UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
Commission File No. 000-33373
COMMUNITY CENTRAL BANK CORPORATION
(Exact name of small business issuer as specified in its charter)
Michigan 38-3291744
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
100 North Main Street, PO Box 7, Mount Clemens, MI 48046-0007
(Address of principal executive offices and zip code)
(586) 783-4500
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding at November 14, 2005
------------ --------------------------------
Common Stock 3,648,134 Shares
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Transitional Small Business Disclosure Format:
Yes No X
--- ---
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
(In thousands)
Assets
Cash and due from banks $ 6,455 $ 4,183
Federal funds sold 2,200 3,000
-------- --------
Cash and Cash Equivalents 8,655 7,183
-------- --------
Securities available for sale, at fair value 77,549 51,425
Securities held to maturity, at amortized cost 1,111 1,161
FHLB stock 4,132 3,246
Residential mortgage loans held for sale 7,260 6,491
Loans
Commercial loans 219,179 207,300
Residential loans 93,981 83,104
Installment loans 14,826 15,035
-------- --------
Total Loans 327,986 305,439
Allowance for credit losses (3,671) (3,377)
-------- --------
Net Loans 324,315 302,062
-------- --------
Net property and equipment 8,529 6,921
Accrued interest receivable 1,964 1,391
Other real estate owned 592 681
Goodwill 1,381 743
Intangibles, net of amortization 229 134
Cash surrender value of Bank owned life insurance 9,753 7,519
Other assets 2,924 2,581
-------- --------
Total Assets $448,394 $391,538
======== ========
(continued)
2
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
(In thousands, except share data)
Liabilities
Deposits
Noninterest bearing demand deposits $ 35,719 $ 32,080
NOW and money market accounts 45,538 40,446
Savings deposits 14,319 20,539
Time deposits 201,802 185,791
-------- --------
Total deposits 297,378 278,856
-------- --------
Repurchase agreements 21,711 11,492
Federal Home Loan Bank advances 81,560 63,360
Accrued interest payable 989 780
Other liabilities 1,046 944
ESOP note payable 160 205
Subordinated debentures 10,310 10,310
-------- --------
Total Liabilities 413,154 365,947
-------- --------
Stockholders' Equity
Common stock -- 9,000,000 shares authorized;
3,648,314 shares issued and outstanding at
9-30-2005 and 3,008,152 at 12-31-2004 31,099 20,774
Retained earnings 4,724 5,111
Unearned employee benefit (160) (205)
Accumulated other comprehensive (loss) income (423) (89)
-------- --------
Total Stockholders' Equity 35,240 25,591
-------- --------
Total Liabilities and Stockholders' Equity $448,394 $391,538
======== ========
3
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------- -------
(In thousands, except per share data)
Interest Income
Loans (including fees) $5,429 $4,409 $15,402 $12,917
Securities 732 537 1,994 1,555
Federal funds sold 96 45 190 86
------ ------ ------- -------
Total Interest Income 6,257 4,991 17,586 14,558
------ ------ ------- -------
Interest Expense
Deposits 2,044 1,364 5,440 4,034
Short term borrowings 68 27 146 72
Advances from FHLB 775 471 1,985 1,363
ESOP loan interest expense 2 3 8 8
Interest expense of subordinated debentures 193 140 540 396
------ ------ ------- -------
Total Interest Expense 3,082 2,005 8,119 5,873
------ ------ ------- -------
Net Interest Income 3,175 2,986 9,467 8,685
Provision for credit losses -- 250 100 1,850
------ ------ ------- -------
Net Interest Income after Provision 3,175 2,736 9,367 6,835
------ ------ ------- -------
Noninterest Income
Fiduciary Income 69 -- 69 --
Deposit service charges 73 79 221 217
Net realized security gain (loss) 7 52 57 172
Mortgage banking income 1,097 1,314 2,713 4,044
Other income 133 352 441 692
------ ------ ------- -------
Total Noninterest Income 1,379 1,797 3,501 5,125
------ ------ ------- -------
Noninterest Expense
Salaries, benefits, and payroll taxes 2,098 2,096 5,617 5,907
Premises and fixed asset expense 408 397 1,161 1,135
Other operating expense 1,014 932 2,832 3,006
------ ------ ------- -------
Total Noninterest Expense 3,520 3,425 9,610 10,048
------ ------ ------- -------
Income Before Taxes 1,034 1,108 3,258 1,912
Provision for income taxes 283 312 925 462
------ ------ ------- -------
Net Income $ 751 $ 796 $ 2,333 $ 1,450
====== ====== ======= =======
Per share data:
Basic earnings $0.21 $0.27 $0.68 $0.49
Diluted earnings $0.20 $0.26 $0.67 $0.48
===== ===== ===== =====
Cash Dividends $0.05 $0.05 $0.15 $0.15
===== ===== ===== =====
* Per share data has been retroactively adjusted for 2005 stock dividend.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2005 2004 2005 2004
----- ------ ------ ------
(In thousands)
Net Income as Reported $ 751 $ 796 $2,333 $1,450
Other Comprehensive Income, Net of Tax
Change in unrealized losses on securities
Available for sale (195) 715 (330) 115
----- ------ ------ ------
Comprehensive Income $ 556 $1,511 $2,003 $1,565
===== ====== ====== ======
5
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2005 2004
-------- --------
(In thousands)
Operating Activities
Net income $ 2,333 $ 1,450
Adjustments to reconcile net income to net
cash flow from operating activities:
Net amortization of security premium 235 314
Net gain on sales and call of securities (57) (172)
Provision for credit losses 100 1,850
Depreciation expense 404 351
Deferred income tax expense (186) (188)
ESOP compensation expense 45 54
Decrease in accrued interest receivable (573) (210)
Increase in other assets (2,863) (699)
Increase in accrued interest payable 209 150
Increase (decrease) in other liabilities 102 (227)
(Increase) decrease in loans held for sale (769) 2,211
-------- --------
Net Cash Provided by (Used In) Operating
Activities (1,020) 4,884
Investing Activities
Maturities, calls, sales and prepayments of
securities available for sale 19,067 62,347
Purchase of securities available for sale (45,867) (59,806)
Maturities, calls, and prepayments of held to
maturity securities 42 86
Purchases of held to maturity securities (886) (484)
Increase in loans (22,353) (26,580)
Purchases of property and equipment (2,012) (1,844)
-------- --------
Net Cash Used in Investing Activities (52,009) (26,281)
Financing Activities
Net increase in demand and savings deposits 2,511 12,858
Net increase in time deposits 16,011 5,290
Net decrease in short term borrowings 10,219 12,119
Increase in FHLB advances 18,200 --
Rights/Public stock offering 5,275 --
River Place Merger 2,750 --
Payment of ESOP debt (45) (54)
Stock option exercise/award 103 52
Cash dividends paid (523) (427)
-------- --------
Net Cash Provided by Financing Activities 54,501 29,838
-------- --------
Increase in Cash and Cash Equivalents 1,472 8,441
Cash and Cash Equivalents at the Beginning of
the Year 7,183 6,227
-------- --------
Cash and Cash Equivalents at the End of the Period $ 8,655 $ 14,668
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 8,119 $ 5,873
Federal Taxes Paid $ 1,050 $ 462
======== ========
6
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The financial statements of Community Central Bank Corporation (the
"Corporation") include the consolidation of its direct and indirect
subsidiaries: Community Central Bank (the "Bank") and Community Central
Mortgage Company, LLC (the "Mortgage Company").
The Corporation's Consolidated Balance Sheets are presented as of September
30, 2005 and December 31, 2004, and Consolidated Statements of Income and
Comprehensive Income for the three and nine month periods ended September
30, 2005 and 2004, and Consolidated Statements of Cash Flow for the nine
months ended September 30, 2005 and 2004. These unaudited financial
statements are for interim periods, and do not include all disclosures
normally provided with annual financial statements. The interim statements
should be read in conjunction with the financial statements and footnotes
contained in the Corporation's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2004.
In the opinion of management, the interim statements referred to above
contain all adjustments (consisting of normal, recurring items) necessary
for a fair presentation of the financial statements. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
2. The accounting and reporting policies of the Corporation conform to
accounting principles generally accepted in the United States of America
and general practices within the banking industry. The following describes
the critical accounting policies, which are employed in the preparation of
financial statements.
Allowance for Credit Losses: The allowance for credit losses is maintained
at a level considered by management to be adequate to absorb losses
inherent in existing loans and loan commitments. The adequacy of the
allowance is based on evaluations that take into consideration such factors
as prior loss experience, changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific
impaired or problem loans and commitments, current economic conditions that
may affect the borrower's ability to pay, and other subjective factors. The
determination of the allowance is also based on regulatory guidance. This
guidance includes, but is not limited to, generally accepted accounting
principles, and guidance issued from other regulatory bodies such as the
joint policy statement issued by the Federal Financial Institutions
Examination Council.
3. Community Central Capital Trust I, a business trust subsidiary of the
Corporation sold 10,000 shares of cumulative preferred securities ("trust
preferred securities") at $1,000.00 per trust preferred security in June
2002. The proceeds from the sale of the trust preferred securities were
used by the trust to purchase an equivalent amount of subordinated
debentures from the Corporation. The trust preferred securities carry a
variable rate of interest at the three month libor plus 365 basis points,
have a stated maturity of 30 years, and, in effect, are guaranteed by the
Corporation. The securities are redeemable at par after 5 years.
Distributions on the trust preferred securities are payable quarterly on
March 30, June 30, September 30 and December 30. The first distribution was
paid on September 30, 2002 and distributions have been made quarterly ever
since. Under certain circumstances, distributions may be deferred for up to
20 calendar quarters. However, during any such deferrals, interest accrues
on any unpaid distributions at the rate of the three month libor plus 365
basis points. The trust preferred securities are carried on the
Corporation's consolidated balance sheet as a liability and the interest
expense is recorded on the Corporation's consolidated statement of income.
The trust preferred securities may constitute up to 25% of tier I capital.
Any amount in excess of this limit may be included as tier 2 capital. At
September 30, 2005, the total allowable trust preferred issuance of $10
million was included in the Corporation's tier 1 capital. Prior to 2004,
the trust was consolidated in the Corporation's financial statements, with
the trust preferred securities issued by the trust reported in liabilities
as "Guaranteed Preferred Beneficial Interest in the Corporation's
Subordinated Debentures" and the subordinated debentures eliminated in
consolidation. Under new accounting guidance, FASB Interpretation No. 46,
as revised in December 2003, the trust is no longer consolidated with the
Corporation, accordingly, the Corporation does not report the securities
issued by the trust as liabilities, and instead reports as liabilities the
subordinated debentures issued by the Corporation and held by the trust, as
these are no longer eliminated in consolidation.
7
Amounts previously reported as "Guaranteed preferred beneficial interest in
Corporation's subordinated debentures" in liabilities have been recaptioned
"subordinated debentures" and continue to be presented in liabilities on
the balance sheet. The effect of no longer consolidating the trust does not
significantly change the amounts reported as the Corporation's assets,
liabilities, equity, or interest expense.
4. In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-based
Payment, (SFAS 123R), which requires entities to measure the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions).
The cost is recognized as an expense over the period during which the
employee is required to provide service in exchange for the award, which is
usually the vesting period. As required by SFAS 123R, as with SFAS 123, the
Corporation will be required to estimate the fair value of all stock
options on each grant date, using an appropriate valuation approach such as
the Black-Scholes option pricing model. The provisions of this statement
will be effective for the Corporation beginning January 1, 2006.
The Corporation issued options to purchase 13,250 shares during the nine
months ended September 30, 2005. The Corporation did not issue options for
the nine months ended September 30, 2004. If the Corporation had used the
fair value method of accounting, using the Black Scholes option pricing
model and recognizing compensation cost for the outstanding options based
on the fair market value of the grant date, net income and earnings per
share on a pro forma basis would have been as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
----- ----- ------ ------
(in thousands, except per share data)
Net income, as reported $ 751 $ 796 $2,333 $1,450
Deduct: Total stock-based employee
and director compensation expense
under fair value based methods of
awards, net of related tax effects (89) (20) (151) (60)
----- ----- ------ ------
Pro forma net income $ 662 $ 776 $2,182 $1,390
===== ===== ====== ======
Earnings per share
Basic - as reported $0.21 $0.27 $ 0.68 $ 0.49
Basic - pro forma $0.18 $0.26 $ 0.64 $ 0.47
Diluted - as reported $0.20 $0.26 $ 0.67 $ 0.48
Diluted - pro forma $0.18 $0.26 $ 0.62 $ 0.46
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model with the following weighted average
assumptions. The assumptions listed below were used in 2005 and 2004, with no
practical changes during each respective period.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2005 2004 2005 2004
------- ----------- ------- -----------
Dividend yield or expected dividends 1.39% 1.63% 1.39% 1.58%
Risk free interest rate 4.60% 4.00% 4.40% 4.00%
Expected life 10 yrs. 7 - 10 yrs. 10 yrs. 7 - 10 yrs.
Expected volatility 30.28% 9.60% 26.53% 9.60%
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion compares the financial condition of Community Central
Bank Corporation (the "Corporation") and its wholly owned subsidiaries at
September 30, 2005 and December 31, 2004 and the results of operations for the
three and nine months ended September 30, 2005 and 2004. This discussion should
be read in conjunction with the financial statements and statistical data
presented elsewhere in this report. This report contains forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates and projections about the financial services industry,
the economy, and about the Corporation and the Bank. Words such as anticipates,
believes, estimates, expects, forecasts, intends, is likely, plans, projects,
variations of such words and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are intended to be
covered by the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions ("Future Factors") that
are difficult to predict with regard to timing, extent, likelihood and degree of
occurrence. Actual results and outcomes may materially differ from what may be
expressed or forecasted in the forward-looking statements. The Corporation
undertakes no obligation to update, amend, or clarify forward looking
statements, whether as a result of new information, future events (whether
anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rate and interest rate relationships;
demand for products and services; the degree of competition by traditional and
non traditional competitors; changes in banking regulation; changes in tax laws;
changes in accounting standards; changes in prices, levies and assessments; the
impact of technological advances; governmental and regulatory policy changes;
the outcomes of contingencies; trends in customer behavior as well as their
ability to repay loans; changes in the national and local economy; our ability
to successfully integrate acquisitions into our existing operations, and the
availability of new acquisition's that build shareholder value; and other
factors, including risk factors, referred to from time to time in filings made
by the Corporation with the Securities and Exchange Commission.
EXECUTIVE SUMMARY
Community Central Bank Corporation is the holding company for Community Central
Bank (the "Bank") in Mount Clemens, Michigan. The Corporation opened for
business in October 1996 and serves businesses and consumers across Macomb,
Oakland and St. Clair counties with a full range of lending, deposit, and
Internet banking services. The Bank operates two full service facilities, one in
Mount Clemens and the other in Rochester Hills, Michigan. Community Central
Mortgage Company, LLC a subsidiary of the Corporation and Bank, operates
locations servicing the Detroit metropolitan area, Central, Northwest Indiana,
and Northern Illinois. The Corporation's common shares trade on the Nasdaq
National Market under the symbol "CCBD."
The results of operations depend largely on net interest income. Net interest
income is the difference in interest income the Corporation earns on
interest-earning assets, which comprise primarily commercial business,
commercial real estate and residential real estate loans and the interest the
Corporation pays on our interest-bearing liabilities, which are primarily
certificates of deposit, money market and demand deposits, as well as
borrowings. Management strives to match the repricing characteristics of the
interest earning assets and interest bearing liabilities to protect net interest
income from changes in market interest rates and changes in the shape of the
yield curve.
The results of our operations may also be affected by local and general economic
conditions. The largest geographic segment of our customer base is in Macomb
County, Michigan. The economic base of the County continues to diversify from
the automotive service sector. This trend should lessen the impact on the County
of future economic downturns in the automotive sector of the economy. Macomb
County's proximity to major highways and affordable housing has continued to
spur economic growth in the area. Macomb County's outstanding debt had a credit
rating of AAA from Moody's Investor Service as of April 2004. Changes in the
local economy may affect the demand for commercial loans and related small to
medium business related products. This could have a significant impact on how
the Corporation deploys earning assets. The competitive environment among other
financial institutions and financial service providers and the Bank in Macomb,
Oakland, and St. Clair counties of Michigan may affect the pricing levels of
various deposit products. The impact of competitive rates on deposit products
may increase the relative cost of funds for the Corporation and thus negatively
impact net interest income.
9
The Corporation continues to see competitive deposit rates offered from local
financial institutions within the geographic proximity of the Bank which could
have the affect of increasing the costs of funds to a level higher than
management projects. The Corporation continues to utilize wholesale forms of
funding earning assets through the FHLB and brokered CDs to balance both
interest rate risk and the overall cost of funds. Brokered and internet CDs are
based on a nationwide interest rate structure, typically at what is considered
to be a premium interest rate. The local competition for CD products has
intensified and the Bank has found this type of wholesale funding to often
effectively compete with the rates offered for similar term retail CD products
of local community and regional banks.
Community Central Mortgage Company, LLC ("the Mortgage Company"), which is a
wholly owned mortgage-banking subsidiary of the Bank and the Corporation, has
felt the effect of the nationwide slowdown in residential mortgage volumes. The
Mortgage Company has scaled back both variable and fixed costs to better match
the reduced revenue generated because of this origination slowdown.
On February 14, 2005, Community Central Bank Corporation completed a
subscription rights offering. The Corporation received gross proceeds of
approximately $5.4 million from the offering and will use the proceeds to fund
its growth strategy, for working capital and for general corporate purposes.
On June 30, 2005, the Corporation completed its acquisition and merger with
River Place Financial Corp., a Michigan-chartered bank ("River Place"), pursuant
to which the Corporation acquired all of the outstanding equity interests of
River Place. River Place was a private bank wholly owned by the descendants of
Julius Stroh, founder of The Stroh Brewery Company. River Place was established
in 1983 to manage the private banking and trust needs of the Stroh family; and
trusts managed by its trust department owned and controlled Stroh Brewery until
its sale in 1999. The total cash paid to shareholders of River Place was
$512,000. The total shares of common stock of the Corporation exchanged for
common shares surrendered from River Place were 199,999. Total gross capital
generated from the transaction was $2.7 million. A total of $798,000 was
generated in intangible assets from the transaction representing $638,000 of
goodwill and $160,000 of an intangible asset associated with the customer
relationships, which will be amortized for approximately 7 years. The total
loans acquired through the transaction represented $682,000 at an estimated fair
market value. The remaining asset base of River Place Financial Corporation
recorded at estimated fair market values represented $2.3 million in short term
agency debentures and cash on hand and other assets of $359,000. The total
deposits assumed at the close of business on June 30, 2005 were $844,000. The
remaining liabilities including accruals and severance payables were $57,000. A
total of $75.0 million in off balance sheet trust assets under management were
also acquired as part of the transaction.
William A. Penner, CEO of River Place, became the President of the Bank's newly
created trust division. After retiring as First Vice President and Business
Manager of Estate Settlement in a 30-year career for Comerica Bank, Mr. Penner
took over as President of River Place in 1984. The trust division of the Bank
has full trust powers and is actively pursuing additional trust customers aside
from those relationships acquired as a result of the merger.
10
ASSETS
Total assets increased $56.8 million, or 14.5% for the first nine months ended
September 30, 2005. The largest segment of asset growth for the first nine
months of 2005 occurred in the security portfolio, which increased $27.0 million
and total portfolio loans which increased $22.5 million.
The largest portion of loan growth occurred primarily in the commercial real
estate area consistent with the Corporation's commercial lending focus. During
the first quarter, some categories of loans within the commercial and commercial
real estate portfolio were reviewed to ensure the proper reporting of underlying
collateral and purpose of the loan. It was determined that approximately $12
million of commercial and industrial loans should be classified as commercial
real estate loans based on the underlying collateral. When both the commercial
real estate loans and commercial and industrial loans are combined, the net
increase from December 31, 2004 to the period ended September 30, 2005 is $11.9
million, representing the largest portion of total loan growth. Total
residential real estate loans increased $10.4 million during the first nine
months of 2005. Most of the growth in the residential portfolio was comprised of
adjustable rate mortgages. The Corporation continues to focus on generation of
adjustable rate mortgages for its portfolio of residential mortgage loans, with
approximately $50.2 million in total. The home equity line portfolio increased
$437,000 during the first nine months of 2005. This portfolio product is tied to
the Wall Street prime interest rate. As short-term market rates have increased
during 2005, some customers have moved balances in the home equity lines into
other fixed rate products with lower overall interest rates. The consumer loan
portfolio decreased $239,000 for the nine months ended September 30, 2005.
The total security portfolio at September 30, 2005 was $82.8 million, which was
comprised of $77.5 million in available for sale securities and $5.3 million in
held to maturity securities. The security portfolio primarily consisted of
federal agency securities and bank qualified tax-exempt municipal securities.
The total portfolio increased $27.0 million from December 31, 2004. A portion of
the increase in investment securities was attributable to funding from the
rights offering completed in February 2005. These funds were invested into
mortgage-backed securities with principal repayment characteristics that could
be used to fund loan advances at a later date. The net change was driven by
purchases of $46.8 million, with maturities, calls and sales comprising a
reduction of $19.8 million. During the nine months ended September 30, 2005, the
federal agency debenture portfolio increased $11.2 million, which are partially
pledged against repurchase agreements. The federal agency mortgage backed
securities and collateralized mortgage obligations (CMOs) increased $5.6
million. The remaining increase in the total security portfolio comprised bank
qualified tax-exempt municipal bonds increasing $9.4 million. At September 30,
2005, the available for sale portfolio had a net unrealized loss of $641,000,
compared to a $135,000 unrealized loss at December 31, 2004. Unrealized losses
on securities have not been recognized into income because the issuers' bonds
are of high credit quality. We have the intent and ability to hold the
securities for the foreseeable future and the decline in the fair value is
primarily due to increased market interest rates.
Mortgage loans held for sale totaled $7.3 million at September 30, 2005 compared
to $6.5 million at December 31, 2004. The mortgage loans were originated by the
Bank's mortgage subsidiary. Loans closed generally remain in loans held for sale
for less than 30 days. Loans are normally committed for sale before funding
takes place. The Corporation makes loans to customers primarily in Macomb
County, Michigan. Although the Corporation has a diversified loan portfolio, a
substantial portion of the local economy has traditionally been dependent on the
automotive industry. Accordingly, a downturn in the automotive industry could
adversely affect a borrower's ability to repay its loan. Additionally, the
Corporation had approximately $66.4 million in outstanding loans at September
30, 2005, to borrowers in the real estate rental and property management
industries, representing approximately 34.6% of the total commercial real estate
loan portfolio.
11
The major components of the loan portfolio for loans held for sale and loans in
the portfolio are as follows:
September 30, Percentage December 31, Percentage Net Net
2005 of total loans 2004 of total loans Change Change %
------------- -------------- ------------ -------------- -------- --------
(in thousands, except percentages)
Loans held for sale:
Residential real estate $ 7,260 100.0% $ 6,491 100.0% $ 769 11.8%
======== ===== ======== ===== ======== =====
Loans held in the portfolio:
Commercial real estate* $191,995 58.5% $166,686 54.6% $ 25,309 15.2%
Commercial and industrial* 27,184 8.3 40,614 13.3 (13,430) (33.1)
Residential real estate 74,680 22.8 64,240 21.0 10,440 16.3
Home equity lines 19,301 5.9 18,864 6.2 437 2.3
Consumer loans 14,138 4.3 14,377 4.7 (239) (1.7)
Credit cards 688 0.2 658 0.2 30 4.6
-------- ----- -------- ----- -------- -----
$327,986 100.0% $305,439 100.0% $ 22,547 7.4%
======== ===== ======== ===== ======== =====
* Approximately $12 million of the commercial and industrial loan portfolio
was reclassified during the 1st quarter of 2005 as commercial real estate
loans as discussed above.
12
A summary of nonperforming assets is as follows:
September 30, December 31,
2005 2004
------------- ------------
(Dollars in thousands)
Nonaccrual loans:
Commercial real estate $ 937 $ 220
Commercial and industrial 428 305
Residential real estate 147 16
Home equity lines -- --
Consumer loans -- --
Credit cards -- --
------ ------
Total nonaccrual loans 1,512 541
Accruing loans delinquent more than 90 days:
Commercial real estate -- --
Commercial and industrial -- --
Residential real estate 388 100
Home equity lines -- --
Consumer loans 6 124
Credit cards 17 10
------ ------
Total accruing loans delinquent more than 90 days 411 234
------ ------
Total nonperforming loans 1,923 775
Other real estate owned
Commercial real estate -- 681
Residential real estate 592 --
------ ------
Total other real estate owned 592 681
------ ------
Total nonperforming assets $2,515 $1,456
====== ======
Total nonperforming loans as a percentage of
total loans 0.59% 0.25%
====== ======
Total nonperforming assets as a percentage of
total assets 0.56% 0.37%
====== ======
At September 30, 2005, nonperforming loans totaled $1,923,000 compared to
$775,000 at December 31, 2004, an increase of $1,148,000. The increase in
nonaccrual loans was primarily attributable to the additional $1.1 million
relationship secured by commercial real estate and a floor plan line of credit
secured by marine craft. The total nonaccrual loans of $1.5 million comprise six
separate loan relationships. Total nonperforming loans, which include both
nonaccrual loans and total accruing loans delinquent more than 90 days,
represented 0.59% of total portfolio loans as of September 30, 2005, which was
an increase from December 31, 2004 of 0.25%. The balance of other real estate
owned at September 30, 2005 was $592,000, and represented residential real
estate collateral.
13
The following table shows an analysis of the allowance for credit losses:
September 30, December 31,
2005 2004
------------- ------------
(Dollars in thousands)
Balance as beginning of the period $3,377 $3,573
Charge-offs:
Commercial real estate 181 --
Commercial and industrial 57 2,040
Residential real estate 38 61
Home equity lines -- --
Consumer loans 141 71
Credit cards 11 44
------ ------
Total charge-offs $ 428 $2,216
------ ------
Recoveries:
Commercial real estate -- --
Commercial and industrial 604 1
Residential real estate -- --
Home equity lines -- --
Consumer loans 17 18
Credit cards 1 1
------ ------
Total recoveries $ 622 $ 20
------ ------
Net charge-offs (recoveries) (194) 2,196
------ ------
Provision charged to earnings 100 2,000
------ ------
Balance at end of the period $3,671 $3,377
====== ======
As a percentage of total portfolio loans 1.12% 1.11%
The allowance for credit losses as a percentage of total loans remained
relatively unchanged at September 30, 2005, compared to December 31, 2004. The
allowance for credit losses as a percentage of nonperforming loans was 190.90%
at September 30, 2005. The allowance for credit losses increased $294,000 from
December 31, 2004 from loan recoveries, which were primarily attributable to
partial collection of loan charge offs recorded in June 2004. No provision for
credit losses was made in the third quarter of 2005, due in part to the net
recovery position through September 30, 2005, and overall credit quality
considerations. The provision for credit losses for the first nine months of
2005 was $100,000, and in contrast to the provision recorded for the first nine
months of 2004, which was $1.9 million. The large provision in 2004 was
primarily attributable to a fraud related loan charge off associated with one
relationship for which a partial recovery was recorded this year. Year to date
loan recoveries exceeded loan charge offs by $194,000 or 8 basis points on an
annualized basis compared to total average loans. The loan portfolio has been
reviewed and analyzed for the purpose of estimating probable credit losses
inherent in the loan portfolio. The Corporation performs a detailed quarterly
review of the allowance for credit losses. The Corporation evaluates those loans
classified as substandard, under its internal risk rating system, on an
individual basis for impairment under SFAS 114. The level and allocation of the
allowance is determined primarily on management's evaluation of collateral
value, less the cost of disposal, for loans reviewed in this category. The
remainder of the total loan portfolio is segmented into homogeneous loan pools
with similar risk characteristics for evaluation under SFAS 5. The allowance for
credit losses in maintained at a level considered by management to be adequate
to absorb losses inherent in existing loans and loan commitments. The adequacy
of the allowance is based on evaluations that take into consideration such
factors as prior loss experience, changes in the nature and volume of the
portfolio, overall
14
portfolio quality, loan concentrations, specific impaired or problem loans and
commitments, current economic conditions that may affect the borrower's ability
to pay, and other subjective factors. The determination of the allowance is also
based on regulatory guidance. This guidance includes, but is not limited to,
generally accepted accounting principles, and guidance issued from other
regulatory bodies such as the joint policy statement issued by the Federal
Financial Institutions Examination Council. The Corporation's policy dictates
that specifically identified credit losses be recognized immediately by a charge
to the allowance for credit losses. Management believes that the present
allowance is adequate, based on the broad range of considerations utilized.
Although management believes that the allowance for credit losses is adequate to
absorb losses as they arise, there can be no assurance that the Corporation will
not sustain losses in any given period that could be substantial in relation to
the size of the allowance for credit losses.
15
LIABILITIES
During the nine months ended September 30, 2005, total deposits increased $18.5
million to $297.4 million. The increase in deposits was attributable to
increases in time deposits $100,000 and over, which increased $19.7 million.
Noninterest bearing demand deposits and NOW accounts increased $3.6 million and
$9.9 million, respectively. This was offset by decreases in money market,
savings accounts and time deposits under $100,000 of $4.8 million, $6.2 million
and $3.7 million, respectively. The decrease in money market balances was
attributable to seasonal factors, the current competitive rate environment and
movement of funds between deposit products within the Bank.
The largest segment of deposit growth occurred in jumbo certificates of deposit.
Brokered certificates of deposits increased $15.1 million during the first nine
months of 2005 to $65.3 million at September 30, 2005. Internet certificates of
deposit decreased $9.0 million to end at $18.6 million at September 30, 2005.
Local municipal time deposits totaled $37.6 million at September 30, 2005, which
is a decrease of $8.8 million from December 31, 2004. The Corporation continues
to see competitive deposit rates offered from local financial institutions
within the geographic proximity of the Bank which could have the affect of
increasing the cost of funds to a level higher than management projects. The
Corporation continues to utilize wholesale forms of funding earning assets
through the FHLB and brokered CDs to balance both interest rate risk and the
overall cost of funds. Brokered and internet CDs are based on a nationwide
interest rate structure, typically at what is considered to be a premium
interest rate. The local competition for CD products has intensified and the
Bank has found this type of wholesale funding to often effectively compete with
the rates offered for similar term retail CD products of local community and
regional banks.
The major components of deposits are as follows:
September 30, Percentage December 31, Percentage Net Net
2005 of total deposits 2004 of total deposits Change Change %
------------- ----------------- ------------ ----------------- ------- --------
(Dollars in Thousands)
Noninterest bearing demand $ 35,719 12.0% $ 32,080 11.5% $ 3,639 11.3%
NOW accounts-interest
bearing checking 22,504 7.6 12,575 4.5 9,929 79.0
Money market 23,034 7.7 27,871 10.0 (4,837) (17.4)
Savings 14,319 4.8 20,539 7.4 (6,220) (30.3)
Time deposits under $100,000 56,684 19.1 60,375 21.6 (3,691) (6.1)
Time deposits $100,000 and
over 145,118 48.8 125,416 45.0 19,702 15.7
-------- ------ -------- ----- ------- -----
Total deposits 297,378 100.00% 278,856 100.0% 18,522 6.6%
======== ====== ======== ===== ======= =====
16
Short term borrowings at September 30, 2005 consisted of short term FHLB
advances of $23.7 million and securities sold with an agreement to repurchase
them the following day of $21.7 million. Following are details of our short term
borrowings for the dates indicated:
September 30, December 31,
2005 2004
------------- ------------
(Dollars in thousands)
Amount outstanding at end of period
Repurchase agreements $21,711 $11,492
Short-term FHLB advances $23,700 $17,000
Weighted average interest rate on ending balance
Repurchase agreements 2.00% 1.00%
Short-term FHLB advances 3.42% 2.23%
Maximum amount outstanding at any month end
during the period
Repurchase agreements $21,711 $24,995
Short-term FHLB advances $24,000 $17,000
In June 2001, the Corporation started to borrow long-term advances from the FHLB
to fund fixed rate instruments and to minimize the interest rate risk associated
with certain fixed rate mortgage instruments and investment securities. These
advances are secured under a blanket security agreement by first mortgage loans
and the pledging of certain securities. Long-term advances comprised thirty-nine
advances with maturities from December 2006 to September 2015.
FHLB advances outstanding at September 30, 2005 were as follows:
Ending Average rate
Balance at end of period
------- ----------------
(Dollars in thousands)
Short-term FHLB advances $23,700 3.42%
Long-term FHLB advances 57,860 4.36%
------- ----
$81,560 4.09%
17
LIQUIDITY AND CAPITAL RESOURCES
The liquidity of a bank allows it to provide funds to meet loan requests, to
accommodate possible outflows in deposits, and to take advantage of other
investment opportunities. Funding of loan requests, providing for liability
outflows, and managing interest rate risk require continuous analysis to match
the maturities of specific categories of loans and investments with specific
types of deposits and borrowings. Bank liquidity depends upon the mix of the
banking institution's potential sources and uses of funds. The major sources of
liquidity for the Bank have been deposit growth, federal funds sold, loans and
securities which mature within one year, and sales of residential mortgage
loans. Additional liquidity is provided by $27.5 million in available unsecured
federal funds borrowing facilities, and a $100.0 million secured line of credit
with the FHLB. Large deposit balances which might fluctuate in response to
interest rate changes are closely monitored. These deposits consist mainly of
jumbo time certificates of deposit. We anticipate that we will have sufficient
funds available to meet our future commitments. As of September 30, 2005, unused
commitments comprised $89.5 million. The Bank has $150.3 million in time
deposits coming due within the next twelve months from September 30, 2005. At
September 30, 2005, the Bank had $65.3 million in brokered certificates of
deposit, of which $34.6 million is due within one year or less. Additionally, at
September 30, 2005, municipal time deposits and internet time deposits were
$37.6 million and $18.6 million, respectively. Municipal time deposits typically
have maturities less than three months. $13.7 million of internet certificates
of deposit mature in one year or less. On August 16, 2005, the Corporation's
Board of Directors declared the Corporation's fourteenth consecutive quarterly
cash dividend of $0.05 per common share, payable October 3, 2005, to
shareholders of record September 1, 2005.
The largest uses and sources of cash and cash equivalents for the Corporation
for the nine months ended September 30, 2005, as noted in the Consolidated
Statement of Cash Flow, were centered primarily on the uses of cash in investing
activities and the net cash provided by financing activities. The uses of cash
in investing activities were largely due to the increase in loans of $22.4
million and the purchase of securities of $46.8 million, offset by maturities,
calls and sales of securities totaling $19.1 million. The purchase of property
and equipment for $2.0 million was primarily due to the completion of
construction of the new administration building for the Corporation and Bank.
Offsetting the uses of cash in investing activities, was the area of cash
provided from financing activities which included net increases in demand and
savings deposits, time deposits, short term borrowings and FHLB advances of $2.5
million, $16.0 million, $10.2 million and $18.2 million, respectively.
Additionally, cash was provided from financing activities through the rights
offering completed in February 2005 which totaled $5.4 million and the
completion of the River Place Financial Corporation merger which totaled $2.8
million. The total net cash used in operating activities was $1.0 million and
was largely attributable to net income of $2.3 million and offset by an increase
in other assets of $2.9 million. Total cash and cash equivalents at the end of
September 30, 2005 increased to $8.7 million from the year ended December 31,
2004, which was $7.2 million.
Following are selected capital ratios for the Corporation and the Bank as of the
dates indicated, along with the minimum regulatory capital requirement for each
item. Capital requirements for bank holding companies are set by the Federal
Reserve Board. In many cases, bank holding companies are expected to operate at
capital levels higher than the minimum requirement.
September 30, December 31, Minimum Ratio
2005 2004 for Capital
--------------- --------------- Adequacy Ratio to be
Capital Ratio Capital Ratio Purposes "Well Capitalized"
------- ----- ------- ----- ------------- ------------------
Total capital to risk-weighted assets
Consolidated $47,717 14.06% $38,177 12.58% 8% 10%
Bank only 44,633 13.18% 36,349 12.00% 8% 10%
Tier I capital to risk-weighted assets
Consolidated $44,046 12.98% $33,068 10.90% 4% 6%
Bank only 40,962 12.10% 32,972 10.89% 4% 6%
Tier I capital to average assets
Consolidated $44,046 10.02% $33,068 8.47% 4% NA
Bank only 40,962 9.34% 32,972 8.47% 4% 5%
18
Management believes that the current capital position as well as net income from
operations, loan repayments and other sources of funds will be adequate to meet
our short and long term liquidity needs.
The following table shows the changes in stockholders' equity for the nine
months ended September 30, 2005:
Unearned Accumulated Other
Common Retained Employee Comprehensive Total
Stock Earnings Benefits Income/(Loss) Equity
------- -------- -------- ----------------- -------
Beginning balance, January 1 $20,774 $ 5,111 ($205) ($89) $25,591
Cash dividend -- (523) -- -- (523)
Stock option exercise/stock awards 103 -- -- -- 103
Rights offering 5,275 -- -- -- 5,275
Stock dividend 2,197 (2,197) -- -- --
Net income -- 2,333 -- -- 2,333
Release of ESOP shares -- -- 45 -- 45
RPFC merger 2,750 -- -- -- 2,750
Change in unrealized gain/loss -- -- -- (334) (334)
------- ------- ----- ----- -------
Balance September 30, 2005 $31,099 $ 4,724 ($160) ($423) $35,240
======= ======= ===== ===== =======
NET INTEREST INCOME
Net interest income was $3.2 million during the third quarter of 2005, an
increase of $189,000, or 6.3% over the third quarter 2004. The increase was
attributable to growth in earning assets. The net interest margin, as measured
on a tax equivalent basis was 3.15% for the third quarter of 2005, compared with
3.28% for the third quarter of 2004. The net interest margin in the third
quarter was affected by the relative mix of earning assets, with an increase in
investment securities, providing incremental net interest income growth, but at
a lower relative interest rate spread than loans. The Corporation invested in
securities in the form of bank qualified municipal securities and mortgage
backed securities. The Corporation believes the cash flow generated from the
investment portfolio can provide for a funding base for future loan demand. The
Corporation had approximately $156.9 million in loans that could reprice within
three months as of September 30, 2005.
Net interest income was $9.5 million for the nine months ended September 30,
2005, which was an increase of $782,000, or 9.0% over the nine months ended
September 30, 2004. The net interest margin, as measured on a tax equivalent
basis, was 3.26% for the first nine months of 2005, compared with 3.24% for the
first nine months of 2004. Growth in earning assets resulted in the increase in
net interest income. The anticipated favorable effect of short term market
interest rates was offset by a competitive rate environment for deposit products
amongst local financial institutions. In some cases, the Corporation found it
more advantageous from a pricing and term matching standpoint to utilize
brokered certificates of deposit and Federal Home Loan Bank advances for funding
sources over local deposits. The flattening of the treasury yield curve has also
made comparative spreads between new earning assets and corresponding interest
bearing liabilities much smaller than in previous years.
19
The following table shows the dollar amount of changes in net interest income
for each major category of interest earning asset and interest bearing
liability, and the amount of change attributable to changes in average balances
(volume) or average rates for the periods shown. Variances that are jointly
attributable to both volume and rate changes have been allocated to the volume
component.
Three Months Ended Nine Months Ended
September 30, 2005 vs. 2004 September 30, 2005 vs. 2004
---------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In
------------------- -------------------
Volume Volume
Total and Both Rate Total and Both Rate
------ -------- ------ ------ -------- ------
(In thousands)
Earning Assets - Interest Income
Loans $1,020 $469 $ 551 $2,485 $1,005 $1,480
Securities 195 145 50 439 323 116
Federal funds sold 51 (29) 80 104 (50) 154
------ ---- ------ ------ ------ ------
Total 1,266 585 681 3,028 1,278 1,750
------ ---- ------ ------ ------ ------
Deposits and Borrowed Funds -
Interest Expense
NOW and money market accounts 82 4 78 113 (30) 143
Savings deposits (6) (11) 5 129 91 38
Time deposits 604 83 521 1,164 157 1,007
FHLB and repo sweeps 345 208 137 696 351 345
ESOP (1) (1) -- -- (2) 2
Subordinated debentures 53 -- 53 144 -- 144
------ ---- ------ ------ ------ ------
Total 1,077 283 794 2,246 567 1,679
------ ---- ------ ------ ------ ------
Net Interest Income $ 189 $302 ($113) $ 782 $ 711 $ 71
====== ==== ====== ====== ====== ======
20
AVERAGE BALANCE SHEET
The following tables show the Corporation's consolidated average balances of
assets, liabilities, and stockholders' equity; the amount of interest income or
interest expense and the average yield or rate for each major category of
interest earning asset and interest bearing liability, and the net interest
margin, for the three and nine month periods ended September 30, 2005 and 2004.
Average loans are presented net of unearned income, gross of the allowance for
credit losses. Interest on loans includes loan fees. Average securities are
based on amortized cost.
Three Months Ended September 30,
-------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
-------- -------- ------- -------- -------- -------
(In thousands)
Assets
Loans $330,045 $5,429 6.58% $301,537 $4,409 5.85%
Securities 73,003 732 4.01 58,583 537 3.67
Federal funds sold 9,860 96 3.89 12,874 45 1.40
-------- ------ ---- -------- ------ ----
Total Earning Assets/
Total Interest Income 412,908 6,257 6.06 372,994 4,991 5.35
-------- ------ ---- -------- ------ ----
Cash and due from banks 8,697 7,626
All other assets 19,747 15,134
-------- --------
Total Assets $441,352 $395,754
======== ========
Liabilities and Equity
NOW and money market accounts $ 43,696 187 1.71 $ 42,673 105 0.98
Savings deposits 14,886 69 1.85 17,210 75 1.74
Time deposits 206,668 1,788 3.46 197,099 1,184 2.40
FHLB advances and repurchase
agreements 89,647 843 3.76 67,487 498 2.95
ESOP loan 175 2 4.57 225 3 5.33
Subordinated debentures 10,310 193 7.49 10,310 140 5.43
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities/
Total Interest Expense / Interest
Rate Spread 365,382 3,082 3.37 335,004 2,005 2.39
-------- ------ ---- -------- ------ ----
Noninterest bearing demand deposits 38,829 35,024
All other liabilities 2,279 1,272
Stockholders' equity 34,862 24,454
-------- --------
Total Liabilities and Stockholder's
Equity $441,352 $395,754
======== ========
Net Interest Income $3,175 $2,986
====== ======
Net Interest Margin (Net Interest
Income/Total Earning Assets) 3.08% 3.20%
==== ====
Net Interest Margin
(fully taxable equivalent) 3.15% 3.28%
==== ====
21
Nine Months Ended September 30,
-------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
-------- -------- ------- -------- -------- -------
(In thousands)
Assets
Loans $320,585 $15,402 3.27% $299,663 $12,917 5.75%
Securities 66,450 1,994 4.00 55,695 1,555 3.72
Federal funds sold 7,741 190 6.41 9,781 86 1.17
-------- ------- ---- -------- ------- ----
Total Earning Assets/
Total Interest Income 394,776 17,586 5.94 365,139 14,558 5.32
-------- ------- ---- -------- ------- ----
Cash and due from banks 7,770 7,317
All other assets 17,947 13,533
-------- --------
Total Assets $420,493 $385,989
======== ========
Liabilities and Equity
NOW and money market accounts $ 40,046 432 1.44 $ 42,846 319 0.99
Savings deposits 19,016 273 1.91 12,690 144 1.51
Time deposits 200,235 4,735 3.15 193,610 3,571 2.46
FHLB advances and repurchase agreements 80,233 2,131 3.54 67,002 1,435 2.86
ESOP loan 187 8 5.70 245 8 4.35
Subordinated debentures 10,310 540 6.98 10,310 396 5.12
-------- ------- ---- -------- ------- ----
Total Interest Bearing Liabilities/
Total Interest Expense / Interest Rate Spread 350,027 8,119 3.09 326,703 5,873 2.40
-------- ------- ---- -------- ------- ----
Noninterest bearing demand deposits 36,828 33,961
All other liabilities 1,926 1,035
Stockholders' equity 31,712 24,290
-------- --------
Total Liabilities and Stockholder's Equity $420,493 $385,989
======== ========
Net Interest Income $ 9,467 $ 8,685
======= =======
Net Interest Margin (Net Interest
Income/Total Earning Assets) 3.20% 3.17%
==== ====
Net Interest Margin
(fully taxable equivalent) 3.26% 3.24%
==== ====
22
PROVISION FOR CREDIT LOSSES
No provision for credit losses was made in the third quarter of 2005, due in
part to the net recovery position through September 30, 2005, and overall credit
quality considerations. The provision for credit losses for the first nine
months of 2005 was $100,000, and in contrast to the provision recorded for the
first nine months of 2004, which was $1.9 million. The large provision in 2004
was primarily attributable to a fraud related loan charge off associated with
one relationship for which a partial recovery was recorded this year. Year to
date loan recoveries exceeded loan charge offs by $194,000 for 8 basis points on
an annualized basis compared to total average loans.
NONINTEREST INCOME
Noninterest income in the third quarter of 2005 was $1.4 million, a decrease of
$418,000 compared to the third quarter of 2004. This was primarily due to a
decrease in gains from the sale of residential mortgages, which was $1.1 million
for the third quarter of 2005 compared to $1.3 million during the third quarter
of 2004. The decrease in the gains on the sales of mortgage loans was due to
lower origination loan volumes than in the third quarter of 2004. A decrease in
mortgage loan originations from prior years because of a slow down in refinance
activity has been experienced industry wide. Fiduciary income of $69,000 was
generated in the third quarter of 2005 through management of trust accounts
acquired in our merger with River Place. The fiduciary income generated was more
than offset by the costs of operating the new trust division. The Bank expects
to expand its fiduciary income through initiatives and business referrals to
provide incremental earnings in the future. It believes the trust and wealth
management business lines compliment the full banking services provided to its
small business and affluent customer base. Other income of $133,000 for the
third quarter of 2005 compared to $352,000 during the third quarter of 2004 was
due primarily to loan portfolio sales recorded in the third quarter of 2004.
Noninterest income for the first nine months of 2005 of $3.5 million was down
$1.6 million from the first nine months of 2004, again primarily from decreases
in gains on the sale of residential mortgages. Total net security gains of
$57,000 were attributable to restructuring in the security portfolio and down
from $172,000 recorded in net gains from the first nine months of 2004. Mortgage
banking income comprising primarily gains on the sale of residential mortgages
was $2.7 million, down $1.3 million from the first nine months of 2004 due to
the lower volume of mortgage originations and subsequent sales in the secondary
market. Other income for the first nine months of 2005 was $441,000, decreasing
251,000 from the same period last year due to portfolio loan gains recorded
during the first nine months of 2004.
NONINTEREST EXPENSE
Noninterest expense was $3.5 million for the third quarter of 2005 compared to
$3.4 million for the third quarter of 2004. The increase in noninterest expense
of $95,000, or 2.8% was largely centered on other operating expenses connected
with the growth of the Corporation. While salary and benefit costs remained
flat, decreases in salary and benefit costs attributable to lower mortgage
originations were offset by increases from trust and commercial lending
operations. Net occupancy expense for the third quarter increased $11,000, or
2.8%. The increase in occupancy expense was related to overall increases in the
general costs including property taxes and maintenance. Other operating expense
was $1.0 million, increasing from $932,000 from the third quarter of 2004 as the
result of the aforementioned trust operations, coupled with general increases in
the cost of an expanding operation.
Noninterest expense for the first nine months of 2005 of $9.6 million was down
$438,000, or 4.4% primarily due to lower commission expense paid on a
corresponding lower volume of mortgage loan origination activity. Total
salaries, benefits and payroll taxes of $5.6 million for the first nine months
of 2005 decreased $290,000 from the same period in 2004 due to a decrease in
commission expense. Other operating expense of $2.8 million decreased $174,000,
or 5.8% due to lower costs related to lower mortgage origination volumes and
related costs from the mortgage company subsidiary.
PROVISION FOR INCOME TAXES
The provision for federal income taxes of $283,000 for the quarter ended
September 30, 2005 decreased $29,000 over the third quarter of 2004. The
decrease in the federal income tax provision was related to decreased pretax
23
income. The effective tax rate for the quarter ended September 30, 2005 and
September 30, 2004 was 27.4% and 28.2%, respectively. The lower effective tax
rate was due in part to investments in bank qualified tax exempt securities at a
higher level than in the quarter ended September 30, 2004.
The provision for federal income taxes of $925,000 for the nine months ended
September 30, 2005 increased $463,000 over the first nine months of 2004. Again,
the pretax income level was higher over the respective periods and the effective
tax rate was also higher. The effective tax rate for the first nine months of
2005 was 28.4% compared to 24.2% for the first nine months of 2004. The
difference in the effective rates is due to the relative percentage of
tax-exempt income to the total pretax income, which would include both taxable
and tax exempt income. The tax-exempt income as a percentage of total pretax
income was 12%, compared to 20% for the nine month periods ended September 30,
2005 and 2004, respectively.
24
ASSET/LIABILITY MANAGEMENT
The Asset Liability Management Committee ("ALCO"), which meets at least
quarterly, is responsible for reviewing interest rate sensitivity position and
establishing policies to monitor and limit exposure to interest rate risk.
Currently two quantitative tools are used to measure and monitor interest rate
risk: static gap analysis and net interest income simulation modeling. Each of
these interest rate risk measurements has limitations, but management believes
when these tools are evaluated together, they provide a balanced view of our
exposure to interest rate risk.
Static gap analysis measures the difference between the assets and liabilities
repricing or maturing within specific time periods. An asset-sensitive position
indicates that there are more rate-sensitive assets than rate-sensitive
liabilities repricing or maturing within specific time periods, which would
generally imply a favorable impact on net interest income in periods of rising
interest rates and a negative impact in periods of falling rates. A
liability-sensitive position would generally imply a negative impact on net
interest income in periods of rising rates and a positive impact in periods of
falling rates.
Static gap analysis has limitations because it cannot measure precisely the
effect of interest rate movements and competitive pressures on the repricing and
maturity characteristics of interest-earning assets and interest-bearing
liabilities. In addition, a significant portion of our adjustable-rate assets
have limits on their maximum yield, whereas most of our interest-bearing
liabilities are not subject to these limitations. As a result, certain assets
and liabilities indicated as repricing within a stated period may in fact
reprice at different times and at different volumes, and certain adjustable-rate
assets may reach their yield limits and not reprice.
25
The following table presents an analysis of our interest-sensitivity static gap
position at September 30, 2005. All interest-earning assets and interest-bearing
liabilities are shown based on the earlier of their contractual maturity or
repricing date adjusted by forecasted repayment and decay rates. Asset
prepayment and liability decay rates are selected after considering the current
rate environment, industry prepayment and decay rates and our historical
experience.
After Three After One
Within Months But Year But After
Three Within One Within Five
Months Year Five Years Years Total
-------- ----------- ---------- ------- --------
(Dollars in thousands)
Interest earning assets:
Federal funds sold $ 2,200 $ -- $ -- $ -- $ 2,200
Securities 9,083 11,152 39,314 19,751 79,300
FHLB stock -- -- -- 4,132 4,132
Portfolio loans and
held for resale 156,894 37,720 103,810 36,822 335,246
-------- --------- -------- ------- --------
Total 168,177 48,872 143,124 60,705 $420,878
-------- --------- -------- ------- ========
Interest bearing liabilities:
NOW and money market
accounts 3,863 17,122 24,553 -- $ 45,538
Savings deposits 1,432 4,153 8,734 -- 14,319
Jumbo time deposits 45,401 62,278 37,439 -- 145,118
Time deposits < $100,000 10,742 31,857 14,085 -- 56,684
Repurchase agreements 21,711 -- -- -- 21,711
FHLB 10,700 13,000 39,860 18,000 81,560
ESOP payable 160 -- -- -- 160
Subordinated debentures 10,310 -- -- -- 10,310
-------- --------- -------- ------- --------
Total 104,319 128,410 124,671 18,000 $375,400
-------- --------- -------- ------- ========
Interest rate sensitivity gap $ 63,858 ($79,538) $ 18,453 $42,705
Cumulative interest rate
sensitivity gap ($15,680) $ 2,773 $45,478
Interest rate sensitivity gap
ratio 1.61 0.38 1.15 3.37
Cumulative interest rate
sensitivity gap ratio 0.93 1.01 1.12
We also evaluate interest rate risk using a simulation model. The use of
simulation models to assess interest rate risk is an accepted industry practice,
and the results of the analysis are useful in assessing the vulnerability of our
net interest income to changes in interest rates. However, the assumptions used
in the model are oversimplifications and not necessarily representative of the
actual impact of interest rate changes. The simulation model assesses the
direction and magnitude of variations in net interest income resulting from
potential changes in market interest rates. Key assumptions in the model include
prepayment speeds of various loan and investment assets; cash flows and
maturities of interest-sensitive assets and liabilities, and changes in market
conditions impacting loan and deposit volumes and pricing. These assumptions are
inherently uncertain, and subject to fluctuation and revision in a dynamic
environment. Therefore, the model cannot precisely estimate future net interest
income or exactly predict the impact of higher or lower interest rates. Actual
results may differ from simulated results due to the timing, magnitude, and
frequency of interest rate changes, changes in market conditions, management's
pricing decisions, and customer reactions to those decisions, among other
factors.
26
On a quarterly basis, the net interest income simulation model is used to
quantify the effects of hypothetical changes in interest rates on the Bank's net
interest income over a projected twelve-month period. The model permits
management to evaluate the effects of shifts in the Treasury yield curve, upward
and downward, on net interest income expected in a stable interest rate
environment.
As of June 30, 2005 the table below, based on the most recent available
analysis, reflects the impact the various instantaneous parallel shifts in the
yield curve would have on net interest income over a twelve month period of time
from the base forecast.
Percentage Change
Interest Rate Scenario In Net Interest Income
---------------------- ----------------------
Interest rates up 300 basis points 5.5%
Interest rates up 200 basis points 4.3%
Interest rates up 100 basis points 2.1%
Base case
Interest rates down 100 basis points (2.7%)
Interest rates down 200 basis points (5.4%)
Interest rates down 300 basis points (6.4%)
ITEM 3. CONTROLS AND PROCEDURES
An evaluation of the Corporation's disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934 ("Act")) as
of September 30, 2005, was carried out under the supervision and with the
participation of the Corporation's Chief Executive Officer, Chief Financial
Officer and several other members of the Corporation's senior management. The
Corporation's Chief Executive Officer and Chief Financial Officer concluded that
the Corporation's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Corporation in the reports it files or submits under the Act is (i) accumulated
and communicated to the Corporation's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
There have been no changes in our internal control over financial reporting (as
defined in Rule 13a--15(f) of the Act) that occurred during the quarter ended
September 30, 2005, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
The Corporation intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material non-financial information concerning the Corporation's
business. While the Corporation believes the present design of its disclosure
controls and procedures is effective to achieve its goal, future events
affecting its business may cause the Corporation to modify its disclosures and
procedures.
The Corporation does not expect that its disclosure controls and procedures and
internal control over financial reporting will prevent all error and all fraud.
A control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedure, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Corporation have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls may be circumvented by the individual acts of some
persons, by collusion of two or more people, or by override of the control. The
design of any control procedure also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of
27
the inherent limitations in a cost-effective control procedure, misstatements
due to error or fraud may occur and not be detected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate
and annually report on their systems of internal control over financial
reporting. In addition, our independent accountants must report on management's
evaluation. We are in the process of evaluating, documenting and testing our
system of internal control over financial reporting to provide the basis for our
report that will, for the first time, be a required part of our annual report on
Form 10-KSB for the fiscal year ending December 31, 2007. Due to the ongoing
evaluation and testing of our internal controls, there can be no assurance that
if any control deficiencies are identified they will be remediated before the
end of the 2007 fiscal year, or that there will not be significant deficiencies
or material weaknesses that would be required to be reported.
28
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY 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.
Cash Dividend - On August 16, 2005, the Corporation's Board of Directors
declared the Corporation's fourteenth quarterly cash dividend of $0.05 per
common share, payable September 1, 2005, to shareholders of record October 3,
2005.
ITEM 6. EXHIBITS.
See Exhibit Index attached.
29
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on November 14, 2005.
COMMUNITY CENTRAL BANK CORPORATION
By: /S/ DAVID A. WIDLAK
------------------------------------
David A. Widlak;
President and CEO
(Principal Executive Officer)
By: /S/ RAY T. COLONIUS
------------------------------------
Ray T. Colonius;
Treasurer
(Principal Financial and Accounting
Officer)
30
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1 Articles of Incorporation are incorporated by reference to Exhibit 3.1
of the Corporation's Registration Statement on Form SB-2 (SEC File No.
333-04113) which became effective on September 23, 1996
3.2 Bylaws of the Corporation are incorporated by reference to Exhibit 3.2
of the Corporation's Quarterly Report on Form 10-QSB filed with the
SEC for the quarter ended June 30, 2004 (SEC File No. 000-33373)
4.1 Specimen of Stock Certificate of Community Central Bank Corporation is
incorporated by reference to Exhibit 4.2 of the Corporation's
Registration Statement on Form SB-2 (SEC File No. 333-04113) which
became effective on September 23, 1996
10.1 1996 Employee Stock Option Plan is incorporated by reference to
Exhibit 10.1 of the Corporation's Registration Statement on Form SB-2
(SEC File No. 333-04113) which became effective September 23, 1996
10.2 1996 Stock Option Plan for Nonemployee Directors is incorporated by
reference to Exhibit 10.2 of the Corporation's Registration Statement
on Form SB-2 (SEC File No. 333-04113) which became effective September
23, 1996
10.3 1999 Stock Option Plan for Directors in incorporated by reference to
Exhibit 10.5 of the Corporation's Annual Report filed with the SEC on
Form 10-KSB for the year ended December 31, 1999 (SEC File No.
000-33373)
10.4 2000 Employee Stock Option Plan is incorporated by reference to
Exhibit 10.6 of the Corporation's Annual Report filed with the SEC on
Form 10-KSB for the year ended December 31, 2000 (SEC File No.
000-33373)
10.5 2002 Incentive Plan is incorporated by reference to Exhibit 10.7 of
the Corporation's Annual Report filed with the SEC on Form 10-KSB for
the year ended December 31, 2001 (SEC File No. 000-33373)
10.6 Community Central Bank Supplemental Executive Retirement Plan is
incorporated by reference to Exhibit 10.6 of the Corporation's
Quarterly Report on Form 10-QSB filed with the SEC for the quarter
ended June 20, 3003 (SEC File No. 000-33373)
10.7 Community Central Bank Death Benefit Plan is incorporated by reference
to Exhibit 10.7 of the Corporation's Quarterly Report on Form 10-QSB
filed with the SEC for the quarter ended June 20, 3003 (SEC File No.
000-33373)
10.8 Form of Incentive Stock Option Agreement incorporated by reference to
Exhibit 99.1 of the Corporation's Current Report on Form 8-K filed
with the SEC on March 25, 2005. (SEC File No. 000-33373)
10.9 Summary of Named Executive Officer Salary and Bonus Arrangements is
incorporated by reference to Exhibit 10.9 of the Corporation's Annual
Report filed with the SEC on Form 10-KSB for the year ended December
31, 2004. (SEC File No. 000-33373)
10.10 Summary of Current Director Fee Arrangements is incorporated by
reference to Exhibit 10.10 of the Corporation's Annual Report filed
with the SEC on Form 10-KSB for the year ended December 31, 2004. (SEC
File No. 000-33373)
11 Computation of Per Share Earnings
31.1 Rule 13a - 14(a) Certification (Chief Executive Officer)
31.2 Rule 13a - 14(a) Certification (Chief Financial Officer)
32 Rule 1350 Certifications