10-K 1 0001.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 - Commission File No. 000-25381 CCBT FINANCIAL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 495 Station Avenue, South Yarmouth, Massachusetts 02664 (Address of principal executive office) (Zip Code) (Registrant's telephone #, incl. area code): 508-394-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None Securities registered pursuant to Section 12(g) of the Act: Title of class Name of each exchange on which registered -------------------- ----------------------------------------- Common Capital Stock The Nasdaq Stock Market, Inc. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the $22.25 price on February 21, 2001, on the Nasdaq National Market was $188,751,445. 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 February 21, 2001, 8,608,048 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the CCBT Financial Companies, Inc. Notice of Annual Meeting and definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2001 are incorporated by reference into Part III of this Form 10-K. ================================================================================ The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. CCBT Financial Companies, Inc. (the "Company" or the "Registrant") may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, the factors listed under "Risk Factors and Factors Affecting Forward Looking Statements," beginning on page 4. Readers should carefully review the factors described under "Risk Factors and Factors Affecting Forward Looking Statements" and should not place undue reliance on our forward-looking statements. The Company assumes no obligations to update any forward-looking statements. PART I Item 1. Business. General. The Company was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 under the name CCBT Bancorp, Inc. at the direction of the Board of Directors and management of Cape Cod Bank and Trust Company ("Bank") for the purpose of becoming a bank holding company for the Bank. On February 11, 1999, the Company 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 the Company's common stock (the "Reorganization"). At a special stockholders' meeting held July 29, 1999, CCBT Bancorp, Inc.'s name was changed to CCBT Financial Companies, Inc. This name change became effective September 23, 1999. The Bank's charter was converted to a national bank on September 1, 1999. Currently, the Company's business activities are conducted primarily through the Bank. Cape Cod Bank and Trust Company, N.A. is the main operating subsidiary of the Company and is a federally chartered commercial bank with trust powers. The 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, N.A. is located at 307 Main Street, Hyannis, Barnstable County, Massachusetts. There are 27 other banking offices located in Barnstable and Plymouth Counties in Massachusetts. The Bank is a member of the Federal Deposit Insurance Corporation, of the Federal Reserve System and the Federal Home Loan Bank of Boston ("FHLB"). At December 31, 2000, the Bank employed 356 people on a full-time basis and another 81 people on a part-time basis. Financial information contained herein for periods and dates prior to February 11, 1999 is that of the Bank. Since the Bank is the only subsidiary of the Company, financial information contained herein for periods and dates after February 11, 1999 is essentially financial information of the Bank. Certain amounts have been reclassified in the 1999 and 1998 financial statements to conform to the 2000 presentation. During the quarter ended March 31, 1999, the Company's Board of Directors authorized the repurchase of up to 5% of the Company's stock in the open market. Consistent with that authorization, the Company repurchased 453,016 shares (5.0%) during 1999, at an average cost of $16.33 per share. During the second quarter of 1999, the Company formed a real estate investment trust as a subsidiary of the Bank to utilize several advantages afforded to the Bank, such as a way of centralizing mortgages more efficiently, the flexibility to raise additional capital and beneficial tax treatment provided by the structure of a real estate investment trust. Under the name of CCBT Preferred Corp., this new corporation purchased 100% of the commercial mortgage loans of the Bank on May 14, 1999, and retained the Bank as servicer of those loans. During the second quarter of 2000, the Company, through its wholly-owned subsidiary, Cape Cod Bank & Trust Company N.A., acquired 51% of the stock of Murray & MacDonald Insurance Services, Inc. of Falmouth, Massachusetts, a full service insurance Agency offering property, casualty, life, accident and health products to clients on Cape Cod. The Agency has been in business since 1972 and has license agreements with more than thirty insurance firms. As part of the transaction, Murray & MacDonald President Douglas D. MacDonald will continue as President of the Agency, and will direct all insurance activities for the Bank. In addition to the acquisition of Murray & MacDonald Insurance Services, Inc., the Company also completed its acquisition of two branch banking offices, in Falmouth and Wareham, Massachusetts, from Fleet Bank during the second quarter of 2000. These branches added approximately $55 million in deposits at a 15.5% premium, at June 30, 2000. 2. Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered in Barnstable County. It offers a wide range of commercial banking services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. The Bank receives substantially all of its deposits from and makes substantially all of its loans to individuals and businesses on Cape Cod, although the Bank has some loans on properties outside its market area, including some sizable participations in commercial mortgages. The Bank's core market is comprised of retail, wholesale, and manufacturing businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population contributes to seasonal deposit growth. The Company's principal sources of revenue are loans and investments, which accounted for 85% of gross income during 2000. Of the remaining portion, 2% was received from service charges. The balance was derived from Trust Department services income and other items. Banking services for individuals include checking accounts, regular savings accounts, NOW accounts, money market deposit accounts, certificates of deposit, club accounts, mortgage loans, consumer loans, safe deposit services, trust services, discount brokerage and investment services, and insurance services. The Company also owns and maintains 32 automated teller machines which are connected to the AMEX, CIRRUS, NYCE, and PLUS networks. Trust Department services include estate, trust, tax returns, agency, investment management, discount brokerage, custodial services, and IRA accounts. The Company has no foreign operations. Competition The Company faces substantial competition for loan origination and for the attraction and retention of deposits. Competition for loan origination arises primarily from commercial banks, other thrift institutions, credit unions and mortgage companies. The Company competes for loans on the basis of product variety and flexibility, competitive interest rates and fees, service quality and convenience. Competition for the attraction and retention of deposits arises primarily from other commercial banks, thrift institutions, co-operative banks, and credit unions having a presence within and around the market area served by the Bank's main office and its community branches and ATM network. There are approximately twelve of these financial institutions in the Bank's market area. In addition, the Company competes with regional and national firms that offer stocks, bonds, mutual funds, and other investment alternatives to the general public. The Company competes on its ability to satisfy such requirements of savers and investors as product alternatives, competitive rates, liquidity, service quality, convenience, and safety against loss of principal and earnings. Management believes that the Company's emphasis on personal service and convenience, coupled with active involvement within the communities it serves, contributes to its ability to compete successfully. Moreover, under the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley Act"), effective March 11, 2000, securities firms, insurance companies and other financial services providers that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Company and its subsidiaries conduct business. See "The Financial Services Modernization Legislation" below. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. Supervision and Regulation Regulation of the Company. The Company is a Massachusetts corporation and a bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended, and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. As a bank holding company, the Company's activities are limited to the business of banking and activities closely related or incidental to banking. The Company 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 and also generally must provide notice to or obtain approval of the Federal Reserve Board in connection with any such acquisition. The Financial Services Modernization Legislation. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve member banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Gramm-Leach-Bliley Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system, such as the Company, to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to 3. be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Generally, the Gramm-Leach-Bliley Act: o repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; o provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; o broadens the activities that may be conducted by national banks (and derivatively state banks), banking subsidiaries of bank holding companies, and their financial subsidiaries; o provides an enhanced framework for protecting the privacy of consumer information; o adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; o modifies the laws governing the implementation of the Community Reinvestment Act of 1977; and o addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order to engage in the new activities, a bank holding company, such as the Company, must meet certain tests. Specifically, all of a bank holding company's banks must be well-capitalized and well-managed, as measured by regulatory guidelines, and all of the bank holding company's banks must have been rated "satisfactory" or better in the most recent Community Reinvestment Act evaluation of each bank. At this time, the Company has not determined whether it will become a financial holding company. Regulation of the Bank. As a nationally-chartered commercial bank, the Bank is subject to regulation and examination by the Office of the Comptroller of the Currency ("OCC"). Relevant statutes and regulations govern, among other things, lending and investment powers, deposit activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings, and payment of dividends. The Bank is also subject to regulatory provisions covering such matters as issuance of capital stock, branching, and mergers and acquisitions. Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures the Bank's deposit accounts up to $100,000 per depositor. Federal Reserve Board Regulations. Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including the Bank, to maintain reserves against their transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the amount of the institution's interest-bearing assets. 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 the Company under the Exchange Act, as administered by the SEC. In connection with the Reorganization, the Bank deregistered the Bank's common stock under the Exchange Act. Risk Factors And Factors Affecting Forward Looking Statements The discussions set forth below and elsewhere herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. The Company may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to stockholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "will," "should," and other expressions which predict or indicate future events and trends and which do not relate to historical matters. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, the risk factors below, changes in the volume of loan originations, fluctuations in prevailing interest rates, increases in costs to borrowers of loans held, 4. increases in costs of funds, and changes in assumptions used in making such forward-looking statements. Readers should carefully review the factors described under "Risk factors and Factors Affecting Forward Looking Statements" and should not place undue reliance on our forward-looking statements. The Company assumes no obligations to update any forward-looking statements. The Company's Expansion into Non-banking Activities. During the second quarter of 2000, the Company, through its wholly-owned subsidiary, Cape Cod Bank and Trust Company N.A., acquired 51% of the stock of Murray & MacDonald Insurance Services, Inc. (See "Business - General".) Although the Company has significant experience in providing bank-related services, this expertise may not assist us in our expansion into non-banking activities. As a result, we may be exposed to risks associated with, among other things, (1) a lack of market and product knowledge or awareness of other industry related matters; and (2) an inability to attract and retain qualified employees with experience in these non-banking activities. See "Business." The Bank's Business is Seasonal and is Largely Dependent Upon the Market Area on Cape Cod. The Company experiences a wide swing in its liquidity each year as a result of the dependence of its customer base on the seasonal tourist and vacation business on Cape Cod. The Bank receives substantially all of its deposits from and makes substantially all of its loans to individuals and businesses on Cape Cod. A decline in the economy on Cape Cod, or in the United States generally, may have a material adverse effect on the operating results of the Company. General Business Risks Could Adversely Impact the Company's Business. The banking business is subject to various business risks. Continued success depends in large part on the contributions of our senior management personnel. The volume of loan originations is dependent upon demand for loans of the type originated and serviced by the Company and the competition in the marketplace for such loans. The level of consumer confidence, fluctuations in real estate values, fluctuations in prevailing interest rates and fluctuations in investment returns expected by the financial community could combine to make loans of the type originated by the Company less attractive. In addition, the Company may be adversely affected by other factors that could (a) increase the cost to the borrower of loans held by the Company, (b) create alternative lending sources for such borrowers or (c) increase the cost of funds of the Bank at a rate faster than an increase in interest income, thereby narrowing net interest rate margins. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company Could Be Adversely Impacted by Applicable Regulatory Changes or Modifications. The Company is subject to extensive regulation by federal and state governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. There can be no assurance that these laws, rules and regulations will not be modified in the future, which could make compliance much more difficult or expensive, restrict ability to originate, broker or sell loans or otherwise adversely affect business or prospects. See "Supervision and Regulation." 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 Company. It cannot be predicted whether any legislation currently being considered will be adopted or how such legislation or any other legislation that might be enacted in the future would affect the business of the Company. 5. EXECUTIVE OFFICERS OF THE REGISTRANT All officers were elected to their positions on April 27, 2000 to serve until the annual meeting on April 26, 2001 and until their successors are duly elected.
Age at Title and Area of Date Appointed Date of Officer 12/31/00 Responsibility to Present Position Employment -------------------------------------------------------------------------------------------------------------------- Stephen B. Lawson 59 President, Chief Executive Officer and Director 10/08/98 12/06/65 Robert T. Boon 46 Executive Vice President 01/04/01 04/01/85 John S. Burnett 54 Clerk 10/08/98 09/07/71 Robert R. Prall 57 Executive Vice President 01/04/01 06/01/93 Noal D. Reid 56 Chief Financial Officer and Treasurer 10/08/98 10/16/72 Larry K. Squire 53 Executive Vice President 01/04/01 05/17/71
Business Experience During the Past Five Years ---------------------------------------------- Stephen B. Lawson President, Chief Executive Officer, 7/01/92 (Bank) President, CEO and Director, 10/08/98 (the Company) Robert T. Boon Chief Trust Officer 10/13/95 (Bank) Chief Investment Officer, 06/29/98 (Bank) Executive Vice President, 01/04/01 (Bank) John S. Burnett Vice President, 12/11/80 (Bank) Clerk, 10/08/98 (the Company) Robert R. Prall Sr. V.P., Loan Administration, 6/01/93 (Bank) Chief Lending Officer, 1/01/97 (Bank) Executive Vice President, 01/04/01 (Bank) Noal D. Reid Chief Financial Officer and Treasurer, 9/15/95 (Bank) Chief Financial Officer and Treasurer, 10/08/98 (the Company) Chief Financial Officer and Cashier, 9/01/99 (Bank) Larry K. Squire Chief Operating Officer, 9/15/95 (Bank) Executive Vice President, 01/04/01 (Bank) 6. Item 2. Properties. A. Properties held in fee - Banking Offices of Cape Cod Bank and Trust Company, N.A.: 1) 307 Main Street, Hyannis - Main Office 2) 835 Main Street, Osterville - Branch Office 3) 536 Main Street, Harwichport - Branch Office 4) 1095 Route 28, South Yarmouth - Branch Office 5) 40 Main Street, Orleans - Branch Office 6) Shank Painter Road, Provincetown - Branch Office 7) 121 Main Street, Buzzards Bay - Branch Office 8) 119 Route 6A, Sandwich - Branch Office 9) Route 6A and Underpass Road, Brewster - Branch Office 10) 700 Route 6A, Dennis - Branch Office 11) 397 Palmer Avenue, Falmouth - Branch Office 12) 693 Main Street, Chatham - Branch Office 13) Main Street, Wellfleet - Branch Office 14) 249 Worcester Court, Falmouth - Branch Office 15) 237 Main Street, Wareham - Branch office 16) 495 Station Avenue, South Yarmouth - Branch Office 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 offices of the Cape Cod Trust Company and the Buzzards Bay National Bank prior to merger. The Bank also owns a house in Meredith, New Hampshire, one in Orlando, Florida, and one in Killington, Vermont, which are used as vacation sites by its employees. B. Rental of Bank Premises of Cape Cod Bank and Trust Company, N.A.: The land on which the Hyannis Airport Rotary Office is located is leased from the Barnstable Municipal Airport for $56,199 per year until 2005. The banking office located in Pocasset on the corner of MacArthur Boulevard and Barlow's Landing Road is leased from Paul J. Medeiros 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 $54,000 in 2001 with 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 ten year period. The Route 134, South Dennis branch office is leased from Chamberlain Realty for $44,000 in 2001 and is adjusted annually with the Consumer Price Index ("CPI"). The lease expires in 2002 with right to renew for up to fifteen years. The banking office at Skaket Corners, Orleans is leased from Skaket Associates for $65,550 in 2001 and 2002; $75,380 in 2003, 2004 and 2005; and $86,690 in 2006 and 2007 plus taxes and other expenses under a lease expiring in 2007. The Bank also operates a Customer Service Center that is leased from the Davenport Realty Trust, South Yarmouth for $111,972 per year (adjustable annually with CPI) plus taxes and other expenses under a lease expiring in 2012. The banking office located in the Village Green Shopping Center on Brackett Road, North Eastham is leased from Alan G. Vadnais for $10,080 per year with a 5% increase annually under a lease expiring in 2002. The Bank also rents a building next door to the Customer Service Center from Davenport Realty Trust, South Yarmouth for $76,200 in 2001 to 2011 and $19,050 in 2012. In addition, the Bank also rents office spaces from Stop & Shop for $476,000 per year under a lease expiring in 2005. The Bank also pays rent of $24,500 for Automated Teller Machines (ATMs) in 2001. Item 3. Legal Proceedings. The Company is not involved in any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. None. 7. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of the Company and, prior to the Reorganization, of the Bank is quoted on the Nasdaq National Market System under the symbol "CCBT". The table below shows the high and low trading prices of the stock for each quarter in the past two years and the dividends declared each quarter. According to the Company's transfer agent, there were approximately 1,000 stockholders of record as of February 21, 2001. 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.
1999 2000 -------------------------------------------- ------------------------------------------ First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Market price: High $19 1/8 $19 3/8 $19 1/8 $17 $15 1/4 $15 15/16 $20 $18 13/16 Low $16 1/8 $15 7/8 $15 1/4 $14 15/16 $12 5/8 $13 1/8 $15 1/2 $17 Dividends declared per share $0.14 $0.14 $0.14 $0.14 $0.16 $0.16 $0.16 $0.16
Item 6. Selected Consolidated Financial Data.
2000 1999 1998 1997 1996 ----------------------------------------------------------------- (Dollar amounts in thousands except per share amounts) Total assets $1,403,919 $1,231,114 $1,177,530 $973,105 $817,884 Stockholders' equity 98,729 85,650 83,542 75,636 66,603 Net interest income 48,345 40,796 37,767 36,907 32,650 Provision for loan losses -- -- -- -- -- Non-interest income 16,211 18,268 17,036 20,174 13,873 Non-interest expense 38,226 32,517 34,196 35,642 30,985 Provision for income taxes 9,101 10,086 8,050 8,190 6,070 Net income 17,229 16,461 12,557 13,249 9,468 Book value per share $11.47 $9.95 $9.22 $8.35 $7.35 Basic earnings per share(1) 2.00 1.85 1.39 1.46 1.05 Diluted earnings per share 2.00 1.85 1.38 1.46 1.05 Cash dividends per share .64 .56 .50 .42 .35 Return on average assets 1.35% 1.35% 1.15% 1.45% 1.26% Return on average stockholders' equity 19.3% 19.6% 15.8% 18.7% 15.2%
-------- (1) Based on average shares outstanding: 8,608,048 in 2000;8,876,776 in 1999; 9,061,064 in 1998 and in 1997; and 9,052,434 in 1996. (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, changes in the size and nature of the Company's competition, and changes in the assumptions used in making such forward-looking statements. Additional factors that could cause or contribute to such differences include, but are not limited to, those described under "Risk Factors". The following discussion should be read in conjunction with the accompanying consolidated financial statements and selected consolidated financial data included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this Item generally will refer to the investments and activities of the Company and the Bank, except where otherwise noted. 8. Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered on Cape Cod in Barnstable County, Massachusetts. The Bank's twenty-eight banking offices are principally engaged in accepting deposits from individuals and businesses, and in making loans. The Bank also has a substantial Trust Department, managing assets in excess of $804 million at December 31, 2000 on behalf of its clients. The Bank's core market is comprised of retail, wholesale, and manufacturing businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population contributes to seasonal deposit growth. 2000 COMPARED WITH 1999 Source and Use of Funds. At year-end 2000, total deposits of $973,303,000 were $207,239,000, or 27% greater than at the prior year-end. Demand deposits increased $34,280,000 or 20% and NOW deposits increased $19,145,000 or 16%. Money Market deposits increased $25,506,000 or 18%, while Other Savings declined by $14,903,000 or 9%. Significant deposit growth occurred in time deposits with Certificates of Deposit greater than $100,000 increasing $35,493,000 or 59% and Other Time Deposits increasing $107,718,000 or 89% from the prior year-end. The growth in deposits can be attributed to the acquisition of approximately $55 million in deposits from Fleet Bank as well as the offering of a 7.20% APY on a one year certificate of deposit during the year. Also, during the second quarter of 2000, the Bank accepted $25 million in brokered deposits, which are included in Other Time Deposits. On average for the year, total deposits of $863,577,000 exceeded the prior year average by $113,496,000 or 15%. Demand deposits were higher on average by $22,228,000 or 13% and NOW deposits were higher on average by $10,808,000 or 9%. Money market deposits were higher on average by $9,154,000 or 6%, while Other Savings were lower by $14,848,000 on average, for a decrease of 9%. Average Certificates of Deposit greater than $100,000 increased by $36,907,000 or 93% and average Other Time Deposits increased by $49,247,000 or 41%. During 2000, Securities decreased by $76,068,000 on average or 14%, however, at year-end Securities were lower by $36,552,000 or 8% when compared to the prior year-end as the Company's investment options were more favorable during the fourth quarter of the year. At year-end 2000, total loans of $848,490,000 were $173,748,000, or 26% greater than at the prior year-end. Loans secured by real estate accounted for this growth with Residential Mortgages up $102,852,000 or 35%, Equity Lines of Credit up $14,342,000 or 62%, and Construction loans up $19,169,000 or 28%. Additionally, Commercial Real Estate loans increased $38,548,000 or 19%. The Company made a sizable investment in participation loans during the year, which contributed $40,052,000 in total to the Commercial Mortgage and Commercial Loan categories at December 31, 2000. On average for the year, total loans of $755,451,000 exceeded the prior year average by $125,344,000 or 20%. Residential Mortgages increased $69,373,000 on average or 26% and Equity Lines of Credit increased $9,454,000 on average or 44%. Construction loans also contributed to the growth in average loan balances, increasing $28,030,000 on average or 50%. Additional funds were utilized by management to reduce Federal Home Loan Bank borrowings, which decreased by $56,676,000 or 16% from the prior year-end. Net Interest Income. On average, interest rates were higher in 2000 than they were in 1999, which increased the yields on the Bank's securities and loans. The cost of the Bank's deposits and borrowings also increased, 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. Accordingly, net interest income increased by $7,549,000, an increase of 19%. Provision for Loan losses. Recoveries on loans previously charged off exceeded charge-offs during 2000. Management determined that additions to the reserve for loan losses were unnecessary in 2000, 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 portfolio. See "Reserve for Loan Losses" below. Other Income and Expense. Non-interest income increased by $1,438,000 or 10% over the prior year-end results excluding the gain of $3,495,000 in 1999 on the sale of the Merchant Credit Card portfolio. Increased Financial Advisor (Trust) and Electronic Banking fees as well as the addition of revenues from insurance activities contributed to this increase. Operating expenses increased $5,764,000 or 18% over 1999. Salaries and benefits, the largest combined category of expense, accounted for $2.8 million of this increase. Increased expenses in other categories include one time conversion expenses of new branches, amortization of intangibles resulting from acquisitions and increased marketing and advertising costs to support the Company's entrance into new markets. Provision for Income Taxes. As a result of lower pretax income, the provision for income taxes decreased by 10%. Net Income. As a result of the foregoing factors, net income for 2000 was $17,228,749, an increase of 5% from the previous year. 1999 COMPARED WITH 1998 Source and Use of Funds. At year-end 1999, total deposits of $766,064,000 were 5% greater than the prior 9. year-end. Demand deposits increased $6,658,000 or 4% and NOW deposits increased $6,097,000 or 5%. Money market accounts and Other savings declined by $3,029,000 or 2% and $1,984,000 or 1%, respectively, while Certificates of deposit greater than $100,000 doubled, from $30,299,000 at year end 1998 to $60,666,000 at year end 1999. This significant growth of large CDs began in August and continued throughout the last trimester of the year. Management believes that this growth is attributable to highly competitive rates offered during that period while the weaker performance of other deposit types occurred largely in December and may have been related to customers' Year 2000 concerns. On average for the year, total deposits of $750,084,000 exceeded the prior year average by nearly 5%, led by greater average demand deposits, up $18,343,000 or 12%, NOW accounts, up $7,991,000 or 8%, and large denomination CDs, up $11,193,000 or 39%. Management believes that these averages reflect the strong economy on the Cape during 1999. As well, additional funds were raised through increased borrowings, notably the FHLB. While FHLB borrowings increased only modestly from year-end to year-end, 1999 average outstandings increased $80,027,000 or 29% over the 1998 comparable as the Bank continued to take long term advances to support fixed rate lending as well as to take shorter term advances for the continued purpose of making high quality investments with short effective duration. At year end 1999, loans totaled $674,743,000 reflecting growth of $80,923,000 or 14% over the 1998 year end. Loans secured by real estate, including residential first mortgages, up $57,190,000 or 24% and construction loans, up $20,900,000 or 44% accounted for this growth, as well as did increased commercial loans, up $7,000,000 or 10% in the latter weeks of the year. These growth statistics also reflect the strong Cape Cod economy during 1999. On average, loans were $47,400,000 or 8% greater during 1999 than during 1998, with most of that change occurring in residential mortgage outstandings. Also on the asset side, securities averaged significantly higher during 1999 as compared to 1998, up $75,281,000 or 16% reflecting utilization of the FHLB advances taken down for this purpose. In contrast, however, year end 1999 securities were $30,164,000 or 6% lower than the 1998 year end comparable, as management used maturities and paydowns to reduce FHLB advances, to respond to the late year growth of commercial loans and to provide extra cash to respond to unusual customer demands that might have arisen in relation to Year 2000 concerns. Net Interest Income. On average, interest rates were lower in 1999 than they were in 1998, which decreased the yields on the Bank's loans. The cost of the Bank's deposits and borrowings also decreased by a comparable amount. Because of the positive spread between the return on earning assets and the cost of funds, as well as the overall growth of deposits, borrowings, loans and investments discussed above, the Bank's net interest income increased. Accordingly, net interest income increased by $3,029,000, an increase of 8%. Provision for Loan losses. Recoveries on loans previously charged off exceeded charge-offs during 1999. Management determined that additions to the reserve for loan losses were unnecessary in 1999, notwithstanding the growth in the loan portfolio. Other Income and Expense. Non-interest income increased $5,233,000 or 31% on increased Financial Advisor (Trust) fees, greater credit card merchant fees, and the sale of the credit card merchant portfolio, which in itself produced a pretax gain of $3,495,000. Operating expenses increased $2,322,000 or 7% over 1998 with most of this increase reflected in salaries and benefits expenses. Provision for Income Taxes. As a result of higher pretax income, the provisions for income taxes increased by 25%. Net Income. As a result of the foregoing factors, net income for 1999 was $16,461,093, an increase of 31% from the previous year. MATURITY STRUCTURE OF ASSETS AND LIABILITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES As of December 31, 2000 fixed rate debt securities and loans mature as follows: Fixed Rate ----------------------------- Debt Securities Loans ----------------------------- Term to maturity: (Dollar amounts in thousands) Three months or less $ 48,672 $ 44,266 Over three months through 12 months 27,147 45,812 Over one year through five years 54,515 122,244 Over five years 32,257 36,848 -------- -------- Totals $162,591 $249,170 ======== ======== 10. Included in fixed rate debt securities are $136,959,000 of collateralized mortgage obligations, mortgage-backed securities, and other debt securities. These have been distributed based on estimates of their principal cash flows rather than their contractual final maturities. The balance, largely fixed rate municipal securities, are distributed on the basis of contractual maturity. Included in loans maturing in three months or less are $880,000 of customer account overdrafts. As of December 31, 2000 floating rate debt securities, FHLB and FRB stock and loans reprice as follows:
Floating Rate ----------------------------------------------- Debt FHLB & FRB Securities Stock Loans ---------- ----- ----- Term to repricing/maturity: (Dollar amounts in thousands) Three months or less $251,744 $23,306 $151,160 Over three months through 12 months 8,699 -- 180,805 Over one year through five years 3,163 -- 261,302 Over five years 546 -- 6,053 Totals $264,152 $23,306 $599,320
Most residential mortgage loans are adjustable rate mortgages subject to interest rate caps. The Company's investment securities are subject to market risk in the following ways. $287,458,000 of the investment securities owned as of December 31, 2000 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 that range from 8% to 24%. If interest rates rise enough so that there is a significant possibility that a given security will become subject to its interest rate cap, the market value of that security will be reduced. This risk is greater to the extent that the remaining life of the investment is longer. The Company's floating rate investments have an average life of about two years. Market risk may also result from the fact that various indices will not always move by the same amount when interest rates increase. This may cause securities tied to one index to perform less well than securities tied to other indices. Most of the remaining $162,591,000 of securities are fixed-rate collateralized mortgage obligations ("CMOs"), mortgage backed securities and other debt securities. Fixed-rate investments have market risk because their rate of return does not change at all with the general level of interest rates. Because homeowners are less likely to refinance their mortgages at higher rates, an additional characteristic of CMOs and mortgage backed securities is that their principal payments tend to slow when interest rates rise. If the fixed rate earned on the investment is lower than the new market rate, this can result in a decline in the value of these securities. Almost all of the Company's fixed-rate CMOs have very short lives and have interest rates above current market levels, which reduces the market risk of these securities. The average life of the Company's fixed-rate investments is less than two years. The remaining maturity of time certificates of deposit as of December 31, 2000 was as follows: Fixed Rate ---------------------------------------- Certificates of Deposit $100,000 or more Less than $100,000 ---------------------------------------- Remaining maturity: (Dollar amounts in thousands) Three months or less $ 54,267 $ 52,040 Over three months through 12 months 34,917 145,708 Over one year through five years 6,820 31,006 Over five years 155 -- -------- -------- Totals $ 96,159 $228,754 ======== ======== Other deposits may be withdrawn by the customer without notice or penalty. The rates paid thereon are reviewed each month and changed at the Company's option as often as indicated by changing market conditions. 11. The remaining maturity of borrowings from the Federal Home Loan Bank as of December 31, 2000 was as follows: Fixed Rate ----------------------------- FHLB Borrowings ----------------------------- Remaining maturity: (Dollar amounts in thousands) Three months or less $ 149,530 Over three months through 12 months 9,900 Over one year through five years 112,901 Over five years 18,956 --------- Totals $ 291,287 Rates paid on other interest-bearing liabilities change daily. Reserve for Loan Losses The reserve for loan losses is an estimate of the amount necessary to absorb probable losses in the 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. In addition, the Company's reserve for loan losses is periodically reviewed by the OCC as part of their examination process. The OCC may require the Company to make additions to the reserve based upon judgments different from those of management. Non-performing Assets and Loan Loss Experience Non-performing assets as of December 31 were as follows:
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Nonaccrual loans $2,192 $1,777 $7,468 $2,770 $3,679 Loans past due 90 days or more and still accruing -- -- -- -- 266 Property from defaulted loans 1,500 1,500 -- 621 430 ------ ------ ------ ------ ------ Total non-performing assets $3,692 $3,277 $7,468 $3,391 $4,375 ====== ====== ====== ====== ====== Restructured troubled debt performing in accordance with amended terms, not included above $ 237 $ 626 $ 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 and in the process of collection. Accordingly, for loans that 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 Company 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, 2000, $6,994,870 of loans were included in this category, in addition to loans reported above. The Company's loan classification system also includes a category for loans that are monitored for possible deterioration in credit quality. At December 31, 2000, $3,530,420 of loans were included in this category. In addition, it is possible that there may be losses on other loans that have not been specifically identified. 12. The changes in the reserve for loan losses during the five years ended December 31 were as follows:
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Balance, beginning of year $11,158 $11,108 $10,962 $11,417 $11,701 Provision for loan losses -- -- -- -- -- Charge-offs: Commercial loans (108) (347) (353) -- (669) Construction mortgage loans -- -- -- -- (39) Commercial mortgage loans -- (186) (86) (69) -- Industrial revenue bonds -- -- -- -- -- Residential mortgage loans -- -- (1) (119) -- Consumer loans (60) (77) (166) (749) (637) Recoveries on loans previously charged off: Commercial loans 826 351 475 653 792 Construction mortgage loans 89 60 47 -- 43 Commercial mortgage loans 216 190 174 120 143 Industrial revenue bonds -- -- -- -- -- Residential mortgage loans 10 -- 23 8 1 Consumer loans 23 59 33 101 82 ------- ------- ------- ------- ------- Balance, end of year $12,154 $11,158 $11,108 $10,962 $11,417 ======= ======= ======= ======= =======
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Allocation of ending balance: Commercial loans $ 1,502 $ 1,457 $ 1,578 $ 1,676 $ 2,872 Construction mortgage loans 802 755 705 521 792 Commercial mortgage loans 5,838 5,681 5,822 6,587 5,221 Industrial revenue bonds 16 20 23 28 33 Residential mortgage loans 3,361 2,725 2,460 1,610 1,484 Consumer loans 635 520 520 540 1,015 ------- ------- ------- ------- ------- Balance, end of year $12,154 $11,158 $11,108 $10,962 $11,417 ======= ======= ======= ======= =======
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Ratio of net charge-offs (recoveries) (0.13)% (0.01)% (0.03)% 0.09% 0.07% to average loans outstanding
Recoveries on loans previously charged off exceeded charge-offs therefore management determined that additions to the reserve for loan losses were unnecessary in 2000, notwithstanding the growth in the loan portfolio. The reserve represented 1.43% of total loans at December 31, 2000, 1.65% at December 31, 1999 and 1.87% at December 31, 1998. Although management believes that upon review of loan quality and payment statistics, the reserve is adequate to cover losses likely to result from loans in the current portfolio at December 31, 2000, there can be no assurance that the reserve is adequate or that additional provisions might not become necessary. Liquidity The Company 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. With the exception of the year ended December 31, 1999, substantially all of the amount shown as cash and due from banks at year end is made up of checks and similar items in the process of collection or was needed to satisfy a requirement to maintain a portion of deposits in an account at the Federal Reserve. Accordingly, it does not represent a source of liquidity. At year end December 31, 1999, however, a portion of cash and due from banks was accumulated to 13. honor potential customer demands arising from Year 2000 concerns. The Company did not experience these potential customer demands. In general, investment securities could also be sold if necessary to meet liquidity needs. In that event, a gain or loss would be realized if the market value of the securities sold was not equal to their cost, adjusted for the amortization of premium or accretion of discount. The Bank can also borrow funds using investment securities as collateral, and it has a line of credit of $5,000,000 from the Federal Home Loan Bank of Boston. The Bank may borrow from the Federal Reserve if necessary. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; AVERAGE INTEREST RATES AND INTEREST SPREAD The average amount outstanding for certain categories of interest-earning assets and interest-bearing liabilities, the interest income or expense and the average yields earned or rates paid thereon, are summarized in the following table for the three years ended December 31, 2000. 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 6.26%, 4.97% and 5.35% during 2000, 1999 and 1998 , respectively. 14.
Net Interest Income, Net Interest Margin Years ended December 31, -------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------- ----------------------------- ----------------------------- Average Average Average Average Average Average Balance Interest Yield Balance Interest Yield Balance Interest Yield ----------------------------- ----------------------------- ----------------------------- (Dollar amounts in thousands) ASSETS Securities: Mortgage-backed securities $ 27,465 $ 2,173 7.91% $ 60,641 $ 3,394 5.60% $ -- $ -- -- U.S. Government CMOs 129,902 9,634 7.41% 154,257 7,893 5.12% 256,334 14,141 5.52% U.S. Government agencies 26,362 1,775 6.73% 26,610 1,400 5.26% 36,949 2,039 5.52% Other CMOs 49,417 3,555 7.19% 72,714 4,176 5.74% 53,619 3,110 5.80% State and municipal obligations 19,678 921 4.68% 21,643 822 3.80% 17,494 806 4.61% Other securities 209,580 14,621 6.97% 202,607 12,215 6.03% 98,795 5,624 5.69% Total securities 462,404 32,679 7.07% 538,472 29,900 5.55% 463,191 25,720 5.55% ---------- ------- ---------- ------- ---------- ------- Loans: Commercial 77,352 7,529 9.73% 73,487 6,650 9.05% 72,623 6,994 9.63% Commercial construction 30,861 2,899 9.39% 14,937 1,342 8.98% 10,845 999 9.21% Residential construction 52,789 3,316 6.28% 40,683 2,388 5.87% 33,711 2,033 6.03% Commercial mortgages 219,690 20,298 9.24% 204,275 18,139 8.88% 207,207 19,317 9.32% Industrial revenue bonds 1,382 114 8.25% 1,278 98 7.67% 1,678 148 8.82% Residential mortgages 333,308 23,199 6.96% 263,935 17,672 6.70% 223,572 15,608 6.98% Home equity 30,934 3,001 9.70% 21,480 1,876 8.73% 19,866 1,868 9.40% Consumer 9,135 934 10.22% 10,032 1,042 10.39% 13,183 1,291 9.79% ---------- ------- ---------- ------- ---------- ------- Total loans 755,451 61,290 8.11% 630,107 49,207 7.81% 582,685 48,258 8.28% ---------- ------- ---------- ------- ---------- ------- Total earning assets 1,217,855 93,969 7.72% 1,168,579 79,107 6.77% 1,045,876 73,978 7.07% ------- ------- ------- Non-earning assets 61,027 52,179 47,457 ---------- ---------- ---------- Total assets $1,278,882 $1,220,758 $1,093,333 ========== ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Deposits: NOW accounts $ 124,663 928 0.74% $ 113,855 936 0.82% $ 105,864 1,281 1.21% Regular savings 148,790 4,639 3.12% 163,638 4,755 2.91% 161,749 5,234 3.24% Money Market accounts 154,187 5,748 3.73% 145,033 4,484 3.09% 147,623 5,071 3.44% Certificates of Deposit of $100,000 or more 76,672 5,682 7.41% 39,765 2,021 5.08% 28,572 1,525 5.34% Other time deposits 168,318 9,127 5.42% 119,071 5,832 4.90% 121,216 6,479 5.35% ---------- ------- ---------- ------- ---------- ------- Total interest bearing deposits 672,630 26,124 3.88% 581,362 18,028 3.10% 565,024 19,590 3.47% ---------- ------- ---------- ------- ---------- ------- Borrowings: Federal Home Loan Bank 293,950 18,098 6.16% 356,276 19,405 5.45% 276,249 15,956 5.78% Other short-term borrowings 25,579 1,402 5.48% 20,898 878 4.20% 14,890 665 4.47% ---------- ------- ---------- ------- ---------- ------- Total borrowings 319,529 19,500 6.10% 377,174 20,283 5.38% 291,139 16,621 5.71% ---------- ------- ---------- ------- ---------- ------- Total interest-bearing liabilities 992,159 45,624 4.60% 958,536 38,311 4.00% 856,163 36,211 4.23% ------- ------- ------- Demand deposits 190,947 168,719 150,376 Non-interest bearing liabilities 6,614 9,348 7,237 Stockholders' equity 89,162 84,155 79,557 ---------- ---------- ---------- Total liabilities & equity $1,278,882 $1,220,758 $1,093,333 ========== ========== ========== Net interest income/spread $48,345 3.12% $40,796 2.77% $37,767 2.84% ======= ======= ======= Net interest margin (NII/Avg. Earning Assets) 3.97% 3.49% 3.61%
15. 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 2000, higher interest rates increased interest income more than interest expense because the Company had more earning assets than interest-bearing liabilities and the rates paid on many types of deposits were not increased by as much as investment rates increased. Repayments of Federal Home Loan Bank borrowings by the Company also contributed to reduced interest expense. In 1999, lower interest rates reduced interest expense more than interest income as security portfolio yields were stable to 1998 levels overall. Greater volume in 1999 also contributed to improved net interest income.
2000 compared to 1999 1999 compared to 1998 ------------------------------- --------------------------------- Change Due to Increase Change Due to Increase (Decrease) (Decrease) ------------------------------- --------------------------------- Volume Rate Net Volume Rate Net -------- -------- -------- --------- --------- ---------- (Dollar amounts in thousands) EARNING ASSETS Securities: Mortgage-backed securities $(2,211) $ 990 $(1,221) $ 1,697 $ 1,697 $ 3,394 U.S. Government CMOs (1,430) 3,171 1,741 (5,396) (852) (6,248) U.S. Government agencies 3 372 375 (556) (83) (639) Other CMOs (1,464) 843 (621) 1,119 (53) 1,066 State & municipal obligations (84) 183 99 175 (159) 16 Other securities 517 1,889 2,406 6,073 518 6,591 -------- -------- -------- --------- --------- ---------- Total securities (4,669) 7,448 2,779 3,112 1,068 4,180 -------- -------- -------- --------- --------- ---------- Loans: Commercial 363 516 879 81 (425) (344) Commercial construction 1,463 94 1,557 372 (29) 343 Residential construction 736 192 928 415 (60) 355 Commercial mortgages 1,397 762 2,159 (267) (911) (1,178) Industrial revenue bonds 8 8 16 (33) (17) (50) Residential mortgages 4,736 791 5,527 2,761 (696) 2,065 Home equity 871 254 1,125 146 (139) 7 Consumer (93) (15) (108) (318) 69 (249) -------- -------- -------- --------- --------- ---------- Total loans 9,481 2,602 12,083 3,157 (2,208) 949 -------- -------- -------- --------- --------- ---------- Total interest income 4,812 10,050 14,862 6,269 (1,140) 5,129 -------- -------- -------- --------- --------- ---------- INTEREST BEARING LIABILITIES Deposits: NOW accounts 85 (93) (8) 81 (426) (345) Regular savings (447) 331 (116) 58 (537) (479) Money Market accounts 312 952 1,264 (85) (502) (587) Certificates of deposit of $100,000 or more 2,306 1,355 3,661 584 (88) 496 Other time deposits 2,541 754 3,295 (110) (537) (647) -------- -------- -------- --------- --------- ---------- Total interest bearing deposits 4,797 3,299 8,096 528 (2,090) (1,562) -------- -------- -------- --------- --------- ---------- Borrowings: Federal Home Loan Bank (3,616) 2,309 (1,307) 4,491 (1,042) 3,449 Other short-term borrowings 227 297 524 260 (47) 213 -------- -------- -------- --------- --------- ---------- Total borrowings (3,389) 2,606 (783) 4,751 (1,089) 3,662 -------- -------- -------- --------- --------- ---------- Total interest bearing liabilities 1,408 5,905 7,313 5,279 (3,179) 2,100 -------- -------- -------- --------- --------- ---------- Net changes due to volume/rate $ 3,404 $ 4,145 $ 7,549 $ 990 $ 2,039 $ 3,029 ======== ======== ======== ========= ========= ==========
16. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk is the risk of loss from adverse changes in market prices. In particular, the market prices of interest-earning assets may be affected by changes in interest rates. Since net interest income (the difference or spread between the interest earned on loans and investments and the interest paid on deposits and borrowings) is the Company's primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company's assets and liabilities. Interest rate risk is the exposure of net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available for sale and the flow and mix of deposits. The Company's Asset/Liability Management Committee, comprised of 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 Company is subject to interest rate risk in the event that rates either increase or decrease. In the event that interest rates increase, the value of net assets (the liquidation value of stockholders' equity) would decline. At December 31, 2000, it is estimated that an increase in interest rates of 200 basis points (for example, an increase in the prime rate from 9.5% to 11.5%) would reduce the value of net assets by $20,407,000. On the other hand, if interest rates were to decrease, the value of net assets would increase. Although the value of net assets is subject to risk if interest rates rise (but not if rates fall) the opposite is true of the Company's earnings. If interest rates were to increase, net interest income would increase because the Company has more interest-earning assets than it has interest-bearing liabilities and because much of this excess amount reprices within a short period of time. As a result, net interest income is instead subject to the risk of a decline in rates. Not only are there fewer interest-bearing liabilities to reprice, but many of these liabilities could not reprice much lower because the rates paid on them are already low. Accordingly, if interest rates were to decrease by 200 basis points (for example, a decrease in the prime rate from 9.5% to 7.5%) it is estimated that net interest income would decrease by $4,261,000. On the other hand, if interest rates were to increase, net interest income would increase. At December 31, 1999, it was estimated that the value of the net assets of the Company would decline by $6,156,000 if interest rates were to increase by 200 basis points and that the Company's net interest income would decline by $6,506,000 if interest rates were to decline by 200 basis points. The year-to-year change in these estimates is a result of a lengthening of the duration of the net assets of the Company. Item 8. Financial Statements and Supplementary Data. FINANCIAL STATEMENTS INDEX o Reports of Independent Certified Public Accountants o Consolidated Statements of Condition at December 31, 2000, 1999 and 1998 o Consolidated Statements of Income for the Three Years Ended December 31, 2000 o Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2000 o Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2000 o Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 2000 o Notes to Consolidated Financial Statements 17. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors CCBT Financial Companies, Inc. We have audited the consolidated statements of condition of CCBT Financial Companies, Inc. as of December 31, 2000, 1999 and 1998, and the related consolidated statements of income, cash flows, comprehensive income and changes in stockholders' equity, for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 CCBT Financial Companies, Inc. as of December 31, 2000, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP Boston, Massachusetts February 9, 2001 18. CONSOLIDATED STATEMENTS OF CONDITION
December 31, ----------------------------------------------------- ASSETS 2000 1999 1998 ---- ---- ---- Cash and due from banks $ 49,371,492 $ 43,415,100 $ 29,383,227 Short term interest-bearing deposits 16,843,538 2,207,328 107,488 Securities available for sale at fair value 426,742,801 463,379,414 495,956,643 Federal Home Loan Bank stock, at cost 22,125,400 22,125,400 22,125,400 Federal Reserve Bank stock, at cost 1,180,700 1,096,700 -- Total loans 848,490,319 674,742,548 593,820,277 Less: Reserve for loan losses (12,153,944) (11,158,126) (11,107,633) -------------- -------------- -------------- Net loans 836,336,375 663,584,422 582,712,644 Loans held for sale 860,840 200,000 18,140,522 Premises and equipment 16,633,912 12,396,729 12,847,002 Deferred tax assets 4,512,589 4,657,933 4,992,690 Accrued interest receivable on securities 3,353,580 2,850,366 4,067,975 Principal and interest receivable on loans 4,331,987 3,156,914 3,596,836 Intangibles 9,555,425 -- -- Other assets 12,070,707 12,044,040 3,599,734 -------------- -------------- -------------- Total assets $1,403,919,346 $1,231,114,346 $1,177,530,161 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 973,302,664 $ 766,063,617 $ 727,896,975 Borrowings from the Federal Home Loan Bank 291,286,797 347,962,999 343,506,683 Other short-term borrowings 24,520,157 19,345,885 14,606,322 Current taxes payable 2,267,117 1,721,187 255,080 Interest payable on deposits and borrowings 4,206,555 3,061,932 2,497,740 Post retirement benefits payable 2,830,386 2,442,736 2,016,146 Employee profit sharing retirement and bonuses payable 2,946,642 2,396,542 1,783,350 Other liabilities 3,705,815 2,469,837 1,425,465 -------------- -------------- -------------- Total liabilities 1,305,066,133 1,145,464,735 1,093,987,761 -------------- -------------- -------------- Minority interest 124,435 -- -- -------------- -------------- -------------- Stockholders' equity Common stock, par value: $1.00 in 2000 and 1999 $2.50 in 1998 Authorized: 12,000,000 shares Issued: 9,061,064 9,061,064 9,061,064 22,652,660 Surplus 27,494,890 27,494,890 13,903,294 Undivided profits 69,896,759 58,181,480 46,704,129 Treasury stock, at cost (453,016 shares) (7,399,628) (7,399,628) -- Accumulated other comprehensive income (324,307) (1,688,195) 282,317 -------------- -------------- -------------- Total stockholders' equity 98,728,778 85,649,611 83,542,400 -------------- -------------- -------------- Total liabilities and stockholders' equity $1,403,919,346 $1,231,114,346 $1,177,530,161 ============== ============== ==============
The accompanying notes are an integral part of these financial statements. 19. CONSOLIDATED STATEMENTS OF INCOME for the Years Ended December 31,
2000 1999 1998 ---- ---- ---- INTEREST INCOME Interest and fees on loans $61,289,410 $49,206,774 $48,258,130 Interest on short term interest-bearing deposits 934,679 675,357 428,027 Interest on federal funds sold 107,610 -- -- Taxable interest income on securities 28,996,374 26,993,403 23,345,153 Tax-exempt interest income on securities 910,454 775,355 740,344 Dividends on securities 1,730,510 1,456,359 1,206,296 ----------- ------------ ------------ Total interest income 93,969,037 79,107,248 73,977,950 ----------- ------------ ------------ INTEREST EXPENSE Interest on deposits 26,123,306 18,028,054 19,589,900 Interest on borrowings from the Federal Home Loan Bank 18,097,810 19,405,176 15,955,929 Interest on other short-term borrowings 1,402,676 877,907 665,338 ----------- ------------ ------------ Total interest expense 45,623,792 38,311,137 36,211,167 ----------- ------------ ------------ Net interest income 48,345,245 40,796,111 37,766,783 Provision for loan losses -- -- -- ----------- ------------ ------------ Net interest income after provision for loan losses 48,345,245 40,796,111 37,766,783 ----------- ------------ ------------ NON-INTEREST INCOME Financial Advisor fees 6,433,397 5,957,566 5,111,716 Deposit account service charges 1,967,843 1,915,777 1,513,856 Branch banking fees 3,073,595 3,049,663 3,031,343 Electronic banking fees 2,001,454 1,829,980 1,752,286 Loan servicing and other loan fees 232,815 167,504 164,173 Brokerage fees and commissions 981,233 992,652 1,140,189 Net gain on sales of securities 84,602 234,301 383,888 Net gain on sales of loans 88,063 219,587 332,579 Insurance commissions 878,261 -- -- Gain on sale of credit card merchant portfolio -- 3,494,733 -- Other income 469,290 405,776 330,774 ----------- ------------ ------------ Total non-interest income 16,210,553 18,267,539 13,760,804 ----------- ------------ ------------ NON-INTEREST EXPENSE Salaries 14,399,574 12,381,649 11,578,347 Employee benefits 6,227,247 5,454,900 4,707,206 Building and equipment 4,889,482 4,340,295 4,137,912 Data processing 2,721,222 2,793,269 2,666,629 Accounting and legal fees 771,361 891,402 936,629 Other outside services 2,104,604 1,856,415 1,896,258 Amortization of goodwill 851,443 -- -- Delivery and communications 1,564,002 1,376,039 1,390,952 Directors' fees 280,125 294,691 329,300 Marketing and advertising 1,252,521 906,818 858,775 Printing and supplies 781,718 753,762 876,808 Insurance 376,081 285,681 336,143 Branch conversion expenses 283,218 -- -- All other expenses 1,778,009 1,181,246 1,205,848 ----------- ------------ ------------ Total operating expense 38,280,607 32,516,167 30,920,807 ----------- ------------ ------------ Minority Interest (54,504) -- -- ----------- ------------ ------------ Net income before taxes 26,329,695 26,547,483 20,606,780 Applicable income taxes 9,100,946 10,086,390 8,049,834 ----------- ------------ ------------ Net income $17,228,749 $16,461,093 $12,556,946 =========== =========== =========== Average shares outstanding 8,608,048 8,876,776 9,061,064 Basic earnings per share $2.00 $1.85 $1.39 Diluted earnings per share 2.00 1.85 1.38 Cash dividends declared .64 .56 .50
The accompanying notes are an integral part of these financial statements 20. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,
2000 1999 1998 ---- ---- ---- CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 17,228,749 $ 16,461,093 $ 12,556,946 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses -- -- -- Depreciation and amortization 3,226,343 2,139,147 1,913,955 Net amortization of securities 4,891,652 3,020,243 1,979,750 (Accretion) amortization of deferred loan fees (48,784) 209,556 862,228 Net gain on sale of investment securities (84,602) (234,301) (383,888) Deferred income tax (benefit) expense (622,294) 1,998,127 (664,597) Net gain on sale of loans (88,063) (219,587) (332,579) Net loss on disposal of premises and equipment 57,155 -- -- Gain on sale of credit card merchant portfolio -- (3,494,733) -- Net change in: Loans held for sale (660,840) 17,940,522 (14,210,369) Accrued interest receivable (1,619,663) 1,657,531 (776,650) Accrued expenses and other liabilities 3,008,301 2,648,346 2,474,725 Other, net (243,069) 4,301,611 1,741,890 --------------- -------------- -------------- Net cash provided by operating activities 25,044,885 46,427,555 5,161,411 -------------- -------------- -------------- CASH USED BY INVESTING ACTIVITIES Net increase in loans (176,228,729) (164,067,605) (159,465,444) Proceeds from sale of loans 12,188,480 85,294,654 93,135,361 Dispositions of property from defaulted loans 70,000 115,000 809,674 Maturities of securities 248,979,523 496,592,930 490,955,326 Purchase of available for sale securities (312,851,725) (563,093,625) (866,352,399) Sales of available for sale securities 97,908,163 82,270,203 243,852,925 Purchases of premises and equipment (4,199,951) (2,386,550) (2,130,960) Sale of premises and equipment 50,000 -- -- Acquisition of banking offices 35,874,054 -- -- Acquisition of 51% of Murray & MacDonald Insurance Services, Inc. (1,199,094) -- -- --------------- --------------- --------------- Net cash used by investing activities (99,409,279) (65,274,993) (199,195,517) --------------- --------------- --------------- CASH PROVIDED BY FINANCING ACTIVITIES Net increase in deposits 151,972,396 38,166,642 18,812,489 Net (decrease) increase in borrowings from the Federal Home Loan Bank (56,676,202) 4,456,316 172,211,409 Net increase in other short-term borrowings 5,174,272 4,739,563 2,943,962 Purchase of CCBT Financial Companies, Inc. common stock in open market -- (7,399,628) -- Cash dividends paid on common stock (5,513,470) (4,983,742) (4,530,532) --------------- -------------- --------------- Net cash provided by financing activities 94,956,996 34,979,151 189,437,328 -------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents 20,592,602 16,131,713 (4,596,778) Cash and cash equivalents at beginning of year 45,622,428 29,490,715 34,087,493 -------------- -------------- -------------- Cash and cash equivalents at end of year $ 66,215,030 $ 45,622,428 $ 29,490,715 ============== ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 44,479,170 $ 37,746,945 $ 35,545,921 Income taxes 8,967,843 6,599,480 9,476,298 Non-cash transactions: Additions to property from defaulted loans $ 70,000 $ 1,615,000 $ 188,900 Loans to finance OREO property -- 100,000 137,500
For a description of assets acquired and liabilities assumed in connection with the acquisition of Murray & MacDonald Insurance Services Inc., and the acquisition of two branch offices from Fleet Bank, see notes 9 and 10, respectively, of Notes to the Consolidated Financial Statements. The accompanying notes are an integral part of these financial statements. 21. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31,
2000 1999 1998 ---- ---- ---- Net income $ 17,228,749 $16,461,093 $12,556,946 ------------ ----------- ----------- Unrealized holding gains (losses) on securities available for sale 2,458,196 (2,937,312) 177,084 Reclassification of gains on securities realized in income (84,602) (234,301) (383,888) ------------ ----------- ----------- Net unrealized gains (losses) 2,373,594 (3,171,613) (206,804) Related tax effect (1,009,706) 1,201,101 86,496 ------------ ----------- ----------- Net other comprehensive income (loss) 1,363,888 (1,970,512) (120,308) ------------ ----------- ----------- Comprehensive income $ 18,592,637 $14,490,581 $12,436,638 ============ =========== ===========
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31,
2000 1999 1998 ---- ---- ---- COMMON STOCK Balance, beginning of the year $ 9,061,064 $22,652,660 $11,326,330 Two-for-one stock distribution -- -- 11,326,330 Stock exchange at Reorganization -- (13,591,596) -- ------------- ------------ ------------ Balance, end of year 9,061,064 9,061,064 22,652,660 ------------- ------------ ------------ SURPLUS Balance, beginning of the year 27,494,890 13,903,294 25,229,624 Two-for-one stock distribution -- -- (11,326,330) Stock exchange at Reorganization -- 13,591,596 -- ------------- ------------ ------------ Balance, end of year 27,494,890 27,494,890 13,903,294 ------------- ------------ ------------ UNDIVIDED PROFITS Balance, beginning of the year 58,181,480 46,704,129 38,677,715 Net income 17,228,749 16,461,093 12,556,946 Cash dividends declared (5,513,470) (4,983,742) (4,530,532) ------------- ------------ ------------ Balance, end of year 69,896,759 58,181,480 46,704,129 ------------- ------------ ------------ TREASURY STOCK Balance, beginning of the year (7,399,628) -- -- ------------- ------------ ------------ Purchase of Treasury stock -- (7,399,628) -- ------------- ------------ ------------ Balance, end of year (7,399,628) (7,399,628) -- ------------- ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of the year (1,688,195) 282,317 402,625 Net other comprehensive income (loss) 1,363,888 (1,970,512) (120,308) ------------- ------------ ------------ Balance, end of year (324,307) (1,688,195) 282,317 ------------- ------------ ------------ TOTAL STOCKHOLDERS' EQUITY $98,728,778 $85,649,611 $83,542,400 ============= ============ ============
The accompanying notes are an integral part of these financial statements. 22. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Principles of consolidation -- Financial information contained herein for periods and dates prior to February 11, 1999 is that of the Bank. Since the Bank is the only subsidiary of the Company, financial information contained herein for periods and dates after February 11, 1999 is essentially financial information of the Bank. Certain amounts have been reclassified in the 1999 and 1998 financial statements to conform to the 2000 presentation. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts have been eliminated upon consolidation in the presentation of the consolidated financial statements. Nature of business -- The Company was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 under the name CCBT Bancorp, Inc. at the direction of the Board of Directors and management of Cape Cod Bank and Trust Company ("Bank") for the purpose of becoming a bank holding company for the Bank. On February 11, 1999, the Company 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 the Company's common stock (the "Reorganization"). Pursuant to the Plan of Reorganization, each issued and outstanding share of the Bank's common stock, par value of $2.50 per share, automatically and without consideration was converted into and exchanged for one share of the common stock par value $1.00 per share (the "Common Stock"), of the Company. At a special stockholders' meeting held July 29, 1999, CCBT Bancorp, Inc.'s name was changed to CCBT Financial Companies, Inc. This name change became effective September 23, 1999. The Bank's charter was converted to a national bank on September 1, 1999. Currently, the Company's business activities are conducted primarily through the Bank. The Bank provides loan, deposit, trust and investment services, and insurance products to businesses and consumers primarily 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents -- Cash and cash equivalents include amounts due from banks, short term interest-bearing deposits and federal funds sold, all of which mature within 90 days. Securities -- Securities held for investment that the Company has the positive intent and ability to hold to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. 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, 2000, 1999 and 1998, the Company 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 origination, are deferred and taken into income over the life of the loan using the interest method. Interest income on loans is recognized when accrued. Accrual of interest income on loans is discontinued when it is doubtful whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral. Interest previously accrued but not collected is reversed and charged against interest income at the time the related loan is placed on nonaccrual status. Interest collected on nonaccrual loans is credited to interest income when received. When doubt exists as to the ultimate collection of principal on a loan, the estimated loss is included in the provision for loan losses. Loans held for sale -- Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Impaired loans -- A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair 23. value of the collateral if the loan is collateral dependent. Mortgage servicing rights -- On January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") 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 Company has actually received title or taken possession. Provisions or losses subsequent to acquisition, operating income and expenses, and gains or losses from the sale of properties are credited or charged to income, while costs relating to improving real estate are capitalized. Premises and equipment -- Premises and equipment are reported at cost less accumulated depreciation. Depreciation is computed on a straight-line basis by charges to income in amounts estimated to recover the cost of premises and equipment over their estimated useful lives, which range between 3 and 8 years for furniture and fixtures and up to 40 years for Bank premises and leasehold improvements. Intangibles -- The core deposit intangible arising from the acquisition of two branch banking offices during 2000 is being amortized on a straight-line basis over 7 years. Goodwill arising from the acquisition of Murray & MacDonald Insurance Services, Inc., is being amortized on a straight-line basis over 5 years. Marketing expense -- The Company charges to marketing expense any advertising related expenses at the time they are incurred. 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 -- Basic earnings per share is computed by dividing net income by the average shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to purchase common stock were exercised resulting in the issuance of common stock that then shared in the earnings of the Company. Segments -- SFAS 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. The statement also requires that public enterprises report a measure of segment profit or loss, certain specific revenue and expense items and segment assets. It also requires that information be reported about revenues derived from the enterprises' products or services, or about the countries in which the enterprises earn revenues and holds assets, and about major customers, regardless of whether that information is used in making operating decisions. The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. Reclassifications -- Certain amounts in the 1998 and 1999 financial statements have been reclassified to conform to the 2000 presentation. 24. New accounting pronouncements -- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities" as amended in June, 1999 by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June, 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively SFAS 133). SFAS 133 requires that entities recognize all derivatives as either assets or liabilities in the statement of condition and measure those instruments at fair value. Under SFAS 133 an entity may designate a derivative as a hedge of exposure to either changes in: (a) fair value of a recognized asset or liability or firm commitment, (b) cash flows of a recognized or forecasted transaction, or (c) foreign currencies of a net investment in foreign operations, firm commitments, available-for-sale securities or a forecasted transaction. Depending upon the effectiveness of the hedge and/or the transaction being hedged, any changes in the fair value of the derivative instrument is either recognized in earnings in the current year, deferred to future periods, or recognized in other comprehensive income. Changes in the fair value of all derivative instruments not recognized as hedge accounting are recognized in current year earnings. SFAS 133 is required for all fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 effective July 1, 2000. No adjustment was required as a result of the adoption of this pronouncement. Statement of Financial Accounting Standards No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" ("SFAS 119") requires disclosures about financial instruments, which are defined as futures, forwards, swap and option contracts and other financial instruments with similar characteristics. On balance sheet receivables and payables are excluded from this definition. The Company did not hold any derivative financial instruments as defined by SFAS 119 at December 31, 2000, 1999 or 1998. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replacing SFAS No. 125. This new statement revises the standard for accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. The new standard is based on consistent application of a financial-components approach that recognizes financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. The standard provides consistent guidelines for distinguishing transfers of financial assets from transfers that are secured borrowings. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. However, for recognition and reclassification of collateral and for disclosures relating to securitizations transactions and collateral this statement is effective for fiscal years ending after December 15, 2000 with earlier application not allowed and is to be applied prospectively. The adoption of this statement is not expected to have a material impact on the Company's consolidated financial statements. (2) Securities The adjusted cost and estimated market values of securities which the Company classified as available for sale as of December 31, 2000 were as follows:
December 31, 2000 ---------------------------------------------------------------------- Gross Gross Estimated Adjusted Unrealized Unrealized Market Cost Gains Losses Value ---------------- ------------------ ---------------- ----------------- (Dollar amounts in thousands) U.S. Government agency CMOs $140,472 $1,412 $2,437 $139,447 Other U.S. Government agencies 22,663 31 200 22,494 Other collateralized mortgage obligations 47,746 526 529 47,743 State and municipal obligations 25,479 3 -- 25,482 Other debt securities 190,946 1,484 853 191,577 ---------------- ------------------ ---------------- ----------------- Totals $427,306 $3,456 $4,019 $426,743 ================ ================== ================ =================
The net unrealized loss on these securities is included net of tax in stockholders' equity. 25. Included in Other debt securities at December 31, 2000 are investments with certain issuers that, in the aggregate, exceed 10% of stockholders' equity, as follows:
Aggregate Aggregate Estimated Issuer Adjusted Cost Market Value ------ ------------- ------------------- Evans Withycombe Finance Trust $11,960,000 $12,617,800 Merrill Lynch CLO Series 1998 - Delano - 1 11,584,372 10,927,847 Eagle CBO, Ltd. 10,235,204 10,354,688 St. George Holdings, Ltd. 9,984,621 10,000,000 Sterling Automobile Loan Securitization 12,996,625 12,996,625 First Dominion Funding II 10,000,000 10,025,000 Highland Legacy Limited CLO 9,990,841 10,031,025
The Company's investment securities are subject to market risk in the following ways. $287,458,000 of the investment securities owned as of December 31, 2000 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 24%. If interest rates rise enough so that there is a significant possibility that a given security will become subject to its interest rate cap, the market value of that security will be reduced. This risk is greater to the extent that the remaining life of the investment is longer. The Company's floating rate investments have an average life of about two years. Market risk may also result from the fact that various indices will not always move by the same amount when interest rates increase. This may cause securities tied to one index to perform less well than securities tied to other indices. Most of the remaining $162,591,000 of securities are fixed-rate collateralized mortgage obligations, mortgage backed securities and other debt securities. Fixed-rate investments have market risk because their rate of return does not change at all with the general level of interest rates. Because homeowners are less likely to refinance their mortgages at higher rates, an additional characteristic of CMOs and mortgage backed securities is that their principal payments tend to slow when interest rates rise. If the fixed rate earned on the investment is lower than the new market rate, this can result in a decline in the value of these securities. Almost all of the Company's fixed-rate CMOs have very short lives and have interest rates above current market levels, which reduces the market risk of these securities. The average life of the Company's fixed-rate investments is less than two years. The adjusted cost and estimated market values of securities which the Company classified as available for sale as of December 31, 1999 and 1998 were as follows:
December 31, 1999 ---------------------------------------------------------------------- Gross Gross Estimated Adjusted Unrealized Unrealized Market Cost Gains Losses Value ----------------- ----------------- ---------------- ----------------- (Dollar amounts in thousands) U.S. Government agency CMOs $176,935 $2,234 $4,444 $174,725 Other U.S. Government agencies 16,819 3 266 16,556 Other collateralized mortgage obligations 79,425 535 677 79,283 State and municipal obligations 20,596 -- -- 20,596 Other debt securities 172,542 429 752 172,219 -------- ------ ------ -------- Totals $466,317 $3,201 $6,139 $463,379 ======== ====== ====== ======== 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 obligations 79,107 617 176 79,548 State and municipal obligations 16,416 -- -- 16,416 Other debt securities 114,997 138 638 114,497 -------- ------ ------ -------- Totals $495,471 $2,385 $1,899 $495,957 ======== ====== ====== ========
26. Gross proceeds from the sale of available for sale securities were $97,908,163 in 2000. Gross gains of $409,737 and gross losses of $325,135 were realized on those sales. Gross proceeds from the sale of available for sale securities were $82,270,203 in 1999. Gross gains of $334,394 and gross losses of $100,093 were realized on those sales. 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. The amount of income tax expense attributable to net gains in 2000, 1999 and 1998 was $35,385, $97,996 and $161,584, respectively. The adjusted cost and estimated market value of debt securities which the Company classified as available for sale at December 31, 2000 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 $ 41,527 $ 42,134 Due after one year through five years 49,806 49,623 Due after five years through ten years 96,557 96,172 Due after ten years 262,722 262,120 -------- -------- Totals $450,612 $450,049 ======== ======== At December 31, 2000, securities carried at $24,520,000 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 following is a summary of loans outstanding as of the dates indicated:
December 31, ----------------------------------------------------- 2000 1999 1998 ---- ---- ---- Mortgage loans on real estate Residential $ 393,574,418 $ 290,722,415 $ 233,533,062 Commercial 242,535,682 203,987,613 207,860,415 Construction 87,978,360 68,809,298 47,939,708 Equity lines of credit 37,377,120 23,035,447 20,787,422 Other loans Commercial 76,274,801 77,775,782 70,766,629 Industrial revenue bonds 1,602,973 1,137,423 1,344,336 Consumer 9,146,965 9,274,570 11,588,705 ------------- ------------- ------------- Total loans 848,490,319 674,742,548 593,820,277 Less: Allowance for loan losses (12,153,944) (11,158,126) (11,107,633) ------------- ------------- ------------- Total portfolio loans, net $ 836,336,375 $ 663,584,422 $ 582,712,644 ============= ============= ============= Loans held for sale $ 860,840 $ 200,000 $ 18,140,522 ============= ============= =============
The Company enters into banking transactions in the ordinary course of its business with directors, officers, principal stockholders and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. The total amount of loans outstanding to Directors and Officers at December 31, 2000, 1999 and 1998 was $5,885,182, $5,552,278 and $11,248,796, respectively. During 2000, $8,454,582 in new loans were made to Directors and Officers and there were $8,121,678 in repayments. The total amount of deposits from Directors and Officers at December 31, 2000, 1999 and 1998 was $5,557,794, $3,829,135 and $8,010,955, respectively. Nonaccrual loans at December 31, 2000, 1999 and 1998 amounted to $2,192,000, $1,777,000 and $7,468,000, respectively. Interest income which would have been accrued on nonaccrual loans, had they performed in accordance with the terms of their contracts, for the year ended December 31, 2000 was $162,000. Interest income recognized on 27. nonaccrual loans in 2000 amounted to $20,871. The amount of restructured troubled debt which was performing in accordance with amended terms at December 31, 2000, 1999 and 1998 was $237,000, $626,000 and $478,000, 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 SFAS No. 66 for the years ended December 31, 2000, 1999 and 1998 was $0., $100,000 and $137,500, respectively. Included in the consumer loan totals for the years ended December 31, 2000, 1999 and 1998 are customer account overdrafts that the Company reclassified as loans in the amounts of $880,138, $499,900 and $407,700, respectively. The Company also has participated in loans with other entities. As of December 31, 2000 gross participation loans totaled $50,361,716 of which $5,038,166 was participated out. As of December 31, 1999 gross participation loans totaled $5,439,522 of which $793,948 was participated out. December 31, 1998, gross participation loans totaled $1,777,084 of which $1,001,080 was participated out. The Company's business is primarily in southeastern Massachusetts, and many of the Company's loan customers are involved in real estate construction or the hotel and restaurant industry. This can cause a number of them to be similarly affected by economic conditions. Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $160,104,000, $168,260,000 and $122,908,000 at December 31, 2000, 1999 and 1998, respectively. The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances: December 31, ---------------------------------- 2000 1999 1998 ---- ---- ---- (Dollar amounts in thousands) Mortgage servicing rights capitalized $ 42 $528 $687 ==== ==== ==== Mortgage servicing rights amortized $147 $194 $123 ==== ==== ==== Mortgage servicing rights included in Other Assets at December 31, 2000, 1999, and 1998, were $1,123,000, $1,228,000, and $894,000, respectively. The fair value balance of capitalized servicing rights was determined using a discount rate of 8% and a prepayment speed of 7%. (4) Reserve for Loan Losses The changes in the reserve for loan losses during the three years ended December 31, 2000 were as follows:
2000 1999 1998 ---- ---- ---- Balance, beginning of year $11,158,126 $11,107,633 $10,962,345 Provision for loan losses -- -- -- Charge-offs (167,875) (610,238) (606,686) Recoveries on loans previously charged off 1,163,693 660,731 751,974 ----------- ----------- ----------- Balance, end of year $12,153,944 $11,158,126 $11,107,633 =========== =========== ===========
28. The following is a summary of information pertaining to impaired loans:
2000 1999 1998 ---- ---- ---- Impaired loans without a valuation allowance $ -- $ -- $ -- Impaired loans with a valuation allowance: Commercial loans $ 441,686 $ 559,345 $ 537,661 Commercial mortgage loans 328,164 419,245 2,277,262 Residential mortgage loans -- -- 474,000 ---------- --------- ----------- Total impaired loans $ 769,850 $ 978,590 $ 3,288,923 ========== ========= =========== FASB 114 reserves on impaired loans $ 352,747 $ 448,810 $ 998,827 ========== ========= =========== Average investment in impaired loans $1,051,918 $2,397,106 $ 1,645,505 ========== ========== =========== Interest income recognized on impaired loans $ 182,559 $ 200,157 $ 309,131 ========== ========== =========== Interest income recognized on a cash basis on impaired loans $ 182,559 $ 200,157 $ 309,131 ========== ========== ===========
(5) Bank Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization of $15,736,000 at December 31, 2000, $13,332,000 at December 31, 1999, and $11,540,000 at December 31, 1998. Certain banking premises are leased under non-capitalized operating leases expiring at various dates through 2012. Annual rental expenses under these leases were $959,000 in 2000, $914,000 in 1999 and $808,000 in 1998. The total rental commitments under non-cancelable leases for future years are $5,818,000 not including amounts payable under Consumer Price Index escalator provisions in three such leases which become effective in 2001 and later years. Annual commitments are $969,390 in 2001, $921,920 in 2002, $887,280 in 2003, $880,800 in 2004, $642,250 in 2005, and a total of $1,516,590 for the years 2006 through 2012. Certain of these leases also contain renewal options. December 31, -------------------------------------- 2000 1999 1998 ---- ---- ---- (Dollar amounts in thousands) Premises: Land $ 2,769 $ 1,511 $ 1,390 Buildings 9,516 7,094 7,781 Leasehold improvements 4,513 4,375 4,114 Equipment 15,572 12,749 11,102 Accumulated depreciation (15,736) (13,332) (11,540) -------- -------- -------- $ 16,634 $ 12,397 $ 12,847 ======== ======== ======== Depreciation and amortization expense for the years ended December 31, 2000, 1999 and 1998 amounted to $2,375,000, $1,938,000 and $1,780,000, respectively. (6) Employee Benefits The Company has a defined contribution Profit Sharing Retirement Plan covering substantially all employees following two years of service. Each year, the Company contributes amounts equal to 8% of each participant's compensation plus 4.3% of compensation over one-half the social security wage base. Profit sharing retirement expense was $1,154,000 in 2000, $1,102,000 in 1999 and $1,068,000 in 1998. Also in 2000, 1999 and 1998, bonuses were accrued under the provisions of the Company's Profit Incentive Plan totaling $1,750,000, $1,280,000, and $706,000 respectively, and paid in the year following. The Company's Employee Stock Ownership Plan holds 38,367 shares of the Company's common stock. At December 31, 2000, all shares were allocated to employees. The Company has an unfunded plan for providing medical and life insurance coverage for retired employees who meet age and service requirements. For an employee retiring at age 65 with 30 or more years of service, the Company pays 100% of the cost of his or her medical insurance and 50% of the cost of the medical insurance of his or her dependents. The Company also pays for the cost of life insurance in an amount between $5,000 and $25,000 based on the earnings of the employee and the number of years since retirement. Lesser benefits are provided for employees who retire at a younger age or with fewer years of service. The Company's share of increases in the cost of providing post-retirement medical insurance is limited to 5% per year for employees who retire after 1993. SFAS No. 106 requires that the expected expense be recognized over the period that employees render the service making them eligible for this benefit rather than when the premiums are actually paid following retirement. SFAS No. 29. 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 $3,600,000 for future premiums. The following table sets forth the plan's funded status reconciled with the amount shown in the Company's statement of condition at December 31, 2000, 1999 and 1998: Accumulated post-retirement benefit obligation:
2000 1999 1998 ---- ---- ---- Retirees $ 967,586 $ 748,889 $ 796,448 Fully eligible active plan participants 976,271 695,194 564,518 Other plan participants 1,689,082 1,595,339 1,629,512 ---------- ---------- ---------- 3,632,939 3,039,422 2,990,478 Plan assets at fair value -- -- -- Accumulated post-retirement benefit obligation in excess of plan assets 3,632,939 3,039,422 2,990,478 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 515,647 831,364 563,568 Unrecognized prior service cost -- -- -- Unrecognized net obligation at transition (1,318,200) (1,428,050) (1,537,900) ---------- ---------- ---------- Unfunded accrued post-retirement benefit expense $2,830,386 $2,442,736 $2,016,146 ========== ========== ==========
Net periodic post-retirement benefit for 2000, 1999 and 1998 included the following components:
2000 1999 1998 ---- ---- ---- Service cost - benefits attributed to service during the during the year $172,394 $202,281 $153,799 Interest cost on accumulated post-retirement benefit obligation 234,489 211,806 171,024 Actual return on plan assets -- -- -- Amortization of transition obligation over 20 years 109,850 109,850 109,850 Amortization of gain (831,364) (563,568) (550,854) Asset gain deferred 807,416 563,568 518,754 -------- -------- -------- Net periodic post-retirement benefit cost $492,785 $523,937 $402,573 ======== ======== ========
For measurement purposes, a 6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001; 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, 2000 by $58,055 and the aggregate service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $4,534. The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7.5%. 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 Company 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 Company 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. 30. 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.
2000 1999 1998 ------------------------- ------------------------ ------------------------ Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- -------------- -------- -------------- -------- -------------- Outstanding, beginning of year 104,000 $16.72 57,000 $17.41 26,000 $13.38 Granted 61,500 $18.00 52,500 $16.07 35,000 $20.34 Exercised -- -- -- -- -- -- Forfeited (6,000) $16.60 (5,500) $17.66 (4,000) $17.06 ------- ------- ------ Outstanding, end of year 159,500 $17.22 104,000 $16.72 57,000 $17.41 ======= ======= ======
The following table summarizes information about stock options outstanding at December 31, 2000: Remaining Years in Exercise Price Number Outstanding Contractual Life Number Exercisable -------------- ------------------ ---------------- ------------------ $13.38 22,000 6.35 16,500 $20.75 22,000 7.12 11,000 $19.25 6,000 7.87 3,000 $17.38 16,000 8.04 4,000 $16.38 10,000 8.84 2,500 $15.06 22,000 8.92 5,500 $18.00 61,500 9.93 -- 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 Company's common stock, dividend yield, and a risk-free rate equal to the five-year Treasury rate. The table below shows these assumptions and the weighted-average fair value of the options which were granted during each year as well as what the effect would have been if the Company had adopted the fair value method of accounting for stock options described in SFAS No. 123.
2000 1999 1998 ---- ---- ---- Weighted average volatility 27.03% 25.86% 26.90% Weighted average dividend 3.16% 2.77% 2.65% Weighted average risk-free rate 5.26% 5.58% 5.23% Weighted average fair value of options $ 4.26 $ 3.94 $ 5.12 granted during the year Additional expense had the Company adopted SFAS No. 123 $ 106,606 $ 67,883 $ 39,628 Related tax benefit $ 44,588 $ 28,392 $ 16,575 Pro-forma net income $17,166,731 $16,421,602 $12,532,870 Pro-forma basic and diluted earnings per share $ 1.99 $ 1.85 $ 1.38
31. The Company has also entered into stock appreciation rights agreements with selected employees who are paid the amount by which a certain number of shares exceeds its value at the time the agreement was entered into. Stock appreciation rights mature ten years after their issuance and are not ordinarily exercisable prior to maturity. A total of $84,375 was charged to compensation expense in 1997 for these rights. The table below shows the amount of stock appreciation rights which were outstanding at the beginning and end of each year, and how many were exercised, granted, forfeited, or expired.
2000 1999 1998 --------------------------- ------------------------ -------------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ----- -------------- ----- -------------- Outstanding, beginning of year 8,100 $17.62 3,700 $19.25 -- -- Granted 7,100 18.00 4,600 $16.38 3,700 $19.25 Exercised -- -- -- -- -- -- Forfeited (500) $16.95 (200) $19.25 -- -- ------ ----- ----- Outstanding, end of year 14,700 $17.82 8,100 $17.62 3,700 $19.25 ====== ===== =====
The following table summarizes information about stock appreciation rights outstanding at December 31, 2000: Remaining Years in Exercise Price Number Outstanding Contractual Life Number Exercisable -------------- ------------------ ---------------- ------------------ $19.25 3,400 7.86 -- $16.38 4,200 8.84 -- $18.00 7,100 9.93 -- (7) Deposits and Borrowed Funds The following summarize deposits and borrowed funds outstanding as of the dates indicated:
December 31, ---------------------------------------------------- 2000 1999 1998 ---- ---- ---- Deposits Demand $201,904,120 $167,624,319 $160,966,042 NOW 139,452,453 120,307,407 114,210,098 Money market 163,793,368 138,287,456 141,316,906 Other savings 143,239,002 158,141,665 160,125,653 Certificates of deposit greater than $100,000 96,159,335 60,666,301 30,299,027 Other time 228,754,386 121,036,469 120,979,249 ------------- ------------- ------------ Total deposits $973,302,664 $766,063,617 $727,896,975 ============= ============= ============
Maturities of time certificates of deposit as of December 31, 2000 are $286,932,000 in 2001, $25,477,000 in 2002, $5,325,000 in 2003, $1,569,000 in 2004, $5,456,000 in 2005, and $155,000 in 2006. Historically, the Company has maintained a significant level of core deposits from within its market area, serviced through its branch and ATM networks. Generally, the Company's strategy is to price deposits that reflect market rates, offering higher alternative rates based on increasing amounts deposited. Interest rates paid are frequently reviewed and are modified to reflect changing conditions.
December 31, --------------------------------------------------- 2000 1999 1998 ---- ---- ---- Borrowed funds Federal Home Loan Bank $291,286,797 $347,962,999 $343,506,683 Other short term borrowings 24,520,157 19,345,885 14,606,322 ------------ ------------ ------------ Total borrowed funds $315,806,954 $367,308,884 $358,113,005 ============ ============ ============
The contractual maturities of borrowings from the Federal Home Loan Bank as of December 31, 2000, are $159,430,000 in 2001, $19,065,000 in 2002, $45,350,000 in 2003, $18,900,000 in 2004, $29,586,000 in 2005, and $18,956,000 in years thereafter. These borrowings bore interest rates between 3.07% and 7.35% with a weighted average interest rate of 6.32%. The balance at February 29, 2000 of $397,898,388 was the maximum amount outstanding at any month end during 2000. These borrowings are collateralized by the Company's commercial and residential mortgage 32. loans and securities. The Company also has an IDEAL Way Line of Credit with Federal Home Loan Bank of Boston. The unused balance at December 31, 2000 was $5,000,000 and at December 31, 1999 and 1998 it was $12,963,000. Other short-term borrowings at December 31, 2000, 1999 and 1998 consisted of a demand note payable to the U.S. Treasury of $2,338,819, $1,912,887 and $212,748, respectively, and securities sold subject to agreements to repurchase of $22,181,338, $17,432,998 and $14,393,574, respectively. These borrowings are collateralized by the pledge of securities. (8) 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, 2000, 1999 and 1998, the Bank met all regulatory capital requirements and satisfied the requirements of the "well-capitalized" category under the Federal Deposit Insurance 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, 2000, the Bank's leverage ratio was 7.0%. 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, 2000, the Bank's total risk-weighted assets were $954,367,000 and its net risk-weighted assets were $954,143,000. 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, 2000, $11,930,000 of the reserve for loan losses could be used toward risk-based capital requirements. Accordingly, at December 31, 2000, total capital for risk-based capital purposes was $98,538,000 equal to 10.3% 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, 2000, the Bank's stockholders' equity was 9.1% 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. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. 33. (9) Acquisition of Murray & MacDonald Insurance Services, Inc. On May 2, 2000, the Company acquired 51% of the stock of Murray & MacDonald Insurance Services, Inc., for a purchase price of $1,199,094. Murray & MacDonald Insurance Services, Inc. is a full service insurance agency offering property, casualty, life, accident, and health insurance products. The Agency has been in business since 1972 and has license agreements with more than thirty insurance companies. The business combination was accounted for by the purchase method. Assets acquired were $292,009 while liabilities assumed were $524,570, resulting in net liabilities assumed of $232,561. Goodwill of $1,431,655 is being amortized on a straight-line basis over a 5 year period. The Company's Consolidated Statement of Income includes the results of operations of Murray & MacDonald Insurance Services, Inc. since the date of acquisition. If the acquisition had occurred at the beginning of the period, total revenues would be $110,585,200, operating income would be $26,255,970 and net income would be $17,178,985. Earnings per share of $2.00 would remain unchanged. (10) Acquisition of Branches In June 2000, the Company completed its acquisition of two branch offices from Fleet Bank. The acquired branches are located in Falmouth and Wareham, Massachusetts. The acquisition was accounted for by the purchase method of accounting. The core deposit intangible is being amortized over 7 years on a straight-line basis. The Company's Consolidated Statement of Income includes the results of operations relating to the acquired branches since the date of acquisition. The acquisition was allocated as follows: Loans $ 8,490,408 Premises and equipment 2,330,496 Core deposit intangible 8,572,834 Principal and interest receivable on loans 58,624 Other assets 3,394 ------------ Assets acquired 19,455,756 ------------ Deposits 55,266,651 Interest payable on deposits and borrowings 40,473 Other liabilities 22,686 ------------ Liabilities assumed 55,329,810 ------------ Net liabilities assumed $35,874,054 ============ Cash received, including cash acquired of $819,386, in connection with the acquisition $35,874,054 ============ (11) Provision for Income Taxes The provision for income taxes for the three years ended December 31, 2000, 1999 and 1998, consists of the following:
2000 1999 1998 ---- ---- ---- Current federal income tax $9,338,924 $ 7,388,341 $6,756,489 Current state income tax 384,316 699,922 1,957,942 ---------- ----------- ---------- 9,723,240 8,088,263 8,714,431 ---------- ----------- ---------- Deferred federal income tax (benefit) expense (466,070) 1,496,505 (523,786) Deferred state income tax (benefit) expense (156,224) 501,622 (140,811) ---------- ----------- ---------- (622,294) 1,998,127 (664,597) ---------- ----------- ---------- $9,100,946 $10,086,390 $8,049,834 ========== =========== ==========
Deferred income tax (benefit) 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 loan losses. 34. The following reconciles the provision for income taxes with the statutory federal income tax rate of 35%.
2000 1999 1998 ---- ---- ---- Tax at statutory rate $9,215,393 $ 9,291,619 $7,209,146 Reduction due to tax-exempt income (314,613) (274,945) (293,139) State taxes, net of federal tax benefit 148,260 781,004 1,112,989 Other, net 51,906 288,712 20,838 ---------- ----------- ---------- $9,100,946 $10,086,390 $8,049,834 ========== =========== ==========
At December 31, 2000, 1999 and 1998, the net deferred tax asset consisted of the following:
2000 1999 1998 ---- ---- ---- Future bad debt deductions $5,083,387 $4,666,886 $4,645,768 Nonaccrual loan interest 87,049 132,057 675,093 Unfunded accrued benefits 1,463,780 1,274,509 1,081,774 Unearned Revenues Murray and MacDonald 242,067 -- -- Unrealized loss on securities 239,411 1,249,117 -- ---------- ---------- ---------- Gross deferred tax asset 7,115,694 7,322,569 6,402,635 Valuation reserve -- -- -- ---------- ---------- ---------- Deferred tax asset 7,115,694 7,322,569 6,402,635 Deferred tax liability 2,603,105 2,664,636 1,409,945 ---------- ---------- ---------- Net deferred tax asset $4,512,589 $4,657,933 $4,992,690 ========== ========== ==========
(12) Commitments and Contingencies In the normal course of business, various commitments are entered into by the Company, such as standby letters of credit and commitments to extend credit, which are not reflected in the consolidated financial statements. Management does not anticipate any material losses as a result of these transactions. At December 31, 2000, 1999 and 1998, the Company had the following commitments outstanding:
2000 1999 1998 ---- ---- ---- Standby letters of credit $ 1,094,752 $ 1,627,000 $ 2,356,000 Commitments to extend credit at fixed rates 10,469,800 5,242,500 9,465,067 Other commitments to extend credit 172,522,589 152,546,500 101,334,933 ------------ ------------ ------------ Total commitments $184,087,141 $159,416,000 $113,156,000 ============ ============ ============
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 Company. 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 Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential property and income producing commercial properties. In the event that no collateral is required, or the collateral proved to be of no value to the Company, the Company would be exposed to possible credit loss up to the maximum amount of these contingent liabilities. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. 35. (13) Disclosure about the Fair Value of Financial Instruments SFAS No. 107 requires the disclosure of the fair value of financial instruments for which it is practicable to estimate that value. At December 31 the estimated fair values of the Company's financial instruments were as follows:
2000 1999 1998 ---- ---- ---- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value -------- -------- -------- -------- -------- -------- (Dollar amounts in thousands) Financial assets: Cash and cash equivalents $ 66,215 $ 66,215 $ 44,242 $ 44,242 $ 29,427 $ 29,427 Investment securities 426,743 426,743 463,379 463,379 495,957 495,957 Net loans 837,197 837,666 663,784 666,762 600,853 608,962 Financial liabilities: Deposits 973,303 972,811 766,064 766,189 727,897 729,704 Borrowings from 291,287 290,338 347,963 345,027 343,507 344,434 Federal Home Loan Bank Other short-term borrowings 24,520 24,520 19,346 19,346 14,606 14,606
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 because they are short term in nature and/or priced at variable interest rates. 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. Because no market exists for a significant portion of the Company's loans, fair value estimates were based on judgments regarding estimated future cash flows, current economic conditions, expected loss experience, risk characteristics of various kinds of loans, and other such factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, unrealized gains or losses are not expected to be realized. Fair values of deposits and borrowings from FHLB have been determined by applying discounted cash flow techniques at replacement market rates. As required by SFAS No. 107, the fair value of deposits does not include the value of the ongoing relationships with depositors, sometimes referred to as the "core deposit intangible," although it is 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. (14) Earnings per Share The following reconciles the calculation of basic and diluted earnings per share for the three years ending December 31, 2000, 1999 and 1998:
2000 ----------------------------------------------- Income Shares Per Share (numerator) (denominator) Amount ----------- ----------- ----- Basic earnings per share $17,228,749 8,608,048 $2.00 Effect of dilutive stock options -- 6,015 -- Diluted earnings per share $17,228,749 8,614,063 $2.00 =========== =========== ===== 1999 ----------------------------------------------- Income Shares Per Share (numerator) (denominator) Amount ----------- ----------- ----- Basic earnings per share $16,461,093 8,876,776 $1.85 Effect of dilutive stock options -- 4,748 -- ----------- ----------- ----- Diluted earnings per share $16,461,093 8,881,524 $1.85 =========== =========== =====
36.
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 (0.01) ----------- ----------- ----- Diluted earnings per share $12,556,946 9,068,990 $1.38 =========== =========== =====
(15) Selected Quarterly Financial Data (Unaudited) The table below shows supplemental financial data for each quarter in 2000 and 1999.
2000 --------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Interest income $ 22,024,623 $ 22,519,333 $ 24,341,924 $ 25,083,157 Interest expense 10,709,200 11,077,188 11,535,926 12,301,478 ------------ ------------ ------------ ------------ Net interest income 11,315,423 11,442,145 12,805,998 12,781,679 Provision for loan losses -- -- -- -- Non-interest income 3,580,349 4,449,232 3,989,267 4,191,705 Non-interest expense 8,682,634 9,269,297 10,235,099 10,093,577 Minority interest -- (10,496) (6,917) (37,091) ------------ ------------ ------------ ------------ Income before income taxes 6,213,138 6,632,576 6,567,083 6,916,898 Provision for income taxes 2,112,089 2,279,237 2,199,774 2,509,846 ------------ ------------ ------------ ------------ Net income $ 4,101,049 $ 4,353,339 $ 4,367,309 $ 4,407,052 ============ ============ ============ ============ Average shares outstanding 8,608,048 8,608,048 8,608,048 8,608,048 Net income per share $0.48 $0.50 $0.51 $0.51 Cash dividends declared $0.16 $0.16 $0.16 $0.16 1999 --------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Interest income $ 18,345,260 $ 19,176,340 $ 19,794,956 $ 21,790,692 Interest expense 9,248,081 9,357,460 9,451,050 10,254,546 ------------ ------------ ------------ ------------ Net interest income 9,097,179 9,818,880 10,343,906 11,536,146 Provision for loan losses -- -- -- -- Non-interest income 3,416,940 3,767,719 3,969,101 7,113,779 Non-interest expense 7,477,626 8,034,319 8,281,022 8,723,200 ------------ ------------ ------------ ------------ Income before income taxes 5,036,493 5,552,280 6,031,985 9,926,725 Provision for income taxes 1,987,635 1,842,679 2,181,763 4,074,313 ------------ ------------ ------------ ------------ Net income $ 3,048,858 $ 3,709,601 $ 3,850,222 $ 5,852,412 ============ ============ ============ ============ Average shares outstanding 9,045,270 8,941,188 8,887,753 8,637,257 Net income per share $0.34 $0.41 $0.43 $0.67 Cash dividends declared $0.14 $0.14 $0.14 $0.14
As a result of continuing improvement in the quality of the loan portfolio, no provision for loan losses was made during 2000, 1999, or 1998. Non-interest income in the fourth quarter of 1999 was increased by $3,494,733 gain on sale of the Company's credit card merchant portfolio. Because of the seasonal nature of the economy in the Company's market area, demand deposits and business activity follow a somewhat seasonal cycle with their low point ordinarily being reached in February and their high point in 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. 37. (16) Parent Company Financial Information Condensed financial information for CCBT Financial Companies, Inc. is as follows (in thousands): Statement of Condition December 31, 2000 Assets Cash $ 50,352 Investment Securities 2,685,753 Investment in subsidiary 95,824,093 Other assets 168,580 -------------- Total assets $ 98,728,778 ============== Stockholders' equity Stockholders' equity $ 98,728,778 -------------- Total stockholders' equity $ 98,728,778 ============== Statement of Income Year ended December 31, 2000 Interest income $ 181,894 Operating income 169 Operating expenses 293,049 ------------- Loss before taxes, dividends and undistributed income from subsidiary (110,986) Applicable income taxes (credit) (26,228) Dividends from subsidiary 5,700,000 Undistributed income from subsidiary 11,613,507 ------------- Net income $ 17,228,749 ============= Statement of Cash Flows Year ended December 31, 2000 Cash flows from operating activities Net income $17,228,749 Adjustments to reconcile net income to net cash provided by operating activities: Dividends received from subsidiary 5,700,000 Earnings from subsidiary (17,313,507) Other, net 80,273 ----------- Net cash provided by operating activities 5,695,515 ----------- Cash flows from investing activities Purchase of investments (1,800,769) Maturities and repayments of investments 4,462,975 Investment in subsidiary (2,800,000) ----------- Net cash used by investing activities (137,794) ----------- Cash flows from financing activities Cash dividends paid to stockholders (5,509,151) ----------- Net cash used by financing activities (5,509,151) ----------- Net increase in cash and cash equivalents 48,570 Cash at beginning of period 1,782 ----------- Cash at end of period $ 50,352 =========== 38. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 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 the Company and the Bank which is contained in Item 1 of Part 1 to this Form 10-K under the caption "Executive Officers of the Registrant," the response to this item is incorporated by reference from the discussion under the captions "Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders ("Proxy Statement") to be held on April 26, 2001, filed with the SEC pursuant to Regulation 14A of the Exchange Act Rules. Item 11. Executive Compensation. The response to this item is incorporated by reference from the discussion under the captions "Executive Compensation" and "The Board of Directors, its Committees and Compensation" in the Company's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The response to this item is incorporated by reference from the discussion under the caption "Ownership by Management and Other Stockholders" in the Company's Proxy Statement. Item 13. Certain Relationships and Related Transactions. The Company enters into banking transactions in the ordinary course of its business with directors, officers, principal stockholders and their associates, on the same terms including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. The total amount of loans outstanding to Directors and Officers of the Company at December 31, 2000 and 1999, was $2,400,295 and $586,287 respectively, and for the Bank in 1998 was $11,248,796. During 2000, $1,986,788 in new loans were made to Directors and Officers and there were $172,780 in repayments. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) See "Financial Statements Index" or page 17 of this Form 10-K. (2) Schedules other than those listed in the Financial Statements Index have been omitted since they either are not required or the information required is included in the financial statements or the notes thereto. (3) The following is a complete list of Exhibits filed or incorporated by reference as part of this Form 10-K. Exhibit Description ------- ----------- 2.1 Plan of Reorganization and Acquisition dated as of October 8, 1998 between the Company and the Bank (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on February 11,1999) 3.1 Restated Articles of Organization of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1999 that was filed with the SEC on November 15, 1999) 3.2 Amended By-laws of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1999 that was filed with the SEC on November 15, 1999) 39. 4.1 Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for the year ended December 31, 1999) 10.1 Amended and Restated Special Termination Agreement with Stephen B. Lawson. (Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.2 Amended and Restated Special Termination Agreement with Noal D. Reid. (Incorporated by reference to Exhibit 10.2 to the ` Annual Report on Form 10-K for the year ended December 31, 1998) 10.3 Amended and Restated Special Termination Agreement with Larry K. Squire. (Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.4 CCBT Financial Companies, Inc. Stock Option Plan (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed with the SEC on February 18, 1999) 10.5 Cape Cod Bank and Trust Company Employee Stock Ownership and Plan and Trust, as amended 21.1 Subsidiaries of the Company -- The Company has one direct subsidiary, Cape Cod Bank and Trust Company, N.A., a federally chartered commercial bank. Cape Cod Bank and Trust Company, N.A., has eight subsidiaries: CCBT Securities Corp. which is a securities corporation; CCB&T Brokerage Direct, Inc., an investment broker/dealer; CCBT Preferred Corp., a real estate investment trust; TBM Development Corp., RAFS Ltd. Partnership, Osterville Concorde Ltd. and Osterville DC9 Ltd. Partnership, which are all inactive; and a 51% ownership interest in Murray & MacDonald Insurance Services, Inc., an insurance agency. 23.1 Consent of Grant Thornton LLP (Filed herewith) (b) Reports on Form 8-K: None. 40. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CCBT FINANCIAL COMPANIES, INC. ------------------------------------------------------------------- By (Signature and Title)* /s/ STEPHEN B. LAWSON ----------------------------------------------------- President and Chief Executive Officer Date March 16, 2001 ------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ NOAL D. REID ------------------------------------------------------- Treasurer and Chief Financial Officer Date March 16, 2001 ------------------ SIGNATURES OF THE BOARD OF DIRECTORS /s/ STEPHEN B. LAWSON /s/ GEORGE D. DENMARK ---------------------------------- -------------------------------- Stephen B. Lawson George D. Denmark /s/ JOHN OTIS DREW /s/ JOHN F. AYLER ---------------------------------- -------------------------------- John Otis Drew, Chairman John F. Aylmer /s/ WILLIAM C. SNOW /s/ WILLIAM R. ENLOW ---------------------------------- -------------------------------- William C. Snow William R Enlow Date March 16, 2001 --------------------- 41.