10-K 1 form10k_58474.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003- Commission File No. 000-25381 CCBT FINANCIAL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 495 Station Avenue, South Yarmouth, Massachusetts 02664 (Address of principal executive office) (Zip Code) (Registrant's telephone number, incl. area code): 508-394-1300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None Securities registered pursuant to Section 12(g) of the Act: Title of class Name of each exchange on which registered Common Capital Stock The Nasdaq Stock Market, Inc. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). |X| Yes |_| No The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the $23.90 closing price on June 30, 2003, on the Nasdaq National Market was $199,510,651. Although Directors and executive officers of the registrant were assumed to be "affiliates" of the registrant for the purposes of this calculation, this classification is not to be interpreted as an admission of such status. As of March 4, 2004, 8,425,323 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ FORWARD-LOOKING STATEMENTS This Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. CCBT Financial Companies, Inc. (the "Company") cautions investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management's beliefs and on assumptions made by, and information currently available to, management. When used, the words "anticipate", "believe", expect", "intend", "may", "might", "plan", "estimate", "project", "should", "will", "result" and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company's control, including the following: difficulty in obtaining regulatory approvals required for completion of the merger with Banknorth Group, Inc., changes in the volume of loan originations, fluctuations in prevailing interest rates, increases in costs to borrowers of loans held, increases in costs of funds, changes in legislation and changes in the assumptions used in making such forward-looking statements. In addition, the factors listed under "Risk Factors and Factors Affecting Forward Looking Statements" beginning on Page 8 of this report, which readers should carefully review, may result in these differences. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The Company cautions you that, while forward-looking statements reflect its good faith beliefs when the Company makes them, they are not guarantees of future performance and are impacted by actual events when they occur after the Company makes such statements. The Company expressly disclaims any responsibility to update its forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends. 2 PART I Item 1. Business. General The Company was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 and is the bank holding company for Cape Cod Bank and Trust Company (the "Bank"), a national bank. Currently, the Company's business activities are conducted primarily through the Bank. Cape Cod Bank and Trust Company, N.A. is the main operating subsidiary of the Company and is a federally chartered commercial bank with trust powers. The Bank is the result of a merger between the Hyannis Trust Company and the Cape Cod Trust Company in 1964 and a subsequent merger with the Buzzards Bay National Bank in 1974. The main office of the Bank is located at 307 Main Street, Hyannis, Barnstable County, Massachusetts. There are 26 other banking offices located in Barnstable and Plymouth Counties in Massachusetts. The Bank is a member of the Federal Deposit Insurance Corporation, of the Federal Reserve System and the Federal Home Loan Bank of Boston ("FHLB"). At December 31, 2003, the Bank employed 398 people on a full-time basis and another 54 people on a part-time basis. Financial information contained in this report for periods and dates prior to February 11, 1999 is that of the Bank. Since the Bank is the main operating subsidiary of the Company, financial information contained in this report for periods and dates after February 11, 1999 is essentially financial information of the Bank. Certain amounts have been reclassified in the 2002 and 2001 financial statements to conform to the 2003 presentation. Recent Developments On December 9, 2003, the Company and Banknorth Group, Inc. ("Banknorth") announced that they had entered into an Agreement and Plan of Merger, dated as of December 8, 2003 (the "Agreement"), which sets forth the terms and conditions pursuant to which the Company will be merged with and into Banknorth (the "Merger"). The Agreement provides, among other things, that as a result of the Merger each outstanding share of common stock of the Company (subject to certain exceptions) will be converted into the right to receive 1.084 shares of common stock of Banknorth, plus cash in lieu of any fractional share interest. Consummation of the Merger is subject to a number of customary conditions, including, but not limited to, (i) the approval of the Agreement by the Company's shareholders and (ii) the receipt of requisite regulatory approvals of the Merger and the proposed merger of the Bank with and into Banknorth's banking subsidiary, Banknorth, NA, immediately prior to consummation of the Merger. The Merger is expected to be completed in the second quarter of 2004 with operational integration to follow soon after. Repurchase of Stock During the quarter ended March 31, 2003, the Company's Board of Directors authorized the repurchase of up to 200,000 shares of the Company's stock in the open market. Consistent with that authorization, the Company repurchased 187,100 shares during 2003, at an average cost of $23.03 per share. Other The Bank is the largest commercial bank headquartered in Barnstable County. It offers a wide range of banking and financial services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. The Bank receives substantially all of its deposits from, and makes substantially all of its loans to, individuals and businesses on Cape Cod, although the Bank has some loans on properties outside its market area, including some sizable participations in commercial mortgages. The Bank's core market is comprised of retail and wholesale businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population causes seasonal deposit growth. The Bank's principal sources of revenue are loans and investments, which accounted for 73% of gross income during 2003. Of the remaining portion, 7% was received from service charges related to deposit and branch banking activities. The balance was derived from Trust Department services income and other items. Banking services for individuals include checking accounts, regular savings accounts, NOW accounts, money market deposit accounts, certificates of deposit, club accounts, mortgage loans, consumer loans, safe deposit services, trust services, discount brokerage and investment services, and insurance services. The Company also owns and maintains 35 automated teller machines which are connected to the AMEX, CIRRUS, NYCE, NOVUS/DISCOVER, MASTERCARD, VISA, STAR 3 and PLUS networks. Trust Department services include estate, trust, tax returns, agency, investment management, discount brokerage, custodial services, and IRA accounts. The Company's Web site is located at http://www.ccbt.com. On the Company's Web site, investors can obtain a copy of the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company files such material electronically with, or furnishes it to, the Securities and Exchange Commission. Competition The Company faces substantial competition for loan origination and for the attraction and retention of deposits. Competition for loan origination arises primarily from other commercial banks, thrift institutions, credit unions and mortgage companies. The Company competes for loans on the basis of product variety and flexibility, competitive interest rates and fees, service quality and convenience. Competition for the attraction and retention of deposits arises primarily from other commercial banks, thrift institutions, co-operative banks, and credit unions having a presence within and around the market area served by the Bank's main office and its community branches and ATM network. There are approximately twelve of these financial institutions in the Bank's market area. In addition, the Company competes with regional and national firms that offer stocks, bonds, mutual funds, and other investment alternatives to the general public. The Company competes on its ability to satisfy savers' and investors' requirements, such as product alternatives, competitive rates, liquidity, service quality, convenience, and safety against loss of principal and earnings. Management believes that the Company's emphasis on personal service and convenience, coupled with active involvement within the communities it serves, contributes to its ability to compete successfully. Moreover, under the Gramm-Leach-Bliley Act of 1999 (the "GLBA"), effective March 11, 2000, securities firms, insurance companies and other financial services providers that elect to become financial holding companies may acquire banks and other financial institutions. The GLBA may significantly change the competitive environment in which the Company and its subsidiaries conduct business. See "The Financial Services Modernization Legislation" below. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. Regulation and Supervision In addition to the generally applicable state and federal laws governing businesses and employers, the Company is further regulated by federal and state laws and regulations applicable to financial institutions and their parent companies. Virtually all aspects of the Company's operations are subject to specific requirements or restrictions and general regulatory oversight. State and federal banking laws have as their principal objective the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system, the protection of consumers or classes of consumers or the furtherance of broad public policy goals, rather than the specific protection of stockholders of a bank or its parent company. Several of the more significant statutory and regulatory provisions applicable to banks and bank holding companies to which the Company and its subsidiaries are subject are described more fully below, together with certain statutory and regulatory matters concerning the Company and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on the Company's business, prospects and operations, as well as those of its subsidiaries. The Company General. The Company is a Massachusetts corporation and a bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. The Federal Reserve Board has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the Federal Reserve Board. The Federal Reserve Board is also empowered to assess civil money penalties against companies or individuals who violate the Bank Holding Company Act, or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non- 4 banking subsidiary by a bank holding company. The Bank Holding Company Act--Activities and Other Limitations. The Bank Holding Company Act prohibits a bank holding company from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, or merging or consolidating with any bank holding company without prior approval of the Federal Reserve Board. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes bank holding companies to acquire banks located in any state, possibly subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers and to a lesser extent, interstate branching. Unless a bank holding company becomes a financial holding company ("FHC") under the GLBA (as discussed below), the Bank Holding Company Act also prohibits a bank holding company from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company that is not a bank or a bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the Federal Reserve Board determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests or unsound banking practices. The Financial Services Modernization Legislation. The GLBA established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit bank holding companies that qualify and elect to be treated as financial holding companies to engage in a range of financial activities broader than would be permissible for traditional bank holding companies, such as the Company, that have not elected to be treated as financial holding companies. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In order to become a financial holding company, a bank holding company, such as the Company, must meet certain tests and file an election form with the Federal Reserve Board. Specifically, to qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the bank holding company's banks must have been rated "satisfactory" or better in the most recent federal Community Reinvestment Act evaluation of each bank. At this time, the Company has not elected to become a financial holding company. Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. These capital adequacy guidelines generally require bank holding companies to maintain minimum total capital equal to 8% of total risk-adjusted assets and off-balance sheet items (the "Total Risk-Based Capital Ratio"), with at least 50% of that amount consisting of Tier I or core capital and the remaining amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and other non-qualifying intangible assets. Tier II capital generally consists of hybrid capital instruments; perpetual debt and mandatory convertible debt securities; perpetual preferred stock, which is not eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan and lease losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital (defined by reference to the risk-based capital guidelines) to its average total consolidated assets (the "Leverage Ratio") of 4.0%. Total average consolidated assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 4.0% Leverage Ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those, which are not experiencing or anticipating significant growth. 5 The Company currently is in compliance with both the Risk Based Capital Ratio and the Leverage Ratio requirements. At December 31, 2003, the Company had a Tier I Risk Based Capital Ratio equal to 12.0% and a Total Risk Based Capital Ratio equal to 13.2% and a Leverage Ratio equal to 8.7%. U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision ("Basel Committee"), currently are considering changes to the risk-based capital adequacy framework, which ultimately could affect the appropriate capital guidelines, including changes (such as those relating to lending to registered broker-dealers) that are of particular relevance to banks, such as the Bank, that engage in significant securities activities. Among other things, the Basel Committee rules, which were proposed formally for public comment in May 2003 and are expected to become effective around early 2007, would add operational risk as a third component to the denominator of the risk-capital calculation, which currently includes only credit and market risks. Limitations on Acquisitions of Common Stock. The federal Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been given at least 60 days to review the proposal. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company, such as the Company, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") would, under the circumstances set forth in the presumption, constitute the acquisition of control of the bank holding company. In addition, any company, as that term is broadly defined in the statute, would be required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more, or such lesser percentage of our outstanding common stock as the Federal Reserve Board deems to constitute control over us. Cash Dividends. Federal Reserve Board policy provides that a bank or a bank holding company generally should not maintain its existing rate of cash dividends on common stock unless the organization's net income available to common shareholders over the past year combined with its retained net income of the preceding two years has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization's capital needs, asset quality and overall financial condition. Federal Reserve Board policy further provides that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company's ability to serve as a source of strength. The Bank General. As a federally-chartered national bank, the Bank is subject to regulation and examination by the Office of the Comptroller of the Currency ("OCC"). Relevant statutes and regulations govern, among other things, lending and investment powers, deposit activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings, and payment of dividends. The Bank is also subject to regulatory provisions covering such matters as issuance of capital stock, branching, and mergers and acquisitions. Under the GLBA, the OCC permits national banks, to the extent permitted under state law, to engage in certain new activities which are permissible for subsidiaries of an FHC. Further, it expressly preserves the ability of national banks to retain all existing subsidiaries. Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures the Bank's deposit accounts up to $100,000 per depositor. Federal Reserve Board Regulations. Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including the Bank, to maintain reserves against their transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the amount of the institution's interest-bearing assets. 6 CRA. The CRA requires the OCC to evaluate the Bank's performance in helping to meet the credit needs of the community. Massachusetts has also enacted a similar statute that requires the Commissioner to evaluate the Bank's performance in helping to meet community credit needs. The Bank is currently in compliance with all CRA requirements. Customer Information Security. The Federal Reserve Board, the OCC and other bank regulatory agencies have adopted final guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Privacy. The OCC and other regulatory agencies have published final privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting-out" of that disclosure, subject to certain exceptions. USA Patriot Act. The USA PATRIOT Act of 2001 (the "USA PATRIOT Act"), designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, require financial institutions, including the Bank, to implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting and due diligence on customers. They also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the Federal Reserve Board (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the Bank Holding Company Act or the Bank Merger Act. Management believes that the Bank is currently in compliance with all currently effective requirements prescribed by the USA PATRIOT Act and all applicable final implementing regulations. The Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 ("S-O Act") implements a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoings that occurred at Enron and WorldCom, among other companies. The S-O Act's principal provisions, many of which have been interpreted through regulations released in 2003, provide for and include, among other things: o The creation of an independent accounting oversight board; o Auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; o Additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; o The forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; o An increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the company's independent auditors; o Requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; o Requirements that companies disclose whether at least one member of the audit committee is a 'financial expert' (as such term is defined by the SEC) and if not, why not; o Expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; 7 o A prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, such as the Bank, on nonpreferential terms and in compliance with other bank regulatory requirements; o Disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; and o A range of enhanced penalties for fraud and other violations. The Company has taken steps to comply with and anticipates that it will incur additional expenses in continuing to comply with the provisions of the S-O Act and its underlying regulations. Management believes that such compliance efforts have strengthened the Company's overall corporate governance structure and does not expect that such compliance has to date, or will in the future have a material impact on the Company's results of operations or financial condition. Risk Factors And Factors Affecting Forward Looking Statements The discussion set forth below contains certain statements that may be considered "forward-looking statements." Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results to materially differ from those projected in the forward-looking statements. You should carefully review the factors below and should not place undue reliance on our forward-looking statements. For further information regarding forward-looking statements, you should review the discussion under "FORWARD-LOOKING STATEMENTS" on page 2 of this report. The Merger with Banknorth may not be completed as anticipated. Even if approved by the Company's shareholders, completion of the Merger is conditioned upon the receipt of regulatory approvals and clearances from various federal and state governmental entities, including the approval of or a waiver from the Federal Reserve Board and the Office of the Comptroller of the Currency of the United States. The Company and Banknorth cannot predict, however, whether the required regulatory approvals will be obtained. The failure to complete the Merger when anticipated or at all may have a material adverse effect on the Company's operating results. The Bank's business is seasonal and is largely dependent upon the market area on Cape Cod. The Company experiences changes in its liquidity each year as a result of the dependence of its customer base on the seasonal tourist and vacation business on Cape Cod. The Bank receives substantially all of its deposits from and makes substantially all of its loans to individuals and businesses on Cape Cod. A decline in the economy on Cape Cod, or in the United States generally, may have a material adverse effect on the operating results of the Company. General business risks could adversely impact the Company's business. The banking business is subject to various business risks. Continued success depends in large part on the contributions of our senior management personnel. The volume of loan originations is dependent upon demand for loans of the type originated and serviced by the Company and the competition in the marketplace for such loans. The level of consumer confidence, fluctuations in real estate values, fluctuations in prevailing interest rates and fluctuations in investment returns expected by the financial community could combine to make loans of the type originated by the Company less attractive. In addition, the Company may be adversely affected by other factors that could (a) increase the cost to the borrower of loans held by the Company, (b) create alternative lending sources for such borrowers or (c) increase the cost of funds of the Bank at a rate faster than an increase in interest income, thereby narrowing net interest rate margins. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Fluctuations in interest rates may negatively impact the Company's business. Interest rates are highly sensitive to many factors beyond the Company's control, including general economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. Net interest income can be affected significantly by changes in market interest rates, which are currently at historically low levels, and changes in the relationship between short term and long term interest rates. A decrease in current interest rates could further reduce the Company's interest income on loans and investment securities without a comparable reduction in interest expense because a substantial portion of the Company's deposits are held in low interest accounts. An increase in interest rates could reduce the demand for loans and, as a result, the amount of loan and commitment fees and the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate increases to the Company's allowance for loan losses. See "Quantitative and Qualitative Disclosures about Market Risk." The Company could be adversely impacted by applicable regulatory changes or modifications. The Company is subject to extensive regulation by federal and state governmental authorities and is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. There can be no 8 assurance that these laws, rules and regulations will not be modified in the future, which could make compliance much more difficult or expensive, restrict ability to originate, broker or sell loans or otherwise adversely affect business or prospects. See "Regulation and Supervision." Proposed legislation may result in increased regulation of the Company's business. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and modifications of restrictions on, the business of the Company. It cannot be predicted whether any legislation currently being considered will be adopted or how such legislation or any other legislation that might be enacted in the future would affect the business of the Company. The remainder of this page intentionally left blank. 9 Item 2. Properties. A. Properties owned by the Bank - Banking Offices of Cape Cod Bank and Trust Company, N.A.: 1) 307 Main Street, Hyannis - Main Office 2) 835 Main Street, Osterville - Branch Office 3) 536 Main Street, Harwichport - Branch Office 4) 1095 Route 28, South Yarmouth - Branch Office 5) 40 Main Street, Orleans - Branch Office 6) Shank Painter Road, Provincetown - Branch Office 7) 121 Main Street, Buzzards Bay - Branch Office 8) 119 Route 6A, Sandwich - Branch Office 9) Route 6A and Underpass Road, Brewster - Branch Office 10) 700 Route 6A, Dennis - Branch Office 11) 397 Palmer Avenue, Falmouth - Branch Office 12) 693 Main Street, Chatham - Branch Office 13) Main Street, Wellfleet - Branch Office 14) 249 Worcester Court, Falmouth - Branch Office 15) 237 Main Street, Wareham - Branch Office 16) 495 Station Avenue, South Yarmouth - Branch Office 17) 350 Front Street, Marion - Branch Office 18) 2 Market Crossing, Plymouth -Branch Office None of the above offices is subject to any mortgage lien or any other material encumbrance. The main office is located in Hyannis, Massachusetts, and is a modern, two-story brick building located on approximately two acres of land. The Harwichport office and the Buzzards Bay office are somewhat larger than the remaining offices, having formerly been the main offices of the Cape Cod Trust Company and the Buzzards Bay National Bank prior to merger. The Bank also owns a house in Meredith, New Hampshire, one in Orlando, Florida, and one in Killington, Vermont, which are used as vacation sites by its employees. B. Rental of Bank Premises of Cape Cod Bank and Trust Company, N.A.: 1) Airport Rotary Circle, Hyannis - Branch Office 2) 2 Barlow's Landing Road, Pocasset - Branch Office 3) 1708 Falmouth Road, Centerville - Branch Office 4) 519 Route 134, South Dennis - Branch Office 5) 9 West Road, Skaket Corners, Orleans - Branch Office 6) 31 Workshop Road, South Yarmouth - Customer Service Center 7) Village Green Shopping Ctr., N. Eastham - Branch Office 8) 3206 Main Street, Barnstable Village - Branch Office 9) 170 Commercial Street, Provincetown - Branch Office 10) 64 King's Circuit, Kings Way, Yarmouth Port - Branch Office 11) Mashpee Commons, Mashpee - Branch Office Certain lease agreements are adjusted annually with the Consumer Price Index, include contingent expenses and have renewal options. While the Company has excellent relationships with its lessors, there is no guarantee that it will be able to renew any or all of said agreements when they expire. The Company believes that its properties are adequate for its present needs. 10 Item 3. Legal Proceedings. As previously announced on June 23, 2003, the Bank entered into a settlement with the Massachusetts Department of Revenue ("DOR"), representing approximately 50% of a disputed tax liability for which the Company previously accrued income tax and related interest expense totaling approximately $5.1 million. As a result of the settlement, the Company recognized a reduction of income tax and related interest expense of approximately $2.5 million, or approximately $.30 per share, in the second quarter of 2003. The Bank's settlement with the DOR was similar to and in participation with numerous other financial institutions in Massachusetts. The dispute involved the DOR's disallowance of the deduction taken by the Bank for dividends received from its REIT subsidiary for the 1999, 2000, 2001 and 2002 tax years. In March 2003, legislation was enacted in Massachusetts expressly disallowing the deduction for dividends received from a real estate investment trust subsidiary, retroactive to tax years ending on or after December 31, 1999. As a result of the enactment of this legislation, the Company ceased recording the tax benefits associated with the dividends received deduction effective for the 2003 tax year and established the $5.1 million accrual, representing an estimate of the additional state tax liability, including interest (net of any federal and state tax deduction associated with such taxes and interest), relating to the deduction for dividends received from the REIT for the 1999 through 2002 fiscal years. Item 4. Submission of Matters to a Vote of Security Holders. None. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of the Company is quoted on the Nasdaq National Market System under the symbol "CCBT". The table below shows the high and low trading prices of the stock for each quarter in the past two years and the dividends declared each quarter. According to the Company's transfer agent, there were approximately 840 stockholders of record as of February 20, 2004. The number of holders of record does not reflect the number of persons or entities who or which held their stock in nominee or "street" name through various brokerage firms or other entities. 2003 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Market price: High $ 26.05 $ 25.60 $ 27.24 $ 34.95 Low $ 22.00 $ 21.84 $ 24.45 $ 25.00 Dividends declared per share $ 0.19 $ 0.19 $ 0.19 $ 0.19 2002 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Market price: High $ 28.00 $ 28.93 $ 27.79 $ 26.84 Low $ 23.80 $ 24.70 $ 24.70 $ 24.00 Dividends declared per share $ 0.19 $ 0.19 $ 0.19 $ 0.19 Equity Compensation Plan Information The following table provides information as of December 31, 2003 regarding shares of common stock of the Company that may be issued under the Company's existing equity compensation plans, including the Company's Stock Option Plan (the "Plan") and the Company's 2001 Directors' Option Plan (the "Directors' Plan").
--------------------------------------------------------------------------------------------------------------------- Equity Compensation Plan Information --------------------------------------------------------------------------------------------------------------------- Number of securities remaining available for Number of securities to be Weighted-average exercise future issuance under issued upon exercise of price of outstanding equity compensation plans outstanding options, options, warrants and (excluding securities Plan category warrants and rights rights reflected in column (a)) --------------------------------------------------------------------------------------------------------------------- (a) (b) (c) --------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders (1) ............... 364,375 $ 22.64 175,500 Equity compensation plans not approved by security holders .......... N/A N/A N/A Total ............... 364,375 $ 22.64 175,500
1) Includes information related to the CCBT Financial Companies, Inc. Stock Option Plan and the 2001 Directors Stock Option Plan. 12 Item 6. Selected Consolidated Financial Data.
2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (In thousands, except per share amounts) Statement of Income Data: Interest and dividend income $ 59,212 $ 77,237 $ 97,755 $ 93,969 $ 79,107 Interest expense 17,798 29,118 44,555 45,624 38,311 ---------- ---------- ---------- ---------- ---------- Net interest income 41,414 48,119 53,200 48,345 40,796 Provision for loan losses -- -- -- -- -- Net gain (loss) on securities (1,692) 2,074 2,187 85 234 Other non-interest income 23,173 20,875 20,734 16,126 18,034 Non-interest expense 48,579 48,945 46,035 38,226 32,517 ---------- ---------- ---------- ---------- ---------- Income before income taxes 14,316 22,123 30,086 26,330 26,547 Provision for income taxes 7,939 7,683 10,622 9,101 10,086 ---------- ---------- ---------- ---------- ---------- Net income $ 6,377 $ 14,440 $ 19,464 $ 17,229 $ 16,461 ========== ========== ========== ========== ========== Basic earnings per share $ 0.75 $ 1.68 $ 2.26 $ 2.00 $ 1.85 Diluted earnings per share 0.75 1.67 2.25 2.00 1.85 Cash dividends per share 0.76 0.76 0.72 0.64 0.56 Balance Sheet Data: Total assets $1,338,233 $1,481,883 $1,454,667 $1,403,919 $1,231,114 Securities available for sale 359,592 510,837 438,350 426,743 463,379 Securities held to maturity 54,167 -- -- -- -- Net loans 780,898 789,018 872,039 836,336 663,584 Deposits - Non-interest bearing 251,313 229,033 209,551 201,904 167,624 - Interest-bearing 753,788 713,187 693,840 771,399 598,440 Borrowings 208,015 397,841 420,049 315,807 367,309 Stockholders' equity 114,477 118,447 115,316 98,729 85,650 Book value per share $ 13.60 $ 13.79 $ 13.38 $ 11.47 $ 9.95 Selected Ratios: Return on average assets 0.48% 0.99% 1.32% 1.35% 1.35% Return on average stockholders' equity 5.64% 12.24% 18.43% 19.32% 19.60% Average equity to average assets 8.46% 8.10% 7.14% 6.97% 6.89% Dividend payout ratio 101.33% 45.24% 31.86% 32.00% 30.27% Net interest spread 2.87% 2.93% 3.07% 3.12% 2.77% Net interest margin 3.29% 3.46% 3.77% 3.97% 3.49%
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. This Form 10-K contains certain statements that may be considered "forward-looking statements." Forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those factors described under the caption "Risk Factors and Factors Affecting Forward-Looking Statements," that may cause the Company's actual results to materially differ from those projected in the forward-looking statements. You should not place undue reliance on our forward-looking statements. For further information regarding forward-looking statements, you should review the discussion under the caption "FORWARD LOOKING STATEMENTS" on Page 2 of this report. The following discussion should be read in conjunction with the accompanying consolidated financial statements and selected consolidated financial data included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this discussion generally will refer to the investments and activities of the Company and the Bank, except where otherwise noted. Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered on Cape Cod in Barnstable County, Massachusetts. The Bank's twenty-seven banking offices are principally engaged in accepting deposits from individuals and businesses, and in making loans. The Bank also has a substantial Trust Department, managing assets in excess of $793 million at December 31, 2003 on behalf of its clients. The Bank's core market is comprised of retail and wholesale businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population causes seasonal deposit growth. 13 RESULTS OF OPERATIONS Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 2003 COMPARED WITH 2002 Net Income. Net income was $6.4 million or $0.75 per share for the year ended December 31, 2003 as compared to $14.4 million or $1.68 ($1.67 diluted) per share for the same period in 2002. Following is a discussion of the major factors affecting the results of operations for the periods. Net Interest Income. Net interest income was $41.4 million for the year ended December 31, 2003 as compared to $48.1 million for the prior year, representing a decrease of 13.9%. The decline in net interest income for the comparative periods can be attributed to the lower levels of average earning assets and interest bearing liabilities coupled with the narrowing of interest rate spreads and margins. Average earning assets and average interest-bearing liabilities declined to $1.3 and $1.0 billion from $1.4 and $1.1 billion for the years ended December 31, 2003 and 2002, respectively. The net interest spread and net interest margin ratios were 2.87% and 3.29%, respectively, for the year ended December 31, 2003, as compared to 2.93% and 3.46%, respectively, for the prior year. With the Federal Open Market Committee's (FOMC) targeted federal funds rate at 1.00%, the current interest rate environment is at a 45 year low. Lower mortgage rates during 2003 substantially accelerated pre-payments on both residential mortgage loans and investment securities backed by housing collateral. In this low rate environment, residential mortgage borrowers refinanced from adjustable-rate to fixed-rate mortgages, which were sold by the Bank to mitigate future interest rate risk. This activity in the residential mortgage portfolio reduced the average balance of residential mortgages outstanding by $120 million during the year ended December 31, 2003 when compared to 2002, and has more than offset the positive growth in the Company's other loan categories. Investment securities backed by housing collateral (MBS's and CMO's) were subjected to accelerated pre-payments of principal during this low rate environment and combined average balances in these categories for the year ended December 31, 2003 were lower in comparison to 2002. As loans and investments declined, average borrowings correspondingly decreased. This funding decline was partially offset by the increase in average deposits during the year ended December 31, 2003. The deposit increase represents organic growth of core deposits as the year-round Cape Cod region population continues to increase. The extended period of lower rates, declining since 2001, decreased the yield on all earning assets for the year ended December 31, 2003 when compared with the prior year. As previously stated, lower mortgage rates were an incentive for mortgage borrowers to refinance their loans and thus accelerated pre-payments on both residential mortgage loans and investment securities backed by housing collateral, resulting in reinvestment of the principal proceeds at much lower rates. Interest income was reduced as accelerated pre-payments stepped up the write-off of deferred costs on residential mortgage loans and hastened the amortization of premiums paid on mortgage-related investment securities. The Company's CMO securities, in particular, experienced a significant negative impact upon their yield of 0.40% for the year ended December 31, 2003, as the acceleration in the amortization of premiums outpaced receipt of interest income. The Company lowered its funding costs, but at a pace not equal to the decline in average earning asset yields given the substantial mix of already low cost core deposits. Provision for Loan Losses. Recoveries on loans previously charged-off exceeded charge-offs during the year ended December 31, 2003 by $329,000. Management's assessment of the risks in the loan portfolio at December 31, 2003 resulted in no provision for loan losses during the year. The allowance for loan losses as a percentage of total loans was 1.60% and 1.55% at December 31, 2003 and 2002, respectively, representing management's consideration of qualitative factors, primarily the weakness in local and national economic trends and growth in outstanding higher-risk commercial loans. 14 RESULTS OF OPERATIONS Non-Interest Income. Non-interest income of $21.5 million reflected a decline of $1.5 million during 2003 as compared to the prior year due primarily to a $3.8 million unfavorable change in the net gain (loss) on securities. Security losses of $1.7 million were recorded during the 2003 period, including a $1.3 million impairment loss recognized on an asset-backed security, as well as losses from the sale of interest-only CMO's. By contrast, during the 2002 period, $2.1 million of gains were reported as a result of the sale of securities. The decrease in the Other Income category of non-interest income in 2003 was caused by the Company's net write-down of approximately $650,000 of fixed assets related to the closure of nine Stop & Shop transaction offices. The increase in net gain on sales of loans of $1.2 million and the combined increase in fee-based revenues of $1.3 million (financial advisor, brokerage and insurance commissions) during 2003 as compared to 2002 helped to partially offset the unfavorable changes in the net gain (loss) on securities and other income. Non-Interest Expense. Total non-interest expense remained essentially unchanged at $48.5 and $48.9 million for 2003 and 2002, respectively. Salary costs, which remained almost level during the 2003 period as compared to 2002 was affected by the increase of $1.1 million in 2003 for the deferral of salaries under SFAS 91, largely due to the increased volume of residential mortgage originations, and the accrual of $506,000 of costs associated with an early retirement program during 2002. Employee benefits decreased $1.0 million during 2003 as compared to 2002 and can be attributed to a $1.5 million decrease in incentive based employee benefits partially offset by increases in post-retirement and insurance benefits and payroll taxes. When comparing the years ended 2003 with 2002, all other expenses increased $1.1 million primarily as a result of the $443,000 of interest expenses on the REIT state tax assessment as well as increases in insurance, electronic banking and OREO expenses of $134,000, $127,000 and $175,000 respectively. Provision for Income Taxes. The provision for income taxes increased from $7.7 million in the prior year to $7.9 million in 2003. This increase, despite the decrease in income before taxes, is due to the previously disclosed settlement in June 2003 of the REIT tax law dispute with the Massachusetts Department of Revenue. The settlement resulted in a net increase of $2.3 million in the income tax provision and an effective tax rate of 55.5% for the year ended December 31, 2003. The adjusted effective income tax rate for the year ended December 31, 2003, excluding the REIT settlement, is 39.3% as compared with 34.7% for 2002. This higher effective tax rate reflects the loss of the REIT state tax advantage. 2002 COMPARED WITH 2001 Net Income. Net income was $14.4 million or $1.68 per share ($1.67 diluted) for the year ended December 31, 2002 as compared to $19.5 million or $2.26 per share ($2.25 diluted) for 2001. Following is a discussion of the major factors affecting the results of operations for the periods. Net Interest Income. Net interest income was $48.1 million for the year ended December 31, 2002 as compared to $53.2 million for the previous year, a decrease of 10%. In addition to a $1,900,000 penalty for the prepayment of Federal Home Loan Bank borrowings, the decline in net interest income can be attributed to reduced yields on earning assets and the inability to further reduce rates on non-term deposits. The net interest spread and net interest margin ratios were 2.9% and 3.5%, respectively, for the year ended December 31, 2002, as compared to 3.1% and 3.8%, respectively, for the prior year. At December 31, 2002, total deposits of $942,220,000 were $38,829,000 or 4% greater than at the prior year-end. Demand deposits increased $19,482,000 or 9% and NOW deposits increased $21,975,000 or 15%. Money market deposits increased $26,563,000, or 10%, while other savings deposits increased by $15,824,000 or 22%. Consistent with the trend in market interest rates, lower rates offered on certificates of deposit caused customers to seek alternative products providing higher rates and/or increased liquidity, contributing to a lower year-end balance in these products in 2002 as compared with 2001. Certificates of deposit greater than $100,000 decreased $15,779,000, or 30%, and other time deposits decreased $29,236,000, or 19%, from the prior year-end. Similarly, the decrease in the average level of certificates of deposit in 2002, as customers sought higher rates and/or increased liquidity, modestly exceeded growth in average core deposits. On average for the year, total deposits of $926,448,000 were $11,581,000, or 1%, lower than the prior year average. Demand deposits were higher on average by $14,112,000 or 7% and NOW deposits were higher on average by $16,590,000 or 12%. On average, money market deposits were higher by $37,299,000 or 15% and other savings deposits increased $15,098,000 or 22% over the prior year. Average certificates of deposit greater than $100,000 decreased by $44,613,000 or 52% and average other time deposits decreased by $50,066,000 or 27%. Average Federal Home Loan Bank borrowings were $27,239,000 or 7% lower than the prior year average, while other short-term 15 RESULTS OF OPERATIONS borrowings increased, on average, by $1,146,000 or 4%. As of year-end 2002, other short-term borrowings had declined from the prior year-end by $9,345,000 or 30%. The decrease in Federal Home Loan Bank borrowings at December 31, 2002 of $12,865,000 or 3% compared to the prior year includes a prepayment of $17,800,000 of borrowings scheduled to mature in 2005. The prepayment of these borrowings, carrying a weighted-average interest rate of 6.10%, will result in an annual improvement in pre-tax net interest income of approximately $675,000 over their remaining lives. At year-end 2002, loans totaled $801,402,000, reflecting a decrease of $82,889,000, or 9% when compared to the prior year-end. For interest rate risk concerns, the Company has elected not to hold long-term fixed rate residential mortgages in the current low mortgage interest rate environment. Sales of fixed rate residential mortgages throughout the year contributed to a decline of $114,409,000 or 30% in this category since the prior year-end. Partially offsetting this decrease were increases in all other real estate loan categories with commercial real estate loans up $18,524,000 or 7%, construction loans up $4,358,000 or 5%, and Equity Lines of Credit up $12,458,000 or 23%. On average for the year, total loans of $882,175,000 decreased from the prior year average by $12,323,000 or 1%. Residential mortgages decreased $54,259,000 on average or 13% while average commercial mortgages increased $22,919,000 or 9% and Equity Lines of Credit increased $16,290,000, on average, or 37%. Construction loans, on average, also increased $3,280,000 or 3% when compared to the prior year. During 2002, securities decreased by $9,805,000, on average, or 2%, with significant prepayments resulting in declines in mortgage-backed securities and collateralized mortgage obligations, down $18,311,000 or 63% and $14,127,000 or 7%, respectively. A portion of the prepayments received were reinvested in the securities portfolio resulting in increases in other securities, up $10,011,000 or 4%, and US Government agencies, up $17,940,000 or 106%. As of December 31, 2002, securities, including Federal Home Loan Bank and Federal Reserve Bank stock, were up by $72,487,000 or 16% when compared to the prior year-end with other debt securities comprising the majority of this increase, up $70,192,000 over the prior year-end balance. Provision for Loan losses. Recoveries on loans previously charged off exceeded charge-offs during 2002 by $132,000. Management's assessment of the risks in the loan portfolio at December 31, 2002 as well as the Company's recent loss experience, whereby recoveries have actually exceeded charge-offs since 1997, resulted in no provision for loan losses in 2002. The allowance for loan losses was 1.55% and 1.39% of total loans at December 31, 2002 and 2001, respectively. Non-Interest Income. Non-interest income increased by $28,000 over the prior year-end as increases in insurance commissions and electronic banking fees were offset by a decrease in the net gain on sale of loans. Insurance commissions increased by $989,000 over the prior year inclusive of a $398,000 adjustment for the recognition of previously deferred insurance commissions for which no deferral is required. Other categories of non-interest income which experienced significant increases over the prior year included electronic banking fees, up $498,000 as a result of increased transaction volume as well as the addition of new products, and brokerage fees and commissions which increased $183,000 as a result of the recognition of a full year of revenues on an investment advisory product which became a product of CCB&T Brokerage Direct, Inc. in April 2001. The net gain on the sale of loans decreased by $1,015,000 in 2002 as compared to 2001 results. This decrease can be attributed to the effect on prior year results of a $52 million loan sale from the residential mortgage portfolio in September 2001 as well as the increase in deferred costs recognized during 2002 as a result of the sale of current production fixed rate mortgages. The net gain on the sale of securities was negatively impacted during 2002 by a $1 million impairment loss recognized on an asset-backed security due to increased delinquencies in its underlying collateral. Included in other income, which decreased by $311,000 when compared to 2001, was a $230,000 loss on the sale of a fixed asset. Non-Interest Expense. During 2002, non-interest expense increased $2,802,000 or 6% over 2001 results. Salaries and employee benefits increased $1,256,000, or 5%, a result of annual merit increases, increased staffing for newly opened financial centers, incentive commissions on financial services and an early retirement plan offered during the second quarter of 2002. These increases were partially offset by the $908,000 decrease in the Company's accrual for its Profit Incentive Plan. An increase in building and equipment expense of $855,000 can be attributed to the opening of six (6) locations since the prior year as well as amortization expense of computer software and depreciation of equipment. An increase in delivery and communications of $398,000 is largely due to increased telephone expense. Increased electronic banking expenses of approximately $350,000, included in all other expenses, are due to the higher volume of electronic transactions as well as the offering of new products. 16 RESULTS OF OPERATIONS Provision for Income Taxes. As a result of lower pretax income for the year ended December 31, 2002, the provision for income taxes decreased by 28% to $7,683,000 from $10,622,000 in the prior year. These provisions reflect a combined effective federal and state income tax rate of 35% for both 2002 and 2001. The remainder of this page intentionally left blank. 17 FINANCIAL CONDITION MATURITY STRUCTURE OF ASSETS AND LIABILITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES Securities The Company invests its excess funds in a variety of investment structures, including collateralized mortgage obligations (CMOs) and other asset-backed securities, usually with short effective durations. All securities purchased are investment grade, nonetheless there exists the possibility of loss from time to time resulting from changes in credit risk, as these securities are collateralized with loans made by others, and from substantial changes in interest rate environments during volatile economic periods. The following tables reflect the Company's securities at December 31, 2003, by fixed and floating rates. Other securities are primarily comprised of collateralized mortgage obligations and asset-backed securities as outlined in Note 2 to the accompanying consolidated financial statements.
Fixed Rate Securities ------------------------------------------------------------------ U.S. Government State and Other Agencies Municipal Securities -------------------- -------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Securities Available for Sale Term to maturity: One year or less $ 45,653 3.06% $ 10,328 2.04% $ 80,328 3.60% Over one year through five years 47,219 5.27% 4,157 4.04% 78,850 5.00% Over five years -- -- 1,472 4.28% 25 -- -------- -------- -------- Totals $ 92,872 4.18% $ 15,957 2.77% $159,203 4.29% ======== ======== ======== Securities Held to Maturity Term to maturity: One year or less $ 10,486 4.20% $ -- --% $ -- --% Over one year through five years 20,600 4.32% -- -- -- -- Over five years -- -- -- -- -- -- -------- -------- -------- Totals $ 31,086 4.28% $ -- -- $ -- -- ======== ======== ========
18 FINANCIAL CONDITION Included in fixed rate debt securities are $263,011,000 of CMOs, mortgage-backed securities, and other debt securities. These have been distributed based on estimates of their principal cash flows rather than their contractual final maturities. The balance, largely fixed rate municipal securities, are distributed on the basis of contractual maturity.
Floating Rate Securities ------------------------------------------------------------------ U.S. Government State and Other Agencies Municipal Securities -------------------- -------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Securities Available for Sale Term to repricing/maturity: One year or less $ 15,135 2.02% $ -- --% $ 77,950 1.76% Over one year through five years -- -- -- -- -- -- Over five years -- -- -- -- -- -- -------- -------- -------- Totals $ 15,135 2.02% $ -- --% $ 77,950 1.76% ======== ======== ======== Securities Held to Maturity Term to repricing/maturity: One year or less $ 23,081 4.11% $ -- --% $ -- -% Over one year through five years -- -- -- -- -- -- Over five years -- -- -- -- -- -- -------- -------- -------- Totals $ 23,081 4.11% $ -- --% $ -- -% ======== ======== ========
At December 31, 2003, gross unrealized gains and gross unrealized losses on securities available for sale amounted to $2.4 million and $3.9 million, respectively. The Company's investment securities are subject to market risk in the following ways. Of the investment securities owned as of December 31, 2003, $116,166,000 are floating rate instruments tied to various indices, primarily LIBOR. Lesser amounts are tied to Treasury rates and other indices. The majority of these floating rate instruments are subject to interest rate caps that range from 8% to 32%. If interest rates rise enough so that there is a significant possibility that a given security will become subject to its interest rate cap, the market value of that security will be reduced. This risk is greater to the extent that the remaining life of the investment is longer. The Company's floating rate investments have an average life of about six years. Market risk may also result from the fact that various indices will not always move by the same amount when interest rates increase. This may cause securities tied to one index to perform less well than securities tied to other indices. Most of the remaining $299,118,000 of securities are fixed-rate CMOs, mortgage backed securities and other debt securities. Fixed-rate investments have market risk because their rate of return does not change at all with the general level of interest rates. Because homeowners are less likely to refinance their mortgages at higher rates, an additional characteristic of CMOs and mortgage-backed securities is that their principal payments tend to slow when interest rates rise. If the fixed rate earned on the investment is lower than the new market rate, this can result in a decline in the value of these securities. The Company's fixed-rate CMOs have an average life of less than two years, and have interest rates above current market levels, which reduces the market risk of these securities. The average life of the Company's fixed-rate investments is less than two years. 19 FINANCIAL CONDITION Loans The following tables reflect maturity/repricing information for commercial, construction and other loans. In both the fixed and floating rate loan tables, the category of Other Loans is primarily comprised of mortgage loans on real estate, including residential, commercial and equity lines of credit, as outlined in Note 3 to the accompanying consolidated financial statements. Fixed Rate Loans ------------------------------------- Commercial Construction Other Loans Loans Loans ---------- ------------ --------- (In thousands) Term to maturity: One year or less $ 7,261 $ 21,671 $ 26,444 Over one year through five years 6,123 18,719 124,838 Over five years 82 986 28,760 --------- --------- --------- Totals $ 13,466 $ 41,376 $ 180,042 ========= ========= ========= Included in fixed rate loans maturing in one year or less are $447,000 of customer account overdrafts. Floating Rate Loans ------------------------------------- Commercial Construction Other Loans Loans Loans ---------- ------------ --------- (In thousands) Term to repricing/maturity: One year or less $ 63,573 $ 46,055 $ 296,854 Over one year through five years 7,410 -- 134,919 Over five years 1,399 -- 8,517 --------- --------- --------- Totals $ 72,382 $ 46,055 $ 440,290 ========= ========= ========= Most residential mortgage loans are adjustable rate mortgages subject to interest rate caps. 20 FINANCIAL CONDITION Deposits The remaining maturity of time certificates of deposit as of December 31, 2003 was as follows: Fixed Rate Certificates of Deposit ------------------------- More than $100,000 $100,000 or Less --------- --------- (In thousands) Remaining maturity: Three months or less $ 12,835 $ 33,801 Over three months through six months 4,356 20,545 Over six months through 12 months 2,459 19,205 Over one year through five years 36,809 38,839 Over five years -- -- --------- --------- Totals $ 56,459 $ 112,390 ========= ========= Other deposits may be withdrawn by the customer without notice or penalty. The rates paid thereon are reviewed each month and changed at the Company's option as often as indicated by changing market conditions. Generally, the Company's strategy is to price deposits in relation to rates available in the open market, including other financial institutions, and its liquidity needs based on factors that include loan demand. Interest rates paid are frequently reviewed and are modified to reflect changing conditions. Borrowings The remaining maturity of borrowings from the Federal Home Loan Bank as of December 31, 2003 was as follows: Fixed Rate FHLB Borrowings --------------- (In thousands) Remaining maturity: Three months or less $ 4,945 Over three months through six months 33,200 Over six months through 12 months 8,300 Over one year through five years 118,976 Over five years 14,506 --------- Total $ 179,927 ========= Rates paid on other short-term borrowings change daily. 21 FINANCIAL CONDITION Loans The following is a summary of loans outstanding as of the dates indicated:
December 31, --------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (In thousands) Commercial loans $ 85,848 $ 83,953 $ 84,947 $ 76,275 $ 77,776 Construction mortgage loans 87,431 99,544 95,186 87,978 68,809 Commercial mortgage loans 316,317 283,458 264,934 242,536 203,988 Industrial revenue bonds 760 929 1,163 1,603 1,137 Residential mortgage loans 298,644 327,889 429,840 430,951 313,757 Consumer loans 4,611 5,629 8,221 9,147 9,275 --------- --------- --------- --------- --------- Total loans $ 793,611 $ 801,402 $ 884,291 $ 848,490 $ 674,742 ========= ========= ========= ========= =========
Allowance for Loan Losses The allowance for loan losses is an estimate of the amount necessary to absorb probable losses in the loan portfolio. The allowance consists of specific, general and unallocated components. Commercial real estate and commercial business loans are evaluated individually for allowance purposes. Other categories of loans are generally evaluated as a group. The specific component relates to loans that are classified as doubtful, substandard or special mention. Loans classified as doubtful are considered impaired in accordance with SFAS No. 114, and an allowance is determined using a discounted cash flow calculation. Loss factors for substandard loans are based on a loss migration database, while loss factors for all other categories of loans are based on the Company's historical loss experience with similar loans of similar quality as determined by the Company's internal rating system. Loss factors are then adjusted for additional points that consider qualitative factors such as current economic trends (both local and national), concentrations, growth and performance trends, and the results of risk management assessments. Accordingly, increases or decreases in the amount of each loan category as well as the ratings of the loans within each category are considered in calculating the overall allowance. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. In addition, the Company's allowance for loan losses is periodically reviewed by the OCC as part of their examination process. The OCC may require the Company to make additions to the allowance based upon judgments different from those of management. Although management believes that upon review of loan quality and payment statistics, the allowance is adequate to cover losses in the current portfolio at December 31, 2003, there can be no assurance that the allowance is adequate or that additional provisions might not become necessary. Non-performing Assets and Loan Loss Experience Non-performing assets as of December 31 were as follows:
2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (In thousands) Nonaccrual loans $ 2,550 $ 1,348 $ 1,802 $ 2,192 $ 1,777 Loans past due 90 days or more and still accruing -- -- -- -- -- Property from defaulted loans 1,500 1,500 1,500 1,500 1,500 -------- -------- -------- -------- -------- Total non-performing assets $ 4,050 $ 2,848 $ 3,302 $ 3,692 $ 3,277 ======== ======== ======== ======== ======== Restructured troubled debt performing in accordance with amended terms, not included above $ 194 $ 210 $ 224 $ 237 $ 626 ======== ======== ======== ======== ========
22 FINANCIAL CONDITION The property from defaulted loans was sold in January 2004 and a gain on sale was recognized in the amount of $376,000. Accrual of interest income on loans is discontinued when it is questionable whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral and in the process of collection. Loans are classified "substandard" when they are not adequately protected by the current sound worth and paying capacity of the debtor or of the collateral. At December 31, 2003 and 2002, $10,732,000 and $7,240,000 of loans were included in this category, in addition to loans reported above. The Company's loan classification system also includes a category for loans that are monitored for possible deterioration in credit quality. At December 31, 2003 and 2002, $6,742,000 and $9,371,000, respectively, of loans were included in this category. In addition, it is possible that there may be losses on other loans that have not been specifically identified. The changes in the allowance for loan losses and related charge-off (recovery) ratios for the years ended December 31 were as follows:
2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (Dollars in thousands) Balance, beginning of year $ 12,384 $ 12,252 $ 12,154 $ 11,158 $ 11,108 Provision for loan losses -- -- -- -- -- Charge-offs: Commercial loans (75) (134) (275) (108) (347) Construction mortgage loans -- -- -- -- -- Commercial mortgage loans -- -- -- -- (186) Residential mortgage loans -- -- -- -- -- Consumer loans (71) (92) (71) (60) (77) -------- -------- -------- -------- -------- Total charge-offs (146) (226) (346) (168) (610) -------- -------- -------- -------- -------- Recoveries on loans previously charged off: Commercial loans 223 300 321 826 351 Construction mortgage loans -- -- 84 89 60 Commercial mortgage loans 231 8 6 216 190 Residential mortgage loans -- 6 -- 10 -- Consumer loans 21 44 33 23 59 -------- -------- -------- -------- -------- Total recoveries 475 358 444 1,164 660 -------- -------- -------- -------- -------- Balance, end of year $ 12,713 $ 12,384 $ 12,252 $ 12,154 $ 11,158 ======== ======== ======== ======== ======== Ratio of net charge-offs (recoveries) to average loans outstanding (0.04)% (0.01)% (0.01)% (0.13)% (0.01)% ======== ======== ======== ======== ======== Ratio of allowance to total loans outstanding 1.60% 1.55% 1.39% 1.43% 1.65% ======== ======== ======== ======== ========
23 FINANCIAL CONDITION The allowance for loan losses, as of December 31, was allocated as follows:
2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (In thousands) Commercial loans $ 1,631 $ 1,789 $ 2,219 $ 1,502 $ 1,457 Construction mortgage loans 915 951 787 802 755 Commercial mortgage loans 7,551 6,742 5,903 5,838 5,681 Industrial revenue bonds 11 14 14 16 20 Residential mortgage loans 2,520 2,794 3,133 3,922 3,071 Consumer loans 85 94 196 74 174 -------- -------- -------- -------- -------- $ 12,713 $ 12,384 $ 12,252 $ 12,154 $ 11,158 ======== ======== ======== ======== ========
Liquidity The Company normally experiences changes in its liquidity each year as a result of the seasonal nature of the economy in its market area. Liquidity is usually at its high in late summer and early fall and the annual low point is usually in the spring. Substantially all of the amount shown as cash and due from banks at year end was comprised of checks and similar items in the process of collection or was needed to satisfy a requirement to maintain a portion of deposits in an account at the Federal Reserve. Accordingly, it does not represent a source of liquidity. In general, investment securities could be sold if necessary to meet liquidity needs. In that event, a gain or loss would be realized if the market value of the securities sold was not equal to their cost, adjusted for the amortization of premium or accretion of discount. The Bank can also borrow funds using investment securities as collateral, and it has a line of credit of $5,000,000 from the Federal Home Loan Bank of Boston. The Bank has also established lines of credit of $7,000,000 and $2,500,000 for the purchase of federal funds from SunTrust Bank and Fleetbank, respectively, and may borrow from the Federal Reserve Bank if necessary. Contractual Obligations The table below contains information on the Company's contractual obligations as of the fiscal year ended December 31, 2003:
Payment Due by Period ---------------------------------------------------- Less More Than 1-3 3-5 Than Total 1 Year Years Years 5 Years -------- -------- -------- -------- -------- (In thousands) Contractual Obligations Long-term debt $138,482 $ -- $ 61,504 $ 57,472 $ 19,506 Capital lease obligation -- -- -- -- -- Operating leases 4,205 683 1,223 935 1,364 Purchase obligations 71 71 -- -- -- Other long-term liabilities -- -- -- -- -- -------- -------- -------- -------- -------- Total $142,758 $ 754 $ 62,727 $ 58,407 $ 20,870 ======== ======== ======== ======== ========
24 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; AVERAGE INTEREST RATES AND INTEREST SPREAD The average amount outstanding for certain categories of interest-earning assets and interest-bearing liabilities, the interest income or expense and the average yields earned or rates paid thereon, are summarized in the following table for the three years ended December 31, 2003. Nonaccrual loan balances have been included in their respective loan categories, which reduces the calculated yields. A portion of the income reported in certain of the asset categories is not subject to federal income tax, making it relatively more valuable. The computed yields shown have not been adjusted for taxable equivalency. As an indication of the amount of change in the general level of interest rates between years, the average rate on overnight federal funds traded among banks was 1.12%, 1.67% and 3.88% during 2003, 2002 and 2001, respectively.
Years Ended December 31, ------------------------------------------------------------------------------------- 2003 2002 2001 --------------------------- --------------------------- --------------------------- Average Average Average Average Average Average Balance Interest Yield Balance Interest Yield Balance Interest Yield ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (Dollars in thousands) ASSETS Securities: Mortgage-backed securities $ 27,059 $ 798 2.95% $ 10,942 $ 617 5.64% $ 29,253 $ 1,868 6.38% CMOs 140,894 557 0.40% 180,336 7,114 3.94% 194,463 11,948 6.14% U.S. Government agencies 20,115 362 1.80% 34,845 1,111 3.19% 16,905 869 5.14% State and municipal obligations 21,353 545 2.55% 18,252 590 3.23% 23,571 948 4.02% Other securities 259,689 10,992 4.23% 262,263 11,016 4.20% 252,251 14,689 5.82% ---------- ------- ---------- ------- ---------- ------- Total securities 469,110 13,254 2.83% 506,638 20,448 4.04% 516,443 30,322 5.87% ---------- ------- ---------- ------- ---------- ------- Loans: Commercial 87,448 4,381 5.01% 85,589 4,815 5.63% 83,973 6,692 7.97% Commercial construction 64,195 2,985 4.65% 56,923 2,928 5.14% 48,461 3,529 7.28% Residential construction 31,730 1,724 5.43% 43,331 2,488 5.74% 48,513 3,038 6.26% Commercial mortgages 290,751 20,427 7.03% 271,784 20,833 7.67% 248,865 22,064 8.87% Industrial revenue bonds 848 48 5.67% 1,048 60 5.73% 1,324 91 6.87% Residential mortgages 236,233 12,472 5.28% 356,494 21,941 6.15% 410,753 27,913 6.80% Home equity 73,950 3,388 4.58% 60,586 3,054 5.04% 44,296 3,245 7.33% Consumer 5,063 533 10.52% 6,420 670 10.44% 8,313 861 10.36% ---------- ------- ---------- ------- ---------- ------- Total loans 790,218 45,958 5.82% 882,175 56,789 6.44% 894,498 67,433 7.54% ---------- ------- ---------- ------- ---------- ------- Total earning assets 1,259,328 59,212 4.70% 1,388,813 77,237 5.56% 1,410,941 97,755 6.93% ------- ------- ------- Non-earning assets 77,275 70,664 70,033 ---------- ---------- ---------- Total assets $1,336,603 $1,459,477 $1,480,974 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: NOW accounts $ 176,922 323 0.18% $ 156,075 727 0.47% $ 139,485 745 0.53% Regular savings 95,756 519 0.54% 83,045 930 1.12% 67,947 932 1.37% Money Market accounts 303,332 3,072 1.01% 289,682 5,002 1.73% 252,384 7,143 2.83% Certificates of deposit of $100,000 or more 39,539 1,105 2.79% 41,642 1,266 3.04% 86,255 4,708 5.46% Other time deposits 116,445 3,030 2.60% 133,821 4,470 3.34% 183,887 10,024 5.45% ---------- ------- ---------- ------- ---------- ------- Total interest-bearing deposits 731,994 8,049 1.10% 704,265 12,395 1.76% 729,958 23,552 3.23% ---------- ------- ---------- ------- ---------- ------- Borrowings: Federal Home Loan Bank 206,929 9,305 4.50% 367,588 16,120 4.39% 394,827 20,090 5.09% Other short-term borrowings 26,786 190 0.71% 29,905 318 1.06% 28,758 765 2.66% Subordinated debt 5,000 254 5.08% 5,000 285 5.70% 2,096 148 7.06% ---------- ------- ---------- ------- ---------- ------- Total borrowings 238,715 9,749 4.08% 402,493 16,723 4.15% 425,681 21,003 4.93% ---------- ------- ---------- ------- ---------- ------- Total interest-bearing liabilities 970,709 17,798 1.83% 1,106,758 29,118 2.63% 1,155,639 44,555 3.86% ------- ------- ------- Demand deposits 242,185 222,183 208,071 Non-interest-bearing liabilities 10,669 12,589 11,648 Stockholders' equity 113,040 117,947 105,616 ---------- ---------- ---------- Total liabilities and equity $1,336,603 $1,459,477 $1,480,974 ========== ========== ========== Net interest income/spread $41,414 2.87% $48,119 2.93% $53,200 3.07% ======= ======= ======= Net interest margin (NII/Avg. Earning Assets) 3.29% 3.46% 3.77%
25 CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN VOLUME AND RATE The effects on net interest income from changes in interest rates on, and changes in the outstanding balances of, interest-earning assets and interest-bearing liabilities are summarized in the following table. These effects were calculated directly from the average outstanding balances and interest income and expense included in the preceding table. The change in net interest income resulting from the change in volume for each line item was calculated by multiplying the change in volume by the average of the interest rates earned or paid thereon. The change in the net interest income resulting from the change in rates for each line item was calculated by multiplying the change in rates by the average of the outstanding balances for the two periods for that line item. In 2003, declines of both volumes of and rates on earning assets and interest-bearing liabilities impacted net interest income. The lower volume of earning assets, resulting primarily from fewer investment securities and fewer residential mortgages, was more than offset by reduced borrowings such that net interest income was improved by approximately $1,653,000. Lower rates on earning assets were not completely offset by reduced rates on interest-bearing liabilities, however, resulting in a reduction of net interest income from rates of approximately $8,358,000. In 2002, the negative effect of changes in rates more than offset the positive contribution from changes in volume as rates on earning assets declined faster than the Company's ability to lower rates on interest-bearing liabilities. The improvement in 2002 from changes in volume was because average interest-bearing liabilities declined faster than earning assets.
2003 Compared to 2002 2002 Compared to 2001 Change Due to Increase (Decrease) Change Due to Increase (Decrease) --------------------------------- --------------------------------- Volume Rate Net Volume Rate Net -------- -------- --------- -------- -------- --------- (In thousands) EARNING ASSETS Securities: Mortgage-backed securities $ 692 $ (511) $ 181 $ (1,100) $ (151) $ (1,251) CMOs (856) (5,701) (6,557) (712) (4,122) (4,834) U.S. Government agencies (368) (381) (749) 747 (505) 242 State and municipal obligations 90 (135) (45) (193) (165) (358) Other securities (108) 84 (24) 502 (4,175) (3,673) -------- -------- -------- -------- -------- -------- Total securities (550) (6,644) (7,194) (756) (9,118) (9,874) -------- -------- -------- -------- -------- -------- Loans: Commercial 99 (533) (434) 110 (1,987) (1,877) Commercial construction 356 (299) 57 525 (1,126) (601) Residential construction (648) (116) (764) (311) (239) (550) Commercial mortgages 1,394 (1,800) (406) 1,895 (3,126) (1,231) Industrial revenue bonds (11) (1) (12) (17) (14) (31) Residential mortgages (6,873) (2,596) (9,469) (3,513) (2,459) (5,972) Home equity 643 (309) 334 1,008 (1,199) (191) Consumer (142) 5 (137) (197) 6 (191) -------- -------- -------- -------- -------- -------- Total loans (5,182) (5,649) (10,831) (500) (10,144) (10,644) -------- -------- -------- -------- -------- -------- Total earning assets (5,732) (12,293) (18,025) (1,256) (19,262) (20,518) -------- -------- -------- -------- -------- -------- INTEREST-BEARING LIABILITIES Interest-bearing deposits: NOW accounts 68 (472) (404) 83 (101) (18) Regular savings 106 (517) (411) 188 (190) (2) Money Market accounts 187 (2,117) (1,930) 850 (2,991) (2,141) Certificates of deposit of $100,000 or more (61) (100) (161) (1,896) (1,546) (3,442) Other time deposits (516) (924) (1,440) (2,200) (3,354) (5,554) -------- -------- -------- -------- -------- -------- Total interest-bearing deposits (216) (4,130) (4,346) (2,975) (8,182) (11,157) -------- -------- -------- -------- -------- -------- Borrowings: Federal Home Loan Bank (7,141) 326 (6,815) (1,291) (2,679) (3,970) Other short-term borrowings (28) (100) (128) 21 (468) (447) Subordinated debt -- (31) (31) 185 (48) 137 -------- -------- -------- -------- -------- -------- Total borrowings (7,169) 195 (6,974) (1,085) (3,195) (4,280) -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities (7,385) (3,935) (11,320) (4,060) (11,377) (15,437) -------- -------- -------- -------- -------- -------- Net changes due to volume/rate $ 1,653 $ (8,358) $ (6,705) $ 2,804 $ (7,885) $ (5,081) ======== ======== ======== ======== ======== ========
26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk is the risk of loss from adverse changes in market prices. In particular, the market prices of interest-earning assets may be affected by changes in interest rates. Since net interest income (the difference or spread between the interest earned on loans and investments and the interest paid on deposits and borrowings) is the Company's primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the levels and durations of the Company's assets and liabilities. Interest rate risk is the exposure of net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available for sale and the flow and mix of deposits. The Company's Asset/Liability Management Committee, comprised of several Directors with senior management, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The Committee meets monthly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. The Company's investment portfolio mix consists of collateralized mortgage obligations, other debt securities, and asset-backed securities collateralized with pools of loans and obligations issued by others. The Company's investment policy provides for purchases to be of investment quality and, in the instance of securities classified as available-for-sale, of relatively short duration. The Company's loan portfolio is concentrated in residential and commercial real estate loans from southeastern Massachusetts. However, the probability exists for losses from both investments and loans during periods of significant interest rate and economic volatility. The Company is subject to interest rate risk in the event that rates either increase or decrease. In the event that interest rates increase, the value of net assets (the liquidation value of stockholders' equity) would decline. At December 31, 2003, it is estimated that an increase in interest rates of 100 basis points (for example, an increase in the prime rate from 4% to 5%) would reduce the value of net assets by $9,645,000. On the other hand, if interest rates were to decrease, the value of net assets would increase. Although the value of net assets is subject to risk if interest rates rise, the opposite is generally true of the Company's earnings. If interest rates were to increase, net interest income would likely increase because the Company has more interest-earning assets than it has interest-bearing liabilities and because much of this excess amount reprices within a short period of time. As a result, net interest income is instead generally subject to the risk of a decline in rates. Not only are there fewer interest-bearing liabilities to reprice, but many of these liabilities could not reprice much lower because the rates paid on them are already low. During 2003, the Company increased its proportion of short-term fixed rate investments to total investments to protect yields. Accordingly, if interest rates were to decrease by 100 basis points (for example, a decrease in the prime rate from 4% to 3%) it is estimated that net interest income would decrease by $643,000. On the other hand, if interest rates were to increase, net interest income would likely increase. At December 31, 2002, it was estimated that the value of the net assets of the Company would decline by $5,429,000 if interest rates were to increase by 100 basis points and that the Company's net interest income would decline by $1,733,000 if interest rates were to decline by 100 basis points. The year-to-year change in these estimates is a result of a lengthening of the duration of the net assets of the Company. 27 Item 8. Financial Statements and Supplementary Data. FINANCIAL STATEMENTS INDEX Page ---- o Independent Auditors' Report 29 o Consolidated Balance Sheets at December 31, 2003 and 2002 30 o Consolidated Statements of Income for the Three Years Ended December 31, 2003 31 o Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2003 32 o Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 2003 33 o Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 2003 33 o Notes to Consolidated Financial Statements 34 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders of CCBT Financial Companies, Inc. We have audited the accompanying consolidated balance sheets of CCBT Financial Companies, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, cash flows, comprehensive income and changes in stockholders' equity for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CCBT Financial Companies, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Wolf & Company, P.C. Boston, Massachusetts January 30, 2004 29 CCBT FINANCIAL COMPANIES, INC. CONSOLIDATED BALANCE SHEETS
December 31, --------------------------- ASSETS 2003 2002 ----------- ----------- (Dollars in thousands) Cash and due from banks $ 38,254 $ 60,057 Short-term, interest-bearing deposits 25,470 741 Securities available for sale, at fair value 359,592 510,837 Securities held to maturity, at amortized cost 54,167 -- Federal Home Loan Bank stock, at cost 23,503 23,503 Federal Reserve Bank stock, at cost 1,235 1,235 Loans held for sale 7,306 37,332 Total loans 793,611 801,402 Less: Allowance for loan losses (12,713) (12,384) ----------- ----------- Net loans 780,898 789,018 ----------- ----------- Premises and equipment 21,517 20,602 Deferred tax asset, net 6,054 5,572 Accrued interest receivable on securities and loans 4,479 5,982 Intangible assets 5,089 6,314 Foreclosed real estate 1,500 1,500 Other assets 9,169 19,190 ----------- ----------- Total assets $ 1,338,233 $ 1,481,883 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 1,005,101 $ 942,220 Federal Home Loan Bank borrowings - short-term 46,445 205,700 Other short-term borrowings 23,088 21,391 Federal Home Loan Bank borrowings - long-term 133,482 165,750 Subordinated debt 5,000 5,000 Accrued interest payable on deposits and borrowings 1,086 1,501 Post retirement benefits payable 4,245 3,710 Employee profit sharing retirement and bonuses payable 2,566 3,017 Due to broker for securities settlement 54 11,627 Other liabilities 2,407 3,286 ----------- ----------- Total liabilities 1,223,474 1,363,202 ----------- ----------- Minority interest 282 234 ----------- ----------- Commitments and contingencies (Notes 5 and 11) Stockholders' equity: Common stock, $1.00 par value; 12,000,000 shares authorized; 9,061,064 shares issued 9,061 9,061 Surplus 27,512 27,484 Undivided profits 90,972 91,042 Treasury stock, at cost (640,866 shares - 2003; 470,266 shares - 2002) (12,161) (8,122) Accumulated other comprehensive loss (907) (1,018) ----------- ----------- Total stockholders' equity 114,477 118,447 ----------- ----------- Total liabilities and stockholders' equity $ 1,338,233 $ 1,481,883 =========== ===========
The accompanying notes are an integral part of these financial statements. 30 CCBT FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (In thousands, except per share data) INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 45,958 $ 56,789 $ 67,433 Interest on short-term, interest-bearing deposits 216 302 514 Taxable interest income on securities available for sale 11,211 18,613 27,489 Tax-exempt interest income on securities available for sale 545 590 934 Interest on securities held to maturity 488 -- -- Dividends on securities 794 943 1,385 -------- -------- -------- Total interest and dividend income 59,212 77,237 97,755 -------- -------- -------- INTEREST EXPENSE Interest on deposits 8,049 12,395 23,552 Interest on Federal Home Loan Bank borrowings 9,305 16,120 20,090 Interest on other short-term borrowings 190 318 765 Interest on subordinated debt 254 285 148 -------- -------- -------- Total interest expense 17,798 29,118 44,555 -------- -------- -------- Net interest income 41,414 48,119 53,200 Provision for loan losses -- -- -- -------- -------- -------- Net interest income, after provision for loan losses 41,414 48,119 53,200 -------- -------- -------- NON-INTEREST INCOME Financial advisor fees 7,596 6,807 6,909 Deposit account service charges 2,358 2,210 2,130 Branch banking fees 2,918 3,086 3,110 Electronic banking fees 2,847 2,496 1,998 Loan servicing and other loan fees, net (316) (98) 59 Brokerage fees and commissions 1,790 1,494 1,311 Net gain (loss) on securities (1,692) 2,074 2,187 Net gain on sales of loans 3,180 1,941 2,956 Insurance commissions 2,805 2,562 1,573 Other income (charges) (5) 377 688 -------- -------- -------- Total non-interest income 21,481 22,949 22,921 -------- -------- -------- NON-INTEREST EXPENSE Salaries 18,814 18,659 17,653 Employee benefits 7,381 8,415 8,164 Building and equipment 6,048 6,289 5,434 Data processing 2,690 3,003 2,600 Accounting and legal fees 1,345 1,130 955 Other outside services 2,533 2,301 2,277 Amortization of intangibles 1,225 1,225 1,583 Delivery and communications 1,941 2,296 1,898 Marketing and advertising 1,880 1,875 1,774 All other expenses 4,674 3,667 3,720 -------- -------- -------- Total non-interest expense 48,531 48,860 46,058 -------- -------- -------- Minority interest 48 85 (23) -------- -------- -------- Income before income taxes 14,316 22,123 30,086 Provision for income taxes 7,939 7,683 10,622 -------- -------- -------- Net income $ 6,377 $ 14,440 $ 19,464 ======== ======== ======== Basic earnings per share $ 0.75 $ 1.68 $ 2.26 Diluted earnings per share $ 0.75 $ 1.67 $ 2.25 Average shares outstanding - basic 8,463 8,613 8,613 Average shares outstanding - diluted 8,488 8,649 8,647 Cash dividends declared per share $ 0.76 $ 0.76 $ 0.72
The accompanying notes are an integral part of these financial statements. 31 CCBT FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------- 2003 2002 2001 ----------- ----------- ----------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,377 $ 14,440 $ 19,464 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of fixed and intangible assets 4,126 4,308 4,284 Net amortization (accretion) of securities 8,539 1,335 (5,610) Amortization of net deferred loan costs 183 414 1,309 Net loss (gain) on securities 1,692 (2,074) (2,187) Deferred income tax benefit (623) (169) (370) Net gain on sales of loans (3,180) (1,941) (2,956) Net change in: Loans held for sale, net 33,206 4,141 (5,709) Accrued interest receivable 1,503 386 (1,317) Accrued expenses and other liabilities (1,210) (4,393) 154 Other, net 10,069 (6,115) (1,538) ----------- ----------- ----------- Net cash provided by operating activities 60,682 10,332 5,524 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in loans 7,937 51,424 (86,431) Proceeds from sale of portfolio loans -- -- 52,841 Maturities of available-for-sale securities 533,356 713,688 514,544 Purchases of available-for-sale securities (463,669) (873,168) (656,605) Sales of available-for-sale securities 60,232 92,736 143,661 Principal payments of held-to-maturity securities 6,790 -- -- Purchases of held-to-maturity securities (61,183) -- -- Purchases of premises and equipment (3,816) (5,428) (4,563) Purchase of Federal Home Loan Bank and Federal Reserve Bank stock -- -- (1,431) ----------- ----------- ----------- Net cash provided (used) by investing activities 79,647 (20,748) (37,984) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 62,881 38,829 (69,912) Federal Home Loan Bank borrowings 942,000 1,858,250 1,855,224 Repayments of Federal Home Loan Bank borrowings (1,133,523) (1,871,114) (1,762,197) Net increase (decrease) in other short-term borrowings 1,697 (9,344) 6,215 Proceeds from issuance of subordinated debt -- -- 5,000 Purchase of treasury stock (4,308) (1,217) -- Issuance of common stock under stock option plan 297 303 181 Cash dividends paid on common stock (6,447) (6,555) (6,204) ----------- ----------- ----------- Net cash provided (used) by financing activities (137,403) 9,152 28,307 ----------- ----------- ----------- Net change in cash and cash equivalents 2,926 (1,264) (4,153) Cash and cash equivalents at beginning of year 60,798 62,062 66,215 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 63,724 $ 60,798 $ 62,062 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest $ 18,213 $ 30,022 $ 46,404 Income taxes 8,549 10,974 11,050 Non-cash transactions: Net change in due to/from broker for securities settlement (11,573) 11,627 (757) Transfer from loans to loans held for sale -- 31,183 --
The accompanying notes are an integral part of these financial statements. 32 CCBT FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, ------------------------------------- 2003 2002 2001 --------- --------- --------- (In thousands) Net income $ 6,377 $ 14,440 $ 19,464 --------- --------- --------- Unrealized holding gains (losses) on securities available for sale (1,440) (4,549) 7,596 Reclassification of losses (gains) on securities realized in income 1,692 (2,074) (2,187) --------- --------- --------- Net unrealized gains (losses) 252 (6,623) 5,409 Related tax effect (141) 2,783 (2,263) --------- --------- --------- Net other comprehensive income (loss) 111 (3,840) 3,146 --------- --------- --------- Comprehensive income $ 6,488 $ 10,600 $ 22,610 ========= ========= =========
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, ------------------------------------- 2003 2002 2001 --------- --------- --------- (In thousands) COMMON STOCK Balance, beginning and end of year $ 9,061 $ 9,061 $ 9,061 --------- --------- --------- SURPLUS Balance, beginning of year 27,484 27,473 27,495 Issuance of common stock under stock option plan 28 11 (22) --------- --------- --------- Balance, end of year 27,512 27,484 27,473 --------- --------- --------- UNDIVIDED PROFITS Balance, beginning of year 91,042 83,157 69,897 Net income 6,377 14,440 19,464 Cash dividends declared and paid ($.76, $.76 and $.72 per share, respectively) (6,447) (6,555) (6,204) --------- --------- --------- Balance, end of year 90,972 91,042 83,157 --------- --------- --------- TREASURY STOCK Balance, beginning of year (8,122) (7,197) (7,400) Purchase of treasury stock (187,100 and 47,500 shares, respectively) (4,308) (1,217) -- Issuance of common stock under stock option plan (16,500, 17,875 and 12,375 shares, respectively) 269 292 203 --------- --------- --------- Balance, end of year (12,161) (8,122) (7,197) --------- --------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance, beginning of year (1,018) 2,822 (324) Net other comprehensive income (loss) 111 (3,840) 3,146 --------- --------- --------- Balance, end of year (907) (1,018) 2,822 --------- --------- --------- TOTAL STOCKHOLDERS' EQUITY, END OF YEAR $ 114,477 $ 118,447 $ 115,316 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 33 CCBT FINANCIAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2003, 2002 and 2001 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of business -- The activities of CCBT Financial Companies, Inc. (the "Company") are conducted primarily through its subsidiary, Cape Cod Bank and Trust Company (the "Bank"). The Bank provides loans, deposits, trust and investment services, and insurance products to businesses and consumers primarily located in southeastern Massachusetts. Recent developments -- On December 9, 2003, the Company and Banknorth Group, Inc. ("Banknorth") announced that they had entered into an Agreement and Plan of Merger, dated as of December 8, 2003 (the "Agreement"), which sets forth the terms and conditions pursuant to which the Company will be merged with and into Banknorth (the "Merger"). The Agreement provides, among other things, that as a result of the Merger each outstanding share of common stock of the Company (subject to certain exceptions) will be converted into the right to receive 1.084 shares of common stock of Banknorth, plus cash in lieu of any fractional share interest. Consummation of the Merger is subject to a number of customary conditions, including, but not limited to, (i) the approval of the Agreement by the Company's shareholders and (ii) the receipt of requisite regulatory approvals of the Merger and the proposed merger of the Bank with and into Banknorth's banking subsidiary, Banknorth, NA, immediately prior to consummation of the Merger. The Merger is expected to be completed in the second quarter of 2004 with operational integration to follow soon after. Principles of consolidation -- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries and 51% ownership interest in an insurance agency. All inter-company accounts have been eliminated upon consolidation in the presentation of the consolidated financial statements. The Company's wholly-owned subsidiary, CCBT Statutory Trust I (See Note 7) is presented on the equity method. Certain amounts have been reclassified in the 2002 and 2001 financial statements to conform to the 2003 presentation. Use of estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities and the valuation of mortgage servicing rights. Cash and cash equivalents -- Cash and cash equivalents include amounts due from banks, short-term, interest-bearing deposits and federal funds sold, all of which mature within 90 days. The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2003 and 2002, these reserve balances amounted to $12,379,000 and $10,599,000, respectively. 34 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Securities -- Securities that the Company has purchased with the positive intent and ability to hold to maturity are classified "held-to-maturity" and are stated at cost, adjusted for amortization of premiums and accretion of discounts, except in the instance of "other-than-temporary losses" as explained below. Securities that might be sold prior to maturity to meet liquidity needs or to provide funds for the purchase of alternative investments are classified "available-for-sale" and are stated at fair value. Securities purchased and held principally for the purpose of selling them in the near term, are classified "trading securities" The Company held no trading securities at either December 31, 2003 or December 31, 2002. Gains and losses on sales of securities are recorded on the trade date and are determined using the specific identification method. Unrealized gains and losses adjusting securities available-for-sale to fair value, if any, are credited or charged to "Other Comprehensive Income," net of any related tax effect. Declines in the fair value of securities available for sale and securities held to maturity to levels below their adjusted cost, which are deemed to be other-than-temporary losses, are realized as losses in earnings. In estimating other-than-temporary impairment losses, management considers 1) the length of time and the extent to which the fair value has been less than cost, 2) underlying collateral delinquency and loss trends, 3) current and projected underlying collateral support levels, 4) the financial condition and near-term prospects of the issuer, and 5) the intent and ability of the Company to retain said securities for the period of time sufficient to allow for any recovery of unrealized losses. Purchase premiums and discounts are generally recognized in interest income using the interest method over the terms of the securities. For interest-only securities, the interest method is based on the outstanding principal balances of the underlying assets. Loans -- Loans are reported at their principal balance outstanding, adjusted for deferred origination fees and costs and charge-offs. Loan fees, net of the direct costs of origination, are deferred and recognized in income over the life of the loan generally using the interest method. For certain loan categories, the straight-line method is used, which does not differ materially from the interest method. Interest income on loans is recognized when accrued. Accrual of interest income on loans is discontinued when it is doubtful whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral. Past due status is based on contractual terms of the loan. Interest previously accrued but not collected is reversed and charged against interest income at the time the related loan is placed on nonaccrual status. Interest collected on nonaccrual loans is credited to interest income when received. When doubt exists as to the ultimate collection of principal on a loan, the estimated loss is included in the provision for loan losses. Loans held for sale -- Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Impaired loans -- A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that have been determined to be impaired are also classified as nonaccrual. 35 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Mortgage servicing rights -- The fair value of the right to service loans is capitalized when loans are sold to other investors and is amortized against servicing income over the estimated life of the underlying loans. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as loan types and terms. Fair value is based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Allowance for loan losses -- The allowance for loan losses is an estimate of the amount necessary to provide an adequate allowance to absorb probable losses in the current loan portfolio. This amount is determined by management based on a regular evaluation of the loan portfolio and considers such factors as loan loss experience, nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Foreclosed real estate -- Foreclosed real estate is carried at the lower of the amount of the related loan or the estimated market value of the assets received, less estimated selling costs. Foreclosed real estate includes properties where the Company has actually received title or taken possession. Provisions or losses subsequent to acquisition, operating income and expenses, and gains or losses from the sale of properties are credited or charged to income, while costs relating to improving real estate are capitalized. Premises and equipment -- Premises and equipment are reported at cost less accumulated depreciation. Depreciation is computed on a straight-line basis by charges to income in amounts estimated to recover the cost of premises and equipment over their estimated useful lives, which range between 3 and 8 years for furniture and fixtures and up to 40 years for Bank premises and leasehold improvements. Intangibles -- The core deposit intangible arising from the acquisition of two branch banking offices during 2000 is being amortized on a straight-line basis over 7 years. Prior to January 1, 2002, goodwill, arising from the acquisition of Murray & MacDonald Insurance Services, Inc., was being amortized on a straight-line basis over 5 years. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and goodwill, which amounted to $803,000 at December 31, 2003 and 2002, is no longer amortized, but is evaluated for impairment. If goodwill amortization of $359,000 was not recorded for the year ending December 31, 2001, net income as reported for 2001 would have increased by $215,000 or $.02 per share (basic and diluted) to $19,679,000 or $2.28 per share (basic) and $2.27 per share (diluted). Marketing expense -- The Company charges to marketing expense any advertising related expenses at the time they are incurred. 36 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Stock compensation plans -- At December 31, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note 6. The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the fair value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share for the years ending December 31, if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to the stock option plans. 2003 2002 2001 ---------- ---------- ---------- (In thousands, except per share amounts) Net income as reported $ 6,377 $ 14,440 $ 19,464 Additional expense had the Company adopted SFAS No. 123 (445) (403) (182) Related tax benefit 186 168 76 ---------- ---------- ---------- Pro-forma net income $ 6,118 $ 14,205 $ 19,358 ========== ========== ========== Basic earnings per share, as reported $ 0.75 $ 1.68 $ 2.26 Pro-forma basic earnings per share $ 0.72 $ 1.65 $ 2.25 Diluted earnings per share, as reported $ 0.75 $ 1.67 $ 2.25 Pro-forma diluted earnings per share $ 0.72 $ 1.64 $ 2.24 Post retirement benefit plans -- Post retirement benefits are accrued over the period that employees render the service making them eligible for the benefits. Provision for income taxes -- The provision for income taxes includes deferred income taxes arising as a result of reporting certain items of revenue and expense in different periods for tax and financial reporting purposes. Resultant deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which they are expected to be settled. Earnings per share -- Basic earnings per share is computed by dividing net income by the weighted average shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to purchase common stock were exercised, resulting in the issuance of common stock that then shared in the earnings of the Company. Segments -- The Company has one reportable segment, "Community Banking." All of the Company's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, commercial lending is dependent upon the ability of the Bank to fund itself with retail deposits and other borrowings and to manage interest rate and credit risk. This situation is also similar for consumer and residential mortgage lending. The Company's brokerage and insurance activities are not material to the Company's consolidated financial statements. Net income for the year ended December 31, 2003 for such activities amounted to $200,000 and $98,000, respectively. Accordingly, all significant operating decisions are based upon analysis of the Company as one operating segment or unit. Recent accounting pronouncements -- In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46) which establishes guidance for determining when an entity should consolidate another entity that meets the definition of a variable interest entity. FIN 46 requires a variable interest entity to be consolidated by a company if that company will absorb a majority of the expected losses, will receive a majority of the expected residual returns, or both. On December 17, 2003, the FASB deferred the effective date of FIN 46 to no later than the end of the first reporting period that ends after March 15, 2004. However, for special-purpose entities such as CCBT Statutory Trust I, the Company is required to apply FIN 46 as of December 31, 2003. Application of FIN 46 resulted in CCBT Statutory Trust I being presented on the equity method instead of being consolidated, which had no material effect on the Company's consolidated financial statements. 37 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This Statement is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances, and for hedging relationships designated after June 30, 2003. This Statement did not have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement provides new rules on the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. Such financial instruments include mandatorily redeemable shares, instruments that require the issuer to buy back some of its shares in exchange for cash or other assets, or obligations that can be settled with shares, the monetary value of which is fixed. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 30, 2003. This Statement had no effect on the Company's consolidated financial statements. (2) SECURITIES The amortized cost and estimated fair values of securities, with gross unrealized gains and losses, follows:
December 31, 2003 ------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) Securities Available for Sale U.S. Government agency CMOs and MBSs $ 82,643 $ 305 $ 180 $ 82,768 Other U.S. Government agency obligations 25,162 69 80 25,151 Other collateralized mortgage obligations 73,204 276 158 73,322 Interest only securities 1,256 329 121 1,464 State and municipal obligations 15,957 -- -- 15,957 Other debt securities 162,895 1,385 3,350 160,930 --------- --------- --------- --------- Totals $ 361,117 $ 2,364 $ 3,889 $ 359,592 ========= ========= ========= ========= Securities Held to Maturity U.S. Government agency MBSs $ 54,167 $ 159 $ 256 $ 54,070 ========= ========= ========= =========
38 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 2002 ------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- (In thousands) Securities Available for Sale U.S. Government agency CMOs and MBSs $ 63,131 $ 685 $ 22 $ 63,794 Other U.S. Government agency obligations 24,635 51 41 24,645 Other collateralized mortgage obligations 105,136 238 258 105,116 Interest only securities 14,444 1,359 2,206 13,597 State and municipal obligations 19,798 -- -- 19,798 Other debt securities 285,470 2,472 4,055 283,887 --------- --------- --------- --------- Totals $ 512,614 $ 4,805 $ 6,582 $ 510,837 ========= ========= ========= =========
Gross proceeds from the sale of available-for-sale securities were $60,232,000 in 2003. Gross gains of $122,000 and gross losses of $488,000 were realized on those sales. In addition, the Company recognized a loss of $1,326,000, which resulted from the write-down of a debt security available for sale which experienced a decline in value that was deemed other than temporary. Gross proceeds from the sale of available-for-sale securities were $92,736,000 in 2002. Gross gains of $3,229,000 and gross losses of $155,000 were realized on those sales. In addition, the Company recognized a loss of $1,000,000, which resulted from the write-down of a debt security available for sale which experienced a decline in value that was deemed to be other than temporary. Gross proceeds from the sale of available-for-sale securities were $143,661,000 in 2001. Gross gains of $2,464,000 and gross losses of $277,000 were realized on those sales. The amount of income tax expense (benefit) attributable to the net gain (loss) on securities in 2003, 2002 and 2001 was ($708,000), $868,000 and $915,000, respectively. The amortized cost and estimated fair value of debt securities at December 31, 2003, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity ---------------------- ---------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- (In thousands) Due in one year or less $ 14,591 $ 14,604 $ -- $ -- Due after one year through five years 36,626 36,506 1,243 1,243 Due after five years through ten years 48,330 48,715 13,135 13,115 Due after ten years 261,570 259,767 39,789 39,712 --------- --------- --------- --------- $ 361,117 $ 359,592 $ 54,167 $ 54,070 ========= ========= ========= =========
At December 31, 2003 and 2002, securities with an estimated fair value of $23,088,000 and $21,391,000, respectively, were pledged to secure borrowings from the U.S. Treasury and securities sold subject to agreements to repurchase. (See Note 7.) 39 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Information pertaining to securities with gross unrealized losses at December 31, 2003, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than Twelve Months Over Twelve Months ------------------------ ------------------------ Gross Gross Unrealized Fair Unrealized Fair Losses Value Losses Value ---------- ---------- ---------- ---------- (In thousands) Securities Available for Sale U.S. Government agency CMOs and MBSs $ 39 $ 14,278 $ 141 $ 22,846 Other U.S. Government agency obligations -- -- 80 5,083 Other collateralized mortgage obligations 9 8,258 149 14,062 Interest only securities 6 96 115 401 Other debt securities 531 31,067 2,819 83,959 ---------- ---------- ---------- ---------- Totals $ 585 $ 53,699 $ 3,304 $ 126,351 ========== ========== ========== ========== Securities Held to Maturity U.S. Government agency MBSs $ 256 $ 23,069 $ -- $ -- ========== ========== ========== ==========
Any security with a current book value equal to or greater than $500,000 that is downgraded is reported immediately to the Investment Committee for the purpose of researching the reason for the downgrade and then for possible sale or other-than-temporary impairment recognition. The Company's Investment Committee maintains a monthly report of downgraded issues for review. The Investment Committee will evaluate a security for possible sale or other-than-temporary impairment recognition based upon a rating downgrade to or near minimum investment grade and/or a significant negative change in price indication. In estimating other-than-temporary impairment losses, management considers 1) the length of time and the extent to which the fair value has been less than cost, 2) underlying collateral delinquency and loss trends, 3) current and projected underlying collateral support levels, 4) the financial condition and near-term prospects of the issuer, and 5) the intent and ability of the Company to retain said securities for the period of time sufficient to allow for any recovery of fair value. At December 31, 2003, 79 debt securities have unrealized losses with aggregate depreciation of 2% from the Company's amortized cost basis. These unrealized losses generally relate to increased credit risk on certain asset-backed securities, as these securities are collateralized with loans made by others, and/or from substantial changes in interest rate environments during volatile economic periods. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other than temporary. 40 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (3) LOANS, NET The following is a summary of loans outstanding as of the dates indicated: December 31, ------------------------ 2003 2002 --------- --------- (In thousands) Mortgage loans on real estate: Residential $ 211,546 $ 262,095 Commercial 316,317 283,458 Construction 87,431 99,544 Equity lines of credit 87,098 65,794 Other loans: Commercial 85,848 83,953 Consumer 4,611 5,629 Industrial revenue bonds 760 929 --------- --------- Total loans 793,611 801,402 Less: Allowance for loan losses (12,713) (12,384) --------- --------- Total loans, net $ 780,898 $ 789,018 ========= ========= The Company enters into banking transactions in the ordinary course of its business with related parties such as directors, officers, principal stockholders and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. The total amount of loans outstanding to related parties at December 31, 2003 and 2002 was $14,989,000 and $10,037,000, respectively. During 2003, new loans to related parties amounted to $34,151,000 and repayments amounted to $29,199,000. The Company's business is primarily in southeastern Massachusetts, and many of the Company's loan customers are involved in real estate construction or the hotel and restaurant industry. This can cause a number of them to be similarly affected by economic conditions. Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $419,386,000 and $322,085,000 at December 31, 2003 and 2002, respectively. The following summarizes mortgage servicing rights capitalized and amortized for the years ended December 31: 2003 2002 2001 ------ ------ ------ (In thousands) Mortgage servicing rights capitalized $2,049 $1,444 $ 585 ====== ====== ====== Mortgage servicing rights amortized $1,357 $ 707 $ 357 ====== ====== ====== Mortgage servicing rights included in Other Assets at December 31, 2003 and 2002 were $2,780,000 and $2,088,000, respectively. The estimated fair values of these rights were $3,183,000 and $2,279,000, respectively. 41 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (4) ALLOWANCE FOR LOAN LOSSES The changes in the allowance for loan losses were as follows: Years Ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Balance, beginning of year $ 12,384 $ 12,252 $ 12,154 Provision for loan losses -- -- -- Charge-offs (146) (226) (346) Recoveries on loans previously charged-off 475 358 444 -------- -------- -------- Balance, end of year $ 12,713 $ 12,384 $ 12,252 ======== ======== ======== The following is a summary of information pertaining to impaired and nonaccrual loans: December 31, ----------------- 2003 2002 ------- ------- (In thousands) Impaired loans without a valuation allowance $ -- $ -- Impaired loans with a valuation allowance: Commercial loans 383 43 Commercial mortgage loans -- 121 ------- ------- Total impaired loans $ 383 $ 164 ======= ======= Valuation allowance related to impaired loans $ 319 $ 35 ======= ======= Nonaccrual loans $ 2,550 $ 1,348 ======= ======= Loans 90 days past due, still accruing $ -- $ -- ======= =======
Years Ended December 31, --------------------------- 2003 2002 2001 ------- ------- ------- Average investment in impaired loans $ 300 $ 346 $ 528 ======= ======= ======= Interest income recognized on impaired loans $ 51 $ 69 $ 112 ======= ======= ======= Interest income recognized on a cash basis on impaired loans $ 51 $ 69 $ 112 ======= ======= =======
42 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (5) PREMISES AND EQUIPMENT The cost and accumulated depreciation and amortization of premises and equipment are as follows: December 31, ---------------------- 2003 2002 -------- -------- (In thousands) Premises: Land $ 3,069 $ 3,069 Buildings 13,679 12,021 Leasehold improvements 3,157 5,079 Equipment 23,688 21,431 -------- -------- 43,593 41,600 Accumulated depreciation and amortization (22,076) (20,998) -------- -------- $ 21,517 $ 20,602 ======== ======== Depreciation and amortization expense for the years ended December 31, 2003, 2002 and 2001 amounted to $2,901,000, $3,083,000 and $2,700,000, respectively. Certain banking premises are leased under non-capitalized operating leases expiring at various dates through 2013. Annual rental expenses under these leases were $1,032,000 in 2003, $1,268,000 in 2002 and $1,003,000 in 2001. The total rental commitments under non-cancelable leases for future years aggregate $4,205,000, excluding amounts payable under Consumer Price Index escalator provisions in certain leases which become effective in 2004 and later years. Annual commitments are $683,000 in 2004, $651,000 in 2005, $572,000 in 2006, $538,000 in 2007, $397,000 in 2008, and a total of $1,364,000 for the years 2009 through 2013. Certain of these leases also contain renewal options. (6) Employee Benefits Retirement and Incentive Plans The Company has a defined contribution Profit Sharing Retirement Plan covering substantially all employees following two years of service. Each year, the Company contributes amounts equal to 8% of each participant's compensation plus 4.3% of compensation over one-half the social security wage base. Profit sharing retirement expense was $1,602,000 in 2003, $1,708,000 in 2002 and $1,352,000 in 2001. Also in 2003, 2002 and 2001, bonuses were accrued under the provisions of the Company's Profit Incentive Plan totaling $863,000, $1,205,000 and $2,098,000, respectively, and paid in the year following. Employee Stock Ownership Plan At December 31, 2003 and 2002, the Company's Employee Stock Ownership Plan ("ESOP") held 31,676 shares and 34,773 shares, respectively, of the Company's common stock, all of which were allocated to employees. There were no contributions to the ESOP from the Company in 2003, 2002 or 2001. Post-Retirement Benefit Plan The Company has an unfunded plan for providing medical and life insurance coverage for retired employees who meet age and service requirements. For an employee retiring at age 65 with 30 or more years of service, the Company pays 100% of the cost of his or her medical insurance and 50% of the cost of the medical insurance of his or her dependents. The Company also pays for the cost of life insurance in an amount between $5,000 and $25,000 based on the earnings of the employee and the number of years since retirement. Lesser benefits are provided for employees who retire at a younger age or with fewer years of service. The Company's share of increases in the cost of providing post-retirement medical insurance is limited to 5% per year for employees who retire after 1993. 43 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) The following table sets forth the plan's funded status reconciled with the amount included in the Company's balance sheet: December 31, ----------------- 2003 2002 ------- ------- (In thousands) Accumulated post-retirement benefit obligation: Retirees $ 842 $ 1,142 Fully eligible active plan participants 1,397 1,193 Other plan participants 2,629 2,164 ------- ------- $ 4,868 $ 4,499 ======= =======
Years Ended December 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (In thousands) Plan assets at fair value $ -- $ -- $ -- ------- ------- ------- Accumulated post-retirement benefit obligation at beginning of year 4,499 3,652 3,633 Service cost 262 209 222 Interest cost 250 250 268 Actuarial (gain) loss (31) 525 (352) Benefit payments (112) (137) (119) ------- ------- ------- Accumulated post-retirement benefit obligation at end of year 4,868 4,499 3,652 ------- ------- ------- Accumulated post-retirement benefit obligation in excess of plan assets 4,868 4,499 3,652 Unrecognized net gain from past experience different from that assumed and from changes in assumptions 421 306 860 Unrecognized net obligation at transition (989) (1,099) (1,208) ------- ------- ------- Unfunded accrued post-retirement benefit expense $ 4,300 $ 3,706 $ 3,304 ======= ======= =======
The following table sets forth the discount rate used to determine benefit obligations: December 31, ----------------- 2003 2002 ------- ------- Discount rate 6.00% 6.50% 44 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Net periodic post-retirement benefit expense included the following components:
Years Ended December 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (In thousands) Service cost - benefits attributed to service during the year $ 262 $ 209 $ 222 Interest cost on accumulated post-retirement benefit obligation 250 250 268 Amortization of transition obligation over 20 years 110 110 110 Amortization of gain (421) (306) (516) Asset gain deferred 393 277 508 ------- ------- ------- Net periodic post-retirement benefit cost $ 594 $ 540 $ 592 ======= ======= =======
The following table sets forth the discount rate used to determine net periodic benefit cost: Years Ended December 31, ----------------------------- 2003 2002 2001 ------- ------- ------- Discount rate 6.50% 7.00% 7.50% The following table sets forth the assumed health care cost trend rates: December 31, ----------------- 2003 2002 ------- ------- Health care cost trend rate assumed for next year 11.00% 9.00% Rate to which the cost trend is assumed to decline (the ultimate trend rate) 5.00% 5.00% Year that the rate reaches the ultimate trend rate 2013 2010 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The following table sets forth the effect on the amounts reported for the health care plan with a one-percentage-point change in assumed health care cost trends: December 31, 2003 ------------------------------- One Percentage One Percentage Point Increase Point Decrease -------------- -------------- (In thousands) Effect on total service and interest cost $ 21 $ (121) Effect on post-retirement benefit obligation 130 (783) Post-employment benefits are all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. Post-employment benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care benefits and life insurance coverage. 45 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) Stock Option Plans In 1997, the Company adopted a Stock Option Plan for Employees and in 2001, the Company adopted a Stock Option Plan for Directors. Options for up to 620,000 shares may be granted under these plans. Options become exercisable over a period of four years at a rate of 25% per year and expire after ten years. The table below shows the number of stock options that were outstanding at the beginning and end of each year, and how many were exercised, granted, forfeited or expired.
Years Ended December 31, ----------------------------------------------------------------------- 2003 2002 2001 --------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- -------- -------- -------- -------- Outstanding, beginning of year 360,125 $ 22.40 300,625 $ 20.95 159,500 $ 17.22 Granted 32,000 22.82 83,000 26.27 157,000 24.24 Exercised (16,500) 18.00 (17,875) 16.93 (12,375) 14.60 Forfeited (11,250) 22.82 (5,625) 19.16 (3,500) 20.94 -------- -------- -------- Outstanding, end of year 364,375 $ 22.64 360,125 $ 22.40 300,625 $ 20.95 ======== ======== ======== Exercisable, end of year 183,125 $ 21.10 122,000 $ 19.65 69,625 $ 17.23 ======== ======== ========
The following table summarizes information about stock options outstanding at December 31, 2003: Remaining Years in Exercise Number Contractual Number Price Outstanding Life Exercisable -------- ----------- ----------- ----------- $13.38 10,000 3.35 10,000 $20.75 16,000 4.12 16,000 $19.25 3,000 4.87 3,000 $17.38 7,750 5.04 7,750 $16.38 6,000 5.84 6,000 $15.06 13,500 5.92 13,500 $18.00 48,375 6.93 34,250 $22.44 34,000 7.68 16,500 $24.80 110,750 7.93 55,375 $26.21 32,000 8.32 8,000 $26.30 51,000 8.95 12,750 $22.82 32,000 9.31 -- -------- -------- 364,375 183,125 ======== ======== 46 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) A value at the time of grant was calculated for each option using the Black-Scholes option pricing model with an estimated average option life of five years and using the five-year averages of price volatility of the Company's common stock, dividend yield, and a risk-free rate equal to the five-year Treasury rate. The table below shows these assumptions and the weighted-average fair value of the options which were granted. Years Ended December 31, --------------------------------------- 2003 2002 2001 ------ ------ ------ (In thousands, except per share amounts) Weighted average volatility 28.01% 28.80% 28.82% Weighted average dividend 3.16% 3.08% 3.11% Weighted average risk-free rate 2.92% 3.60% 4.48% Weighted average fair value per share of options granted during the year $ 4.70 $ 5.90 $ 5.77 Stock Appreciation Rights The Company has also entered into stock appreciation rights agreements with selected employees who are paid the amount by which a certain number of shares exceeds its value at the time the agreement was entered into. Stock appreciation rights mature ten years after their issuance and are not ordinarily exercisable prior to maturity. Compensation expense applicable to stock appreciation rights is not material. No stock appreciation rights were exercisable at December 31, 2003. The table below shows the amount of stock appreciation rights which were outstanding at the beginning and end of each year, and how many were exercised, granted, forfeited, or expired.
Years Ended December 31, ------------------------------------------------------------------- 2003 2002 2001 -------------------- -------------------- -------------------- Weighted Weighted Weighted Average Average Average Price at Price at Price at Shares Issuance Shares Issuance Shares Issuance -------- -------- -------- -------- -------- -------- Outstanding, beginning of year 19,600 $20.11 20,900 $20.03 14,700 $17.82 Granted -- -- -- -- 6,900 24.52 Forfeited -- -- (1,300) $18.82 (700) 18.13 Exercised (200) $17.81 -- -- -- -- -------- -------- -------- Outstanding, end of year 19,400 $20.13 19,600 $20.11 20,900 $20.03 ======== ======== ========
The following table summarizes information about stock appreciation rights outstanding at December 31, 2003: Remaining Years in Price at Number Contractual Issuance Outstanding Life -------- ----------- ----------- $19.25 2,900 4.86 $16.38 3,700 5.84 $18.00 6,100 6.93 $24.52 6,700 7.97 -------- 19,400 ======== 47 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (7) DEPOSITS AND BORROWED FUNDS The following summarizes deposits and borrowed funds outstanding: December 31, ----------------------- 2003 2002 ---------- ---------- (In thousands) Deposits: Demand $ 251,313 $ 229,033 NOW 184,841 171,084 Money market 302,962 294,295 Other savings 97,136 88,503 Certificates of deposit greater than $100,000 56,459 37,344 Certificates of deposit $100,000 or less 112,390 121,961 ---------- ---------- Total deposits $1,005,101 $ 942,220 ========== ========== Maturities of time certificates of deposit as of December 31, 2003 are $92,558,000 in 2004, $31,370,000 in 2005, $6,957,000 in 2006, $37,239,000 in 2007, and $725,000 in 2008. The total amount of deposits from related parties at December 31, 2003 and 2002 was $21,202,000 and $19,365,000, respectively. December 31, ----------------------- 2003 2002 ---------- ---------- (In thousands) Borrowed funds: Federal Home Loan Bank (long- and short-term) $ 179,927 $ 371,450 Other short-term borrowings 23,088 21,391 Subordinated debt 5,000 5,000 ---------- ---------- Total borrowed funds $ 208,015 $ 397,841 ========== ========== The contractual maturities of borrowings from the Federal Home Loan Bank of Boston ("FHLBB") as of December 31, 2003, are $46,445,000 in 2004, $16,522,000 in 2005, $44,982,000 in 2006, $27,122,000 in 2007, $30,350,000 in 2008, and $14,506,000 in years thereafter. These borrowings bear fixed interest rates between 1.27% and 7.35% with a weighted average interest rate of 4.44%. The Company also has an IDEAL Way Line of Credit with the FHLBB. The unused balance at December 31, 2003 and 2002 was $5,000,000. These borrowings are collateralized by the Company's residential mortgage loans and securities. In addition, the Company established lines of credit of $7,000,000 and $2,500,000 for the purchase of federal funds from SunTrust Bank and Fleetbank, respectively. The Company may also borrow from the Federal Reserve Bank if necessary. Other short-term borrowings at December 31, 2003 and 2002 consisted of a demand note payable to the U.S. Treasury of $1,944,000 and $3,652,000, respectively, and securities sold subject to agreements to repurchase of $21,144,000 and $17,739,000, respectively, which mature overnight. The weighted average interest rate on these borrowings was .55% and .62% as of December 31, 2003 and 2002, respectively. These borrowings are collateralized by the pledge of securities. (See Note 2.) During the third quarter of 2001, CCBT Statutory Trust I was formed for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2031, callable at the option of the Company after July 31, 2006. Distributions on these securities are payable quarterly in arrears on the last day of April, July, October and January. 48 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (8) STOCKHOLDERS' EQUITY The Company (on a consolidated basis) and the Bank are required to meet certain regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. As of December 31, 2003 and 2002, management believes the Company and the Bank met all regulatory capital requirements and the Bank satisfied the requirements of the "well-capitalized" category under the Federal Deposit Insurance Corporation Improvement Act. Management believes that there have been no subsequent events or conditions that have affected the well-capitalized category of the Company or the Bank. For risk-based capital requirement purposes, some loan commitments, lines of credit and financial guarantees are subject to capital requirements in addition to assets shown on the balance sheet. The risk-based capital regulations assign one of four weights to assets -- 0%, 20%, 50% or 100%. Full capital must be maintained to support assets with 100% risk weight, with proportionally lower capital required for assets assigned a lower weight. For the periods presented, most of the investment securities are assigned a 20% risk weight, and residential mortgages are assigned a 50% risk weight. Most other assets are assigned to the 100% risk category. At December 31, 2003 and 2002, the net risk-weighted assets of the Company were $961,575,000 and $997,685,000, while the net risk-weighted assets of the Bank were $961,550,000 and $997,348,000. For purposes of total capital, stockholders' equity and all or a portion of the allowance for loan losses can be used to meet capital requirements. The allowance for loan losses used to meet risk-based capital requirements cannot be more than 1.25% of total risk-weighted assets. At December 31, 2003 and 2002, respectively, $12,028,000 and $12,384,000 of the allowance for loan losses could be used toward risk-based capital requirements. The risk-based capital ratio focuses on broad categories of credit risk. However, the ratio does not take account of many other factors that can affect financial condition. These factors include overall interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan portfolio concentrations, the quality of loans and investments, the effectiveness of loan and investment policies, and management's overall ability to monitor and control financial and operating risks. In addition to evaluating capital ratios, an overall assessment of capital adequacy must take into account each of these other factors, including, in particular, the level and severity of problem and adversely classified assets. In light of these other considerations, banks generally are expected to operate above the minimum risk-based capital ratio and additional requirements may be set by bank examiners. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. 49 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) The Company's and the Bank's actual and required capital amounts and ratios as of December 31, 2003 and 2002 are presented in the following table. Prompt corrective action provisions are not applicable to bank holding companies.
Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions -------------------- --------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- --------- ------- --------- ------- (Dollars in thousands) December 31, 2003: Total capital to risk weighted assets: Consolidated $ 127,040 13.2% $ 76,926 8.0% N/A N/A Bank 126,035 13.1 76,924 8.0 $ 96,155 10.0% Tier 1 capital to risk weighted assets: Consolidated 115,012 12.0 38,463 4.0 N/A N/A Bank 114,007 11.9 38,462 4.0 57,693 6.0 Tier 1 capital to average assets: Consolidated 115,012 8.7 52,943 4.0 N/A N/A Bank 114,007 8.6 52,942 4.0 66,177 5.0 December 31, 2002: Total capital to risk weighted assets: Consolidated $ 130,205 13.1% $ 79,815 8.0% N/A N/A Bank 129,478 13.0 79,788 8.0 $ 99,735 10.0% Tier 1 capital to risk weighted assets: Consolidated 117,821 11.8 39,907 4.0 N/A N/A Bank 117,094 11.7 39,894 4.0 59,841 6.0 Tier 1 capital to average assets: Consolidated 117,821 7.7 61,418 4.0 N/A N/A Bank 117,094 7.6 61,411 4.0 76,764 5.0
During the quarter ended March 31, 2003, the Company's Board of Directors authorized the repurchase of up to 200,000 shares of the Company's stock in the open market. Consistent with that authorization, the Company repurchased 187,100 shares during 2003, at an average cost of $23.03 per share. (9) CORE DEPOSIT INTANGIBLE The core deposit intangible arising from the acquisition of two branch banking offices in 2000, amounting to $8,572,000, is being amortized over 7 years on a straight-line basis. The accumulated amortization of the core deposit intangible is $4,287,000, $3,062,000 and $1,837,000 at December 31, 2003, 2002 and 2001, respectively. The related amortization expense amounted to $1,225,000 for each of the years ended December 31, 2003, 2002 and 2001. Estimated amortization expense for years 2004 through 2006 is $1,225,000 per year and $611,000 for 2007. 50 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (10) Income Taxes The provision for income taxes consisted of the following: Years Ended December 31, ------------------------------------ 2003 2002 2001 -------- -------- -------- (In thousands) Current federal provision $ 3,711 $ 7,713 $ 10,351 Current state provision 4,851 139 641 -------- -------- -------- Total current 8,562 7,852 10,992 -------- -------- -------- Deferred federal benefit (467) (127) (294) Deferred state benefit (156) (42) (76) -------- -------- -------- Total deferred (623) (169) (370) -------- -------- -------- Total provision $ 7,939 $ 7,683 $ 10,622 ======== ======== ======== The following reconciles the provision for income taxes with the statutory federal income tax amounts at a rate of 35%: Years Ended December 31, ---------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Tax at statutory rate $ 5,011 $ 7,743 $ 10,530 Reduction due to tax-exempt income (153) (165) (315) State taxes, net of federal tax benefit 3,051 63 367 Other, net 30 42 40 -------- -------- -------- Total provision $ 7,939 $ 7,683 $ 10,622 ======== ======== ======== The deferred income tax benefit results from the recognition of income or expense items in different periods for income tax purposes than for financial reporting purposes. Accordingly, the net deferred tax asset consisted of the following: December 31, -------------------- 2003 2002 -------- -------- (In thousands) Future bad debt deductions $ 5,317 $ 5,180 Unfunded accrued benefits 1,996 1,761 Write-down of securities 997 418 Unrealized loss on securities available for sale 618 759 Other 121 120 -------- -------- Gross deferred tax assets 9,049 8,238 -------- -------- Gain on sale of credit card merchant portfolio 743 703 Mortgage servicing rights 1,162 873 Other 1,090 1,090 -------- -------- Gross deferred tax liabilities 2,995 2,666 -------- -------- Net deferred tax asset $ 6,054 $ 5,572 ======== ======== 51 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) REIT tax assessment --On June 23, 2003, the Bank reached a settlement agreement with the Massachusetts Department of Revenue ("DOR") with respect to a tax assessment resulting from the DOR's disallowance of the Bank's deduction for state tax purposes of certain dividend distributions received by the Bank from its real estate investment trust ("REIT"). The Bank recorded net charges during the year of $2,317,000 representing settlement with the DOR, net of federal tax benefits. (11) OTHER COMMITMENTS AND CONTINGENCIES Loan commitments -- In the normal course of business, various commitments are entered into by the Company, such as standby letters of credit and commitments to extend credit, which are not reflected in the consolidated financial statements. Management does not anticipate any material losses as a result of these transactions. The Company had the following commitments outstanding: December 31, -------------------- 2003 2002 -------- -------- (In thousands) Standby letters of credit $ 962 $ 1,250 Commitments to extend credit at fixed rates 8,354 22,800 Other commitments to extend credit 216,592 214,250 -------- -------- Total commitments $225,908 $238,300 ======== ======== In the event that interest rates increase during the period of the commitment, commitments to extend credit at a fixed rate of interest could result in the extension of credit at less than a prevailing rate of interest, with accompanying loss of value to the Company. Although the commitments shown above are not carried on the balance sheet as loans, their risk is comparable to that of loans which are carried on the balance sheet. The Company evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential property and income producing commercial properties. In the event that no collateral is required, or the collateral proved to be of no value to the Company, the Company would be exposed to possible credit loss up to the maximum amount of these contingent liabilities. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses various derivative instruments for mortgage banking activities. These transactions involve both credit and market risk. Forward commitments to sell loans require the Company to make delivery at a specific future date of a specified amount, at a specified price or yield. At December 31, 2003, such commitments amounted to $4,438,000. Rate lock agreements with individual borrowers require the Company to originate a loan at a specific interest rate upon completion of various underwriting requirements. At December 31, 2003 and 2002, the Bank had $2,375,000 and $11,636,000, respectively, in outstanding rate lock agreements on mortgage loans that are intended to be sold. The fair value adjustsments for these derivative instruments is not material. Executive termination agreements -- The Bank has entered into special termination agreements with the President and certain senior executives. The agreements generally provide for certain monthly severance payments within a two-year period following a "change in control", as defined in the agreements. 52 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (12) DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires the disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The estimated fair values of the Company's financial instruments were as follows:
December 31, ------------------------------------------------- 2003 2002 ----------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- (In thousands) Financial assets: Cash and cash equivalents $ 63,724 $ 63,724 $ 60,798 $ 60,798 Securities 438,497 438,400 535,575 535,575 Net loans and loans held for sale 788,204 800,856 826,350 842,125 Accrued interest receivable 4,479 4,479 5,982 5,982 Financial liabilities: Deposits 1,005,101 1,010,842 942,220 948,325 Federal Home Loan Bank borrowings 179,927 187,537 371,450 383,409 Other short-term borrowings 23,088 23,088 21,391 21,391 Subordinated debt 5,000 5,008 5,000 5,004 Accrued interest payable 1,086 1,086 1,501 1,501
The carrying value of cash and cash equivalents, short-term borrowings and accrued interest approximate fair value because of the short maturity of these financial instruments. Fair values of securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Because no market exists for a significant portion of the Company's loans, fair value estimates were based on judgments regarding estimated future cash flows, current economic conditions, expected loss experience, risk characteristics of various kinds of loans, and other such factors. Estimated cash flows are discounted using current rates for similar loans. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, unrealized gains or losses are not expected to be realized. Fair values of deposits, Federal Home Loan Bank borrowings and subordinated debt have been determined by applying discounted cash flow techniques at replacement market rates. As required by SFAS No. 107, the fair value of deposits does not include the value of the ongoing relationships with depositors, sometimes referred to as the "core deposit intangible," although it is likely that some amount would be received for this relationship on an actual sale of deposits. Similarly, the fair value of loans does not include any value assigned to customer relationships. Fair values of commitments not reflected in the financial statements are not material because they are short term in nature and/or generally priced at variable interest rates. 53 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (13) EARNINGS PER SHARE The following reconciles the calculation of basic and diluted earnings per share: Average Net Shares Per Share Income Outstanding Amount -------- ----------- --------- (In thousands) Year Ended December 31, 2003: Basic earnings per share $ 6,377 8,463 $ 0.75 Effect of dilutive stock options -- 25 -- -------- --------- -------- Diluted earnings per share $ 6,377 8,488 $ 0.75 ======== ========= ======== Year Ended December 31, 2002: Basic earnings per share $ 14,440 8,613 $ 1.68 Effect of dilutive stock options -- 36 (0.01) -------- --------- -------- Diluted earnings per share $ 14,440 8,649 $ 1.67 ======== ========= ======== Year Ended December 31, 2001: Basic earnings per share $ 19,464 8,613 $ 2.26 Effect of dilutive stock options -- 34 (0.01) -------- --------- -------- Diluted earnings per share $ 19,464 8,647 $ 2.25 ======== ========= ======== For the years ended December 31, 2003 and 2002, options applicable to 83,000 and 24,000 shares, respectively, were anti-dilutive and excluded from the diluted earnings per share calculation. 54 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (14) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The table below shows supplemental financial data for each quarter in the years ended December 31.
Year Ended December 31, 2003 -------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (In thousands, except per share amounts) Interest income $ 16,052 $ 15,012 $ 13,951 $ 14,197 Interest expense 5,237 4,427 4,055 4,079 --------- --------- --------- --------- Net interest income 10,815 10,585 9,896 10,118 Losses on securities, net -- (1,692) -- -- Other non-interest income 6,685 5,833 5,793 4,862 Non-interest expense 12,203 11,256 11,865 13,207 Minority interest 18 29 35 (34) --------- --------- --------- --------- Income before income taxes 5,279 3,441 3,789 1,807 Provision (benefit) for income taxes 6,760 (967) 1,514 632 --------- --------- --------- --------- Net income (loss) $ (1,481) $ 4,408 $ 2,275 $ 1,175 ========= ========= ========= ========= Average shares outstanding - basic 8,563 8,451 8,420 8,420 Average shares outstanding - diluted 8,584 8,469 8,449 8,463 Net income (loss) per share - basic $ (0.17) $ 0.52 $ 0.27 $ 0.14 Net income (loss) per share - diluted $ (0.17) $ 0.52 $ 0.27 $ 0.14 Cash dividends declared per share $ 0.19 $ 0.19 $ 0.19 $ 0.19 Year Ended December 31, 2002 -------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (In thousands, except per share amounts) Interest income $ 19,197 $ 19,717 $ 19,623 $ 18,700 Interest expense 7,186 6,629 6,884 8,419 --------- --------- --------- --------- Net interest income 12,011 13,088 12,739 10,281 Gains (losses) on securities, net 1,679 962 538 (1,104) Other non-interest income 5,029 5,817 5,291 4,737 Non-interest expense 11,174 12,725 12,612 12,349 Minority interest (4) 148 17 (76) --------- --------- --------- --------- Income before income taxes 7,549 6,994 5,939 1,641 Provision for income taxes 2,502 2,459 2,034 688 --------- --------- --------- --------- Net income $ 5,047 $ 4,535 $ 3,905 $ 953 ========= ========= ========= ========= Average shares outstanding - basic 8,622 8,630 8,611 8,590 Average shares outstanding - diluted 8,657 8,671 8,645 8,623 Net income per share - basic $ 0.59 $ 0.52 $ 0.45 $ 0.11 Net income per share - diluted $ 0.58 $ 0.52 $ 0.45 $ 0.11 Cash dividends declared per share $ 0.19 $ 0.19 $ 0.19 $ 0.19
The fluctuations in the provision (benefit) for income taxes in the first and second quarters of 2003 are related to the accrual of the entire DOR assessment related to the REIT (see Note 10) in the first quarter and reversal of 50% of this accrual in the second quarter upon settlement with the DOR. Due to the seasonal nature of the economy in the Company's market area, demand deposits and business activity follow a somewhat seasonal cycle with their low point ordinarily being reached in February and their high point in September. As a result of this cycle, operating income has usually been at its high during the third quarter each year. In the 2002 fourth quarter, interest expense increased in a declining rate environment reflecting the Company's $1,900,000 prepayment penalty on Federal Home Loan Bank borrowings. 55 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Continued) (15) PARENT COMPANY FINANCIAL INFORMATION Condensed financial information for CCBT Financial Companies, Inc. is as follows: BALANCE SHEET December 31, --------------------- 2003 2002 --------- --------- (In thousands) ASSETS Cash in subsidiary $ 526 $ 437 Securities 25 25 Investments in subsidiaries 118,488 122,732 Other assets 634 455 --------- --------- Total assets $ 119,673 $ 123,649 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Subordinated debt $ 5,155 $ 5,155 Other liabilities 41 47 --------- --------- Total liabilities 5,196 5,202 Stockholders' equity 114,477 118,447 --------- --------- Total liabilities and stockholders' equity $ 119,673 $ 123,649 ========= ========= STATEMENTS OF INCOME Years Ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Interest income $ -- $ 3 $ 83 Interest expense 254 285 148 -------- -------- -------- Net interest expense (254) (282) (65) Gain on sale of securities -- -- 298 Non-interest expense (166) (132) (196) -------- -------- -------- Income (loss) before taxes, dividends and undistributed income from subsidiaries (420) (414) 37 Provision (benefit) for income taxes (143) (141) 13 Dividends from subsidiaries 11,008 6,416 2,100 Undistributed income (loss) from subsidiaries (4,354) 8,297 17,340 -------- -------- -------- Net income $ 6,377 $ 14,440 $ 19,464 ======== ======== ======== 56 CCBT FINANCIAL COMPANIES, INC. NOTES TO FINANCIAL STATEMENTS (Concluded) STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------------- 2003 2002 2001 -------- -------- -------- (In thousands) Cash flows from operating activities: Net income $ 6,377 $ 14,440 $ 19,464 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities -- -- (298) Undistributed (income) loss from subsidiaries 4,354 (8,297) (17,340) Other, net (184) (165) (82) -------- -------- -------- Net cash provided by operating activities 10,547 5,978 1,744 -------- -------- -------- Cash flows from investing activities: Purchase of securities -- -- (15) Sales, maturities and repayments of securities -- -- 2,765 Investment in subsidiaries -- -- (1,966) -------- -------- -------- Net cash provided by investing activities -- -- 784 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of subordinated debt -- -- 5,155 Proceeds from issuance of common stock 297 303 181 Purchase of treasury stock (4,308) (1,217) -- Cash dividends paid on common stock (6,447) (6,555) (6,204) -------- -------- -------- Net cash used by financing activities (10,458) (7,469) (868) -------- -------- -------- Net change in cash and cash equivalents 89 (1,491) 1,660 Cash and cash equivalents at beginning of year 437 1,928 268 -------- -------- -------- Cash and cash equivalents at end of year $ 526 $ 437 $ 1,928 ======== ======== ========
57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial disclosure. [None.] Item 9A. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as required by Exchange Act Rule 13a-15 as of December 31, 2003, determined the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken. 58 PART III Item 10. Directors and Executive Officers of the Registrant. OFFICERS All officers of the Company and Bank were elected to their positions on April 24, 2003 to serve until their successors are duly elected.
Date Appointed Age at Title and Area of to Present Date of Officer 12/31/03 Responsibility Position Employment -------------------------------------------------------------------------------------------------------------------- Stephen B. Lawson 62 President, Chief Executive Officer and Director 10/08/98 12/06/65 Robert T. Boon 49 Executive Vice President 01/04/01 04/01/85 John S. Burnett 57 Clerk 10/08/98 09/07/71 Nancy S. Hardaway 51 Executive Vice President 10/20/02 06/30/00 Robert R. Prall 60 Executive Vice President 01/04/01 06/01/93 Larry K. Squire 56 Executive Vice President 01/04/01 05/17/71 Phillip W. Wong 53 Executive Vice President/Chief Financial Officer 11/04/02 11/04/02 Business Experience During the Past Five Years ---------------------------------------------- Stephen B. Lawson President, Chief Executive Officer, 7/01/92 (Bank) President, CEO and Director, 10/08/98 (the Company) Robert T. Boon Chief Trust Officer 10/13/95 (Bank) Chief Investment Officer, 06/29/98 (Bank) Executive Vice President, 01/04/01 (Bank) John S. Burnett Vice President, 12/11/80 (Bank) Clerk, 10/08/98 (the Company) Nancy S. Hardaway Senior Vice President, 6/30/00 (Bank) Executive Vice President, Marketing, 10/20/02 (Bank) Director of Marketing & Sales, 3/01/99 (the Pinehills) Robert R. Prall Sr. V.P., Loan Administration, 6/01/93 (Bank) Chief Lending Officer, 1/01/97 (Bank) Executive Vice President, 01/04/01 (Bank) Larry K. Squire Chief Operating Officer, 9/15/95 (Bank) Executive Vice President, 01/04/01 (Bank) Phillip W. Wong Executive Vice President, CFO, 11/4/02 (Bank) Executive Vice President, CFO, 11/4/02 (the Company) Executive Vice President, CFO, 2/01/97 (Medford Bancorp, Inc.)
59 DIRECTORS The following table sets forth, as of December 31, 2003, information supplied by each person who is currently a Director of the Company with respect to such person's age, principal occupation for the past five years and the year in which the person began serving as a Director of the Company (or the Bank, prior to the reorganization into the holding company structure). DIRECTORS WHOSE TERMS WILL EXPIRE IN 2004 NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION ---- --- -------------- -------------------- John F. Aylmer 70 1982 Maritime consultant; attorney at law; Executive Director, Build America Committee (advocacy for U. S. shipbuilding); former state senator; former president, Massachusetts Maritime Academy. John Otis Drew 54 1982 Chairman, Board of Directors of the Bank since 1994 and of the Company since 1998; Principal/President, John A. Drew, Realtor (Hyannis, MA); Vice President, A. D. Makepeace Co.; President, Parker Mills, Inc., Real Estate Holding Company; President, Sassamon Holdings, Inc.; President, Wankinco River, Inc.; President, Tihonet Land & Development Company, Inc. DIRECTORS WHOSE TERMS WILL EXPIRE IN 2005 NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION ---- --- -------------- -------------------- George D. Denmark 69 1974 Retired; former President, Denmark, Inc., New Bedford, MA (Medical equipment firm). Daniel A. Wolf 46 2001 President and Director, Hyannis Air Service, Inc., d/b/a Cape Air/Nantucket Airlines; President and Director, Hyannis Air Leasing, Inc.; Director of the Bank since 1999. 60 DIRECTORS WHOSE TERMS WILL EXPIRE IN 2006 NAME AGE DIRECTOR SINCE PRINCIPAL OCCUPATION ---- --- -------------- -------------------- William R. Enlow 56 2000 Partner, law firm of Sorling, Northrup, Hanna, Cullen and Cochran, Ltd. (1988 - Present); Former Director Firstbank Illinois Corp, Marine Corporation (multi-bank holding companies); Director, Memorial Health System and Memorial Medical Center (Springfield, Illinois); Board Member Springfield School District 186. Stephen B. Lawson 62 1992 President, Chief Executive Officer of the Bank since 1992. President, Chief Executive Officer of the Company since 1998. Audit Committee Financial Expert The Company does not have a financial expert serving on the audit committee of the Board of Directors. Although the Company has been searching for a director candidate who would qualify as a financial expert, the Company has suspended this search due to the impending merger with Banknorth. Code of Ethics The Company has adopted a code of ethics applicable to its CEO and its principal accounting and financial officer and is available, free of charge, by contacting the Company's Human Resource department at 508-394-1300. Section 16a Beneficial Ownership Reporting Compliance Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and Regulations of the Securities and Exchange Commission (the "SEC"), the Company's executive officers and directors must file reports of ownership and changes in ownership with the SEC and the Nasdaq Stock Market, Inc. and furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, no executive officer or director of the Company failed to timely file any such reports. Item 11. Executive Compensation. Executive officers of the Company currently receive no compensation in their capacities as executive officers of the Company but are compensated as employees of the Bank. I. Summary Compensation Table The following table sets forth information concerning the compensation for services rendered in all capacities during the three fiscal years through 2003 earned by the President and Chief Executive Officer, and the four other most highly compensated executive officers of the Bank whose total compensation exceeded $100,000. Mr. Lawson is also President and Chief Executive Officer of the Company. 61
Long Term Compensation Annual Compensation Awards --------------------------------------- ------------ Other Securities Compen- Underlying Name and Principal Position Year Salary ($) Bonus ($) sation ($) (1) Options (#) --------------------------- ---- ---------- --------- ------------- ------------ Stephen B. Lawson 2003 $353,600 $17,680 $22,730 -0- President/ 2002 353,600 35,360 22,775 10,000 Chief Executive Officer 2001 340,000 64,600 19,181 12,500 Robert T. Boon 2003 154,704 12,648 22,661 -0- Executive Vice President 2002 147,000 33,160 22,775 5,000 Personal Financial Services 2001 140,010 49,004 19,181 11,000 Nancy S. Hardaway (2) 2003 139,100 7,890 17,306 -0- Executive Vice President 2002 111,955 27,345 17,171 5,000 Marketing Robert R. Prall 2003 148,066 14,953 19,184 -0- Executive Vice President 2002 146,600 23,110 22,776 5,000 Business Financial Services 2001 141,539 49,349 19,181 8,000 Phillip W. Wong (3) 2003 185,000 44,240 -0- -0- Executive Vice President and 2002 28,522 28,875 -0- 5,000 Cashier Chief Financial Officer
(1) The Bank maintains a Profit Sharing Retirement Plan covering substantially all employees following two years of service. Each year, the Bank contributes an amount equal to 8% of each participant's base compensation plus an amount equal to 4.3% of base compensation over one-half the social security wage base. (2) Ms. Hardaway was appointed to this position October 24, 2002. (3) Mr. Wong was appointed to this position November 4, 2002. His bonus for 2003 includes $25,740 representing 1,000 shares of Company common stock received November 14, 2003, at a market price of $25.74. His bonus for 2002 includes $25,875 representing 1,000 shares of Company common stock received November 7, 2002, at market price of $25.875. Executive Officers also receive group insurance benefits available generally to all employees and other personal benefits not in excess of 10% of cash compensation. II. Stock Options Granted in Fiscal 2003 No stock options were granted during 2003 to Executive Officers. III. Option Exercises and Year-End Value Table The following table sets forth information concerning the number of options exercised during 2003 by each executive officer of the Company and/or the Bank listed below, the number of exercisable options and unexercisable options they held at December 31, 2003, and the value of unexercised in-the-money options they held as of such date. On December 8, 2003, the Company entered into an Agreement and Plan of Merger ("Agreement") with Banknorth Group, Inc., subject to regulatory approval and approval by the Company's shareholders at a Special Meeting. If the Agreement is approved and the Merger consummated, all of the unexercisable options in the table below will become exercisable as of the effective date of the Merger. 62
Number of Shares Underlying Value of Unexercised In Shares Unexercised Stock Options the Money Stock Options as Acquired on Value as of year-end of year-end(1) Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable ---------------------------------------------------------------------------------------------------------------- Stephen B. Lawson -0- -0- 34,375/15,625 $547,219/$160,094 Robert T. Boon 3,250 21,671(2) 11,250/10,500 $139,928/$109,450 Nancy S. Hardaway -0- -0- 7,000/8,000 $84,475/$80,675 Robert R. Prall -0- -0- 21,250/8,750 $340,175/$89,988 Larry K. Squire -0- -0- 16,625/6,875 $248,469/$73,769 Phillip W. Wong -0- -0- 1,250/3,750 $10,813/$32,438
(1) Based on closing price of $34.95 per share on December 31, 2003. (2) Cashless exercise of 2,500 options at strike price of $18.00 and 750 options at strike price of $15.0625, and market prices of $23.981 (1,500 shares) and $23.998 (1,750 shares) per share, February 4, 2003. Change of Control Agreements In connection with the formation of the holding company structure, the Bank and the Company entered into amended and restated Change in Control Agreements with Messrs. Lawson and Squire (each, a "Key Executive"), effective February 11, 1999, to include the Company as a party to such agreements and to amend the definition of change in control to conform to the definitions included in the Federal Securities Laws. On June 15, 2000, and April 1, 2001, November 22, 2002, and May 22, 2003, the bank entered into similar agreements with Robert R. Prall, Robert T. Boon, Phillip W. Wong, and Nancy S. Hardaway (also "Key Executives"), respectively. Under the terms of the amended and restated Change in Control Agreements, each Key Executive is entitled to receive his base salary (offset by any compensation from a new employer) for a certain period of time if, after a change of control of the Company or the Bank has occurred, the Key Executive's employment is terminated other than for cause (as defined in the Change in Control Agreement), or the Key Executive terminates his employment following: (i) his demotion; (ii) a reduction in base salary; (iii) exclusion from any incentive program for which the Key Executive was previously eligible or in which other executives with comparable duties participate; or (iv) a change in location of the Key Executive's principal place of employment by more than 50 miles. In general, a Change in Control under the agreements occurs (i) upon a Change in Control of either the Company or the Bank as defined under the Securities Exchange Act of 1934 or (ii) under the Change in Bank Control Act; (iii) if any person becomes the direct or indirect beneficial owner of 50% or more of any class of securities of the Company; (iv) individuals who constitute the Board of Directors of the Company on February 11, 1999, (June 15, 2000, in Mr. Prall's agreement; April 1, 2001, in Mr. Boon's agreement; November 22, 2002, in Mr. Wong's agreement; May 23, 2003, in Ms. Hardaway's agreement) cease to constitute the majority thereof (with certain exceptions); (v) a merger or the sale of substantially all the assets of the Company, in which the Company is not the resulting entity; or (vi) a proxy contest by a stockholder to force a transaction in which the stock of the Company is exchanged for or converted into cash, property or securities not issued by the Company. The benefits under the Change in Control Agreements continue for a period of 24 months for Ms. Hardaway and Messrs. Boon, Prall, Squire, and Wong, and 36 months for Mr. Lawson. The benefits under these agreements only become payable following termination after a Change in Control (as defined in the agreements); the Change in Control Agreements do not serve as employment agreements. Board of Directors Compensation The Board of Directors of the Company held 13 meetings during fiscal year 2003, in addition to meetings conducted as the Company's Audit Committee. The Board of Directors of the Bank held 13 meetings during fiscal year 2003. Compensation for Directors of the Company is $10,000 per quarter, with Mr. Drew, as Chairman, receiving an additional $2,500 per quarter. Directors of the Bank who are not Directors of the Company receive $7,000 per quarter. Neither the Company nor the Bank pays a separate fee to its Directors for service on Committees. All of the Directors of the Company attended at least 75% of the aggregate of scheduled meetings of the Company's Board of Directors, meetings of the Bank's Board of Directors, and the meetings of the committees of which they are members. 63 At their 2001 Annual Meeting, shareholders approved the 2001 Directors' Option Plan. Under the plan, 220,000 shares of the common stock of the Company are available for options grants. On April 26, 2001, options to purchase 5,000 shares of common stock of the Company were awarded to each continuing or newly-elected director of the Company who was not employed by the Company or by the Bank (Messrs. Aylmer, Denmark, Drew, Enlow, and Wolf), and options to purchase 2,500 shares of common stock of the Company were awarded to each continuing or newly elected director of the Bank who was not also a director of the Company. On the date of each Annual Meeting beginning in 2002, options to purchase 4,000 and options to purchase 2,000 shares of the common stock of the Company were and will be automatically awarded to each continuing or newly elected non-employee director of the Company and the Bank, respectively. 64 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. OWNERSHIP BY MANAGEMENT AND OTHER STOCKHOLDERS The following table sets forth certain information with respect to the number of shares of the Company's common stock beneficially owned as of February 20, 2004, by beneficial owners of more than 5% of the common stock, and by the Directors and the Executive Officers of the Company.
Principal Shareholders Amount and Nature of Beneficial Ownership Number of Shares Owned ------------------------------------------ Percent of Sole voting Shared CCBT and voting and Common investment investment Stock Beneficial Owner power (1) power (2) Total Outstanding ---------------- ------------ ------------ ----------- ----------- Beneficial owner of more than 5%: Trustees of the Abel D. Makepeace Trust Box 151 Wareham, MA 02571 Zelinda M. Douhan 6,800 548,720(3) 555,520(3) 6.51% Christopher Makepeace 47,900 727,220(3) 775,120(3) 9.09% Thomas Otis, Jr. (4) 207,884 548,720(3) 756,604(3) 8.87% Directors and Executive Officers: John F. Aylmer 8,382 900 9,282 0.11% Robert T. Boon 11,450 738 12,188 0.14% George D. Denmark 17,457 0 17,457 0.20% John Otis Drew (5) 7,500 3,499 10,999 0.13% William R. Enlow 5,643 200 5,843 0.07% Nancy S. Hardaway 7,000 0 7,000 0.08% Stephen B. Lawson 38,375 18,461 56,836 0.67% Robert R. Prall 24,290 160 24,450 0.29% Larry K. Squire 18,476 891 19,367 0.23% Daniel A. Wolf 4,912 0 4,912 0.06% Phillip W. Wong 5,250 0 5,250 0.06% All directors and executive officers 148,735 24,849 173,584 2.03% as a group (11 persons)
---------- (1) Includes shares of CCBT common stock subject to stock options exercisable as of February 20, 2004, or which will become exercisable within 60 days after that date, as follows: Mr. Aylmer, 3,500 shares; Mr. Boon, 11,250 shares; Mr. Denmark, 2,500 shares; Mr. Drew, 3,500 shares; Mr. Enlow 3,500 shares; Ms. Hardaway, 7,000 shares; Mr. Lawson, 34,375 shares; Mr. Prall, 21,250; Mr. Squire, 16,625 shares; Mr. Wolf, 3,500 shares; Mr. Wong, 1,250 shares; and all directors and executive officers as a group, 108,250 shares (2) Where applicable, includes shares owned by spouses, minor children, other relatives living in an owner's home or in estates or trusts in which they may be deemed to have beneficial ownership but for which they disclaim such beneficial ownership. Also includes interests in shares of CCBT common stock held in the ESOP, as follows: Mr. Boon, 738 shares; Mr. Lawson, 1,261 shares; Mr. Prall, 160 shares; and Mr. Squire, 891 shares. (3) Includes a total of 548,720 shares held in the Abel D. Makepeace Trust, voting authority for which is shared by Ms. Douhan and Messrs. Makepeace and Otis. (4) Mr. Otis is the uncle of Mr. Drew, a director. (5) Mr. Drew is a beneficiary of the Abel D. Makepeace Trust but disclaims any voting or investment power over shares of CCBT common stock held by the trust. 65 Item 13. Certain Relationships and Related Transactions. Certain Directors and Officers of the Company and the Bank and members of their immediate family are at present, as in the past, customers of the Bank and have transactions with the Bank in the ordinary course of business. In addition, certain of the Directors are at present, as in the past, also directors, officers or stockholders of corporations or members of partnerships that are customers of the Bank and have transactions with the Bank in the ordinary course of business. Such transactions for the Directors and Officers of the Company and the Bank and their families and with such corporations and partnerships were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other features unfavorable to the Bank. Item 14. Principal Accountant Fees and Services. The firm of Wolf & Company, P.C. served as the Company's independent public accountants for the year ended December 31, 2003. Audit Fees. The aggregate fees billed or to be billed by Wolf & Company, P.C., for professional services rendered for the audit of the Company's annual financial statements for 2003 and 2002 and reviews of the financial statements included in the Company's Forms 10-Q for 2003 and 2002 are approximately $147,000 and $130,000, respectively. Audit Related Fees. Wolf & Company, P.C. did not bill any audit related fees for 2003 and 2002. Tax Fees. In 2003, Wolf & Company, P.C., billed or will bill approximately $25,000 in fees related to tax compliance, tax advice and tax planning related to 2003 and billed $15,000 for miscellaneous tax matters related to 2002. All Other Fees: In 2002, Wolf & Company, P.C., billed approximately $8,000 for internal audit assistance related to 2002. Audit Committee Pre-Approval Policies and Procedures The Audit Committee must pre-approve any non-audit related engagements performed by its principal accountant/external auditor. The Audit Committee's review/approval is for the express purpose of determining that any additional non-audit services rendered by its principal accountant/external auditor is compatible with their ability to maintain their independence. None of the fees in the above four categories for 2003 relate to services performed under the de minimis exception. No hours were expended by other than full-time, permanent employees of Wolf & Company on the audit of CCBT's financial statements for the 2003 fiscal year. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) (1) See "Financial Statements Index" on page 28 of this Form 10-K. (2) Schedules other than those listed in the Financial Statements Index have been omitted since they either are not required or the information required is included in the financial statements or the notes thereto. (3) The following is a complete list of Exhibits filed or incorporated by reference as part of this Form 10-K. 66 Exhibit Description 2.1 Plan of Reorganization and Acquisition dated as of October 8, 1998 between the Company and the Bank (Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K filed with the SEC on February 11, 1999) 2.2 Agreement and Plan of Merger, dated as of December 8, 2003, between Banknorth Group, Inc. and the Company (Incorporated by reference to Exhibit 2.1 of the Form 8-K, dated as of December 8, 2003, filed by Banknorth Group, Inc.). 3.1 Restated Articles of Organization of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1999 that was filed with the SEC on November 15, 1999) 3.2 Amended By-laws of the Company (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 30, 1999 that was filed with the SEC on November 15, 1999 4.1 Specimen certificate for shares of Common Stock of the Company (Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for the year ended December 31, 1999) 10.1 Amended and Restated Special Termination Agreement with Stephen B. Lawson. (Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.2 Amended and Restated Special Termination Agreement with Noal D. Reid. (Incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.3 Amended and Restated Special Termination Agreement with Larry K. Squire. (Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.4 Change of Control Agreement with Robert T. Boon. (Incorporated by reference to Exhibit 10.1 on Form 10-Q for the quarter ended March 31, 2001 that was filed with the SEC on May 15, 2001) 10.5 Amended and Restated Change of Control Agreement with Robert R. Prall. (Incorporated by reference to Exhibit 10.2 on Form 10-Q for the quarter ended March 31, 2001 that was filed with the SEC on May 15, 2001) 10.6 CCBT Financial Companies, Inc. Stock Option Plan (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed with the SEC on February 18, 1999) 10.7 Cape Cod Bank and Trust Company Employee Stock Ownership and Plan and Trust, as amended. 10.8 CCBT Financial Companies, Inc. 2001 Directors' Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Form S-8 filed on July 17, 2001, No. 333-65222) 10.9 Change in Control Agreement with Nancy S. Hardaway. (Incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Q for the quarter ended June 30, 2003 that was filed with the SEC on August 13, 2003) 67 10.10 Change in Control Agreement with Phillip W. Wong. (Incorporated by reference to Exhibit 10.2 to the Company's report on Form 10-Q for the quarter ended June 30, 2003 that was filed with the SEC on August 13, 2003) 10.11 Form of Shareholder Agreement between certain shareholders of CCBT and Banknorth (Incorporated by reference to Annex A to Exhibit 2.1 of the Form 8-K, dated as of December 8, 2003, filed by Banknorth Group, Inc.). 10.12 Form of Consulting Agreement between Banknorth and John Otis Drew (Incorporated by reference to Annex B to Exhibit 2.1 of the Form 8-K, dated as of December 8, 2003, filed by Banknorth Group, Inc.). 21.1 Subsidiaries of the Company--The Company has two subsidiaries, Cape Cod Bank and Trust Company, N.A., a federally-chartered commercial bank and CCBT Statutory Trust I. Cape Cod Bank and Trust Company, N.A., has eight subsidiaries: Cape Dune Holdings Corp. and CCBT Securities Corp., both of which are securities corporations; CCB&T Brokerage Direct, Inc., an investment broker/dealer; TBM Development Corp., RAFS Ltd. Partnership, Osterville Concorde Ltd. and Osterville DC9 Ltd. Partnership, which are all inactive; and a 51% ownership interest in Murray & MacDonald Insurance Services, Inc., an insurance agency. 23.1 Consent of Wolf & Company, P.C. (Filed herewith) 31.1 Certification of President of CCBT Financial Companies, Inc., pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 31.2 Certification of Chief Financial Officer of CCBT Financial Companies, Inc., pursuant to rules 13(a)-15(e) and 5d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 32.1 Certification of President of CCBT Financial Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) 32.2 Certification of Chief Financial Officer of CCBT Financial Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) (b) Reports on Form 8-K: (1) The Company filed a report on Form 8-K on April 17, 2003 to file its press release, dated April 17, 2003, regarding first quarter 2003 earnings. (2) The Company filed a report on Form 8-K on June 24, 2003 to file a press release, dated June 23, 2003, announcing that the Company had entered into a settlement with the Massachusetts Department of Revenue regarding a disputed tax liability. (3) The Company filed a report on Form 8-K on July 17, 2003 to file its press release, dated July 17, 2003, regarding second quarter 2003 earnings. (4) The Company filed a report on Form 8-K on October 16, 2003 to file its press release, dated October 16, 2003, regarding third quarter 2003 earnings. (5) The Company filed a report on Form 8-K on December 15, 2003 to file its press release, dated December 9, 2003, announcing that the Company had entered into a merger agreement with Banknorth Group, Inc. (6) The Company filed a report on Form 8-K on January 29, 2004 to file its press release, dated January 29, 2004, regarding fourth quarter 2003 earnings. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) CCBT FINANCIAL COMPANIES, INC. ------------------------------ By (Signature and Title)* /s/ STEPHEN B. LAWSON. President and Chief Executive Officer ------------------------------------------------------------ Date March 11, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ PHILLIP W. WONG, Executive Vice President and Chief Financial Officer ------------------------------------------------------------------------- Date March 11, 2004 SIGNATURES OF THE BOARD OF DIRECTORS /s/ STEPHEN B. LAWSON /s/ GEORGE D. DENMARK --------------------------------- -------------------------------- Stephen B. Lawson George D. Denmark /s/ JOHN OTIS DREW /s/ JOHN F. AYLMER --------------------------------- -------------------------------- John Otis Drew, Chairman John F. Aylmer /s/ DANIEL A. WOLF /s/ WILLIAM R. ENLOW --------------------------------- -------------------------------- Daniel A. Wolf William R. Enlow Date March 11, 2004 69