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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, 2003- 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 $23.90 closing price on June 30, 2003, on the
Nasdaq National Market was $199,510,651. 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, 2004, 8,425,323 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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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: difficulty in obtaining regulatory approvals required
for completion of the merger with Banknorth Group, Inc., 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.
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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 26 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, 2003,
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 2002 and 2001
financial statements to conform to the 2003 presentation.
Recent Developments
On December 9, 2003, the Company and Banknorth Group, Inc. ("Banknorth")
announced that they had entered into an Agreement and Plan of Merger, dated as
of December 8, 2003 (the "Agreement"), which sets forth the terms and conditions
pursuant to which the Company will be merged with and into Banknorth (the
"Merger"). The Agreement provides, among other things, that as a result of the
Merger each outstanding share of common stock of the Company (subject to certain
exceptions) will be converted into the right to receive 1.084 shares of common
stock of Banknorth, plus cash in lieu of any fractional share interest.
Consummation of the Merger is subject to a number of customary conditions,
including, but not limited to, (i) the approval of the Agreement by the
Company's shareholders and (ii) the receipt of requisite regulatory approvals of
the Merger and the proposed merger of the Bank with and into Banknorth's banking
subsidiary, Banknorth, NA, immediately prior to consummation of the Merger. The
Merger is expected to be completed in the second quarter of 2004 with
operational integration to follow soon after.
Repurchase of Stock
During the quarter ended March 31, 2003, the Company's Board of Directors
authorized the repurchase of up to 200,000 shares of the Company's stock in the
open market. Consistent with that authorization, the Company repurchased 187,100
shares during 2003, at an average cost of $23.03 per share.
Other
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.
The Bank's principal sources of revenue are loans and investments, which
accounted for 73% of gross income during 2003. Of the remaining portion, 7% 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 Company also owns and maintains 35 automated teller machines which are
connected to the AMEX, CIRRUS, NYCE, NOVUS/DISCOVER, MASTERCARD, VISA, STAR
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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.
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 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-
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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 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 minimum 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.
5
The Company currently is in compliance with both the Risk Based Capital
Ratio and the Leverage Ratio requirements. At December 31, 2003, the Company had
a Tier I Risk Based Capital Ratio equal to 12.0% and a Total Risk Based Capital
Ratio equal to 13.2% and a Leverage Ratio equal to 8.7%.
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 were proposed formally for public comment in May 2003 and
are expected to become effective around early 2007, 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 combined with its retained net income of
the preceding two years 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.
6
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. 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 the Bank is currently in compliance with all currently
effective requirements prescribed by the USA PATRIOT Act and all applicable
final implementing regulations.
The Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 ("S-O Act") implements a broad range of
corporate governance and accounting measures for public companies (including
publicly-held bank holding companies such as the Company) designed to promote
honesty and transparency in corporate America and better protect investors from
the type of corporate wrongdoings that occurred at Enron and WorldCom, among
other companies. The S-O Act's principal provisions, many of which have been
interpreted through regulations released in 2003, provide for and include, among
other things:
o The creation of an independent accounting oversight board;
o Auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
o Additional corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer
of a public company certify financial statements;
o The forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of any
financial statements that later require restatement;
o An increase in the oversight of, and enhancement of certain requirements
relating to, audit committees of public companies and how they interact
with the company's independent auditors;
o Requirements that audit committee members must be independent and are
barred from accepting consulting, advisory or other compensatory fees from
the issuer;
o Requirements that companies disclose whether at least one member of the
audit committee is a 'financial expert' (as such term is defined by the
SEC) and if not, why not;
o Expanded disclosure requirements for corporate insiders, including
accelerated reporting of stock transactions by insiders and a prohibition
on insider trading during pension blackout periods;
7
o A prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions, such as the Bank, on
nonpreferential terms and in compliance with other bank regulatory
requirements;
o Disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code; and
o A range of enhanced penalties for fraud and other violations.
The Company has taken steps to comply with and anticipates that it will incur
additional expenses in continuing to comply with the provisions of the S-O Act
and its underlying regulations. Management believes that such compliance efforts
have strengthened the Company's overall corporate governance structure and does
not expect that such compliance has to date, or will in the future have a
material impact on the Company's results of operations or financial condition.
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 Merger with Banknorth may not be completed as anticipated. Even if
approved by the Company's shareholders, completion of the Merger is conditioned
upon the receipt of regulatory approvals and clearances from various federal and
state governmental entities, including the approval of or a waiver from the
Federal Reserve Board and the Office of the Comptroller of the Currency of the
United States. The Company and Banknorth cannot predict, however, whether the
required regulatory approvals will be obtained. The failure to complete the
Merger when anticipated or at all may have a material adverse effect on the
Company's operating results.
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 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
8
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.
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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 -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) 3206 Main Street, Barnstable Village - Branch Office
9) 170 Commercial Street, Provincetown - Branch Office
10) 64 King's Circuit, Kings Way, Yarmouth Port - Branch Office
11) Mashpee Commons, Mashpee - Branch Office
Certain lease agreements 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 agreements when they expire. The Company
believes that its properties are adequate for its present needs.
10
Item 3. Legal Proceedings.
As previously announced on June 23, 2003, the Bank entered into a
settlement with the Massachusetts Department of Revenue ("DOR"), representing
approximately 50% of a disputed tax liability for which the Company previously
accrued income tax and related interest expense totaling approximately $5.1
million. As a result of the settlement, the Company recognized a reduction of
income tax and related interest expense of approximately $2.5 million, or
approximately $.30 per share, in the second quarter of 2003.
The Bank's settlement with the DOR was similar to and in participation
with numerous other financial institutions in Massachusetts. The dispute
involved the DOR's disallowance of the deduction taken by the Bank for dividends
received from its REIT subsidiary for the 1999, 2000, 2001 and 2002 tax years.
In March 2003, legislation was enacted in Massachusetts expressly disallowing
the deduction for dividends received from a real estate investment trust
subsidiary, retroactive to tax years ending on or after December 31, 1999. As a
result of the enactment of this legislation, the Company ceased recording the
tax benefits associated with the dividends received deduction effective for the
2003 tax year and established the $5.1 million accrual, representing an estimate
of the additional state tax liability, including interest (net of any federal
and state tax deduction associated with such taxes and interest), relating to
the deduction for dividends received from the REIT for the 1999 through 2002
fiscal years.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
11
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 840 stockholders of record as of February 20, 2004. 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.
2003
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Market price: High $ 26.05 $ 25.60 $ 27.24 $ 34.95
Low $ 22.00 $ 21.84 $ 24.45 $ 25.00
Dividends declared
per share $ 0.19 $ 0.19 $ 0.19 $ 0.19
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
Equity Compensation Plan Information
The following table provides information as of December 31, 2003 regarding
shares of common stock of the Company that may be issued under the Company's
existing equity compensation plans, including the Company's Stock Option Plan
(the "Plan") and the Company's 2001 Directors' Option Plan (the "Directors'
Plan").
- ---------------------------------------------------------------------------------------------------------------------
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 security
holders (1) ............... 364,375 $ 22.64 175,500
Equity compensation plans
not approved by
security holders .......... N/A N/A N/A
Total ............... 364,375 $ 22.64 175,500
1) Includes information related to the CCBT Financial Companies, Inc. Stock
Option Plan and the 2001 Directors Stock Option Plan.
12
Item 6. Selected Consolidated Financial Data.
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Statement of Income Data:
Interest and dividend income $ 59,212 $ 77,237 $ 97,755 $ 93,969 $ 79,107
Interest expense 17,798 29,118 44,555 45,624 38,311
---------- ---------- ---------- ---------- ----------
Net interest income 41,414 48,119 53,200 48,345 40,796
Provision for loan losses -- -- -- -- --
Net gain (loss) on securities (1,692) 2,074 2,187 85 234
Other non-interest income 23,173 20,875 20,734 16,126 18,034
Non-interest expense 48,579 48,945 46,035 38,226 32,517
---------- ---------- ---------- ---------- ----------
Income before income taxes 14,316 22,123 30,086 26,330 26,547
Provision for income taxes 7,939 7,683 10,622 9,101 10,086
---------- ---------- ---------- ---------- ----------
Net income $ 6,377 $ 14,440 $ 19,464 $ 17,229 $ 16,461
========== ========== ========== ========== ==========
Basic earnings per share $ 0.75 $ 1.68 $ 2.26 $ 2.00 $ 1.85
Diluted earnings per share 0.75 1.67 2.25 2.00 1.85
Cash dividends per share 0.76 0.76 0.72 0.64 0.56
Balance Sheet Data:
Total assets $1,338,233 $1,481,883 $1,454,667 $1,403,919 $1,231,114
Securities available for sale 359,592 510,837 438,350 426,743 463,379
Securities held to maturity 54,167 -- -- -- --
Net loans 780,898 789,018 872,039 836,336 663,584
Deposits - Non-interest bearing 251,313 229,033 209,551 201,904 167,624
- Interest-bearing 753,788 713,187 693,840 771,399 598,440
Borrowings 208,015 397,841 420,049 315,807 367,309
Stockholders' equity 114,477 118,447 115,316 98,729 85,650
Book value per share $ 13.60 $ 13.79 $ 13.38 $ 11.47 $ 9.95
Selected Ratios:
Return on average assets 0.48% 0.99% 1.32% 1.35% 1.35%
Return on average stockholders' equity 5.64% 12.24% 18.43% 19.32% 19.60%
Average equity to average assets 8.46% 8.10% 7.14% 6.97% 6.89%
Dividend payout ratio 101.33% 45.24% 31.86% 32.00% 30.27%
Net interest spread 2.87% 2.93% 3.07% 3.12% 2.77%
Net interest margin 3.29% 3.46% 3.77% 3.97% 3.49%
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
twenty-seven 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 $793 million at December 31, 2003
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.
13
RESULTS OF OPERATIONS
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
2003 COMPARED WITH 2002
Net Income. Net income was $6.4 million or $0.75 per share for the year
ended December 31, 2003 as compared to $14.4 million or $1.68 ($1.67 diluted)
per share for the same period in 2002. Following is a discussion of the major
factors affecting the results of operations for the periods.
Net Interest Income. Net interest income was $41.4 million for the year
ended December 31, 2003 as compared to $48.1 million for the prior year,
representing a decrease of 13.9%. The decline in net interest income for the
comparative periods can be attributed to the lower levels of average earning
assets and interest bearing liabilities coupled with the narrowing of interest
rate spreads and margins. Average earning assets and average interest-bearing
liabilities declined to $1.3 and $1.0 billion from $1.4 and $1.1 billion for the
years ended December 31, 2003 and 2002, respectively. The net interest spread
and net interest margin ratios were 2.87% and 3.29%, respectively, for the year
ended December 31, 2003, as compared to 2.93% and 3.46%, respectively, for the
prior year.
With the Federal Open Market Committee's (FOMC) targeted federal funds
rate at 1.00%, the current interest rate environment is at a 45 year low. Lower
mortgage rates during 2003 substantially accelerated pre-payments on both
residential mortgage loans and investment securities backed by housing
collateral. In this low rate environment, residential mortgage borrowers
refinanced from adjustable-rate to fixed-rate mortgages, which were sold by the
Bank to mitigate future interest rate risk. This activity in the residential
mortgage portfolio reduced the average balance of residential mortgages
outstanding by $120 million during the year ended December 31, 2003 when
compared to 2002, and has more than offset the positive growth in the Company's
other loan categories. Investment securities backed by housing collateral (MBS's
and CMO's) were subjected to accelerated pre-payments of principal during this
low rate environment and combined average balances in these categories for the
year ended December 31, 2003 were lower in comparison to 2002. As loans and
investments declined, average borrowings correspondingly decreased. This funding
decline was partially offset by the increase in average deposits during the year
ended December 31, 2003. The deposit increase represents organic growth of core
deposits as the year-round Cape Cod region population continues to increase.
The extended period of lower rates, declining since 2001, decreased the
yield on all earning assets for the year ended December 31, 2003 when compared
with the prior year. As previously stated, lower mortgage rates were an
incentive for mortgage borrowers to refinance their loans and thus accelerated
pre-payments on both residential mortgage loans and investment securities backed
by housing collateral, resulting in reinvestment of the principal proceeds at
much lower rates. Interest income was reduced as accelerated pre-payments
stepped up the write-off of deferred costs on residential mortgage loans and
hastened the amortization of premiums paid on mortgage-related investment
securities. The Company's CMO securities, in particular, experienced a
significant negative impact upon their yield of 0.40% for the year ended
December 31, 2003, as the acceleration in the amortization of premiums outpaced
receipt of interest income. The Company lowered its funding costs, but at a pace
not equal to the decline in average earning asset yields given the substantial
mix of already low cost core deposits.
Provision for Loan Losses. Recoveries on loans previously charged-off
exceeded charge-offs during the year ended December 31, 2003 by $329,000.
Management's assessment of the risks in the loan portfolio at December 31, 2003
resulted in no provision for loan losses during the year. The allowance for loan
losses as a percentage of total loans was 1.60% and 1.55% at December 31, 2003
and 2002, respectively, representing management's consideration of qualitative
factors, primarily the weakness in local and national economic trends and growth
in outstanding higher-risk commercial loans.
14
RESULTS OF OPERATIONS
Non-Interest Income. Non-interest income of $21.5 million reflected a
decline of $1.5 million during 2003 as compared to the prior year due primarily
to a $3.8 million unfavorable change in the net gain (loss) on securities.
Security losses of $1.7 million were recorded during the 2003 period, including
a $1.3 million impairment loss recognized on an asset-backed security, as well
as losses from the sale of interest-only CMO's. By contrast, during the 2002
period, $2.1 million of gains were reported as a result of the sale of
securities. The decrease in the Other Income category of non-interest income in
2003 was caused by the Company's net write-down of approximately $650,000 of
fixed assets related to the closure of nine Stop & Shop transaction offices. The
increase in net gain on sales of loans of $1.2 million and the combined increase
in fee-based revenues of $1.3 million (financial advisor, brokerage and
insurance commissions) during 2003 as compared to 2002 helped to partially
offset the unfavorable changes in the net gain (loss) on securities and other
income.
Non-Interest Expense. Total non-interest expense remained essentially
unchanged at $48.5 and $48.9 million for 2003 and 2002, respectively. Salary
costs, which remained almost level during the 2003 period as compared to 2002
was affected by the increase of $1.1 million in 2003 for the deferral of
salaries under SFAS 91, largely due to the increased volume of residential
mortgage originations, and the accrual of $506,000 of costs associated with an
early retirement program during 2002. Employee benefits decreased $1.0 million
during 2003 as compared to 2002 and can be attributed to a $1.5 million decrease
in incentive based employee benefits partially offset by increases in
post-retirement and insurance benefits and payroll taxes. When comparing the
years ended 2003 with 2002, all other expenses increased $1.1 million primarily
as a result of the $443,000 of interest expenses on the REIT state tax
assessment as well as increases in insurance, electronic banking and OREO
expenses of $134,000, $127,000 and $175,000 respectively.
Provision for Income Taxes. The provision for income taxes increased from
$7.7 million in the prior year to $7.9 million in 2003. This increase, despite
the decrease in income before taxes, is due to the previously disclosed
settlement in June 2003 of the REIT tax law dispute with the Massachusetts
Department of Revenue. The settlement resulted in a net increase of $2.3 million
in the income tax provision and an effective tax rate of 55.5% for the year
ended December 31, 2003. The adjusted effective income tax rate for the year
ended December 31, 2003, excluding the REIT settlement, is 39.3% as compared
with 34.7% for 2002. This higher effective tax rate reflects the loss of the
REIT state tax advantage.
2002 COMPARED WITH 2001
Net Income. Net income was $14.4 million or $1.68 per share ($1.67
diluted) for the year ended December 31, 2002 as compared to $19.5 million or
$2.26 per share ($2.25 diluted) for 2001. Following is a discussion of the major
factors affecting the results of operations for the periods.
Net Interest Income. Net interest income was $48.1 million for the year
ended December 31, 2002 as compared to $53.2 million 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.
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 deposit 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
15
RESULTS OF OPERATIONS
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.
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.
Non-Interest Income. 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.
Non-Interest Expense. 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.
16
RESULTS OF OPERATIONS
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.
The remainder of this page intentionally left blank.
17
FINANCIAL CONDITION
MATURITY STRUCTURE OF ASSETS AND LIABILITIES
AND SENSITIVITY TO CHANGES IN INTEREST RATES
Securities
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 securities at December 31,
2003, 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)
Securities Available for Sale
Term to maturity:
One year or less $ 45,653 3.06% $ 10,328 2.04% $ 80,328 3.60%
Over one year through five years 47,219 5.27% 4,157 4.04% 78,850 5.00%
Over five years -- -- 1,472 4.28% 25 --
-------- -------- --------
Totals $ 92,872 4.18% $ 15,957 2.77% $159,203 4.29%
======== ======== ========
Securities Held to Maturity
Term to maturity:
One year or less $ 10,486 4.20% $ -- --% $ -- --%
Over one year through five years 20,600 4.32% -- -- -- --
Over five years -- -- -- -- -- --
-------- -------- --------
Totals $ 31,086 4.28% $ -- -- $ -- --
======== ======== ========
18
FINANCIAL CONDITION
Included in fixed rate debt securities are $263,011,000 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)
Securities Available for Sale
Term to repricing/maturity:
One year or less $ 15,135 2.02% $ -- --% $ 77,950 1.76%
Over one year through five years -- -- -- -- -- --
Over five years -- -- -- -- -- --
-------- -------- --------
Totals $ 15,135 2.02% $ -- --% $ 77,950 1.76%
======== ======== ========
Securities Held to Maturity
Term to repricing/maturity:
One year or less $ 23,081 4.11% $ -- --% $ -- -%
Over one year through five years -- -- -- -- -- --
Over five years -- -- -- -- -- --
-------- -------- --------
Totals $ 23,081 4.11% $ -- --% $ -- -%
======== ======== ========
At December 31, 2003, gross unrealized gains and gross unrealized losses
on securities available for sale amounted to $2.4 million and $3.9 million,
respectively.
The Company's investment securities are subject to market risk in the
following ways. Of the investment securities owned as of December 31, 2003,
$116,166,000 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 six 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 $299,118,000 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. The
Company's fixed-rate CMOs have an average life of less than two years, 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.
19
FINANCIAL CONDITION
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 $ 7,261 $ 21,671 $ 26,444
Over one year through five years 6,123 18,719 124,838
Over five years 82 986 28,760
--------- --------- ---------
Totals $ 13,466 $ 41,376 $ 180,042
========= ========= =========
Included in fixed rate loans maturing in one year or less are $447,000 of
customer account overdrafts.
Floating Rate Loans
-------------------------------------
Commercial Construction Other
Loans Loans Loans
---------- ------------ ---------
(In thousands)
Term to repricing/maturity:
One year or less $ 63,573 $ 46,055 $ 296,854
Over one year through five years 7,410 -- 134,919
Over five years 1,399 -- 8,517
--------- --------- ---------
Totals $ 72,382 $ 46,055 $ 440,290
========= ========= =========
Most residential mortgage loans are adjustable rate mortgages subject to
interest rate caps.
20
FINANCIAL CONDITION
Deposits
The remaining maturity of time certificates of deposit as of December 31,
2003 was as follows:
Fixed Rate
Certificates of Deposit
-------------------------
More than $100,000
$100,000 or Less
--------- ---------
(In thousands)
Remaining maturity:
Three months or less $ 12,835 $ 33,801
Over three months through six months 4,356 20,545
Over six months through 12 months 2,459 19,205
Over one year through five years 36,809 38,839
Over five years -- --
--------- ---------
Totals $ 56,459 $ 112,390
========= =========
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, 2003 was as follows:
Fixed Rate
FHLB Borrowings
---------------
(In thousands)
Remaining maturity:
Three months or less $ 4,945
Over three months through six months 33,200
Over six months through 12 months 8,300
Over one year through five years 118,976
Over five years 14,506
---------
Total $ 179,927
=========
Rates paid on other short-term borrowings change daily.
21
FINANCIAL CONDITION
Loans
The following is a summary of loans outstanding as of the dates indicated:
December 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In thousands)
Commercial loans $ 85,848 $ 83,953 $ 84,947 $ 76,275 $ 77,776
Construction mortgage loans 87,431 99,544 95,186 87,978 68,809
Commercial mortgage loans 316,317 283,458 264,934 242,536 203,988
Industrial revenue bonds 760 929 1,163 1,603 1,137
Residential mortgage loans 298,644 327,889 429,840 430,951 313,757
Consumer loans 4,611 5,629 8,221 9,147 9,275
--------- --------- --------- --------- ---------
Total loans $ 793,611 $ 801,402 $ 884,291 $ 848,490 $ 674,742
========= ========= ========= ========= =========
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. Although management believes that upon review of loan
quality and payment statistics, the allowance is adequate to cover losses in the
current portfolio at December 31, 2003, there can be no assurance that the
allowance is adequate or that additional provisions might not become necessary.
Non-performing Assets and Loan Loss Experience
Non-performing assets as of December 31 were as follows:
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In thousands)
Nonaccrual loans $ 2,550 $ 1,348 $ 1,802 $ 2,192 $ 1,777
Loans past due 90 days or more and still accruing -- -- -- -- --
Property from defaulted loans 1,500 1,500 1,500 1,500 1,500
-------- -------- -------- -------- --------
Total non-performing assets $ 4,050 $ 2,848 $ 3,302 $ 3,692 $ 3,277
======== ======== ======== ======== ========
Restructured troubled debt performing in accordance
with amended terms, not included above $ 194 $ 210 $ 224 $ 237 $ 626
======== ======== ======== ======== ========
22
FINANCIAL CONDITION
The property from defaulted loans was sold in January 2004 and a gain on
sale was recognized in the amount of $376,000.
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, 2003 and 2002, $10,732,000 and $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, 2003 and
2002, $6,742,000 and $9,371,000, respectively, 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:
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance, beginning of year $ 12,384 $ 12,252 $ 12,154 $ 11,158 $ 11,108
Provision for loan losses -- -- -- -- --
Charge-offs:
Commercial loans (75) (134) (275) (108) (347)
Construction mortgage loans -- -- -- -- --
Commercial mortgage loans -- -- -- -- (186)
Residential mortgage loans -- -- -- -- --
Consumer loans (71) (92) (71) (60) (77)
-------- -------- -------- -------- --------
Total charge-offs (146) (226) (346) (168) (610)
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Commercial loans 223 300 321 826 351
Construction mortgage loans -- -- 84 89 60
Commercial mortgage loans 231 8 6 216 190
Residential mortgage loans -- 6 -- 10 --
Consumer loans 21 44 33 23 59
-------- -------- -------- -------- --------
Total recoveries 475 358 444 1,164 660
-------- -------- -------- -------- --------
Balance, end of year $ 12,713 $ 12,384 $ 12,252 $ 12,154 $ 11,158
======== ======== ======== ======== ========
Ratio of net charge-offs (recoveries) to
average loans outstanding (0.04)% (0.01)% (0.01)% (0.13)% (0.01)%
======== ======== ======== ======== ========
Ratio of allowance to total loans
outstanding 1.60% 1.55% 1.39% 1.43% 1.65%
======== ======== ======== ======== ========
23
FINANCIAL CONDITION
The allowance for loan losses, as of December 31, was allocated as
follows:
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(In thousands)
Commercial loans $ 1,631 $ 1,789 $ 2,219 $ 1,502 $ 1,457
Construction mortgage loans 915 951 787 802 755
Commercial mortgage loans 7,551 6,742 5,903 5,838 5,681
Industrial revenue bonds 11 14 14 16 20
Residential mortgage loans 2,520 2,794 3,133 3,922 3,071
Consumer loans 85 94 196 74 174
-------- -------- -------- -------- --------
$ 12,713 $ 12,384 $ 12,252 $ 12,154 $ 11,158
======== ======== ======== ======== ========
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 was comprised 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 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 lines of credit of $7,000,000 and $2,500,000 for the purchase of
federal funds from SunTrust Bank and Fleetbank, respectively, and may borrow
from the Federal Reserve Bank if necessary.
Contractual Obligations
The table below contains information on the Company's contractual
obligations as of the fiscal year ended December 31, 2003:
Payment Due by Period
----------------------------------------------------
Less More
Than 1-3 3-5 Than
Total 1 Year Years Years 5 Years
-------- -------- -------- -------- --------
(In thousands)
Contractual Obligations
Long-term debt $138,482 $ -- $ 61,504 $ 57,472 $ 19,506
Capital lease obligation -- -- -- -- --
Operating leases 4,205 683 1,223 935 1,364
Purchase obligations 71 71 -- -- --
Other long-term liabilities -- -- -- -- --
-------- -------- -------- -------- --------
Total $142,758 $ 754 $ 62,727 $ 58,407 $ 20,870
======== ======== ======== ======== ========
24
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, 2003. 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 1.12%, 1.67% and 3.88% during 2003, 2002 and 2001, respectively.
Years Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
ASSETS
Securities:
Mortgage-backed securities $ 27,059 $ 798 2.95% $ 10,942 $ 617 5.64% $ 29,253 $ 1,868 6.38%
CMOs 140,894 557 0.40% 180,336 7,114 3.94% 194,463 11,948 6.14%
U.S. Government agencies 20,115 362 1.80% 34,845 1,111 3.19% 16,905 869 5.14%
State and municipal obligations 21,353 545 2.55% 18,252 590 3.23% 23,571 948 4.02%
Other securities 259,689 10,992 4.23% 262,263 11,016 4.20% 252,251 14,689 5.82%
---------- ------- ---------- ------- ---------- -------
Total securities 469,110 13,254 2.83% 506,638 20,448 4.04% 516,443 30,322 5.87%
---------- ------- ---------- ------- ---------- -------
Loans:
Commercial 87,448 4,381 5.01% 85,589 4,815 5.63% 83,973 6,692 7.97%
Commercial construction 64,195 2,985 4.65% 56,923 2,928 5.14% 48,461 3,529 7.28%
Residential construction 31,730 1,724 5.43% 43,331 2,488 5.74% 48,513 3,038 6.26%
Commercial mortgages 290,751 20,427 7.03% 271,784 20,833 7.67% 248,865 22,064 8.87%
Industrial revenue bonds 848 48 5.67% 1,048 60 5.73% 1,324 91 6.87%
Residential mortgages 236,233 12,472 5.28% 356,494 21,941 6.15% 410,753 27,913 6.80%
Home equity 73,950 3,388 4.58% 60,586 3,054 5.04% 44,296 3,245 7.33%
Consumer 5,063 533 10.52% 6,420 670 10.44% 8,313 861 10.36%
---------- ------- ---------- ------- ---------- -------
Total loans 790,218 45,958 5.82% 882,175 56,789 6.44% 894,498 67,433 7.54%
---------- ------- ---------- ------- ---------- -------
Total earning assets 1,259,328 59,212 4.70% 1,388,813 77,237 5.56% 1,410,941 97,755 6.93%
------- ------- -------
Non-earning assets 77,275 70,664 70,033
---------- ---------- ----------
Total assets $1,336,603 $1,459,477 $1,480,974
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 176,922 323 0.18% $ 156,075 727 0.47% $ 139,485 745 0.53%
Regular savings 95,756 519 0.54% 83,045 930 1.12% 67,947 932 1.37%
Money Market accounts 303,332 3,072 1.01% 289,682 5,002 1.73% 252,384 7,143 2.83%
Certificates of deposit of
$100,000 or more 39,539 1,105 2.79% 41,642 1,266 3.04% 86,255 4,708 5.46%
Other time deposits 116,445 3,030 2.60% 133,821 4,470 3.34% 183,887 10,024 5.45%
---------- ------- ---------- ------- ---------- -------
Total interest-bearing deposits 731,994 8,049 1.10% 704,265 12,395 1.76% 729,958 23,552 3.23%
---------- ------- ---------- ------- ---------- -------
Borrowings:
Federal Home Loan Bank 206,929 9,305 4.50% 367,588 16,120 4.39% 394,827 20,090 5.09%
Other short-term borrowings 26,786 190 0.71% 29,905 318 1.06% 28,758 765 2.66%
Subordinated debt 5,000 254 5.08% 5,000 285 5.70% 2,096 148 7.06%
---------- ------- ---------- ------- ---------- -------
Total borrowings 238,715 9,749 4.08% 402,493 16,723 4.15% 425,681 21,003 4.93%
---------- ------- ---------- ------- ---------- -------
Total interest-bearing liabilities 970,709 17,798 1.83% 1,106,758 29,118 2.63% 1,155,639 44,555 3.86%
------- ------- -------
Demand deposits 242,185 222,183 208,071
Non-interest-bearing liabilities 10,669 12,589 11,648
Stockholders' equity 113,040 117,947 105,616
---------- ---------- ----------
Total liabilities and equity $1,336,603 $1,459,477 $1,480,974
========== ========== ==========
Net interest income/spread $41,414 2.87% $48,119 2.93% $53,200 3.07%
======= ======= =======
Net interest margin (NII/Avg. Earning Assets) 3.29% 3.46% 3.77%
25
CHANGES IN NET INTEREST INCOME DUE TO
CHANGES IN VOLUME AND RATE
The effects on net interest income from changes in interest rates on, and
changes in the outstanding balances of, interest-earning assets and
interest-bearing liabilities are summarized in the following table. These
effects were calculated directly from the average outstanding balances and
interest income and expense included in the preceding table. The change in net
interest income resulting from the change in volume for each line item was
calculated by multiplying the change in volume by the average of the interest
rates earned or paid thereon. The change in the net interest income resulting
from the change in rates for each line item was calculated by multiplying the
change in rates by the average of the outstanding balances for the two periods
for that line item. In 2003, declines of both volumes of and rates on earning
assets and interest-bearing liabilities impacted net interest income. The lower
volume of earning assets, resulting primarily from fewer investment securities
and fewer residential mortgages, was more than offset by reduced borrowings such
that net interest income was improved by approximately $1,653,000. Lower rates
on earning assets were not completely offset by reduced rates on
interest-bearing liabilities, however, resulting in a reduction of net interest
income from rates of approximately $8,358,000. In 2002, the negative effect of
changes in rates more than offset the positive contribution from changes in
volume as rates on earning assets declined faster than the Company's ability to
lower rates on interest-bearing liabilities. The improvement in 2002 from
changes in volume was because average interest-bearing liabilities declined
faster than earning assets.
2003 Compared to 2002 2002 Compared to 2001
Change Due to Increase (Decrease) Change Due to Increase (Decrease)
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
-------- -------- --------- -------- -------- ---------
(In thousands)
EARNING ASSETS
Securities:
Mortgage-backed securities $ 692 $ (511) $ 181 $ (1,100) $ (151) $ (1,251)
CMOs (856) (5,701) (6,557) (712) (4,122) (4,834)
U.S. Government agencies (368) (381) (749) 747 (505) 242
State and municipal obligations 90 (135) (45) (193) (165) (358)
Other securities (108) 84 (24) 502 (4,175) (3,673)
-------- -------- -------- -------- -------- --------
Total securities (550) (6,644) (7,194) (756) (9,118) (9,874)
-------- -------- -------- -------- -------- --------
Loans:
Commercial 99 (533) (434) 110 (1,987) (1,877)
Commercial construction 356 (299) 57 525 (1,126) (601)
Residential construction (648) (116) (764) (311) (239) (550)
Commercial mortgages 1,394 (1,800) (406) 1,895 (3,126) (1,231)
Industrial revenue bonds (11) (1) (12) (17) (14) (31)
Residential mortgages (6,873) (2,596) (9,469) (3,513) (2,459) (5,972)
Home equity 643 (309) 334 1,008 (1,199) (191)
Consumer (142) 5 (137) (197) 6 (191)
-------- -------- -------- -------- -------- --------
Total loans (5,182) (5,649) (10,831) (500) (10,144) (10,644)
-------- -------- -------- -------- -------- --------
Total earning assets (5,732) (12,293) (18,025) (1,256) (19,262) (20,518)
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts 68 (472) (404) 83 (101) (18)
Regular savings 106 (517) (411) 188 (190) (2)
Money Market accounts 187 (2,117) (1,930) 850 (2,991) (2,141)
Certificates of deposit
of $100,000 or more (61) (100) (161) (1,896) (1,546) (3,442)
Other time deposits (516) (924) (1,440) (2,200) (3,354) (5,554)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits (216) (4,130) (4,346) (2,975) (8,182) (11,157)
-------- -------- -------- -------- -------- --------
Borrowings:
Federal Home Loan Bank (7,141) 326 (6,815) (1,291) (2,679) (3,970)
Other short-term borrowings (28) (100) (128) 21 (468) (447)
Subordinated debt -- (31) (31) 185 (48) 137
-------- -------- -------- -------- -------- --------
Total borrowings (7,169) 195 (6,974) (1,085) (3,195) (4,280)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities (7,385) (3,935) (11,320) (4,060) (11,377) (15,437)
-------- -------- -------- -------- -------- --------
Net changes due to volume/rate $ 1,653 $ (8,358) $ (6,705) $ 2,804 $ (7,885) $ (5,081)
======== ======== ======== ======== ======== ========
26
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 levels and durations 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 of collateralized mortgage
obligations, other debt securities, and 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, in the instance
of securities classified as available-for-sale, of relatively short duration.
The Company's loan portfolio is concentrated in residential and commercial real
estate loans from southeastern Massachusetts. 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, 2003, it is estimated that an increase in interest
rates of 100 basis points (for example, an increase in the prime rate from 4% to
5%) would reduce the value of net assets by $9,645,000. 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, the opposite is generally true of the Company's earnings. If interest
rates were to increase, net interest income would likely 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% to 3%) it
is estimated that net interest income would decrease by $643,000. On the other
hand, if interest rates were to increase, net interest income would likely
increase.
At December 31, 2002, it was estimated that the value of the net assets of
the Company would decline by $5,429,000 if interest rates were to increase by
100 basis points and that the Company's net interest income would decline by
$1,733,000 if interest rates were to decline by 100 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.
27
Item 8. Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS INDEX
Page
----
o Independent Auditors' Report 29
o Consolidated Balance Sheets at December 31, 2003 and 2002 30
o Consolidated Statements of Income for the Three Years Ended
December 31, 2003 31
o Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 2003 32
o Consolidated Statements of Comprehensive Income for the
Three Years Ended December 31, 2003 33
o Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 2003 33
o Notes to Consolidated Financial Statements 34
28
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, 2003 and 2002, and
the related consolidated statements of income, cash flows, comprehensive income
and changes in stockholders' equity for each of the years in the three-year
period ended December 31, 2003. 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, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 30, 2004
29
CCBT FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
ASSETS 2003 2002
----------- -----------
(Dollars in thousands)
Cash and due from banks $ 38,254 $ 60,057
Short-term, interest-bearing deposits 25,470 741
Securities available for sale, at fair value 359,592 510,837
Securities held to maturity, at amortized cost 54,167 --
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 7,306 37,332
Total loans 793,611 801,402
Less: Allowance for loan losses (12,713) (12,384)
----------- -----------
Net loans 780,898 789,018
----------- -----------
Premises and equipment 21,517 20,602
Deferred tax asset, net 6,054 5,572
Accrued interest receivable on securities and loans 4,479 5,982
Intangible assets 5,089 6,314
Foreclosed real estate 1,500 1,500
Other assets 9,169 19,190
----------- -----------
Total assets $ 1,338,233 $ 1,481,883
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,005,101 $ 942,220
Federal Home Loan Bank borrowings - short-term 46,445 205,700
Other short-term borrowings 23,088 21,391
Federal Home Loan Bank borrowings - long-term 133,482 165,750
Subordinated debt 5,000 5,000
Accrued interest payable on deposits and borrowings 1,086 1,501
Post retirement benefits payable 4,245 3,710
Employee profit sharing retirement and bonuses payable 2,566 3,017
Due to broker for securities settlement 54 11,627
Other liabilities 2,407 3,286
----------- -----------
Total liabilities 1,223,474 1,363,202
----------- -----------
Minority interest 282 234
----------- -----------
Commitments and contingencies (Notes 5 and 11)
Stockholders' equity:
Common stock, $1.00 par value; 12,000,000 shares authorized;
9,061,064 shares issued 9,061 9,061
Surplus 27,512 27,484
Undivided profits 90,972 91,042
Treasury stock, at cost (640,866 shares - 2003; 470,266 shares - 2002) (12,161) (8,122)
Accumulated other comprehensive loss (907) (1,018)
----------- -----------
Total stockholders' equity 114,477 118,447
----------- -----------
Total liabilities and stockholders' equity $ 1,338,233 $ 1,481,883
=========== ===========
The accompanying notes are an integral part of these financial statements.
30
CCBT FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 45,958 $ 56,789 $ 67,433
Interest on short-term, interest-bearing deposits 216 302 514
Taxable interest income on securities available for sale 11,211 18,613 27,489
Tax-exempt interest income on securities available for sale 545 590 934
Interest on securities held to maturity 488 -- --
Dividends on securities 794 943 1,385
-------- -------- --------
Total interest and dividend income 59,212 77,237 97,755
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 8,049 12,395 23,552
Interest on Federal Home Loan Bank borrowings 9,305 16,120 20,090
Interest on other short-term borrowings 190 318 765
Interest on subordinated debt 254 285 148
-------- -------- --------
Total interest expense 17,798 29,118 44,555
-------- -------- --------
Net interest income 41,414 48,119 53,200
Provision for loan losses -- -- --
-------- -------- --------
Net interest income, after provision for loan losses 41,414 48,119 53,200
-------- -------- --------
NON-INTEREST INCOME
Financial advisor fees 7,596 6,807 6,909
Deposit account service charges 2,358 2,210 2,130
Branch banking fees 2,918 3,086 3,110
Electronic banking fees 2,847 2,496 1,998
Loan servicing and other loan fees, net (316) (98) 59
Brokerage fees and commissions 1,790 1,494 1,311
Net gain (loss) on securities (1,692) 2,074 2,187
Net gain on sales of loans 3,180 1,941 2,956
Insurance commissions 2,805 2,562 1,573
Other income (charges) (5) 377 688
-------- -------- --------
Total non-interest income 21,481 22,949 22,921
-------- -------- --------
NON-INTEREST EXPENSE
Salaries 18,814 18,659 17,653
Employee benefits 7,381 8,415 8,164
Building and equipment 6,048 6,289 5,434
Data processing 2,690 3,003 2,600
Accounting and legal fees 1,345 1,130 955
Other outside services 2,533 2,301 2,277
Amortization of intangibles 1,225 1,225 1,583
Delivery and communications 1,941 2,296 1,898
Marketing and advertising 1,880 1,875 1,774
All other expenses 4,674 3,667 3,720
-------- -------- --------
Total non-interest expense 48,531 48,860 46,058
-------- -------- --------
Minority interest 48 85 (23)
-------- -------- --------
Income before income taxes 14,316 22,123 30,086
Provision for income taxes 7,939 7,683 10,622
-------- -------- --------
Net income $ 6,377 $ 14,440 $ 19,464
======== ======== ========
Basic earnings per share $ 0.75 $ 1.68 $ 2.26
Diluted earnings per share $ 0.75 $ 1.67 $ 2.25
Average shares outstanding - basic 8,463 8,613 8,613
Average shares outstanding - diluted 8,488 8,649 8,647
Cash dividends declared per share $ 0.76 $ 0.76 $ 0.72
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,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,377 $ 14,440 $ 19,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of fixed and intangible assets 4,126 4,308 4,284
Net amortization (accretion) of securities 8,539 1,335 (5,610)
Amortization of net deferred loan costs 183 414 1,309
Net loss (gain) on securities 1,692 (2,074) (2,187)
Deferred income tax benefit (623) (169) (370)
Net gain on sales of loans (3,180) (1,941) (2,956)
Net change in:
Loans held for sale, net 33,206 4,141 (5,709)
Accrued interest receivable 1,503 386 (1,317)
Accrued expenses and other liabilities (1,210) (4,393) 154
Other, net 10,069 (6,115) (1,538)
----------- ----------- -----------
Net cash provided by operating activities 60,682 10,332 5,524
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in loans 7,937 51,424 (86,431)
Proceeds from sale of portfolio loans -- -- 52,841
Maturities of available-for-sale securities 533,356 713,688 514,544
Purchases of available-for-sale securities (463,669) (873,168) (656,605)
Sales of available-for-sale securities 60,232 92,736 143,661
Principal payments of held-to-maturity securities 6,790 -- --
Purchases of held-to-maturity securities (61,183) -- --
Purchases of premises and equipment (3,816) (5,428) (4,563)
Purchase of Federal Home Loan Bank and
Federal Reserve Bank stock -- -- (1,431)
----------- ----------- -----------
Net cash provided (used) by investing activities 79,647 (20,748) (37,984)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 62,881 38,829 (69,912)
Federal Home Loan Bank borrowings 942,000 1,858,250 1,855,224
Repayments of Federal Home Loan Bank borrowings (1,133,523) (1,871,114) (1,762,197)
Net increase (decrease) in other short-term borrowings 1,697 (9,344) 6,215
Proceeds from issuance of subordinated debt -- -- 5,000
Purchase of treasury stock (4,308) (1,217) --
Issuance of common stock under stock option plan 297 303 181
Cash dividends paid on common stock (6,447) (6,555) (6,204)
----------- ----------- -----------
Net cash provided (used) by financing activities (137,403) 9,152 28,307
----------- ----------- -----------
Net change in cash and cash equivalents 2,926 (1,264) (4,153)
Cash and cash equivalents at beginning of year 60,798 62,062 66,215
----------- ----------- -----------
Cash and cash equivalents at end of year $ 63,724 $ 60,798 $ 62,062
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 18,213 $ 30,022 $ 46,404
Income taxes 8,549 10,974 11,050
Non-cash transactions:
Net change in due to/from broker for securities settlement (11,573) 11,627 (757)
Transfer from loans to loans 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,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
Net income $ 6,377 $ 14,440 $ 19,464
--------- --------- ---------
Unrealized holding gains (losses) on securities available for sale (1,440) (4,549) 7,596
Reclassification of losses (gains) on securities realized in income 1,692 (2,074) (2,187)
--------- --------- ---------
Net unrealized gains (losses) 252 (6,623) 5,409
Related tax effect (141) 2,783 (2,263)
--------- --------- ---------
Net other comprehensive income (loss) 111 (3,840) 3,146
--------- --------- ---------
Comprehensive income $ 6,488 $ 10,600 $ 22,610
========= ========= =========
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
COMMON STOCK
Balance, beginning and end of year $ 9,061 $ 9,061 $ 9,061
--------- --------- ---------
SURPLUS
Balance, beginning of year 27,484 27,473 27,495
Issuance of common stock under stock option plan 28 11 (22)
--------- --------- ---------
Balance, end of year 27,512 27,484 27,473
--------- --------- ---------
UNDIVIDED PROFITS
Balance, beginning of year 91,042 83,157 69,897
Net income 6,377 14,440 19,464
Cash dividends declared and paid ($.76, $.76 and
$.72 per share, respectively) (6,447) (6,555) (6,204)
--------- --------- ---------
Balance, end of year 90,972 91,042 83,157
--------- --------- ---------
TREASURY STOCK
Balance, beginning of year (8,122) (7,197) (7,400)
Purchase of treasury stock (187,100 and 47,500 shares, respectively) (4,308) (1,217) --
Issuance of common stock under stock option plan
(16,500, 17,875 and 12,375 shares, respectively) 269 292 203
--------- --------- ---------
Balance, end of year (12,161) (8,122) (7,197)
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year (1,018) 2,822 (324)
Net other comprehensive income (loss) 111 (3,840) 3,146
--------- --------- ---------
Balance, end of year (907) (1,018) 2,822
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY, END OF YEAR $ 114,477 $ 118,447 $ 115,316
========= ========= =========
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, 2003, 2002 and 2001
(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.
Recent developments -- On December 9, 2003, the Company and Banknorth
Group, Inc. ("Banknorth") announced that they had entered into an Agreement and
Plan of Merger, dated as of December 8, 2003 (the "Agreement"), which sets forth
the terms and conditions pursuant to which the Company will be merged with and
into Banknorth (the "Merger"). The Agreement provides, among other things, that
as a result of the Merger each outstanding share of common stock of the Company
(subject to certain exceptions) will be converted into the right to receive
1.084 shares of common stock of Banknorth, plus cash in lieu of any fractional
share interest.
Consummation of the Merger is subject to a number of customary conditions,
including, but not limited to, (i) the approval of the Agreement by the
Company's shareholders and (ii) the receipt of requisite regulatory approvals of
the Merger and the proposed merger of the Bank with and into Banknorth's banking
subsidiary, Banknorth, NA, immediately prior to consummation of the Merger. The
Merger is expected to be completed in the second quarter of 2004 with
operational integration to follow soon after.
Principles of consolidation -- The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiary,
the Bank, and the Bank's wholly-owned subsidiaries and 51% ownership interest in
an insurance agency. All inter-company accounts have been eliminated upon
consolidation in the presentation of the consolidated financial statements. The
Company's wholly-owned subsidiary, CCBT Statutory Trust I (See Note 7) is
presented on the equity method.
Certain amounts have been reclassified in the 2002 and 2001 financial
statements to conform to the 2003 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 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, 2003 and 2002, these
reserve balances amounted to $12,379,000 and $10,599,000, respectively.
34
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Securities -- Securities that the Company has purchased with the positive
intent and ability to hold to maturity are classified "held-to-maturity" and are
stated at cost, adjusted for amortization of premiums and accretion of
discounts, except in the instance of "other-than-temporary losses" as explained
below. Securities that might be sold prior to maturity to meet liquidity needs
or to provide funds for the purchase of alternative investments are classified
"available-for-sale" and are stated at fair value. Securities purchased and held
principally for the purpose of selling them in the near term, are classified
"trading securities" The Company held no trading securities at either December
31, 2003 or December 31, 2002. Gains and losses on sales of securities are
recorded on the trade date and are determined using the specific identification
method. Unrealized gains and losses adjusting securities available-for-sale to
fair value, if any, are credited or charged to "Other Comprehensive Income," net
of any related tax effect. Declines in the fair value of securities available
for sale and securities held to maturity to levels below their adjusted cost,
which are deemed to be other-than-temporary losses, are realized as losses in
earnings. In estimating other-than-temporary impairment losses, management
considers 1) the length of time and the extent to which the fair value has been
less than cost, 2) underlying collateral delinquency and loss trends, 3) current
and projected underlying collateral support levels, 4) the financial condition
and near-term prospects of the issuer, and 5) the intent and ability of the
Company to retain said securities for the period of time sufficient to allow for
any recovery of unrealized losses. 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 origination fees and costs and charge-offs. Loan fees, net
of the direct costs of origination, are deferred and recognized in income over
the life of the loan generally using the interest method. For certain loan
categories, the straight-line method is used, which does not differ materially
from 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.
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.
35
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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. For sales of
mortgage loans, a portion of the cost of originating the loan is allocated to
the servicing right based on relative fair value. Fair value is based on market
prices for comparable mortgage servicing contracts. 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 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.
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, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets" and goodwill, which amounted to $803,000 at
December 31, 2003 and 2002, is no longer amortized, but is evaluated for
impairment. If goodwill amortization of $359,000 was not recorded for the year
ending December 31, 2001, net income as reported for 2001 would have increased
by $215,000 or $.02 per share (basic and diluted) to $19,679,000 or $2.28 per
share (basic) and $2.27 per share (diluted).
Marketing expense -- The Company charges to marketing expense any
advertising related expenses at the time they are incurred.
36
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock compensation plans -- At December 31, 2003, 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.
2003 2002 2001
---------- ---------- ----------
(In thousands, except per share amounts)
Net income as reported $ 6,377 $ 14,440 $ 19,464
Additional expense had the Company
adopted SFAS No. 123 (445) (403) (182)
Related tax benefit 186 168 76
---------- ---------- ----------
Pro-forma net income $ 6,118 $ 14,205 $ 19,358
========== ========== ==========
Basic earnings per share, as reported $ 0.75 $ 1.68 $ 2.26
Pro-forma basic earnings per share $ 0.72 $ 1.65 $ 2.25
Diluted earnings per share, as reported $ 0.75 $ 1.67 $ 2.25
Pro-forma diluted earnings per share $ 0.72 $ 1.64 $ 2.24
Post retirement benefit plans -- Post retirement benefits are accrued over
the period that employees render the service making them eligible for the
benefits.
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 -- 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, 2003 for such activities amounted to $200,000
and $98,000, respectively. Accordingly, all significant operating decisions are
based upon analysis of the Company as one operating segment or unit.
Recent accounting pronouncements -- In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46)
which establishes guidance for determining when an entity should consolidate
another entity that meets the definition of a variable interest entity. FIN 46
requires a variable interest entity to be consolidated by a company if that
company will absorb a majority of the expected losses, will receive a majority
of the expected residual returns, or both. On December 17, 2003, the FASB
deferred the effective date of FIN 46 to no later than the end of the first
reporting period that ends after March 15, 2004. However, for special-purpose
entities such as CCBT Statutory Trust I, the Company is required to apply FIN 46
as of December 31, 2003. Application of FIN 46 resulted in CCBT Statutory Trust
I being presented on the equity method instead of being consolidated, which had
no material effect on the Company's consolidated financial statements.
37
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This Statement amends SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, except in certain circumstances, and for hedging
relationships designated after June 30, 2003. This Statement did not have a
material effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement provides new rules on the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. Such
financial instruments include mandatorily redeemable shares, instruments that
require the issuer to buy back some of its shares in exchange for cash or other
assets, or obligations that can be settled with shares, the monetary value of
which is fixed. Most of the guidance in SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 30,
2003. This Statement had no effect on the Company's consolidated financial
statements.
(2) SECURITIES
The amortized cost and estimated fair values of securities, with gross
unrealized gains and losses, follows:
December 31, 2003
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Securities Available for Sale
U.S. Government agency CMOs and MBSs $ 82,643 $ 305 $ 180 $ 82,768
Other U.S. Government agency obligations 25,162 69 80 25,151
Other collateralized mortgage obligations 73,204 276 158 73,322
Interest only securities 1,256 329 121 1,464
State and municipal obligations 15,957 -- -- 15,957
Other debt securities 162,895 1,385 3,350 160,930
--------- --------- --------- ---------
Totals $ 361,117 $ 2,364 $ 3,889 $ 359,592
========= ========= ========= =========
Securities Held to Maturity
U.S. Government agency MBSs $ 54,167 $ 159 $ 256 $ 54,070
========= ========= ========= =========
38
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
Securities Available for Sale
U.S. Government agency CMOs and MBSs $ 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
========= ========= ========= =========
Gross proceeds from the sale of available-for-sale securities were
$60,232,000 in 2003. Gross gains of $122,000 and gross losses of $488,000 were
realized on those sales. In addition, the Company recognized a loss of
$1,326,000, which resulted from the write-down of a debt security available for
sale which experienced a decline in value that was deemed other than temporary.
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.
The amount of income tax expense (benefit) attributable to the net gain
(loss) on securities in 2003, 2002 and 2001 was ($708,000), $868,000 and
$915,000, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 2003, 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.
Available for Sale Held to Maturity
---------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
Due in one year or less $ 14,591 $ 14,604 $ -- $ --
Due after one year through five years 36,626 36,506 1,243 1,243
Due after five years through ten years 48,330 48,715 13,135 13,115
Due after ten years 261,570 259,767 39,789 39,712
--------- --------- --------- ---------
$ 361,117 $ 359,592 $ 54,167 $ 54,070
========= ========= ========= =========
At December 31, 2003 and 2002, securities with an estimated fair value of
$23,088,000 and $21,391,000, respectively, were pledged to secure borrowings
from the U.S. Treasury and securities sold subject to agreements to repurchase.
(See Note 7.)
39
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Information pertaining to securities with gross unrealized losses at
December 31, 2003, aggregated by investment category and length of time that
individual securities have been in a continuous loss position, follows:
Less Than Twelve Months Over Twelve Months
------------------------ ------------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ---------- ---------- ----------
(In thousands)
Securities Available for Sale
U.S. Government agency CMOs and MBSs $ 39 $ 14,278 $ 141 $ 22,846
Other U.S. Government agency obligations -- -- 80 5,083
Other collateralized mortgage obligations 9 8,258 149 14,062
Interest only securities 6 96 115 401
Other debt securities 531 31,067 2,819 83,959
---------- ---------- ---------- ----------
Totals $ 585 $ 53,699 $ 3,304 $ 126,351
========== ========== ========== ==========
Securities Held to Maturity
U.S. Government agency MBSs $ 256 $ 23,069 $ -- $ --
========== ========== ========== ==========
Any security with a current book value equal to or greater than $500,000
that is downgraded is reported immediately to the Investment Committee for the
purpose of researching the reason for the downgrade and then for possible sale
or other-than-temporary impairment recognition. The Company's Investment
Committee maintains a monthly report of downgraded issues for review. The
Investment Committee will evaluate a security for possible sale or
other-than-temporary impairment recognition based upon a rating downgrade to or
near minimum investment grade and/or a significant negative change in price
indication. In estimating other-than-temporary impairment losses, management
considers 1) the length of time and the extent to which the fair value has been
less than cost, 2) underlying collateral delinquency and loss trends, 3) current
and projected underlying collateral support levels, 4) the financial condition
and near-term prospects of the issuer, and 5) the intent and ability of the
Company to retain said securities for the period of time sufficient to allow for
any recovery of fair value.
At December 31, 2003, 79 debt securities have unrealized losses with
aggregate depreciation of 2% from the Company's amortized cost basis. These
unrealized losses generally relate to increased credit risk on certain
asset-backed securities, as these securities are collateralized with loans made
by others, and/or from substantial changes in interest rate environments during
volatile economic periods. As management has the ability to hold debt securities
until maturity, or for the foreseeable future if classified as available for
sale, no declines are deemed to be other than temporary.
40
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(3) LOANS, NET
The following is a summary of loans outstanding as of the dates indicated:
December 31,
------------------------
2003 2002
--------- ---------
(In thousands)
Mortgage loans on real estate:
Residential $ 211,546 $ 262,095
Commercial 316,317 283,458
Construction 87,431 99,544
Equity lines of credit 87,098 65,794
Other loans:
Commercial 85,848 83,953
Consumer 4,611 5,629
Industrial revenue bonds 760 929
--------- ---------
Total loans 793,611 801,402
Less: Allowance for loan losses (12,713) (12,384)
--------- ---------
Total loans, net $ 780,898 $ 789,018
========= =========
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, 2003 and 2002 was $14,989,000 and $10,037,000,
respectively. During 2003, new loans to related parties amounted to $34,151,000
and repayments amounted to $29,199,000.
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 $419,386,000 and $322,085,000 at December 31,
2003 and 2002, respectively.
The following summarizes mortgage servicing rights capitalized and
amortized for the years ended December 31:
2003 2002 2001
------ ------ ------
(In thousands)
Mortgage servicing rights capitalized $2,049 $1,444 $ 585
====== ====== ======
Mortgage servicing rights amortized $1,357 $ 707 $ 357
====== ====== ======
Mortgage servicing rights included in Other Assets at December 31, 2003
and 2002 were $2,780,000 and $2,088,000, respectively. The estimated fair values
of these rights were $3,183,000 and $2,279,000, respectively.
41
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(4) ALLOWANCE FOR LOAN LOSSES
The changes in the allowance for loan losses were as follows:
Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Balance, beginning of year $ 12,384 $ 12,252 $ 12,154
Provision for loan losses -- -- --
Charge-offs (146) (226) (346)
Recoveries on loans previously charged-off 475 358 444
-------- -------- --------
Balance, end of year $ 12,713 $ 12,384 $ 12,252
======== ======== ========
The following is a summary of information pertaining to impaired and
nonaccrual loans:
December 31,
-----------------
2003 2002
------- -------
(In thousands)
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance:
Commercial loans 383 43
Commercial mortgage loans -- 121
------- -------
Total impaired loans $ 383 $ 164
======= =======
Valuation allowance related to impaired loans $ 319 $ 35
======= =======
Nonaccrual loans $ 2,550 $ 1,348
======= =======
Loans 90 days past due, still accruing $ -- $ --
======= =======
Years Ended December 31,
---------------------------
2003 2002 2001
------- ------- -------
Average investment in impaired loans $ 300 $ 346 $ 528
======= ======= =======
Interest income recognized on impaired loans $ 51 $ 69 $ 112
======= ======= =======
Interest income recognized on a cash basis on impaired loans $ 51 $ 69 $ 112
======= ======= =======
42
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,
----------------------
2003 2002
-------- --------
(In thousands)
Premises:
Land $ 3,069 $ 3,069
Buildings 13,679 12,021
Leasehold improvements 3,157 5,079
Equipment 23,688 21,431
-------- --------
43,593 41,600
Accumulated depreciation and amortization (22,076) (20,998)
-------- --------
$ 21,517 $ 20,602
======== ========
Depreciation and amortization expense for the years ended December 31,
2003, 2002 and 2001 amounted to $2,901,000, $3,083,000 and $2,700,000,
respectively.
Certain banking premises are leased under non-capitalized operating leases
expiring at various dates through 2013. Annual rental expenses under these
leases were $1,032,000 in 2003, $1,268,000 in 2002 and $1,003,000 in 2001. The
total rental commitments under non-cancelable leases for future years aggregate
$4,205,000, excluding amounts payable under Consumer Price Index escalator
provisions in certain leases which become effective in 2004 and later years.
Annual commitments are $683,000 in 2004, $651,000 in 2005, $572,000 in 2006,
$538,000 in 2007, $397,000 in 2008, and a total of $1,364,000 for the years 2009
through 2013. 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 $1,602,000 in 2003, $1,708,000 in 2002 and
$1,352,000 in 2001. Also in 2003, 2002 and 2001, bonuses were accrued under the
provisions of the Company's Profit Incentive Plan totaling $863,000, $1,205,000
and $2,098,000, respectively, and paid in the year following.
Employee Stock Ownership Plan
At December 31, 2003 and 2002, the Company's Employee Stock Ownership Plan
("ESOP") held 31,676 shares and 34,773 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 2003, 2002 or 2001.
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.
43
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table sets forth the plan's funded status reconciled with
the amount included in the Company's balance sheet:
December 31,
-----------------
2003 2002
------- -------
(In thousands)
Accumulated post-retirement benefit obligation:
Retirees $ 842 $ 1,142
Fully eligible active plan participants 1,397 1,193
Other plan participants 2,629 2,164
------- -------
$ 4,868 $ 4,499
======= =======
Years Ended December 31,
-----------------------------
2003 2002 2001
------- ------- -------
(In thousands)
Plan assets at fair value $ -- $ -- $ --
------- ------- -------
Accumulated post-retirement benefit obligation at
beginning of year 4,499 3,652 3,633
Service cost 262 209 222
Interest cost 250 250 268
Actuarial (gain) loss (31) 525 (352)
Benefit payments (112) (137) (119)
------- ------- -------
Accumulated post-retirement benefit obligation
at end of year 4,868 4,499 3,652
------- ------- -------
Accumulated post-retirement benefit obligation
in excess of plan assets 4,868 4,499 3,652
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions 421 306 860
Unrecognized net obligation at transition (989) (1,099) (1,208)
------- ------- -------
Unfunded accrued post-retirement benefit expense $ 4,300 $ 3,706 $ 3,304
======= ======= =======
The following table sets forth the discount rate used to determine benefit
obligations:
December 31,
-----------------
2003 2002
------- -------
Discount rate 6.00% 6.50%
44
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Net periodic post-retirement benefit expense included the following
components:
Years Ended December 31,
-----------------------------
2003 2002 2001
------- ------- -------
(In thousands)
Service cost - benefits attributed to service during the year $ 262 $ 209 $ 222
Interest cost on accumulated post-retirement benefit obligation 250 250 268
Amortization of transition obligation over 20 years 110 110 110
Amortization of gain (421) (306) (516)
Asset gain deferred 393 277 508
------- ------- -------
Net periodic post-retirement benefit cost $ 594 $ 540 $ 592
======= ======= =======
The following table sets forth the discount rate used to determine net
periodic benefit cost:
Years Ended December 31,
-----------------------------
2003 2002 2001
------- ------- -------
Discount rate 6.50% 7.00% 7.50%
The following table sets forth the assumed health care cost trend rates:
December 31,
-----------------
2003 2002
------- -------
Health care cost trend rate assumed for next year 11.00% 9.00%
Rate to which the cost trend is assumed to decline
(the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2013 2010
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The following table sets forth the
effect on the amounts reported for the health care plan with a
one-percentage-point change in assumed health care cost trends:
December 31, 2003
-------------------------------
One Percentage One Percentage
Point Increase Point Decrease
-------------- --------------
(In thousands)
Effect on total service and interest cost $ 21 $ (121)
Effect on post-retirement benefit obligation 130 (783)
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.
45
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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,
-----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 360,125 $ 22.40 300,625 $ 20.95 159,500 $ 17.22
Granted 32,000 22.82 83,000 26.27 157,000 24.24
Exercised (16,500) 18.00 (17,875) 16.93 (12,375) 14.60
Forfeited (11,250) 22.82 (5,625) 19.16 (3,500) 20.94
-------- -------- --------
Outstanding, end of year 364,375 $ 22.64 360,125 $ 22.40 300,625 $ 20.95
======== ======== ========
Exercisable, end of year 183,125 $ 21.10 122,000 $ 19.65 69,625 $ 17.23
======== ======== ========
The following table summarizes information about stock options outstanding
at December 31, 2003:
Remaining
Years in
Exercise Number Contractual Number
Price Outstanding Life Exercisable
-------- ----------- ----------- -----------
$13.38 10,000 3.35 10,000
$20.75 16,000 4.12 16,000
$19.25 3,000 4.87 3,000
$17.38 7,750 5.04 7,750
$16.38 6,000 5.84 6,000
$15.06 13,500 5.92 13,500
$18.00 48,375 6.93 34,250
$22.44 34,000 7.68 16,500
$24.80 110,750 7.93 55,375
$26.21 32,000 8.32 8,000
$26.30 51,000 8.95 12,750
$22.82 32,000 9.31 --
-------- --------
364,375 183,125
======== ========
46
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,
---------------------------------------
2003 2002 2001
------ ------ ------
(In thousands, except per share amounts)
Weighted average volatility 28.01% 28.80% 28.82%
Weighted average dividend 3.16% 3.08% 3.11%
Weighted average risk-free rate 2.92% 3.60% 4.48%
Weighted average fair value per share
of options granted during the year $ 4.70 $ 5.90 $ 5.77
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, 2003. 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,
-------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Price at Price at Price at
Shares Issuance Shares Issuance Shares Issuance
-------- -------- -------- -------- -------- --------
Outstanding, beginning of year 19,600 $20.11 20,900 $20.03 14,700 $17.82
Granted -- -- -- -- 6,900 24.52
Forfeited -- -- (1,300) $18.82 (700) 18.13
Exercised (200) $17.81 -- -- -- --
-------- -------- --------
Outstanding, end of year 19,400 $20.13 19,600 $20.11 20,900 $20.03
======== ======== ========
The following table summarizes information about stock appreciation rights
outstanding at December 31, 2003:
Remaining
Years in
Price at Number Contractual
Issuance Outstanding Life
-------- ----------- -----------
$19.25 2,900 4.86
$16.38 3,700 5.84
$18.00 6,100 6.93
$24.52 6,700 7.97
--------
19,400
========
47
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(7) DEPOSITS AND BORROWED FUNDS
The following summarizes deposits and borrowed funds outstanding:
December 31,
-----------------------
2003 2002
---------- ----------
(In thousands)
Deposits:
Demand $ 251,313 $ 229,033
NOW 184,841 171,084
Money market 302,962 294,295
Other savings 97,136 88,503
Certificates of deposit greater than $100,000 56,459 37,344
Certificates of deposit $100,000 or less 112,390 121,961
---------- ----------
Total deposits $1,005,101 $ 942,220
========== ==========
Maturities of time certificates of deposit as of December 31, 2003 are
$92,558,000 in 2004, $31,370,000 in 2005, $6,957,000 in 2006, $37,239,000 in
2007, and $725,000 in 2008.
The total amount of deposits from related parties at December 31, 2003 and
2002 was $21,202,000 and $19,365,000, respectively.
December 31,
-----------------------
2003 2002
---------- ----------
(In thousands)
Borrowed funds:
Federal Home Loan Bank (long- and short-term) $ 179,927 $ 371,450
Other short-term borrowings 23,088 21,391
Subordinated debt 5,000 5,000
---------- ----------
Total borrowed funds $ 208,015 $ 397,841
========== ==========
The contractual maturities of borrowings from the Federal Home Loan Bank
of Boston ("FHLBB") as of December 31, 2003, are $46,445,000 in 2004,
$16,522,000 in 2005, $44,982,000 in 2006, $27,122,000 in 2007, $30,350,000 in
2008, and $14,506,000 in years thereafter. These borrowings bear fixed interest
rates between 1.27% and 7.35% with a weighted average interest rate of 4.44%.
The Company also has an IDEAL Way Line of Credit with the FHLBB. The unused
balance at December 31, 2003 and 2002 was $5,000,000. These borrowings are
collateralized by the Company's residential mortgage loans and securities. In
addition, the Company established lines of credit of $7,000,000 and $2,500,000
for the purchase of federal funds from SunTrust Bank and Fleetbank,
respectively. The Company may also borrow from the Federal Reserve Bank if
necessary.
Other short-term borrowings at December 31, 2003 and 2002 consisted of a
demand note payable to the U.S. Treasury of $1,944,000 and $3,652,000,
respectively, and securities sold subject to agreements to repurchase of
$21,144,000 and $17,739,000, respectively, which mature overnight. The weighted
average interest rate on these borrowings was .55% and .62% as of December 31,
2003 and 2002, respectively. These borrowings are collateralized by the pledge
of securities. (See Note 2.)
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.
48
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, 2003 and 2002, 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, 2003 and 2002,
the net risk-weighted assets of the Company were $961,575,000 and $997,685,000,
while the net risk-weighted assets of the Bank were $961,550,000 and
$997,348,000.
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, 2003 and 2002,
respectively, $12,028,000 and $12,384,000 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.
49
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company's and the Bank's actual and required capital amounts and
ratios as of December 31, 2003 and 2002 are presented in the following table.
Prompt corrective action provisions are not applicable to bank holding
companies.
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, 2003:
Total capital to risk weighted assets:
Consolidated $ 127,040 13.2% $ 76,926 8.0% N/A N/A
Bank 126,035 13.1 76,924 8.0 $ 96,155 10.0%
Tier 1 capital to risk weighted assets:
Consolidated 115,012 12.0 38,463 4.0 N/A N/A
Bank 114,007 11.9 38,462 4.0 57,693 6.0
Tier 1 capital to average assets:
Consolidated 115,012 8.7 52,943 4.0 N/A N/A
Bank 114,007 8.6 52,942 4.0 66,177 5.0
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
During the quarter ended March 31, 2003, the Company's Board of Directors
authorized the repurchase of up to 200,000 shares of the Company's stock in the
open market. Consistent with that authorization, the Company repurchased 187,100
shares during 2003, at an average cost of $23.03 per share.
(9) CORE DEPOSIT INTANGIBLE
The core deposit intangible arising from the acquisition of two branch
banking offices in 2000, amounting to $8,572,000, is being amortized over 7
years on a straight-line basis.
The accumulated amortization of the core deposit intangible is $4,287,000,
$3,062,000 and $1,837,000 at December 31, 2003, 2002 and 2001, respectively. The
related amortization expense amounted to $1,225,000 for each of the years ended
December 31, 2003, 2002 and 2001. Estimated amortization expense for years 2004
through 2006 is $1,225,000 per year and $611,000 for 2007.
50
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(10) Income Taxes
The provision for income taxes consisted of the following:
Years Ended December 31,
------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Current federal provision $ 3,711 $ 7,713 $ 10,351
Current state provision 4,851 139 641
-------- -------- --------
Total current 8,562 7,852 10,992
-------- -------- --------
Deferred federal benefit (467) (127) (294)
Deferred state benefit (156) (42) (76)
-------- -------- --------
Total deferred (623) (169) (370)
-------- -------- --------
Total provision $ 7,939 $ 7,683 $ 10,622
======== ======== ========
The following reconciles the provision for income taxes with the statutory
federal income tax amounts at a rate of 35%:
Years Ended December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Tax at statutory rate $ 5,011 $ 7,743 $ 10,530
Reduction due to tax-exempt income (153) (165) (315)
State taxes, net of federal tax benefit 3,051 63 367
Other, net 30 42 40
-------- -------- --------
Total provision $ 7,939 $ 7,683 $ 10,622
======== ======== ========
The deferred income tax benefit results from the recognition of income or
expense items in different periods for income tax purposes than for financial
reporting purposes. Accordingly, the net deferred tax asset consisted of the
following:
December 31,
--------------------
2003 2002
-------- --------
(In thousands)
Future bad debt deductions $ 5,317 $ 5,180
Unfunded accrued benefits 1,996 1,761
Write-down of securities 997 418
Unrealized loss on securities available for sale 618 759
Other 121 120
-------- --------
Gross deferred tax assets 9,049 8,238
-------- --------
Gain on sale of credit card merchant portfolio 743 703
Mortgage servicing rights 1,162 873
Other 1,090 1,090
-------- --------
Gross deferred tax liabilities 2,995 2,666
-------- --------
Net deferred tax asset $ 6,054 $ 5,572
======== ========
51
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
REIT tax assessment --On June 23, 2003, the Bank reached a settlement
agreement with the Massachusetts Department of Revenue ("DOR") with respect to a
tax assessment resulting from the DOR's disallowance of the Bank's deduction for
state tax purposes of certain dividend distributions received by the Bank from
its real estate investment trust ("REIT"). The Bank recorded net charges during
the year of $2,317,000 representing settlement with the DOR, net of federal tax
benefits.
(11) 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,
--------------------
2003 2002
-------- --------
(In thousands)
Standby letters of credit $ 962 $ 1,250
Commitments to extend credit at fixed rates 8,354 22,800
Other commitments to extend credit 216,592 214,250
-------- --------
Total commitments $225,908 $238,300
======== ========
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.
The Company uses various derivative instruments for mortgage banking
activities. These transactions involve both credit and market risk. Forward
commitments to sell loans require the Company to make delivery at a specific
future date of a specified amount, at a specified price or yield. At December
31, 2003, such commitments amounted to $4,438,000. Rate lock agreements with
individual borrowers require the Company to originate a loan at a specific
interest rate upon completion of various underwriting requirements. At December
31, 2003 and 2002, the Bank had $2,375,000 and $11,636,000, respectively, in
outstanding rate lock agreements on mortgage loans that are intended to be sold.
The fair value adjustsments for these derivative instruments is not material.
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.
52
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(12) 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,
-------------------------------------------------
2003 2002
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
Financial assets:
Cash and cash equivalents $ 63,724 $ 63,724 $ 60,798 $ 60,798
Securities 438,497 438,400 535,575 535,575
Net loans and loans held for sale 788,204 800,856 826,350 842,125
Accrued interest receivable 4,479 4,479 5,982 5,982
Financial liabilities:
Deposits 1,005,101 1,010,842 942,220 948,325
Federal Home Loan Bank borrowings 179,927 187,537 371,450 383,409
Other short-term borrowings 23,088 23,088 21,391 21,391
Subordinated debt 5,000 5,008 5,000 5,004
Accrued interest payable 1,086 1,086 1,501 1,501
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 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.
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.
53
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(13) 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, 2003:
Basic earnings per share $ 6,377 8,463 $ 0.75
Effect of dilutive stock options -- 25 --
-------- --------- --------
Diluted earnings per share $ 6,377 8,488 $ 0.75
======== ========= ========
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
======== ========= ========
For the years ended December 31, 2003 and 2002, options applicable to
83,000 and 24,000 shares, respectively, were anti-dilutive and excluded from the
diluted earnings per share calculation.
54
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(14) 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, 2003
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share amounts)
Interest income $ 16,052 $ 15,012 $ 13,951 $ 14,197
Interest expense 5,237 4,427 4,055 4,079
--------- --------- --------- ---------
Net interest income 10,815 10,585 9,896 10,118
Losses on securities, net -- (1,692) -- --
Other non-interest income 6,685 5,833 5,793 4,862
Non-interest expense 12,203 11,256 11,865 13,207
Minority interest 18 29 35 (34)
--------- --------- --------- ---------
Income before income taxes 5,279 3,441 3,789 1,807
Provision (benefit) for income taxes 6,760 (967) 1,514 632
--------- --------- --------- ---------
Net income (loss) $ (1,481) $ 4,408 $ 2,275 $ 1,175
========= ========= ========= =========
Average shares outstanding - basic 8,563 8,451 8,420 8,420
Average shares outstanding - diluted 8,584 8,469 8,449 8,463
Net income (loss) per share - basic $ (0.17) $ 0.52 $ 0.27 $ 0.14
Net income (loss) per share - diluted $ (0.17) $ 0.52 $ 0.27 $ 0.14
Cash dividends declared per share $ 0.19 $ 0.19 $ 0.19 $ 0.19
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
The fluctuations in the provision (benefit) for income taxes in the first
and second quarters of 2003 are related to the accrual of the entire DOR
assessment related to the REIT (see Note 10) in the first quarter and reversal
of 50% of this accrual in the second quarter upon settlement with the DOR.
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.
55
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(15) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for CCBT Financial Companies, Inc. is as
follows:
BALANCE SHEET
December 31,
---------------------
2003 2002
--------- ---------
(In thousands)
ASSETS
Cash in subsidiary $ 526 $ 437
Securities 25 25
Investments in subsidiaries 118,488 122,732
Other assets 634 455
--------- ---------
Total assets $ 119,673 $ 123,649
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debt $ 5,155 $ 5,155
Other liabilities 41 47
--------- ---------
Total liabilities 5,196 5,202
Stockholders' equity 114,477 118,447
--------- ---------
Total liabilities and stockholders' equity $ 119,673 $ 123,649
========= =========
STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Interest income $ -- $ 3 $ 83
Interest expense 254 285 148
-------- -------- --------
Net interest expense (254) (282) (65)
Gain on sale of securities -- -- 298
Non-interest expense (166) (132) (196)
-------- -------- --------
Income (loss) before taxes, dividends and
undistributed income from subsidiaries (420) (414) 37
Provision (benefit) for income taxes (143) (141) 13
Dividends from subsidiaries 11,008 6,416 2,100
Undistributed income (loss) from subsidiaries (4,354) 8,297 17,340
-------- -------- --------
Net income $ 6,377 $ 14,440 $ 19,464
======== ======== ========
56
CCBT FINANCIAL COMPANIES, INC.
NOTES TO FINANCIAL STATEMENTS (Concluded)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 6,377 $ 14,440 $ 19,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of securities -- -- (298)
Undistributed (income) loss from subsidiaries 4,354 (8,297) (17,340)
Other, net (184) (165) (82)
-------- -------- --------
Net cash provided by operating activities 10,547 5,978 1,744
-------- -------- --------
Cash flows from investing activities:
Purchase of securities -- -- (15)
Sales, maturities and repayments of securities -- -- 2,765
Investment in subsidiaries -- -- (1,966)
-------- -------- --------
Net cash provided by investing activities -- -- 784
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of subordinated debt -- -- 5,155
Proceeds from issuance of common stock 297 303 181
Purchase of treasury stock (4,308) (1,217) --
Cash dividends paid on common stock (6,447) (6,555) (6,204)
-------- -------- --------
Net cash used by financing activities (10,458) (7,469) (868)
-------- -------- --------
Net change in cash and cash equivalents 89 (1,491) 1,660
Cash and cash equivalents at beginning of year 437 1,928 268
-------- -------- --------
Cash and cash equivalents at end of year $ 526 $ 437 $ 1,928
======== ======== ========
57
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial disclosure.
[None.]
Item 9A. 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 required by
Exchange Act Rule 13a-15 as of December 31, 2003, determined 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.
58
PART III
Item 10. Directors and Executive Officers of the Registrant.
OFFICERS
All officers of the Company and Bank were elected to their positions on
April 24, 2003 to serve until their successors are duly elected.
Date Appointed
Age at Title and Area of to Present Date of
Officer 12/31/03 Responsibility Position Employment
- --------------------------------------------------------------------------------------------------------------------
Stephen B. Lawson 62 President, Chief Executive Officer and Director 10/08/98 12/06/65
Robert T. Boon 49 Executive Vice President 01/04/01 04/01/85
John S. Burnett 57 Clerk 10/08/98 09/07/71
Nancy S. Hardaway 51 Executive Vice President 10/20/02 06/30/00
Robert R. Prall 60 Executive Vice President 01/04/01 06/01/93
Larry K. Squire 56 Executive Vice President 01/04/01 05/17/71
Phillip W. Wong 53 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 Senior Vice President, 6/30/00 (Bank)
Executive Vice President, Marketing, 10/20/02 (Bank)
Director of Marketing & Sales, 3/01/99 (the Pinehills)
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.)
59
DIRECTORS
The following table sets forth, as of December 31, 2003, information supplied by
each person who is currently a Director of the Company with respect to such
person's age, principal occupation for the past five years and the year in which
the person began serving as a Director of the Company (or the Bank, prior to the
reorganization into the holding company structure).
DIRECTORS WHOSE TERMS WILL EXPIRE IN 2004
NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION
- ---- --- -------------- --------------------
John F. Aylmer 70 1982 Maritime consultant; attorney at law;
Executive Director, Build America
Committee (advocacy for U. S.
shipbuilding); former state senator;
former president, Massachusetts
Maritime Academy.
John Otis Drew 54 1982 Chairman, Board of Directors of the
Bank since 1994 and of the Company
since 1998; Principal/President, John
A. Drew, Realtor (Hyannis, MA); Vice
President, A. D. Makepeace Co.;
President, Parker Mills, Inc., Real
Estate Holding Company; President,
Sassamon Holdings, Inc.; President,
Wankinco River, Inc.; President,
Tihonet Land & Development Company,
Inc.
DIRECTORS WHOSE TERMS WILL EXPIRE IN 2005
NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION
- ---- --- -------------- --------------------
George D. Denmark 69 1974 Retired; former President, Denmark,
Inc., New Bedford, MA (Medical
equipment firm).
Daniel A. Wolf 46 2001 President and Director, Hyannis Air
Service, Inc., d/b/a Cape
Air/Nantucket Airlines; President and
Director, Hyannis Air Leasing, Inc.;
Director of the Bank since 1999.
60
DIRECTORS WHOSE TERMS WILL EXPIRE IN 2006
NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION
- ---- --- -------------- --------------------
William R. Enlow 56 2000 Partner, law firm of Sorling,
Northrup, Hanna, Cullen and Cochran,
Ltd. (1988 - Present); Former
Director Firstbank Illinois Corp,
Marine Corporation (multi-bank
holding companies); Director,
Memorial Health System and Memorial
Medical Center (Springfield,
Illinois); Board Member Springfield
School District 186.
Stephen B. Lawson 62 1992 President, Chief Executive Officer of
the Bank since 1992. President, Chief
Executive Officer of the Company
since 1998.
Audit Committee Financial Expert
The Company does not have a financial expert serving on the audit committee of
the Board of Directors. Although the Company has been searching for a director
candidate who would qualify as a financial expert, the Company has suspended
this search due to the impending merger with Banknorth.
Code of Ethics
The Company has adopted a code of ethics applicable to its CEO and its principal
accounting and financial officer and is available, free of charge, by contacting
the Company's Human Resource department at 508-394-1300.
Section 16a Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and Regulations
of the Securities and Exchange Commission (the "SEC"), the Company's executive
officers and directors must file reports of ownership and changes in ownership
with the SEC and the Nasdaq Stock Market, Inc. and furnish the Company with
copies of all Section 16(a) reports they file. To the Company's knowledge, based
solely on review of the copies of such reports furnished to the Company, no
executive officer or director of the Company failed to timely file any such
reports.
Item 11. Executive Compensation.
Executive officers of the Company currently receive no compensation in their
capacities as executive officers of the Company but are compensated as employees
of the Bank.
I. Summary Compensation Table
The following table sets forth information concerning the compensation for
services rendered in all capacities during the three fiscal years through 2003
earned by the President and Chief Executive Officer, and the four other most
highly compensated executive officers of the Bank whose total compensation
exceeded $100,000. Mr. Lawson is also President and Chief Executive Officer of
the Company.
61
Long Term
Compensation
Annual Compensation Awards
--------------------------------------- ------------
Other Securities
Compen- Underlying
Name and Principal Position Year Salary ($) Bonus ($) sation ($) (1) Options (#)
- --------------------------- ---- ---------- --------- ------------- ------------
Stephen B. Lawson 2003 $353,600 $17,680 $22,730 -0-
President/ 2002 353,600 35,360 22,775 10,000
Chief Executive Officer 2001 340,000 64,600 19,181 12,500
Robert T. Boon 2003 154,704 12,648 22,661 -0-
Executive Vice President 2002 147,000 33,160 22,775 5,000
Personal Financial Services 2001 140,010 49,004 19,181 11,000
Nancy S. Hardaway (2) 2003 139,100 7,890 17,306 -0-
Executive Vice President 2002 111,955 27,345 17,171 5,000
Marketing
Robert R. Prall 2003 148,066 14,953 19,184 -0-
Executive Vice President 2002 146,600 23,110 22,776 5,000
Business Financial Services 2001 141,539 49,349 19,181 8,000
Phillip W. Wong (3) 2003 185,000 44,240 -0- -0-
Executive Vice President and 2002 28,522 28,875 -0- 5,000
Cashier
Chief Financial Officer
(1) The Bank maintains a Profit Sharing Retirement Plan covering
substantially all employees following two years of service.
Each year, the Bank contributes an amount equal to 8% of each
participant's base compensation plus an amount equal to 4.3%
of base compensation over one-half the social security wage
base.
(2) Ms. Hardaway was appointed to this position October 24, 2002.
(3) Mr. Wong was appointed to this position November 4, 2002. His
bonus for 2003 includes $25,740 representing 1,000 shares of
Company common stock received November 14, 2003, at a market
price of $25.74. His bonus for 2002 includes $25,875
representing 1,000 shares of Company common stock received
November 7, 2002, at market price of $25.875.
Executive Officers also receive group insurance benefits available
generally to all employees and other personal benefits not in excess of 10% of
cash compensation.
II. Stock Options Granted in Fiscal 2003
No stock options were granted during 2003 to Executive Officers.
III. Option Exercises and Year-End Value Table
The following table sets forth information concerning the number of
options exercised during 2003 by each executive officer of the Company and/or
the Bank listed below, the number of exercisable options and unexercisable
options they held at December 31, 2003, and the value of unexercised
in-the-money options they held as of such date.
On December 8, 2003, the Company entered into an Agreement and Plan of
Merger ("Agreement") with Banknorth Group, Inc., subject to regulatory approval
and approval by the Company's shareholders at a Special Meeting. If the
Agreement is approved and the Merger consummated, all of the unexercisable
options in the table below will become exercisable as of the effective date of
the Merger.
62
Number of Shares Underlying Value of Unexercised In
Shares Unexercised Stock Options the Money Stock Options as
Acquired on Value as of year-end of year-end(1)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------------------------------------------------------------------------------------------------
Stephen B. Lawson -0- -0- 34,375/15,625 $547,219/$160,094
Robert T. Boon 3,250 21,671(2) 11,250/10,500 $139,928/$109,450
Nancy S. Hardaway -0- -0- 7,000/8,000 $84,475/$80,675
Robert R. Prall -0- -0- 21,250/8,750 $340,175/$89,988
Larry K. Squire -0- -0- 16,625/6,875 $248,469/$73,769
Phillip W. Wong -0- -0- 1,250/3,750 $10,813/$32,438
(1) Based on closing price of $34.95 per share on December 31, 2003.
(2) Cashless exercise of 2,500 options at strike price of $18.00 and 750
options at strike price of $15.0625, and market prices of $23.981
(1,500 shares) and $23.998 (1,750 shares) per share, February 4,
2003.
Change of Control Agreements
In connection with the formation of the holding company structure, the
Bank and the Company entered into amended and restated Change in Control
Agreements with Messrs. Lawson and Squire (each, a "Key Executive"), effective
February 11, 1999, to include the Company as a party to such agreements and to
amend the definition of change in control to conform to the definitions included
in the Federal Securities Laws. On June 15, 2000, and April 1, 2001, November
22, 2002, and May 22, 2003, the bank entered into similar agreements with Robert
R. Prall, Robert T. Boon, Phillip W. Wong, and Nancy S. Hardaway (also "Key
Executives"), respectively.
Under the terms of the amended and restated Change in Control Agreements,
each Key Executive is entitled to receive his base salary (offset by any
compensation from a new employer) for a certain period of time if, after a
change of control of the Company or the Bank has occurred, the Key Executive's
employment is terminated other than for cause (as defined in the Change in
Control Agreement), or the Key Executive terminates his employment following:
(i) his demotion; (ii) a reduction in base salary; (iii) exclusion from any
incentive program for which the Key Executive was previously eligible or in
which other executives with comparable duties participate; or (iv) a change in
location of the Key Executive's principal place of employment by more than 50
miles. In general, a Change in Control under the agreements occurs (i) upon a
Change in Control of either the Company or the Bank as defined under the
Securities Exchange Act of 1934 or (ii) under the Change in Bank Control Act;
(iii) if any person becomes the direct or indirect beneficial owner of 50% or
more of any class of securities of the Company; (iv) individuals who constitute
the Board of Directors of the Company on February 11, 1999, (June 15, 2000, in
Mr. Prall's agreement; April 1, 2001, in Mr. Boon's agreement; November 22,
2002, in Mr. Wong's agreement; May 23, 2003, in Ms. Hardaway's agreement) cease
to constitute the majority thereof (with certain exceptions); (v) a merger or
the sale of substantially all the assets of the Company, in which the Company is
not the resulting entity; or (vi) a proxy contest by a stockholder to force a
transaction in which the stock of the Company is exchanged for or converted into
cash, property or securities not issued by the Company. The benefits under the
Change in Control Agreements continue for a period of 24 months for Ms. Hardaway
and Messrs. Boon, Prall, Squire, and Wong, and 36 months for Mr. Lawson. The
benefits under these agreements only become payable following termination after
a Change in Control (as defined in the agreements); the Change in Control
Agreements do not serve as employment agreements.
Board of Directors Compensation
The Board of Directors of the Company held 13 meetings during fiscal year
2003, in addition to meetings conducted as the Company's Audit Committee. The
Board of Directors of the Bank held 13 meetings during fiscal year 2003.
Compensation for Directors of the Company is $10,000 per quarter, with Mr. Drew,
as Chairman, receiving an additional $2,500 per quarter. Directors of the Bank
who are not Directors of the Company receive $7,000 per quarter. Neither the
Company nor the Bank pays a separate fee to its Directors for service on
Committees. All of the Directors of the Company attended at least 75% of the
aggregate of scheduled meetings of the Company's Board of Directors, meetings of
the Bank's Board of Directors, and the meetings of the committees of which they
are members.
63
At their 2001 Annual Meeting, shareholders approved the 2001 Directors'
Option Plan. Under the plan, 220,000 shares of the common stock of the Company
are available for options grants. On April 26, 2001, options to purchase 5,000
shares of common stock of the Company were awarded to each continuing or
newly-elected director of the Company who was not employed by the Company or by
the Bank (Messrs. Aylmer, Denmark, Drew, Enlow, and Wolf), and options to
purchase 2,500 shares of common stock of the Company were awarded to each
continuing or newly elected director of the Bank who was not also a director of
the Company.
On the date of each Annual Meeting beginning in 2002, options to purchase
4,000 and options to purchase 2,000 shares of the common stock of the Company
were and will be automatically awarded to each continuing or newly elected
non-employee director of the Company and the Bank, respectively.
64
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
OWNERSHIP BY MANAGEMENT AND OTHER STOCKHOLDERS
The following table sets forth certain information with respect to the number of
shares of the Company's common stock beneficially owned as of February 20, 2004,
by beneficial owners of more than 5% of the common stock, and by the Directors
and the Executive Officers of the Company.
Principal Shareholders Amount and Nature of Beneficial Ownership
Number of Shares Owned
------------------------------------------
Percent of
Sole voting Shared CCBT
and voting and Common
investment investment Stock
Beneficial Owner power (1) power (2) Total Outstanding
- ---------------- ------------ ------------ ----------- -----------
Beneficial owner of more than 5%:
Trustees of the
Abel D. Makepeace Trust
Box 151
Wareham, MA 02571
Zelinda M. Douhan 6,800 548,720(3) 555,520(3) 6.51%
Christopher Makepeace 47,900 727,220(3) 775,120(3) 9.09%
Thomas Otis, Jr. (4) 207,884 548,720(3) 756,604(3) 8.87%
Directors and Executive Officers:
John F. Aylmer 8,382 900 9,282 0.11%
Robert T. Boon 11,450 738 12,188 0.14%
George D. Denmark 17,457 0 17,457 0.20%
John Otis Drew (5) 7,500 3,499 10,999 0.13%
William R. Enlow 5,643 200 5,843 0.07%
Nancy S. Hardaway 7,000 0 7,000 0.08%
Stephen B. Lawson 38,375 18,461 56,836 0.67%
Robert R. Prall 24,290 160 24,450 0.29%
Larry K. Squire 18,476 891 19,367 0.23%
Daniel A. Wolf 4,912 0 4,912 0.06%
Phillip W. Wong 5,250 0 5,250 0.06%
All directors and executive officers 148,735 24,849 173,584 2.03%
as a group (11 persons)
- ----------
(1) Includes shares of CCBT common stock subject to stock options exercisable
as of February 20, 2004, or which will become exercisable within 60 days
after that date, as follows: Mr. Aylmer, 3,500 shares; Mr. Boon, 11,250
shares; Mr. Denmark, 2,500 shares; Mr. Drew, 3,500 shares; Mr. Enlow 3,500
shares; Ms. Hardaway, 7,000 shares; Mr. Lawson, 34,375 shares; Mr. Prall,
21,250; Mr. Squire, 16,625 shares; Mr. Wolf, 3,500 shares; Mr. Wong, 1,250
shares; and all directors and executive officers as a group, 108,250
shares
(2) Where applicable, includes shares owned by spouses, minor children, other
relatives living in an owner's home or in estates or trusts in which they
may be deemed to have beneficial ownership but for which they disclaim
such beneficial ownership. Also includes interests in shares of CCBT
common stock held in the ESOP, as follows: Mr. Boon, 738 shares; Mr.
Lawson, 1,261 shares; Mr. Prall, 160 shares; and Mr. Squire, 891 shares.
(3) Includes a total of 548,720 shares held in the Abel D. Makepeace Trust,
voting authority for which is shared by Ms. Douhan and Messrs. Makepeace
and Otis.
(4) Mr. Otis is the uncle of Mr. Drew, a director.
(5) Mr. Drew is a beneficiary of the Abel D. Makepeace Trust but disclaims any
voting or investment power over shares of CCBT common stock held by the
trust.
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Item 13. Certain Relationships and Related Transactions.
Certain Directors and Officers of the Company and the Bank and members of
their immediate family are at present, as in the past, customers of the Bank and
have transactions with the Bank in the ordinary course of business. In addition,
certain of the Directors are at present, as in the past, also directors,
officers or stockholders of corporations or members of partnerships that are
customers of the Bank and have transactions with the Bank in the ordinary course
of business. Such transactions for the Directors and Officers of the Company and
the Bank and their families and with such corporations and partnerships were
made in the ordinary course of business, were made on substantially the same
terms, including interest rates and collateral on loans, as those prevailing at
the time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other features unfavorable to
the Bank.
Item 14. Principal Accountant Fees and Services.
The firm of Wolf & Company, P.C. served as the Company's independent public
accountants for the year ended December 31, 2003.
Audit Fees. The aggregate fees billed or to be billed by Wolf & Company, P.C.,
for professional services rendered for the audit of the Company's annual
financial statements for 2003 and 2002 and reviews of the financial statements
included in the Company's Forms 10-Q for 2003 and 2002 are approximately
$147,000 and $130,000, respectively.
Audit Related Fees. Wolf & Company, P.C. did not bill any audit related fees for
2003 and 2002.
Tax Fees. In 2003, Wolf & Company, P.C., billed or will bill approximately
$25,000 in fees related to tax compliance, tax advice and tax planning related
to 2003 and billed $15,000 for miscellaneous tax matters related to 2002.
All Other Fees: In 2002, Wolf & Company, P.C., billed approximately $8,000 for
internal audit assistance related to 2002.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee must pre-approve any non-audit related engagements performed
by its principal accountant/external auditor. The Audit Committee's
review/approval is for the express purpose of determining that any additional
non-audit services rendered by its principal accountant/external auditor is
compatible with their ability to maintain their independence. None of the fees
in the above four categories for 2003 relate to services performed under the de
minimis exception.
No hours were expended by other than full-time, permanent employees of Wolf &
Company on the audit of CCBT's financial statements for the 2003 fiscal year.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) See "Financial Statements Index" on page 28 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.
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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)
2.2 Agreement and Plan of Merger, dated as of December 8, 2003, between
Banknorth Group, Inc. and the Company (Incorporated by reference to
Exhibit 2.1 of the Form 8-K, dated as of December 8, 2003, filed by
Banknorth Group, Inc.).
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)
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)
10.9 Change in Control Agreement with Nancy S. Hardaway. (Incorporated by
reference to Exhibit 10.1 to the Company's report on Form 10-Q for
the quarter ended June 30, 2003 that was filed with the SEC on
August 13, 2003)
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10.10 Change in Control Agreement with Phillip W. Wong. (Incorporated by
reference to Exhibit 10.2 to the Company's report on Form 10-Q for
the quarter ended June 30, 2003 that was filed with the SEC on
August 13, 2003)
10.11 Form of Shareholder Agreement between certain shareholders of CCBT
and Banknorth (Incorporated by reference to Annex A to Exhibit 2.1
of the Form 8-K, dated as of December 8, 2003, filed by Banknorth
Group, Inc.).
10.12 Form of Consulting Agreement between Banknorth and John Otis Drew
(Incorporated by reference to Annex B to Exhibit 2.1 of the Form
8-K, dated as of December 8, 2003, filed by Banknorth Group, Inc.).
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 eight subsidiaries: Cape Dune Holdings Corp. and CCBT
Securities Corp., both of which are securities corporations; CCB&T
Brokerage Direct, Inc., an investment broker/dealer; 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 Consent of Wolf & Company, P.C. (Filed herewith)
31.1 Certification of President of CCBT Financial Companies, Inc.,
pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
31.2 Certification of Chief Financial Officer of CCBT Financial
Companies, Inc., pursuant to rules 13(a)-15(e) and 5d-15(e), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(Filed herewith)
32.1 Certification of President of CCBT Financial Companies, Inc.,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
32.2 Certification of Chief Financial Officer of CCBT Financial
Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith)
(b) Reports on Form 8-K:
(1) The Company filed a report on Form 8-K on April 17, 2003 to file
its press release, dated April 17, 2003, regarding first quarter 2003
earnings.
(2) The Company filed a report on Form 8-K on June 24, 2003 to file
a press release, dated June 23, 2003, announcing that the Company had
entered into a settlement with the Massachusetts Department of Revenue
regarding a disputed tax liability.
(3) The Company filed a report on Form 8-K on July 17, 2003 to file
its press release, dated July 17, 2003, regarding second quarter 2003
earnings.
(4) The Company filed a report on Form 8-K on October 16, 2003 to
file its press release, dated October 16, 2003, regarding third quarter
2003 earnings.
(5) The Company filed a report on Form 8-K on December 15, 2003 to
file its press release, dated December 9, 2003, announcing that the
Company had entered into a merger agreement with Banknorth Group, Inc.
(6) The Company filed a report on Form 8-K on January 29, 2004 to
file its press release, dated January 29, 2004, regarding fourth quarter
2003 earnings.
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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 11, 2004
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 11, 2004
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 11, 2004
69