SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

Commission File Number: 1-9047

Independent Bank Corp.

(Exact name of registrant as specified in its charter)

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

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

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

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

Yes þ      No o

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

Large Accelerated Filer o       Accelerated Filer þ       Non-accelerated Filer o

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

Yes o       No þ

     As of November 1, 2006, there were 14,682,918 shares of the issuer’s common stock outstanding, par value $0.01 per share.

 

 

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) — September 30, 2006 and December 31, 2005			3
Consolidated Statements of Income (unaudited) — Three and Nine months ended September 30, 2006 and 2005			4
Consolidated Statements of Stockholders’ Equity (unaudited) — Nine months ended September 30, 2006 and for the year ended December 31, 2005			5
Consolidated Statements of Cash Flows (unaudited) — Nine months ended September 30, 2006 and 2005			6
Condensed Notes to Unaudited Consolidated Financial Statements — September 30, 2006
Note 1 - Basis of Presentation			7
Note 2 - Stock-Based Compensation			7
Note 3 - Recent Accounting Developments			13
Note 4 - Earnings Per Share			16
Note 5 - Common Stock Repurchase Program			18
Note 6 - Employee Benefits			18
Note 7 - Repurchase Agreements			19
Note 8 - Comprehensive Income			20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Table 1 - Summary of Delinquency Information			29
Table 2 - Nonperforming Assets / Loans			30
Table 3 - Summary of Changes in the Allowance for Loan Losses			33
Table 4 - Summary of Allocation of the Allowance for Loan Losses			34
Table 5 - Average Balance, Interest Earned/Paid & Average Yields — Three Months Ended September 30, 2006 and 2005			38
Table 6 - Average Balance, Interest Earned/Paid & Average Yields — Nine Months Ended September 30, 2006 and 2005			39
Table 7 - Volume Rate Analysis			40
Table 8 - New Markets Tax Credit Recognition Schedule			43
Table 9 - Interest Rate Derivatives			45
Table 10 - Fair Value of Residential Mortgage Loan Commitments and Forward Sales Agreements			46
Table 11 - Interest Rate Sensitivity			47
Table 12 - Contractual Obligations, Commitments and Off-Balance Sheet Financial Instruments by Maturity			49
Item 3. Quantitative and Qualitative Disclosures About Market Risk			49
Item 4. Controls and Procedures			50
PART II. OTHER INFORMATION			50
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. Submission of Matters to a Vote of Security Holders			51
Item 5. Other Information			51
Item 6. Exhibits			51
Signatures			55
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32-1 Section 906 Certification of CEO
Ex-32-2 Section 906 Certification of CFO

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

INDEPENDENT BANK CORP.

CONSOLIDATED BALANCE SHEETS

(Unaudited- Dollars in Thousands, Except Share and Per Share Amounts)

		September 30,				December 31,
		2006				2005
ASSETS
CASH AND DUE FROM BANKS		$	64,403			$	66,289
FEDERAL FUNDS SOLD AND SHORT TERM INVESTMENTS			48,500				63,662
SECURITIES
TRADING ASSETS			1,588				1,557
SECURITIES AVAILABLE FOR SALE			494,422				581,516
SECURITIES HELD TO MATURITY
(fair value $99,596 and $106,730)			98,236				104,268
FEDERAL HOME LOAN BANK STOCK			22,634				29,287
TOTAL SECURITIES			616,880				716,628
LOANS
COMMERCIAL AND INDUSTRIAL			170,389				155,081
COMMERCIAL REAL ESTATE			730,213				683,240
COMMERCIAL CONSTRUCTION			128,469				140,643
BUSINESS BANKING			57,522				51,373
RESIDENTIAL REAL ESTATE			396,564				428,343
RESIDENTIAL CONSTRUCTION			9,122				8,316
RESIDENTIAL LOANS HELD FOR SALE			10,954				5,021
CONSUMER — HOME EQUITY			278,879				251,852
CONSUMER — AUTO			217,629				263,179
CONSUMER — OTHER			51,554				53,760
TOTAL LOANS			2,051,295				2,040,808
LESS: ALLOWANCE FOR LOAN LOSSES			(26,814	)			(26,639	)
NET LOANS			2,024,481				2,014,169
BANK PREMISES AND EQUIPMENT, NET			37,110				37,431
GOODWILL			55,078				55,078
CORE DEPOSIT INTANGIBLES			1,538				1,780
MORTGAGE SERVICING RIGHTS			2,571				2,892
BANK OWNED LIFE INSURANCE			45,180				44,762
OTHER REAL ESTATE OWNED			190				—
OTHER ASSETS			38,397				38,994
TOTAL ASSETS		$	2,934,328			$	3,041,685
LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS
DEMAND DEPOSITS		$	509,518			$	511,920
SAVINGS AND INTEREST CHECKING ACCOUNTS			571,227				613,840
MONEY MARKET			508,865				550,677
TIME CERTIFICATES OF DEPOSIT OVER $100,000			198,226				167,242
OTHER TIME CERTIFICATES OF DEPOSIT			392,774				361,815
TOTAL DEPOSITS			2,180,610				2,205,494
FEDERAL HOME LOAN BANK BORROWINGS			340,389				417,477
FEDERAL FUNDS PURCHASED AND ASSETS SOLD UNDER REPURCHASE AGREEMENTS			116,242				113,335
JUNIOR SUBORDINATED DEBENTURES			51,546				51,546
TREASURY TAX AND LOAN NOTES			1,606				5,452
TOTAL BORROWINGS			509,783				587,810
OTHER LIABILITIES			21,591				20,229
TOTAL LIABILITIES		$	2,711,984			$	2,813,533
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
PREFERRED STOCK, $0.01 par value. Authorized: 1,000,000 Shares Outstanding: None		$	—			$	—
COMMON STOCK, $0.01 par value. Authorized: 30,000,000 Issued and Outstanding: 14,674,258 Shares at September 30, 2006 and 15,402,391 Shares at December 31, 2005			147				154
SHARES HELD IN RABBI TRUST AT COST 168,540 Shares at September 30, 2006 and 170,488 Shares at December 31, 2005			(1,712	)			(1,577	)
DEFERRED COMPENSATION OBLIGATION			1,712				1,577
ADDITIONAL PAID IN CAPITAL			60,045				59,700
RETAINED EARNINGS			169,153				175,284
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAX			(7,001	)			(6,986	)
TOTAL STOCKHOLDERS’ EQUITY			222,344				228,152
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,934,328			$	3,041,685

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

INDEPENDENT BANK CORP.

(Unaudited — Dollars in Thousands, Except Share and Per Share Data)

		THREE MONTHS ENDED								NINE MONTHS ENDED
		September 30,								September 30,
		2006				2005				2006				2005
INTEREST INCOME
Interest on Loans		$	34,732			$	30,994			$	101,517			$	88,891
Taxable Interest and Dividends on Securities			6,896				7,492				20,535				23,792
Non-taxable Interest and Dividends on Securities			604				668				1,936				2,007
Interest on Federal Funds Sold and Short-Term Investments			577				71				729				137
Total Interest Income			42,809				39,225				124,717				114,827
INTEREST EXPENSE
Interest on Deposits			11,229				6,616				29,093				17,949
Interest on Borrowings			5,751				5,890				17,680				17,946
Total Interest Expense			16,980				12,506				46,773				35,895
Net Interest Income			25,829				26,719				77,944				78,932
PROVISION FOR LOAN LOSSES			530				1,070				1,630				3,105
Net Interest Income After Provision For Loan Losses			25,299				25,649				76,314				75,827
NON-INTEREST INCOME
Service Charges on Deposit Accounts			3,669				3,462				10,652				9,611
Investment Management Services Income			1,438				1,348				4,497				3,999
Mortgage Banking Income			526				1,068				1,994				2,580
BOLI Income			479				462				2,729				1,360
Net Gain/(Loss) on Sales of Securities			—				—				(1,769	)			616
Other Non-Interest Income			937				797				2,588				2,330
Total Non-Interest Income			7,049				7,137				20,691				20,496
NON-INTEREST EXPENSE
Salaries and Employee Benefits			12,088				11,804				36,024				35,758
Occupancy and Equipment Expenses			2,378				2,273				7,618				7,465
Data Processing and Facilities Management			1,166				1,070				3,262				3,023
Other Non-Interest Expense			4,341				5,095				14,187				14,186
Total Non-Interest Expense			19,973				20,242				61,091				60,432
INCOME BEFORE INCOME TAXES			12,375				12,544				35,914				35,891
PROVISION FOR INCOME TAXES			3,819				3,857				11,165				11,249
NET INCOME		$	8,556			$	8,687			$	24,749			$	24,642
BASIC EARNINGS PER SHARE		$	0.58			$	0.56			$	1.65			$	1.60
DILUTED EARNINGS PER SHARE		$	0.58			$	0.56			$	1.63			$	1.59
Weighted average common shares (Basic)			14,696,065				15,391,937				15,014,292				15,370,226
Common share equivalents			178,433				145,684				165,725				147,813
Weighted average common shares (Diluted)			14,874,498				15,537,621				15,180,017				15,518,039

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

INDEPENDENT BANK CORP.

																										ACCUMULATED
		COMMON								SHARES				DEFERRED				ADDITIONAL								OTHER
		SHARES				COMMON				HELD IN				COMPENSATION				PAID-IN				RETAINED				COMPREHENSIVE
		OUTSTANDING				STOCK				RABBI TRUST				OBLIGATION				CAPITAL				EARNINGS				INCOME/(LOSS)				TOTAL
BALANCE DECEMBER 31, 2004			15,326,236			$	153				($1,428	)		$	1,428			$	59,415			$	150,241			$	934			$	210,743
Net Income																							33,205								33,205
Cash Dividends Declared ($0.60 per share)																							(9,233	)							(9,233	)
Proceeds From Exercise of Stock Options			76,155				1																1,071								1,072
Tax Benefit on Stock Option Exercise																			282												282
Stock-Based Compensation																			3												3
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains																											870				870
Deferred Compensation Obligation											(149	)			149																—
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains																											(8,790	)			(8,790	)
BALANCE DECEMBER 31, 2005			15,402,391			$	154				($1,577	)		$	1,577			$	59,700			$	175,284				($6,986	)		$	228,152
Net Income																							24,749								24,749
Cash Dividends Declared ($0.48 per share)																							(7,163	)							(7,163	)
Purchase of Common Stock			(800,000	)			(8	)															(24,818	)							(24,826	)
Proceeds From Exercise of Stock Options			71,867				1																1,101								1,102
Tax Benefit on Stock Option Exercise																			224												224
Stock-Based Compensation																			121												121
Change in Fair Value of Derivatives During Period, Net of Tax, and Realized Gains																											(640	)			(640	)
Deferred Compensation Obligation											(135	)			135																—
Change in Unrealized Gain on Securities Available For Sale, Net of Tax and Realized Gains																											625				625
BALANCE SEPTEMBER 30, 2006			14,674,258			$	147				($1,712	)		$	1,712			$	60,045			$	169,153				($7,001	)		$	222,344

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

INDEPENDENT BANK CORP.

		NINE MONTHS ENDED
		SEPTEMBER 30,
		2006				2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	24,749			$	24,642
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Depreciation and amortization			4,238				4,517
Provision for loan losses			1,630				3,105
Deferred income tax expense			(127	)			(5,079	)
Loans originated for resale			(123,804	)			(149,935	)
Proceeds from mortgage loan sales			118,987				154,844
Gain on sale of mortgages			(1,116	)			(1,192	)
Proceeds from Bank Owned Life Insurance			(1,316	)			—
Loss/(gain) on sale of investments			1,769				(616	)
Other Real Estate Owned			(190	)			—
Gain recorded from mortgage servicing rights, net of amortization			321				325
Stock based compensation expense			121				—
Tax benefit from stock option exercises			—				206
Changes in assets and liabilities:
Decrease in other assets			526				766
Increase in other liabilities			1,331				3,035
TOTAL ADJUSTMENTS			2,370				9,976
NET CASH PROVIDED FROM OPERATING ACTIVITIES			27,119				34,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal repayments of Securities Held to Maturity			5,943				3,023
Proceeds from maturities and principal repayments and sales of Securities Available For Sale			85,782				185,260
Purchase of Securities Available For Sale			—				(121,418	)
Sale/(purchase) of Federal Home Loan Bank Stock			6,653				(874	)
Net increase in Loans			(6,008	)			(108,326	)
Investment in Bank Premises and Equipment			(2,994	)			(3,541	)
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES			89,376				(45,876	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in Time Deposits			61,943				72,006
Net (decrease) increase in Other Deposits			(86,827	)			40,249
Net increase in Federal Funds Purchased and Assets Sold Under Repurchase Agreements			2,907				28,816
Net decrease in Federal Home Loan Bank Borrowings			(77,088	)			(114,414	)
Net decrease in Treasury Tax and Loan Notes			(3,846	)			(2,720	)
Proceeds from exercise of stock options			1,102				1,072
Excess tax benefit from stock option exercises			224				—
Payments for purchase of common stock			(24,826	)			—
Dividends paid			(7,132	)			(6,757	)
NET CASH (USED IN) PROVIDED FROM FINANCING ACTIVITIES			(133,543	)			18,252
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(17,048	)			6,994
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD			129,951				65,696
CASH AND CASH EQUIVALENTS AS OF SEPTEMBER 30,		$	112,903			$	72,690
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest on deposits and borrowings		$	44,904			$	33,919
Income taxes			12,299				10,245
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in fair value of derivatives, net of tax and realized gains			(640	)			696
Change in fair value of securities available for sale, net of tax and realized gains			625				(7,132	)

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

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

     Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company headquartered in Rockland, Massachusetts incorporated in 1986. The Company is the sole stockholder of Rockland Trust Company (“Rockland” or the “Bank”), a Massachusetts trust company chartered in 1907. The Company has established Independent Capital Trust III (“Trust III”) and Independent Capital Trust IV (“Trust IV”), each of which have issued trust preferred securities to the public. Trust III and Trust IV are not included in the Company’s consolidated financial statements. The Bank’s subsidiaries consist of: three Massachusetts securities corporations, RTC Securities Corp. I, RTC Securities Corp. X, and Taunton Avenue Securities Corp.; Taunton Avenue, Inc.; Rockland Trust Community Development LLC (“RTC CDE I”), Rockland Trust Community Development Corporation II (“RTC CDE II”), and Rockland Trust Community Development Corporation (“Parent CDE”). Taunton Avenue, Inc. was formed in May 2003 to hold loans, industrial development bonds and other assets. RTC CDE I and RTC CDE II were formed in August 2003 and August 2005, respectively, to make loans and to provide financial assistance to qualified businesses and individuals in low-income communities in accordance with the U.S. Treasury’s New Markets Tax Credit Program criteria. Parent CDE was formed in August 2006 to act as the parent of both RTC CDE I and RTC CDE II. All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the quarter and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 31, 2006 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, 2005 filed with the Securities and Exchange Commission (“SEC”).

NOTE 2 — STOCK-BASED COMPENSATION

     The Company has five stock-based plans, all of which were approved by the Company’s Board of Directors and shareholders, including the 2006 Plan (as defined below), which was approved by shareholders on April 13, 2006.

	•		Amended and Restated 1987 Incentive Stock Option Plan (“the 1987 Plan”)
	•		1996 Non-Employee Directors’ Stock Option Plan (“the 1996 Plan”)
	•		1997 Employee Stock Option Plan (“the 1997 Plan”)
	•		2005 Employee Stock Plan (“the 2005 Plan”)
	•		2006 Non-Employee Director Stock Plan (“the 2006 Plan”)

     The following table presents the amount of cumulatively granted options and restricted stock awards, net of cancellations, through September 30, 2006.

		Authorized				Authorized								Cumulative
		Stock				Restricted								Granted, Net
		Option Awards				Stock Awards				Total				of Cancellations
1987 Plan			800,000				N/A				800,000				586,813
1996 Plan			300,000				N/A				300,000				209,000
1997 Plan			1,100,000				N/A				1,100,000				1,074,572
2005 Plan			(1	)			(1	)			800,000				145,100	(3)
2006 Plan			(2	)			(2	)			50,000				15,200	(4)

(1)		The Company may award up to a total of 800,000 shares as stock options or restricted stock awards.
(2)		The Company may award up to a total of 50,000 shares as stock options or restricted stock awards.
(3)		This amount represents 134,500 stock options and 10,600 restricted stock awards.
(4)		This amount represents 10,000 stock options and 5,200 restricted stock awards.

     At September 30, 2006, there were no shares available for grant under either the 1987 Plan or the 1996 Plan due to their expiration. Under the 2006 Plan, the 2005 Plan, the 1997 Plan, and the 1996 Plan the option exercise price equals the fair market value on the date of grant. All options granted under the 1997 Plan prior to December 15, 2005 vested between six months and two years from the date of grant and have ten-year contractual terms. All options granted on December 15, 2005 under either the 2005 Plan or the 1997 Plan vested immediately and have seven-year contractual terms. All options granted in 2006 under the 2005 Plan vest between six and 28 months from the date of grant and have seven-year contractual terms. All options granted under the 2006 Plan vest between the date of grant and approximately 21 months from the date of grant and have seven-year contractual terms. Options granted to date under all plans expire between 2007 and 2015. The Company issues shares for option exercises and restricted stock issuances from its pool of authorized but unissued shares.

     On December 15, 2005, the Company’s Board of Directors voted to accelerate the vesting of certain unvested “out-of-the-money” stock options awarded to employees pursuant to the 1997 Plan so that they immediately vested as of December 15, 2005. No other changes were made to the terms and conditions of the stock options affected by the Board vote. The Board vote approved the acceleration and immediate vesting of all unvested options with an exercise price of $31.44 or greater per share. As a consequence of the Board vote, options to purchase 135,549 shares of the Company’s common stock became exercisable immediately. The average of the high price and low price at which the Company’s common stock traded on December 15, 2005, the date of the Board vote, was $28.895 per share. The Company estimates that, as a result of this accelerated vesting, approximately $710,000 of 2006 non-cash compensation expense and $8,000 of 2007 non-cash compensation expense were eliminated that would otherwise have been recognized in the Company’s earnings in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”).

     On December 15, 2005, the Company granted 11,450 restricted stock awards to employees from the 2005 Plan. These awards vest evenly over a five-year period assuming continued employment with the Company. The holders of these awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The

employees are not required to pay any consideration to the Company for the restricted stock awards. The Company measured the fair value of the shares based on the average of the high price and low price at which the Company’s common stock traded on the date of the grant.

     On April 18, 2006, the Company granted 5,200 restricted stock awards to non-employee directors from the 2006 Plan. These awards vest at the end of a five-year period, or earlier if the director ceases to be a director for any reason other than cause, for example, retirement. If a non-employee director is removed from the Board for cause, the Company has ninety (90) days within which to exercise a right to repurchase any unvested portion of any restricted stock award from the non-employee director for the aggregate price of One Dollar ($1.00). The holders of these awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The directors are not required to pay any consideration to the Company for the restricted stock awards. The Company measured the fair value of the awards based on the average of the high price and low price at which the Company’s common stock traded on the date of the grant.

     Prior to January 1, 2006, the Company accounted for its stock-based plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). No compensation cost was recognized for stock options in the Consolidated Statement of Income for the periods ended on or prior to December 31, 2005, as options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. However, there was compensation expense recorded in the year ended December 31, 2005 related to restricted stock awards in accordance with APB 25 in the amount of approximately $3,000 before tax.

     Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R for all share-based payments, using the modified-prospective transition method. Under this transition method, compensation cost recognized in the quarter and nine months ended September 30, 2006 includes: (1) compensation expense recognized over the requisite service period for all share-based awards granted prior to, but not yet fully vested, as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (2) compensation cost for all share-based awards granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. Upon adoption of SFAS 123R, the Company elected to retain its method of valuation for share-based awards granted using the Black-Scholes option-pricing model which was also previously used for the Company’s pro forma information required under SFAS 123. The Company is recognizing compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.

     The total stock-based compensation expense before tax recognized in earnings by the Company in the quarter and nine months ended September 30, 2006 was approximately $40,000 and $121,000, respectively. The portion of this expense related to restricted stock awards was approximately $29,000 and $68,000 in the quarter and nine months ended September 30, 2006, respectively.

     As required, prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. Therefore, the Company had $0 and $224,000 of excess tax benefits classified as a financing cash inflow during the quarter and nine months ended September 30, 2006, respectively.

     Cash received from stock option exercises for the quarter and nine months ended September 30, 2006 was approximately $84,000 and $1.1 million, respectively. The actual tax benefit realized for the tax deductions from option exercises under all plans totaled $4,000 and $77,000 for the quarters ending September 30, 2006 and 2005, respectively, and $287,000 and $206,000 for the nine months ending September 30, 2006 and 2005, respectively. No cash was used by the Company to settle equity instruments granted under share-based compensation arrangements during the quarter or nine months ended September 30, 2006.

     For purposes of pro forma disclosures for periods prior to January 1, 2006, the estimated fair value of the stock options is amortized into expense over the vesting period of the options. The Company’s net income and earnings per share for the three and nine months ended September 30, 2005, had the Company elected to recognize compensation expense for the granting of options under SFAS 123 using the Black-Scholes option pricing model, would have been reduced to the following pro forma amounts:

				Three Months				Nine Months
				Ended				Ended
				September 30, 2005
				(Dollars in Thousands, except Per Share Data)
Net Income:		As Reported		$	8,687			$	24,642
Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax				$	233			$	674
		Pro Forma		$	8,454			$	23,968
Basic EPS:
		As Reported		$	0.56			$	1.60
		Pro Forma		$	0.55			$	1.56
Diluted EPS:
		As Reported		$	0.56			$	1.59
		Pro Forma		$	0.54			$	1.54

     The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions used for grants under the identified plans:

	•		Expected volatility is based on the standard deviation of the historical volatility of the weekly adjusted closing price of the Company’s shares for a period equivalent to the expected life of the option.
	•		Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, historical exercise/forfeiture behavior, and the vesting period, if any.

	•		Expected dividend yield is an annualized rate calculated using the most recent dividend payment at time of grant and the Company’s average trailing twelve-month daily closing stock price.
	•		The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.
	•		In addition, as SFAS 123R requires that the stock-based compensation expense recognized in earnings be based on the amount of awards ultimately expected to vest, a forfeiture assumption is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in the third quarter of 2006 has been reduced for annualized estimated forfeitures of 5% for both restricted stock and stock option awards. Forfeitures were estimated based on historical experience.

				2006 Plan								2005 Plan								1997 Plan								1996 Plan
Expected Volatility		September 30, 2006			27	%			(1	)			25	%			(2	)			N/A								N/A
		Fiscal Year 2005			N/A								25	%			(3	)			25	%			(3	)			—
													—								26	%			(4	)			27	%			(5	)
Expected Lives		September 30, 2006		4 years					(1	)		4 years					(2	)			N/A								N/A
		Fiscal Year 2005			N/A							3.5 years					(3	)		3.5 years					(3	)			—
													—							3.5-4 years					(4	)		4.5 years					(5	)
Expected Dividend Yields		September 30, 2006			2.36	%			(1	)			2.08	%			(2	)			N/A								N/A
		Fiscal Year 2005			N/A								2.04	%			(3	)			2.04	%			(3	)			—
													—								1.91%-1.95	%			(4	)			2.21	%			(5	)
Risk Free Interest Rate		September 30, 2006			4.87	%			(1	)			4.73	%			(2	)			N/A								N/A
		Fiscal Year 2005			N/A								4.38	%			(3	)			4.38	%			(3	)			—
													—								3.53%-3.80	%			(4	)			3.93	%			(5	)

     A summary of the status of all the Company’s Plans for the nine months ended September 30, 2006 is presented in the table below:

Summary Status of All Plans

						Nine Months Ended September 30, 2006
						Weighted				Wtd Avg.				Aggregate								Weighted
						Average				Remaining				Intrinsic				Restricted				Average
						Exercise				Contractual				Value				Stock				Exercise
		Stock Options				Price ($)				Term (years)				($000)				Awards				Price ($)
Balance at January 1, 2006			950,390			$	25.67												11,450			$	28.90
Granted			15,000			$	32.50												5,200			$	32.23
Exercised			(74,467	)		$	15.96												—			$	—
Forfeited			—			$	—												(850	)		$	28.90
Expired			(32,202	)		$	31.75												—			$	—
Balance at September 30, 2006			858,721			$	26.41				6.3			$	5,784				15,800			$	29.99
Options Exercisable at September 30			846,889			$	26.32				6.2			$	5,779				n/a				n/a

		Three Months Ended								Nine Months Ended
		September 30, 2006				September 30, 2005				September 30, 2006				September 30, 2005
Weighted average grant date fair value of options granted ($  per share)		$	7.35			$	6.29			$	7.32			$	6.62
Total intrinsic value of share options exercised		$	10,000			$	183,000			$	686,000			$	490,000

     The aggregate intrinsic value in the preceding tables represents the total pre-tax intrinsic value, based on the average of the high price and low price at which the Company’s common stock traded on September 29, 2006 (the last trading day of the quarter) of $32.93, which would have been received by the option holders had they all exercised their options as of that date.

     A summary of the status of the Non-Employee Director Plans as of September 30, 2006 and changes during the nine months then ended is presented in the table below:

Non-Employee Director Plans

		Nine Months Ended September 30, 2006
		1996 Plan								2006 Plan
						Weighted				Stock				Weighted
						Average				Options				Average
		Stock				Exercise				and				Exercise
		Options				Price				Awards				Price
Balance at January 1, 2006			98,000			$	18.96				—			$	—
Granted
Options			—			$	—				10,000			$	32.23
Restricted Stock Awards			n/a				n/a				5,200			$	32.23
Exercised			(14,000	)		$	9.51				—			$	—
Forfeited			—			$	—				—			$	—
Expired			—			$	—				—			$	—
Outstanding at September 30, 2006			84,000			$	20.54				15,200			$	32.23
Options Exercisable at September 30			84,000			$	20.54				3,334			$	32.23

     A summary of the status of the Company’s nonvested awards under all Plans as of September 30, 2006 and changes during the nine months then ended is presented in the table below:

Nonvested Awards Issued Under All Plans

		Nine Months Ended September 30, 2006
		Stock Options								Restricted Stock Awards
						Weighted								Weighted
						Average								Average
						Grant Date								Grant Date
		Awards				Fair Value				Awards				Fair Value
Nonvested at January 1, 2006			37,849			$	6.64				11,450			$	28.90
Granted			15,000			$	7.32				5,200			$	32.23
Vested			(39,201	)		$	6.70				—			$	—
Expired			(1,816	)		$	6.73				—			$	—
Forfeited			—			$	—				(850	)		$	28.90
Nonvested at September 30, 2006			11,832			$	7.31				15,800			$	29.99

Unrecognized compensation cost, including forfeiture estimate		$	66,000			$	350,000
Weighted average remaining recognition period (years)			1.7				4.0

     The total fair value of stock options that vested during the quarters ended September 30, 2006 and 2005 was $20,000 and $107,000, respectively. The total fair value of stock options that vested during the nine months ended September 30, 2006 and 2005 was $262,000 and $1.0 million, respectively.

NOTE 3 — RECENT ACCOUNTING DEVELOPMENTS

     FASB Staff Position (“FSP”) 123R-3 (“FSP 123R-3”), “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” In November 2005, the FASB issued FSP FAS 123R-3. This FSP provides a simplified, elective transition alternative to (1) calculating the beginning balance of the pool of excess tax benefits available to absorb tax deficiencies subsequent to the adoption of SFAS 123R (“APIC Pool”) and (2) determining the subsequent impact on the APIC Pool from the tax benefits of awards that are fully vested and outstanding upon the adoption of SFAS 123R. An entity shall follow either the transition guidance described in this FSP or the transition guidance described in SFAS 123R paragraph 81. An entity that adopted SFAS 123R using the modified prospective or modified retrospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS 123R or the effective date of this FSP to make this one-time election. The Company has not yet determined the transition method that will be applied in calculating the APIC pool after adopting SFAS 123R.

     FSP FAS 123R-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event” In February 2006, the FASB issued FSP FAS 123R-4. This FSP addresses the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event. The guidance in this FSP amends certain paragraphs of SFAS 123R, which required that options or

similar instruments be classified as liabilities if the entity could be required under any circumstances to settle the option or similar instrument by transferring cash or other assets. These paragraphs are amended such that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet the condition in those paragraphs of SFAS 123R until it becomes probable that the event will occur. This FSP was to be applied upon initial adoption of SFAS 123R. An entity that adopted SFAS 123R prior to the issuance of this FSP (such as the Company) is to apply the guidance in the first reporting period beginning after FSP FAS 123R-4 was made available. If in applying SFAS 123R an entity treated options or similar instruments that allow for cash settlement upon the occurrence of a contingent event in a manner consistent with the guidance in this FSP (such as the Company), then that entity would not be required to retrospectively apply the guidance in this FSP to prior periods. The adoption of FSP FAS 123R-4 did not have a material impact on the Company’s financial position or results of operations because the Company treated options that allow for cash settlement upon the occurrence of a contingent event in a manner consistent with the guidance in this FSP upon adoption of SFAS 123R.

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

     SFAS No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140” In February 2006, the FASB issued SFAS 155. SFAS 155 amends SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest- and principal-only strips are not subject to SFAS 133; requires an evaluation of interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This SFAS is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006 and the fair value election may be applied upon adoption to hybrid financial instruments that had been bifurcated under SFAS 133 prior to the adoption of this statement. As this standard is effective for the Company beginning on January 1, 2007, if the Company were to acquire or issue financial instruments subsequent to that date the guidance in SFAS 155 would be applied and the Company will consider applying the fair value election to its’ hybrid financial instruments that have been bifurcated under SFAS 133.

     SFAS No. 156 (“SFAS 156”) , “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” In March 2006, the FASB issued SFAS 156. SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement requires an entity to recognize a servicing asset or servicing liability when it undertakes an obligation to service a financial asset in certain situations; requires separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose between an amortization or fair value measurement method for each class of separately recognized servicing assets and servicing liabilities; at initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights; requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS 156 is to be adopted as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted, provided the entity has not yet issued financial statements for any period of that fiscal year. The effective date of SFAS 156 is the date an entity adopts it, and an entity should apply the requirements for recognition and initial measurement of servicing assets and servicing liabilities prospectively to all transactions after the effective date. The Company has not yet adopted SFAS 156 and is not required to do so until the Company’s fiscal year that begins on January 1, 2007. The Company does not believe that the adoption of SFAS 156 will have a material impact on the Company’s financial position.

     FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” In June 2006, the FASB issued FIN 48, an interpretation SFAS No. 109, “Accounting for Income Taxes,” in order to add clarity to the accounting for uncertainty in income taxes recognized in a Company’s financial statements. The interpretation requires that only tax positions that are more likely than not to be sustained upon a tax examination are to be recognized in a Company’s financial statements to the extent that the benefit is greater than 50% likely of being recognized. The differences that arise between the amounts recognized in the financial statements and the amounts recognized in the tax return will lead to an increase or decrease in current taxes, an increase or decrease to the deferred tax asset or deferred tax liability, respectively, or both. FIN 48 is effective for fiscal years beginning after December 15, 2006 with early application encouraged if interim financial statements have not yet been issued. The Company has not yet assessed the impact that the adoption of FIN 48 will have on the Company’s financial position or results of operation.

     SFAS No. 157 (“SFAS 157”), “Fair Value Measurements” In September 2006, the FASB issued SFAS 157. SFAS 157 was issued to provide consistency and comparability in determining fair value measurements and to provide for expanded disclosures about fair value measurements. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities. The effective date is for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe that the adoption of SFAS 157 will have a material impact on the Company’s financial position.

     SFAS No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans- An Amendment of FASB Statements No. 87, 88, 106, and 132(R),” In September 2006, the FASB issued SFAS 158. SFAS 158 will require

companies to recognize the funded status of defined benefit plans (other than a multiemployer plan) to recognize any changes in funded status through comprehensive income in the year in which the changes occur. Additionally, SFAS 158 will require companies to measure the funded status of a plan as of the date of the fiscal year end financial statements with limited exceptions. The effective date for the recognition of the funded status of a defined benefit postretirement plan and to provide the required disclosures is as of the end of the fiscal year ending after December 15, 2006 for publicly traded companies. The effective date for measuring plan assets and benefit obligations as of the fiscal year end is effective for fiscal years ending after December 15, 2008. The Company has not yet measured the impact of the adoption of SFAS 158 on the Company’s financial position for its “other” post retirement plans including its supplemental executive retirement plans and its post retirement benefits plan. The Company does however know that its pension plan falls outside the scope of SFAS 158 because it is a multiemployer plan.

     Staff Accounting Bulletin (“SAB”) No. 108 In September 2006, the SEC issued SAB No. 108. SAB No. 108 was issued to provide guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 addresses the diversity in practice in quantifying financial statement misstatements and will require Companies to quantify the effects of an identified unadjusted error on each financial statement and financial statement disclosure by considering the impact of prior year misstatements on the current year financial statements. Initial application of SAB No. 108 allows companies to elect not to restate prior periods but to reflect the initial application in their annual financial statements covering the first fiscal year ending after November 15, 2006. The cumulative effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment, net of tax, should be made to the opening balance of retained earnings for that year. Companies will need to disclose the nature and amount of each item, when and how each error being corrected arose, and the fact that the errors were previously considered immaterial. The Company has not yet determined the impact of the adoption of SAB No. 108 on its financial statements.

NOTE 4 — EARNINGS PER SHARE

     Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding before any dilution during the period. Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options) were issued during the period, computed using the treasury stock method.

     Earnings per share consisted of the following components for the three and nine months ended September 30, 2006 and 2005:

For the Three Months Ended September 30,

		Net Income
		2006				2005
		(Dollars in Thousands)
Net Income		$	8,556			$	8,687

		Weighted Average
		Shares
		2006				2005
Basic EPS			14,696,065				15,391,937
Effect of dilutive securities			178,433				145,684
Diluted EPS			14,874,498				15,537,621

		Net Income
		Per Share
		2006				2005
Basic EPS		$	0.58			$	0.56
Effect of dilutive securities		$	0.00			$	0.00
Diluted EPS		$	0.58			$	0.56

For the Nine Months Ended September 30,

		Net Income
		2006				2005
		(Dollars in Thousands)
Net Income		$	24,749			$	24,642

		Weighted Average
		Shares
		2006				2005
Basic EPS			15,014,292				15,370,226
Effect of dilutive securities			165,725				147,813
Diluted EPS			15,180,017				15,518,039

		Net Income
		Per Share
		2006				2005
Basic EPS		$	1.65			$	1.60
Effect of dilutive securities		$	0.02			$	0.01
Diluted EPS		$	1.63			$	1.59

     For the three months ended September 30, 2006, there were 161,904 options to purchase common stock and no shares of restricted stock excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2006, there were 171,013 options to purchase common stock and no shares of restricted stock excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three and nine months ended September 30, 2005, there were 328,295 and 329,927, respectively, options to purchase common stock excluded from the calculation of diluted earnings per share because they were anti-dilutive. There was no restricted stock outstanding during the three or nine months ended September 30, 2005.

17

NOTE 5 — COMMON STOCK REPURCHASE PROGRAM

     On January 19, 2006, the Company’s Board of Directors approved a common stock repurchase program. Under the program, the Company was authorized to repurchase up to 800,000 shares, or approximately 5% of the Company’s outstanding common stock. During the quarter ended September 30, 2006, the Company completed its repurchase plan with a total of 800,000 shares of common stock repurchased at a weighted average share price of $31.04. Additional information about the repurchase program is set forth in Part II, Item 2 of this Form 10-Q.

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 September 30, for the periods presented:

Components of Net Periodic Benefit Cost

		Post Retirement Benefits								SERPs
		Three months ended September 30,
		2006				2005				2006				2005
		(Unaudited - Dollars in Thousands)
Service cost		$	23			$	23			$	50			$	44
Interest cost			18				18				34				32
Amortization of transition obligation			8				8				—				—
Amortization of prior service cost			3				3				10				11
Recognized net actuarial (gain)/loss			—				—				(1	)			—
Net periodic benefit cost		$	52			$	52			$	93			$	87

Components of Net Periodic Benefit Cost

		Post Retirement Benefits								SERPs
		Nine months ended September 30,
		2006				2005				2006				2005
		(Unaudited - Dollars in Thousands)
Service cost		$	69			$	69			$	149			$	132
Interest cost			54				54				102				96
Amortization of transition obligation			25				26				—				—
Amortization of prior service cost			9				9				31				34
Recognized net actuarial (gain)/loss			—				—				(3	)			—
Net periodic benefit cost		$	157			$	158			$	279			$	262

     The Company previously disclosed in its financial statements for the fiscal year ended December 31, 2005 that it expected to contribute $60,000 to its post retirement benefit plan

and $112,000 to its SERPs in 2006 and presently anticipates making these contributions. For the three months ended September 30, 2006, $7,000 and $28,000 of contributions have been made to the post retirement benefit plan and the SERPs, respectively, and for the nine months ended September 30, 2006, $41,000 and $88,000 of contributions have been made to the post retirement benefit plan and the SERPs, respectively.

     Not included in the above summary are the components of net periodic benefit cost for the noncontributory defined benefit pension plan administered by Pentegra (“the Fund”). The Fund does not segregate the assets or liabilities of all participating employers and, accordingly, disclosure of accumulated vested and non-vested benefits is not possible. The pension plan year is July 1st through June 30th. The Company anticipates that contributions paid in 2006 to the defined benefit pension plan related to the 2006-2007 plan year will be $1.2 million, of which $776,000 has been paid to date. Contributions for the 2005-2006 plan year were all paid in 2005. Pension expense associated with this plan was $2.4 million for the year 2005 and is expected to be $2.1 million for the full year 2006 of which $300,000 has been recognized during the three months ended September 30, 2006 and $1.8 million has been recognized year to date.

     Effective July 1, 2006, the Company froze the pension plan by eliminating all future benefit accruals, with the exception of the employees that are participants on July 1, 2006 but that are not yet fully vested. These employees will earn benefits up to the year in which they are fully vested and at that point there will be no more future benefit accruals. All benefits accrued up to July 1, 2006 will remain in the pension plan and the participants’ frozen benefit will be determined as of July 1, 2006. Also effective July 1, 2006, the Company implemented a new defined contribution plan in which employees, with one year of service, will receive a 5% cash contribution of eligible pay up to the social security limit and a 10% cash contribution of eligible pay over the social security limit up to the maximum amount permitted by law. Benefits conferred to employees under the new defined contribution plan vest immediately.

NOTE 7 — REPURCHASE AGREEMENTS

     Both wholesale and retail repurchase agreements are collateralized by mortgage-backed securities and U.S. Government obligations. At September 30, 2006, the Company had $25.0 million securities of repurchase agreements outstanding with third party brokers and $91.2 million of customer repurchase agreements outstanding. The related securities are included in the securities available for sale portfolio.

NOTE 8 — COMPREHENSIVE INCOME

     Information on the Company’s comprehensive income, presented net of taxes, is set forth below for the three and nine months ended September 30, 2006 and 2005 .

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

		FOR THE THREE								FOR THE NINE
		MONTHS ENDED								MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2006				2005				2006				2005
Net Income		$	8,556			$	8,687			$	24,749			$	24,642
Other Comprehensive Income/(Loss), Net of Tax:
Increase (decrease) in fair value of securities available for sale, net of tax of $2,982 and $2,878 for the three months ended September 30, 2006 and 2005, respectively, and $278 and $4,045 for the nine months ended September 30, 2006 and 2005, respectively.			4,864				(4,827	)			(507	)			(6,746	)
Less: reclassification adjustment for realized losses/(gains) included in net income, net of tax of $0 and $0 for the three months ended September 30, 2006 and 2005, respectively, and $637 and $230 for the nine months ended September 30, 2006 and 2005, respectively.			—				—				1,132				(386	)
Net change in fair value of securities available for sale, net of tax of $2,982 and $2,878 for the three months ended September 30, 2006 and 2005, respectively, and $359 and $4,275 for the nine months ended September 30, 2006 and 2005, respectively.			4,864				(4,827	)			625				(7,132	)
(Decrease) increase in fair value of derivatives, net of tax of $1,594 and $854 for the three months ended September 30, 2006 and 2005, respectively, and $133 and $994 for the nine months ended September 30, 2006 and 2005, respectively.			(2,202	)			1,174				(183	)			1,229
Less: reclassification of realized gains on derivatives, net of tax of $78 and $189 for the three months ended September 30, 2006 and 2005, respectively, and $331 and $387 for the nine months ended September 30, 2006 and 2005, respectively.			(106	)			(261	)			(457	)			(533	)
Net change in fair value of derivatives, net of tax of $1,672 and $665 for the three months ended September 30, 2006 and 2005, respectively, and $464 and $607, for the nine months ended September 30, 2006 and 2005, respectively.			(2,308	)			913				(640	)			696
Other Comprehensive Income/(Loss), Net of Tax:			2,556				(3,914	)			(15	)			(6,436	)
Comprehensive Income		$	11,112			$	4,773			$	24,734			$	18,206

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, 2005, 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, 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 losses;
	•		the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System could affect the Company’s business environment or affect the Company’s operations;
	•		the effects of, any changes in, and any failure by the Company to comply with tax laws generally and requirements of the federal New Markets Tax Credit program in particular could adversely affect the Company’s tax provision and its financial results;
	•		inflation, interest rate, market and monetary fluctuations could reduce net interest income and could increase credit losses;

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

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

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

EXECUTIVE LEVEL OVERVIEW

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

     The Company reported an increase in earnings on a per share diluted basis of $0.02, or 3.6%, to $0.58 for the quarter ending September 30, 2006 as compared to the same period in 2005. Net income for the quarter was $8.6 million, a decrease of 1.5% from the $8.7 million reported for the quarter ended September 30, 2005. Year to date earnings on a diluted per share basis increased $0.04, or 2.5%, to $1.63 and net income of $24.7 million increased by $107,000 as compared to the same period in 2005. The Company’s return on average assets, return on average equity and net interest margin were 1.17%, 15.56% and 3.89%, respectively, for the three month period ending September 30, 2006, representing strong profitability metrics. The Company’s return on average assets, return on average equity and net interest margin were 1.17%, 15.49% and 3.93%, respectively, for the three month period ending September 30, 2005.

     Management continues to focus on earning asset growth in the commercial and home equity lending segments, while placing less emphasis on indirect auto, portfolio residential lending and the securities portfolio. While this strategy has resulted in a somewhat smaller balance sheet and slowed earnings growth, management believes it is a prudent strategy in the current interest rate environment. Emphasis on the securities portfolio continues to decrease on both a relative basis (as a percent of earning assets) as well as on an actual basis, reflecting the current flat yield curve (defined below) environment which management believes not to be conducive to growing the securities portfolio. Management also continues to de-emphasize auto loan originations due to what management currently believes to be poor return characteristics on certain segments of that business. As a result of Management’s disciplined approach to quality asset generation, as well as in-market competition, earning asset growth is expected to be minimal for the remainder of 2006.

     The following pie charts depict the continuing shift in the composition of earning assets into the high value areas of commercial and home equity lending as of September 30, 2005 and 2006.

     The following graph depicts the historical U.S. Treasury yield curve as of September 30, for the years 2004 – 2006.

     “A yield curve is a graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates.” ¹ “A flat yield curve is one in which there is little difference between short-term and long-term rates for bonds of the same credit quality. When short- and long-term bonds are offering equivalent yields, there is usually little benefit in holding the longer-term instruments — that is, the investor does not gain any excess compensation for the risks associated with holding longer-term securities. For example, a flat yield curve on U.S. Treasury Securities would be one in which the yield on a two-year bond is 5% and the yield on a 30-year bond is 5.1%.” ²

     The following graph presents the decline in the Company’s securities portfolio from September 2005 into 2006:

     Total deposits of $2.2 billion at September 30, 2006 decreased $24.9 million, or 1.1%, compared to December 31, 2005, due in part to the competitive pricing environment. For the quarter ending September 30, 2006 deposits increased $3.2 million, or 0.2%, partially attributable to promotions in the time deposit categories. The Company remains committed to deposit generation, with careful management of deposit pricing and selective deposit promotion, in an effort to control the Company’s cost of funds. In the current interest rate environment the Company is focused on pricing deposits for customer retention as well as core deposit growth and does not feel a need to aggressively grow non-core deposits to fund balance sheet growth.

          The net interest margin for the third quarter of 2006 was 3.89% as compared to 3.93% for the same period in 2005. The net interest margin was negatively impacted by a higher cost of deposits than anticipated as well as a large Fed fund sold position created by excess liquidity, averaging $44 million for the quarter. Collectively these factors negatively impacted the margin by a total of 9 basis points. The margin was also positively impacted by the recognition of the Federal Home Loan Bank of Boston’s (“FHLBB”) dividend received during the third quarter which was paid out on a six month basis to adjust for lack of a dividend in the second quarter. This additional dividend positively impacted net interest income and pre-tax earnings by $342,000 and the net interest margin by 6 basis points.

          While changes in the prevailing interest rate environment (see Historical U.S. Treasury Yield Curve graph above) have and will continue to have an impact on the Company’s earnings, management strives to mitigate volatility in net interest income resulting from changes in benchmark interest rates through adjustable rate asset generation, effective liability management, and utilization of off-balance sheet interest rate derivatives. (For a discussion of interest rate derivatives and interest rate sensitivity see the Asset/Liability Management section, Table 9 – “Interest Rate Derivatives”, and Market Risk section, Table 10 – “Interest Rate Sensitivity” within the Management’s Discussion and Analysis of Financial Condition and Results of Operations hereof.)

     Net charge-off performance during 2006 continues to be very good at 9 basis points of average loans on an annualized basis compared to 12 basis points of average loans on annualized basis at September 30, 2005. The Company’s allowance for loan loss is at 1.31% as a percentage of loans for the fifth consecutive quarter. Nonperforming assets were $7.0 million at September 30, 2006, an increase of $3.7 million from December 31. 2005. See Table 2- Nonperforming Assets/ Loans for detail on nonperforming assets.

     A large portion of the increase in nonperforming assets is attributable to a single commercial credit, for which Management does not foresee potential loss beyond current levels of reserves. The Company had one foreclosure in the third quarter, an infrequent occurrence over the last several years. The Company has seen good performance over the last several years across all loan portfolios, as demonstrated by the net recoveries achieved in its commercial portfolio for a number of years. The Company’s credit quality has been good and, while Management remains confident in the quality of the Company’s credit portfolios, there is some possibility of loss in the future.

     The following graph depicts the Company’s non-performing assets to total assets at the periods indicated:

       Some of the Company’s other highlights for the first nine months of 2006 included:

o		opening of a new commercial banking office in New Bedford, MA staffed by two new seasoned bankers from that market,
o		hiring of three additional seasoned commercial bankers in other markets, which increases the Company’s total staff of commercial bankers by 10%,

o

strengthening the residential mortgage banking business by hiring a new senior vice president to lead the department, as well as the hiring of two new experienced mortgage loan originators,

o

the award on June 1, 2006 of $45 million of tax credit allocation authority under the New Markets Tax Credit Program to a subsidiary of the Bank,

o

continued disciplined capital management, as reflected by:

	§		Completion of the previously announced common stock repurchase program by repurchasing 800,000 common shares of the Company’s outstanding stock at a weighted average share price of $31. 04;
	§		Management’s announcement of the anticipated refinancing of the Company’s current Trust Preferred Securities in the latter part of the fourth quarter of 2006, saving approximately $1.0 million in interest expense, on an annualized basis, beginning in 2007, (the Company will also write-off unamortized issuance costs associated with the debt of approximately $995,000 in December of 2006 and $905,000 in April of 2007 when the existing Trust Preferred Securities are called); and, by

§

The 6.7% increase in the quarterly dividend to $0.16 per share.

FINANCIAL POSITION

     Loan Portfolio Total loans increased by $10.5 million, or 0.5%, during the nine months ended September 30, 2006. The increases were mainly in commercial real estate which increased by $47.0 million, or 6.9%, the consumer-home equity portfolio which increased by $27.0 million, or 10.7%, and commercial and industrial lending which increased by $15.3 million, or 9.9%. Business banking loans totaled $57.5 million, an increase of $6.1 million, representing growth of 12.0%. Partially offsetting these increases are decreases in the consumer-auto portfolio of $45.6 million, or 17.3%, as this segment of the loan portfolio has been de-emphasized due to poor return characteristics, decreases in the residential lending portfolio of $25.0 million, or 5.7%, and decreases in commercial construction of $12.2 million, or 8.7% primarily attributable to one large credit.

     The Bank considers a concentration of credit to a particular industry to exist when the aggregate credit exposure to a borrower, an affiliated group of borrowers or a non-affiliated group of borrowers engaged in one industry exceeds 10% of the Bank’s loan portfolio which includes direct, indirect or contingent obligations. As of September 30, 2006, loans made by the Company to the industry concentration of lessors of non-residential buildings grew to 10.5% of the Company’s total loan portfolio.

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

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

     On loans secured by one-to-four family owner-occupied properties, the Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure action. If such efforts do not result in a satisfactory arrangement, the loan is referred to legal counsel to initiate foreclosure proceedings. At any time prior to a sale of the property at foreclosure, the Bank may and will terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan. On loans secured by commercial real estate or other

business assets, the Bank similarly seeks to reach a satisfactory payment plan so as to avoid foreclosure or liquidation.

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

Table 1 — Summary of Delinquency Information

		At September 30, 2006																At December 31, 2005
		60-89 days								90 days or more								60-89 days								90 days or more
		Number				Principal				Number				Principal				Number				Principal				Number				Principal
		of Loans				Balance				of Loans				Balance				of Loans				Balance				of Loans				Balance
										(Unaudited - Dollars in Thousands)
Commercial and Industrial			—			$	—				7			$	373				2			$	24				4			$	209
Commercial Real Estate			1				22				5				3,004				3				2,892				2				288
Commercial Construction			—				—				—				—				—				—				—				—
Business Banking			5				83				6				117				5				97				3				47
Residential Real Estate			2				180				4				1,594				4				1,337				2				373
Residential Construction			—				—				—				—				—				—				—				—
Consumer — Home Equity			1				7				4				206				—				—				—				—
Consumer — Auto			65				739				61				643				65				597				61				572
Consumer — Other			15				140				13				34				18				112				17				110
Total			89			$	1,171				100			$	5,971				97			$	5,059				89			$	1,599