================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002- Commission File No. 000-25381
CCBT FINANCIAL COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-3437708
(State of Incorporation) (I.R.S. Employer Identification No.)
495 Station Avenue, South Yarmouth, Massachusetts 02664
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, incl. area code): 508-394-1300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Title of class Name of each exchange on which registered
Common Capital Stock The Nasdaq Stock Market, Inc.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). |X| Yes |_| No
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the $28.41 closing price on June 28, 2002, on the
Nasdaq National Market was $243,560,720. Although Directors and executive
officers of the registrant were assumed to be "affiliates" of the registrant for
the purposes of this calculation, this classification is not to be interpreted
as an admission of such status.
As of March 4, 2003, 8,544,048 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the CCBT Financial Companies, Inc. Notice of Annual Meeting
and definitive Proxy Statement for the Annual Meeting of Stockholders to be held
on April 24, 2003 are incorporated by reference into Part III of this Form 10-K.
================================================================================
FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. CCBT Financial Companies, Inc. (the
"Company") cautions investors that any forward-looking statements in this
report, or which management may make orally or in writing from time to time, are
based on management's beliefs and on assumptions made by, and information
currently available to, management. When used, the words "anticipate",
"believe", expect", "intend", "may", "might", "plan", "estimate", "project",
"should", "will", "result" and similar expressions that do not relate solely to
historical matters are intended to identify forward-looking statements. Such
statements are subject to risks, uncertainties and assumptions and are not
guarantees of future performance, which may be affected by known and unknown
risks, trends, uncertainties and factors that are beyond the Company's control,
including the following: changes in the volume of loan originations,
fluctuations in prevailing interest rates, increases in costs to borrowers of
loans held, increases in costs of funds, changes in legislation and changes in
the assumptions used in making such forward-looking statements. In addition, the
factors listed under "Risk Factors and Factors Affecting Forward Looking
Statements," beginning on Page 8 of this report, which readers should carefully
review may result in these differences.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. The Company cautions you that, while
forward-looking statements reflect its good faith beliefs when the Company makes
them, they are not guarantees of future performance and are impacted by actual
events when they occur after the Company makes such statements. The Company
expressly disclaims any responsibility to update its forward-looking statements,
whether as a result of new information, future events or otherwise. Accordingly,
investors should use caution in relying on past forward-looking statements,
which are based on results and trends at the time they are made, to anticipate
future results or trends.
2
PART I
Item 1. Business.
General
The Company was incorporated under the laws of the Commonwealth of
Massachusetts on October 8, 1998 and is the bank holding company for Cape Cod
Bank and Trust Company (the "Bank"), a national bank. Currently, the Company's
business activities are conducted primarily through the Bank.
Cape Cod Bank and Trust Company, N.A. is the main operating subsidiary of
the Company and is a federally chartered commercial bank with trust powers. The
Bank is the result of a merger between the Hyannis Trust Company and the Cape
Cod Trust Company in 1964 and a subsequent merger with the Buzzards Bay National
Bank in 1974. The main office of the Bank is located at 307 Main Street,
Hyannis, Barnstable County, Massachusetts. There are 33 other banking offices
located in Barnstable and Plymouth Counties in Massachusetts. The Bank is a
member of the Federal Deposit Insurance Corporation, of the Federal Reserve
System and the Federal Home Loan Bank of Boston ("FHLB"). At December 31, 2002,
the Bank employed 398 people on a full-time basis and another 54 people on a
part-time basis.
Financial information contained in this report for periods and dates prior
to February 11, 1999 is that of the Bank. Since the Bank is the main operating
subsidiary of the Company, financial information contained in this report for
periods and dates after February 11, 1999 is essentially financial information
of the Bank. Certain amounts have been reclassified in the 2001 and 2000
financial statements to conform to the 2002 presentation.
Repurchase of Stock
During the quarter ended March 31, 2002, the Company's Board of Directors
authorized the repurchase of up to 220,000 shares of the Company's stock in the
open market. Consistent with that authorization, the Company repurchased 47,500
shares during 2002, at an average cost of $25.61 per share. The Board of
Directors also authorized the repurchase, from time to time based on market
conditions, of an additional 200,000 shares of common stock at its meeting held
on January 23, 2003. Coupled with the shares remaining from the aforementioned
repurchase program, the Company will have the ability to repurchase a total of
372,500 shares or approximately 4.3% of the stock currently outstanding.
Other
During the second quarter of 2000, the Bank acquired 51% of the stock of
Murray & MacDonald Insurance Services, Inc. of Falmouth, Massachusetts (the
"Agency"), a full service insurance agency offering property, casualty, life,
accident and health products to clients on Cape Cod. The Agency has been in
business since 1972 and has license agreements with more than thirty insurance
firms. As part of the transaction, Murray & MacDonald's President, Douglas D.
MacDonald, has continued to serve as President of the Agency, and he directs all
insurance activities for the Bank.
In addition to the acquisition of the Agency, the Bank also acquired two
branch banking offices, in Falmouth and Wareham, Massachusetts, from Fleet Bank
during the second quarter of 2000. These branches added approximately $55
million in deposits at a 15.5% premium, at June 30, 2000.
During the fourth quarter of 2002, the Bank formed a Massachusetts
securities corporation, Cape Dune Holdings Corp., as a wholly-owned subsidiary
of the Bank to purchase, hold, and/or sell securities.
The Bank is the largest commercial bank headquartered in Barnstable
County. It offers a wide range of banking and financial services for
individuals, businesses, non-profit organizations, governmental units and
fiduciaries. The Bank receives substantially all of its deposits from, and makes
substantially all of its loans to, individuals and businesses on Cape Cod,
although the Bank has some loans on properties outside its market area,
including some sizable participations in commercial mortgages. The Bank's core
market is comprised of retail and wholesale businesses; primary households
(including a significant retirement population); and a growing number of second
homeowners. In addition, a substantial non-core vacation population causes
seasonal deposit growth.
3
The Bank's principal sources of revenue are loans and investments, which
accounted for 77% of gross income during 2002. Of the remaining portion, 5% was
received from service charges related to deposit and branch banking activities.
The balance was derived from Trust Department services income and other items.
Banking services for individuals include checking accounts, regular savings
accounts, NOW accounts, money market deposit accounts, certificates of deposit,
club accounts, mortgage loans, consumer loans, safe deposit services, trust
services, discount brokerage and investment services, and insurance services.
The Bank is working to become a full service retail financial company because of
the favorable demographics in its market area. Currently 47% of its non-interest
income is generated from advisor fees, brokerage fees and commissions, and
insurance commissions. The Company also owns and maintains 42 automated teller
machines which are connected to the AMEX, CIRRUS, NYCE, NOVUS/DISCOVER,
MASTERCARD, VISA, STAR and PLUS networks. Trust Department services include
estate, trust, tax returns, agency, investment management, discount brokerage,
custodial services, and IRA accounts.
The Company's Web site is located at http://www.ccbt.com. On the Company's
Web site, investors can obtain a copy of the Company's annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable
after the Company files such material electronically with, or furnishes it to,
the Securities and Exchange Commission.
Recent Developments
On March 5, 2003, the Company announced that it will accrue a liability in
the first quarter of 2003 of approximately $5.1 million, representing an
estimate of the additional state tax liability, including interest (net of any
federal and state tax deductions associated with such taxes and interest),
relating to the deduction for dividends received from a real estate investment
trust subsidiary (a "REIT") for the 1999 through 2001 fiscal years, and the
previously anticipated deduction for fiscal 2002 thus reducing earnings by $5.1
million in the first quarter of 2003. The accrued liability is the result of new
legislation signed on March 5, 2003 by the Governor of Massachusetts that amends
Massachusetts law to expressly disallow the deduction for dividends received
from a REIT. This amendment applies retroactively to tax years ending on or
after December 31, 1999. As a result of the enactment of this legislation, the
Company has ceased recording the tax benefits associated with the dividend
received deduction effective for the 2003 tax year and accrued the liability
described above.
CCBT Preferred Corp. ("CCBT Preferred") is a REIT formed by the Bank in
the second quarter of 1999. Since that time and prior to the enactment of the
new legislation discussed above, the Bank has taken a tax deduction under a
Massachusetts statute that provides for a dividends received deduction equal to
95% of certain dividend distributions made by CCBT Preferred to the Bank. As
previously announced, the Bank received notices of assessment from The
Commonwealth of Massachusetts Department of Revenue ("DOR") for tax years ended
December 31, 1999, 2000 and 2001 based on the DOR's contention that dividend
distributions by CCBT Preferred to the Bank are fully taxable in Massachusetts.
The Company is aware that the DOR has also sent similar notices to numerous
other financial institutions in Massachusetts that reported a deduction for
dividends received from a REIT on their Massachusetts financial institution
excise tax returns.
The Company believes that this legislation will be challenged, especially
the retroactive provisions, on constitutional and other grounds. The Company
would support such a challenge and otherwise intends to defend vigorously its
position.
Competition
The Company faces substantial competition for loan origination and for the
attraction and retention of deposits. Competition for loan origination arises
primarily from other commercial banks, thrift institutions, credit unions and
mortgage companies. The Company competes for loans on the basis of product
variety and flexibility, competitive interest rates and fees, service quality
and convenience.
Competition for the attraction and retention of deposits arises primarily
from other commercial banks, thrift institutions, co-operative banks, and credit
unions having a presence within and around the market area served by the Bank's
main office and its community branches and ATM network. There are approximately
twelve of these financial institutions in the Bank's market area. In addition,
the Company competes with regional and national firms that offer
4
stocks, bonds, mutual funds, and other investment alternatives to the general
public. The Company competes on its ability to satisfy savers' and investors'
requirements, such as product alternatives, competitive rates, liquidity,
service quality, convenience, and safety against loss of principal and earnings.
Management believes that the Company's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contributes to its ability to compete successfully. Moreover, under the
Gramm-Leach-Bliley Act of 1999 (the "GLBA"), effective March 11, 2000,
securities firms, insurance companies and other financial services providers
that elect to become financial holding companies may acquire banks and other
financial institutions. The GLBA may significantly change the competitive
environment in which the Company and its subsidiaries conduct business. See "The
Financial Services Modernization Legislation" below. The financial services
industry is also likely to become more competitive as further technological
advances enable more companies to provide financial services. These
technological advances may diminish the importance of depository institutions
and other financial intermediaries in the transfer of funds between parties.
Regulation and Supervision
In addition to the generally applicable state and federal laws governing
businesses and employers, the Company is further regulated by federal and state
laws and regulations applicable to financial institutions and their parent
companies. Virtually all aspects of the Company's operations are subject to
specific requirements or restrictions and general regulatory oversight. State
and federal banking laws have as their principal objective the maintenance of
the safety and soundness of financial institutions and the federal deposit
insurance system, the protection of consumers or classes of consumers or the
furtherance of broad public policy goals, rather than the specific protection of
stockholders of a bank or its parent company.
Several of the more significant statutory and regulatory provisions
applicable to banks and bank holding companies to which the Company and its
subsidiaries are subject are described more fully below, together with certain
statutory and regulatory matters concerning the Company and its subsidiaries.
The description of these statutory and regulatory provisions does not purport to
be complete and is qualified in its entirety by reference to the particular
statutory or regulatory provision. Any change in applicable law or regulation
may have a material effect on the Company's business, prospects and operations,
as well as those of its subsidiaries.
The Company
General. The Company is a Massachusetts corporation and a bank holding
company subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and
files with the Federal Reserve Board an annual report and such additional
reports as the Federal Reserve Board may require. The Federal Reserve Board has
the authority to issue orders to bank holding companies to cease and desist from
unsound banking practices and violations of conditions imposed by, or violations
of agreements with, the Federal Reserve Board. The Federal Reserve Board is also
empowered to assess civil money penalties against companies or individuals who
violate the Bank Holding Company Act, or orders or regulations thereunder, to
order termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a
non-banking subsidiary by a bank holding company.
The Bank Holding Company Act--Activities and Other Limitations. The Bank
Holding Company Act prohibits a bank holding company from acquiring
substantially all the assets of a bank or acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any bank, or increasing such
ownership or control of any bank, or merging or consolidating with any bank
holding company without prior approval of the Federal Reserve Board. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally
authorizes bank holding companies to acquire banks located in any state,
possibly subject to certain state-imposed age and deposit concentration limits,
and also generally authorizes interstate mergers and to a lesser extent,
interstate branching.
Unless a bank holding company becomes a financial holding company ("FHC")
under the GLBA (as discussed below), the Bank Holding Company Act also prohibits
a bank holding company from acquiring a direct or indirect interest in or
control of more than 5% of the voting shares of any company that is not a bank
or a bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or
5
furnishing services to its subsidiary banks, except that it may engage in and
may own shares of companies engaged in certain activities the Federal Reserve
Board determined to be so closely related to banking or managing and controlling
banks as to be a proper incident thereto. In making such determinations, the
Federal Reserve Board is required to weigh the expected benefit to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests or unsound banking
practices.
The Financial Services Modernization Legislation. The GLBA established a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the Bank Holding Company Act framework to permit bank holding
companies that qualify and elect to be treated as financial holding companies to
engage in a range of financial activities broader than would be permissible for
traditional bank holding companies, such as the Company, that have not elected
to be treated as financial holding companies. "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the Federal Reserve Board,
in consultation with the Secretary of the Treasury, determines to be financial
in nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
In order to become a financial holding company, a bank holding company,
such as the Company, must meet certain tests and file an election form with the
Federal Reserve Board. Specifically, to qualify, all of a bank holding company's
subsidiary banks must be well-capitalized and well-managed, as measured by
regulatory guidelines. In addition, to engage in the new activities, each of the
bank holding company's banks must have been rated "satisfactory" or better in
the most recent federal Community Reinvestment Act evaluation of each bank. At
this time, the Company has not elected to become a financial holding company.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. These capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets and off-balance sheet items (the "Total Risk-Based
Capital Ratio"), with at least 50% of that amount consisting of Tier I or core
capital and the remaining amount consisting of Tier II or supplementary capital.
Tier I capital for bank holding companies generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such stocks which may be
included as Tier I capital), less goodwill and other non-qualifying intangible
assets. Tier II capital generally consists of hybrid capital instruments;
perpetual debt and mandatory convertible debt securities; perpetual preferred
stock, which is not eligible to be included as Tier I capital; term subordinated
debt and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan and lease losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital (defined by reference to the risk-based capital
guidelines) to its average total consolidated assets (the "Leverage Ratio") of
4.0%. Total average consolidated assets for this purpose does not include
goodwill and any other intangible assets and investments that the Federal
Reserve Board determines should be deducted from Tier I capital. The Federal
Reserve Board has announced that the 4.0% Leverage Ratio requirement is the
minimum for the top-rated bank holding companies without any supervisory,
financial or operational weaknesses or deficiencies or those, which are not
experiencing or anticipating significant growth.
The Company currently is in compliance with both the Risk Based Capital
Ratio and the Leverage Ratio requirements. At December 31, 2002, the Company had
a Tier I Risk Based Capital Ratio equal to 11.8% and a Total Risk Based Capital
Ratio equal to 13.1% and a Leverage Ratio equal to 7.7%.
6
U.S. bank regulatory authorities and international bank supervisory
organizations, principally the Basel Committee on Banking Supervision ("Basel
Committee"), currently are considering changes to the risk-based capital
adequacy framework, which ultimately could affect the appropriate capital
guidelines, including changes (such as those relating to lending to registered
broker-dealers) that are of particular relevance to banks, such as the Bank,
that engage in significant securities activities. Among other things, the Basel
Committee rules, which are expected to be proposed formally for public comment
in the next 6 months and are expected to become effective around 2006, would add
operational risk as a third component to the denominator of the risk-capital
calculation, which currently includes only credit and market risks.
Limitations on Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve Board has been given at least 60
days to review the proposal. Under a rebuttable presumption established by the
Federal Reserve Board, the acquisition of 10% or more of a class of voting stock
of a bank holding company, such as the Company, with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") would, under the circumstances set forth in the
presumption, constitute the acquisition of control of the bank holding company.
In addition, any company, as that term is broadly defined in the statute,
would be required to obtain the approval of the Federal Reserve Board under the
Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer
that is a bank holding company) or more, or such lesser percentage of our
outstanding common stock as the Federal Reserve Board deems to constitute
control over us.
Cash Dividends. Federal Reserve Board policy provides that a bank or a
bank holding company generally should not maintain its existing rate of cash
dividends on common stock unless the organization's net income available to
common shareholders over the past year has been sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent with
the organization's capital needs, asset quality and overall financial condition.
Federal Reserve Board policy further provides that a bank holding company should
not maintain a level of cash dividends to its shareholders that places undue
pressure on the capital of bank subsidiaries, or that can be funded only through
additional borrowings or other arrangements that may undermine the bank holding
company's ability to serve as a source of strength.
The Bank
General. As a federally-chartered national bank, the Bank is subject to
regulation and examination by the Office of the Comptroller of the Currency
("OCC"). Relevant statutes and regulations govern, among other things, lending
and investment powers, deposit activities, borrowings, maintenance of surplus
and reserve accounts, distribution of earnings, and payment of dividends. The
Bank is also subject to regulatory provisions covering such matters as issuance
of capital stock, branching, and mergers and acquisitions.
Under the GLBA, the OCC permits national banks, to the extent permitted
under state law, to engage in certain new activities which are permissible for
subsidiaries of an FHC. Further, it expressly preserves the ability of national
banks to retain all existing subsidiaries.
Federal Deposit Insurance Corporation ("FDIC"). The FDIC insures the
Bank's deposit accounts up to $100,000 per depositor.
Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against their transaction accounts (generally, demand
deposits, NOW accounts and certain other types of accounts that permit payments
or transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the
institution's interest-bearing assets.
7
CRA. The CRA requires the OCC to evaluate the Bank's performance in
helping to meet the credit needs of the community. Massachusetts has also
enacted a similar statute that requires the Commissioner to evaluate the Bank's
performance in helping to meet community credit needs. Management believes the
Bank is currently in compliance with all CRA requirements.
Customer Information Security. The Federal Reserve Board, the OCC and
other bank regulatory agencies have adopted final guidelines (the "Guidelines")
for safeguarding confidential customer information. The Guidelines require each
financial institution, under the supervision and ongoing oversight of its Board
of Directors, to create a comprehensive written information security program
designed to ensure the security and confidentiality of customer information,
protect against any anticipated threats or hazards to the security or integrity
of such information; and protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.
Privacy. The OCC and other regulatory agencies have published final
privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy
Rules, which govern the treatment of nonpublic personal information about
consumers by financial institutions, require a financial institution to provide
notice to customers (and other consumers in some circumstances) about its
privacy policies and practices, describe the conditions under which a financial
institution may disclose nonpublic personal information to nonaffiliated third
parties and provide a method for consumers to prevent a financial institution
from disclosing that information to most nonaffiliated third parties by
"opting-out" of that disclosure, subject to certain exceptions.
USA Patriot Act. The USA Patriot Act of 2001 (the "USA Patriot Act"),
designed to deny terrorists and others the ability to obtain anonymous access to
the U.S. financial system, has significant implications for depository
institutions, broker-dealers and other businesses involved in the transfer of
money. The USA Patriot Act, together with the implementing regulations of
various federal regulatory agencies, require financial institutions, including
the Bank, to implement additional or amend existing policies and procedures with
respect to, among other things, anti-money laundering compliance, suspicious
activity and currency transaction reporting and due diligence on customers. They
also permit information sharing for counter-terrorist purposes between federal
law enforcement agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the Federal Reserve
Board (and other federal banking agencies) to evaluate the effectiveness of an
applicant in combating money laundering activities when considering applications
filed under Section 3 of the Bank Holding Company Act or the Bank Merger Act.
Management believes that we are currently in compliance with all currently
effective requirements prescribed by the USA Patriot Act and all applicable
final implementing regulations.
Risk Factors And Factors Affecting Forward Looking Statements
The discussion set forth below contains certain statements that may be
considered "forward-looking statements." Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results to materially differ from those projected in the
forward-looking statements. You should carefully review the factors below and
should not place undue reliance on our forward-looking statements. For further
information regarding forward-looking statements, you should review the
discussion under "FORWARD-LOOKING STATEMENTS" on page 2 of this report.
The Bank's business is seasonal and is largely dependent upon the market
area on Cape Cod. The Company experiences changes in its liquidity each year as
a result of the dependence of its customer base on the seasonal tourist and
vacation business on Cape Cod. The Bank receives substantially all of its
deposits from and makes substantially all of its loans to individuals and
businesses on Cape Cod. A decline in the economy on Cape Cod, or in the United
States generally, may have a material adverse effect on the operating results of
the Company.
General business risks could adversely impact the Company's business. The
banking business is subject to various business risks. Continued success depends
in large part on the contributions of our senior management personnel. The
volume of loan originations is dependent upon demand for loans of the type
originated and serviced by the Company and the competition in the marketplace
for such loans. The level of consumer confidence, fluctuations in real estate
values, fluctuations in prevailing interest rates and fluctuations in investment
returns expected by the financial community could combine to make loans of the
type originated by the Company less attractive. In addition, the
8
Company may be adversely affected by other factors that could (a) increase the
cost to the borrower of loans held by the Company, (b) create alternative
lending sources for such borrowers or (c) increase the cost of funds of the Bank
at a rate faster than an increase in interest income, thereby narrowing net
interest rate margins. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fluctuations in interest rates may negatively impact the Company's
business. Interest rates are highly sensitive to many factors beyond the
Company's control, including general economic conditions and the monetary and
fiscal policies of various governmental and regulatory authorities. Net interest
income can be affected significantly by changes in market interest rates, which
are currently at historically low levels, and changes in the relationship
between short term and long term interest rates. A decrease in current interest
rates could further reduce the Company's interest income on loans and investment
securities without a comparable reduction in interest expense because a
substantial portion of the Company's deposits are held in low interest accounts.
An increase in interest rates could reduce the demand for loans and, as a
result, the amount of loan and commitment fees and the ability of borrowers to
repay their current loan obligations, which could not only result in increased
loan defaults, foreclosures and write-offs, but also necessitate increases to
the Company's allowance for loan losses. See "Quantitative and Qualitative
Disclosures about Market Risk."
The Company could be adversely impacted by applicable regulatory changes
or modifications. The Company is subject to extensive regulation by federal and
state governmental authorities and is subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of its operations. There can be no assurance that these laws, rules and
regulations will not be modified in the future, which could make compliance much
more difficult or expensive, restrict ability to originate, broker or sell loans
or otherwise adversely affect business or prospects. See "Regulation and
Supervision."
Proposed legislation may result in increased regulation of the Company's
business. From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and modifications
of restrictions on, the business of the Company. It cannot be predicted whether
any legislation currently being considered will be adopted or how such
legislation or any other legislation that might be enacted in the future would
affect the business of the Company.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and Bank were elected to their positions on
April 25, 2002, except as noted in parentheses, to serve until the annual
meeting on April 24, 2003 and until their successors are duly elected.
Date Appointed
Age at Title and Area of to Present Date of
Officer 12/31/02 Responsibility Position Employment
- --------------------------------------------------------------------------------------------------------------------
Stephen B. Lawson 61 President, Chief Executive Officer and Director 10/08/98 12/06/65
Robert T. Boon 48 Executive Vice President 01/04/01 04/01/85
John S. Burnett 56 Clerk 10/08/98 09/07/71
Nancy S. Hardaway 50 Executive Vice President (10/20/02) 06/30/00
Robert R. Prall 59 Executive Vice President 01/04/01 06/01/93
Larry K. Squire 55 Executive Vice President 01/04/01 05/17/71
Phillip W. Wong 52 Executive Vice President/Chief Financial Officer (11/04/02) 11/04/02
Business Experience During the Past Five Years
----------------------------------------------
Stephen B. Lawson President, Chief Executive Officer, 7/01/92 (Bank)
President, CEO and Director, 10/08/98 (the Company)
Robert T. Boon Chief Trust Officer 10/13/95 (Bank)
Chief Investment Officer, 06/29/98 (Bank)
Executive Vice President, 01/04/01 (Bank)
John S. Burnett Vice President, 12/11/80 (Bank)
Clerk, 10/08/98 (the Company)
Nancy S. Hardaway Executive Vice President, Marketing, 10/20/02 (Bank)
Senior Vice President, 6/30/00 (Bank)
Director of Marketing & Sales, 3/01/99 (the Pinehills)
Sales Director, 5/01/93, (Kings Way Yarmouth Port)
Robert R. Prall Sr. V.P., Loan Administration, 6/01/93 (Bank)
Chief Lending Officer, 1/01/97 (Bank)
Executive Vice President, 01/04/01 (Bank)
Larry K. Squire Chief Operating Officer, 9/15/95 (Bank)
Executive Vice President, 01/04/01 (Bank)
Phillip W. Wong Executive Vice President, CFO, 11/4/02 (Bank)
Executive Vice President, CFO, 11/4/02 (the Company)
Executive Vice President, CFO, 2/01/97 (Medford
Bancorp, Inc.)
10
Item 2. Properties.
A. Properties owned by the Bank - Banking Offices of Cape Cod Bank and Trust
Company, N.A.:
1) 307 Main Street, Hyannis - Main Office
2) 835 Main Street, Osterville - Branch Office
3) 536 Main Street, Harwichport - Branch Office
4) 1095 Route 28, South Yarmouth - Branch Office
5) 40 Main Street, Orleans - Branch Office
6) Shank Painter Road, Provincetown - Branch Office
7) 121 Main Street, Buzzards Bay - Branch Office
8) 119 Route 6A, Sandwich - Branch Office
9) Route 6A and Underpass Road, Brewster - Branch Office
10) 700 Route 6A, Dennis - Branch Office
11) 397 Palmer Avenue, Falmouth - Branch Office
12) 693 Main Street, Chatham - Branch Office
13) Main Street, Wellfleet - Branch Office
14) 249 Worcester Court, Falmouth - Branch Office
15) 237 Main Street, Wareham - Branch Office
16) 495 Station Avenue, South Yarmouth - Branch Office
17) 350 Front Street, Marion - Branch Office
18) 2 Market Crossing, Plymouth - Land, future Branch Office
None of the above offices is subject to any mortgage lien or any other
material encumbrance. The main office is located in Hyannis, Massachusetts, and
is a modern, two-story brick building located on approximately two acres of
land. The Harwichport office and the Buzzards Bay office are somewhat larger
than the remaining offices, having formerly been the main offices of the Cape
Cod Trust Company and the Buzzards Bay National Bank prior to merger. The Bank
also owns a house in Meredith, New Hampshire, one in Orlando, Florida, and one
in Killington, Vermont, which are used as vacation sites by its employees.
B. Rental of Bank Premises of Cape Cod Bank and Trust Company, N.A.:
1) Airport Rotary Circle, Hyannis - Branch Office
2) 2 Barlow's Landing Road, Pocasset - Branch Office
3) 1708 Falmouth Road, Centerville - Branch Office
4) 519 Route 134, South Dennis - Branch Office
5) 9 West Road, Skaket Corners, Orleans - Branch Office
6) 31 Workshop Road, South Yarmouth - Customer Service Center
7) Village Green Shopping Ctr., N. Eastham - Branch Office
8) Nine Stop & Shop Locations on Cape Cod - Branch Offices
9) 3206 Main Street, Barnstable Village - Branch Office
10) 170 Commercial Street, Provincetown - Branch Office
11) 64 King's Circuit, Kings Way, Yarmouth Port - Branch Office
Certain rental properties are adjusted annually with the Consumer Price
Index, include contingent expenses and have renewal options. While the Company
has excellent relationships with its lessors, there is no guarantee that it will
be able to renew any or all of said leases when they expire. The Company
believes that its properties are adequate for its present needs.
11
Item 3. Legal Proceedings.
The Bank has received notices of assessment from The Commonwealth of
Massachusetts DOR for tax years ended December 31, 1999, 2000 and 2001 based on
the DOR's contention that dividend distributions by CCBT Preferred, a REIT, to
the Bank are fully taxable in Massachusetts. On March 5, 2003, the Governor of
Massachusetts signed new legislation that amends Massachusetts law to expressly
disallow the deduction for dividends received from a REIT. This amendment
applies retroactively to tax years ending on or after December 31, 1999. As a
result of the enactment of this legislation, the Company has ceased recording
the tax benefits associated with the dividend received deduction effective for
the 2003 tax year and will accrue a liability in the first quarter of 2003 with
respect to the additional state tax liability. The Company believes that this
legislation will be challenged, especially the retroactive provisions, on
constitutional and other grounds. The Company would support such a challenge and
otherwise intends to defend vigorously its position. See "Business--Recent
Developments."
Item 4. Submission of Matters to a Vote of Security Holders.
None.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The common stock of the Company is quoted on the Nasdaq National Market
System under the symbol "CCBT". The table below shows the high and low trading
prices of the stock for each quarter in the past two years and the dividends
declared each quarter. According to the Company's transfer agent, there were
approximately 925 stockholders of record as of February 28, 2003. 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.
2002
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------ -------------
Market price: High $ 28.00 $ 28.93 $ 27.79 $ 26.84
Low $ 23.80 $ 24.70 $ 24.70 $ 24.00
Dividends declared
per share $ 0.19 $ 0.19 $ 0.19 $ 0.19
2001
-----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------ -------------
Market price: High $ 22.75 $ 29.99 $ 30.96 $ 26.00
Low $ 18.63 $ 21.16 $ 23.70 $ 22.44
Dividends declared
per share $ 0.18 $ 0.18 $ 0.18 $ 0.18
13
Item 6. Selected Consolidated Financial Data.
2002 2001 2000 1999 1998
------------- -------------- -------------- -------------- --------------
(In thousands, except per share amounts)
Statement of Income Data:
Interest and dividend income $ 77,237 $ 97,755 $ 93,969 $ 79,107 $ 73,978
Interest expense 29,118 44,555 45,624 38,311 36,211
------------- -------------- -------------- -------------- --------------
Net interest income 48,119 53,200 48,345 40,796 37,767
Provision for loan losses -- -- -- -- --
Net gain on securities 2,074 2,187 85 234 384
Other non-interest income 20,875 20,735 16,126 18,034 13,377
Non-interest expense 48,945 46,036 38,226 32,517 30,921
------------ -------------- -------------- -------------- --------------
Income before income taxes 22,123 30,086 26,330 26,547 20,607
Provision for income taxes 7,683 10,622 9,101 10,086 8,050
------------- -------------- -------------- -------------- --------------
Net income $ 14,440 $ 19,464 $ 17,229 $ 16,461 $ 12,557
============= ============== ============== ============== ==============
Basic earnings per share $ 1.68 $ 2.26 $ 2.00 $ 1.85 $ 1.39
Diluted earnings per share 1.67 2.25 2.00 1.85 1.38
Cash dividends per share 0.76 0.72 0.64 0.56 0.50
Balance Sheet Data:
Total assets $1,481,883 $ 1,454,667 $ 1,403,919 $ 1,231,114 $ 1,177,530
Securities available for sale 510,837 438,350 426,743 463,379 495,957
Net loans 789,018 872,039 836,336 663,584 582,713
Deposits - Non-interest bearing 229,033 209,551 201,904 167,624 160,966
- Interest-bearing 713,187 693,840 771,399 598,440 566,931
Borrowings 397,840 420,049 315,807 367,309 358,113
Stockholders' equity 118,447 115,316 98,729 85,650 83,542
Book value per share $ 13.79 $ 13.38 $ 11.47 $ 9.95 $ 9.22
Selected Ratios:
Return on average assets 0.99% 1.32% 1.35% 1.35% 1.15%
Return on average stockholders' equity 12.24% 18.43% 19.32% 19.60% 15.80%
Average equity to average assets 8.10% 7.14% 6.97% 6.89% 7.28%
Dividend payout ratio 45.24% 31.86% 32.00% 30.27% 35.97%
Net interest spread 2.93% 3.07% 3.12% 2.77% 2.84%
Net interest margin 3.46% 3.77% 3.97% 3.49% 3.61%
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
This Form 10-K contains certain statements that may be considered
"forward-looking statements." Forward-looking statements involve known and
unknown risks, uncertainties and other factors, including, but not limited to,
those factors described under the caption "Risk Factors and Factors Affecting
Forward-Looking Statements," that may cause the Company's actual results to
materially differ from those projected in the forward-looking statements. You
should not place undue reliance on our forward-looking statements. For further
information regarding forward-looking statements, you should review the
discussion under the caption "FORWARD LOOKING STATEMENTS" on Page 2 of this
report.
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and selected consolidated
financial data included within this report. Given that the Company's principal
activity currently is ownership of the Bank, for ease of reference, the term
"Company" in this discussion generally will refer to the investments and
activities of the Company and the Bank, except where otherwise noted.
Cape Cod Bank and Trust Company, N.A. is the largest commercial bank
headquartered on Cape Cod in Barnstable County, Massachusetts. The Bank's
thirty-four banking offices are principally engaged in accepting deposits from
individuals and businesses, and in making loans. The Bank also has a substantial
Trust Department, managing assets in excess of $677 million at December 31, 2002
on behalf of its clients. The Bank's core market is comprised of retail and
wholesale businesses; primary households (including a significant retirement
population); and a growing number of second homeowners. In addition, a
substantial non-core vacation population causes seasonal deposit growth.
14
RESULTS OF OPERATIONS
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
2002 COMPARED WITH 2001
Source and Use of Funds. At December 31, 2002, total deposits of $942,220,000
were $38,829,000 or 4% greater than at the prior year-end. Demand deposits
increased $19,482,000 or 9% and NOW deposits increased $21,975,000 or 15%. Money
market deposits increased $26,563,000, or 10%, while other savings deposits
increased by $15,824,000 or 22%. Consistent with the trend in market interest
rates, lower rates offered on certificates of deposit caused customers to seek
alternative products providing higher rates and/or increased liquidity,
contributing to a lower year-end balance in these products in 2002 as compared
with 2001. Certificates of deposit greater than $100,000 decreased $15,779,000,
or 30%, and other time deposits decreased $29,236,000, or 19%, from the prior
year-end. Similarly, the decrease in the average level of certificates of
deposits in 2002, as customers sought higher rates and/or increased liquidity,
modestly exceeded growth in average core deposits. On average for the year,
total deposits of $926,448,000 were $11,581,000, or 1%, lower than the prior
year average. Demand deposits were higher on average by $14,112,000 or 7% and
NOW deposits were higher on average by $16,590,000 or 12%. On average, money
market deposits were higher by $37,299,000 or 15% and other savings deposits
increased $15,098,000 or 22% over the prior year. Average certificates of
deposit greater than $100,000 decreased by $44,613,000 or 52% and average other
time deposits decreased by $50,066,000 or 27%. Average Federal Home Loan Bank
borrowings were $27,239,000 or 7% lower than the prior year average, while other
short-term borrowings increased, on average, by $1,146,000 or 4%. As of year-end
2002, other short-term borrowings had declined from the prior year-end by
$9,345,000 or 30%. The decrease in Federal Home Loan Bank borrowings at December
31, 2002 of $12,865,000 or 3% compared to the prior year includes a prepayment
of $17,800,000 of borrowings scheduled to mature in 2005. The prepayment of
these borrowings, carrying a weighted-average interest rate of 6.10%, will
result in an annual improvement in pre-tax net interest income of approximately
$675,000 over their remaining lives.
At year-end 2002, loans totaled $801,402,000, reflecting a decrease of
$82,889,000, or 9% when compared to the prior year-end. For interest rate risk
concerns, the Company has elected not to hold long-term fixed rate residential
mortgages in the current low mortgage interest rate environment. Sales of fixed
rate residential mortgages throughout the year contributed to a decline of
$114,409,000 or 30% in this category since the prior year-end. Partially
offsetting this decrease were increases in all other real estate loan categories
with commercial real estate loans up $18,524,000 or 7%, construction loans up
$4,358,000 or 5%, and Equity Lines of Credit up $12,458,000 or 23%. On average
for the year, total loans of $882,175,000 decreased from the prior year average
by $12,323,000 or 1%. Residential mortgages decreased $54,259,000 on average or
13% while average commercial mortgages increased $22,919,000 or 9% and Equity
Lines of Credit increased $16,290,000, on average, or 37%. Construction loans,
on average, also increased $3,280,000 or 3% when compared to the prior year.
During 2002, securities decreased by $9,805,000, on average, or 2%, with
significant prepayments resulting in declines in mortgage-backed securities and
collateralized mortgage obligations, down $18,311,000 or 63% and $14,127,000 or
7%, respectively. A portion of the prepayments received were reinvested in the
securities portfolio resulting in increases in other securities, up $10,011,000
or 4%, and US Government agencies, up $17,940,000 or 106%. As of December 31,
2002, securities, including Federal Home Loan Bank and Federal Reserve Bank
stock, were up by $72,487,000 or 16% when compared to the prior year-end with
other debt securities comprising the majority of this increase, up $70,192,000
over the prior year-end balance.
Net Interest Income. In 2002, net interest income was $48,119,000 as
compared to $53,200,000 for the previous year, a decrease of 10%. In addition to
a $1,900,000 penalty for the prepayment of Federal Home Loan Bank borrowings,
the decline in net interest income can be attributed to reduced yields on
earning assets and the inability to further reduce rates on non-term deposits.
The net interest spread and net interest margin ratios were 2.9% and 3.5%,
respectively, for the year ended December 31, 2002, as compared to 3.1% and
3.8%, respectively, for the prior year.
Provision for Loan losses. Recoveries on loans previously charged off
exceeded charge-offs during 2002 by $132,000. Management's assessment of the
risks in the loan portfolio at December 31,2002 as well as the Company's recent
loss experience, whereby recoveries have actually exceeded charge-offs since
1997, resulted in no provision for loan losses in 2002. The allowance for loan
losses was 1.55% and 1.39% of total loans at December 31, 2002 and 2001,
respectively.
15
RESULTS OF OPERATIONS
Other Income and Expense. Non-interest income increased by $28,000 over
the prior year-end as increases in insurance commissions and electronic banking
fees were offset by a decrease in the net gain on sale of loans. Insurance
commissions increased by $989,000 over the prior year inclusive of a $398,000
adjustment for the recognition of previously deferred insurance commissions for
which no deferral is required. Other categories of non-interest income which
experienced significant increases over the prior year included electronic
banking fees, up $498,000 as a result of increased transaction volume as well as
the addition of new products, and brokerage fees and commissions which increased
$183,000 as a result of the recognition of a full year of revenues on an
investment advisory product which became a product of CCB&T Brokerage Direct,
Inc. in April 2001. The net gain on the sale of loans decreased by $1,015,000 in
2002 as compared to 2001 results. This decrease can be attributed to the effect
on prior year results of a $52 million loan sale from the residential mortgage
portfolio in September 2001 as well as the increase in deferred costs recognized
during 2002 as a result of the sale of current production fixed rate mortgages.
The net gain on the sale of securities was negatively impacted during 2002 by a
$1 million impairment loss recognized on an asset backed security due to
increased delinquencies in its underlying collateral. Included in other income,
which decreased by $311,000 when compared to 2001, was a $230,000 loss on the
sale of a fixed asset.
During 2002, non-interest expense increased $2,802,000 or 6% over 2001
results. Salaries and employee benefits increased $1,256,000, or 5%, a result of
annual merit increases, increased staffing for newly opened financial centers,
incentive commissions on financial services and an early retirement plan offered
during the second quarter of 2002. These increases were partially offset by the
$908,000 decrease in the Company's accrual for its Profit Incentive Plan. An
increase in building and equipment expense of $855,000 can be attributed to the
opening of six (6) locations since the prior year as well as amortization
expense of computer software and depreciation of equipment. An increase in
delivery and communications of $398,000 is largely due to increased telephone
expense. Increased electronic banking expenses of approximately $350,000,
included in all other expenses, are due to the higher volume of electronic
transactions as well as the offering of new products.
Provision for Income Taxes. As a result of lower pretax income for the
year ended December 31, 2002, the provision for income taxes decreased by 28% to
$7,683,000 from $10,622,000 in the prior year. These provisions reflect a
combined effective federal and state income tax rate of 35% for both 2002 and
2001.
Net Income. Net income of $14,440,000 for the year ended December 31, 2002
represents a decrease of $5,024,000 or 26% compared to 2001 results for the
reasons described above. In 2002, basic earnings per share of $1.68 and diluted
earnings per share of $1.67 both represent a decrease of $.58 when compared to
2001 results.
2001 COMPARED WITH 2000
Source and Use of Funds. On average, deposits during 2001 increased from
the prior year by $74,452,000 or 9% with core deposits, consisting of demand,
NOW, money market, and savings accounts, accounting for $49,300,000, of this
increase and time deposits accounting for the remaining $25,152,000. In
contrast, total deposits of $903,391,000 at December 31, 2001 reflect a decrease
of $69,912,000 or 7% when compared to the prior year-end. Core deposits
increased by $50,682,000 or 8% while time deposits decreased by $120,594,000 or
37% from the prior year-end. The decrease in year-end balances in time deposits
can be attributed to the maturity of a significant amount of one year
certificates of deposit during the year following a special interest rate
offered during 2000 as well as the decrease in the interest rate being offered
on these products. Additional funds were raised through increased borrowings.
Borrowings from the Federal Home Loan Bank increased in 2001, on average, by
$100,877,000 or 34%, compared to the prior year. At December 31, 2001, these
borrowings amounted to $384,314,000, an increase of $93,027,000 or 32% over
year-end 2000. In addition, CCBT Statutory Trust I, a subsidiary of the Company,
issued $5 million of Trust Preferred Securities during the third quarter of
2001; these funds are to be used to support growth and general corporate
purposes.
At December 31, 2001, total loans including loans held for sale were
$892,640,000, an increase of $43,290,000 or 5% when compared to the prior
year-end. This increase was primarily in the commercial mortgage portfolio,
which increased $22,398,000 or 9%, as well as home equity lines of credit, which
increased $15,959,000 or 43%. Residential mortgages, including loans held for
sale, were lower at year-end 2001 by $9,582,000 or 2% due to the sale of
$168,648,000 of residential mortgages during the year. On average, total loans
increased $139,047,000 or 18.4% over the prior year. Average loan growth was led
by residential mortgages, which increased $77,445,000 or 23%. Other loan
categories, which experienced significant average growth include commercial
mortgages, up $29,175,000 or 13%, and commercial construction loans, up
$17,600,000 or 57%. Home equity lines of credit were higher, on average, by
16
RESULTS OF OPERATIONS
$13,362,000 or 432% than the prior year. At December 31, 2001, securities,
including Federal Home Loan Bank and Federal Reserve Bank stock, were up by
$13,039,000 or 3% over the prior year-end. The increase in other debt securities
of $22,118,000 or 12% was partially offset by declines in collateralized
mortgage obligations and U.S. Government agencies. On average, the increase in
securities was $54,039,000 or 12% with other securities accounting for
$42,671,000 of this increase, or 20%. Collateralized mortgage obligations were
higher, on average, by $15,144,000 or 8% while U.S. Government agencies declined
by $9,457,000 or 36%.
Net Interest Income. Net interest income was $53,200,000 for the year
ended December 31, 2001 as compared to $48,345,000 for the prior year, an
increase of 10%. Lower yields on earning assets were offset by the increased
volume of earning assets as well as lower yields on interest bearing
liabilities. The net interest spread and net interest margin ratios were 3.1%
and 3.8 % respectively, for the year ended December 31, 2001, compared to 3% and
4%, respectively for the year 2000.
Provision for Loan losses. Recoveries on loans previously charged off
exceeded charge-offs during 2001 by $98,000. Despite overall growth in the loan
portfolio in 2001, management's assessment of the risks in the loan portfolio at
December 31, 2001 as well as the Company's recent loss experience, whereby
recoveries have actually exceeded charge-offs since 1997, resulted in no
provision for loan losses in 2001. The allowance for loan losses was 1.39% and
1.43% of total loans at December 31, 2001 and 2000, respectively.
Other Income and Expense. Non-interest income increased by $6,712,000 or
41% over the prior year-end. Of this increase, $2,103,000 and $2,867,000,
respectively, can be attributed to net gains on the sale of securities and
loans. Insurance commissions have increased $763,000 compared to the prior year
results, which only included the Agency's revenues from the date of purchase.
Non-interest expenses totaled $46,058,000 for the year ended December 31,
2001, a $7,778,000 or 20% increase from the comparable 2000 period. Salaries and
employee benefits rose $5,191,000 or 25% with commissions accounting for
$1,397,000 of this increase and salaries, in line with management expectations,
increasing $2,294,000. The increased benefits expense of $1,668,000 is largely
attributable to increases in performance-based compensation programs and
increases in medical and dental insurance costs. Increased expenses in other
categories include amortization of intangibles for acquisitions completed during
the second quarter of 2000, building and equipment expenses for additional
locations and depreciation and amortization related to upgraded computer
equipment and software, and marketing and advertising costs incurred for the
launch of the Company's new logo.
Provision for Income Taxes. For the year ended December 31, 2001, the
provision for income taxes was $10,622,000, an increase of 17% over the prior
year's provision of $9,101,000. These provisions reflect a combined effective
federal and state income tax rate of 35% in 2001 and 2000, respectively.
Net Income. Net income of $19,464,000 for the year ended December 31, 2001
reflects an increase over 2000 results of $2,236,000 or 13%. Basic earnings per
share of $2.26 represents a $.26 increase in 2001 compared to 2000 results.
17
FINANCIAL CONDITION
MATURITY STRUCTURE OF ASSETS AND LIABILITIES
AND SENSITIVITY TO CHANGES IN INTEREST RATES
Securities Available for Sale
The Company invests its excess funds in a variety of investment
structures, including collateralized mortgage obligations (CMOs) and other
asset-backed securities, usually with short effective durations. All securities
purchased are investment grade, nonetheless there exists the possibility of loss
from time to time resulting from changes in credit risk, as these securities are
collateralized with loans made by others, and from substantial changes in
interest rate environments during volatile economic periods.
The following tables reflect the Company's available-for-sale securities
at December 31, 2002, by fixed and floating rates. Other securities are
primarily comprised of collateralized mortgage obligations and asset-backed
securities as outlined in Note 2 to the accompanying consolidated financial
statements.
Fixed Rate Securities
-------------------------------------------------------------------------------------
U.S. Government State and Other
Agencies Municipal Securities
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Term to maturity:
One year or less $ 44,518 5.57% $ 15,037 1.96% $ 173,741 5.52%
Over one year through five years 16,626 4.27% 3,376 4.63% 135,567 5.84%
Over five years -- -- 1,385 4.60% 210 2.54%
----------- ----------- ------------
Totals $ 61,144 5.22% $ 19,798 2.60% $ 309,518 5.66%
=========== =========== ============
Included in fixed rate debt securities are $359,212,000 of CMOs,
mortgage-backed securities, and other debt securities. These have been
distributed based on estimates of their principal cash flows rather than their
contractual final maturities. The balance, largely fixed rate municipal
securities, are distributed on the basis of contractual maturity.
Floating Rate Securities
-------------------------------------------------------------------------------------
U.S. Government State and Other
Agencies Municipal Securities
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Term to repricing/maturity:
One year or less $ 37,654 (0.79)% $-- --% $ 84,500 2.88%
Over one year through five years -- -- -- -- -- --
Over five years -- -- -- -- -- --
----------- ----------- ------------
Totals $ 37,654 (0.79)% $-- --% $ 84,500 2.88%
=========== =========== ============
At December 31, 2002, gross unrealized gains and gross unrealized losses
on securities available for sale amounted to $4.8 million and $6.6 million,
respectively.
18
FINANCIAL CONDITION
The Company's investment securities are subject to market risk in the
following ways. Of the investment securities owned as of December 31, 2002,
$122,154,000 are floating rate instruments tied to various indices, primarily
LIBOR. Lesser amounts are tied to Treasury rates and other indices. The majority
of these floating rate instruments are subject to interest rate caps that range
from 8% to 32%. If interest rates rise enough so that there is a significant
possibility that a given security will become subject to its interest rate cap,
the market value of that security will be reduced. This risk is greater to the
extent that the remaining life of the investment is longer. The Company's
floating rate investments have an average life of about 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 $390,460,000 of securities are fixed-rate CMOs, mortgage backed
securities and other debt securities. Fixed-rate investments have market risk
because their rate of return does not change at all with the general level of
interest rates. Because homeowners are less likely to refinance their mortgages
at higher rates, an additional characteristic of CMOs and mortgage-backed
securities is that their principal payments tend to slow when interest rates
rise. If the fixed rate earned on the investment is lower than the new market
rate, this can result in a decline in the value of these securities. Almost all
of the Company's fixed-rate CMOs have very short average lives and have interest
rates above current market levels, which reduces the market risk of these
securities. The average life of the Company's fixed-rate investments is less
than two years.
Loans
The following tables reflect maturity/repricing information for
commercial, construction and other loans. In both the fixed and floating rate
loan tables, the category of Other Loans is primarily comprised of mortgage
loans on real estate, including residential, commercial and equity lines of
credit, as outlined in Note 3 to the accompanying consolidated financial
statements.
Fixed Rate Loans
----------------------------------------------------
Commercial Construction Other
Loans Loans Loans
--------------- --------------- --------------
(In thousands)
Term to maturity:
One year or less $ 5,498 $ 30,907 $ 1,130
Over one year through five years 4,531 9,189 75,792
Over five years 585 1,837 46,792
--------------- --------------- --------------
Totals $ 10,614 $ 41,933 $ 123,714
=============== =============== ==============
Included in fixed rate loans maturing in one year or less are $369,000 of
customer account overdrafts.
Floating Rate Loans
----------------------------------------------------
Commercial Construction Other
Loans Loans Loans
--------------- --------------- --------------
(In thousands)
Term to repricing/maturity:
One year or less $ 64,143 $ 57,610 $ 332,977
Over one year through five years 7,494 -- 154,897
Over five years 1,701 -- 6,319
--------------- --------------- --------------
Totals $ 73,338 $ 57,610 $ 494,193
=============== =============== ==============
Most residential mortgage loans are adjustable rate mortgages subject to
interest rate caps.
19
FINANCIAL CONDITION
Deposits
The remaining maturity of time certificates of deposit as of December 31,
2002 was as follows:
Fixed Rate
Certificates of Deposit
-------------------------------
More than $100,000 or
$100,000 Less
----------- -----------
(In thousands)
Remaining maturity:
Three months or less $ 8,945 $ 38,332
Over three months through six months 4,388 26,645
Over six months through 12 months 3,822 23,613
Over one year through five years 10,189 33,371
Over five years -- --
----------- -----------
Totals $ 37,344 $ 121,961
=========== ===========
Other deposits may be withdrawn by the customer without notice or penalty.
The rates paid thereon are reviewed each month and changed at the Company's
option as often as indicated by changing market conditions.
Generally, the Company's strategy is to price deposits in relation to
rates available in the open market, including other financial institutions, and
its liquidity needs based on factors that include loan demand. Interest rates
paid are frequently reviewed and are modified to reflect changing conditions.
Borrowings
The remaining maturity of borrowings from the Federal Home Loan Bank as of
December 31, 2002 was as follows:
Fixed Rate
FHLB Borrowings
---------------
(In thousands)
Remaining maturity:
Three months or less $ 216,700
Over three months through six months 20,000
Over six months through 12 months 16,650
Over one year through five years 100,494
Over five years 17,606
----------
Totals $ 371,450
==========
Rates paid on other short-term borrowings change daily.
20
FINANCIAL CONDITION
Loans
The following is a summary of loans outstanding as of the dates indicated:
December 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(In thousands)
Commercial loans $ 83,953 $ 84,947 $ 76,275 $ 77,776 $ 70,767
Construction mortgage loans 99,544 95,186 87,978 68,809 47,940
Commercial mortgage loans 283,458 264,934 242,536 203,988 207,860
Industrial revenue bonds 929 1,163 1,603 1,137 1,344
Residential mortgage loans 327,889 429,840 430,951 313,757 254,320
Consumer loans 5,629 8,221 9,147 9,275 11,589
------------- ------------- ------------- ------------- -------------
Total loans $ 801,402 $ 884,291 $ 848,490 $ 674,742 $ 593,820
============= ============= ============= ============= =============
Allowance for Loan Losses
The allowance for loan losses is an estimate of the amount necessary to
absorb probable losses in the loan portfolio. The allowance consists of
specific, general and unallocated components. Commercial real estate and
commercial business loans are evaluated individually for allowance purposes.
Other categories of loans are generally evaluated as a group. The specific
component relates to loans that are classified as doubtful, substandard or
special mention. Loans classified as doubtful are considered impaired in
accordance with SFAS No. 114, and an allowance is determined using a discounted
cash flow calculation. Loss factors for substandard loans are based on a loss
migration database, while loss factors for all other categories of loans are
based on the Company's historical loss experience with similar loans of similar
quality as determined by the Company's internal rating system. Loss factors are
then adjusted for additional points that consider qualitative factors such as
current economic trends (both local and national), concentrations, growth and
performance trends, and the results of risk management assessments. Accordingly,
increases or decreases in the amount of each loan category as well as the
ratings of the loans within each category are considered in calculating the
overall allowance. The allowance is an estimate, and ultimate losses may vary
from current estimates. As adjustments become necessary, they are reported in
earnings of the periods in which they become known.
In addition, the Company's allowance for loan losses is periodically
reviewed by the OCC as part of their examination process. The OCC may require
the Company to make additions to the allowance based upon judgments different
from those of management.
Non-performing Assets and Loan Loss Experience
Non-performing assets as of December 31 were as follows:
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(In thousands)
Nonaccrual loans $1,348 $1,802 $2,192 $1,777 $7,468
Loans past due 90 days or more and still accruing -- -- -- -- --
Property from defaulted loans 1,500 1,500 1,500 1,500 --
------ ------ ------ ------ ------
Total non-performing assets $2,848 $3,302 $3,692 $3,277 $7,468
====== ====== ====== ====== ======
Restructured troubled debt performing in accordance
with amended terms, not included above $ 210 $ 224 $ 237 $ 626 $ 478
====== ====== ====== ====== ======
21
FINANCIAL CONDITION
Accrual of interest income on loans is discontinued when it is
questionable whether the borrower will be able to pay principal and interest in
full and/or when loan payments are 60 days past due unless the loan is fully
secured by real estate or other collateral and in the process of collection.
Loans are classified "substandard" when they are not adequately protected
by the current sound worth and paying capacity of the debtor or of the
collateral. At December 31, 2002, $7,240,000 of loans were included in this
category, in addition to loans reported above. The Company's loan classification
system also includes a category for loans that are monitored for possible
deterioration in credit quality. At December 31, 2002, $9,371,000 of loans were
included in this category. In addition, it is possible that there may be losses
on other loans that have not been specifically identified.
The changes in the allowance for loan losses and related charge-off
(recovery) ratios for the years ended December 31 were as follows:
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance, beginning of year $ 12,252 $ 12,154 $ 11,158 $ 11,108 $ 10,962
Provision for loan losses -- -- -- -- --
Charge-offs:
Commercial loans (134) (275) (108) (347) (353)
Construction mortgage loans -- -- -- -- --
Commercial mortgage loans -- -- -- (186) (86)
Industrial revenue bonds -- -- -- -- --
Residential mortgage loans -- -- -- -- (1)
Consumer loans (92) (71) (60) (77) (166)
-------- -------- -------- -------- --------
Total charge-offs (226) (346) (168) (610) (606)
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Commercial loans 300 321 826 351 475
Construction mortgage loans -- 84 89 60 47
Commercial mortgage loans 8 6 216 190 174
Industrial revenue bonds -- -- -- -- --
Residential mortgage loans 6 -- 10 -- 23
Consumer loans 44 33 23 59 33
-------- -------- -------- -------- --------
Total recoveries 358 444 1,164 660 752
-------- -------- -------- -------- --------
Balance, end of year $ 12,384 $ 12,252 $ 12,154 $ 11,158 $ 11,108
======== ======== ======== ======== ========
Ratio of net charge-offs (recoveries) to (0.01)% (0.01)% (0.013)% (0.01)% (0.03)%
average loans outstanding ======== ======== ======== ======== ========
22
FINANCIAL CONDITION
The allowance for loan losses, as of December 31, was allocated as
follows:
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In thousands)
Commercial loans $ 1,789 $ 2,219 $ 1,502 $ 1,457 $ 1,578
Construction mortgage loans 951 787 802 755 705
Commercial mortgage loans 6,742 5,903 5,838 5,681 5,822
Industrial revenue bonds 14 14 16 20 23
Residential mortgage loans 1,812 2,335 3,361 2,725 2,460
Consumer loans 1,076 994 635 520 520
------- ------- ------- ------- -------
$12,384 $12,252 $12,154 $11,158 $11,108
======= ======= ======= ======= =======
Recoveries on loans previously charged off exceeded charge-offs therefore
management determined that additions to the allowance for loan losses were
unnecessary in 2002. The allowance represented 1.55% of total loans at December
31, 2002, 1.39% of total loans at December 31, 2001, and 1.43% of total loans at
December 31, 2000. Although management believes that upon review of loan quality
and payment statistics, the allowance is adequate to cover losses likely to
result from loans in the current portfolio at December 31, 2002, there can be no
assurance that the allowance is adequate or that additional provisions might not
become necessary.
Liquidity
The Company normally experiences changes in its liquidity each year as a
result of the seasonal nature of the economy in its market area. Liquidity is
usually at its high in late summer and early fall and the annual low point is
usually in the spring.
Substantially all of the amount shown as cash and due from banks at year
end is made up of checks and similar items in the process of collection or was
needed to satisfy a requirement to maintain a portion of deposits in an account
at the Federal Reserve. Accordingly, it does not represent a source of
liquidity.
In general, investment securities could also be sold if necessary to meet
liquidity needs. In that event, a gain or loss would be realized if the market
value of the securities sold was not equal to their cost, adjusted for the
amortization of premium or accretion of discount. The Bank can also borrow funds
using investment securities as collateral, and it has a line of credit of
$5,000,000 from the Federal Home Loan Bank of Boston. The Bank has also
established a line of credit of $7,000,000 for the purchase of federal funds
from SunTrust Bank and may borrow from the Federal Reserve Bank if necessary.
23
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
AVERAGE INTEREST RATES AND INTEREST SPREAD
The average amount outstanding for certain categories of interest-earning
assets and interest-bearing liabilities, the interest income or expense and the
average yields earned or rates paid thereon, are summarized in the following
table for the three years ended December 31, 2002. Nonaccrual loan balances have
been included in their respective loan categories, which reduces the calculated
yields. A portion of the income reported in certain of the asset categories is
not subject to federal income tax, making it relatively more valuable. The
computed yields shown have not been adjusted for taxable equivalency. As an
indication of the amount of change in the general level of interest rates
between years, the average rate on overnight federal funds traded among banks
was 1.67%, 3.88% and 6.26% during 2002, 2001 and 2000, respectively.
Years Ended December 31,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- -------- ----- ----------- -------- -----
(Dollars in thousands)
ASSETS
Securities:
Mortgage-backed securities $ 10,942 $ 617 5.64% $ 29,253 $ 1,868 6.38%
CMOs 180,336 7,114 3.94% 194,463 11,948 6.14%
U.S. Government agencies 34,845 1,111 3.19% 16,905 869 5.14%
State and municipal obligations 18,252 590 3.23% 23,571 948 4.02%
Other securities 262,263 11,016 4.20% 252,251 14,689 5.82%
----------- -------- ----------- --------
Total securities 506,638 20,448 4.04% 516,443 30,322 5.87%
----------- -------- ----------- --------
Loans:
Commercial 85,589 4,815 5.63% 83,973 6,692 7.97%
Commercial construction 56,923 2,928 5.14% 48,461 3,529 7.28%
Residential construction 43,331 2,488 5.74% 48,513 3,038 6.26%
Commercial mortgages 271,784 20,833 7.67% 248,865 22,064 8.87%
Industrial revenue bonds 1,048 60 5.73% 1,324 91 6.87%
Residential mortgages 356,494 21,941 6.15% 410,753 27,913 6.80%
Home equity 60,586 3,054 5.04% 44,296 3,245 7.33%
Consumer 6,420 670 10.44% 8,313 861 10.36%
----------- -------- ----------- --------
Total loans 882,175 56,789 6.44% 894,498 67,433 7.54%
----------- -------- ----------- --------
Total earning assets 1,388,813 77,237 5.56% 1,410,941 97,755 6.93%
-------- --------
Non-earning assets 67,176 67,263
----------- -----------
Total assets $ 1,455,989 $ 1,478,204
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 156,075 727 0.47% $ 139,485 745 0.53%
Regular savings 83,045 930 1.12% 67,947 932 1.37%
Money Market accounts 289,682 5,002 1.73% 252,384 7,143 2.83%
Certificates of deposit of
$100,000 or more 41,642 1,266 3.04% 86,255 4,708 5.46%
Other time deposits 133,821 4,470 3.34% 183,887 10,024 5.45%
----------- -------- ----------- --------
Total interest-bearing deposits 704,265 12,395 1.76% 729,958 23,552 3.23%
----------- -------- ----------- --------
Borrowings:
Federal Home Loan Bank 367,588 16,120 4.39% 394,827 20,090 5.09%
Other short-term borrowings 29,905 318 1.06% 28,758 765 2.66%
Subordinated debt 5,000 285 5.70% 2,096 148 7.06%
----------- -------- ----------- --------
Total borrowings 402,493 16,723 4.15% 425,681 21,003 4.93%
----------- -------- ----------- --------
Total interest-bearing liabilities 1,106,758 29,118 2.63% 1,155,639 44,555 3.86%
-------- --------
Demand deposits 222,183 208,071
Non-interest-bearing liabilities 9,101 8,878
Stockholders' equity 117,947 105,616
----------- -----------
Total liabilities and equity $ 1,455,989 $ 1,478,204
=========== ===========
Net interest income/spread $ 48,119 2.93% $ 53,200 3.07%
======== ========
Net interest margin (NII/Avg.
Earning Assets) 3.46% 3.77%
Years Ended December 31,
---------------------------------------
2000
---------------------------------------
Average Average
Balance Interest Yield
----------- -------- -----
(Dollars in thousands)
ASSETS
Securities:
Mortgage-backed securities $ 27,465 $ 2,173 7.91%
CMOs 179,319 13,189 7.36%
U.S. Government agencies 26,362 1,775 6.73%
State and municipal obligations 19,678 921 4.68%
Other securities 209,580 14,621 6.97%
----------- --------
Total securities 462,404 32,679 7.07%
----------- --------
Loans:
Commercial 77,352 7,529 9.73%
Commercial construction 30,861 2,899 9.39%
Residential construction 52,789 3,316 6.28%
Commercial mortgages 219,690 20,298 9.24%
Industrial revenue bonds 1,382 114 8.25%
Residential mortgages 333,308 23,199 6.96%
Home equity 30,934 3,001 9.70%
Consumer 9,135 934 10.22%
----------- --------
Total loans 755,451 61,290 8.11%
----------- --------
Total earning assets 1,217,855 93,969 7.72%
--------
Non-earning assets 61,027
-----------
Total assets $ 1,278,882
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 124,663 928 0.74%
Regular savings 66,057 1,339 2.03%
Money Market accounts 236,920 9,048 3.82%
Certificates of deposit of
$100,000 or more 76,672 5,682 7.41%
Other time deposits 168,318 9,127 5.42%
----------- --------
Total interest-bearing deposits 672,630 26,124 3.88%
----------- --------
Borrowings:
Federal Home Loan Bank 293,950 18,098 6.16%
Other short-term borrowings 25,579 1,402 5.48%
Subordinated debt -- -- --
----------- --------
Total borrowings 319,529 19,500 6.10%
----------- --------
Total interest-bearing liabilities 992,159 45,624 4.60%
--------
Demand deposits 190,947
Non-interest-bearing liabilities 6,614
Stockholders' equity 89,162
-----------
Total liabilities and equity $ 1,278,882
===========
Net interest income/spread $ 48,345 3.12%
========
Net interest margin (NII/Avg.
Earning Assets) 3.97%
24
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 2002, the negative effect of changes in rate more than
offset the positive contribution from changes in volume. Rates on earning assets
decreased at a faster pace than the Company's ability to lower rates on
interest-bearing liabilities. The improvement from changes in volume in 2002 was
a result of the level of average interest-bearing liabilities decreased at a
more rapid rate than the decrease in average earning assets. In 2001, declining
rates had a negative impact on net interest income. However, the growth in
earning assets exceeded the growth in interest bearing liabilities resulting in
an increase in net interest income when compared to 2000.
2002 Compared to 2001 2001 Compared to 2000
Change Due to Increase (Decrease) Change Due to Increase (Decrease)
------------------------------------ ------------------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(In thousands)
EARNING ASSETS
Securities:
Mortgage-backed securities $ (1,100) $ (151) $ (1,251) $ 128 $ (433) $ (305)
CMOs (712) (4,122) (4,834) 1,022 (2,263) (1,241)
U.S. Government agencies 747 (505) 242 (561) (345) (906)
State and municipal obligations (193) (165) (358) 193 (166) 27
Other securities 502 (4,175) (3,673) 2,729 (2,661) 68
-------- -------- -------- -------- -------- --------
Total securities (756) (9,118) (9,874) 3,511 (5,868) (2,357)
-------- -------- -------- -------- -------- --------
Loans:
Commercial 110 (1,987) (1,877) 586 (1,423) (837)
Commercial construction 525 (1,126) (601) 1,467 (837) 630
Commercial mortgages 1,895 (3,126) (1,231) 2,642 (876) 1,766
Industrial revenue bonds (17) (14) (31) (5) (18) (23)
Residential mortgages (3,513) (2,459) (5,972) 5,328 (614) 4,714
Home equity 1,008 (1,199) (191) 1,138 (894) 244
Consumer (197) 6 (191) (85) 12 (73)
-------- -------- -------- -------- -------- --------
Total loans (189) (9,905) (10,094) 11,071 (4,650) 6,421
-------- -------- -------- -------- -------- --------
Total earning assets (945) (19,023) (19,968) 14,582 (10,518) 4,064
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
NOW accounts 83 (101) (18) 94 (277) (183)
Regular savings 188 (190) (2) 32 (439) (407)
Money Market accounts 850 (2,991) (2,141) 514 (2,419) (1,905)
Certificates of deposit
of $100,000 or more (1,896) (1,546) (3,442) 617 (1,591) (974)
Other time deposits (2,200) (3,354) (5,554) 846 51 897
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits (2,975) (8,182) (11,157) 2,103 (4,675) (2,572)
-------- -------- -------- -------- -------- --------
Borrowings:
Federal Home Loan Bank (1,291) (2,679) (3,970) 5,644 (3,652) 1,992
Other short-term borrowings 21 (468) (447) 129 (766) (637)
Subordinated debt 185 (48) 137 74 74 148
-------- -------- -------- -------- -------- --------
Total borrowings (1,085) (3,195) (4,280) 5,847 (4,344) 1,503
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities (4,060) (11,377) (15,437) 7,950 (9,019) (1,069)
-------- -------- -------- -------- -------- --------
Net changes due to volume/rate $ 3,115 $ (7,646) $ (4,531) $ 6,632 $ (1,499) $ 5,133
======== ======== ======== ======== ======== ========
25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss from adverse changes in market prices. In
particular, the market prices of interest-earning assets may be affected by
changes in interest rates. Since net interest income (the difference or spread
between the interest earned on loans and investments and the interest paid on
deposits and borrowings) is the Company's primary source of revenue, interest
rate risk is the most significant non-credit related market risk to which the
Company is exposed. Net interest income is affected by changes in interest rates
as well as fluctuations in the level and duration of the Company's assets and
liabilities.
Interest rate risk is the exposure of net interest income to adverse
movements in interest rates. In addition to directly impacting net interest
income, changes in interest rates can also affect the amount of new loan
originations, the ability of borrowers to repay variable rate loans, the volume
of loan prepayments and refinancings, the carrying value of investment
securities classified as available for sale and the flow and mix of deposits.
The Company's Asset/Liability Management Committee, comprised of several
Directors with senior management, is responsible for managing interest rate risk
in accordance with policies approved by the Board of Directors regarding
acceptable levels of interest rate risk, liquidity and capital. The Committee
meets monthly and sets the rates paid on deposits, approves loan pricing and
reviews investment transactions.
The Company's investment portfolio mix consists primarily of
collateralized mortgage obligations, including certain interest-only securities,
and other debt securities, asset backed securities, collateralized with pools of
loans and obligations issued by others. The Company's investment policy provides
for purchases to be of investment quality and short duration. The Company's loan
portfolio is concentrated in residential and commercial real estate loans from
southeastern Massachusetts. Both the investment and loan portfolio have
performed well during the recent reporting period. However, the probability
exists for losses from both investments and loans during periods of significant
interest rate and economic volatility.
The Company is subject to interest rate risk in the event that rates
either increase or decrease. In the event that interest rates increase, the
value of net assets (the liquidation value of stockholders' equity) would
decline. At December 31, 2002, it is estimated that an increase in interest
rates of 100 basis points (for example, an increase in the prime rate from 4.5%
to 5.5%) would reduce the value of net assets by $5,429,000. On the other hand,
if interest rates were to decrease, the value of net assets would increase.
Although the value of net assets is subject to risk if interest rates rise
(but not if rates fall) the opposite is generally true of the Company's
earnings. If interest rates were to increase, net interest income would increase
because the Company has more interest-earning assets than it has
interest-bearing liabilities and because much of this excess amount reprices
within a short period of time. As a result, net interest income is instead
generally subject to the risk of a decline in rates. Not only are there fewer
interest-bearing liabilities to reprice, but many of these liabilities could not
reprice much lower because the rates paid on them are already low. During 2003,
the Company increased its proportion of short-term fixed rate investments to
total investments to protect yields. Accordingly, if interest rates were to
decrease by 100 basis points (for example, a decrease in the prime rate from
4.5% to 3.5%) it is estimated that net interest income would decrease by
$1,733,000. On the other hand, if interest rates were to increase, net interest
income would increase.
At December 31, 2001, it was estimated that the value of the net assets of
the Company would decline by $19,420,000 if interest rates were to increase by
200 basis points and that the Company's net interest income would decline by
$6,014,000 if interest rates were to decline by 200 basis points. The
year-to-year change in these estimates is a result of a lengthening of the
duration of the net assets of the Company.
26
Item 8. Financial Statements and Supplementary Data.
FINANCIAL STATEMENTS INDEX
Page
----
o Independent Auditors' Reports 28
o Consolidated Balance Sheets at December 31, 2002 and 2001 30
o Consolidated Statements of Income for the Three Years Ended
December 31, 2002 31
o Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2002 32
o Consolidated Statements of Comprehensive Income for the Three Years
Ended December 31, 2002 33
o Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 2002 33
o Notes to Consolidated Financial Statements 34
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
CCBT Financial Companies, Inc.
We have audited the accompanying consolidated balance sheets of CCBT
Financial Companies, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, cash flows, comprehensive income
and changes in stockholders' equity for