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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Quarter ended June 30, 2003
Commission file number: 0-17482
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
--------- ---------
County Bank Corp
Michigan EIN 38-0746329
83 W. Nepessing St., Lapeer, MI 48446
(810) 664-2977
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding as of each of the issuer's classes of
common stock, as of the latest practicable date.
There are 1,186,472 shares of common stock outstanding as of June 30, 2003
COUNTY BANK CORP
FORM 10-Q
For the Quarter ended June 30, 2003
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets-
At June 30, 2003 and December 31, 2002 4
Statements of Income-
For the three months and six months ended June 30, 2003 and June 30, 2002 5
Statement of Cash Flows
For the six months ended June 30, 2003 and June 30, 2002 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and the Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
Item 4. Controls and Procedures 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports of Form 8-K 10
All items except those set forth above are inapplicable and have been omitted.
SIGNATURES 14
This report includes forward-looking statements within the meaning of section
27a of the Securities Act of 1933, as amended, which involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Those factors
include the economic environment, competition, products and pricing in the
geographic area and business areas in which County Bank Corp (the Corporation)
operates, prevailing interest rates, changes in government regulations and
policies affecting financial services companies, credit quality and credit risk
management, changes in the banking industry including the effects of
consolidation resulting form possible mergers of financial institutions,
acquisitions and integration of acquired businesses. The Corporation undertakes
no obligation to release revisions to these forward-looking statements or
reflect events or circumstances after the date of this report.
2
Part I - Financial Information
Item I - Financial Statements
Introduction to Financial Statements
The consolidated financial statements of County Bank Corp and subsidiary, Lapeer
County Bank & Trust Co., have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with financial statements and the notes thereto included in
County Bank Corp's Form 10-K as filed with the Securities and Exchange
Commission for the year ended December 31, 2002.
The financial information presented reflects all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods presented. The
results for interim periods are not necessarily indicative of the results to be
expected for the year.
Critical Accounting Policies
The nature of the financial services industry is such that, other than described
below, the use of estimates and management judgment are not likely to present a
material risk to the financial statements. In cases where estimates or
management judgment are required, internal controls and processes are
established to provide assurance that such estimates and management judgments
are materially correct to the best of management's knowledge.
Allowance for Loan Losses. Accounting for loan classifications, accrual status,
and determination of the allowance for loan losses is based on regulatory
guidance. This guidance includes, but is not limited to, generally accepted
accounting principles, the uniform retail credit classification and joint policy
statement on the allowance for loan losses methodologies issued by the Federal
Financial Institutions Council. Accordingly, the allowance for loan losses
includes a reserve calculation based on an evaluation of loans determined to be
impaired, risk ratings, historical losses, loans past due, and other subjective
factors.
3
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS (in thousands)
(Unaudited)
June 30 December 31
2003 2002
ASSETS
Cash and due from banks $ 11,836 $ 14,401
Investment securities held to maturity 24,437 24,040
Investment securities available for sale 36,587 34,690
Other securities 541 541
---------- ----------
Total investment securities 61,565 59,271
Federal funds sold 12,250 5,850
Loans 154,107 155,315
Less: Reserve for possible loan losses 2,161 2,165
---------- ----------
Net loans 151,946 153,150
Bank premises and equipment 5,453 4,934
Interest receivable and other assets 2,739 2,710
---------- ----------
TOTAL ASSETS $ 245,789 $ 240,316
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 39,799 $ 33,704
Interest bearing demand 60,786 66,809
Savings 54,232 50,215
Time 57,144 57,690
---------- ----------
Total deposits 211,961 208,418
Interest payable and other liabilities 2,778 2,483
---------- ----------
TOTAL LIABILITIES 214,739 210,901
STOCKHOLDERS' EQUITY
Common Stock-$5.00 par value, 3,000,000 shares
authorized and 1,186,472 shares outstanding 5,932 5,932
Surplus 8,634 8,634
Undivided profits 13,916 12,595
Unrealized gains and losses on securities available
for sale 2,568 2,254
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 31,050 29,415
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 245,789 $ 240,316
========== ==========
4
CONSOLIDATED INCOME STATEMENTS
(in thousands)
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30 June 30
2003 2002 2003 2002
INTEREST INCOME
Interest and fees on loans $ 2,590 $ 2,636 $ 5,230 $ 5,238
Interest on investments: taxable 264 444 552 867
Interest on investments: nontaxable 344 348 690 699
Interest on Federal funds sold 51 45 84 73
--------- --------- --------- ---------
TOTAL INTEREST INCOME 3,249 3,473 6,556 6,877
INTEREST EXPENSE
Demand deposits 122 236 256 476
Savings deposits 124 174 241 336
Time deposits 482 582 986 1,193
Interest on Federal funds purchased
TOTAL INTEREST EXPENSE 728 992 1,483 2,005
--------- --------- --------- ---------
NET INTEREST INCOME 2,521 2,481 5,073 4,872
Provision for possible loan losses 15 50 30 110
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 2,506 2,431 5,043 4,762
OTHER INCOME
Service fees on loan and deposit accounts 292 290 586 568
Other 399 404 763 783
--------- --------- --------- ---------
TOTAL OTHER INCOME 691 694 1,349 1,351
OTHER EXPENSES
Salaries and employee benefits 1,229 1,124 2,445 2,235
Net occupancy expense 235 240 476 482
Other 508 536 992 981
--------- --------- --------- ---------
TOTAL OTHER EXPENSE 1,972 1,900 3,913 3,698
INCOME BEFORE PROVISION FOR FEDERAL
INCOME TAX 1,225 1,225 2,479 2,415
Provision for Federal income tax 290 292 590 575
--------- --------- --------- ---------
NET INCOME 935 933 1,889 1,840
========= ========= ========= =========
EARNINGS PER SHARE
Net income $ 0.79 $ 0.79 $ 1.59 $ 1.55
Cash dividend declared $ 0.24 $ 0.22 $ 0.48 $ 0.44
5
STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
June 30
2003 2002
Cash flows from operating activities
Net income $ 1,889 $ 1,840
Adjustments to reconcile net income to net cash
provided from operating activities
Depreciation 206 230
Provision for loan losses 30 110
Net amortization and accretion of securities 121 111
Deferred income taxes - -
Net gain on sale of investment securities - -
Gain on other real estate owned - (31)
Net change in accrued interest receivable (81) (133)
Net change in accrued interest payable and other 134 (20)
--------- ---------
Net cash provided by operating activities 2,299 2,107
Cash flows form investing activities
Proceeds from calls of investment securities: AFS 2,097 2,552
Proceeds from maturities of investment securities: AFS 3,986 2,000
Proceeds from calls of investment securities: HTM 513 652
Proceeds from maturities of investment securities: HTM 1,116 1,497
Purchase of investment securities: AFS (7,608) (8,032)
Purchase of investment securities: HTM (2,043) (601)
Net (increase) decrease in loans 1,174 (4,549)
Proceeds from the sale of other real estate 52 201
Premises and equipment expenditures (725) (418)
--------- ---------
Net cash used in investing activities (1,438) (6,698)
Cash flows from financing activities
Net increase in interest bearing and
non-interest bearing demand accounts 72 84
Net increase in savings and time deposits 3,471 2,015
Cash dividends paid (569) (522)
--------- ---------
Net cash provided by financing activities 2,974 1,577
--------- ---------
Net increase (decrease) in cash and equivalents 3,835 (3,014)
Cash and equivalents at beginning of year 20,251 19,933
--------- ---------
Cash and equivalents at end of period $ 24,086 $ 16,919
========= =========
Cash paid for:
Interest $ 1,520 $ 2,064
Income taxes $ 634 $ 632
6
NOTE 1. INVESTMENTS
(in thousands)
The carrying amount and approximate market value of securities held to maturity
were as follows
June 30, 2003
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Obligations of states and political subdivisions $ 21,981 $ 1,626 $ 5 $ 23,602
Mortgage-backed securities 2,456 92 - 2,548
---------- --------- -------- ---------
Total $ 24,437 $ 1,718 $ 5 $ 26,150
========== ========= ======== =========
The carrying amount and approximate market value of securities held to maturity
were as follows
December 31, 2002
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Obligations of states and political subdivisions $ 21,224 $ 1,339 $ 5 $ 22,558
Mortgage-backed securities 2,816 88 - 2,904
---------- --------- -------- ---------
Total $ 24,040 $ 1,427 $ 5 $ 25,462
========== ========= ======== =========
The carrying amount and approximate market value of securities available for
sale were as follows
June 30, 2003
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government securities and obligations of
U.S. Government corporations and political
subdivisions $ 7,268 $ 89 $ - $ 7,357
Obligations of states and political subdivisions 8,464 726 - 9,190
Corporate securities 2,957 2,889 53 5,793
Mortgage-backed securities 14,007 278 38 14,247
---------- --------- -------- ---------
Total $ 32,696 $ 3,982 $ 91 $ 36,587
========== ========= ======== =========
The carrying amount and approximate market value of securities available for
sale were as follows
December 31, 2002
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Government securities and obligations of
U.S. Government corporations and political
subdivisions $ 6,008 $ 70 $ 1 $ 6,077
Obligations of states and political subdivisions 7,605 505 1 8,109
Corporate securities 2,974 2,584 - 5,558
Mortgage-backed securities 14,688 327 69 14,946
---------- --------- -------- ---------
Total $ 31,275 $ 3,486 $ 71 $ 34,690
========== ========= ======== =========
7
NOTE 2. LOANS
(in thousands)
6/30/03 12/31/02
Commercial $ 82,398 $ 81,349
Real estate mortgage 40,339 37,265
Installment 22,394 20,413
Construction 8,976 16,288
--------- ---------
$ 154,107 $ 155,315
========= =========
Transactions in the reserve for possible loan losses were as follows for the six
months ended June 30:
2003 2002
Beginning balance at beginning of period $ 2,165 $ 2,139
Provision charged to earnings 30 110
Loans charged off 52 52
Recoveries 18 5
--------- ---------
Balance at end of the period $ 2,161 $ 2,202
========= =========
Reserve as a percent of total loans 1.40% 1.42%
Loans outstanding to executive officers, directors,
principal shareholders and their related companies.
In the opinion of management, such loans were made
on the same terms and conditions as those to other
borrowers and did not involve more than the normal
risk of collectability $ 4,356 $ 3,188
ITEM 2. MANAGEMENTS' DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Financial Condition
The Corporation experienced moderate loan demand through the second quarter. Net
loans decreased $1,174,000 in the first six months. New loan activity was mild
in commercial loan categories and did not replace commercial loan repayments.
Mortgage loan activity remained strong as a result of low interest rates, but
most of the eligible loans were sold in the secondary market. The demand for
traditional consumer loans remained soft. Home equity lines of credit increased,
although many credit lines were rewritten in mortgage restructuring.
Savings deposits increased while interest bearing demand deposits decreased
during the first six months of the year. Our Choice product, which offers a
short term market rate with check writing privileges declined due to continued
low rates. Balances in non-interest bearing demand accounts increased. Deposit
customers are waiting for increases in deposit rates and continue to seek the
safety of principal.
Activity in the investment portfolio increased as loan demand moderated. Cash
flow from mortgage backed securities increased as a result of low interest rates
and the refinancing activity. Municipal investments increased as bonds were
purchased with shorter maturities to obtain yield yet a shorter duration of the
portfolio. The Corporation is shortening its securities investment targets in
anticipation of rising rates. The Corporation continues to seek investment
opportunities to supplement income but remain liquid enough to meet loan demand.
8
Capital Resources
The Corporation paid a quarterly dividend of $.24 per share during the first and
second quarters. Strong capital ratios in excess of regulatory requirements
enabled the Board of Directors to take this action. The Corporation's tier one
risk-based capital ratio was 18.0 on June 30, 2003 after payment of the
dividends. Financial institutions are adequately capitalized if this ratio
exceeds 4.0% and well capitalized if the ratio exceeds 6.0%. The primary use of
the Corporation's capital is to support growth. The Corporation is remodeling
and modernizing its main office facilities and building a new branch in
Deerfield Township to support operations for the future.
Results of Operations
Stable then declining interest rates created challenges for the Bank's interest
margin. The Bank's asset and liability repricing opportunities are closely
matched over the short term. Pressure builds from loan customers seeking to lock
interest rates for longer terms and deposit customers are more sensitive to
competitor's interest rate offerings. The quarterly FTE return on average assets
for the second quarter fell to 4.39% from 4.53% in the first quarter of 2003.
The interest spread declined from 4.46% to 4.32%. Management anticipates that
the Federal Reserve Bank will make few changes to interest rates in the next few
quarters and pressure on the interest margin will increase as more assets
reprice at a lower return. Loan rates are carefully negotiated to maintain
margin, particularly when fixed rate financing is requested. Other income and
other expense categories performed at the comparable levels to previous years.
The Bank's return on average assets was 1.51% during the second quarter.
Provision for Possible Loan Losses
Management realizes that loan losses cannot be predicted with absolute
certainty. The Corporation adheres to a loan review procedure that identifies
loans that may develop into problem credits. The adequacy of the reserve for
possible loan losses is evaluated against the listings that result from the
review procedure, historical net loan loss experience, current and projected
loan volumes, the level and composition of non-accrual, past due and
renegotiated or reduced rate loans, current and anticipated economic conditions
and an evaluation of each borrower's credit worthiness. Based on these factors,
management determines the amount of the provision for possible loan losses
needed to maintain an adequate reserve for possible loan losses. The amount of
the provision for possible loan losses is recorded as current expense and may be
greater or less than the actual net charged off loans.
Activity related to the reserve for loan losses resulted in net charged off
loans of $26,000 in the second quarter of 2003. Management continues to fund the
reserve for loan losses based on deteriorating economic conditions in the
immediate market area related to the slow down in the automobile industry.
Higher losses and delinquency ratios are anticipated, although they are not
expected to become unmanageable.
Liquidity
There were no significant changes to the Corporation's liquidity risk during the
quarter. Liquidity is required to meet loan demand and pay dividends to
shareholders. The Corporation maintains sufficient liquidity in Federal Funds
Sold to meet normal liquidity demands. The Corporation maintains an available
for sale portfolio of U.S. Government bonds and U.S. Government Sponsored Agency
bonds as additional insurance against liquidity risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation reported market risk detail in its 10-K filing for the year
ended December 31, 2002. There have been no events or changes to the
Corporations' assets and liabilities that significantly alter those risk
disclosures.
9
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of June 30, 2003,
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II.
ITEM 1. LEGAL PROCEEDINGS
The Corporation from time to time is involved in legal proceedings arising in
the ordinary course of business, which in aggregate involve amounts that are
believed by management to be immaterial to the financial condition of the
Corporation. The Corporation is not currently involved in legal proceedings that
are of a material nature.
ITEM 6. EXHIBITS AN REPORTS OF FORM 8-K
A) Exhibits
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302
EX-31.2 Certification of Chief Financial Officer Pursuant to Section 302
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
B) A form 8-K was filed on June 2, 2003 in response to regulation FD
containing a press release relative to the payment of the second quarter
dividend.
10
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
August 13, 2003
COUNTY BANK CORP
/s/Joseph H. Black
------------------
Joseph H. Black
Treasurer and Chief Financial Officer
11
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Chief Executive Officer pursuant to Section 302
EX-31.2 Certification of Chief Financial Officer Pursuant to Section 302
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002