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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998--Commission File No. 000-25381
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CCBT BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3437708
(State of Incorporation) (I.R.S. Employer Identification No.)
307 Main Street, Hyannis, 02601
Massachusetts (Zip Code)
(Address of principal executive
office)
(Registrant's telephone #, incl. area code): 508-394-1300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Title of class Name of each exchange on which registered
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Common Capital
Stock NASDAQ National Association of Securities Dealers, Inc.
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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. (1) [X] Yes [_] No and
(2) [_] Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the $17.75 price on February 26, 1999, on the Nasdaq
National Market was $155,935,010. 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 December 31, 1998, 9,061,064 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CCBT Bancorp, Inc. Definitive Notice of Annual Meeting and
Proxy Statement for the Annual Meeting of Stockholders to be held on April 22,
1999 are incorporated by reference into Part III of this Form 10-K.
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PART I
Item 1. Business.
CCBT Bancorp, Inc. ("Bancorp" or the "Registrant") was incorporated under
the laws of the Commonwealth of Massachusetts on October 8, 1998 at the
direction of the Board of Directors and management of Cape Cod Bank and Trust
Company (the "Bank") for the purpose of becoming a bank holding company for
the Bank. On February 11, 1999, Bancorp became the holding company for the
Bank by acquiring 100% of the outstanding shares of the Bank's common stock in
a 1:1 exchange for Bancorp common stock (the "Reorganization"). Currently,
Bancorp's business activities are conducted primarily through the Bank. The
main office of Bancorp is located at 307 Main Street, Hyannis, Barnstable
County, Massachusetts.
Cape Cod Bank and Trust Company is the main operating subsidiary of Bancorp
and is a state-chartered commercial bank with trust powers, organized under
the laws of the Commonwealth of Massachusetts. The present 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 Cape Cod Bank and Trust Company is located at 307 Main
Street, Hyannis, Barnstable County, Massachusetts. There are 25 other banking
offices located in Barnstable County, Massachusetts. The Bank is a member of
the Federal Deposit Insurance Corporation but is not a member of the Federal
Reserve System. At December 31, 1998, the Bank employed 339 people on a full-
time basis and another 61 people on a part-time basis.
Cape Cod Bank and Trust Company is the largest commercial bank headquartered
in Barnstable County. The Bank's market area is heavily dependent on the
tourist and vacation business on Cape Cod. It offers a complete range of
commercial banking services for individuals, businesses, non-profit
organizations, governmental units and fiduciaries. During the past five years,
there has been no significant change in the principal markets or the banking
services offered by the Bank. The Bank has not merged with or acquired the
business of any other bank or entity since 1974. 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
purchased some loans on properties outside its market area.
The Bank's principal sources of revenue are loans and investments which
accounted for 81% of the Bank's gross income during 1998. Of the remaining
portion, 2% was received from service charges. The balance was derived from
Trust Department income and other miscellaneous 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. In the latter category, the Bank
does a major business in acting as agent to purchase U.S. Government
securities for its customers. The Bank also owns and maintains 30 automated
teller machines which are connected to the TX, AMEX, CIRRUS, NYCE, EXCHANGE,
and PLUS networks. Trust department services include estate, trust, tax
returns, agency, investment management, discount brokerage, custodial
services, and IRA accounts.
The Bank has no involvement in foreign countries and does not derive any of
its income from foreign sources.
Supervision and Regulation
General. Bancorp 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 "BHC Act"), and files with the Federal
Reserve Board an annual report and such additional reports as the Federal
Reserve Board may require. Bancorp is also subject to the jurisdiction of the
Massachusetts Commissioner of Banks. As a bank holding company, Bancorp's
activities are limited to the business of banking and activities closely
related or incidental to banking. Bancorp may not directly or indirectly
acquire the ownership or control of more than 5 percent of any class of voting
shares or substantially all of the assets of any company that is not engaged
in activities closely related to banking
2
and also generally must provide notice to or obtain approval of the Federal
Reserve Board in connection with any such acquisition.
As a Massachusetts-chartered commercial bank, the Bank is subject to
regulation and examination by the Commissioner of Banks of The Commonwealth of
Massachusetts ("Commissioner"). The Massachusetts 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 state
regulatory provisions covering such matters as issuance of capital stock,
branching, and mergers and acquisitions.
Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures the Bank's
deposit accounts up to $100,000 per depositor. As a state-chartered, FDIC-
insured nonmember bank, the Bank is subject to regulation, examination, and
supervision by the FDIC.
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.
Federal Securities Laws. Upon consummation of the Reorganization, the
reporting obligations of the Bank under the Securities Exchange Act of 1934
("Exchange Act") , as administered by the FDIC, were replaced with
substantially identical obligations of Bancorp under the Exchange Act, as
administered by the Securities and Exchange Commission ("SEC"). In connection
with the Reorganization, the Bank deregistered the Bank's common stock under
the Exchange Act.
Proposed Legislation. 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 Bank or Bancorp. 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 Bank or Bancorp.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers were elected to their positions on October 8, 1998 to serve
until the annual meeting on April 22, 1999 and until their successors are duly
elected.
Age at Title and Area of Date Appointed Date of
Officer 12/31/98 Responsibility to Present Position Employment
------- -------- ----------------------------------------------- ------------------- ----------
Stephen B. Lawson.. 57 President, Chief Executive Officer and Director 10/08/98 12/06/65
John S. Burnett.... 52 Clerk 10/08/98 9/07/71
Noal D. Reid....... 54 Chief Financial Officer and Treasurer 10/08/98 10/16/72
3
Business Experience During The Past Five Years
----------------------------------------------
Stephen B. Lawson.... Executive Vice President, Trust, 12/12/85 (Bank)
President, Chief Executive Officer, 7/01/92 (Bank)
President, CEO and Director, 10/08/98 (Bancorp)
John S. Burnett...... Secretary of the Corporation, 8/31/78 (Bank)
Vice President, 12/11/80 (Bank)
Clerk, 10/08/98 (Bancorp)
Noal D. Reid......... Executive Vice President/Treasurer, 12/12/85 (Bank)
Chief Financial Officer and Treasurer, 9/15/95 (Bank)
Chief Financial Officer and Treasurer, 10/08/98 (Bancorp)
Item 2. Properties.
A. Properties held in fee--Banking Offices of Cape Cod Bank and Trust
Company:
1) 307 Main Street, Hyannis--Main Offices
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) Jones Road, Falmouth--Branch Office
12) 693 Main Street, Chatham--Branch Office
13) Main Street, Wellfleet--Branch Office
None of the above offices is subject to mortgage liens 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 office 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:
The land on which the Hyannis Airport Rotary Office is located is rented
from the Barnstable Municipal Airport as a tenancy at will for $53,067 per
year. The banking office located in Pocasset on the corner of MacArthur
Boulevard and Barlow's Landing Road is leased from Paul J. Mederios for
$25,000 per year plus taxes and other expenses under a lease expiring in 2005.
A banking office at the intersection of Route 28 and Camp Opechee Road,
Centerville is leased for $52,500 in 1999 and an increase of $2,500 per year
plus taxes and other expenses under a lease expiring in 2008 with right to
renew for an additional fifteen year period. The Route 134, South Dennis
branch office is leased from Chamberlain Realty for $44,000 per year until
2001 and $22,000 in 2002 plus taxes and other expenses. The banking office at
Skaket Corners, Orleans is leased from Skaket Associates for $50,916 in 1999;
$58,554 in 2000, 2001 and 2002; $67,337 in 2003, 2004 and 2005; and $77,437 in
2006 and 2007 plus taxes and other expenses under a lease expiring in 2007.
The Bank also operates
4
a Customer Service Center which is leased from the Davenport Realty Trust,
South Yarmouth for $111,972 per year plus taxes and other expenses until 2011
and $27,993 in 2012 under a lease expiring in 2012 with the right to renew for
an additional ten-year period. The banking office located in the Village Green
Shopping Center on Brackett Road, North Eastham is leased from Alan G. Vadnais
for $2,400 in 1999 expiring on 3/31/99. The office located at 763 Main Street,
Falmouth is leased from RFB Realty Trust for $42,000 through 2001 and $24,500
in 2002 with a lease expiring September, 2002 with the option of renewing the
lease for two additional five-year periods. The Bank also rents a building
next door to the Customer Service Center from Davenport Realty Trust, South
Yarmouth for $76,200 in 1999 to 2011 and $19,050 in 2012. In addition, the
Bank also rents office spaces from Stop & Shop for $408,000 per year under a
lease expiring in 1999 and $204,000 in 2000. The Bank also pays rent of
$24,000 in 1999, 2000, and $11,000 in 2001 for Automated Teller Machines
(ATMs).
Item 3. Legal Proceedings.
Bancorp is not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 4, 1998, a special meeting of the stockholders of the Bank (the
"Special Meeting") was held to consider and vote upon the Reorganization. A
brief description of the vote is incorporated herein by reference to the
Bank's proxy statement for the Special Meeting, filed as an exhibit to
Bancorp's Current Report on Form 8-K filed with the SEC on February 11, 1999.
The Reorganization was approved by more than 71% of the stockholders eligible
to vote.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
CCBT Bancorp, Inc.'s and, prior to the Reorganization, the Bank's Common
Stock 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,
adjusted for the two-for-one stock distribution made August 7, 1998. According
to Bancorp's transfer agent, there were approximately 1,100 stockholders of
record as of December 31, 1998. 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.
1998 1997
------------------------------------ -------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- ---------- -------- -------- --------
Market price: High...... $ 22 7/16 $ 22 3/8 $ 24 $ 20 3/4 $ 13 15/16 $ 15 $ 17 1/4 $ 20 1/2
Low............... $ 19 1/8 $ 19 5/8 $ 17 1/4 $ 15 1/2 $ 10 3/4 $ 13 3/8 $ 14 1/4 $ 17 5/8
Dividends declared per
share.................. $.12 $.12 $.13 $.13 $.105 $.105 $.105 $.105
5
Item 6. Selected Consolidated Financial Data.
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
(Dollar amounts in thousands except per share amounts)
Total assets............ $ 1,177,530 $ 973,105 $ 817,884 $ 646,911 $ 528,438
Stockholders' equity.... 83,542 75,636 66,603 59,601 53,087
Net interest income..... 37,767 36,907 32,650 29,156 25,574
Provision for loan
losses................. -- -- -- -- 1,200
Non-interest income..... 17,036 20,174 13,874 13,649 12,320
Non-interest expense.... 34,196 35,642 30,985 28,631 27,062
Provision for income
taxes.................. 8,050 8,190 6,070 5,391 1,930
Net income.............. 12,557 13,249 9,468 8,783 7,703
Book value per share.... $ 9.22 $ 8.35 $ 7.35 $ 6.59 $ 5.86
Basic earnings per
share(1)............... 1.39 1.46 1.05 .97 .86
Diluted earnings per
share.................. 1.38 1.46 1.05 .97 .86
Cash dividends per
share.................. $ .50 $ .42 $ .35 $ .28 $ .09
Return on average
assets................. 1.15% 1.45% 1.26% 1.47% 1.43%
Return on average
stockholders' equity... 15.8% 18.7% 15.2% 15.6% 15.5%
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(1) Based on average shares outstanding: 9,061,064 in 1998 and in 1997;
9,052,434 in 1996; 9,042,740 in 1995; and 9,033,236 in 1994. (Adjusted for
two-for-one stock distributions in 1996 and in 1998).
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 within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors,
of changes in general, national or regional economic conditions, changes in
loan default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
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 Bancorp's principal activity currently
is ownership of the Bank, for ease of reference, the term "Company" in this
Item generally will refer to the investments and activities of the Company and
the Bank, except where otherwise noted.
Cape Cod Bank and Trust Company is a commercial bank with twenty-six banking
offices located in Barnstable County, Massachusetts. As such, its principal
business activities are the acceptance of deposits from businesses and
individuals and the making of loans. The Bank also has a sizable Trust
Department operation. The Bank's market area is heavily dependent on the
tourist and vacation business on Cape Cod.
1998 COMPARED WITH 1997
Source and Use of Funds. Although at year end total deposits were
$18,813,000 higher than a year earlier, an increase of 3%, on average total
deposits in 1998 were $37,746,000 more than in 1997, an increase of 6%. All
deposit categories were higher on average during the year. Demand deposits
were higher by $14,928,000 on average, an increase of 11%. Management believes
that this was the result of a continued strong economic climate in its market
area. NOW account deposits were higher by $6,515,000 on average, an increase
of 7%. Money market account deposits were higher by $746,000 on average, an
increase of 1%. Other savings deposits were higher by $5,642,000 on average,
an increase of 4%. Certificates of deposit of $100,000 or more were higher by
$5,109,000 on average, an increase of 22%. Other time deposits were higher by
$4,806,000 on average, an increase of 4%. Additional funds were raised from
increased borrowings. Borrowings from the Federal Home Loan Bank were
$124,397,000 higher on average, an increase of 82%, as the Bank continued to
take long-term
6
advances to offset the interest-rate risk of fixed-rate commercial mortgage
lending and increased the level of its short-term borrowing for the purpose of
making high quality investments with short effective duration. Through these
efforts, management is attempting to increase earnings without incurring
significant additional risk. Other short-term borrowings were higher by
$4,250,000 on average, an increase of 40%. At year end, total loans were
$80,851,000 higher than a year earlier, an increase of 15%. On average for the
year, they were $91,315,000 higher, an increase of 19%. Increases in some loan
categories were partially offset by declines in others. Residential mortgage
loans were higher by $96,590,000 on average, an increase of 53%, as the Bank
continued to increase its market share in this line of business and retained
the adjustable rate mortgages that it originated. Commercial mortgage loans
were higher by $11,179,000, an increase of 5%. Commercial loans were lower by
$613,000 on average, a decline of 1%. Industrial revenue bonds were lower by
$712,000 on average, a decline of 30%, and consumer loans were lower by
$15,129,000 on average, a decline of 53%, as the result of the sale of the
Bank's credit card portfolio in the fourth quarter of 1997. The remaining
funds were invested. Total investments were higher by $89,009,000 on average,
an increase of 24%, to use the additional funds from Federal Home Loan Bank
borrowings made for this purpose.
Net Interest Income. Interest rates declined during 1998, which decreased
the yields on the Bank's loans and investments. The cost of the Bank's
deposits and borrowings also decreased, but by a smaller amount. Because of
the positive spread between the return on earning assets and the cost of
funds, the Bank's net interest income increased as a result of the overall
growth in deposits, borrowings, loans and investments discussed above.
Accordingly, net interest income increased by $860,000, an increase of 2%.
Provision for Possible Loan Losses. Recoveries on loans previously charged
off exceeded charge-offs and management determined that additions to the
reserve for possible loan losses were unnecessary in 1998, notwithstanding the
growth in the loan portfolio. Management believes that the reserve is adequate
to cover the losses likely to result from loans in the current loan portfolio.
See "Reserve for Loan Losses" below.
Other Income and Expense. Non-interest income decreased by 16% because 1997
income had included the receipt of $1,900,000 on the settlement of a dispute
with a software provider and a gain of $2,140,570 on the sale of the Bank's
credit card portfolio. Non-interest expense decreased by 4% in large part
because of lower expenses related to the conversion of the Bank's operating
system.
Provision for Income Taxes. As a result of lower income before income taxes,
the provision for income taxes decreased by 2%.
Net Income. As a result of the foregoing factors, net income for 1998 was
$12,556,946, a decrease of 5% from the previous year.
1997 COMPARED WITH 1996
Source and Use of Funds. Although at year end total deposits were
$75,751,000 higher than a year earlier, on average total deposits in 1997 were
$66,061,000 more than in 1996, an increase of 11%. Money market deposit
account balances were slightly lower but all other deposit categories were
higher on average during the year. Demand deposits were higher by $13,092,000
on average, an increase of 11%. NOW account deposits were higher by $8,770,000
on average, an increase of 10%. Other savings deposits were higher by
$8,444,000 on average, an increase of 6%. Certificates of deposit of $100,000
or more were higher by $9,767,000 on average, an increase of 71%, and other
time deposits were higher by $26,058,000 on average, an increase of 29%.
Additional funds were raised from increased borrowings. Borrowings from the
Federal Home Loan Bank were $84,341,000 higher on average, an increase of
125%, while other short-term borrowings were higher by $2,521,000 on average,
an increase of 31%. At year end, total loans were $77,678,000 higher than a
year earlier. On average for the year they were $58,886,000 higher, an
increase of 14%. Increases in some loan categories were partially offset by
declines in others. In part as a result of purchasing some loan packages
during the year, residential mortgage loans were higher by $57,999,000 on
average, an increase of 47%. Commercial mortgage loans were higher by
$9,008,000, an increase of 5%. Commercial loans were lower by $445,000 on
average, a
7
decline of 1%. Industrial revenue bonds were lower by $772,000 on average, a
decline of 24%, and consumer loans were lower by $6,904,000 on average, a
decline of 20%. The remaining funds were invested. Total investments were
higher by $108,764,000 on average, an increase of 41%.
Net Interest Income. The general level of interest rates was slightly higher
in 1997 than in 1996, which increased the yields on the Bank's investments.
However, yields on loans were lower as a result of competitive pressures in
commercial lending and low initial rates on adjustable rate residential
mortgage loans. Because of the positive spread between the return on earning
assets and the cost of funds, the Bank's net interest income increased as a
result of the overall growth in deposits, borrowings, loans and investments
discussed above. Accordingly, net interest income increased by $4,257,000, an
increase of 13%.
Provision for Possible Loan Losses. Non-performing assets continued to
decline during the course of the year and management determined that additions
to the reserve for possible loan losses were unnecessary in 1997,
notwithstanding the growth in the loan portfolio. Management believes that the
reserve is adequate to cover the losses likely to result from loans in the
current loan portfolio. See "Reserve for Loan Losses" below.
Other Income and Expense. Non-interest income increased by 41%, primarily
due to the receipt of $1,900,000 on the settlement of a dispute with a
software provider and a gain of $2,140,570 on the sale of the Bank's credit
card portfolio. Non-interest expense increased by 15% because of increases in
salaries and wages and costs associated with the conversion of the Bank's data
processing system.
Provision for Income Taxes. As a result of higher income before income
taxes, the provision for income taxes increased by 35%.
Net Income. As a result of the foregoing factors, net income for 1997 was
$13,248,536, an increase of 40% from the previous year.
MATURITY STRUCTURE OF ASSETS AND LIABILITIES
AND SENSITIVITY TO CHANGES IN INTEREST RATES
As of December 31, 1998 fixed rate debt securities and loans mature as
follows:
Fixed Rate
---------------------------------
Debt Securities Loans
---------------------------------
(Dollar amounts in thousands)
Remaining maturity:
Three months or less...................... $ 65,052 $ 11,376
Over three months through 12 months....... 61,097 26,378
Over one year through five years.......... 133,538 67,910
Over five years........................... 2,889 14,908
-------------- --------------
Totals.................................... $ 262,576 $ 120,572
============== ==============
Included in fixed rate debt securities are $70,937,000 of collateralized
mortgage obligations. These have been distributed based on estimates of their
principal cash flows rather than their contractual final maturities. Included
in three months or less of loans are $407,700 of customer account overdrafts
that the Bank reclassified as loans.
8
The remaining maturity of time certificates of deposit as of December 31,
1998 was as follows:
Fixed Rate
Certificates of Deposit
-----------------------------------
$100,000 or more Less than $100,000
---------------- ------------------
(Dollar amounts in thousands)
Remaining maturity:
Three months or less.................... $21,143 $ 39,348
Over three months through 12 months..... 6,955 64,398
Over one year through two years......... 1,086 9,188
Over two years through three years...... 987 7,562
Over three years through four years..... 128 --
Over four years through five years...... -- --
Over five years......................... -- --
------- --------
Totals.................................. $30,299 $120,496
======= ========
Other deposits may be withdrawn by the customer without notice or penalty.
The rates paid thereon are reviewed each month and changed at the Bank's
option as often as indicated by changing market conditions.
The remaining maturity of borrowings from the Federal Home Loan Bank as of
December 31, 1998 was as follows:
Fixed Rate
FHLB Borrowings
-----------------------------
(Dollar amounts in thousands)
Remaining maturity:
Three months or less........................... $ 3,300
Over three months through 12 months............ 113,125
Over one year through five years............... 157,455
Over five years................................ 11,627
--------
Totals......................................... $285,507
========
Rates paid on other interest-bearing liabilities change daily.
As of December 31, 1998, floating rate debt securities, FHLB stock and loans
reprice as follows:
Floating Rate
-----------------------------------
Debt Securities FHLB Stock Loans
--------------- ---------- --------
(Dollar amounts in thousands)
Repricing frequency:
Quarterly or more frequently........... $230,002 $22,125 $114,354
Annually or more frequently, but less
frequently than quarterly............. 3,443 -- 157,556
Every five years or more frequently,
but less frequently than annually..... -- -- 188,460
Less frequently than every five years.. -- -- 31,019
-------- ------- --------
Totals................................. $233,445 $22,125 $491,389
======== ======= ========
9
Floating Rate
FHLB Borrowings
-----------------------------
(Dollar amounts in thousands)
Repricing frequency:
Quarterly or more frequently................. $58,000
Annually or more frequently, but less
frequently than quarterly................... --
Every five years or more frequently, but less
frequently than annually.................... --
Less frequently than every five years........ --
-------
Totals....................................... $58,000
=======
Most of the Bank's residential mortgage loans are adjustable rate mortgages
subject to interest rate caps.
The Bank's investment securities are subject to market risk in the following
ways. $255,570,000 of the investment securities owned as of December 31, 1998
are floating rate instruments tied to various indices, primarily the 3-month
Treasury bill and LIBOR. Lesser amounts are tied to longer-term Treasury rates
and other indices. Almost all of these floating rate instruments are subject
to interest rate caps which range from 8% to 25%. 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 Bank's floating rate investments have an average
life of about two years. Market risk may also result from the fact that
various indices will not always move by the same amount when interest rates
increase. This may cause securities tied to one index to perform less well
than securities tied to other indices. Most of the remaining $262,576,000 of
securities are fixed-rate collateralized mortgage obligations. Fixed-rate
investments have market risk because their rate of return does not change at
all with the general level of interest rates. An additional characteristic of
CMOs is that their principal payments tend to slow when interest rates rise.
If the fixed rate earned on the investment is lower than the new market rate,
this can result in a decline in the value of these securities. Almost all of
the Bank's fixed-rate CMOs have very short lives and have interest rates above
current market levels, which reduces the market risk of these securities. The
average life of the Bank's fixed-rate investments is less than one year.
Reserve for Loan Losses
The reserve for loan losses is an estimate of the amount necessary to
provide an adequate reserve to absorb probable losses in 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 and current economic conditions. The reserve 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.
Some assumptions must be made in order to estimate the extent of losses
likely to result from loans in the current portfolio. Although the local
economy has been strong in recent years, the national economy may eventually
enter into a recession after a long period of expansion. This could result in
a decline in tourism on Cape Cod negatively affecting the Bank's borrowers and
resulting in higher losses to the Bank. The Bank has experienced increased
delinquency and charge-off rates in its consumer loan portfolio. A downturn in
the local economy could adversely affect the ability of these and other
borrowers to repay their loans. The Bank has also purchased packages of
residential mortgage loans which contain loans on properties outside of the
Bank's market area which may be subject to their own economic risks. These
factors could result in greater losses than are currently expected, in which
case, greater provisions for loan losses may prove to be necessary in future
periods. On the other hand, if these factors do not result in significant
deterioration to the quality of the loan portfolio, actual losses may be less
than the reserve and the excess amount will be recovered by credits to income
in future periods.
In addition, various regulatory agencies periodically review the Bank's
reserve for loan losses as part of their examination process. Such agencies
may require the Bank to make additions to the reserve based upon judgements
different from those of management.
10
Non-performing Assets and Loan Loss Experience
Non-performing assets as of December 31, 1998, 1997 and 1996 were as
follows:
1998 1997 1996
--------- --------- ---------
(Dollar amounts in thousands)
Nonaccrual loans............................. $ 7,468 $ 2,770 $ 3,679
Loans past due 90 days or more and still
accruing.................................... -- -- 266
Property from defaulted loans................ -- 621 430
--------- --------- ---------
Total non-performing assets.................. $ 7,468 $ 3,391 $ 4,375
========= ========= =========
Restructured troubled debt performing in
accordance with amended terms, not included
above....................................... $ 478 $ 1,131 $ 3,439
========= ========= =========
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 held by the Bank.
Accordingly, for loans which are shown as past due 90 days or more and still
accruing, management expects that principal and interest will be repaid in
full. In some instances, the Bank may also be repaid in full on nonaccrual
loans. 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, 1998, $8,694,951 of loans were included in
this category, in addition to loans reported above. The Bank's loan
classification system also includes a category for loans which are monitored
for possible deterioration in credit quality. At December 31, 1998, $5,676,832
of loans were included in this category. However, it is probable that there
will be losses on other loans which have not been specifically identified.
The changes in the reserve for loan losses during the three years ended
December 31, 1998 were as follows:
1998 1997 1996
--------- --------- ---------
(Dollar amounts in thousands)
Balance, beginning of
year..................... $ 10,962 $ 11,417 $ 11,701
Provision for loan
losses................... -- -- --
Charge-offs:
Commercial loans........ (353) (400) (669)
Construction mortgage
loans.................. -- -- (39)
Commercial mortgage
loans.................. (86) (69) --
Industrial revenue
bonds.................. -- -- --
Residential mortgage
loans.................. (1) (119) --
Consumer loans.......... (166) (749) (637)
Recoveries on loans
previously charged off:
Commercial loans........ 475 653 792
Construction mortgage
loans.................. 47 -- 43
Commercial mortgage
loans.................. 174 120 143
Industrial revenue
bonds.................. -- -- --
Residential mortgage
loans.................. 23 8 1
Consumer loans.......... 33 101 82
--------- --------- ---------
Balance, end of year...... $ 11,108 $ 10,962 $ 11,417
========= ========= =========
11
1998 1997 1996
--------- --------- ---------
(Dollar amounts in thousands)
Allocation of ending balance:
Commercial loans............................ $ 1,578 $ 1,676 $ 2,872
Construction mortgage loans................. 705 521 792
Commercial mortgage loans................... 5,822 6,587 5,221
Industrial revenue bonds.................... 23 28 33
Residential mortgage loans.................. 2,460 1,610 1,484
Consumer loans.............................. 520 540 1,015
--------- --------- ---------
Balance, end of year.......................... $ 11,108 $ 10,962 $ 11,417
========= ========= =========
1998 1997 1996
----- ---- ----
Ratio of net charge-offs (recoveries) to average loans
outstanding.......................................... (0.03)% 0.09% 0.07%
Recoveries on loans previously charged off exceeded charge-offs and
management determined that additions to the reserve for possible loan losses
were unnecessary in 1998, notwithstanding the growth in the loan portfolio.
Management believes that the reserve is adequate to cover the losses likely to
result from loans in the current loan portfolio.
Liquidity
The Bank normally experiences a wide swing 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 made up of checks and similar items in the process of collection or was
needed to satisfy a requirement to maintain a portion of the Bank's deposits
in an account at the Federal Reserve. Accordingly, it does not represent a
source of liquidity for the Bank. In general, the Bank's investment securities
could also be easily 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. The Bank has a line of credit of $12,963,000 from
the Federal Home Loan Bank of Boston. The Bank has also established a line of
credit for the purchase of federal funds from a regional bank and may borrow
from the Federal Reserve if necessary.
Computer Processing in the Year 2000
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.
Much computer software has been written which allows the year in a date to
be recognized and/or stored based on a two-digit number, i.e., "12/31/99"
might be recognized as meaning December 31, 1999. The same is true of a
variety of hardware devices with built-in clock-calendars, such as computers.
In some cases, this could create problems at the turn of the century when
"01/01/00" could, in some cases, be interpreted to mean January 1, 1900 rather
than January 1, 2000. If such circumstances are not identified and corrected
in advance, they could cause system failure or erroneous calculations of such
items as interest income or expense. This could potentially have a significant
impact on the Bank's ability to do business.
For the Bank's internal computer processing, it was determined that it was
necessary to replace some of its personal computers and to acquire more recent
versions of certain software. $800,000 was spent for this purpose in 1998 and
an additional $500,000 is expected to be spent in 1999. These costs will be
capitalized and depreciated over the useful lives of the items purchased.
12
The Bank relies on outside vendors for much of its critical data processing.
These vendors have assured the Bank that they are Year 2000 compliant. The
Bank's testing has confirmed this, but testing is not yet complete.
Approximately one-half of those systems that the Bank considers to be critical
or high-risk have not yet been tested at December 31, 1998. The remaining
testing is expected to be completed by March 31, 1999.
Contingency plans are being developed for processing of the Bank's work in
the event of the failure of any of these systems.
The Bank is also dependent on other providers for the conduct of its
business, most notably for electrical power and telecommunications. These
providers could possibly be subject to Year 2000 problems which disrupted
their services. Prolonged outages in these services could seriously affect the
Bank's ability to conduct business as usual.
Certain customers of the Bank may be subject to Year 2000 problems which
affect their ability to do business. Among other things, this could result in
reducing the ability of borrowers to repay their loans to the Bank. Year 2000
risk still needs to be evaluated for approximately one-half of the Bank's
significant customer relationships.
Other customers may withdraw funds from the Bank in anticipation of possible
Year 2000 disruptions. The Bank has lengthened the maturities of certain of
its borrowings and expects to continue to maintain a very short investment
portfolio to meet any deposit outflows. It is anticipated that maturities in
the investment portfolio will be far in excess of any such withdrawals, but
the Bank may lose the ability to earn on these amounts for the period of time
that they are out of the Bank.
Please refer to the statement regarding "Forward-Looking Information" at the
beginning of Management's Discussion and Analysis of Financial Condition and
Results of Operations with regard to any forward-looking statements in this
section. Although the Bank and Bancorp believe that they are responding
appropriately to the Year 2000 issue, please note that neither the Bank nor
Bancorp can guarantee their Year 2000 readiness nor that of material vendors
and customers or the effectiveness of their contingency plans in the event of
a failure in any of the Bank's computing systems.
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, and 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, 1998. 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 5.35%, 5.46% and 5.30% during 1998, 1997 and 1996,
respectively.
13
Year ended December 31,
----------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ---------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income or Yield or Average Income or Yield or Average Income or Yield or
Balance Expense Rate Paid Balance Expense Rate Paid Balance Expense Rate Paid
---------- --------- --------- -------- --------- --------- -------- --------- ---------
(Dollar amounts in thousands)
Interest-earning assets:
Commercial loans....... $ 72,623 $ 6,994 9.63% $ 73,236 $ 7,384 10.08% $ 73,681 $ 7,536 10.23%
Commercial mortgage
loans................. 218,052 20,316 9.32% 206,873 19,842 9.59% 197,865 19,221 9.71%
Industrial revenue
bonds................. 1,678 148 8.82% 2,390 179 7.49% 3,162 219 6.93%
Residential mortgage
loans................. 277,149 19,509 7.04% 180,559 14,214 7.87% 122,560 10,281 8.39%
Consumer loans......... 13,183 1,291 9.79% 28,312 2,978 10.52% 35,216 3,612 10.26%
U.S. Government agency
CMOs.................. 256,334 14,141 5.52% 102,891 6,918 6.72% 87,581 5,361 6.12%
Other U.S. Government
agencies.............. 36,949 2,039 5.52% 72,771 4,571 6.28% 73,796 4,107 5.57%
Other CMOs............. 53,619 3,110 5.80% 55,284 3,232 5.85% 25,001 1,504 6.02%
State and municipal
obligations........... 17,494 806 4.61% 17,065 760 4.45% 18,240 795 4.36%
Other securities....... 98,795 5,624 5.69% 126,171 7,624 6.04% 60,800 3,809 6.26%
---------- ------- -------- ------- -------- -------
Total earning assets... 1,045,876 73,978 7.07% 865,552 67,702 7.82% 697,902 56,445 8.09%
Total non-earning
assets................ 47,457 49,650 54,924
---------- ------- -------- --------
Total assets........... $1,093,333 $73,978 6.77% $915,202 $67,702 7.40% $752,826 $56,445 7.50%
========== ------- ======== ------- ======== -------
Interest-bearing
liabilities:
NOW account deposits... $ 105,864 $ 1,281 1.21% $ 99,349 $ 1,897 1.91% $ 90,579 $ 1,859 2.05%
Money market account
deposits.............. 147,623 5,071 3.44% 146,877 5,751 3.92% 146,947 5,815 3.96%
Other savings
deposits.............. 161,749 5,234 3.24% 156,107 6,021 3.86% 147,663 5,792 3.92%
Certificates of Deposit
of $100,000 or more... 28,572 1,525 5.34% 23,463 1,267 5.40% 13,696 739 5.40%
Other time deposits.... 121,216 6,479 5.35% 116,410 6,400 5.50% 90,352 5,102 5.65%
Borrowings from FHLB... 276,249 15,956 5.78% 151,852 8,961 5.90% 67,511 4,103 6.08%
Other short-term
borrowings............ 14,890 665 4.47% 10,640 498 4.68% 8,119 385 4.74%
---------- ------- -------- ------- -------- -------
Total interest-
bearing............... 856,163 36,211 4.23% 704,698 30,795 4.37% 564,867 23,795 4.21%
Total non-interest-
bearing deposits...... 150,376 135,448 122,356
Other liabilities...... 7,237 4,142 3,428
Stockholders' equity... 79,557 70,914 62,175
---------- ------- -------- ------- -------- -------
Total liabilities and
stockholders' equity.. $1,093,333 $36,211 3.31% $915,202 $30,795 3.36% $752,826 $23,795 3.16%
========== ------- ======== ------- ======== -------
Net interest income, as
% of total assets...... $37,767 3.45% $36,907 4.03% $32,650 4.34%
======= ==== ======= ===== ======= =====
Net interest income, as
% of total earning
assets................. 3.61% 4.26% 4.68%
==== ===== =====
Interest spread (the
average yield earned on
earning assets less the
average rate paid on
interest-bearing
liabilities): 2.84% 3.45% 3.88%
==== ===== =====
Return on average
assets................. 1.15% 1.45% 1.26%
==== ===== =====
Average stockholders'
equity to average total
assets................. 7.28% 7.75% 8.26%
==== ===== =====
Return on average
stockholders' equity... 15.8% 18.7% 15.2%
==== ===== =====
Dividend payout ratio... 36.1% 28.7% 34.0%
==== ===== =====
14
CHANGES IN NET INTEREST INCOME DUE TO
CHANGES IN VOLUME AND RATE
The effect on net interest income from changes in interest rates and in the
amounts of interest-earning assets and interest-bearing liabilities is
summarized in the following table. These amounts were calculated directly from
the amounts included in the preceding table. The amount allocated to change in
volume was calculated by multiplying the change in volume by the average of
the interest rates earned or paid in the two periods. The amount allocated to
change in rate was calculated by multiplying the change in rate by the average
volume over the two periods. In 1998 lower interest rates reduced interest
income by more than the decrease in interest expense because the Bank has more
interest-earning assets and because sharply lower Treasury rates reduced the
yields on loans and investments. Higher interest rates in 1997 increased the
yields on investment securities but loan yields decreased and the Bank was
less aggressive in gaining deposit market share.
1998 compared to 1997 1997 compared to 1996
------------------------- --------------------------
Change Due to Increase Change Due to Increase
(Decrease) (Decrease)
------------------------- --------------------------
Volume Rate Net Volume Rate Net
------- ------- ------- --------- ------- --------
(Dollar amounts in thousands)
Interest income:
Commercial loans...... $ (60) $ (330) $ (390) $ (45) $ (107) $ (152)
Commercial mortgage
loans................ 1,057 (583) 474 870 (249) 621
Industrial revenue
bonds................ (58) 27 (31) (56) 16 (40)
Residential mortgage
loans................ 7,201 (1,906) 5,295 4,716 (783) 3,933
Consumer loans........ (1,536) (151) (1,687) (717) 83 (634)
U.S. Government agency
CMOs................. 9,391 (2,168) 7,223 983 574 1,557
Other U.S. Government
agencies............. (2,113) (419) (2,532) (61) 525 464
Other CMOs............ (97) (25) (122) 1,796 (68) 1,728
State and municipal
obligations.......... 19 27 46 (52) 17 (35)
Other securities...... (1,606) (394) (2,000) 4,023 (208) 3,815
------- ------- ------- -------- ------ --------
Total interest
income............. 12,198 (5,922) 6,276 11,457 (200) 11,257
------- ------- ------- -------- ------ --------
Interest expense:
NOW account deposits.. 102 (718) (616) 174 (136) 38
Money market account
deposits............. 27 (707) (680) (3) (61) (64)
Other savings
deposits............. 200 (987) (787) 328 (99) 229
Certificates of
deposits of $100,000
or more.............. 274 (16) 258 527 1 528
Other time deposits... 261 (182) 79 1,452 (154) 1,298
Borrowings from FHLB.. 7,263 (268) 6,995 5,052 (194) 4,858
Other short-term
borrowings........... 194 (27) 167 119 (6) 113
------- ------- ------- -------- ------ --------
Total interest
expense............ 8,321 (2,905) 5,416 7,649 (649) 7,000
------- ------- ------- -------- ------ --------
Net interest income..... $ 3,877 $(3,017) $ 860 $ 3,808 $ 449 $ 4,257
======= ======= ======= ======== ====== ========
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 Bank's primary source of revenue, interest
rate risk is the most significant non-credit related market risk to which the
Bank is exposed. Net interest income is affected by changes in interest rates
as well as fluctuations in the level and duration of the Bank's assets and
liabilities.
Interest rate risk is the exposure of the Bank's 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
15
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 Bank's Asset/Liability Management Committee, comprised of senior
management and several Directors, 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 Bank 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
the net assets of the Bank (the liquidation value of stockholders' equity)
would decline. At December 31, 1998 it is estimated that an increase in
interest rates of 200 basis points (for example, an increase in the prime rate
from 7.75% to 9.75%) would reduce the value of the net assets of the Bank by
$9,737,000. On the other hand, if interest rates were to decrease, the value
of the net assets of the Bank would increase.
Although the value of the net assets of the Bank is subject to risk if
interest rates rise (but not if rates fall) the opposite is true of the Bank's
earnings. If interest rates were to increase the net interest income of the
Bank would increase because the Bank has more interest-earning assets than it
has interest-bearing liabilities and much of this excess amount reprices
within a short period of time. As a result, the Bank's net interest income is
instead subject to a 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.
Accordingly, if interest rates were to decrease by 200 basis points (for
example, a decrease in the prime rate from 7.75% to 5.75%) it is estimated
that the net interest income of the Bank would decrease by $4,183,000. On the
other hand, if interest rates were to increase the net interest income of the
Bank would increase.
Item 8. Financial Statements and Supplementary Data.
At December 31, 1998, CCBT Bancorp, Inc. was a wholly owned subsidiary of
Cape Cod Bank and Trust Company. Accordingly, the consolidated financial
statements of Cape Cod Bank and Trust Company and its subsidiaries are
presented here.
FINANCIAL STATEMENTS INDEX
. Report of Grant Thornton, LLP as Independent Certified Public Accountants
. Report of Ernst & Young, LLP as Independent Certified Public Accountants
. Consolidated Statements of Condition at December 31, 1998, 1997 and 1996
. Consolidated Statements of Income for the Three Years Ended December 31,
1998
. Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1998
. Consolidated Statements of Changes in Stockholders' Equity for the Three
Years Ended December 31, 1998
. Consolidated Statements of Comprehensive Income for the Three Years Ended
December 31, 1998
. Notes to Consolidated Financial Statements
16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Cape Cod Bank and Trust Company
We have audited the consolidated statement of condition of Cape Cod Bank and
Trust Company as of December 31, 1998, and the related consolidated statements
of income, cash flows, stockholders' equity, and comprehensive income for the
year then ended. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Cape Cod
Bank and Trust Company as of December 31, 1997 and 1996 and for the years then
ended were audited by other auditors whose report dated January 30, 1998,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1998 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Cape
Cod Bank and Trust Company as of December 31, 1998, and the consolidated
results of their operations and their consolidated cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Boston, Massachusetts
January 29, 1999
17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Cape Cod Bank and Trust Company
We have audited the accompanying consolidated statements of condition of
Cape Cod Bank and Trust Company as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, cash flows
and comprehensive income for the years then ended. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cape Cod Bank
and Trust Company at December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 30, 1998
18
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
------------------------------------------
1998 1997 1996
ASSETS -------------- ------------ ------------
Cash and due from banks............ $ 29,383,227 $ 33,849,649 $ 20,720,015
-------------- ------------ ------------
Interest-bearing deposits in
banks............................. 43,888 237,844 240,782
-------------- ------------ ------------
Securities available for sale at
fair value (Note 2)............... 496,020,243 372,751,235 312,358,427
-------------- ------------ ------------
Federal Home Loan Bank stock, at
cost.............................. 22,125,400 18,744,900 16,705,700
-------------- ------------ ------------
Loans (Notes 3 and 4)
Commercial loans.................. 70,766,629 72,190,145 70,672,773
Construction mortgage loans....... 47,939,708 34,798,447 16,449,090
Commercial mortgage loans......... 207,860,415 198,944,076 197,056,394
Industrial revenue bonds.......... 1,344,336 1,882,600 2,885,318
Residential mortgage loans........ 254,320,484 203,461,595 132,475,131
Consumer loans.................... 11,588,705 15,902,887 32,767,662
Loans held for sale............... 18,140,522 3,930,152 1,125,640
-------------- ------------ ------------
Total loans....................... 611,960,799 531,109,902 453,432,008
Less: Reserve for loan losses..... (11,107,633) (10,962,345) (11,416,873)
-------------- ------------ ------------
Net loans......................... 600,853,002 520,147,557 442,015,135
-------------- ------------ ------------
Premises and equipment (Note 5).... 12,847,002 12,776,994 13,090,868
Deferred tax assets................ 4,992,690 4,630,204 4,880,682
Current tax assets................. 177,720 -- --
Accrued interest receivable on
securities........................ 4,067,975 3,749,980 2,102,156
Principal and interest receivable
on loans.......................... 3,596,836 3,138,181 2,376,094
Mortgage servicing rights.......... 893,992 330,364 127,122
Assets in charitable trusts........ 1,000,000 1,000,000 1,000,000
Other assets....................... 1,528,022 1,747,807 2,267,212
-------------- ------------ ------------
Total assets...................... $1,177,530,161 $973,104,715 $817,884,193
============== ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand deposits.................... $ 160,966,042 $147,278,175 $118,490,803
NOW account deposits............... 114,210,098 103,754,145 95,485,946
Money market account deposits...... 141,316,906 149,096,741 146,779,625
Other savings deposits............. 160,125,653 157,868,656 152,600,646
Certificates of deposit of $100,000
or more........................... 30,299,027 26,453,179 16,147,569
Other time deposits................ 120,979,249 124,633,590 103,828,855
-------------- ------------ ------------
Total deposits.................... 727,896,975 709,084,486 633,333,444
Borrowings from the Federal Home
Loan Bank (Note 8)................ 343,506,683 171,295,274 102,685,085
Other short-term borrowings (Note
8)................................ 14,606,322 11,662,360 9,359,746
Current taxes payable.............. 255,080 178,325 275,953
Interest payable on deposits....... 1,060,045 1,255,127 1,078,374
Interest payable on borrowings..... 1,437,695 577,366 579,232
Post retirement benefits payable... 2,016,146 1,692,186 1,391,710
Employee profit sharing retirement
and bonuses payable............... 1,783,350 787,553 1,409,532
Other liabilities.................. 1,425,465 935,744 1,167,929
-------------- ------------ ------------
Total liabilities................. 1,093,987,761 897,468,421 751,281,005
-------------- ------------ ------------
Commitments and contingencies
(Notes 5 and 10)
Stockholders' equity (Notes 6 and
9)
Common stock, $2.50 par value
Authorized: 12,000,000 shares
Outstanding: 9,061,064 shares.... 22,652,660 11,326,330 11,326,330
Surplus........................... 13,903,294 25,229,624 25,229,624
Undivided profits................. 46,704,129 38,677,715 29,234,826
Accumulated other comprehensive
income........................... 282,317 402,625 812,408
-------------- ------------ ------------
Total stockholders' equity........ 83,542,400 75,636,294 66,603,188
-------------- ------------ ------------
Total liabilities and
stockholders' equity............. $1,177,530,161 $973,104,715 $817,884,193
============== ============ ============
The accompanying notes are an integral part of these financial statements.
19
CONSOLIDATED STATEMENTS OF INCOME
for the Three Years Ended December 31, 1998
1998 1997 1996
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans............... $48,258,130 $44,597,302 $40,839,410
Taxable interest income on securities.... 23,773,180 21,681,389 13,894,468
Tax-exempt interest income on
securities.............................. 740,344 759,957 794,063
Dividends on securities.................. 1,206,296 663,740 917,342
----------- ----------- -----------
Total interest income..................... 73,977,950 67,702,388 56,445,283
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits..................... 19,589,900 21,335,764 19,307,349
Interest on borrowings from the Federal
Home Loan Bank.......................... 15,955,929 8,961,486 3,712,583
Interest on other short-term borrowings.. 665,338 497,887 775,131
----------- ----------- -----------
Total interest expense.................... 36,211,167 30,795,137 23,795,063
----------- ----------- -----------
Net interest income....................... 37,766,783 36,907,251 32,650,220
Provision for loan losses (Note 4)........ -- -- --
----------- ----------- -----------
Net interest income after provision for
loan losses.............................. 37,766,783 36,907,251 32,650,220
----------- ----------- -----------
NON-INTEREST INCOME
Trust and Investment division fees....... 5,111,716 4,344,027 3,950,392
Credit card merchant fees................ 3,878,902 3,404,145 3,229,837
MoneyCard interchange fees............... 453,014 306,151 116,536
Service charges on deposit accounts...... 1,513,856 1,532,827 1,520,514
Return and overdraft charges............. 2,044,653 2,008,882 1,872,525
ATM fees................................. 612,677 529,441 219,366
Settlement from software provider (Note
13)..................................... -- 1,900,000 --
Net gain (loss) on sale of loans......... 353,958 115,834 (55,409)
Residential mortgage marketing gain
servicing rights........................ 686,537 236,577 137,671
Gain on sale of credit card portfolio.... -- 2,140,570 --
Net gain (loss) on sale of investment
securities (Note 2)..................... 383,888 535,678 131,746
Other.................................... 1,996,687 3,119,424 2,750,482
----------- ----------- -----------
Total non-interest income................. 17,035,888 20,173,556 13,873,660
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and wages....................... 11,578,347 11,754,886 11,012,447
Employee benefits (Note 6)............... 4,707,206 4,577,627 4,436,349
Occupancy expense........................ 2,148,275 2,284,832 2,470,662
Equipment rental and expense............. 1,989,637 2,227,641 1,934,708
Credit card processing expense........... 3,275,084 3,197,436 2,932,946
Advertising and marketing expense........ 858,775 924,714 830,082
Printing and supplies.................... 876,808 945,835 1,141,094
Delivery and communication expense....... 1,390,952 1,316,440 1,094,235
Service charges correspondent banks...... 420,437 206,245 63,245
Directors' fees.......................... 329,300 324,854 295,263
Outside services......................... 4,578,965 4,075,618 2,098,680
ATM network expense...................... 407,686 293,427 388,418
Insurance expense........................ 336,143 336,252 259,022
Expenses from defaulted loans............ 120,777 116,275 153,365
Other.................................... 1,177,499 3,060,282 1,874,557
----------- ----------- -----------
Total non-interest expense................ 34,195,891 35,642,364 30,985,073
----------- ----------- -----------
Income before income taxes................ 20,606,780 21,438,443 15,538,807
Provision for income taxes (Note 7)....... 8,049,834 8,189,907 6,070,397
----------- ----------- -----------
Net income................................ $12,556,946 $13,248,536 $ 9,468,410
=========== =========== ===========
Average shares outstanding................ 9,061,064 9,061,064 9,052,580
Basic earnings per share (Notes 9 and
12)...................................... $ 1.39 $ 1.46 $ 1.05
Diluted earnings per share................ $ 1.38 $ 1.46 $ 1.05
Cash dividends declared................... .50 .42 .36
The accompanying notes are an integral part of these financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1998
1998 1997 1996
------------- ------------- -------------
CASH PROVIDED BY OPERATING
ACTIVITIES
Net income....................... $ 12,556,946 $ 13,248,536 $ 9,468,410
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses....... -- -- --
Depreciation and amortization... 1,913,955 2,194,828 1,704,379
Net amortization of securities.. 1,979,750 (2,085,330) (307,656)
Gain from Mortgage Servicing
rights......................... (686,537) (236,577) (137,671)
Amortization of deferred loan
fees costs..................... 862,228 821,635 (18,445)
Net gain on sale of investment
securities..................... (383,888) (535,678) (131,746)
Deferred (prepaid) income
taxes.......................... (664,597) 214,136 98,019
Gain from settlement............ -- (1,900,000) --
Gain on sale of loans........... (353,958) (115,834) 55,409
Gain on sale of credit card
portfolio...................... -- (2,140,570) --
Gain on sale of mutual funds
held for trading............... -- (1,068,320) --
Net change in:
Loans held for sale............. (14,210,369) (2,804,512) 806,459
Accrued interest receivable..... (776,650) (2,409,911) (1,467,487)
Accrued expenses and other
liabilities.................... 2,474,725 (378,801) 1,302,685
Other, net...................... 2,449,806 524,463 399,282
------------- ------------- -------------
Net cash provided by operating
activities...................... 5,161,411 3,328,065 11,771,638
------------- ------------- -------------
CASH USED BY INVESTING ACTIVITIES
Net increase in loans........... (159,465,444) (197,603,424) (55,619,727)
Proceeds from sale of loans..... 93,135,361 121,319,852 12,988,808
Dispositions of property from
defaulted loans................ 809,674 474,500 645,000
Purchase of mutual funds held
for trading.................... -- (75,000,000) --
Proceeds from sale of mutual
funds held for trading......... -- 76,068,320 --
Maturities of securities........ 490,955,326 289,317,822 166,738,525
Purchase of available for sale
securities..................... (866,415,999) (680,844,675) (501,787,175)
Sale of available for sale
securities..................... 243,852,925 335,485,576 197,169,611
Purchase of premises and
equipment...................... (2,130,960) (2,277,538) (4,166,119)
------------- ------------- -------------
Net cash used by investing
activities...................... (199,259,117) (133,059,567) (184,031,077)
------------- ------------- -------------
CASH PROVIDED BY FINANCING
ACTIVITIES
Net increase in deposits........ 18,812,489 75,751,042 64,020,388
Net increase in borrowings from
the Federal Home Loan Bank..... 172,211,409 68,610,189 93,298,788
Net increase in other short-term
borrowings..................... 2,943,962 2,302,614 3,582,367
Cash dividends paid on common
stock.......................... (4,530,532) (3,805,647) (3,216,678)
------------- ------------- -------------
Net cash provided by financing
activities...................... 189,437,328 142,858,198 157,684,865
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents............ (4,660,378) 13,126,696 (14,574,574)
Cash and cash equivalents at
beginning of year............... 34,087,493 20,960,797 35,535,371
------------- ------------- -------------
Cash and cash equivalents at end
of year......................... $ 29,427,115 $ 34,087,493 $ 20,960,797
============= ============= =============
Cash equivalents include amounts
due from banks and federal funds
sold.
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for:
Interest........................ $ 35,545,921 $ 30,620,250 $ 23,061,614
Income taxes.................... 9,476,298 5,540,921 5,603,982
Non-cash transactions:
Additions to property from
defaulted loans................ $ 188,900 $ 665,274 $ 975,000
Loans to finance OREO property.. 137,500 104,125 83,000
The accompanying notes are an integral part of these financial statements.
21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1998
1998 1997 1996
------------ ----------- -----------
COMMON STOCK
Balance, beginning of year............ $ 11,326,330 $11,326,330 $ 5,663,165
Two-for-one stock distribution........ 11,326,330 -- 5,663,165
------------ ----------- -----------
Balance, end of year.................. 22,652,660 11,326,330 11,326,330
------------ ----------- -----------
SURPLUS
Balance, beginning of year............ 25,229,624 25,229,624 25,204,873
Two-for-one stock distribution........ (11,326,330) -- --
Difference between cost and current
value of ESOP stock allocated to em-
ployees.............................. -- -- 24,751
------------ ----------- -----------
Balance, end of year.................. 13,903,294 25,229,624 25,229,624
------------ ----------- -----------
UNDIVIDED PROFITS
Balance, beginning of year............ 38,677,715 29,234,826 28,646,259
Net income............................ 12,556,946 13,248,536 9,468,410
Cash dividends declared............... (4,530,532) (3,805,647) (3,216,678)
Two-for-one stock distribution........ -- -- (5,663,165)
------------ ----------- -----------
Balance, end of year.................. 46,704,129 38,677,715 29,234,826
------------ ----------- -----------
UNALLOCATED STOCK IN ESOP
Balance, beginning of year............ -- -- (82,409)
Allocated to employees................ -- -- 82,409
------------ ----------- -----------
Balance, end of year.................. -- -- --
------------ ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance, beginning of year............ 402,625 812,408 169,025
------------ ----------- -----------
Net other comprehensive income........ (120,308) (409,783) 643,383
------------ ----------- -----------
Balance, end of year.................. 282,317 402,625 812,408
------------ ----------- -----------
Total stockholders' equity, end of
year............................... $ 83,542,400 $75,636,294 $66,603,188
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
22
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Years Ended December 31, 1998
1998 1997 1996
----------- ----------- -----------
Net income............................. $12,556,946 $13,248,536 $ 9,468,410
----------- ----------- -----------
Holding gains (losses) on securities
available for sale.................... 177,084 (104,462) 1,177,836
Reclassification of gains on securities
realized in income.................... (383,888) (535,678) (131,746)
----------- ----------- -----------
Net unrealized gains (losses).......... (206,804) (640,140) 1,046,090
Related tax effect..................... 86,496 230,357 (402,707)
----------- ----------- -----------
Net other comprehensive income......... (120,308) (409,783) 643,383
----------- ----------- -----------
Comprehensive income................... $12,436,638 $12,838,753 $10,111,793
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of consolidation--The accompanying consolidated financial
statements include the accounts of the Bank and its wholly owned subsidiaries.
All intercompany accounts have been eliminated upon consolidation in the
presentation of the consolidated financial statements.
Nature of operations--The Bank provides loans, deposit, trust and investment
services to businesses and consumers located in southeastern Massachusetts.
Use of estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents--All the amounts shown as cash and due from banks
is made up of checks and similar items in the process of collection or as is
needed to satisfy a requirement to maintain a portion of the Bank's deposits
in an account at the Federal Reserve. Accordingly, it does not represent a
source of liquidity for the Bank.
Securities--Securities held for investment are stated at cost adjusted for
amortization of premium and accretion of discount and the Bank has the
positive intent and ability to hold those securities to maturity. Available
for sale securities are securities which might be sold prior to maturity to
meet needs for liquidity or for the purchase of alternative investments. These
securities are stated at market. Unrealized gains and losses on such
securities, if any, are credited or charged to stockholders' equity net of any
related tax effect. Trading securities are securities which are bought and
held principally for the purpose of selling them in the near term. At December
31, 1998, 1997, and 1996, the Bank did not own any trading securities. Gains
and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
Loans--Loans are reported at their principal outstanding, net of charge-
offs. Loan fees, net of the direct cost of originating a loan, are deferred
and taken into income over the life of the loan.
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 held by the Bank. 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
24
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Mortgage servicing rights--On January 1, 1997, the Bank adopted Statement of
Financial Accounting Standards No. 125 which requires that the fair value of
the right to service loans be capitalized when the loans are sold to other
investors and amortized against servicing income over the estimated life of
the underlying loans. Servicing assets are evaluated for impairment based upon
the fair value of the rights as compared to amortized cost. Impairment is
determined by stratifying rights by predominant characteristics, such as
interest rates and terms. Fair value is determined using prices for similar
assets with similar characteristics, when available, or based upon discounted
cash flows using market-based assumptions. Impairment is recognized through a
valuation allowance for an individual stratum, to the extent that fair value
is less than the capitalized amount for the stratum.
Reserve for loan losses--The reserve for loan losses is an estimate of the
amount necessary to provide an adequate reserve 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 and current economic conditions. Loan losses are charged
against the reserve when management believes the collectibility of the
principal is unlikely. Recoveries on loans previously charged off are credited
to the reserve. The reserve 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.
Property from defaulted loans--Property from defaulted loans 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. Property from defaulted
loans includes foreclosed properties where the Bank 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.
Marketing expense--The Bank charges to marketing expense any advertising
related expenses at the time they are due.
Provision for income taxes--The provision for income taxes includes deferred
income taxes arising as a result of reporting some items of revenue and
expense in different years for tax and financial reporting purposes.
Earnings per share--In 1997, the Bank adopted Statement of Financial
Accounting Standards No. 128 which changes the method of calculating earnings
per share and requires restatement of prior periods. This had no effect on
earnings per share for any prior period shown.
Reclassifications--Certain amounts in the 1996 and 1997 financial statements
have been reclassified to conform to the 1998 presentation without effect on
net income.
New accounting pronouncements--Effective January 1, 1997, the Bank adopted
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers of Financial Assets and Extinguishment of Liabilities." This
Statement is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. However, SFAS
No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No.
125," requires the deferral of implementation as it relates to repurchase
agreements, dollar-rolls, securities lending and similar transactions until
years beginning after December 31, 1997. Adoption of SFAS No. 125 and SFAS No.
127 in 1998 did not have a significant effect on the Bank's financial position
or results of operations.
25
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 129, "Disclosure of Information About Capital Structure," which is
effective for the Bank's 1998 financial statements. The Bank's disclosures
comply with the provisions of this Statement.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate
as other comprehensive income. The Bank's financial statements comply with the
provisions of this Statement.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which is effective for the
Bank's 1998 financial statements. This Statement establishes standards for
reporting information about operating segments. An operating segment is
defined as a component of a business for which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and evaluate performance. The Bank has
determined that its business is comprised of a single operating segment and
that SFAS No. 131 therefore has no impact on its financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which is effective for the
Bank's 1998 financial statements. This Statement standardizes disclosure
requirements for pensions and other postretirement benefits to the extent
practicable. The Bank's disclosures comply with the provisions of this
Statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in
its balance sheet and measures those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of
the derivative and the resulting designation. The Bank is required to adopt
this Statement effective January 1, 2000. Through December 31, 1998, the
Bank's use of derivative instruments has not been material.
(2) Securities
The adjusted cost and estimated market values of securities which the Bank
considers to be available for sale were as follows:
December 31, 1998
----------------------------------------
Gross Gross Estimated
Adjusted Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollar amounts in thousands)
U.S. Government agency CMOs.......... $266,397 $1,506 $ 850 $267,053
Other U.S. Government agencies....... 18,554 124 235 18,443
Other collateralized mortgage obliga-
tions............................... 79,107 617 176 79,548
State and municipal obligations...... 16,416 -- -- 16,416
Other debt securities................ 115,061 138 638 114,561
FHLB stock........................... 22,125 -- -- 22,125
-------- ------ ------ --------
Totals............................. $517,660 $2,385 $1,899 $518,146
======== ====== ====== ========
The net unrealized gain on these securities is included net of tax in
stockholders' equity.
The Bank's investment securities are subject to market risk in the following
ways. $255,570,000 of the investment securities owned as of December 31, 1998
are floating rate instruments tied to various indices, primarily the 3-month
Treasury bill and LIBOR. Lesser amounts are tied to longer-term Treasury rates
and other indices. Almost all of these floating rate instruments are subject
to interest rate caps which range from 8% to 25%.
26
The adjusted cost and estimated market values of securities which the Bank
considered to be available for sale were as follows:
December 31, 1997
----------------------------------------
Gross Gross Estimated
Adjusted Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollar amounts in thousands)
U.S. Government agency CMOs.......... $121,507 $657 $ 57 $122,107
Other U.S. Government agencies....... 82,371 87 68 82,390
Other collateralized mortgage obliga-
tions............................... 64,540 198 107 64,631
State and municipal obligations...... 16,325 -- 3 16,322
Other debt securities................ 87,320 43 58 87,305
FHLB stock........................... 18,741 -- -- 18,741
-------- ---- ---- --------
Totals............................. $390,804 $985 $293 $391,496
======== ==== ==== ========
The adjusted cost and estimated market values of securities which the Bank
considered to be available for sale were as follows:
December 31, 1996
----------------------------------------
Gross Gross Estimated
Adjusted Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
(Dollar amounts in thousands)
U.S. Government agency CMOs.......... $155,527 $1,014 $130 $156,411
Other U.S. Government agencies....... 44,311 53 39 44,325
Other collateralized mortgage obliga-
tions............................... 70,394 379 62 70,711
State and municipal obligations...... 25,222 79 -- 25,301
Other debt securities................ 15,443 38 -- 15,481
FHLB stock........................... 16,835 -- -- 16,835
-------- ------ ---- --------
Totals............................. $327,732 $1,563 $231 $329,064
======== ====== ==== ========
Gross proceeds from the sale of available for sale securities were
$243,852,925 in 1998. Gross gains of $394,397 and gross losses of $10,509 were
realized on those sales.
Gross proceeds from the sale of available for sale securities were
$271,238,838 in 1997. Gross gains of $562,228 and gross losses of $26,550 were
realized on those sales. Gross proceeds from the sale of available for sale
securities were $197,169,611 in 1996. Gross gains of $327,889 and gross losses
of $196,143 were realized on those sales. The amount of income tax expense
attributable to net gains in 1998, 1997 and 1996 was $161,584, $226,902 and
$56,148, respectively.
The adjusted cost and estimated market value of debt securities which the
Bank considered to be available for sale at December 31, 1998 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.
Adjusted Estimated
Cost Market Value
-------------- ----------------
(Dollar amounts in thousands)
Due in one year or less........................ $ 45,804 $ 45,846
Due after one year through five years.......... 60,672 60,742
Due after five years through ten years......... 79,833 79,629
Due after ten years............................ 331,351 331,929
-------------- --------------
Totals....................................... $ 517,660 $ 518,146
============== ==============
27
At December 31, 1998, securities carried at $147,845,000 were pledged to
secure public deposits and borrowings from the U.S. Treasury. Federal Home
Loan Bank stock of $22,125,400 is pledged to secure FHLB borrowings.
(3) Loans
The Bank enters into banking transactions in the ordinary course of its
business with directors, officers, principal stockholders and their
associates, on the same terms, including interest rates and collateral on
loans, as those prevailing at the same time for comparable transactions with
others. The total amount of loans outstanding to Directors and Officers at
December 31, 1998, 1997 and 1996 was $16,418,718, $15,937,340 and $13,244,549,
respectively. During 1998, $21,798,603 in new loans were made to Directors and
Officers and there were $21,317,225 in repayments. The total amount of
deposits of Directors and Officers at December 31, 1998, 1997 and 1996 was
$8,010,955, $8,413,028 and $4,751,376, respectively.
Nonaccrual loans at December 31, 1998, 1997 and 1996 amounted to $7,468,000,
$2,770,000 and $3,679,000, respectively. Gross income was reduced by $258,276
in 1998 because of the loss of income from these nonaccrual loans and others
which were charged off during the year.
The amount of restructured troubled debt which was performing in accordance
with amended terms at December 31, 1998, 1997 and 1996 was $478,000,
$1,131,000 and $3,439,000, respectively. For each of these years, the
difference between the amount of income recorded on these loans and the amount
of income that would have been recognized had the loans performed in
accordance with their original terms was not material.
Loans to finance other real estate owned in accordance to Statement of
Financial Accounting Standards No. 66 for the years ended December 31, 1998,
1997 and 1996 was $137,500, $104,125 and $83,000, respectively.
Included in the consumer loan totals for the years ended December 31, 1998,
1997 and 1996 are customer account overdrafts that the Bank reclassified as
loans in the amounts of $407,700, $742,806 and $1,224,519, respectively.
The Bank also has participated in loans with other entities. As of December
31, 1998, gross participation loans totaled $1,777,084 of which $1,001,080 was
participated out. December 31, 1997 gross participation loans totaled
$6,915,069 of which $3,344,963 was participated out. December 31, 1996 gross
participation loans totaled $7,970,918 of which $3,783,369 was participated
out.
The Bank's business is primarily in southeastern Massachusetts, and many of
the Bank'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 $122,908,000, $75,140,000 and $68,624,000 at December
31, 1998, 1997 and 1996, respectively.
The fair value balance of capitalized servicing rights was determined using
a discount rate of 8% and a prepayment speed of 7%.
The following summarizes mortgage servicing rights capitalized and
amortized, along with the aggregate activity in related valuation allowances:
December 31,
-----------------
1998 1997 1996
----- ----- -----
(Dollar amounts
in thousands)
Mortgage servicing rights capitalized........................ $ 687 $ 237 $ 138
===== ===== =====
Mortgage servicing rights amortized.......................... $ 123 $ 33 $ 11
===== ===== =====
28
(4) Reserve for Loan Losses
The changes in the reserve for loan losses during the three years ended
December 31, 1998 were as follows:
1998 1997 1996
----------- ----------- -----------
Balance, beginning of year............. $10,962,345 $11,416,873 $11,701,258
Provision for loan losses.............. -- -- --
Charge-offs............................ (606,686) (1,336,521) (1,345,977)
Recoveries on loans previously charged
off................................... 751,974 881,993 1,061,592
----------- ----------- -----------
Balance, end of year................... $11,107,633 $10,962,345 $11,416,873
=========== =========== ===========
The following is a summary of information pertaining to impaired loans:
1998 1997 1996
---------- ---------- ----------
Impaired loans without a valuation allow-
ance........................................ $ -- $ -- $ --
Impaired loans with a valuation allowance:
Commercial loans........................... $ 537,661 $ 193,108 $ 361,081
Commercial mortgage loans.................. 2,277,262 986,323 518,745
Residential mortgage loans................. 474,000 -- 196,306
---------- ---------- ----------
Total impaired loans..................... $3,288,923 $1,179,431 $1,076,132
========== ========== ==========
Valuation allowance related to impaired
loans....................................... $ 592,006 $ 212,298 $ 193,704
Additional FASB 114 reserves on impaired
loans....................................... 406,821 176,800 164,035
---------- ---------- ----------
Total valuation allowance for impaired
loans................................... $ 989,827 $ 389,098 $ 357,739
========== ========== ==========
Average investment in impaired loans......... $1,645,505 $1,086,660 $3,375,711
========== ========== ==========
Interest income recognized on impaired
loans....................................... $ 309,131 $ 108,666 $ 337,546
========== ========== ==========
Interest income recognized on a cash basis on
impaired loans.............................. $ 309,131 $ 108,666 $ 337,546
========== ========== ==========
(5) Bank Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization of $10,593,000 at December 31, 1998, $9,205,000 at December 31,
1997, and $7,941,000 at December 31, 1996. Certain banking premises are leased
under non-capitalized operating leases expiring at various dates through 2012.
Annual rental expenses under these leases were $808,000 in 1998, $767,000 in
1997, and $733,000 in 1996. The total rental commitments under non-cancelable
leases for future years are $5,023,000 not including amounts payable under
consumer price index escalator provisions in three such leases which become
effective in 1999 and later years. Annual commitments are $890,100 in 1999,
$694,000 in 2000, $479,000 in 2001, $431,000 in 2002, $396,000 in 2003 and a
total of $2,316,000 for the years 2004 through 2012. Certain of these leases
also contain renewal options.
December 31,
--------------------------
1998 1997 1996
-------- ------- -------
Premises:
Land.............................................. $ 1,390 $ 1,390 $ 1,390
Buildings......................................... 7,781 8,048 7,096
Leasehold improvements............................ 4,114 3,810 3,437
Equipment......................................... 11,102 9,399 9,833
-------- ------- -------
Accumulated depreciation.......................... (11,540) (9,870) (8,665)
-------- ------- -------
$ 12,847 $12,777 $13,091
======== ======= =======
29
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
amounted to $1,780,000, $2,101,000 and $1,621,000, respectively.
(6) Employee Benefits
The Bank has a defined contribution Profit Sharing Retirement Plan covering
substantially all employees following two years of service. Each year, the
Bank 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 $1,068,000 in 1998, $786,000 in 1997 and
$745,000 in 1996. Also in 1998, 1997, and 1996, bonuses were accrued under the
provisions of the Bank's Profit Incentive Plan totaling $706,000, $762,000 and
$660,000, respectively.
The Bank's Employee Stock Ownership Plan holds 44,600 shares of the Bank's
common stock. In 1996, the remaining 9,146 shares were allocated to employees
and $107,160 was recorded as expense.
The Bank 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 Bank 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 Bank 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 Bank'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.
Statement of Financial Accounting Standards No. 106 requires that the
expected expense be recognized over the period that employees render the
service making them eligible for this benefit rather than when the premiums
are actually paid following retirement. S.F.A.S. No. 106 will increase the
amount of expense over the transitional period during which expense will be
charged for both the expense of current premiums and to build up a reserve of
approximately $3,000,000 for future premiums.
The following table sets forth the plan's funded status reconciled with the
amount shown in the Bank's statement of condition at December 31, 1998, 1997
and 1996:
1998 1997 1996
---------- ---------- ----------
Accumulated post-retirement benefit obliga-
tion:
Retirees................................. $ 796,448 $ 850,567 $ 737,035
Fully eligible active plan participants.. 564,518 430,087 390,504
Other plan participants.................. 1,629,512 1,508,428 1,572,669
---------- ---------- ----------
2,990,478 2,789,082 2,700,208
Plan assets at fair value.................. -- -- --
---------- ---------- ----------
Accumulated post-retirement benefit
obligation in excess of plan assets....... 2,990,478 2,789,082 2,700,208
Unrecognized net gain from past experience
different from that assumed and from
changes in assumptions.................... 563,568 550,854 449,102
Unrecognized prior service cost............ -- -- --
Unrecognized net obligation at transition.. (1,537,900) (1,647,750) (1,757,600)
---------- ---------- ----------
Unfunded accrued post-retirement benefit
expense................................... $2,016,146 $1,692,186 $1,391,710
========== ========== ==========
30
Net periodic post-retirement benefit for 1998, 1997 and 1996 included the
following components:
1998 1997 1996
-------- -------- --------
Service cost--benefits attributed to service
during the year................................ $153,799 $133,729 $148,301
Interest cost on accumulated post-retirement
benefit obligation............................. 171,024 172,768 194,908
Actual return on plan assets.................... -- -- --
Amortization of transition obligation over 20
years.......................................... 109,850 109,850 109,850
Amortization of gain............................ (550,854) (449,102) (242,958)
Asset gain deferred............................. 518,754 419,156 242,958
-------- -------- --------
Net periodic post-retirement benefit cost....... $402,573 $386,401 $453,059
======== ======== ========
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999; the rate was
assumed to decrease gradually to 5% by 2003 and remain level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates
by one percentage point in each year would increase the accumulated post-
retirement benefit obligation as of December 31, 1998 by $47,517 and the
aggregate service and interest cost components of net periodic post-retirement
benefit cost for the year then ended by $3,564.
The weighted-average discount rate used in determining the accumulated post-
retirement benefit obligation was 6.5%.
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.
In 1997, the Bank adopted a Stock Option Plan. Options on up to 400,000
shares may be granted under the plan. Options become exercisable over a period
of four years at the rate of 25% per year and expire after 10 years. The Bank
measures compensation cost for plans such as this using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25. Accordingly, no
compensation cost was recognized on these options.
The table below shows the number of stock options which were outstanding at
the beginning and end of each year, and how many were exercised, granted,
forfeited or expired.
1998 1997 1996
----------------------- ----------------------- -----------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
Outstanding, beginning
of year................ 26,000 $13.38 -- -- -- --
Granted................. 35,000 $20.34 26,000 $13.38 -- --
Exercised............... -- -- -- -- -- --
Forfeited............... -- $17.06 -- -- -- --
------ ------ ---
Outstanding, end of
year................... 57,000 $17.41 26,000 $13.38 -- --
====== ====== ===
The following table summarizes information about stock options outstanding
at December 31, 1998:
Remaining
Exercise Price Number Outstanding Contractual Life Number Exercisable
-------------- ------------------ ---------------- ------------------
$13.38 24,000 8.35 6,000
$20.75 24,000 9.12 --
$19.25 9,000 9.87 --
31
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 5 years
and using the five-year averages of price volatility of the Bank'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 during each year as well as what the
effect would have been if the Bank had adopted the fair value method of
accounting for stock options described in Statement of Financial Accounting
Standards No. 123.
1998 1997 1996
----------- ----------- ----------
Weighted average volatility.............. 26.90% 31.40%
Weighted average dividend................ 2.65% 2.93%
Weighted average risk-free rate.......... 5.23% 6.57%
Weighted average fair value of options
granted during the year................. $ 5.12 $ 3.94 --
Additional expense had the Bank adopted
S.F.A.S. 123............................ $ 39,628 $ 34,680 --
Related tax benefit...................... $ 16,575 $ 14,505 --
Pro-forma net income..................... $12,532,870 $13,228,361 $9,468,410
Pro-forma basic and diluted earnings per
share................................... $ 1.38 $ 1.46 $ 1.05
The Bank 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. $84,375 was charged to compensation
expense in 1997. The table below shows the amount of stock appreciation rights
which were exercised, granted, forfeited, or expired.
1998 1997 1996
--------------- ----------------- ---------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------ --------
Outstanding, beginning of
year....................... -- -- 20,000 $9.50 20,000 $9.50
Granted..................... 3,700 $19.25 -- -- -- --
Exercised................... -- -- (20,000) $9.50 -- --
Forfeited................... -- -- -- -- -- --
----- ------ ------- ----- ------ -----
Outstanding, end of year.... 3,700 $19.25 -- -- 20,000 $9.50
===== ====== ======= ===== ====== =====
(7) Provision for Income Taxes
The provision for income taxes for the three years ended December 31, 1998,
1997 and 1996, consists of the following:
1998 1997 1996
---------- ---------- ----------
Current federal income tax................... $6,756,489 $5,940,648 $4,395,067
Current state income tax..................... 1,957,942 2,035,123 1,577,311
---------- ---------- ----------
8,714,431 7,975,771 5,972,378
---------- ---------- ----------
Deferred federal income tax.................. (523,786) 159,203 72,874
Deferred (prepaid) state income tax.......... (140,811) 54,933 25,145
---------- ---------- ----------
(664,597) 214,136 98,019
---------- ---------- ----------
$8,049,834 $8,189,907 $6,070,397
========== ========== ==========
Deferred (prepaid) income tax expense results from the recognition of income
or expense items in different periods for income tax purposes than when they
are accrued, such as interest earned on nonaccrual loans and the provision for
possible loan losses.
32
The following reconciles the provision for income taxes with the statutory
federal income tax rate of 35%.
1998 1997 1996
---------- ---------- ----------
Tax at statutory rate...................... $7,209,146 $7,503,455 $5,438,582
Reduction due to tax-exempt income......... (293,139) (328,829) (315,350)
State taxes, net of federal tax benefit.... 1,112,989 1,358,537 1,088,728
Change in valuation reserve................ -- (373,912) --
Other, net................................. 20,838 30,656 (141,563)
---------- ---------- ----------
$8,049,834 $8,189,907 $6,070,397
========== ========== ==========
In 1997, interest and dividends on securities included $1,068,320 of capital
gains from mutual fund investments. Capital loss carryovers were applied to
this income and the valuation reserve was reduced by $373,912.
At December 31, 1998, 1997 and 1996, the net deferred tax asset consisted of
the following:
1998 1997 1996
---------- ---------- ----------
Future bad debt deductions.................... $4,645,768 $4,486,888 $4,672,926
Nonaccrual loan interest...................... 675,093 185,662 42,038
Unfunded accrued benefits..................... 1,081,774 901,325 719,299
Potential value of capital loss carryovers.... -- -- 557,463
---------- ---------- ----------
Gross deferred tax asset.................... 6,402,635 5,573,875 5,991,726
Valuation reserve............................. -- -- 557,463
---------- ---------- ----------
Deferred tax asset.......................... 6,402,635 5,573,875 5,434,263
Deferred tax liability........................ 1,409,945 943,671 553,581
---------- ---------- ----------
Net deferred tax asset...................... $4,992,690 $4,630,204 $4,880,682
========== ========== ==========
(8) Borrowings
Borrowings from the Federal Home Loan Bank at December 31, 1998 had maturity
dates between January 19, 1999 and June 10, 2013 and bore interest rates
between 4.85% and 7.05%. The weighted average interest rate on these
borrowings was 5.31%. The balance at November 30, 1998 of $363,035,140 was the
maximum amount outstanding at any month end during 1998. These borrowings are
collateralized by the Bank's residential mortgage loans and securities. The
Bank also has an IDEAL Way Line of Credit with Federal Home Loan Bank of
Boston. The unused balance at December 31, 1998, 1997 and 1996 was
$12,963,000.
Other short-term borrowings at December 31, 1998, 1997 and 1996 consisted of
a demand note payable to the U.S. Treasury of $212,748, $2,809,485 and
$3,100,647, respectively, and securities sold subject to agreements to
repurchase of $14,393,575, $8,852,875 and $6,259,099, respectively. These
borrowings are collateralized by the pledge of securities.
(9) Stockholders' Equity
On August 7, 1998, the Bank issued 4,530,532 shares of common stock in the
form of a 100% stock dividend. The effect of this transaction was to increase
the outstanding shares of common stock from 4,530,532 to 9,061,064. Net income
and dividends per share have been restated for all periods presented to
reflect this transaction.
As a member of the Federal Deposit Insurance Corporation, the Bank is
required to meet certain capital requirements. 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 Bank's financial statements. As of December 31, 1998,
1997 and 1996, the Bank met all regulatory capital requirements and satisfied
the requirements of the "well-capitalized" category under the Federal Deposit
Insurance
33
Corporation Improvement Act. Management believes that there have been no
events or conditions that have affected the well-capitalized category of the
Bank.
The Bank is required to maintain a leverage ratio, stockholders' equity to
total assets, of at least 3%. For the Bank to be considered well-capitalized,
this ratio must be at least 5%. At December 31, 1998, the Bank's leverage
ratio was 7.1%.
Risk-based capital requirements also apply.
Some loan commitments, lines of credit and financial guarantees are subject
to capital requirements in addition to assets shown on the Bank's statement of
condition. The risk-based capital regulations assign one of four weights to
assets of the Bank--0%, 20%, 50% and 100%. Full capital must be maintained to
support assets with 100% risk weight, with proportionally lower capital
required for assets assigned a lower weight. Most of the Bank's 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, 1998, the Bank's total risk-weighted assets were
$733,756,000 and its net risk-weighted assets were $731,820,000.
Stockholders' equity and a portion of the reserve for loan losses can all be
used to meet capital requirements. The reserve for loan losses used to meet
risk-based capital requirements cannot be more than 1.25% of total risk-
weighted assets. At December 31, 1998, $9,172,000 of the reserve for loan
losses could be used toward risk-based capital requirements. $485,000 in
capital of the CCB&T Investment Company subsidiary is excluded for risk-based
capital calculations. Also, $121,000 of intangible assets is excluded for
risk-based capital calculations. Accordingly, at December 31, 1998, total
capital for risk-based capital purposes was $91,826,000 equal to 12.5% of
risk-weighted assets.
This ratio is required to be at least 8%, and for the Bank to be considered
well-capitalized it must be at least 10%.
Stockholders' equity alone is required to be at least 4% of net risk-
weighted assets. For the Bank to be considered well-capitalized, this ratio
must be at least 6%. At December 31, 1998, the Bank's stockholders' equity was
11.3% of net risk-weighted assets.
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
a bank's 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.
Under state law, future cash dividends are limited to the balance in the
undivided profits account.
(10) Commitments and Contingencies
Substantially all of the amount shown as cash and due from banks is made up
of checks and similar items in the process of collection or is needed to
satisfy Federal Reserve requirements.
As of December 31, 1998, this requirement was $11,076,000 which included
$9,346,000 vault cash.
In the normal course of business, various commitments are entered into by
the Bank, such as standby letters of credit and commitments to extend credit,
which are not reflected in the consolidated financial statements.
34
Management does not anticipate any material losses as a result of these
transactions. At December 31, 1998, 1997 and 1996, the Bank had the following
commitments outstanding:
1998 1997 1996
------------ ------------ ------------
Standby letters of credit.............. $ 2,356,000 $ 2,567,925 $ 3,346,000
Commitments to extend credit at fixed
rates................................. 9,465,067 10,108,350 4,707,000
Other commitments to extend credit..... 101,334,933 96,699,725 129,301,000
------------ ------------ ------------
Total commitments...................... $113,156,000 $109,376,000 $137,354,000
============ ============ ============
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 Bank. Although the commitments shown
above are not carried on the statement of condition as loans, their risk is
comparable to that of loans which are carried on the statement of condition.
The Bank evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank 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 Bank, the Bank 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.
(11) Disclosure about the Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires the disclosure
of the fair value of financial instruments for which it is practicable to
estimate that value.
At December 31, 1998, 1997 and 1996, the estimated fair values of the Bank's
financial instruments were as follows:
1998 1997 1996
----------------- ----------------- -----------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- -------- -------- -------- -------- --------
(Dollar amounts in thousands)
Financial assets:
Cash and cash equiva-
lents................. $ 29,427 $ 29,427 $ 34,087 $ 34,087 $ 20,961 $ 20,961
Investment securities.. 518,146 518,146 391,496 391,496 329,064 329,064
Net loans.............. 600,853 608,962 520,148 520,620 442,015 444,467
Financial liabilities:
Deposits............... 727,897 729,704 709,084 709,780 633,333 633,820
Borrowings from Federal
Home Loan Bank........ 343,507 344,434 171,295 172,009 102,685 103,074
Other short-term
borrowings............ 14,606 14,606 11,662 11,662 9,360 9,360
The carrying value of cash and cash equivalents and short-term borrowings
approximates fair value because of the short maturity of these financial
instruments.
Fair values of commitments not reflected in the financial statements are not
materially different from their carrying amounts.
Fair values of investment 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.
35
Because no market exists for a significant portion of the Bank'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. 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.
As required by S.F.A.S. 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 unlikely 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.
(12) Earnings Per Share
The following reconciles the calculation of basic and diluted earnings per
share for the three years ending December 31, 1998, 1997 and 1996:
1998
-----------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings per share................... $12,556,946 9,061,064 $1.39
Effect of dilutive stock options........... -- 7,926
----------- ---------
Diluted earnings per share................. $12,556,946 9,068,990 $1.38
1997
-----------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic earnings per share................... $13,248,536 9,061,064 $1.46
Effect of dilutive stock options........... -- 3,504
----------- ---------
Diluted earnings per share................. $13,248,536 9,064,568 $1.46
1996
-----------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
Basic and diluted earnings per share....... $ 9,468,410 9,052,434 $1.05
36
(13) Selected Quarterly Financial Data (unaudited)
The table below shows supplemental financial data for each quarter in 1998
and 1997.
1998
---------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income......... $16,875,617 $17,896,787 $19,501,548 $19,703,998
Interest expense........ 8,048,084 8,297,732 9,890,478 9,974,873
----------- ----------- ----------- -----------
Net interest income..... 8,827,533 9,599,055 9,611,070 9,729,125
Provision for loan loss-
es..................... -- -- -- --
Non-interest income..... 3,632,707 4,187,575 4,860,504 4,355,102
Non-interest expense.... 8,461,129 8,260,852 8,849,968 8,623,942
----------- ----------- ----------- -----------
Income before income
taxes.................. 3,999,111 5,525,778 5,621,606 5,460,285
Provision for income
taxes.................. 1,599,343 2,201,580 2,237,542 2,011,369
----------- ----------- ----------- -----------
Net income.............. $ 2,399,768 $ 3,324,198 $ 3,384,064 $ 3,448,916
=========== =========== =========== ===========
Average shares outstand-
ing.................... 9,061,064 9,061,064 9,061,064 9,061,064
Net income per share.... $.26 $.37 $.38 $.38
Cash dividends de-
clared................. $.12 $.12 $.13 $.13
1997
---------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Interest income......... $15,703,645 $16,359,726 $17,740,687 $17,898,330
Interest expense........ 7,044,933 7,426,532 8,020,327 8,303,345
----------- ----------- ----------- -----------
Net interest income..... 8,658,712 8,933,194 9,720,360 9,594,985
Provision for loan loss-
es..................... -- -- -- --
Non-interest income..... 5,258,625 4,002,706 4,492,101 6,420,124
Non-interest expense.... 7,738,989 8,648,095 9,156,816 10,098,464
----------- ----------- ----------- -----------
Income before income
taxes.................. 6,178,348 4,287,805 5,055,645 5,916,645
Provision for income
taxes.................. 2,369,938 1,629,994 2,019,962 2,170,013
----------- ----------- ----------- -----------
Net income.............. $ 3,808,410 $ 2,657,811 $ 3,035,683 $ 3,746,632
=========== =========== =========== ===========
Average shares outstand-
ing.................... 9,061,064 9,061,064 9,061,064 9,061,064
Net income per share.... $.42 $.30 $.33 $.41
Cash dividends de-
clared................. $.105 $.105 $.105 $.105
As a result of continuing reductions in the amount of non-performing assets,
no provision for loan losses was made during 1997 or 1998.
Non-interest income in the first quarter of 1997 was increased by $1,900,000
received on the settlement of a dispute with a software provider. Non-interest
income in the fourth quarter of 1997 was increased by a $2,140,570 gain on the
sale of the Bank's credit card portfolio.
Because of the seasonal nature of the economy in the Bank's market area,
demand deposits and business activity follow a seasonal cycle with their low
point ordinarily being reached in February and their high point in August. As
a result of this cycle, operating income in past years has usually been at its
high during the third quarter of each year.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On June 18, 1998, the accounting firm Ernst & Young, LLP, was dismissed by
the Company's Audit Committee and the accounting firm Grant Thornton, LLP, was
hired to replace them. The financial statements
37
for the past two years did not contain an adverse opinion or a disclaimer of
opinion nor were the opinions qualified as to uncertainty, audit scope or
accounting principles. During the past two years and the subsequent interim
period preceding the dismissal, there were no disagreements with the former
accountant on any matter of accounting principles or practice, financial
statement disclosure, or auditing scope or procedure.
There were no changes in or disagreements with Accountants on accounting and
financial disclosures as defined by Item 304 of Regulation S-K.
PART III
Item 10. Directors and Executive Officers of the Registrant.
With the exception of certain information regarding the executive officers
of Bancorp and the Bank, the response to this item is incorporated by
reference from the discussion under the captions "Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in Bancorp's definitive Proxy
Statement for the Annual Meeting of Stockholders ("Proxy Statement") to be
held on April 22, 1999, to be filed with the SEC pursuant to Regulation 14A of
the Exchange Act Rules.
Information regarding the executive officers of Bancorp is contained in Item
I of Part I to this Form 10-K under the caption "Executive Officers of the
Registrant."
Item 11. Executive Compensation.
The response to this item is incorporated by reference from the discussion
under the captions "Executive Compensation" and "The Board of Directors, its
Committees and Compensation" in Bancorp's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this item is incorporated by reference from the discussion
under the caption "Ownership by Management and Other Stockholders" in
Bancorp's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The Bank enters into banking transactions in the ordinary course of its
business with directors, officers, principal stockholders and their
associates, on the same terms including interest rates and collateral on
loans, as those prevailing at the same time for comparable transactions with
others. The total amount of loans outstanding to Directors and Officers of the
Bank at December 31, 1998, 1997 and 1996 was $16,418,718, $15,937,340, and
$13,244,549, respectively. During 1998, $21,798,603 in new loans were made to
Directors and Officers and there were $21,317,225 in repayments.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
A. Documents filed as part of the report:
Exhibits as required by Item 601 of Regulation S-K ((S) 229.601 of this
chapter).
Exhibit Description
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2.1 Plan of Reorganization and Acquisition dated as of October 8, 1998
between Bancorp and the Bank (filed as Exhibit 2.1 to Bancorp's
Current Report on Form 8-K filed with the SEC on February 11, 1999 and
incorporated herein by reference)
3.1 Articles of Organization of Bancorp (filed as Exhibit 3.1 to Bancorp's
Current Report on Form 8-K filed with the SEC on February 11, 1999 and
incorporated herein by reference)
3.2 By-laws of Bancorp (filed as Exhibit 3.2 to Bancorp's Current Report
on Form 8-K filed with the SEC on February 11, 1999 and incorporated
herein by reference)
4.1 Specimen certificate for shares of Common Stock of Bancorp (filed as
Exhibit 4.1 to Bancorp's Current Report on Form 8-K filed with the SEC
on February 11, 1999 and incorporated herein by reference)
10.1 Amended and Restated Change in Control Agreement with Stephen B.
Lawson
10.2 Amended and Restated Change in Control Agreement with Noal D. Reid
10.3 Amended and Restated Change in Control Agreement with Larry K. Squire
10.4 CCBT Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.2 to
Bancorp's Registration Statement on Form S-8 filed with the SEC on
February 18, 1999 and incorporated herein by reference)
10.5 Cape Cod Bank and Trust Company Employee Stock Ownership and Plan and
Trust, as amended
11.1 Statement Regarding Computation of Per Share Earnings--Such
computation can be clearly determined from the material contained in
this Report.
12.1 Statement Regarding Computation of Ratios--Such computation can be
clearly determined from the material contained in this Report.
21.1 Subsidiaries of Bancorp--Bancorp has one direct subsidiary, Cape Cod
Bank and Trust Company, a Massachusetts-chartered commercial bank.
Cape Cod Bank and Trust Company has six subsidiaries: CCB&T Securities
Corp. which is a securities corporation; 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.
23.1 Consent of Grant Thornton, LLP, as independent public accountants
23.2 Consent of Ernst & Young, LLP, as independent public accountants
27.1 Financial Data Schedule
- --------
B. Reports on Form 8-K:
A report on Form 8-K was filed by the Bank with the FDIC on July 27, 1998,
reporting a change in the registrant's certifying accountant.
A report on Form 8-K was filed by Bancorp with the SEC on February 11, 1999,
registering Bancorp's Common Stock in place of that of the Bank pursuant to
Rule 12g-3 under the Exchange Act.
39