-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C3COo3QnxoNEs1cEjDTXd0KTTv/3v16TpTA6nhmiPDuHr4V64mIP7kx3H2UXmVaE C+fLsDjr8GAoU/BDOhQFFg== 0000927016-99-001051.txt : 19990325 0000927016-99-001051.hdr.sgml : 19990325 ACCESSION NUMBER: 0000927016-99-001051 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCBT BANCORP INC CENTRAL INDEX KEY: 0001074972 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043437708 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-72565 FILM NUMBER: 99570255 BUSINESS ADDRESS: STREET 1: 307 MAIN STREET CITY: HYANNIS STATE: MA ZIP: 02601 BUSINESS PHONE: 5087608323 MAIL ADDRESS: STREET 1: 307 MAIN STREET CITY: HYANNIS STATE: MA ZIP: 02601 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998--Commission File No. 000-25381 ---------------- CCBT BANCORP, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 307 Main Street, Hyannis, 02601 Massachusetts (Zip Code) (Address of principal executive office) (Registrant's telephone #, incl. area code): 508-394-1300 ---------------- 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 NASDAQ National Association of Securities Dealers, 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. (1) [X] Yes [_] No and (2) [_] Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the $17.75 price on February 26, 1999, on the Nasdaq National Market was $155,935,010. Although Directors and executive officers of the registrant were assumed to be "affiliates" of the registrant for the purposes of this calculation, this classification is not to be interpreted as an admission of such status. As of December 31, 1998, 9,061,064 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the CCBT Bancorp, Inc. Definitive Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on April 22, 1999 are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business. CCBT Bancorp, Inc. ("Bancorp" or the "Registrant") was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 at the direction of the Board of Directors and management of Cape Cod Bank and Trust Company (the "Bank") for the purpose of becoming a bank holding company for the Bank. On February 11, 1999, Bancorp became the holding company for the Bank by acquiring 100% of the outstanding shares of the Bank's common stock in a 1:1 exchange for Bancorp common stock (the "Reorganization"). Currently, Bancorp's business activities are conducted primarily through the Bank. The main office of Bancorp is located at 307 Main Street, Hyannis, Barnstable County, Massachusetts. Cape Cod Bank and Trust Company is the main operating subsidiary of Bancorp and is a state-chartered commercial bank with trust powers, organized under the laws of the Commonwealth of Massachusetts. The present Bank is the result of a merger between the Hyannis Trust Company and the Cape Cod Trust Company in 1964 and a subsequent merger with the Buzzards Bay National Bank in 1974. The main office of Cape Cod Bank and Trust Company is located at 307 Main Street, Hyannis, Barnstable County, Massachusetts. There are 25 other banking offices located in Barnstable County, Massachusetts. The Bank is a member of the Federal Deposit Insurance Corporation but is not a member of the Federal Reserve System. At December 31, 1998, the Bank employed 339 people on a full- time basis and another 61 people on a part-time basis. Cape Cod Bank and Trust Company is the largest commercial bank headquartered in Barnstable County. The Bank's market area is heavily dependent on the tourist and vacation business on Cape Cod. It offers a complete range of commercial banking services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. During the past five years, there has been no significant change in the principal markets or the banking services offered by the Bank. The Bank has not merged with or acquired the business of any other bank or entity since 1974. The Bank receives substantially all of its deposits from and makes substantially all of its loans to individuals and businesses on Cape Cod, although the Bank has purchased some loans on properties outside its market area. The Bank's principal sources of revenue are loans and investments which accounted for 81% of the Bank's gross income during 1998. Of the remaining portion, 2% was received from service charges. The balance was derived from Trust Department income and other miscellaneous items. Banking services for individuals include checking accounts, regular savings accounts, NOW accounts, money market deposit accounts, certificates of deposit, club accounts, mortgage loans, consumer loans, safe deposit services, trust services, discount brokerage and investment services. In the latter category, the Bank does a major business in acting as agent to purchase U.S. Government securities for its customers. The Bank also owns and maintains 30 automated teller machines which are connected to the TX, AMEX, CIRRUS, NYCE, EXCHANGE, and PLUS networks. Trust department services include estate, trust, tax returns, agency, investment management, discount brokerage, custodial services, and IRA accounts. The Bank has no involvement in foreign countries and does not derive any of its income from foreign sources. Supervision and Regulation General. Bancorp is a Massachusetts corporation and a bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. Bancorp is also subject to the jurisdiction of the Massachusetts Commissioner of Banks. As a bank holding company, Bancorp's activities are limited to the business of banking and activities closely related or incidental to banking. Bancorp may not directly or indirectly acquire the ownership or control of more than 5 percent of any class of voting shares or substantially all of the assets of any company that is not engaged in activities closely related to banking 2 and also generally must provide notice to or obtain approval of the Federal Reserve Board in connection with any such acquisition. As a Massachusetts-chartered commercial bank, the Bank is subject to regulation and examination by the Commissioner of Banks of The Commonwealth of Massachusetts ("Commissioner"). The Massachusetts statutes and regulations govern, among other things, lending and investment powers, deposit activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings, and payment of dividends. The Bank is also subject to state regulatory provisions covering such matters as issuance of capital stock, branching, and mergers and acquisitions. Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures the Bank's deposit accounts up to $100,000 per depositor. As a state-chartered, FDIC- insured nonmember bank, the Bank is subject to regulation, examination, and supervision by the FDIC. Federal Reserve Board Regulations. Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including the Bank, to maintain reserves against their transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the amount of the institution's interest-bearing assets. Federal Securities Laws. Upon consummation of the Reorganization, the reporting obligations of the Bank under the Securities Exchange Act of 1934 ("Exchange Act") , as administered by the FDIC, were replaced with substantially identical obligations of Bancorp under the Exchange Act, as administered by the Securities and Exchange Commission ("SEC"). In connection with the Reorganization, the Bank deregistered the Bank's common stock under the Exchange Act. Proposed Legislation. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and modifications of restrictions on, the business of the Bank or Bancorp. It cannot be predicted whether any legislation currently being considered will be adopted or how such legislation or any other legislation that might be enacted in the future would affect the business of the Bank or Bancorp. EXECUTIVE OFFICERS OF THE REGISTRANT All officers were elected to their positions on October 8, 1998 to serve until the annual meeting on April 22, 1999 and until their successors are duly elected.
Age at Title and Area of Date Appointed Date of Officer 12/31/98 Responsibility to Present Position Employment ------- -------- ----------------------------------------------- ------------------- ---------- Stephen B. Lawson.. 57 President, Chief Executive Officer and Director 10/08/98 12/06/65 John S. Burnett.... 52 Clerk 10/08/98 9/07/71 Noal D. Reid....... 54 Chief Financial Officer and Treasurer 10/08/98 10/16/72
3
Business Experience During The Past Five Years ---------------------------------------------- Stephen B. Lawson.... Executive Vice President, Trust, 12/12/85 (Bank) President, Chief Executive Officer, 7/01/92 (Bank) President, CEO and Director, 10/08/98 (Bancorp) John S. Burnett...... Secretary of the Corporation, 8/31/78 (Bank) Vice President, 12/11/80 (Bank) Clerk, 10/08/98 (Bancorp) Noal D. Reid......... Executive Vice President/Treasurer, 12/12/85 (Bank) Chief Financial Officer and Treasurer, 9/15/95 (Bank) Chief Financial Officer and Treasurer, 10/08/98 (Bancorp)
Item 2. Properties. A. Properties held in fee--Banking Offices of Cape Cod Bank and Trust Company: 1) 307 Main Street, Hyannis--Main Offices 2) 835 Main Street, Osterville--Branch Office 3) 536 Main Street, Harwichport--Branch Office 4) 1095 Route 28, South Yarmouth--Branch Office 5) 40 Main Street, Orleans--Branch Office 6) Shank Painter Road, Provincetown--Branch Office 7) 121 Main Street, Buzzards Bay--Branch Office 8) 119 Route 6A, Sandwich--Branch Office 9) Route 6A and Underpass Road, Brewster--Branch Office 10) 700 Route 6A, Dennis--Branch Office 11) Jones Road, Falmouth--Branch Office 12) 693 Main Street, Chatham--Branch Office 13) Main Street, Wellfleet--Branch Office None of the above offices is subject to mortgage liens or any other material encumbrance. The main office is located in Hyannis, Massachusetts, and is a modern, two-story brick building located on approximately two acres of land. The Harwichport office and the Buzzards Bay office are somewhat larger than the remaining offices, having formerly been the main office of the Cape Cod Trust Company and the Buzzards Bay National Bank prior to merger. The Bank also owns a house in Meredith, New Hampshire, one in Orlando, Florida, and one in Killington, Vermont which are used as vacation sites by its employees. B. Rental of Bank Premises of Cape Cod Bank and Trust Company: The land on which the Hyannis Airport Rotary Office is located is rented from the Barnstable Municipal Airport as a tenancy at will for $53,067 per year. The banking office located in Pocasset on the corner of MacArthur Boulevard and Barlow's Landing Road is leased from Paul J. Mederios for $25,000 per year plus taxes and other expenses under a lease expiring in 2005. A banking office at the intersection of Route 28 and Camp Opechee Road, Centerville is leased for $52,500 in 1999 and an increase of $2,500 per year plus taxes and other expenses under a lease expiring in 2008 with right to renew for an additional fifteen year period. The Route 134, South Dennis branch office is leased from Chamberlain Realty for $44,000 per year until 2001 and $22,000 in 2002 plus taxes and other expenses. The banking office at Skaket Corners, Orleans is leased from Skaket Associates for $50,916 in 1999; $58,554 in 2000, 2001 and 2002; $67,337 in 2003, 2004 and 2005; and $77,437 in 2006 and 2007 plus taxes and other expenses under a lease expiring in 2007. The Bank also operates 4 a Customer Service Center which is leased from the Davenport Realty Trust, South Yarmouth for $111,972 per year plus taxes and other expenses until 2011 and $27,993 in 2012 under a lease expiring in 2012 with the right to renew for an additional ten-year period. The banking office located in the Village Green Shopping Center on Brackett Road, North Eastham is leased from Alan G. Vadnais for $2,400 in 1999 expiring on 3/31/99. The office located at 763 Main Street, Falmouth is leased from RFB Realty Trust for $42,000 through 2001 and $24,500 in 2002 with a lease expiring September, 2002 with the option of renewing the lease for two additional five-year periods. The Bank also rents a building next door to the Customer Service Center from Davenport Realty Trust, South Yarmouth for $76,200 in 1999 to 2011 and $19,050 in 2012. In addition, the Bank also rents office spaces from Stop & Shop for $408,000 per year under a lease expiring in 1999 and $204,000 in 2000. The Bank also pays rent of $24,000 in 1999, 2000, and $11,000 in 2001 for Automated Teller Machines (ATMs). Item 3. Legal Proceedings. Bancorp is not involved in any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. On December 4, 1998, a special meeting of the stockholders of the Bank (the "Special Meeting") was held to consider and vote upon the Reorganization. A brief description of the vote is incorporated herein by reference to the Bank's proxy statement for the Special Meeting, filed as an exhibit to Bancorp's Current Report on Form 8-K filed with the SEC on February 11, 1999. The Reorganization was approved by more than 71% of the stockholders eligible to vote. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. CCBT Bancorp, Inc.'s and, prior to the Reorganization, the Bank's Common Stock is quoted on the Nasdaq National Market System under the symbol "CCBT". The table below shows the high and low trading prices of the stock for each quarter in the past two years and the dividends declared each quarter, adjusted for the two-for-one stock distribution made August 7, 1998. According to Bancorp's transfer agent, there were approximately 1,100 stockholders of record as of December 31, 1998. The number of holders of record does not reflect the number of persons or entities who or which held their stock in nominee or "street" name through various brokerage firms or other entities.
1998 1997 ------------------------------------ ------------------------------------- First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter -------- -------- -------- -------- ---------- -------- -------- -------- Market price: High...... $ 22 7/16 $ 22 3/8 $ 24 $ 20 3/4 $ 13 15/16 $ 15 $ 17 1/4 $ 20 1/2 Low............... $ 19 1/8 $ 19 5/8 $ 17 1/4 $ 15 1/2 $ 10 3/4 $ 13 3/8 $ 14 1/4 $ 17 5/8 Dividends declared per share.................. $.12 $.12 $.13 $.13 $.105 $.105 $.105 $.105
5 Item 6. Selected Consolidated Financial Data.
1998 1997 1996 1995 1994 ------------ ---------- ---------- ---------- ---------- (Dollar amounts in thousands except per share amounts) Total assets............ $ 1,177,530 $ 973,105 $ 817,884 $ 646,911 $ 528,438 Stockholders' equity.... 83,542 75,636 66,603 59,601 53,087 Net interest income..... 37,767 36,907 32,650 29,156 25,574 Provision for loan losses................. -- -- -- -- 1,200 Non-interest income..... 17,036 20,174 13,874 13,649 12,320 Non-interest expense.... 34,196 35,642 30,985 28,631 27,062 Provision for income taxes.................. 8,050 8,190 6,070 5,391 1,930 Net income.............. 12,557 13,249 9,468 8,783 7,703 Book value per share.... $ 9.22 $ 8.35 $ 7.35 $ 6.59 $ 5.86 Basic earnings per share(1)............... 1.39 1.46 1.05 .97 .86 Diluted earnings per share.................. 1.38 1.46 1.05 .97 .86 Cash dividends per share.................. $ .50 $ .42 $ .35 $ .28 $ .09 Return on average assets................. 1.15% 1.45% 1.26% 1.47% 1.43% Return on average stockholders' equity... 15.8% 18.7% 15.2% 15.6% 15.5%
- -------- (1) Based on average shares outstanding: 9,061,064 in 1998 and in 1997; 9,052,434 in 1996; 9,042,740 in 1995; and 9,033,236 in 1994. (Adjusted for two-for-one stock distributions in 1996 and in 1998). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. This Form 10-K contains certain statements that may be considered forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, and changes in the assumptions used in making such forward-looking statements. The following discussion should be read in conjunction with the accompanying consolidated financial statements and selected consolidated financial data included within this report. Given that Bancorp's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this Item generally will refer to the investments and activities of the Company and the Bank, except where otherwise noted. Cape Cod Bank and Trust Company is a commercial bank with twenty-six banking offices located in Barnstable County, Massachusetts. As such, its principal business activities are the acceptance of deposits from businesses and individuals and the making of loans. The Bank also has a sizable Trust Department operation. The Bank's market area is heavily dependent on the tourist and vacation business on Cape Cod. 1998 COMPARED WITH 1997 Source and Use of Funds. Although at year end total deposits were $18,813,000 higher than a year earlier, an increase of 3%, on average total deposits in 1998 were $37,746,000 more than in 1997, an increase of 6%. All deposit categories were higher on average during the year. Demand deposits were higher by $14,928,000 on average, an increase of 11%. Management believes that this was the result of a continued strong economic climate in its market area. NOW account deposits were higher by $6,515,000 on average, an increase of 7%. Money market account deposits were higher by $746,000 on average, an increase of 1%. Other savings deposits were higher by $5,642,000 on average, an increase of 4%. Certificates of deposit of $100,000 or more were higher by $5,109,000 on average, an increase of 22%. Other time deposits were higher by $4,806,000 on average, an increase of 4%. Additional funds were raised from increased borrowings. Borrowings from the Federal Home Loan Bank were $124,397,000 higher on average, an increase of 82%, as the Bank continued to take long-term 6 advances to offset the interest-rate risk of fixed-rate commercial mortgage lending and increased the level of its short-term borrowing for the purpose of making high quality investments with short effective duration. Through these efforts, management is attempting to increase earnings without incurring significant additional risk. Other short-term borrowings were higher by $4,250,000 on average, an increase of 40%. At year end, total loans were $80,851,000 higher than a year earlier, an increase of 15%. On average for the year, they were $91,315,000 higher, an increase of 19%. Increases in some loan categories were partially offset by declines in others. Residential mortgage loans were higher by $96,590,000 on average, an increase of 53%, as the Bank continued to increase its market share in this line of business and retained the adjustable rate mortgages that it originated. Commercial mortgage loans were higher by $11,179,000, an increase of 5%. Commercial loans were lower by $613,000 on average, a decline of 1%. Industrial revenue bonds were lower by $712,000 on average, a decline of 30%, and consumer loans were lower by $15,129,000 on average, a decline of 53%, as the result of the sale of the Bank's credit card portfolio in the fourth quarter of 1997. The remaining funds were invested. Total investments were higher by $89,009,000 on average, an increase of 24%, to use the additional funds from Federal Home Loan Bank borrowings made for this purpose. Net Interest Income. Interest rates declined during 1998, which decreased the yields on the Bank's loans and investments. The cost of the Bank's deposits and borrowings also decreased, but by a smaller amount. Because of the positive spread between the return on earning assets and the cost of funds, the Bank's net interest income increased as a result of the overall growth in deposits, borrowings, loans and investments discussed above. Accordingly, net interest income increased by $860,000, an increase of 2%. Provision for Possible Loan Losses. Recoveries on loans previously charged off exceeded charge-offs and management determined that additions to the reserve for possible loan losses were unnecessary in 1998, notwithstanding the growth in the loan portfolio. Management believes that the reserve is adequate to cover the losses likely to result from loans in the current loan portfolio. See "Reserve for Loan Losses" below. Other Income and Expense. Non-interest income decreased by 16% because 1997 income had included the receipt of $1,900,000 on the settlement of a dispute with a software provider and a gain of $2,140,570 on the sale of the Bank's credit card portfolio. Non-interest expense decreased by 4% in large part because of lower expenses related to the conversion of the Bank's operating system. Provision for Income Taxes. As a result of lower income before income taxes, the provision for income taxes decreased by 2%. Net Income. As a result of the foregoing factors, net income for 1998 was $12,556,946, a decrease of 5% from the previous year. 1997 COMPARED WITH 1996 Source and Use of Funds. Although at year end total deposits were $75,751,000 higher than a year earlier, on average total deposits in 1997 were $66,061,000 more than in 1996, an increase of 11%. Money market deposit account balances were slightly lower but all other deposit categories were higher on average during the year. Demand deposits were higher by $13,092,000 on average, an increase of 11%. NOW account deposits were higher by $8,770,000 on average, an increase of 10%. Other savings deposits were higher by $8,444,000 on average, an increase of 6%. Certificates of deposit of $100,000 or more were higher by $9,767,000 on average, an increase of 71%, and other time deposits were higher by $26,058,000 on average, an increase of 29%. Additional funds were raised from increased borrowings. Borrowings from the Federal Home Loan Bank were $84,341,000 higher on average, an increase of 125%, while other short-term borrowings were higher by $2,521,000 on average, an increase of 31%. At year end, total loans were $77,678,000 higher than a year earlier. On average for the year they were $58,886,000 higher, an increase of 14%. Increases in some loan categories were partially offset by declines in others. In part as a result of purchasing some loan packages during the year, residential mortgage loans were higher by $57,999,000 on average, an increase of 47%. Commercial mortgage loans were higher by $9,008,000, an increase of 5%. Commercial loans were lower by $445,000 on average, a 7 decline of 1%. Industrial revenue bonds were lower by $772,000 on average, a decline of 24%, and consumer loans were lower by $6,904,000 on average, a decline of 20%. The remaining funds were invested. Total investments were higher by $108,764,000 on average, an increase of 41%. Net Interest Income. The general level of interest rates was slightly higher in 1997 than in 1996, which increased the yields on the Bank's investments. However, yields on loans were lower as a result of competitive pressures in commercial lending and low initial rates on adjustable rate residential mortgage loans. Because of the positive spread between the return on earning assets and the cost of funds, the Bank's net interest income increased as a result of the overall growth in deposits, borrowings, loans and investments discussed above. Accordingly, net interest income increased by $4,257,000, an increase of 13%. Provision for Possible Loan Losses. Non-performing assets continued to decline during the course of the year and management determined that additions to the reserve for possible loan losses were unnecessary in 1997, notwithstanding the growth in the loan portfolio. Management believes that the reserve is adequate to cover the losses likely to result from loans in the current loan portfolio. See "Reserve for Loan Losses" below. Other Income and Expense. Non-interest income increased by 41%, primarily due to the receipt of $1,900,000 on the settlement of a dispute with a software provider and a gain of $2,140,570 on the sale of the Bank's credit card portfolio. Non-interest expense increased by 15% because of increases in salaries and wages and costs associated with the conversion of the Bank's data processing system. Provision for Income Taxes. As a result of higher income before income taxes, the provision for income taxes increased by 35%. Net Income. As a result of the foregoing factors, net income for 1997 was $13,248,536, an increase of 40% from the previous year. MATURITY STRUCTURE OF ASSETS AND LIABILITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES As of December 31, 1998 fixed rate debt securities and loans mature as follows:
Fixed Rate --------------------------------- Debt Securities Loans --------------------------------- (Dollar amounts in thousands) Remaining maturity: Three months or less...................... $ 65,052 $ 11,376 Over three months through 12 months....... 61,097 26,378 Over one year through five years.......... 133,538 67,910 Over five years........................... 2,889 14,908 -------------- -------------- Totals.................................... $ 262,576 $ 120,572 ============== ==============
Included in fixed rate debt securities are $70,937,000 of collateralized mortgage obligations. These have been distributed based on estimates of their principal cash flows rather than their contractual final maturities. Included in three months or less of loans are $407,700 of customer account overdrafts that the Bank reclassified as loans. 8 The remaining maturity of time certificates of deposit as of December 31, 1998 was as follows:
Fixed Rate Certificates of Deposit ----------------------------------- $100,000 or more Less than $100,000 ---------------- ------------------ (Dollar amounts in thousands) Remaining maturity: Three months or less.................... $21,143 $ 39,348 Over three months through 12 months..... 6,955 64,398 Over one year through two years......... 1,086 9,188 Over two years through three years...... 987 7,562 Over three years through four years..... 128 -- Over four years through five years...... -- -- Over five years......................... -- -- ------- -------- Totals.................................. $30,299 $120,496 ======= ========
Other deposits may be withdrawn by the customer without notice or penalty. The rates paid thereon are reviewed each month and changed at the Bank's option as often as indicated by changing market conditions. The remaining maturity of borrowings from the Federal Home Loan Bank as of December 31, 1998 was as follows:
Fixed Rate FHLB Borrowings ----------------------------- (Dollar amounts in thousands) Remaining maturity: Three months or less........................... $ 3,300 Over three months through 12 months............ 113,125 Over one year through five years............... 157,455 Over five years................................ 11,627 -------- Totals......................................... $285,507 ========
Rates paid on other interest-bearing liabilities change daily. As of December 31, 1998, floating rate debt securities, FHLB stock and loans reprice as follows:
Floating Rate ----------------------------------- Debt Securities FHLB Stock Loans --------------- ---------- -------- (Dollar amounts in thousands) Repricing frequency: Quarterly or more frequently........... $230,002 $22,125 $114,354 Annually or more frequently, but less frequently than quarterly............. 3,443 -- 157,556 Every five years or more frequently, but less frequently than annually..... -- -- 188,460 Less frequently than every five years.. -- -- 31,019 -------- ------- -------- Totals................................. $233,445 $22,125 $491,389 ======== ======= ========
9
Floating Rate FHLB Borrowings ----------------------------- (Dollar amounts in thousands) Repricing frequency: Quarterly or more frequently................. $58,000 Annually or more frequently, but less frequently than quarterly................... -- Every five years or more frequently, but less frequently than annually.................... -- Less frequently than every five years........ -- ------- Totals....................................... $58,000 =======
Most of the Bank's residential mortgage loans are adjustable rate mortgages subject to interest rate caps. The Bank's investment securities are subject to market risk in the following ways. $255,570,000 of the investment securities owned as of December 31, 1998 are floating rate instruments tied to various indices, primarily the 3-month Treasury bill and LIBOR. Lesser amounts are tied to longer-term Treasury rates and other indices. Almost all of these floating rate instruments are subject to interest rate caps which range from 8% to 25%. If interest rates rise enough so that there is a significant possibility that a given security will become subject to its interest rate cap, the market value of that security will be reduced. This risk is greater to the extent that the remaining life of the investment is longer. The Bank's floating rate investments have an average life of about two years. Market risk may also result from the fact that various indices will not always move by the same amount when interest rates increase. This may cause securities tied to one index to perform less well than securities tied to other indices. Most of the remaining $262,576,000 of securities are fixed-rate collateralized mortgage obligations. Fixed-rate investments have market risk because their rate of return does not change at all with the general level of interest rates. An additional characteristic of CMOs is that their principal payments tend to slow when interest rates rise. If the fixed rate earned on the investment is lower than the new market rate, this can result in a decline in the value of these securities. Almost all of the Bank's fixed-rate CMOs have very short lives and have interest rates above current market levels, which reduces the market risk of these securities. The average life of the Bank's fixed-rate investments is less than one year. Reserve for Loan Losses The reserve for loan losses is an estimate of the amount necessary to provide an adequate reserve to absorb probable losses in current loan portfolio. This amount is determined by management based on a regular evaluation of the loan portfolio and considers such factors as loan loss experience and current economic conditions. The reserve is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. Some assumptions must be made in order to estimate the extent of losses likely to result from loans in the current portfolio. Although the local economy has been strong in recent years, the national economy may eventually enter into a recession after a long period of expansion. This could result in a decline in tourism on Cape Cod negatively affecting the Bank's borrowers and resulting in higher losses to the Bank. The Bank has experienced increased delinquency and charge-off rates in its consumer loan portfolio. A downturn in the local economy could adversely affect the ability of these and other borrowers to repay their loans. The Bank has also purchased packages of residential mortgage loans which contain loans on properties outside of the Bank's market area which may be subject to their own economic risks. These factors could result in greater losses than are currently expected, in which case, greater provisions for loan losses may prove to be necessary in future periods. On the other hand, if these factors do not result in significant deterioration to the quality of the loan portfolio, actual losses may be less than the reserve and the excess amount will be recovered by credits to income in future periods. In addition, various regulatory agencies periodically review the Bank's reserve for loan losses as part of their examination process. Such agencies may require the Bank to make additions to the reserve based upon judgements different from those of management. 10 Non-performing Assets and Loan Loss Experience Non-performing assets as of December 31, 1998, 1997 and 1996 were as follows:
1998 1997 1996 --------- --------- --------- (Dollar amounts in thousands) Nonaccrual loans............................. $ 7,468 $ 2,770 $ 3,679 Loans past due 90 days or more and still accruing.................................... -- -- 266 Property from defaulted loans................ -- 621 430 --------- --------- --------- Total non-performing assets.................. $ 7,468 $ 3,391 $ 4,375 ========= ========= ========= Restructured troubled debt performing in accordance with amended terms, not included above....................................... $ 478 $ 1,131 $ 3,439 ========= ========= =========
Accrual of interest income on loans is discontinued when it is questionable whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral held by the Bank. Accordingly, for loans which are shown as past due 90 days or more and still accruing, management expects that principal and interest will be repaid in full. In some instances, the Bank may also be repaid in full on nonaccrual loans. Loans are classified "substandard" when they are not adequately protected by the current sound worth and paying capacity of the debtor or of the collateral. At December 31, 1998, $8,694,951 of loans were included in this category, in addition to loans reported above. The Bank's loan classification system also includes a category for loans which are monitored for possible deterioration in credit quality. At December 31, 1998, $5,676,832 of loans were included in this category. However, it is probable that there will be losses on other loans which have not been specifically identified. The changes in the reserve for loan losses during the three years ended December 31, 1998 were as follows:
1998 1997 1996 --------- --------- --------- (Dollar amounts in thousands) Balance, beginning of year..................... $ 10,962 $ 11,417 $ 11,701 Provision for loan losses................... -- -- -- Charge-offs: Commercial loans........ (353) (400) (669) Construction mortgage loans.................. -- -- (39) Commercial mortgage loans.................. (86) (69) -- Industrial revenue bonds.................. -- -- -- Residential mortgage loans.................. (1) (119) -- Consumer loans.......... (166) (749) (637) Recoveries on loans previously charged off: Commercial loans........ 475 653 792 Construction mortgage loans.................. 47 -- 43 Commercial mortgage loans.................. 174 120 143 Industrial revenue bonds.................. -- -- -- Residential mortgage loans.................. 23 8 1 Consumer loans.......... 33 101 82 --------- --------- --------- Balance, end of year...... $ 11,108 $ 10,962 $ 11,417 ========= ========= =========
11
1998 1997 1996 --------- --------- --------- (Dollar amounts in thousands) Allocation of ending balance: Commercial loans............................ $ 1,578 $ 1,676 $ 2,872 Construction mortgage loans................. 705 521 792 Commercial mortgage loans................... 5,822 6,587 5,221 Industrial revenue bonds.................... 23 28 33 Residential mortgage loans.................. 2,460 1,610 1,484 Consumer loans.............................. 520 540 1,015 --------- --------- --------- Balance, end of year.......................... $ 11,108 $ 10,962 $ 11,417 ========= ========= =========
1998 1997 1996 ----- ---- ---- Ratio of net charge-offs (recoveries) to average loans outstanding.......................................... (0.03)% 0.09% 0.07%
Recoveries on loans previously charged off exceeded charge-offs and management determined that additions to the reserve for possible loan losses were unnecessary in 1998, notwithstanding the growth in the loan portfolio. Management believes that the reserve is adequate to cover the losses likely to result from loans in the current loan portfolio. Liquidity The Bank normally experiences a wide swing in its liquidity each year as a result of the seasonal nature of the economy in its market area. Liquidity is usually at its high in late summer and early fall and the annual low point is usually in the spring. Substantially all of the amount shown as cash and due from banks at year end was made up of checks and similar items in the process of collection or was needed to satisfy a requirement to maintain a portion of the Bank's deposits in an account at the Federal Reserve. Accordingly, it does not represent a source of liquidity for the Bank. In general, the Bank's investment securities could also be easily sold if necessary to meet liquidity needs. In that event, a gain or loss would be realized if the market value of the securities sold was not equal to their cost, adjusted for the amortization of premium or accretion of discount. The Bank can also borrow funds using investment securities as collateral. The Bank has a line of credit of $12,963,000 from the Federal Home Loan Bank of Boston. The Bank has also established a line of credit for the purchase of federal funds from a regional bank and may borrow from the Federal Reserve if necessary. Computer Processing in the Year 2000 The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. Much computer software has been written which allows the year in a date to be recognized and/or stored based on a two-digit number, i.e., "12/31/99" might be recognized as meaning December 31, 1999. The same is true of a variety of hardware devices with built-in clock-calendars, such as computers. In some cases, this could create problems at the turn of the century when "01/01/00" could, in some cases, be interpreted to mean January 1, 1900 rather than January 1, 2000. If such circumstances are not identified and corrected in advance, they could cause system failure or erroneous calculations of such items as interest income or expense. This could potentially have a significant impact on the Bank's ability to do business. For the Bank's internal computer processing, it was determined that it was necessary to replace some of its personal computers and to acquire more recent versions of certain software. $800,000 was spent for this purpose in 1998 and an additional $500,000 is expected to be spent in 1999. These costs will be capitalized and depreciated over the useful lives of the items purchased. 12 The Bank relies on outside vendors for much of its critical data processing. These vendors have assured the Bank that they are Year 2000 compliant. The Bank's testing has confirmed this, but testing is not yet complete. Approximately one-half of those systems that the Bank considers to be critical or high-risk have not yet been tested at December 31, 1998. The remaining testing is expected to be completed by March 31, 1999. Contingency plans are being developed for processing of the Bank's work in the event of the failure of any of these systems. The Bank is also dependent on other providers for the conduct of its business, most notably for electrical power and telecommunications. These providers could possibly be subject to Year 2000 problems which disrupted their services. Prolonged outages in these services could seriously affect the Bank's ability to conduct business as usual. Certain customers of the Bank may be subject to Year 2000 problems which affect their ability to do business. Among other things, this could result in reducing the ability of borrowers to repay their loans to the Bank. Year 2000 risk still needs to be evaluated for approximately one-half of the Bank's significant customer relationships. Other customers may withdraw funds from the Bank in anticipation of possible Year 2000 disruptions. The Bank has lengthened the maturities of certain of its borrowings and expects to continue to maintain a very short investment portfolio to meet any deposit outflows. It is anticipated that maturities in the investment portfolio will be far in excess of any such withdrawals, but the Bank may lose the ability to earn on these amounts for the period of time that they are out of the Bank. Please refer to the statement regarding "Forward-Looking Information" at the beginning of Management's Discussion and Analysis of Financial Condition and Results of Operations with regard to any forward-looking statements in this section. Although the Bank and Bancorp believe that they are responding appropriately to the Year 2000 issue, please note that neither the Bank nor Bancorp can guarantee their Year 2000 readiness nor that of material vendors and customers or the effectiveness of their contingency plans in the event of a failure in any of the Bank's computing systems. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; AVERAGE INTEREST RATES AND INTEREST SPREAD The average amount outstanding for certain categories of interest-earning assets and interest-bearing liabilities, and the interest income or expense and the average yields earned or rates paid thereon, are summarized in the following table for the three years ended December 31, 1998. Nonaccrual loan balances have been included in their respective loan categories which reduces the calculated yields. A portion of the income reported in certain of the asset categories is not subject to federal income tax, making it relatively more valuable. The computed yields shown have not been adjusted for taxable equivalency. As an indication of the amount of change in the general level of interest rates between years, the average rate on overnight federal funds traded among banks was 5.35%, 5.46% and 5.30% during 1998, 1997 and 1996, respectively. 13
Year ended December 31, ---------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ ---------------------------- ---------------------------- Interest Average Interest Average Interest Average Average Income or Yield or Average Income or Yield or Average Income or Yield or Balance Expense Rate Paid Balance Expense Rate Paid Balance Expense Rate Paid ---------- --------- --------- -------- --------- --------- -------- --------- --------- (Dollar amounts in thousands) Interest-earning assets: Commercial loans....... $ 72,623 $ 6,994 9.63% $ 73,236 $ 7,384 10.08% $ 73,681 $ 7,536 10.23% Commercial mortgage loans................. 218,052 20,316 9.32% 206,873 19,842 9.59% 197,865 19,221 9.71% Industrial revenue bonds................. 1,678 148 8.82% 2,390 179 7.49% 3,162 219 6.93% Residential mortgage loans................. 277,149 19,509 7.04% 180,559 14,214 7.87% 122,560 10,281 8.39% Consumer loans......... 13,183 1,291 9.79% 28,312 2,978 10.52% 35,216 3,612 10.26% U.S. Government agency CMOs.................. 256,334 14,141 5.52% 102,891 6,918 6.72% 87,581 5,361 6.12% Other U.S. Government agencies.............. 36,949 2,039 5.52% 72,771 4,571 6.28% 73,796 4,107 5.57% Other CMOs............. 53,619 3,110 5.80% 55,284 3,232 5.85% 25,001 1,504 6.02% State and municipal obligations........... 17,494 806 4.61% 17,065 760 4.45% 18,240 795 4.36% Other securities....... 98,795 5,624 5.69% 126,171 7,624 6.04% 60,800 3,809 6.26% ---------- ------- -------- ------- -------- ------- Total earning assets... 1,045,876 73,978 7.07% 865,552 67,702 7.82% 697,902 56,445 8.09% Total non-earning assets................ 47,457 49,650 54,924 ---------- ------- -------- -------- Total assets........... $1,093,333 $73,978 6.77% $915,202 $67,702 7.40% $752,826 $56,445 7.50% ========== ------- ======== ------- ======== ------- Interest-bearing liabilities: NOW account deposits... $ 105,864 $ 1,281 1.21% $ 99,349 $ 1,897 1.91% $ 90,579 $ 1,859 2.05% Money market account deposits.............. 147,623 5,071 3.44% 146,877 5,751 3.92% 146,947 5,815 3.96% Other savings deposits.............. 161,749 5,234 3.24% 156,107 6,021 3.86% 147,663 5,792 3.92% Certificates of Deposit of $100,000 or more... 28,572 1,525 5.34% 23,463 1,267 5.40% 13,696 739 5.40% Other time deposits.... 121,216 6,479 5.35% 116,410 6,400 5.50% 90,352 5,102 5.65% Borrowings from FHLB... 276,249 15,956 5.78% 151,852 8,961 5.90% 67,511 4,103 6.08% Other short-term borrowings............ 14,890 665 4.47% 10,640 498 4.68% 8,119 385 4.74% ---------- ------- -------- ------- -------- ------- Total interest- bearing............... 856,163 36,211 4.23% 704,698 30,795 4.37% 564,867 23,795 4.21% Total non-interest- bearing deposits...... 150,376 135,448 122,356 Other liabilities...... 7,237 4,142 3,428 Stockholders' equity... 79,557 70,914 62,175 ---------- ------- -------- ------- -------- ------- Total liabilities and stockholders' equity.. $1,093,333 $36,211 3.31% $915,202 $30,795 3.36% $752,826 $23,795 3.16% ========== ------- ======== ------- ======== ------- Net interest income, as % of total assets...... $37,767 3.45% $36,907 4.03% $32,650 4.34% ======= ==== ======= ===== ======= ===== Net interest income, as % of total earning assets................. 3.61% 4.26% 4.68% ==== ===== ===== Interest spread (the average yield earned on earning assets less the average rate paid on interest-bearing liabilities): 2.84% 3.45% 3.88% ==== ===== ===== Return on average assets................. 1.15% 1.45% 1.26% ==== ===== ===== Average stockholders' equity to average total assets................. 7.28% 7.75% 8.26% ==== ===== ===== Return on average stockholders' equity... 15.8% 18.7% 15.2% ==== ===== ===== Dividend payout ratio... 36.1% 28.7% 34.0% ==== ===== =====
14 CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN VOLUME AND RATE The effect on net interest income from changes in interest rates and in the amounts of interest-earning assets and interest-bearing liabilities is summarized in the following table. These amounts were calculated directly from the amounts included in the preceding table. The amount allocated to change in volume was calculated by multiplying the change in volume by the average of the interest rates earned or paid in the two periods. The amount allocated to change in rate was calculated by multiplying the change in rate by the average volume over the two periods. In 1998 lower interest rates reduced interest income by more than the decrease in interest expense because the Bank has more interest-earning assets and because sharply lower Treasury rates reduced the yields on loans and investments. Higher interest rates in 1997 increased the yields on investment securities but loan yields decreased and the Bank was less aggressive in gaining deposit market share.
1998 compared to 1997 1997 compared to 1996 ------------------------- -------------------------- Change Due to Increase Change Due to Increase (Decrease) (Decrease) ------------------------- -------------------------- Volume Rate Net Volume Rate Net ------- ------- ------- --------- ------- -------- (Dollar amounts in thousands) Interest income: Commercial loans...... $ (60) $ (330) $ (390) $ (45) $ (107) $ (152) Commercial mortgage loans................ 1,057 (583) 474 870 (249) 621 Industrial revenue bonds................ (58) 27 (31) (56) 16 (40) Residential mortgage loans................ 7,201 (1,906) 5,295 4,716 (783) 3,933 Consumer loans........ (1,536) (151) (1,687) (717) 83 (634) U.S. Government agency CMOs................. 9,391 (2,168) 7,223 983 574 1,557 Other U.S. Government agencies............. (2,113) (419) (2,532) (61) 525 464 Other CMOs............ (97) (25) (122) 1,796 (68) 1,728 State and municipal obligations.......... 19 27 46 (52) 17 (35) Other securities...... (1,606) (394) (2,000) 4,023 (208) 3,815 ------- ------- ------- -------- ------ -------- Total interest income............. 12,198 (5,922) 6,276 11,457 (200) 11,257 ------- ------- ------- -------- ------ -------- Interest expense: NOW account deposits.. 102 (718) (616) 174 (136) 38 Money market account deposits............. 27 (707) (680) (3) (61) (64) Other savings deposits............. 200 (987) (787) 328 (99) 229 Certificates of deposits of $100,000 or more.............. 274 (16) 258 527 1 528 Other time deposits... 261 (182) 79 1,452 (154) 1,298 Borrowings from FHLB.. 7,263 (268) 6,995 5,052 (194) 4,858 Other short-term borrowings........... 194 (27) 167 119 (6) 113 ------- ------- ------- -------- ------ -------- Total interest expense............ 8,321 (2,905) 5,416 7,649 (649) 7,000 ------- ------- ------- -------- ------ -------- Net interest income..... $ 3,877 $(3,017) $ 860 $ 3,808 $ 449 $ 4,257 ======= ======= ======= ======== ====== ========
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market risk is the risk of loss from adverse changes in market prices. In particular, the market prices of interest-earning assets may be affected by changes in interest rates. Since net interest income (the difference or spread between the interest earned on loans and investments and the interest paid on deposits and borrowings) is the Bank's primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Bank is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Bank's assets and liabilities. Interest rate risk is the exposure of the Bank's net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new 15 loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and refinancings, the carrying value of investment securities classified as available for sale and the flow and mix of deposits. The Bank's Asset/Liability Management Committee, comprised of senior management and several Directors, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The Committee meets monthly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. The Bank is subject to interest rate risk in the event that rates either increase or decrease. In the event that interest rates increase the value of the net assets of the Bank (the liquidation value of stockholders' equity) would decline. At December 31, 1998 it is estimated that an increase in interest rates of 200 basis points (for example, an increase in the prime rate from 7.75% to 9.75%) would reduce the value of the net assets of the Bank by $9,737,000. On the other hand, if interest rates were to decrease, the value of the net assets of the Bank would increase. Although the value of the net assets of the Bank is subject to risk if interest rates rise (but not if rates fall) the opposite is true of the Bank's earnings. If interest rates were to increase the net interest income of the Bank would increase because the Bank has more interest-earning assets than it has interest-bearing liabilities and much of this excess amount reprices within a short period of time. As a result, the Bank's net interest income is instead subject to a risk of a decline in rates. Not only are there fewer interest-bearing liabilities to reprice, but many of these liabilities could not reprice much lower because the rates paid on them are already low. Accordingly, if interest rates were to decrease by 200 basis points (for example, a decrease in the prime rate from 7.75% to 5.75%) it is estimated that the net interest income of the Bank would decrease by $4,183,000. On the other hand, if interest rates were to increase the net interest income of the Bank would increase. Item 8. Financial Statements and Supplementary Data. At December 31, 1998, CCBT Bancorp, Inc. was a wholly owned subsidiary of Cape Cod Bank and Trust Company. Accordingly, the consolidated financial statements of Cape Cod Bank and Trust Company and its subsidiaries are presented here. FINANCIAL STATEMENTS INDEX . Report of Grant Thornton, LLP as Independent Certified Public Accountants . Report of Ernst & Young, LLP as Independent Certified Public Accountants . Consolidated Statements of Condition at December 31, 1998, 1997 and 1996 . Consolidated Statements of Income for the Three Years Ended December 31, 1998 . Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998 . Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1998 . Consolidated Statements of Comprehensive Income for the Three Years Ended December 31, 1998 . Notes to Consolidated Financial Statements 16 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Cape Cod Bank and Trust Company We have audited the consolidated statement of condition of Cape Cod Bank and Trust Company as of December 31, 1998, and the related consolidated statements of income, cash flows, stockholders' equity, and comprehensive income for the year then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Cape Cod Bank and Trust Company as of December 31, 1997 and 1996 and for the years then ended were audited by other auditors whose report dated January 30, 1998, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1998 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cape Cod Bank and Trust Company as of December 31, 1998, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Boston, Massachusetts January 29, 1999 17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Cape Cod Bank and Trust Company We have audited the accompanying consolidated statements of condition of Cape Cod Bank and Trust Company as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, cash flows and comprehensive income for the years then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cape Cod Bank and Trust Company at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Boston, Massachusetts January 30, 1998 18 CONSOLIDATED STATEMENTS OF CONDITION
December 31, ------------------------------------------ 1998 1997 1996 ASSETS -------------- ------------ ------------ Cash and due from banks............ $ 29,383,227 $ 33,849,649 $ 20,720,015 -------------- ------------ ------------ Interest-bearing deposits in banks............................. 43,888 237,844 240,782 -------------- ------------ ------------ Securities available for sale at fair value (Note 2)............... 496,020,243 372,751,235 312,358,427 -------------- ------------ ------------ Federal Home Loan Bank stock, at cost.............................. 22,125,400 18,744,900 16,705,700 -------------- ------------ ------------ Loans (Notes 3 and 4) Commercial loans.................. 70,766,629 72,190,145 70,672,773 Construction mortgage loans....... 47,939,708 34,798,447 16,449,090 Commercial mortgage loans......... 207,860,415 198,944,076 197,056,394 Industrial revenue bonds.......... 1,344,336 1,882,600 2,885,318 Residential mortgage loans........ 254,320,484 203,461,595 132,475,131 Consumer loans.................... 11,588,705 15,902,887 32,767,662 Loans held for sale............... 18,140,522 3,930,152 1,125,640 -------------- ------------ ------------ Total loans....................... 611,960,799 531,109,902 453,432,008 Less: Reserve for loan losses..... (11,107,633) (10,962,345) (11,416,873) -------------- ------------ ------------ Net loans......................... 600,853,002 520,147,557 442,015,135 -------------- ------------ ------------ Premises and equipment (Note 5).... 12,847,002 12,776,994 13,090,868 Deferred tax assets................ 4,992,690 4,630,204 4,880,682 Current tax assets................. 177,720 -- -- Accrued interest receivable on securities........................ 4,067,975 3,749,980 2,102,156 Principal and interest receivable on loans.......................... 3,596,836 3,138,181 2,376,094 Mortgage servicing rights.......... 893,992 330,364 127,122 Assets in charitable trusts........ 1,000,000 1,000,000 1,000,000 Other assets....................... 1,528,022 1,747,807 2,267,212 -------------- ------------ ------------ Total assets...................... $1,177,530,161 $973,104,715 $817,884,193 ============== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits.................... $ 160,966,042 $147,278,175 $118,490,803 NOW account deposits............... 114,210,098 103,754,145 95,485,946 Money market account deposits...... 141,316,906 149,096,741 146,779,625 Other savings deposits............. 160,125,653 157,868,656 152,600,646 Certificates of deposit of $100,000 or more........................... 30,299,027 26,453,179 16,147,569 Other time deposits................ 120,979,249 124,633,590 103,828,855 -------------- ------------ ------------ Total deposits.................... 727,896,975 709,084,486 633,333,444 Borrowings from the Federal Home Loan Bank (Note 8)................ 343,506,683 171,295,274 102,685,085 Other short-term borrowings (Note 8)................................ 14,606,322 11,662,360 9,359,746 Current taxes payable.............. 255,080 178,325 275,953 Interest payable on deposits....... 1,060,045 1,255,127 1,078,374 Interest payable on borrowings..... 1,437,695 577,366 579,232 Post retirement benefits payable... 2,016,146 1,692,186 1,391,710 Employee profit sharing retirement and bonuses payable............... 1,783,350 787,553 1,409,532 Other liabilities.................. 1,425,465 935,744 1,167,929 -------------- ------------ ------------ Total liabilities................. 1,093,987,761 897,468,421 751,281,005 -------------- ------------ ------------ Commitments and contingencies (Notes 5 and 10) Stockholders' equity (Notes 6 and 9) Common stock, $2.50 par value Authorized: 12,000,000 shares Outstanding: 9,061,064 shares.... 22,652,660 11,326,330 11,326,330 Surplus........................... 13,903,294 25,229,624 25,229,624 Undivided profits................. 46,704,129 38,677,715 29,234,826 Accumulated other comprehensive income........................... 282,317 402,625 812,408 -------------- ------------ ------------ Total stockholders' equity........ 83,542,400 75,636,294 66,603,188 -------------- ------------ ------------ Total liabilities and stockholders' equity............. $1,177,530,161 $973,104,715 $817,884,193 ============== ============ ============
The accompanying notes are an integral part of these financial statements. 19 CONSOLIDATED STATEMENTS OF INCOME for the Three Years Ended December 31, 1998
1998 1997 1996 ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans............... $48,258,130 $44,597,302 $40,839,410 Taxable interest income on securities.... 23,773,180 21,681,389 13,894,468 Tax-exempt interest income on securities.............................. 740,344 759,957 794,063 Dividends on securities.................. 1,206,296 663,740 917,342 ----------- ----------- ----------- Total interest income..................... 73,977,950 67,702,388 56,445,283 ----------- ----------- ----------- INTEREST EXPENSE Interest on deposits..................... 19,589,900 21,335,764 19,307,349 Interest on borrowings from the Federal Home Loan Bank.......................... 15,955,929 8,961,486 3,712,583 Interest on other short-term borrowings.. 665,338 497,887 775,131 ----------- ----------- ----------- Total interest expense.................... 36,211,167 30,795,137 23,795,063 ----------- ----------- ----------- Net interest income....................... 37,766,783 36,907,251 32,650,220 Provision for loan losses (Note 4)........ -- -- -- ----------- ----------- ----------- Net interest income after provision for loan losses.............................. 37,766,783 36,907,251 32,650,220 ----------- ----------- ----------- NON-INTEREST INCOME Trust and Investment division fees....... 5,111,716 4,344,027 3,950,392 Credit card merchant fees................ 3,878,902 3,404,145 3,229,837 MoneyCard interchange fees............... 453,014 306,151 116,536 Service charges on deposit accounts...... 1,513,856 1,532,827 1,520,514 Return and overdraft charges............. 2,044,653 2,008,882 1,872,525 ATM fees................................. 612,677 529,441 219,366 Settlement from software provider (Note 13)..................................... -- 1,900,000 -- Net gain (loss) on sale of loans......... 353,958 115,834 (55,409) Residential mortgage marketing gain servicing rights........................ 686,537 236,577 137,671 Gain on sale of credit card portfolio.... -- 2,140,570 -- Net gain (loss) on sale of investment securities (Note 2)..................... 383,888 535,678 131,746 Other.................................... 1,996,687 3,119,424 2,750,482 ----------- ----------- ----------- Total non-interest income................. 17,035,888 20,173,556 13,873,660 ----------- ----------- ----------- NON-INTEREST EXPENSE Salaries and wages....................... 11,578,347 11,754,886 11,012,447 Employee benefits (Note 6)............... 4,707,206 4,577,627 4,436,349 Occupancy expense........................ 2,148,275 2,284,832 2,470,662 Equipment rental and expense............. 1,989,637 2,227,641 1,934,708 Credit card processing expense........... 3,275,084 3,197,436 2,932,946 Advertising and marketing expense........ 858,775 924,714 830,082 Printing and supplies.................... 876,808 945,835 1,141,094 Delivery and communication expense....... 1,390,952 1,316,440 1,094,235 Service charges correspondent banks...... 420,437 206,245 63,245 Directors' fees.......................... 329,300 324,854 295,263 Outside services......................... 4,578,965 4,075,618 2,098,680 ATM network expense...................... 407,686 293,427 388,418 Insurance expense........................ 336,143 336,252 259,022 Expenses from defaulted loans............ 120,777 116,275 153,365 Other.................................... 1,177,499 3,060,282 1,874,557 ----------- ----------- ----------- Total non-interest expense................ 34,195,891 35,642,364 30,985,073 ----------- ----------- ----------- Income before income taxes................ 20,606,780 21,438,443 15,538,807 Provision for income taxes (Note 7)....... 8,049,834 8,189,907 6,070,397 ----------- ----------- ----------- Net income................................ $12,556,946 $13,248,536 $ 9,468,410 =========== =========== =========== Average shares outstanding................ 9,061,064 9,061,064 9,052,580 Basic earnings per share (Notes 9 and 12)...................................... $ 1.39 $ 1.46 $ 1.05 Diluted earnings per share................ $ 1.38 $ 1.46 $ 1.05 Cash dividends declared................... .50 .42 .36
The accompanying notes are an integral part of these financial statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Years Ended December 31, 1998
1998 1997 1996 ------------- ------------- ------------- CASH PROVIDED BY OPERATING ACTIVITIES Net income....................... $ 12,556,946 $ 13,248,536 $ 9,468,410 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses....... -- -- -- Depreciation and amortization... 1,913,955 2,194,828 1,704,379 Net amortization of securities.. 1,979,750 (2,085,330) (307,656) Gain from Mortgage Servicing rights......................... (686,537) (236,577) (137,671) Amortization of deferred loan fees costs..................... 862,228 821,635 (18,445) Net gain on sale of investment securities..................... (383,888) (535,678) (131,746) Deferred (prepaid) income taxes.......................... (664,597) 214,136 98,019 Gain from settlement............ -- (1,900,000) -- Gain on sale of loans........... (353,958) (115,834) 55,409 Gain on sale of credit card portfolio...................... -- (2,140,570) -- Gain on sale of mutual funds held for trading............... -- (1,068,320) -- Net change in: Loans held for sale............. (14,210,369) (2,804,512) 806,459 Accrued interest receivable..... (776,650) (2,409,911) (1,467,487) Accrued expenses and other liabilities.................... 2,474,725 (378,801) 1,302,685 Other, net...................... 2,449,806 524,463 399,282 ------------- ------------- ------------- Net cash provided by operating activities...................... 5,161,411 3,328,065 11,771,638 ------------- ------------- ------------- CASH USED BY INVESTING ACTIVITIES Net increase in loans........... (159,465,444) (197,603,424) (55,619,727) Proceeds from sale of loans..... 93,135,361 121,319,852 12,988,808 Dispositions of property from defaulted loans................ 809,674 474,500 645,000 Purchase of mutual funds held for trading.................... -- (75,000,000) -- Proceeds from sale of mutual funds held for trading......... -- 76,068,320 -- Maturities of securities........ 490,955,326 289,317,822 166,738,525 Purchase of available for sale securities..................... (866,415,999) (680,844,675) (501,787,175) Sale of available for sale securities..................... 243,852,925 335,485,576 197,169,611 Purchase of premises and equipment...................... (2,130,960) (2,277,538) (4,166,119) ------------- ------------- ------------- Net cash used by investing activities...................... (199,259,117) (133,059,567) (184,031,077) ------------- ------------- ------------- CASH PROVIDED BY FINANCING ACTIVITIES Net increase in deposits........ 18,812,489 75,751,042 64,020,388 Net increase in borrowings from the Federal Home Loan Bank..... 172,211,409 68,610,189 93,298,788 Net increase in other short-term borrowings..................... 2,943,962 2,302,614 3,582,367 Cash dividends paid on common stock.......................... (4,530,532) (3,805,647) (3,216,678) ------------- ------------- ------------- Net cash provided by financing activities...................... 189,437,328 142,858,198 157,684,865 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents............ (4,660,378) 13,126,696 (14,574,574) Cash and cash equivalents at beginning of year............... 34,087,493 20,960,797 35,535,371 ------------- ------------- ------------- Cash and cash equivalents at end of year......................... $ 29,427,115 $ 34,087,493 $ 20,960,797 ============= ============= ============= Cash equivalents include amounts due from banks and federal funds sold. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest........................ $ 35,545,921 $ 30,620,250 $ 23,061,614 Income taxes.................... 9,476,298 5,540,921 5,603,982 Non-cash transactions: Additions to property from defaulted loans................ $ 188,900 $ 665,274 $ 975,000 Loans to finance OREO property.. 137,500 104,125 83,000
The accompanying notes are an integral part of these financial statements. 21 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Years Ended December 31, 1998
1998 1997 1996 ------------ ----------- ----------- COMMON STOCK Balance, beginning of year............ $ 11,326,330 $11,326,330 $ 5,663,165 Two-for-one stock distribution........ 11,326,330 -- 5,663,165 ------------ ----------- ----------- Balance, end of year.................. 22,652,660 11,326,330 11,326,330 ------------ ----------- ----------- SURPLUS Balance, beginning of year............ 25,229,624 25,229,624 25,204,873 Two-for-one stock distribution........ (11,326,330) -- -- Difference between cost and current value of ESOP stock allocated to em- ployees.............................. -- -- 24,751 ------------ ----------- ----------- Balance, end of year.................. 13,903,294 25,229,624 25,229,624 ------------ ----------- ----------- UNDIVIDED PROFITS Balance, beginning of year............ 38,677,715 29,234,826 28,646,259 Net income............................ 12,556,946 13,248,536 9,468,410 Cash dividends declared............... (4,530,532) (3,805,647) (3,216,678) Two-for-one stock distribution........ -- -- (5,663,165) ------------ ----------- ----------- Balance, end of year.................. 46,704,129 38,677,715 29,234,826 ------------ ----------- ----------- UNALLOCATED STOCK IN ESOP Balance, beginning of year............ -- -- (82,409) Allocated to employees................ -- -- 82,409 ------------ ----------- ----------- Balance, end of year.................. -- -- -- ------------ ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of year............ 402,625 812,408 169,025 ------------ ----------- ----------- Net other comprehensive income........ (120,308) (409,783) 643,383 ------------ ----------- ----------- Balance, end of year.................. 282,317 402,625 812,408 ------------ ----------- ----------- Total stockholders' equity, end of year............................... $ 83,542,400 $75,636,294 $66,603,188 ============ =========== ===========
The accompanying notes are an integral part of these financial statements. 22 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Years Ended December 31, 1998
1998 1997 1996 ----------- ----------- ----------- Net income............................. $12,556,946 $13,248,536 $ 9,468,410 ----------- ----------- ----------- Holding gains (losses) on securities available for sale.................... 177,084 (104,462) 1,177,836 Reclassification of gains on securities realized in income.................... (383,888) (535,678) (131,746) ----------- ----------- ----------- Net unrealized gains (losses).......... (206,804) (640,140) 1,046,090 Related tax effect..................... 86,496 230,357 (402,707) ----------- ----------- ----------- Net other comprehensive income......... (120,308) (409,783) 643,383 ----------- ----------- ----------- Comprehensive income................... $12,436,638 $12,838,753 $10,111,793 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Principles of consolidation--The accompanying consolidated financial statements include the accounts of the Bank and its wholly owned subsidiaries. All intercompany accounts have been eliminated upon consolidation in the presentation of the consolidated financial statements. Nature of operations--The Bank provides loans, deposit, trust and investment services to businesses and consumers located in southeastern Massachusetts. Use of estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and cash equivalents--All the amounts shown as cash and due from banks is made up of checks and similar items in the process of collection or as is needed to satisfy a requirement to maintain a portion of the Bank's deposits in an account at the Federal Reserve. Accordingly, it does not represent a source of liquidity for the Bank. Securities--Securities held for investment are stated at cost adjusted for amortization of premium and accretion of discount and the Bank has the positive intent and ability to hold those securities to maturity. Available for sale securities are securities which might be sold prior to maturity to meet needs for liquidity or for the purchase of alternative investments. These securities are stated at market. Unrealized gains and losses on such securities, if any, are credited or charged to stockholders' equity net of any related tax effect. Trading securities are securities which are bought and held principally for the purpose of selling them in the near term. At December 31, 1998, 1997, and 1996, the Bank did not own any trading securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Loans--Loans are reported at their principal outstanding, net of charge- offs. Loan fees, net of the direct cost of originating a loan, are deferred and taken into income over the life of the loan. Interest income on loans is recognized when accrued. Accrual of interest income on loans is discontinued when it is doubtful whether the borrower will be able to pay principal and interest in full and/or when loan payments are 60 days past due unless the loan is fully secured by real estate or other collateral held by the Bank. Interest previously accrued but not collected is reversed and charged against interest income at the time the related loan is placed on nonaccrual status. Interest collected on nonaccrual loans is credited to interest income when received. When doubt exists as to the ultimate collection of principal on a loan, the estimated loss is included in the provision for loan losses. Loans held for sale--Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Impaired loans--A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the 24 loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Mortgage servicing rights--On January 1, 1997, the Bank adopted Statement of Financial Accounting Standards No. 125 which requires that the fair value of the right to service loans be capitalized when the loans are sold to other investors and amortized against servicing income over the estimated life of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Reserve for loan losses--The reserve for loan losses is an estimate of the amount necessary to provide an adequate reserve to absorb probable losses in the current loan portfolio. This amount is determined by management based on a regular evaluation of the loan portfolio and considers such factors as loan loss experience and current economic conditions. Loan losses are charged against the reserve when management believes the collectibility of the principal is unlikely. Recoveries on loans previously charged off are credited to the reserve. The reserve is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. Property from defaulted loans--Property from defaulted loans is carried at the lower of the amount of the related loan or the estimated market value of the assets received, less estimated selling costs. Property from defaulted loans includes foreclosed properties where the Bank has actually received title or taken possession. Provisions or losses subsequent to acquisition, operating income and expenses, and gains or losses from the sale of properties are credited or charged to income, while costs relating to improving real estate are capitalized. Premises and equipment--Premises and equipment are reported at cost less accumulated depreciation. Depreciation is computed on a straight-line basis by charges to income in amounts estimated to recover the cost of premises and equipment over their estimated useful lives, which range between 3 and 8 years for furniture and fixtures and up to 40 years for Bank premises and leasehold improvements. Marketing expense--The Bank charges to marketing expense any advertising related expenses at the time they are due. Provision for income taxes--The provision for income taxes includes deferred income taxes arising as a result of reporting some items of revenue and expense in different years for tax and financial reporting purposes. Earnings per share--In 1997, the Bank adopted Statement of Financial Accounting Standards No. 128 which changes the method of calculating earnings per share and requires restatement of prior periods. This had no effect on earnings per share for any prior period shown. Reclassifications--Certain amounts in the 1996 and 1997 financial statements have been reclassified to conform to the 1998 presentation without effect on net income. New accounting pronouncements--Effective January 1, 1997, the Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers of Financial Assets and Extinguishment of Liabilities." This Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. However, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires the deferral of implementation as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions until years beginning after December 31, 1997. Adoption of SFAS No. 125 and SFAS No. 127 in 1998 did not have a significant effect on the Bank's financial position or results of operations. 25 In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 129, "Disclosure of Information About Capital Structure," which is effective for the Bank's 1998 financial statements. The Bank's disclosures comply with the provisions of this Statement. In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income, which is defined as all changes to equity except investments by and distributions to shareholders. Net income is a component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The Bank's financial statements comply with the provisions of this Statement. Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for the Bank's 1998 financial statements. This Statement establishes standards for reporting information about operating segments. An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. The Bank has determined that its business is comprised of a single operating segment and that SFAS No. 131 therefore has no impact on its financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which is effective for the Bank's 1998 financial statements. This Statement standardizes disclosure requirements for pensions and other postretirement benefits to the extent practicable. The Bank's disclosures comply with the provisions of this Statement. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Bank is required to adopt this Statement effective January 1, 2000. Through December 31, 1998, the Bank's use of derivative instruments has not been material. (2) Securities The adjusted cost and estimated market values of securities which the Bank considers to be available for sale were as follows:
December 31, 1998 ---------------------------------------- Gross Gross Estimated Adjusted Unrealized Unrealized Market Cost Gains Losses Value -------- ---------- ---------- --------- (Dollar amounts in thousands) U.S. Government agency CMOs.......... $266,397 $1,506 $ 850 $267,053 Other U.S. Government agencies....... 18,554 124 235 18,443 Other collateralized mortgage obliga- tions............................... 79,107 617 176 79,548 State and municipal obligations...... 16,416 -- -- 16,416 Other debt securities................ 115,061 138 638 114,561 FHLB stock........................... 22,125 -- -- 22,125 -------- ------ ------ -------- Totals............................. $517,660 $2,385 $1,899 $518,146 ======== ====== ====== ========
The net unrealized gain on these securities is included net of tax in stockholders' equity. The Bank's investment securities are subject to market risk in the following ways. $255,570,000 of the investment securities owned as of December 31, 1998 are floating rate instruments tied to various indices, primarily the 3-month Treasury bill and LIBOR. Lesser amounts are tied to longer-term Treasury rates and other indices. Almost all of these floating rate instruments are subject to interest rate caps which range from 8% to 25%. 26 The adjusted cost and estimated market values of securities which the Bank considered to be available for sale were as follows:
December 31, 1997 ---------------------------------------- Gross Gross Estimated Adjusted Unrealized Unrealized Market Cost Gains Losses Value -------- ---------- ---------- --------- (Dollar amounts in thousands) U.S. Government agency CMOs.......... $121,507 $657 $ 57 $122,107 Other U.S. Government agencies....... 82,371 87 68 82,390 Other collateralized mortgage obliga- tions............................... 64,540 198 107 64,631 State and municipal obligations...... 16,325 -- 3 16,322 Other debt securities................ 87,320 43 58 87,305 FHLB stock........................... 18,741 -- -- 18,741 -------- ---- ---- -------- Totals............................. $390,804 $985 $293 $391,496 ======== ==== ==== ========
The adjusted cost and estimated market values of securities which the Bank considered to be available for sale were as follows:
December 31, 1996 ---------------------------------------- Gross Gross Estimated Adjusted Unrealized Unrealized Market Cost Gains Losses Value -------- ---------- ---------- --------- (Dollar amounts in thousands) U.S. Government agency CMOs.......... $155,527 $1,014 $130 $156,411 Other U.S. Government agencies....... 44,311 53 39 44,325 Other collateralized mortgage obliga- tions............................... 70,394 379 62 70,711 State and municipal obligations...... 25,222 79 -- 25,301 Other debt securities................ 15,443 38 -- 15,481 FHLB stock........................... 16,835 -- -- 16,835 -------- ------ ---- -------- Totals............................. $327,732 $1,563 $231 $329,064 ======== ====== ==== ========
Gross proceeds from the sale of available for sale securities were $243,852,925 in 1998. Gross gains of $394,397 and gross losses of $10,509 were realized on those sales. Gross proceeds from the sale of available for sale securities were $271,238,838 in 1997. Gross gains of $562,228 and gross losses of $26,550 were realized on those sales. Gross proceeds from the sale of available for sale securities were $197,169,611 in 1996. Gross gains of $327,889 and gross losses of $196,143 were realized on those sales. The amount of income tax expense attributable to net gains in 1998, 1997 and 1996 was $161,584, $226,902 and $56,148, respectively. The adjusted cost and estimated market value of debt securities which the Bank considered to be available for sale at December 31, 1998 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Adjusted Estimated Cost Market Value -------------- ---------------- (Dollar amounts in thousands) Due in one year or less........................ $ 45,804 $ 45,846 Due after one year through five years.......... 60,672 60,742 Due after five years through ten years......... 79,833 79,629 Due after ten years............................ 331,351 331,929 -------------- -------------- Totals....................................... $ 517,660 $ 518,146 ============== ==============
27 At December 31, 1998, securities carried at $147,845,000 were pledged to secure public deposits and borrowings from the U.S. Treasury. Federal Home Loan Bank stock of $22,125,400 is pledged to secure FHLB borrowings. (3) Loans The Bank enters into banking transactions in the ordinary course of its business with directors, officers, principal stockholders and their associates, on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. The total amount of loans outstanding to Directors and Officers at December 31, 1998, 1997 and 1996 was $16,418,718, $15,937,340 and $13,244,549, respectively. During 1998, $21,798,603 in new loans were made to Directors and Officers and there were $21,317,225 in repayments. The total amount of deposits of Directors and Officers at December 31, 1998, 1997 and 1996 was $8,010,955, $8,413,028 and $4,751,376, respectively. Nonaccrual loans at December 31, 1998, 1997 and 1996 amounted to $7,468,000, $2,770,000 and $3,679,000, respectively. Gross income was reduced by $258,276 in 1998 because of the loss of income from these nonaccrual loans and others which were charged off during the year. The amount of restructured troubled debt which was performing in accordance with amended terms at December 31, 1998, 1997 and 1996 was $478,000, $1,131,000 and $3,439,000, respectively. For each of these years, the difference between the amount of income recorded on these loans and the amount of income that would have been recognized had the loans performed in accordance with their original terms was not material. Loans to finance other real estate owned in accordance to Statement of Financial Accounting Standards No. 66 for the years ended December 31, 1998, 1997 and 1996 was $137,500, $104,125 and $83,000, respectively. Included in the consumer loan totals for the years ended December 31, 1998, 1997 and 1996 are customer account overdrafts that the Bank reclassified as loans in the amounts of $407,700, $742,806 and $1,224,519, respectively. The Bank also has participated in loans with other entities. As of December 31, 1998, gross participation loans totaled $1,777,084 of which $1,001,080 was participated out. December 31, 1997 gross participation loans totaled $6,915,069 of which $3,344,963 was participated out. December 31, 1996 gross participation loans totaled $7,970,918 of which $3,783,369 was participated out. The Bank's business is primarily in southeastern Massachusetts, and many of the Bank's loan customers are involved in real estate construction or the hotel and restaurant industry. This can cause a number of them to be similarly affected by economic conditions. Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $122,908,000, $75,140,000 and $68,624,000 at December 31, 1998, 1997 and 1996, respectively. The fair value balance of capitalized servicing rights was determined using a discount rate of 8% and a prepayment speed of 7%. The following summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:
December 31, ----------------- 1998 1997 1996 ----- ----- ----- (Dollar amounts in thousands) Mortgage servicing rights capitalized........................ $ 687 $ 237 $ 138 ===== ===== ===== Mortgage servicing rights amortized.......................... $ 123 $ 33 $ 11 ===== ===== =====
28 (4) Reserve for Loan Losses The changes in the reserve for loan losses during the three years ended December 31, 1998 were as follows:
1998 1997 1996 ----------- ----------- ----------- Balance, beginning of year............. $10,962,345 $11,416,873 $11,701,258 Provision for loan losses.............. -- -- -- Charge-offs............................ (606,686) (1,336,521) (1,345,977) Recoveries on loans previously charged off................................... 751,974 881,993 1,061,592 ----------- ----------- ----------- Balance, end of year................... $11,107,633 $10,962,345 $11,416,873 =========== =========== ===========
The following is a summary of information pertaining to impaired loans:
1998 1997 1996 ---------- ---------- ---------- Impaired loans without a valuation allow- ance........................................ $ -- $ -- $ -- Impaired loans with a valuation allowance: Commercial loans........................... $ 537,661 $ 193,108 $ 361,081 Commercial mortgage loans.................. 2,277,262 986,323 518,745 Residential mortgage loans................. 474,000 -- 196,306 ---------- ---------- ---------- Total impaired loans..................... $3,288,923 $1,179,431 $1,076,132 ========== ========== ========== Valuation allowance related to impaired loans....................................... $ 592,006 $ 212,298 $ 193,704 Additional FASB 114 reserves on impaired loans....................................... 406,821 176,800 164,035 ---------- ---------- ---------- Total valuation allowance for impaired loans................................... $ 989,827 $ 389,098 $ 357,739 ========== ========== ========== Average investment in impaired loans......... $1,645,505 $1,086,660 $3,375,711 ========== ========== ========== Interest income recognized on impaired loans....................................... $ 309,131 $ 108,666 $ 337,546 ========== ========== ========== Interest income recognized on a cash basis on impaired loans.............................. $ 309,131 $ 108,666 $ 337,546 ========== ========== ==========
(5) Bank Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization of $10,593,000 at December 31, 1998, $9,205,000 at December 31, 1997, and $7,941,000 at December 31, 1996. Certain banking premises are leased under non-capitalized operating leases expiring at various dates through 2012. Annual rental expenses under these leases were $808,000 in 1998, $767,000 in 1997, and $733,000 in 1996. The total rental commitments under non-cancelable leases for future years are $5,023,000 not including amounts payable under consumer price index escalator provisions in three such leases which become effective in 1999 and later years. Annual commitments are $890,100 in 1999, $694,000 in 2000, $479,000 in 2001, $431,000 in 2002, $396,000 in 2003 and a total of $2,316,000 for the years 2004 through 2012. Certain of these leases also contain renewal options.
December 31, -------------------------- 1998 1997 1996 -------- ------- ------- Premises: Land.............................................. $ 1,390 $ 1,390 $ 1,390 Buildings......................................... 7,781 8,048 7,096 Leasehold improvements............................ 4,114 3,810 3,437 Equipment......................................... 11,102 9,399 9,833 -------- ------- ------- Accumulated depreciation.......................... (11,540) (9,870) (8,665) -------- ------- ------- $ 12,847 $12,777 $13,091 ======== ======= =======
29 Depreciation expense for the years ended December 31, 1998, 1997 and 1996 amounted to $1,780,000, $2,101,000 and $1,621,000, respectively. (6) Employee Benefits The Bank has a defined contribution Profit Sharing Retirement Plan covering substantially all employees following two years of service. Each year, the Bank contributes amounts equal to 8% of each participant's compensation plus 4.3% of compensation over one-half the social security wage base. Profit sharing retirement expense was $1,068,000 in 1998, $786,000 in 1997 and $745,000 in 1996. Also in 1998, 1997, and 1996, bonuses were accrued under the provisions of the Bank's Profit Incentive Plan totaling $706,000, $762,000 and $660,000, respectively. The Bank's Employee Stock Ownership Plan holds 44,600 shares of the Bank's common stock. In 1996, the remaining 9,146 shares were allocated to employees and $107,160 was recorded as expense. The Bank has an unfunded plan for providing medical and life insurance coverage for retired employees who meet age and service requirements. For an employee retiring at age 65 with 30 or more years of service, the Bank pays 100% of the cost of his or her medical insurance and 50% of the cost of the medical insurance of his or her dependents. The Bank also pays for the cost of life insurance in an amount between $5,000 and $25,000 based on the earnings of the employee and the number of years since retirement. Lesser benefits are provided for employees who retire at a younger age or with fewer years of service. The Bank's share of increases in the cost of providing post- retirement medical insurance is limited to 5% per year for employees who retire after 1993. Statement of Financial Accounting Standards No. 106 requires that the expected expense be recognized over the period that employees render the service making them eligible for this benefit rather than when the premiums are actually paid following retirement. S.F.A.S. No. 106 will increase the amount of expense over the transitional period during which expense will be charged for both the expense of current premiums and to build up a reserve of approximately $3,000,000 for future premiums. The following table sets forth the plan's funded status reconciled with the amount shown in the Bank's statement of condition at December 31, 1998, 1997 and 1996:
1998 1997 1996 ---------- ---------- ---------- Accumulated post-retirement benefit obliga- tion: Retirees................................. $ 796,448 $ 850,567 $ 737,035 Fully eligible active plan participants.. 564,518 430,087 390,504 Other plan participants.................. 1,629,512 1,508,428 1,572,669 ---------- ---------- ---------- 2,990,478 2,789,082 2,700,208 Plan assets at fair value.................. -- -- -- ---------- ---------- ---------- Accumulated post-retirement benefit obligation in excess of plan assets....... 2,990,478 2,789,082 2,700,208 Unrecognized net gain from past experience different from that assumed and from changes in assumptions.................... 563,568 550,854 449,102 Unrecognized prior service cost............ -- -- -- Unrecognized net obligation at transition.. (1,537,900) (1,647,750) (1,757,600) ---------- ---------- ---------- Unfunded accrued post-retirement benefit expense................................... $2,016,146 $1,692,186 $1,391,710 ========== ========== ==========
30 Net periodic post-retirement benefit for 1998, 1997 and 1996 included the following components:
1998 1997 1996 -------- -------- -------- Service cost--benefits attributed to service during the year................................ $153,799 $133,729 $148,301 Interest cost on accumulated post-retirement benefit obligation............................. 171,024 172,768 194,908 Actual return on plan assets.................... -- -- -- Amortization of transition obligation over 20 years.......................................... 109,850 109,850 109,850 Amortization of gain............................ (550,854) (449,102) (242,958) Asset gain deferred............................. 518,754 419,156 242,958 -------- -------- -------- Net periodic post-retirement benefit cost....... $402,573 $386,401 $453,059 ======== ======== ========
For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999; the rate was assumed to decrease gradually to 5% by 2003 and remain level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post- retirement benefit obligation as of December 31, 1998 by $47,517 and the aggregate service and interest cost components of net periodic post-retirement benefit cost for the year then ended by $3,564. The weighted-average discount rate used in determining the accumulated post- retirement benefit obligation was 6.5%. Post-employment benefits are all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. Post- employment benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling, and continuation of benefits such as health care benefits and life insurance coverage. In 1997, the Bank adopted a Stock Option Plan. Options on up to 400,000 shares may be granted under the plan. Options become exercisable over a period of four years at the rate of 25% per year and expire after 10 years. The Bank measures compensation cost for plans such as this using the intrinsic value based method of accounting prescribed by APB Opinion No. 25. Accordingly, no compensation cost was recognized on these options. The table below shows the number of stock options which were outstanding at the beginning and end of each year, and how many were exercised, granted, forfeited or expired.
1998 1997 1996 ----------------------- ----------------------- ----------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ ---------------- ------ ---------------- ------ ---------------- Outstanding, beginning of year................ 26,000 $13.38 -- -- -- -- Granted................. 35,000 $20.34 26,000 $13.38 -- -- Exercised............... -- -- -- -- -- -- Forfeited............... -- $17.06 -- -- -- -- ------ ------ --- Outstanding, end of year................... 57,000 $17.41 26,000 $13.38 -- -- ====== ====== ===
The following table summarizes information about stock options outstanding at December 31, 1998:
Remaining Exercise Price Number Outstanding Contractual Life Number Exercisable -------------- ------------------ ---------------- ------------------ $13.38 24,000 8.35 6,000 $20.75 24,000 9.12 -- $19.25 9,000 9.87 --
31 A value at the time of grant was calculated for each option using the Black- Scholes option pricing model with an estimated average option life of 5 years and using the five-year averages of price volatility of the Bank's common stock dividend yield and a risk-free rate equal to the five-year Treasury rate. The table below shows these assumptions and the weighted-average fair value of the options which were granted during each year as well as what the effect would have been if the Bank had adopted the fair value method of accounting for stock options described in Statement of Financial Accounting Standards No. 123.
1998 1997 1996 ----------- ----------- ---------- Weighted average volatility.............. 26.90% 31.40% Weighted average dividend................ 2.65% 2.93% Weighted average risk-free rate.......... 5.23% 6.57% Weighted average fair value of options granted during the year................. $ 5.12 $ 3.94 -- Additional expense had the Bank adopted S.F.A.S. 123............................ $ 39,628 $ 34,680 -- Related tax benefit...................... $ 16,575 $ 14,505 -- Pro-forma net income..................... $12,532,870 $13,228,361 $9,468,410 Pro-forma basic and diluted earnings per share................................... $ 1.38 $ 1.46 $ 1.05
The Bank has also entered into stock appreciation rights agreements with selected employees who are paid the amount by which a certain number of shares exceeds its value at the time the agreement was entered into. Stock appreciation rights mature ten years after their issuance and are not ordinarily exercisable prior to maturity. $84,375 was charged to compensation expense in 1997. The table below shows the amount of stock appreciation rights which were exercised, granted, forfeited, or expired.
1998 1997 1996 --------------- ----------------- --------------- Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ -------- ------- -------- ------ -------- Outstanding, beginning of year....................... -- -- 20,000 $9.50 20,000 $9.50 Granted..................... 3,700 $19.25 -- -- -- -- Exercised................... -- -- (20,000) $9.50 -- -- Forfeited................... -- -- -- -- -- -- ----- ------ ------- ----- ------ ----- Outstanding, end of year.... 3,700 $19.25 -- -- 20,000 $9.50 ===== ====== ======= ===== ====== =====
(7) Provision for Income Taxes The provision for income taxes for the three years ended December 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996 ---------- ---------- ---------- Current federal income tax................... $6,756,489 $5,940,648 $4,395,067 Current state income tax..................... 1,957,942 2,035,123 1,577,311 ---------- ---------- ---------- 8,714,431 7,975,771 5,972,378 ---------- ---------- ---------- Deferred federal income tax.................. (523,786) 159,203 72,874 Deferred (prepaid) state income tax.......... (140,811) 54,933 25,145 ---------- ---------- ---------- (664,597) 214,136 98,019 ---------- ---------- ---------- $8,049,834 $8,189,907 $6,070,397 ========== ========== ==========
Deferred (prepaid) income tax expense results from the recognition of income or expense items in different periods for income tax purposes than when they are accrued, such as interest earned on nonaccrual loans and the provision for possible loan losses. 32 The following reconciles the provision for income taxes with the statutory federal income tax rate of 35%.
1998 1997 1996 ---------- ---------- ---------- Tax at statutory rate...................... $7,209,146 $7,503,455 $5,438,582 Reduction due to tax-exempt income......... (293,139) (328,829) (315,350) State taxes, net of federal tax benefit.... 1,112,989 1,358,537 1,088,728 Change in valuation reserve................ -- (373,912) -- Other, net................................. 20,838 30,656 (141,563) ---------- ---------- ---------- $8,049,834 $8,189,907 $6,070,397 ========== ========== ==========
In 1997, interest and dividends on securities included $1,068,320 of capital gains from mutual fund investments. Capital loss carryovers were applied to this income and the valuation reserve was reduced by $373,912. At December 31, 1998, 1997 and 1996, the net deferred tax asset consisted of the following:
1998 1997 1996 ---------- ---------- ---------- Future bad debt deductions.................... $4,645,768 $4,486,888 $4,672,926 Nonaccrual loan interest...................... 675,093 185,662 42,038 Unfunded accrued benefits..................... 1,081,774 901,325 719,299 Potential value of capital loss carryovers.... -- -- 557,463 ---------- ---------- ---------- Gross deferred tax asset.................... 6,402,635 5,573,875 5,991,726 Valuation reserve............................. -- -- 557,463 ---------- ---------- ---------- Deferred tax asset.......................... 6,402,635 5,573,875 5,434,263 Deferred tax liability........................ 1,409,945 943,671 553,581 ---------- ---------- ---------- Net deferred tax asset...................... $4,992,690 $4,630,204 $4,880,682 ========== ========== ==========
(8) Borrowings Borrowings from the Federal Home Loan Bank at December 31, 1998 had maturity dates between January 19, 1999 and June 10, 2013 and bore interest rates between 4.85% and 7.05%. The weighted average interest rate on these borrowings was 5.31%. The balance at November 30, 1998 of $363,035,140 was the maximum amount outstanding at any month end during 1998. These borrowings are collateralized by the Bank's residential mortgage loans and securities. The Bank also has an IDEAL Way Line of Credit with Federal Home Loan Bank of Boston. The unused balance at December 31, 1998, 1997 and 1996 was $12,963,000. Other short-term borrowings at December 31, 1998, 1997 and 1996 consisted of a demand note payable to the U.S. Treasury of $212,748, $2,809,485 and $3,100,647, respectively, and securities sold subject to agreements to repurchase of $14,393,575, $8,852,875 and $6,259,099, respectively. These borrowings are collateralized by the pledge of securities. (9) Stockholders' Equity On August 7, 1998, the Bank issued 4,530,532 shares of common stock in the form of a 100% stock dividend. The effect of this transaction was to increase the outstanding shares of common stock from 4,530,532 to 9,061,064. Net income and dividends per share have been restated for all periods presented to reflect this transaction. As a member of the Federal Deposit Insurance Corporation, the Bank is required to meet certain capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. As of December 31, 1998, 1997 and 1996, the Bank met all regulatory capital requirements and satisfied the requirements of the "well-capitalized" category under the Federal Deposit Insurance 33 Corporation Improvement Act. Management believes that there have been no events or conditions that have affected the well-capitalized category of the Bank. The Bank is required to maintain a leverage ratio, stockholders' equity to total assets, of at least 3%. For the Bank to be considered well-capitalized, this ratio must be at least 5%. At December 31, 1998, the Bank's leverage ratio was 7.1%. Risk-based capital requirements also apply. Some loan commitments, lines of credit and financial guarantees are subject to capital requirements in addition to assets shown on the Bank's statement of condition. The risk-based capital regulations assign one of four weights to assets of the Bank--0%, 20%, 50% and 100%. Full capital must be maintained to support assets with 100% risk weight, with proportionally lower capital required for assets assigned a lower weight. Most of the Bank's investment securities are assigned a 20% risk weight, and residential mortgages are assigned a 50% risk weight. Most other assets are assigned to the 100% risk category. At December 31, 1998, the Bank's total risk-weighted assets were $733,756,000 and its net risk-weighted assets were $731,820,000. Stockholders' equity and a portion of the reserve for loan losses can all be used to meet capital requirements. The reserve for loan losses used to meet risk-based capital requirements cannot be more than 1.25% of total risk- weighted assets. At December 31, 1998, $9,172,000 of the reserve for loan losses could be used toward risk-based capital requirements. $485,000 in capital of the CCB&T Investment Company subsidiary is excluded for risk-based capital calculations. Also, $121,000 of intangible assets is excluded for risk-based capital calculations. Accordingly, at December 31, 1998, total capital for risk-based capital purposes was $91,826,000 equal to 12.5% of risk-weighted assets. This ratio is required to be at least 8%, and for the Bank to be considered well-capitalized it must be at least 10%. Stockholders' equity alone is required to be at least 4% of net risk- weighted assets. For the Bank to be considered well-capitalized, this ratio must be at least 6%. At December 31, 1998, the Bank's stockholders' equity was 11.3% of net risk-weighted assets. The risk-based capital ratio focuses on broad categories of credit risk. However, the ratio does not take account of many other factors that can affect a bank's financial condition. These factors include overall interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, investment or loan portfolio concentrations, the quality of loans and investments, the effectiveness of loan and investment policies, and management's overall ability to monitor and control financial and operating risks. In addition to evaluating capital ratios, an overall assessment of capital adequacy must take into account each of these other factors, including, in particular, the level and severity of problem and adversely classified assets. In light of these other considerations, banks generally are expected to operate above the minimum risk-based capital ratio and additional requirements may be set by bank examiners. Under state law, future cash dividends are limited to the balance in the undivided profits account. (10) Commitments and Contingencies Substantially all of the amount shown as cash and due from banks is made up of checks and similar items in the process of collection or is needed to satisfy Federal Reserve requirements. As of December 31, 1998, this requirement was $11,076,000 which included $9,346,000 vault cash. In the normal course of business, various commitments are entered into by the Bank, such as standby letters of credit and commitments to extend credit, which are not reflected in the consolidated financial statements. 34 Management does not anticipate any material losses as a result of these transactions. At December 31, 1998, 1997 and 1996, the Bank had the following commitments outstanding:
1998 1997 1996 ------------ ------------ ------------ Standby letters of credit.............. $ 2,356,000 $ 2,567,925 $ 3,346,000 Commitments to extend credit at fixed rates................................. 9,465,067 10,108,350 4,707,000 Other commitments to extend credit..... 101,334,933 96,699,725 129,301,000 ------------ ------------ ------------ Total commitments...................... $113,156,000 $109,376,000 $137,354,000 ============ ============ ============
In the event that interest rates increase during the period of the commitment, commitments to extend credit at a fixed rate of interest could result in the extension of credit at less than a prevailing rate of interest, with accompanying loss of value to the Bank. Although the commitments shown above are not carried on the statement of condition as loans, their risk is comparable to that of loans which are carried on the statement of condition. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential property and income producing commercial properties. In the event that no collateral is required, or the collateral proved to be of no value to the Bank, the Bank would be exposed to possible credit loss up to the maximum amount of these contingent liabilities. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. (11) Disclosure about the Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 requires the disclosure of the fair value of financial instruments for which it is practicable to estimate that value. At December 31, 1998, 1997 and 1996, the estimated fair values of the Bank's financial instruments were as follows:
1998 1997 1996 ----------------- ----------------- ----------------- Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value -------- -------- -------- -------- -------- -------- (Dollar amounts in thousands) Financial assets: Cash and cash equiva- lents................. $ 29,427 $ 29,427 $ 34,087 $ 34,087 $ 20,961 $ 20,961 Investment securities.. 518,146 518,146 391,496 391,496 329,064 329,064 Net loans.............. 600,853 608,962 520,148 520,620 442,015 444,467 Financial liabilities: Deposits............... 727,897 729,704 709,084 709,780 633,333 633,820 Borrowings from Federal Home Loan Bank........ 343,507 344,434 171,295 172,009 102,685 103,074 Other short-term borrowings............ 14,606 14,606 11,662 11,662 9,360 9,360
The carrying value of cash and cash equivalents and short-term borrowings approximates fair value because of the short maturity of these financial instruments. Fair values of commitments not reflected in the financial statements are not materially different from their carrying amounts. Fair values of investment securities are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 35 Because no market exists for a significant portion of the Bank's loans, fair value estimates were based on judgments regarding estimated future cash flows, current economic conditions, expected loss experience, risk characteristics of various kinds of loans, and other such factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, unrealized gains or losses are not expected to be realized. As required by S.F.A.S. No. 107, the fair value of deposits does not include the value of the ongoing relationships with depositors, sometimes referred to as the "core deposit intangible", although it is unlikely that some amount would be received for this relationship on an actual sale of deposits. Similarly, the fair value of loans does not include any value assigned to customer relationships. (12) Earnings Per Share The following reconciles the calculation of basic and diluted earnings per share for the three years ending December 31, 1998, 1997 and 1996:
1998 ----------------------------------- Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- Basic earnings per share................... $12,556,946 9,061,064 $1.39 Effect of dilutive stock options........... -- 7,926 ----------- --------- Diluted earnings per share................. $12,556,946 9,068,990 $1.38 1997 ----------------------------------- Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- Basic earnings per share................... $13,248,536 9,061,064 $1.46 Effect of dilutive stock options........... -- 3,504 ----------- --------- Diluted earnings per share................. $13,248,536 9,064,568 $1.46 1996 ----------------------------------- Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- Basic and diluted earnings per share....... $ 9,468,410 9,052,434 $1.05
36 (13) Selected Quarterly Financial Data (unaudited) The table below shows supplemental financial data for each quarter in 1998 and 1997.
1998 --------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Interest income......... $16,875,617 $17,896,787 $19,501,548 $19,703,998 Interest expense........ 8,048,084 8,297,732 9,890,478 9,974,873 ----------- ----------- ----------- ----------- Net interest income..... 8,827,533 9,599,055 9,611,070 9,729,125 Provision for loan loss- es..................... -- -- -- -- Non-interest income..... 3,632,707 4,187,575 4,860,504 4,355,102 Non-interest expense.... 8,461,129 8,260,852 8,849,968 8,623,942 ----------- ----------- ----------- ----------- Income before income taxes.................. 3,999,111 5,525,778 5,621,606 5,460,285 Provision for income taxes.................. 1,599,343 2,201,580 2,237,542 2,011,369 ----------- ----------- ----------- ----------- Net income.............. $ 2,399,768 $ 3,324,198 $ 3,384,064 $ 3,448,916 =========== =========== =========== =========== Average shares outstand- ing.................... 9,061,064 9,061,064 9,061,064 9,061,064 Net income per share.... $.26 $.37 $.38 $.38 Cash dividends de- clared................. $.12 $.12 $.13 $.13 1997 --------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Interest income......... $15,703,645 $16,359,726 $17,740,687 $17,898,330 Interest expense........ 7,044,933 7,426,532 8,020,327 8,303,345 ----------- ----------- ----------- ----------- Net interest income..... 8,658,712 8,933,194 9,720,360 9,594,985 Provision for loan loss- es..................... -- -- -- -- Non-interest income..... 5,258,625 4,002,706 4,492,101 6,420,124 Non-interest expense.... 7,738,989 8,648,095 9,156,816 10,098,464 ----------- ----------- ----------- ----------- Income before income taxes.................. 6,178,348 4,287,805 5,055,645 5,916,645 Provision for income taxes.................. 2,369,938 1,629,994 2,019,962 2,170,013 ----------- ----------- ----------- ----------- Net income.............. $ 3,808,410 $ 2,657,811 $ 3,035,683 $ 3,746,632 =========== =========== =========== =========== Average shares outstand- ing.................... 9,061,064 9,061,064 9,061,064 9,061,064 Net income per share.... $.42 $.30 $.33 $.41 Cash dividends de- clared................. $.105 $.105 $.105 $.105
As a result of continuing reductions in the amount of non-performing assets, no provision for loan losses was made during 1997 or 1998. Non-interest income in the first quarter of 1997 was increased by $1,900,000 received on the settlement of a dispute with a software provider. Non-interest income in the fourth quarter of 1997 was increased by a $2,140,570 gain on the sale of the Bank's credit card portfolio. Because of the seasonal nature of the economy in the Bank's market area, demand deposits and business activity follow a seasonal cycle with their low point ordinarily being reached in February and their high point in August. As a result of this cycle, operating income in past years has usually been at its high during the third quarter of each year. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. On June 18, 1998, the accounting firm Ernst & Young, LLP, was dismissed by the Company's Audit Committee and the accounting firm Grant Thornton, LLP, was hired to replace them. The financial statements 37 for the past two years did not contain an adverse opinion or a disclaimer of opinion nor were the opinions qualified as to uncertainty, audit scope or accounting principles. During the past two years and the subsequent interim period preceding the dismissal, there were no disagreements with the former accountant on any matter of accounting principles or practice, financial statement disclosure, or auditing scope or procedure. There were no changes in or disagreements with Accountants on accounting and financial disclosures as defined by Item 304 of Regulation S-K. PART III Item 10. Directors and Executive Officers of the Registrant. With the exception of certain information regarding the executive officers of Bancorp and the Bank, the response to this item is incorporated by reference from the discussion under the captions "Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in Bancorp's definitive Proxy Statement for the Annual Meeting of Stockholders ("Proxy Statement") to be held on April 22, 1999, to be filed with the SEC pursuant to Regulation 14A of the Exchange Act Rules. Information regarding the executive officers of Bancorp is contained in Item I of Part I to this Form 10-K under the caption "Executive Officers of the Registrant." Item 11. Executive Compensation. The response to this item is incorporated by reference from the discussion under the captions "Executive Compensation" and "The Board of Directors, its Committees and Compensation" in Bancorp's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The response to this item is incorporated by reference from the discussion under the caption "Ownership by Management and Other Stockholders" in Bancorp's Proxy Statement. Item 13. Certain Relationships and Related Transactions. The Bank enters into banking transactions in the ordinary course of its business with directors, officers, principal stockholders and their associates, on the same terms including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. The total amount of loans outstanding to Directors and Officers of the Bank at December 31, 1998, 1997 and 1996 was $16,418,718, $15,937,340, and $13,244,549, respectively. During 1998, $21,798,603 in new loans were made to Directors and Officers and there were $21,317,225 in repayments. 38 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. A. Documents filed as part of the report: Exhibits as required by Item 601 of Regulation S-K ((S) 229.601 of this chapter).
Exhibit Description ------- ----------- 2.1 Plan of Reorganization and Acquisition dated as of October 8, 1998 between Bancorp and the Bank (filed as Exhibit 2.1 to Bancorp's Current Report on Form 8-K filed with the SEC on February 11, 1999 and incorporated herein by reference) 3.1 Articles of Organization of Bancorp (filed as Exhibit 3.1 to Bancorp's Current Report on Form 8-K filed with the SEC on February 11, 1999 and incorporated herein by reference) 3.2 By-laws of Bancorp (filed as Exhibit 3.2 to Bancorp's Current Report on Form 8-K filed with the SEC on February 11, 1999 and incorporated herein by reference) 4.1 Specimen certificate for shares of Common Stock of Bancorp (filed as Exhibit 4.1 to Bancorp's Current Report on Form 8-K filed with the SEC on February 11, 1999 and incorporated herein by reference) 10.1 Amended and Restated Change in Control Agreement with Stephen B. Lawson 10.2 Amended and Restated Change in Control Agreement with Noal D. Reid 10.3 Amended and Restated Change in Control Agreement with Larry K. Squire 10.4 CCBT Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.2 to Bancorp's Registration Statement on Form S-8 filed with the SEC on February 18, 1999 and incorporated herein by reference) 10.5 Cape Cod Bank and Trust Company Employee Stock Ownership and Plan and Trust, as amended 11.1 Statement Regarding Computation of Per Share Earnings--Such computation can be clearly determined from the material contained in this Report. 12.1 Statement Regarding Computation of Ratios--Such computation can be clearly determined from the material contained in this Report. 21.1 Subsidiaries of Bancorp--Bancorp has one direct subsidiary, Cape Cod Bank and Trust Company, a Massachusetts-chartered commercial bank. Cape Cod Bank and Trust Company has six subsidiaries: CCB&T Securities Corp. which is a securities corporation; CCB&T Brokerage Direct, Inc., an investment broker/dealer; TBM Development Corp., RAFS Ltd. Partnership, Osterville Concorde Ltd. and Osterville DC9 Ltd. Partnership which are all inactive. 23.1 Consent of Grant Thornton, LLP, as independent public accountants 23.2 Consent of Ernst & Young, LLP, as independent public accountants 27.1 Financial Data Schedule
- -------- B. Reports on Form 8-K: A report on Form 8-K was filed by the Bank with the FDIC on July 27, 1998, reporting a change in the registrant's certifying accountant. A report on Form 8-K was filed by Bancorp with the SEC on February 11, 1999, registering Bancorp's Common Stock in place of that of the Bank pursuant to Rule 12g-3 under the Exchange Act. 39 EX-10.1 2 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT EXHIBIT 10.1 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT THIS AMENDED AND RESTATED AGREEMENT is made and entered into this 11th day of February, 1999, by and between Cape Cod Bank and Trust Company, a Massachusetts trust company (the "Bank"), CCBT Bancorp, Inc., a Massachusetts corporation (the "Company") (the Bank and the Company, collectively, the "Employers") and Stephen B. Lawson, a resident of West Barnstable, Massachusetts ("Employee"). WITNESSETH, the Company is the holding company for the Bank; WHEREAS the Employers have determined that it is in the best interests of the Employers to allow the Employee to consider the prospect of a Change in Control (as herein defined) in an objective manner and in consideration of the services to be rendered by the Employee to the Employers and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Employers, the Employers are willing to provide, subject to the terms of this Agreement, certain benefits upon the occurrence of a Terminating Event (as herein defined) subsequent to a Change in Control. WHEREAS the Employer and the Employee hereby amend and restate this Agreement to reflect the reorganization of the Bank into holding company structure, including the addition of the Company as a party to this Agreement. NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, the Employers and the Employee hereby agree as follows: 1. DEFINITIONS. 1.1 "Affiliate" means: 1.1.1 A member of a controlled group of corporations of which either of the Employers is a member; or 1.1.2 An unincorporated trade or business which is under common control with either of the Employers as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended (henceforth the "Code") and regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and (e)(3)(C) of the Code. 1.2 "Base Annual Salary" means the annualized value of the Employee's salary, based on the most recent pay period, prior to a Change of Control. 1.3 "Change in Duties" means: 1.3.1 A significant reduction in the nature or scope of the Employee's authority or duties from those immediately prior to the date on which a Change of Control occurs; 1.3.2 A reduction in the Employee's Base Annual Salary; 1.3.3 Exclusion from any incentive program from which the Employee was previously eligible, or which other executives with comparable duties participate in; 1.3.4 A change in location of the Employee's principal place of employment by more than fifty (50) miles; 1.4 "Change in Control" shall be deemed to have occurred in any one of the following events: 1.4.1 if there has occurred a change in control of either the Company or the Bank which the Company or the Bank would be required to report in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or, if such form and the related regulations are no longer in effect, any forms or regulations promulgated by the Securities and Exchange Commission, pursuant to the Exchange Act, which are intended to serve similar purposes; or 1.4.2 A Change in Control of the Company or the Bank has occurred within the meaning of the Change in Bank Control Act, as amended and the rules and regulations promulgated thereunder; or 1.4.3 Without limitation such a Change in Control shall be deemed to have occurred at such time as: 1.4.3.1 Any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act), or group of persons acting in concert, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act ) directly or indirectly, of any class of equity securities of the Company representing 50% or more of a class of equity securities except for any securities purchased by the Bank's employee stock ownership plan and trust; or 2 1.4.3.2 Individuals who constitute the Board of the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same Committee serving under an Incumbent Board, shall be, for purposes of this clause 1.4.3.2 considered as though he were a member of the Incumbent Board; or 1.4.3.3 A plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or a similar transaction occurs in which the Company is not the resulting entity; or 1.4.3.4 A proxy statement shall be distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company. 1.4.4 Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 1.5 "Code" means the Internal Revenue Code of 1986, as from time to time amended. 1.6 "Constructive Termination" means the voluntary termination of employment by the Employee following a Change in Duties following a Change of Control. 1.7 "Employment Compensation" means any salary, bonus or commissions paid to the Employee as an employee (as defined in the Code) by any entity other than the Employers or their successors. If the Employee is a partner in a partnership, this definition shall include the Employee's share of partnership income. 1.8 "Exchange Act" means the Securities Exchange Act of 1934, as from time to time amended. 3 1.9 "Termination for Cause" means the termination of the Employee's employment with the Bank or the Company, as applicable, as a result of: 1.9.1 The Employee's failure or refusal to perform the Employee's duties occasioned by reason other than sickness or other disability of the Employee, which is not cured within ten (10) business days after written notice from the Bank or the Company, as applicable, specifying such failure or refusal has been delivered; 1.9.2 Commission by the Employee of any materially fraudulent, dishonest or other act of misconduct in the performance of the Employee's duties hereunder, other than at the specific direction of the Board of the Bank or the Company, as applicable; or 1.9.3 Conviction for any felony or crime involving moral turpitude. 1.10 "Voting Securities" means any securities which ordinarily possess the power to vote in the election of directors without the happening of any precondition or contingency. 2. TERM. Subject to the provisions for earlier termination hereinafter set forth in Section 4 of this Agreement, the term of this Agreement shall commence on the date hereof and end on the day preceding the second anniversary hereof. 3. AUTOMATIC EXTENSION. Unless the Employee receives written notification from either of the Employers of their intention not to renew this Agreement at least twelve (12) months prior to the expiration date, plus any extensions, the term of this Agreement shall automatically be extended by twelve (12) months. 4. TERMINATION OF EMPLOYMENT. 4.1 Termination Prior to a Change in Control: 4.1.1 Prior to a Change in Control, the Employers may terminate the Employee's employment under this Section of the Agreement for any reason. 4.1.2 If the Employee's employment is terminated pursuant to this Section 4.1, any severance policies maintained by the Bank or the Company, as applicable, shall apply and no amounts shall be payable pursuant to this Agreement. 4 4.2 Termination following a Change in Control: 4.2.1 If, during a period of two years following a Change in Control, the employment of the Employee is terminated by the Bank or the Company, as applicable, for any reason, other than Cause, or if the Employee is subject to Constructive Termination, benefits shall be payable under Section 5. 4.2.2 If the Employee voluntarily terminates his or her employment following a Change in Control for any reason other than Constructive Termination, no amount shall be paid pursuant to this agreement. 5. BENEFIT FOLLOWING A CHANGE IN CONTROL. If a benefit is payable, pursuant to Section 4.2.1, the Employee shall receive, in monthly installments, payable on the first of each month, an amount equal to: 5.1 One-twelfth (1/12th) of the Employee's Base Annual Salary, less any withholding required pursuant to the Code; reduced by 5.2 Any Employment Compensation payable to the Employee for that month, whether received currently or deferred. 5.3 This benefit shall be payable for 36 months following the termination of the Employee's employment with the Bank or the Company, as applicable. 5.4 No other amounts shall be payable under this Agreement in lieu of bonuses, perquisites or other benefits maintained by the Employers, nor shall the Employee be considered to continue in the employ of the Bank or the Company, as applicable, while payments are being made pursuant to this Section 5. 5.5 Limitation on Benefits. 5.5.1 It is the intention of the Employee and of the Employers that no payments by the Employers to or for the benefit of the Employee under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Employers by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Employers, such payments shall be reduced to the maximum amount which can be deducted by the Employers. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Employee, 5 such excess payments shall be refunded to the Employers with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order than no such payments shall be non-deductible to the Employers by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Employee shall determine which method shall be followed, provided that if the Employee fails to make such determination within forty-five days after the Employers have sent him written notice of the need for such reduction, the Employers may determine the method of such reduction in their sole discretion. 5.5.2 If any dispute between the Employers and the Employee as to any of the amounts to be determined under this Section 5.5.2, or the method of calculating such amounts, cannot be resolved by the Employers and the Employee, either the Employers or the Employee after giving three days' written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Employers and the Employee. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Employers and the Employee. The Employers shall bear the costs of any such determination. 6. MISCELLANEOUS. 6.1 Agreement Supersedes. This Agreement supersedes all prior agreements and understandings by and between the Employee and the Employers and of any Affiliates of their respective directors, officers, shareholders, employees, attorneys, agents, or representatives, including any Severance Agreement, Employment Letter, Employment Terms, Non-Disclosure Agreement and /or Employment Agreement, and constitutes the entire agreement between the parties, respecting the subject matter hereof; there are no representations, warranties or other commitments other than those expressed herein. 6.2 Noncontravention. The Employee represents and warrants to the Employers that the Employee is not a party to or bound by, and the employment of the Employee by the Employers or the Employee's disclosure of any information to the Employers or their use of such information will not violate or breach any employment, retainer, consulting, license, non-competition, non-disclosure, trade secrets or other agreement between the Employee and any other person, partnership, corporation, joint venture, association or other entity. 6 6.3 Modification; Waiver. No modification or amendment of, or waiver under, this Agreement shall be valid unless signed in writing and signed by the Employee and the Chairman of the Board of Directors of the Bank and the Company, pursuant to expressed authority of the Board of each entity. 6.4 Indemnification. The Employee and the Employers and their Affiliates each agree to indemnify and hold the other harmless from, any and all claims, lawsuits, losses, damages, expenses, costs and liabilities, including, without limitation, court costs and attorney's fees which a party to this Agreement may sustain as a result of, or in connection with, either directly or indirectly, a breach or violation of any of the provisions of this Agreement by the other party. 6.5 Remedies. The Employee hereby agrees that if the Employee violates any provision of this Agreement, the Employers shall be entitled, if they, or either of them, so elect, to institute and prosecute proceedings at law or in equity to obtain damages with respect to such violation or to enforce the specific performance of this Agreement by the Employee or to enjoin the Employee from engaging in any activity in violation hereof. 6.6 Waiver. The waiver by either party to this Agreement of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent breach. 6.7 Notices. Any communication which may be required under this Agreement shall be in writing and shall be deemed to have been properly given when delivered personally at the address set forth below for the intended party during normal business hours, or when sent by U.S. registered or certified mail, return receipt requested, postage prepaid as follows: If to the Bank or Cape Cod Bank and Trust Company the Company: 307 Main Street Hyannis, MA 02601 If to the Employee: Mr. Stephen B. Lawson 218 Willow Street West Barnstable, MA 02668 Notices shall be given to such other addressee or address, or both, as a particular party may from time to time request by written notice to the other party to the Agreement. Each notice, request, demand, approval or other communication which is sent in accordance with this Section shall be deemed to be delivered, given and received for all purposes of this Agreement as of two business days after the date of deposit thereof for mailing in a duly constituted 7 U.S. post office or branch thereof, one business day after deposit with a recognized overnight courier service or upon written confirmation of receipt of any facsimile transmission. Notice given to a party hereto by any other method shall only be deemed to be delivered, given and received when actually received in writing by such party. 6.8 Binding Nature; Employment Status. This Agreement shall inure to the benefit of and be binding upon the Employers, jointly and severally, and the Employee. This is not an agreement for the employment of the Employee and shall confer no rights on the Employee except as herein expressly provided. 6.9 Governing Law. This Agreement shall be governed and construed in accordance with the laws of The Commonwealth of Massachusetts. 6.10 Allocation of Obligations. The Bank and the Company shall allocate among themselves which party shall be responsible for paying the severance payments and other benefits directed by this Agreement. The payment by either party of such severance payments and other benefits shall satisfy the obligations of the non-paying party under this Agreement. Both the Bank and the Company shall be jointly liable in the event of a failure by both parties to pay such severance payments and other benefits. 6.11 Assignment; Prior Agreements. Neither the Employers nor the Employee may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Employers and the Employee, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Employee's death prior to the completion by the Employers of all payments due him under this Agreement, the Employers shall continue such payments to the Employee's beneficiary designated in writing to the Employers prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 6.12 Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 8 6.13 Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed instrument as of the day and year first above written. CAPE COD BANK AND TRUST EMPLOYEE COMPANY a Massachusetts Corporation By: /s/ John Otis Drew /s/ Stephen B. Lawson ------------------- --------------------- Name: John Otis Drew Name: Stephen B. Lawson Title: Chairman, Board of Directors CCBT BANCORP, INC. By:/s/ John Otis Drew ------------------ Name: John Otis Drew Title: Chairman, Board of Directors 10 EX-10.2 3 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT THIS AMENDED AND RESTATED AGREEMENT is made and entered into this 11th day of February, 1999, by and between Cape Cod Bank and Trust Company, a Massachusetts trust company (the "Bank"), CCBT Bancorp, Inc., a Massachusetts corporation (the "Company") (the Bank and the Company, collectively, the "Employers") and Noal D. Reid, a resident of South Yarmouth, Massachusetts ("Employee"). WITNESSETH, the Company is the holding company for the Bank; WHEREAS the Employers have determined that it is in the best interests of the Employers to allow the Employee to consider the prospect of a Change in Control (as herein defined) in an objective manner and in consideration of the services to be rendered by the Employee to the Employers and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Employers, the Employers are willing to provide, subject to the terms of this Agreement, certain benefits upon the occurrence of a Terminating Event (as herein defined) subsequent to a Change in Control. WHEREAS the Employer and the Employee hereby amend and restate this Agreement to reflect the reorganization of the Bank into holding company structure, including the addition of the Company as a party to this Agreement. NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, the Employers and the Employee hereby agree as follows: 1. DEFINITIONS. 1.1. "Affiliate" means: 1.1.1 A member of a controlled group of corporations of which either of the Employers is a member; or 1.1.2 An unincorporated trade or business which is under common control with either of the Employers as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended (henceforth the "Code") and regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and (e)(3)(C) of the Code. 1.2 "Base Annual Salary" means the annualized value of the Employee's salary, based on the most recent pay period, prior to a Change of Control. 1.3 "Change in Duties" means: 1.3.1 A significant reduction in the nature or scope of the Employee's authority or duties from those immediately prior to the date on which a Change of Control occurs; 1.3.2 A reduction in the Employee's Base Annual Salary; 1.3.3 Exclusion from any incentive program from which the Employee was previously eligible, or which other executives with comparable duties participate in; 1.3.4 A change in location of the Employee's principal place of employment by more than fifty (50) miles; 1.4 "Change in Control" shall be deemed to have occurred in any one of the following events: 1.4.1 if there has occurred a change in control of either the Company or the Bank which the Company or the Bank would be required to report in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or, if such form and the related regulations are no longer in effect, any forms or regulations promulgated by the Securities and Exchange Commission, pursuant to the Exchange Act, which are intended to serve similar purposes; or 1.4.2 A Change in Control of the Company or the Bank has occured within the meaning of the Change in Bank Control Act, as amended and the rules and regulations promulgated thereunder; or 1.4.3 Without limitation such a Change in Control shall be deemed to have occurred at such time as: 1.4.3.1 Any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act), or group of persons acting in concert, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act ) directly or indirectly, of any class of equity securities of the Company representing 50% or more of a class of equity securities except for any securities purchased by the Bank's employee stock ownership plan and trust; or 2 1.4.3.2 Individuals who constitute the Board of the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same Committee serving under an Incumbent Board, shall be, for purposes of this clause 1.4.3.2 considered as though he were a member of the Incumbent Board; or 1.4.3.3 A plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or a similar transaction occurs in which the Company is not the resulting entity; or 1.4.3.4 A proxy statement shall be distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company. 1.4.4 Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 1.5 "Code" means the Internal Revenue Code of 1986, as from time to time amended. 1.6 "Constructive Termination" means the voluntary termination of employment by the Employee following a Change in Duties following a Change of Control. 1.7 "Employment Compensation" means any salary, bonus or commissions paid to the Employee as an employee (as defined in the Code) by any entity other than the Employers or their successors. If the Employee is a partner in a partnership, this definition shall include the Employee's share of partnership income. 1.8 "Exchange Act" means the Securities Exchange Act of 1934, as from time to time amended. 3 1.9 "Termination for Cause" means the termination of the Employee's employment with the Bank or the Company, as applicable, as a result of: 1.9.1 The Employee's failure or refusal to perform the Employee's duties occasioned by reason other than sickness or other disability of the Employee, which is not cured within ten (10) business days after written notice from the Bank or the Company, as applicable, specifying such failure or refusal has been delivered; 1.9.2 Commission by the Employee of any materially fraudulent, dishonest or other act of misconduct in the performance of the Employee's duties hereunder, other than at the specific direction of the Board of the Bank or the Company, as applicable; or 1.9.3 Conviction for any felony or crime involving moral turpitude. 1.10 "Voting Securities" means any securities which ordinarily possess the power to vote in the election of directors without the happening of any precondition or contingency. 2. TERM. Subject to the provisions for earlier termination hereinafter set forth in Section 4 of this Agreement, the term of this Agreement shall commence on the date hereof and end on the day preceding the second anniversary hereof. 3. AUTOMATIC EXTENSION. Unless the Employee receives written notification from either of the Employers of their intention not to renew this Agreement at least twelve (12) months prior to the expiration date, plus any extensions, the term of this Agreement shall automatically be extended by twelve (12) months. 4. TERMINATION OF EMPLOYMENT. 4.1 Termination Prior to a Change in Control: 4.1.1 Prior to a Change in Control, the Employers may terminate the Employee's employment under this Section of the Agreement for any reason. 4.1.2 If the Employee's employment is terminated pursuant to this Section 4.1, any severance policies maintained by the Bank or the Company, as applicable, shall apply and no amounts shall be payable pursuant to this Agreement. 4 4.2 Termination following a Change in Control: 4.2.1 If, during a period of two years following a Change in Control, the employment of the Employee is terminated by the Bank or the Company, as applicable, for any reason, other than Cause, or if the Employee is subject to Constructive Termination, benefits shall be payable under Section 5. 4.2 If the Employee voluntarily terminates his or her employment following a Change in Control for any reason other than Constructive Termination, no amount shall be paid pursuant to this agreement. 5. BENEFIT FOLLOWING A CHANGE OF CONTROL. If a benefit is payable, pursuant to Section 4.2.1, the Employee shall receive, in monthly installments, payable on the first of each month, an amount equal to: 5.1 One-twelfth (1/12th) of the Employee's Base Annual Salary, less any withholding required pursuant to the Code; reduced by 5.2 Any Employment Compensation payable to the Employee for that month, whether received currently or deferred. 5.3 This benefit shall be payable for 24 months following the termination of the Employee's employment with the Bank or the Company, as applicable. 5.4 No other amounts shall be payable under this Agreement in lieu of bonuses, perquisites or other benefits maintained by the Employers, nor shall the Employee be considered to continue in the employ of the Bank or the Company, as applicable, while payments are being made pursuant to this Section 5. 5.5 Limitation on Benefits. 5.5.1 It is the intention of the Employee and of the Employers that no payments by the Employers to or for the benefit of the Employee under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Employers by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Employers, such payments shall be reduced to the maximum amount which can be deducted by the Employers. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Employee, 5 such excess payments shall be refunded to the Employers with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order than no such payments shall be non-deductible to the Employers by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Employee shall determine which method shall be followed, provided that if the Employee fails to make such determination within forty-five days after the Employers have sent him written notice of the need for such reduction, the Employers may determine the method of such reduction in their sole discretion. 5.5.2 If any dispute between the Employers and the Employee as to any of the amounts to be determined under this Section 5.5.2, or the method of calculating such amounts, cannot be resolved by the Employers and the Employee, either the Employers or the Employee after giving three days' written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Employers and the Employee. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Employers and the Employee. The Employers shall bear the costs of any such determination. 6. MISCELLANEOUS. 6.1 Agreement Supersedes. This Agreement supersedes all prior agreements and understandings by and between the Employee and the Employers and of any Affiliates of their respective directors, officers, shareholders, employees, attorneys, agents, or representatives, including any Severance Agreement, Employment Letter, Employment Terms, Non-Disclosure Agreement and /or Employment Agreement, and constitutes the entire agreement between the parties, respecting the subject matter hereof; there are no representations, warranties or other commitments other than those expressed herein. 6.2 Noncontravention. The Employee represents and warrants to the Employers that the Employee is not a party to or bound by, and the employment of the Employee by the Employers or the Employee's disclosure of any information to the Employers or their use of such information will not violate or breach any employment, retainer, consulting, license, non-competition, non-disclosure, trade secrets or other agreement between the Employee and any other person, partnership, corporation, joint venture, association or other entity. 6 6.3 Modification; Waiver. No modification or amendment of, or waiver under, this Agreement shall be valid unless signed in writing and signed by the Employee and the Chairman of the Board of Directors of the Bank and the Company, pursuant to expressed authority of the Board of each entity. 6.4 Indemnification. The Employee and the Employers and their Affiliates each agree to indemnify and hold the other harmless from, any and all claims, lawsuits, losses, damages, expenses, costs and liabilities, including, without limitation, court costs and attorney's fees which a party to this Agreement may sustain as a result of, or in connection with, either directly or indirectly, a breach or violation of any of the provisions of this Agreement by the other party. 6.5 Remedies. The Employee hereby agrees that if the Employee violates any provision of this Agreement, the Employers shall be entitled, if they, or either of them, so elect, to institute and prosecute proceedings at law or in equity to obtain damages with respect to such violation or to enforce the specific performance of this Agreement by the Employee or to enjoin the Employee from engaging in any activity in violation hereof. 6.6 Waiver. The waiver by either party to this Agreement of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent breach. 6.7 Notices. Any communication which may be required under this Agreement shall be in writing and shall be deemed to have been properly given when delivered personally at the address set forth below for the intended party during normal business hours, or when sent by U.S. registered or certified mail, return receipt requested, postage prepaid as follows: If to the Bank or Cape Cod Bank and Trust Company the Company: 307 Main Street Hyannis, MA 02601 If to the Employee: Mr. Noal D. Reid 156 Blue Rock Road South Yarmouth, MA 02664 Notices shall be given to such other addressee or address, or both, as a particular party may from time to time request by written notice to the other party to the Agreement. Each notice, request, demand, approval or other communication which is sent in accordance with this Section shall be deemed to be delivered, given and received for all purposes of this Agreement as of two business days after the date of deposit thereof for mailing in a duly constituted 7 U.S. post office or branch thereof, one business day after deposit with a recognized overnight courier service or upon written confirmation of receipt of any facsimile transmission. Notice given to a party hereto by any other method shall only be deemed to be delivered, given and received when actually received in writing by such party. 6.8 Binding Nature; Employment Status. This Agreement shall inure to the benefit of and be binding upon the Employers, jointly and severally, and the Employee. This is not an agreement for the employment of the Employee and shall confer no rights on the Employee except as herein expressly provided. 6.9 Governing Law. This Agreement shall be governed and construed in accordance with the laws of The Commonwealth of Massachusetts. 6.10 Allocation of Obligations. The Bank and the Company shall allocate among themselves which party shall be responsible for paying the severance payments and other benefits directed by this Agreement. The payment by either party of such severance payments and other benefits shall satisfy the obligations of the non-paying party under this Agreement. Both the Bank and the Company shall be jointly liable in the event of a failure by both parties to pay such severance payments and other benefits. 6.11 Assignment; Prior Agreements. Neither the Employers nor the Employee may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Employers and the Employee, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Employee's death prior to the completion by the Employers of all payments due him under this Agreement, the Employers shall continue such payments to the Employee's beneficiary designated in writing to the Employers prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 6.12 Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 8 6.13 Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed instrument as of the day and year first above written. CAPE COD BANK AND TRUST EMPLOYEE COMPANY a Massachusetts Corporation By: /s/ John Otis Drew /s/ Noal D. Reid ----------------------------- --------------------------- Name: John Otis Drew Name: Noal D. Reid Title: Chairman of the Board of Directors CCBT BANCORP, INC. By: /s/ John Otis Drew ----------------------------- Name: John Otis Drew Title: Chairman of the Board of Directors 10 EX-10.3 4 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT EXHIBIT 10.3 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT THIS AMENDED AND RESTATED AGREEMENT is made and entered into this 11th day of February, 1999, by and between Cape Cod Bank and Trust Company, a Massachusetts trust company (the "Bank"), CCBT Bancorp, Inc., a Massachusetts corporation (the "Company") (the Bank and the Company, collectively, the "Employers") and Larry K. Squire, a resident of Orleans, Massachusetts ("Employee"). WITNESSETH, the Company is the holding company for the Bank; WHEREAS the Employers have determined that it is in the best interests of the Employers to allow the Employee to consider the prospect of a Change in Control (as herein defined) in an objective manner and in consideration of the services to be rendered by the Employee to the Employers and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Employers, the Employers are willing to provide, subject to the terms of this Agreement, certain benefits upon the occurrence of a Terminating Event (as herein defined) subsequent to a Change in Control. WHEREAS the Employer and the Employee hereby amend and restate this Agreement to reflect the reorganization of the Bank into holding company structure, including the addition of the Company as a party to this Agreement. NOW THEREFORE, in consideration of the promises and mutual covenants herein contained, the Employers and the Employee hereby agree as follows: 1. DEFINITIONS. 1.1 "Affiliate" means: 1.1.1 A member of a controlled group of corporations of which either of the Employers is a member; or 1.1.2 An unincorporated trade or business which is under common control with either of the Employers as determined in accordance with Section 414(c) of the Internal Revenue Code of 1986, as amended (henceforth the "Code") and regulations issued thereunder. For purposes hereof, a "controlled group of corporations" shall mean a controlled group of corporations as defined in Section 1563(a) of the Code determined without regard to Section 1563(a)(4) and (e)(3)(C) of the Code. 1.2 "Base Annual Salary" means the annualized value of the Employee's salary, based on the most recent pay period, prior to a Change of Control. 1.3 "Change in Duties" means: 1.3.1 A significant reduction in the nature or scope of the Employee's authority or duties from those immediately prior to the date on which a Change of Control occurs; 1.3.2 A reduction in the Employee's Base Annual Salary; 1.3.3 Exclusion from any incentive program from which the Employee was previously eligible, or which other executives with comparable duties participate in; 1.3.4 A change in location of the Employee's principal place of employment by more than fifty (50) miles; 1.4 "Change in Control" shall be deemed to have occurred in any one of the following events: 1.4.1 if there has occurred a change in control of either the Company or the Bank which the Company or the Bank would be required to report in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or, if such form and the related regulations are no longer in effect, any forms or regulations promulgated by the Securities and Exchange Commission, pursuant to the Exchange Act, which are intended to serve similar purposes; or 1.4.2 A Change in Control of the Company or the Bank has occurred within the meaning of the Change in Bank Control Act, as amended and the rules and regulations promulgated thereunder; or 1.4.3 Without limitation such a Change in Control shall be deemed to have occurred at such time as: 1.4.3.1 Any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act), or group of persons acting in concert, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act ) directly or indirectly, of any class of equity securities of the Company representing 50% or more of a class of equity securities except for any securities purchased by the Bank's employee stock ownership plan and trust; or 2 1.4.3.2 Individuals who constitute the Board of the Company on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same Committee serving under an Incumbent Board, shall be, for purposes of this clause 1.4.3.2 considered as though he were a member of the Incumbent Board; or 1.4.3.3 A plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or similar transaction occurs in which the Company is not the resulting entity; or 1.4.3.4 A proxy statement shall be distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company. 1.4.4 Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 1.5 "Code" means the Internal Revenue Code of 1986, as from time to time amended. 1.6 "Constructive Termination" means the voluntary termination of employment by the Employee following a Change in Duties following a Change of Control. 1.7 "Employment Compensation" means any salary, bonus or commissions paid to the Employee as an employee (as defined in the Code) by any entity other than the Employers or their successors. If the Employee is a partner in a partnership, this definition shall include the Employee's share of partnership income. 1.8 "Exchange Act" means the Securities Exchange Act of 1934, as from time to time amended. 3 1.9 "Termination for Cause" means the termination of the Employee's employment with the Bank or the Company, as applicable, as a result of: 1.9.1 The Employee's failure or refusal to perform the Employee's duties occasioned by reason other than sickness or other disability of the Employee, which is not cured within ten (10) business days after written notice from the Bank or the Company, as applicable, specifying such failure or refusal has been delivered; 1.9.2 Commission by the Employee of any materially fraudulent, dishonest or other act of misconduct in the performance of the Employee's duties hereunder, other than at the specific direction of the Board of the Bank or the Company, as applicable; or 1.9.3 Conviction for any felony or crime involving moral turpitude. 1.10 "Voting Securities" means any securities which ordinarily possess the power to vote in the election of directors without the happening of any precondition or contingency. 2. TERM. Subject to the provisions for earlier termination hereinafter set forth in Section 4 of this Agreement, the term of this Agreement shall commence on the date hereof and end on the day preceding the second anniversary hereof. 3. AUTOMATIC EXTENSION. Unless the Employee receives written notification from either of the Employers of their intention not to renew this Agreement at least twelve (12) months prior to the expiration date, plus any extensions, the term of this Agreement shall automatically be extended by twelve (12) months. 4. TERMINATION OF EMPLOYMENT. 4.1 Termination Prior to a Change in Control: 4.1.1 Prior to a Change in Control, the Employers may terminate the Employee's employment under this Section of the Agreement for any reason. 4.1.2 If the Employee's employment is terminated pursuant to this Section 4.1, any severance policies maintained by the Bank or the Company, as applicable, shall apply and no amounts shall be payable pursuant to this Agreement. 4 4.2 Termination following a Change in Control: 4.2.1 If, during a period of two years following a Change in Control, the employment of the Employee is terminated by the Bamk or the Company, as applicable, for any reason, other than Cause, or if the Employee is subject to Constructive Termination, benefits shall be payable under Section 5. 4.2.2 If the Employee voluntarily terminates his or her employment following a Change in Control for any reason other than Constructive Termination, no amount shall be paid pursuant to this agreement. 5. BENEFIT FOLLOWING A CHANGE IN CONTROL. If a benefit is payable, pursuant to Section 4.2.1, the Employee shall receive, in monthly installments, payable on the first of each month, an amount equal to: 5.1 One-twelfth (1/12th) of the Employee's Base Annual Salary, less any withholding required pursuant to the Code; reduced by 5.2 Any Employment Compensation payable to the Employee for that month, whether received currently or deferred. 5.3 This benefit shall be payable for 24 months following the termination of the Employee's employment with the Bank or the Company, as applicable. 5.4 No other amounts shall be payable under this Agreement in lieu of bonuses, perquisites or other benefits maintained by the Employers, nor shall the Employee be considered to continue in the employ of the Bank or the Company, as applicable, while payments are being made pursuant to this Section 5. 5.5 Limitation on Benefits. 5.5.1 It is the intention of the Employee and of the Employers that no payments by the Employers to or for the benefit of the Employee under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Employers by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Employers, such payments shall be reduced to the maximum amount which can be deducted by the Employers. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Employee, 5 such excess payments shall be refunded to the Employers with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order than no such payments shall be non-deductible to the Employers by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Employee shall determine which method shall be followed, provided that if the Employee fails to make such determination within forty-five days after the Employers have sent him written notice of the need for such reduction, the Employers may determine the method of such reduction in their sole discretion. 5.5.2 If any dispute between the Employers and the Employee as to any of the amounts to be determined under this Section 5.5.2, or the method of calculating such amounts, cannot be resolved by the Employers and the Employee, either the Employers or the Employee after giving three days' written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Employers and the Employee. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Employers and the Employee. The Employers shall bear the costs of any such determination. 6. MISCELLANEOUS. 6.1 Agreement Supersedes. This Agreement supersedes all prior agreements and understandings by and between the Employee and the Employers and of any Affiliates of their respective directors, officers, shareholders, employees, attorneys, agents, or representatives, including any Severance Agreement, Employment Letter, Employment Terms, Non-Disclosure Agreement and /or Employment Agreement, and constitutes the entire agreement between the parties, respecting the subject matter hereof; there are no representations, warranties or other commitments other than those expressed herein. 6.2 Noncontravention. The Employee represents and warrants to the Employers that the Employee is not a party to or bound by, and the employment of the Employee by the Employers or the Employee's disclosure of any information to the Employers or their use of such information will not violate or breach any employment, retainer, consulting, license, non-competition, non-disclosure, trade secrets or other agreement between the Employee and any other person, partnership, corporation, joint venture, association or other entity. 6 6.3 Modification; Waiver. No modification or amendment of, or waiver under, this Agreement shall be valid unless signed in writing and signed by the Employee and the Chairman of the Board of Directors of the Bank and the Company, pursuant to expressed authority of the Board of each entity. 6.4 Indemnification. The Employee and the Employers and their Affiliates each agree to indemnify and hold the other harmless from, any and all claims, lawsuits, losses, damages, expenses, costs and liabilities, including, without limitation, court costs and attorney's fees which a party to this Agreement may sustain as a result of, or in connection with, either directly or indirectly, a breach or violation of any of the provisions of this Agreement by the other party. 6.5 Remedies. The Employee hereby agrees that if the Employee violates any provision of this Agreement, the Employers shall be entitled, if they, or either of them, so elect, to institute and prosecute proceedings at law or in equity to obtain damages with respect to such violation or to enforce the specific performance of this Agreement by the Employee or to enjoin the Employee from engaging in any activity in violation hereof. 6.6 Waiver. The waiver by either party to this Agreement of a breach of any provision of this Agreement by the other shall not operate or be construed as a waiver of any subsequent breach. 6.7 Notices. Any communication which may be required under this Agreement shall be in writing and shall be deemed to have been properly given when delivered personally at the address set forth below for the intended party during normal business hours, or when sent by U.S. registered or certified mail, return receipt requested, postage prepaid as follows: If to the Bank or Cape Cod Bank and Trust Company the Company: 307 Main Street Hyannis, MA 02601 If to the Employee: Mr. Larry K. Squire 8 Spinnaker Trail Orleans, MA 02653 Notices shall be given to such other addressee or address, or both, as a particular party may from time to time request by written notice to the other party to the Agreement. Each notice, request, demand, approval or other communication which is sent in accordance with this Section shall be deemed to be delivered, given and received for all purposes of this Agreement as of two business days after the date of deposit thereof for mailing in a duly constituted 7 U.S. post office or branch thereof, one business day after deposit with a recognized overnight courier service or upon written confirmation of receipt of any facsimile transmission. Notice given to a party hereto by any other method shall only be deemed to be delivered, given and received when actually received in writing by such party. 6.8 Binding Nature; Employment Status. This Agreement shall inure to the benefit of and be binding upon the Employers, jointly and severally, and the Employee. This is not an agreement for the employment of the Employee and shall confer no rights on the Employee except as herein expressly provided. 6.9 Governing Law. This Agreement shall be governed and construed in accordance with the laws of The Commonwealth of Massachusetts. 6.10 Allocation of Obligations. The Bank and the Company shall allocate among themselves which party shall be responsible for paying the severance payments and other benefits directed by this Agreement. The payment by either party of such severance payments and other benefits shall satisfy the obligations of the non-paying party under this Agreement. Both the Bank and the Company shall be jointly liable in the event of a failure by both parties to pay such severance payments and other benefits. 6.11 Assignment; Prior Agreements. Neither the Employers nor the Employee may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Employers and the Employee, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Employee's death prior to the completion by the Employers of all payments due him under this Agreement, the Employers shall continue such payments to the Employee's beneficiary designated in writing to the Employers prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 6.12 Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 8 6.13 Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed instrument as of the day and year first above written. CAPE COD BANK AND TRUST EMPLOYEE COMPANY a Massachusetts Corporation By: /s/ John Otis Drew /s/ Larry K. Squire ----------------------------- ------------------- Name: John Otis Drew Name: Larry K. Squire Title: Chairman of the Board of Directors CCBT BANCORP, INC. By: /s/ John Otis Drew ----------------------------- Name: John Otis Drew Title: Chairman of the Board of Directors 10 EX-10.4 5 STOCK OWNERSHIP PLAN EXHIBIT 10.4 CAPE COD BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST Effective January 1, 1989 TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1 DEFINITIONS 2 1.01 Account........................................................... 2 1.02 Affiliated Employer............................................... 2 1.03 Annual Compensation............................................... 2 1.04 Beneficiary....................................................... 3 1.05 Board of Directors................................................ 3 1.06 Break in Service.................................................. 3 1.07 Committee......................................................... 3 1.08 Company........................................................... 3 1.09 Effective Date.................................................... 3 1.10 Employee.......................................................... 3 1.11 Entry Date........................................................ 4 1.12 Fiscal Year....................................................... 4 1.13 Limitation Year................................................... 4 1.14 Member............................................................ 4 1.15 Normal Retirement Age............................................. 4 1.16 Plan.............................................................. 4 1.17 Plan Year......................................................... 4 1.18 Stock............................................................. 4 1.19 Termination of Employment......................................... 5 1.20 Trustees.......................................................... 5 1.21 Trust Fund........................................................ 5 1.22 Year of Service................................................... 5 1.23 Valuation Date.................................................... 5 ARTICLE 2 ELIGIBILITY FOR PARTICIPATION..................................... 6 2.01 Eligibility of Participant........................................ 6 2.02 Eligibility Service............................................... 6 2.03 Hours of Service.................................................. 6 2.04 Reemployment of Former Members and Employees...................... 8 ARTICLE 3 CONTRIBUTIONS..................................................... 9 3.01 Initial Contribution.............................................. 9 3.02 Future Contribution............................................... 9 3.03 Limitation on Contributions....................................... 9 3.04 Timing of Contributions........................................... 10 3.05 Company's Contribution Irrevocable................................ 10 3.06 No Employee Contributions......................................... 10
(i) ARTICLE 4 ALLOCATION OF CONTRIBUTIONS AMONG MEMBERS......................... 11 4.01 Method of Allocating Initial...................................... 11 4.02 Amount and Method of Subsequent Allocations....................... 12 4.03 Annual Additions Defined.......................................... 12 4.04 Limitation for this Plan.......................................... 12 4.05 Limitations Applicable to Members Covered by Defined Benefit Plan. 14 4.06 Combining of Plans and Companies.................................. 15 4.07 Participation in Another Defined Contribution Plan................ 16 4.08 Fractional Shares................................................. 16 ARTICLE 5 MEMBERS' ACCOUNTS................................................. 17 5.01 Separate Accounts................................................. 17 5.02 Value of Accounts................................................. 17 5.03 Value to be Used for Distributions................................ 17 5.04 Payment of Dividends.............................................. 17 5.05 Diversification................................................... 18 ARTICLE 6 ELIGIBILITY FOR DISTRIBUTION OF SHARES............................ 20 6.01 Termination of Employment......................................... 20 6.02 Death............................................................. 20 6.03 Designation of Beneficiary........................................ 20 6.04 Time for Payment.................................................. 21 6.05 Required Distribution............................................. 22 ARTICLE 7 PAYMENT OF BENEFITS............................................... 23 7.01 Method of Payment................................................. 23 7.02 Form of Payment................................................... 23 7.03 Limitations on Payments........................................... 23 7.04 Put Option........................................................ 24 7.05 Offer to Purchase................................................. 27 7.06 Restrictions on Shares of Company Stock........................... 27 ARTICLE 8 WITHDRAWALS....................................................... 29 8.01 No Withdrawal of Company Contributions............................ 29 ARTICLE 9 RIGHTS AND DUTIES OF TRUSTEES..................................... 30 9.01 Appointment of Trustees........................................... 30 9.02 Action by Majority of the Trustees................................ 30 9.03 Powers of Trustees................................................ 30 9.04 Investments....................................................... 30 9.05 Exercise of Voting Rights......................................... 31 9.06 Reliance on Trustees as Owner..................................... 34 9.07 Liquidation of Assets............................................. 34 9.08 Evidence on Which Trustees May Act................................ 34
(ii) 9.09 Discretionary Action.............................................. 35 9.10 Records and Accounting............................................ 35 9.11 Payment of Taxes.................................................. 36 9.12 Compensation and Expenses of Trustees............................. 36 9.13 Legal Action...................................................... 37 9.14 Liability of Trustees............................................. 37 ARTICLE 10 ADMINISTRATION OF THE PLAN........................................ 39 10.01 Retirement and Administrative Committee........................... 39 10.02 Chairman, Secretary, Records...................................... 39 10.03 Majority Vote, Execution of Certificates.......................... 39 10.04 Powers............................................................ 40 10.05 Rules and Regulations............................................. 41 10.06 Other Fiduciary Capacity.......................................... 41 10.07 Employment of Professional Assistance............................. 41 10.08 Reliance.......................................................... 41 10.09 Expenses of Administration........................................ 41 10.10 Allocation of Fiduciary Responsibility............................ 42 10.11 No Joint Fiduciary Responsibilities............................... 43 10.12 Claims Procedure.................................................. 43 10.13 Notice to Employee................................................ 44 10.14 Government Reports................................................ 45 ARTICLE 11 NON-ALIENATION OF BENEFITS........................................ 46 11.01 Spendthrift Provision............................................. 46 11.02 Qualified Domestic Relations Orders............................... 46 ARTICLE 12 AMENDMENT AND TERMINATION......................................... 47 12.01 Right to Amend or Terminate....................................... 47 12.02 Liquidation of Trust Fund......................................... 47 ARTICLE 13 GENERAL PROVISIONS................................................ 48 13.01 Rights Against the Company........................................ 48 13.02 Records........................................................... 48 13.03 Payments to Incompetents.......................................... 48 13.04 Mailing of Benefits............................................... 48 13.05 Return of Contributions........................................... 49 13.06 Merger or Consolidation........................................... 50 13.07 Construction...................................................... 50 13.08 Liability of Company.............................................. 50 13.09 Impossibility of Performance...................................... 50 13.10 Headings.......................................................... 51 13.11 Execution of Agreement............................................ 51
(iii) ARTICLE 14 TOP-HEAVY PROVISIONS.............................................. 52 14.01 Article Controls.................................................. 52 14.02 Definitions....................................................... 52 14.03 Top-Heavy Status.................................................. 57 14.04 Termination of Top-Heavy Status 59
(iv) This AGREEMENT OF TRUST made this 24th day of August, 1989 by and between Cape Cod Bank and Trust Company, in its capacity as an employer, (hereinafter referred to as the "Company") and Cape Cod Bank and Trust Company, in their capacity as trustee (hereinafter referred to as the "Trustees"). W I T N E S S E T H WHEREAS the Company desires to afford eligible employees the opportunity of sharing in the ownership of the Company; and WHEREAS the Company believes this purpose can be accomplished by the establishment of an employees' stock ownership plan and trust for the exclusive benefit of its eligible employees as provided for under Sections 401 and 4975 of the Internal Revenue Code of 1986 as now in effect or as hereafter amended (hereinafter called the "Internal Revenue Code"); NOW, THEREFORE, the Company hereby establishes with the Trustees a trust comprising a transfer of excess assets from the Retirement Plan for Employees of the Cape Cod Bank and Trust Company which shall be considered the Company's first year's contribution, such funds (including shares of the Company's stock) as may be hereafter deposited with the Trustees by the Company, and any increment thereto and income therefrom, all such property to be held by the Trustee in trust as herein provided. The Trustee hereby accepts the Trust created hereunder, and agrees to perform the duties imposed on it by the provisions of this Agreement of Trust as set forth hereafter. ARTICLE 1 --------- DEFINITIONS ----------- The following words and phrases as used herein shall have the following meanings unless a different meaning is plainly required by the context: 1.01 "Account" means the separate account established for each Member of ------- the Plan. 1.02 "Affiliated Employer" means any corporation, trade, business, ------------------- partnership or proprietorship (other than the Company) which is a Member of the controlled group which includes the Company pursuant to Code Sections 414(b) and 414(c) or which is a member of an affiliated service group (other than the Company) which includes the Company pursuant to Code Section 414(m). 1.03 "Annual Compensation" means the basic compensation paid to an ------------------- Employee by the Company while a Member during each Plan Year and including any elective deferrals made under a plan maintained by the Company which qualifies under Section 401(k) or Section 125 of the Code, but excluding bonus payments, overtime, commissions and any expense allowance payments or any group life insurance contributions includable in income. "Annual Compensation" to be taken into account under the Plan shall not exceed Two Hundred Thousand Dollars ($200,000), or such other amount as may be provided pursuant to applicable law or regulations; provided, however, that in determining the Annual Compensation of a 5 percent owner (as defined in Section 416 of the Internal Revenue Code) or one of the top 10 Employees by total earnings from the Company, the Annual Compensation of a spouse and of 2 a lineal descendant under the age of 19 before the end of the Plan Year shall be aggregated with such Employee's Annual Compensation. 1.04 "Beneficiary" means the person or persons designated by the Member to ----------- receive any amounts payable under the Plan after the death of the Member. 1.05 "Board of Directors" means the Board of Directors of the Company. ------------------ 1.06 "Break in Service" means the twelve (12) month period commencing on ---------------- his date of employment and each anniversary thereafter during which the Employee is credited with less than 501 Hours of Service. 1.07 "Committee" means the Retirement and Administrative Committee ---------- provided for in Section 10.01. 1.08 "Company" means Cape Cod Bank and Trust Company, and any successor ------- corporation thereto, or any entity now or hereafter affiliated with Cape Cod Bank and Trust Company which adopts this Plan by vote of its board of directors and with the consent of the Company. The term "Company" also includes all of the foregoing as the context may require. 1.09 "Effective Date" means January 1, 1989. -------------- 1.10 "Employee" means any person who is in the employ of the Company on or -------- after January 1, 1989 and any person who is on a leave of absence which has been approved by the Company and who was an Employee within the meaning of this Section 1.10 on the day before the first day of the leave of absence (but only for the period of the approved leave of absence); but excluding (i) any Employee covered by a collective bargaining unit unless the collective bargaining agreement specifically provides for such Employee's inclusion in the Plan, (ii) any Employee who is not residing in the United States of America, (iii) any person employed on a 3 retainer basis (as with the performance of services for the Company of a legal, accounting or consulting nature), or under circumstances as are not included within the common law definition of "Employee", and (iv) any person who is director of the Company unless such person is also a salaried Employee. 1.11 "Entry Date" means the January 1 or July 1 of each Plan Year. ---------- 1.12 "Fiscal Year" means a twelve-month period beginning on January I and ----------- ending on December 31. 1.13 "Limitation Year" means a twelve-month period coinciding with the --------------- Plan Year. 1.14 "Member" means an Employee who has met the eligibility requirements ------ and is included in the Plan. 1.15 "Normal Retirement Age" means the date on which a Member reaches his --------------------- sixty-fifth (65th) birthday. 1.16 "Plan" means the Cape Cod Bank and Trust Company Employee Stock ---- Ownership Plan as described herein and as it may be amended from time to time. 1.17 "Plan Year" means a twelve-month period beginning on January 1 and --------- ending on December 31. 1.18 "Stock" means shares of common stock issued by the Company (or a ----- member of the controlled group which includes the Company) which are readily tradeable on an established securities market or, if such stock is not readily tradeable, shares of common stock issued by the Company which meet the requirements of Section 409(1)(2). 4 1.19 "Termination of Employment" means separation from the employment of ------------------------- the Company for any reason, including, but not limited to, Retirement, death, disability, resignation or dismissal from the Company. 1.20 "Trustees" means the party or parties, individual or corporate, named -------- and duly appointed by this instrument, and a successor Trustee or Trustees acting hereunder. 1.21 "Trust Fund" means the Stock of the Company, cash, and other property ---------- held by the Trustees for purposes of the Plan. 1.22 "Year of-Service" means a Plan year during which the Employee earns --------------- 1,000 Hours of Service. 1.23 "Valuation Date" means December 31 of each year, and such other dates -------------- as the Trustees may use from time to time for periodic valuation of the Trust Fund. Wherever used in this Plan the masculine shall include the feminine and the singular shall include the plural, unless the context indicates otherwise. 5 ARTICLE 2 --------- DEFINITIONS ----------- 2.01 Eligibility to Participate. An Employee shall be eligible to become a -------------------------- Member of the Plan on the Entry Date coincident with or next following his completion of two (2) years of Eligibility Service. 2.02 Eligibility Service. An Employee shall be credited with one year of ------------------- "Eligibility Service" for each computation period in which he is credited with 1,000 Hours of Service, including periods of service prior to the Effective Date of the Plan. The initial computation period shall be the twelve-month period commencing on the Employee's date of employment. Subsequent computation periods shall be the consecutive twelve-month periods commencing on the anniversary date of the Employee's date of employment. 2.03 Hours of Service. An Employee shall be credited with an "Hour of ---------------- Service" on the following basis: (a) each hour for which an Employee is paid or entitled to payment for the performance of duties for the Company; (b) each hour for which an Employee is paid, or entitled to payment, by the Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Hours under this paragraph shall be calculated and credited pursuant to Section 6 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; (c) Unless otherwise credited under subsections (a) or (b), each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Company; (d) each hour for which an Employee is neither paid nor entitled to payment by the Company for a period when no duties are performed due to illness or authorized leave of absence so long as the Employee returns to the service of the Company upon the expiration of his illness or upon the expiration of the period for which the authorized leave of absence was granted and provided further, that no more than 501 hours shall be credited under this subsection (d) and then only to prevent a one-year Break in Service, and (e) unless otherwise credited under a preceding paragraph and only to prevent Break in Service, each hour during a Maternity or Paternity Leave of Absence for which an Employee would have been compensated if he had continued to work his regular schedule as in effect immediately prior to the date such leave began, provided that no more than 501 hours shall be credited under this paragraph (e) and that hours shall be credited to the Plan Year in which the leave began, if necessary to prevent a one-year Break in Service during such Plan Year, or to the following Plan Year. "Maternity or Paternity Leave of Absence" means any leave of 7 absence of an Employee commencing on or after January 1, 1985, due to: (a) the pregnancy of the Employee, (b) the birth of a child of the Employee, (c) the adoption of a child by the Employee, or (d) the caring for such child during the period immediately following such birth or adoption. Hours of Service granted under paragraph (c) shall be credited to the Employee for the Plan Year to which the back pay award is applicable. An Employee shall receive credit under this Section 2.03 for Hours of Service earned while employed by an Affiliated Company, but only during the period of affiliation. 2.04 Reemployment of Former Members and Employees. A Former Member or a -------------------------------------------- former Employee who has completed two years of Eligibility Service (but has not yet become a Member) who is rehired by the Company after a Break in Service shall be eligible to become a Member on his date of reemployment. Any other Employee who is rehired by the Company shall be eligible to become a Member on the Entry Date following his satisfaction of the requirements of Section 2.01 and based on the following computation periods: (1) if such Employee is rehired before a Break in Service his original computation period determined under Section 2.02 shall apply; (2) if such Employee is rehired after a Break in Service a new computation period, commencing on his date of rehire shall apply. An Employee's prior years of Eligibility Service shall be counted in determining if the Employee has satisfied the eligibility requirements under Section 2.01. 8 ARTICLE 3 --------- CONTRIBUTIONS ------------- 3.01 Initial Contribution. The Company's initial contribution shall be -------------------- made in the form of a direct trust to trust transfer from the Retirement Plan for Employees of Cape Cod Bank and Trust Company and in an amount equal to the value of any excess assets in such plan determined after the satisfaction of all liabilities for benefits, costs, and expenses pursuant to the termination of such plan as of December 31, 1988; it being the Company's intent that such transfer be in accordance with any conditions or requirements of Section 4980 of the Internal Revenue Code. The initial contribution shall be used to purchase Stock issued by the Company no later than ninety (90) days after the transfer to the Plan (or such longer period as may be permitted, by the Secretary of the Treasury); such Stock to have the characteristics necessary to qualify as employer securities under Section 409(1) of the Code. 3.02 Future Contributions. After the initial contribution under Section -------------------- 3.01 has been fully allocated to the Accounts of Employees pursuant to Section 4.01, the Company's contributions under the Plan for each Fiscal Year shall be in cash or that number of shares of Stock having a fair market value on the last day of the Fiscal Year equal to such amount as shall be determined by the Company in its sole discretion. 3.03 Limitation on Contributions. Except with regard to the initial --------------------------- contribution under Section 3.01, the determination of the contribution shall be made in such manner and within such time as required under applicable law, regulation, or ruling to permit the Company to deduct such amount for the Fiscal Year; provided, however, that such annual contribution, in conjunction with any other plan sponsored by the Company and qualified under Section 9 401(a) of the Internal Revenue Code, shall not exceed the maximum amount deductible in arriving at the Company's taxable income for such year under the provisions of Section 404 of the Internal Revenue Code, or any statute of similar import. Notwithstanding the foregoing, the Company shall not make a contribution under Section 3.02 until the initial contribution under Section 3.01 is fully allocated in accordance with Section 4.01. 3.04 Timing of Contributions. The contribution for which provision is made ----------------------- in Section 3.02 shall be paid over to the Trustees by the Company prior to or coincident with the date for filing its Federal income tax return (including the period of any extensions thereof) for the Fiscal Year to which the contribution relates. 3.05 Company's Contributions Irrevocable. Except as provided in Section ----------------------------------- 13.05, any and all contributions made to the Trust by the Company shall be irrevocable and shall be applied in accordance with the provisions of the Plan to provide benefits of the Plan; and neither such contributions nor any income therefrom shall be used for, or diverted to, purposes other than for the exclusive benefit of Members under the Plan. 3.06 No Employee Contributions. No Employee shall be required or permitted ------------------------- to make any contributions under the Plan. ARTICLE 4 --------- ALLOCATION OF CONTRIBUTION AMONG MEMBERS ---------------------------------------- 4.01 Method of Allocating Initial Contribution. The initial contribution ----------------------------------------- to the Plan pursuant to Section 3.01 shall be allocated in accordance with the following procedures: (a) For the Plan Year in which the initial contribution occurs, one- eighth (1/8) of the Stock purchased (or such higher proportion as the Board of Directors may determine each year), but in no event in excess of the limitation under Code Section 415, shall be allocated as of the last day of the Plan Year to the Accounts of Members who are then employed by the Company and who earned a Year of Service during the Plan Year in the proportion that such Member's Annual Compensation bears to the total Annual Compensation of all Members; and (b) Any excess Stock not allocated in accordance with subsection (a) above shall be placed in a suspense account, and one-seventh (1/7) of such Stock (or such higher proportion as the Board of Directors may determine each year), but not in excess of the amounts permitted in the limitation under Code Section 415, shall be released and allocated as of the last day of each of the following Plan Years until all such Stock has been allocated to the Accounts of Members who are then employed by the Company in the proportion that such Member's Annual Compensation bears to the total Annual Compensation of all Members. 11 4.02 Amount and Method of Subsequent Allocations. Except as provided in ------------------------------------------- Section 4.01, the Company's contributions to the Plan each Plan Year shall be allocated as of the last day of each Plan Year among the Members under the Plan who are then employed by the Company and who earned a Year of Service during the Plan Year. The allocation for each Member shall be based on the proportion that such Member's Annual Compensation bears to the total Annual Compensation of all Members. Such allocations shall be made after the Valuation Date coinciding with the end of the Plan Year and after the first making adjustment of the Member Accounts in accordance with Section 5.02. 4.03 Annual Additions Defined. The term "Annual Additions" for any ------------------------ Limitation Year means the amount of contributions made by the Company under the Plan and allocated to the Member's Account for such Limitation Year. For purposes of determining Annual Additions the allocation of Stock to a Member's Account from the suspense account under Section 4.01(b) shall be valued at the price of the Stock at the time such Stock was initially credited to the suspense account. 4.04 Limitation for this Plan. The Annual Additions to a Member's Account ------------------------ under the Plan for any Limitation Year shall not exceed the lesser of (i) twenty-five percent (25%) of the Member's total compensation for such Limitation year, or (ii) $30,000 (or, if greater, one-quarter of the dollar limitation in effect under Section 415(b)(1)(A) of the Internal Revenue Code). 4.041 In any Limitation Year in which no more than one-third of the Company's contributions are allocated to highly compensated employees (within the meaning of Section 414(q) of the Internal Revenue Code), the amount otherwise described in 4.04(ii) shall be 12 increased by the lesser of the amount otherwise described in 4-04(ii) or the value of Company Stock contributed, purchased with cash contributed, or allocated from the suspense account. 4.042 If it is determined that the Annual Additions to the Account of a Member for any Limitation Year are in excess of the limitations contained in Sections 4.04 and 4.041 due to the allocation of forfeitures, if any, as a result of a reasonable error in estimating a Member's compensation, or under other limited facts and circumstances, the Committee shall reduce the amount allocated with respect to such Limitation Year, unless the terms of any other qualified defined contribution plan maintained by the Employer provides for a reduction in the Member's Annual Addition under such other plan. In accordance with the provisions of Section 1.415-(6)(b)(6)(iii) of the Regulations issued under the Internal Revenue Code, if any excess contribution is determined to exist under this Plan, such amounts shall be held in a suspense account for the Limitation Year and all amounts in such suspense account shall be reallocated at the end of the next Limitation Year to the Accounts of all Members as part or all, as the case may be, of the Employer's contribution for such Limitation Year, or, if necessary, any subsequent Limitation Year, or, if necessary, any subsequent Limitation Year. 4.043 For purposes of this Section 4.04, "compensation" means all earned income, wages, salary and other amounts received for personal services rendered in the course of employment with the Company but shall not include contributions that qualify under Internal Revenue Code Sections 401(k) or 125 or other contributions to plans of deferred compensation that are not includible in a Member's gross income for the taxable year in which contributed, amounts realized in connection with stock option or stock purchase plans, or other amounts that receive special tax benefits. 13 4.05 Limitations Applicable to Members Covered by Defined Benefit Plan. If ----------------------------------------------------------------- a Member is or has ever been covered by a defined benefit plan maintained by the Company, the maximum Annual Additions to a Member's Account for any Limitation Year shall be limited to the amount determined as follows: (a) First, there shall be computed under this Plan at the close of each Limitation Year a fraction in which the numerator is the sum of the Annual Additions to the Member's Account as of the end of the Limitation Year and the denominator is the sum for all years of an Employee's service of the lesser of: (i) one-hundred twenty-five percent (125%) of the maximum dollar limit pursuant to Section 415(c)(1)(A) of the Internal Revenue Code for the applicable year but determined without regard to the special dollar limitation under Section 4.041; or (ii) one-hundred forty percent (140%) of twenty-five (25%) of the Member's total compensation as defined in Section 4.043 for the applicable year; (b) Second, there shall be computed under the defined benefit plan as of the close of each Limitation Year a fraction in which the numerator is the Member's projected benefit at Normal Retirement Date under such plan in which the Member participates (assuming continued employment and level compensation) and the denominator is the lesser of: 14 (i) one-hundred twenty-five percent (125%) of the maximum limit pursuant to Section 415(b)(1)(A) of the Internal Revenue Code for that year; or (ii) one-hundred forty percent (140%) of the Member's average compensation for the three consecutive calendar years while a Member of the Plan in which his compensation as defined in Section 4.043 was highest; (c) Third, the sum of the fractions determined under (a) and (b) above shall not exceed 1.0. If it is determined that such limitation for any Limitation Year has been or will be exceeded and if the fraction determined under (b) above is not adjusted to avoid exceeding such limitation, then the Annual Additions to the Member's Account for such Limitation Year shall be reduced as necessary in order to avoid exceeding such limitation. 4.06 Combining of Plans and Companies. For purposes of determining the -------------------------------- limitations contained in this Article 4, (a) all defined contribution plans (whether or not terminated) of the Company or an Affiliated Employer shall be treated as one defined contribution plan and the Member's various individual accounts under such plans shall be aggregated; (b) all defined benefit plans (whether or not terminated) of the Company or an Affiliated Employer shall be treated as one defined benefit plan. 15 4.07 Participation in Another Defined Contribution Plan. If a Member is a -------------------------------------------------- participant in another defined contribution plan in addition to this Plan, and as a result of the limitation in Section 4.05 the Member has or will have an excess Annual Addition in a Limitation Year, then the allocations to the Member's Account under this Plan will first be reduced in order to satisfy such limitation. 4.08 Fractional Shares. Shares shall be allocated to the Members' accounts ----------------- under Sections 4.01 and 4.02 to the nearest one-thousandth of a share. 16 ARTICLE 5 --------- MEMBERS' ACCOUNTS ----------------- 5.01 Separate Accounts. The Company (or their agent) shall maintain ----------------- individual Accounts of the interest of Members. Each such Account shall show in dollars and/or in shares of Stock the Member's share of the Trust Fund. A Member shall be fully vested in the value of his Account at all times. 5.02 Value of Accounts. As of each Valuation Date the Trustees shall ----------------- determine the total net worth of-the Trust Fund by valuing all the assets of such Trust Fund exclusive of the Company's contributions for the respective Plan Year. The valuation of all such assets shall be at their fair market value as of such Valuation Date. Each Member's Account shall then be credited with the Member's allocable share of Stock for the Plan Year and any Stock received in the form of stock splits. In addition, a Member's Account shall be adjusted to reflect the Member's proportionate share of any earnings or losses in the Trust Fund due to investments in other than Company Stock or the dividends on Company Stock distributed to Members in accordance with Section 5.04. 5.03 Value to be Used for Distributions. The value of a Member's share in ---------------------------------- the Trust Fund for purposes of a distribution due to a Termination of Employment shall be the value of the Member's Account as of the date of distribution and based on the number of shares (and fractional shares) of Stock in his Account as of the Valuation Date immediately following such Termination of Employment. 5.04 Payment of Dividends. Dividends received by the Trust on Stock -------------------- allocated to a Member's Account shall be paid to such Member in cash as soon as practicable after receipt by 17 the Trustee, but not later than ninety (90) days after the end of the Plan Year in which the dividends were received. Dividends received by the Trust on Stock held in the Suspense Account shall be paid to Members in cash in the same proportion that the number of shares of Stock allocated to a Member's Account bears to the total number of shares of Stock allocated to the Accounts of all Members; such dividends to be paid as soon as practicable after receipt of the dividend by the Trustee, but no later than ninety (90) days after the end of the Plan Year in which the dividends were received. 5.041 Notwithstanding Section 5.04, the Company may provide that the dividends allocable to each Member under Section 5.04 shall be paid directly to the Member (or the Member's Beneficiary) without first being paid into the Trust. The Company shall instruct the Trustee to provide to the Company's dividend paying agent any necessary information to pay and process such dividend amounts, provided the Trustee is given reasonable notification by the Company. 5.05 Diversification. A Member who has attained age fifty-five (55) and --------------- has completed ten (10) years of participation in the Plan may elect, within ninety (90) days after the close of each Plan Year in the six (6) Plan Year period beginning with the Plan Year he attains age fifty-five (55) (or he completes ten (10) years of Eligibility Service, if later) to receive a distribution of twenty-five percent (25%) of his Account in the Plan (to the extent such portion exceeds the amount of any prior distribution under this Section). The Member may elect to receive a distribution of up to fifty percent (50%) of his Account (to the extent such portion exceeds the amount of any prior distribution under this Section) for the last Plan Year such election is available to him. The distribution of a portion of the Member's Account 18 covered by this election shall be made within ninety (90) days after the period during which the election may be made. 19 ARTICLE 6 --------- ELIGIBILITY FOR DISTRIBUTION OF SHARES -------------------------------------- 6.01 Termination of Employment. Subject to the provisions of Section 6.05, ------------------------- a Member shall be eligible to receive the value of his Account within a reasonable period of time (not to exceed 180 days) following the end of the Plan Year in which occurs his Termination of Employment. 6.02 Death. In the event that any Member shall die while in the service of ----- the Company, or after he has (a) retired from service with the Company, or (b) terminated his Service with the Company, but before he has received the entire amount to his credit in the Trust Fund, all amounts held for the benefit of the Member shall be paid to the Beneficiary or Beneficiaries designated under the provisions of 6.03; provided, however that in the event there is no named Beneficiary surviving, or in the event that the named Beneficiary or Beneficiaries should die before receiving all amounts held in the Member's Account, any amount due shall be paid in equal portions to such person or persons in the following classes of successive beneficiaries surviving the Member: the Member's (a) spouse, (b) natural and adopted children, and children of deceased children, per stirpes (c) parents in equa1 shares, (d) brothers and sisters and nephews and nieces who are children of deceased brothers and sisters, per stirpes, or (e) executors or administrators. The payment shall be made in a lump sum. 6.03 Designation of Beneficiary. When an Employee becomes a Member under -------------------------- the Plan he shall designate a Beneficiary who shall be the surviving spouse of the Member, or, who shall be the person or persons designated by the Member in the latest written notice received by the Trustees on a form provided by the Trustees in the event that either: (a) the 20 deceased Member is not survived by a spouse, or (b) the deceased Member's surviving spouse had irrevocably agreed, in writing, witnessed by a notary public or a Plan representative, to the designation of another specified Beneficiary. The Member shall have the right to change his Beneficiary from time to time in the manner hereinabove described, provided the applicable spousal consent requirements are again satisfied. 6.04 Time for Payment. Unless the Member otherwise elects another date in ---------------- writing, in no event will payment of benefits be eligible to commence later than the time set forth in Section 6.041 or, if earlier, one (1) year after the close of the Plan Year in which the latest of the following events occurs: (a) the Member separates from service by reason of attaining his Normal Retirement Age, disability or death; or (b) the fifth Plan Year following the Plan Year in which the Member otherwise separates from service, provided that such Member is not reemployed before the distribution is required to begin under this subsection (b). 6.041 Unless the Member otherwise elects another date in writing, in no event will payment of benefits be eligible to commence later then the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occurs: (a) the Member's sixty-fifth (65th) birthday; (b) the tenth (10th) anniversary of the date on which the Member's Participation in the Plan commenced; or (c) termination of the Member's employment with the Company. 21 6.05 Required Distribution. Distribution of the Account of all Members --------------------- shall begin no later than the April 1st of the calendar year following the calendar year in which he attains the age of seventy and one-half (70 1/2). If a Member continues in the employment of the Company after such date, any additional allocations (of contributions and earnings) to his Account shall be paid out as of December 31 of each Plan Year subsequent to the Plan Year in which he attains the age of seventy and one-half. 22 ARTICLE 7 --------- PAYMENT OF BENEFITS ------------------- 7.01 Method of Payment. When a Member is eligible for a distribution of ----------------- his share in the Trust Fund in accordance with the provisions of Article 6, the Committee shall determine the time of payment and shall instruct the Trustees to pay the Member's Account to him in a lump sum, provided that no lump sum payment may be made prior to the Member attaining age 62 without the Member's consent if the value of such payment would be in excess of $3,500. 7.02 Form of Payment. Except as provided in Sections 5.04 and 7.04, all --------------- payments made under the Plan shall be made in shares of Stock. In the event that the amount of any distribution is not divisible into whole shares of Stock, the Trustees shall distribute the largest number of whole shares not in excess of such amount, and shall either sell the remaining fractional shares to the Company at fair market value as of the same Valuation Date used to determine the value of the Member's distribution and distribute the sale proceeds to the Member, or distribute the value of the remaining fractional shares to or on his behalf from the funds available in the Trust. Any assets held in a Member's Account in a form other than Company Stock shall be distributed in cash. 7.03 Limitations on Payments. Neither the method nor the time for payment ----------------------- of benefits shall be permitted if the anticipated effect would be: (a) to extend benefits beyond the joint and last survivor life expectancy of the Member and a designated Beneficiary; or 23 (b) to reduce the Member's benefit more than fifty percent (50%) of the amount it otherwise would have been if someone other than the Member's spouse is named in such option. 7.04 Put Option. Except as hereinafter provided, each Qualified Holder of ---------- Stock distributed from the Plan shall have the right, at the times, for the price, and on the terms specified below, to require the Company to repurchase any or all of the shares of Stock then held by such Qualified Holder, such right to be referred to herein as a "Put Option". A Put Option shall be exercised by written notice by a Qualified Holder to the Committee, specifying the number of shares of Stock to be repurchased and accompanied by one or more stock certificates evidencing the Stock tendered and a stock assignment duly executed in blank. To the extent mutually agreed upon by the Company and the Trustee, the rights and obligations of the Company hereunder at the time of exercise of such Put Option may be assumed and discharged by the Trustee. The rights and obligations of the Company hereunder may also be assumed and discharged by any one or more other parties designated by the Company and who agree thereto. A Qualified Holder is any person who is or at any time was a Member of the Plan. 7.041 Any Put Option referred to herein may be exercised at any time during the sixty-day period which begins on the date the Stock subject to the Put Option is distributed by the Plan to the Qualified Holder in question and, if the Qualified Holder fails to exercise the Put Option within said sixty-day period, during an additional sixty-day period that commences on the later of the first day of the following Plan Year or the lapse of the initial sixty-day period, provided, that such sixty-day periods shall be extended by the duration of any period 24 during which the party bound by the Put Option is prohibited from honoring it by applicable federal or state law. 7.042 The price per share at which a Put Option is exercisable hereunder shall be the fair market value thereof determined in good faith and otherwise in accordance with the Code by the party purchasing the Stock as of the most recent Valuation Date; provided, however, that if the person exercising the Put Option is a Disqualified Person as defined in Section 4975(e)(2) of the Internal Revenue Code, such fair market value shall be determined as of the date of the purchase. In the case of the exercise of a Put Option by any person other than a Disqualified Person, a determination of fair market value based on at least an annual appraisal independently arrived at by a person who customarily makes such appraisals and who is independent of any party to the transaction may be relied upon as a good faith determination of fair market value. 7.043 The purchase price determined pursuant to the foregoing paragraph shall be payable in cash within 30 days of receipt by the Committee of notice of exercise of the Put Option, provided that, in the cast of repurchase by the Company or the Trust (hereinafter referred to as the "Obligor") of shares of Company Stock which are distributed to the Member as part of a total distribution, the Obligor may, at its option, purchase such Shares in substantially equal periodic installments (not less frequently than annually) over a period beginning not later than 30 days after exercise of the Put Option and not exceeding five (5) years. As used herein, the term "total distribution" shall mean the distribution within one (1) taxable year to the Member or his Beneficiary of the balance of the Member's Account. The obligation to make any payments under this Section due later than 30 days from the date of 25 exercise of the Put Option shall be evidenced by the Obligor's promissory note bearing a reasonable rate of interest and shall provide adequate security. 7.044 Notwithstanding the foregoing, no Stock shall be subject to a Put Option hereunder if it is readily traded when distributed to the Qualified Holder and at all subsequent times during the sixty-day periods during which the Put Option would ordinarily be exercisable. Stock is subject to a trading limitation if it is subject to a restriction under any federal or state securities law, any regulation thereunder, or an agreement (not otherwise prohibited by Section 7.05) affecting the Stock which would make the Stock not as freely tradeable as Stock not subject to such restriction. If any such Stock is readily traded without restriction when distributed but ceases to be so traded within either of said sixty-day periods, the Obligor shall so notify the Qualified Holder within 10 days that for the remainder of such period, the Stock is subject to a Put Option, such notice to specify the terms of the Put Option. If any such notice is not given within such 10-day period, the number of days between such 10th day and the day the notice is given shall be added to the duration of the applicable sixty-day period in which the Put Option is exercisable. As used herein, the term "readily traded" shall refer to Stock of the Company that is listed on a national securities exchange registered under Section 6 of the Securities Exchange Act of 1934 or that is quoted on a system sponsored by a national securities association registered under Section 15(A)(b) of the Securities Exchange Act. 7.045 These rights with respect to shares of Company Stock shall be nonterminable once granted except to the extent they cease to be exercisable as provided in Section 7.044 or are exercised. 26 7.046 If the Stock of the Company held in the Plan is issued by a bank (as defined in Section 581 of the Code) which is prohibited by law from redeeming or purchasing its own securities, the Put Option requirements of this Section 7 shall not be applicable, provided that Members who are entitled to a distribution from the Plan shall receive the value of their Account in cash. 7.05 Offer to Purchase. The Company or the Trustee may at any time offer ----------------- to purchase any shares of Company Stock (including, if a Put Option is issued, the Stock not sold under the Put Option described in Section 7.04) which are held by a former Member (or Beneficiaries), at the then fair market value determined by the Company or the Trustee in the same manner as fair market value is determined for purposes of the Put Option described in Section 7.04. The terms of payment for any such purchase of Company Stock may be either in a lump sum or in installments over a period not exceeding five (5) years, with interest payable at a reasonable rate on any unpaid installment balance (as determined by the Trustee). 7.06 Restrictions on Shares of Company Stock. Shares of Company Stock held --------------------------------------- or distributed by the Trustee may be restricted as to sale or transfer by the Articles of Organization or By-Laws of the Company, which restrictions shall be similarly applicable to all shares of stock of the Company of the same class, and shall, if required by law, bear such appropriate legends and be subject to such restrictions as shall, in the opinion of counsel for the Company, be required in order to assure compliance with applicable federal and state securities and banking laws. Except as otherwise provided in Section 7.04 no shares of Company Stock held or distributed by the Trustee may be subject to a put, call or other option, or buy-sell or similar arrangement. The provisions of Section 7.04 shall continue to be 27 applicable to Company Stock even if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code. 28 ARTICLE 8 --------- WITHDRAWALS ----------- 8.01 No Withdrawal of Company Contributions. A Member shall not be -------------------------------------- entitled to withdraw any portion of his interest in the Trust Fund while he remains in the service of the Company, except for distributions made pursuant to the diversification requirements of Section 5.05 and distributions required by Section 6.05. 29 ARTICLE 9 --------- RIGHTS AND DUTIES OF TRUSTEES ----------------------------- 9.01 Appointment of Trustees. The Board of Directors of the Company shall ----------------------- appoint one or more Trustees, who may but need not be Members of the Plan, to administer the Trust Fund and manage the assets held in the Trust Fund. Each Trustee shall serve at the pleasure of the Board of Directors of the Company, and may resign at any time by giving the Board of Directors not less than thirty (30) days' notice unless the Board of Directors accepts a lesser period of notice. 9.02 Action by Majority of the Trustees. A majority of the Trustees at the ---------------------------------- time in office may do any act which the Plan authorizes or requires the Trustees to do, and the action of such majority expressed from time to time by a vote at a meeting, or in writing without a meeting, which shall constitute the action of the Trustees. 9.03 Powers of Trustees. It shall be the duty of the Trustees to invest ------------------ and reinvest the funds of the Trust pursuant to Section 9.04, and to make distributions therefrom in accordance with the Plan. 9.04 Investments. Subject to all outstanding obligations of the Trust, the Trustees shall invest and reinvest all funds contributed to or accruing to the Trust (except those necessary to (a) pay the liabilities, if any, of the Trust, (b) pay any expenses incurred by the Trustees which the Company fails to pay or (c) to make distributions of dividends) primarily in shares of Stock. With due regard to providing for such primary investment policy, the Trustees may invest funds in savings accounts, certificates of deposit, high-grade short-term securities, stocks, bonds, investment companies, common and collective trusts funds for 30 employee benefit plans which satisfy the requirements of Section 501(a) of the Code (the terms of which shall constitute a part of this Plan), or investments deemed by the Trustees to be desirable for the Trust, or such funds may be held in cash or cash equivalents; provided however, that the Trust may, at the discretion of the Trustee, be invested in any of the investment medium listed above that may be offered by the Company in the ordinary course of its banking business. All purchases of Stock shall be made at prices which, in the judgement of the Trustees, do not exceed the fair market value of such shares. The determination of the fair market value shall be determined in good faith by the Trustees in accordance with this Section and in accordance with regulations to be promulgated by the Secretary of Labor pursuant to Section 3(18) of the Employee Retirement Income Security Act of 1974. Stock may be acquired for cash or on terms. The Trustees may keep the Stock in the name of some other person, firm, or corporation or its own name without disclosing fiduciary capacity. The Trustees may sell at public auction or private contract, redeem, or otherwise realize upon such Stock and for such purposes may execute such instruments and writings and do such things as they shall deem proper. 9.05 Exercise of Voting Rights. Except as provided in Section 9.051, the ------------------------- Trustee shall at all times be entitled to vote in its discretion shares of Company Stock held in the Trust but not allocated to the Account of any Member and any shares of stock not issued by the Company. The Trustee shall in addition be entitled to vote in its discretion shares of Stock held in the Trust and allocated to the Stock Account of any Member; provided, that with respect to any corporate matter that involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, 31 reclassification, liquidation, dissolution, sale of substantially all assets, or such similar transactions as the Secretary of the Treasury may prescribe in regulations, each Participant shall be entitled to direct the Trustee as to the exercise of any voting rights attributable to shares of Stock then allocated to his Account but only to the extent required by Sections 401(a)(22) and 409(e)(3) of the Code and the regulations thereunder. 9.051 Registration-Type Class of Securities. Notwithstanding Section ------------------------------------- 9.05, if at any time the Company has a registration-type class of securities, the Committee shall establish a procedure whereby each Member shall direct the voting of shares of Company Stock allocated to his Account; if a Member fails so to direct, the Trustee shall vote such shares. A registration-type class of securities means a class of securities required to be registered under Section 12 of the Securities Exchange Act of 1934 or a class of securities that would be required to be so registered except for an exemption from registration provided under Section 12(g)(2)(H) of said Act. 9.052 Number of Votes. Members entitled to direct the voting of shares --------------- of Stock allocated to their Accounts pursuant to Sections 9.05 or 9.051 shall have one (1) vote with respect to each share of Stock. Stock which is held by the Trust and which is not allocated to the Account of any Member shall be voted by the Trustee in the same proportion determined after application of the preceding sentence to the shares of Stock allocated to the Accounts of Members, unless the Trustee makes a determination that to vote such shares of Stock in a different proportion would be in the best interest of Members of the Plan. 9.053 Voting on Offers. As soon as practicable after the commencement ---------------- of a tender or exchange offer ("Offer") for shares of Stock, the Committee shall use its best efforts to cause 32 each Member and former Member (whose Account has allocated to it any shares of Stock) to be advised in writing of the terms of the Offer, and to be provided with forms by which the Member may instruct the Trustee, or revoke such instructions, to tender shares of Stock credited to his Account, to the extent permitted under the terms of such Offer. Subject to the provisions of this Article 9, the Trustee shall follow the directions of each Member, but the Trustee shall not tender shares for which no instructions are received unless it makes a determination that to tender such shares is in the best interest of the Members. In advising Members of the terms of the Offer, the Committee may include statements from the Board of Directors setting forth its position with respect to the Offer. The giving of instructions by a Member to the Trustee to tender shares and the tender thereof shall not be deemed a withdrawal or suspension from the Plan or a forfeiture of any portion of the Member's interest in the Plan solely by reason of the giving of such instructions and the Trustee's compliance therewith. The number of shares as to which a Member may provide instructions shall be the total number of shares credited to his Account as of the close of business on the day preceding the date on which the Offer is commenced or such earlier date as shall be designated by the Committee which the Committee, in its sole discretion, deems appropriate for reasons of administrative convenience. Any securities received by the Trustee as a result of a tender of shares of Stock shall be held, and any cash so received, shall be invested in short-term investments, for the Account of the Member or former Member with respect to whom shares were tendered pending any reinvestment by the Trustee, as it may deem appropriate, consistent with the purposes of the Plan. 33 9.06 Reliance on Trustees as Owner. No person dealing with the Trustees ----------------------------- shall be required to take any notice of this Agreement, but all persons so dealing shall be protected in treating the Trustees as the absolute owners with full power of disposition of all the monies, Stock, and other property of the Trust, and all persons dealing with the Trustees are released from inquiry into the decision or authority of the Trustees and from seeing to the application of monies, Stock, or other property paid for or delivered to the Trustees. 9.07 Liquidation of Assets. In the event that cash is required by the --------------------- Trustees to effect any action or distribution under this Trust, or to pay any expenses of this Trust, or for any other reason deemed sufficient by the Trustees consistent with any outstanding obligations of the Trust, the Trustees shall take such action as to the sale or other disposition of Stock forming a part of the Trust as will provide the amount of cash necessary for such payments. 9.08 Evidence on Which Trustees May Act. In taking any action or ---------------------------------- determining any fact or question which may arise under this Trust, the Trustees may, with respect to the affairs of the Company or its Employees, rely upon any statement by the Company with respect thereto. In the event that any dispute may arise regarding the payment of any sums or regarding any act to be performed by the Trustees, the Trustees may in their sole discretion retain such payment or postpone the performance of such act until actual adjudication of such act shall have been made in a Court of competent jurisdiction; or until they shall have been indemnified against loss to their satisfaction; provided, however, that in the event of any such dispute, the Trustees may rely upon and act in accordance with any directions received from the Company. 34 9.09 Discretionary Action. Wherever under the provisions of this -------------------- Agreement the Trustees are given any discretionary power or powers, such power or powers shall not be exercised in such manner as to cause any discrimination in favor of or against any Employee or class of Employees. Any discretionary action taken by the Trustees hereunder shall, to the extent possible, be consistent with any prior discretionary action taken by them under similar circumstances, and to this end the Trustees shall keep a record of all discretionary action taken by them under any provision hereof. 9.10 Records and Accounting. The Trustees shall keep accurate and ---------------------- detailed records of their transactions hereunder and all their accounts, books, and records relating thereto shall be open at all reasonable times to the inspection of the Company and its authorized representatives. The Trustees shall render in writing at least once each twelve (12) months, accounts of their transactions under this Agreement to the Company and the Company may approve such accounts of the Trustee by an instrument in writing delivered to the Trustees. In the absence of the filing in writing by the Company of exceptions or objections to any such account within sixty (60) days after the receipt by the Company of any such account, the Company shall be deemed to have approved such account; and in such case, or upon the written approval of the Company of any such account, the Trustees shall be released, relieved, and discharged with respect to all matters and things set forth in such account except to the extent provided by the Employee Retirement Income Security Act and other applicable Federal law. Except as may otherwise be required by applicable Federal law, no person interested in the Trust or otherwise other than the Company may require an accounting or bring any action against the Trustees with respect to the Trust and its actions as Trustees. In any proceeding 35 instituted by the Trustees and/or the Company, only the Company and/or the Trustees shall be the necessary parties. The Trustees shall from time to time make such other reports and furnish such other information concerning the Trust as the Company may in writing reasonably request or as may be required by applicable Federal law. 9.11 Payment of Taxes. The Trustee shall upon direction of the Company ---------------- pay out of the Trust Fund any and all taxes of any and kinds, including without limitation property taxes and income taxes levied or assessed under existing or future laws upon or in respect of the Trust or any monies, securities or other property forming a part thereof or the income therefrom subject to the terms of any agreements or contracts made with respect to trust investments which make other provisions for such tax payments. The Trustees may assume that any taxes assessed on or in respect of the Trust or its income are lawfully assessed unless the Company shall in writing advise the Trustees that in the opinion of counsel for the Company such taxes are not or may not be lawfully assessed. In the event that the Company shall so advise the Trustees, the Trustees will, if so requested in writing by the Company, contest the validity of such taxes in any manner deemed appropriate by the Company or its counsel; or the Company may itself contest the validity of any such taxes in the name of the Trustees; and the Trustees agree to execute all documents, instruments, claims and petitions necessary or advisable in the opinion of the Company or its counsel for the refund, abatement, reduction, or elimination of any such taxes. 9.12 Compensation and Expenses of Trustees. The Trustees shall serve with ------------------------------------- such compensation for their services as shall be mutually agreed to between the Company and the Trustees, and all such fees and expenses of the Trust (including those arising under Section 36 9.14 hereof) shall be paid by the Trust to the extent that they are not paid by the Company. If the Trustee is a full time employee no compensation (other than normal wages paid by the Company) shall be paid to such Trustee from the Trust. If any Trustee shall die, resign, be removed, or for any other reason cease to be a Trustee, he shall be replaced by a successor, if any, appointed by the Board of Directors and until he is so replaced, the remaining Trustees shall exercise all of the powers of the Trustees. The appointment of a successor Trustee shall be effective upon written notification to the Company and to the Trustees of his acceptance of such appointment. 9.13 Legal Action. Except to the extent required by the Employee ------------ Retirement Income Security Act, the Trustees shall not be required to institute any legal action or to appear or participate in any legal action to which they may be a party, except to contest taxes, unless they shall have been first indemnified to their satisfaction by the Company for all loss, cost, and liability. 9.14 Liability of Trustees. Except as otherwise provided in Section 405 --------------------- of the Employee Retirement Income Security Act of 1974, no Trustees shall be liable for any act or omission of any other Trustees or otherwise for any loss, damage, or depreciation which may result in connection with the exercise of his duties or with the exercise of his discretion or upon any other act or omission hereunder except when due to his own willful misconduct. The Company either through insurance or otherwise shall indemnify and hold harmless each Trustee from any and all claims, loss, damage, expenses (including any reasonable counsel fees) and liability (including any reasonable amounts paid in settlement with the Employer's approval), arising from any act or omission of such Trustee, except when the same is judicially 37 determined to be due to the willful misconduct of such Trustee. No bond, surety, or other security shall be required of the Trustees unless specifically requested by the Company or unless required by law, in which case the cost of such bond, surety, or other security shall be an expense chargeable in accordance with Section 9.12. 38 ART --- ADMINISTRATION OF THE PLAN -------------------------- 10.01 Retirement and Administrative Committee. The general administration --------------------------------------- of the Plan and the responsibility for carrying out the provisions of the Plan shall be placed in an Retirement and Administrative Committee (the "Committee"), the members of which shall be appointed by the Board of Directors. The membership of the Committee may be changed by the Board of Directors at any time and from time to time hereafter; provided, however, that the Committee at all times shall consist of not fewer than three individuals; and, provided further, that any changes in the membership of the Committee shall be certified to the Trustees in writing by the Board of Directors. Any Member of the Committee may resign at any time by delivery of a written notice of resignation to the chairman or secretary of the Board of Directors. 10.02 Chairman, Secretary, Records. The members of the Committee shall ---------------------------- elect a Chairman from among their members and a Secretary who may, but need not, be one of the members of the Committee. The Committee may also designate other positions within the membership of the Committee. The Secretary shall keep minutes of the Committee's proceedings and all dates, records and documents pertaining to the administration of the Plan. 10.03 Majority Vote, Execution of Certificates. The action of the ---------------------------------------- Committee shall be determined by the vote or by agreement in writing or by other affirmative expression of a majority of its members; provided however, that the Committee may, by majority vote, designate one of its members to execute all documents for and on behalf of the Committee. 39 Any certificate or other written direction on behalf of the Committee shall be signed by those individuals granted authority by the Committee to sign documents on its behalf. 10.04 Powers. ------ (A) The Committee may appoint such agents, who need not be members of the Committee, as it may deem necessary for the effective exercise of its duties, and may delegate to such agents any powers and duties, both ministerial and discretionary, as the said Committee may deem expedient or appropriate. (B) Except as to matters required by the terms of the Plan and Trust, the Committee shall have complete control of the administration of this Plan, with all powers necessary to enable it properly to carry out its duties in that respect. Not in limitation, but in amplification of the foregoing, the Committee shall have power to construe this Plan and to determine all questions that may arise hereunder. It shall determine all questions relating to the eligibility of employees to participate in this Plan and the amount of benefit to which any person may become entitled hereunder. (C) To the extent not covered by any applicable insurance policy, the Company shall indemnify each member of the Committee against any and all claims, loss, damages, expense, and liability arising from any action or failure to act, except when the same is judicially determined to be due to the gross negligence or willful misconduct of such member. 40 10.05 Rules and Regulations. Subject to the limitations of this Article --------------------- 10 of the Plan, the Committee from time to time shall establish such supplemental rules and regulations for the administration of the Plan and the transaction of its business as it deems necessary. 10.06 Other Fiduciary Capacity. Nothing contained in this Article 10 of ------------------------ the Plan shall prevent a member of the Committee from serving the Plan in other fiduciary capacities. 10.07 Employment of Professional Assistance. The Company is empowered, on ------------------------------------- behalf of the Trust, to engage accountants, actuaries, legal counsel and such other personnel as it deems necessary or advisable to assist it in the performance of its duties under the Plan. The functions of any such persons engaged by the Company shall be limited to the specific services and duties for which they were engaged, and such persons shall have no other duties, obligations or responsibilities under the Plan or Trust. 10.08 Reliance. The Committee and the Trustees shall be entitled to rely -------- conclusively upon all advice, counsel and opinions provided by accountants, actuaries, legal counsel and other professional assistants engaged pursuant to Section 10.07. 10.09 Expenses of Administration. -------------------------- (A) Direct charges and expenses arising out of the purchase or sale of securities, and taxes levied on or measured by such transactions shall be charged against the Trust Fund. (B) The Company shall pay all other expenses reasonably incurred in administering the Plan, including expenses of the Committee and the Trustees, such compensation to the Trustees as from time to time may be agreed between the Company and the Trustees (as set forth in Section 41 9.14), fees for legal services, and all taxes, if any, other than those charged to the Trust under Section 10.09(A), provided that, at the discretion of the Company, such expenses may be paid from the Trust. 10.10 Allocation of Fiduciary Responsibility. The Trustees and the -------------------------------------- Company shall be the "named fiduciaries" of the Plan as defined in Section 402(a) of the Employee Retirement Income Security Act of 1974. The named fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan and Trust. (A) Company. The Company shall have the sole responsibility for ------- making contributions required under the Plan. The Company shall have the sole authority to appoint and remove the Trustee and members of the Committee. Moreover, the Company shall have the sole authority to terminate or amend the Plan or to merge or consolidate the Plan with other employee benefit plan. The Company shall be the "plan administrator" as defined under the Employee Retirement Income Security Act of 1974. (B) The Trustees. The Trustees shall have the sole responsibility of ------------ administering the Trust Fund and of managing the assets held in the Trust Fund, all as specifically provided under the Plan and Trust. (C) The Committee. The general administration of the Plan, and the ------------- responsibility for carrying out the provisions hereof, shall be placed in the Committee which is authorized and required to take all action necessary to ensure that the Plan meets the requirements of the Employee 42 Retirement Income Security Act of 1974 as now in effect and as it may hereafter be amended from time to time. 10.11 No Joint Fiduciary Responsibilities. The Plan and Trust are ----------------------------------- intended to allocate to each named fiduciary the individual responsibility for the prudent execution of the functions assigned to him, and none of such responsibilities or any other responsibility shall be shared by two or more of such named fiduciaries unless such sharing shall be provided by a specific provision of this Plan and Trust. Whenever one named fiduciary is required by the Plan and Trust to follow the directions of another named fiduciary, the two named fiduciaries shall not be deemed to have been assigned a shared responsibility, but the responsibility of the named fiduciary giving the directions shall be deemed his sole responsibility, and the responsibility of the named fiduciary receiving those directions shall be to follow them insofar as such instructions are on their face proper under applicable law. 10.12 Claims Procedure. ---------------- (A) The right of any Member, Beneficiary or other person claiming a benefit shall be initially determined by the Committee or its appointed agent. Any denial by the Committee or agent of the claim for benefits under the Plan shall be stated in writing and delivered or mailed to the claimant within ninety (90) days of receipt of the claimant's written application (unless the Committee notifies the claimant in writing that an extension of up to ninety (90) day additional is necessary because of reasons stated in the extension notice). Such notice of denial shall set forth the reasons therefor, including specific reference to the pertinent provisions of the 43 Plan on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of why such material or information is necessary, and an explanation of the procedure for appeal of the denial. (B) A claimant who has had an initial claim denied or his duly authorized representative may (i) request a review by written application to the Committee, (ii) review pertinent documents, and (iii) submit issues and comments in writing. Such request for review shall be filed with the Committee within sixty (60) days after receipt by the claimant of the notice of denial; and within sixty (60) days after receipt of such request, or, in special circumstances, such as the need to hold a hearing, require an extended period for processing, as soon thereafter as possible, but not later than one-hundred and twenty (120) days after receipt of such request, the Committee shall render its decision in writing, setting forth the specific reasons therefor, including specific references to the pertinent provisions of the Plan on which the decision is based. (C) Any notice or decision by the Committee or its agent shall be written in a manner calculated to be understood by the claimant. Such decisions shall be final and binding upon the person claiming an interest in the Plan. 10.13 Notice to Employee. The Committee shall cause to be furnished to ------------------ each Employee a written summary of the Plan, any amendments thereto, and such other reports and statements as may 44 be required under applicable law. The foregoing summary shall include the name of the Trustee and the Plan Administrator and shall set forth the Employee's rights and duties with respect to the benefits available to him under the Plan. 10.14 Government Reports. The Committee shall submit annually to the ------------------ Secretary of Labor and the Secretary of Treasury the reports and statements required under the Employee Retirement Income Security Act of 1974. 45 ARTICLE 11 ---------- NON-ALIENATION OF BENEFITS -------------------------- 11.01 Spendthrift Provision. Beneficial interests of Members or their --------------------- Beneficiaries in the Trust Fund shall not be assignable nor subject to attachment nor receivership, nor shall they pass to any Trustee on bankruptcy or be reached or applied by any legal process for the payment of any obligations of any such person. 11.02 Qualified Domestic Relations Orders. Notwithstanding any provisions ----------------------------------- of the Plan to the contrary, if there is entered any qualified domestic relations order (within the meaning of Section 414(p) of the Internal Revenue Code and ERISA Section 206(d)(3)(B), as added by the Retirement Equity Act of 1984) that affects the payment of benefits hereunder, such benefits shall be paid in accordance with the applicable requirements of such order. 46 ARTICLLE 12 ----------- AMENDMENT AND TERMINATION ------------------------- 12.01 Right to Amend or Terminate. While it is the intention of the --------------------------- Company to continue the Plan indefinitely, the Company reserves the right to modify, amend, or terminate the Plan in whole or in part at any time by an instrument in writing pursuant to authority of a vote of the Board of Directors; provided that any such modification, amendment, or termination does not make it possible for any portion of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of Members, retired Members, former Members, or their Beneficiaries after the payment of administrative expenses or taxes levied on the Trust Fund. Any amendment may be made retroactively to the extent permitted by the Internal Revenue Code. 12.02 Liquidation of Trust Fund. In the event of liquidation of the ------------------------- entire Trust Fund, the Trustees shall adjust all Accounts to reflect payment of all expenses, all losses, or profits and reallocations; and each Member, retired Member, former Member, and each Beneficiary of a Member entitled to a distribution under the Plan shall be entitled to the entire amount to his credit in the Trust Fund. The Trustees shall distribute such amount in Stock in one lump sum. Amounts represented by Fractional Shares shall be distributed in accordance with the procedures in Section 7.02. 47 ARTICLE 13 ---------- GENERAL PROVISIONS ------------------ 13.01 Rights Against the Company. Neither the establishment of the Plan, -------------------------- nor of the Trust Fund, nor any modification thereof, nor the payment of any benefits hereunder shall be construed as giving to any Employee or Member the right to be retained in the service of the Company or as interfering with the right of the Company to discharge any Employee at any time. 13.02 Records. The Company and Trustees shall make available all the ------- information reasonably necessary to set up and maintain Members' records and Accounts. 13.03 Payments to Incompetents. In the event that any person entitled to a ------------------------ distribution under this Plan is unable to care for his affairs because of illness or accident, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may be paid to the spouse, parent, child, brother or sister, or other person deemed by the Trustee to have incurred expenses for such person otherwise entitled to payment. Any such payment shall be a payment for the account of the persons entitled to the benefit, and shall be a complete discharge of any liability of the Plan therefor. 13.04 Mailing of Benefits. Each Member or Beneficiary shall furnish the ------------------- Trustees with the address to which benefits shall be mailed. If any such benefits mailed by regular United States mail to the last such address appearing on the Trustee's records are returned because the addressee is not at that address, and if the person entitled to such benefit does not communicate with the Trustees in writing for a period of two years thereafter and the Trustees have made a reasonable effort to locate such person, the interest of such Member shall be 48 distributed to his Beneficiary. If no Beneficiary has been designated by the Member, or if such designated Beneficiary cannot be located, then such Member's interest shall be distributed in accordance with Section 6.03. 13.05 Return of Contributions. Notwithstanding anything to the contrary ----------------------- elsewhere contained in this Plan, if the Internal Revenue Service shall issue an initial determination letter stating that the Plan as contained herein does not meet the requirements of Section 401 of the Internal Revenue Code, the Company shall be entitled to a return of its contributions made hereunder on the basis of the Plan as contained herein within one year after the date of the denial of qualification. Notwithstanding the foregoing, contributions made by the Company may be returned to the Company if: (a) The contribution was made because of a mistake of fact and the contribution is returned within one (1) year of the mistake in payment; or (b) The contribution was conditioned upon its deductibility, the deduction is disallowed and the contribution is returned within one (1) year of disallowance of the deduction. The return of a contribution to the Company shall be permitted if the amount so returned (i) is the excess of the amount actually contributed over the amount which would have been contributed if there had been no mistake in fact or error in determining the deduction, as the case may be, (ii) does not include the earnings attributable to such contribution, and (iii) is reduced by any losses attributable to such contribution. In no case may the Account of any 49 Employee be reduced by such return to less than such Account would have been had the returned contribution not been made in the first instance. 13.06 Merger or Consolidation. In the event that this Plan is merged with ----------------------- or consolidated with any other plan, or the assets or liabilities accrued under this Plan are transferred to any other plan, each Member's benefit under such other plan shall be at least as great immediately after such merger, consolidation, or transfer (if such plan were then to terminate) as the benefit to which he would have been entitled under this Plan immediately before such merger, consolidation, or transfer (if the Plan were then to terminate). 13.07 Construction. The provisions of this Agreement shall be construed, ------------ administered, and enforced according to the laws of the Commonwealth of Massachusetts unless superseded by applicable Federal Law. All contributions to the Trust shall be deemed to be made in the Commonwealth of Massachusetts. 13.08 Liability of Company. Subject to its agreement to indemnify Trustees -------------------- and except as otherwise provided by applicable Federal law any neither the Company nor any person acting on behalf of the Company shall be liable for any act or omission on the part of any Trustee, or for any act performed or the failure to perform any act by any person with respect to this Agreement, the Plan or Trust, the Company's only duty being to use reasonable care in the selection of the Trustees. 13.09 Impossibility of Performance. In case it becomes impossible for the ---------------------------- Company or the Trustees to perform any act under this Plan and Trust, that act shall be performed in which the judgement of the Trustees will most nearly carry out the intent and purpose of this 50 Plan and Trust. All parties to this Agreement or in any way interested in this Plan and Trust shall be bound by any acts performed under such condition. 13.10 Headings. The headings and subheadings in this instrument are for -------- convenience of reference only, and the instrument is not to be construed according to such headings. 13.11 Execution of Agreement. This Agreement may be executed in any number ---------------------- of counterparts, and each fully executed counterpart shall be deemed an original. 51 ARTICLE ------- TOP-HEAVY PROVISIONS -------------------- 14.01 Article Controls. Any Plan provisions to the contrary ---------------- notwithstanding, the provisions of this Article 14 shall control to the extent required to cause the Plan to comply with the requirements imposed by Section 416 of the Code. 14.02 Definitions. Where the following words and phrases appear in this ----------- Article 13, they shall have the respective meanings set forth below, unless their context clearly indicates to the contrary: (a) Account Balance. As of any Valuation Date, the aggregate amount --------------- credited to an individual's Account or Accounts under a qualified defined contribution plan (excluding employee contributions which were deductible within the meaning of Section 219 of the Code and rollover or transfer contributions made by or on behalf of such individual to such plan from another qualified plan, sponsored by an entity other than the Company or an Affiliated Employer) increased by (i) the aggregate distributions made to such individual from such plan during a five-year period ending on the Determination Date, and (ii) the amount of any contributions due as of the Determination Date immediately following such Valuation Date. (b) Accrued Benefit. As of any Valuation Date, the present value --------------- (computed on the basis of the Assumptions) of the cumulative accrued benefit (excluding the portion thereof which is attributable to employee 52 contributions which were deductible pursuant to Section 219 of the Code, to rollover or transfer contributions made by or on behalf of such individual to such plan from another qualified plan sponsored by an entity other than the Company or other Affiliated Employer, to proportional subsidies or to ancillary benefits) of an individual under a qualified defined benefit plan increased by (i) the aggregate distributions made to such individual from such plan during a five (5) year period ending on the Determination Date and (ii) the estimated benefit accrued by such individual between such Valuation Date and the Determination Date immediately following such Valuation Date. (c) Aggregation Group. The group of qualified plans maintained by the ----------------- Company and each Affiliated Employer consisting of (i) each plan in which a Key Employee participates and each other plan which enables a plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) and 410 of the Code, or (ii) each plan in which a Key Employee participates, each other plan which enables a plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) and 410 of the Code and any other plan which the Company elects to include as a part of such group; provided, however, that the Company may not elect to include a plan in such a group if its inclusion would cause the group to fail to meet the requirements of Sections 401(a)(4) and 410 of the Code. 53 (d) Assumptions. For purposes of this Article 13, the interest rate ----------- and mortality assumptions specified for top-heavy status determination purposes in any qualified defined benefit plan included in an Aggregation Group which includes the Plan. (e) Determination Date. For the first Plan Year of any plan, the last ------------------ day of such Plan Year, and for each subsequent Plan Year of such plan, the last day of the preceding Plan Year. For purposes of determining whether an Aggregation Group is Top-Heavy the Determination Date for each separate plan falling within the same calendar year shall be utilized. (f) Former Key Employee. With respect to any Plan Year, any ------------------- individual who was a Key Employee in a previous Plan Year but who is not a Key Employee with respect to such Plan Year. For purposes of this definition, a beneficiary (who would not otherwise be a Key Employee) of a deceased Former Key Employee shall be deemed to be a Former Key Employee in substitution for such deceased Former Key Employee. (g) Key Employee. With respect to any Plan Year, any individual who ------------ at any time during such Plan Year or during any of the four (4) Plan Years immediately preceding such Plan Year was (i) an officer of the Company or an Affiliated Employer having an annual compensation greater than 50 percent of the amount in effect under Section 415(b)(1)(A) of the Internal Revenue Code for such Plan Year, (ii) one of the ten (10) employees having an annual compensation greater than 50 percent of the dollar 54 limitation specified in Section 415(b)(1)(A) of the Internal Revenue Code for any Plan Year and owning both the largest interests in the Company or an Affiliated Employer and greater than a one-half percent (1/2%) interest in the Company or an Affiliated Employer, (iii) an owner of five percent (5%) or more of the outstanding stock of the Company or an Affiliated Company or of stock possessing five percent (5%) or more of the total combined voting power of all the stock of the Company or an Affiliated Employer, or (iv) an employee whose Remuneration (during the calendar year including the Determination Date) exceeded $150,000 and who was an owner of one percent (1%) or more of the outstanding stock of the Company or an Affiliated Employer or of stock possessing one percent (1%) or more of the total combined voting power of all of the stock of the Company or an Affiliated Employer. For purposes of this definition, (i) an individual shall be deemed to own stock owned by other individuals as provided in Section 318 of the Code, but substituting five percent (5%) for fifty percent (50%) in subparagraph (c) of Section 318(a)(2) of the Internal Revenue Code, (ii) a beneficiary (who would not otherwise be a Key Employee) of a deceased Key Employee shall be deemed to be a Key Employee in substitution for such deceased Key Employee, and (iii) the total number of Key Employees who are officers of the Company and the Affiliated Employers shall be limited to: if there is a total of less than thirty (30) employees of the Company and 55 Affiliated Employers, three (3); if there is a total of more than thirty (30) but less than five hundred (500) employees of the Company and Affiliated Employers, ten percent (10%) of such total; and, if there is a total of more than five hundred (500) employees of the Company and Affiliated Employers, fifty (50). (h) Plan Year. With respect to any plan, the annual accounting period --------- used by such plan for annual reporting purposes. (i) Remuneration. An individual's earned income, wages, salaries, and ------------ other amounts actually paid or made available by the Company or an Affiliated Employer to such individual during a Plan Year for personal services actually rendered in the course of employment with the Company or an Affiliated Employer (subject to exclusion of amounts specified by regulations promulgated under Section 415 of the Code). (j) Valuation Date. With respect to any Plan Year of any defined -------------- contribution plan, the most recent date within the twelve (12) month period prior to a Determination Date as of which the trust fund established under such plan was valued and the net income (or loss) thereof allocated to Members' accounts. With respect to any Plan Year of a defined benefit plan, the most recent date within a twelve-month period prior to a Determination Date as of which the plan assets were valued for purposes of computing plan costs for purposes of the requirements imposed under Section 412 of the Code. 56 14.03 Top-Heavy Status. ---------------- (a) The Plan shall be deemed to be top-heavy if, as of any Determination Date, (i) the sum of Account Balances of Members who are Key Employees exceeds sixty percent (60%) of the sum of Account Balances of all Members (excluding the Account Balances of Former Key Employees) unless an Aggregation Group including the Plan is not top-heavy, or (ii) an Aggregation Group including the Plan is top-heavy. An Aggregation Group shall be deemed to be top- heavy as of a Determination Date if the sum (computed in accordance with Section 416(g)(2)(B) of the Code and the regulations promulgated thereunder) of (i) the Account Balances of Key Employees under all defined contribution plans included in the Aggregation Group and (ii) the Accrued Benefits of Key Employees under all defined benefit plans included in the Aggregation Group exceeds sixty percent (60%) of the sum of the Account Balances and the Accrued Benefits of all individuals (excluding Former Key Employees) under such plans. If an individual has not performed services for the Company or an Affiliated Employer at any time during the previous five (5) years, his or her Account Balance or Accrued Benefit shall not be taken into account. (b) If the Plan is determined to be top-heavy for a Plan Year for which it is part of an Aggregation Group which includes a qualified defined benefit plan which is also top-heavy, the requirements of Section 416(c) shall be 57 satisfied for such Plan Year by providing the minimum benefit required by said Section under such defined benefit plan for each Member. If the Plan is determined to be top-heavy for a Plan Year and it is not part of an Aggregation Group which includes a qualified defined benefit plan which is also top-heavy, the Company shall contribute to the Plan for such Plan Year on behalf of each Member who is not a Key Employee and who has not terminated his employment as of the last day of such Plan Year an amount equal to: (i) the lesser of (a) three percent (3%) of such Member's Remuneration for such Plan Year, or (b) a percent of such Member's Remuneration for such Plan Year equal to the greatest percent determined by dividing for each Key Employee the amount of contributions allocated to such Key Employee's Account for such Plan Year pursuant to Article 4 by such Key Employee's Remuneration not in excess of $200,000 for such Plan Year; reduced by (ii) the amount allocated to such Member's Account for such Plan Year pursuant to Article 4. (c) In the event that a Member also participates in a defined benefit plan of the Company during a Plan Year in which the Plan is a Top-Heavy Plan or a Super Top-Heavy Plan, the limitations under Section 4.05 of the Plan shall apply, except that the factor of one-hundred percent (100%) 58 shall be substituted for the factor of one-hundred twenty-five (125%) as set forth under such Section with regard to the defined benefit plan and defined contribution plan fractions. If the Top- Heavy Plan is not a Super Top-Heavy Plan, the preceding sentence shall not apply if: (1) the Member's minimum benefit under the defined benefit plan is increased to equal the product of (a) and (b) below: (a) the lesser of (i) three percent (3%) multiplied by his years of service (up to a maximum of ten (10) years), or (ii) thirty percent (30%); multiplied by: (b) his highest average annual Form W-2 compensation for a five (5) consecutive year period required to be taken into account pursuant to Code Section 416(c), or (2) the Member's minimum contribution under Section 13.03(b)(i)(a) of the Plan is increased to four percent (4%) of a Member's Remuneration. (3) Super Top-Heavy Plan means a plan in which the top-heavy determination pursuant to Section 13.03(2) is performed substituting ninety percent (90%) for sixty percent (60%). 14.04 Termination of Top-Heavy Status. If the Plan has been deemed to be ------------------------------- top-heavy for one or more Plan Years and thereafter ceases to be top-heavy, the provisions of this Article 59 13 shall cease to apply to the Plan effective as of the day following the Determination Date on which it is determined to no longer be top-heavy. IN WITNESS WHEREOF these presents have been signed and sealed for in behalf of the parties hereto, in the case of the Company by its duly authorized officer, as of the date first above written. CAPE COD BANK AND TRUST COMPANY, as the Company By: James H. Rice ------------------------------------ Title: President CAPE COD BANK AND TRUST COMPANY, as the Trustee By: James H. Rice ----------------------------------- Title: President 60 FIRST AMENDMENT TO CAPE COD BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST WHEREAS, Cape Cod Bank and Trust Company (hereinafter referred to as "Company") has established the Cape Cod Bank and Trust Company Employee Stock Ownership Plan and Trust (hereinafter referred to as "Plan"), effective January 1, 1989; and WHEREAS, Section 12.01 of the Plan reserves to the Company the right to amend the Plan at any time; NOW, THEREFORE in consideration of the foregoing, the Company, pursuant to authority granted by its Board of Directors, hereby agrees to amend the Plan in accordance with the following provisions, said amendment to be effective January 1, 1989: Section 4.01(b) shall be amended in its entirety as follows: "(b) Any excess Stock not allocated in accordance with subsection (a) above shall be placed in a suspense account which shall be established and maintained to hold such excess Stock until such time as it is allocated in accordance with the following. One-seventh (1/7) of such Stock (or such higher proportion as the Board of Directors may determine each year), but not in excess of the amounts permitted in the limitation under Code Section 415, shall be released and allocated as of the last day of each of the following Plan Years until all such Stock has been allocated to the Accounts of Members who are then employed by the Company in the proportion that such Member's Annual Compensation bears to the total Annual Compensation of all Members. IN WITNESS WHEREOF, Cape Cod Bank and Trust Company has caused this instrument to be executed in its name on its behalf this 20th day of September, 1990, by its officer thereunto duly authorized. CAPE COD BANK AND TRUST COMPANY By:/s/Noal D. Reid -------------------------------------- Title: Executive Vice President and Treasurer SECOND AMENDMENT TO THE CAPE COD BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN ----------------------------- WHEREAS, Cape Cod Bank and Trust Company (the "Company") has established the Cape Cod Bank and Trust Company Employee Stock Ownership Plan (the "Plan") for its eligible employees, originally effective January 1, 1989; and WHEREAS, Section 12:01 of the Plan reserves to the Employer the right to amend the Plan: NOW THEREFORE, the Plan is amended by this Second Amendment, effective as of January 1, 1992. 1. Section 1.03 of the Plan be and hereby is revised in its entirety and the following substituted therefor: "1.03 "Annual Compensation" means the basic compensation paid to an Employee by the Company while a Member during each Plan Year and including commissions paid to salespersons and any elective deferrals made under a plan maintained by the Company which qualifies under Section 401(k) or 125 of the Code, but excluding bonus payments, overtime, special incentive payments, and any expense allowance payments or any group life insurance contributions includible in income. "Annual Compensation" to be taken into account under the Plan shall not exceed Two Hundred Thousand Dollars ($200,000), or such other amount as may be provided pursuant to applicable law or regulations; provided however, that in determining the Annual Compensation of a 5 percent owner (as defined in Section 416 of the Internal Revenue Code) or one of the top 10 Employees by total earnings from the Company, the Annual Compensation of a spouse and of a lineal descendant under the age of 19 before the end of the Plan Year shall be aggregated with such Employee's Annual Compensation." 2. Section 1.08 of the Plan be and hereby is revised in its entirety and the following substituted therefor: "1.08 "Company" means Cape Cod Bank and Trust Company situated in Hyannis, Massachusetts, and any successor thereof; and any corporation now or hereinafter affiliated with Cape Cod Bank and Trust Company which is designated by the Board as entitled to adopt the Plan for its eligible employees, and which does so by a vote of its governing body; and any successor to any of the foregoing, either singly or as a group, as the context may require; which eligible Employers shall include Montcalm Corporation effective January 1, 1992 and CCB&T Investment Company, Inc. effective July 1, 1992." 3. Section 2.02 of the Plan be and hereby is revised in its entirety and the following substituted therefor: "2.02 Eligibility Service. An Employee shall be credited with one year of ------------------- "Eligibility Service" for each computation period in which he is credited with 1,000 Hours of Service, including periods of service prior to the Effective date of the Plan. The initial computation period shall be the twelve-month period commencing on the Employee's date of employment. Subsequent computation periods shall be the consecutive twelve-month periods commencing on the anniversary date of the Employee's date of employment. For purposes of determining Eligibility Service for Employees of any Affiliated Company, only service following the date of affiliation shall be included, unless otherwise provided for." 4. Section 5.04 of the Plan be and hereby is revised in its entirety and the following substituted therefor: "Section 5.04 Payment of Dividends. Cash dividends received by the Trust -------------------- on Stock allocated to a Member's Account shall be paid to such Member in cash as soon as practicable after receipt by the Trustee, but not later than ninety (90) days after the end of the Plan Year in which the dividends were received. Cash dividends received by the Trust on Stock held in the Suspense Account shall be paid to Members in cash in the same proportion that the number of shares of Stock allocated to a Member's Account bears to the total number of shares of Stock allocated to the Accounts of all Members; such dividends to be paid as soon as practicable after receipt by the Trustee, but not later than ninety (90) days after the end of the Plan Year in which the dividends were received. Dividends received by the Trust in the form of Stock on Stock allocated to a Member's Account shall be allocated to the Member's Account. Dividends received by the Trust in the form of Stock on Stock held in the Suspense Account shall be allocated to the Member's Account in the same proportion that the number of shares of Stock allocated to a Member's Account bears to the total number of shares of Stock allocated to the Accounts of all Members." 5. Section 7.07 of the Plan be and hereby is added to the Plan immediately following Section 7.06 to read as follows: "7.07 Direct Rollovers. This Section applies to all distributions made on ---------------- or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. 7.071 For purposes of Section 7.07, the following words shall have the following meanings unless a different meaning is plainly required by the context: 2 (a) "eligible rollover distribution" shall mean any distribution of all or a portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include any distribution that is one in a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of 10 years or more, any distribution to the extent such distribution is required under Section 6.05, and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to company securities). (b) "eligible retirement plan" shall mean an individual retirement account described in Section 408(a) Internal Revenue Code, an individual retirement annuity described in Section 408(b) Internal Revenue Code, an annuity plan described in Section 403(a) Internal Revenue Code, or a qualified trust described in Section 401(a) Internal Revenue Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) "distributee" shall mean an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 11.02, are distributees with regard to the interest of the spouse or former spouse. (d) "direct rollover" shall mean a payment by the Plan to the eligible retirement plan specified by the distributee." IN WITNESS WHEREOF, Cape Cod Bank and Trust Company has caused this instrument to be executed by its duly authorized representative this 8th day of July, 1993. Attest: Cape Cod Bank and Trust Company /s/Morton D. Furber, Jr. By:/s/Noal D. Reid - ------------------------ ---------------------------- Title:Executive Vice President and Treasurer 3 THIRD AMENDMENT TO THE CAPE COD BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, Cape Cod Bank and Trust Company (the "Company") has established the Cape Cod Bank and Trust Company Employee Stock Ownership Plan (the "Plan") for its eligible employees, originally effective January 1, 1989; and WHEREAS, Section 12.01 of the Plan reserves to the Employer the right to amend the Plan: NOW THEREFORE, the Plan is amended as follows: 1. Section 1.03 of the Plan be and hereby is revised in its entirety and the following substituted therefor: "1.03 "Annual Compensation" for years beginning prior to January 1, 1995 means the basic compensation paid to an Employee by the Company while a Member during each Plan Year and including commissions paid to salespersons and any elective deferrals made under a plan maintained by the Company which qualifies under Section 401(k) or Section 125 of the Code, but excluding bonus payments, overtime, special incentive payments, and any expense allowance payments or any group life insurance contributions includible in income. For years beginning on or after January 1, 1995 "Annual Compensation" means the total taxable earnings as reported on Form W-2, paid by the Employer during a Plan Year, and including any amounts subject to salary reduction under a plan maintained by the Employer pursuant to Internal Revenue Code Section 401(k) or Section 125. Effective January 1, 1989, "Annual Compensation" to be taken into account under the Plan in any Plan Year shall not exceed Two Hundred Thousand Dollars ($200,000) or such other amount as may be provided pursuant to applicable law or regulations. For Plan Years-beginning on or after January 1, 1994, the Annual Compensation of each Member taken into account for determining benefits provided under the Plan for any Plan Year shall not exceed One Hundred Fifty Thousand Dollars ($150,000) (as adjusted for increases in the cost-of-living in accordance with Section 401(a)(17)(B) of the Code). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding twelve months, over which annual Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than twelve months, the annual compensation limit under Section 401(a)(17) of the Code will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve. In determining the compensation of a 5 percent owner (as defined in Section 416 of the Internal Revenue Code) or one of the top 10 Employees by total earnings from the Company, the Annual Compensation of a spouse and of a lineal descendant under the age of 19 before the end of the Plan Year shall be aggregated with such Employee's Annual Compensation." IN WITNESS WHEREOF, Cape Cod Bank and Trust Company has caused this instrument to be executed by its duly authorized representative this eighth day of June, 1995. Attest: Cape Cod Bank and Trust Company /s/ Morton D. Furber, Jr. By: /s/Noal D. Reid - ------------------------ ------------------------------- Title: Executive Vice President Treasurer 2 CAPE COD BANK AND TRUST COMPANY EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST Fourth Amendment ---------------- The Cape Cod Bank and Trust Company Employee Stock Ownership Plan and Trust, dated as of January 1, 1989, as amended, is hereby further amended, pursuant to Section 12.01 thereof, as follows: A. Amendments 1. Article I is hereby amended by deleting section 1.18 in its entirety and substituting therefor the following: "Stock" and "Company Stock" mean shares of common stock issued by CCBT Bancorp, Inc. (the "Holding Company") (or a member of the controlled group which includes the Holding Company) which are readily tradeable on an established securities market or, if such stock is not readily tradeable, shares of common stock issued by the Holding Company which meet the requirements of section 409(1)(2) of the Code. 2. Article VII is hereby amended by deleting references to the "Company" in the first, third and fourth sentences of Section 7.04 and substituting therefor the "Holding Company." 3. Article VII is hereby further amended by deleting the references to the "Company" in the first sentence of Section 7.043 and substituting therefor "the Holding Company." 4. Article VII is hereby further amended by deleting the reference to the "Company" in the last sentence of Section 7.044 and substituting therefor the "Holding Company." 5. Article VII is hereby further amended by deleting the reference to the "Company" in Section 7.046 and substituting therefor the "Holding Company." 6. Article VII is hereby further amended by deleting all references to the "Company" in Section 7.05 and substituting therefor the "Holding Company." 7. Article VII is hereby further amended by deleting references to the "Company" in Section 7.06 and substituting therefor the "Holding Company." B. Miscellaneous 1. This Fourth Amendment shall become effective upon the consummation of the Reorganization as contemplated by the Plan of Reorganization and Acquisition, dated as of October 8, 1998, between the Holding Company and the Company. 2. The Trust Agreement is in all other respects hereby confirmed. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, this Fourth Amendment has been signed and sealed for and on behalf of the undersigned by their duly authorized officer this 11th day of February, 1999. CAPE COD BANK AND TRUST COMPANY By: /s/ Stephen B. Lawson ---------------------------- Stephen B. Lawson President and Chief Executive Officer CCBT BANCORP, INC. By: /s/ Stephen B. Lawson -------------------------------- Stephen B. Lawson President and Chief Executive Officer EX-23.1 6 CONSENT OF GRANT THORNTON, LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We have issued our report dated January 29, 1999, accompanying the consolidated financial statements included in the Annual Report of Cape Cod Bank & Trust Company on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in the Registration Statement pertaining to the CCBT Bancorp, Inc. Stock Option Plan, as amended, on form S-8 filed with the Securities and Exchange Commission on February 18, 1999. /s/ Grant Thornton LLP Boston, Massachusetts March 22, 1999 EX-23.2 7 CONSENT OF ERNST & YOUNG, LLP CONSENT OF INDEPENDENT ACCOUNTS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-72565) pertaining to the CCBT Bancorp, Inc. Stock Option Plan of our report dated January 30, 1998, with respect to the 1997 and 1996 consolidated financial statements of Cape Cod Bank and Trust Company included in the Annual Report (Form 10-K) of CCBT Bancorp, Inc. for the year ended December 31, 1998. /s/ Ernst & Young LLP Boston, Massachusetts March 19, 1999 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements contained in the CCBT Bancorp, Inc. Annual Report on form 10-K for the twelve months ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 29,383,227 43,888 496,020,243 22,125,400 611,960,799 (11,107,633) 12,847,002 1,177,530,161 727,896,975 358,113,005 1,093,987,761 0 22,652,660 0 1,177,530,161 48,258,130 24,513,524 1,206,296 0 73,977,950 19,589,900 16,621,267 37,766,783 0 383,888 16,652,000 34,195,891 20,606,780 8,049,834 12,556,946 1.39 1.38
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