintaining a 1.31% reserve to loan ratio. For the year ended December 31, 2005, net loan charge-offs totaled $2.7 million, an increase of $879,000 from the prior year. The allowance for loan losses at December 31, 2005 was 797.81% of nonperforming loans, as compared to 932.53% at the prior year-end.
 
The provision for loan losses is based upon management’s evaluation of the level of the allowance for loan losses in relation to the estimate of loss exposure in the loan portfolio. An analysis of individual loans and the overall risk characteristics and size of the different loan portfolios is conducted on an ongoing basis. This managerial evaluation is reviewed periodically by a third-party loan review consultant. As adjustments are identified, they are reported in the earnings of the period in which they become known.


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Non-Interest Income  The following table sets forth information regarding non-interest income for the periods shown.
 
Table 16 — Non-Interest Income
 
                         
Years Ended December 31,
  2005     2004     2003  
    (In thousands)  
 
Service charges on deposit accounts
  $ 13,103     $ 12,345     $ 11,409  
Investment management services
    5,287       4,683       4,340  
Mortgage banking income
    3,155       2,763       4,451  
Bank owned life insurance
    1,831       1,902       1,862  
Net gain on sales of securities
    616       1,458       2,629  
Gain on branch sale
          1,756        
Other non-interest income
    3,158       3,448       3,103  
                         
Total
  $ 27,150     $ 28,355     $ 27,794  
                         
 
Non-interest income, which is generated by deposit account service charges, investment management services, mortgage banking activities, and miscellaneous other sources, amounted to $27.2 million in 2005, a $1.2 million, or 4.2%, decrease from the prior year. The majority of the decrease is attributable to the sale of a bank branch in North Eastham, MA during the fourth quarter of 2004 that resulted in a pre-tax gain of approximately $1.8 million as well as a decrease in net securities sales gains of $842,000. Service charges on deposit accounts, which represented 48.3% of total non-interest income in 2005, increased from $12.3 million in 2004 to $13.1 million in 2005, reflecting strong organic growth in core deposits, a full year of earnings related to the acquired deposits in 2005 and increased service charges on overdrafts and return check charges implemented in August 2005. Investment management services revenue increased by 12.9% to $5.3 million compared to $4.7 million in 2004, due to growth in managed assets. Assets under administration at December 31, 2005 were $680.1 million an increase of $116.1 million, or 20.6% as compared to December 31, 2004.
 
Mortgage banking income of $3.2 million in 2005, increased by 14.2% from the $2.8 million recorded in 2004. The increase is a result of selling a higher percentage of loan production and changes in market rates favorably impacting servicing asset amortization. The Bank’s mortgage banking revenue consists primarily of servicing released premiums, net servicing income, and gains and losses on the sale of loans which includes application fees and origination fees on sold loans.
 
Gains and losses on sales of mortgage loans are recorded as mortgage banking income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Residential real estate loans and the related servicing rights are sold on a flow basis.
 
Mortgage servicing rights are amortized on a method that approximates the estimated weighted average life of the underlying loans serviced for others. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking income. Rockland’s assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted periodically to consider market consensus loan prepayment predictions at that date.
 
Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to non-interest expense when incurred.
 
At December 31, 2005 the mortgage servicing rights asset was $2.9 million, or 0.86% of the serviced loan portfolio. At December 31, 2004 the mortgage servicing rights asset was $3.3 million, or 0.84% of the serviced loan portfolio.
 
Net security gains were $616,000 for the twelve months ended December 31, 2005 as compared to $1.5 million for the same period in 2004, a decrease of $842,000, or 57.8%.


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Other non-interest income decreased by $290,000, or 8.4% for the twelve months ended December 31, 2005, mainly due to a decrease in commercial loan prepayment fees.
 
Non-Interest Expense  The following table sets forth information regarding non-interest expense for the periods shown.
 
Table 17 — Non-Interest Expense
 
                                                 
Years Ended December 31,
  2005     2004     2003  
    (Dollars in thousands)  
 
Salaries and employee benefits
          $ 47,912             $ 44,899             $ 41,508  
Occupancy and equipment expenses
            10,070               8,894               8,692  
Data processing and facilities management
            4,091               4,474               4,517  
Merger and acquisition
                          684                
Other
                                               
Advertising
    1,959               2,447               1,985          
Telephone
    1,385               1,777               1,720          
Postage
    1,006               942               1,034          
Debit card and ATM processing
    940               624               546          
Software maintenance
    873               308               628          
Consulting
    794               1,701               1,637          
Examinations and audits
    785               626               496          
Legal fees
    641               478               534          
Business development
    157               482               205          
Prepayment penalty on borrowings
                                1,941          
Other non-interest expense
    9,879       18,419       9,355       18,740       8,384       19,110  
                                                 
Total
          $ 80,492             $ 77,691             $ 73,827  
                                                 
 
Non-interest expense increased by $2.8 million, or 3.6%, during the year ended December 31, 2005 as compared to the same period last year. Salaries and employee benefits increased by $3.0 million, or 6.7%, for the year ended December 31, 2005, as compared to the prior year reflecting annual merit increases for employees, select additions to staff to support strategic initiatives, severance expense due to position eliminations of $333,000 recognized during the quarter ended December 31, 2005, an annual increase in performance based incentive compensation of $399,000 as well as increases in pension costs of $634,000 and medical insurance of $303,000.
 
Occupancy and equipment expenses increased $1.2 million, or 13.2%, for the twelve months ended December 31, 2005. The increase in this expense is primarily driven by facilities rent associated with the Falmouth Bancorp, Inc. acquisition which closed in mid 2004, closed branch lease buyout expense and the accelerated write-off of assets associated with these branch closings, two de novo branches, and increased depreciation expense related to a new phone system installed in 2004. Snow removal cost also increased by $165,000 on a year over year basis due to the inclement weather experienced in the early part of 2005.
 
Data processing and facilities management expense has decreased $383,000, or 8.6%, for the twelve months ended December 31, 2005, compared to the same period in 2004, as a result of a new data processing contract finalized in the latter part of 2004.
 
Merger and acquisition expense of $684,000 related to the purchase of Falmouth Bancorp, Inc. was recognized in the twelve months ended December 31, 2004. No merger and acquisition expense was recognized in 2005.
 
Other non-interest expenses decreased by $321,000, or 1.7%, for the twelve months ended December 31, 2005, as compared to the same period in the prior year. The decrease in the twelve month period is due to lower consultant fees of $907,000, advertising expense of $488,000, telephone expense of $392,000, and business development fees


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of $325,000. These charges were offset by increases in software maintenance fees of $565,000, ATM and debit card services of $316,000 related primarily to system conversion charges, and internet banking expense of $215,000.
 
Minority Interest  Effective March 31, 2004, the Company no longer reports the interest payable, net of the amortization of the issuance costs, on the Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation as Minority Interest. Rather, the interest expense on the Junior Subordinated Debentures, offset by the amortization of the issuance costs, effective March 31, 2004, is captured in borrowings expense. See Junior Subordinated Debentures in Item 7 hereof.
 
Minority Interest expense was zero, $1.1 million, and $4.4 million in 2005, 2004, and 2003, respectively. Interest expense on the junior subordinated debentures, reported in the borrowings expense, was $4.5 million in 2005 and $3.3 million in 2004 and zero in 2003.
 
Income Taxes  For the years ended December 31, 2005, 2004 and 2003 the Company recorded combined federal and state income tax provisions of $15.1 million, $13.6 million and $15.5 million, respectively. These provisions reflect effective income tax rates of 31.3%, 30.7% and 37.0%, in 2005, 2004, and 2003, respectively, which are less than the Bank’s blended federal and state statutory tax rate of 41.8%. The lower effective income tax rates are attributable to certain non-taxable interest and dividends, certain tax efficiency strategies employed by the Company, and tax credits. The effective rate increased 60 basis points for 2005 as compared to 2004 mainly due to a decrease in securities held at the Company’s security corporations year over year. Overall period to period comparisons are skewed due to the Company’s recognition in 2003 of a $2.0 million charge, net of income tax benefits and applicable interest, directly to the provision for income taxes due to a settlement with the Massachusetts Department of Revenue (“DOR”) in connection to the retroactive change to Massachusetts tax law on the deductibility of Real Estate Investment Trust’s (“REIT”) dividend distributions to its parent Company and due to the recognition of $750,000 and $1.5 million of New Markets Tax Credits in 2004 and 2005, respectively. The Company’s effective rate for fiscal year 2003 excluding the $2.0 million settlement charge was 32.2%.
 
During the second quarter of 2004, the Company announced that one of its subsidiaries (a Community Development Entity, or “CDE”) had been awarded $30 million in tax credit allocation authority under the New Markets Tax Credit Program of the United States Department of Treasury. In both 2004 and 2005, the Bank invested $15.0 million in the CDE providing it with the capital necessary to begin assisting qualified businesses in low-income communities throughout its market area. Based upon the Bank’s total $30.0 million investment, it will be eligible to receive tax credits over a eight year period totaling 39% of its investment, or $11.7 million. The Company has begun recognizing the benefit of these tax credits by reducing the provision of income taxes by $750,000 and $1.5 million during 2004 and 2005, respectively. The following table details the tax credit recognition by year based upon the $15 million invested in 2004 and 2005.
 
Table 18 — New Markets Tax Credit Recognition Schedule
 
                                                                                 
Investment     2004     2005     2006     2007     2008     2009     2010     2011     Total  
          (Dollars in thousands)  
 
2004
  $ 15M     $ 750     $ 750     $ 750     $ 900     $ 900     $ 900     $ 900     $     $ 5,850  
2005
  $ 15M           $ 750     $ 750     $ 750     $ 900     $ 900     $ 900     $ 900     $ 5,850  
                                                                                 
Total
  $ 30M     $ 750     $ 1,500     $ 1,500     $ 1,650     $ 1,800     $ 1,800     $ 1,800     $ 900     $ 11,700  
                                                                                 
 
The tax effects of all income and expense transactions are recognized by the Company in each year’s consolidated statements of income regardless of the year in which the transactions are reported for income tax purposes.
 
Comparison of 2004 vs. 2003  The Company’s assets increased to $2.9 billion in 2004, an increase of $507.2 million, or 20.8%, from the $2.4 billion reported in 2003. Securities increased by $145.8 million, or 21.7%, to $818.2 million at December 31, 2004 from $672.5 million a year earlier. Loans increased by $335.2 million, or 21.2%, during the twelve months ended December 31, 2004. At December 31, 2004, deposits of $2.1 billion were $276.9 million, or 15.5%, higher than the prior year-end. Core deposits increased $279.2 million, or 21.0%, and time deposits decreased $2.3 million, or 0.5%. Borrowings were $655.2 million at December 31, 2004, an increase


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of $239.8 million from December 31, 2003. During 2004, the Company completed the acquisition of Falmouth Bancorp, Inc., parent of Falmouth Co-Operative Bank (“Falmouth”) resulting in total assets acquired of $158.4 million, total liabilities assumed of $141.6 million, or $16.8 million of net assets. The acquisition contributed to many of the balance variances discussed below. For more insight into the acquisition see the 2004 Form 10-K.
 
Net income for 2004 was $30.8 million, or $2.03 per diluted share compared to $26.4 million, or $1.79 per diluted share, for 2003. Return on average assets and return on average equity were 1.13% and 16.27%, respectively, for 2004 and 1.11% and 15.89%, respectively, for 2003.
 
Net interest income on a fully tax-equivalent basis increased by $2.0 million in 2004 compared to 2003. Interest income on a fully tax-equivalent basis increased by $6.3 million, or 4.8%, to $136.4 million in 2004 as compared to the prior year-end mainly due to the growth in the average loan balance of $230.8 million to $1.7 billion at December 31, 2004. Based upon loan volume growth alone (not considering the impact of rate change and mix), interest income increased $14.6 million in 2004. Interest income from taxable securities increased by $1.8 million, or 6.1%, to $31.5 million in 2004 as compared to the prior year mainly attributable to higher balances on average in 2004. The overall yield on interest earning assets decreased by 7.8% to 5.41% in 2004 from the 5.87% reported the prior year during 2004 due to the higher yielding assets being replaced in a lower rate environment.
 
Interest expense for the year ended December 31, 2004 increased to $36.8 million from the $32.5 million recorded in 2003, an increase of $4.3 million, or 13.1%, due to an increase in the average balance on deposits and borrowings. The increase is partially offset by an overall decrease in the cost of funds from 1.89% in 2003 to 1.82% in 2004. Contributing to this decrease was a $49.7 million, or 8.6%, increase in non-interest bearing demand deposit balances favorably impacting the Bank’s cost of funds. Average interest-bearing deposits increased $198.6 million, or 15.2%, over prior year, however, the cost of these deposits decreased from 1.36% to 1.26% attributable to both a lower rate environment and increases in lower yielding deposit categories.
 
Average borrowings increased by $100.3 million, or 24.4% from the 2003 average balance of which $38.9 million of the increase is due to the inclusion of junior subordinated debentures (see Junior Subordinated Debentures of the Corporation in Item 7 hereof) and the majority of the remaining increase is in Federal Home Loan Bank borrowings. The average cost of borrowings decreased to 3.50% from 3.59% despite the inclusion of the aforementioned junior subordinated debentures yielding 8.65%.
 
The provision for loan losses was $3.0 million in 2004 compared to $3.4 million in 2003. The allowance for loan losses at December 31, 2004 was 932.53% of nonperforming loans compared to 659.16% at December 31, 2003. Nonperforming loans represented 0.14% of gross loans at December 31, 2004 compared to 0.22% at December 31, 2003. Nonperforming assets were down $812,000 from December 31, 2003 to $2.7 million or 0.09% of total assets at December 31, 2004.
 
Non-interest income, which is generated by deposit account service charges, investment management services, mortgage banking activities, and miscellaneous other sources, amounted to $28.4 million in 2004, a $561,000, or 2.0%, increase over the prior year. The majority of the increase is attributable to the sale of a bank branch in North Eastham, MA during the fourth quarter of 2004 that resulted in a pre-tax gain of approximately $1.8 million. Service charges on deposit accounts, which represented 43.5% of total non-interest income in 2004, increased from $11.4 million in 2003 to $12.3 million in 2004, reflecting strong organic growth in core deposits. Investment management services revenue increased by 7.9% to $4.7 million compared to $4.3 million in 2003, due to growth in managed assets.
 
Mortgage banking income of $2.8 million in 2004, decreased by 37.9% from the $4.5 million recorded in 2003. The decrease experienced is a result of the decline in refinancing activity that was at its peak in 2003.
 
Net security gains were $1.5 million for the twelve months ended December 31, 2004 as compared to $2.6 million for the same period in 2003, a decrease of $1.2 million, or 44.5%. Net security gains of $2.0 million were recorded in the second quarter of 2003 on the sale of $20.0 million of investment securities as part of a strategy to improve the Company’s overall interest rate risk position and increase the net interest margin. That strategy included prepaying $31.5 million of fixed high-rate borrowings resulting in the recognition of a $1.9 million prepayment penalty.


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Other non-interest income increased by $345,000 for the twelve months ended December 31, 2004, compared to the same period in 2003 mainly due to increased commercial loan prepayment fees.
 
Non-interest expense increased by $3.9 million, or 5.2%, during the year ended December 31, 2004 as compared to the same period last year. Non-interest expense, excluding the merger and acquisition expense taken in the third quarter of 2004 and the prepayment penalty on borrowings taken in the second quarter of 2003, increased by $5.1 million, or 7.1%, for the year ended December 31, 2004, as compared to the prior year. Salaries and employee benefits increased by $3.4 million, or 8.2%, for the year ended December 31, 2004, as compared to the prior year reflecting additions to staff to support continued growth as well as increased pension expense.
 
Occupancy and equipment expenses increased $202,000, or 2.3%, for the twelve months ended December 31, 2004 due to infrastructure improvements made throughout the year.
 
A $1.9 million prepayment penalty was incurred during the quarter ended June 30, 2003 as part of the balance sheet repositioning strategy discussed above and is recorded in non-interest expense for the twelve months ended December 31, 2003.
 
During the twelve months ended December 31, 2004, the Company incurred expenses of approximately $684,000, related to the Falmouth acquisition.
 
Other non-interest expenses, not broken out in Table 17, “Non-Interest Expense”, increased $1.3 million, or 17.1%, for the twelve months ended December 31, 2004 compared to the same period in 2003. The increase in other non-interest expenses for the year is primarily attributable to increased expenditures for the Company’s key business initiatives. During 2004, the Company incurred business initiative expenses to implement a small business banking model, to expand residential lending, to develop a new set of consumer deposit products, to improve the commercial loan process, to fund retail sales training, and to fund a core information system selection process. The Company estimates that the total cost associated with its business initiatives was approximately $2.1 million for the twelve months ended December 31, 2004, across all expense categories. In addition, advertising and business development increased by $739,000 for the twelve months ended December 31, 2004, as compared to the same period in the prior year, to support the aforementioned business initiatives and capitalize on market changes due to merger disruption.
 
Risk Management  The Company’s Board of Directors and executive management have identified seven significant “Risk Categories” consisting of credit, interest rate, liquidity, operations, compliance, reputation and strategic risk. The Board of Directors has approved a Risk Management Policy that addresses each category of risk. The chief executive officer, chief financial officer, chief technology and operations officer, the senior lending officer and other members of management provide regular reports to the Board of Directors that review the level of risk to limits established by the Risk Management Policy and other Policies approved by the Board of Directors that address risk and any key risk issues and plans to address these issues.
 
Asset/Liability Management  The Bank’s asset/liability management process monitors and manages, among other things, the interest rate sensitivity of the balance sheet, the composition of the securities portfolio, funding needs and sources, and the liquidity position. All of these factors, as well as projected asset growth, current and potential pricing actions, competitive influences, national monetary and fiscal policy, and the regional economic environment are considered in the asset/liability management process.
 
The Asset/Liability Management Committee (“ALCO”), whose members are comprised of the Bank’s senior management, develops procedures consistent with policies established by the Board of Directors, which monitor and coordinate the Bank’s interest rate sensitivity and the sources, uses, and pricing of funds. Interest rate sensitivity refers to the Bank’s exposure to fluctuations in interest rates and its effect on earnings. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. It is management’s objective to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary, within prudent limits, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps. The Committee employs simulation analyses in an attempt to quantify, evaluate, and manage the impact of changes in interest rates on the Bank’s net interest income. In addition, the Bank engages an independent consultant to render advice with respect to asset and liability management strategy.


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The Bank is careful to increase deposits without adversely impacting the weighted average cost of those funds. Accordingly, management has implemented funding strategies that include FHLB advances and repurchase agreement lines. These non-deposit funds are also viewed as a contingent source of liquidity and, when profitable lending and investment opportunities exist, access to such funds provides a means to leverage the balance sheet.
 
From time to time, the Bank has utilized interest rate swap agreements and interest rates caps and floors as hedging instruments against interest rate risk. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount for a predetermined period of time from a second party. Interest rate caps and floors are agreements whereby one party agrees to pay a floating rate of interest on a notional principal amount for a predetermined period of time to a second party if certain market interest rate thresholds are realized. The assets relating to the notional principal amount are not actually exchanged.
 
At December 31, 2005 the Company had interest rate swaps, designated as “cash flow” hedges, with total notional values of $110.0 million. The purpose of these swaps is to hedge the variability in the cash outflows of LIBOR based borrowings attributable to changes in interest rates. Under these swap agreements the Company pays a fixed rate of interest of 3.65% on $50.0 million notional value through November 21, 2006, 2.49% on $25.0 million notional value through January 21, 2007, and 4.06% on $35.0 million through January 10, 2010, and all receive 3 month LIBOR rate of interest. These swaps had a positive fair value of $2.0 million at December 31, 2005. The Company also has a $100 million, 4.0% 3-month LIBOR interest rate cap with an effective date of January  31, 2005 and a maturity date of January 31, 2008. The interest rate cap pays the Company when 3-month LIBOR exceeds 4.0% on a rate reset date during the effective period of the cap. At December 31, 2005 the interest rate cap had a fair value of $1.7 million.
 
Subsequently, during January 2006, the Company sold the interest rate swap that was hedging $25.0 million of 3 month LIBOR revolving FHLB borrowings with a maturity date of November 21, 2006 in connection with the Company’s decision not to re-enter into these borrowings. A gain of approximately $237,000 will be recognized during the three months ending March 31, 2006 against the interest expense on FHLB borrowings.
 
During the third quarter ending September 30, 2005, the Company sold an interest rate swap that was hedging $25.0 million of 3-month LIBOR revolving FHLB borrowings in connection with the Company’s decision not to re-enter into these borrowings. The gain of $215,000 on the sale of this swap was recognized in earnings against the interest expense on FHLB borrowings.
 
At December 31, 2004 the Company had interest rate swaps with a value of $75.0 million. Under these swap agreements the Company pays a fixed rate of interest of 3.65% on $50 million of the notional value through November 2006, and 2.49% on the remaining $25 million notional value through January 2007, and both receive a 3 month LIBOR rate of interest. These swaps had a positive fair value of $142,000 at December 31, 2004. All changes in the fair value of the interest rate swaps are recorded, net of tax, through equity as other comprehensive income.
 
To improve the Company’s asset sensitivity, the Company sold interest rate swaps hedged against loans during the year ending December 31, 2002 resulting in total deferred gains of $7.1 million. The deferred gain is classified in other comprehensive income, net of tax, as a component of equity. The interest rate swaps sold had total notional amounts of $225.0 million. These swaps were accounted for as cash flow hedges, and therefore, the deferred gains will be amortized into interest income over the remaining life of the hedged item, which will run-off in April of 2007. At December 31, 2005, there are $980,000 gross, or $568,000 million, net of tax, of such deferred gains included in other comprehensive income.
 
Additionally, the Company enters into commitments to fund residential mortgage loans with the intention of selling them in the secondary markets. The Company also enters into forward sales agreements for certain funded loans and loan commitments to protect against changes in interest rates. The Company records unfunded commitments and forward sales agreements at fair value with changes in fair value as a component of Mortgage Banking Income. At December 31, 2005 the Company had residential mortgage loan commitments with a fair value of $108,000 and forward sales agreements with a fair value of ($22,000). At December 31, 2004 the Company had residential mortgage loan commitments with a fair value of $148,000 and forward sales agreements with a fair value


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of ($47,000). Changes in these fair values of ($15,000) and $10,000 for the years ending December 31, 2005 and 2004, respectively, are recorded as a component of mortgage banking income.
 
Market Risk  Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. The Company has no trading operations and thus is only exposed to non-trading market risk.
 
Interest-rate risk is the most significant non-credit risk to which the Company is exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, the Company’s primary source of revenue. Interest-rate risk arises directly from the Company’s core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities and the fair value of securities and derivatives as well as other affects.
 
The primary goal of interest-rate risk management is to control this risk within limits approved by the Board. These limits reflect the Company’s tolerance for interest-rate risk over both short-term and long-term horizons. The Company attempts to control interest-rate risk by identifying, quantifying and, where appropriate, hedging its exposure. The Company manages its interest-rate exposure using a combination of on and off-balance sheet instruments, primarily fixed rate portfolio securities, and interest rate swaps.
 
The Company quantifies its interest-rate exposures using net interest income simulation models, as well as simpler gap analysis, and Economic Value of Equity (EVE) analysis. Key assumptions in these simulation analyses relate to behavior of interest rates and behavior of the Company’s deposit and loan customers. The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of nonmaturity deposits (e.g. DDA, NOW, savings and money market). The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly.
 
To mitigate these uncertainties, the Company gives careful attention to its assumptions. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans.
 
The Company manages the interest-rate risk inherent in its mortgage banking operations by entering into forward sales contracts. An increase in market interest rates between the time the Company commits to terms on a loan and the time the Company ultimately sells the loan in the secondary market will have the effect of reducing the gain (or increasing the loss) the Company records on the sale. The Company attempts to mitigate this risk by entering into forward sales commitments in amounts sufficient to cover all closed loans and a majority of rate-locked loan commitments.
 
The Company’s policy on interest-rate risk simulation specifies that if interest rates were to shift gradually up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 6.0%. Given the unusually low rate environments at December 31, 2004, the Company assumed a 100 basis point decline in interest rates in addition to the normal 200 basis point increase in rates. The Company was well within policy limits at December 31, 2005 and 2004.
 
The Company’s earnings are not directly and materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines.
 
The following table sets forth the estimated effects on the Company’s net interest income over a 12-month period following the indicated dates in the event of the indicated increases or decreases in market interest rates:
 
Table 19 — Interest Rate Sensitivity
 
                         
    200 Basis Point
    200 Basis Point
    100 Basis Point
 
    Rate Increase     Rate Decrease     Rate Decrease  
 
December 31, 2005
    (1.56 %)     (0.87 %)     N/A  
December 31, 2004
    (3.25 %)     N/A       1.06 %


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The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. For instance, asymmetrical rate behavior can have a material impact on the simulation results. If competition for deposits forced the Company to raise rates on those liabilities quicker than is assumed in the simulation analysis without a corresponding increase in asset yields net interest income may be negatively impacted. Alternatively, if the Company is able to lag increases in deposit rates as loans re-price upward net interest income would be positively impacted.
 
The most significant factors affecting market risk exposure of the Company’s net interest income during 2005 were (i) changes in the composition and prepayment speeds of mortgage assets and loans (ii) the shape of the U.S. Government securities and interest rate swap yield curve (iii) the level of U.S. prime interest rates and (iv) the level of rates paid on deposit accounts.
 
The table below provides information about the Company’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps, interest rate caps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates at the reporting date. For interest rate caps, the table presents notional amounts by expected maturity dates, the strike rate, and the anticipated average interest rate cap will pay based upon the implied forward rates at the reporting date.
 
Table 20 — Expected Maturities of Long Term Debt and Interest Rate Derivatives
 
                                                                 
    2006     2007     2008     2009     2010     Thereafter     Total     Fair Value  
    (Dollars in thousands)  
 
LIABILITIES
                                                               
Long Term debt:
                                                               
Fixed Rate
  $ 210,118     $ 126     $ 35,111     $ 3     $ 52,003     $ 171,662     $ 469,023     $ 476,563  
Average interest rate
    4.26 %     5.82 %     3.47 %     3.75 %     4.94 %     5.86 %     4.86 %        
Variable Rate
                                                 
Average interest rate
                                                 
INTEREST RATE DERIVATIVES
                                                               
Interest Rate Swaps:
                                                               
Variable to Fixed
  $ 50,000     $ 25,000                 $ 35,000     $     $ 110,000     $ 1,967  
Average pay rate
    3.65 %     2.49 %                 4.06 %           3.52 %        
Average receive rate
    4.79 %     4.78 %                 4.76 %           4.78 %        
Fixed to Variable
                                                 
Average pay rate
                                                 
Average receive rate
                                                 
Interest Rate Cap:
                                                               
Variable Rate with Interest Rate Cap
              $ 100,000                             $ 1,655  
Interest rate cap strike rate
                4.00 %                                
Net receive rate (1)
                0.75 %                                
 
 
(1) Represents anticipated weighted average rate received from the interest rate cap.
 
Liquidity  Liquidity, as it pertains to the Company, is the ability to generate adequate amounts of cash in the most economical way for the institution to meet its ongoing obligations to pay deposit withdrawals and to fund loan commitments. The Company’s primary sources of funds are deposits, borrowings, and the amortization, prepayment and maturities of loans and securities.
 
The Bank utilizes its extensive branch network to access retail customers who provide a stable base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors. The Bank has also established repurchase agreements, with major brokerage


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firms as potential sources of liquidity. At December 31, 2005, the Company had $25.0 million outstanding of such repurchase agreements. In addition to agreements with brokers, the Bank also had customer repurchase agreements outstanding amounting to $88.3 million at December 31, 2005. As a member of the Federal Home Loan Bank, the Bank has access to approximately $743.1 million of borrowing capacity. On December 31, 2005, the Bank had $417.5 million outstanding in FHLB borrowings.
 
The Company, as a separately incorporated bank holding company, has no significant operations other than serving as the sole stockholder of the Bank. It’s commitments and debt service requirement, at December 31, 2005, consist of junior subordinated debentures, including accrued interest, issued to two unconsolidated subsidiaries, $25.8 million to Independent Capital Trust III and $25.8 million to Independent Capital Trust IV, in connection with the issuance of 8.625% Capital Securities due in 2031 and 8.375% Capital Securities due in 2032, respectively. See Note 17 “Junior Subordinated Debentures” of Notes to Consolidated Financial Statements of Item 8 hereof. The Parent only obligations relate to its reporting obligations under the Securities and Exchange Act of 1934, as amended and related expenses as a publicly traded company. The Company funds virtually all expenses through dividends paid by the Bank.
 
The Company actively manages its liquidity position under the direction of the Asset/Liability Management Committee. Periodic review under prescribed policies and procedures is intended to ensure that the Company will maintain adequate levels of available funds. At December 31, 2005, the Company’s liquidity position was well above policy guidelines. Management believes that the Bank has adequate liquidity available to respond to current and anticipated liquidity demands.
 
Capital Resources  The Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), and other regulatory agencies have established capital guidelines for banks and bank holding companies. Risk-based capital guidelines issued by the federal regulatory agencies require banks to meet a minimum Tier 1 risk-based capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At December 31, 2005, the Company and the Bank exceeded the minimum requirements for Tier 1 risk-based and total risk-based capital.
 
A minimum requirement of 4.0% Tier 1 leverage capital is also mandated. On December 31, 2005, the Tier 1 leverage capital ratio for the Company and the Bank was 7.71% and 7.22%, respectively.
 
Table 21 — Capital Ratios for the Company and the Bank
 
                 
    At December 31,  
    2005     2004  
 
The Company
               
Tier 1 leverage capital ratio
    7.71 %     7.06 %
Tier 1 risk-based capital ratio
    10.74 %     10.19 %
Total risk-based capital ratio
    11.99 %     11.44 %
The Bank
               
Tier 1 leverage capital ratio
    7.22 %     6.95 %
Tier 1 risk-based capital ratio
    10.07 %     10.04 %
Total risk-based capital ratio
    11.32 %     11.29 %
 
(See Note 18, “Regulatory Capital Requirements” of Notes to Consolidated Financial Statements in Item 8. hereof)
 
On January 19, 2006, the Company entered into a common stock repurchase program to repurchase up to 800,000 shares, or approximately 5%, of the Company’s outstanding common stock. The Company placed no deadline on the repurchase program, but expects to make open market or privately negotiated purchases from time to time. The timing and the amount of stock repurchases will depend upon market conditions, securities law limitations, and other corporate considerations. The repurchase program may be modified, suspended, or terminated by the Board of Directors at any time. The Company anticipates that it will maintain its well capitalized status.


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Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Financial Instruments
 
The Company has entered into contractual obligations and commitments and off-balance sheet financial instruments. The following tables summarize the Company’s contractual cash obligations and other commitments and off-balance sheet financial instruments at December 31, 2005.
 
Table 22 — Contractual Obligations, Commitments, and
Off-Balance Sheet Financial Instruments by Maturity
 
                                         
    Payments Due — By Period  
          Less than
    One to
    Four to
    After Five
 
Contractual Obligations
  Total     One Year     Three Years     Five Years     Years  
    (Dollars in thousands)  
 
FHLB advances(1)
  $ 417,477     $ 210,118     $ 35,237     $ 52,006     $ 120,116  
Junior subordinated debentures
    51,546                         51,546  
Lease obligations
    13,666       2,537       3,831       2,841       4,457  
Data processing and core systems
    17,469       5,710       8,424       3,335        
Other vendor contracts
    2,015       1,260       755              
Retirement benefit obligations(2)
    29,558       1,792       1,996       580       25,190  
Other
                                       
Treasury tax & loan notes
    5,452       5,452                    
Securities sold under repurchase agreements
    25,000                   25,000        
Customer repurchase agreements
    88,335       88,335                    
                                         
Total contractual cash obligations
  $ 650,518     $ 315,204     $ 50,243     $ 83,762     $ 201,309  
                                         
 
                                         
    Amount of Commitment Expiring — By Period  
Off-Balance Sheet
        Less than
    One to
    Four to
    After
 
Financial Instruments
  Total     One Year     Three Years     Five Years     Five Years  
 
Lines of credit
  $ 279,884     $ 32,360     $     $     $ 247,524  
Standby letters of credit
    8,893       8,893                    
Other loan commitments
    255,494       225,573       25,560       3,950       411  
Forward commitments to sell loans
    11,591       11,591                    
Interest rate swaps — notional value (1)(3)
    110,000       50,000       25,000       35,000        
Interest rate caps — notional value(1)(4)
    100,000             100,000              
                                         
Total Commitments
  $ 765,862     $ 328,417     $ 150,560     $ 38,950     $ 247,935  
                                         
 
 
(1) The Company has hedged short term borrowings.
 
(2) Retirement benefit obligations include expected contributions to the Company’s pension plan, post retirement plan, and supplemental executive retirement plans. Expected contributions for the pension plan have been included only through plan year July 1, 2005 — June 30, 2006. Contributions beyond this plan year can not be quantified as they will be determined based upon the return on the investments in the plan. Expected contributions for the post retirement plan and supplemental executive retirement plans include obligations that are payable over the life of the participants.
 
(3) Interest rate swaps on borrowings (Rockland Trust Company pays fixed, receives variable).
 
(4) Interest rate cap on borrowings (4.00% 3-month LIBOR strike rate).
 
See Note 16, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements included in Item 8 hereof for a discussion of the nature, business purpose, and importance of off-balance sheet arrangements.
 
Guarantees  FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” considers standby letters of credit, excluding commercial letters of credit and other lines of credit, a guarantee of the Bank. The Bank enters into a standby letter


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of credit to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved is represented by the contractual amounts of those instruments. Under the standby letters of credit, the Bank is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met. Most guarantees extend up to one year. At December 31, 2005 the maximum potential exposure amount of future payments is $8.7 million.
 
The collateral obtained is determined based upon management’s credit evaluation of the customer and may include cash, accounts receivable, inventory, property, plant, and equipment and income-producing real estate. The majority of the Bank’s letters of credit are collateralized by cash. The recourse provisions of the agreements allow the Bank to collect the cash used to collateralize the agreement. If another business asset is used as collateral and cash is not available, the Bank creates a loan for the customer with the same criteria of its other lending activities. Of the Bank’s maximum potential loss, $8.7 million is covered by collateral. The fair value of the guarantees are $61,000 and $70,000 at December 31, 2005 and 2004, respectively. The fair value of these guarantees is not material and not reflected on the balance sheet.
 
Return on Equity and Assets  The consolidated returns on average equity and average assets for the year ended December 31, 2005 were 15.10% and 1.11%, respectively, compared to 16.27% and 1.13% reported for the same periods last year. The ratio of equity to assets was 7.5% at December 31, 2005 and 7.2% at December 31, 2004.
 
Dividends  The Company declared cash dividends of $0.60 per common share in 2005 and $0.56 per common share in 2004. The 2005 and 2004 ratio of dividends paid to earnings was 27.79% and 27.23% respectively.
 
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 deems appropriate. Management believes that the Bank will continue to generate adequate earnings to continue to pay dividends.
 
Impact of Inflation and Changing Prices  The consolidated financial statements and related notes thereto presented elsewhere herein have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
 
The financial nature of the Company’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect the Company because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. The impact on the Company is a noted increase in the size of loan requests with resulting growth in total assets. In addition, operating expenses may increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on the Company’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation.
 
Acquisition  On July 16, 2004, the Company completed its acquisition of Falmouth Bancorp, Inc., the parent of Falmouth Co-Operative Bank. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” the acquisition was accounted for under the purchase method of accounting and, as such, was included in the results of operations from the date of acquisition. The Company issued 586,903 shares of common stock in connection with the acquisition. The value of the common stock, $28.74, was determined based on the average price of the Company’s 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 estimated fair value of the assets acquired and liabilities assumed at the date of acquisition inclusive of adjustments made to the estimated fair value of assets acquired recorded subsequent to the date of acquisition was $16.9 million.


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Recent Accounting Pronouncements
 
Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”)  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 awards 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. In addition, liability awards are remeasured to fair value each reporting period. 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 is therefore required beginning January 1, 2006. The impact of the Company adopting such accounting can be seen in Note 1, “Summary of Significant Accounting Policies,” Stock-Based Compensation of the Notes to Consolidated Financial Statements included in Item 8 hereof. The Company estimates that, after the adoption of SFAS 123R, the compensation expense related to share-based payment transactions to be recognized in earnings in the year ending December 31, 2006 will be approximately $14,000 before tax for options granted to date using the Black-Scholes valuation method and will be approximately $51,000 before tax for restricted stock awards granted to date. See Note 1, “Summary of Significant Accounting Policies” Stock Based Compensation for additional information on restricted stock grants. Management has determined that it will continue to use the Black-Scholes valuation method to value share-based payments and that it will apply the modified prospective transition method upon adoption of SFAS 123R. Management has not decided the amount or type of share-based compensation to be issued in 2006 and beyond and, therefore, the impact of adopting SFAS 123R is not known at this time.
 
FASB Staff Position (“FSP”) FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”  In November 2005, the FASB issued FSP FAS 123R-3. This FSP provides a simplified, elective transition alternative to (1) calculating the beginning balance of the pool of excess tax benefits available to absorb tax deficiencies subsequent to the adoption of SFAS 123R (“APIC Pool”) and (2) determining the subsequent impact on the APIC Pool from the tax benefits of awards that are fully vested and outstanding upon the adoption of SFAS 123R. An entity shall follow either the transition guidance described in this FSP or the transition guidance described in SFAS 123R paragraph 81. An entity that adopts SFAS 123R using the modified prospective or modified retrospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS 123R or the effective date of this FSP to make this one-time election. The Company has not yet determined the transition method that will be applied in calculating the APIC pool upon adoption of SFAS 123R.
 
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


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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 to the aggregate amount of trust preferred securities and certain other capital elements. 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.
 
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. The guidance in EITF 03-1 provided application guidance to assess whether there has been any event or economic circumstances to indicate that a security is impaired on an other-than-temporary basis. Consideration was to be given to the length of time the security has had a market value less than the cost basis, the intent an 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. Securities deemed to be other-than-temporarily impaired are written down to fair value with the write-down recorded as a realized loss. Additionally the guidance provided for expanded annual disclosure.
 
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 delayed the effective date for the guidance in paragraphs 10-20. Paragraphs 10-20 address the considerations to be given to determine whether a security is other-than-temporarily impaired. Companies would still need to comply with the disclosure requirements under EITF 03-1 and all other relevant measurement and recognition requirements in other accounting literature.
 
In November 2005, the FASB issued FSP FAS 115-1 and 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP nullifies certain requirements of EITF 03-1 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Additionally, the FSP addresses accounting considerations subsequent to the recognition of other-than-temporarily impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Other-than-temporary impairment per FSP FAS 115-1and FAS 124-1 require an investor to apply other existing guidance that is pertinent to the determination of whether an impairment is other-than-temporary rather than the evaluation guidance set forth in EITF 03-1. The guidance does require an impairment charge to be recognized in the current period if it is determined that a security will be sold in a subsequent period where the fair value is not expected to be fully recovered by the time of sale. This FSP is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The adoptions of EITF 03-1 and EITF 03-1-1 did not have a material impact on the Company’s financial position or results of operations and the Company does not believe that the adoption of FSP FAS 115-1 and 124-1 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


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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 adoption of SOP 03-3 did not have a material impact on the Company’s financial position or results of operations.
 
FASB Staff Position (“FSP”) SOP 94-6-1, “Terms of Loan Products That May Give Rise to a Concentration of Credit Risk”  In December 2005, the FASB issued FSP SOP 94-6-1. This FSP was issued in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions to address the circumstances in which the terms of loan products give rise to a concentration of credit risk as that term is used in SFAS No. 107 “Disclosures about Fair Value of Financial Instruments”, and what disclosures apply to entities who deal with loan products whose terms may give rise to a concentration of credit risk. An entity shall provide the disclosures required by SFAS No. 107 for either an individual loan product type or a group of loan products with similar features that are determined to represent a concentration of credit risk in accordance with the guidance of SOP 94-6-1 for all periods presented in financial statements. This SOP is effective for interim and annual periods ending after December 19, 2005. The adoption of FSP SOP 94-6-1 did not have a material impact on the Company’s financial position or results of operations.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Assets and Liability Management” in Item 7 hereof.


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Item 8.   Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Independent Bank Corp.:
 
We have audited the accompanying consolidated balance sheets of Independent Bank Corp. and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Independent Bank Corp. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Independent Bank Corp.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
 
(KPMG LLP SIGNATURE)
 
Boston, Massachusetts
February 22, 2006


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CONSOLIDATED BALANCE SHEETS
 
                 
    At December 31,  
    2005     2004  
    (Dollars in thousands)  
 
ASSETS
CASH AND DUE FROM BANKS
  $ 66,289     $ 62,961  
FEDERAL FUNDS SOLD AND ASSETS PURCHASED UNDER RESALE AGREEMENT & SHORT TERM INVESTMENTS
    63,662       2,735  
SECURITIES
               
TRADING ASSETS (Note 3)
    1,557       1,572  
SECURITIES AVAILABLE FOR SALE (Notes 1 and 4)
    581,516       680,286  
SECURITIES HELD TO MATURITY (Notes 1 and 4) (fair value $106,730 and $112,159)
    104,268       107,967  
FEDERAL HOME LOAN BANK STOCK (Note 8)
    29,287       28,413  
                 
TOTAL SECURITIES
    716,628       818,238  
                 
LOANS (Notes 1 and 5) 
               
Commercial and Industrial
    155,081       156,260  
Commercial Real Estate
    683,240       613,300  
Commercial Construction
    140,643       126,632  
Business Banking
    51,373       43,673  
Residential Real Estate
    428,343       427,556  
Residential Construction
    8,316       7,316  
Residential Loans Held for Sale
    5,021       10,933  
Consumer — Home Equity
    251,852       194,647  
Consumer — Auto
    263,179       283,964  
Consumer — Other
    53,760       52,077  
                 
TOTAL LOANS
    2,040,808       1,916,358  
LESS: ALLOWANCE FOR LOAN LOSSES
    (26,639 )     (25,197 )
                 
NET LOANS
    2,014,169       1,891,161  
                 
BANK PREMISES AND EQUIPMENT, NET (Notes 1 and 6)
    37,431       36,449  
GOODWILL (Notes 1 and 10)
    55,078       55,185  
CORE DEPOSIT INTANGIBLES (Notes 1 and 10)
    1,780       2,103  
MORTGAGE SERVICING RIGHTS (Note 1)
    2,892       3,291  
BANK OWNED LIFE INSURANCE
    44,762       42,664  
OTHER ASSETS (Note 11)
    38,994       29,139  
                 
TOTAL ASSETS
  $ 3,041,685     $ 2,943,926  
                 
 
LIABILITIES & STOCKHOLDERS EQUITY
DEPOSITS
               
DEMAND DEPOSITS
  $ 511,920     $ 495,500  
SAVINGS AND INTEREST CHECKING ACCOUNTS
    613,840       614,481  
MONEY MARKET
    550,677       501,065  
TIME CERTIFICATES OF DEPOSIT OVER $100,000 (Note 7)
    167,242       117,258  
OTHER TIME CERTIFICATES OF DEPOSIT (Note 7)
    361,815       331,931  
                 
TOTAL DEPOSITS
    2,205,494       2,060,235  
                 
FEDERAL HOME LOAN BANK BORROWINGS (Note 8)
    417,477       537,919  
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER REPURCHASE AGREEMENTS (Note 8)
    113,335       61,533  
JUNIOR SUBORDINATED DEBENTURES (Notes 8 and 17)
    51,546       51,546  
TREASURY TAX AND LOAN NOTES (Note 8)
    5,452       4,163  
                 
TOTAL BORROWINGS
    587,810       655,161  
                 
OTHER LIABILITIES
    20,229       17,787  
                 
TOTAL LIABILITIES
  $ 2,813,533     $ 2,733,183  
                 
COMMITMENTS AND CONTINGENCIES (Note 16) 
               
STOCKHOLDERS’ EQUITY (Notes 1 and 2) 
               
PREFERRED STOCK, $.01 par value. Authorized: 1,000,000 Shares Outstanding: None
  $     $  
                 
COMMON STOCK, $.01 par value. Authorized: 30,000,000 Issued: 15,413,841 Shares in 2005 and 15,326,236 shares in 2004
    154       153  
SHARES HELD IN RABBI TRUST AT COST 170,488 Shares in 2005 and 171,799 Shares in 2004
    (1,577 )     (1,428 )
DEFERRED COMPENSATION OBLIGATION
    1,577       1,428  
ADDITIONAL PAID IN CAPITAL
    59,700       59,415  
RETAINED EARNINGS
    175,284       150,241  
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX (Notes 1 and 16)
    (6,986 )     934  
                 
TOTAL STOCKHOLDERS’ EQUITY
    228,152       210,743  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 3,041,685     $ 2,943,926  
                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    (Dollars in thousands, except per share data)  
 
INTEREST INCOME
                       
Interest on Loans (Notes 1 and 5)
  $ 121,241     $ 100,230     $ 95,666  
Taxable Interest and Dividends on Securities (Note 4)
    31,223       31,597       29,760  
Non-taxable Interest and Dividends on Securities (Note 4)
    2,682       2,769       2,880  
Interest on Federal Funds Sold and Short-Term Investments
    515       17        
                         
Total Interest Income
    155,661       134,613       128,306  
                         
INTEREST EXPENSE
                       
Interest on Deposits
    25,758       18,925       17,801  
Interest on Borrowings (Note 8)
    24,060       17,872       14,732  
                         
Total Interest Expense
    49,818       36,797       32,533  
                         
Net Interest Income
    105,843       97,816       95,773  
                         
PROVISION FOR LOAN LOSSES (Notes 1 and 5)
    4,175       3,018       3,420  
                         
Net Interest Income After Provision For Loan Losses
    101,668       94,798       92,353  
                         
NON-INTEREST INCOME
                       
Service Charges on Deposit Accounts
    13,103       12,345       11,409  
Investment Management Services
    5,287       4,683       4,340  
Mortgage Banking Income
    3,155       2,763       4,451  
BOLI Income
    1,831       1,902       1,862  
Net Gain on Sales of Securities (Note 4)
    616       1,458       2,629  
Gain on Branch Sale
          1,756        
Other Non-Interest Income
    3,158       3,448       3,103  
                         
Total Non-Interest Income
    27,150       28,355       27,794  
                         
NON-INTEREST EXPENSES
                       
Salaries and Employee Benefits (Note 13)
    47,912       44,899       41,508  
Occupancy and Equipment Expenses (Notes 6 and 16)
    10,070       8,894       8,692  
Data Processing & Facilities Management
    4,091       4,474       4,517  
Advertising Expense
    1,959       2,447       1,985  
Telephone Expense
    1,385       1,777       1,720  
Consulting Expense
    794       1,701       1,637  
Prepayment Penalty on Borrowings
                1,941  
Merger and Acquisition Expense
          684        
Other Non-Interest Expenses (Note 14)
    14,281       12,815       11,827  
                         
Total Non-Interest Expenses
    80,492       77,691       73,827  
                         
Minority Interest Expense (Note 17)
          1,072       4,353  
                         
INCOME BEFORE INCOME TAXES
    48,326       44,390       41,967  
PROVISION FOR INCOME TAXES (Notes 1 and 11)
    15,121       13,623       15,536  
                         
NET INCOME
  $ 33,205     $ 30,767     $ 26,431  
                         
BASIC EARNINGS PER SHARE
  $ 2.16     $ 2.06     $ 1.82  
                         
DILUTED EARNINGS PER SHARE
  $ 2.14     $ 2.03     $ 1.79  
                         
Weighted average common shares (Basic) (Notes 1, 2 and 9)
    15,378,187       14,963,155       14,558,031  
Common stock equivalents
    143,728       191,273       180,047  
                         
Weighted average common shares (Diluted) (Notes 1, 2 and 9)
    15,521,915       15,154,428       14,738,078  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
                                                                 
                                        Accumulated
       
                Shares
    Deferred
    Additional
          Other
       
    Common
    Treasury
    Held in
    Compensation
    Paid-in
    Retained
    Comprehensive
       
    Stock     Stock     Rabbi Trust     Obligation     Capital     Earnings     Income (Loss)     Total  
    (Dollars in thousands, except per share data)  
 
BALANCE DECEMBER 31, 2002
  $ 149     $ (6,292 )   $ (1,189 )   $ 1,189     $ 41,994     $ 110,910     $ 14,481     $ 161,242  
                                                                 
Net Income
                                            26,431               26,431  
Cash Dividends Declared ($.52 per share)
                                            (7,581 )             (7,581 )
Proceeds From Exercise of Stock Options (Note 2)
            2,607                       (314 )                     2,293  
Tax Benefit on Stock Option Exercise
                                    612                       612  
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains (Notes 1 and 16)
                                                    (1,899 )     (1,899 )
Deferred Compensation Obligation (Note 13)
                    (92 )     92                                
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains (Note 4)
                                                    (9,251 )     (9,251 )
                                                                 
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 ($.56 per share)
                                            (8,397 )             (8,397 )
Proceeds From Exercise of Stock Options (Note 2)
            1,091                       14       703               1,808  
Tax Benefit on Stock Option Exercise
                                    247                       247  
Common Stock Issued for Acquisition (Note 12)
    6                               16,862                       16,868  
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains (Notes 1 and 16)
                                                    (135 )     (135 )
Deferred Compensation Obligation (Note 13)
                    (147 )     147                                
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains (Note 4)
                                                    (2,262 )     (2,262 )
Elimination of Treasury Stock Due to Change in Massachusetts Law (Note 1)
    (2 )     2,594                               (2,592 )              
                                                                 
BALANCE DECEMBER 31, 2004
  $ 153     $     $ (1,428 )   $ 1,428     $ 59,415     $ 150,241     $ 934     $ 210,743  
                                                                 
Net Income
                                            33,205               33,205  
Cash Dividends Declared ($.60 per share)
                                            (9,233 )             (9,233 )
Proceeds From Exercise of Stock Options (Note 2)
    1                                       1,071               1,072  
Tax Benefit on Stock Option Exercise
                                    282                       282  
Restricted Shares Issued to Employees (Notes 1 and 2)
                                    3                       3  
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains (Notes 1 and 16)
                                                    870       870  
Deferred Compensation Obligation (Note 13)
                    (149 )     149                                
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains (Note 4)
                                                    (8,790 )     (8,790 )
                                                                 
BALANCE DECEMBER 31, 2005
  $ 154     $     $ (1,577 )   $ 1,577     $ 59,700     $ 175,284     $ (6,986 )   $ 228,152  
                                                                 
 
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Net Income
  $ 33,205     $ 30,767     $ 26,431  
Other Comprehensive (Loss), net of tax:
                       
Decrease in unrealized gains on securities available for sale, net of tax of $5,089, $1,014 and $5,232, respectively
    (8,404 )     (1,631 )     (7,414 )
Less: reclassification adjustment for realized gains included in net earnings, net of tax of $230, $366, and $1,072, respectively
    (386 )     (631 )     (1,837 )
                         
Net change in unrealized gain on securities available for sale, net of tax of $5,321, $1,380 and $6,304, respectively
    (8,790 )     (2,262 )     (9,251 )
                         
Increase/(Decrease) in fair value of derivatives during the period, net of tax of $1,017, $605 and $308, respectively
    1,405       1,095       (573 )
Less: reclassification of realized gains on derivatives, net of tax of $388, $890, and $960, respectively
    (535 )     (1,230 )     (1,326 )
                         
Net change in fair value of derivatives, net of tax of $629, $285 and $1,268, respectively
    870       (135 )     (1,899 )
Other Comprehensive Loss, net of tax:
    (7,920 )     (2,397 )     (11,150 )
                         
Comprehensive Income
  $ 25,285     $ 28,370     $ 15,281  
                         
 
The accompanying notes are an integral part of these consolidated financial statements.


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CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net Income
  $ 33,205     $ 30,767     $ 26,431  
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED FROM OPERATING ACTIVITIES:
                       
Depreciation and amortization
    5,978       5,872       5,558  
Provision for loan losses
    4,175       3,018       3,420  
Deferred income tax (benefit) expense
    (2,291 )     (460 )     81  
Loans originated for resale
    (192,808 )     (153,298 )     (252,129 )
Proceeds from mortgage loan sales
    200,140       144,610       263,798  
Gain on sale of mortgages
    (1,420 )     (774 )     (1,848 )
Net gain on sale of investments
    (616 )     (1,458 )     (2,629 )
Gain on branch sale
          (1,756 )      
Prepayment penalty on borrowings
                1,941  
Loss (gain) recorded from mortgage servicing rights, net of amortization
    399       378       (1,140 )
Compensation expense from restricted stock grant
    3              
Changes in assets and liabilities:
                       
(Increase) decrease in other assets
    (3,262 )     (5,521 )     2,186  
Increase (decrease) in other liabilities
    2,276       (2,055 )     (2,984 )
                         
TOTAL ADJUSTMENTS
    12,574       (11,444 )     16,254  
                         
NET CASH PROVIDED FROM OPERATING ACTIVITIES
    45,779       19,323       42,685  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Proceeds from maturities and principal repayments of Securities Held to Maturity
    3,534       14,791       28,087  
Proceeds from maturities, principal repayments and sales of Securities Available For Sale
    216,104       187,341       424,662  
Purchase of Securities Held to Maturity
          (1,000 )     (1,000 )
Purchase of Securities Available For Sale
    (131,818 )     (343,728 )     (464,641 )
Purchase of Federal Home Loan Bank Stock
    (874 )     (5,628 )     (4,871 )
Net increase in Loans
    (133,095 )     (229,957 )     (160,998 )
Investment in Bank Premises and Equipment
    (5,395 )     (4,788 )     (5,614 )
Cash used for Merger and Acquisition, net of cash acquired
    107       31,900        
Net liabilities sold in branch sale transaction
          (8,202 )      
                         
NET CASH USED IN INVESTING ACTIVITIES
    (51,437 )     (359,271 )     (184,375 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Net increase (decrease) in Time Deposits
    79,868       (48,794 )     (23,067 )
Net increase in Other Deposits
    65,391       199,799       117,673  
Net increase (decrease) in Federal Funds Purchased and Assets Sold Under Repurchase Agreements
    51,802       22,108       (18,667 )
Net (decrease) increase in Federal Home Loan Bank Borrowings
    (120,442 )     164,064       73,544  
Net increase (decrease) in Treasury Tax & Loan Notes
    1,289       (683 )     (1,663 )
Proceeds from stock issuance
    1,072       1,808       2,293  
Dividends Paid
    (9,067 )     (8,153 )     (7,414 )
                         
NET CASH PROVIDED FROM FINANCING ACTIVITIES
    69,913       330,149       142,699  
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    64,255       (9,799 )     1,009  
                         
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
    65,696       75,495       74,486  
                         
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
  $ 129,951     $ 65,696     $ 75,495  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                       
Cash paid during the year for:
                       
Interest on deposits and borrowings
  $ 48,810     $ 36,721     $ 33,188  
Interest on shares subject to mandatory redemption
          1,051       4,353  
Income taxes
    12,454       14,239       14,802  
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                       
Increase (decrease) in fair value of derivatives, net of tax
  $ 870     $ (135 )   $ (1,899 )
Decrease in fair value of securities available for sale, net of tax
    8,790       2,262       9,251  
Issuance of shares from treasury stock for the exercise of stock options
          1,091       2,607  
In conjunction with the purchase acquisition detailed in Note 12 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
                       
Fair value of assets acquired
  $ (107 )   $ 158,438        
Fair Value of liabilities assumed
          141,570        
 
The accompanying notes are an integral part of these consolidated financial statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)  Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
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 in 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.
 
Nature of Operations
 
Independent Bank Corp. is a one-bank holding company whose primary asset is its investment in Rockland Trust Company. Rockland is a state-chartered commercial bank, which operates 52 retail branches, nine commercial banking centers, three investment management group offices and four residential lending centers, all of which are located in the Plymouth, Barnstable, Norfolk and Bristol counties of southeastern Massachusetts and Cape Cod. Rockland’s deposits are insured by the Federal Deposit Insurance Corporation, subject to regulatory limits. The Company’s primary source of income is from providing loans to individuals and small-to-medium sized businesses in its market area.
 
Uses of Estimates in The Preparation of Financial Statements
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could vary from these estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan losses, income taxes, and valuation of goodwill and other intangibles and their respective analysis of impairment.
 
Significant Concentrations of Credit Risk
 
Most of the Company’s activities are with customers located within Massachusetts. Notes 3 and 4 discuss the types of securities in which the Company invests. Note 5 discusses the types of lending in which the Company engages. The Company believes that it does not have any significant concentrations in any one industry or customer.
 
Cash and Cash Equivalents
 
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and assets purchased under resale agreements. Generally, federal funds are sold for up to two week periods.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Securities
 
Securities that are held principally for resale in the near-term and assets used to fund certain non-qualified executive retirement obligations, which are held in the form of Rabbi Trusts, are recorded as trading assets at fair value with changes in fair value recorded in earnings. Interest and dividends are included in net interest income. Quoted market prices, when available, are used to determine the fair value of trading instruments. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of instruments with similar characteristics, or discounted cash flows. At December 31, 2005 and 2004, all assets classified in the trading account relate to the non-qualified executive retirement obligations.
 
Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with changes in fair value excluded from earnings and reported in other comprehensive income, net of the related tax.
 
Purchase premiums and discounts are recognized in interest income using the level yield method, which approximates the effective yield over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as impairment charges. The Company evaluates individual securities that have material fair values below cost for six months or longer to determine if the decline in fair value is other than temporary. Consideration is given to the obligor of the security, whether the security is guaranteed, the liquidity of the security, the type of security, the capital position of security issuers, and payment history of the security, amongst others when evaluating these individual securities.
 
When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. Neither the Company nor the Bank engages in the active trading of investment securities.
 
Loans
 
Loans are carried at the principal amounts outstanding, adjusted by partial charge-offs and net deferred loan costs or fees. Interest income for commercial, business banking, real estate, and consumer loans, is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status.
 
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 interest (and in certain instances remains current for up to three months), when the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.
 
Loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method. When a loan is paid off, the unamortized portion of the net origination fees are recognized into interest income.
 
Allowance for Loan Losses
 
The allowance for loan losses is established as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes the collectibility of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management. It is based upon management’s systematic periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Changes in estimates are provided currently in earnings. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, such agencies may require the institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations.
 
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 December 31, 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.
 
Loan Servicing
 
Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets with servicing retained. Capitalized servicing rights are reported as mortgage servicing rights and are amortized into non-interest income in proportion to, and over the period of, the estimated future servicing of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment for an individual stratum is recognized through earnings within mortgage banking income, to the extent that fair value is less than the capitalized amount for the stratum.
 
Bank Premises and Equipment
 
Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line half year convention method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives of the improvements.
 
Goodwill and Core Deposit Intangibles
 
Goodwill is the price paid over the net fair value of the acquired businesses and is not amortized. Goodwill is evaluated for impairment at least annually using fair value techniques, including multiples of price to equity and price to earnings. The Company determined that goodwill was not impaired during 2005.
 
Core deposit intangibles are identifiable intangible assets which represent the premium paid for purchased deposits and are amortized over seven years using the straight line method which approximates the expected period of time of economic benefits that are realized by the Company. Core deposit intangible is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets.
 
Impairment of Long-Lived Assets Other Than Goodwill
 
The Company reviews long-lived assets, including premises and equipment, for impairment whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
 
Income Taxes
 
Deferred income tax assets and liabilities are determined using the asset and liability (or balance sheet) method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income.
 
Tax credits generated from limited partnerships and the New Markets Tax Credit program are reflected in earnings when realized for federal income tax purposes.
 
Investment Management Group
 
Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheet, as such assets are not assets of the Company. Revenue from administrative and management activities associated with these assets is recorded on an accrual basis. Assets under administration at December 31, 2005 and 2004 were $680.1 million and $563.9 million, respectively.
 
Financial Instruments
 
Credit related financial instruments — In the ordinary course of business, the Bank enters into commitments to extend credit, and with the exception of commitments to originate residential mortgage loans, these financial instruments are recorded when they are funded. See below for “Derivative financial instruments,” for treatment of commitments to originate residential mortgage loans.
 
Derivative financial instruments — As part of asset/liability management, the Bank utilizes interest rate swap agreements and interest rate caps or floors, to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount for a predetermined period of time from a second party. Interest rate caps and floors are agreements whereby one party agrees to pay a floating rate of interest on a notional principal amount for a predetermined period of time to a second party if certain market interest rate thresholds are realized. The assets relating to the notional principal amount are not actually exchanged.
 
The Company has derivatives consisting of forward sales commitments, commitments to fund loans intended for sale, interest rate swaps and interest rate caps.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
All derivative instruments (including certain derivative instruments embedded in other contracts) are recorded on the balance sheet as either an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in income unless specific hedge accounting criteria is met. The Company formally documents, designates and assesses the effectiveness of transactions that receive hedge accounting. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in the fair value of assets, liabilities, or firm commitments through earnings or are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. Also, when a hedged item or derivative is terminated, sold or matures, any remaining value depending on the type of hedge would be recognized in earnings either immediately or over the remaining life of the hedged item.
 
The Company uses interest rate swaps and interest rate caps that are recorded as derivatives. Interest rate swaps and interest rate caps are used primarily by the Company to hedge certain operational exposures resulting from changes in interest rates. Such exposures result from portions of the Company’s assets and liabilities that earn or pay interest at a fixed or floating rate. The Company measures the effectiveness of these hedges by modeling the impact on the exposures under various interest rate scenarios.
 
In addition, the Company enters into commitments to fund residential mortgage loans with the intention of selling them in the secondary market. The Company also enters into forward sales agreements for certain funded loans and loan commitments. The Company records unfunded commitments intended for loans held for sale and forward sales agreements at fair value with changes in fair value recorded as a component of Mortgage Banking Income. Loans originated and intended for sale in the secondary market are carried within residential loans at the lower of cost or estimated fair value in the aggregate.
 
Guarantees
 
Standby letters of credit, excluding commercial letters of credit and other lines of credit, are considered guarantees of the Bank. The Bank enters into a standby letter of credit to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved is represented by the contractual amounts of those instruments. Under the standby letters of credit, the Bank is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary so long as all performance criteria have been met. Most guarantees extend up to one year. At December 31, 2005 the maximum potential amount of future payments is $8.7 million all of which is covered by collateral.
 
The collateral obtained is determined based upon management’s credit evaluation of the customer and may include cash, accounts receivable, inventory, property, plant, and equipment and income-producing real estate. The majority of the Bank’s letters of credit are collateralized by cash. The recourse provisions of the agreements allow the Bank to collect the cash used to collateralize the agreement. If another business asset is used as collateral and cash is not available, the Bank creates a loan for the customer with the same criteria as its other lending activities. The fair value of the guarantees are $61,000 and $70,000 at December 31, 2005 and 2004. The fair value of these guarantees is not material and not reflected on the balance sheet.
 
Transfers of Financial Assets
 
Transfers of financial assets, typically residential mortgages for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Earnings Per Share
 
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding before any dilution during the period. Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options) were issued during the period, computed using the treasury stock method.
 
Bank Owned Life Insurance
 
Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. The Bank purchases BOLI in order to use its earning to help offset the costs of the Bank’s benefit expenses including pre and post-retirement employee benefits. Increases in the cash surrender value (“CSV”) of the policies, as well as death benefits received net of any CSV, are recorded in other non-interest income, and are not subject to income taxes. The CSV of the policies are recorded as assets of the Bank. The Company reviews the financial strength of the insurance carriers prior to the purchase of BOLI and annually thereafter. BOLI with any individual carrier is limited to 15% of capital plus the allowance for loan losses and BOLI in total limited to 25% of capital plus the allowance for loan losses.
 
Treasury Stock
 
On July 1, 2004 Chapter 156D of the Massachusetts General Laws, a statute known as the Massachusetts Business Corporation Act, took effect. Chapter 156D applies to Massachusetts corporations, such as the Company, as of its effective date. One provision of Chapter 156D is designed to eliminate the concept of “treasury stock” and provides, in pertinent part, that shares that a Massachusetts company reacquires after July 1, 2004 will be treated as authorized but unissued shares. The Company has, based upon this change in Massachusetts law, retroactively converted its existing treasury stock to authorized but unissued shares back to July 1, 2004 and accounted for this change, in the aggregate amount of $2.6 million, as a reduction in the Company’s common stock (at par value) and retained earnings. There was no impact to total equity. At December 31, 2004 the Company had 124,488 shares at a cost of $1.9 million previously classified as treasury stock.
 
Stock-Based Compensation
 
For the year ending December 31, 2005, SFAS No. 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. Until January 1, 2006, an entity could 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. Beginning on January 1, 2006, the Company was required to adopt Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123R”) (See discussion which follows in Recent Accounting Pronouncements), which will require the Company to reflect, in earnings, compensation expense measured at the date of grant based on the fair value of the awards and recognized over the requisite service period for awards granted or modified after January 1, 2006. In addition, for any awards outstanding on January 1, 2006 that are not fully vested, compensation expense based on the fair value at the date of grant will also be required to be recognized in earnings.
 
The Company has four stock-based 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 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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 the issuance of either stock options or restricted stock awards for up to 800,000 shares of common stock. At December 31, 2005, there were no shares available for issuance under either the 1987 Plan or the 1996 Plan.
 
On December 15, 2005, the Company’s Board of Directors voted to accelerate the vesting of certain unvested “out-of-the-money” stock options awarded to employees pursuant to the 1997 Plan so that they immediately vested as of December 15, 2005. No other changes were made to the terms and conditions of the stock options affected by the Board vote. The Board vote approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.44 or greater per share. As a consequence of the Board vote, options to purchase 135,549 shares of the Company’s common stock became exercisable immediately. The average of the high price and low price at which the Company’s common stock traded on December 15, 2005, the date of the Board vote, was $28.895 per share. The Company estimates that, as a result of this accelerated vesting, approximately $710,000 of 2006 non-cash compensation expense and $8,000 of 2007 non-cash compensation expense will be eliminated that would otherwise have been recognized in the Company’s earnings in accordance with SFAS 123R. The Company estimates that, after the adoption of SFAS 123R, the compensation expense related to share-based payment transactions to be recognized in earnings in the year ending December 31, 2006 will be approximately $14,000 before tax for partially vested options granted to date using the Black-Scholes valuation method.
 
Also on December 15, 2005, the Company granted 11,450 restricted stock awards to employees from the 2005 Plan. These awards vest evenly over a five-year period assuming continued employment with the Company and the holders of these awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The employees are not required to pay any consideration to the Company for the restricted stock awards. The Company measured the fair value of the shares based on the average of the high price and low price at which the Company’s common stock traded on the date of the grant. The compensation expense recorded in the year ended December 31, 2005 related to these awards was approximately $3,000.
 
As of December 31, 2005, the Company has elected to measure 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 for stock options has not been recognized as the exercise price has historically equaled the grant date fair value of the underlying stock. Had the Company recognized compensation cost for stock options granted under its plans determined as the fair value of the stock options 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:
 
                             
        Years Ended December 31,  
        2005     2004     2003  
        (Dollars in thousands, except per share data)  
 
Net Income
  As Reported   $ 33,205     $ 30,767     $ 26,431  
    Pro Forma   $ 31,123     $ 30,264     $ 25,754  
Basic Earnings Per Share
  As Reported   $ 2.16     $ 2.06     $ 1.82  
    Pro Forma   $ 2.02     $ 2.02     $ 1.77  
Diluted Earnings Per Share
  As Reported   $ 2.14     $ 2.03     $ 1.79  
    Pro Forma   $ 2.01     $ 2.00     $ 1.75  


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
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 2005 Plan, the 1997 Plan and the 1996 Plan:
 
                                 
          2005 Plan     1997 Plan     1996 Plan  
 
Risk Free Interest Rate
    2005       4.38 %(1)     4.38 %(1)      
                    3.53%-3.80 %(2)     3.93 %(3)
      2004             3.35 %(4)      
                    2.64%-3.49 %(5)     3.19 %(6)
      2003             2.42 %(7)      
                      2.33 %(8)     2.41 %(9)
Expected Dividend Yields
    2005       2.04 %(1)     2.04 %(1)      
                    1.91%-1.95 %(2)     2.21 %(3)
      2004             1.64 %(4)      
                    1.71%-2.09 %(5)     2.02 %(6)
      2003             1.73 %(7)      
                    2.13 %(8)     2.56 %(9)
Expected Lives
    2005       3.5 years (1)     3.5 years (1)      
                    3.5-4 years (2)     4.5 years (3)
      2004             4 years (4)      
                    3.5 years (5)     4 years( 6)
      2003             3.5 years (7)      
                    3 years (8)     3.5 years (9)
Expected Volatility
    2005       25 %(1)     25 %(1)      
                    26 %(2)     27 %(3)
      2004             28 %(4)      
                    28%-30 %(5)     28 %(6)
      2003             31 %(7)      
                    33 %(8)     31 %(9)
 
 
(1) On December 15, 2005, 137,000 options were granted from the 2005 Plan and 45,500 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 15, 2005.
 
(2) 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 from the 1997 Plan to a Vice President of the Company. The risk free rate, expected dividend yield, expected life and expected volatility for this grant was determined on September 1, 2005.
 
(3) 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 was determined on April 26, 2005.
 
(4) 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 was determined on December 9, 2004.
 
(5) 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


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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.
 
(6) 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 was determined on April 27, 2004.
 
(7) On December 11, 2003, 127,350 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 was determined on December 11, 2003.
 
(8) On January 9, 2003, 50,000 options were granted from the 1997 Plan to the Company’s President and Chief Executive Officer. The risk free rate, expected dividend yield, expected life and expected volatility for this grant was determined on January 9, 2003.
 
(9) On April 15, 2003, 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 was determined on April 15, 2003.
 
Recent Accounting Pronouncements
 
SFAS No. 123R, “Share-Based Payment”  In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R. SFAS No. 123R replaces SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes APB 25, “Accounting for Stock Issued to Employees”. SFAS No. 123R will require that the compensation cost relating to share-based payment awards 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. In addition, liability awards are remeasured to fair value each reporting period. 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 is therefore required beginning January 1, 2006. The impact of the Company adopting such accounting can be seen in Note 1, “Summary of Significant Accounting Policies,” Stock-Based Compensation of the Notes to Consolidated Financial Statements above. The Company estimates that, after the adoption of SFAS 123R, the compensation expense related to share-based payment transactions to be recognized in earnings in the year ending December 31, 2006 will be approximately $14,000 before tax for options granted to date using the Black-Scholes valuation method and will be approximately $51,000 before tax for restricted stock awards granted to date. See above in Note 1, “Summary of Significant Accounting Policies” Stock Based Compensation for additional information on restricted stock grants. Management has determined that it will continue to use the Black-Scholes valuation method to value share-based payments and that it will apply the modified prospective transition method upon adoption of SFAS 123R. Management has not decided the amount or type of share-based compensation to be issued in 2006 and beyond and, therefore, the impact of adopting SFAS 123R is not known at this time.
 
FASB Staff Position (“FSP”) FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards”  In November 2005, the FASB issued FSP FAS 123R-3. This FSP provides a simplified, elective transition alternative to (1) calculating the beginning balance of the pool of excess tax benefits available to absorb tax deficiencies subsequent to the adoption of SFAS 123R (“APIC Pool”) and (2) determining the subsequent impact on the APIC Pool from the tax benefits of awards that are fully vested and outstanding upon the adoption of SFAS 123R. An entity shall follow either the transition guidance described in this FSP or the transition guidance described in SFAS 123R paragraph 81. An entity that adopts SFAS 123R using the modified prospective or modified retrospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS 123R or the effective date of this FSP to make this one-time election. The Company has not yet determined the transition method that will be applied in calculating the APIC pool upon adoption of SFAS 123R.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
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 to the aggregate amount of trust preferred securities and certain other capital elements. 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.
 
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. The guidance in EITF 03-1 provided application guidance to assess whether there has been any event or economic circumstances to indicate that a security is impaired on an other-than-temporary basis. Consideration was to be given to the length of time the security has had a market value less than the cost basis, 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. Securities deemed to be other-than-temporarily impaired are written down to fair value with the write-down recorded as a realized loss. Additionally the guidance provided for expanded annual disclosure.
 
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 delayed the effective date for the guidance in paragraphs 10-20. Paragraphs 10-20 address the considerations to be given to determine whether a security is other-than-temporarily impaired. Companies would still need to comply with the disclosure requirements under EITF 03-1 and all other relevant measurement and recognition requirements in other accounting literature.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
In November 2005, the FASB issued FSP FAS 115-1 and 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP nullifies certain requirements of EITF 03-1 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Additionally, the FSP addresses accounting considerations subsequent to the recognition of other-than-temporarily impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Other-than-temporary impairment per FSP FAS 115-1and FAS 124-1 require an investor to apply other existing guidance that is pertinent to the determination of whether an impairment is other than temporary rather than the evaluation guidance set forth in EITF 03-1. The guidance does require an impairment charge to be recognized in the current period if it is determined that a security will be sold in a subsequent period where the fair value is not expected to be fully recovered by the time of sale. This FSP is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The adoptions of EITF 03-1 and EITF 03-1-1 did not have a material impact on the Company’s financial position or results of operations and the Company does not believe that the adoption of FSP FAS 115-1 and 124-1 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 adoption of SOP 03-3 did not have a material impact on the Company’s financial position or results of operations.
 
FASB Staff Position (“FSP”) SOP 94-6-1, “Terms of Loan Products That May Give Rise to a Concentration of Credit Risk”  In December 2005, the FASB issued FSP SOP 94-6-1. This FSP was issued in response to inquiries from constituents and discussions with the SEC staff and regulators of financial institutions to address the circumstances in which the terms of loan products give rise to a concentration of credit risk as that term is used in SFAS No. 107 “Disclosures about Fair Value of Financial Instruments”, and what disclosures apply to entities who deal with loan products whose terms may give rise to a concentration of credit risk. An entity shall provide the disclosures required by SFAS No. 107 for either an individual loan product type or a group of loan products with similar features that are determined to represent a concentration of credit risk in accordance with the guidance of SOP 94-6-1 for all periods presented in financial statements. This SOP is effective for interim and annual periods ending after December 19, 2005. The adoption of FSP SOP 94-6-1 did not have a material impact on the Company’s financial position or results of operations.
 
(2)  Common Stock Purchase and Option Plans and Restricted Stock Awards
 
The Company maintains a Dividend Reinvestment and Stock Purchase Plan. Under the terms of the plan, stockholders may elect to have cash dividends reinvested in newly issued shares of common stock at a 5% discount from the market price on the date of the dividend payment. Stockholders also have the option of purchasing additional new shares, at the full market price, up to the aggregate amount of dividends payable to the stockholder during the calendar year.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Under the Independent Bank Corp. 1997 Employee Stock Option Plan (the “1997 Employee Plan”), the Independent Bank Corp. 1996 Non-Employee Directors’ Stock Option Plan (the “1996 Director Plan”), and the Amended and Restated Independent Bank Corp. 1987 Incentive Stock Option Plan (the “1987 Employee Plan”), respectively, the Company may grant options for up to 1,100,000, 300,000, and 800,000 shares. The Company has cumulatively granted options under each plan, net of cancellations, of 1,099,274, 209,000, and 586,813, respectively, through December 31, 2005.
 
Under the Independent Bank Corp. 2005 Employee Stock Plan (the “2005 Employee Plan”), the maximum number of shares of Common Stock for which either stock options may be granted or restricted stock awards made is 800,000 shares. The Company has cumulatively granted options and restricted stock awards, net of cancellations, of 148,450, under the 2005 Employee Plan through December 31, 2005.
 
The Company has individual stock option agreements for its Chief Executive Officer, Chief Financial Officer, two Executive Vice Presidents, General Counsel, Chief Technology and Operations Officer, one Managing Director, and one Senior Vice President that include a clause that requires any unvested options that vest upon a change of control that would be an event described in Section 280G of the Internal Revenue Code of 1986 will be cashed out at the difference between the deal price of the acquisition and the exercise price of the option.
 
As of December 31, 2005 no shares were available for grant under either the 1987 Employee Plan or the 1996 Director Plan due to their expiration. Under the 2005 Employee Plan, the 1997 Employee Plan, and the 1996 Director Plan the option exercise price equals the fair market value on the date of grant. All options granted under the 1997 Employee Plan prior to 2005 vested between six months and two years of the date of grant. All options granted on December 15, 2005 under either the 2005 Employee Plan or the 1997 Employee Plan vested immediately. Options granted under the 1987 Employee Plan, the 1996 Director Plan, the 1997 Employee Plan, and the 2005 Employee Plan expire between 2006 and 2015.
 
A summary of the status of the Company’s 2005 Employee Plan, 1997 Employee Plan, 1996 Director Plan, and 1987 Employee Plan at December 31, 2005, 2004, and 2003 and changes during the years then ended is presented in the tables below:
 
                                                 
    2005     2004     2003  
          Wtd
          Wtd
          Wtd
 
          Avg. Ex.
          Avg. Ex.
          Avg. Ex.
 
Options
  Shares     Price     Shares     Price     Shares     Price  
 
Balance, January 1
    818,729     $ 23.76       731,400     $ 19.95       730,022     $ 16.52  
Granted
    233,500     $ 29.25       216,500     $ 33.21       188,350     $ 28.05  
Exercised
    (80,684 )   $ 14.90       (111,180 )   $ 16.27       (175,965 )   $ 14.16  
Canceled
    (21,155 )   $ 31.97       (17,991 )   $ 28.94       (11,007 )   $ 23.48  
                                                 
Balance, December 31
    950,390     $ 25.67       818,729     $ 23.76       731,400     $ 19.95  
                                                 
Options Exercisable at December 31
    912,541     $ 25.50       513,383     $ 18.99       487,065     $ 16.70  
                                                 
Weighted average fair value of options granted
          $ 6.08             $ 7.22             $ 6.18  
 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                         
    Options Outstanding     Options Exercisable  
          Weighted
                   
          Average
                   
    Number
    Remaining
    Weighted
          Weighted
 
    Outstanding
    Contractual
    Average
    Exercisable
    Average
 
    as of
    Life
    Exercise
    as of
    Exercise
 
Range of Exercise Prices
  12/31/2005     (Years)     Price     12/31/2005     Price  
 
$ 8.00-$11.91
    62,534       3.50     $ 10.88       62,534     $ 10.88  
$11.92-$17.72
    111,714       3.21     $ 15.55       111,714     $ 15.55  
$17.73-$24.41
    226,297       6.38     $ 22.21       226,297     $ 22.21  
$24.42-$34.18
    549,845       8.02     $ 30.84       511,996     $ 30.90  
                                         
      950,390       6.77     $ 25.67       912,541     $ 25.50  
                                         
 
(3)  Trading Assets
 
Trading assets, at fair value, consist of the following:
 
                 
    At December 31,  
    2005     2004  
    Fair Value  
    (In thousands)  
 
Cash Equivalents
  $ 15     $ 66  
Fixed Income Securities
    349       383  
Marketable Equity Securities
    1,193       1,123  
                 
Total
  $ 1,557     $ 1,572  
                 
 
The Company realized a gain on trading activities of $60,000 in 2005, $113,000 in 2004, and $102,000 in 2003. The trading assets are held for funding non-qualified executive retirement obligations. Trading assets are recorded at fair value with changes in fair value recorded in earnings.
 
(4)  Securities
 
The amortized cost, gross unrealized gains and losses, and fair value of securities held to maturity at December 31, 2005 and 2004 were as follows:
 
                                                                 
    2005     2004  
          Gross
    Gross
                Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Gains     Losses     Value     Cost     Gains     Losses     Value  
    (In thousands)     (In thousands)  
 
Mortgage-Backed Securities
  $ 6,936     $ 65     $     $ 7,001     $ 8,971     $ 341     $     $ 9,312  
State, County, and Municipal Securities
    41,628       1,180             42,808       43,084       1,431             44,515  
Corporate Debt Securities
    55,704       1,447       (230 )     56,921       55,912       2,790       (370 )     58,332  
                                                                 
Total
  $ 104,268     $ 2,692     $ (230 )   $ 106,730     $ 107,967     $ 4,562     $ (370 )   $ 112,159  
                                                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale at December 31, 2005 and 2004 were as follows:
 
                                                                 
    2005     2004  
          Gross
    Gross
                Gross
    Gross
       
    Amortized
    Unrealized
    Unrealized
    Fair
    Amortized
    Unrealized
    Unrealized
    Fair
 
    Cost     Gains     Losses     Value     Cost     Gains     Losses     Value  
    (In thousands)     (In thousands)  
 
U.S. Treasury and U.S. Government Agency Securities
  $ 154,615     $     $ (3,362 )   $ 151,253     $ 140,400     $ 317     $ (361 )   $ 140,356  
Mortgage-Backed Securities
    263,289       820       (6,577 )     257,532       348,364       2,918       (1,567 )     349,715  
Collateralized Mortgage Obligations
    155,307             (4,985 )     150,322       172,278       176       (1,792 )     170,662  
State, County and Municipal Securities
    22,743             (334 )     22,409       19,571       52       (70 )     19,553  
                                                                 
Total
  $ 595,954     $ 820     $ (15,258 )   $ 581,516     $ 680,613     $ 3,463     $ (3,790 )   $ 680,286  
                                                                 
 
The Bank realized gross gains in 2005, 2004 and 2003 of $792,000, $1.5 million and $3.5 million, respectively. Realized gross losses were $176,000 in 2005, none in 2004, and $873,000 in 2003.
 
A schedule of the contractual maturities of securities held to maturity and securities available for sale as of December 31, 2005 is presented below.
 
                                 
    Held to Maturity     Available for Sale  
    Amortized
          Amortized
       
    Cost     Fair Value     Cost     Fair Value  
    (In thousands)     (In thousands)  
 
Due in one year or less
  $ 38     $ 38     $ 3,400     $ 3,400  
Due from one year to five years
    654       665       170,910       167,242  
Due from five to ten years
    13,761       14,031       83,722       82,107  
Due after ten years
    89,815       91,996       337,922       328,767  
                                 
Total
  $ 104,268     $ 106,730     $ 595,954     $ 581,516  
                                 
 
The actual maturities of mortgage-backed securities, collateralized mortgage obligations and corporate debt securities will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations. At December 31, 2005, the Bank has $95.2 million of callable securities in its investment portfolio.
 
On December 31, 2005 and 2004, investment securities carried at $146.1 million and $103.6 million, respectively, were pledged to secure public deposits, assets sold under repurchase agreements, treasury tax and loan notes, letters of credit, interest rate derivatives and for other purposes as required by law. Additionally, $420.3 million and $555.1 million of securities were pledged to the Federal Home Loan Bank (“FHLB”) at December 31, 2005 and 2004, respectively.
 
At year-end 2005 and 2004, the Company had no investments in obligations of individual states, counties, or municipalities, which exceed 10% of stockholders’ equity.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Other Than Temporarily Impaired Securities
 
The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005 and 2004.
 
                                                 
    At December 31, 2005  
    Less Than 12 Months     12 Months or Longer     Total  
          Unrealized
          Unrealized
          Unrealized
 
Description of Securities
  Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
 
U.S. Treasury Obligations and Direct Obligation of U.S. Government Agencies
  $ 97,392     $ (1,866 )   $ 53,861     $ (1,496 )   $ 151,253     $ (3,362 )
All Mortgage Backed Securities
    144,620       (2,945 )     244,968       (8,617 )     389,588       (11,562 )
Corporate Bonds
                2,891       (230 )     2,891       (230 )
City, State and Local Municipal Bonds
    15,473       (210 )     3,536       (124 )     19,009       (334 )
                                                 
Total Temporarily Impaired Securities
  $ 257,485     $ (5,021 )   $ 305,256     $ (10,467 )   $ 562,741     $ (15,488 )
                                                 
 
                                                 
    At December 31, 2004  
    Less Than 12 Months     12 Months or Longer     Total  
          Unrealized
          Unrealized
          Unrealized
 
Description of Securities
  Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (In thousands)  
 
U.S. Treasury Obligations and Direct Obligation of U.S. Government Agencies
  $ 55,380     $ (361 )   $     $     $ 55,380     $ (361 )
All Mortgage Backed Securities
    288,112       (2,183 )     45,478       (1,176 )     333,590       (3,359 )
Corporate Bonds
    2,844       (290 )     1,463       (80 )     4,307       (370 )
City, State and Local Municipal Bonds
    3,669       (70 )                 3,669       (70 )
                                                 
Total Temporarily Impaired Securities
  $ 350,005     $ (2,904 )   $ 46,941     $ (1,256 )   $ 396,946     $ (4,160 )
                                                 
 
At December 31, 2005, the Bank had securities of $562.7 million with $15.5 million of unrealized losses on these securities. $257.5 million of these securities, with losses of $5.0 million, have been at a loss position for less than 12 months and $305.3 million of these securities, with losses of $10.5 million, have been at a loss position for longer than 12 months. The Bank believes that these securities are only temporarily impaired and that the full principle will be collected as anticipated.
 
Of the total, $151.3 million, or 26.8%, are direct obligations of U.S. Government Agencies and are at a loss position because they were acquired when the general level of interest rates were lower than that on December 31, 2005. As of December 31, 2005, $389.6 million or 69.0% are mortgage backed securities, 100% of which are guaranteed by the U.S. Government or its agencies. The majority of the mortgage backed securities are also at a loss because they were purchased during a lower interest rate environment. As of December 31, 2005, $2.9 million, or 0.5%, are bank trust preferred securities and are at a loss because of the relative illiquidity in these types of instruments. All bank trust preferred issuers are adequately capitalized and all dividend payments are current. Also, at December 31, 2005, $19.0 million, or the remaining 3.4% are municipal bonds which are insured by an AAA rated agency and are also at a loss because of the interest rate environment at the time of purchase.
 
Because the declines in market value of investments are attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value,


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which may be until maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2005.
 
(5)  Loans and Allowance for Loan Losses
 
The vast majority of the Bank’s lending activities are conducted in the Commonwealth of Massachusetts. The Bank originates commercial and residential real estate loans, commercial and industrial loans, business banking and consumer home equity, auto, and other loans for its portfolio. The Bank considers a concentration of credit to a particular industry to exist when the aggregate credit exposure to a borrower, and affiliated group of borrowers or a non-affiliated group of borrowers engaged in one industry exceeds 10% of the Bank’s loan portfolio which includes direct, indirect or contingent obligations. At December 31, 2005, no concentration of credit to a particular industry existed as defined by these parameters.
 
The composition of loans at December 31, 2005 and 2004 was as follows:
 
                 
    2005     2004  
    (In thousands)  
 
Commercial and Industrial
  $ 155,081     $ 156,260  
Commercial Real Estate
    683,240       613,300  
Commercial Construction
    140,643       126,632  
Business Banking
    51,373       43,673  
Residential Real Estate
    428,343       427,556  
Residential Construction
    8,316       7,316  
Residential Loans Held for Sale
    5,021       10,933  
Consumer — Home Equity
    251,852       194,647  
Consumer — Auto
    263,179       283,964  
Consumer — Other
    53,760       52,077  
                 
Loans
  $ 2,040,808     $ 1,916,358  
                 
 
Net deferred fees included in loans at December 31, 2005 and December 31, 2004 were $2.3 million and $1.1 million, respectively.
 
In addition to the loans noted above, at December 31, 2005 and 2004, the Company serviced approximately $336.5 million and $392.0 million, respectively, of loans sold to investors in the secondary mortgage market and other financial institutions.
 
At December 31, 2005 and 2004, loans held for sale amounted to approximately $5.0 million and $10.9 million, respectively. The Company has derivatives consisting of forward sales contracts and commitments to fund loans intended for sale. Forward loan sale contracts and the commitments to fund loans intended for sale are recorded at fair value. This change in fair value resulted in a decrease in earnings of $16,000 in 2005 and an increase in earnings of $10,000 in 2004.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
As of December 31, 2005 and 2004, the Bank’s recorded investment in impaired loans and the related valuation allowance was as follows:
 
                                 
    At December 31,  
    2005     2004  
    Recorded
    Valuation
    Recorded
    Valuation
 
    Investment     Allowance     Investment     Allowance  
    (In thousands)  
 
Impaired loans:
                               
Valuation allowance required
  $ 1     $ 1     $ 1,653     $ 400  
No valuation allowance required
    557             976        
                                 
Total
  $ 558     $ 1     $ 2,629     $ 400  
                                 
 
The valuation allowance is included in the allowance for loan losses on the consolidated balance sheet. The average recorded investment in impaired loans for the years ended December 31, 2005 and 2004 was $1.6 million and $2.4 million, respectively. Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reductions of principal.
 
At December 31, 2005 and 2004, accruing loans 90 days or more past due totaled $227,000 and $245,000, respectively, and nonaccruing loans totaled $3.1 million and $2.5 million respectively. Gross interest income that would have been recognized for the years ended December 31, 2005, 2004 and 2003, if nonperforming loans at the respective dates had been performing in accordance with their original terms approximated $282,000, $312,000, and $210,000, respectively. The actual amount of interest that was collected on these loans during each of those periods and included in interest income was approximately $103,000, $140,000, and $261,000, respectively. There were no commitments to advance additional funds to borrowers whose loans are on nonaccrual.
 
The aggregate amount of all loans outstanding to directors, principal officers, and principal security holders at December 31, 2005 and 2004 were $22.4 million and $19.4 million, respectively.
 
All such loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectibility or present other unfavorable features.
 
An analysis of the total allowances for loan losses for each of the three years ending December 31, 2005, 2004, and 2003 are as follows:
 
                         
    2005     2004     2003  
    (In thousands)  
 
Allowance for loan losses, beginning of year
  $ 25,197     $ 23,163     $ 21,387  
Loans charged off
    (3,474 )     (2,599 )     (2,329 )
Recoveries on loans previously charged off
    741       745       685  
                         
Net charge-offs
    (2,733 )     (1,854 )     (1,644 )
Provision charged to expense
    4,175       3,018       3,420  
Allowance related to business combinations
          870        
                         
Allowance for loan losses, end of year
  $ 26,639     $ 25,197     $ 23,163  
                         


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(6)  Bank Premises and Equipment
 
Bank premises and equipment at December 31, 2005 and 2004 were as follows:
 
                         
                Estimated
 
    2005     2004     Useful Life  
    (In thousands)     (In years)  
 
Cost:
                       
Land
  $ 5,488     $ 5,122       N/A  
Bank Premises
    29,256       27,426       5-39  
Leasehold Improvements
    10,414       10,441       5-15  
Furniture and Equipment
    25,339       22,896       3-7  
                         
Total Cost
    70,497       65,885          
                         
Accumulated Depreciation
    (33,066 )     (29,436 )        
                         
Net Bank Premises and Equipment
  $ 37,431     $ 36,449          
                         
 
Depreciation expense related to bank premises and equipment was $4.4 million in 2005, $4.2 million in 2004, and $4.0 million in 2003.
 
(7)  Deposits
 
The following is a summary of original maturities of time deposits as of December 31, 2005:
 
                 
    Balance of
       
    Time Deposits
       
    Maturing     Percent  
    (In thousands)        
 
1 year or less
  $ 446,512       84 %
Over 1 year to 2 years
    46,884       9 %
Over 2 years to 3 years
    26,324       5 %
Over 3 years
    9,337       2 %
                 
Total
  $ 529,057       100 %
                 
 
(8)  Borrowings
 
Short-term borrowings consist of federal funds purchased, assets sold under repurchase agreements, and treasury tax and loan notes. Information on the amounts outstanding and interest rates of short-term borrowings for each of the three years in the period ended December 31 are as follows:
 
                         
    2005     2004     2003  
    (Dollars in thousands)  
 
Balance outstanding at end of year
  $ 118,787     $ 65,696     $ 44,233  
Average daily balance outstanding
    81,727       64,287       54,567  
Maximum balance outstanding at any month end
    118,787       103,031       60,814  
Weighted average interest rate for the year
    1.75 %     0.94 %     0.91 %
Weighted average interest rate at end of year
    2.40 %     1.18 %     1.12 %
 
At December 31, 2005 and 2004, the Bank had $1.1 billion of assets pledged as collateral against borrowings.
 
The Bank has established two lines of credit each one for $10.0 million, neither of which was outstanding at December 31, 2005 and 2004. The Bank has established repurchase agreements with major brokerage firms. Borrowings under these agreements are classified as assets sold under repurchase agreements. The balance outstanding under these lines was $25.0 million at December 31, 2005. In addition to these agreements, the Bank


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

has entered into similar agreements with certain customers. At December 31, 2005 and 2004 the Bank had $88.3 million and $61.5 million, respectively, of customer repurchase agreements outstanding.
 
Both wholesale and retail repurchase agreements are collateralized by mortgage-backed securities and U.S. Government obligations. At December 31, 2005, the Company had $25.0 million of securities repurchase agreements outstanding with third party brokers. The Company pays a 3 month LIBOR rate of interest minus 75 basis points through May 18, 2007 at which time the Company pays a fixed rate of 4.45% until May 18, 2010, which is its maturity date. The repurchase agreement is callable quarterly from May 18, 2007 until May 18, 2010. At December 31, 2005 there was also $88.3 million of customer repurchase agreements outstanding. The related securities are included in securities available for sale.
 
FHLB borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLB stock, certain qualified investment securities, deposits at the Federal Home Loan Bank, and residential mortgages held in the Bank’s portfolio. The Bank’s available borrowing capacity at the Federal Home Loan Bank was approximately $320.6 million at December 31, 2005. In addition, the Bank has a $5.0 million line of credit with the FHLB, none of which is outstanding at December 31, 2005. A schedule of the maturity distribution of FHLB advances with the weighted average interest rates at December 31, 2005 and 2004 follows:
 
                                 
    2005     2004  
          Weighted
          Weighted
 
          Average
          Average
 
    Amount     Rate     Amount     Rate  
    (Dollars in thousands)  
 
Due in one year or less
  $ 210,118       4.26 %   $ 330,330       2.19 %
Due in greater than one year to five years
    87,243       4.35 %     35,456       3.50 %
Due in greater than five years
    120,116       4.73 %     172,133       4.79 %
                                 
Total
  $ 417,477       4.42 %   $ 537,919       3.11 %
                                 
 
Of the $210.1 million outstanding at year-end, and due in one year or less, $110.0 million of these borrowings are hedged by interest rate swaps to lock the rate of interest at 3.65% on $50.0 million through November 21, 2006 and 2.49% on $25.0 million through January 21, 2007, and 4.06% on $35.0 million through January 10, 2010. Also, an additional, $100.0 million of these borrowings are hedged by an interest rate cap to cap the rate of interest at 4.00% through January 31, 2008.
 
Also included as long term borrowings are junior subordinated debentures payable to the Company’s unconsolidated special purpose entities Trust III and Trust IV that issued trust preferred securities to the public. The Company pays interest of 8.625% and 8.375% on $25.8 million of junior subordinated debentures issued by each Trust III and Trust IV, respectively on a quarterly basis in arrears. The weighted average rate of interest paid on these securities is 8.50%. The debentures have a stated maturity date of December 31, 2031, and April 30, 2032, for amounts due to Trust III and Trust IV, respectively and callable by the option of the Company on or after December 31, 2006 and April 30, 2007 for amounts due to Trust III and Trust IV, respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(9)  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 securities 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 years ended December 31, 2005, 2004 and 2003:
 
                         
    Net Income  
    2005     2004     2003  
    (In thousands)  
 
Net Income
  $ 33,205     $ 30,767     $ 26,431  
                         
 
                         
    Weighted Average Shares  
    2005     2004     2003  
    (In thousands)  
 
Basic Shares
    15,378       14,963       14,558  
Effect of dilutive securities
    144       191       180  
                         
Diluted Shares
    15,522       15,154       14,738  
                         
 
                         
    Net Income per Share  
    2005     2004     2003  
 
Basic EPS
  $ 2.16     $ 2.06     $ 1.82  
Effect of dilutive securities
    0.02       0.03       0.03  
                         
Diluted EPS
  $ 2.14     $ 2.03     $ 1.79  
                         
 
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 antidilutive. There were 350,933, 133,781, and 19,734 shares of common stock as of December 31, 2005, 2004, and 2003, respectively, excluded from the calculation of diluted earnings per share.
 
(10)  Goodwill and Core Deposit Intangibles
 
Goodwill and core deposit intangibles as of December 31, 2005 and December 31, 2004 was $56.9 million and $57.3 million, respectively. The Company acquired Falmouth Bancorp, Inc. on July 16, 2004. The transaction was accounted for in accordance with SFAS No. 142, creating goodwill for the excess of purchase price over assets acquired. Core deposit intangible of $2.2 million was recorded upon the acquisition of Falmouth Bancorp, Inc. for the fair value of the acquired deposit base.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The changes in goodwill and core deposit intangibles for the years ended December 31, 2005 and 2004 are shown in the table below.
 
                 
    Carrying Amount of Goodwill and Core
 
    Deposit Intangibles  
          Core Deposit
 
    Goodwill     Intangibles  
    (Dollars in thousands)  
 
Balance at December 31, 2003
  $ 36,236     $  
                 
Recorded during the year
    18,843       2,251  
Amortization Expense
          (148 )
Adjustment of purchase accounting estimates
    106        
                 
Balance at December 31, 2004
  $ 55,185     $ 2,103  
                 
Recorded during the year
           
Amortization Expense
          (323 )
Adjustment of purchase accounting estimates
    (107 )      
                 
Balance at December 31, 2005
  $ 55,078     $ 1,780  
                 
 
The following table sets forth the estimated annual amortization expense of the core deposit intangibles.
 
                                                 
    Estimated Annual Amortization Expense  
    2006     2007     2008     2009     2010     Thereafter  
 
Core Deposit Intangibles
  $ 323     $ 323     $ 323     $ 323     $ 323     $ 162  
                                                 
 
(11)  Income Taxes
 
The provision for income taxes is comprised of the following components:
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Current Expense
Federal
  $ 10,441     $ 11,716     $ 10,687  
State
    2,333       2,308       4,872  
                         
TOTAL CURRENT EXPENSE
    12,774       14,024       15,559  
                         
Deferred (Benefit) Expense
Federal
    1,805       (234 )     (210 )
State
    542       (167 )     187  
                         
TOTAL DEFERRED EXPENSE (BENEFIT)
    2,347       (401 )     (23 )
                         
TOTAL EXPENSE
  $ 15,121     $ 13,623     $ 15,536  
                         


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
The difference between the statutory federal income tax rate and the effective federal income tax rate is as follows:
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Computed statutory federal income tax provision
  $ 16,914     $ 15,536     $ 14,688  
State taxes, net of federal tax benefit
    1,869       1,392       3,288  
Nontaxable interest, net
    (1,174 )     (1,129 )     (1,201 )
Tax Credits
    (1,714 )     (964 )     (214 )
Bank Owned Life Insurance
    (640 )     (666 )     (652 )
Other, net
    (134 )     (546 )     (373 )
                         
TOTAL EXPENSE
  $ 15,121     $ 13,623     $ 15,536  
                         
 
During 2003, the Company recognized a $2.0 million charge to state tax expense, net of interest and income tax benefits, due to a settlement with the Massachusetts Department of Revenue on a state tax dispute related to Real Estate Investment Trusts (“REIT”). This amount is included in the above reconciliation of the statutory rate within state taxes.
 
The net deferred tax asset that is included in other assets amounted to approximately $3.9 million and $1.5 million at December 31, 2005, and 2004, respectively. The tax-effected components of the net deferred tax asset at December 31, 2005 and 2004 are as follows:
 
                 
    At Years Ended December 31,  
    2005     2004  
    (In thousands)  
 
Deferred Tax Assets
               
Allowance for loan losses
  $ 11,136     $ 10,571  
Securities fair value adjustment
    5,392       71  
Accrued expenses not deducted for tax purposes
    1,596       1,487  
Limited Partnerships
    322       304  
                 
TOTAL
  $ 18,446     $ 12,433  
                 
Deferred Tax Liabilities
               
Goodwill
  $ (4,398 )   $ (3,368 )
Mark to market adjustment
    (2,051 )     (2,835 )
Tax depreciation
    (2,038 )     (1,055 )
Derivatives fair value adjustment
    (1,488 )     (849 )
Mortgage servicing asset
    (1,095 )     (1,233 )
Deferred loan origination fees
    (1,957 )      
Prepaid expenses not deducted for tax purposes
    (801 )      
Core deposit intangible
    (756 )     (891 )
Fair value adjustment on assets acquired
          (673 )
                 
TOTAL
  $ (14,584 )   $ (10,904 )
                 
TOTAL NET DEFERRED TAX ASSET
  $ 3,862     $ 1,529  
                 


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The Company has determined that a valuation allowance is not required for any of its deferred tax assets since it is more likely than not that these assets will be realized principally through carry back to taxable income on prior years and future reversals of existing taxable temporary differences and by offsetting other future taxable income.
 
(12)  Acquisition
 
On July 16, 2004, the Company completed its acquisition of Falmouth Bancorp, Inc., the parent of Falmouth Co-Operative Bank. In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, the acquisition was accounted for under the purchase method of accounting and, as such, was included in our results of operations from the date of acquisition. The Company issued 586,903 shares of common stock. The value of the common stock, $28.74, was determined based on the average price of the Company’s 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 following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition inclusive of adjustments made to the estimated fair value of assets acquired recorded subsequent to the date of acquisition. The estimated fair value of the assets acquired and liabilities assumed at the date of acquisition inclusive of adjustments made to the estimated fair value of assets acquired recorded subsequent to the date of acquisition was $16.9 million.
 
(13)  Employee Benefits
 
Pension
 
All eligible officers and employees of the Bank, which includes substantially all employees of the Bank, are included in a noncontributory, defined benefit pension plan (the “Pension Plan”) provided by the Bank. The Pension Plan is administered by Pentegra Retirement Services (the “Fund”). The Fund does not segregate the assets or liabilities of all participating employers and, accordingly, disclosure of accumulated vested and nonvested benefits is not possible. Contributions are based on each individual employer’s experience. The pension plan year is July 1st through June 30th. The Bank has made cash contributions to the Fund of $3.0 million, $2.8 million, and $841,000 during 2005, 2004, and 2003, respectively, of which $3.0 million relates to the 2005-2006 plan year, $2.0 million relates to the 2004-2005 plan year and $1.6 million relates to the 2003-2004 plan year. Pension expense was $2.4 million, $1.8 million, and $841,000 for 2005, 2004, and 2003, respectively. In 2005 the Company amended the vesting schedule of the pension plan to provide graduated vesting beginning after two years of service whereas previously employees were not vested until five years of service.
 
Post-Retirement Benefits
 
Employees retiring from the Bank after attaining age 65 who have rendered at least 10 years of continuous service to the Bank are entitled to have a portion of the premium for post-retirement health care benefits and a $5,000 death benefit paid by the Bank. The health care benefits are subject to deductibles, co-payment provisions and other limitations. The Bank may amend or change these benefits periodically.
 
Effective January 1, 1993, the Company adopted SFAS No. 106, “Employers Accounting for Post-Retirement Benefits Other Than Pensions,” which requires the recognition of post-retirement benefits over the service lives of the employees rather than on a cash basis. The Company elected to recognize its accumulated benefit obligation of approximately $678,000 at January 1, 1993 prospectively on a straight-line basis over the average service life expectancy of the beneficiaries, which is anticipated to be less than 20 years.
 
Post-retirement benefit expense was $211,000, $198,000 and $177,000 in 2005, 2004 and 2003, respectively. Contributions paid to the plan, which were used only to pay the current year benefits were $57,000, $39,000, and $54,000 for 2005, 2004, and 2003, respectively. The Company’s best estimate of contributions expected to be paid


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in 2006 is $60,000. See the following table for the benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter:
 
         
    Post- Retirement Expected
 
Year
  Benefit Payment  
    (Dollars in thousands)  
 
2006
  $ 60  
2007
    65  
2008
    67  
2009
    73  
2010
    76  
2011-2015
    547  
 
The measurement date used to determine the post retirement plan benefits is December 31st for each of the years reported. The following table illustrates the status of the post-retirement benefit plan at December 31 for the years presented:
 
                         
    Post-Retirement Benefits  
    2005     2004     2003  
    (Dollars in thousands)  
 
Change in benefit obligation
                       
Benefit obligation at beginning of year
  $ 1,443     $ 1,142     $ 971  
Service cost
    93       79       65  
Interest cost
    72       71       65  
Other
    (66 )     190       95  
Benefits paid
    (57 )     (39 )     (54 )
                         
Benefit obligation at end of year
    1,485       1,443       1,142  
                         
Funded Status
    (1,485 )     (1,443 )     (1,142 )
Unrecognized net actuarial loss
    197       264       75  
Unrecognized net transition liability
    232       266       300  
Unrecognized prior service cost
    55       66       79  
                         
Accrued benefit cost
  $ (1,001 )   $ (847 )   $ (688 )
                         
Weighted-average assumptions
                       
Discount rate used for net periodic benefit cost
    5.75 %     6.25 %     7.00 %
Discount rate used for benefit obligations
    5.50 %     5.75 %     6.25 %
Components of net periodic benefit cost
                       
Service cost
  $ 93     $ 79     $ 65  
Interest cost
    72       71       65  
Expected return on plan assets
                 
Amortization of transition obligation
    34       34       34  
Amortization of prior service cost
    12       12       13  
Recognized net actuarial (gain) loss
          2        
                         
Net periodic benefit cost
  $ 211     $ 198     $ 177  
                         
 
Supplemental Executive Retirement Plans
 
The Bank maintains supplemental retirement plans for certain highly compensated employees designed to offset the impact of regulatory limits on benefits under qualified pension plans. There are supplemental retirement plans in place for seven current and four former employees.


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In connection with these plans, the Bank had entered into twelve Split Dollar Life Insurance policies with eight of these individuals. In 2003, in response to changes to regulatory and IRS treatment of Split Dollar Life Insurance policies, which would require premium payments by the Bank in these policies to be considered a loan to the employee, five of these individuals transferred 100% ownership in eight policies to the Bank and receive no benefits from these policies. The Bank is the beneficiary of the policies and they are included as BOLI as an asset of the Bank. One individual reimbursed the Bank for its interest in one of these policies for which the Bank endorsed the policy over to the individual. Three split dollar life policies for three former executives remain unchanged as no additional payments are required by the Bank on the policies. The Bank will recover amounts paid into the policies upon either the death of the individual or at age 65, depending upon the policy.
 
The Bank has established and funded Rabbi Trusts to accumulate funds in order to satisfy the contractual liability of the supplemental retirement plan benefits for seven current executives and two former executives. These agreements provide for the Bank to pay all benefits from its general assets, and the establishment of these trust funds does not reduce nor otherwise affect the Bank’s continuing liability to pay benefits from such assets except that the Bank’s liability shall be offset by actual benefit payments made from the trusts. The related trust assets totaled $1.6 million at both December 31, 2005 and 2004, respectively.
 
At December 31, 2005 and 2004, the Company’s liability for these plans was $1.8 million and $1.9 million, respectively. Supplemental retirement expense amounted to $349,000, $418,000, and $377,000 for fiscal years 2005, 2004, and 2003, respectively. Contributions paid to the plan, which were used only to pay the current year benefits were $114,000 in 2005, $124,000 in 2004, and $67,000 in 2003. The Company’s best estimate of contributions expected to be paid in 2006 is $112,000. See the following table for the benefits expected to be paid in each of the next five years and in the aggregate for the five fiscal years thereafter:
 
         
    Supplemental Executive
 
    Retirement Plans
 
Year
 
Expected Benefit Payment
 
    (Dollars in thousands)  
 
2006
  $ 112  
2007
    112  
2008
    131  
2009
    206  
2010
    225  
2011-2015
    1,130  
 
In 2003, in connection with the revisions to supplemental executive retirement plans described above, the Company elected to account for these plans under SFAS No. 87, “Employers’ Accounting for Pensions.” The Company elected to recognize its additional benefit obligation that had not been recorded as of the beginning of the year of approximately $537,000 at January  1, 2003, and will be amortizing this amount prospectively on a straight-line basis over the average estimated service period of the beneficiaries of approximately 13 years.


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The measurement date used to determine the supplemental executive retirement plans benefits is December 31st for each of the years reported. The following table illustrates the status of the supplemental executive retirement plans at December 31, for the years presented:
 
                         
    Supplemental Executive Retirement Benefits  
    2005     2004     2003  
    (Dollars in thousands)  
 
Change in benefit obligation
                       
Benefit obligation at beginning of year
  $ 2,292     $ 2,042     $ 1,133  
Service cost
    176       138       223  
Interest cost
    129       122       111  
Unamortized prior service cost
                537  
Plan amendment
          114        
Actuarial loss
    11             105  
Benefits paid
    (114 )     (124 )     (67 )
                         
Benefit obligation at end of year
  $ 2,494     $ 2,292     $ 2,042  
                         
Funded status
    (2,494 )     (2,292 )     (2,042 )
Unrecognized net actuarial loss
    116       106       105  
Unrecognized prior service cost
    406       449       494  
                         
Accrued benefit cost
  $ (1,972 )   $ (1,737 )   $ (1,443 )
                         
Amounts recognized in the statement of financial position consist of:
                       
Accrued benefit cost
  $ (1,972 )   $ (1,737 )   $ (1,443 )
Accrued benefit liability
    2,047       1,892       1,602  
Intangible Asset
    (75 )     (139 )     (155 )
Other
          (16 )     (4 )
                         
Net amount recognized
  $     $     $  
                         
Discount rate used for net periodic benefit cost
    5.75 %     6.25 %     6.75 %
Discount rate used for benefit obligation
    5.50 %     5.75 %     6.25 %
Expected return on plan assets
                 
Rate of compensation increase
    5.00 %     5.00 %     5.00 %
Components of net periodic benefit cost
                       
Service cost
  $ 176     $ 138     $ 223  
Interest cost
    129       122       111  
Amortization of prior service cost
    44       158       43  
                         
Net periodic benefit cost
  $ 349     $ 418     $ 377  
                         
Accumulated benefit obligation
                       
Accumulated benefit obligation
  $ 1,823     $ 1,847     $ 1,551  
                         
 
Other Employee Benefits
 
In 1994, the Bank implemented an incentive compensation plan in which senior management, and officers are eligible to participate at varying levels. The plan provides for awards based upon the attainment of a combination of Bank, divisional and individual performance objectives. In addition, the Bank from time to time has paid a


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discretionary bonus to non-officers of the bank. In 2005, the Bank implemented a revised incentive compensation plan for executive officers and a separate incentive plan for its officers. The 2005 plan provides for awards based upon the attainment of Bank and individual performance objectives. The expense for the incentive plans and the discretionary bonus amounted to $2.9 million, $2.5 million and $3.0 million in 2005, 2004 and 2003, respectively.
 
Also, in 1994, the Bank amended its Profit Sharing Plan by converting it to an Employee Savings Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Employee Savings Plan, participating employees may defer a portion of their pre-tax earnings, not to exceed the Internal Revenue Service annual contribution limits. On April 14, 2004, the Bank amended the 401K Plan to eliminate company matching contributions. In the fourth quarter of 2004 in place of the 401K match contributions, the Company contributed a discretionary $250,000 of profit sharing into the plan to be disbursed amongst the participants of the plan. Prior to 2004, the Bank matched 50% of each employee’s contributions up to 6% of the employee’s earnings. A match of 25% of each employee’s contributions up to 6% of the employee’s earnings was restored in January 2005. Also in 2005, the 401K Plan was amended to incorporate an Employee Stock Ownership Plan for contributions invested in the Company’s common stock. In 2005, 2004, and 2003, the expense for this plan amounted to $338,000, $448,000 and $655,000, respectively.
 
The Company also maintains a deferred compensation plan for the Company’s Board of Directors. The Board of Directors are entitled to elect to defer their director’s fees until retirement. If the Director elects to do so, their compensation is invested in the Company’s stock and maintained within the Company’s Investment Management Group. The amount of compensation deferred in 2005, 2004, and 2003 was $68,000, $70,000, and $54,000, respectively. The Company has 170,448 shares provided for the plan with a related liability of $1.6 million established within shareholders’ equity.
 
In 1998, the Bank purchased $30.0 million of BOLI. The Bank purchased these policies for the purpose of protecting itself against the cost/loss due to the death of key employees and to offset the Bank’s future obligations to its employees under its retirement and benefit plans. As discussed above under Post Retirement Benefits, additional policies covering the Senior Executives of the Bank were added in 2003. The total value of this BOLI was $44.8 million and $42.7 million at December 31, 2005 and 2004, respectively. The Bank recorded income from BOLI of $1.8 million in 2005 and $1.9 million for each of the years 2004 and 2003.
 
(14)  Other Non-Interest Expenses
 
Included in other non-interest expenses for each of the three years in the period ended December 31, 2005, 2004 and 2003 were the following:
 
                         
    2005     2004     2003  
    (In thousands)  
 
Postage expense
  $ 1,006     $ 942     $ 1,034  
Debit card & ATM processing
    940       624       546  
Office supplies and printing
    897       644       524  
Software maintenance
    873       308       628  
Exams and audits
    785       626       496  
Legal fees
    641       478       534  
Insurance — other
    518       474       340  
Recruitment
    501       493       325  
Business development
    157       482       205  
Loss on CRA investment
    137       178       549  
Other non-interest expenses
    7,826       7,566       6,646  
                         
TOTAL
  $ 14,281     $ 12,815     $ 11,827  
                         


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(15)  Fair Value of Financial Instruments
 
SFAS No. 107 “Disclosures about Fair Value of Financial Instruments” (“SFAS No. 107”) requires disclosure of fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted fair values are not available, fair values are based upon estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates can not be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.
 
The carrying amount reported on the balance sheet for cash and due from banks, federal funds sold and short term investments, and interest-bearing deposits (excluding time deposits) approximates those assets’ or liabilities’ fair values. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.


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The following table reflects the book and fair value of financial instruments, including on-balance sheet and off-balance sheet instruments, as of December 31, 2005 and 2004.
 
                                 
    2005     2004  
    Book Value     Fair Value     Book Value     Fair Value  
    (In thousands)     (In thousands)  
 
FINANCIAL ASSETS
                               
Cash and Due From Banks
  $ 66,289     $ 66,289     $ 62,961     $ 62,961 (a)
Federal Funds Sold and Assets Purchased Under Resale Agreement & Short Term Investments
    63,662       63,662       2,735       2,735 (a)
Securities Held To Maturity
    104,268       106,730       107,967       112,159 (b)
Securities Available For Sale
    581,516       581,516       680,286       680,286 (b)
Trading Assets
    1,557       1,557       1,572       1,572 (b)
Federal Home Loan Bank Stock
    29,287       29,287       28,413       28,413 (c)
Net Loans
    2,009,148       2,041,885       1,880,228       1,910,221 (d)
Loans Held For Sale
    5,021       5,251       10,933       10,933 (b)
Mortgage Servicing Rights
    2,892       2,892       3,291       3,291 (f)
Bank Owned Life Insurance
    44,762       44,762       42,664       42,664 (b)
FINANCIAL LIABILITIES
                               
Demand Deposits
    511,920       511,920       495,500       495,500 (e)
Savings and Interest Checking Accounts
    613,840       613,840       614,481       614,481 (e)
Money Market
    550,677       550,677       501,065       501,065 (e)
Time Certificates of Deposit
    529,057       523,095       449,189       446,027 (f)
Federal Funds Purchased and Assets Sold Under Repurchase Agreements
    113,335       113,335       61,533       61,533 (f)
Treasury Tax and Loan Notes
    5,452       5,452       4,163       4,163 (a)
Federal Home Loan Bank Borrowings
    417,477       419,265       537,919       545,496 (f)
Junior Subordinated Debentures
    51,546       52,371       51,546       54,230 (h)
UNRECOGNIZED FINANCIAL INSTRUMENTS
                               
Standby Letters of Credit
          61             70 (g)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET NOTIONAL AMOUNTS
                               
Interest Rate Swap Agreements
    1,967       1,967       142       142 (b)
Interest Rate Cap Agreements
    1,655       1,655             (b)
Forward Commitments to Sell Loans
    (22 )     (22 )     (47 )     (47 )(b)
Commitments to Originate Fixed Rate Mortgage Loans Intended for Sale
    108       108       148       148 (b)
 
 
(a) Book value approximates fair value due to short term nature of these instruments.
 
(b) Fair value was determined based on market prices or dealer quotes.
 
(c) Federal Home Loan Bank stock is redeemable at cost.
 
(d) The fair value of loans was estimated by discounting anticipated future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
 
(e) Fair value is presented as equaling book value. SFAS No. 107 requires that deposits which can be withdrawn without penalty at any time be presented at such amount without regard to the inherent value of such deposits and the Bank’s relationship with such depositors.
 
(f) The fair value of these instruments is estimated by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.


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(g) The fair value of these instruments was estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of customers.
 
(h) The fair value of this instrument was determined based upon market prices of securities with similar terms and maturities.
 
(16)  Commitments and Contingencies
 
Financial Instruments with Off-Balance Sheet Risk
 
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
 
Off-balance sheet financial instruments whose contractual amounts present credit risk include the following at December 31, 2005 and 2004.
 
                 
    2005     2004  
    (In thousands)  
 
Commitments to extend credit:
               
Fixed rate
  $ 6,879     $ 9,949  
Adjustable rate
    5,255       8,198  
Unused portion of existing credit lines
    477,931       415,332  
Unadvanced construction loans
    52,221       60,628  
Standby letters of credit
    8,893       7,148  
Interest rate swaps — notional value
    110,000       75,000  
Interest rate caps — notional value
    100,000        
 
The Company’s exposure to credit loss in the event of nonperformance by the counterparty for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The Bank evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained upon extension of the credit is based upon management’s credit evaluation of the customer. Collateral varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial real estate. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
 
Standby letters of credit are conditional commitments issued by the Bank to guarantee performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most guarantees extend for one year.
 
As a component of its asset/liability management activities intended to control interest rate exposure, the Bank has entered into certain hedging transactions. Interest rate swap agreements represent transactions, which involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. At December 31, 2005 the Company had interest rate swaps, designated as “cash flow” hedges, with total notional values of $110.0 million. The purpose of these swaps is to hedge the variability in the cash outflows of LIBOR based borrowings attributable to changes in interest rates. Under these swap agreements the Company pays a fixed rate of interest of 3.65% on $50.0 million notional value through November 21, 2006, 2.49%


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on $25.0 million notional value through January 21, 2007, and 4.06% on $35.0 million through January 10, 2010, and all receive 3 month LIBOR rate of interest. These swaps had a positive fair value of $2.0 million at December 31, 2005. The Company also has a $100 million, 4.0% 3-month LIBOR interest rate cap with an effective date of January 31, 2005 and a maturity date of January 31, 2008. The interest rate cap pays the Company when 3-month LIBOR exceeds 4.0% on a rate reset date during the effective period of the cap. At December 31, 2005 the interest rate cap had a fair value of $1.7 million.
 
Subsequently during January 2006, the Company sold the interest rate swap that was hedging $25.0 million of 3 month LIBOR revolving FHLB borrowings with a maturity date of November 21, 2006 in connection with the Company’s decision not to re-enter into these borrowings. A gain of approximately $237,000 will be recognized during the three months ending March 31, 2006 against the interest expense on FHLB borrowings.
 
During the third quarter ending September 30, 2005, the Company sold an interest rate swap that was hedging $25.0 million of 3-month LIBOR revolving FHLB borrowings in connection with the Company’s decision not to re-enter into these borrowings. The gain of $215,000 on the sale of this swap was recognized currently in earnings against the interest expense on FHLB borrowings.
 
At December 31, 2004 the Company had interest rate swaps with a total notional values of $75.0 million. Under these swap agreements the Company pays a fixed rate of interest of 3.65% on $50.0 million of the notional value through November 21, 2006, and 2.49% on the remaining $25.0 million notional value through January 21, 2007, and both receive a 3-month LIBOR rate of interest. These swaps had a positive fair value of $142,000 at December 31, 2004. All changes in the fair value of the interest rate swaps are recorded, net of tax, through equity as other comprehensive income.
 
As a result of interest rate swaps, the Bank realized income of $884,000, $755,000, and $2.1 million for the years ended December 31, 2005, 2004, and 2003, respectively. There was no impact on income as a result of hedge ineffectiveness associated with interest rate swaps.
 
During 2002, the Company sold interest rate swaps resulting in gross gains of $7.1 million. The gain was deferred and is being amortized over the lives of the hedged items. The deferred gain is classified in other comprehensive income, net of tax, as a component of equity with the amortized gains recognized into earnings. At December 31, 2005, there are $980,000 gross, or $568,000, net of tax, of such deferred gains included in other comprehensive income. At December 31, 2004, there are $1.9 million gross, or $1.1 million, net of tax, of such deferred gains included in other comprehensive income.
 
Entering into interest rate swap agreements, including interest rate caps, involves both the credit risk of dealing with counterparties and their ability to meet the terms of the contracts and interest rate risk. While notional principal amounts are generally used to express the volume of these transactions, the amounts potentially subject to credit risk are smaller due to the structure of the agreements. The Bank is a direct party to these agreements that provide for net settlement between the Bank and the counterparty on a monthly, quarterly or semiannual basis. Should the counterparty fail to honor the agreement, the Bank’s credit exposure is limited to the net settlement amount. The Bank had $175,000 of a net receivable at December 31, 2005 and $93,000 of a net payable at December 31, 2004.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Leases
 
The Company leased equipment, office space, space for ATM locations, and certain branch locations under non-cancelable operating leases. The following is a schedule of minimum future lease commitments under such leases as of December 31, 2005:
 
         
    Lease
 
Years
  Commitments  
    (In thousands)  
 
2006
  $ 2,537  
2007
    1,999  
2008
    1,832  
2009
    1,582  
2010
    1,259  
Thereafter
    4,457  
         
Total future minimum rentals
  $ 13,666  
         
 
Rent expense incurred under operating leases was approximately $2.9 million in 2005, $2.5 million in 2004 and $2.6 million in 2003. Renewal options ranging from 3 to 20 years exist for several of these leases. The Company has entered into lease agreements with related third parties on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties. Rent expense incurred under related party leases was approximately $763,000 in 2005, $804,000 in 2004 and $682,000 in 2003. In addition, the Company had a sub-lease in which it earned lease income of approximately $71,000 and $69,000 for 2004 and 2003, respectively.
 
Other Contingencies
 
At December 31, 2005, there were lawsuits pending that arose in the ordinary course of business. Management has reviewed these actions with legal counsel and has taken into consideration the view of counsel as to the outcome of the litigation. In the opinion of management, final disposition of these lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.
 
The Bank is required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement included in cash and due from banks was $10.0 million and $3.6 million at December 31, 2005 and 2004, respectively.
 
On April 1, 2005 the Federal National Mortgage Association (“FNMA”) Master Commitment to deliver loans was executed with an expiration date of March 31, 2006 and decreased from $60.0 million to $40.0 million (all of which is optional to the Company). On November 30, 2005 the Master Agreement of $25.0 million to sell loans to Federal Home Loan Mortgage Corporation (“FHLMC”) expired and a decision was made not to execute a new Master Agreement at that time.
 
(17)  Junior Subordinated Debentures
 
On December 11, 2001, Independent Capital Trust III was formed for the purpose of issuing the Trust III Preferred Securities and investing the proceeds of the sale of these securities in $25.8 million of 8.625% junior subordinated debentures issued by the Company. A total of $25.0 million of 8.625% Trust III Preferred Securities were issued by Trust III and are scheduled to mature in 2031, callable at the option of the Company on or after December 31, 2006. Distributions on these securities are payable quarterly in arrears on the last day of March, June, September and December, such distributions can be deferred at the option of the Company for up to five years. The Trust III Preferred Securities can be prepaid in whole or in part on or after December 31, 2006 at a redemption price equal to $25.0 million per Trust III Preferred Security plus accumulated but unpaid distributions thereon to the date of the redemption. On December 11, 2001, Trust III also issued $0.8 million in common securities to the Company.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The net proceeds of the Trust III issuance were used to redeem $25.0 million of 11.0% Trust Preferred Securities, issued by Trust II on January 31, 2002. Thereafter, Trust II was liquidated.
 
On April 12, 2002, Independent Capital Trust IV was formed for the purpose of issuing Trust IV Preferred Securities and investing the proceeds of the sale of these securities in $25.8 million of 8.375% junior subordinated debentures issued by the Company. A total of $25.0 million of 8.375% Trust IV Preferred Securities were issued by Trust IV and are scheduled to mature in 2032, callable at the option of the Company on or after April 30, 2007. Distributions on these securities are payable quarterly in arrears on the last day of March, June, September and December, such distributions can be deferred at the option of the Company for up to five years. The Trust IV Preferred Securities can be prepaid in whole or in part on or after April 30, 2007 at a redemption price equal to $25.0 per Trust IV Preferred Security plus accumulated but unpaid distributions thereon to the date of the redemption. On April 12, 2002, Trust IV also issued $0.8 million in common securities to the Company. The net proceeds of the Trust IV issuance were used to redeem $28.75 million of 9.28% Trust Preferred Securities, issued by Trust I, on May 20, 2002. Thereafter, Trust I was liquidated.
 
Effective March 31, 2004, the Company no longer consolidates its investment in Capital Trust III and Capital Trust IV previously recorded in the mezzanine section of the balance sheet between liabilities and equity as Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation due to the adoption of FIN No. 46 (see Note 1 “Summary of Significant Accounting Policies”; Recent Accounting Pronouncements, of the Notes to Consolidated Financial Statements in Item 8 hereof). Rather, the Company now classifies its obligation to the trusts within borrowings as Junior Subordinated Debentures. Additionally, the distributions payable on these securities and the amortization of the issuance costs are no longer being reported as Minority Interest. The interest expense on the debentures, plus the amortization of the issuance costs, is now captured as borrowings expense.
 
Junior Subordinated Debentures were $51.5 million at both December 31, 2005 and 2004. Unamortized issuance costs are included in other assets. Unamortized issuance costs at December 31, 2005 and 2004 were $2.0 million and $2.1 million, respectively. Additional costs associated with the issuance of the trust preferred securities are added on periodically.
 
Minority Interest expense was $1.1 million, and $4.4 million, in 2004 and 2003, respectively. Interest expense on the junior subordinated debentures, reported in borrowings expense, which includes the amortization of issuance costs, was $4.5 million in 2005 and $3.3 million in 2004.
 
The Company unconditionally guarantees all Trust III and Trust IV obligations under the trust preferred securities.
 
In December, the Trustees of Trust III and Trust IV declared a cash dividend of $0.54 and $0.52 per share to stockholders of record of Trust III and Trust IV, respectively, as of the close of business on December 29, 2005. The dividend was paid on December 30, 2005. The Company has paid on all scheduled dividends.
 
(18)  Regulatory Capital Requirements
 
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital (as defined) to average assets


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(as defined). Management believes, as of December 31, 2005 that the Company and the Bank met all capital adequacy requirements to which they are subject.
 
As of December 31, 2005, the most recent notification from the Federal Deposit Insurance Corporation, and the Commonwealth of Massachusetts relating to the Bank, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized an insured depository institution must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
 
The Company’s and the Bank’s actual capital amounts and ratios are also presented in the table.
 
                                                                                 
                      To be Well Capitalized
 
                      Under Prompt
 
                For Capital
    Corrective Action
 
    Actual           Adequacy Purposes    
Provisions
 
    Amount     Ratio           Amount           Ratio           Amount           Ratio  
                      (Dollars in thousands)                          
 
As of December 31, 2005:
                                                                               
Company: (Consolidated)
                                                                               
Total capital (to risk weighted assets)
  $ 254,524       11.99 %     ³     $ 169,808       ³       8.0 %             N/A               N/A  
Tier 1 capital (to risk weighted assets)
    227,990       10.74       ³       84,904       ³       4.0               N/A               N/A  
Tier 1 capital (to average assets)
    227,990       7.71       ³       118,224       ³       4.0               N/A               N/A  
Bank:
                                                                               
Total capital (to risk weighted assets)
  $ 239,567       11.32 %     ³     $ 169,249       ³       8.0 %     ³     $ 211,561       ³       10.0 %
Tier 1 capital (to risk weighted assets)
    213,120       10.07       ³       84,624       ³       4.0       ³       1,269       ³       6.0  
Tier 1 capital (to average assets)
    213,120       7.22       ³       118,072       ³       4.0       ³       147,591       ³       5.0  
As of December 31, 2004:
                                                                               
Company: (Consolidated)
                                                                               
Total capital (to risk weighted assets)
  $ 226,992       11.44 %     ³     $ 158,692       ³       8.0 %             N/A               N/A  
Tier 1 capital (to risk weighted assets)
    202,191       10.19       ³       79,346       ³       4.0               N/A               N/A  
Tier 1 capital (to average assets)
    202,191       7.06       ³       114,524       ³       4.0               N/A               N/A  
Bank:
                                                                               
Total capital (to risk weighted assets)
  $ 223,398       11.29 %     ³     $ 158,276       ³       8.0 %     ³     $ 197,846       ³       10.0 %
Tier 1 capital (to risk weighted assets)
    198,662       10.04       ³       79,138       ³       4.0       ³       118,707       ³       6.0  
Tier 1 capital (to average assets)
    198,662       6.95       ³       114,372       ³       4.0       ³       142,965       ³       5.0  


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
(19)  Selected Quarterly Financial Data (Unaudited)
 
                                                                 
    First Quarter     Second Quarter     Third Quarter     Fourth Quarter  
    2005     2004     2005     2004     2005     2004     2005     2004  
    (Dollars in thousands, except per share data)  
 
INTEREST INCOME
  $ 36,976     $ 31,074     $ 38,626     $ 32,142     $ 39,225     $ 34,941     $ 40,834     $ 36,456  
INTEREST EXPENSE
    11,108       7,639       12,282       9,173       12,506       9,911       13,923       10,074  
                                                                 
NET INTEREST INCOME
  $ 25,868     $ 23,435     $ 26,344     $ 22,969     $ 26,719     $ 25,030     $ 26,911     $ 26,382  
                                                                 
PROVISION FOR LOAN LOSSES
    930       744       1,105       744       1,070       761       1,070       769  
NON-INTEREST INCOME
    6,244       6,258       6,436       6,457       7,104       6,233       6,751       6,193  
NET GAIN ON SECURITIES
    343       997       273                   461              
GAIN ON BRANCH SALE
                                              1,756  
NON-INTEREST EXPENSES
    19,790       18,966       20,336       18,670       20,209       18,559       20,156       20,814  
MERGER & ACQUISITION EXPENSE
                      221             463              
MINORITY INTEREST
          1,072                                      
PROVISION FOR INCOME TAXES
    3,821       3,208       3,571       3,170       3,857       3,679       3,872       3,565  
                                                                 
NET INCOME
  $ 7,914     $ 6,700     $ 8,041     $ 6,621     $ 8,687     $ 8,262     $ 8,564     $ 9,183  
                                                                 
BASIC EARNINGS PER SHARE
  $ 0.52     $ 0.46     $ 0.52     $ 0.45     $ 0.56     $ 0.55     $ 0.56     $ 0.60  
                                                                 
DILUTED EARNINGS PER SHARE
  $ 0.51     $ 0.45     $ 0.52     $ 0.45     $ 0.56     $ 0.54     $ 0.55     $ 0.59  
                                                                 
Weighted average common shares (Basic)
    15,347,540       14,651,901       15,372,253       14,688,789       15,391,937       15,142,272       15,402,690       15,311,051  
Common stock equivalents
    164,680       205,330       132,723       164,961       145,684       178,821       131,400       220,075  
Weighted average common shares (Diluted)
    15,512,220       14,857,231       15,504,976       14,853,750       15,537,621       15,321,093       15,534,090       15,531,126  
                                                                 
 
(20)  Parent Company Financial Statements
 
Condensed financial information relative to the Parent Company’s balance sheets at December 31, 2005 and 2004 and the related statements of income and cash flows for the years ended December 31, 2005, 2004, and 2003 are presented below. The statement of stockholders’ equity is not presented below as the parent company’s stockholders’ equity is that of the consolidated Company.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
BALANCE SHEETS
 
                 
    At December 31,  
    2005     2004  
    (In thousands)  
 
Assets:
               
Cash*
  $ 15,337     $ 3,854  
Investments in subsidiaries*
    264,828       258,761  
Deferred tax asset
    280       196  
Deferred stock issuance costs
    1,991       2,067  
Other assets
    30       8  
                 
Total assets
  $ 282,466     $ 264,886  
                 
 
Liabilities and Stockholders’ Equity:
Dividends payable
  $ 2,312     $ 2,146  
Junior subordinated debentures
    51,546       51,546  
Accrued federal income taxes
    436       352  
Other liabilities
    20       99  
                 
Total liabilities
    54,314       54,143  
Stockholders’ equity
    228,152       210,743  
                 
Total liabilities and stockholders’ equity
  $ 282,466     $ 264,886  
                 
 
 
* Eliminated in consolidation
 
STATEMENTS OF INCOME
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    (In thousands)  
 
Income:
                       
Dividends received from subsidiaries
  $ 22,609     $ 21,778     $ 11,958  
Interest income
    36       38       59  
                         
Total income
    22,645       21,816       12,017  
                         
Expenses:
                       
Interest expense
    4,381       4,448       4,381  
Other expenses
    447       702       452  
                         
Total expenses
    4,828       5,150       4,833  
                         
Income before income taxes and equity in undistributed income of subsidiaries
    17,817       16,666       7,184  
Equity in undistributed income of subsidiaries
    13,703       12,491       16,544  
Income tax benefit
    1,685       1,610       2,703  
                         
Net income
  $ 33,205     $ 30,767     $ 26,431  
                         


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31 ,  
    2005     2004     2003  
    (In thousands)  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income
  $ 33,205     $ 30,767     $ 26,431  
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED FROM OPERATING ACTIVITIES:
                       
Amortization
    88       87       103  
Increase in other assets
    (117 )     (11 )     (154 )
Increase in other liabilities
    5       89       137  
Equity in income of subsidiaries
    (13,703 )     (12,491 )     (16,544 )
                         
TOTAL ADJUSTMENTS
    (13,727 )     (12,326 )     (16,458 )
                         
NET CASH PROVIDED FROM OPERATING ACTIVITIES
    19,478       18,441       9,973  
                         
CASH FLOWS USED IN INVESTING ACTIVITIES:
                       
Cash used for Merger and Acquisition- Falmouth Acquisition
          (18,131 )      
                         
NET CASH USED IN INVESTING ACTIVITIES
          (18,131 )      
                         
CASH FLOWS USED IN FINANCING ACTIVITIES:
                       
Proceeds from stock issued and stock options exercised
    1,072       1,808       2,293  
Dividends paid
    (9,067 )     (8,153 )     (7,414 )
                         
NET CASH USED IN FINANCING ACTIVITIES
    (7,995 )     (6,345 )     (5,121 )
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    11,483       (6,035 )     4,852  
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR
    3,854       9,889       5,037  
                         
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR
  $ 15,337     $ 3,854     $ 9,889  
                         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
                       
Cash paid during the year for:
                       
Income taxes
  $     $     $ 1  
Interest on junior subordinated debentures
  $ 4,381     $ 4,381     $ 4,381  
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                       
Issuance of shares from treasury stock for the exercise of stock options
  $     $ 1,091     $ 2,607  
 
(21)  Subsequent Event
 
On February 15, 2006, the Company submitted a death benefit claim through its Bank Owned Life Insurance Policies. The claim proceeds will result in an approximate tax exempt gain of $1.2 million to be recognized during the three months ending March 31, 2006.


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Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
None
 
Item 9A.   Controls and Procedures
 
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures  The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this annual report.
 
Changes in Internal Controls over Financial Reporting  There were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are, reasonably likely to materially affect, the Company’s internal controls over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting  Management of Independent Bank Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Independent Bank Corp.’s internal control over financial reporting includes those policies and procedures that:
 
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflects the transactions and disposition of the assets of the Company;
 
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management assessed the effectiveness of the Company’s internal control over financial reporting as of year-end December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of year-end December 31, 2005.
 
Independent Bank Corp.’s independent registered public accounting firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That report appears below.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Independent Bank Corp.:
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Independent Bank Corp. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Independent Bank Corp.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that Independent Bank Corp. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Independent Bank Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Independent Bank Corp. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 22, 2006 expressed an unqualified opinion on those consolidated financial statements.
 
(KPMG LLP SIGNATURE)
 
Boston, MA
February 22, 2006


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Item 9B.  Other Information
 
None
 
PART III
 
Item 10.   Directors and Executive Officers of Independent Bank Corp.
 
The information required herein is incorporated by reference from the Company’s proxy statement (the “Definitive Proxy Statement”) relating to its April 13, 2006, Annual Meeting of Stockholders that will be filed with the Commission within 120 days following the fiscal year end December 31, 2005.
 
Item 11.   Executive Compensation
 
The information required herein is incorporated by reference to “Executive Compensation” in the Definitive Proxy Statement.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required herein is incorporated by reference from the Definitive Proxy Statement.
 
Item 13.   Certain Relationships and Related Transactions
 
The information required herein is incorporated by reference from the Definitive Proxy Statement.
 
Item 14.   Principal Accounting Fees and Services
 
Information with respect to this item is set forth under “Report of the Joint Audit Committee of the Company and of Rockland Trust” in the Definitive Proxy Statement. Such information is incorporated herein by reference.
 
PART IV
 
Item 15.   Exhibits, Financial Statement Schedules
 
(a) Documents Filed as Part of this Report
 
  (1)  The following financial statements are incorporated herein by reference from Item 8 hereto:
 
Management’s Report on Internal Control over Financial Reporting
 
Reports of Independent Registered Public Accounting Firm.
 
Consolidated balance sheets as of December 31, 2005 and 2004.
 
Consolidated statements of income for each of the years in the three-year period ended December 31, 2005.
 
Consolidated statements of stockholders’ equity for each of the years in the three-year period ended December 31, 2005.
 
Consolidated statements of comprehensive income for each of the years in the three-year period ended December 31, 2005.
 
Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2005.
 
Notes to Consolidated Financial Statements.
 
(2) All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.
 
(3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.


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EXHIBITS INDEX
 
         
No.  
Exhibit
 
  3 .(i)   Restated Articles of Organization, as amended as of February 10, 2005, incorporated by reference to the Company’s Form 8-K filed on May 18, 2005.
         
     
  3 .(ii)   Amended and Restated Bylaws of the Company, as amended as of February 10, 2005, incorporated by reference to the Company’s Form 8-K filed on May 18, 2005.
         
     
  4 .1   Specimen Common Stock Certificate, incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1992.
         
     
  4 .2   Specimen preferred Stock Purchase Rights Certificate, incorporated by reference to the Company’s Form 8-A Registration Statement filed by the Company on November 5, 2001.
         
     
  4 .3   Indenture of Registrant relating to the 8.625% Junior Subordinated Debentures issued to Independent Capital Trust III, incorporated by reference to the Form 8-K filed by the Company on April 18, 2002.
         
     
  4 .4   Form of Certificate of 8.625% Junior Subordinated Debenture (included as Exhibit A to Exhibit 4.3).
         
     
  4 .5   Amended and Restated Declaration of Trust for Independent Capital Trust III, incorporated by reference to the Form 8-K filed by the Company on April 18, 2002.
         
     
  4 .6   Form of Preferred Security Certificate for Independent Capital Trust III (included as Exhibit D to exhibit 4.5).
         
     
  4 .7   Preferred Securities Guarantee Agreement of Independent Capital Trust III, incorporated by reference to the Form 8-K filed by the Company on April 18, 2002.
         
     
  4 .8   Indenture of Registrant relating to the 8.375% Junior Subordinated Debentures issued to Independent Capital Trust IV, incorporated by reference to the Form 8-K filed by the Company on April 18, 2002.
         
     
  4 .9   Form of Certificate of 8.375% Junior Subordinated Debenture (included as Exhibit A to Exhibit 4.8).
         
     
  4 .10   Amended and Restated Declaration of Trust for Independent Capital Trust IV, incorporated by reference to the Form 8-K filed by the Company on April 18, 2002.
         
     
  4 .11   Form of Preferred Security Certificate for Independent Capital Trust IV (included as Exhibit D to Exhibit 4.10).
         
     
  4 .12   Preferred Securities Guarantee Agreement of Independent Capital Trust IV, incorporated by reference to the Form 8-K filed by the Company on April 18, 2002.
         
     
  10 .1   Amended and Restated Independent Bank Corp. 1987 Incentive Stock Option Plan (“Stock Option Plan”) (Management contract under Item 601 (10)(iii)(A)). Incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 1994.
         
     
  10 .2   Independent Bank Corp. 1996 Non-Employee Directors’ Stock Option Plan (Management contract under Item 601 (10)(iii)(A)). Incorporated by reference to the Company’s Definitive Proxy Statement for the 1996 Annual Meeting of Stockholders filed with the Commission on March 19, 1996.
         
     
  10 .3   Independent Bank Corp. 1997 Employee Stock Option Plan (Management contract under Item 601 (10)(iii)(A)). Incorporated by reference to the Company’s Definitive Proxy Statement for the 1997 Annual Meeting of Stockholders filed with the Commission on March 20, 1997.
         
     
  10 .4   Independent Bank Corp. 2005 Employee Stock Plan incorporated by reference to Form S-8 filed by the Company on July 28, 2005.
         
     
  10 .5   Renewal Rights Agreement noted as of September 14, 2000 by and between the Company and Rockland, as Rights Agent (Exhibit to Form 8-K filed on October 23, 2000).
         
     
  10 .6   Independent Bank Corp. Deferred Compensation Program for Directors (restated as amended as of December 1, 2000). Incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2000.
         
     
  10 .7   Master Securities Repurchase Agreement, incorporated by reference to Form S-1 Registration Statement filed by the Company on September 18, 1992.
         
     
  10 .8   First Amended and Restated Employment Agreement between Christopher Oddleifson and the Company and Rockland Trust dated April 14, 2005 is filed as an exhibit under the Form 8-K filed on April 14, 2005.
         


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No.  
Exhibit
 
  10 .9   Revised employment agreement between Raymond G. Fuerschbach, Edward F. Jankowski, Ferdinand T. Kelley, Jane L. Lundquist, Edward H. Seksay and Denis K. Sheahan and the Company and Rockland Trust (Management Contracts under Item 601 (10)(iii)(A)) dated December 6, 2004 are filed as an exhibit under the Form 8-K filed on December 9, 2004.
         
     
  10 .10   A revised Change of Control Agreements between Anthony A. Paciulli and Rockland dated December 6, 2004 is filed as an exhibit under the Form 8-K filed on December 9, 2004.
         
     
  10 .11   Options to acquire shares of the Company’s Common Stock pursuant to the Independent Bank Corp. 1997 Employee Stock Option Plan were awarded to Christopher Oddleifson, Raymond G. Fuerschbach, Edward F. Jankowski, Ferdinand T. Kelley, Jane L. Lundquist, Anthony A. Paciulli, Edward H. Seksay and Denis K. Sheahan pursuant to option agreements dated December  9, 2004. The form of these option agreements were filed as exhibits under the Form 8-K filed on December 15, 2004.
         
     
  10 .12   On-Site Outsourcing Agreement by and between Fidelity Information Services, Inc. and Independent Bank Corp., effective as of November 1, 2004. Incorporated by reference to the Company’s annual report on Form 10-K for the year ended December 31, 2004 filed on March 4, 2005. (PLEASE NOTE: Portions of this contract, and its exhibits and attachments, have been omitted pursuant to a request for confidential treatment sent on March 4, 2005 to the Securities and Exchange Commission. The locations where material has been omitted are indicated by the following notation: “{****}”. The entire contract, in unredacted form, has been filed separately with the Commission with the request for confidential treatment.)
         
     
  10 .13   Independent Bank Corp and Rockland Trust Company Executive Officer Performance Incentive Plan (Management contract under Item 601 (10)(iii)(A)). Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 2005, filed on May 3, 2005. (PLEASE NOTE: Portions of this Plan, and its schedules, have been omitted pursuant to a request for confidential treatment sent on May 3, 2005 to the Securities and Exchange Commission. The locations where material has been omitted are indicated by the following notation: “{****}”. The entire Plan, in unredacted form, has been filed separately with the Commission with the request for confidential treatment.)
         
     
  10 .14   New Markets Tax Credit program Allocation Agreement between the Community Development Financial Institutions Fund of the United States Department of the Treasury and Rockland Community Development with an Allocation Effective Date of September 22, 2004 is filed as an exhibit under the Form 8-K filed on October 14, 2004.
         
     
  10 .15   Options to acquire shares of the Company’s Common Stock pursuant to the Independent Bank Corp. 2005 Employee Stock Plan were awarded to Christopher Oddleifson, Raymond G. Fuerschbach, Edward F. Jankowski, Ferdinand T. Kelley, Jane L. Lundquist, Anthony A. Paciulli, Edward H. Seksay, and Denis K. Sheahan pursuant to option agreements dated December 15, 2005. The form of option agreements used for these awards were filed as exhibits under the Form 8-K filed on December 20, 2005.
         
     
  21     Subsidiaries of the Registrant, incorporated by reference to Form S-3 Registration Statement filed by the Company on October 28, 1999.
         
     
  23     Consent of Independent Registered Public Accounting Firm.
         
     
  31 .1   Section 302 Certification of Sarbanes-Oxley Act of 2003 is attached hereto.
         
     
  31 .2   Section 302 Certification of Sarbanes-Oxley Act of 2003 is attached hereto.
         
     
  32 .1   Section 906 Certification of Sarbanes-Oxley Act of 2003 is attached hereto.
         
     
  32 .2   Section 906 Certification of Sarbanes-Oxley Act of 2003 is attached hereto.
 
(b) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
 
(c) All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or related notes.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 8(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Independent Bank Corp.
 
/s/  Christopher Oddleifson
Christopher Oddleifson,
Chief Executive Officer and President
 
Date: February 16, 2006
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby makes, constitutes and appoints Christopher Oddleifson and Denis K. Sheahan and each of them acting individually, his true and lawful attorneys, with full power to sign for such person and in such person’s name and capacity indicated below any and all amendments to this Form 10-K, hereby ratifying and confirming such person’s signature as it may be signed by said attorneys to any and all amendments.
 
             
/s/  Richard S. Anderson

Richard S. Anderson
  Director   Date: February 16, 2006
         
/s/  W. Paul Clark

W. Paul Clark
  Director   Date: February 16, 2006
         
/s/  Alfred L. Donovan

Alfred L. Donovan
  Director   Date: February 16, 2006
         
/s/  Benjamin A. Gilmore, II

Benjamin A. Gilmore, II
  Director   Date: February 16, 2006
         
/s/  E. Winthrop Hall

E. Winthrop Hall
  Director   Date: February 16, 2006
         
/s/  Kevin J. Jones

Kevin J. Jones
  Director   Date: February 16, 2006
         
/s/  Donna A. Lopolito

Donna A. Lopolito
  Director   Date: February 16, 2006
         
/s/  Eileen C. Miskell

Eileen C. Miskell
  Director   Date: February 16, 2006
         
/s/  Christopher Oddleifson

Christopher Oddleifson
  Director   Date: February 16, 2006
         
/s/  Richard H. Sgarzi

Richard H. Sgarzi
  Director   Date: February 16, 2006


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/s/  John H. Spurr, Jr.

John H. Spurr, Jr.
  Director   Date: February 16, 2006
         
/s/  Robert D. Sullivan

Robert D. Sullivan
  Director   Date: February 16, 2006
         
/s/  Brian S. Tedeschi

Brian S. Tedeschi
  Director   Date: February 16, 2006
         
/s/  Thomas J. Teuten

Thomas J. Teuten
  Director and Chairman of the Board   Date: February 16, 2006
         
/s/  Denis K. Sheahan

Denis K. Sheahan
  Chief Financial Officer and Treasurer (Principal financial and accounting officer)   Date: February 16, 2006

110