================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002- Commission File No. 000-25381
CCBT FINANCIAL COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3437708
(State of Incorporation) (I.R.S. Employer Identification No.)
495 Station Avenue, South Yarmouth, Massachusetts 02664
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, incl. area code): 508-394-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Title of class Name of each exchange on which registered
Common Capital Stock The Nasdaq Stock Market, Inc.
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. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). |X| Yes |_| No
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the $28.41 closing price on June 28, 2002, on the
Nasdaq National Market was $243,560,720. Although Directors and executive
officers of the registrant were assumed to be "affiliates" of the registrant for
the purposes of this calculation, this classification is not to be interpreted
as an admission of such status.
As of March 4, 2003, 8,544,048 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CCBT Financial Companies, Inc. Notice of Annual Meeting
and definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on April 24, 2003 are incorporated by reference into Part III of this Form 10-K.
================================================================================
FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. CCBT Financial Companies, Inc. (the
"Company") cautions investors that any forward-looking statements in this
report, or which management may make orally or in writing from time to time, are
based on management's beliefs and on assumptions made by, and information
currently available to, management. When used, the words "anticipate",
"believe", expect", "intend", "may", "might", "plan", "estimate", "project",
"should", "will", "result" and similar expressions that do not relate solely to
historical matters are intended to identify forward-looking statements. Such
statements are subject to risks, uncertainties and assumptions and are not
guarantees of future performance, which may be affected by known and unknown
risks, trends, uncertainties and factors that are beyond the Company's control,
including the following: changes in the volume of loan originations,
fluctuations in prevailing interest rates, increases in costs to borrowers of
loans held, increases in costs of funds, changes in legislation and changes in
the assumptions used in making such forward-looking statements. In addition, the
factors listed under "Risk Factors and Factors Affecting Forward Looking
Statements," beginning on Page 8 of this report, which readers should carefully
review may result in these differences.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. The Company cautions you that, while
forward-looking statements reflect its good faith beliefs when the Company makes
them, they are not guarantees of future performance and are impacted by actual
events when they occur after the Company makes such statements. The Company
expressly disclaims any responsibility to update its forward-looking statements,
whether as a result of new information, future events or otherwise. Accordingly,
investors should use caution in relying on past forward-looking statements,
which are based on results and trends at the time they are made, to anticipate
future results or trends.
2
PART I
Item 1. Business.
General
The Company was incorporated under the laws of the Commonwealth of
Massachusetts on October 8, 1998 and is the bank holding company for Cape Cod
Bank and Trust Company (the "Bank"), a national bank. Currently, the Company's
business activities are conducted primarily through the Bank.
Cape Cod Bank and Trust Company, N.A. is the main operating subsidiary of
the Company and is a federally chartered commercial bank with trust powers. The
Bank is the result of a merger between the Hyannis Trust Company and the Cape
Cod Trust Company in 1964 and a subsequent merger with the Buzzards Bay National
Bank in 1974. The main office of the Bank is located at 307 Main Street,
Hyannis, Barnstable County, Massachusetts. There are 33 other banking offices
located in Barnstable and Plymouth Counties in Massachusetts. The Bank is a
member of the Federal Deposit Insurance Corporation, of the Federal Reserve
System and the Federal Home Loan Bank of Boston ("FHLB"). At December 31, 2002,
the Bank employed 398 people on a full-time basis and another 54 people on a
part-time basis.
Financial information contained in this report for periods and dates prior
to February 11, 1999 is that of the Bank. Since the Bank is the main operating
subsidiary of the Company, financial information contained in this report for
periods and dates after February 11, 1999 is essentially financial information
of the Bank. Certain amounts have been reclassified in the 2001 and 2000
financial statements to conform to the 2002 presentation.
Repurchase of Stock
During the quarter ended March 31, 2002, the Company's Board of Directors
authorized the repurchase of up to 220,000 shares of the Company's stock in the
open market. Consistent with that authorization, the Company repurchased 47,500
shares during 2002, at an average cost of $25.61 per share. The Board of
Directors also authorized the repurchase, from time to time based on market
conditions, of an additional 200,000 shares of common stock at its meeting held
on January 23, 2003. Coupled with the shares remaining from the aforementioned
repurchase program, the Company will have the ability to repurchase a total of
372,500 shares or approximately 4.3% of the stock currently outstanding.
Other
During the second quarter of 2000, the Bank acquired 51% of the stock of
Murray & MacDonald Insurance Services, Inc. of Falmouth, Massachusetts (the
"Agency"), a full service insurance agency offering property, casualty, life,
accident and health products to clients on Cape Cod. The Agency has been in
business since 1972 and has license agreements with more than thirty insurance
firms. As part of the transaction, Murray & MacDonald's President, Douglas D.
MacDonald, has continued to serve as President of the Agency, and he directs all
insurance activities for the Bank.
In addition to the acquisition of the Agency, the Bank also acquired two
branch banking offices, in Falmouth and Wareham, Massachusetts, from Fleet Bank
during the second quarter of 2000. These branches added approximately $55
million in deposits at a 15.5% premium, at June 30, 2000.
During the fourth quarter of 2002, the Bank formed a Massachusetts
securities corporation, Cape Dune Holdings Corp., as a wholly-owned subsidiary
of the Bank to purchase, hold, and/or sell securities.
The Bank is the largest commercial bank headquartered in Barnstable
County. It offers a wide range of banking and financial services for
individuals, businesses, non-profit organizations, governmental units and
fiduciaries. The Bank receives substantially all of its deposits from, and makes
substantially all of its loans to, individuals and businesses on Cape Cod,
although the Bank has some loans on properties outside its market area,
including some sizable participations in commercial mortgages. The Bank's core
market is comprised of retail and wholesale businesses; primary households
(including a significant retirement population); and a growing number of second
homeowners. In addition, a substantial non-core vacation population causes
seasonal deposit growth.
3
The Bank's principal sources of revenue are loans and investments, which
accounted for 77% of gross income during 2002. Of the remaining portion, 5% was
received from service charges related to deposit and branch banking activities.
The balance was derived from Trust Department services income and other items.
Banking services for individuals include checking accounts, regular savings
accounts, NOW accounts, money market deposit accounts, certificates of deposit,
club accounts, mortgage loans, consumer loans, safe deposit services, trust
services, discount brokerage and investment services, and insurance services.
The Bank is working to become a full service retail financial company because of
the favorable demographics in its market area. Currently 47% of its non-interest
income is generated from advisor fees, brokerage fees and commissions, and
insurance commissions. The Company also owns and maintains 42 automated teller
machines which are connected to the AMEX, CIRRUS, NYCE, NOVUS/DISCOVER,
MASTERCARD, VISA, STAR and PLUS networks. Trust Department services include
estate, trust, tax returns, agency, investment management, discount brokerage,
custodial services, and IRA accounts.
The Company's Web site is located at http://www.ccbt.com. On the Company's
Web site, investors can obtain a copy of the Company's annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable
after the Company files such material electronically with, or furnishes it to,
the Securities and Exchange Commission.
Recent Developments
On March 5, 2003, the Company announced that it will accrue a liability in
the first quarter of 2003 of approximately $5.1 million, representing an
estimate of the additional state tax liability, including interest (net of any
federal and state tax deductions associated with such taxes and interest),
relating to the deduction for dividends received from a real estate investment
trust subsidiary (a "REIT") for the 1999 through 2001 fiscal years, and the
previously anticipated deduction for fiscal 2002 thus reducing earnings by $5.1
million in the first quarter of 2003. The accrued liability is the result of new
legislation signed on March 5, 2003 by the Governor of Massachusetts that amends
Massachusetts law to expressly disallow the deduction for dividends received
from a REIT. This amendment applies retroactively to tax years ending on or
after December 31, 1999. As a result of the enactment of this legislation, the
Company has ceased recording the tax benefits associated with the dividend
received deduction effective for the 2003 tax year and accrued the liability
described above.
CCBT Preferred Corp. ("CCBT Preferred") is a REIT formed by the Bank in
the second quarter of 1999. Since that time and prior to the enactment of the
new legislation discussed above, the Bank has taken a tax deduction under a
Massachusetts statute that provides for a dividends received deduction equal to
95% of certain dividend distributions made by CCBT Preferred to the Bank. As
previously announced, the Bank received notices of assessment from The
Commonwealth of Massachusetts Department of Revenue ("DOR") for tax years ended
December 31, 1999, 2000 and 2001 based on the DOR's contention that dividend
distributions by CCBT Preferred to the Bank are fully taxable in Massachusetts.
The Company is aware that the DOR has also sent similar notices to numerous
other financial institutions in Massachusetts that reported a deduction for
dividends received from a REIT on their Massachusetts financial institution
excise tax returns.
The Company believes that this legislation will be challenged, especially
the retroactive provisions, on constitutional and other grounds. The Company
would support such a challenge and otherwise intends to defend vigorously its
position.
Competition
The Company faces substantial competition for loan origination and for the
attraction and retention of deposits. Competition for loan origination arises
primarily from other commercial banks, thrift institutions, credit unions and
mortgage companies. The Company competes for loans on the basis of product
variety and flexibility, competitive interest rates and fees, service quality
and convenience.
Competition for the attraction and retention of deposits arises primarily
from other commercial banks, thrift institutions, co-operative banks, and credit
unions having a presence within and around the market area served by the Bank's
main office and its community branches and ATM network. There are approximately
twelve of these financial institutions in the Bank's market area. In addition,
the Company competes with regional and national firms that offer
4
stocks, bonds, mutual funds, and other investment alternatives to the general
public. The Company competes on its ability to satisfy savers' and investors'
requirements, such as product alternatives, competitive rates, liquidity,
service quality, convenience, and safety against loss of principal and earnings.
Management believes that the Company's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contributes to its ability to compete successfully. Moreover, under the
Gramm-Leach-Bliley Act of 1999 (the "GLBA"), effective March 11, 2000,
securities firms, insurance companies and other financial services providers
that elect to become financial holding companies may acquire banks and other
financial institutions. The GLBA may significantly change the competitive
environment in which the Company and its subsidiaries conduct business. See "The
Financial Services Modernization Legislation" below. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services. These
technological advances may diminish the importance of depository institutions
and other financial intermediaries in the transfer of funds between parties.
Regulation and Supervision
In addition to the generally applicable state and federal laws governing
businesses and employers, the Company is further regulated by federal and state
laws and regulations applicable to financial institutions and their parent
companies. Virtually all aspects of the Company's operations are subject to
specific requirements or restrictions and general regulatory oversight. State
and federal banking laws have as their principal objective the maintenance of
the safety and soundness of financial institutions and the federal deposit
insurance system, the protection of consumers or classes of consumers or the
furtherance of broad public policy goals, rather than the specific protection of
stockholders of a bank or its parent company.
Several of the more significant statutory and regulatory provisions
applicable to banks and bank holding companies to which the Company and its
subsidiaries are subject are described more fully below, together with certain
statutory and regulatory matters concerning the Company and its subsidiaries.
The description of these statutory and regulatory provisions does not purport to
be complete and is qualified in its entirety by reference to the particular
statutory or regulatory provision. Any change in applicable law or regulation
may have a material effect on the Company's business, prospects and operations,
as well as those of its subsidiaries.
The Company
General. The Company is a Massachusetts corporation and a bank holding
company subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
files with the Federal Reserve Board an annual report and such additional
reports as the Federal Reserve Board may require. The Federal Reserve Board has
the authority to issue orders to bank holding companies to cease and desist from
unsound banking practices and violations of conditions imposed by, or violations
of agreements with, the Federal Reserve Board. The Federal Reserve Board is also
empowered to assess civil money penalties against companies or individuals who
violate the Bank Holding Company Act, or orders or regulations thereunder, to
order termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a
non-banking subsidiary by a bank holding company.
The Bank Holding Company Act--Activities and Other Limitations. The Bank
Holding Company Act prohibits a bank holding company from acquiring
substantially all the assets of a bank or acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any bank, or increasing such
ownership or control of any bank, or merging or consolidating with any bank
holding company without prior approval of the Federal Reserve Board. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally
authorizes bank holding companies to acquire banks located in any state,
possibly subject to certain state-imposed age and deposit concentration limits,
and also generally authorizes interstate mergers and to a lesser extent,
interstate branching.
Unless a bank holding company becomes a financial holding company ("FHC")
under the GLBA (as discussed below), the Bank Holding Company Act also prohibits
a bank holding company from acquiring a direct or indirect interest in or
control of more than 5% of the voting shares of any company that is not a bank
or a bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or
5
furnishing services to its subsidiary banks, except that it may engage in and
may own shares of companies engaged in certain activities the Federal Reserve
Board determined to be so closely related to banking or managing and controlling
banks as to be a proper incident thereto. In making such determinations, the
Federal Reserve Board is required to weigh the expected benefit to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests or unsound banking
practices.
The Financial Services Modernization Legislation. The GLBA established a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the Bank Holding Company Act framework to permit bank holding
companies that qualify and elect to be treated as financial holding companies to
engage in a range of financial activities broader than would be permissible for
traditional bank holding companies, such as the Company, that have not elected
to be treated as financial holding companies. "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the Federal Reserve Board,
in consultation with the Secretary of the Treasury, determines to be financial
in nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
In order to become a financial holding company, a bank holding company,
such as the Company, must meet certain tests and file an election form with the
Federal Reserve Board. Specifically, to qualify, all of a bank holding company's
subsidiary banks must be well-capitalized and well-managed, as measured by
regulatory guidelines. In addition, to engage in the new activities, each of the
bank holding company's banks must have been rated "satisfactory" or better in
the most recent federal Community Reinvestment Act evaluation of each bank. At
this time, the Company has not elected to become a financial holding company.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. These capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets and off-balance sheet items (the "Total Risk-Based
Capital Ratio"), with at least 50% of that amount consisting of Tier I or core
capital and the remaining amount consisting of Tier II or supplementary capital.
Tier I capital for bank holding companies generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such stocks which may be
included as Tier I capital), less goodwill and other non-qualifying intangible
assets. Tier II capital generally consists of hybrid capital instruments;
perpetual debt and mandatory convertible debt securities; perpetual preferred
stock, which is not eligible to be included as Tier I capital; term subordinated
debt and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan and lease losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital (defined by reference to the risk-based capital
guidelines) to its average total consolidated assets (the "Leverage Ratio") of
4.0%. Total average consolidated assets for this purpose does not include
goodwill and any other intangible assets and investments that the Federal
Reserve Board determines should be deducted from Tier I capital. The Federal
Reserve Board has announced that the 4.0% Leverage Ratio requirement is the
minimum for the top-rated bank holding companies without any supervisory,
financial or operational weaknesses or deficiencies or those, which are not
experiencing or anticipating significant growth.
The Company currently is in compliance with both the Risk Based Capital
Ratio and the Leverage Ratio requirements. At December 31, 2002, the Company had
a Tier I Risk Based Capital Ratio equal to 11.8% and a Total Risk Based Capital
Ratio equal to 13.1% and a Leverage Ratio equal to 7.7%.
6
U.S. bank regulatory authorities and international bank supervisory
organizations, principally the Basel Committee on Banking Supervision ("Basel
Committee"), currently are considering changes to the risk-based capital
adequacy framework, which ultimately could affect the appropriate capital
guidelines, including changes (such as those relating to lending to registered
broker-dealers) that are of particular relevance to banks, such as the Bank,
that engage in significant securities activities. Among other things, the Basel
Committee rules, which are expected to be proposed formally for public comment
in the next 6 months and are expected to become effective around 2006, would add
operational risk as a third component to the denominator of the risk-capital
calculation, which currently includes only credit and market risks.
Limitations on Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given at least 60
days to review the proposal. Under a rebuttable presumption established by the
Federal Reserve Board, the acquisition of 10% or more of a class of voting stock
of a bank holding company, such as the Company, with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") would, under the circumstances set forth in the
presumption, constitute the acquisition of control of the bank holding company.
In addition, any company, as that term is broadly defined in the statute,
would be required to obtain the approval of the Federal Reserve Board under the
Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer
that is a bank holding company) or more, or such lesser percentage of our
outstanding common stock as the Federal Reserve Board deems to constitute
control over us.
Cash Dividends. Federal Reserve Board policy provides that a bank or a
bank holding company generally should not maintain its existing rate of cash
dividends on common stock unless the organization's net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent with
the organization's capital needs, asset quality and overall financial condition.
Federal Reserve Board policy further provides that a bank holding company should
not maintain a level of cash dividends to its shareholders that places undue
pressure on the capital of bank subsidiaries, or that can be funded only through
additional borrowings or other arrangements that may undermine the bank holding
company's ability to serve as a source of strength.
The Bank
General. As a federally-chartered national bank, the Bank is subject to
regulation and examination by the Office of the Comptroller of the Currency
("OCC"). Relevant statutes and regulations govern, among other things, lending
and investment powers, deposit activities, borrowings, maintenance of surplus
and reserve accounts, distribution of earnings, and payment of dividends. The
Bank is also subject to regulatory provisions covering such matters as issuance
of capital stock, branching, and mergers and acquisitions.
Under the GLBA, the OCC permits national banks, to the extent permitted
under state law, to engage in certain new activities which are permissible for
subsidiaries of an FHC. Further, it expressly preserves the ability of national
banks to retain all existing subsidiaries.
Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures the
Bank's deposit accounts up to $100,000 per depositor.
Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against their transaction accounts (generally, demand
deposits, NOW accounts and certain other types of accounts that permit payments
or transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the
institution's interest-bearing assets.
7
CRA. The CRA requires the OCC to evaluate the Bank's performance in
helping to meet the credit needs of the community. Massachusetts has also
enacted a similar statute that requires the Commissioner to evaluate the Bank's
performance in helping to meet community credit needs. Management believes the
Bank is currently in compliance with all CRA requirements.
Customer Information Security. The Federal Reserve Board, the OCC and
other bank regulatory agencies have adopted final guidelines (the "Guidelines")
for safeguarding confidential customer information. The Guidelines require each
financial institution, under the supervision and ongoing oversight of its Board
of Directors, to create a comprehensive written information security program
designed to ensure the security and confidentiality of customer information,
protect against any anticipated threats or hazards to the security or integrity
of such information; and protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.
Privacy. The OCC and other regulatory agencies have published final
privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy
Rules, which govern the treatment of nonpublic personal information about
consumers by financial institutions, require a financial institution to provide
notice to customers (and other consumers in some circumstances) about its
privacy policies and practices, describe the conditions under which a financial
institution may disclose nonpublic personal information to nonaffiliated third
parties and provide a method for consumers to prevent a financial institution
from disclosing that information to most nonaffiliated third parties by
"opting-out" of that disclosure, subject to certain exceptions.
USA Patriot Act. The USA Patriot Act of 2001 (the "USA Patriot Act"),
designed to deny terrorists and others the ability to obtain anonymous access to
the U.S. financial system, has significant implications for depository
institutions, broker-dealers and other businesses involved in the transfer of
money. The USA Patriot Act, together with the implementing regulations of
various federal regulatory agencies, require financial institutions, including
the Bank, to implement additional or amend existing policies and procedures with
respect to, among other things, anti-money laundering compliance, suspicious
activity and currency transaction reporting and due diligence on customers. They
also permit information sharing for counter-terrorist purposes between federal
law enforcement agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the Federal Reserve
Board (and other federal banking agencies) to evaluate the effectiveness of an
applicant in combating money laundering activities when considering applications
filed under Section 3 of the Bank Holding Company Act or the Bank Merger Act.
Management believes that we are currently in compliance with all currently
effective requirements prescribed by the USA Patriot Act and all applicable
final implementing regulations.
Risk Factors And Factors Affecting Forward Looking Statements
The discussion set forth below contains certain statements that may be
considered "forward-looking statements." Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results to materially differ from those projected in the
forward-looking statements. You should carefully review the factors below and
should not place undue reliance on our forward-looking statements. For further
information regarding forward-looking statements, you should review the
discussion under "FORWARD-LOOKING STATEMENTS" on page 2 of this report.
The Bank's business is seasonal and is largely dependent upon the market
area on Cape Cod. The Company experiences changes in its liquidity each year as
a result of the dependence of its customer base on the seasonal tourist and
vacation business on Cape Cod. The Bank receives substantially all of its
deposits from and makes substantially all of its loans to individuals and
businesses on Cape Cod. A decline in the economy on Cape Cod, or in the United
States generally, may have a material adverse effect on the operating results of
the Company.
General business risks could adversely impact the Company's business. The
banking business is subject to various business risks. Continued success depends
in large part on the contributions of our senior management personnel. The
volume of loan originations is dependent upon demand for loans of the type
originated and serviced by the Company and the competition in the marketplace
for such loans. The level of consumer confidence, fluctuations in real estate
values, fluctuations in prevailing interest rates and fluctuations in investment
returns expected by the financial community could combine to make loans of the
type originated by the Company less attractive. In addition, the
8
Company may be adversely affected by other factors that could (a) increase the
cost to the borrower of loans held by the Company, (b) create alternative
lending sources for such borrowers or (c) increase the cost of funds of the Bank
at a rate faster than an increase in interest income, thereby narrowing net
interest rate margins. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fluctuations in interest rates may negatively impact the Company's
business. Interest rates are highly sensitive to many factors beyond the
Company's control, including general economic conditions and the monetary and
fiscal policies of various governmental and regulatory authorities. Net interest
income can be affected significantly by changes in market interest rates, which
are currently at historically low levels, and changes in the relationship
between short term and long term interest rates. A decrease in current interest
rates could further reduce the Company's interest income on loans and investment
securities without a comparable reduction in interest expense because a
substantial portion of the Company's deposits are held in low interest accounts.
An increase in interest rates could reduce the demand for loans and, as a
result, the amount of loan and commitment fees and the ability of borrowers to
repay their current loan obligations, which could not only result in increased
loan defaults, foreclosures and write-offs, but also necessitate increases to
the Company's allowance for loan losses. See "Quantitative and Qualitative
Disclosures about Market Risk."
The Company could be adversely impacted by applicable regulatory changes
or modifications. The Company is subject to extensive regulation by federal and
state governmental authorities and is subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of its operations. There can be no assurance that these laws, rules and
regulations will not be modified in the future, which could make compliance much
more difficult or expensive, restrict ability to originate, broker or sell loans
or otherwise adversely affect business or prospects. See "Regulation and
Supervision."
Proposed legislation may result in increased regulation of the Company's
business. From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and modifications
of restrictions on, the business of the Company. It cannot be predicted whether
any legislation currently being considered will be adopted or how such
legislation or any other legislation that might be enacted in the future would
affect the business of the Company.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and Bank were elected to their positions on
April 25, 2002, except as noted in parentheses, to serve until the annual
meeting on April 24, 2003 and until their successors are duly elected.
Date Appointed
Age at Title and Area of to Present Date of
Officer 12/31/02 Responsibility Position Employment
- --------------------------------------------------------------------------------------------------------------------
Stephen B. Lawson 61 President, Chief Executive Officer and Director 10/08/98 12/06/65
Robert T. Boon 48 Executive Vice President 01/04/01 04/01/85
John S. Burnett 56 Clerk 10/08/98 09/07/71
Nancy S. Hardaway 50 Executive Vice President (10/20/02) 06/30/00
Robert R. Prall 59 Executive Vice President 01/04/01 06/01/93
Larry K. Squire 55 Executive Vice President 01/04/01 05/17/71
Phillip W. Wong 52 Executive Vice President/Chief Financial Officer (11/04/02) 11/04/02
Business Experience During the Past Five Years
----------------------------------------------
Stephen B. Lawson President, Chief Executive Officer, 7/01/92 (Bank)
President, CEO and Director, 10/08/98 (the Company)
Robert T. Boon Chief Trust Officer 10/13/95 (Bank)
Chief Investment Officer, 06/29/98 (Bank)
Executive Vice President, 01/04/01 (Bank)
John S. Burnett Vice President, 12/11/80 (Bank)
Clerk, 10/08/98 (the Company)
Nancy S. Hardaway Executive Vice President, Marketing, 10/20/02 (Bank)
Senior Vice President, 6/30/00 (Bank)
Director of Marketing & Sales, 3/01/99 (the Pinehills)
Sales Director, 5/01/93, (Kings Way Yarmouth Port)
Robert R. Prall Sr. V.P., Loan Administration, 6/01/93 (Bank)
Chief Lending Officer, 1/01/97 (Bank)
Executive Vice President, 01/04/01 (Bank)
Larry K. Squire Chief Operating Officer, 9/15/95 (Bank)
Executive Vice President, 01/04/01 (Bank)
Phillip W. Wong Executive Vice President, CFO, 11/4/02 (Bank)
Executive Vice President, CFO, 11/4/02 (the Company)
Executive Vice President, CFO, 2/01/97 (Medford
Bancorp, Inc.)
10
Item 2. Properties.
A. Properties owned by the Bank - Banking Offices of Cape Cod Bank and Trust
Company, N.A.:
1) 307 Main Street, Hyannis - Main Office
2) 835 Main Street, Osterville - Branch Office
3) 536 Main Street, Harwichport - Branch Office
4) 1095 Route 28, South Yarmouth - Branch Office
5) 40 Main Street, Orleans - Branch Office
6) Shank Painter Road, Provincetown - Branch Office
7) 121 Main Street, Buzzards Bay - Branch Office
8) 119 Route 6A, Sandwich - Branch Office
9) Route 6A and Underpass Road, Brewster - Branch Office
10) 700 Route 6A, Dennis - Branch Office
11) 397 Palmer Avenue, Falmouth - Branch Office
12) 693 Main Street, Chatham - Branch Office
13) Main Street, Wellfleet - Branch Office
14) 249 Worcester Court, Falmouth - Branch Office
15) 237 Main Street, Wareham - Branch Office
16) 495 Station Avenue, South Yarmouth - Branch Office
17) 350 Front Street, Marion - Branch Office
18) 2 Market Crossing, Plymouth - Land, future Branch Office
None of the above offices is subject to any mortgage lien or any other
material encumbrance. The main office is located in Hyannis, Massachusetts, and
is a modern, two-story brick building located on approximately two acres of
land. The Harwichport office and the Buzzards Bay office are somewhat larger
than the remaining offices, having formerly been the main offices of the Cape
Cod Trust Company and the Buzzards Bay National Bank prior to merger. The Bank
also owns a house in Meredith, New Hampshire, one in Orlando, Florida, and one
in Killington, Vermont, which are used as vacation sites by its employees.
B. Rental of Bank Premises of Cape Cod Bank and Trust Company, N.A.:
1) Airport Rotary Circle, Hyannis - Branch Office
2) 2 Barlow's Landing Road, Pocasset - Branch Office
3) 1708 Falmouth Road, Centerville - Branch Office
4) 519 Route 134, South Dennis - Branch Office
5) 9 West Road, Skaket Corners, Orleans - Branch Office
6) 31 Workshop Road, South Yarmouth - Customer Service Center
7) Village Green Shopping Ctr., N. Eastham - Branch Office
8) Nine Stop & Shop Locations on Cape Cod - Branch Offices
9) 3206 Main Street, Barnstable Village - Branch Office
10) 170 Commercial Street, Provincetown - Branch Office
11) 64 King's Circuit, Kings Way, Yarmouth Port - Branch Office
Certain rental properties are adjusted annually with the Consumer Price
Index, include contingent expenses and have renewal options. While the Company
has excellent relationships with its lessors, there is no guarantee that it will
be able to renew any or all of said leases when they expire. The Company
believes that its properties are adequate for its present needs.
11
Item 3. Legal Proceedings.
The Bank has received notices of assessment from The Commonwealth of
Massachusetts DOR for tax years ended December 31, 1999, 2000 and 2001 based on
the DOR's contention that dividend distributions by CCBT Preferred, a REIT, to
the Bank are fully taxable in Massachusetts. On March 5, 2003, the Governor of
Massachusetts signed new legislation that amends Massachusetts law to expressly
disallow the deduction for dividends received from a REIT. This amendment
applies retroactively to tax years ending on or after December 31, 1999. As a
result of the enactment of this legislation, the Company has ceased recording
the tax benefits associated with the dividend received deduction effective for
the 2003 tax year and will accrue a liability in the first quarter of 2003 with
respect to the additional state tax liability. The Company believes that this
legislation will be challenged, especially the retroactive provisions, on
constitutional and other grounds. The Company would support such a challenge and
otherwise intends to defend vigorously its position. See "Business--Recent
Developments."
Item 4. Submission of Matters to a Vote of Security Holders.
None.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company is quoted on the Nasdaq National Market
System under the symbol "CCBT". The table below shows the high and low trading
prices of the stock for each quarter in the past two years and the dividends
declared each quarter. According to the Company's transfer agent, there were
approximately 925 stockholders of record as of February 28, 2003. The number of
holders of record does not reflect the number of persons or entities who or
which held their stock in nominee or "street" name through various brokerage
firms or other entities.
2002
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------ -------------
Market price: High $ 28.00 $ 28.93 $ 27.79 $ 26.84
Low $ 23.80 $ 24.70 $ 24.70 $ 24.00
Dividends declared
per share $ 0.19 $ 0.19 $ 0.19 $ 0.19
2001
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------ -------------
Market price: High $ 22.75 $ 29.99 $ 30.96 $ 26.00
Low $ 18.63 $ 21.16 $ 23.70 $ 22.44
Dividends declared
per share $ 0.18 $ 0.18 $ 0.18 $ 0.18
13
Item 6. Selected Consolidated Financial Data.
2002 2001 2000 1999 1998
------------- -------------- -------------- -------------- --------------
(In thousands, except per share amounts)
Statement of Income Data:
Interest and dividend income $ 77,237 $ 97,755 $ 93,969 $ 79,107 $ 73,978
Interest expense 29,118 44,555 45,624 38,311 36,211
------------- -------------- -------------- -------------- --------------
Net interest income 48,119 53,200 48,345 40,796 37,767
Provision for loan losses -- -- -- -- --
Net gain on securities 2,074 2,187 85 234 384
Other non-interest income 20,875 20,735 16,126 18,034 13,377
Non-interest expense 48,945 46,036 38,226 32,517 30,921
------------ -------------- -------------- -------------- --------------
Income before income taxes 22,123 30,086 26,330 26,547 20,607
Provision for income taxes 7,683 10,622 9,101 10,086 8,050
------------- -------------- -------------- -------------- --------------
Net income $ 14,440 $ 19,464 $ 17,229 $ 16,461 $ 12,557
============= ============== ============== ============== ==============
Basic earnings per share $ 1.68 $ 2.26 $ 2.00 $ 1.85 $ 1.39
Diluted earnings per share 1.67 2.25 2.00 1.85 1.38
Cash dividends per share 0.76 0.72 0.64 0.56 0.50
Balance Sheet Data:
Total assets $1,481,883 $ 1,454,667 $ 1,403,919 $ 1,231,114 $ 1,177,530
Securities available for sale 510,837 438,350 426,743 463,379 495,957
Net loans 789,018 872,039 836,336 663,584 582,713
Deposits - Non-interest bearing 229,033 209,551 201,904 167,624 160,966
- Interest-bearing 713,187 693,840 771,399 598,440 566,931
Borrowings 397,840 420,049 315,807 367,309 358,113
Stockholders' equity 118,447 115,316 98,729 85,650 83,542
Book value per share $ 13.79 $ 13.38 $ 11.47 $ 9.95 $ 9.22
Selected Ratios:
Return on average assets 0.99% 1.32% 1.35% 1.35% 1.15%
Return on average stockholders' equity 12.24% 18.43% 19.32% 19.60% 15.80%
Average equity to average assets 8.10% 7.14% 6.97% 6.89% 7.28%
Dividend payout ratio 45.24% 31.86% 32.00% 30.27% 35.97%
Net interest spread 2.93% 3.07% 3.12% 2.77% 2.84%
Net interest margin 3.46% 3.77% 3.97% 3.49% 3.61%
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
This Form 10-K contains certain statements that may be considered
"forward-looking statements." Forward-looking statements involve known and
unknown risks, uncertainties and other factors, including, but not limited to,
those factors described under the caption "Risk Factors and Factors Affecting
Forward-Looking Statements," that may cause the Company's actual results to
materially differ from those projected in the forward-looking statements. You
should not place undue reliance on our forward-looking statements. For further
information regarding forward-looking statements, you should review the
discussion under the caption "FORWARD LOOKING STATEMENTS" on Page 2 of this
report.
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and selected consolidated
financial data included within this report. Given that the Company's principal
activity currently is ownership of the Bank, for ease of reference, the term
"Company" in this discussion generally will refer to the investments and
activities of the Company and the Bank, except where otherwise noted.
Cape Cod Bank and Trust Company, N.A. is the largest commercial bank
headquartered on Cape Cod in Barnstable County, Massachusetts. The Bank's
thirty-four banking offices are principally engaged in accepting deposits from
individuals and businesses, and in making loans. The Bank also has a substantial
Trust Department, managing assets in excess of $677 million at December 31, 2002
on behalf of its clients. The Bank's core market is comprised of retail and
wholesale businesses; primary households (including a significant retirement
population); and a growing number of second homeowners. In addition, a
substantial non-core vacation population causes seasonal deposit growth.
14
RESULTS OF OPERATIONS
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
2002 COMPARED WITH 2001
Source and Use of Funds. At December 31, 2002, total deposits of $942,220,000
were $38,829,000 or 4% greater than at the prior year-end. Demand deposits
increased $19,482,000 or 9% and NOW deposits increased $21,975,000 or 15%. Money
market deposits increased $26,563,000, or 10%, while other savings deposits
increased by $15,824,000 or 22%. Consistent with the trend in market interest
rates, lower rates offered on certificates of deposit caused customers to seek
alternative products providing higher rates and/or increased liquidity,
contributing to a lower year-end balance in these products in 2002 as compared
with 2001. Certificates of deposit greater than $100,000 decreased $15,779,000,
or 30%, and other time deposits decreased $29,236,000, or 19%, from the prior
year-end. Similarly, the decrease in the average level of certificates of
deposits in 2002, as customers sought higher rates and/or increased liquidity,
modestly exceeded growth in average core deposits. On average for the year,
total deposits of $926,448,000 were $11,581,000, or 1%, lower than the prior
year average. Demand deposits were higher on average by $14,112,000 or 7% and
NOW deposits were higher on average by $16,590,000 or 12%. On average, money
market deposits were higher by $37,299,000 or 15% and other savings deposits
increased $15,098,000 or 22% over the prior year. Average certificates of
deposit greater than $100,000 decreased by $44,613,000 or 52% and average other
time deposits decreased by $50,066,000 or 27%. Average Federal Home Loan Bank
borrowings were $27,239,000 or 7% lower than the prior year average, while other
short-term borrowings increased, on average, by $1,146,000 or 4%. As of year-end
2002, other short-term borrowings had declined from the prior year-end by
$9,345,000 or 30%. The decrease in Federal Home Loan Bank borrowings at December
31, 2002 of $12,865,000 or 3% compared to the prior year includes a prepayment
of $17,800,000 of borrowings scheduled to mature in 2005. The prepayment of
these borrowings, carrying a weighted-average interest rate of 6.10%, will
result in an annual improvement in pre-tax net interest income of approximately
$675,000 over their remaining lives.
At year-end 2002, loans totaled $801,402,000, reflecting a decrease of
$82,889,000, or 9% when compared to the prior year-end. For interest rate risk
concerns, the Company has elected not to hold long-term fixed rate residential
mortgages in the current low mortgage interest rate environment. Sales of fixed
rate residential mortgages throughout the year contributed to a decline of
$114,409,000 or 30% in this category since the prior year-end. Partially
offsetting this decrease were increases in all other real estate loan categories
with commercial real estate loans up $18,524,000 or 7%, construction loans up
$4,358,000 or 5%, and Equity Lines of Credit up $12,458,000 or 23%. On average
for the year, total loans of $882,175,000 decreased from the prior year average
by $12,323,000 or 1%. Residential mortgages decreased $54,259,000 on average or
13% while average commercial mortgages increased $22,919,000 or 9% and Equity
Lines of Credit increased $16,290,000, on average, or 37%. Construction loans,
on average, also increased $3,280,000 or 3% when compared to the prior year.
During 2002, securities decreased by $9,805,000, on average, or 2%, with
significant prepayments resulting in declines in mortgage-backed securities and
collateralized mortgage obligations, down $18,311,000 or 63% and $14,127,000 or
7%, respectively. A portion of the prepayments received were reinvested in the
securities portfolio resulting in increases in other securities, up $10,011,000
or 4%, and US Government agencies, up $17,940,000 or 106%. As of December 31,
2002, securities, including Federal Home Loan Bank and Federal Reserve Bank
stock, were up by $72,487,000 or 16% when compared to the prior year-end with
other debt securities comprising the majority of this increase, up $70,192,000
over the prior year-end balance.
Net Interest Income. In 2002, net interest income was $48,119,000 as
compared to $53,200,000 for the previous year, a decrease of 10%. In addition to
a $1,900,000 penalty for the prepayment of Federal Home Loan Bank borrowings,
the decline in net interest income can be attributed to reduced yields on
earning assets and the inability to further reduce rates on non-term deposits.
The net interest spread and net interest margin ratios were 2.9% and 3.5%,
respectively, for the year ended December 31, 2002, as compared to 3.1% and
3.8%, respectively, for the prior year.
Provision for Loan losses. Recoveries on loans previously charged off
exceeded charge-offs during 2002 by $132,000. Management's assessment of the
risks in the loan portfolio at December 31,2002 as well as the Company's recent
loss experience, whereby recoveries have actually exceeded charge-offs since
1997, resulted in no provision for loan losses in 2002. The allowance for loan
losses was 1.55% and 1.39% of total loans at December 31, 2002 and 2001,
respectively.
15
RESULTS OF OPERATIONS
Other Income and Expense. Non-interest income increased by $28,000 over
the prior year-end as increases in insurance commissions and electronic banking
fees were offset by a decrease in the net gain on sale of loans. Insurance
commissions increased by $989,000 over the prior year inclusive of a $398,000
adjustment for the recognition of previously deferred insurance commissions for
which no deferral is required. Other categories of non-interest income which
experienced significant increases over the prior year included electronic
banking fees, up $498,000 as a result of increased transaction volume as well as
the addition of new products, and brokerage fees and commissions which increased
$183,000 as a result of the recognition of a full year of revenues on an
investment advisory product which became a product of CCB&T Brokerage Direct,
Inc. in April 2001. The net gain on the sale of loans decreased by $1,015,000 in
2002 as compared to 2001 results. This decrease can be attributed to the effect
on prior year results of a $52 million loan sale from the residential mortgage
portfolio in September 2001 as well as the increase in deferred costs recognized
during 2002 as a result of the sale of current production fixed rate mortgages.
The net gain on the sale of securities was negatively impacted during 2002 by a
$1 million impairment loss recognized on an asset backed security due to
increased delinquencies in its underlying collateral. Included in other income,
which decreased by $311,000 when compared to 2001, was a $230,000 loss on the
sale of a fixed asset.
During 2002, non-interest expense increased $2,802,000 or 6% over 2001
results. Salaries and employee benefits increased $1,256,000, or 5%, a result of
annual merit increases, increased staffing for newly opened financial centers,
incentive commissions on financial services and an early retirement plan offered
during the second quarter of 2002. These increases were partially offset by the
$908,000 decrease in the Company's accrual for its Profit Incentive Plan. An
increase in building and equipment expense of $855,000 can be attributed to the
opening of six (6) locations since the prior year as well as amortization
expense of computer software and depreciation of equipment. An increase in
delivery and communications of $398,000 is largely due to increased telephone
expense. Increased electronic banking expenses of approximately $350,000,
included in all other expenses, are due to the higher volume of electronic
transactions as well as the offering of new products.
Provision for Income Taxes. As a result of lower pretax income for the
year ended December 31, 2002, the provision for income taxes decreased by 28% to
$7,683,000 from $10,622,000 in the prior year. These provisions reflect a
combined effective federal and state income tax rate of 35% for both 2002 and
2001.
Net Income. Net income of $14,440,000 for the year ended December 31, 2002
represents a decrease of $5,024,000 or 26% compared to 2001 results for the
reasons described above. In 2002, basic earnings per share of $1.68 and diluted
earnings per share of $1.67 both represent a decrease of $.58 when compared to
2001 results.
2001 COMPARED WITH 2000
Source and Use of Funds. On average, deposits during 2001 increased from
the prior year by $74,452,000 or 9% with core deposits, consisting of demand,
NOW, money market, and savings accounts, accounting for $49,300,000, of this
increase and time deposits accounting for the remaining $25,152,000. In
contrast, total deposits of $903,391,000 at December 31, 2001 reflect a decrease
of $69,912,000 or 7% when compared to the prior year-end. Core deposits
increased by $50,682,000 or 8% while time deposits decreased by $120,594,000 or
37% from the prior year-end. The decrease in year-end balances in time deposits
can be attributed to the maturity of a significant amount of one year
certificates of deposit during the year following a special interest rate
offered during 2000 as well as the decrease in the interest rate being offered
on these products. Additional funds were raised through increased borrowings.
Borrowings from the Federal Home Loan Bank increased in 2001, on average, by
$100,877,000 or 34%, compared to the prior year. At December 31, 2001, these
borrowings amounted to $384,314,000, an increase of $93,027,000 or 32% over
year-end 2000. In addition, CCBT Statutory Trust I, a subsidiary of the Company,
issued $5 million of Trust Preferred Securities during the third quarter of
2001; these funds are to be used to support growth and general corporate
purposes.
At December 31, 2001, total loans including loans held for sale were
$892,640,000, an increase of $43,290,000 or 5% when compared to the prior
year-end. This increase was primarily in the commercial mortgage portfolio,
which increased $22,398,000 or 9%, as well as home equity lines of credit, which
increased $15,959,000 or 43%. Residential mortgages, including loans held for
sale, were lower at year-end 2001 by $9,582,000 or 2% due to the sale of
$168,648,000 of residential mortgages during the year. On average, total loans
increased $139,047,000 or 18.4% over the prior year. Average loan growth was led
by residential mortgages, which increased $77,445,000 or 23%. Other loan
categories, which experienced significant average growth include commercial
mortgages, up $29,175,000 or 13%, and commercial construction loans, up
$17,600,000 or 57%. Home equity lines of credit were higher, on average, by
16
RESULTS OF OPERATIONS
$13,362,000 or 432% than the prior year. At December 31, 2001, securities,
including Federal Home Loan Bank and Federal Reserve Bank stock, were up by
$13,039,000 or 3% over the prior year-end. The increase in other debt securities
of $22,118,000 or 12% was partially offset by declines in collateralized
mortgage obligations and U.S. Government agencies. On average, the increase in
securities was $54,039,000 or 12% with other securities accounting for
$42,671,000 of this increase, or 20%. Collateralized mortgage obligations were
higher, on average, by $15,144,000 or 8% while U.S. Government agencies declined
by $9,457,000 or 36%.
Net Interest Income. Net interest income was $53,200,000 for the year
ended December 31, 2001 as compared to $48,345,000 for the prior year, an
increase of 10%. Lower yields on earning assets were offset by the increased
volume of earning assets as well as lower yields on interest bearing
liabilities. The net interest spread and net interest margin ratios were 3.1%
and 3.8 % respectively, for the year ended December 31, 2001, compared to 3% and
4%, respectively for the year 2000.
Provision for Loan losses. Recoveries on loans previously charged off
exceeded charge-offs during 2001 by $98,000. Despite overall growth in the loan
portfolio in 2001, management's assessment of the risks in the loan portfolio at
December 31, 2001 as well as the Company's recent loss experience, whereby
recoveries have actually exceeded charge-offs since 1997, resulted in no
provision for loan losses in 2001. The allowance for loan losses was 1.39% and
1.43% of total loans at December 31, 2001 and 2000, respectively.
Other Income and Expense. Non-interest income increased by $6,712,000 or
41% over the prior year-end. Of this increase, $2,103,000 and $2,867,000,
respectively, can be attributed to net gains on the sale of securities and
loans. Insurance commissions have increased $763,000 compared to the prior year
results, which only included the Agency's revenues from the date of purchase.
Non-interest expenses totaled $46,058,000 for the year ended December 31,
2001, a $7,778,000 or 20% increase from the comparable 2000 period. Salaries and
employee benefits rose $5,191,000 or 25% with commissions accounting for
$1,397,000 of this increase and salaries, in line with management expectations,
increasing $2,294,000. The increased benefits expense of $1,668,000 is largely
attributable to increases in performance-based compensation programs and
increases in medical and dental insurance costs. Increased expenses in other
categories include amortization of intangibles for acquisitions completed during
the second quarter of 2000, building and equipment expenses for additional
locations and depreciation and amortization related to upgraded computer
equipment and software, and marketing and advertising costs incurred for the
launch of the Company's new logo.
Provision for Income Taxes. For the year ended December 31, 2001, the
provision for income taxes was $10,622,000, an increase of 17% over the prior
year's provision of $9,101,000. These provisions reflect a combined effective
federal and state income tax rate of 35% in 2001 and 2000, respectively.
Net Income. Net income of $19,464,000 for the year ended December 31, 2001
reflects an increase over 2000 results of $2,236,000 or 13%. Basic earnings per
share of $2.26 represents a $.26 increase in 2001 compared to 2000 results.
17
FINANCIAL CONDITION
MATURITY STRUCTURE OF ASSETS AND LIABILITIES
AND SENSITIVITY TO CHANGES IN INTEREST RATES
Securities Available for Sale
The Company invests its excess funds in a variety of investment
structures, including collateralized mortgage obligations (CMOs) and other
asset-backed securities, usually with short effective durations. All securities
purchased are investment grade, nonetheless there exists the possibility of loss
from time to time resulting from changes in credit risk, as these securities are
collateralized with loans made by others, and from substantial changes in
interest rate environments during volatile economic periods.
The following tables reflect the Company's available-for-sale securities
at December 31, 2002, by fixed and floating rates. Other securities are
primarily comprised of collateralized mortgage obligations and asset-backed
securities as outlined in Note 2 to the accompanying consolidated financial
statements.
Fixed Rate Securities
-------------------------------------------------------------------------------------
U.S. Government State and Other
Agencies Municipal Securities
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Term to maturity:
One year or less $ 44,518 5.57% $ 15,037 1.96% $ 173,741 5.52%
Over one year through five years 16,626 4.27% 3,376 4.63% 135,567 5.84%
Over five years -- -- 1,385 4.60% 210 2.54%
----------- ----------- ------------
Totals $ 61,144 5.22% $ 19,798 2.60% $ 309,518 5.66%
=========== =========== ============
Included in fixed rate debt securities are $359,212,000 of CMOs,
mortgage-backed securities, and other debt securities. These have been
distributed based on estimates of their principal cash flows rather than their
contractual final maturities. The balance, largely fixed rate municipal
securities, are distributed on the basis of contractual maturity.
Floating Rate Securities
-------------------------------------------------------------------------------------
U.S. Government State and Other
Agencies Municipal Securities
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Term to repricing/maturity:
One year or less $ 37,654 (0.79)% $-- --% $ 84,500 2.88%
Over one year through five years -- -- -- -- -- --
Over five years -- -- -- -- -- --
----------- ----------- ------------
Totals $ 37,654 (0.79)% $-- --% $ 84,500 2.88%
=========== =========== ============
At December 31, 2002, gross unrealized gains and gross unrealized losses
on securities available for sale amounted to $4.8 million and $6.6 million,
respectively.
18
FINANCIAL CONDITION
The Company's investment securities are subject to market risk in the
following ways. Of the investment securities owned as of December 31, 2002,
$122,154,000 are floating rate instruments tied to various indices, primarily
LIBOR. Lesser amounts are tied to Treasury rates and other indices. The majority
of these floating rate instruments are subject to interest rate caps that range
from 8% to 32%. If interest rates rise enough so that there is a significant
possibility that a given security will become subject to its interest rate cap,
the market value of that security will be reduced. This risk is greater to the
extent that the remaining life of the investment is longer. The Company's
floating rate investments have an average life of about two years. Market risk
may also result from the fact that various indices will not always move by the
same amount when interest rates increase. This may cause securities tied to one
index to perform less well than securities tied to other indices. Most of the
remaining $390,460,000 of securities are fixed-rate CMOs, mortgage backed
securities and other debt securities. Fixed-rate investments have market risk
because their rate of return does not change at all with the general level of
interest rates. Because homeowners are less likely to refinance their mortgages
at higher rates, an additional characteristic of CMOs and mortgage-backed
securities is that their principal payments tend to slow when interest rates
rise. If the fixed rate earned on the investment is lower than the new market
rate, this can result in a decline in the value of these securities. Almost all
of the Company's fixed-rate CMOs have very short average lives and have interest
rates above current market levels, which reduces the market risk of these
securities. The average life of the Company's fixed-rate investments is less
than two years.
Loans
The following tables reflect maturity/repricing information for
commercial, construction and other loans. In both the fixed and floating rate
loan tables, the category of Other Loans is primarily comprised of mortgage
loans on real estate, including residential, commercial and equity lines of
credit, as outlined in Note 3 to the accompanying consolidated financial
statements.
Fixed Rate Loans
----------------------------------------------------
Commercial Construction Other
Loans Loans Loans
--------------- --------------- --------------
(In thousands)
Term to maturity:
One year or less $ 5,498 $ 30,907 $ 1,130
Over one year through five years 4,531 9,189 75,792
Over five years 585 1,837 46,792
--------------- --------------- --------------
Totals $ 10,614 $ 41,933 $ 123,714
=============== =============== ==============
Included in fixed rate loans maturing in one year or less are $369,000 of
customer account overdrafts.
Floating Rate Loans
----------------------------------------------------
Commercial Construction Other
Loans Loans Loans
--------------- --------------- --------------
(In thousands)
Term to repricing/maturity:
One year or less $ 64,143 $ 57,610 $ 332,977
Over one year through five years 7,494 -- 154,897
Over five years 1,701 -- 6,319
--------------- --------------- --------------
Totals $ 73,338 $ 57,610 $ 494,193
=============== =============== ==============
Most residential mortgage loans are adjustable rate mortgages subject to
interest rate caps.
19
FINANCIAL CONDITION
Deposits
The remaining maturity of time certificates of deposit as of December 31,
2002 was as follows:
Fixed Rate
Certificates of Deposit
-------------------------------
More than $100,000 or
$100,000 Less
----------- -----------
(In thousands)
Remaining maturity:
Three months or less $ 8,945 $ 38,332
Over three months through six months 4,388 26,645
Over six months through 12 months 3,822 23,613
Over one year through five years 10,189 33,371
Over five years -- --
----------- -----------
Totals $ 37,344 $ 121,961
=========== ===========
Other deposits may be withdrawn by the customer without notice or penalty.
The rates paid thereon are reviewed each month and changed at the Company's
option as often as indicated by changing market conditions.
Generally, the Company's strategy is to price deposits in relation to
rates available in the open market, including other financial institutions, and
its liquidity needs based on factors that include loan demand. Interest rates
paid are frequently reviewed and are modified to reflect changing conditions.
Borrowings
The remaining maturity of borrowings from the Federal Home Loan Bank as of
December 31, 2002 was as follows:
Fixed Rate
FHLB Borrowings
---------------
(In thousands)
Remaining maturity:
Three months or less $ 216,700
Over three months through six months 20,000
Over six months through 12 months 16,650
Over one year through five years 100,494
Over five years 17,606
----------
Totals $ 371,450
==========
Rates paid on other short-term borrowings change daily.
20
FINANCIAL CONDITION
Loans
The following is a summary of loans outstanding as of the dates indicated:
December 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(In thousands)
Commercial loans $ 83,953 $ 84,947 $ 76,275 $ 77,776 $ 70,767
Construction mortgage loans 99,544 95,186 87,978 68,809 47,940
Commercial mortgage loans 283,458 264,934 242,536 203,988 207,860
Industrial revenue bonds 929 1,163 1,603 1,137 1,344
Residential mortgage loans 327,889 429,840 430,951 313,757 254,320
Consumer loans 5,629 8,221 9,147 9,275 11,589
------------- ------------- ------------- ------------- -------------
Total loans $ 801,402 $ 884,291 $ 848,490 $ 674,742 $ 593,820
============= ============= ============= ============= =============
Allowance for Loan Losses
The allowance for loan losses is an estimate of the amount necessary to
absorb probable losses in the loan portfolio. The allowance consists of
specific, general and unallocated components. Commercial real estate and
commercial business loans are evaluated individually for allowance purposes.
Other categories of loans are generally evaluated as a group. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. Loans classified as doubtful are considered impaired in
accordance with SFAS No. 114, and an allowance is determined using a discounted
cash flow calculation. Loss factors for substandard loans are based on a loss
migration database, while loss factors for all other categories of loans are
based on the Company's historical loss experience with similar loans of similar
quality as determined by the Company's internal rating system. Loss factors are
then adjusted for additional points that consider qualitative factors such as
current economic trends (both local and national), concentrations, growth and
performance trends, and the results of risk management assessments. Accordingly,
increases or decreases in the amount of each loan category as well as the
ratings of the loans within each category are considered in calculating the
overall allowance. The allowance is an estimate, and ultimate losses may vary
from current estimates. As adjustments become necessary, they are reported in
earnings of the periods in which they become known.
In addition, the Company's allowance for loan losses is periodically
reviewed by the OCC as part of their examination process. The OCC may require
the Company to make additions to the allowance based upon judgments different
from those of management.
Non-performing Assets and Loan Loss Experience
Non-performing assets as of December 31 were as follows:
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands)
Nonaccrual loans $1,348 $1,802 $2,192 $1,777 $7,468
Loans past due 90 days or more and still accruing -- -- -- -- --
Property from defaulted loans 1,500 1,500 1,500 1,500 --
------ ------ ------ ------ ------
Total non-performing assets $2,848 $3,302 $3,692 $3,277 $7,468
====== ====== ====== ====== ======
Restructured troubled debt performing in accordance
with amended terms, not included above $ 210 $ 224 $ 237 $ 626 $ 478
====== ====== ====== ====== ======
21
FINANCIAL CONDITION
Accrual of interest income on loans is discontinued when it is
questionable whether the borrower will be able to pay principal and interest in
full and/or when loan payments are 60 days past due unless the loan is fully
secured by real estate or other collateral and in the process of collection.
Loans are classified "substandard" when they are not adequately protected
by the current sound worth and paying capacity of the debtor or of the
collateral. At December 31, 2002, $7,240,000 of loans were included in this
category, in addition to loans reported above. The Company's loan classification
system also includes a category for loans that are monitored for possible
deterioration in credit quality. At December 31, 2002, $9,371,000 of loans were
included in this category. In addition, it is possible that there may be losses
on other loans that have not been specifically identified.
The changes in the allowance for loan losses and related charge-off
(recovery) ratios for the years ended December 31 were as follows:
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance, beginning of year $ 12,252 $ 12,154 $ 11,158 $ 11,108 $ 10,962
Provision for loan losses -- -- -- -- --
Charge-offs:
Commercial loans (134) (275) (108) (347) (353)
Construction mortgage loans -- -- -- -- --
Commercial mortgage loans -- -- -- (186) (86)
Industrial revenue bonds -- -- -- -- --
Residential mortgage loans -- -- -- -- (1)
Consumer loans (92) (71) (60) (77) (166)
-------- -------- -------- -------- --------
Total charge-offs (226) (346) (168) (610) (606)
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Commercial loans 300 321 826 351 475
Construction mortgage loans -- 84 89 60 47
Commercial mortgage loans 8 6 216 190 174
Industrial revenue bonds -- -- -- -- --
Residential mortgage loans 6 -- 10 -- 23
Consumer loans 44 33 23 59 33
-------- -------- -------- -------- --------
Total recoveries 358 444 1,164 660 752
-------- -------- -------- -------- --------
Balance, end of year $ 12,384 $ 12,252 $ 12,154 $ 11,158 $ 11,108
======== ======== ======== ======== ========
Ratio of net charge-offs (recoveries) to (0.01)% (0.01)% (0.013)% (0.01)% (0.03)%
average loans outstanding ======== ======== ======== ======== ========
22
FINANCIAL CONDITION
The allowance for loan losses, as of December 31, was allocated as
follows:
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In thousands)
Commercial loans $ 1,789 $ 2,219 $ 1,502 $ 1,457 $ 1,578
Construction mortgage loans 951 787 802 755 705
Commercial mortgage loans 6,742 5,903 5,838 5,681 5,822
Industrial revenue bonds 14 14 16 20 23
Residential mortgage loans 1,812 2,335 3,361 2,725 2,460
Consumer loans 1,076 994 635 520 520
------- ------- ------- ------- -------
$12,384 $12,252 $12,154 $11,158 $11,108
======= ======= ======= ======= =======
Recoveries on loans previously charged off exceeded charge-offs therefore
management determined that additions to the allowance for loan losses were
unnecessary in 2002. The allowance represented 1.55% of total loans at December
31, 2002, 1.39% of total loans at December 31, 2001, and 1.43% of total loans at
December 31, 2000. Although management believes that upon review of loan quality
and payment statistics, the allowance is adequate to cover losses likely to
result from loans in the current portfolio at December 31, 2002, there can be no
assurance that the allowance is adequate or that additional provisions might not
become necessary.
Liquidity
The Company normally experiences changes in its liquidity each year as a
result of the seasonal nature of the economy in its market area. Liquidity is
usually at its high in late summer and early fall and the annual low point is
usually in the spring.
Substantially all of the amount shown as cash and due from banks at year
end is made up of checks and similar items in the process of collection or was
needed to satisfy a requirement to maintain a portion of deposits in an account
at the Federal Reserve. Accordingly, it does not represent a source of
liquidity.
In general, investment securities could also be sold if necessary to meet
liquidity needs. In that event, a gain or loss would be realized if the market
value of the securities sold was not equal to their cost, adjusted for the
amortization of premium or accretion of discount. The Bank can also borrow funds
using investment securities as collateral, and it has a line of credit of
$5,000,000 from the Federal Home Loan Bank of Boston. The Bank has also
established a line of credit of $7,000,000 for the purchase of federal funds
from SunTrust Bank and may borrow from the Federal Reserve Bank if necessary.
23
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
AVERAGE INTEREST RATES AND INTEREST SPREAD
The average amount outstanding for certain categories of interest-earning
assets and interest-bearing liabilities, the interest income or expense and the
average yields earned or rates paid thereon, are summarized in the following
table for the three years ended December 31, 2002. Nonaccrual loan balances have
been included in their respective loan categories, which reduces the calculated
yields. A portion of the income reported in certain of the asset categories is
not subject to federal income tax, making it relatively more valuable. The
computed yields shown have not been adjusted for taxable equivalency. As an
indication of the amount of change in the general level of interest rates
between years, the average rate on overnight federal funds traded among banks
was 1.67%, 3.88% and 6.26% during 2002, 2001 and 2000, respectively.
Years Ended December 31,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- -------- ----- ----------- -------- -----
(Dollars in thousands)
ASSETS
Securities:
Mortgage-backed securities $ 10,942 $ 617 5.64% $ 29,253 $ 1,868 6.38%
CMOs 180,336 7,114 3.94% 194,463 11,948 6.14%
U.S. Government agencies 34,845 1,111 3.19% 16,905 869 5.14%
State and municipal obligations 18,252 590 3.23% 23,571 948 4.02%
Other securities 262,263 11,016 4.20% 252,251 14,689 5.82%
----------- -------- ----------- --------
Total securities 506,638 20,448 4.04% 516,443 30,322 5.87%
----------- -------- ----------- --------
Loans:
Commercial 85,589 4,815 5.63% 83,973 6,692 7.97%
Commercial construction 56,923 2,928 5.14% 48,461 3,529 7.28%
Residential construction 43,331 2,488 5.74% 48,513 3,038 6.26%
Commercial mortgages 271,784 20,833 7.67% 248,865 22,064 8.87%
Industrial revenue bonds 1,048 60 5.73% 1,324 91 6.87%
Residential mortgages 356,494 21,941 6.15% 410,753 27,913 6.80%
Home equity 60,586 3,054 5.04% 44,296 3,245 7.33%
Consumer 6,420 670 10.44% 8,313 861 10.36%
----------- -------- ----------- --------
Total loans 882,175 56,789 6.44% 894,498 67,433 7.54%
----------- -------- ----------- --------
Total earning assets 1,388,813 77,237 5.56% 1,410,941 97,755 6.93%
-------- --------
Non-earning assets 67,176 67,263
----------- -----------
Total assets $ 1,455,989 $ 1,478,204
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 156,075 727 0.47% $ 139,485 745 0.53%
Regular savings 83,045 930 1.12% 67,947 932 1.37%
Money Market accounts 289,682 5,002 1.73% 252,384 7,143 2.83%
Certificates of deposit of
$100,000 or more 41,642 1,266 3.04% 86,255 4,708 5.46%
Other time deposits 133,821 4,470 3.34% 183,887 10,024 5.45%
----------- -------- ----------- --------
Total interest-bearing deposits 704,265 12,395 1.76% 729,958 23,552 3.23%
----------- -------- ----------- --------
Borrowings:
Federal Home Loan Bank 367,588 16,120 4.39% 394,827 20,090 5.09%
Other short-term borrowings 29,905 318 1.06% 28,758 765 2.66%
Subordinated debt 5,000 285 5.70% 2,096 148 7.06%
----------- -------- ----------- --------
Total borrowings 402,493 16,723 4.15% 425,681 21,003 4.93%
----------- -------- ----------- --------
Total interest-bearing liabilities 1,106,758 29,118 2.63% 1,155,639 44,555 3.86%
-------- --------
Demand deposits 222,183 208,071
Non-interest-bearing liabilities 9,101 8,878
Stockholders' equity 117,947 105,616
----------- -----------
Total liabilities and equity $ 1,455,989 $ 1,478,204
=========== ===========
Net interest income/spread $ 48,119 2.93% $ 53,200 3.07%
======== ========
Net interest margin (NII/Avg.
Earning Assets) 3.46% 3.77%
Years Ended December 31,
---------------------------------------
2000
---------------------------------------
Average Average
Balance Interest Yield
----------- -------- -----
(Dollars in thousands)
ASSETS
Securities:
Mortgage-backed securities $ 27,465 $ 2,173 7.91%
CMOs 179,319 13,189 7.36%
U.S. Government agencies 26,362 1,775 6.73%
State and municipal obligations 19,678 921 4.68%
Other securities 209,580 14,621 6.97%
----------- --------
Total securities 462,404 32,679 7.07%
----------- --------
Loans:
Commercial 77,352 7,529 9.73%
Commercial construction 30,861 2,899 9.39%
Residential construction 52,789 3,316 6.28%
Commercial mortgages 219,690 20,298 9.24%
Industrial revenue bonds 1,382 114 8.25%
Residential mortgages 333,308 23,199 6.96%
Home equity 30,934 3,001 9.70%
Consumer 9,135 934 10.22%
----------- --------
Total loans 755,451 61,290 8.11%
----------- --------
Total earning assets 1,217,855 93,969 7.72%
--------
Non-earning assets 61,027
-----------
Total assets $ 1,278,882
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 124,663 928 0.74%
Regular savings 66,057 1,339 2.03%
Money Market accounts 236,920 9,048 3.82%
Certificates of deposit of
$100,000 or more 76,672 5,682 7.41%
Other time deposits 168,318 9,127 5.42%
----------- --------
Total interest-bearing deposits 672,630 26,124 3.88%
----------- --------
Borrowings:
Federal Home Loan Bank 293,950 18,098 6.16%
Other short-term borrowings 25,579 1,402 5.48%
Subordinated debt -- -- --
----------- --------
Total borrowings 319,529 19,500 6.10%
----------- --------
Total interest-bearing liabilities 992,159 45,624 4.60%
--------
Demand deposits 190,947
Non-interest-bearing liabilities 6,614
Stockholders' equity 89,162
-----------
Total liabilities and equity $ 1,278,882
===========
Net interest income/spread $ 48,345 3.12%
========
Net interest margin (NII/Avg.
Earning Assets) 3.97%
24
CHANGES IN NET INTEREST INCOME DUE TO
CHANGES IN VOLUME AND RATE
The effect on net interest income from changes in interest rates and in the
amounts of interest-earning assets and interest-bearing liabilities is
summarized in the following table. These amounts were calculated directly from
the amounts included in the preceding table. The amount allocated to change in
volume was calculated by multiplying the change in volume by the average of the
interest rates earned or paid in the two periods. The amount allocated to change
in rate was calculated by multiplying the change in rate by the average volume
over the two periods. In 2002, the negative effect of changes in rate more than
offset the positive contribution from changes in volume. Rates on earning assets
decreased at a faster pace than the Company's ability to lower rates on
interest-bearing liabilities. The improvement from changes in volume in 2002 was
a result of the level of average interest-bearing liabilities decreased at a
more rapid rate than the decrease in average earning assets. In 2001, declining
rates had a negative impact on net interest income. However, the growth in
earning assets exceeded the growth in interest bearing liabilities resulting in
an increase in net interest income when compared to 2000.
2002 Compared to 2001 2001 Compared to 2000
Change Due to Increase (Decrease) Change Due to Increase (Decrease)
------------------------------------ ------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In thousands)
EARNING ASSETS
Securities:
Mortgage-backed securities $ (1,100) $ (151) $ (1,251) $ 128 $ (433) $ (305)
CMOs (712) (4,122) (4,834) 1,022 (2,263) (1,241)
U.S. Government agencies 747 (505) 242 (561) (345) (906)
State and municipal obligations (193) (165) (358) 193 (166) 27
Other securities 502 (4,175) (3,673) 2,729 (2,661) 68
-------- -------- -------- -------- -------- --------
Total securities (756) (9,118) (9,874) 3,511 (5,868) (2,357)
-------- -------- -------- -------- -------- --------
Loans:
Commercial 110 (1,987) (1,877) 586 (1,423) (837)
Commercial construction 525 (1,126) (601) 1,467 (837) 630
Commercial mortgages 1,895 (3,126) (1,231) 2,642 (876) 1,766
Industrial revenue bonds (17) (14) (31) (5) (18) (23)
Residential mortgages (3,513) (2,459) (5,972) 5,328 (614) 4,714
Home equity 1,008 (1,199) (191) 1,138 (894) 244
Consumer (197) 6 (191) (85) 12 (73)
-------- -------- -------- -------- -------- --------
Total loans (189) (9,905) (10,094) 11,071 (4,650) 6,421
-------- -------- -------- -------- -------- --------
Total earning assets (945) (19,023) (19,968) 14,582 (10,518) 4,064
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts 83 (101) (18) 94 (277) (183)
Regular savings 188 (190) (2) 32 (439) (407)
Money Market accounts 850 (2,991) (2,141) 514 (2,419) (1,905)
Certificates of deposit
of $100,000 or more (1,896) (1,546) (3,442) 617 (1,591) (974)
Other time deposits (2,200) (3,354) (5,554) 846 51 897
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits (2,975) (8,182) (11,157) 2,103 (4,675) (2,572)
-------- -------- -------- -------- -------- --------
Borrowings:
Federal Home Loan Bank (1,291) (2,679) (3,970) 5,644 (3,652) 1,992
Other short-term borrowings 21 (468) (447) 129 (766) (637)
Subordinated debt 185 (48) 137 74 74 148
-------- -------- -------- -------- -------- --------
Total borrowings (1,085) (3,195) (4,280) 5,847 (4,344) 1,503
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities (4,060) (11,377) (15,437) 7,950 (9,019) (1,069)
-------- -------- -------- -------- -------- --------
Net changes due to volume/rate $ 3,115 $ (7,646) $ (4,531) $ 6,632 $ (1,499) $ 5,133
======== ======== ======== ======== ======== ========
25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss from adverse changes in market prices. In
particular, the market prices of interest-earning assets may be affected by
changes in interest rates. Since net interest income (the difference or spread
between the interest earned on loans and investments and the interest paid on
deposits and borrowings) is the Company's primary source of revenue, interest
rate risk is the most significant non-credit related market risk to which the
Company is exposed. Net interest income is affected by changes in interest rates
as well as fluctuations in the level and duration of the Company's assets and
liabilities.
Interest rate risk is the exposure of net interest income to adverse
movements in interest rates. In addition to directly impacting net interest
income, changes in interest rates can also affect the amount of new loan
originations, the ability of borrowers to repay variable rate loans, the volume
of loan prepayments and refinancings, the carrying value of investment
securities classified as available for sale and the flow and mix of deposits.
The Company's Asset/Liability Management Committee, comprised of several
Directors with senior management, is responsible for managing interest rate risk
in accordance with policies approved by the Board of Directors regarding
acceptable levels of interest rate risk, liquidity and capital. The Committee
meets monthly and sets the rates paid on deposits, approves loan pricing and
reviews investment transactions.
The Company's investment portfolio mix consists primarily of
collateralized mortgage obligations, including certain interest-only securities,
and other debt securities, asset backed securities, collateralized with pools of
loans and obligations issued by others. The Company's investment policy provides
for purchases to be of investment quality and short duration. The Company's loan
portfolio is concentrated in residential and commercial real estate loans from
southeastern Massachusetts. Both the investment and loan portfolio have
performed well during the recent reporting period. However, the probability
exists for losses from both investments and loans during periods of significant
interest rate and economic volatility.
The Company is subject to interest rate risk in the event that rates
either increase or decrease. In the event that interest rates increase, the
value of net assets (the liquidation value of stockholders' equity) would
decline. At December 31, 2002, it is estimated that an increase in interest
rates of 100 basis points (for example, an increase in the prime rate from 4.5%
to 5.5%) would reduce the value of net assets by $5,429,000. On the other hand,
if interest rates were to decrease, the value of net assets would increase.
Although the value of net assets is subject to risk if interest rates rise
(but not if rates fall) the opposite is generally true of the Company's
earnings. If interest rates were to increase, net interest income would increase
because the Company has more interest-earning assets than it has
interest-bearing liabilities and because much of this excess amount reprices
within a short period of time. As a result, net interest income is instead
generally subject to the risk of a decline in rates. Not only are there fewer
interest-bearing liabilities to reprice, but many of these liabilities could not
reprice much lower because the rates paid on them are already low. During 2003,
the Company increased its proportion of short-term fixed rate investments to
total investments to protect yields. Accordingly, if interest rates were to
decrease by 100 basis points (for example, a decrease in the prime rate from
4.5% to 3.5%) it is estimated that net interest income would decrease by
$1,733,000. On the other hand, if interest rates were to increase, net interest
income would increase.
At December 31, 2001, it was estimated that the value of the net assets of
the Company would decline by $19,420,000 if interest rates were to increase by
200 basis points and that the Company's net interest income would decline by
$6,014,000 if interest rates were to decline by 200 basis points. The
year-to-year change in these estimates is a result of a lengthening of the
duration of the net assets of the Company.
26
Item 8. Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS INDEX
Page
----
o Independent Auditors' Reports 28
o Consolidated Balance Sheets at December 31, 2002 and 2001 30
o Consolidated Statements of Income for the Three Years Ended
December 31, 2002 31
o Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2002 32
o Consolidated Statements of Comprehensive Income for the Three Years
Ended December 31, 2002 33
o Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 2002 33
o Notes to Consolidated Financial Statements 34
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
CCBT Financial Companies, Inc.
We have audited the accompanying consolidated balance sheets of CCBT
Financial Companies, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, cash flows, comprehensive income
and changes in stockholders' equity for each of the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCBT
Financial Companies, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Wolf & Company, P.C.
- -------------------------
Boston, Massachusetts
January 30, 2003, except for Note 11 as to which
the date is March 5, 2003
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CCBT Financial Companies, Inc.
We have audited the accompanying consolidated statements of income, cash
flows, comprehensive income and changes in stockholders' equity of CCBT
Financial Companies, Inc. for the year ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of CCBT Financial Companies, Inc. for the year ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/Grant Thornton LLP
Boston, Massachusetts
February 9, 2001
29
CCBT FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------
ASSETS 2002 2001
----------- -----------
(Dollars in thousands)
Cash and due from banks $ 60,057 $ 51,205
Short term interest-bearing deposits 741 10,857
Securities available for sale, at fair value 510,837 438,350
Federal Home Loan Bank stock, at cost 23,503 23,503
Federal Reserve Bank stock, at cost 1,235 1,235
Loans held for sale 37,332 8,349
Total loans 801,402 884,291
Less: Allowance for loan losses (12,384) (12,252)
----------- -----------
Net loans 789,018 872,039
----------- -----------
Premises and equipment 20,602 18,496
Deferred tax asset, net 5,572 2,620
Accrued interest receivable on securities and loans 5,982 6,368
Intangible assets 6,314 7,690
Foreclosed real estate 1,500 1,500
Other assets 19,190 12,455
----------- -----------
Total assets $ 1,481,883 $ 1,454,667
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 942,220 $ 903,391
Federal Home Loan Bank borrowings - short-term 205,700 200,000
Other short-term borrowings 21,391 30,735
Federal Home Loan Bank borrowings - long-term 165,750 184,314
Subordinated debt 5,000 5,000
Accrued interest payable on deposits and borrowings 1,501 2,410
Post retirement benefits payable 3,710 3,293
Employee profit sharing retirement and bonuses payable 3,017 4,214
Due to broker for securities settlement 11,627 --
Other liabilities 3,286 5,990
----------- -----------
Total liabilities 1,363,202 1,339,347
----------- -----------
Minority interest 234 4
----------- -----------
Commitments and contingencies (Notes 5 and 12)
Stockholders' equity:
Common stock, $1.00 par value; 12,000,000 shares authorized;
9,061,064 shares issued 9,061 9,061
Surplus 27,484 27,473
Undivided profits 91,042 83,157
Treasury stock, at cost (470,266 shares -
2002; 440,641 shares - 2001) (8,122) (7,197)
Accumulated other comprehensive income (loss) (1,018) 2,822
----------- -----------
Total stockholders' equity 118,447 115,316
----------- -----------
Total liabilities and stockholders' equity $ 1,481,883 $ 1,454,667
=========== ===========
The accompanying notes are an integral part of these financial statements.
30
CCBT FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 56,789 $ 67,433 $ 61,289
Interest on short term interest-bearing deposits 302 514 1,043
Taxable interest income on securities 18,613 27,489 28,996
Tax-exempt interest income on securities 590 934 910
Dividends on securities 943 1,385 1,731
-------- -------- --------
Total interest and dividend income 77,237 97,755 93,969
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 12,395 23,552 26,123
Interest on Federal Home Loan Bank borrowings 16,120 20,090 18,098
Interest on other short-term borrowings 318 765 1,403
Interest on subordinated debt 285 148 --
-------- -------- --------
Total interest expense 29,118 44,555 45,624
-------- -------- --------
Net interest income 48,119 53,200 48,345
Provision for loan losses -- -- --
-------- -------- --------
Net interest income, after provision for loan losses 48,119 53,200 48,345
-------- -------- --------
NON-INTEREST INCOME
Financial advisor fees 6,807 6,909 6,433
Deposit account service charges 2,210 2,130 1,968
Branch banking fees 3,086 3,110 3,074
Electronic banking fees 2,496 1,998 2,001
Loan servicing and other loan fees (98) 59 233
Brokerage fees and commissions 1,494 1,311 1,033
Net gain on securities 2,074 2,187 85
Net gain on sales of loans 1,941 2,956 88
Insurance commissions 2,562 1,573 810
Other income 377 688 486
-------- -------- --------
Total non-interest income 22,949 22,921 16,211
-------- -------- --------
NON-INTEREST EXPENSE
Salaries 18,659 17,653 14,400
Employee benefits 8,415 8,164 6,227
Building and equipment 6,289 5,434 4,889
Data processing 2,567 2,600 2,321
Accounting and legal fees 1,130 955 771
Other outside services 2,301 2,277 2,218
Amortization of intangibles 1,225 1,583 851
Delivery and communications 2,296 1,898 1,564
Marketing and advertising 1,875 1,774 1,253
All other expenses 4,103 3,720 3,786
-------- -------- --------
Total non-interest expense 48,860 46,058 38,280
-------- -------- --------
Minority interest 85 (23) (54)
-------- -------- --------
Income before income taxes 22,123 30,086 26,330
Provision for income taxes 7,683 10,622 9,101
-------- -------- --------
Net income $ 14,440 $ 19,464 $ 17,229
======== ======== ========
Basic earnings per share $ 1.68 $ 2.26 $ 2.00
Diluted earnings per share $ 1.67 $ 2.25 $ 2.00
Average shares outstanding - basic 8,613 8,613 8,608
Average shares outstanding - diluted 8,649 8,647 8,614
Cash dividends declared per share $ 0.76 $ 0.72 $ 0.64
The accompanying notes are an integral part of these financial statements.
31
CCBT FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,440 $ 19,464 $ 17,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of fixed and intangible assets 4,308 4,284 3,226
Net amortization (accretion) of securities 1,335 (5,610) 4,892
Amortization of net deferred loan costs 414 1,309 744
Net gain on securities (2,074) (2,187) (85)
Deferred income tax benefit (169) (370) (622)
Net gain on sale of loans (1,941) (2,956) (88)
Net change in:
Loans held for sale, net 4,141 (5,709) (661)
Accrued interest receivable 386 (1,317) (1,620)
Accrued expenses and other liabilities (4,393) 154 3,008
Other, net (6,115) (1,538) (101)
----------- ----------- -----------
Net cash provided by operating activities 10,332 5,524 25,922
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans 51,424 (86,431) (176,952)
Proceeds from sale of portfolio loans -- 52,841 12,188
Maturities of available-for-sale securities 713,688 514,544 248,980
Purchases of available-for-sale securities (873,168) (656,605) (312,852)
Sales of available-for-sale securities 92,736 143,661 97,908
Purchases of premises and equipment (5,428) (4,563) (4,150)
Purchase of Federal Home Loan Bank and
Federal Reserve Bank stock -- (1,431) (84)
Acquisition of branch offices -- -- 35,874
Acquisition of 51% of insurance subsidiary -- -- (1,199)
----------- ----------- -----------
Net cash used by investing activities (20,748) (37,984) (100,287)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 38,829 (69,912) 151,972
Federal Home Loan Bank borrowings 1,858,250 1,855,224 2,001,324
Repayments of Federal Home Loan Bank borrowings (1,871,114) (1,762,197) (2,058,000)
Net increase in other short-term borrowings (9,344) 6,215 5,174
Proceeds from issuance of subordinated debt -- 5,000 --
Purchase of treasury stock (1,217) -- --
Issuance of common stock under stock option plan 303 181 --
Cash dividends paid on common stock (6,555) (6,204) (5,513)
----------- ----------- -----------
Net cash provided by financing activities 9,152 28,307 94,957
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (1,264) (4,153) 20,592
Cash and cash equivalents at beginning of year 62,062 66,215 45,623
----------- ----------- -----------
Cash and cash equivalents at end of year $ 60,798 $ 62,062 $ 66,215
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 30,022 $ 46,404 $ 44,479
Income taxes 10,974 11,050 8,968
Non-cash transactions:
Net change in due to/from broker for securities settlement 11,627 (757) 556
Transfer from loans to loan held for sale 31,183 -- --
The accompanying notes are an integral part of these financial statements.
32
CCBT FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
Net income $ 14,440 $ 19,464 $ 17,229
--------- --------- ---------
Unrealized holding (losses) gains on securities available for sale (4,549) 7,596 2,458
Reclassification of gains on securities realized in income (2,074) (2,187) (85)
--------- --------- ---------
Net unrealized (losses) gains (6,623) 5,409 2,373
Related tax effect 2,783 (2,263) (1,010)
--------- --------- ---------
Net other comprehensive income (loss) (3,840) 3,146 1,363
--------- --------- ---------
Comprehensive income $ 10,600 $ 22,610 $ 18,592
========= ========= =========
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
(In thousands)
COMMON STOCK
Balance, beginning and end of year $ 9,061 $ 9,061 $ 9,061
--------- --------- ---------
SURPLUS
Balance, beginning of year 27,473 27,495 27,495
Issuance of common stock under stock option plan 11 (22) --
--------- --------- ---------
Balance, end of year 27,484 27,473 27,495
--------- --------- ---------
UNDIVIDED PROFITS
Balance, beginning of year 83,157 69,897 58,181
Net income 14,440 19,464 17,229
Cash dividends declared and paid (6,555) (6,204) (5,513)
--------- --------- ---------
Balance, end of year 91,042 83,157 69,897
--------- --------- ---------
TREASURY STOCK
Balance, beginning of year (7,197) (7,400) (7,400)
Purchase of treasury stock (47,500 shares) (1,217) -- --
Issuance of common stock under stock option plan
(17,875 and 12,375 shares, respectively) 292 203 --
--------- --------- ---------
Balance, end of year (8,122) (7,197) (7,400)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year 2,822 (324) (1,687)
Net other comprehensive income (loss) (3,840) 3,146 1,363
--------- --------- ---------
Balance, end of year (1,018) 2,822 (324)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY, END OF YEAR $ 118,447 $ 115,316 $ 98,729
========= ========= =========
The accompanying notes are an integral part of these financial statements.
33
CCBT FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business -- The activities of CCBT Financial Companies, Inc.
(the "Company") are conducted primarily through its subsidiary, Cape Cod Bank
and Trust Company (the "Bank"). The Bank provides loans, deposits, trust and
investment services, and insurance products to businesses and consumers
primarily located in southeastern Massachusetts.
Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, the Bank and CCBT Statutory Trust I (See Note 7). All
inter-company accounts have been eliminated upon consolidation in the
presentation of the consolidated financial statements. Certain amounts have been
reclassified in the 2001 and 2000 financial statements to conform to the 2002
presentation.
Use of estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, other-than-temporary impairment of securities, the valuation of
foreclosed real estate and the valuation of mortgage servicing rights.
Cash and cash equivalents -- Cash and cash equivalents include amounts due
from banks, short term interest-bearing deposits and federal funds sold, all of
which mature within 90 days.
The Bank is required to maintain average balances on hand or with the
Federal Reserve Bank. At December 31, 2002, these reserve balances amounted to
$10,599,000.
Securities -- Securities held for investment that the Company has the
positive intent and ability to hold to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts. Securities available for
sale are securities that might be sold prior to maturity to meet needs for
liquidity or for the purchase of alternative investments. These securities are
stated at fair value. Unrealized gains and losses on such securities, if any,
are credited or charged to other comprehensive income net of any related tax
effect. Trading securities are securities which are bought and held principally
for the purpose of selling them in the near term. At December 31, 2002 and 2001,
the Company did not own any held-to-maturity or trading securities. Declines in
the fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In estimating other-than-temporary impairment losses,
management considers independent price quotations and the financial condition of
the issuer. For asset-backed securities, management also considers data related
to delinquency and loss trends, as well as collateral support levels available.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method. Purchase premiums and
discounts are generally recognized in interest income using the interest method
over the terms of the securities. For interest only securities, the interest
method is based on the outstanding principal balances of the underlying assets.
Loans -- Loans are reported at their principal balance outstanding,
adjusted for deferred fees and costs and charge-offs. Loan fees, net of the
direct cost of origination, are deferred and taken into income over the life of
the loan using the interest method.
Interest income on loans is recognized when accrued. Accrual of interest
income on loans is discontinued when it is doubtful whether the borrower will be
able to pay principal and interest in full and/or when loan payments are 60 days
past due unless the loan is fully secured by real estate or other collateral.
Past due status is based on contractual terms of the loan. Interest previously
accrued but not collected is reversed and charged against interest income at the
time the related loan is placed on nonaccrual status. Interest collected on
nonaccrual loans is credited to interest income when received. When doubt exists
as to the ultimate collection of principal on a loan, the estimated loss is
included in the provision for loan losses.
34
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Loans held for sale -- Loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income.
Impaired loans -- A loan is considered impaired when, based on current
information and events, it is probable that a creditor 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. Loans that have been determined to be impaired are also
classified as nonaccrual.
Mortgage servicing rights -- The fair value of the right to service loans
is capitalized when loans are sold to other investors and is amortized against
servicing income over the estimated life of the underlying loans. Servicing
assets are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by stratifying rights by
predominant characteristics, such as loan types and terms. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
Allowance for loan losses -- The allowance for loan losses is an estimate
of the amount necessary to provide an adequate allowance to absorb probable
losses in the current loan portfolio. This amount is determined by management
based on a regular evaluation of the loan portfolio and considers such factors
as loan loss experience, nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and current economic conditions. This evaluation is
inherently subjective, as it requires estimates that are susceptible to
significant revision as more information becomes available. Loan losses are
charged against the allowance when management believes the collectibility of the
principal is unlikely. Recoveries on loans previously charged off are credited
to the allowance. The allowance is an estimate, and ultimate losses may vary
from current estimates. As adjustments become necessary, they are reported in
earnings of the periods in which they become known.
The allowance consists of specific, general and unallocated components.
The specific component relates to loans that are classified as doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
Foreclosed real estate -- Foreclosed real estate is carried at the lower
of the amount of the related loan or the estimated market value of the assets
received, less estimated selling costs. Foreclosed real estate includes
properties where the Company has actually received title or taken possession.
Provisions or losses subsequent to acquisition, operating income and expenses,
and gains or losses from the sale of properties are credited or charged to
income, while costs relating to improving real estate are capitalized.
Premises and equipment -- Premises and equipment are reported at cost less
accumulated depreciation. Depreciation is computed on a straight-line basis by
charges to income in amounts estimated to recover the cost of premises and
equipment over their estimated useful lives, which range between 3 and 8 years
for furniture and fixtures and up to 40 years for Bank premises and leasehold
improvements.
35
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Intangibles -- The core deposit intangible arising from the acquisition of
two branch banking offices during 2000 is being amortized on a straight-line
basis over 7 years. Prior to January 1, 2002, goodwill, arising from the
acquisition of Murray & MacDonald Insurance Services, Inc., was being amortized
on a straight-line basis over 5 years. Effective January 1, 2002, goodwill is no
longer amortized, but is evaluated for impairment (See "Accounting changes").
Marketing expense -- The Company charges to marketing expense any
advertising related expenses at the time they are incurred.
Stock compensation plans -- At December 31, 2002, the Company has two
stock-based employee compensation plans, which are described more fully in Note
6. The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the fair value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share for the years ending December 31, if the Company had applied
the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to the stock option plans.
2002 2001 2000
---------- ----------- -----------
(In thousands, except per share data)
Net income as reported $ 14,440 $ 19,464 $ 17,229
Additional expense had the Company
adopted SFAS No. 123 (403) (182) (107)
Related tax benefit 168 76 45
---------- ----------- -----------
Pro-forma net income $ 14,205 $ 19,358 $ 17,167
========== =========== ===========
Basic earnings per share, as reported $ 1.68 $ 2.26 $ 2.00
Pro-forma basic earnings per share $ 1.65 $ 2.25 $ 1.99
Diluted earnings per share, as reported $ 1.67 $ 2.25 $ 2.00
Pro-forma diluted earnings per share $ 1.64 $ 2.24 $ 1.99
Provision for income taxes -- The provision for income taxes includes
deferred income taxes arising as a result of reporting certain items of revenue
and expense in different periods for tax and financial reporting purposes.
Resultant deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which they are expected to be
settled.
Earnings per share -- Basic earnings per share is computed by dividing net
income by the weighted average shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if options
to purchase common stock were exercised, resulting in the issuance of common
stock that then shared in the earnings of the Company.
Segments -- Statement of Financial Accounting Standards ("SFAS") No. 131
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in subsequent
interim financial reports issued to shareholders. It also establishes standards
for related disclosure about products and services, geographic areas, and major
customers. The Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and assess
performance. The Statement also requires that public enterprises report a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. It also requires that information be reported about revenues
derived from the enterprises' products or services, or about the countries in
which the enterprises earn revenues and holds assets, and about major customers,
regardless of whether that information is used in making operating decisions.
36
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company has one reportable segment, "Community Banking." All of the
Company's activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Company supports the others.
For example, commercial lending is dependent upon the ability of the Bank to
fund itself with retail deposits and other borrowings and to manage interest
rate and credit risk. This situation is also similar for consumer and
residential mortgage lending. The Company's brokerage and insurance activities
are not material to the Company's consolidated financial statements. Net income
for the year ended December 31, 2002 for such activities amounted to $163,000
and $174,000, respectively. Accordingly, all significant operating decisions are
based upon analysis of the Company as one operating segment or unit.
Accounting changes -- The Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002. Accordingly, goodwill is no
longer subject to amortization over its estimated useful life, but is subject to
at least an annual assessment for impairment by applying a fair value based
test. Additionally, under SFAS No. 142, acquired intangible assets (such as core
deposit intangibles) are separately recognized if the benefit of the intangible
asset is obtained through contractual or other legal rights, or if the
intangible asset can be sold, transferred, licensed, rented, or exchanged, and
amortized over their useful life. Branch acquisition transactions were outside
the scope of SFAS No. 142 and, accordingly, intangible assets related to such
transactions continued to amortize upon the adoption of SFAS No. 142. On October
31, 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain Financial
Institutions." This Statement amends (except for transactions between two or
more mutual enterprises) previous interpretive guidance on the application of
the purchase method of accounting to acquisitions of financial institutions, and
requires the application of SFAS No. 141, "Business Combinations" and SFAS No.
142 to branch acquisitions if such transactions meet the definition of a
business combination. This Statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", to include in its scope core
deposit intangibles of financial institutions. Accordingly, such intangibles are
subject to a recoverability test based on undiscounted cash flows, and to the
impairment recognition and measurement provisions that are required for other
long-lived assets that are held and used. As a result, effective January 1,
2002, the Company's goodwill, which amounted to $803,000 at December 31, 2002,
is no longer amortized but is evaluated for impairment and the Company's core
deposit intangibles continue to be amortized over their estimated useful lives.
The adoption of SFAS Nos. 141, 142 and 147 did not have a material impact on the
Company's consolidated financial statements.
In December, 2001, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 01-6, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others", to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry audit guides. This
Statement is effective for annual and interim financial statements issued for
fiscal years beginning after December 15, 2001, and did not have a material
impact on the Company's consolidated financial statements.
Subsequent accounting change -- In June, 2002, the FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", which
requires recognition of a liability, when incurred, for a cost associated with
an exit or disposal activity. The liability shall be recognized at fair value.
The provisions of this Statement are effective for exit or disposal activities
initiated after December 31, 2002. Management does not anticipate that the
adoption of this Statement will have a material impact on the consolidated
financial statements.
37
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(2) SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities available for
sale, with gross unrealized gains and losses, follows:
December 31, 2002
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
U.S. Government agency CMOs $ 63,131 $ 685 $ 22 $ 63,794
Other U.S. Government agency obligations 24,635 51 41 24,645
Other collateralized mortgage obligations 105,136 238 258 105,116
Interest only securities 14,444 1,359 2,206 13,597
State and municipal obligations 19,798 -- -- 19,798
Other debt securities 285,470 2,472 4,055 283,887
-------- -------- -------- --------
Totals $512,614 $ 4,805 $ 6,582 $510,837
======== ======== ======== ========
December 31, 2001
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In thousands)
U.S. Government agency CMOs $105,836 $ 830 $ 290 $106,376
Other U.S. Government agency obligations 14,254 158 48 14,364
Other collateralized mortgage obligations 60,460 341 63 60,738
Interest only securities 17,009 2,911 857 19,063
State and municipal obligations 24,114 -- -- 24,114
Other debt securities 211,831 2,672 808 213,695
-------- -------- -------- --------
Totals $433,504 $ 6,912 $ 2,066 $438,350
======== ======== ======== ========
The net unrealized gain or loss on securities available for sale is
included net of tax in accumulated other comprehensive income.
Gross proceeds from the sale of available for sale securities were
$92,736,000 in 2002. Gross gains of $3,229,000 and gross losses of $155,000 were
realized on those sales. In addition, the Company recognized a loss of
$1,000,000, which resulted from the write-down of a debt security available for
sale which experienced a decline in value that was deemed to be
other-than-temporary.
Gross proceeds from the sale of available for sale securities were
$143,661,000 in 2001. Gross gains of $2,464,000 and gross losses of $277,000
were realized on those sales.
Gross proceeds from the sale of available for sale securities were
$97,908,000 in 2000. Gross gains of $410,000 and gross losses of $325,000 were
realized on those sales.
38
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The amount of income tax expense attributable to net gains in 2002, 2001
and 2000 was $868,000, $915,000 and $35,000, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 2002, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
(In thousands)
Due in one year on less $ 27,761 $ 27,796
Due after one year through five years 49,053 49,077
Due after five years through ten years 46,613 45,627
Due after ten years 389,187 388,337
--------- ---------
$ 512,614 $ 510,837
========= =========
At December 31, 2002, securities with an estimated fair value of
$21,391,000 were pledged to secure borrowings from the U.S. Treasury and
securities sold subject to agreements to repurchase.
(3) LOANS, NET
The following is a summary of loans outstanding as of the dates indicated:
December 31,
-------------------------
2002 2001
--------- ---------
(In thousands)
Mortgage loans on real estate:
Residential $ 262,095 $ 376,504
Commercial 283,458 264,934
Construction 99,544 95,186
Equity lines of credit 65,794 53,336
Other loans:
Commercial 83,953 84,947
Consumer 5,629 8,221
Industrial revenue bonds 929 1,163
--------- ---------
Total loans 801,402 884,291
Less: Allowance for loan losses (12,384) (12,252)
--------- ---------
Total loans, net $ 789,018 $ 872,039
========= =========
The Company enters into banking transactions in the ordinary course of its
business with related parties such as directors, officers, principal
stockholders and their associates, on the same terms, including interest rates
and collateral on loans, as those prevailing at the same time for comparable
transactions with others. The total amount of loans outstanding to related
parties at December 31, 2002 and 2001 was $10,037,000 and $4,895,000,
respectively. During 2002, new loans to related parties amounted to $20,355,000
and repayments amounted to $15,213,000. The total amount of deposits from
related parties at December 31, 2002 and 2001 was $19,365,000 and $3,257,000,
respectively.
Nonaccrual loans at December 31, 2002 and 2001 amounted to $1,348,000 and
$1,802,000, respectively. Interest income, which would have been accrued on
nonaccrual loans, had they performed in accordance with the terms of their
contracts, for the year ended December 31, 2002 was $77,000. Interest income
recognized on nonaccrual loans in 2002 amounted to $35,000.
39
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company's business is primarily in southeastern Massachusetts, and
many of the Company's loan customers are involved in real estate construction or
the hotel and restaurant industry. This can cause a number of them to be
similarly affected by economic conditions.
Loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage and other
loans serviced for others were $322,085,000 and $197,553,000 at December 31,
2002 and 2001, respectively.
The following summarizes mortgage servicing rights capitalized and
amortized for the years ended December 31:
2002 2001 2000
------ ------ ------
(In thousands)
Mortgage servicing rights capitalized $1,444 $ 585 $ 42
====== ====== ======
Mortgage servicing rights amortized $ 707 $ 357 $ 147
====== ====== ======
Mortgage servicing rights included in Other Assets at December 31, 2002
and 2001 were $2,088,000 and $1,351,000, respectively. The estimated fair values
of these rights were $2,279,000 and $1,433,000, respectively.
(4) ALLOWANCE FOR LOAN LOSSES
The changes in the allowance for loan losses for the years ended December
31 were as follows:
2002 2001 2000
-------- -------- --------
(In thousands)
Balance, beginning of year $ 12,252 $ 12,154 $ 11,158
Provision for loan losses -- -- --
Charge-offs (226) (346) (168)
Recoveries on loans previously charged-off 358 444 1,164
-------- -------- --------
Balance, end of year $ 12,384 $ 12,252 $ 12,154
======== ======== ========
The following is a summary of information pertaining to impaired loans:
December 31,
------------------
2002 2001
------ ------
(In thousands)
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance:
Commercial loans 43 468
Commercial mortgage loans 121 148
------ ------
Total impaired loans $ 164 $ 616
====== ======
Valuation allowance related to impaired loans $ 35 $ 347
====== ======
Years Ended December 31,
------------------------------
2002 2001 2000
------ ------ ------
(In thousands)
Average investment in impaired loans $ 346 $ 528 $1,052
====== ====== ======
Interest income recognized on impaired loans $ 69 $ 112 $ 183
====== ====== ======
Interest income recognized on a cash basis on impaired loans $ 69 $ 112 $ 183
====== ====== ======
40
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(5) PREMISES AND EQUIPMENT
The cost and accumulated depreciation and amortization of premises and
equipment are as follows:
December 31,
-----------------------
2002 2001
-------- --------
(In thousands)
Premises:
Land $ 3,069 $ 2,769
Buildings 12,021 10,188
Leasehold improvements 5,079 4,513
Equipment 21,431 19,447
-------- --------
41,600 36,917
Accumulated depreciation and amortization (20,998) (18,421)
-------- --------
$ 20,602 $ 18,496
======== ========
Depreciation and amortization expense for the years ended December 31,
2002, 2001 and 2000 amounted to $3,083,000, $2,700,000 and $2,375,000,
respectively.
Certain banking premises are leased under non-capitalized operating leases
expiring at various dates through 2012. Annual rental expenses under these
leases were $1,268,000 in 2002, $1,003,000 in 2001 and $959,000 in 2000. The
total rental commitments under non-cancelable leases for future years are
$4,989,000, excluding amounts payable under Consumer Price Index escalator
provisions in certain leases which become effective in 2003 and later years.
Annual commitments are $1,290,0000 in 2003, $1,235,000 in 2004, $843,000 in
2005, $406,000 in 2006, $372,000 in 2007, and a total of $843,000 for the years
2008 through 2012. Certain of these leases also contain renewal options.
(6) EMPLOYEE BENEFITS
Retirement and Incentive Plans
------------------------------
The Company has a defined contribution Profit Sharing Retirement Plan
covering substantially all employees following two years of service. Each year,
the Company contributes amounts equal to 8% of each participant's compensation
plus 4.3% of compensation over one-half the social security wage base. Profit
sharing retirement expense was $1,708,000 in 2002, $1,352,000 in 2001 and
$1,154,000 in 2000. Also in 2002, 2001 and 2000, bonuses were accrued under the
provisions of the Company's Profit Incentive Plan totaling $1,205,000,
$2,098,000 and $1,750,000, respectively, and paid in the year following.
Employee Stock Ownership Plan
-----------------------------
At December 31, 2002 and 2001, the Company's Employee Stock Ownership Plan
("ESOP") held 34,773 shares and 36,691 shares, respectively, of the Company's
common stock, all of which were allocated to employees. There were no
contributions to the ESOP from the Company in 2002, 2001 or 2000.
Post-Retirement Benefit Plan
----------------------------
The Company has an unfunded plan for providing medical and life insurance
coverage for retired employees who meet age and service requirements. For an
employee retiring at age 65 with 30 or more years of service, the Company pays
100% of the cost of his or her medical insurance and 50% of the cost of the
medical insurance of his or her dependents. The Company also pays for the cost
of life insurance in an amount between $5,000 and $25,000 based on the earnings
of the employee and the number of years since retirement. Lesser benefits are
provided for employees who retire at a younger age or with fewer years of
service. The Company's share of increases in the cost of providing
post-retirement medical insurance is limited to 5% per year for employees who
retire after 1993.
SFAS No. 106 requires that the expected expense be recognized over the
period that employees render the
41
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
service making them eligible for this benefit rather than when the premiums are
actually paid following retirement. SFAS No. 106 will increase the amount of
expense over the transitional period during which expense will be charged for
both the expense of current premiums and to build up a reserve of approximately
$4,400,000 for future premiums.
The following table sets forth the plan's funded status reconciled with
the amount included in the Company's statement of condition:
December 31,
------------------
2002 2001
------- -------
(In thousands)
Accumulated post-retirement benefit obligation:
Retirees $ 1,142 $ 1,081
Fully eligible active plan participants 1,193 1,032
Other plan participants 2,164 1,539
------- -------
$ 4,499 $ 3,652
======= =======
Years Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
(In thousands)
Plan assets at fair value $ -- $ -- $ --
------- ------- -------
Accumulated post-retirement benefit obligation at
beginning of year 3,652 3,633 3,040
Service cost 209 222 172
Interest cost 250 268 234
Actuarial (gain) loss 525 (352) 292
Benefit payments (137) (119) (105)
------- ------- -------
Accumulated post-retirement benefit obligation
at end of year 4,499 3,652 3,633
------- ------- -------
Accumulated post-retirement benefit obligation
in excess of plan assets 4,499 3,652 3,633
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions 305 860 516
Unrecognized net obligation at transition (1,098) (1,208) (1,318)
------- ------- -------
Unfunded accrued post-retirement benefit expense $ 3,706 $ 3,304 $ 2,831
======= ======= =======
Net periodic post-retirement benefit expense included the following
components:
Years Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
(In thousands)
Service cost - benefits attributed to service during the year $ 209 $ 222 $ 172
Interest cost on accumulated post-retirement benefit obligation 250 268 234
Amortization of transition obligation over 20 years 110 110 110
Amortization of gain (306) (516) (831)
Asset gain deferred 277 508 807
------- ------- -------
Net periodic post-retirement benefit cost $ 540 $ 592 $ 492
======= ======= =======
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2003; the rate was assumed
to decrease to 8% by 2004 and decrease by .5% per year through 2010 to 5%
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by one percentage point in each year would increase
42
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
the accumulated post-retirement benefit obligation as of December 31, 2002 by
$68,000 and the aggregate service and interest cost components of net periodic
post-retirement benefit cost for the year then ended by $5,000.
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 6.5% at December 31, 2002 and 7.0% at
December 31, 2001 and 2000.
Post-employment benefits are all types of benefits provided to former or
inactive employees, their beneficiaries and covered dependents. Post-employment
benefits include, but are not limited to, salary continuation, supplemental
unemployment benefits, severance benefits, disability-related benefits
(including workers' compensation), job training and counseling, and continuation
of benefits such as health care benefits and life insurance coverage.
Stock Option Plans
- ------------------
In 1997, the Company adopted a Stock Option Plan for Employees and in
2001, the Company adopted a Stock Option Plan for Directors. Options for up to
620,000 shares may be granted under these plans. Options become exercisable over
a period of four years at a rate of 25% per year and expire after ten years.
The table below shows the number of stock options that were outstanding at
the beginning and end of each year, and how many were exercised, granted,
forfeited or expired.
Years Ended December 31,
--------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ------------- ----------- ------------- ----------- -------------
Outstanding, beginning of year 300,625 $ 20.95 159,500 $ 17.22 104,000 $ 16.72
Granted 83,000 26.27 157,000 24.24 61,500 18.00
Exercised (17,875) 16.93 (12,375) 14.60 -- --
Forfeited (5,625) 19.16 (3,500) 20.94 (6,000) 16.60
----------- ----------- -----------
Outstanding, end of year 360,125 $ 22.40 300,625 $ 20.95 159,500 $ 17.22
=========== =========== ===========
Exercisable, end of year 122,000 $ 19.65 69,625 $ 17.23 42,500 $ 16.47
=========== =========== ===========
The following table summarizes information about stock options outstanding
at December 31, 2002:
Remaining
Years in
Exercise Number Contractual Number
Price Outstanding Life Exercisable
---------- --------------- --------------- ---------------
$13.38 10,000 4.35 10,000
$20.75 20,000 5.12 20,000
$19.25 3,750 5.87 3,750
$17.38 10,500 6.04 6,750
$16.38 7,000 6.84 4,875
$15.06 17,000 6.92 12,000
$18.00 56,875 7.93 27,375
$22.44 34,000 8.68 7,750
$24.80 118,000 8.93 29,500
$26.21 32,000 9.32 --
$26.30 51,000 9.95 --
---------- ---------
360,125 122,000
========== =========
43
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
A value at the time of grant was calculated for each option using the
Black-Scholes option pricing model with an estimated average option life of five
years and using the five-year averages of price volatility of the Company's
common stock, dividend yield, and a risk-free rate equal to the five-year
Treasury rate. The table below shows these assumptions and the weighted-average
fair value of the options which were granted.
Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
Weighted average volatility 28.80% 28.82% 27.03%
Weighted average dividend 3.08% 3.11% 3.16%
Weighted average risk-free rate 3.60% 4.48% 5.26%
Weighted average fair value per share
of options granted during the year $ 5.90 $ 5.77 $ 4.26
Stock Appreciation Rights
- -------------------------
The Company has also entered into stock appreciation rights agreements
with selected employees who are paid the amount by which a certain number of
shares exceeds its value at the time the agreement was entered into. Stock
appreciation rights mature ten years after their issuance and are not ordinarily
exercisable prior to maturity. Compensation expense applicable to stock
appreciation rights is not material. No stock appreciation rights were
exercisable at December 31, 2002. The table below shows the amount of stock
appreciation rights which were outstanding at the beginning and end of each
year, and how many were exercised, granted, forfeited, or expired.
Years Ended December 31,
-----------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Price at Price at Price at
Shares Issuance Shares Issuance Shares Issuance
----------- ------------- ----------- ------------- ----------- ----------
Outstanding, beginning of year 20,900 $20.03 14,700 $17.82 8,100 $17.62
Granted -- -- 6,900 24.52 7,100 18.00
Forfeited (1,300) $18.82 (700) 18.13 (500) 16.95
----------- ----------- -----------
Outstanding, end of year 19,600 $20.11 20,900 $20.03 14,700 $17.82
=========== =========== ===========
The following table summarizes information about stock appreciation rights
outstanding at December 31, 2002:
Remaining
Years in
Price at Number Contractual
Issuance Outstanding Life
----------- ------------------- -------------
$19.25 3,000 5.86
$16.38 3,800 6.84
$18.00 6,100 7.93
$24.52 6,700 8.97
--------------
19,600
==============
44
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(7) DEPOSITS AND BORROWED FUNDS
The following summarizes deposits and borrowed funds outstanding:
December 31,
---------------------
2002 2001
-------- --------
(In thousands)
Deposits:
Demand $229,033 $209,551
NOW 171,084 149,109
Money market 294,295 267,732
Other savings 88,503 72,679
Certificates of deposit greater than $100,000 37,344 53,123
Certificates of deposit $100,000 or less 121,961 151,197
-------- --------
Total deposits $942,220 $903,391
======== ========
Maturities of time certificates of deposit as of December 31, 2002 are
$115,745,000 in 2003, $10,718,000 in 2004, $8,801,000 in 2005, $4,995,000 in
2006, and $19,046,000 in 2007.
December 31,
-------------------------
2002 2001
-------- --------
(In thousands)
Borrowed funds:
Federal Home Loan Bank $371,450 $384,314
Other short term borrowings 21,391 30,735
Subordinated debt 5,000 5,000
-------- --------
Total borrowed funds $397,841 $420,049
======== ========
The contractual maturities of borrowings from the Federal Home Loan Bank
of Boston ("FHLBB") as of December 31, 2002, are $253,350,000 in 2003,
$20,645,000 in 2004, $19,223,000 in 2005, $40,216,000 in 2006, $20,410,000 in
2007, and $17,606,000 in years thereafter. These borrowings bear interest rates
between 1.30% and 7.35% with a weighted average interest rate of 3.15%. The
Company also has an IDEAL Way Line of Credit with the FHLBB. The unused balance
at December 31, 2002 and 2001 was $5,000,000. These borrowings are
collateralized by the Company's residential mortgage loans and securities. At
December 31, 2002 the Company's outstanding FHLBB borrowings exceeded the amount
of qualified collateral, as defined by the FHLBB, by $42,806,000. The Company is
working with the FHLBB to reduce borrowings and return to compliance with their
agreement with the FHLBB. In addition, the Company established a line of credit
in 2001 of $7,000,000 for the purchase of federal funds from SunTrust Bank. The
Company may also borrow from the Federal Reserve Bank if necessary.
Other short-term borrowings at December 31, 2002 and 2001 consisted of a
demand note payable to the U.S. Treasury of $3,652,000 and $4,708,000,
respectively, and securities sold subject to agreements to repurchase of
$17,739,000 and $26,027,000, respectively, which mature overnight. The weighted
average interest rate on these borrowings was .62% and .87% as of December 31,
2002 and 2001, respectively. These borrowings are collateralized by the pledge
of securities.
During the third quarter of 2001, CCBT Statutory Trust I was formed for
the purpose of issuing trust preferred securities and investing the proceeds of
the sale of these securities in subordinated debentures issued by the Company. A
total of $5 million of floating rate Trust Preferred Securities were issued and
are scheduled to mature in 2031, callable at the option of the Company after
July 31, 2006. Distributions on these securities are payable quarterly in
arrears on the last day of April, July, October and January. The Trust Preferred
Securities are presented in the consolidated balance sheets of the Company as
Subordinated Debt. The Company records distributions payable on the Trust
Preferred Securities as interest on subordinated debt in its consolidated
statements of income.
45
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(8) STOCKHOLDERS' EQUITY
The Company (on a consolidated basis) and the Bank are required to meet
certain regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's and the Bank's
financial statements. As of December 31, 2002 and 2001, management believes the
Company and the Bank met all regulatory capital requirements and the Bank
satisfied the requirements of the "well-capitalized" category under the Federal
Deposit Insurance Corporation Improvement Act. Management believes that there
have been no subsequent events or conditions that have affected the
well-capitalized category of the Company or the Bank.
For risk-based capital requirement purposes, some loan commitments, lines
of credit and financial guarantees are subject to capital requirements in
addition to assets shown on the balance sheet. The risk-based capital
regulations assign one of four weights to assets -- 0%, 20%, 50% or 100%. Full
capital must be maintained to support assets with 100% risk weight, with
proportionally lower capital required for assets assigned a lower weight. For
the periods presented, most of the investment securities are assigned a 20% risk
weight, and residential mortgages are assigned a 50% risk weight. Most other
assets are assigned to the 100% risk category. At December 31, 2002 and 2001,
the net risk-weighted assets of the Company were $997,685,000 and
$1,044,191,000, while the net risk-weighted assets of the Bank were $997,348,000
and $1,043,796,000.
For purposes of total capital, stockholders' equity and all or a portion
of the allowance for loan losses can be used to meet capital requirements. The
allowance for loan losses used to meet risk-based capital requirements cannot be
more than 1.25% of total risk-weighted assets. At December 31, 2002 and 2001,
respectively, $12,384,000 and $12,252,000 of the allowance for loan losses could
be used toward risk-based capital requirements.
The risk-based capital ratio focuses on broad categories of credit risk.
However, the ratio does not take account of many other factors that can affect
financial condition. These factors include overall interest rate risk exposure,
liquidity, funding and market risks, the quality and level of earnings,
investment or loan portfolio concentrations, the quality of loans and
investments, the effectiveness of loan and investment policies, and management's
overall ability to monitor and control financial and operating risks. In
addition to evaluating capital ratios, an overall assessment of capital adequacy
must take into account each of these other factors, including, in particular,
the level and severity of problem and adversely classified assets. In light of
these other considerations, banks generally are expected to operate above the
minimum risk-based capital ratio and additional requirements may be set by bank
examiners.
In addition, dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements.
46
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Corporation's and the Bank's actual and required capital amounts and
ratios as of December 31, 2002 and 2001 are presented in the following table.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
-------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --------- ------------ --------- ------------ ---------
(Dollars in thousands)
December 31, 2002:
Total capital to risk weighted assets:
Consolidated $ 130,205 13.1% $ 79,815 8.0% N/A N/A
Bank 129,478 13.0 79,788 8.0 $ 99,735 10.0%
Tier 1 capital to risk weighted assets:
Consolidated 117,821 11.8 39,907 4.0 N/A N/A
Bank 117,094 11.7 39,894 4.0 59,841 6.0
Tier 1 capital to average assets:
Consolidated 117,821 7.7 61,418 4.0 N/A N/A
Bank 117,094 7.6 61,411 4.0 76,764 5.0
December 31, 2001:
Total capital to risk weighted assets:
Consolidated $ 121,491 11.6% $ 83,535 8.0% N/A N/A
Bank 119,445 11.4 83,504 8.0 $ 104,380 10.0%
Tier 1 capital to risk weighted assets:
Consolidated 109,239 10.5 41,768 4.0 N/A N/A
Bank 107,193 10.3 41,752 4.0 62,628 6.0
Tier 1 capital to average assets:
Consolidated 109,239 7.3 60,111 4.0 N/A N/A
Bank 107,193 7.1 60,044 4.0 75,055 5.0
During the quarter ended March 31, 2002, the Company's Board of Directors
authorized the repurchase of up to 220,000 shares of the Company's stock in the
open market. Consistent with that authorization, the Company repurchased 47,500
shares during 2002, at an average cost of $25.61 per share. The Board of
Directors has also authorized the repurchase, from time to time based on market
conditions, of an additional 200,000 shares of common stock at its meeting held
on January 23, 2003. Coupled with the shares remaining from the aforementioned
repurchase program, the Company will have the ability to repurchase a total of
372,500 shares, or approximately 4.3%, of the stock currently outstanding.
47
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(9) ACQUISITION OF MURRAY & MACDONALD INSURANCE SERVICES, INC.
On May 2, 2000, the Company acquired 51% of the stock of Murray &
MacDonald Insurance Services, Inc., for a purchase price of $1,199,000. Murray &
MacDonald Insurance Services, Inc. is a full service insurance agency offering
property, casualty, life, accident, and health insurance products. The Agency
has been in business since 1972 and has license agreements with more than thirty
insurance companies. The business combination was accounted for by the purchase
method. Assets acquired were $292,000 while liabilities assumed were $525,000,
resulting in net liabilities assumed of $233,000. Prior to January 1, 2002,
goodwill of $1,432,000 was being amortized on a straight-line basis over five
years (see Note 1 "Accounting Change"). The Company's consolidated statement of
income includes the results of operations of Murray & MacDonald Insurance
Services, Inc. since the date of acquisition.
(10) ACQUISITION OF BRANCHES AND CORE DEPOSIT INTANGIBLE
In June 2000, the Company completed its acquisition of two branch offices
from Fleet Bank. The acquired branches are located in Falmouth and Wareham,
Massachusetts. The acquisition was accounted for by the purchase method of
accounting. The core deposit intangible is being amortized over 7 years on a
straight-line basis. The Company's consolidated statement of income includes the
results of operations relating to the acquired branches since the date of
acquisition. The acquisition was allocated as follows (in thousands):
Cash $35,874
Loans 8,490
Premises and equipment 2,330
Interest receivable on loans 59
Other assets 3
-------
Tangible assets acquired 46,756
-------
Deposits 55,267
Interest payable on deposits and borrowings 40
Other liabilities 23
-------
Liabilities assumed 55,330
-------
Excess of tangible assets acquired over
liabilities assumed - core deposit intangible $ 8,574
=======
The accumulated amortization of the core deposit intangible is $3,062,000,
$1,837,000 and $612,000 at December 31, 2002, 2001 and 2000, respectively. The
related amortization expense amounted to $1,225,000, $1,225,000 and $612,000,
respectively, for 2002, 2001 and 2000. Estimated amortization expense for years
2003 through 2006 is $1,225,000 per year and $612,000 for 2007. (See Note 1
"Accounting Change").
48
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(11) INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended December 31,
------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Current federal provision $ 7,713 $ 10,351 $ 9,339
Current state provision 139 641 384
-------- -------- --------
Total current 7,852 10,992 9,723
-------- -------- --------
Deferred federal benefit (127) (294) (466)
Deferred state benefit (42) (76) (156)
-------- -------- --------
Total deferred (169) (370) (622)
-------- -------- --------
Total provision $ 7,683 $ 10,622 $ 9,101
======== ======== ========
Deferred income tax provision (benefit) results from the recognition of
income or expense items in different periods for income tax purposes than when
they are provided for, such as interest earned on nonaccrual loans and the
provision for loan losses.
The following reconciles the provision for income taxes with the statutory
federal income tax amounts at a rate of 35%:
Years Ended December 31,
-------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Tax at statutory rate $ 7,743 $ 10,530 $ 9,216
Reduction due to tax-exempt income (165) (315) (315)
State taxes, net of federal tax benefit 63 367 148
Other, net 42 40 52
-------- -------- --------
Total provision $ 7,683 $ 10,622 $ 9,101
======== ======== ========
The net deferred tax asset consisted of the following:
December 31,
----------------------
2002 2001
-------- --------
(In thousands)
Future bad debt deductions $ 5,180 $ 5,124
Unfunded accrued benefits 1,761 1,565
Write-down of securities 418 --
Unrealized loss on securities available for sale 759 --
Other 120 440
-------- --------
Gross deferred tax assets 8,238 7,129
-------- --------
Unrealized gain on securities available for sale -- 2,024
Gain on sale of credit card merchant portfolio 703 901
Mortgage servicing rights 873 565
Other 1,090 1,019
-------- --------
Gross deferred tax liabilities 2,666 4,509
-------- --------
Net deferred tax asset $ 5,572 $ 2,620
======== =========
49
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Subsequent event -- In June 2002, the Bank received a "Notice of Intent to
Assess" from the Commonwealth of Massachusetts Department of Revenue ("DOR")
and, subsequently, in August and November 2002, received "Notices of
Assessment." The notices indicate that the Bank owes approximately $5,238,000 in
additional state taxes, plus interest, for the tax years ended December 31,
1999, 2000 and 2001, related to the denial by the DOR of the Bank's claim of a
dividends received deduction for dividends received from the Bank's real estate
investment trust ("REIT") subsidiary. The possible assessment relating to the
December 31, 2002 return is estimated to be $1,900,000, plus interest. Any state
tax assessments, if ultimately accrued or paid, would be deductible expenses for
federal income tax purposes.
The DOR contends that dividend distributions by the Bank's subsidiary,
CCBT Preferred Corp. (the "Subsidiary") to the Bank are fully taxable in
Massachusetts. The Bank believes that the Massachusetts statute that provides
for a dividends received deduction equal to 95% of certain dividend
distributions applies to the distributions made by Subsidiary to the Bank.
Accordingly, no provision has been made in the Bank's consolidated financial
statements through December 31, 2002 for the amounts assessed or additional
amounts that might be assessed in the future. The Bank has appealed the
assessment and will pursue all available means to defend its position.
In January 2003, legislation was proposed in Massachusetts which
retroactively prohibits use of the 95% dividends received deduction when the
dividends are received from a REIT, effective for tax years beginning in 1999.
On March 5, 2003, the Governor of Massachusetts signed the legislation and, as a
result, the Bank has ceased recording tax benefits associated with the dividends
received deduction effective for the 2003 tax year and accrued the liabilities
described above aggregating approximately $5.1 million, after federal tax
benefits. The Bank will vigorously appeal the retroactive nature of the
provision.
(12) OTHER COMMITMENTS AND CONTINGENCIES
Loan commitments -- In the normal course of business, various commitments
are entered into by the Company, such as standby letters of credit and
commitments to extend credit, which are not reflected in the consolidated
financial statements. Management does not anticipate any material losses as a
result of these transactions. The Company had the following commitments
outstanding:
December 31,
-------------------
2002 2001
-------- --------
(In thousands)
Standby letters of credit $ 1,250 $ 943
Commitments to extend credit at fixed rates 22,800 10,684
Other commitments to extend credit 214,250 190,803
-------- --------
Total commitments $238,300 $202,430
======== ========
In the event that interest rates increase during the period of the
commitment, commitments to extend credit at a fixed rate of interest could
result in the extension of credit at less than a prevailing rate of interest,
with accompanying loss of value to the Company. Although the commitments shown
above are not carried on the balance sheet as loans, their risk is comparable to
that of loans which are carried on the balance sheet. The Company evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the customer. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment,
residential property and income producing commercial properties. In the event
that no collateral is required, or the collateral proved to be of no value to
the Company, the Company would be exposed to possible credit loss up to the
maximum amount of these contingent liabilities.
Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.
50
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Executive termination agreements -- The Bank has entered into special
termination agreements with the President and certain senior executives. The
agreements generally provide for certain monthly severance payments within a
two-year period following a "change in control", as defined in the agreements.
(13) DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires the disclosure of the fair value of financial
instruments for which it is practicable to estimate that value. The estimated
fair values of the Company's financial instruments were as follows:
December 31,
--------------------------------------------------------------
2002 2001
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
(In thousands)
Financial assets:
Cash and cash equivalents $ 60,798 $ 60,798 $ 62,062 $ 62,062
Securities 535,575 535,575 463,088 463,088
Net loans and loans held for sale 826,350 842,125 880,388 904,873
Accrued interest receivable 5,982 5,982 6,368 6,368
Financial liabilities:
Deposits 942,220 948,325 903,391 908,247
Federal Home Loan Bank borrowings 371,450 383,409 384,314 391,688
Other short-term borrowings 21,391 21,391 30,735 30,735
Subordinated debt 5,000 5,004 5,000 5,000
Accrued interest payable 1,501 1,501 2,410 2,410
The carrying value of cash and cash equivalents, short-term borrowings and
accrued interest approximate fair value because of the short maturity of these
financial instruments.
Fair values of commitments not reflected in the financial statements are
not material because they are short term in nature and/or generally priced at
variable interest rates.
Fair values of securities are based on quoted market prices, if available.
If a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Because no market exists for a significant portion of the Company's loans,
fair value estimates were based on judgments regarding estimated future cash
flows, current economic conditions, expected loss experience, risk
characteristics of various kinds of loans, and other such factors. Estimated
cash flows are discounted using current rates for similar loans. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Accordingly, unrealized
gains or losses are not expected to be realized.
Fair values of deposits, Federal Home Loan Bank borrowings and
subordinated debt have been determined by applying discounted cash flow
techniques at replacement market rates.
As required by SFAS No. 107, the fair value of deposits does not include
the value of the ongoing relationships with depositors, sometimes referred to as
the "core deposit intangible," although it is likely that some amount would be
received for this relationship on an actual sale of deposits. Similarly, the
fair value of loans does not include any value assigned to customer
relationships.
51
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(14) EARNINGS PER SHARE
The following reconciles the calculation of basic and diluted earnings
per share:
Average
Net Shares Per Share
Income Outstanding Amount
-------- ----------- ---------
(In thousands)
Year Ended December 31, 2002:
Basic earnings per share $14,440 8,613 $1.68
Effect of dilutive stock options -- 36 (0.01)
------- ------- -----
Diluted earnings per share $14,440 8,649 $1.67
======= ======= =====
Year Ended December 31, 2001:
Basic earnings per share $19,464 8,613 $2.26
Effect of dilutive stock options -- 34 (0.01)
------- ------- -----
Diluted earnings per share $19,464 8,647 $2.25
======= ======= =====
Year Ended December 31, 2000:
Basic earnings per share $17,229 8,608 $2.00
Effect of dilutive stock options -- 6 --
------- ------- -----
Diluted earnings per share $17,229 8,614 $2.00
======= ======= =====
For the year ended December 31, 2002, options applicable to 24,310 shares
were anti-dilutive and excluded from the diluted earnings per share calculation.
52
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below shows supplemental financial data for each quarter in the
years ended December 31.
Year Ended December 31, 2002
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest income $ 19,197 $ 19,717 $ 19,623 $ 18,700
Interest expense 7,186 6,629 6,884 8,419
-------- -------- -------- --------
Net interest income 12,011 13,088 12,739 10,281
Gains (losses) on securities, net 1,679 962 538 (1,104)
Other non-interest income 5,029 5,817 5,291 4,737
Non-interest expense 11,174 12,725 12,612 12,349
Minority interest (4) 148 17 (76)
-------- -------- -------- --------
Income before income taxes 7,549 6,994 5,939 1,641
Provision for income taxes 2,502 2,459 2,034 688
-------- -------- -------- --------
Net income $ 5,047 $ 4,535 $ 3,905 $ 953
======== ======== ======== ========
Average shares outstanding - basic 8,622 8,630 8,611 8,590
Average shares outstanding - diluted 8,657 8,671 8,645 8,623
Net income per share - basic $ 0.59 $ 0.52 $ 0.45 $ 0.11
Net income per share - diluted $ 0.58 $ 0.52 $ 0.45 $ 0.11
Cash dividends declared per share $ 0.19 $ 0.19 $ 0.19 $ 0.19
Year Ended December 31, 2001
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest income $ 26,069 $ 25,251 $ 23,194 $ 23,241
Interest expense 13,017 12,588 10,237 8,713
-------- -------- -------- --------
Net interest income 13,052 12,663 12,957 14,528
Gains on securities, net 460 392 292 1,042
Other non-interest income 4,456 4,954 6,102 5,223
Non-interest expense 10,642 11,433 11,582 12,401
Minority interest 12 (18) 8 (25)
-------- -------- -------- --------
Income before income taxes 7,314 6,594 7,761 8,417
Provision for income taxes 2,484 2,208 2,749 3,181
-------- -------- -------- --------
Net income $ 4,830 $ 4,386 $ 5,012 $ 5,236
======== ======== ======== ========
Average shares outstanding - basic 8,608 8,608 8,616 8,620
Average shares outstanding - diluted 8,640 8,648 8,659 8,650
Net income per share - basic $ 0.56 $ 0.51 $ 0.58 $ 0.61
Net income per share - diluted $ 0.56 $ 0.51 $ 0.58 $ 0.61
Cash dividends declared per share $ 0.18 $ 0.18 $ 0.18 $ 0.18
53
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Due to the seasonal nature of the economy in the Company's market area,
demand deposits and business activity follow a somewhat seasonal cycle with
their low point ordinarily being reached in February and their high point in
September. As a result of this cycle, operating income has usually been at its
high during the third quarter each year. In the 2002 fourth quarter, interest
expense increased in a declining rate environment reflecting the Company's
$1,900,000 prepayment penalty on Federal Home Loan Bank borrowings.
(16) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCBT Financial Companies, Inc. is as
follows:
BALANCE SHEET
December 31,
----------------------
2002 2001
-------- --------
(In thousands)
ASSETS
Cash in subsidiary $ 437 $ 28
Short term interest-bearing deposits -- 1,900
Securities 25 15
Investment in subsidiaries 122,732 118,275
Other assets 455 305
-------- --------
Total assets $123,649 $120,523
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debt $ 5,155 $ 5,155
Other liabilities 47 52
-------- --------
Total liabilities 5,202 5,207
Stockholders' equity 118,447 115,316
-------- --------
Total liabilities and stockholders' equity $123,649 $120,523
======== ========
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Interest income $ 3 $ 83 $ 182
Interest expense 285 148 --
-------- -------- --------
Net interest income (expense) (282) (65) 182
Gain on sale of securities -- 298 --
Non-interest expense (132) (196) (293)
-------- -------- --------
Income (loss) before taxes, dividends and
undistributed income from subsidiaries (414) 37 (111)
Provision (benefit) for income taxes (141) 13 (26)
Dividends from subsidiaries 6,416 2,100 5,700
Undistributed income from subsidiaries 8,297 17,340 11,614
-------- -------- --------
Net income $ 14,440 $ 19,464 $ 17,229
======== ======== ========
54
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Concluded)
STATEMENTS OF CASH FLOW
Years Ended December 31,
--------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 14,440 $ 19,464 $ 17,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities -- (298) --
Undistributed income from subsidiaries (8,297) (17,340) (11,614)
Other, net (165) (82) 84
-------- -------- --------
Net cash provided by operating activities 5,978 1,744 5,699
-------- -------- --------
Cash flows from investing activities:
Purchase of securities -- (15) (1,623)
Sales, maturities and repayments of securities -- 2,765 4,463
Investment in subsidiaries -- (1,966) (2,800)
-------- -------- --------
Net cash provided by investing activities -- 784 40
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long term debt -- 5,155 --
Proceeds from issuance of common stock 303 181 --
Purchase of treasury stock (1,217) -- --
Cash dividends paid on common stock (6,555) (6,204) (5,513)
-------- -------- --------
Net cash used by financing activities (7,469) (868) (5,513)
-------- -------- --------
Net change in cash and cash equivalents (1,491) 1,660 226
Cash and cash equivalents at beginning of year 1,928 268 42
-------- -------- --------
Cash and cash equivalents at end of year $ 437 $ 1,928 $ 268
======== ======== ========
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On May 17, 2001, the accounting firm Grant Thornton LLP was dismissed by
the Company's Audit Committee and the accounting firm Wolf & Company, P.C. was
hired to replace them. The financial statements for the past two years did not
contain an adverse opinion or a disclaimer of opinion nor were the opinions
qualified as to uncertainty, audit scope or accounting principles. During the
past two years and the subsequent interim period preceding the dismissal, there
were no disagreements with the former accountant on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope or
procedure.
There were no disagreements with Accountants on accounting and financial
disclosures as defined by Item 304 of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant.
With the exception of certain information regarding the executive officers
of the Company and the Bank which is contained in Item 1 of Part 1 to this Form
10-K under the caption "Executive Officers of the Registrant," the response to
this item is incorporated by reference from the discussion under the captions
"Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
("Proxy Statement") to be held on April 24, 2003, filed with the SEC pursuant to
Regulation 14A of the Exchange Act Rules.
Item 11. Executive Compensation.
The response to this item is incorporated by reference from the discussion
under the captions "Executive Compensation" and "The Board of Directors, its
Committees and Compensation" in the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Information regarding the security ownership of certain beneficial owners
and management is incorporated by reference from the discussion under the
caption "Ownership by Management and Other Stockholders" in the Company's Proxy
Statement.
Equity Compensation Plan Information
- ----------------------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
- ----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a))
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by 360,125 $22.40 207,500
security holders (1) ...........
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved N/A N/A N/A
by security holders ............
- ----------------------------------------------------------------------------------------------------------------------
Total ................ 360,125 $22.40 207,500
- ----------------------------------------------------------------------------------------------------------------------
(1) Includes information related to the CCBT Financial Companies, Inc. Stock
Option Plan and the 2001 Directors Stock Option Plan.
56
Item 13. Certain Relationships and Related Transactions.
The Company enters into banking transactions in the ordinary course of its
business with directors, officers, principal stockholders and their associates,
on the same terms including interest rates and collateral on loans, as those
prevailing at the same time for comparable transactions with others. The total
amount of loans outstanding to directors and officers at December 31, 2002 and
2001 was $10,037,000 and $4,895,000, respectively. During 2002, $20,355,000 in
new loans were made to directors and officers and there were $15,213,000 in
repayments.
Item 14. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) within 90 days
prior to the date of this report, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made
known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly
affect the Company's disclosure controls and procedures subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in the Company's internal controls. As a result, no
corrective actions were required or undertaken.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) See "Financial Statements Index" on page 27 of this Form 10-K.
(2) Schedules other than those listed in the Financial
Statements Index have been omitted since they either are not
required or the information required is included in the
financial statements or the notes thereto.
(3) The following is a complete list of Exhibits filed or
incorporated by reference as part of this Form 10-K.
Exhibit Description
2.1 Plan of Reorganization and Acquisition dated as of October 8,
1998 between the Company and the Bank (Incorporated by
reference to Exhibit 2.1 to the Company's Report on Form 8-K
filed with the SEC on February 11, 1999)
3.1 Restated Articles of Organization of the Company
(Incorporated by reference to Exhibit 3.1 to the Company's
Form 10-Q for the quarter ended September 30, 1999 that was
filed with the SEC on November 15, 1999)
3.2 Amended By-laws of the Company (Incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended
September 30, 1999 that was filed with the SEC on November 15,
1999)
4.1 Specimen certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's
Form 10-K for the year ended December 31, 1999)
10.1 Amended and Restated Special Termination Agreement with
Stephen B. Lawson. (Incorporated by reference to Exhibit 10.1
to the Annual Report on Form 10-K for the year ended December
31, 1998)
10.2 Amended and Restated Special Termination Agreement with Noal
D. Reid. (Incorporated by reference to Exhibit 10.2 to the
Annual Report on Form 10-K for the year ended December 31,
1998)
57
10.3 Amended and Restated Special Termination Agreement with Larry
K. Squire. (Incorporated by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the year ended December 31,
1998)
10.4 Change of Control Agreement with Robert T. Boon. (Incorporated
by reference to Exhibit 10.1 on Form 10-Q for the quarter
ended March 31, 2001 that was filed with the SEC on May 15,
2001)
10.5 Amended and Restated Change of Control Agreement with Robert
R. Prall. (Incorporated by reference to Exhibit 10.2 on Form
10-Q for the quarter ended March 31, 2001 that was filed with
the SEC on May 15, 2001)
10.6 CCBT Financial Companies, Inc. Stock Option Plan (Incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-8 filed with the SEC on February 18, 1999)
10.7 Cape Cod Bank and Trust Company Employee Stock Ownership and
Plan and Trust, as amended
10.8 CCBT Financial Companies, Inc. 2001 Directors' Stock Option
Plan (Incorporated by reference to Exhibit 99.1 to the Form
S-8 filed on July 17, 2001, No. 333-65222)
21.1 Subsidiaries of the Company -- The Company has two
subsidiaries, Cape Cod Bank and Trust Company, N.A., a
federally-chartered commercial bank and CCBT Statutory Trust
I. Cape Cod Bank and Trust Company, N.A., has nine
subsidiaries: Cape Dune Holdings Corp. and CCBT Securities
Corp., both of which are securities corporations; CCB&T
Brokerage Direct, Inc., an investment broker/dealer; CCBT
Preferred Corp., a real estate investment trust; TBM
Development Corp., RAFS Ltd. Partnership, Osterville Concorde
Ltd. and Osterville DC9 Ltd. Partnership, which are all
inactive; and a 51% ownership interest in Murray & MacDonald
Insurance Services, Inc., an insurance agency.
23.1 Consents of Wolf & Company, P.C. and Grant Thornton LLP (Filed
herewith)
(b) Reports on Form 8-K:
None.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) CCBT FINANCIAL COMPANIES, INC.
------------------------------
By (Signature and Title)* /s/ STEPHEN B. LAWSON.
----------------------
President and Chief Executive Officer
Date March 13, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By (Signature and Title)* /s/ PHILLIP W. WONG,
--------------------
Executive Vice President and Chief Financial Officer
Date March 13, 2003
SIGNATURES OF THE BOARD OF DIRECTORS
/s/ STEPHEN B. LAWSON /s/ GEORGE D. DENMARK
- -------------------------- --------------------------
Stephen B. Lawson George D. Denmark
/s/ JOHN OTIS DREW /s/ JOHN F. AYLMER
- -------------------------- --------------------------
John Otis Drew, Chairman John F. Aylmer
/s/ DANIEL A. WOLF /s/ WILLIAM R. ENLOW
- -------------------------- --------------------------
Daniel A. Wolf William R. Enlow
Date March 13, 2003
59
CERTIFICATIONS
I, Stephen B. Lawson, certify that:
1. I have reviewed this annual report on Form 10-K of CCBT Financial Companies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consoloditated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee or
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ STEPHEN B. LAWSON
--------------------------------
Stephen B. Lawson, President and
Chief Executive Officer
60
CERTIFICATIONS
I, Phillip W. Wong, certify that:
1. I have reviewed this annual report on Form 10-K of CCBT Financial Companies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee or
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/ PHILLIP W. WONG
-------------------
Phillip W. Wong, Executive Vice President
and Chief Financial Officer
61