10-Q 1 form10q-53545_ccbt.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended June 30, 2003 Commission File No. 000-25381 CCBT FINANCIAL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 495 Station Avenue, South Yarmouth, Massachusetts 02664 (Address of principal executive office) (Zip Code) (Registrant's telephone number, incl. area code): 508-394-1300 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No There were 8,420,198 shares of the issuer's common stock outstanding as of August 13, 2003. 1 TABLE OF CONTENTS Section Description Page No. ------- ----------- -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets at June 30, 2003 and December 31, 2002 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 5 Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2003 and 2002 6 Consolidated Statements of Changes in Stockholders' Equity for the Six Months Ended June 30, 2003 and 2002 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19-20 SIGNATURES 21 CERTIFICATIONS 22-23 2 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements CONSOLIDATED BALANCE SHEETS

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

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

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

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months Ended June 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 Six months ended June 30, 2003 and 2002 (Unaudited) 1. Business CCBT Financial Companies, Inc. ("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. 2. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 principles for complete financial statements. Certain amounts have been reclassified in the June 30, 2002 financial statements to conform to the 2003 presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2003 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, 2002. 3. REIT Tax Law Dispute With Massachusetts Department of Revenue CCBT Preferred Corp. ("CCBT Preferred") is a real estate investment trust subsidiary ("REIT") formed by the Bank in the second quarter of 1999. Since that time and prior to the enactment of the new tax legislation and settlement discussed below, the Bank had 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 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. In the first quarter of 2003, the Company accrued a liability 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 the 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 was the result of legislation signed March 5, 2003 by the Governor of Massachusetts that amended Massachusetts law to expressly disallow the deduction for dividends received from a REIT. This amendment applied retroactively to tax years ending on or after December 31, 1999. As a result of the enactment of this legislation, the Company ceased recording the tax benefits associated with the dividends received deduction effective for the 2003 tax year and accrued the liability described above. On June 23, 2003, the Company entered into a settlement with the Massachusetts Department of Revenue ("DOR"), and agreed to pay approximately 50% of the disputed tax liability which had previously been accrued. As a result of the settlement, the Company recognized a reduction of income tax and related interest expense of approximately $2.5 million in the second quarter of 2003. The Company's settlement with the DOR is similar to and in participation with numerous other financial institutions in Massachusetts. 4. Stock Compensation Plans At June 30, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note 6 of the Company's annual report on Form 10-K for the year ended December 31, 2002. The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the fair value of the underlying common stock on the date of grant. 7 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) Had the Company applied SFAS No. 123, "Accounting for Stock -Based Compensation", for the quarter ended June 30, 2003, the additional net after-tax expense of $63,000 would have resulted in pro-forma basic and diluted earnings per share to be reported as $.51 as compared to $.52 per share. For the quarter ended June 30, 2002, the additional net after-tax expense of $59,000 would have resulted in no change to the reported basic and diluted earnings per share of $.52. Had the Company applied SFAS No. 123, "Accounting for Stock -Based Compensation", for the six months ended June 30, 2003, the additional net after-tax expense of $127,000 would have resulted in pro-forma basic and diluted earnings per share to be reported as $.33 as compared to the $.34 per share reported. For the six months ended June 30, 2002, the additional net after-tax expense of $117,000 would have resulted in pro-forma basic and diluted earnings per share to be reported as $1.10 and $1.09, respectively, as compared to the $1.11 per share reported. 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 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 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, Massachusetts. It offers a wide range of banking and financial services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. The Bank receives substantially all of its deposits from, and makes substantially all of its loans to, individuals and businesses on Cape Cod, although the Bank has some loans on properties outside its market area, including some sizable participations in commercial mortgages. The Bank's core market is comprised of retail and wholesale businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population causes seasonal deposit growth. (The 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 June 30, 2003 vs June 30, 2002 Source and Use of Funds. Average deposits, up $43.0 million or 4.8%, increased modestly during the second quarter of 2003 as compared to the same period in the prior year. This growth was led by an increase in transaction accounts of $32.1 million or 8.8% with additional growth occurring in regular savings and money market accounts, up $13.4 million or 16.9% and $17.2 million or 6.2%, respectively. Time deposits, the only category of deposits experiencing a decline, were down $19.7 million or 11.1% as a result of the low interest rate environment. Average borrowings decreased $119.5 million or 33.6% for the quarter ended June 30, 2003 when compared to the same period in 2002. Borrowings from the Federal Home Loan Bank declined, on average, by $136.1 million or 41.4% during the second quarter of 2003 as compared to 2002 as the Company continued to repay maturing advances. Partially offsetting the decrease in Federal Home Loan Bank borrowings, short-term borrowings, consisting of Treasury Notes and securities sold under agreements to repurchase, increased $16.6 million or 75.2%. On average, securities increased by $16.1 million or 3.7% during the second quarter of 2003 when compared to the second quarter of 2002. This increase can be attributed to increases in state and municipal obligations of $9.0 million or 66.5%, and other securities of $19.8 million or 7.8% due to increased holdings of asset-backed securities. All other categories of securities declined during the same period with mortgage-backed securities down $3.2 million or 32.7%, CMO's down $4.4 million or 3.3%, and US Government agencies down $5.2 million or 23.3%. Average loans declined in the second quarter of 2003 by $106.8 million or 12.0% as compared to the same period in the prior year. As a result of significant prepayments in the residential mortgage portfolio as well as the Company's decision not to hold long-term fixed rate residential mortgages, this category has declined by $131.2 million or 35.9%, on average, compared to the prior year. Partially offsetting this decrease was the growth in the commercial mortgage portfolio, up $18.7 million or 7.1%. Additionally, home equity loans continued to increase, up $9.8 million or 16.3%, on average, over prior year as consumers continued to take advantage of this low interest rate product. Net Interest Income. Net interest income was $10.6 million for the three months ended June 30, 2003 as compared to $13.1 million for the same period in 2002, a decrease of 19.1%. The decline in net interest income can be attributed to the continued low interest rate environment and the resulting pre-payments in the Company's residential mortgage portfolio and its holdings of mortgage related securities. The 0.51% yield on CMO securities and (0.80%) yield on U.S. Government agency securities reflect the impact arising from the amortization of premiums associated with the accelerated pre-payments of the underlying collateral and call of securities, respectively. The net interest spread and net interest margin ratios were 3.0% and 3.5%, respectively, for the quarter ended June 30, 2003, as compared to 3.4% and 4.0%, respectively, for the prior year. Provision for Loan Losses. Recoveries on loans previously charged off exceeded charge-offs during the three months ended June 30, 2003 by $84,000. Management's assessment of the risks in the loan portfolio at June 30, 2003 as well as the Company's recent loss experience, whereby recoveries have actually exceeded charge-offs since 1997, resulted in no provision for loan losses during the second quarter of 2003. The allowance for loan losses as a percentage of total loans was 1.63% and 1.38% at June 30, 2003 and 2002, respectively, representing management's consideration of qualitative factors, primarily the ongoing weakness in local and national economic trends and growth in outstanding commercial loans. Other Income and Expense. Non-interest income totaled $4.1 million for the quarter ended June 30, 2003, resulting in a decrease of $2.6 million as compared to the same period in the prior year. This decline can primarily be attributed to the change in the net gain (loss) on securities of $2.7 million. Securities losses of $1.7 million were recorded during the quarter ended June 30, 2003, including a $1.3 million impairment loss recognized on an asset-backed security and losses from the sale of interest-only CMO's, while during the same period in 2002, the Company reported $962 thousand of gains. A decrease in insurance commissions of $253 thousand when comparing the second quarter of 2003 to the same period in 2002 is due to the inclusion of a $398 thousand adjustment in the 2002 period for the recognition of previously deferred insurance commissions. Increases in financial advisor fees of $275 thousand, and in brokerage fees and commissions of $95 thousand, an aggregate increase of 17.7%, reflect the Company's efforts to increase revenues from fee-based products. During the second quarter of 2003, non-interest expense of $11.3 million reflected a decrease of $1.5 million as compared to the second quarter of 2002. Decreases in salaries and employee benefits, down a combined $879 thousand, can be attributed to the inclusion during the second quarter of 2002 of $506 thousand of costs associated with an early retirement program, as well as an increase of $575 thousand during the second quarter of 2003 of the deferral of salaries under FAS91 as a result of the increased volume of residential mortgage originations. Partially offsetting these changes was an increase in sales commissions of $117 thousand during the second quarter of 2003 as compared to the same period in the prior year, also attributable to the aforementioned volume increase in residential mortgage activity. A significant decrease in all other expenses when comparing the quarter ended June 30, 2003 to the same quarter in 2002 is largely a result of the reversal of $359 thousand of interest expense due to the settlement with the DOR of the REIT tax issue. Income before Income Taxes. Income before income taxes was $3.4 million for the quarter ended June 30, 2003 compared to $7.0 million for the same period in 2002. 10 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Provision for Income Taxes. The provision(benefit) for income taxes decreased by 139.3% from $2.5 million in the second quarter of the prior year to a benefit of $967 thousand in the comparable period in 2003. This decrease is due to the reversal of $2.3 million of previously accrued taxes as a result of the settlement with the DOR of the REIT tax issue. Excluding the reversal of the previously accrued REIT taxes in the second quarter ended June 30, 2003, the effective tax rate would have been 39.4% as compared to 35.2% for the same period last year. The higher adjusted effective tax rate for the comparative periods reflect the loss of the REIT tax advantage. Net Income. Net income of $4.4 million for the quarter ended June 30, 2003 represents a modest decrease of $100 thousand compared to 2002 results. Second quarter 2003 basic and diluted earnings per share of $.52 are comparable to the $.52 reported for the 2002 period. (The remainder of this page intentionally left blank.) 11 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)

12 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) RESULTS OF OPERATIONS Six Months Ended June 30, 2003 vs June 30, 2002 Source and Use of Funds. During the first six months of 2003, average deposits increased $38.7 million or 4.3%, as compared to the same period in the prior year. This growth was led by an increase in transaction accounts of $34.9 million or 9.8% with additional growth occurring in regular savings and money market accounts, up $14.3 million or 18.4% and $18.0 million or 6.5%, respectively. Time deposits, the only category of deposits experiencing a decline, were down $28.4 million or 15.2%. Average borrowings decreased $94.8 million or 25.0% year to date in 2003 when compared to the same period in 2002. Borrowings from the Federal Home Loan Bank declined, on average, by $98.6 million or 28.2% during the first six months of 2003 as compared to 2002. The decrease in Federal Home Loan Bank borrowings includes the prepayment of $20.3 million of borrowings scheduled to mature in 2005 as well as the repayment of maturing advances. Short-term borrowings from other sources, which include Treasury Notes and securities repurchase agreements, were up, on average, by $3.9 million or 15.8%. On average, securities increased by $28.3 million or 6.3% during the first half of 2003 when compared to the first half of 2002. Increases in other securities of $31.7 million or 12.6% and state and municipal obligations of $4.5 million or 24.6% were offset by declines in mortgage-backed securities, which as a result of significant prepayments decreased $6.8 million or 49.8%. Average loans declined in the first six months of 2003 by $92.2 million or 10.4% as compared to the same period in the prior year. As a result of significant prepayments in the residential mortgage portfolio as well as the Company's decision not to hold long-term fixed rate residential mortgages, this category has declined by $117.0 million or 31.8%, on average, compared to the prior year while residential construction loans decreased , on average, by $10.0 million or 22.4%. Partially offsetting these decreases was the growth in commercial real estate loans, up $24.7 million or 7.8%. Additionally, home equity loans continued to increase, up $11.5 million or 19.9%, on average, over prior year as consumers continued to take advantage of this low interest rate product. Net Interest Income. Net interest income was $21.4 million for the six months ended June 30, 2003 as compared to $25.1 million for the same period in 2002, a decrease of 14.7%. The Company's net interest income has been negatively affected during the first six months of 2003 by a $286 thousand penalty on the prepayment of an advance from the Federal Home Loan Bank of Boston and a decline of $2.8 million in interest income applicable to an interest only CMO, as amortization of premium was accelerated due to underlying prepayments. This acceleration of amortization of premium accounts for the 0.64% yield on CMO securities for the six months ended June 30, 2003 down from 6.10% for the same period last year. The decline in net interest income can also be attributed to the continued low interest rate environment and the resulting pre-payments in the Company's residential mortgage portfolio and its holdings of mortgage related securities. The net interest spread and net interest margin ratios were 2.9% and 3.4%, respectively, for the six months ended June 30, 2003, as compared to 3.2% and 3.8%, respectively, for the prior year. Provision for Loan Losses. Recoveries on loans previously charged off exceeded charge-offs during the six months ended June 30, 2003 by $296 thousand. Management's assessment of the risks in the loan portfolio at June 30, 2003 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 first six months of 2003. The allowance for loan losses as a percentage of total loans increased to 1.63% from 1.38% at June 30, 2003 and 2002, respectively, representing management's consideration of qualitative factors, primarily the ongoing weakness in local and national economic trends and growth in outstanding commercial loans. Other Income and Expense. Non-interest income of $10.8 million reflected a decline of $2.7 million during the first six months of 2003 as compared to the corresponding period in the prior year due primarily to the unfavorable change in the net gain(loss) on securities of $4.3 million. Security losses of $1.7 million were recorded during the 2003 period, including a $1.3 million impairment loss recognized on an asset backed security as well as losses from the sale of interest-only CMO's. By contrast, during the 2002 period, $2.6 million of gains were reported as a result of the sale of securities. Sales of residential mortgages resulted in an increase in the net gain on sales of loans of $1.1 million during the first half of 2003 as compared to the comparable 2002 period. Increases in financial advisor fees of $474 thousand, brokerage fees and commissions of $141 thousand and electronic banking fees of $245 thousand reflect the Company's efforts to increase fee-based revenue through the expansion of the Company's products and expertise. Non-interest expense decreased $441 thousand or 1.8% from the first six months of 2002 to the same period in 2003. A decrease in salaries and employee benefits of $816 thousand during the 2003 period as compared to 2002 can be attributed to the accrual of $506 thousand of costs associated with an early retirement program during the 2002 period as well as an increase of $917 thousand in the 2003 period of the deferral of salaries under FAS91, largely due to the increased volume of residential mortgage originations. Partially offsetting these changes in salaries and benefits were increased costs related to annual merit increases and increases in benefit costs as well as an increase in sales commissions of $284 thousand in the first half of 2003 as compared to the same period in 2002. In the first six months of 2003, there was also a significant increase in all other expenses of $370 thousand over the 2002 level as a result of the $443 thousand of interest expenses on a state tax assessment which is the result of a retroactive amendment to state tax law during the first quarter of 2003. Income before Income Taxes. Income before income taxes was $8.7 million for the six months ended June 30, 2003 compared to $14.5 million for the same period in 2002. 13 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Provision for Income Taxes. The provision for income taxes increased by 16.8% from $5.0 million in the prior year to $5.8 million in 2003. This increase, despite the decrease in income before taxes, is due to the amendment, in March of 2003, of Massachusetts law that expressly disallows the deduction for dividends received from a real estate investment trust subsidiary resulting in a net increase of $2.3 million in the income tax provision. Excluding the $2.3 million REIT income tax provision, the effective tax rate would have been 39.9% as compared to 34.1% for the six months ended June 30, 2002, the increase reflecting the loss of the REIT tax advantage. Net Income. Net income of $2.9 million for the six months ended June 30, 2003 represents a decrease of $6.7 million compared to 2002 results. In 2003, basic and diluted earnings per share of $.34 represent a decrease of $.77 for basic and diluted earning per share when compared to 2002 results. COMPARATIVE ANALYSIS OF SELECTED PERIOD-END ASSETS, LIABILITIES AND CAPITAL The Company had $1.28 billion consolidated total assets, $975.8 million deposits and $113.0 million in stockholders' equity at June 30, 2003. Its capital to assets ratio was 8.81%, exceeding all regulatory requirements. As compared to reported balances at December 31, 2002, securities available for sale decreased $164.0 million or 32.1%, loans decreased $25.7 million or 3.20%, deposits increased $33.5 million or 3.56% and borrowed funds decreased $214.3 million or 53.9%. Securities The adjusted cost and estimated market values of securities which the Company classified as available for sale at June 30, 2003 and December 31, 2002 were as follows:

14 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) The Company invests in various investment grade structures, including asset backed securities and collateralized mortgage securities (CMO's), usually with short effective durations. These securities are subject to the possibility of loss and changes in market values resulting from changes in credit risk arising from weak economic conditions and from substantial changes in interest rates. Security losses of $1.7 million were recorded during the quarter ended June 30, 2003, including a $1.3 million impairment loss recognized on an asset backed security and losses from the sale of interest-only CMO's. During the same period in 2002, the Company reported $962 thousand of gains. Securities available for sale decreased $164.1 million, from $510.8 million at December 31, 2002 to $346.8 million at June 30, 2003. Loans The following is a summary of the Company's outstanding loan balances as of the dates indicated: June 30, 2003 December 31, 2002 ------------- ----------------- (In thousands) Mortgage loans on real estate: Residential $ 211,816 $ 262,095 Commercial 286,827 283,458 Construction 101,306 99,544 Equity lines of credit 72,328 65,794 Other loans: Commercial 97,495 83,953 Consumer 5,116 5,629 Industrial revenue bonds 854 929 --------- --------- Total loans 775,742 801,402 Less: Allowance for loan losses (12,680) (12,384) --------- --------- Total loans, net $ 763,062 $ 789,018 ========= ========= Loans held for sale $ 11,074 $ 37,332 ========= ========= As shown in the table above, total loans decreased $25.7 million or 3.2% to $775.7 million at June 30, 2003 as compared to December 31, 2002, with balanced growth between commercial loans, equity lines of credit and commercial mortgages, up $13.5, $6.5 and $3.4 million, respectively. New residential mortgage originations of $82.0 million (fixed rate) and $19.0 million (adjustable rate) were achieved in the second quarter 2003. During the same period, the Company sold $79.4 million in fixed rate residential mortgages, producing net gains of $657 thousand. Allowance for Loan Losses The allowance for loan losses is an estimate of the amount necessary to absorb probable losses in the loan portfolio. The allowance consists of specific, general and unallocated components. Commercial real estate and commercial business loans are evaluated individually for allowance purposes. Other categories of loans are generally evaluated as a group. The specific component relates to loans that are classified as doubtful, substandard or special mention. Loans classified as doubtful are considered impaired in accordance with SFAS No. 114, and an allowance is determined using a discounted cash flow calculation. Loss factors for substandard loans are based on a loss migration database, while loss factors for all other categories of loans are based on the Company's historical loss experience with similar loans of similar quality as determined by the Company's internal rating system. Loss factors are then adjusted for additional points that consider qualitative factors such as current economic trends (both local and national), concentrations, growth and 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. 15 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Non performing assets and loan loss experience As shown in the following table non-performing assets were $2.3 million or .18% of total assets at June 30, 2003 compared to $2.8 million or .19% of total assets at December 31, 2002. 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, unless the loan is fully secured by real estate or other collateral and in the process of collection. June 30, December 31, 2003 2002 -------- -------- (In thousands) Nonaccrual loans $ 845 $ 1,348 Loans past due 90 days or more and still accruing -- -- Property from defaulted loans 1,500 1,500 -------- -------- Total non-performing assets $ 2,345 $ 2,848 ======== ======== Restructured troubled debt performing in accordance with amended terms, not included above $ 259 $ 210 ======== ======== The following is a summary of the activity in the allowance for loan losses for the indicated periods: Six Months Ended June 30, 2003 2002 -------- -------- (In thousands) Balance, beginning of period $ 12,384 $ 12,252 Provision for loan losses -- -- Charge-offs (36) (53) Recoveries on loans previously charged off 332 188 -------- -------- Balance, end of period $ 12,680 $ 12,387 ======== ======== Recoveries on loans previously charged off exceeded charge-offs therefore management determined that additions to the allowance for loan losses were unnecessary in 2003. The allowance represented 1.63% of total loans at June 30, 2003, 1.55% at December 31, 2002, and 1.38% at June 30, 2002. 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 June 30, 2003, there can be no assurance that the allowance is adequate or that additional provisions might not become necessary. The Company had outstanding commitments to originate new residential and commercial mortgages of $49.5 million at June 30, 2003 and $44.0 million at December 31, 2002 which are not reflected on the consolidated statement of financial condition. Additional unadvanced loan funds are summarized as follows for the indicated periods: June 30, 2003 December 31, 2002 ------------- ----------------- Commercial loans (In thousands) Dealer floor plan $ 4,856 $ 6,618 Lines of credit 42,078 54,267 Other 2,559 3,231 Commercial mortgages Construction 31,156 32,480 Other 9,537 8,485 Residential mortgages Home equity 82,827 79,480 Consumer loans Lines of credit 3,479 3,388 -------- -------- Total $176,492 $187,949 ======== ======== 16 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Deposits The following table is a summary of deposits outstanding as of the dates indicated:

Reflecting somewhat the seasonal nature of the Cape Cod economy as discussed in "Liquidity" on page 18 herein, total deposits at June 30, 2003 are $33.5 million or 3.6% higher than total deposits at December 31, 2002. Generally, the Company's strategy is to price deposits according to local market rates, offering higher alternative rates based on increasing amounts deposited. Interest rates paid are frequently reviewed and are modified to reflect changing conditions. Borrowed Funds Historically, the Company has selectively engaged in short and long term borrowings from the Federal Home Loan Bank of Boston, and has sold securities under agreements to repurchase, to fund loans and investments. At June 30, 2003, borrowed funds totaled $183.6 million, down 53.9% or $214.3 million compared to borrowed funds at December 31, 2002. CCBT Statutory Trust I was formed for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2031, callable at the option of the Company after July 31, 2006. Distributions on these securities are payable quarterly in arrears on the last day of April, July, October and January. The Trust Preferred Securities are presented in the consolidated balance sheets 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. Stockholders' Equity The Company's capital to assets ratio was 8.81% at June 30, 2003 compared to 7.99% at December 31, 2002. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies, such as the Company, are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts of total and Tier 1 capital (as defined) to average assets (as defined). The following schedule displays these capital guidelines and the ratios of the Company and the Bank as of June 30, 2003. Minimum June 30, 2003 Regulatory --------------------- Guidelines Company Bank ----------------------------------- Tier 1 leverage capital 4.00% 8.71% 8.64% Tier 1 capital to risk-weighted assets 4.00% 11.74% 11.65% Total capital to risk-weighted assets 8.00% 12.99% 12.90% 17 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) The Company's book value at June 30, 2003 was $13.43 per share compared to $13.79 per share at December 31, 2002. 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. 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. 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 fee income growth from increasing customer relationship cross-selling. 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, 2002 (the "2002 Annual Report"). For quantitative information about market risk, see Item 7A of Part II of the Company's 2002 Annual Report. There have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2003 from those presented in the Company's 2002 Annual Report. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this quarterly report, (the "Evaluation Date") have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company would be made known to such officers by others within the Company on a timely basis. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 18 PART I FINANCIAL INFORMATION ITEM 4. Controls and Procedures (continued) (c) Changes in internal control over financial reporting. There were no significant changes in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company's internal control over the financial reporting. 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 The Company's annual meeting of stockholders was held on April 24, 2003 (the "Annual Meeting"). The presence, in person or by proxy, of at least a majority of the total number of issued and outstanding shares of the Company's common stock, $1.00 par value (the "Common Stock"), was necessary to constitute a quorum for the transaction of business at the Annual Meeting. There were 8,544,048 shares of Common Stock issued, outstanding and eligible to vote as of March 4, 2003. A total of 7,130,141 shares of Common Stock were present in person or by proxy at the Annual Meeting, constituting a quorum. At the Annual Meeting, the stocholders elected the following two individuals as Directors of the Company to serve for three-year terms and John Burnett was nominated as Clerk to serve until the 2004 annual meeting of stockholders, with the following votes cast: BROKER NON-VOTES NOMINEE FOR AND WITHELD ------- --------- ---------------- William R. Enlow 6,695,170 0 Stephen B. Lawson 6,790,647 0 John S. Burnett 7,114,487 0 ITEM 5. Other information Not applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Description Change in Control agreements 10.1 Change in Control Agreement with Nancy S. Hardaway. 10.2 Change in Control Agreement with Phillip W. Wong. 31.1 Certification of President of CCBT Financial Companies, Inc., pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of CCBT Financial Companies, Inc., pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 19 PART II OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (continued) 32.1 Certification of President of CCBT Financial Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of CCBT Financial Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On April 17, 2003 a report on Form 8-K was filed by the Company under Item 9 "Regulations FD Disclosure" reporting that a press release was issued announcing the Company's earnings for the first quarter 2003 and filing as an exhibit under Item 7 thereby, the press release dated April 17, 2003. On June 24, 2003 a report on Form 8-K was filed by the Company under Item 9 "Regulations FD Disclosure" reporting that a press release was issued announcing that the Bank had entered into a settlement with the Massachusetts Department of Revenue regarding a disputed tax liability and filing as an exhibit under Item 7 thereby, the press release dated June 23, 2003. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (Registrant): CCBT Financial Companies, Inc. --------------------------------------- Date: August 13, 2003 ------------------------------------------------ /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 21

CCBT FINANCIAL COMPANIES INC 10-Q