-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cn3u5jVypJDoMoodpkQyQ1bsB+VPhB/et7ho1LFePRw+6l8DMfIBwCHjCPwVdFMC 4k+bMF3IHDMwkb4FyQeb3w== 0000914317-02-000262.txt : 20020415 0000914317-02-000262.hdr.sgml : 20020415 ACCESSION NUMBER: 0000914317-02-000262 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCBT FINANCIAL COMPANIES INC CENTRAL INDEX KEY: 0001074972 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 043437708 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-72565 FILM NUMBER: 02584604 BUSINESS ADDRESS: STREET 1: 495 STATION AVENUE CITY: SOUTH YARMOUTH STATE: MA ZIP: 02601 BUSINESS PHONE: 5087608323 MAIL ADDRESS: STREET 1: 495 STATION AVENUE CITY: SOUTH YARMOUTH STATE: MA ZIP: 02601 FORMER COMPANY: FORMER CONFORMED NAME: CCBT BANCORP INC DATE OF NAME CHANGE: 19981209 10-K 1 from10k-42815_320.txt 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, 2001- 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 each 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 $25.65 price on February 28, 2002, on the Nasdaq National Market was $190,462,069. 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 28, 2002, 8,621,048 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 25, 2002 are incorporated by reference into Part III of this Form 10-K. FORWARD-LOOKING STATEMENTS This report contains 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, 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," the negatives of such words, and other similar expressions which predict or indicate future events and trends and which do not relate to historical matters. These forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause the Company's actual results to materially differ from those projected in the forward-looking statements. Some of the factors that might cause these differences include the following: changes in the volume of loan originations, fluctuations in prevailing interest rates, increases in costs to borrowers of loans held, increases in costs of funds and changes in the assumptions used in making such forward-looking statements. In addition, the factors listed under "Risk Factors and Factors Affecting Forward Looking Statements," beginning on page 5 of this report may result in these differences. Readers should carefully review the factors described under "Risk Factors and Factors Affecting Forward Looking Statements." You should be aware that there may be other factors that could cause these differences. You should not place undue reliance on our forward-looking statements. The forward-looking statements contained in this report were based on information, plans and estimates at the date of this report, and the Company assumes no obligations to update any forward-looking statements to reflect new information, future events or other changes. 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 (the "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 Bank is the result of a merger between the Hyannis Trust Company and the Cape Cod Trust Company in 1964 and a subsequent merger with the Buzzards Bay National Bank in 1974. The main office of the Bank is located at 307 Main Street, Hyannis, Barnstable County, Massachusetts. There are 28 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, 2001, the Bank employed 376 people on a full-time basis and another 68 people on a part-time basis. Financial information contained in this report for periods and dates prior to February 11, 1999 is that of the Bank. Since the Bank is the main operating subsidiary of the Company, financial information contained in this report for periods and dates after February 11, 1999 is essentially financial information of the Bank. Certain amounts have been reclassified in the 2000 and 1999 financial statements to conform to the 2001 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 Bank 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 the 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 Bank acquired 51% of the stock of Murray & MacDonald Insurance Services, Inc. of Falmouth, Massachusetts (the "Agency"), a full service insurance agency offering property, casualty, 2 life, accident and health products to clients on Cape Cod. The Agency has been in business since 1972 and has license agreements with more than thirty insurance firms. As part of the transaction, Murray & MacDonald's President, Douglas D. MacDonald, has continued to serve as President of the Agency, and he directs all insurance activities for the Bank. In addition to the acquisition of the Agency, the Bank also 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. The Bank 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 Bank's principal sources of revenue are loans and investments, which accounted for 81% of gross income during 2001. 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 35 automated teller machines which are connected to the AMEX, CIRRUS, NYCE, NOVUS/DISCOVER, MASTERCARD, VISA, MAESTRO 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 other commercial banks, thrift institutions, credit unions and mortgage companies. The Company competes for loans on the basis of product variety and flexibility, competitive interest rates and fees, service quality and convenience. Competition for the attraction and retention of deposits arises primarily from other commercial banks, thrift institutions, co-operative banks, and credit unions having a presence within and around the market area served by the Bank's main office and its community branches and ATM network. There are approximately twelve of these financial institutions in the Bank's market area. In addition, the Company competes with regional and national firms that offer stocks, bonds, mutual funds, and other investment alternatives to the general public. The Company competes on its ability to satisfy savers' and investors' requirements, such as product alternatives, competitive rates, liquidity, service quality, convenience, and safety against loss of principal and earnings. Management believes that the Company's emphasis on personal service and convenience, coupled with active involvement within the communities it serves, contributes to its ability to compete successfully. Moreover, under the Gramm-Leach-Bliley Act of 1999 (the "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 (the "Bank Holding Company Act"), and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. The Federal Reserve Board has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve Board. The Federal Reserve Board is also empowered to assess civil money penalties against companies or individuals who violate the Bank Holding Company Act, or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. 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. 3 The Financial Services Modernization Legislation. The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit bank holding companies that qualify and elect to be treated as financial holding companies to engage in a range of financial activities broader than would be permissible for traditional bank holding companies, such as the Company, that have not elected to be treated as financial holding companies. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In order to become a financial holding company, a bank holding company, such as the Company, must meet certain tests and file an election form with the Federal Reserve Board. Specifically, to qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the bank holding company's banks must have been rated "satisfactory" or better in the most recent federal Community Reinvestment Act evaluation of each bank. At this time, the Company has not elected to become a financial holding company. Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. These capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items (the `Total Risk-Based Capital Ratio'), with at least one-half of that amount consisting of Tier I or core capital and the remaining amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and other non-qualifying intangible assets. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital (defined by reference to the risk-based capital guidelines) to total average assets (the `Leverage Ratio') of 3.0%. Total average assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Leverage Ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating significant growth. The Company currently is in compliance with both the Risk Based Capital Ratio and the Leverage Ratio requirements. At December 31, 2001, the Company had a Tier I Risk Based Capital Ratio equal to 10.5% and a Total Risk Based Capital Ratio equal to 11.6% and a Leverage Ratio equal to 7.3%. U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision, currently are considering changes to the risk-based capital adequacy framework which ultimately could affect the appropriate capital guidelines, including changes (such as those relating to lending to registered broker-dealers) that are of particular relevance to banks, such as the Bank, that engage in significant securities activities. Limitations on Acquisitions of Common Stock. The Federal Change in Bank Control Act prohibits a person or group of persons from acquiring `control' of a bank holding company unless the Federal Reserve Board has been given at least 60 days to review the proposal. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company, such as the Company, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the `Exchange Act') would, under the circumstances set forth in the presumption, constitute the acquisition of control. In addition, any company, as that term is broadly defined in the statute, would be required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of 4 an acquirer that is a bank holding company) or more, or such lesser percentage of our outstanding common stock as the Federal Reserve Board deems to constitute control over us. 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. Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires the OCC to evaluate the Bank's performance in helping to meet the credit needs of the community. Massachusetts has also enacted a similar statute that requires the Commissioner to evaluate the Bank's performance in helping to meet community credit needs. Management believes the Bank is currently in compliance with all CRA requirements. Customer Information Security. The Federal Reserve Board, the OCC and other bank regulatory agencies have adopted final guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Privacy. The Gramm-Leach-Bliley Act requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the statute requires the Company to explain to consumers the Company's policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, the Company is prohibited from disclosing such information except as provided in the Company's policies and procedures. USA Patriot Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates or will require financial institutions to implement additional policies and procedures with respect to, or additional measures designed to address, any or all of the following matters, among others: money laundering; suspicious activities and currency transaction reporting; and currency crimes. Risk Factors And Factors Affecting Forward Looking Statements The discussion set forth below contains certain statements that may be considered "forward-looking statements." Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results to materially differ from those projected in the forward-looking statements. You should carefully review the factors below and should not place undue reliance on our forward-looking statements. For further information regarding forward-looking statements, you should review the discussion under "FORWARD-LOOKING STATEMENTS" on page 2 of this report. The Company's experience in banking activities may not aid 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 5 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 may result in increased regulation of the Company's business. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and modifications of restrictions on, the business of the Company. It cannot be predicted whether any legislation currently being considered will be adopted or how such legislation or any other legislation that might be enacted in the future would affect the business of the Company. 6 EXECUTIVE OFFICERS OF THE REGISTRANT All officers were elected to their positions on April 26, 2001 to serve until the annual meeting on April 25, 2002 and until their successors are duly elected.
Age at Title and Area of Date Appointed Date of Officer 12/31/01 Responsibility to Present Position Employment - --- Stephen B. Lawson 60 President, Chief Executive Officer and Director 10/08/98 12/06/65 Robert T. Boon 47 Executive Vice President 01/04/01 04/01/85 John S. Burnett 55 Clerk 10/08/98 09/07/71 Robert R. Prall 58 Executive Vice President 01/04/01 06/01/93 Noal D. Reid 57 Chief Financial Officer and Treasurer 10/08/98 10/16/72 Larry K. Squire 54 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)
7 Item 2. Properties. A. Properties owned by the Bank - Banking Offices of Cape Cod Bank and Trust Company, N.A.: 1) 307 Main Street, Hyannis - Main Office 2) 835 Main Street, Osterville - Branch Office 3) 536 Main Street, Harwichport - Branch Office 4) 1095 Route 28, South Yarmouth - Branch Office 5) 40 Main Street, Orleans - Branch Office 6) Shank Painter Road, Provincetown - Branch Office 7) 121 Main Street, Buzzards Bay - Branch Office 8) 119 Route 6A, Sandwich - Branch Office 9) Route 6A and Underpass Road, Brewster - Branch Office 10) 700 Route 6A, Dennis - Branch Office 11) 397 Palmer Avenue, Falmouth - Branch Office 12) 693 Main Street, Chatham - Branch Office 13) Main Street, Wellfleet - Branch Office 14) 249 Worcester Court, Falmouth - Branch Office 15) 237 Main Street, Wareham - Branch office 16) 495 Station Avenue, South Yarmouth - Branch Office None of the above offices is subject to any mortgage lien or any other material encumbrance. The main office is located in Hyannis, Massachusetts, and is a modern, two-story brick building located on approximately two acres of land. The Harwichport office and the Buzzards Bay office are somewhat larger than the remaining offices, having formerly been the main offices of the Cape Cod Trust Company and the Buzzards Bay National Bank prior to merger. The Bank also owns a house in Meredith, New Hampshire, one in Orlando, Florida, and one in Killington, Vermont, which are used as vacation sites by its employees. B. Rental of Bank Premises of Cape Cod Bank and Trust Company, N.A.: The land on which the Hyannis Airport Rotary Office is located is leased from the Barnstable Municipal Airport for $58,173 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 $59,000 in 2002 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 2002 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 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 $11,040 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 2002 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 $26,400 for Automated Teller Machines (ATMs) in 2002. 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. 8 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 28, 2002. 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.
2000 2001 ----------------------------------------- -------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- ------- Market price: $15.25 $15.9375 $20 $18.8125 $22.75 $29.99 $30.96 $22.44 High Low $12.625 $13.125 $15.50 $17 $18.625 $21.16 $23.70 $26 Dividends declared $0.16 $0.16 $0.16 $0.16 $0.18 $0.18 $0.18 $0.18 per share Item 6. Selected Consolidated Financial Data. 2001 2000 1999 1998 1997 ---------- (Dollar amounts in thousands except per share amounts) Total assets $1,454,667 $1,403,919 $1,231,114 $1,177,530 $973,105 Stockholders' equity 115,316 98,729 85,650 83,542 75,636 Net interest income 53,200 48,345 40,796 37,767 36,907 Provision for loan losses -- -- -- -- -- Non-interest income 22,922 16,211 18,268 17,036 20,174 Non-interest expense 46,058 38,281 32,517 34,196 35,642 Provision for income taxes 10,622 9,101 10,086 8,050 8,190 Net income 19,464 17,229 16,461 12,557 13,249 Book value per share $13.38 $11.47 $9.95 $9.22 $8.35 Basic earnings per share(1) 2.26 2.00 1.85 1.39 1.46 Diluted earnings per share 2.25 2.00 1.85 1.38 1.46 Cash dividends per share .72 .64 .56 .50 .42 Return on average assets 1.32% 1.35% 1.35% 1.15% 1.45% Return on average stockholders' equity 18.4% 19.3% 19.6% 15.8% 18.7% Dividend payout ratio 31.86% 32.00% 30.27% 35.97% 28.77% Equity to assets ratio 7.14% 6.97% 6.89% 7.28% 7.75%
(1) Based on average shares outstanding: 8,613,106 in 2001; 8,608,048 in 2000; 8,876,776 in 1999; 9,061,064 in 1998 and in 1997. 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. This Form 10-K contains certain statements that may be considered "forward-looking statements." Forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those factors described under the caption "Risk Factors and Factors Affecting Forward-Looking Statements," that may cause the Company's actual results to materially differ from those projected in the forward-looking statements. You should not place undue reliance on our forward-looking statements. For further information regarding forward-looking statements, you should review the discussion under the caption "FORWARD LOOKING STATEMENTS" on page 2 of this report. The following discussion should be read in conjunction with the accompanying consolidated financial statements and selected consolidated financial data included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this discussion generally will refer to the investments and activities of the Company and the Bank, except where otherwise noted. Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered on Cape Cod in Barnstable County, Massachusetts. The Bank's twenty-nine banking offices are principally engaged in accepting deposits from individuals and businesses, and in making loans. The Bank also has a substantial Trust Department, managing assets in excess of $677 million at December 31, 2001 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. 2001 COMPARED WITH 2000 Source and Use of Funds. On average, deposits during 2001 increased from the prior year by $74,452,000 or 9% with core deposits, consisting of demand, NOW, money market, and savings accounts, accounting for $49,300,000, of this increase and time deposits accounting for the remaining $25,152,000. In contrast, total deposits of $903,391,000 at December 31, 2001 reflect a decrease of $69,912,000 or 7% when compared to the prior year-end. Core deposits increased by $50,682,000 or 8% while time deposits decreased by $120,594,000 or 37% from the prior year-end. The decrease in year end balances in time deposits can be attributed to the maturity of a significant amount of one year Certificates of Deposit during the year following a special interest rate offered during 2000 as well as the decrease in the interest rate being offered on these products. Additional funds were raised through increased borrowings. Borrowings from the Federal Home Loan Bank increased in 2001, on average, by $100,877,000 or 34%, compared to the prior year. At December 31, 2001, these borrowings amounted to $384,314,000, an increase of $93,027,000 or 32% over year-end 2000. In addition, CCBT Statutory Trust I, a subsidiary of the Company, issued $5,000,000 of Trust Preferred Securities during the third quarter of 2001. At December 31, 2001, total loans including loans held for sale were $892,641,000, an increase of $43,290,000 or 5.1% when compared to the prior year-end. This increase was primarily in the Commercial Mortgage portfolio, which increased $22,398,000 or 9%, as well as Home Equity lines of credit, which increased $15,959,000 or 43%. Residential Mortgages, including loans held for sale, were lower at year-end 2001 by $9,582,000 or 2% due to the sale of $168,648,000 of Residential Mortgages during the year. On average, total loans increased $139,047,000 or 18.4% over the prior year. Average loan growth was led by Residential Mortgages, which increased $77,445,000 or 23%. Other loan categories, which experienced significant average growth include Commercial Mortgages, up $29,175,000 or 13%, and Commercial Construction loans, up $17,600,000 or 57%. Home Equity lines of credit were higher, on average, by $13,362,000 or 432% than the prior year. At December 31, 2001, securities, including Federal Home Loan Bank and Federal Reserve Bank stock, were up by $13,039,000 or 3% over the prior year-end. The increase in Other debt securities of $22,118,000 or 12% was partially offset by declines in collateralized mortgage obligations and U.S. Government agencies. On average, the increase in securities was $54,039,000 or 12% with Other securities accounting for $42,671,000 of this increase, or 20%. Collateralized mortgage obligations were higher, on average, by $15,144,000 or 8% while U.S. Government agencies declined by $9,457,000 or 36%. Net Interest Income. Net interest income was $53,200,000 for the year ended December 31, 2001 as compared to $48,345,000 for the prior year, an increase of 10%. Lower yields on earning assets were offset by the increased volume of earning assets as well as lower yields on interest bearing liabilities. The spread and net interest margin ratios were 3% and 4% respectively, for the year ended December 31, 2001, compared to 3% and 4%, respectively for the year 2000. Provision for Loan losses. Recoveries on loans previously charged off exceeded charge-offs during 2001 by $98,000. Despite overall growth in the loan portfolio in 2001, management's assessment of the risks in the loan portfolio at December 31, 2001 as well as the Company's recent loss experience, whereby recoveries have actually exceeded charge-offs since 1997, resulted in no provision for loan losses in 2001. The allowance for loan losses was 1.39% and 1.43% of total loans at December 31,2001 and 2000, respectively. 10 Other Income and Expense. Non-interest income increased by $6,712,000 or 41% over the prior year-end. Of this increase, $2,103,000 and $2,867,000, respectively, can be attributed to net gains on the sale of securities and loans. Insurance commissions have increased $763,000 compared to the prior year results, which only included the Agency's revenues from the date of purchase. However, the increase in insurance commissions can also be attributed to increased volume as a result of the referral of bank customers to the Agency. Non-interest expenses totaled $46,058,000 for the year ended December 31, 2001, a $7,778,000 or 20% increase from the comparable 2000 period. Salaries and employee benefits rose $5,191,000 or 25% with commissions accounting for $1,397,000 of this increase and salaries, in line with management expectations, increasing $2,294,000. The increased benefits expense of $1,668,000 is largely attributable to increases in performance-based compensation programs and increases in medical and dental insurance costs. Increased expenses in other categories include amortization of intangibles for acquisitions completed during the second quarter of 2000, building and equipment expenses for additional locations and depreciation and amortization related to upgraded computer equipment and software, and marketing and advertising costs incurred for the launch of the Company's new logo. Provision for Income Taxes. For the year ended December 31, 2001, the provision for income taxes was $10,622,000, an increase of 17% over the prior year's provision of $9,101,000. These provisions reflect a combined effective federal and state income tax rate of 35% in 2001 and 2000, respectively. Net Income. Net income of $19,464,000 for the year ended December 31, 2001 reflects an increase over 2000 results of $2,236,000 or 13%. Basic earnings per share of $2.26 represents a $.26 increase in 2001 compared to 2000 results. 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. 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 11 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. MATURITY STRUCTURE OF ASSETS AND LIABILITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
Fixed Rate Securities ----------------------------------------------------------------- U.S. Government State and Other Agencies Municipal Securities ------------------- ---------------------- --------------------- Weighted Weighted Weighted Adjusted Average Adjusted Average Adjusted Average Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- Term to maturity: (Dollar amounts in thousands) One year or less $60,852 4.42% $18,639 2.81% $142,703 6.70% Over one year through five years 15,295 5.41% 4,525 4.64% 18,043 6.43% Over five years 46 6.66% 950 4.83% 1,224 5.11% ------- ------- -------- Totals $76,193 4.62% $24,114 3.23% $161,970 6.66% ======= ======= ========
Included in fixed rate debt securities are $240,534,000 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.
Floating Rate Securities ----------------------------------------------------------------- U.S. Government State and Other Agencies Municipal Securities ------------------- ---------------------- --------------------- Weighted Weighted Weighted Adjusted Average Adjusted Average Adjusted Average Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- (Dollar amounts in thousands) Term to repricing/maturity: One year or less $44,103 3.74% -- -- $127,124 3.54% Over one year through five years -- -- -- -- -- -- Over five years -- -- -- -- -- -- ------- ------- -------- Totals $44,103 3.74% -- -- $127,124 3.54% ======= ======= ========
The Company's investment securities are subject to market risk in the following ways. $171,227,000 of the investment securities owned as of December 31, 2001 are floating rate instruments tied to various indices, primarily LIBOR. Lesser amounts are tied to Treasury rates and other indices. The majority of these floating rate instruments are subject to interest rate caps that range from 8% to 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 12 less well than securities tied to other indices. Most of the remaining $262,277,000 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 average lives and have interest rates above current market levels, which reduces the market risk of these securities. The average life of the Company's fixed-rate investments is less than two years.
Fixed Rate Loans ---------------- Commercial Construction Other Loans Loans Loans ----- ----- ----- (Dollar amounts in thousands) Term to maturity: One year or less $7,668 $33,702 $25,483 Over one year through five years 7,648 19,208 122,545 Over five years 3,550 2,017 23,642 ------- ------- -------- Totals $18,866 $54,927 $171,670 ======= ======= ========
Included in fixed rate loans maturing in one year or less are $1,414,000 of customer account overdrafts.
Floating Rate Loans ------------------- Commercial Construction Other Loans Loans Loans ----- ----- ----- (Dollar amounts in thousands) Term to repricing/maturity: One year or less $66,081 $40,259 $342,799 Over one year through five years -- -- 189,665 Over five years -- -- 24 ------- ------- -------- Totals $66,081 $40,259 $532,488 ======= ======= ========
Most residential mortgage loans are adjustable rate mortgages subject to interest rate caps. The remaining maturity of time certificates of deposit as of December 31, 2001 was as follows:
Fixed Rate ----------------------- Certificates of Deposit $100,000 or more Less than $100,000 ---------------- ------------------ (Dollar amounts in thousands) Remaining maturity: Three months or less $33,104 $ 53,877 Over three months through six months 10,204 42,328 Over six months through 12 months 5,163 35,108 Over one year through five years 4,652 19,884 Over five years -- -- ------- -------- Totals $53,123 $151,197 ======= ========
Other deposits may be withdrawn by the customer without notice or penalty. The rates paid thereon are reviewed each month and changed at the Company's option as often as indicated by changing market conditions. Generally, the Company's strategy is to price deposits 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. 13 The remaining maturity of borrowings from the Federal Home Loan Bank as of December 31, 2001 was as follows: Fixed Rate ----------------------------- FHLB Borrowings ----------------------------- Remaining maturity: (Dollar amounts in thousands) Three months or less $207,000 Over three months through six months 2,065 Over six months through 12 months 10,000 Over one year through five years 146,571 Over five years 18,678 -------- Totals $384,314 ======== Rates paid on other interest-bearing liabilities change daily. Loans The following is a summary of loans outstanding as of the dates indicated:
December 31, ------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Commercial loans $84,947 $76,275 $ 77,776 $70,767 $72,190 Construction mortgage loans 95,186 87,978 68,809 47,940 34,798 Commercial mortgage loans 264,934 242,536 203,988 207,860 198,944 Industrial revenue bonds 1,163 1,603 1,137 1,344 1,883 Residential mortgage loans 429,840 430,951 313,757 254,320 203,462 Consumer loans 8,221 9,147 9,275 11,589 15,903 -------- -------- -------- -------- -------- Total loans $884,291 $848,490 $674,742 $593,820 $527,180 ======== ======== ======== ======== ========
Allowance for Loan Losses The allowance for loan losses is an estimate of the amount necessary to absorb probable losses in the loan portfolio. The allowance consists of specific, general and unallocated components. Commercial real estate and commercial business loans are evaluated individually for allowance purposes. Other categories of loans are generally evaluated as a group. The specific component relates to loans that are classified as doubtful, substandard or special mention. Loans classified as doubtful are considered impaired in accordance with SFAS No. 114, and an allowance is determined using a discounted cash flow calculation. Loss factors for substandard loans are based on a loss migration database, while loss factors for all other categories of loans are based on the Company's historical loss experience with similar loans of similar quality as determined by the Company's internal rating system. Loss factors are then adjusted for additional points that consider qualitative factors such as current economic trends (both local and national), concentrations, growth and performance trends, and the results of risk management assessments. Accordingly, increases or decreases in the amount of each loan category as well as the ratings of the loans within each category are considered in calculating the overall allowance. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. In addition, the Company's allowance for loan losses is periodically reviewed by the OCC as part of their examination process. The OCC may require the Company to make additions to the allowance based upon judgments different from those of management. 14 Non-performing Assets and Loan Loss Experience Non-performing assets as of December 31 were as follows:
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Nonaccrual loans $1,802 $2,192 $1,777 $7,468 $2,770 Loans past due 90 days or more and still accruing -- -- -- -- -- Property from defaulted loans 1,500 1,500 1,500 -- 621 ------ ------ ------ ------ ------ Total non-performing assets $3,302 $3,692 $3,277 $7,468 $3,391 ====== ====== ====== ====== ====== Restructured troubled debt performing in accordance with amended terms, not included above $ 224 $ 237 $ 626 $ 478 $1,131 ====== ====== ====== ====== ======
Accrual of interest income on loans is discontinued when it is questionable whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral and in the process of collection. Loans are classified "substandard" when they are not adequately protected by the current sound worth and paying capacity of the debtor or of the collateral. At December 31, 2001, $14,182,000 of loans were included in this category, in addition to loans reported above. The Company's loan classification system also includes a category for loans that are monitored for possible deterioration in credit quality. At December 31, 2001, $2,323,000 of loans were included in this category. In addition, it is possible that there may be losses on other loans that have not been specifically identified. The changes in the reserve for loan losses during the five years ended December 31 were as follows:
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Balance, beginning of year $12,154 $11,158 $11,108 $10,962 $11,417 Provision for loan losses -- -- -- -- -- Charge-offs: Commercial loans (275) (108) (347) (353) (400) Construction mortgage loans -- -- -- -- -- Commercial mortgage loans -- -- (186) (86) (69) Industrial revenue bonds -- -- -- -- -- Residential mortgage loans -- -- -- (1) (119) Consumer loans (71) (60) (77) (166) (749) Recoveries on loans previously charged off: Commercial loans 321 826 351 475 653 Construction mortgage loans 84 89 60 47 -- Commercial mortgage loans 6 216 190 174 120 Industrial revenue bonds -- -- -- -- -- Residential mortgage loans -- 10 -- 23 8 Consumer loans 33 23 59 33 101 ------- ------- ------- ------- ------- Balance, end of year $12,252 $12,154 $11,158 $11,108 $10,962 ======= ======= ======= ======= =======
15
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Allocation of ending balance: Commercial loans $ 2,219 $ 1,502 $ 1,457 $1,578 $1,676 Construction mortgage loans 787 802 755 705 521 Commercial mortgage loans 5,903 5,838 5,681 5,822 6,587 Industrial revenue bonds 14 16 20 23 28 Residential mortgage loans 2,335 3,361 2,725 2,460 1,610 Consumer loans 994 635 520 520 540 ------- ------- ------- ------- ------- Balance, end of year $12,252 $12,154 $11,158 $11,108 $10,962 ======= ======= ======= ======= ======= 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Ratio of net charge-offs (recoveries) -- (0.13)% (0.01)% (0.03)% 0.09% 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 2001, notwithstanding the growth in the loan portfolio. The reserve represented 1.39% of total loans at December 31, 2001, 1.43% of total loans at December 31, 2000 and 1.65% at December 31, 1999. 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, 2001, 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 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 has also established a line of credit of $7,000,000 for the purchase of federal funds from SunTrust Bank and may also 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, 2001. 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 3.88%, 6.26% and 4.97% during 2001, 2000 and 1999, respectively. 16
Net Interest Income, Net Interest Margin Years ended December 31, 2001 2000 1999 --------------------------- --------------------------- --------------------------- Average Average Average Average Average Average Balance Interest Yield Balance Interest Yield Balance Interest Yield ------- -------- ----- ------- -------- ----- ------- -------- ----- (Dollar amounts in thousands) ASSETS Securities: Mortgage-backed securities $ 29,253 $ 1,868 6.38% $27,465 $ 2,173 7.91% $60,641 $ 3,394 5.60% CMOs 194,463 11,948 6.14% 179,319 13,189 7.36% 226,971 12,069 5.32% U.S. Government agencies 16,905 869 5.14% 26,362 1,775 6.73% 26,610 1,400 5.26% State and municipal obligations 23,571 948 5.23% 19,678 921 4.68% 21,643 822 3.80% Other securities 252,251 14,689 5.82% 209,580 14,621 6.97% 202,607 12,215 6.03% ------- ------ ------- ------ ------- ------ Total securities 516,443 30,322 5.93% 462,404 32,679 7.07% 538,472 29,900 5.55% ------- ------ ------- ------ ------- ------ Loans: Commercial 83,973 6,692 7.97% 77,352 7,529 9.73% 73,487 6,650 9.05% Commercial construction 48,461 3,529 7.28% 30,861 2,899 9.39% 14,937 1,342 8.98% Residential construction 48,513 3,038 6.26% 52,789 3,316 6.28% 40,683 2,388 5.87% Commercial mortgages 248,865 22,064 8.87% 219,690 20,298 9.24% 204,275 18,139 8.88% Industrial revenue bonds 1,324 91 9.65% 1,382 114 8.25% 1,278 98 7.67% Residential mortgages 410,753 27,913 6.80% 333,308 23,199 6.96% 263,935 17,672 6.70% Home equity 44,296 3,245 7.33% 30,934 3,001 9.70% 21,480 1,876 8.73% Consumer 8,313 861 10.36% 9,135 934 10.22% 10,032 1,042 10.39% ------- ------ ------- ------ ------- ------ Total loans 894,498 67,433 7.54% 755,451 61,290 8.11% 630,107 49,207 7.81% ------- ------ ------- ------ ------- ------ Total earning assets 1,410,941 97,755 6.97% 1,217,855 93,969 7.72% 1,168,579 79,107 6.77% ------ ------ ------ Non-earning assets 67,263 61,027 52,179 --------- --------- --------- Total assets $1,478,204 $1,278,882 $1,220,758 ========== ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Interest bearing deposits: NOW accounts $ 139,485 745 0.53% $ 124,663 928 0.74% $113,855 936 0.82% Regular savings 146,656 3,247 2.21% 148,790 4,639 3.12% 163,638 4,755 2.91% Money Market accounts 173,675 4,828 2.78% 154,187 5,748 3.73% 145,033 4,484 3.09% Certificates of Deposit of $100,000 or more 86,255 4,708 5.46% 76,672 5,682 7.41% 39,765 2,021 5.08% Other time deposits 183,887 10,024 5.45% 168,318 9,127 5.42% 119,071 5,832 4.90% ------- ------ ------- ----- ------- ----- Total interest bearing deposits 729,958 23,552 3.23% 672,630 26,124 3.88% 581,362 18,028 3.10% ------- ------ ------- ----- ------- ----- Borrowings: Federal Home Loan Bank 394,827 20,090 5.09% 293,950 18,098 6.16% 356,276 19,405 5.45% Other short-term borrowings 30,854 913 2.96% 25,579 1,402 5.48% 20,898 878 4.20% ------- ------ ------- ----- ------- ----- Total borrowings 425,681 21,003 4.93% 319,529 19,500 6.10% 377,174 20,283 5.38% ------- ------ ------- ----- ------- ----- Total interest-bearing 1,155,639 44,555 3.86% 992,159 45,624 4.60% 958,536 38,311 4.00% ------ ----- ----- liabilities Demand deposits 208,071 190,947 168,719 Non-interest bearing liabilities 8,878 6,614 9,348 Stockholders' equity 105,616 89,162 84,155 ---------- ---------- ---------- Total liabilities & equity $1,478,204 $1,278,882 $1,220,758 ========== ========== ========== Net interest income/spread $53,200 3.11% $48,345 3.12% $40,796 2.77% ======= ======= ======= Net interest margin (NII/Avg. Earning Assets) 3.77% 3.97% 3.49%
17 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 2001, declining rates had a negative impact on net interest income. However, the growth in earning assets exceeded the growth in interest bearing liabilities resulting in an increase in net interest income when compared to 2000. 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.
2001 compared to 2000 2000 compared to 1999 ----------------------------- --------------------------------- 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 $ 128 $ (433) $ (305) $(2,211) $ 990 $(1,221) CMOs 1,022 (2,263) (1,241) (2,894) 4,014 1,120 U.S. Government agencies (561) (345) (906) 3 372 375 State & municipal obligations 193 (166) 27 (84) 183 99 Other securities 2,729 (2,661) 68 517 1,889 2,406 ----- ------ ------ ------ ----- ----- Total securities 3,511 (5,868) (2,357) (4,669) 7,448 2,779 ----- ------ ------ ------ ----- ----- Loans: Commercial 586 (1,423) (837) 363 516 879 Commercial construction 1,467 (837) 630 1,463 94 1,557 Residential construction (268) (10) (278) 736 192 928 Commercial mortgages 2,642 (876) 1,766 1,397 762 2,159 Industrial revenue bonds (5) (18) (23) 8 8 16 Residential mortgages 5,328 (614) 4,714 4,736 791 5,527 Home equity 1,138 (894) 244 871 254 1,125 Consumer (85) 12 (73) (93) (15) (108) ----- ------ ------ ------ ----- ----- Total loans 10,803 (4,660) 6,143 9,481 2,602 12,083 ----- ------ ------ ------ ----- ----- Total earning assets 14,314 (10,528) 3,786 4,812 10,050 14,862 ----- ------ ------ ------ ----- ----- INTEREST BEARING LIABILITIES Interest bearing deposits: NOW accounts 94 (277) (183) 85 (93) (8) Regular savings (57) (1,335) (1,392) (447) 331 (116) Money Market accounts 634 (1,554) (920) 312 952 1,264 Certificates of deposit 617 (1,591) (974) 2,306 1,355 3,661 of $100,000 or more Other time deposits 846 51 897 2,541 754 3,295 ----- ------ ------ ------ ----- ----- Total interest bearing deposits 2,134 (4,706) (2,572) 4,797 3,299 8,096 ----- ------ ------ ------ ----- ----- Borrowings: Federal Home Loan Bank 5,644 (3,652) 1,992 (3,616) 2,309 (1,307) Other short-term borrowings 223 (712) (489) 227 297 524 ----- ------ ------ ------ ----- ----- Total borrowings 5,867 (4,364) 1,503 (3,389) 2,606 (783) ----- ------ ------ ------ ----- ----- Total interest bearing 8,001 (9,070) (1,069) 1,408 5,905 7,313 ----- ------ ------ ------ ----- ----- liabilities Net changes due to volume/rate $ 6,313 $ (1,458) $ 4,855 $ 3,404 $ 4,145 $ 7,549 ======= ======== ======= ======= ======= =======
18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk is the risk of loss from adverse changes in market prices. In particular, the market prices of interest-earning assets may be affected by changes in interest rates. Since net interest income (the difference or spread between the interest earned on loans and investments and the interest paid on deposits and borrowings) is the Company's primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company's assets and liabilities. Interest rate risk is the exposure of net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available for sale and the flow and mix of deposits. The Company's Asset/Liability Management Committee, comprised of several Directors with senior management, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The Committee meets monthly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. The Company 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, 2001, it is estimated that an increase in interest rates of 200 basis points (for example, an increase in the prime rate from 4.5% to 6.5%) would reduce the value of net assets by $19,420,000. 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 4.5% to 2.5%) it is estimated that net interest income would decrease by $6,014,000. On the other hand, if interest rates were to increase, net interest income would increase. At December 31, 2000, it was estimated that the value of the net assets of the Company would decline by $20,407,000 if interest rates were to increase by 200 basis points and that the Company's net interest income would decline by $4,261,000 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 Independent Auditors' Reports o Consolidated Statements of Condition at December 31, 2001, 2000 and 1999 o Consolidated Statements of Income for the Three Years Ended December 31, 2001 o Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2001 o Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2001 o Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 2001 o Notes to Consolidated Financial Statements 19 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of CCBT Financial Companies, Inc. We have audited the accompanying consolidated statement of condition of CCBT Financial Companies, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, cash flows, comprehensive income and changes in stockholders' equity, for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CCBT Financial Companies, Inc. and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Wolf & Company, P.C. - ------------------------ Boston, Massachusetts February 1, 2002 20 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 and 1999, 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 and 1999, 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. /s/ Grant Thornton LLP - ---------------------- Boston, Massachusetts February 9, 2001 21 CONSOLIDATED STATEMENTS OF CONDITION
December 31, ----------------------------------------------------- ASSETS 2001 2000 1999 ------------- --------------- ---------------- Cash and due from banks $ 51,204,747 $ 49,371,492 $ 43,415,100 Short term interest-bearing deposits 10,857,540 16,843,538 2,207,328 Securities available for sale at fair value 438,349,833 426,742,801 463,379,414 Federal Home Loan Bank stock, at cost 23,502,600 22,125,400 22,125,400 Federal Reserve Bank stock, at cost 1,235,050 1,180,700 1,096,700 Total loans 884,291,338 848,490,319 674,742,548 Less: Allowance for loan losses (12,251,907) (12,153,944) (11,158,126) ------------- --------------- ---------------- Net loans 872,039,431 836,336,375 663,584,422 ------------- --------------- ---------------- Loans held for sale 8,349,342 860,840 200,000 Premises and equipment 18,496,280 16,633,912 12,396,729 Deferred tax assets 2,619,189 4,512,589 4,657,933 Accrued interest receivable on securities 2,632,117 3,353,580 2,850,366 Interest receivable on loans 3,736,071 4,331,987 3,156,914 Intangibles 7,972,088 9,555,425 -- Other assets 13,672,642 12,070,707 12,044,040 -------------- --------------- ---------------- Total assets $1,454,666,930 $1,403,919,346 $1,231,114,346 ============== ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 903,390,528 $ 973,302,664 $ 766,063,617 Borrowings from the Federal Home Loan Bank 384,314,318 291,286,797 347,962,999 Other short-term borrowings 30,735,238 24,520,157 19,345,885 Subordinated debt 5,000,000 -- -- Current taxes payable 2,064,060 2,267,117 1,721,187 Interest payable on deposits and borrowings 2,410,159 4,206,555 3,061,932 Post retirement benefits payable 3,293,458 2,881,892 2,501,480 Employee profit sharing retirement and bonuses payable 4,214,186 2,946,642 2,396,542 Other liabilities 3,925,378 3,654,309 2,411,093 ------------- ------------- ------------- Total liabilities 1,339,347,325 1,305,066,133 1,145,464,735 ------------- ------------- ------------- Minority interest 3,602 124,435 -- ------------- ------------- ------------- Commitments and contingencies (Notes 5 and 12) Stockholders' equity Common stock, $1.00 par value: Authorized: 12,000,000 shares Issued: 9,061,064 9,061,064 9,061,064 9,061,064 Surplus 27,473,395 27,494,890 27,494,890 Undivided profits 83,156,834 69,896,759 58,181,480 Treasury stock, at cost (440,641 shares in 2001) (453,016 shares in 2000 and 1999) (7,197,493) (7,399,628) (7,399,628) Accumulated other comprehensive income (loss) 2,822,203 (324,307) (1,688,195) ----------- ---------- ---------- Total stockholders' equity 115,316,003 98,728,778 85,649,611 ----------- ---------- ---------- Total liabilities and stockholders' equity $1,454,666,930 $1,403,919,346 $1,231,114,346 ============== ============== ==============
The accompanying notes are an integral part of these financial statements. 22
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- INTEREST & DIVIDEND INCOME Interest and fees on loans $67,433,306 $61,289,410 $49,206,774 Interest on short term interest-bearing deposits 509,594 934,679 675,357 Interest on federal funds sold 3,909 107,610 -- Taxable interest income on securities 27,488,845 28,996,374 26,993,403 Tax-exempt interest income on securities 934,219 910,454 775,355 Dividends on securities 1,384,945 1,730,510 1,456,359 ---------- ---------- ---------- Total interest & dividend income 97,754,818 93,969,037 79,107,248 ---------- ---------- ---------- INTEREST EXPENSE Interest on deposits 23,552,091 26,123,306 18,028,054 Interest on borrowings from the Federal Home Loan Bank 20,089,588 18,097,810 19,405,176 Interest on other short-term borrowings 765,525 1,402,676 877,907 Interest on subordinated debt 147,975 -- -- ---------- ---------- ---------- Total interest expense 44,555,179 45,623,792 38,311,137 ---------- ---------- ---------- Net interest income 53,199,639 48,345,245 40,796,111 Provision for loan losses -- -- -- ---------- ---------- ---------- Net interest income after provision for loan losses 53,199,639 48,345,245 40,796,111 ---------- ---------- ---------- NON-INTEREST INCOME Financial advisor fees 6,909,406 6,433,397 5,957,566 Deposit account service charges 2,129,856 1,967,843 1,915,777 Branch banking fees 3,110,268 3,073,595 3,049,663 Electronic banking fees 1,749,624 1,705,453 1,829,980 Loan servicing and other loan fees 59,342 232,815 167,504 Brokerage fees and commissions 1,311,197 1,032,582 1,041,553 Net gain on sales of securities 2,187,219 84,602 234,301 Net gain on sales of loans 2,955,530 88,063 219,587 Insurance commissions 1,573,101 809,931 -- Gain on sale of credit card merchant portfolio 248,166 296,001 3,494,733 Other income 688,449 486,271 356,875 ---------- ---------- ---------- Total non-interest income 22,922,158 16,210,553 18,267,539 ---------- ---------- ---------- NON-INTEREST EXPENSE Salaries 17,653,413 14,399,574 12,381,649 Employee benefits 8,164,248 6,227,247 5,454,900 Building and equipment 5,434,329 4,889,482 4,340,295 Data processing 2,987,162 2,721,222 2,793,269 Accounting and legal fees 954,684 771,361 891,402 Other outside services 2,407,688 2,217,641 1,966,130 Amortization of intangibles 1,583,333 851,443 -- Delivery and communications 1,898,007 1,564,002 1,376,039 Directors' fees 278,971 280,125 294,691 Marketing and advertising 1,774,334 1,252,521 906,818 Printing and supplies 872,002 781,718 753,762 Insurance 473,146 376,081 285,681 Branch conversion expenses -- 283,218 -- All other expenses 1,576,940 1,664,972 1,071,531 ---------- ---------- ---------- Total non-interest expense 46,058,257 38,280,607 32,516,167 ---------- ---------- ---------- Minority interest (23,299) (54,504) -- ---------- ---------- ---------- Net income before taxes 30,086,839 26,329,695 26,547,483 Applicable income taxes 10,622,422 9,100,946 10,086,390 ---------- ---------- ---------- Net income $19,464,417 $17,228,749 $16,461,093 =========== =========== =========== Average shares outstanding - basic 8,613,106 8,608,048 8,876,776 Basic earnings per share $2.26 $2.00 $1.85 Diluted earnings per share $2.25 $2.00 $1.85 $ .72 $ .64 $ .56 The accompanying notes are an integral part of these financial statements
23
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 19,464,417 $ 17,228,749 $ 16,461,093 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,283,720 3,226,343 2,139,147 Net (accretion) amortization of securities (5,610,231) 4,891,652 3,020,243 Amortization of net deferred loan costs 1,308,577 744,250 595,459 Net gain on sales of securities (2,187,219) (84,602) (234,301) Deferred income tax (benefit) expense (369,967) (622,294) 1,998,127 Net gain on sale of loans (2,955,530) (88,063) (219,587) Net loss on disposal of premises and equipment -- 57,155 -- Gain on sale of credit card merchant portfolio (248,166) (296,001) (3,494,733) Net change in: Proceeds from sales (originations) of loans held for sale, net (5,709,420) (660,840) 17,940,522 Accrued interest receivable (1,317,379) (1,619,663) 1,657,531 Accrued expenses and other liabilities 153,782 3,008,301 2,648,346 Other, net (1,287,972) 136,932 5,398,311 ---------------- -------------- -------------- Net cash provided by operating activities 5,524,612 25,921,919 47,910,158 ---------------- -------------- -------------- CASH USED BY INVESTING ACTIVITIES Net increase in loans (86,431,069) (177,021,763) (164,453,508) Proceeds from sale of portfolio loans 52,840,954 12,188,480 85,294,654 Dispositions of property from defaulted loans -- 70,000 115,000 Maturities of available-for-sale securities 514,544,235 248,979,523 496,592,930 Purchase of available-for-sale securities (656,605,300) (312,851,725) (563,093,625) Sales of available-for-sale securities 143,661,360 97,908,163 82,270,203 Purchases of premises and equipment (4,562,749) (4,199,951) (2,386,550) Purchase of Federal Home Loan Bank stock (1,377,200) -- -- Purchase of Federal Reserve Bank stock (54,350) (84,000) (1,096,700) 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 (37,984,119) (100,286,313) (66,757,596) ---------------- -------------- -------------- CASH PROVIDED BY FINANCING ACTIVITIES Net (decrease) increase in deposits (69,912,136) 151,972,396 38,166,642 Advances of borrowings from the Federal Home Loan Bank 1,855,224,404 2,001,323,981 1,062,525,072 Repayments of borrowings from the Federal Home Loan Bank (1,762,196,883) (2,058,000,183) (1,058,068,756) Net increase in other short-term borrowings 6,215,081 5,174,272 4,739,563 Proceeds from issuance of subordinated debt 5,000,000 -- -- Purchase of treasury stock -- -- (7,399,628) Issuance of common stock under stock option plan 180,640 -- -- Cash dividends paid on common stock (6,204,342) (5,513,470) (4,983,742) ---------------- -------------- -------------- Net cash provided by financing activities 28,306,764 94,956,996 34,979,151 ---------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents (4,152,743) 20,592,602 16,131,713 Cash and cash equivalents at beginning of year 66,215,030 45,622,428 29,490,715 ---------------- -------------- -------------- Cash and cash equivalents at end of year $ 62,062,287 $ 66,215,030 $ 45,622,428 =============== =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 46,403,510 $ 44,479,170 $ 37,746,945 Income taxes 11,049,819 8,967,843 6,599,480 Non-cash transactions: Additions to property from defaulted loans -- 70,000 1,615,000 Loans to finance OREO property -- -- 100,000 The accompanying notes are an integral part of these financial statements.
24
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2001 2000 1999 ---- ---- ---- Net income $19,464,417 $17,228,749 $16,461,093 ----------- ----------- ----------- Unrealized holding gains (losses) on securities available for sale 7,597,096 2,458,196 (2,937,312) Reclassification of gains on securities realized in income (2,187,219) (84,602) (234,301) ----------- ----------- ----------- Net unrealized gains (losses) 5,409,877 2,373,594 (3,171,613) Related tax effect (2,263,367) (1,009,706) 1,201,101 ----------- ----------- ----------- Net other comprehensive income (loss) 3,146,510 1,363,888 (1,970,512) ----------- ----------- ----------- Comprehensive income $22,610,927 $18,592,637 $14,490,581 =========== =========== ===========
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31,
2001 2000 1999 ---- ---- ---- COMMON STOCK Balance, beginning of year $ 9,061,064 $ 9,061,064 $ 22,652,660 Stock exchange at reorganization -- -- (13,591,596) ----------- ----------- ----------- Balance, end of year 9,061,064 9,061,064 9,061,064 ----------- ----------- ----------- SURPLUS Balance, beginning of year 27,494,890 27,494,890 13,903,294 Stock exchange at reorganization -- -- 13,591,596 Issuance of common stock under stock option plan (21,495) -- -- ----------- ----------- ----------- Balance, end of year 27,473,395 27,494,890 27,494,890 ----------- ----------- ----------- UNDIVIDED PROFITS Balance, beginning of year 69,896,759 58,181,480 46,704,129 Net income 19,464,417 17,228,749 16,461,093 Cash dividends declared (6,204,342) (5,513,470) (4,983,742) ----------- ----------- ----------- Balance, end of year 83,156,834 69,896,759 58,181,480 ----------- ----------- ----------- TREASURY STOCK Balance, beginning of year (7,399,628) (7,399,628) -- Purchase of treasury stock -- -- (7,399,628) Issuance of common stock under stock option plan 202,135 -- -- ----------- ----------- ----------- Balance, end of year (7,197,493) (7,399,628) (7,399,628) ----------- ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of year (324,307) (1,688,195) 282,317 Net other comprehensive income (loss) 3,146,510 1,363,888 (1,970,512) ----------- ----------- ----------- Balance, end of year 2,822,203 (324,307) (1,688,195) ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY, END OF YEAR $115,316,003 $98,728,778 $85,649,611 ============ =========== ===========
The accompanying notes are an integral part of these financial statements. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies 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. 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 main operating 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 2000 and 1999 financial statements to conform to the 2001 presentation. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All inter-company accounts have been eliminated upon consolidation in the presentation of the consolidated financial statements. Use of estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of foreclosed real estate. 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 that might be sold prior to maturity to meet needs for liquidity or for the purchase of alternative investments. These securities are stated at market value. Unrealized gains and losses on such securities, if any, are credited or charged to other comprehensive income net of any related tax effect. Trading securities are securities which are bought and held principally for the purpose of selling them in the near term. At December 31, 2001, 2000 and 1999, the Company did not own any held to maturity or trading securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Loans -- Loans are reported at their principal balance outstanding, adjusted for deferred fees and costs and charge-offs. Loan fees, net of the direct cost of origination, are deferred and taken into income over the life of the loan using the interest method. Interest income on loans is recognized when accrued. Accrual of interest income on loans is discontinued when it is doubtful whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral. 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 26 all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Mortgage servicing rights -- The fair value of the right to service loans is capitalized when loans are sold to other investors and is amortized against servicing income over the estimated life of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as 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. Allowance for loan losses -- The allowance 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, nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and current economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Loan losses are charged against the 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. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 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. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which they are expected to be settled. Earnings per share -- Basic earnings per share is computed by dividing net income by the weighted average shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to purchase common stock were exercised resulting in the issuance of common stock that then shared in the earnings of the Company. Segments -- Statement of Financial Accounting Standards ("SFAS") No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in subsequent interim financial reports issued to shareholders. It also establishes standards for related disclosure about products and services, geographic areas, and major customers. The statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial 27 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. The Company's brokerage and insurance activities are not material to the Company's consolidated financial statements. Net income (loss) for the year ended December 31, 2001 for such activities amounted to $180,000 and $(24,000), respectively. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. Subsequent accounting change -- On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142, effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life, but will be subject to at least an annual assessment for impairment by applying a fair value based test. The first impairment evaluation must be completed by June 30, 2002. Additionally, under SFAS No. 142, acquired intangible assets (such as core deposit intangibles) should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of intent to do so. Unidentified intangible assets pertaining to branch acquisitions will continue to be amortized as such transactions are outside the scope of SFAS No. 142. As a result, effective January 1, 2002, the Company's goodwill will no longer be amortized but will be evaluated for impairment and the Company's core deposit intangibles will continue to be amortized over their estimated useful lives. (2) Securities The amortized cost and estimated fair values of securities, which the Company classified as available for sale as of December 31, 2001, 2000 and 1999 were as follows:
December 31, 2001 -------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (Dollar amounts in thousands) U.S. Government agency CMOs $116,949 $2,362 $921 $118,390 Other U.S. Government agency obligations 14,254 158 48 14,364 Other collateralized mortgage obligations 66,356 1,720 289 67,787 State and municipal obligations 24,114 -- -- 24,114 Other debt securities 211,831 2,672 808 213,695 -------- ------ ------ -------- Totals $433,504 $6,912 $2,066 $438,350 ======== ====== ====== ======== December 31, 2000 -------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair 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 agency obligations 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 ======== ====== ====== ========
28
December 31, 1999 -------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair 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 agency obligations 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 ======== ====== ====== ========
The net unrealized gain or loss on securities is included net of tax in other comprehensive income. Gross proceeds from the sale of available for sale securities were $143,661,000. Gross gains of $2,464,000 and gross losses of $277,000 were realized on those sales. Gross proceeds from the sale of available for sale securities were $97,908,000 in 2000. Gross gains of $410,000 and gross losses of $325,000 were realized on those sales. Gross proceeds from the sale of available for sale securities were $82,270,000 in 1999. Gross gains of $334,000 and gross losses of $100,000 were realized on those sales. The amount of income tax expense attributable to net gains in 2001, 2000 and 1999 was $915,000, $35,000 and $98,000, respectively. The amortized cost and estimated fair value of debt securities, which the Company classified as available for sale at December 31, 2001 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.
Amortized Estimated Cost Fair Value ---- ---------- (Dollar amounts in thousands) Due in one year or less $ 30,360 $30,318 Due after one year through five years 63,085 63,351 Due after five years through ten years 97,883 98,610 Due after ten years 242,176 246,071 -------- -------- Totals $433,504 $438,350 ======== ========
At December 31, 2001, securities carried at $30,735,000 were pledged to secure borrowings from the U.S. Treasury and securities sold subject to agreements to repurchase. (3) Loans The following is a summary of loans outstanding as of the dates indicated:
December 31, --------------------------------------------------- 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Mortgage loans on real estate Residential $376,504 $393,574 $290,722 Commercial 264,934 242,536 203,988 Construction 95,186 87,978 68,809 Equity lines of credit 53,336 37,377 23,035 Other loans Commercial 84,947 76,275 77,776 Industrial revenue bonds 1,163 1,603 1,137 Consumer 8,221 9,147 9,275 -------- -------- -------- Total loans 884,291 848,490 674,742 Less: Allowance for loan losses (12,252) (12,154) (11,158) -------- -------- -------- Total portfolio loans, net $872,039 $836,336 $663,584 ======== ======== ======== Loans held for sale $ 8,349 $ 861 $ 200 ======== ======== ========
29 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, 2001, 2000 and 1999 was $4,895,000, $5,885,000 and $5,552,000, respectively. During 2001, $2,666,000 in new loans were made to Directors and Officers and there were $3,656,000 in repayments. The total amount of deposits from Directors and Officers at December 31, 2001, 2000 and 1999 was $3,257,000, $5,558,000 and $3,829,000, respectively. Nonaccrual loans at December 31, 2001, 2000 and 1999 amounted to $1,802,000, $2,192,000, and $1,777,000, 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, 2001 was $127,000. Interest income recognized on nonaccrual loans in 2001 amounted to $38,000. The amount of restructured troubled debt which was performing in accordance with amended terms at December 31, 2001, 2000 and 1999 was $224,000, $237,000 and $626,000, 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. 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 $197,553,000, $160,104,000, and $168,260,000 at December 31, 2001, 2000 and 1999, respectively. The following summarizes mortgage servicing rights capitalized and amortized:
December 31, ----------------------------------------------- 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Mortgage servicing rights capitalized $585 $ 42 $528 ==== ==== ==== Mortgage servicing rights amortized $357 $147 $194 ==== ==== ====
Mortgage servicing rights included in Other Assets at December 31, 2001, 2000, and 1999, were $1,351,000, $1,123,000, and $1,228,000, respectively. The fair values of these rights were $1,433,000, $1,201,000 and $1,388,000, respectively. The fair value balance of capitalized servicing rights was determined using a discount rate of 8% and a prepayment speed of 7%. (4) Allowance for Loan Losses The changes in the allowance for loan losses during the three years ended December 31, 2001 were as follows:
2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Balance, beginning of year $12,154 $11,158 $11,107 Provision for loan losses -- -- -- Charge-offs (347) (168) (610) Recoveries on loans previously charged off 445 1,164 661 ------- ------- ------- Balance, end of year $12,252 $12,154 $11,158 ======= ======= =======
30 The following is a summary of information pertaining to impaired loans:
2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Impaired loans without a valuation allowance $ -- $ -- $ -- ==== ===== ====== Commercial loans $468 $ 442 $ 559 Commercial mortgage loans 148 328 419 ---- ----- ----- Total impaired loans $616 $ 770 $ 978 ==== ===== ====== Valuation allowance $347 $ 353 $ 449 ==== ===== ====== Average investment in impaired loans $528 $1,052 $2,397 ==== ====== ====== Interest income recognized on impaired loans $112 $ 183 $ 200 ==== ====== ====== Interest income recognized on a cash basis on impaired loans $112 $ 183 $ 200 ==== ====== ====== (5) Bank Premises and Equipment The cost and accumulated depreciation and amortization of premises and equipment are as follows: December 31, -------------------------------------------------------- 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Premises: Land $ 2,769 $ 2,769 $ 1,511 Buildings 10,188 9,516 7,094 Leasehold improvements 4,513 4,513 4,375 Equipment 19,447 15,572 12,749 Accumulated depreciation and amortization (18,421) (15,736) (13,332) ------- ------- ------- $18,496 $ 16,634 $ 12,397 ======= ======== ========
Depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 amounted to $2,700,000, $2,375,000 and $1,938,000, respectively. Certain banking premises are leased under non-capitalized operating leases expiring at various dates through 2012. Annual rental expenses under these leases were $1,003,000 in 2001, $959,000 in 2000 and $914,000 in 1999. The total rental commitments under non-cancelable leases for future years are $5,251,000 not including amounts payable under Consumer Price Index escalator provisions in three such leases which become effective in 2002 and later years. Annual commitments are $999,000 in 2002, $1,007,000 in 2003, $960,000 in 2004, $703,000 in 2005, $380,000 in 2006, and a total of $1,203,000 for the years 2007 through 2012. Certain of these leases also contain renewal options. (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 $1,091,000 in 2001, $1,154,000 in 2000 and $1,102,000 in 1999. Also in 2001, 2000 and 1999, bonuses were accrued under the provisions of the Company's Profit Incentive Plan totaling $1,810,000, $1,750,000 and $1,280,000, respectively, and paid in the year following. The Company's Employee Stock Ownership Plan holds 36,691 shares of the Company's common stock. At December 31, 2001, 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. 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. 31 The following table sets forth the plan's funded status reconciled with the amount included in the Company's statement of condition at December 31, 2001, 2000 and 1999:
Accumulated post-retirement benefit obligation: 2001 2000 1999 ---- ---- ---- Retirees $1,080,678 $ 967,586 $ 748,889 Fully eligible active plan participants 1,032,301 976,271 695,194 Other plan participants 1,538,627 1,689,082 1,595,339 --------- --------- --------- 3,651,606 3,632,939 3,039,422 Plan assets at fair value -- -- -- Accumulated post-retirement benefit obligation in excess of plan assets 3,651,606 3,632,939 3,039,422 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 859,577 515,647 831,364 Unrecognized prior service cost -- -- -- Unrecognized net obligation at transition (1,208,350) (1,318,200) (1,428,050) --------- --------- --------- Unfunded accrued post-retirement benefit expense $3,302,833 $2,830,386 $2,442,736 ========== ========== ========== Net periodic post-retirement benefit for 2001, 2000 and 1999 included the following components: 2001 2000 1999 ---- ---- ---- Service cost - benefits attributed to service during the $221,960 $172,394 $202,281 year Interest cost on accumulated post-retirement 268,073 234,489 211,806 benefit obligation Actual return on plan assets -- -- -- Amortization of transition obligation over 20 years 109,850 109,850 109,850 Amortization of gain (515,647) (831,364) (563,568) Asset gain deferred 507,628 807,416 563,568 ------- ------- ------- Net periodic post-retirement benefit cost $591,864 $492,785 $523,937 ======== ======== ========
For measurement purposes, a 5.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002; the rate was assumed to decrease 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, 2001 by $70,000 and the aggregate service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $5,000. The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7.%. 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 for Employees and in 2001, the Company adopted a Stock Option Plan for Directors. Options on up to 620,000 shares may be granted under these plans. 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. The table below shows the number of stock options that were outstanding at the beginning and end of each year, and how many were exercised, granted, forfeited or expired. 32
2001 2000 1999 -------------------------- -------------------------- -------------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding, beginning of year 159,500 $17.22 104,000 $16.72 57,000 $17.41 Granted 157,000 $24.24 61,500 $18.00 52,500 $16.07 Exercised (12,375) $14.60 -- -- -- -- Forfeited (3,500) $20.94 (6,000) $16.60 (5,500) $17.66 ------ ------ ------ Outstanding, end of year 300,625 $20.95 159,500 $17.22 104,000 $16.72 ======= ======= ======= Exercisable, end of year 69,625 $17.23 42,500 $16.47 18,375 $16.18 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 2001:
Remaining Years in Exercise Price Number Outstanding Contractual Life Number Exercisable -------------- ------------------ ---------------- ------------------ $13.38 12,000 5.35 12,000 $20.75 20,500 6.12 15,000 $19.25 5,500 6.87 4,000 $17.38 16,000 7.04 8,000 $16.38 9,125 7.84 4,375 $15.06 22,000 7.92 11,000 $18.00 61,000 8.93 15,250 $22.44 35,000 9.68 -- $24.80 119,500 9.93 -- ------- 300,625 69,625 ======= ======
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.
2001 2000 1999 ---- ---- ---- Weighted average volatility 28.82% 27.03% 25.86% Weighted average dividend 3.11% 3.16% 2.77% Weighted average risk-free rate 4.48% 5.26% 5.58% Weighted average fair value of options $ 5.77 $ 4.26 $ 3.94 granted during the year Additional expense had the Company adopted SFAS No. 123 $ 181,635 $ 106,606 $ 67,883 Related tax benefit $ 75,969 $ 44,588 $ 28,392 Pro-forma net income $19,358,751 $17,166,731 $16,421,602 Pro-forma basic earnings per share $ 2.25 $ 1.99 $ 1.85 Pro-forma diluted earnings per share $ 2.24 $ 1.99 $ 1.85
The Company has also entered into stock appreciation rights agreements with selected employees who are paid the amount by which a certain number of shares exceeds its value at the time the agreement was entered into. Stock appreciation rights mature ten years after their issuance and are not ordinarily exercisable prior to maturity. Compensation expense applicable to stock appreciation rights is not material. 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. 33
2001 2000 1999 -------------------------- ------------------------ ------------------------ Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding, beginning of year 14,700 $ 17.82 8,100 $ 17.62 3,700 $ 19.25 Granted 6,900 $ 24.52 7,100 $ 18.00 4,600 $ 16.38 Exercised -- -- -- -- -- -- Forfeited (700) $ 18.13 (500) $ 16.95 (200) $ 19.25 ------ ------ ----- Outstanding, end of year 20,900 $ 20.03 14,700 $ 17.82 8,100 $ 17.62 ====== ====== =====
The following table summarizes information about stock appreciation rights outstanding at December 31, 2001:
Remaining Years in Exercise Price Number Outstanding Contractual Life Number Exercisable -------------- ------------------ ---------------- ------------------ $19.25 3,200 6.86 -- $16.38 4,100 7.84 -- $18.00 6,700 8.93 -- $24.52 6,900 9.97 -- ------ 20,900 ======
(7) Deposits and Borrowed Funds The following summarizes deposits and borrowed funds outstanding as of the dates indicated:
December 31, ------------------------------------------------- 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Deposits Demand $209,551 $201,904 $167,624 NOW 149,109 139,453 120,308 Money market 185,156 163,793 138,288 Other savings 155,255 143,239 158,142 Certificates of deposit greater than $100,000 53,123 96,159 60,666 Other time 151,197 228,755 121,036 -------- -------- -------- Total deposits $903,391 $973,303 $766,064 ======== ======== ======== Maturities of time certificates of deposit as of December 31, 2001 are $179,784,000 in 2002, $12,454,000 in 2003, $2,901,000 in 2004, $5,982,000 in 2005, and $3,198,000 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. December 31, ------------------------------------------------- 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Borrowed funds Federal Home Loan Bank $384,314 $291,287 $347,963 Other short term borrowings 30,735 24,520 19,346 Subordinated debt 5,000 -- -- -------- -------- -------- Total borrowed funds $420,049 $315,807 $367,309 ======== ======== ========
The contractual maturities of borrowings from the Federal Home Loan Bank of Boston as of December 31, 2001, are $219,065,000 in 2002, $47,650,000 in 2003, $20,645,000 in 2004, $29,410,000 in 2005, $48,866,000 in 2006, and $18,678,000 in years thereafter. These borrowings bore interest rates between 2.18% and 7.35% with a weighted average interest rate of 4.45%. The balance at October 31, 2001 of $452,257,000 was the maximum amount outstanding at any month end during 2001. These borrowings are collateralized by the Company's residential mortgage loans and securities. The Company also has an IDEAL Way Line of Credit with the Federal Home Loan Bank of Boston. The unused balance at December 31, 2001 and 2000 was $5,000,000 and at December 31, 1999 it was $12,963,000. In addition, the Company 34 established a line of credit in 2001 of $7,000,000 for the purchase of federal funds from SunTrust Bank. The Company may also borrow from the Federal Reserve if necessary. Other short-term borrowings at December 31, 2001, 2000 and 1999 consisted of a demand note payable to the U.S. Treasury of $4,709,000, $2,339,000 and $1,913,000, respectively, and securities sold subject to agreements to repurchase of $26,027,000, $22,181,000 and $17,433,000, respectively, which mature overnight. The weighted average interest rate on these borrowings was .87% as of December 31, 2001. These borrowings are collateralized by the pledge of securities. During the third quarter of 2001, CCBT Statutory Trust I was formed for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2031, callable at the option of the Company after 7/31/06. Distributions on these securities are payable quarterly in arrears on the last day of April, July, October and January. The Trust Preferred Securities are presented in the consolidated statements of financial condition of the Company as Subordinated Debt. The Company records distributions payable on the Trust Preferred Securities as Interest on subordinated debt in its consolidated statements of income. (8) Stockholders' Equity The Company (on a consolidated basis) and the Bank are required to meet certain Regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. As of December 31, 2001, 2000 and 1999, the Company and 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 Company or the Bank. The Company and the Bank are required to maintain a Tier 1 leverage capital ratio, Tier 1 Capital to average assets, of at least 4%. For the Bank to be considered well-capitalized, this ratio must be at least 5%. At December 31, 2001, 2000 and 1999, the Tier 1 leverage capital ratios of the Company were 7.3%, 6.7% and 6.9%, respectively, and the Bank's ratios were 7.1%, 6.6% and 6.5%, respectively. At December 31, 2001, Tier 1 capital amounts for the Company and the Bank were $109,239,000 and $107,193,000, respectively. 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 statement of condition. The risk-based capital regulations assign one of four weights to assets -- 0%, 20%, 50% or 100%. Full capital must be maintained to support assets with 100% risk weight, with proportionally lower capital required for assets assigned a lower weight. For the periods presented, most of the investment securities are assigned a 20% risk weight, and residential mortgages are assigned a 50% risk weight. Most other assets are assigned to the 100% risk category. At December 31, 2001, 2000 and 1999 the net risk-weighted assets were $1,044,191,000, $956,893,000 and $870,850,000 while the net risk-weighted assets of the Bank were $1,043,796,000, $954,143,000 and $865,438,000. 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, 2001, 2000 and 1999, respectively $12,252,000, $11,930,000 and $10,822,000 of the reserve for loan losses could be used toward risk-based capital requirements. Accordingly, at December 31, 2001, 2000 and 1999 the Bank's total capital for risk-based capital purposes was $119,445,000, $98,538,000 and $92,441,000 equal to 11.4%, 10.3% and 10.7%, respectively, of risk-weighted assets. The Company had total capital for risk-based capital purposes of $121,491,000, $101,473,000 and $98,037,000 equal to 11.6%, 10.6% and 11.3% at December 31, 2001, 2000 and 1999. This ratio is required to be at least 8%, and for the Bank to be considered well capitalized, it must be at least 10%. Tier 1 capital 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, 2001, 2000 and 1999, the Company's Tier 1 capital to net risk-weighted assets was 10.5%, 9.4% and 10.0%, respectively. The Bank's Tier 1 capital to net risk-weighted assets was 10.3%, 9.1% and 9.4% for the years ended December 31, 2001, 2000 and 1999, respectively. The risk-based capital ratio focuses on broad categories of credit risk. However, the ratio does not take account of many other factors that can affect financial condition. These factors include overall interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan portfolio concentrations, the quality of loans and investments, the effectiveness of loan and investment policies, and management's overall ability to monitor and control financial and operating risks. In addition to evaluating capital ratios, an overall assessment of capital adequacy 35 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. (9) Acquisition of Murray & MacDonald Insurance Services, Inc. On May 2, 2000, the Company acquired 51% of the stock of Murray & MacDonald Insurance Services, Inc., for a purchase price of $1,199,000. Murray & MacDonald Insurance Services, Inc. is a full service insurance agency offering property, casualty, life, accident, and health insurance products. The Agency has been in business since 1972 and has license agreements with more than thirty insurance companies. The business combination was accounted for by the purchase method. Assets acquired were $292,000 while liabilities assumed were $525,000, resulting in net liabilities assumed of $233,000. Goodwill of $1,432,000 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 $110,585,000, operating income would be $26,256,000 and net income would be $17,179,000. 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 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, 2001, 2000 and 1999, consists of the following:
2001 2000 1999 ---- ---- ---- Current federal income tax $10,351,436 $9,338,924 $ 7,388,341 Current state income tax 640,953 384,316 699,922 ----------- ---------- ------------ 10,992,389 9,723,240 8,088,263 ----------- ---------- ------------ Deferred federal income tax (benefit) expense (294,450) (466,070) 1,496,505 Deferred state income tax (benefit) expense (75,517) (156,224) 501,622 ----------- ---------- ------------ (369,967) (622,294) 1,998,127 ----------- ---------- ------------ $10,622,422 $9,100,946 $10,086,390 =========== ========== ===========
36 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. The following reconciles the provision for income taxes with the statutory federal income tax rate of 35%.
2001 2000 1999 ---- ---- ---- Tax at statutory rate $10,530,394 $9,215,393 $ 9,291,619 Reduction due to tax-exempt income (315,117) (314,613) (274,945) State taxes, net of federal tax benefit 367,534 148,260 781,004 Other, net 39,611 51,906 288,712 ----------- ---------- ----------- $10,622,422 $9,100,946 $10,086,390 =========== ========== ===========
At December 31, 2001, 2000 and 1999, the net deferred tax asset consisted of the following:
2001 2000 1999 ---- ---- ---- Future bad debt deductions $5,124,360 $5,083,387 $4,666,886 Nonaccrual loan interest 128,490 87,049 132,057 Unfunded accrued benefits 1,565,471 1,463,780 1,274,509 Unearned Revenues Murray and MacDonald 311,226 242,067 -- Unrealized loss on securities -- 239,411 1,249,117 --------- --------- --------- Gross deferred tax asset 7,129,547 7,115,694 7,322,569 --------- --------- --------- Unrealized gain on securities 2,023,956 -- -- Gain on sale of credit card merchant portfolio 900,927 1,135,837 1,264,982 Mortgage servicing rights 565,041 469,756 513,646 Other 1,020,434 997,512 886,008 --------- --------- --------- Deferred tax liability 4,510,358 2,603,105 2,664,636 --------- --------- --------- Net deferred tax asset $2,619,189 $4,512,589 $4,657,933 ========== ========== ==========
(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, 2001, 2000 and 1999, the Company had the following commitments outstanding:
2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Standby letters of credit $ 943 $ 1,095 $ 1,627 Commitments to extend credit at fixed rates 10,684 10,470 5,242 Other commitments to extend credit 190,803 172,522 152,547 ------- ------- ------- Total commitments $202,430 $184,087 $159,416 ======== ======== ========
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. 37 The Bank has entered into special termination agreements with the President and certain senior executives. The agreements generally provide for certain monthly severance payments within a two-year period following a "change in control", as defined in the agreements. (13) Disclosure about the Fair Value of Financial Instruments SFAS No. 107 requires the disclosure of the fair value of financial instruments for which it is practicable to estimate that value. At December 31 the estimated fair values of the Company's financial instruments were as follows:
2001 2000 1999 ------------------- -------------------- --------------------- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value ------ ----- ------ ----- ------ ----- (Dollar amounts in thousands) Financial assets: Cash and cash equivalents $ 62,062 $ 62,062 $ 66,215 $ 66,215 $ 44,242 $ 44,242 Securities 463,087 463,087 450,049 450,049 486,601 486,601 Net loans and loans held for sale 880,389 904,873 837,197 837,666 663,784 666,762 Accrued interest receivable 3,736 3,736 4,332 4,332 3,157 3,157 Financial liabilities: Deposits 903,391 908,247 973,303 972,811 766,064 766,189 Borrowings from 384,314 391,688 291,287 290,338 347,963 345,027 Federal Home Loan Bank Other short-term borrowings 30,735 30,735 24,520 24,520 19,346 19,346 Subordinated debt 5,000 5,000 -- -- -- -- Accrued interest payable 2,410 2,410 4,207 4,207 3,062 3,062
The carrying value of cash and cash equivalents, short-term borrowings and accrued interest approximate fair value because of the short maturity of these financial instruments. Fair values of commitments not reflected in the financial statements are not materially different from their carrying amounts because they are short term in nature and/or generally priced at variable interest rates. Fair values of securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Because no market exists for a significant portion of the Company's loans, fair value estimates were based on judgments regarding estimated future cash flows, current economic conditions, expected loss experience, risk characteristics of various kinds of loans, and other such factors. Estimated cash flows are discounted using current rates for similar loans. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, unrealized gains or losses are not expected to be realized. Fair values of deposits 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 likely that some amount would be received for this relationship on an actual sale of deposits. Similarly, the fair value of loans does not include any value assigned to customer relationships. (14) Earnings per Share The following reconciles the calculation of basic and diluted earnings per share for the three years ending December 31, 2001, 2000 and 1999: 2001 ---------------------------------------------- Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- ------ Basic earnings per share $19,464,417 8,613,106 $2.26 Effect of dilutive stock options -- 33,519 (0.01) ----------- --------- ----- Diluted earnings per share $19,464,417 8,646,625 $2.25 =========== ========= ===== 38 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 =========== ========= ===== (15) Selected Quarterly Financial Data (Unaudited) The table below shows supplemental financial data for each quarter in 2001 and 2000.
2001 --------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- (Dollar amounts in thousands except per share amounts) Interest income $26,069 $25,251 $23,194 $23,242 Interest expense 13,017 12,588 10,237 8,714 -------- -------- ------- ------- Net interest income 13,052 12,663 12,957 14,528 Provision for loan losses -- -- -- -- Non-interest income 4,951 5,375 6,333 6,264 Non-interest expense 10,677 11,462 11,521 12,398 Minority interest 12 (18) 8 (25) -------- -------- ------- ------- Income before income taxes 7,314 6,594 7,761 8,419 Provision for income taxes 2,484 2,208 2,749 3,182 -------- -------- ------- ------- Net income $ 4,830 $ 4,386 $ 5,012 $ 5,237 ======== ======== ======= ======= Average shares outstanding 8,608,048 8,608,048 8,615,738 8,620,423 Net income per share - basic $0.56 $0.51 $0.58 $0.61 Cash dividends declared per share $0.18 $0.18 $0.18 $0.18
2000 --------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- (Dollar amounts in thousands except per share amounts) Interest income $22,025 $22,519 $24,342 $25,083 Interest expense 10,709 11,077 11,536 12,301 -------- -------- ------- ------- Net interest income 11,316 11,442 12,806 12,782 Provision for loan losses -- -- -- -- Non-interest income 3,580 4,449 3,989 4,192 Non-interest expense 8,683 9,269 10,235 10,094 Minority interest -- (10) (7) (37) -------- -------- ------- ------- Income before income taxes 6,213 6,632 6,567 6,917 Provision for income taxes 2,112 2,279 2,200 2,510 -------- -------- ------- ------- Net income $ 4,101 $ 4,353 $ 4,367 $ 4,407 ======== ======== ======== ======== Average shares outstanding 8,608,048 8,608,048 8,608,048 8,608,048 Net income per share - basic $0.48 $0.50 $0.51 $0.51 Cash dividends declared per share $0.16 $0.16 $0.16 $0.16
Due to the seasonal nature of the economy in the Company's market area, demand deposits and business activity follow a somewhat seasonal cycle with their low point ordinarily being reached in February and their high point in August. As a result of this cycle, operating income has usually been at its high during the third quarter each year. 39 (16) Parent Company Financial Information Condensed financial information for CCBT Financial Companies, Inc. is as follows:
STATEMENTS OF CONDITION December 31, --------------------------------------------------- 2001 2000 1999 ---- ---- ---- ASSETS (Dollar amounts in thousands) Cash in subsidiary $ 28 $ 50 $ 2 Short term interest-bearing deposits 1,900 218 40 Securities 15 2,468 5,288 Investment in subsidiaries 118,275 95,824 80,065 Other assets 305 169 255 -------- ------- ------- Total assets $120,523 $98,729 $85,650 ======== ======= ======= LIABILITIES Subordinated debt $ 5,155 $ -- $ -- Other liabilities 52 -- -- -------- ------- ------- Total liabilities $ 5,207 $ -- $ -- -------- ------- ------- STOCKHOLDERS' EQUITY Stockholders' equity $115,316 $98,729 $85,650 -------- ------- ------- Total stockholders' equity $115,316 $98,729 $85,650 -------- ------- ------- Total liabilities and stockholders' equity $120,523 $98,729 $85,650 ======== ======= ======= STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Interest income $ 83 $ 182 $ 147 Interest expense 148 -- -- ------ ------ ----- Net interest income (expense) (65) 182 147 Operating income 298 -- -- Operating expenses 196 293 360 ------ ------ ----- Income (loss) before taxes, dividends and undistributed income from subsidiaries 37 (111) (213) Applicable income taxes 13 (26) (55) Dividends from subsidiary 2,100 5,700 10,600 Undistributed income from subsidiaries 17,340 11,614 6,019 ------ ------ ----- Net Income $19,464 $17,229 $16,461 ======= ======= =======
40
STATEMENTS OF CASH FLOW For the Years Ended December 31, 2001 2000 1999 ---- ---- ---- (Dollar amounts in thousands) Cash flows from operating activities Net income $ 19,464 $ 17,229 $16,461 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities (298) -- -- Undistributed income from subsidiaries (17,340) (11,614) (6,019) Other, net (86) 80 874 ------- ------- ------ Net cash provided by operating activities 1,740 5,695 11,316 ------- ------- ------ Cash flows from investing activities Purchase of securities (15) (1,623) (12,515) Sales, maturities and repayments of securities 2,765 4,463 7,356 Investment in subsidiaries (1,966) (2,800) -- ------- ------- ------ Net cash provided (used) by investing activities 784 40 (5,159) ------- ------- ------ Cash flows from financing activities Proceeds from issuance of long term debt 5,155 -- -- Contribution to capital by subsidiaries -- -- 5,000 Proceeds from issuance of common stock 181 -- -- Purchase of treasury stock -- -- (7,400) Cash dividends paid to stockholders (6,200) (5,509) (3,715) ------- ------- ------ Net cash used by financing activities (864) (5,509) (6,115) ------- ------- ------ Net increase in cash and cash equivalents 1,660 226 42 Cash and cash equivalents at beginning of year 268 42 -- ------- ------- ------ Cash and cash equivalents at end of year $1,928 $ 268 $ 42 ====== ======= =======
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. On May 17, 2001, the accounting firm Grant Thornton LLP was dismissed by the Company's Audit Committee and the accounting firm Wolf & Company, P.C. was hired to replace them. The financial statements for the past two years did not contain an adverse opinion or a disclaimer of opinion nor were the opinions qualified as to uncertainty, audit scope or accounting principles. During the past two years and the subsequent interim period preceding the dismissal, there were no disagreements with the former accountant on any matter of accounting principles or practice, financial statement disclosure, or auditing scope or procedure. . There were no disagreements with Accountants on accounting and financial disclosures as defined by Item 304 of Regulation S-K. PART III Item 10. Directors and Executive Officers of the Registrant. With the exception of certain information regarding the executive officers of the Company and the Bank which is contained in Item 1 of Part 1 to this Form 10-K under the caption "Executive Officers of the Registrant," the response to this item is incorporated by reference from the discussion under the captions "Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders ("Proxy Statement") to be held on April 25, 2002, 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. 41 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 at December 31, 2001, 2000 and 1999, was $4,895,000, $5,885,000 and $5,552,000 respectively. During 2001, $2,666,000 in new loans were made to Directors and Officers and there were $3,656,000 in repayments. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) See "Financial Statements Index" on page 19 of this Form 10-K. (2) Schedules other than those listed in the Financial Statements Index have been omitted since they either are not required or the information required is included in the financial statements or the notes thereto. (3) The following is a complete list of Exhibits filed or incorporated by reference as part of this Form 10-K. Exhibit Description ------- ----------- 2.1 Plan of Reorganization and Acquisition dated as of October 8, 1998 between the Company and the Bank (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K filed with the SEC on February 11,1999) 3.1 Restated Articles of Organization of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1999 that was filed with the SEC on November 15, 1999) 3.2 Amended By-laws of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1999 that was filed with the SEC on November 15, 1999) 4.1 Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for the year ended December 31, 1999) 10.1 Amended and Restated Special Termination Agreement with Stephen B. Lawson. (Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.2 Amended and Restated Special Termination Agreement with Noal D. Reid. (Incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.3 Amended and Restated Special Termination Agreement with Larry K. Squire. (Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.4 Change of Control Agreement with Robert T. Boon. (Incorporated by reference to Exhibit 10.1 on Form 10-Q for the quarter ended March 31, 2001 that was filed with the SEC on May 15, 2001) 10.5 Amended and Restated Change of Control Agreement with Robert R. Prall. (Incorporated by reference to Exhibit 10.2 on Form 10-Q for the quarter ended March 31, 2001 that was filed with the SEC on May 15, 2001) 10.6 CCBT Financial Companies, Inc. Stock Option Plan (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed with the SEC on February 18, 1999) 42 10.7 Cape Cod Bank and Trust Company Employee Stock Ownership and Plan and Trust, as amended 21.1 Subsidiaries of the Company -- The Company has two subsidiaries, Cape Cod Bank and Trust Company, N.A., a federally-chartered commercial bank and CCBT Statutory Trust I. Cape Cod Bank and Trust Company, N.A., has eight subsidiaries: 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 Consents of Wolf & Company, P.C. and Grant Thornton LLP (Filed herewith) (b) Reports on Form 8-K: None. 43 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 21, 2002 -------------- 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 21, 2002 -------------- SIGNATURES OF THE BOARD OF DIRECTORS /s/ STEPHEN B. LAWSON /s/ GEORGE D. DENMARK - --------------------- --------------------- Stephen B. Lawson George D. Denmark /s/ JOHN OTIS DREW /s/ JOHN F. AYLMER - ------------------ ------------------ John Otis Drew, Chairman John F. Aylmer /s/ DANIEL A. WOLF - ------------------ Daniel A. Wolf Date March 21, 2002 --------------- 44 EX-23.1 3 exhibit23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Stateinent Number 333-72565 (dated February 18, 1999 on Form S-8) and Registration Statement Number 333-65222 (dated July, 17, 2001 on Form S-8) of our report dated February 1, 2002 on the consolidated financial statements of CCBT Financial Companies, Inc. and subsidiaries, appearing in the Annual Report on Form 1O-K of CCBT Financial Companies, Inc. for the year ended December 31, 2001. /s/ Wolf & Company, P.C. - ------------------------ Boston, Massachusetts March 21, 2002 EX-23.2 4 exhibit23-2.txt Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of CCBT Financial Companies, Inc, on Form S-8 (File No, 333-72565, effective February 18, 1999) and on Form S-8 (File No. 333-65222, effective July 17, 2001) of our report dated February 9, 2001, with respect to the 2000 and 1999 consolidated financial statements included in the Annual Report (Form 10-K) of CCBT Financial Companies, Inc. for the year ended December 31,2001. /s/ Grant Thornton LLP - ---------------------- Boston, Massachusetts March 21, 2002 -----END PRIVACY-ENHANCED MESSAGE-----