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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 September 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 September 30, 2003.
COUNTY BANK CORP
FORM 10-Q
For the Quarter ended September 30, 2003
PART I: FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets-At September 30, 2003 and December 31, 2002 4
Statements of Income-For the three months and nine months
ended September 30, 2003 and September 30, 2002 5
Statement of Cash Flows
For the nine months ended September 30, 2003 and
September 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)
September 30 December 31
2003 2002
ASSETS
Cash and due from banks $ 10,979 $ 14,401
Investment securities held to maturity 23,932 24,040
Investment securities available for sale 39,447 34,690
Other securities 541 541
-------- --------
Total investment securities 63,920 59,271
Federal funds sold 15,450 5,850
Loans 150,520 155,315
Less: Reserve for possible loan losses 2,160 2,165
-------- --------
Net loans 148,360 153,150
Bank premises and equipment 5,860 4,934
Interest receivable and other assets 2,923 2,710
-------- --------
TOTAL ASSETS $247,492 $240,316
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 41,323 $ 33,704
Interest bearing demand 60,189 66,809
Savings 54,798 50,215
Time 57,320 57,690
-------- --------
Total deposits 213,630 208,418
Interest payable and other liabilities 2,517 2,483
-------- --------
TOTAL LIABILITIES 216,147 210,901
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 14,500 12,595
Unrealized gains and losses on securities available for sale 2,279 2,254
-------- --------
TOTAL STOCKHOLDERS' EQUITY 31,345 29,415
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $247,492 $240,316
======== ========
4
CONSOLIDATED INCOME STATEMENTS (Unaudited) (Unaudited)
(in thousands) Three months ended Nine months ended
September 30 September 30
2003 2002 2003 2002
INTEREST INCOME
Interest and fees on loans $ 2,415 $ 2,690 $ 7,645 $ 7,928
Interest on investments: taxable 247 387 799 1,254
Interest on investments: nontaxable 359 349 1,049 1,048
Interest on Federal funds sold 42 21 126 94
--------- --------- --------- ---------
TOTAL INTEREST INCOME 3,063 3,447 9,619 10,324
INTEREST EXPENSE
Demand deposits 101 215 357 691
Savings deposits 100 169 341 505
Time deposits 459 562 1,445 1,755
--------- --------- --------- ---------
TOTAL INTEREST EXPENSE 660 946 2,143 2,951
--------- --------- --------- ---------
NET INTEREST INCOME 2,403 2,501 7,476 7,373
Provision for possible loan losses 5 20 35 130
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 2,398 2,481 7,441 7,243
OTHER INCOME
Service fees on loan and deposit accounts 301 310 887 878
Other 456 412 1,219 1,195
--------- --------- --------- ---------
TOTAL OTHER INCOME 757 722 2,106 2,073
OTHER EXPENSES
Salaries and employee benefits 1,266 1,168 3,711 3,403
Net occupancy expense 227 260 703 742
Other 536 493 1,528 1,474
--------- --------- --------- ---------
TOTAL OTHER EXPENSE 2,029 1,921 5,942 5,619
INCOME BEFORE PROVISION FOR FEDERAL
INCOME TAX 1,126 1,282 3,605 3,697
Provision for Federal income tax 257 307 847 882
--------- --------- --------- ---------
NET INCOME 869 975 2,758 2,815
========= ========= ========= =========
EARNINGS PER SHARE
Net income $ 0.73 $ 0.82 $ 2.32 $ 2.37
Cash dividend declared $ 0.24 $ 0.22 $ 0.72 $ 0.66
5
STATEMENT OF CASH FLOWS (Unaudited)
(in thousands) Nine months ended
September 30
2003 2002
Cash flows from operating activities
Net income $ 2,758 $ 2,815
Adjustments to reconcile net income to net cash
provided from operating activities
Depreciation 310 346
Provision for loan losses 35 130
Net amortization and accretion of securities 139 166
(Gain) loss on other real estate owned (31)
Net change in accrued interest receivable (265) (76)
Net change in accrued interest payable and other 21 390
-------- --------
Net cash provided by operating activities 2,998 3,740
Cash flows form investing activities
Proceeds from maturities of investment securities: AFS 11,357 10,949
Proceeds from maturities of investment securities: HTM 2,170 2,676
Purchase of investment securities: AFS (16,233) (10,112)
Purchase of investment securities: HTM (2,043) (1,043)
Net (increase) decrease in loans 4,755 (8,580)
Proceeds from the sale of other real estate 52 201
Premises and equipment expenditures
(1,236) (744)
-------- --------
Net cash provided from (used in) investing
activities (1,178) (6,653)
Cash flows from financing activities
Net increase (decrease) in interest bearing and
non-interest bearing demand accounts 999 (5,769)
Net increase (decrease) in savings and time
deposits 4,213 2,703
Cash dividends paid (854) (783)
-------- --------
Net cash provided from (used in) financing
activities 4,358 (3,849)
-------- --------
Net increase (decrease) in cash and equivalents 6,178 (6,762)
Cash and equivalents at beginning of year 20,251 19,933
-------- --------
Cash and equivalents at end of period $ 26,429 $ 13,171
======== ========
Cash paid for:
Interest $ 2,212 $ 3,046
Income taxes $ 905 $ 726
6
NOTE 1. INVESTMENTS
(in thousands)
The carrying amount and approximate market value of securities held to maturity
were as follows
September 30, 2003
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
Gains Losses Value
Obligations of states and political subdivisions $ 21,722 $ 1,626 $ 5 $ 23,343
Mortgage-backed securities 2,210 92 - 2,302
--------- -------- ----- ---------
Total $ 23,932 $ 1,718 $ 5 $ 25,645
========= ======== ===== =========
The carrying amount and approximate market value of securities held to maturity
were as follows
December 31,2002
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
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
September 30, 2003
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
Gains Losses Value
U.S. Government securities and obligations of
U.S. Government corporations and political $ 10,112 $ 24 $ 58 $ 10,078
Obligations of states and political subdivisions 10,207 593 49 10,751
Corporate securities 2,949 2,875 44 5,780
Mortgage-backed securities 12,725 200 87 12,838
--------- -------- ----- ---------
Total $ 35,993 $ 3,692 $ 238 $ 39,447
========= ======== ===== =========
The carrying amount and approximate market value of securities available for
sale were as follows
December 31,2002
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Market
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) 9/30/2003 12/31/2002
Commercial $ 78,651 $ 81,349
Real estate mortgage 37,641 37,265
Installment 24,450 20,413
Construction 9,778 16,288
--------- ---------
$ 150,520 $ 155,315
========= =========
Transactions in the reserve for possible loan losses were as follows for the
nine months ended September 30:
2003 2002
Beginning balance at beginning of period $ 2,165 $ 2,139
Provision charged to earnings 35 130
Loans charged off 66 83
Recoveries 26 15
-------- --------
Balance at end of the period $ 2,160 $ 2,201
======== ========
Reserve as a percent of total loans 1.44% 1.42%
Loans outstanding to executive officers, $ 4,110 $ 2,938
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 that the normal risk
of collectability
ITEM 2. MANAGEMENTS' DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Financial Condition
The Corporation experienced falling loan demand through the third quarter. Net
loans decreased $4,755,000 in the first nine months. New loan activity in
commercial loan categories did not replace commercial loan repayments. Mortgage
loan activity moderated as a result of stable to rising interest rates. The
demand for traditional consumer loans remained soft. Home equity lines of credit
increased, although some credit lines were rewritten in mortgage restructuring.
Savings deposits increased while interest bearing demand deposits decreased
during the first nine 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 shorten the 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.
Capital Resources
8
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 18.3 on September 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 completed a new
branch in Deerfield Township and is finalizing the modernization of its main
office facilities to support operations for the future.
Results of Operations
Stable then declining interest rates and loan repayments reduced 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 interest margin as
percent of average assets for the third quarter fell to 4.17% from 4.39% in the
second quarter of 2003. The interest spread declined from 4.32% to 4.14%.
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
continue 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 1.39% during
the third 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 $6,000 in the third quarter of 2003. Management ceased funding the
reserve for loan losses based on a strong ratio of loan loss reserve to total
loans and stable risk factors in the loan portfolio.
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
September 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
September 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 September 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
B) A form 8-K was filed on September 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
November 13, 2003
COUNTY BANK CORP
/s/Joseph H. Black
------------------
Joseph H. Black
Treasurer and Chief Financial Officer
14
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