10-Q 1 form10q_45883-0802.txt THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON AUGEST 14, 2002 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended June 30, 2002 Commission File No. 000-25381 CCBT FINANCIAL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 495 Station Avenue, South Yarmouth, Massachusetts 02664 (Address of principal executive office) (Zip Code) (Registrant's telephone #, incl. area code): 508-394-1300 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. : Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. There were 8,618,548 shares of common stock outstanding as of August 12, 2002. TABLE OF CONTENTS
Section Description Page No. ------- ----------- -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition 3 June 30, 2002 and December 31, 2001 Consolidated Statements of Income 4 Three and Six Months Ended June 30, 2002 and 2001 Consolidated Statements of Cash Flows 5 Six Months Ended June 30, 2002 and 2001 Consolidated Statements of Comprehensive Income 6 Six Months Ended June 30, 2002 and 2001 Consolidated Statements of Changes in Stockholders' Equity 6 Six Months Ended June 30, 2002 and 2001 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition 7-18 and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
PART I FINANCIAL INFORMATION ITEM 1. Financial Statements CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, December 31, 2002 2001 ---- ---- ASSETS (Unaudited) Cash and due from banks $ 53,412,052 $ 51,204,747 Short term interest-bearing deposits 656,412 10,857,540 Securities available for sale, at fair value 431,144,198 438,349,833 Federal Home Loan Bank stock, at cost 23,502,600 23,502,600 Federal Reserve Bank stock, at cost 1,235,050 1,235,050 Total loans 895,750,473 884,291,338 Less: Allowance for loan losses (12,387,038) (12,251,907) --------------- --------------- Net loans 883,363,435 872,039,431 --------------- --------------- Loans held for sale 2,566,541 8,349,342 Premises and equipment 20,138,999 18,496,280 Deferred tax assets 2,636,818 2,619,189 Accrued interest receivable on securities 2,943,473 2,632,117 Accrued interest receivable on loans 3,689,384 3,736,071 Intangibles 7,172,143 7,972,088 Other assets 16,951,164 13,672,642 --------------- --------------- Total assets $ 1,449,412,269 $ 1,454,666,930 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 923,358,155 $ 903,390,528 Borrowings from the Federal Home Loan Bank 353,648,511 384,314,318 Other short-term borrowings 25,418,774 30,735,238 Subordinated debt 5,000,000 5,000,000 Current taxes payable 800,029 2,064,060 Interest payable on deposits and borrowings 1,743,404 2,410,159 Post retirement benefits payable 3,485,408 3,293,458 Employee profit sharing retirement and bonuses payable 1,661,894 4,214,186 Due to broker-securities settlement 9,019,889 15,101 Other liabilities 3,340,826 3,910,277 -------------- -------------- Total liabilities 1,327,476,890 1,339,347,325 ------------- -------------- Minority interest 293,414 3,602 ------------- -------------- Commitments and contingencies Stockholders' equity Common stock, $1.00 par value: Authorized: 12,000,000 shares Issued: 9,061,064 9,061,064 9,061,064 Surplus 27,481,728 27,473,395 Undivided profits 89,462,023 83,156,834 Treasury stock, at cost (425,016 shares) in 2002 (440,641 shares) in 2001 (6,942,306) (7,197,493) Accumulated other comprehensive income 2,579,456 2,822,203 ------------- -------------- Total stockholders' equity 121,641,965 115,316,003 ------------- -------------- Total liabilities and stockholders' equity $1,449,412,269 $1,454,666,930 ============== ==============
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---- ---- ---- ---- INTEREST & DIVIDEND INCOME: (Unaudited) (Unaudited) Interest and fees on loans $ 14,254,996 $ 17,453,717 $ 28,409,458 $ 34,588,499 Interest on short term interest-bearing deposits 82,271 134,334 161,248 323,695 Taxable interest income on securities 5,012,365 7,070,495 9,551,970 15,160,057 Tax-exempt interest income on securities 122,615 229,888 307,365 466,885 Dividends on securities 245,091 362,473 483,904 780,415 ------------ ------------ ------------ ------------ Total interest & dividend income 19,717,338 25,250,907 38,913,945 51,319,551 ------------ ------------ ------------ ------------ INTEREST EXPENSE Interest on deposits 3,163,598 6,747,503 6,501,088 14,521,220 Interest on borrowings from the Federal Home Loan Bank 3,341,938 5,640,327 7,059,164 10,606,711 Interest on other short-term borrowings 52,555 199,680 111,454 476,764 Interest on subordinated debt 71,473 -- 143,428 -- ------------ ------------ ------------ ------------ Total interest expense 6,629,564 12,587,510 13,815,134 25,604,695 ------------ ------------ ------------ ------------ Net interest income 13,087,774 12,663,397 25,098,811 25,714,856 Provision for loan losses -- -- -- -- ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 13,087,774 12,663,397 25,098,811 25,714,856 ------------ ------------ ------------ ------------ NON-INTEREST INCOME Financial advisor fees 1,746,142 1,887,868 3,466,332 3,648,231 Deposit account service charges 566,969 539,891 1,125,525 1,041,637 Branch banking fees 763,866 819,913 1,510,726 1,537,309 Electronic banking fees 687,440 475,817 1,207,849 958,165 Loan servicing and other loan fees (costs) 120,757 47,427 67,194 107,099 Brokerage fees and commissions 346,414 332,210 708,752 604,740 Net gain on sales of securities 961,940 392,063 2,640,755 852,557 Net gain on sales of loans 499,855 280,409 1,075,915 422,040 Insurance commissions 999,398 368,934 1,425,526 766,627 Other income 86,417 201,592 259,211 323,628 ------------ ------------ ------------ ------------ Total non-interest income 6,779,198 5,346,124 13,487,785 10,262,033 ------------ ------------ ------------ ------------ NON-INTEREST EXPENSE Salaries 5,001,520 4,382,870 9,084,505 8,327,408 Employee benefits 2,023,425 1,677,057 4,078,681 3,538,255 Buildings and equipment 1,598,069 1,421,257 3,062,148 2,751,104 Data processing 717,679 809,260 1,373,029 1,586,980 Accounting and legal fees 263,630 258,083 488,461 472,760 Other outside services 524,102 589,093 1,076,883 1,098,281 Amortization of intangibles 324,250 395,833 648,501 791,666 Delivery and communications 590,467 471,557 1,167,435 996,048 Directors' fees 85,800 85,800 171,600 171,600 Marketing and advertising 539,499 591,479 849,640 939,731 Printing and supplies 214,416 308,377 386,500 445,752 Insurance 178,860 109,918 322,284 247,388 All other expenses 663,071 333,157 1,188,930 708,440 ------------ ------------ ------------ ------------ Total non-interest expense 12,724,788 11,433,741 23,898,597 22,075,413 ------------ ------------ ------------ ------------ Minority Interest 147,916 (17,753) 144,310 (5,584) ------------ ------------ ------------ ------------ Net income before taxes 6,994,268 6,593,533 14,543,689 13,907,060 Applicable income taxes 2,459,115 2,207,861 4,961,338 4,691,404 ------------ ------------ ------------ ------------ Net income $ 4,535,153 $ 4,385,672 $ 9,582,351 $ 9,215,656 ============ ============ ============ ============ Average shares outstanding - basic 8,630,478 8,608,048 8,626,313 8,608,048 Average shares outstanding - diluted 8,670,676 8,647,543 8,664,207 8,641,190 Basic earnings per share $ 0.52 $ 0.51 $ 1.11 $ 1.07 Diluted earnings per share $ 0.52 $ 0.51 $ 1.11 $ 1.07 Cash dividends declared $ 0.19 $ 0.18 $ 0.38 $ 0.36
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30,
2002 2001 ---- ---- (Unaudited) CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 9,582,351 $ 9,215,656 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,121,727 2,134,598 Net amortization of securities 568,068 460,380 Amortization of net deferred loan costs 669,709 517,047 Net gain on sales of securities (2,640,755) (852,557) Net gain on sale of loans (1,075,915) (422,040) Proceeds from sales (originations) of loans held for sale, 6,858,716 (485,592) net Net change in: Accrued interest receivable 264,669 403,358 Accrued expenses and other liabilities (3,596,548) (2,757,705) Other, net 1,851,622 (222,451) ------------- ------------- Net cash provided by operating activities 14,603,644 7,990,694 ------------- ------------- CASH PROVIDED (USED) BY INVESTING ACTIVITIES Net increase in loans (10,654,295) (69,515,489) Maturities of available-for-sale securities 301,730,450 187,778,611 Purchase of available-for-sale securities (335,938,949) (270,323,202) Sales of available-for-sale securities 44,409,557 67,467,964 Purchases of premises and equipment (3,115,944) (2,857,831) ------------- ------------- Net cash (used) by investing activities (3,569,181) (87,449,947) ------------- ------------- CASH PROVIDED (USED) BY FINANCING ACTIVITIES Net increase (decrease) in deposits 19,967,627 (46,287,100) Advances of borrowings from the Federal Home Loan Bank 663,438,876 772,994,404 Repayments of borrowings from the Federal Home Loan Bank (694,104,683) (660,629,842) Net (decrease) increase in other short-term borrowings (5,316,464) 6,128,664 Issuance of common stock under stock option plan 263,520 -- Cash dividends paid on common stock (3,277,162) (3,098,897) ------------- ------------- Net cash provided (used) by financing activities (19,028,286) 69,107,229 ------------- ------------- Net decrease in cash and cash equivalents (7,993,823) (10,352,024) Cash and cash equivalents at beginning of period 62,062,287 66,215,030 ------------- ------------- Cash and cash equivalents at end of period $ 54,068,464 $ 55,863,006 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 14,478,794 $ 26,702,737 Income taxes 6,036,630 7,179,819 Non-cash transactions: Unsettled trades $ 9,004,788 $ 9,995
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 5 FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Six Months Ended June 30,
2002 2001 ---- ---- (Unaudited) Net income $ 9,582,351 $ 9,215,656 ------------ ----------- Unrealized holding gains on securities available for sale 2,069,153 5,380,784 Reclassification of gains on securities realized in income (2,640,755) (852,557) ------------ ----------- Net unrealized gains (571,602) 4,528,227 Related tax effect 328,855 (1,868,130) ------------ ----------- Net other comprehensive income (242,747) 2,660,097 ------------ ----------- Comprehensive income $ 9,339,604 $11,875,753 ============ ===========
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months Ended June 30,
2002 2001 ---- ---- (Unaudited) COMMON STOCK Balance, beginning of period $ 9,061,064 $ 9,061,064 ------------- ------------- Balance, June 30 9,061,064 9,061,064 ------------- ------------- SURPLUS Balance, beginning of period 27,473,395 27,494,890 Issuance of common stock under stock option plan 8,333 -- ------------- ------------- Balance, June 30 27,481,728 27,494,890 ------------- ------------- UNDIVIDED PROFITS Balance, beginning of period 83,156,834 69,896,759 Net income 9,582,351 9,215,656 Cash dividends declared (3,277,162) (3,098,897) ------------- ------------- Balance, June 30 89,462,023 76,013,518 ------------- ------------- TREASURY STOCK Balance, beginning of period (7,197,493) (7,399,628) Issuance of common stock under stock option plan 255,187 -- ------------- ------------- Balance, June 30 (6,942,306) (7,399,628) ------------- ------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period 2,822,203 (324,307) Net other comprehensive income (242,747) 2,660,097 ------------- ------------- Balance, June 30 2,579,456 2,335,790 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 121,641,965 $ 107,505,634 ============= =============
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 6 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CCBT FINANCIAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended June 30, 2002 and 2001 (Unaudited) Business CCBT Financial Companies, Inc. ("Company") was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 under the name of 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, Bancorp became the holding company for the Bank by acquiring 100% of the outstanding shares of the Bank's common stock in a 1:1 exchange for Bancorp common stock. During 1999, the Company's name was changed to CCBT Financial Companies, Inc. The Bank's charter was converted to that of a national bank effective September 1, 1999. Currently, the Company's business activities are conducted primarily through the Bank. 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. (the "Agency") of Falmouth, Massachusetts, a full service insurance Agency offering property, casualty, life, accident and health products to clients on Cape Cod. The Agency has been in business since 1972 and has license agreements with more than thirty insurance firms. In addition to the acquisition of Murray & MacDonald Insurance Services, Inc., the Company also completed its acquisition of two branch banking offices, in Falmouth and Wareham, Massachusetts, from Fleet Bank during the second quarter of 2000. These branches added approximately $55 million in deposits at a 15.5% premium, at June 30, 2000. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principals for complete financial statements. Certain amounts have been reclassified in the June 30, 2001 financial statements to conform to the 2002 presentation. In the opinion of management, all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. 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 is subject to at least an annual assessment for impairment by applying a fair value based test. The first impairment evaluation was completed by June 30, 2002, and no impairment was identified. 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 is no longer being amortized but is evaluated for impairment, and the Company's core deposit intangibles continue to be amortized over their estimated useful lives. Contingency In June, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR"), a Notice of Intent to Assess additional state excise taxes of $3,102,504 plus interest of $462,797. The assessment is based on a desk review of the financial institution excise return filed by the Bank for the years ended December 31, 1999 and 2000. The 2001 tax return had not yet been filed by the Bank as of the time of the DOR desk review. 7 The DOR contends that dividend distributions which the Bank received from its real estate investment trust subsidiary, CCBT Preferred Corp., are fully taxable in Massachusetts. The Bank believes that 95% of these distributions are excludable from its income under Massachusetts tax law. Accordingly, no provision has been made in the Bank's consolidated financial statements for the PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) amounts assessed or additional amounts that might be assessed in the future. The Bank intends to vigorously appeal the assessment and to pursue all available means to defend its position. Assessed amounts ultimatley paid, if any, would be deductible expenses for federal income tax purposes. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General This Form 10Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, changes in the size and nature of the Company's competition, and changes in the assumptions used in making such forward-looking statements. The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this item generally will refer to the investments and activities of the Company and the Bank except where otherwise noted. CCBT Financial Companies, Inc. is a bank holding company. Its main operating subsidiary, Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered in Barnstable County. It offers a wide range of commercial banking services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. The Bank receives substantially all of its deposits from and makes substantially all of its loans to individuals and businesses on Cape Cod, although the Bank has some loans on properties outside its market area, including some sizable participations in commercial mortgages. The Bank's core market is comprised of retail, wholesale, and manufacturing businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population contributes to seasonal deposit growth. (The remainder of this page intentionally left blank.) 8 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)
Net Interest Income, Net Interest Margin Three Months Ended June 30, --------------------------------------------------------------------- 2002 2001 ---------------------------------- ------------------------------ Average Average Average Average Balance Interest Yield Balance Interest Yield --------------------------------------------------------------------- (Dollar amounts in thousands) ASSETS Securities: Mortgage-backed securities $ 9,730 $ 137 5.65% $ 36,694 $ 518 5.65% CMOs 131,811 2,423 7.35% 187,016 2,850 6.10% U.S. Government agencies 22,228 228 4.10% 15,916 152 3.87% State and municipal obligations 13,488 123 3.64% 20,064 230 6.04% Other securities 254,642 2,551 4.02% 261,502 4,047 6.27% ---------- -------- ---------- -------- Total securities 431,899 5,462 5.07% 521,192 7,797 6.08% ---------- -------- ---------- -------- Loans: Commercial 92,014 1,312 5.64% 93,196 1,937 8.43% Commercial construction 54,355 699 5.09% 48,320 943 7.83% Residential construction 45,430 690 6.08% 48,835 818 6.62% Commercial mortgages 263,281 5,066 7.61% 245,737 5,548 9.06% Industrial revenue bonds 1,075 15 5.66% 1,300 21 9.16% Residential mortgages 365,137 5,545 6.07% 415,091 7,134 6.88% Home equity 60,351 758 5.04% 42,302 828 7.85% Consumer 6,657 170 11.31% 8,702 225 10.90% ---------- -------- ---------- -------- Total loans 888,300 14,255 6.39% 903,483 17,454 7.75% ---------- -------- ---------- -------- Total earning assets 1,320,199 19,717 5.95% 1,424,675 25,251 7.11% -------- -------- Cash and due from banks 28,101 37,552 Non-earning assets 36,528 30,713 ---------- ---------- Total assets $1,384,828 $1,492,940 ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Interest bearing deposits: NOW accounts $ 150,882 180 0.48%$ 138,333 180 0.52% Regular savings 79,704 227 1.14% 63,942 207 1.29% Money Market accounts 277,711 1,260 1.82% 240,983 1,921 3.20% Certificates of Deposit of $100,000 or more 41,619 320 3.08% 105,731 1,557 5.91% Other time deposits 136,803 1,176 3.45% 196,663 2,883 5.88% ---------- -------- ---------- -------- Total interest bearing deposits 686,719 3,163 1.85% 745,652 6,748 3.63% ---------- -------- ---------- -------- Borrowings: Federal Home Loan Bank 329,202 3,342 4.07% 412,679 5,640 5.48% Other short-term borrowings 22,066 53 0.96% 26,309 200 3.04% Subordinated debt 5,000 71 5.73% -- -- -- ---------- -------- ---------- -------- Total borrowings 356,268 3,466 3.90% 438,988 5,840 5.34% ---------- -------- ---------- -------- Total interest-bearing liabilities 1,042,987 6,629 2.55% 1,184,640 12,588 4.26% -------- -------- Demand deposits 215,478 199,080 Non-interest bearing liabilities 9,172 6,347 Stockholders' equity 117,191 102,873 ---------- ---------- Total liabilities & equity $1,384,828 $1,492,940 ========== ========== Net interest income/interest rate spread $ 13,088 3.40% $ 12,663 2.85% ======== ========== ==== Net interest margin (NII/Avg. Earning Assets) 3.98% 3.57%
9 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) RESULTS OF OPERATIONS Three Months Ended June 30, 2002 vs. June 30, 2001 Source and Use of Funds When compared to the second quarter of 2001, average interest bearing deposits declined by 7.9% or $58.9 million in the second quarter of 2002. A significant decline in average time certificates of deposit of $124.0 million or 41.0% can be attributed to the maturity of a large amount of one year certificates of deposit during the third quarter of 2001. Partially offsetting the decrease in time deposits were increases in all other interest bearing deposits (NOW accounts, regular savings and money market accounts), up a combined 14.7% or $65.1 million. Average non-interest bearing demand deposits also increased in the second quarter of 2002 by $16.4 million or 8.2% when compared to the same period in the prior year. On average, borrowings from the Federal Home Loan Bank during the second quarter of 2002 declined by 20.2% or $83.5 million as compared to prior year. The issuance of $5 million of Trust Preferred Securities during the latter half of 2001 by CCBT Statutory Trust I, a subsidiary of the Company, provided an additional source of funds. During the second quarter of 2002 as compared to 2001, average loans decreased slightly by $15.2 million or 1.7%. On average, residential construction and mortgage loans declined by $53.4 million or 11.5% reflecting payoffs as well as sales. The Company generally sells fixed rate mortgages upon origination. In contrast, commercial construction and mortgage loans were up $23.6 million or 8.0%, while home equity loans increased by $18.0 million or 42.7% due in large part to the lower rates currently available on this product. Total securities during the second quarter of 2002 decreased on average, by $89.3 million or 17.1% compared to the same period in 2001. Declining interest-rates have resulted in significant prepayments on mortgage-backed securities, down 73.5% or $27.0 million, and CMO's, down 29.5% or $55.2 million. Net interest income Net interest income for the three months ended June 30, 2002 was $13.1 million, which represented an increase of 3.4% over the $12.7 million reported for the same period in 2001. The interest rate spread and net interest margin were 3.40% and 3.98%, respectively, for the quarter ended June 30, 2002 as compared to 2.85% and 3.57%, respectively, for the comparable period in 2001. Despite the current low interest rate environment, these results show improvement from the prior year in part due to the maturity of higher-yield time certificates of deposit since the prior year. Also, consistent with the current low interest rate environment, the variable rate costs of interest bearing liabilities has been reduced while, by contrast, the proportion of fixed and intermediate term adjustable rate earning assets have helped to maintain the gross yield thereon. The improved yield on Collateralized Mortgage Obligations (CMOs) reflects a comparatively high yield being earned on a small portion of the portfolio which was purchased during the second quarter of 2002. Provision for loan losses Recoveries on loans previously charged off exceeded charge-offs during the three months ended June 30, 2002 by $51,000. Management's assessment of the risks in the loan portfolio at June 30, 2002 as well as the Company's recent loss experience, whereby recoveries have actually exceeded charge-offs since 1997, resulted in no provision for loan losses during the second quarter of 2002. Non-interest Income and Expense Non-interest income totaled $6.8 million for the quarter ended June 30, 2002, an increase of 26.8% or $1.4 million compared to the $5.3 million earned during the comparable period in 2001. Net gain on sales of securities accounted for $570 thousand of this increase, while insurance commissions increased $630 thousand inclusive of a $398 thousand adjustment for the recognition of previously deferred insurance commissions for which no deferral is required. For the three months ended June 30, 2002, non-interest expense totaled $12.7 million, an increase of 11.3% or $1.3 million over the $11.4 million expended during the same period in 2001. Salaries and employee benefits increased $965 thousand or 15.9%, with approximately $500 thousand of this increase attributable to the recognition of expenses associated with an early retirement program offered to certain long-term employees during the second quarter of 2002. The remainder of this increase is due to normal salary increases as well as additional staff for new locations. An increase in building and equipment expense of $177 thousand or 12.4% can be attributed to three added locations since the prior year. The increase in all other expenses of $330 thousand is largely due to increased expenses of electronic banking products due to the higher volume of this type of transaction as well as the offering of new products. 10 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Additionally, a payment of $50 thousand was made to the Commonwealth of Massachusetts Department of Revenue in June 2002 for a sales/use tax assessment as a result of an audit. Income taxes Applicable State and Federal income tax expense of $2.5 million for the quarter ended June 30, 2002 was 11.4% more than the $2.2 million recorded for the same quarter in 2001, a reflection of higher pretax net income. The combined effective State and Federal tax rate was 35% and 33% of pretax net income for the quarters ended June 30, 2002 and 2001, respectively. Net income Consolidated net income was $4.5 million representing earnings per share of $0.52 for the three months ended June 30, 2002 as compared to $4.4 million or $0.51 per share for the comparable three months ended June 30, 2001. Annualized returns on average assets and average equity were 1.31% and 15.48%, respectively, for the three months ended June 30, 2002 as compared to 1.18% and 17.05%, respectively, for the three months ended June 30, 2001. (The remainder of this page intentionally left blank.) 11 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)
Net Interest Income, Net Interest Margin Six Months Ended June 30, --------------------------------------------------------------------- 2002 2001 ---------------------------------- ------------------------------ Average Average Average Average Balance Interest Yield Balance Interest Yield --------------------------------------------------------------------- (Dollar amounts in thousands) ASSETS Securities: Mortgage-backed securities $ 13,679 $ 372 5.43% $ 37,061 $1,219 6.58% CMOs 145,245 4,430 6.10% 182,421 6,282 6.89% U.S. Government agencies 19,930 428 4.29% 19,091 510 5.41% State and municipal obligations 18,466 307 3.33% 21,087 481 6.01% Other securities 250,950 4,968 3.99% 253,789 8,240 6.58% ---------- -------- ---------- -------- Total securities 448,270 10,505 4.71% 513,449 16,732 6.62% ---------- -------- ---------- -------- Loans: Commercial 88,914 2,545 5.69% 86,756 3,758 8.78% Commercial construction 53,742 1,393 5.15% 45,241 1,868 8.33% Residential construction 44,712 1,289 5.76% 49,180 1,590 6.43% Commercial mortgages 263,902 10,120 7.63% 241,153 10,957 9.16% Industrial revenue bonds 1,105 31 5.64% 1,432 53 10.53% Residential mortgages 368,057 11,237 6.11% 407,810 14,230 6.98% Home equity 57,630 1,440 5.04% 40,145 1,691 8.50% Consumer 6,836 354 11.37% 8,611 441 10.73% ---------- -------- ---------- -------- Total loans 884,898 28,409 6.41% 880,328 34,588 7.90% ---------- -------- ---------- -------- Total earning assets 1,333,168 38,914 5.83% 1,393,777 51,320 7.44% -------- -------- Cash and due from banks 33,384 37,185 Non-earning assets 33,844 30,835 ---------- ---------- Total assets $1,400,396 $1,461,797 ========== ========== LIABILITIES & STOCKHOLDERS' EQUITY Interest bearing deposits: NOW accounts $ 148,712 349 0.47% $ 135,369 405 0.60% Regular savings 77,731 439 1.14% 64,431 492 1.54% Money Market accounts 274,689 2,475 1.82% 240,516 4,120 3.45% Certificates of Deposit of $100,000 or more 44,959 711 3.19% 114,062 3,461 6.12% Other time deposits 141,499 2,528 3.60% 199,997 6,043 6.09% ---------- -------- ---------- -------- Total interest bearing deposits 687,590 6,502 1.91% 754,375 14,521 3.88% ---------- -------- ---------- -------- Borrowings: Federal Home Loan Bank 349,944 7,059 4.07% 378,700 10,606 5.65% Other short-term borrowings 24,410 111 0.92% 26,122 478 3.68% 5,000 143 5.78% -- -- -- ---------- -------- ---------- -------- Subordinated debt Total borrowings 379,354 7,313 3.89% 404,822 11,084 5.52% ---------- -------- ---------- -------- Total interest-bearing liabilities 1,066,944 13,815 2.61% 1,159,197 25,605 4.45% -------- -------- Demand deposits 207,483 193,995 Non-interest bearing liabilities 9,818 8,301 Stockholders' equity 116,151 100,304 Total liabilities & equity $1,400,396 $1,461,797 ========== ========== Net interest income/interest rate spread $25,099 3.22% $25,715 2.99% ======= ======= Net interest margin (NII/Avg. Earning Assets) 3.80% 3.72%
12 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) RESULTS OF OPERATIONS Six Months Ended June 30, 2002 vs. June 30, 2001 Source and Use of Funds On average, interest bearing deposits decreased $66.8 million or 8.9% when comparing the first half of 2002 with the same period in 2001. This decline can be attributed to time certificates of deposit which decreased $127.6 million or 40.6% as a result of the maturity of a significant amount of one year certificates of deposit during the third quarter of 2001 and the reduction of interest rates being offered on these products. Partially offsetting the decrease in time deposits were increases in NOW accounts of $13.3 million or 9.9%, regular savings up $13.3 million or 20.6%, and money market accounts up $34.2 million or 14.2%. Average non-interest bearing demand deposits also increased $13.5 million or 7.0% for the first half of 2002 as compared to 2001. Average Federal Home Loan Bank borrowings declined by $28.8 million or 7.6% during the first six months of 2002 when compared to the same period in 2001. An additional source of funds was the issuance of $5.0 million of Trust Preferred Securities during the third quarter of 2001 by CCBT Statutory Trust I, a subsidiary of the Company. Average loans increased $4.6 million or 0.5% during the first half of 2002 as compared to 2001. On average, commercial construction and mortgage loans grew by $31.3 million or 10.9% while residential construction and mortgage loans declined by $44.2 million or 9.7% as a result of sales of residential mortgages. Average home equity loans increased 43.6% or $17.5 million, in large part due to lower rates on this prime-based product. Additional loan growth, on average, occurred in commercial loans, up $2.2 milllion or 2.5% while consumer loans declined $1.8 million or 20.6%. When compared to the first six months of 2001, average securities declined in 2002 by $65.2 million or 12.7%. Substantial decreases in CMO's, down $37.2 million or 20.4%, and mortgage-backed securities, down $23.4 million or 63.1%, can be attributed to prepayments on these securities as a result of the decline in interest rates. Net interest income Net interest income was $25.1 million for the six months ended June 30, 2002 as compared to $25.7 million for the same period in 2001, a decline of 2.4%. The spread and net interest margin ratios were 3.22% and 3.80%, respectively, for the six months ended June 30, 2002 as compared to 2.96% and 3.72%, respectively, for the comparable 2001 period. The effect of lower interest rates on net interest income has been tempered somewhat by the maturity of higher-yield time certificates of deposit since the prior year. Also, consistent with the current low interest rate environment, the variable rate costs of interest bearing liabilities has been reduced while, by contrast, the proportion of fixed and intermediate term adjustable rate earning assets have helped to maintain the gross yield thereon. The improved interst rate spread and net interest margin results are also affected by the high proportion of transaction deposits having little or no interest cost as well as the Company's practice of match-funding 3 to 5 year fixed rate commercial loans with similar term FHLB Advances. This portfolio totalled $186 million at June 30, 2002 as compared with $166 million one year ago. Provision for loan losses Recoveries on loans previously charged off exceeded charge-offs during the six months ended June 30, 2002 by $135,000. Management's assessment of the risks in the loan portfolio at June 30, 2002 as well as the Company's recent loss experience, whereby recoveries have exceeded charge-offs since 1997, resulted in no provision for loan losses during the first half of 2002. The allowance for loan losses was 1.38% and 1.33% of total loans at June 30, 2002 and 2001, respectively. Non-interest Income and Expense Non-interest income of $13.5 million for the six months ended June 30, 2002, represented an increase of 31.4% compared to the $10.3 million earned during the same period in 2001. Net gain on sales of securities contributed $1.8 million to this increase while the net gain on sales of loans increased $654 thousand. Insurance commissions accounted for an additional $659 thousand of the increase inclusive of a $398 thousand adjustment in the second quarter for the recognition of deferred insurance commissions for which no deferral is required. During the first six months of 2002, non-interest expenses totaled $23.9 million, an increase of 8.3% or $1.8 million over the $22.1 million expended during the comparable period last year. Salaries and employee benefits rose $1.3 million or 10.9%. 13 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Approximately $500 thousand of this increase is attributable to expenses associated with an early retirement package offered to certain long-term employees during the second quarter of 2002. The remainder of this increase is a factor of normal salary increases as well as planned additions to staff. The increase of $480,000 or 67.8% in the all other expenses category is, in large part, attributable to an increase in expenses associated with the higher volume of electronic transactions as well as the offering of new electronic banking products. Also included in all other expenses in 2002 is a $50 thousand payment to the Commonwealth of Massachusetts Department of Revenue for a sales/use tax assessment. Buildings and equipment increased $311,000 or 11.3%, as a result of increased expenses due to the addition of three new financial service offices during the last year Income taxes Applicable State and Federal income tax expense of $5.0 million for the six months ended June 30, 2002 was 5.8% greater than the $4.7 million recorded for the same period in 2001, a reflection of higher pretax net income. The combined effective State and Federal tax rate was 34% of pretax net income for each period presented. Net income Consolidated net income was $9.6 million representing earnings per share of $1.11 for the six months ended June 30, 2002 as compared to $9.2 million or $1.07 per share for the comparable six months ended June 30, 2001. Annualized returns on average assets and average equity were 1.37% and 16.50%, respectively, for the six months ended June 30, 2002 as compared to 1.26% and 18.38%, respectively, for the six months ended June 30, 2001. COMPARATIVE ANALYSIS OF SELECTED PERIOD-END ASSETS, LIABILITIES AND CAPITAL The Company had $1.45 billion consolidated total assets, $923.4 million deposits and $121.6 million stockholders' equity at June 30, 2002. Its capital to assets ratio was 8.4%, exceeding all regulatory requirements. As compared to reported balances at December 31, 2001, securities available for sale decreased $7.2 million or 1.64%, gross loans increased $11.5 million or 1.3%, deposits increased $20.0 million or 2.21% and borrowed funds decreased $36.0 million or 8.7%. Securities The adjusted cost and estimated market values of investment securities, which the Company classified as available for sale, at June 30, 2002 and December 31, 2001 were as follows:
June 30, 2002 --------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (Dollar amounts in thousands) U.S. Government agency CMOs $ 89,724 $3,877 $1,034 $ 92,567 Other U.S. Government agency obligations 41,611 22 322 41,311 Other collateralized mortgage obligations 81,445 985 455 81,975 State and municipal obligations 18,819 -- -- 18,819 Other debt securities 195,270 2,285 1,083 196,472 ------- ----- ----- ------- Totals $426,869 $7,169 $2,894 $431,144 ======== ====== ====== ========
14 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)
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 ======== ====== ====== ========
Securities available for sale decreased $7.2 million, from $438.3 million at December 31, 2001 to $431.1 million at June 30, 2002. Net gains from sales were $962 thousand and $2.6 million during the quarter and six months ended June 30, 2002, respectively, compared to net gains of $392 thousand and $853 thousand, respectively, during the same periods in 2001. Loans The following is a summary of the Company's outstanding loan balances as of the dates indicated: June 30, December 31, 2002 2001 ---- ---- Mortgage loans on real estate Residential $356,339 $376,504 Commercial 276,285 264,934 Construction 100,581 95,186 Equity lines of credit 62,600 53,336 Other loans Commercial 92,781 84,947 Industrial revenue bonds 1,054 1,163 Consumer 6,110 8,221 -------- -------- Total loans 895,750 884,291 Less: Allowance for loan losses (12,387) (12,252) -------- -------- Total portfolio loans, net $883,363 $872,039 ======== ======== Loans held for sale $ 2,567 $ 8,349 ======== ======== As shown in the table above, total loans increased $11.5 million or 1.30% to $895.8 million at June 30, 2002 as compared to December 31, 2001, with significant growth occuring in the commercial mortgage, equity lines of credit and commercial loan portfolios, up $11.4, $9.3 and $7.8 million, respectively. New residential mortgage originations of $27.5 million fixed rate and $55.7 million adjustable rate were achieved in the second quarter 2002. During the same period, the Company, consistent with its strategy of generally selling fixed rate mortgages, sold $28.0 million residential mortgages, producing net gains of $499.9 thousand. 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 15 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) performance trends, and the results of risk management assessments. Accordingly, increases or decreases in the amount of each loan category as well as the ratings of the loans within each category are considered in calculating the overall allowance. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. In addition, the Company's allowance for loan losses is periodically reviewed by the OCC as part of their examination process. The OCC may require the Company to make additions to the allowance based upon judgments different from those of management. Non performing assets and loan loss experience As shown in the following table non-performing assets were $2.8 million or .19% of total assets at June 30, 2002 compared to $3.3 million or .23% of total assets at December 31, 2001. Accrual of interest income on loans is discontinued when it is questionable whether the borrower will be able to pay the principal and interest in full and/or when loan payments are 60 days past due, or 90 days past due if the loan is fully secured by real estate or other collateral held by the Bank.
June 30, December 31, 2002 2001 ---- ---- (Dollar amounts in thousands) Nonaccrual loans $1,266 $1,802 Loans past due 90 days or more and still accruing -- -- Property from defaulted loans 1,500 1,500 ------ ------ Total non-performing assets $2,766 $3,302 ====== ====== Restructured troubled debt performing in accordance with amended terms, not included above $ 220 $ 224 ====== ======
The following is a summary of the activity in the allowance for loan losses for the indicated periods:
Six Months Ended June 30, 2002 2001 ---- ---- Balance, beginning of period $12,252 $12,154 Provision for loan losses -- -- Charge-offs (53) (114) Recoveries on loans previously charged off 188 182 ------ ------- Balance, end of period $12,387 $12,222 ======= ======= Recoveries on loans previously charged off exceeded charge-offs therefore management determined that additions to the reserve for loan losses were unnecessary in 2002, notwithstanding the minor growth in the loan portfolio. The reserve represented 1.38% of total loans at June 30, 2002, 1.39% at December 31, 2001, and 1.33% at June 30, 2001. 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 June 30, 2002, there can be no assurance that the reserve is adequate or that additional provisions might not become necessary.
16 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) The Company had outstanding commitments to originate new residential and commercial mortgages of $27.6 million at June 30, 2002 and $40.3 million at December 31, 2001 which are not reflected on the consolidated statements of financial condition. Additional unadvanced loan funds are summarized as follows for the indicated periods:
June 30, 2002 December 31, 2001 ------------- ----------------- Commercial loans (Dollar amounts in thousands) Dealer floor plan $ 7,566 $ 9,997 Lines of credit 39,805 45,469 Other 6,054 4,845 Commercial mortgages Construction 34,288 25,685 Other 7,987 10,346 Residential mortgages Home equity 71,907 61,891 Consumer loans Lines of credit 3,016 2,969 -------- -------- Total $170,623 $161,202 ======== ========
Deposits The following table is a summary of deposits outstanding as of the dates indicated:
June 30, 2002 December 31, 2001 ------------- ----------------- Deposits Demand $233,186 $209,551 NOW 158,146 149,109 Money market 278,768 185,156 Other savings 81,466 155,255 Certificates of deposit greater than $100,000 40,089 53,123 Other time 131,703 151,197 -------- -------- Total deposits $923,358 $903,391 ======== ========
Reflecting somewhat the seasonal nature of Cape Cod economy as discussed in "Liquidity" on page 18 herein, total deposits at June 30, 2002 are $20.0 million or 2.2% higher than total deposits at December 31, 2001. Generally, the Company's strategy is to price deposits according to local market rates, offering higher alternative rates based on increasing amounts deposited. Interest rates paid are frequently reviewed and are modified to reflect changing conditions. Borrowed Funds Historically, the Company has selectively engaged in short and long term borrowings from the Federal Home Loan Bank of Boston, and has sold securities under agreements to repurchase, to fund loans and investments. At June 30, 2002, borrowed funds totaled $384.1 million, down 8.6% or $36.0 million compared to borrowed funds at December 31,2001. This decrease offsets the seasonal deposit decline described under the section entitled "Deposits" above and contributes to the support of heretofore described loan growth. 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. 17 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Stockholders' Equity The Company's capital to assets ratio was 8.39% at June 30, 2002 compared to 7.93% at December 31, 2001. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies, such as the Company, are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts of total and Tier 1 capital (as defined) to average assets (as defined). The following schedule displays these capital guidelines and the ratios of the Company and the Bank as of June 30, 2002. Minimum June 30, 2002 Regulatory ----------------------- Guidelines Company Bank ------------------------------------ Tier 1 leverage capital 4.00% 8.49% 8.42% Tier 1 capital to risk-weighted assets 4.00% 12.25% 12.16% Total capital to risk-weighted assets 8.00% 13.50% 13.41% The Company's book value at June 30, 2002 was $14.09 per share compared to $13.38 per share at December 31, 2001. 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 early spring. The Bank's investment securities could be sold if necessary to meet liquidity needs. In that event, a gain or loss would be realized if the market value of the securities sold was not equal to their cost, adjusted for the amortization of premium or accretion of discount. The Bank can also borrow funds using investment securities as collateral and it has a line of credit of $5,000,000 from the Federal Home Loan Bank of Boston. The Bank has also established a line of credit of $7,000,000 for the purchase of federal funds from SunTrust Bank and may borrow from the Federal Reserve Bank if necessary. ASSET/LIABILITY MANAGEMENT The Company's Asset/Liability Management Committee ("ALCO"), which is 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. Given the substantial liquidity from cash flow and maturities of the Company's investment portfolio, the sizable proportion of rate sensitive loans to total loans, and the large core deposit base, ALCO believes the Company to be moderately asset-sensitive to changes in interest rates. Nevertheless, the Company's strategy has included the funding of certain fixed rate loans with medium term borrowed funds in order to mitigate a margin squeeze should interest rates rise. The Cape Cod market is one in which competing financial institutions frequently offer a wide range of yields for similar deposit products. Within this market, the Company finds it necessary, from time to time, to offer higher rates than it would otherwise justify, thereby increasing pressure on net interest income. In order to offset this pressure somewhat, the Company is strategically focusing on customer relationship profitability. 18 PART I FINANCIAL INFORMATION ITEM 3. Quantitative and Qualitative Disclosures about Market Risk For a discussion of the Company's management of market risk exposure, see "Asset/Liability Management" in Item 2 of Part I of this report and Item 7A of Part II of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001 Annual Report"). For quantitative information about market risk, see Item 7A of Part II of the Company's 2001 Annual Report. There have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2002 from those presented in the Company's 2001 Annual Report. PART II OTHER INFORMATION ITEM 1. Legal proceedings There are no material legal proceedings to which the Company is a party or to which any of its property is subject, although the Company is a party to ordinary routine litigation incidental to its business. ITEM 2. Changes in securities and use of proceeds Not applicable ITEM 3. Defaults upon senior securities Not applicable ITEM 4. Submission of matters to a vote of security holders Not applicable ITEM 5. Other information Not applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the three month period ended June 30, 2002 19 SIGNATURES Pursuant to the requirements 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. -------------------------------------------------------------- Date: August 14, 2002 -------------------------------------------------------------- /s/ STEPHEN B. LAWSON, President and Chief Executive Officer ------------------------------------------------------------- Stephen B. Lawson, President and Chief Executive Officer /s/ NOAL D. REID, Chief Financial Officer and Treasurer ------------------------------------------------------------- Noal D. Reid, Chief Financial Officer and Treasurer (For the period covered by this report) 20 Correspondence CERTIFICATION PURSUANT TO 18 U.S.C.ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of CCBT Financial Companies, Inc. (the "Company") for the quarter ended June 30, 2002 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned President and Chief Executive Officer for the Company, certify pursuant to 18 U.S.C. Section.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ STEPHEN B. LAWSON, President and Chief Executive Officer --------------------------------------- President and Chief Executive Officer Date: ----------------------------------- 21 Correspondence CERTIFICATION PURSUANT TO 18 U.S.C.ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of CCBT Financial Companies, Inc. (the "Company") for the quarter ended June 30, 2002 , as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Financial officer and Treasurer for the Company, certify pursuant to 18 U.S.C. Section.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ NOAL D. REID, Chief Financial Officer and Treasurer ------------------------------------------------------- Noal D. Reid, Chief Financial Officer and Treasurer (For the period covered by this report) Date: August 14, 2002 ------------------------------------------------------- 22