INDEPENDENT BANK CORP - 10-K Annual Report

Indicate by check mark whether, the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was $299,311,709, based on the closing price on such date of the registrant’s common stock on the NASDAQ National Market.

List hereunder the following documents incorporated by reference and the Part of Form 10-K into which the document is incorporated:


(1)	Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2003 are incorporated into Part II, Items 5-8 of this Form 10-K.

(2)	Portions of the Registrant’s definitive proxy statement for its 2004 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K.

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.

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;

	•	inflation, interest rate, market and monetary fluctuations could reduce net interest income and could increase credit losses;

	•	adverse changes in asset quality could result in increasing credit risk-related losses and expenses;

	•	competitive pressures could intensify and affect the Company’s profitability, including as a result of continued industry consolidation, the increased financial services from non-banks and banking reform;

	•	a deterioration in the conditions of the securities markets could adversely affect the value or credit quality of the Company’s assets, the availability and terms of funding necessary to meet the Company’s liquidity needs and the Company’s ability to originate loans;

	•	the potential to adapt to changes in information technology could adversely impact the Company’s operations and require increased capital spending;

	•	changes in consumer spending and savings habits could negatively impact the Company’s financial results; and

	•	future acquisitions may not produce results at levels or within time frames originally anticipated and may result in unforeseen integrations 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.

Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts and was incorporated in 1992. 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 and investment management services and is managed as a single strategic unit. The community banking business derives its revenues from a wide range of banking services, including lending activities, acceptance of demand, savings and time deposits, trust and investment management services, and mortgage banking income. Rockland offers a full range of community banking services through its network of 52 banking offices (including 49 full-service branches), seven commercial lending centers, three investment management offices and three residential lending centers, all of which are located in the Plymouth, Norfolk, Barnstable and Bristol Counties of southeastern Massachusetts and Cape Cod. At December 31, 2003, the Company had total assets of $2.4 billion, total deposits of $1.8 billion, stockholders’ equity of $171.8 million, and 744 full-time equivalent employees.

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 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 rate of return, liquidity, and risk among other factors, convenient branch location and hours of operation, personalized customer service, online access to accounts, and automated teller machines.

The Bank’s market area may be found very attractive and entry into the market by financial institutions not currently competing in the market area may occur. The potential entry into the market area by these institutions, and other non-bank institutions that offer financial alternatives could have an adverse effect on the Bank’s growth or profitability.

The Bank’s gross loan portfolio (loans before allowance for loan losses) amounted to $1.6 billion on December 31, 2003 or 64.9% of total assets on that date. The Bank classifies loans as commercial, real estate, or consumer. Commercial loans consist primarily of loans to businesses for working capital and other business-related purposes and floor plan financing. Real estate loans are comprised of commercial mortgages that are secured by 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 installment obligations, the majority of which are 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 and consumer loan portfolios consist of loans made to residents of and businesses located in southeastern Massachusetts. The

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. In order to facilitate the disposition of other real estate owned (OREO), the Bank may finance the purchase of such properties at market rates, if the borrower qualifies under the Bank’s standard underwriting guidelines.

Origination of Loans Commercial loan applications are obtained through existing customers, solicitation by Bank loan officers, referrals from current or past customers, or walk-in customers. Commercial real estate loan applications are obtained primarily from previous borrowers, direct contacts with the Bank, or referrals. Applications for residential real estate loans and all types of consumer loans are taken at all of the Bank’s full-service branch offices. Residential real estate loan applications primarily result from referrals by real estate brokers, homebuilders, and existing or walk-in customers. The Bank also maintains a staff of field originators who solicit and refer residential real estate loan applications to the Bank. These employees are compensated on a commission basis and provide convenient origination services during banking and non-banking hours. Consumer loan applications are directly obtained through existing or walk-in customers who have been made aware of the Bank’s consumer loan services through advertising and other media, as well as indirectly through a network of automobile, recreational vehicle and boat dealers.

Commercial loans, commercial real estate loans, and construction loans may be approved by commercial loan officers up to their individually assigned lending limits, which are established and modified periodically 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.

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 $42.3 million at December 31, 2003. Notwithstanding the foregoing, the Bank has established a more restrictive limit of not more than 75% of the Bank’s legal lending limit, or $31.7 million at December 31, 2003, which may only be exceeded with the approval of the Board of Directors. There were no borrowers whose total indebtedness in aggregate exceeded $31.7 million as of December 31, 2003.

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 2003, the Bank originated $451.5 million in residential real estate loans of which $199.4 million was retained in its portfolio, and comprised primarily of adjustable rate loans.

Commercial Loans The Bank offers secured and unsecured commercial loans for business purposes, including issuing letters of credit. At December 31, 2003, $171.2 million, or 10.8% of the Bank’s gross loan portfolio consisted of commercial loans. Commercial loans generated 7.7%, 6.8%, and 7.8% of total interest income for the fiscal years ending 2003, 2002 and 2001, 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, 2003 there were $61.2 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, 2003 there were $110.0 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, 2003, the Bank had $6.2 million of standby letters of credit.

The Bank also provides automobile and, to a lesser extent, boat and other vehicle floor plan financing. Floor plan loans are secured by the automobiles, boats, or other vehicles, which constitute the 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.

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, 2003, the Bank’s loan portfolio included $564.9 million in commercial real estate loans, $325.5 million in residential real estate loans, $75.4 million in commercial construction loans and $9.6 million in residential construction loans, altogether totaling 61.7% of the Bank’s gross loan portfolio. Real estate loans generated an aggregate of 45.6%, 40.4%, and 38.6% of total interest income for the fiscal years ending December 31, 2003, 2002 and 2001, 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. As such, a number of commercial real estate loans are primarily secured by residential development tracts but, to a much greater extent, they are secured by owner-occupied commercial and industrial buildings and warehouses. Commercial real estate loans also include multi-family residential loans that are primarily secured by apartment buildings and, to a much lesser extent, condominiums. The Bank has a modest portfolio of loans secured by special purpose properties, such as hotels, motels, or restaurants.

Although terms vary, commercial real estate loans generally have maturities of five years or less, amortization periods of 20 years, and interest rates that either float in accordance with a designated index 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.

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, cash reserve loans and small business lines. As of December 31, 2003, $434.5 million, or 27.5%, of the Bank’s gross loan portfolio consisted of consumer loans. Consumer loans generated 21.3%, 21.0% and 23.0% of total interest income for the fiscal years ending December 31, 2003, 2002, and 2001, respectively.

The Bank’s installment loans consist primarily of automobile loans. A substantial portion of the Bank’s automobile loans are originated indirectly by a network of approximately 150 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 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 72 months for a new car loan and 66 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 picks up 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. 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 the loan origination date.

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 term loan or under a revolving line of credit secured by a first or second mortgage on the borrower’s residence. The Bank will originate home equity loans in an amount up to 80% of the appraised value or, without appraisal, up to 80% of the tax assessed value, reduced for any loans outstanding secured by such collateral.

Cash reserve loans are made pursuant to previously approved unsecured cash reserve lines of credit. The rate on these loans is tied to the prime rate.

The Bank’s securities portfolio consists of equity securities held for the purpose of funding supplemental executive retirement plan obligations through a Rabbi Trust, U.S. Government and U.S. Government Agency obligations, state, county and municipal securities, mortgage-backed securities, Federal Home Loan Bank (“FHLB”) stock, and corporate debt securities. Most of these securities are investment grade debt obligations with average lives of five years and less. U.S. Government 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. The Chief Executive Officer or the Chief Financial Officer may make investments with the approval of one additional member of the Asset/ Liability Management Committee, subject to limits on the type, size and quality of all investments, which are specified in the Investment Policy. The Bank’s Asset/ Liability Management Committee, or its designee, is required to evaluate any proposed purchase from the standpoint of overall diversification of the portfolio. At December 31, 2003, securities totaled $672.5 million. Total securities generated interest and dividends on securities of 25.4%, 29.7%, and 29.6% of total interest income for the fiscal years ended 2003, 2002 and 2001, respectively.

Deposits Deposits obtained through Rockland’s branch banking network have traditionally been the principal source of the Bank’s funds for use in lending and for other general business purposes. The Bank has built a stable base of in-market core deposits from the residents of and businesses located in southeastern Massachusetts and Cape Cod. Rockland offers a range of demand deposits, interest checking, money market accounts, savings accounts and time certificates of deposit. Interest rates on deposits are based on factors that include loan demand, deposit maturities, 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. As of December 31, 2003, total deposits were $1.8 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 seven additional remote ATM

locations. The ATM cards and debit cards also allow customer’s access to the “NYCE” regional ATM network, as well as the “Cirrus” nationwide ATM network. In addition, Rockland has joined the “SUM” network, which allows access to over 2,500 surcharge-free ATM’s throughout New England. Most importantly for our customers, the City of Boston has approximately 70 SUM ATM locations. 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. The securities underlying the agreements are delivered to the dealer who arranges the transactions as security for the repurchase obligation. Payments on such borrowings are interest only until the scheduled repurchase date, which generally occurs within a period of 30 days or less. Repurchase agreements represent a non-deposit funding source for the Bank. However, the Bank is subject to the risk that the lender may default at maturity and not return the collateral. In order to minimize this potential risk, the Bank only deals with established investment brokerage firms when entering into these transactions. On December 31, 2003 the Bank had no 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, 2003 the Bank had $39.4 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, 2003, the Bank had $371.1 million outstanding in FHLB borrowings with initial maturities ranging from 2 days to 20 years. In addition, the Bank has a $5.0 million line of credit with the FHLB.

The Rockland Trust Investment Management Group offers a variety of services, including assistance with investments, estate planning, custody services, employee benefit plans, and tax planning, which are provided primarily to individuals and small businesses located in southeastern Massachusetts and Cape Cod. In addition, the Bank acts as executor or administrator of estates and as trustee for various types of trusts.

Accounts maintained by the Rockland Trust Investment Management Group consist of “managed” and “non-managed” accounts. “Managed accounts” are those accounts for which Rockland has responsibility for administration and investment management and/or investment advice. “Non-managed” accounts are those accounts for which Rockland acts as a custodian. The Bank receives fees dependent upon the level and type of service(s) provided, those fees as of December 31, 2003 amounted to $3.8 million. Total trust assets at December 31, 2003 were $481.8 million.

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.

In 1999, the Bank entered into an agreement with Independent Financial Market Group (IFMG), a Sun Life Financial Company for the sale of mutual fund shares, unit investment trust shares, interests in direct participation programs, similar non-insurance investment products, and general securities brokerage services. IFMG Securities Incorporated has placed their registered representatives on-site to sell these services to the Bank’s customer base.

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”).

BHCA (The Bank Holding Company Act) BHCA prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve. The BHCA also prohibits the Company from, with certain exceptions, acquiring more than 5% of any class of voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks.

Under the BHCA, the Federal Reserve is authorized to approve the ownership by the Company of shares in any company, the activities of which the Federal Reserve has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Federal Reserve has, by regulation, determined that some activities are closely related to banking within the meaning of the BHCA. These activities include, but are not limited to, operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing data processing operations; providing some securities brokerage services; acting as an investment or financial adviser; acting as an insurance agent for types of credit-related insurance; engaging in insurance underwriting under limited circumstances; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency and a credit bureau; providing consumer financial counseling and courier services. The Federal Reserve also has determined that other activities, including real estate brokerage and syndication, land development, property management and, except under limited circumstances, underwriting of life insurance not related to credit transactions, are not closely related to banking and are not a proper incident thereto.

Interstate Banking Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”), bank holding companies may acquire banks in states other than their home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state.

Pursuant to Massachusetts law, no approval to acquire a banking institution, acquire additional shares in a banking institution, acquire substantially all the assets of a banking institution or merge or consolidate with another bank holding company may be given if the bank being acquired has been in existence for a period less than three years or, as a result, the bank holding company would control, in excess of 30%, of the total deposits of all state and federally chartered banks in Massachusetts, unless waived by the Commissioner. With the prior written approval of the Commissioner, Massachusetts also permits the establishment of de novo branches in Massachusetts to the fullest 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.

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, 2003, the Company had Tier 1 capital and total capital equal to 11.00% and 12.25% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 7.60% 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 10.41% and 11.66% of total risk-adjusted assets, respectively, and Tier 1 leverage capital equal to 7.18% 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 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, 2003 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 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 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”) — Rockland 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 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 has assigned the Bank with a CRA rating of satisfactory 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 of 1999, or the GLB, was enacted. The GLB repeals provisions of the Glass-Steagall Act which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities, and which restricted officer, director or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities.

In addition, the GLB also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers by revising and expanding the 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 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 has.

Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the SOA. 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 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.


	•	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;

	•	“real time” filing of periodic reports;

	•	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. To date, the SEC has implemented some of the provisions of the SOA. However, the SEC continues to issue final rules, reports and press releases. As the SEC provides new requirements, we review those rules and comply as required.

Although we anticipate that we will incur additional expense in complying with the provisions of the SOA and the resulting regulations, 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 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.


	•	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.

Employees As of December 31, 2003, the Bank had 744 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 regulating 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.

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.

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 Securities and Exchange Commission (“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), Form 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 with the SEC and additional shareholder information is available free of charge on the Company’s website: www.rocklandtrust.com. The Company’s Code of Ethics is also available on the Company’s website in the investor relations section of the website.

At December 31, 2003, the Bank conducted its business from its headquarters and main office at 288 Union Street, Rockland, Massachusetts and 51 other branch locations throughout Barnstable, Bristol, Norfolk and Plymouth Counties of southeastern Massachusetts and Cape Cod. In addition to its main office, the Bank owns eighteen of its branches and leases the remaining thirty-three offices. Of the branch offices which are leased by the Bank, seven have remaining lease terms, including options renewable at the Bank’s option, of five years or less; seven have remaining lease terms of greater than five years and less than ten years; and nineteen have a remaining lease term of ten years or more. The Bank’s aggregate rental expense under such leases was $2.3 million in 2003. In January 2003, the Bank entered into a lease agreement for a new branch location on New State Highway (Route 44) in Raynham, Massachusetts. In addition to a new branch, this location will be the new home of the Middleboro Commercial Lending Group. It is anticipated that this location will open during the second quarter of 2004. In April 2003, the Bank entered into a lease agreement for a new branch on East Washington Street (Route 1), North Attleboro, Massachusetts. It is anticipated that this branch will open during the second quarter of 2004. In May 2003, the Bank opened a new branch at 5 Shellback Way, Mashpee, Massachusetts. This location replaced the existing Mashpee branch and is in a much more visible area on busy Route 28. In May, 2003, the Bank purchased two condominium units that house the Bank’s branch office located at 27 Bay Road, Duxbury, Massachusetts. The Bank has been a tenant at this branch for a number of years. In October 2003, the Bank signed a lease for office space in Quincy, Massachusetts to open a Residential Mortgage Origination office. This office opened for business on November 12, 2003. The Bank also consolidated its Residential Mortgage Origination operation on Cape Cod into available space at the Bank’s branch office located at 375 Iyanough Road, Hyannis, Massachusetts and has expanded its Residential Mortgage Origination operation into available space at 100 Belmont Street, Brockton, Massachusetts. Certain of the Bank’s branch offices are leased from companies with whom directors of the Company are affiliated. The Bank leases space for its Investment Management Group in Hanover, Massachusetts through a joint venture consisting of the Bank and A.W. Perry, Inc.

It also leases office space in two additional facilities used as lending centers, one of which is in Attleboro that also houses an Investment Management Group office. At December 31, 2003, the net book values of the property and leasehold improvements of the offices of the Bank amounted to $27.2 million. The Bank’s properties that are not leased are owned free and clear of any mortgages. The Bank believes that all of its

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. Under Massachusetts’s law, interest will be computed at a 12% rate on any damages which the Bank recovers, either from the date of breach or the date on which the case was filed. 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, plus interest at a rate as high as 24% pursuant to the Agreement.

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.

There were no matters submitted to a vote of our security holders in the fourth quarter of 2003.

Independent Bank Corp.’s common stock trades on the NASDAQ National Market under the symbol INDB. The Company declared cash dividends of $0.52 per share in 2003 and $0.48 per share in 2002. The ratio of dividends paid to earnings in 2003 and 2002 was 28.6% and 27.7%, 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 2003 and 2002.

As of December 31, 2003 there were 14,628,154 shares of common stock outstanding which were held by approximately 5,700 holders of record. The closing price of the Company’s stock on December 31, 2003 was $28.30. 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.

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.


(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 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.

(4)	Including credit quality discount for the years 2000 through 2002.

See Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note (1) Summary of Significant Accounting Policies, Goodwill and Note (10) Goodwill and Intangible Assets, for information related to the Company’s acquisitions and adoption of Statement of Financial Accounting Standards (“SFAS”) No. 147 “Acquisitions of Certain Financial Institutions”, which affects the comparability of the information reflected in the selected financial data.

Independent Bank Corp. is a one-bank holding company whose primary asset is its investment in Rockland. Rockland is a state-chartered commercial bank, which operates 52 retail branches, seven commercial lending centers, three investment management offices and three residential lending centers, all of which are located in the Plymouth, Barnstable, Norfolk and Bristol Counties of southeastern Massachusetts and Cape Cod. The Bank’s primary source of income is from providing loans to individuals and small-to-medium-sized businesses in its market area. Independent Capital Trust III and Independent Capital Trust IV were formed for the purposes of issuing trust preferred securities and investing the proceeds of these securities in junior subordinated debentures issued by the Company.

The condensed financial review which follows presents management’s discussion and analysis of the consolidated financial condition and operating results of the Company and its subsidiaries Rockland, Capital Trust III and Capital Trust IV. The Bank’s subsidiaries consist of two Massachusetts securities corporations; RTC Securities Corp. I and RTC Securities Corp. X, Taunton Avenue Inc., and Rockland Trust Community Development LLC. Taunton Avenue Inc. was formed in May 2003 to hold loans, industrial development bonds and other assets. Rockland Trust Community Development LLC was formed in August 2003 to provide investment capital to low-income communities and low-income persons. The following should be read in conjunction with the Consolidated Financial Statements and related notes thereto.

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: Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses as well as 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. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and 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 below.

Income Taxes: The Company estimates income tax expense based on the amount we expect to owe various tax authorities. Taxes are discussed in more detail in Note 11 of the consolidated financial statements. Accrued taxes represent the net estimated amount due to or to be received from taxing authorities. 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. Although the Company uses available information to record accrued income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws influencing the Company’s overall tax position.

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 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.

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

In 2003, the Company anticipated a compression in the net interest margin due to the low interest rate environment as well as an intentionally shortened duration of the securities portfolio and a strategic focus on origination of more adjustable rate lending verses fixed rate lending. See below for the trend in the historical monthly five year treasury note constant maturity yield beginning in January of 2001 through December of 2003 as an example of the continued low interest rate environment and the Company’s monthly net interest margin for the same periods.

Shortening the duration of the securities portfolio allowed the Company to limit price, interest and extension risk in the prevailing low rate environment. The origination of more adjustable rate lending has positioned the Company to realize a higher rate of return when in a rising interest rate environment. Net interest income decreased $4.3 million during 2003 as compared to 2002. The following pie charts represent the change in mix of adjustable rate loans and fixed rate loans from 2001 through 2003:

To mitigate the impact of a declining net interest margin the Company focused on non-interest income opportunities, particularly mortgage banking income, and non-interest expense control. The residential lending division focused on increasing production to take advantage of the refinance market as well as retooling to focus on the purchase market. This resulted in an increase of $1.4 million in mortgage banking income in 2003 as compared to 2002. Service charges on deposit accounts increased $1.4 million in 2003 compared to 2002.Total non interest income increased $2.5 million, excluding securities gains, mitigating much of the decrease in net interest income.

Additionally, the Company focused on expense control resulting in a modest increase of only 0.9% in 2003 over 2002 when excluding a prepayment penalty recognized on the prepayment of Federal Home Loan Bank (“FHLB”) borrowings in 2003 and an impairment charge on a WorldCom bond (following the announcement of fraud) in 2002. The Company was successful in managing the modest increase in expenses despite additional pension expense of $841,000 in 2003.

Lower loan loss provision and a decrease in minority interest expense also contributed to the Company’s success in 2003. In 2003, the Company was able to reduce the level of loan loss provisioning as compared to 2002 by $1.2 million due to continued strong asset quality and generally improving economic conditions. Minority interest expense was significantly less than in prior years ($688,000 less in 2003 compare to 2002) as a result of the Company refinancing its trust preferred securities in 2002 and 2001.

Looking ahead to 2004, the Company expects continued net interest margin compression, however at a slower rate than in 2003, as assets continue to re-price to current interest rates without the capacity to re-price deposits in correlation to assets. Management plans to mitigate the impact of the continued compression with prudent asset growth, non interest income growth generation, and expense control. Additionally, there are a number of initiatives that are expected to contribute to 2004 and beyond. These initiatives include:


	•	a new business banking model designed to improve our penetration of the smaller business banking market,

	•	investment in additional new business development capabilities and process improvements within commercial lending,


	•	continued investment in the Company’s residential lending unit to provide for a greater breadth of products to its customers with a greater level of expertise,

	•	new branches in the North Attleboro and Taunton/ Raynham markets,

	•	the acquisition of Falmouth Bank Corp.,

	•	a sales coaching and sales training program designed to improve deposit gathering and revenue generation from our branch network,

	•	and increased advertising and business development spending (approximately $1 million) designed to position the Company to take full advantage of near term in-market turmoil resulting from recent merger and acquisition activity.

These initiatives will require substantial investment in 2004 and are expected to provide materially to earnings growth in the latter part of 2004 and particularly in 2005 and 2006.

Loan Portfolio At December 31, 2003, the Bank’s loan portfolio amounted to $1.6 billion, an increase of $149.5 million, or 10.4%, from year-end 2002. This increase was primarily in real estate loans which in total increased $123.5 million, or 14.5%.

Commercial and Industrial loans increased $19.6 million, or 13.0%. Commercial real estate loans increased $53.8 million, or 10.5%. Commercial real estate construction increased $26.3 million, or 53.5%, the increase being primarily attributable to loans with variable rates of interest. Residential mortgage loans increased $53.9 million, or 20.0%. While the Bank sells the majority of its residential real estate loan production, the Bank will retain for its portfolio mostly adjustable rate and, on a selective basis, certain fixed rate residential mortgages. Residential loans held for sale decreased $9.8 million. During 2003, the Bank originated $451.5 million in residential real estate loans of which $199.4 million was retained in its portfolio. Residential real estate construction decreased $625,000, or 6.1%. Consumer loans increased by $6.4 million, or 1.5% compared to prior year and was primarily attributable to an increase in home equity lines of credit.

The following table sets forth information concerning the composition of the Bank’s loan portfolio by loan type at the dates indicated.

At December 31, 2003, $171.2 million, or 10.8%, of the Bank’s gross loan portfolio consisted of commercial and industrial loans, compared to $151.6 million, or 10.6%, at December 31, 2002. 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, 2003, the Bank had $76.5 million outstanding under commercial revolving lines of credit compared to $63.2 million at December 31, 2002 and $116.8 million of unused commitments under such lines at December 31, 2003 compared to $124.4 million in the prior year. As of December 31, 2003, the Bank had $6.2 million in outstanding commitments pursuant to standby letters of credit compared to $8.1 million at December 31, 2002. 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 $23.9 million as of December 31, 2003 compared to $18.0 million at the prior year-end.

Real estate loans totaling $975.4 million comprised 61.7% of gross loans at December 31, 2003, as compared to $852.0 million or 59.5% of gross loans at December 31, 2002. The Bank’s real estate loan portfolio included $564.9 million in commercial real estate loans at December 31, 2003. This category has reflected increases over the last year of $53.8 million, or 10.5%. Residential real estate loans, including residential loans held for sale, which were, $325.5 million at year-end 2003, increased $44.1 million, or 15.7%, in 2003. During 2003, the Bank sold $250.7 million of the current production of residential mortgages as part of its overall asset/liability management. Commercial construction of $75.4 million increased by $26.3 million or 53.5% compared to year-end 2002. Residential construction of $9.6 million decreased $625,000 from year-end December 31, 2002.

Consumer loans primarily consist of closed-end installment loans, cash reserve loans, and home equity loans. As of December 31, 2003, $434.5 million, or 27.5%, of the Bank’s gross loan portfolio, consisted of consumer loans compared to $428.1 million, or 29.9%, of the Bank’s gross loans at December 31, 2002. Consumer installment loans of $301.8 million, decreased $21.7, or 6.7%, in 2003. As of December 31, 2003 and 2002, automobile loans, which makes up the majority of the Bank’s installment loans, of $239.7 million represented 55.2% and of $265.0 million represented 61.9%, respectively, of the Bank’s consumer loan portfolio. Indirect automobile loans accounted for approximately 75% of the Bank’s total installment loan originations during 2003 and 2002, respectively. As of December 31, 2003, installment loans other than automobile loans amounted to $62.1 million compared to $58.5 million as December 31, 2002. These loans

Other consumer loans have consisted primarily of cash reserve loans, home equity lines and small business lines. The balances of other consumer loans increased $28.1 million to $132.7 million, or 26.9%, in 2003 compared to $104.6 million, in 2002. This is mainly due to an increase of $23.1 million in home equity lines of credit to $104.5 million at December 31, 2003.

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. The rate on these loans is subject to change due to market conditions. As of December 31, 2003 and 2002, $20.6 million, for both periods, had been committed to but was unused under cash reserve lines of credit.

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. As of December 31, 2003, there were $112.2 million in unused commitments under revolving home equity lines of credit compared to $82.3 million at December 31, 2002.

The following table sets forth the scheduled contractual amortization of the Bank’s loan portfolio at December 31, 2003. Loans having no schedule of repayments or no stated maturity are reported as due in one year or less. The following table also sets forth the rate structure of loans scheduled to mature after one year.

As of December 31, 2003, $1.2 million of loans scheduled to mature within one year were nonperforming.

Generally, the actual maturity of loans is substantially less than their contractual maturity due to prepayments and, in the case of real estate loans, due-on-sale clauses, which generally gives the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage and the loan is not repaid. The average life of real estate loans tends to increase when current real estate loan rates are higher than rates on mortgages in the portfolio and, conversely, tends to decrease when rates on mortgages in the portfolio are higher than current real estate loan rates. Under the latter scenario, the weighted average yield on the portfolio tends to decrease as higher yielding loans are repaid or refinanced at lower rates. Due to the fact that the Bank may, consistent with industry practice, “roll over” a significant portion of commercial and commercial real estate loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period. In addition, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual obligations of the loan.

The principal balance of loans serviced by the Bank for investors amounted to $398.9 million at December 31, 2003 and $353.6 million at December 31, 2002. Under its mortgage servicing arrangements, the Bank generally continues to collect payments on loans, to inspect the mortgaged property, to make insurance

and tax advances on behalf of borrowers and to otherwise service the loans and receives a fee for performing these services. Net servicing fee income amounted to $2.1 million and $1.3 million for the years ended December 31, 2003 and 2002, respectively. The Bank also sells certain loans and does not retain servicing. During 2003 and 2002 the Bank originated and sold $13.9 million and $6.7 million of loans along with the servicing rights, respectively. The servicing release premium on sold loans was approximately $127,000 in 2003 and $73,000 in 2002. Loan origination fees that relate to loans sold by the Bank are recognized as a component of mortgage banking income at the time of the loan sale. Under its sales agreements, the Bank pays the purchaser of mortgage loans a specified yield on the loans sold. The difference, after payment of any guarantee fee, is retained by the Bank and recognized as fee income over the life of the loan. In addition, loans may be sold at a premium or a discount with any resulting gain or loss recognized at the time of sale. As of December 31, 2003 and 2002, the Bank’s loan-servicing asset was $3.2 million and $2.0 million, respectively. Amortization including impairment of the loan-servicing asset (included in net servicing fee income above) was $1.2 million and $1.0 million for the years ending December 31, 2003 and 2002, 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.

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

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, when the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.

Nonperforming Assets Nonperforming assets are comprised of nonperforming loans, nonperforming securities and Other Real Estate Owned (“OREO”). Nonperforming loans consist of 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, 2003, nonperforming assets totaled $3.5 million, an increase of $437,000, or 14.2%, from the prior year-end. Nonperforming assets represented 0.14% of total assets for the year ending December 31, 2003 and 0.13% for the year ending December 31, 2002. There were no OREO or nonperforming securities for the periods ended December 31, 2003 or December 31, 2002.

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


(1)	There were no restructured, nonaccruing loans at December 31, 2003, 2002 and 1999. In 2001 and 2000 there were $0.1 million and $0.2 million, respectively, of restructured nonaccruing loans.

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, 2003, the Bank had $453,000 of restructured loans. At December 31, 2003, the Bank had two potential problem loans not included in nonperforming loans with an outstanding balance of $3.3 million.

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

Interest income that would have been recognized for the years ended December 31, 2003, 2002 and 2001, if nonperforming loans at the respective dates had been performing in accordance with their original terms approximated $210,000, $227,000, and $280,000, 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 $261,000, $194,000, and $287,000, 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, 2003, impaired loans include all commercial real estate loans and commercial and industrial loans on nonaccrual status and restructured loans. Total impaired loans at December 31, 2003 and 2002 were $2.1 million for both years.

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 first quarter of 2002 and the Bank was most recently examined by the Federal Deposit Insurance Corporation, “FDIC”, in the third quarter of 2002. 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 potential 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. In 2000, the Bank established a separate “credit quality discount” as a reduction of the loan balances acquired from FleetBoston Financial. This credit quality discount represents inherent losses in the acquired loan portfolio. The level of credit quality discount was $0.5 million at December 31, 2002 and there was no longer any credit quality discount remaining as of December 31, 2003.

The total allowances for loan losses was $23.2 million at December 31, 2003, compared to $21.9 million at December 31, 2002 (including the “credit quality discount”).

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

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 $3.2 million to $20.2 million at December 31, 2003 with increases shown in each of the various loan categories except consumer — installment, which exhibited a decrease. Increased amounts of allowance allocated to three major portfolio components: commercial & industrial, real estate — commercial, and real estate — residential represented approximately 95% of the total increase in allocated allowances from December 31, 2002.

The increase in the amount of allowance allocated to the commercial & industrial portfolio component is attributed to the combined impact of portfolio growth and the re-categorization of certain loans. Certain loans have been re-categorized based upon the results of loan reviews conducted both internally and by third party loan review consultants. Loans that have been re-categorized in a manner requiring increased amounts of allowance to be allocated represented approximately 12.1% of balances outstanding in this category at December 31, 2003.

The increase in the amount of allowance allocated to the real estate — commercial portfolio component is attributed to the combination of growth of portfolio balances and the re-categorization of certain loans. Balances outstanding in this loan category at December 31, 2003 increased by 10.5% compared to balances outstanding at December 31, 2002. Certain loans in this subset of the loan portfolio also have been re-categorized based upon the results of loan reviews conducted both internally and by third party loan review consultants. Loans that have been re-categorized in a manner requiring increased amounts of allowance to be allocated represented approximately 4.3% of balances outstanding in this loan category at December 31, 2003.

The increase in the amount of allowance allocated to the real estate — residential portfolio component is a direct result of growth in the residential mortgage and home equity subsets of this component of the loan portfolio. Outstanding balances at December 31, 2003 in each of these subcategories grew by 15.7% and 28.5%, respectively, and by 18.5% combined as a whole, from December 31, 2002.

The decrease in the amount of allowance allocated to the consumer — installment portfolio segment reflects lower loan volume in the indirect automobile financing subset of the loan types that compose this segment.

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

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 segment. Individual loans within the commercial & industrial, real estate — commercial and

real estate — construction loan portfolio segments 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.

A similar formula-based approach, using a point-in-time credit grade distribution, was developed for the consumer — installment segment of the loan portfolio. This method was developed in response both to the significance of the balance and the seasoning of this segment of the portfolio which has allowed for a more analytical overview of its inherent risk characteristics. This method has been combined with subjective factors, which reflect changing environmental conditions in the consumer — installment loan market. The result of this analytical combined approach provided an allowance allocation for installment loans of $2.8 million at December 31, 2003, compared with $3.0 million at December 31, 2002.

Allocations for 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 segment, 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 the 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 on 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.) fair value of collateral, (b.) present value of anticipated future cash flows or (c.) the loan’s observable fair market price. Loans with a specific allowance and the amount of such allowance totaled $903,000 and $450,000, respectively at December 31, 2003 and $848,000 and $346,000, respectively, at December 31, 2002.

A portion of the allowance for loan loss is not allocated to any specific segment 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 a non-specific allowance for loan losses. The amount of this measurement imprecision allocation was $3.0 million at December 31, 2003, compared to $4.4 million at December 31, 2002.

Management decreased the measurement imprecision allocation primarily based on its assessment of the effects of changing economic conditions in the United States on borrowers in its loan portfolio. Through the fiscal year-ending December 31, 2003, the general state of the U.S. economy has exhibited signs of improvement following a period of well publicized weakness in 2001 and 2002, including a contraction in gross

domestic product (GDP) and rising rates of unemployment. National economic conditions notwithstanding, the credit quality of the Bank’s loan portfolio has remained stable and the incidence of default within the portfolio has not increased substantially through the year-ended December 31, 2003. Management, nonetheless, has maintained an allocation for measurement imprecision of $3.0 million at December 31, 2003. This amount has been decreased by $1.4 million from a $4.4 million allocation for measurement imprecision at December 31, 2002.

As of December 31, 2003, the allowance for loan losses totaled $23.2 million as compared to $21.4 million at December 31, 2002. Based on the processes described above, management believes that the level of the allowance for possible loan losses at December 31, 2003 is adequate. The “credit quality discount” was $0 and $0.5 million at December 31, 2003 and 2002, respectively.

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 held for the purpose of funding Rabbi Trust obligations (see Note 12; Employee Benefits, of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data) are classified as trading assets. Trading assets are recorded at fair value with changes in fair value recorded in earnings. Trading assets at December 31, 2003 and 2002 were $1.2 million and $1.1 million, respectively.

Securities which management intends to hold until maturity consist of U.S. Treasury and U.S. Government Agency obligations, mortgage-backed securities, state, county and municipal securities and corporate debt securities. Securities held to maturity as of December 31, 2003 are carried at their amortized cost of $121.9 million and exclude gross unrealized gains of $5.9 million and gross unrealized losses of $473,000. A year earlier, securities held to maturity totaled $149.1 million excluding gross unrealized gains of $4.5 million and gross unrealized losses of $1.0 million. In the third quarter of 2002, after recognizing a securities impairment charge of $2.5 million, net of tax, due to a significant deterioration of the credit worthiness of WorldCom, Inc. the Company reclassified its investment in bonds issued by WorldCom, Inc. to the available for sale portfolio. See the discussion below for impact upon sale of the security from the available for sale portfolio.

Securities available for sale consist of certain mortgage-backed securities, including collateralized mortgage obligations, and U.S. Government Agency 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, 2003 totaled $527.5 million and pre-tax net unrealized gains totaled $3.3 million. A year earlier, securities available for sale were $501.8 million with pre-tax net unrealized gains of $18.9 million. In 2003, the Company recognized $2.6 million of net gains on the sale of available for sale securities. In 2002, after recognizing a securities impairment charge of $2.5 million, net of tax, due to a significant deterioration of the credit worthiness of WorldCom, Inc. the Company reclassified its investment in bonds issued by WorldCom, Inc. to the available for sale portfolio. Upon reclassification of the bonds issued by WorldCom Inc. to the available for sale portfolio, the Company sold the investment and realized a gross loss of $38,000 in 2002. In 2001 gross gains of, $1.4 million were recognized 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.

The following table sets forth the fair value and percentage distribution of securities available for sale at the dates indicated.

The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2003.

At December 31, 2003 and 2002, 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 2003 or 2002.

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 transferred to the Bank for 100% ownership 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 12, Employee Benefits, of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplemental Data). These insurance policies of $1.5 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 this life insurance was $40.5 million and $37.1 million at December 31, 2003 and 2002, respectively. The Bank recorded income from Bank Owned Life Insurance of $1.9 million, in both 2003 and 2002 and $1.8 million in 2001.

Deposits The Bank’s branch system consists of 52 locations, of which 49 are full-service branches. Each full-service branch operates as a retail sales and services outlet offering a complete line of deposit and loan products. As of December 31, 2003, deposits of $1.8 billion were $94.6 million, or 5.6%, higher than the prior year-end. Core deposits increased by $117.7 million, or 9.7%, particularly in the relationship deposit categories. The time deposits category was intentionally managed downward by $23.1 million, or 4.9%, to $451.5 million at December 31, 2003.

The following table sets forth the average balances of the Bank’s deposits for the periods indicated.

The Bank’s time certificates of deposit of $100,000 or more totaled $118.6 million at December 31, 2003. The maturity of these certificates are as follows:

Borrowings The Bank’s borrowings amounted to $415.4 million at December 31, 2003, an increase of $53.2 million from year-end 2002. At December 31, 2003, the Bank’s borrowings consisted primarily of FHLB advances totaling $371.1 million, an increase of $73.5 million from the prior year-end. The remaining borrowings consisted of federal funds purchased, assets sold under repurchase agreements and treasury tax and loan notes. These borrowings totaled $44.2 million at December 31, 2003, a decrease of $20.3 million from the prior year-end. See Note 8 of the Notes to Consolidated Financial Statements included in Item 8 hereof for schedule of borrowings outstanding and their interest rates and other information related to the Company’s borrowings.

Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation In 1997, 2000, 2001, and 2002 the Company formed Independent Capital Trust I (“Trust I”), Independent Capital Trust II (“Trust II”), Independent Capital Trust III (“Trust III”) and Independent Capital Trust IV (“Trust IV”), respectively, for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in junior subordinated debentures issued by the Company. Under regulatory capital requirements, trust preferred securities, within certain limitations, qualify as Tier I and Tier II capital. The Company raised capital through Trust I and Trust II as support for asset growth. More specifically, the funds raised through the Trust II issuance were used as capital support for the FleetBoston Financial branch acquisition. In addition, given the low interest rate environment at the end of 2001, the Company issued trust preferred securities through Trust III, the proceeds of which were used to redeem in full on January 31, 2002, the higher rate securities issued through Trust II. As the low interest rate environment continued into 2002, the Company issued trust preferred securities through Trust IV on April 12, 2002, the proceeds of which were used to redeem in full on May 20, 2002, the higher rate securities issued through Trust I. Therefore, Trust I and II were liquidated in 2002. The remaining issuance costs related to the issuance of Trust I and Trust II of $1.5 million, net of tax, were written-off as a direct charge to equity. The refinancing of the Trust Preferred Security issuances reduced the Company’s annual pre-tax minority interest expense by $1.6 million in 2003 as compared to 2002.

The interest expense associated with the trust preferred securities is reported as Minority Interest Expense on the Consolidated Statements of Income. Trust Preferred Securities totaled $47.9 million at December 31, 2003 and $47.8 million at December 31, 2002 and are reported as Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation in the Consolidated Balance Sheets. Minority Interest Expense was $4.4 million, $5.0 million and $5.7 million for 2003, 2002 and 2001, respectively.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued guidance (revised FASB Interpretation (“FIN”) No. 46) which in part specifically addresses limited purpose trusts formed to issue trust preferred securities. The guidance will require the Company to deconsolidate its investment in Capital Trust III and IV as of March 31, 2004. Deconsolidating these entities will result in the Company classifying its obligation to the trusts, its junior subordinated debentures, as debt. Currently, the obligation recognized is that to the owners of the trust preferred securities and is recorded on 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. Additionally, the interest expense related to these debentures and the amortization of the issuance costs will no longer be classified as minority interest, it will then be recorded as a component of net interest margin. As a result of this reclassification there will be no impact to net income.

Investment Management As of December 31, 2003, the Rockland Trust Investment Management Group maintained approximately 1,292 trust/fiduciary/agency accounts, with an aggregate fair value of $481.8 million. At December 31, 2002, there were approximately 1,411 trust/fiduciary/agency accounts, with an aggregate fair value of $433.8 million. Income from trust activities is reported on an accrual basis. Income from the Investment Management Group amounted to $3.8 million, $4.6 million, and $4.0 million for 2003, 2002, and 2001, respectively.

Summary of Results of Operations Net income was $26.4 million for the year ended December 31, 2003, compared to $25.1 million for the year ended December 31, 2002. Diluted earnings per share were $1.79 and $1.61 for the years ended 2003 and 2002, respectively.

In 2003 the Company realized $1.7 million of security gains, net of tax, prepayment penalties on borrowings of $1.3 million, net of tax, and a net REIT settlement/expense of $2.0 million. The Company did not realize any net security gains/losses in 2002. The Company did recognize an impairment charge on a WorldCom bond, (following the announcement of fraud at WorldCom Inc.), in 2002 of $2.5 million, net of tax.

Return on average assets and return on average equity was 1.11% and 15.89%, respectively, for the year ending December 31, 2003 as compared to 1.12% and 17.26%, respectively, for the year ending December 31, 2002. Equity to assets was 7.05% as of December 31, 2003 compared to 7.06% 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 $97.6 million in 2003, a 4.0% decrease from 2002 net interest income of $101.6 million. The decrease in net interest income in 2003 compared with that of 2002 was primarily the result of contraction in the interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) from 4.32% in 2002 to 3.98% in 2003. However, the impact of contraction of the interest rate spread was partly mitigated with growth in interest earning assets of $137.2 million in 2003 to $2.2 billion from fiscal year ending December 31, 2002. The yield on earning assets was 5.87% in 2003, compared with 6.84% in 2002. The average balance of securities decreased by $9.3 million, or 1.3%, as compared with the prior year. The average balance of loans increased by $167.3 million, or 12.4%, and the yield on loans decreased by 101 basis points to 6.34% in 2003, compared to 7.35% in 2002. This decrease in loan yield was due to decreases that occurred in market interest rates throughout 2002 and early 2003. During 2003, the average balance of interest-bearing liabilities increased by $98.8 million, or 6.1%, over 2002 average balances. The average cost of these liabilities, or cost of funds, decreased to 1.89% compared to 2.52% in 2002. The decrease in cost of funds is attributable to lower prevailing market rates and a lower cost of funding mix. Increases in demand deposits and relatively low yielding deposit categories allowed the Bank to manage down its level of more expensive time deposits.

The following table presents the Company’s average balances, net interest income, interest rate spread, and net interest margin for 2003, 2002, and 2001. 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.


(1)	The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,864, $1,604 and $1,314 in 2003, 2002 and 2001, 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. Net interest margin represents net interest income as a percent of average interest-earning assets.

The following table presents certain information on a fully-taxable equivalent basis regarding changes in our 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 rate/volume (change in rate multiplied by change in volume).


(1)	The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1,864, $1,604 and $1,314 in 2003, 2002 and 2001, respectively.

(2)	Loans include portfolio loans, loans held for sale and nonaccrual loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income.

Net interest income on a fully tax-equivalent basis decreased by $4.0 million in 2003 compared to 2002. Interest income on a fully tax-equivalent basis decreased by $12.3 million, or 8.6%, to $130.2 million in 2003 as compared to the prior year-end. Interest income from taxable securities decreased by $9.5 million, or 24.2%, to $29.7 million in 2003 as compared to the prior year mainly attributable to the lower rate environment and a smaller taxable securities portfolio on average in 2003. Interest earned on loans decreased by $3.0 million, or 3.0%, reflecting a decrease in the average yield on loans to 6.34% in 2003 from 7.35% in 2002. The decrease in interest earned on loans was mitigated significantly by increased loan balances on average of $167.3 million in 2003.

Interest expense for the year ended December 31, 2003 decreased to $32.5 million from the $40.8 million recorded in 2002, a decrease of $8.3 million, or 20.2%, due to a decrease in the average rate paid on deposits and borrowings. Average borrowings increased by $39.8 million, or 10.7% from the 2002 average balance. Despite the increase in average balances, the interest expense on borrowings decreased $1.2 million primarily attributable to the low rate environment. Average interest-bearing deposits increased $59.0 million, or 4.7% over prior year, however, the cost of deposits decreased by $7.1 million, or 28.4%, to $17.8 million attributable to both the low rate environment and the intentional change in deposit mix.

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 decreased in 2003 to $3.4 million, compared with $4.7 million in 2002. For the year ended December 31, 2003, net loan charge-offs totaled $1.6 million, an increase of $0.1 million from the prior year. As of December 31, 2003, the allowance for loan losses represented 1.46% of loans, as compared to 1.49% at December 31, 2002. The allowance for loan losses at December 31, 2003 was 659.16% of nonperforming loans, as compared to 695.06% at the prior year-end. As of December 31, 2003, the total allowance for loan losses (including the “credit quality discount” described previously in the discussion for Allowance for Loan Losses of $0.5 million at December 31, 2002) represented 1.46% of loans, as compared to 1.53% at December 31, 2002. The total allowance for loan losses (including the “credit quality discount” in 2002) at December 31, 2003 represented 695.16% of nonperforming loans, as compared to 711.89% 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.

Non-Interest Income The following table sets forth information regarding non-interest income for the periods shown.

Non-interest income, which is generated by deposit account service charges, investment management services, mortgage banking activities, and miscellaneous other sources, amounted to $27.8 million in 2003, a $5.2 million, or 22.7%, increase over the prior year-end. Service charges on deposit accounts, which represented 41.0% of total non-interest income in 2003, increased from $10.0 million in 2002 to $11.4 million in 2003, representing growth in core deposits and lower earnings credit rates. Investment management and mutual fund income revenue decreased by 17.4% to $4.3 million compared to $5.3 million in 2002, due to the general performance of the equities market over the past few years shifting customers’ bias towards fixed income products which generate lower fees, as well as higher estate and trust distribution fees in the quarter ending March 31, 2002.

Mortgage banking income, $4.5 million in 2003, increased 44.1% over 2002 income of $3.1 million. This increase is due to the refinancing boom that was at its strongest during the first half of 2003. The Bank’s mortgage banking revenue consists primarily of net servicing income and gains and losses on the sale of loans which includes application fees and origination fees on sold loans. Residential mortgage loans are originated as necessary to meet consumer demand. Sales of such loans in the secondary market occur to lend balance to the Bank’s interest rate sensitivity. Such sales generate gains or losses at the time of sale, produce future servicing income, and provide funds for additional lending and other purposes. Typically, loans are sold with the Bank retaining responsibility for collecting and remitting loan payments, inspecting properties, making certain insurance and tax payments on behalf of the borrowers and otherwise servicing the loans for which the Bank receives a fee. At December 31, 2003 the servicing asset was $3.2 million, which was 0.80% of the serviced loan portfolio. At December 31, 2002 the servicing asset was $2.0 million, which was 0.58% of the serviced loan portfolio.

Security gains were $2.6 million for the twelve months ended December 31, 2003. In an effort to improve the Company’s overall interest rate risk position as well as improve the net interest margin, the Company prepaid $31.5 million of fixed, high rate borrowings and sold $20.0 million of investment securities during the second quarter of 2003. The prepayment penalty on the borrowings totaled $1.9 million and is recorded in non-interest expense, while the gain on the sale of the securities was $2.0 million. Other non-interest income increased by $675,000 for the twelve months ended December 31, 2003, respectively, mainly due to prepayment penalties received on loan payoffs.

Non-Interest Expense The following table sets forth information regarding non-interest expense for the periods shown.

Non-interest expense decreased by $1.8 million, or 2.4%, during the year ended December 31, 2003 as compared to the same period last year. Non-interest expense, excluding the securities’ impairment charge taken in the second quarter of 2002 and the prepayment penalty on borrowings taken in the second quarter of 2003, increased by $633,000 or 0.9% for the year ended December 31, 2003, as compared to the same period in the prior year. Salaries and employee benefits increased by $1.9 million, or 4.9% for the year ended December 31, 2003, due to additions to staff needed to support continued growth, employees’ merit increases, and pension expense, offset by lower executive retirement costs. As previously disclosed, Rockland Trust is a member of the Financial Institutions Retirement Fund, a defined benefit pension plan. Management has been notified by the administrator that, primarily due to the poor performance of the equities markets over the last several years, a contribution of $1.7 million will be required for the plan year beginning July 1, 2003 and ending June 30, 2004. The Company has therefore paid $841,000 for pension expense during the second half of 2003. No pension expense was recorded in the comparative periods.

Occupancy and equipment-related expense decreased $47,000, or 0.5%, for the twelve months ended December 31, 2003 due to assets being fully depreciated during the prior year. In 2003, the Company recorded a $393,000 loss, compared to $1.0 million in 2002, on an equity investment made for Community Reinvestment Act purposes. The remaining book value of the equity investment is $40,000.

During the twelve months ending December 31, 2002, the Company recognized an impairment charge of $4.4 million, pre-tax, on an investment in corporate bonds issued by WorldCom, which is a significant factor in the decrease in non-interest expense when comparing this period to the twelve months ending December 31, 2003. As mentioned above the Company incurred a prepayment penalty on borrowings of $1.9 million in the second quarter of 2003 which is recorded in non-interest expense.

Other non-interest expenses decreased $1.6 million or (8.4)%, for the twelve months ended December 31, 2003, mainly due to decreases in costs associated with a lower loss on a CRA equity investment, information technology consulting, office supplies, and executive recruitment.

Minority Interest The Trust Preferred Securities are presented in the consolidated balance sheets of the Company entitled “Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation”. The Company records distributions payable on the Trust Preferred Securities as minority interest expense in its consolidated statements of income. The minority interest expense was $4.4 million and $5.0 million for the years ended December 31, 2003 and 2002, respectively.

The cost of issuance of the trust preferred securities are being netted against the outstanding balance of the securities and are amortized to minority interest over the life of the securities on a straight-line basis. Additional costs associated with issuance are added on a periodic basis. Upon the Company’s exercise of the call option on Trust I and Trust II, the remaining balances were written off net of tax as a direct charge to equity of $738,000 on January 31, 2002 and of $767,000 on May 20, 2002. The remaining unamortized issuance costs at December 31, 2003 were $1.1 million and $1.0 million for Trust III and IV, respectively. The unamortized issuance costs at December 31, 2002 were $1.2 million and $1.1 million, respectively. Amortization expense related to these issuance costs was $103,000 in 2003 and $92,000 in 2002.

The Company unconditionally guarantees all Trust III and Trust IV obligations under the trust preferred securities.

In December, the Company’s Board of Directors 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 30, 2003. The dividend was paid on December 31, 2003.

Income Taxes For the years ended December 31, 2003, 2002 and 2001 the Company recorded combined federal and state income tax provisions of $15.5 million, $12.3 million and $10.5 million respectively. These provisions reflect effective income tax rates of 37.0%, 32.9% and 32.2%, in 2003, 2002, and 2001, respectively, which are less than the Bank’s statutory tax rate of 41.8%. The lower effective income tax rates are attributable to certain non-taxable interest and dividends and certain tax efficiency strategies employed by the Company. In 2003, the Company recognized 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 their retroactive change to Massachusetts tax law on the deductibility of Real Estate Investment Trust’s (“REIT”) dividend distributions to its parent Company. The Company’s effective rate for fiscal year 2003 excluding the $2.0 million settlement charge is 32.2%.

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 2002 vs. 2001 The Company’s assets increased to $2.3 billion in 2002, an increase of $86.2 million, or 3.9%, from the $2.2 billion reported in 2001. Investment securities decreased by $51.2 million, or 7.1%, to $669.0 million at December 31, 2002 from $720.2 million a year earlier. Loans increased by $132.7 million, or 10.2%, during the twelve months ended December 31, 2002. At December 31, 2002, deposits of $1.7 billion were $107.1 million, or 6.8%, higher than the prior year-end. Core deposits increased $173.0 million, or 16.6%, and time deposits decreased $65.9 million, or 12.2%.

Net income for 2002 was $25.1 million, or $1.61 per diluted share compared with net income of $22.1 million, or $1.53 per diluted share, reported for 2001. Return on average assets and return on average equity were 1.12% and 17.26%, respectively, for 2002 and 1.07% and 17.42%, respectively, for 2001.

Net interest income on a fully tax-equivalent basis totaled $101.6 million in 2002, as compared with $91.9 million in 2001. Growth in net interest income in 2002 compared with that of 2001 was primarily the result of a 9.7% increase in average earning assets and a 108 basis point decrease in the average cost of interest bearing liabilities. The yield on earning assets was 6.84% in 2002 compared with 7.72% in 2001. The Company’s interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) increased by 20 basis points in 2002. This increase was due to a lower cost of funds, attributable to lower prevailing market rates and lower cost funding mix.

The provision for loan losses was $4.7 million in 2002 compared to $4.6 million in 2001. The ratio of the allowance for loan losses to nonperforming loans at December 31, 2002 was 711.89% compared to 630.18% at December 31, 2001. Nonperforming loans represented 0.21% of gross loans at December 31, 2002 compared to 0.23% at December 31, 2001. Nonperforming assets were up $62,000 from December 31, 2001 to $3.1 million or 0.13% of total assets at December 31, 2002.

Non-interest income, which is generated by deposit account service charges, investment management services, mortgage banking activities, and miscellaneous other sources, amounted to $22.6 million and $20.8 million for the years ended December 31, 2002 and 2001, respectively. Service charges on deposit accounts, which represented 44.2% of total non-interest income in 2002, increased from $8.8 million in 2001 to $10.0 million in 2002. Investment management revenue increased by 18.8% to $5.3 million compared to $4.4 million in 2002, primarily due to estate and trust distribution fees. Mortgage banking income, $3.1 million in 2002, increased 60.0% over 2001 income of $1.9 million. This increase was due to a declining interest rate environment, which stimulated refinancing activity.

The Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangibles,” as of January 1, 2002. Upon adoption, the Company ceased amortization of goodwill, as defined at that time, of $0.8 million. In September 2002, the Company adopted, and retroactively applied to January 1, 2002, SFAS No. 147, “Acquisitions of Certain Financial Institutions.” Upon adoption, the previously defined balance of unidentifiable intangibles was reclassified to goodwill effective January 1, 2002. All 2002 unidentifiable intangible asset amortization expense recorded through September 30, 2002 was reversed and all future amortization was halted. The restated goodwill balance was $36.2 million. As a result of the adoption of SFAS No. 142 and SFAS No. 147, the Company did not record any goodwill amortization expense in 2002 as compared to $2.8 million recorded in 2001. Goodwill amortization is reported as a component of non-interest expense.

The Company did not realize any net security gains/losses in 2002. The Company did recognize an impairment charge on a WorldCom bond, (following the announcement of fraud at WorldCom Inc.), in 2002 of $4.4 million, pre-tax, and net security gains on the sale of available for sale securities in 2001 of $1.4 million.

For the year ended December 31, 2002 non-interest expense increased by $7.1 million, or 10.4% as compared to the same period in 2001. Non interest expense, excluding the securities impairment charge taken in the second quarter of 2002, increased $2.7 million, or 4.0% for the year ended December 31, 2002 as compared to the same period in the prior year.

For the years ending December 31, 2002 and 2001 the Company recorded combined federal and state income tax provisions of $12.3 million and $10.5 million, respectively. These provisions reflect an effective income tax rate of 32.9% and 32.2% for 2002 and 2001, respectively, which are less than the Company’s combined statutory tax rate of 41.8%. The lower effective income tax rates were attributable to certain non-taxable interest and dividends and certain tax efficiency strategies employed by the Company.

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, the chief risk officer, the senior lending officers and other members of management provide regular reports to the board of directors that review the level of risk to limits established by the policy, the trend of risks (increasing, stable or decreasing) 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

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. 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.

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 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. The assets relating to the notional principal amount are not actually exchanged.

At December 31, 2003 the Company had swaps, designated as “cash flow” hedges, with total notional values of $50.0 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% and receives a 3 month LIBOR rate of interest. These swaps had a negative fair value of $1.5 million at December 31, 2003. 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 range between two and five years. At December 31, 2003, there are $4.0 million gross, or $2.3 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, 2003 the Company had residential mortgage loan commitments with a fair value of $89,000 and forward sales agreements with a fair value of $2,000. At December 31, 2002 the Company had residential mortgage loan commitments with a fair value of $532,000 and forward sales agreements with a fair value of ($256,000). Changes in these fair values of ($184,000) and $234,000 for the years ending December 31, 2003 and 2002, 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%. Given the unusually low rate environments at December 31, 2003 and 2002, 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, 2003 and 2002.

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:

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.

The most significant factors affecting market risk exposure of the Company’s net interest income during 2003 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 the (iv) level of rates paid on deposit accounts.

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 businesses.

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 agreement lines, with major brokerage firms as potential sources of liquidity. At December 31, 2003, the Company had no advances outstanding under these lines. In addition to agreements with brokers, the Bank also had customer repurchase agreements outstanding amounting to $39.4 million at December 31, 2003. As a member of the Federal Home Loan Bank, the Bank has access to approximately $631.3 million of borrowing capacity. On December 31, 2003, the Bank had $371.1 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, 2003, consist of junior subordinated debentures, including accrued interest, issued to two 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 16 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 is directly reimbursed by the Bank for virtually all such expenses.

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, 2003, 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, 2003, 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, 2003, the Tier 1 leverage capital ratio for the Company and the Bank was 7.60% and 7.18%, respectively.

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, 2003.

(1)

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, 2004 — June 30, 2005. 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 time of the participants.

See Note 15 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 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, 2003 the maximum potential exposure amount of future payments is $5.3 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, $2.1 million is covered by collateral. The fair value of the guarantees are $41,000 and $48,000 at December 31, 2003 and 2002. The fair value of these guarantees is not reflected on the balance sheet.

Subsequent Event On January 9, 2004, Independent Bank Corp. announced that it had reached a definitive agreement to acquire Falmouth Bancorp, Inc. (AMEX: FCB), the parent of Falmouth Bank, in a part cash, part stock transaction valued at approximately $36.9 million, including approximately $2.5 million in cash that will be paid to Falmouth Bancorp option holders in exchange for the cancellation of those options. The $36.9 million transaction value is derived by using Independent Bank Corp.’s closing price per share on January 8, 2004 of $29.00 for the stock component of the transaction. The terms of the definitive agreement call for half of the outstanding shares of Falmouth Bancorp, Inc. to be converted into 1.28 shares of Independent Bank Corp. and for the other half of the outstanding Falmouth shares to be purchased for $38.00 in cash.

Falmouth Bancorp, Inc., headquartered in Falmouth, Massachusetts, has $166.1 million in assets and four branches located within Barnstable County, Massachusetts: East and North Falmouth, Falmouth, and Bourne. Barnstable County has one of the fastest growing populations in Massachusetts.

The transaction is intended to qualify as a tax-free reorganization for federal income tax purposes and to provide a tax-free exchange of shares.

Dividends The Company declared cash dividends of $0.52 per common share in 2003 and $0.48 per common share in 2002. The 2003 and 2002 ratio of dividends paid to earnings was 28.64% and 27.67% 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

SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” In December 2002, the FASB issued SFAS No. 148. SFAS No. 148 amends No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based methods of accounting for stock-based employee compensation. Companies are able to eliminate a “ramp-up” effect that the SFAS No. 123 transition rule creates in the year of adoption. Companies can choose to elect a method that will provide for comparability amongst years reported. In addition, this Statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the fair value based method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2002. The Company is currently considering the adoption of fair value based compensation of stock options. The potential impact to the Company of adopting such accounting can be seen in Footnote 1 of the Notes to Consolidated Financial Statements included in Item 8 hereof.

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 specifically addresses limited purpose trusts formed to issue trust preferred securities. The guidance will require the Company to deconsolidate its investment in Capital Trust III and IV as of March 31, 2004. In July 2003, the Board of Governors of the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of any accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of December 31, 2003, assuming the Company was not allowed to include the $50.0 million in trust preferred securities issued by Capital Trust III and Capital Trust IV in Tier I capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes. If the trust preferred securities were no longer allowed to be included in Tier 1 capital, the Company would also be permitted to redeem the capital securities, which bear interest at 8.625% and 8.375%, respectively, without penalty.

For all other arrangements entered into subsequent January 31, 2003, the Company adopted FIN 46R as of December 31, 2003. The Company does not believe the adoption of this interpretation will have a material impact on the Company’s financial position or results of operations.

Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. The Company adopted this statement on July 1, 2003. There was no material impact on the Company’s financial position or results of operations.

SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” In May 2003, the FASB issued SFAS No. 150, which establishes standards for how certain financial instruments with characteristics of both liabilities and equity should be measured and classified. Certain financial instruments with characteristics of both liabilities and equity will be required to be classified as a liability. This statement is effective for financial instruments entered into or modified after May 31, 2003, and July 1, 2003 for all other financial instruments with the exception of existing mandatorily redeemable financial instruments issued by limited life subsidiaries which have been indefinitely deferred from the scope of the statement. The Company does not believe the adoption of SFAS 150 will have a material impact on the Company’s financial position or results of operations.

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 excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances can not be created nor “carried over” in the initial accounting for loans acquired in a transfer on loans subject to SFAS 114, “Accounting by Creditors for Impairment of a Loan.” This SOP is effective for loans acquired after December 31, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company’s financial position or results of operations.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Assets and Liability Management” in Item 7 hereof.

We have audited the accompanying consolidated balance sheets of Independent Bank Corp. and subsidiaries (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The 2001 financial statements of Independent Bank Corp. were audited by other auditors who have ceased operations. Those auditors’ report, dated January 18, 2002, except for note 20 as to which the date was January 31, 2002, was unqualified and included an explanatory paragraph that described the change in the Company’s accounting for its derivative instruments and hedging activities.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 provides a reasonable basis for our opinion.

In our opinion, the 2003 and 2002 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, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 10 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 147, “Acquisitions of Certain Financial Institutions.”

We have audited the accompanying consolidated balance sheets of Independent Bank Corp. and subsidiaries (the Company) as of December 31, 2001 and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 its subsidiaries as of December 31, 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, effective January 1, 2001, the Company changed its method of accounting for its derivative instruments and hedging activities.

This Report of Independent Certified Public Accountants is a copy of a previously issued Arthur Andersen LLP (“Andersen”) report and has not been reissued by Andersen. The inclusion of this previously issued Andersen report is made pursuant to Section 2.02(e) of regulation S-X. Note that this previously issued Andersen report includes references to certain fiscal years which are not required to be presented in the accompanying consolidated financial statements as of and for the years ended December 31, 2003.