10-Q 1 form10q-47603_1102.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 2002 Commission File No. 000-25381 CCBT FINANCIAL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 495 Station Avenue, South Yarmouth, Massachusetts 02664 (Address of principal executive office) (Zip Code) (Registrant's telephone #, incl. area code): 508-394-1300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. : Yes X No Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. There were 8,590,798 shares of common stock outstanding as of November 7, 2002. 1 TABLE OF CONTENTS

2 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued)

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30,

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 5 FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Nine Months Ended September 30,

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Nine Months Ended September 30,

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 6 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CCBT FINANCIAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 2002 and 2001 (Unaudited) Business CCBT Financial Companies, Inc. ("Company") was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 under the name of CCBT Bancorp, Inc. at the direction of the Board of Directors and management of Cape Cod Bank and Trust Company ("Bank") for the purpose of becoming a bank holding company for the Bank. On February 11, 1999, Bancorp became the holding company for the Bank by acquiring 100% of the outstanding shares of the Bank's common stock in a 1:1 exchange for Bancorp common stock. During 1999, the Company's name was changed to CCBT Financial Companies, Inc. The Bank's charter was converted to that of a national bank effective September 1, 1999. Currently, the Company's business activities are conducted primarily through the Bank. During the second quarter of 2000, the Company, through its wholly-owned subsidiary, Cape Cod Bank and Trust Company N.A., acquired 51% of the stock of Murray & MacDonald Insurance Services, Inc. (the "Agency") of Falmouth, Massachusetts, a full service insurance Agency offering property, casualty, life, accident and health products to clients on Cape Cod. The Agency has been in business since 1972 and has license agreements with more than thirty insurance firms. In addition to the acquisition of Murray & MacDonald Insurance Services, Inc., the Company also completed its acquisition of two branch banking offices, in Falmouth and Wareham, Massachusetts, from Fleet Bank during the second quarter of 2000. These branches added approximately $55 million in deposits at a 15.5% premium, at June 30, 2000. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principals for complete financial statements. Certain amounts have been reclassified in the September 30, 2001 financial statements to conform to the 2002 presentation. In the opinion of management, all adjustments (consisting principally of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. On June 30, 2001, the FASB issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. With the adoption of SFAS No. 142, effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. The first impairment evaluation was completed by June 30, 2002, and no impairment was identified. Additionally, under SFAS No. 142, acquired intangible assets (such as core deposit intangibles) should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of intent to do so. Unidentified intangible assets pertaining to branch acquisitions will continue to be amortized as such transactions are outside the scope of SFAS No. 142. As a result, effective January 1, 2002, the Company's goodwill is no longer being amortized but is evaluated for impairment, and the Company's core deposit intangibles continue to be amortized over their estimated useful lives. Contingency In June 2002, the Bank received from the Commonwealth of Massachusetts Department of Revenue ("DOR"), a Notice of Intent to Assess additional state excise taxes of $3,102,504 plus interest of $462,797 through July 2, 2002. The assessment is based on a desk review of the financial institution excise return filed by the Bank for the years ended December 31, 1999 and 2000. The 2001 tax return had not yet been filed by the Bank as of the time of the DOR desk review. In September 2002, the Bank filed the 2001 tax return, excluding from its income $20.3 million of dividend distributions received from its real estate investment trust subsidiary. The DOR contends that dividend distributions which the Bank received from its real estate investment trust subsidiary, CCBT Preferred Corp., are fully taxable in Massachusetts. The Bank believes that 95% of these distributions are excludable from its income under Massachusetts tax law. Accordingly, no provision has been made in the Bank's consolidated financial statements for the 7 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) amounts assessed or additional amounts that might be assessed in the future. The Bank intends to vigorously appeal the assessment and to pursue all available means to defend its position. Assessed amounts ultimatley paid, if any, would be deductible expenses for federal income tax purposes. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General This Form 10-Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, changes in the size and nature of the Company's competition, and changes in the assumptions used in making such forward-looking statements. The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this item generally will refer to the investments and activities of the Company and the Bank except where otherwise noted. CCBT Financial Companies, Inc. is a bank holding company. Its main operating subsidiary, Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered in Barnstable County. It offers a wide range of commercial banking services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. The Bank receives substantially all of its deposits from and makes substantially all of its loans to individuals and businesses on Cape Cod, although the Bank has some loans on properties outside its market area, including some sizable participations in commercial mortgages. The Bank's core market is comprised of retail, wholesale, and manufacturing businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population contributes to seasonal deposit growth. (The remainder of this page intentionally left blank.) 8 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)

9 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) RESULTS OF OPERATIONS Three Months Ended September 30, 2002 vs. September 30, 2001 Source and Use of Funds Average interest bearing deposits increased $1.1 million or 1.5% when comparing the third quarter of 2002 with the same period in 2001. A decline in average time certificates of deposit of $71.9 miilion or 30.0% was offset by increases in all other interest bearing deposits (NOW accounts, money market accounts and regular savings accounts). Money market accounts, on average, increased $40.0 million or 15.5%, regular savings increased $17.3 million or 24.7%, and NOW accounts increased $15.6 million or 10.9%. Average non-interest bearing demand deposits increased $12.5 million or 5.5%. As compared to the same period in 2001, average borrowings from the Federal Home Loan Bank declined during the third quarter of 2002 by $20.5 million or 5.2% while other short-term borrowings also declined slightly by $1.1 million or 3.5%. The issuance of $5 million of Trust Preferred Securities during the third quarter of 2001 by CCBT Statutory Trust I, a subsidiary of the Company, provided an additional source of funds. When compared to the third quarter of 2001, average securities increased $39.1 million or 7.9% during the third quarter of 2002. This growth was led by an increase in U.S. Government agencies of $33.9 million or 265.5% and an increase in CMOs of $23.2 million or 12.3%. Other securities also increased slightly by $1.6 million or 0.64%. These increases were partially offset by declines in mortgage backed securities of $11.4 million or 57.2%. During the third quarter of 2002 as compared to 2001, average loans decreased $30.6 million or 3.3%. This decrease can be attributed to the decline in residential mortgages of $74.1 million or 17.2% as a result of payoffs as well as the Company's policy of selling fixed rate mortgages upon origination. Other categories of loans experiencing a decrease include residential construction, down $2.9 million or 6.0%, and consumer loans, down $2.4 million or 28.5%. These declines were partially offset by the increase in commercial construction and mortgage loans of $33.6 million or 11.0%. Net interest income Net interest income for the three months ended September 30, 2002 was $12.7 million, which represented a decrease of 1.7% compared to the $13.0 million reported for the same period in 2001. The interest rate spread and net interest margin were 3.02% and 3.55%, respectively, for the quarter ended September 30, 2002 as compared to 2.92% and 3.63%, respectively, for the comparable period in 2001. Consistent with the current low interest rate environment, the variable rate costs of interest bearing liabilities has been reduced while, by contrast, the proportion of fixed and intermediate term adjustable rate earning assets has caused the gross yield on earning assets to decrease at a slower pace. Provision for loan losses Recoveries on loans previously charged off exceeded charge-offs during the three months ended September 30, 2002 by $35,000. Management's assessment of the risks in the loan portfolio at September 30, 2002 as well as the Company's recent loss experience, whereby recoveries have actually exceeded charge-offs since 1997, resulted in no provision for loan losses during the third quarter of 2002. Non-interest Income and Expense Non-interest income totaled $5.8 million for the quarter ended September 30, 2002, a decrease of 8.8% or $565 thousand compared to the $6.4 million earned during the comparable period in 2001. In addition to a $230 thousand loss on the sale of a fixed asset included in other income (loss), there was a significant decrease in the net gain on sales of loans, down $1.2 million compared to the third quarter of 2001 results which included the effect of a large sale of residential mortgages. Partially offsetting these decreases were increases in net gain on sales of securities of $246 thousand and electronic banking fees, up $253 thousand, due to increased transaction volume as well as new product offerings. In addition, insurance commissions increased $228 thousand as a result of planned growth in this area. For the three months ended September 30, 2002, non-interest expense totaled $12.6 million, an increase of 8.9% or $1.0 million over the $11.6 million expended during the same period in 2001. Salaries and employee benefits increased $1.1 million or 17.3% with a significant portion of this increase attributable to a performance-based bonus program and incentive program. The remainder of the increase is due to normal salary increases, increased insurance costs and additional staff for new locations. 10 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Income taxes Applicable State and Federal income tax expense of $2.0 million for the quarter ended September 30, 2002 was 25.9% less than the $2.7 million recorded for the same quarter in 2001, a reflection of lower pretax net income. The combined effective State and Federal tax rate was 34% and 35% of pretax net income for the quarters ended September 30, 2002 and 2001, respectively. Net income Consolidated net income was $3.9 million representing earnings per share of $0.45 for the three months ended September 30, 2002 as compared to $5.0 million or $0.58 per share for the comparable three months ended September 30, 2001. Annualized returns on average assets and average equity were 1.05 % and 12.87%, respectively, for the three months ended September 30, 2002 as compared to 1.35% and 18.59%, respectively, for the three months ended September 30, 2001. 11 (The remainder of this page intentionally left blank.) PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)

12 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) RESULTS OF OPERATIONS Nine Months Ended September 30, 2002 vs. September 30, 2001 Source and Use of Funds On average, interest bearing deposits decreased $43.9 million or 5.9% when comparing the first nine months of 2002 with the same period in 2001. This decline can be attributed to time certificates of deposit which decreased $108.8 million or 37.7% as a result of the maturity of a significant amount of one year certificates of deposit during the third quarter of 2001 as well as the reduction of interest rates being offered on these products. Partially offsetting the decrease in time deposits were increases in NOW accounts of $14.1 million or 10.2%, regular savings up $14.6 million or 22.1%, and money market accounts up $36.2 million or 14.7%. Average non-interest bearing demand deposits also increased $13.2 million or 6.4% for the first nine months of 2002 as compared to 2001. Average Federal Home Loan Bank borrowings declined by $26.0 million or 6.8% during the first nine months of 2002 when compared to the same period in 2001. An additional source of funds was the issuance of $5.0 million of Trust Preferred Securities during the third quarter of 2001 by CCBT Statutory Trust I, a subsidiary of the Company. Average loans decreased $7.3 million or 0.8% during the first nine months of 2002 as compared to 2001. On average, residential construction and mortgage loans declined by $55.3 million or 11.9% as a result of sales of residential mortgages while commercial construction and mortgage loans grew by $32.0 million or 11.0%. Average home equity loans increased 40.4% or $17.0 million, in large part due to lower rates on this prime-based product. Additional loan growth, on average, occurred in commercial loans, up $1.2 million or 1.4% while consumer loans declined $2.0 million or 23.3%. When compared to the first nine months of 2001, average securities declined in 2002 by $30.0 million or 5.9%. Substantial decreases in mortgage-backed securities, down $19.3 million or 61.8%, and CMO's, down $16.8 million or 9.1%, can be attributed to prepayments on these securities as a result of the decline in interest rates. Partially offsetting these decreases is an increase in U.S. Government agencies of 70.7% or $12.0 million. Net interest income Net interest income was $37.8 million for the nine months ended September 30, 2002 as compared to $38.7 million for the same period in 2001, a decline of 2.2%. The spread and net interest margin ratios were 3.15% and 3.71%, respectively, for the nine months ended September 30, 2002 as compared to 2.91% and 3.69%, respectively, for the comparable 2001 period. The effect of lower interest rates on net interest income has been tempered somewhat by the maturity of higher-yield time certificates of deposit since the prior year. Also, consistent with the current low interest rate environment, the variable rate costs of interest bearing liabilities has been reduced while, by contrast, the proportion of fixed and intermediate term adjustable rate earning assets has caused the gross yield on earning assets to decrease at a slower pace. The improved interest rate spread and net interest margin results are also affected by the high proportion of transaction deposits having little or no interest cost as well as the Company's practice of match-funding 3 to 5 year fixed rate commercial loans with similar term FHLB Advances. This portfolio totalled $193 million at September 30, 2002 as compared with $171 million one year ago. Provision for loan losses Recoveries on loans previously charged off exceeded charge-offs during the nine months ended September 30, 2002 by $170,000. Management's assessment of the risks in the loan portfolio at September 30, 2002 as well as the Company's recent loss experience, whereby recoveries have exceeded charge-offs since 1997, resulted in no provision for loan losses during the first nine months of 2002. The allowance for loan losses was 1.42% and 1.39% of total loans at September 30, 2002 and 2001, respectively. Non-interest Income and Expense Non-interest income of $19.3 million for the nine months ended September 30, 2002, represented an increase of 16.0% compared to the $16.7 million earned during the same period in 2001. Net gain on sales of securities contributed $2.0 million to this increase while electronic banking fees increased $503 thousand as a result of increased volume of electronic transactions as well as new product offerings. Insurance commissions accounted for $887 thousand of the increase inclusive of a $398 thousand adjustment in the second quarter for the recognition of deferred insurance commissions for which no deferral is required. Partially offsetting these increases was a decrease in net gain on sales of loans, down $546 thousand from 2001 results which included the gain on a significant sale of residential mortgages as well as a $230 thousand loss on the sale of a fixed asset. During the first nine months of 2002, non-interest expenses totaled $36.5 million, an increase of 8.5% or $2.9 million over the $33.7 million expended during the comparable period last year. Salaries and employee benefits rose $2.4 million or 13.1%. 13 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Approximately $500 thousand of this increase is attributable to expenses associated with an early retirement package offered to certain long-term employees during the second quarter of 2002. The remainder of this increase is a factor of normal salary increases, planned additions to staff, increased insurance costs and increases attributable to performance based bonus and incentive programs. The increase of $480,000 or 39.6% in the all other expenses category is, in large part, attributable to an increase in expenses associated with the higher volume of electronic transactions as well as the offering of new electronic banking products. Also included in all other expenses in 2002 is a $50 thousand payment to the Commonwealth of Massachusetts Department of Revenue for a sales/use tax assessment. Buildings and equipment increased $481 thousand or 11.5%, as a result of increased expenses due to the addition of three new financial service offices and two new branches during the last year. Income taxes Applicable State and Federal income tax expense of $7.0 million for the nine months ended September 30, 2002 was 6.0% less than the $7.4 million recorded for the same period in 2001, a reflection of lower pretax net income. The combined effective State and Federal tax rate was 34% of pretax net income for each period presented. Net income Consolidated net income was $13.5 million representing earnings per share of $1.56 for the nine months ended September 30, 2002 as compared to $14.2 million or $1.65 per share for the comparable nine months ended September 30, 2001. Annualized returns on average assets and average equity were 1.26% and 15.25%, respectively, for the nine months ended September 30, 2002 as compared to 1.29% and 18.43%, respectively, for the nine months ended September 30, 2001. COMPARATIVE ANALYSIS OF SELECTED PERIOD-END ASSETS, LIABILITIES AND CAPITAL The Company had $1.62 billion consolidated total assets, $973.9 million deposits and $119.4 million stockholders' equity at September 30, 2002. Its capital to assets ratio was 7.4%, exceeding all regulatory requirements. As compared to reported balances at December 31, 2001, securities available for sale increased $127.6 million or 29.1%, gross loans decreased $12.3 million or 1.4%, deposits increased $70.5 million or 7.8% and borrowed funds increased $29.4 million or 7.1%. Securities The adjusted cost and estimated market values of investment securities, which the Company classified as available for sale, at September 30, 2002 and December 31, 2001 were as follows:

14 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)

Securities available for sale increased $127.6 million, from $438.3 million at December 31, 2001 to $566.0 million at September 30, 2002. Net gains from sales were $538 thousand and $3.2 million during the quarter and nine months ended September 30, 2002, respectively, compared to net gains of $292 thousand and $1.1 million, respectively, during the same periods in 2001. The investment securities portfolio is subject to changing valuations resulting from both changes in interest rates, and in credit quality during weak economic periods. Gross unrealized losses on other collateralized mortgage obligations and other debt securities increased from $0.5 and $1.1 million at June 30, 2002 to $2.8 and $2.9 million at September 30, 2002, respectively. Each of these categories includes an individual security that experienced a significant decrease in fair value as a result of market factors within the quarter. Collateralized mortgage obligations include an inverse interest-only security with an amortized cost of $3.0 million and a fair value of $0.9 million. Other debt securities include an asset-backed security with an amortized cost of $4.8 million and a fair value of $2.8 million for which there has been a credit downgrade. This security is supported by subordinate tranches that must absorb all credit losses before this security would be affected. This security is not in default as to either principal or interest, and if payments continue as they have been, it is anticipated that the security will pay out entirely within one year. Although management's assessment of these securities at September 30, 2002 supports their amortized costs, changes in future market conditions may result in the recognition of loss. Loans The following is a summary of the Company's outstanding loan balances as of the dates indicated: September 30, December 31, 2002 2001 ---- ---- Mortgage loans on real estate Residential $335,709 $376,504 Commercial 280,808 264,934 Construction 102,369 95,186 Equity lines of credit 63,865 53,336 Other loans Commercial 82,258 84,947 Industrial revenue bonds 977 1,163 Consumer 5,992 8,221 -------- -------- Total loans 871,978 884,291 Less: Allowance for loan losses (12,422) (12,252) -------- -------- Total portfolio loans, net $859,556 $872,039 ======== ======== Loans held for sale $ 14,084 $ 8,349 ======== ======== As shown in the table above, total loans decreased $12.3 million or 1.39% to $872.0 million at September 30, 2002 as compared to December 31, 2001, despite significant growth in the commercial mortgage, equity lines of credit and construction loan portfolios, up $15.9, $10.5 and $7.2 million, respectively. New residential mortgage originations of $39.3 million fixed rate and $34.0 million adjustable rate were achieved in the third quarter 2002. During the same period, the Company, consistent with its strategy of generally selling fixed rate mortgages, sold $46.2 million residential mortgages, producing net gains of $571.4 thousand. Allowance for Loan Losses The allowance for loan losses is an estimate of the amount necessary to absorb probable losses in the loan portfolio. The allowance consists of specific, general and unallocated components. Commercial real estate and commercial business loans are evaluated 15 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) 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 As shown in the following table non-performing assets were $3.5 million or .22% of total assets at September 30, 2002 compared to $3.3 million or .23% of total assets at December 31, 2001. Accrual of interest income on loans is discontinued when it is questionable whether the borrower will be able to pay the principal and interest in full and/or when loan payments are 60 days past due, or 90 days past due if the loan is fully secured by real estate or other collateral held by the Bank.

The following is a summary of the activity in the allowance for loan losses for the indicated periods:

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 1.42% of total loans at September 30, 2002, 1.39% at December 31, 2001, and 1.39% at September 30, 2001. 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 September 30, 2002, there can be no assurance that the allowance is adequate or that additional provisions might not become necessary. 16 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) The Company had outstanding commitments to originate new residential and commercial mortgages of $25.2 million at September 30, 2002 and $40.3 million at December 31, 2001 which are not reflected on the consolidated statements of financial condition. Additional unadvanced loan funds are summarized as follows for the indicated periods: September 30, 2002 December 31, 2001 ------------------ ----------------- Commercial loans (Dollar amounts in thousands) Dealer floor plan $ 9,324 $ 9,997 Lines of credit 55,337 45,469 Other 3,492 4,845 Commercial mortgages Construction 37,308 25,685 Other 7,736 10,346 Residential mortgages Home equity 73,125 61,891 Consumer loans Lines of credit 3,108 2,969 -------- -------- Total $189,430 $161,202 ======== ======== Deposits The following table is a summary of deposits outstanding as of the dates indicated:

Reflecting somewhat the seasonal nature of Cape Cod economy as discussed in "Liquidity" on page 18 herein, total deposits at September 30, 2002 are $70.5 million or 7.8% higher than total deposits at December 31, 2001. Generally, the Company's strategy is to price deposits according to local market rates, offering higher alternative rates based on increasing amounts deposited. Interest rates paid are frequently reviewed and are modified to reflect changing conditions. Borrowed Funds Historically, the Company has selectively engaged in short and long term borrowings from the Federal Home Loan Bank of Boston, and has sold securities under agreements to repurchase, to fund loans and investments. At September 30, 2002, borrowed funds totaled $444.4 million, up 7.1% or $29.4 million compared to borrowed funds at December 31,2001. During the third quarter of 2001, CCBT Statutory Trust I was formed for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2031, callable at the option of the Company after 7/31/06. Distributions on these securities are payable quarterly in arrears on the last day of April, July, October and January. The Trust Preferred Securities are presented in the consolidated statements of financial condition of the Company as Subordinated Debt. The Company records distributions payable on the Trust Preferred Securities as Interest on subordinated debt in its consolidated statements of income. 17 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Stockholders' Equity The Company's capital to assets ratio was 7.37% at September 30, 2002 compared to 7.93% at December 31, 2001. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies, such as the Company, are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts of total and Tier 1 capital (as defined) to average assets (as defined). The following schedule displays these capital guidelines and the ratios of the Company and the Bank as of September 30, 2002.

The Company's book value at September 30, 2002 was $13.90 per share compared to $13.38 per share at December 31, 2001. LIQUIDITY The Company normally experiences a wide swing in its liquidity each year as a result of the seasonal nature of the economy in its market area. Liquidity is usually at its high in late summer and early fall and the annual low point is usually in the early spring. The Bank's investment securities could be sold if necessary to meet liquidity needs. In that event, a gain or loss would be realized if the market value of the securities sold was not equal to their cost, adjusted for the amortization of premium or accretion of discount. The Bank can also borrow funds using investment securities as collateral and it has a line of credit of $5,000,000 from the Federal Home Loan Bank of Boston. The Bank has also established a line of credit of $7,000,000 for the purchase of federal funds from SunTrust Bank and may borrow from the Federal Reserve Bank if necessary. ASSET/LIABILITY MANAGEMENT The Company's Asset/Liability Management Committee ("ALCO"), which is comprised of several Directors with senior management, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The committee meets monthly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. Given the substantial liquidity from cash flow and maturities of the Company's investment portfolio, the sizable proportion of rate sensitive loans to total loans, and the large core deposit base, ALCO believes the Company to be moderately asset-sensitive to changes in interest rates. Nevertheless, the Company's strategy has included the funding of certain fixed rate loans with medium term borrowed funds in order to mitigate a margin squeeze should interest rates rise. The Cape Cod market is one in which competing financial institutions frequently offer a wide range of yields for similar deposit products. Within this market, the Company finds it necessary, from time to time, to offer higher rates than it would otherwise justify, thereby increasing pressure on net interest income. In order to offset this pressure somewhat, the Company is strategically focusing on customer relationship profitability. 18 PART I FINANCIAL INFORMATION ITEM 3. Quantitative and Qualitative Disclosures about Market Risk For a discussion of the Company's management of market risk exposure, see "Asset/Liability Management" in Item 2 of Part I of this report and Item 7A of Part II of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001 Annual Report"). For quantitative information about market risk, see Item 7A of Part II of the Company's 2001 Annual Report. There have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2002 from those presented in the Company's 2001 Annual Report. PART II OTHER INFORMATION ITEM 1. Legal proceedings There are no material legal proceedings to which the Company is a party or to which any of its property is subject, although the Company is a party to ordinary routine litigation incidental to its business. ITEM 2. Changes in securities and use of proceeds Not applicable ITEM 3. Defaults upon senior securities Not applicable ITEM 4. Submission of matters to a vote of security holders Not applicable ITEM 5. Other information Not applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K On August 14, 2002 a report on Form 8-K was filed by the Company pertaining to the "Regulation FD Disclosure". 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (Registrant): CCBT Financial Companies, Inc. ------------------------------------------------------------------- Date: November 14, 2002 --------------------------------------------------------------------------- /s/ STEPHEN B. LAWSON, President and Chief Executive Officer ----------------------------------------------------------------------------- Stephen B. Lawson, President and Chief Executive Officer /s/ PHILLIP W. WONG, Executive Vice President and Chief Financial Officer ----------------------------------------------------------------------------- Phillip W. Wong, Executive Vice President and Chief Financial Officer 20 CERTIFICATIONS -------------- I, Stephen B. Lawson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CCBT Financial Companies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consoloditated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee or registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ----------------- /s/ STEPHEN B. LAWSON, President and Chief Executive Officer -------------------------------------------------------------- Stephen B. Lawson, President and Chief Executive Officer 21 CERTIFICATIONS -------------- I, Phillip W. Wong, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CCBT Financial Companies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee or registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ----------------- /s/ PHILLIP W. WONG, Executive Vice President & Chief Financial Officer ----------------------------------------------------------------------- Phillip W. Wong, Executive Vice President and Chief Financial Officer

CCBT FINANCIAL COMPANIES INC 10-Q