SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004
Commission File Number: 1-9047

Independent Bank Corp.

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

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

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

Yes X                      No

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

Yes X                      No

     As of May 3, 2004, there were 14,694,652 shares of the issuer’s common stock outstanding, par value $.01 per share.

1

INDEX

 2 

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT BANK CORP.

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

3

INDEPENDENT BANK CORP.

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

4

INDEPENDENT BANK CORP.

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

5

INDEPENDENT BANK CORP.

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

6

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

     Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts and was incorporated in 1986. The Company is the sole stockholder of Rockland Trust Company (“Rockland” or “the Bank”), a Massachusetts trust company chartered in 1907. The Company also owns 100% of the common stock of Independent Capital Trust III (“Trust III”) and Independent Capital Trust IV (“Trust IV”), each of which have issued trust preferred securities to the public. As of March 31, 2004, Trust III and Trust IV will no longer be included in the Company’s consolidated financial statements (See Fin 46R discussion in Note 3 to the Condensed Notes to unaudited Consolidated Financial Statements below). 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. All material intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004 or any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

NOTE 2 - STOCK BASED COMPENSATION

     The Company has three stock option plans; the Amended and Restated 1987 Incentive Stock Option Plan (“The 1987 Plan”), the 1996 Non-employee Directors’ Stock Option Plan (“The 1996 Plan”) and the 1997 Employee Stock Option Plan (“The 1997 Plan”). All three plans were approved by the Company’s board of directors. The Company measures compensation cost for stock-based compensation plans as the excess, if any, of the exercise price of options granted over the fair market value of the Company’s stock at the grant date. Compensation cost is not recognized as the exercise price has historically equaled the grant date fair value of the underlying stock; however, the Company discloses pro forma net income and earnings per share in the notes to its consolidated financial statements as if compensation was measured at the date of grant based on the fair value, as determined using the Black Scholes model, of the award and recognized over the service period.

7

     Had the Company recognized compensation cost for these plans determined as the fair market value of the Company’s stock at the grant date and recognized over the service period, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts:

     The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Annual grant dates for the 1996 plan are in April and grant dates for the 1997 plan are in December, consequently full year 2003 assumptions are shown below for both the 1996 and 1997 plan. On an exception basis, grants are made to new employees that meet plan specifications. The following weighted average assumptions were used for grants under the 1997 and 1996 plans:

8

(1) On January 8, 2004, 5,000 options were granted from the 1997 plan to the Company’s Managing Director of Business Banking. The risk free rate, the expected dividend yield, expected life and expected volatility for this grant was determined on January 8, 2004. The normal annual grant of 1997 Plan options is expected to occur in December of 2004 upon which a risk free interest rate, expected dividend yield, expected life and expected volatility will be determined for those grants.

(2) The 1996 plan option grant assumptions for 2004 will be determined upon normal option grants in April 2004.

(3) On December 11, 2003, 127,350 options were granted from the 1997 plan to the Company’s members of Senior Management. The risk free rate, expected dividend yield, the expected life and expected volatility for this grant was determined on December 11, 2003.

(4) On January 9, 2003, 50,000 options were granted from the 1997 plan to the Company’s President and Chief Executive Officer. The risk free rate, the expected dividend yield, expected life and expected volatility for this grant was determined on January 9, 2003.

(5) On April 15, 2003, 11,000 options were granted from the 1996 plan to the Company’s Board of Directors. The risk free rate, the expected dividend yield, expected life and expected volatility for this grant was determined on April 15, 2003.

9

     NOTE 3 – RECENT ACCOUNTING DEVELOPMENTS

     FASB Interpretation (“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”), FIN 46R, which, in part, addresses limited purpose trusts formed to issue trust preferred securities. FIN 46R required the Company to deconsolidate its two subsidiary trusts (Independent Capital Trust III and Independent Capital Trust IV) on March 31, 2004. The result of deconsolidating these trusts is that trust preferred securities of the trusts, which were classified between liabilities and equity on the balance sheet (mezzanine section), will no longer appear on the consolidated balance sheet of the Company. The related minority interest expense also will no longer be included in the consolidated statement of income. Due to FIN 46R, the junior subordinated debentures of the parent company that were previously eliminated in consolidation will now be included on the consolidated balance sheet within total borrowings. The interest expense on the junior subordinated debentures will be included in the net interest margin of the consolidated company, negatively impacting the net interest margin by approximately 0.19% on an annualized basis. There is no impact to net income as the amount of interest previously recognized as minority interest is equal to the amount of interest expense that will be recognized currently in the net interest margin offset by the dividend income on the subsidiary trusts common stock recognized in other non-interest income. Prior periods will not be restated to reflect the changes made by FIN 46R.

     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 March 31, 2004, 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 to January 31, 2003, the Company adopted FIN 46R as of December 31, 2003. There was no material impact on the Company’s financial position or results of operations.

10

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

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

NOTE 4 -	SETTLEMENT OF REAL ESTATE INVESTMENT TRUST (“REIT”) RETROACTIVE TAXATION DISPUTE

     In June of 2003, two of the Company’s subsidiaries settled a state tax dispute with the Commonwealth of Massachusetts Department of Revenue (“DOR”). The settlement resulted from a negotiation between the DOR and a group of approximately 50 to 60 banks. The dispute that led to the settlement arose from the assessment by the DOR in approximately June 2002, of additional state taxes against Massachusetts banks that had a REIT in their corporate structure. The dispute was exacerbated when, on March 5, 2003, the Governor of Massachusetts signed legislation that declared that the dividends which banks received from REIT subsidiaries were subject to state taxation, retroactive to 1999. Under the settlement, approximately $3.2 million, prior to federal deduction, was paid to the DOR on June 23, 2003 on behalf of the Company’s two subsidiaries.

     In the first quarter of 2003, the Company recorded a $4.1 million, charge to earnings, including interest and net of applicable tax benefits, due to the state tax dispute between its subsidiaries and the DOR. As a result of the settlement, the Company recognized a credit of approximately $2.1 million, including interest and net of applicable tax benefits, to income in the second quarter of 2003.

11

NOTE 5 - EARNINGS PER SHARE

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

     Earnings per share consisted of the following components for the three months ended March 31, 2004 and 2003:

     For the Three Months Ended March 31,

     For the Three Months Ended March 31,

     Options to purchase common stock with an exercise price greater than the average market price of common shares for the period are excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be antidilutive. For the three months ended March 31, 2004, there were 127,350, of shares excluded from the calculation of diluted earnings per share. For the three months ended March 31, 2003, there were 183,381 shares excluded from the calculation of diluted earnings per share.

12

NOTE 6 - EMPLOYEE BENEFITS

POST RETIREMENT BENEFITS AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS

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

     Components of Net Periodic Benefit Cost

     The Company previously disclosed in its financial statements for the fiscal year ended December 31, 2003, that it expected to contribute $55,000 to its post retirement benefit plan and $124,000 to its SERPs in 2004 and presently anticipates making these contributions. As of March 31, 2004, $12,000 and $31,000 of contributions have been made to the post retirement benefit plan and the SERPs, respectively.

     Not included in the above summary are the components of net periodic benefit cost for the noncontributory defined benefit pension plan administered by Penetgra (“the Fund”). The Fund does not segregate the assets or liabilities of all participating employers and, accordingly, disclosure of accumulated vested and nonvested benefits is not possible. The pension plan year is July 1^st through June 30^th. The Company disclosed in its financial statements for the year ended 2003 that the expected contributions for the remainder of the 2003-2004 plan years were $859,000. As of March 31, 2004, $781,000 of contributions were paid as the final obligation for the 2003-2004 plan years. The Company anticipates that $1.0 million of contributions will be paid during the remainder of 2004 for the 2004-2005 plan years.

13

NOTE 7 - COMPREHENSIVE INCOME

     Information on the Company’s comprehensive income, presented net of taxes, is set forth below for the quarter ended March 31, 2004 and 2003.

Comprehensive income is reported net of taxes, as follows:
(unaudited, In Thousands)

NOTE 8 - ACQUISITION

     On January 9, 2004, the Company announced that it reached a definitive agreement to acquire Falmouth Bancorp, Inc. (“Falmouth”), 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 the Company’s closing price per share on January 8, 2004 of $29.00 for the stock component of the transaction. Falmouth is 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. In accordance with SFAS No. 142, this transaction will be accounted for under the purchase method of accounting and goodwill of approximately $20 million is expected to be recognized. The definitive agreement has been approved by the Boards of Directors of both Independent Bank Corp. and Falmouth. The transaction is subject to all required regulatory approvals, approval by the shareholders of Falmouth, and other standard conditions. A special meeting of the stockholders of Falmouth is scheduled to be held on June 7, 2004. The transaction is expected to be completed by mid-year 2004.

14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the Securities and Exchange Commission.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

•		A weakening in the strength of the United States economy in general and the strength of the regional and local economies within the New England region and Massachusetts which could result in a deterioration of credit quality, a change in the allowance for loan losses or a reduced demand for the Company’s credit or fee-based products and services;
•		adverse changes in the local real estate market, as most of the Company’s loans are concentrated in southeastern Massachusetts and Cape Cod and a substantial portion of these loans have real estate as collateral, could result in a deterioration of credit quality and an increase in the allowance for loan loss;
•		the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System could affect the Company’s business environment or affect the Company’s operations;

15

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

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

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

EXECUTIVE LEVEL OVERVIEW

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

     For the quarter ending March 31, 2004, the Company anticipated continued net interest margin compression and anticipates continued compression throughout the remainder of 2004, however at a slower rate than in 2003. The net interest margin for the quarter ending March 31, 2004 is 4.14% as compared to 4.52% for the same period in 2003. Management anticipates the margin to compress and stabilize around 3.90% by the end of 2004. The 3.90% includes the impact of the adoption of FIN 46R of 0.19% (see Note 3 to the Condensed Notes to Unaudited Consolidated Financial Statements in Item 1 hereof). The total margin

16

compression for the year to date 2003 was 0.48%. The additional compression is anticipated as assets continue to re-price to current interest rates without the capacity to re-price deposits in correlation to assets.

     Management is working to mitigate the impact of the continued compression with prudent asset growth, non interest income generation, and expense control. Additionally, the Company is underway in implementing strategic business initiatives including a small business banking model, expanding residential lending, developing a new set of consumer deposit products, improving the commercial loan process, funding retail sales training, and funding a core information system selection process. These investments are requiring substantial investment in 2004, of which the Company has incurred approximately $550,000, pre-tax, related to these initiatives to date in 2004 and an incremental $200,000, pre-tax, has been spent on marketing and business development activities. The Company anticipates incurring an additional $1.1 million, pre-tax, related to these expenses during the remainder of 2004. These investments are expected to provide good earnings growth in 2005 and 2006.

FINANCIAL POSITION

     Loan Portfolio Total loans increased by $44.8 million, or 2.8%, during the three months ended March 31, 2004 as compared to December 31, 2003. The increases were mainly in consumer, residential real estate, commercial and industrial loans, and commercial construction, which increased $25.3 million, or 5.8%, $16.2 million, or 5.0%, $10.2 million, or 6.0%, and $4.0 million, or 5.2%, respectively. Consumer loans increased primarily due to an increase in indirect auto loans and home equity lines. Commercial real estate decreased by $13.0 million, or 2.3%, primarily due to the prepayment of a large credit. Residential loans held for sale increased $3.3 million.

     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

17

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:

Table 1 - Summary of Delinquency Information

     The increase in 90 days or more delinquency in the commercial and industrial loans category are due to a bankruptcy filing involving a well-collateralized floor plan relationship for which management does not anticipate a loss exposure.

     Nonaccrual Loans 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. 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.

     Nonperforming Assets Nonperforming assets are comprised of nonperforming loans, other real estate owned (“OREO”) and nonperforming investment securities. Nonperforming loans consist of nonaccrual loans and loans that are more than 90 days past due but still accruing interest. OREO includes properties held by the Bank as a result of foreclosure or by acceptance of a deed in lieu of foreclosure. Nonperforming investment securities consist of investments that have been identified as other than temporarily impaired and are no longer accruing interest. The Company’s strong underwriting guidelines, prudent investment practices, and the resilient local economy continue to result in very strong asset quality. Nonperforming assets totaled $5.0 million at March 31, 2004 (0.20% of total assets), as compared to the $3.5 million (0.14% of total assets) reported at December 31, 2003. The increase is due to the aforementioned bankruptcy filing involving a well-collateralized, floor plan relationship for which management does not anticipate loss exposure. The Company’s loan losses to nonperforming loans is 465.43% as compared to 659.16% at December 31,

18

2003. The Bank held no OREO property on March 31, 2004 and all investment securities were performing.

     Repossessed automobile loan balances continue to be classified as nonperforming loans, and not as other assets, because the borrower has the potential capacity to satisfy the obligation within twenty days from the date of repossession (before the Bank can schedule disposal of the collateral). The borrower can redeem the property by payment in full at anytime prior to the disposal of it by the Bank. Repossessed automobiles loan balances amounted to $562,000, $770,000, and $635,000 for the periods ending March 31, 2004, December 31, 2003, and March 31, 2003, respectively.

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

Table 2 - Nonperforming Assets / Loans
(Dollars In Thousands)

(1)

There were no restructured nonaccruing loans at March 31, 2004, December 31, 2003 and March 31, 2003.

     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 capacity of the borrower to repay in line with the current financial status of the borrower. It is the Bank’s policy to maintain restructured loans on nonaccrual status for approximately six months before management considers a return to accrual status. At March 31, 2004 the Bank had $443,000 of restructured loans. At March 31, 2004, the Bank also had nine potential problem loans which were not included in nonperforming loans with an outstanding balance of $4.7 million. Potential problem loans are those loans deemed to have well-defined weakness in credit quality, but that are not yet impaired. Potential problem loans are identified through a formal, ongoing loan review process and through monitoring of past due payment status.

19

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

     Interest income that would have been recognized for the three months ended March 31, 2004 and March 31, 2003, if nonperforming loans at the respective dates had been performing in accordance with their original terms, approximated $90,000 and $72,000, respectively. The actual amount of interest that was collected on nonaccrual and restructured loans during the three months ended March 31, 2004 and March 31, 2003 and included in interest income was approximately $41,000 and $113,000, 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 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 March 31, 2004 and December 31, 2003, impaired loans were $3.3 million and $2.1 million, respectively, which include all commercial real estate loans and commercial and industrial loans on nonaccrual status and restructured loans.

     Allowance For Loan Losses While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on increases in nonperforming loans, changes in economic conditions, or for other reasons. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. The Federal Deposit Insurance Corporation, (“FDIC”) Regulators examined the Company during the first quarter of 2004. No additional provision for loan losses was required as a result of that examination.

     The allowance for loan losses is maintained at a level that management considers adequate to provide for potential loan losses based upon an evaluation of known and inherent risks in the loan portfolio. The allowance is increased by provisions for loan losses and by

20

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. The credit quality discount was a separate allowance that was established for the acquired loan balances. This credit quality discount represented inherent losses in the acquired loan portfolio. The credit quality discount was amortized over the remaining average life of the loans purchased and amortized into interest income proportionately with the loan balances and absorbs charge-offs on these loans. The balance of the credit quality discount has been zero since September 30, 2003.

     As of March 31, 2004, the allowance for loan losses totaled $23.5 million, or 1.44% of total loans as compared to $23.2 million, or 1.46% of total loans at December 31, 2003. Based on the analyses described below, management believes that the level of the allowance for loan losses at March 31, 2004 is adequate.

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

21

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

     The allowance for loan losses is allocated to various loan categories as part of the Bank’s process of evaluating its adequacy. The allocated amount of allowance was $20.3 million at March 31, 2004, similar to the $20.2 million at December 31, 2003. The distribution of allowances allocated among the various loan categories was comparable to the distribution as of December 31, 2003. Small increases in the amounts allocated were observed in all loan type categories except Commercial and Industrial and Real Estate - Commercial, which exhibited minor decreases. These changes are attributed to changes in portfolio balances outstanding and the results of ongoing assessments of the loan portfolio.

22

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

Table 4 - Summary of Allocation of the Allowance for Loan Losses
(Dollars - In Thousands)

     A portion of the allowance for loan losses 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 exogenous factors, may impact the portfolio in ways currently unforeseen.

     Moreover, management has identified certain risk factors, which are not readily quantifiable, but which could still 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.

     Management is maintaining the non-specific allowance for measurement imprecision primarily based on its assessment of the effects of changing economic conditions in the United States on borrowers in its loan portfolio. Through the latter half of 2003 and the quarter ended March 31, 2004, the general state of the U.S. economy has exhibited 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. Regionally, employment levels in Massachusetts have remained flat through the quarter ended March 31, 2004 following an

23

extended declining trend. Despite this trend, the overall rate of unemployment in the state compared favorably to the National rate of unemployment as of March 2004. Additionally, local real estate markets have continued to exhibit signs of stability in terms of price and demand leading into first quarter of 2004.

     National, regional and local economic conditions notwithstanding, the credit quality of the Bank’s loan portfolio has remained stable through the first quarter ended March 31, 2004. Management, nonetheless, has maintained a non-specific allowance for measurement imprecision of $3.2 million at March 31, 2004. This amount has been increased by $200,000 from a $3.0 million non-specific allowance for measurement imprecision at December 31, 2003.

     Investments Total investments increased $64.3 million, or 9.6%, to $736.7 million at March 31, 2004 from December 31, 2003, with purchases consisting primarily of mortgage backed securities collateralized by 15 year mortgages enabling the Company to take advantage of the steepness in the Treasury yield curve while avoiding undue extension risk.

     Deposits Total deposits of $1.8 billion at March 31, 2004 increased $57.7 million since year-end 2003. Core deposits increased by $36.5 million, or 2.7%. The balance of time deposits increased by $21.3 million, or 4.7%, mainly due to the introduction of promotional rate time deposits in the first quarter of 2004.

     Borrowings Total borrowings increased $81.0 million, or 19.5%, to $496.3 million at March 31, 2004 from December 31, 2003, of which $51.5 million, or 12.4%, are the junior subordinated debentures that are now being consolidated within debt due to the adoption of FIN 46R on March 31, 2004 (see Note 3 to the Condensed Notes to Unaudited Consolidated Financial Statements in Item 1 hereof). The junior subordinated debentures were issued to the Trust III and IV in connection with the Trust’s issuance of trust preferred securities. FIN 46R effectively reclassifies the Company’s Trust Preferred Securities, net of issuance costs, of $47.8 million from the mezzanine section of the balance sheet to debt shown as Junior Subordinated Debentures. Prior periods were not restated to reflect this change.

     Corporation-Obligated Mandatorily Redeemable Trust Preferred Securities As a result of the adoption of FIN 46R on March 31, 2004 (see Note 3 to the Condensed Notes to Unaudited Consolidated Financial Statements in Item 1 hereof), the balance of the trust preferred securities issued by the Company’s trusts, Trust III and Trust IV, net of issuance costs, of $47.8 million are no longer consolidated in the Company’s financial statements. As disclosed above, the junior subordinated debentures, of $51.5 million, that were issued by the Company to the trusts will be consolidated and shown as debt. Prior periods are not restated to reflect the change in accounting.

     Stockholders’ Equity Stockholders’ equity as of March 31, 2004 totaled $180.8 million as compared to $171.8 million at December 31, 2003.

     Equity to Assets Ratio The ratio of equity to assets was 7.1% at March 31, 2004 and at December 31, 2003.

24

RESULTS OF OPERATIONS

     Summary of Results of Operations The Company reported net income of $6.7 million for the first quarter 2004 as compared with net income of $2.4 million for the first quarter of 2003. Diluted earnings per share were $0.45 for the three months ended March 31, 2004, compared to $0.17 per share for the same quarter in the prior year. During the quarter ending March 31, 2003, the Company recognized a $4.1 million charge to earnings due to a retroactive change in Massachusetts tax law pertaining to real estate investment trusts (see Note 4 to the Condensed Notes to Unaudited Consolidated Financial Statements in Item 1 hereof), which is the primary reason for the increase in earnings year over year. This charge resulted in a $0.28 per share decrease in the first quarter of 2003 earnings.

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

     On a fully tax equivalent basis, net interest income for the first quarter of 2004 decreased $194,000, or 0.8%, to $23.9 million, as compared to the first quarter of 2003. The Company’s net interest margin decreased to 4.14% for the first quarter of 2004 from 4.52% in the first quarter of 2003. 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) decreased by 28 basis points to 3.77% during the first quarter of 2004 as compared to the same period in the prior year.

     In an effort to better position the balance sheet for a rising rate environment the Company has increased the emphasis on adjustable rate lending and extended the duration of its borrowings. These steps, coupled with the prevailing low rate environment and the use of promotional pricing for certain retail deposit products, have had a negative impact on the Company’s current net interest margin. The effects of the compression in the net interest margin has been somewhat mitigated by the Company’s continued ability to generate loan growth.

     The following table presents the Company’s average balances, net interest income, interest rate spread, and net interest margin for the three months ending March 31, 2004 and March 31, 2003. For purposes of the table and the following discussion, income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of the Company’s securities to make them equivalent to income and yields on fully-taxable investments, assuming a federal income tax rate of 35%.

25

Table 5 - Average Balance, Interest Earned/Paid & Average Yields
(Unaudited - Dollars in Thousands)