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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 10 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
Commission files 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 38-0746239
83 W. Nepessing St. Lapeer, MI 48446
(810) 664-2977
Securities registered pursuant to section 12(b) of the act: none
Securities registered pursuant to 12(g) of the Act:
3,000,000 shares, common stock, $5.00 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. { X }
Indicate by check mark whether the registrant is an accelerated filer (as
defined by rule 12b-2 of the act).
Yes[ ] No [X]
As of June 30, 2003, the aggregate market value of the voting shares of stock
held by nonaffiliates of the registrant was $56,945,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
There are 1,186,472 shares of common stock ($5.00 par value) outstanding as of
December 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Shareholders, December 31, 2003, Part I, Part II.
Proxy statement dated March 26, 2004, Part III.
Form 10-K
COUNTY BANK CORP
TABLE OF CONTENTS
Form 10-K Items PAGE
- ------------------------------------------------------------------------------------------------------------------------
Item 1. Business 1-16
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 17-20
Item 7a.. Quantitative and Qualitative Disclosures About Market Risk 20-21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Disagreements on Accounting and Financial Disclosure 21
Item 9A. Controls and Procedures 21-22
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23-24
Item 13. Certain Relationships and Related Transactions 24
Item 14. Principal Accountant Fees and Services 24
Item 15. Exhibits, Financial Schedules and Reports on Form 8-K 24
Signatures and Certifications 25
Total Pages: 38
Statements contained in this portion of the Company's annual report may be
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be identified by
the use of such words as "intend," "believe," "expect," "anticipate," "should,"
"planned," "estimated," and "potential." Such forward-looking statements are
based on current expectations, but may differ materially from those currently
anticipated due to a number of factors, which include, but are not limited to,
factors discussed in documents filed by the Company with the Securities and
Exchange Commission from time to time. Other factors which could have a material
adverse effect on the operations of the company and its subsidiaries which
include, but are not limited to, changes in interest rates, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality and
2
composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Bank's market
area, changes in relevant accounting principles and guidelines and other factors
over which management has no control. The forward-looking statements are made as
of the date of this report, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
Part I
ITEM 1. BUSINESS
GENERAL
County Bank Corp, a one bank holding company, was formed on January 3, 1989 by
converting and exchanging, except for the shares of dissenting stockholders,
each share of Lapeer County Bank & Trust Co. (the Bank) into one share of County
Bank Corp (the Corporation). As a result, the Corporation became the sole
stockholder and parent of the Bank.
The Bank was chartered in 1902, is headquartered in Lapeer, MI, and serves all
of Lapeer County (the County) and portions of surrounding counties. Lapeer has
an approximate population of 9,100 people while the County has in excess of
90,000 people. Lapeer is located 60 miles north of metropolitan Detroit, the
largest city in Michigan, 30 miles north of Pontiac, MI, and 20 miles east of
Flint, MI.
The Corporation serves the County through the subsidiary Bank at eight
locations. The main office is located at 83 W. Nepessing St., in downtown
Lapeer. A drive through location is located at the corner of Pine St. and Clay
St. across the street from the main office. A full service office is located in
the south end of Lapeer at 637 south M-24. Attica Township is served by a full
service office located at 4515 Imlay City Rd. Full service offices are located
in Elba Township at 5508 Davison Road and in Metamora Township on M-24, south of
Lapeer. A full service office serves the City of Imlay City at 1875 S. Cedar
St., Imlay City, MI. A full service branch is located at the corner of M-24 and
Burnside Road in Deerfield Township. One automated teller machine (ATM) is
located in Lapeer Regional Hospital, 1375 N. Main St., Lapeer. One cash
dispensing machine is located the lobby of Lapeer Cinemas at 1650 Demille Rd.,
Lapeer, MI. One ATM is located in the Whistle Stop Party Store at 3670 North
Branch Rd., North Branch, MI.
The Corporation grew moderately during 2003. Total assets grew to $248,622,000
on December 31, 2003, while total deposits grew to $214,971,000. Total assets
grew 3.5% while total deposits grew 3.1%. These numbers were similar to the
previous year. The Federal Reserve Board lowered interest rates 25 basis points
one time during 2003 after lowering rates 50 basis points one time in 2002 and
eleven times during 2001. Customers responded to the lower rate volatility by
choosing more traditional savings deposit categories. The Corporation expects
moderate growth through 2004.
The Corporation offers commercial banking services through the Bank at the main
office and the six branches throughout the County. The customer base extends to
all sections of the County and includes all segments of the population,
including individuals, retail businesses, farming operations, and industrial
plants. This locally owned full service Bank offers commercial and personal
checking, savings and time deposit services; the Bank offers commercial and
industrial loans, real estate mortgages and consumer loans. The trust
department, with full trust powers, is in its fifth decade of providing
customers with employee benefit plans, estate planning services, and complete
trust services.
The Corporation faces substantial competition for financial services. The chief
competitor is National City Bank of Michigan/Illinois. National City operates
branches throughout the County. Independent Bank Corp. of Ionia, MI operates
four branch locations in the Bank's market area after recently expanding a loan
production office to a full service branch. Bank One operates an office north of
the city limits of Lapeer. Tri-County Bank has offices in Imlay City and Almont.
CSB Bank of Capac has an office in Imlay City. Oxford Bank operates a branch in
Dryden. There are two full service branches and one loan production office of
Citizen's Federal Savings Bank in the County. Two credit unions, Lapeer County
School
3
Employees Credit Union and The Lapeer County Community Credit Union, which
operates offices in Lapeer and Imlay City, serve the County. There are two
securities brokers Fahnestock & Co., Inc. and Edward D. Jones & Co. A number of
other securities brokers serve the County through Flint offices. Comerica Bank
operates a Comerimart branch in a local grocery store. The local telephone book
lists twelve financial planners and thirty three mortgage brokers, an increase
of thirteen listings..
SUPERVISION AND REGULATION
INTRODUCTION
The Corporation and its banking subsidiary are subject to extensive regulation
by federal and state agencies. The regulation of bank holding companies and
their subsidiaries is intended primarily for the protection of depositors,
federal deposit insurance funds and the banking system as a whole and not for
the protection of security holders.
As discussed in more detail below, this regulatory environment, among other
things, may restrict The Corporation's ability to diversify into certain areas
of financial services, acquire depository institutions in certain states and pay
dividends on its capital stock. It may also require The Corporation to provide
financial support to its banking subsidiary, maintain capital balances in excess
of those desired by management and pay higher deposit insurance premiums as a
result of the deterioration in the financial condition of depository
institutions in general.
REGULATORY AGENCIES
Holding Company. The Corporation, as a bank holding company, is subject to
regulation under the Bank Holding Company Act of 1956 (BHCA), as amended, and to
inspection, examination and supervision by the Board of Governors of the Federal
Reserve System under the BHCA.
Subsidiary Bank. The Corporation's banking subsidiary is subject to regulation
and examination primarily by the Michigan Office of Financial and Insurance
Services and the Federal Reserve Board and secondarily by the Federal Deposit
Insurance Corporation (FDIC).
Securities and Exchange Commission (SEC). The Corporation is also under the
jurisdiction of the SEC and certain state securities commissions for matters
relating to the offering and sale of its securities. The Corporation is subject
to the disclosure and regulatory requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as administered by
the SEC.
BANK HOLDING COMPANY ACTIVITIES
Interstate Banking. Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal Act"), as amended, a bank holding company
may acquire banks in states other than its home state, subject to any state
requirement that the bank has been organized and operating for a minimum period
of time, not to exceed five years, and the requirement that the bank holding
company not control, prior to or following the proposed acquisition, more than
10% of the total amount of deposits of insured depository institutions
nationwide or, unless the acquisition is the bank holding company's initial
entry into the state, more than 30% of such deposits in the state, or such
lesser or greater amount set by the state.
The Riegle-Neal Act also authorizes banks to merge across state lines, thereby
creating interstate branches. States were permitted for a period of time to opt
out of the interstate merger authority provided by the Riegle-Neal Act and, by
doing so, prohibit interstate mergers in the state. The Corporation will be
unable to consolidate its banking operations in one state with those of another
state if either state in question has opted out of the Riegle-Neal Act.
Banks are also permitted to acquire and to establish de novo branches in other
states where authorized under the laws of those states.
Regulatory Approval. In determining whether to approve a proposed bank
acquisition, federal banking regulators will consider, among other factors, the
effect of the acquisition on competition, the public benefits expected to be
received from the acquisition, the projected capital ratios and levels on a
post-
4
acquisition basis, and the acquiring institution's record of addressing the
credit needs of the communities it serves, including the needs of low and
moderate income neighborhoods, consistent with the safe and sound operation of
the bank, under the Community Reinvestment Act of 1977.
DIVIDEND RESTRICTIONS
The Corporation is a legal entity separate and distinct from its subsidiary bank
and other subsidiaries. Its principal source of funds to pay dividends on its
common and preferred stock and debt service on its debt is dividends from its
subsidiaries, primarily Lapeer County Bank & Trust Co. Various federal and state
statutory provisions and regulations limit the amount of dividends that Lapeer
County Bank & Trust Co may pay without regulatory approval. Dividends payable by
a state chartered bank are limited to the lesser of the bank's undivided profits
and the bank's retained net income for the current year plus its retained net
income for the preceding two years (less any required transfers to capital
surplus) up to the date of any dividend declaration in the current calendar
year.
Federal bank regulatory agencies have the authority to prohibit Lapeer County
Bank & Trust Co from engaging in unsafe or unsound practices in conducting its
business. The payment of dividends, depending on the financial condition of the
bank, could be deemed an unsafe or unsound practice. The ability of Lapeer
County Bank & Trust Co to pay dividends in the future is currently influenced,
and could be further influenced, by bank regulatory policies and capital
guidelines.
HOLDING COMPANY STRUCTURE
Transfer of Funds from Banking Subsidiary. The Corporation's banking subsidiary
is subject to restrictions under federal law that limit the transfer of funds or
other items of value from this subsidiary to The Corporation, including
affiliates, whether in the form of loans and other extensions of credit,
investments and asset purchases or as other transactions involving the transfer
of value from a subsidiary to an affiliate or for the benefit of an affiliate.
Unless an exemption applies, these transactions by a banking subsidiary with a
single affiliate are limited to 10% of the subsidiary bank's capital and surplus
and, with respect to all covered transactions with affiliates in the aggregate,
to 20% of the subsidiary bank's capital and surplus. Moreover, loans and
extensions of credit to affiliates generally are required to be secured in
specified amounts. A bank's transactions with its non-bank affiliates are also
generally required to be on arm's-length terms.
Source of Strength Doctrine. Under current Federal Reserve Board policy, The
Corporation is expected to act as a source of financial and managerial strength
to its subsidiary bank and, under appropriate circumstances, to commit resources
to support such subsidiary bank. This support could be required at times when
The Corporation might not have the resources to provide it.
Capital loans from The Corporation to its subsidiary bank are subordinate in
right of payment to deposits and certain other indebtedness of the subsidiary
bank. In the event of The Corporation's bankruptcy, any commitment by The
Corporation to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Depositor Preference. The Federal Deposit Insurance Act provides that, in the
event of the "liquidation or other resolution" of an insured depository
institution, the claims of depositors of the institution, including the claims
of the FDIC as subrogee of insured depositors, and certain claims for
administrative expenses of the FDIC as a receiver, will have priority over other
general unsecured claims against the institution. If an insured depository
institution fails, insured and uninsured depositors, along with the FDIC, will
have priority in payment ahead of unsecured, non-deposit creditors, including
The Corporation, with respect to any extensions of credit they have made to such
insured depository institution.
CAPITAL REQUIREMENTS
General. The Corporation is subject to risk-based capital requirements and
guidelines imposed by the Federal Reserve Board. These are substantially similar
to the capital requirements and guidelines imposed by the Office of the
Comptroller of Currency (OCC) and the FDIC on the depository institutions under
their jurisdictions. For this purpose, a depository institution's or holding
company's assets, and some of its
5
specified off-balance sheet commitments and obligations, are assigned to various
risk categories. A depository institution's or holding company's capital, in
turn, is classified in one of three tiers, depending on type:
CORE ("TIER 1") CAPITAL
- Common equity
- Retained earnings
- Qualifying non-cumulative perpetual preferred stock
- A limited amount of qualifying cumulative perpetual stock at the holding
company level
- Minority interests in equity accounts of consolidated subsidiaries
- Less goodwill, most intangible assets and certain other assets
SUPPLEMENTARY ("TIER 2") CAPITAL
- Perpetual preferred stock not meeting the Tier 1 definition
- Qualifying mandatory convertible securities
- Qualifying subordinated debt
- Allowances for loan and lease losses, subject to limitations
- Recourse obligation on sold loan portfolios
MARKET RISK ("TIER 3") CAPITAL
- Qualifying unsecured subordinated debt
The Corporation, like other bank holding companies, currently is required to
maintain Tier 1 capital and "total capital" (the sum of Tier 1, Tier 2 and Tier
3 capital) equal to at least 4% and 8%, respectively, of its total risk-weighted
assets (including various off-balance-sheet items, such as standby letters of
credit). For a holding company to be considered "well capitalized" for
regulatory purposes, its Tier 1 and total capital ratios must be 6% and 10% on a
risk-adjusted basis, respectively. At December 31, 2003, The Corporation met
both requirements, with Tier 1 and total capital equal to 17.5% and 19.5% of its
respective total risk-weighted assets.
Federal Reserve Board, FDIC and state rules require The Corporation to
incorporate market and interest rate risk components into its risk-based capital
standards. Under these market risk requirements, capital is allocated to support
the amount of market risk related to a financial institution's ongoing trading
activities.
The Federal Reserve Board also requires bank holding companies to maintain a
minimum "leverage ratio" (Tier 1 capital to adjusted total assets) of 3% if the
holding company has the highest regulatory rating and meets other requirements,
or of 3% plus an additional "cushion" of at least 100 to 200 basis points (one
to two percentage points) if the holding company does not meet these
requirements. The Corporation's leverage ratio at December 31, 2003 was 11.8%.
The Federal Reserve Board may set capital requirements higher than the minimums
described above for holding companies whose circumstances warrant it. For
example, holding companies experiencing or anticipating significant growth may
be expected to maintain capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets. The
Federal Reserve Board has also indicated that it will consider a "tangible Tier
1 capital leverage ratio" (deducting all intangibles) and other indications of
capital strength in evaluating proposals for expansion or new activities.
6
Lapeer County Bank & Trust Co is subject to similar risk-based and leverage
capital requirements adopted by the Federal Reserve Board. The Corporation's
management believes that Lapeer County Bank & Trust Co meets all capital
requirements to which it is subject.
Failure to meet capital requirements could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to restrictions on its business, which are described under the next
paragraph.
Federal Deposit Insurance Corporation Improvement Act of 1991. The Federal
Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), among
other things, identifies five capital categories for insured depository
institutions: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. It requires U.S.
federal bank regulatory agencies to implement systems for "prompt corrective
action" for insured depository institutions that do not meet minimum capital
requirements based on these categories. The FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Unless a bank
is well capitalized, it is subject to restrictions on its ability to offer
brokered deposits and on other aspects of its operations. The FDICIA generally
prohibits a bank from paying any dividend or making any capital distribution or
paying any management fee to its holding company if the bank would thereafter be
undercapitalized. An undercapitalized bank must develop a capital restoration
plan, and its parent holding company must guarantee the bank's compliance with
the plan up to the lesser of 5% of the bank's assets at the time it became
undercapitalized and the amount needed to comply with the plan.
As of December 31, 2003, The Corporation believes that its bank subsidiary was
well capitalized, based on the prompt corrective action ratios and guidelines
described above. A bank's capital category is determined solely for the purpose
of applying the prompt corrective action regulations, and the capital category
may not constitute an accurate representation of the bank's overall financial
condition or prospects for other purposes.
DEPOSIT INSURANCE ASSESSMENTS
The FDIC insures the deposits of The Corporation's depository institution
subsidiary up to prescribed limits for each depositor. The amount of FDIC
assessments paid by each Bank Insurance Fund (BIF) member institution is based
on its relative risk of default as measured by regulatory capital ratios and
other factors. Specifically, the assessment rate is based on the institution's
capitalization risk category and supervisory subgroup category. An institution's
capitalization risk category is based on the FDIC's determination of whether the
institution is well capitalized, adequately capitalized or less than adequately
capitalized. An institution's supervisory subgroup category is based on the
FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
The FDIC may increase or decrease the assessment rate schedule on a semi-annual
basis. An increase in the assessment rate could have a material adverse effect
on The Corporation's earnings, depending on the amount of the increase. The FDIC
is authorized to terminate a depository institution's deposit insurance upon a
finding by the FDIC that the institution's financial condition is unsafe or
unsound or that the institution has engaged in unsafe or unsound practices or
has violated any applicable rule, regulation, order or condition enacted or
imposed by the institution's regulatory agency. The termination of deposit
insurance for Lapeer County Bank & Trust Co. could have a material adverse
effect on The Corporation's earnings, depending on the collective size of the
particular institutions involved.
FISCAL AND MONETARY POLICIES
The Corporation's business and earnings are affected significantly by the fiscal
and monetary policies of the federal government and its agencies. The
Corporation is particularly affected by the policies of the Federal Reserve
Board, which regulates the supply of money and credit in the United States.
Among the instruments of monetary policy available to the Federal Reserve are
(a) conducting open market operations in United States government securities,
(b) changing the discount rates of borrowings of depository institutions, (c)
imposing or changing reserve requirements against depository institutions'
deposits, and (d)
7
imposing or changing reserve requirements against certain borrowing by banks and
their affiliates. These methods are used in varying degrees and combinations to
affect directly the availability of bank loans and deposits, as well as the
interest rates charged on loans and paid on deposits. For that reason alone, the
policies of the Federal Reserve Board have a material effect on the earnings of
The Corporation.
PRIVACY PROVISIONS OF GRAMM-LEACH-BLILEY ACT
Under Gramm-Leach-Bliley Act (GLB Act) federal banking regulators adopted rules
that limit the ability of banks and other financial institutions to disclose
non-public information about consumers to non-affiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal
information to non-affiliated third parties. The privacy provisions of the GLB
Act affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.
FUTURE LEGISLATION
Various legislation, including proposals to change substantially the financial
institution regulatory system and to expand or contract the powers of banking
institutions and bank holding companies, is from time to time introduced in
Congress. This legislation may change banking statutes and the operating
environment of The Corporation and its subsidiaries in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities or affect the
competitive balance among banks, savings associations, credit unions and other
financial institutions. The Corporation cannot predict whether any of this
potential legislation will be enacted, and if enacted, the effect that it, or
any implemented regulations, would have on the financial condition or results of
operations of The Corporation or any of its subsidiaries.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002,
which contains important new requirements for public companies in the area of
financial disclosure and corporate governance. In accordance with section 302(a)
of the Sarbanes-Oxley Act, written certifications by The Corporation's Chief
Executive Officer and Chief Financial Officer are required. These certifications
attest that The Corporation's quarterly and annual reports filed with the SEC do
not contain any untrue statement of a material fact. In response to the
Sarbanes-Oxley Act of 2002, The Corporation adopted a series of procedures to
improve its already strong corporate governance practices. One of these actions
included the formation of a Financial Disclosure Committee whose members include
the Chief Executive Officer, the Chief Financial Officer and other The
Corporation officers. The Corporation also requires signed certifications from
managers who are responsible for internal controls throughout The Corporation as
to the integrity of the information they prepare. These procedures supplement
The Corporation's Code of Ethics policies and procedures that have previously
been in place. See Item 9(a) "Evaluation of Disclosure Controls and Procedures"
for The Corporation's evaluation of its disclosure controls and procedures.
To the extent that the previous information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the full text of
those provisions. Also, such statutes, regulations and policies are continually
under review by Congress and state legislatures and federal and state regulatory
agencies. A change in statutes, regulations or regulatory policies applicable to
The Corporation could have a material effect on the business of The Corporation.
EMPLOYEES
The number of full time equivalent employees totaled 122 and 116 on December 31,
2003 and 2002, respectively.
AVAILABLE INFORMATION:
The Company files reports with the Securities and Exchange Commission (SEC).
Copies of all filings made with the SEC may be read and copied at the SEC's
Public Reference Room, 450 Fifth Street, Washington, DC, 20549. You may obtain
information about the SEC's Public Reference Room by calling
8
(800/SEC-0330). Because the Company makes its filings with the SEC
electronically, you may access such reports at the SEC's website, www.sec.gov.
The Company makes available, free of charge copies of its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to these reports as soon as reasonably practicable after such
materials have been filed with or furnished to the SEC. Copies of these
documents may be obtained, by contacting Joseph H. Black, Chief Financial
Officer of the Company at P.O. Box 250, Lapeer, MI 48446.
9
Guide 3. Statistical disclosures:
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest (000's)
Table I. Average Assets (000's) Income (000's) Yield (%)
Interest margin analysis as a % of average
earning assets 2003 2002 2001 2003 2002 2001 2003 2002 2001
Assets
Securities:
US Gov't & agencies $ 23,795 $ 28,271 $ 30,394 $ 882 $ 1,379 $ 1,864 3.7% 4.9% 6.1%
State and political subdivisions* 30,865 29,451 27,305 2,126 2,133 2,030 6.9% 7.2% 7.4%
Other securities 6,462 5,614 3,036 207 238 82 3.2% 4.2% 2.7%
-------- -------- -------- -------- -------- -------- --- --- ---
Total investment securities 61,122 63,336 60,735 3,215 3,750 3,976 5.3% 6.6% 6.5%
Federal funds sold 14,196 7,300 8,326 151 117 312 1.1% 1.6% 3.7%
Loans:
Commercial loans* 97,389 93,008 83,129 6,312 6,433 6,842 6.5% 6.9% 8.2%
Real estate mortgages 27,422 25,844 28,255 1,752 1,963 2,294 6.4% 7.6% 8.1%
Consumer loans 30,197 29,579 27,716 2,047 2,293 2,369 6.8% 7.8% 8.5%
-------- -------- -------- -------- -------- -------- --- --- ---
Total loans 155,008 148,431 139,100 10,111 10,689 11,505 6.5% 7.2% 8.3%
-------- -------- -------- -------- -------- -------- --- --- ---
Total average earning assets $230,326 $219,067 $208,161 13,477 14,556 15,793 5.9% 6.6% 7.6%
======== ======== ======== -------- -------- -------- --- --- ---
Total average assets $247,978 $236,227 $225,248
======== ======== ========
Interest bearing liabilities:
Deposits:
NOW account deposits $ 63,181 $ 67,003 $ 67,946 460 857 1,853 0.7% 1.3% 2.7%
Savings deposits 54,525 45,801 38,335 437 650 842 0.8% 1.4% 2.2%
Time deposits over $100,000 12,681 11,932 10,970 422 470 563 3.3% 3.9% 5.1%
Other time deposits 44,606 45,826 45,434 1,454 1,825 2,325 3.3% 4.0% 5.1%
-------- -------- -------- -------- -------- -------- --- --- ---
Total deposits 174,993 170,562 162,685 2,773 3,802 5,583 1.6% 2.2% 3.4%
Federal funds purchased - 13 - - - - - - -
-------- -------- -------- -------- -------- -------- --- --- ---
Total interest bearing liabilities 174,993 170,575 162,685 2,773 3,802 5,583 1.6% 2.2% 3.4%
-------- -------- -------- --- --- ---
Demand deposits 39,554 35,399 34,347
Other liabilities 2,643 2,155 2,347
Stockholders' equity 30,788 28,098 25,869
-------- -------- --------
Total liabilities and stockholders' equity $247,978 $236,227 $225,248
======== ======== ========
Interest expense as a % of average
earning assets 1.2% 1.7% 2.7%
--- --- ---
Net interest margin/net interest yield as a %
of average earning assets $ 10,704 $ 10,754 $ 10,210 4.6% 4.9% 4.9%
======== ======== ======== === === ===
Net interest yield as a % of average assets 4.3% 4.6% 4.5%
=== === ===
* A tax adjustment of $781, $825 and $741 has been added to 2003, 2002 and 2001
income respectively to reflect the impact of a 34% Federal income tax rate in
each year. Non accruing loans are reported in their related categories and
reduce the related yields.
10
Table II. The dollar amounts of changes in interest income and interest expense
are presented in the accompanying table. The change in volume is calculated by
multiplying the change in volume by the old rate. The change in rate is
calculated by multiplying the change in rate by the old volume. The change in
rate volume is calculated by multiplying the change in rate by the change in
volume.
Rate/volume variance analysis
2003 vs 2002 2002 vs 2001
Change in Change in Change in Change in Change in Change in
Volume Rate Rate/volume Total Volume Rate Rate/volume Total
Assets
Securities:
US Gov't & agencies $ (218) $ (331) $ 52 $ (497) $ (130) $ (381) $ 26 $ (485)
State and political subdivisions 102 (104) (5) (7) 160 (52) (5) 103
Other securities 36 (58) (9) (31) 70 47 39 156
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities (80) (493) 38 (535) 100 (386) 60 (226)
Federal funds sold 111 (39) (38) 34 (38) (179) 22 (195)
Loans:
Commercial loans 303 (405) (19) (121) 813 1,092) (130) (409)
Real estate mortgages 120 (312) (19) (211) (196) (148) 13 (331)
Consumer loans 48 (288) (6) (246) 159 (220) (15) (76)
------- ------- ------- ------- ------- ------- ------- -------
Total loans 471 (1,005) (44) (578) 776 (1,460) (132) (816)
------- ------- ------- ------- ------- ------- ------- -------
Total average earning assets 502 (1,537) (44) 1,079) 838 (2,025) (50) (1,237)
------- ------- ------- ------- ------- ------- ------- -------
Interest bearing liabilities:
NOW account deposits (49) (369) 21 (397) (26) (984) 14 (996)
Savings deposits 124 (283) (54) (213) 164 (298) (58) (192)
Time deposits over $100,000 30 (73) (5) (48) 49 (131) (11) (93)
Other time deposits (49) (331) 9 (371) 20 (516) (4) (500)
------- ------- ------- ------- ------- ------- ------- -------
Total deposits 56 (1,056) (29) (1,029) 207 (1,929) (59) (1,781)
Federal funds purchased - - - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total interest bearing liabilities 56 (1,056) (29) (1,029) 207 (1,929) (59) (1,781)
------- ------- ------- ------- ------- ------- ------- -------
Net Interest Income $ 446 $ (481) $ (15) $ (50) $ 631 $ (96) $ 9 $ 544
======= ======= ======= ======= ======= ======= ======= =======
II. Investment Portfolio
A. Book values of the investment portfolio (000's)
2003 2002 2001
U.S. Treasury securities and obligations of
U.S. Government corporations or agencies $ 12,901 $ 6,077 $ 11,101
Obligations of states and political subdivisions 32,563 29,377 29,062
Other securities 6,282 6,029 3,811
Mortgage backed securities 14,552 17,788 19,895
---------- ---------- ----------
Total securities $ 66,298 $ 59,271 $ 63,869
========== ========== ==========
11
B. Maturity distribution of the investment portfolio.
Book Value Yield
2003 (000's) (%)
US Government securities
Maturity distribution:
One year or less $ - -
Over one year through five years 12,035 3.58
Over five years through ten years 1,000 3.00
Over ten years -
State and political subdivisions*
Maturity distribution:
One year or less 2,342 7.27
Over one year through five years 11,460 6.21
Over five years through ten years 17,021 6.34
Over ten years 1,223 7.52
Mortgage-backed securities 14,396 3.61
Other securities 5,777 2.49
III. Loan Portfolio
A. Types of loans
2003 2002 2001 2000 1999
Commercial $ 26,180 $ 29,028 $ 14,136 $ 27,515 $ 28,316
Commercial Real estate mortgage 64,288 52,321 49,893 37,752 36,231
Real estate mortgage 37,164 37,265 38,499 28,184 31,502
Installment 23,555 20,413 24,083 27,561 27,625
Construction 10,527 16,288 16,442 15,963 10,977
---------- ---------- ---------- ---------- ----------
Total loans $ 161,714 $ 155,315 $ 143,053 $ 136,975 $ 134,651
========== ========== ========== ========== ==========
B. Maturities and sensitivities of loans to changes in interest rates as of
December 31, 2003 (000's).
Commercial Loans
Fixed rate loans with a maturity of:
Three months or less $ 137
Over three months through twelve months 247
One year through five years 4,467
Over five years 249
----------
Total fixed rate loans 5,100
Floating rate loans with a repricing frequency of :
Quarterly or more frequently 21,080
----------
Total commercial loans $ 26,180
==========
12
Commercial Real estate mortgages
Fixed rate loans with a maturity of:
Three months or less $ 1,087
Over three months through twelve months 3,555
One year through five years 39,865
Over five years 3,420
----------
Total fixed rate loans 47,927
Floating rate loans with a repricing frequency of :
Quarterly or more frequently 16,361
----------
Total commercial loans $ 64,288
==========
Real estate construction loans
Fixed rate loans with a maturity of:
Three months or less $ 172
Over three months through twelve months 979
One year through five years 733
----------
Total fixed rate loans 1,884
Floating rate loans with a repricing frequency of:
Quarterly or more frequently 8,643
----------
Total real estate construction loans $ 10,527
==========
C. Risk Elements
1. Non accrual, past due, and restructured loans (000's)
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
Loans 90 days past due and still accruing
Commercial loans $ 37 $ 801 $ 19 $ 5 $ 125
Real estate loans 79 - 80 - -
Installment loans 30 28 72 69 21
-------- -------- -------- -------- --------
Total loans 90 days past due $ 146 $ 829 $ 171 $ 74 $ 146
== ======== ======== ======== ======== ========
Non accruing loans
Commercial loans $ 829 $ 458 $ 577 $ 1,177 $ 802
Real estate loans 258 - 85 163 87
Installment loans 203 101 108 225 128
-------- -------- -------- -------- --------
Total non accruing loans $ 1,290 $ 559 $ 770 $ 1,565 $ 1,017
======== ======== ======== ======== ========
There were no restructured loans.
For the year ended 2003, if the loans reported as non accrual had earned at the
contracted interest rate, $77,700 of interest income would have been recorded.
Interest income of $5,000 was recorded on these loans in 2002.
The Corporation places loans on a non accruing status when management feels that
a significant risk of non-repayment exists. Criteria for evaluating risk include
the borrowers' payment histories, past due status, and financial condition.
Loans on which the required payment of principal or interest has not been
received within 90 days of the due date are placed on nonaccrual status.
13
2. Potential problem loans
Management identified one potential problem loan in the amount of $428,000 that
is experiencing difficulties in the liquidation of the business and may cease
making the contractual payments before satisfactory resolution of the problems
are achieved. The Bank is secured on the credit, but a potential loss of $50,000
has been identified and provided for.
Foreign outstandings
Not applicable
3. Loan concentrations
As of December 31, 2003, there were no loan concentrations other than those
categories already reported that exceed 10% of total loans.
D. Other interest bearing assets
As of December 31, 2003, there was no other interest bearing assets that would
have been classified 90 days past due and still accruing if it were a loan.
IV. Summary of Loan Loss Experience
A. Analysis of allowance for loan losses (000's)
2003 2002 2001 2000 1999
Balance at beginning of the period $ 2,165 $ 2,139 $ 1,951 $ 1,913 $ 1,881
Charge offs:
Commercial 17 12 28 172 240
Real estate 3 - - - -
Installment 73 113 77 91 137
Construction - - - - -
----------------------------------------------------
Total charge offs 93 125 105 263 377
Recoveries:
Commercial 5 2 87 42 68
Real estate - - - - -
Installment 24 19 11 19 21
Construction - - - - -
----------------------------------------------------
Total recoveries 29 21 98 61 89
----------------------------------------------------
Net charge offs 64 104 7 202 288
Provision charged to earnings 35 130 195 240 320
----------------------------------------------------
Balance at the end of the period $ 2,136 $ 2,165 $ 2,139 $ 1,951 $ 1,913
====================================================
Ratio of net charge offs during the period to
average loans during the period 0.04% 0.07% 0.01% 0.15% 0.23%
Net charged off loans totaled $64,000 during 2003. Charged off deficiency
balances continued to be the primary source of losses. Underwriting standards
are continuously under review and losses appear to result from reasonable risk
when loans were originated. Low losses for the past few years and positive risk
factors enabled management to cease to fund the loss reserve early in 2003.
Net charged off loans totaled $104,000 during 2002. Most charged off loans were
the result of deficiency balances on repossessed automobiles and other assets
financed by retail consumers. Management's review of underwriting practices on
these loans indicated that most losses resulted from reasonable risk assumed
when the loans were originated.
14
Net charged off loans totaled $7,000 for 2001. Two commercial loans from a
number of years previously were recovered, one as a result of final settlements
of legal action and the other as a result of the economic recovery of the
borrower. Consumer loans continued to experience losses as collateral values
deteriorate faster than estimates. Recoveries of consumer loans continue to
develop as a result of bankruptcy and judgement proceedings
Net charged off loans totaled $202,000 for 2000. Two commercial loans accounted
for $112,000 of the net charged off loans. One loan was the result of the legal
resolution of a long standing collection effort and the second resulted from the
charge down of a loan to an appraised real estate value. Installment loans
charged off declined as a result of increased collection and underwriting
vigilance.
Net charged off loans totaled $288,000 for 1999. Charged off loans as a result
of consumer loan activity increased. Most losses resulted from deficiency
balances from repossessed collateral. One commercial loan resulted in a loss of
$150,000. The Bank expects to recover some of this loss. The Bank allocated
$320,000 to the reserve for loan losses to replenish the reserve and maintain
the ratio of the reserve for loan losses to total loans in the face of strong
loan growth.
B. Allocation of the allowance for loan losses (000's)
Real estate
Balances: Commercial Mortgage Installment Construction Unallocated Total
December 31, 2003 $ 1,151 $ 212 $ 131 $ 100 $ 542 $ 2,136
% of loans in category 55.9% 23.0% 14.6% 6.5% 100.0%
December 31, 2002 $ 941 $ 43 $ 122 $ 95 $ 964 $ 2,165
% of loans in category 52.4% 24.0% 13.1% 10.5% 100.0%
December 31, 2001 $ 872 $ 15 $ 289 $ 95 $ 868 $ 2,139
% of loans in category 44.8% 26.9% 16.8% 11.5% 100.0%
December 31, 2000 $ 653 $ 30 $ 159 $ 124 $ 985 $ 1,951
% of loans in category 47.6% 20.6% 20.1% 11.7% 100.0%
December 31, 1999 $ 492 $ 5 $ 135 $ - $ 1,281 $ 1,913
% of loans in category 47.9% 23.4% 20.5% 8.2% 100.0%
V. Deposits
A. Refer to Item I of the Guide 3 statistical disclosures for a presentation of
the information required by this item.
B. Not applicable
C. Not applicable
D. Maturities of time certificates of deposits of $100,000 or more. (000's)
Three months or less $ 1,594
Over three through six months 2,195
Over six months through twelve months 4,086
Over twelve months 5,194
-----------
$ 13,069
===========
E. Not applicable
15
VI. Return on Equity and Assets
2003 2002 2001
Return on assets (%) 1.47 1.62 1.56
Return on equity (%) 11.9 13.6 13.6
Dividend payout ratio (%) 44.5 39.2 123.2
Equity to assets ratio (%) 12.6 12.2 11.4
VI. Short-term Borrowings
Not applicable
ITEM 2. PROPERTY
The following is a tabulation of facilities owned by the Bank. All property is
used in the delivery of services to the customer base. Over the past few years,
all properties have been appropriately reviewed and upgraded or remodeled to
continue providing quality service to our customers. The Bank completed
extensive renovations to the main office during 2003. A full service branch in
Deerfield Township was constructed during 2003.
App. Building Date
Description/location Square footage Occupied
Main office 34,948 9/15/1902
83 W. Nepessing St.
Lapeer, MI
Elba Office 3,744 10/22/65
5508 Davison Rd.
Lapeer, MI
Pine-Clay office 528 1/5/68
305 Pine St.
Lapeer, MI
Southgate Office 1,700 11/2/70
637 S. Main St.
Lapeer, MI
Attica Office 4,158 6/27/79
4515 Imlay City Rd.
Attica, MI
Metamora Office 2,668 9/18/89
3414 S Lapeer Rd.
Metamora , MI
Imlay City Office 2,668 8/11/99
1875 S Cedar St.
Imlay City, MI
Deerfield Office 2,561 9/15/03
30 W. Burnside Rd.
Fostoria, MI
16
ITEM 3. LEGAL PROCEEDINGS
No material legal proceeding is pending to which the Corporation or the Bank is
the party, or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Refer to Page 17 of the accompanying Annual Report to Shareholders
ITEM 6. SELECTED FINANCIAL DATA
Refer to Page 16 of the accompanying Annual Report to Shareholders, except for:
(000's)
2003 2002 2001 2000 1999
Total Assets $248,662 $240,316 $232,195 $225,258 $207,397
Long Term Debt - - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
EARNINGS
Major components of the operating result of the Corporation are presented in the
accompanying table, Summary of Operations. A discussion of these results is
presented in greater detail in subsequent pages.
Summary of Operations (000's)
2003 2002 2001 2000 1999
Interest income $ 12,696 $ 13,731 $ 15,052 $ 15,578 $ 14,027
Interest expense 2,774 3,802 5,583 6,460 5,373
---------- ---------- ---------- ---------- ----------
Net interest income 9,922 9,929 9,469 9,118 8,654
Provision for possible loan losses 35 130 195 240 320
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 9,887 9,799 9,274 8,878 8,334
Other income 2,813 2,731 2,482 2,245 2,597
Other expense 7,926 7,507 7,091 6,693 6,487
---------- ---------- ---------- ---------- ----------
Income before provision for Federal income tax 4,774 5,023 4,665 4,430 4,444
Provision for Federal income tax 1,123 1,207 1,150 1,129 1,166
---------- ---------- ---------- ---------- ----------
Net income $ 3,651 $ 3,816 $ 3,515 $ 3,301 $ 3,278
========== ========== ========== ========== ==========
Per share:
Net income $ 3.08 $ 3.22 $ 2.96 $ 2.78 $ 2.76
========== ========== ========== ========== ==========
Dividends declared $ 1.37 $ 1.26 $ 3.65 $ 1.04 $ 0.94
========== ========== ========== ========== ==========
17
Summary of Operations 2003 by Quarter (000's)
4th qtr 3rd qtr 2nd qtr 1st qtr
Interest income $ 3,077 $ 3,063 $ 3,249 $ 3,307
Interest expense 631 660 728 755
---------- ---------- ---------- ----------
Net interest income 2,446 2,403 2,521 2,552
Provision for possible loan losses - 5 15 15
---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 2,446 2,398 2,506 2,537
Other income 707 757 691 658
Other expense 1,984 2,029 1,972 1,941
---------- ---------- ---------- ----------
Income before provision for Federal income tax 1,169 1,126 1,225 1,254
Provision for Federal income tax 276 257 290 300
---------- ---------- ---------- ----------
Net income $ 893 $ 869 $ 935 $ 954
========== ========== ========== ==========
Per share:
Net Income $ 0.75 $ 0.73 $ 0.79 $ 0.80
========== ========== ========== ==========
Dividends declared $ 0.65 $ 0.24 $ 0.24 $ 0.24
========== ========== ========== ==========
Summary of Operations 2002 by Quarter (000's)
4th qtr 3rd qtr 2nd qtr 1st qtr
Interest income $ 3,407 $ 3,447 $ 3,473 $ 3,404
Interest expense 851 946 992 1,013
---------- ---------- ---------- ----------
Net interest income 2,556 2,501 2,481 2,391
Provision for possible loan losses - 20 50 60
---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 2,556 2,481 2,431 2,331
Other income 658 722 694 657
Other expense 1,888 1,921 1,900 1,798
---------- ---------- ---------- ----------
Income before provision for Federal income tax 1,326 1,282 1,225 1,190
Provision for Federal income tax 325 307 292 283
---------- ---------- ---------- ----------
Net income $ 1,001 $ 975 $ 933 $ 907
========== ========== ========== ==========
Per share:
Net Income $ 0.84 $ 0.82 $ 0.79 $ 0.77
========== ========== ========== ==========
Dividends declared $ 0.60 $ 0.22 $ 0.22 $ 0.22
========== ========== ========== ==========
Net interest income
The Federal Reserve Corporation's Open Market Committee reduced rates twenty
five basis points during June 2003 after a fifty basis point reduction in
November 2002. These were the only changes following eleven rate reductions
during 2001 that ended in December 2001. Deposit, loan and securities yields
declined during the year instruments renewed at lower rates. Customers continued
to choose the traditional deposit categories such as Every Day Interest
Statement Savings accounts and Money Market Deposit accounts. The Corporation
experienced average growth of 19% in savings accounts, which are comprised of
these two categories. Commercial loan demand moderated during the year with
balances falling early in the year and gaining strength late in the year.
Falling rates encouraged borrowers to refinance mortgages, although activity
declined during the fourth quarter of the year as rates tended to increase
slightly. The
18
Corporation is currently selling most of the refinanced mortgages to the
secondary market; the Corporation is offering low rates for shorter term
mortgage products to be held in the portfolio and the average mortgage portfolio
increased as a result. The market for traditional consumer loans continues to
shrink as car leases, 0% financing from the auto finance companies and home
equity loans remain popular. Customers did respond to an incentive promotion in
the fourth quarter, and the portfolio grew by $5,100,000. The Corporation's
interest margin declined during 2003. The return on average earning assets
declined .7% while the total deposit cost dropped .6%. Interest expense as a
percent of average earning assets declined .5%. The Bank's net interest yield on
a Federal tax equivalent (FTE) basis was 4.3% in 2003 compared to 4.6% in 2002.
The Corporation continues to monitor rate sensitive assets and rate sensitive
liabilities to maintain margins in different rate environments.
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 nonaccrual, 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 $64,000 in 2003. Net charged off loans recorded in 2002 were $104,000.
Provisions for possible loan losses were $35,000 in 2003 and $130,000 for 2002.
The ratio of reserve for possible loan losses to gross loans equaled 1.3% and
1.4% in 2003 and 2002, respectively.
Non-interest income
Non-interest income is composed of trust department income, service charges on
deposit accounts, fees for providing other services to customers, gains on
securities sales and other income. Non-interest income increased 3% during 2003.
Trust income declined 2.9% during 2003. Declining market values in accounts
where fees are based on asset values continued to have a negative effect on
trust income. Service fees on deposit accounts increased as a result of lower
earnings credits on business accounts and increased activity. Other income
categories increased by 7% as a result in increases in mortgage servicing
income, the capitalization of mortgage servicing rights and gains on sale of
mortgages in the secondary market.
Non-interest expense
Major components of non-interest expense are salaries and employee benefits,
occupancy and equipment expenses and other operating expenses. Total
non-interest expense increased 5.6% during 2003. Personnel expense increased
9.6% in 2003 compared to 5.5% in 2002. Occupancy expenses increased 2.5% as a
result of increased depreciation expenses related to remodeling and the
introduction of Internet banking. Other expenses declined 2.3% for the year. The
Corporation celebrated the 100th anniversary of the Bank during 2002, these
expenses were not incurred in 2003; the celebration events were welcomed and
appreciated by our customers. Legal fees resulting from the normal risks of
business continue to be an issue as we move forward through these increasingly
uncertain times.
FINANCIAL CONDITION
Average assets for the Corporation totaled $247,978,000, $236,227,000 and
$225,248,000 in 2003, 2002 and 2001 respectively. The 5.0% growth in average
assets follows a 4.9% growth in 2002.. Average loans grew 4.4% while average
interest bearing deposits grew 2.6%. Average earning assets grew 5.1% compared
to average total deposit growth of 4.2%.
19
LIQUIDITY
The anticipated requirements of the Corporation can be met by upstreaming
dividends from the subsidiary Bank. Refer to footnote 9 of the accompanying
financial statements for a discussion of the restrictions on undivided profits
of the subsidiary. The anticipated cash needs of the Corporation are for the
payment of annual dividends to current stockholders and the minimal expenses of
the Corporation. Dividends upstreamed to the Corporation were $1,649,000 in 2003
and $1,537,000 in 2002.
The estimated market value of U.S. Government securities and U.S. Agency
securities totaled 12.8% of total deposits on December 31, 2003. The percentage
for 2002 was 11.5%. The Corporation is able to meet normal demands for liquidity
through loan repayments, securities payments and deposit growth. The Bank
maintains a liquidity plan for use in the event of unforeseen liquidity
problems. The plan incorporates prearranged lines of credit and a plan for the
liquidation of certain types of assets if the liquidity problem continued beyond
the time that normal cash flows would meet the demand.
CAPITAL
The Corporation has 546 stockholders representing 1,186,472 shares of common
stock. Refer to page 16 of the Corporation's Annual Report for a discussion of
the market for this stock.
The Corporation's return on average equity totaled 11.9% for 2003 and 13.6% in
2002. Effective December 31, 1993, the Corporation is required to maintain
capital in excess of 8% of risk-weighted assets as defined by the Federal
Reserve Board. The Corporation's capital to risk-weighted asset ratio was 19.5%
on December 31, 2003 and was 19.2% on December 31, 2002. Refer to footnote 12 of
the accompanying financial statements for a tabular presentation of the
Corporation's capital adequacy.
The Corporation paid quarterly cash dividends and paid a special dividend in
December 2003 and in 2002. Cash dividends totaled $1,625,000 in 2003 and
$1,495,000 in 2002. Dividends per share equaled $1.37 in 2003 and $1.26 in 2002.
The Corporation normally pays dividends at a rate between 30% to 40% of net
income. The Corporation expects to pay dividends in that range in the future.
The Corporation did not issue any authorized shares of stock in 2003 or 2002.
OFF - BALANCE SHEET ARRANGEMENTS
Refer to foot note 11 on page 13 of the Annual Report to Shareholders for a
discussion of the Corporation's off-balance sheet activities. The Corporation is
a party to credit related financial instruments with off-balance sheet risk in
the normal course of business to meet the needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Such commitments involve to varying degrees elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
Unfunded commitments under commercial line of credit and revolving credit line
agreements are commitments for possible future extensions of credit to existing
customers. These lines of credit are collateralized and contain a specified
maturity date and may not be drawn upon to the total extent to which the
Corporation is committed.
20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Rate sensitivity analysis (000's), December 31, 2003
Repricing period in days 0-30 31-90 91-180 181-365 0-365 Over 365
Rate sensitive assets (RSA):
Federal fund sold $ 900 $ - $ - $ - $ 900 $ -
Investment securities 6,261 3,553 3,672 8,715 22,201 44,097
Loans 35,163 6,327 23,267 48,556 113,313 48,401
--------- --------- --------- --------- --------- ---------
Total rate sensitive assets $ 42,324 $ 9,880 $ 26,939 $ 57,271 $ 136,414 $ 92,498
Rate sensitive liabilities (RSL):
Demand deposits $ 32,935 $ - $ - $ - $ 32,935 $ 67,631
Savings deposits 22,449 - - - 22,449 32,245
Time deposits 7,586 4,818 6,648 12,084 31,136 25,575
--------- --------- --------- --------- --------- ---------
Total rate sensitive liabilities $ 62,970 $ 4,818 $ 6,648 $ 12,084 $ 86,520 $ 125,451
Repricing gap (RSA-RSL) $ (20,646) $ 5,062 $ 20,291 $ 45,187 $ 49,894 $ (32,953)
========= ========= ========= ========= ========= =========
As a percent of capital -65.85% 16.14% 64.72% 144.12% 159.13% -105.10%
As a percent of total assets -8.30% 2.04% 8.16% 18.17% 20.06% -13.25%
The Asset/liability management committee meets monthly to review the impact of
changes in rates and market pricing on the Corporation's interest earning assets
and interest paying liabilities. Customers' responses to interest rates and
deposit products are reviewed. Loan demand is discussed and methods to answer
customers' needs are reviewed. The rate sensitivity of current production of
both loans and deposits are reviewed. Management's goal is to achieve a balance
between rate sensitive assets and rate sensitive liabilities in order to
maintain a reasonable interest margin in changing rate environments.
Income rate shock analysis, December 31, 2003
The difference in projected income assuming the following basis point change in
rates:
Changes in rates (bp's) -300 -200 -100 100 200 300
Change in cash flow $ (383) $ (256) $ (128) $ 128 $ 256 $ 383
As a percent of net int income -5.3% -3.6% -1.8% 1.8% 3.6% 5.3%
As a percent of net income -14.1% -9.4% -4.7% 4.7% 9.4% 14.1%
As a percent of net int income(FTE) -3.5% -2.3% -1.2% 1.2% 2.3% 3.5%
As a percent of net income (FTE) -9.3% -6.2% -3.1% 3.1% 6.2% 9.3%
The preceding table presents the difference in net income in the event of a real
and immediate change in rates from +/- 300 basis points (bp). It is based on the
previous table and is management's calculation based on management's assessment
of the most likely scenario as a response to such an event.
The Federal Reserve Bank evaluates the Corporation on its management of risk
factors effecting the organization. These risks include credit, liquidity,
market, operational, fiduciary, legal and reputational. Credit, liquidity, and
market risk were discussed in earlier sections of this narrative. Legal matters
are discussed in ITEM 13. The Board of Directors discusses matters relating to
its reputation and performance in the community at its regular meetings and two
planning meetings held during the year
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation's Independent Auditors Report and Consolidated Financial
Statements are incorporated herein by reference to the Corporation's Annual
Report (Exhibit 13). Refer to Pages 3-14 of the Annual Report to Shareholders.
In addition the Supplementary financial information required by Item 302 of
Regulation S-K, selected unaudited quarterly financial data, is included on page
18 of the Corporation's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Within the 90 days prior
to the date of this report, the Corporation carried out an evaluation, under the
supervision and with the participation of the Corporation's management,
including the Corporation's President and Chief Executive Officer and Treasurer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Corporation's disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the President and Chief Executive
Officer and Vice President and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Corporation (including its
consolidated subsidiaries) required to be included in the Corporation's periodic
SEC filings.
(b) Changes in internal controls. There were no significant changes made in the
Corporation's internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of the evaluation
performed by the Corporation's Chief Executive Officer and Chief Financial
Officer.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information called for under the items within this part with respect to
directors is included in County Bank Corp's March 26, 2004 Proxy Statement at
page 3 thereof and is incorporated herein by reference.
The following table sets forth the name, age and business experience of each of
the executive officers of the Corporation. Each of the executive officers is
appointed on an annual basis and serves at the pleasure of the Board.
Executive Officers: Ages Office Service
Curt Carter 59 Employee 37 years
Officer President & Chief 15 years
Executive Officer
Present term 15 years
51 Employee 4 years
Bruce J. Cady
Officer Vice President 4 years
Present term 4 years
59 Employee 21 years
Laird A. Kellie
Officer Secretary 15 years
Present term 15 years
54 Employee 14 years
Joseph H. Black
Officer Treasurer & Chief 14 years
Financial Officer
Present term 14 years
The Corporation has not adopted a "Code of Ethics" as defined by Item 406 of
Regulation SK that applies to the Corporation's principal executive officer,
principal financial officer and principal accounting officer. The Board has
determined that the Corporation does not need to adopt a "Code of Ethics" as
defined by Item 406 of Regulation SK because the Corporation has a Conflict of
Interest Policy that governs the Board of Directors and a Code of Conduct that
every employee signs upon employment with the Bank. A copy of the policy and
code may be obtained by submitting a request in writing to Joseph Black,
Treasurer, County Bank Corp, Lapeer, MI 48446
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the captions "Executive Compensation" and
"Compensation Committee Report on Executive Compensation" of the Corporations's
2004 Proxy Statement at pages 4-6 thereof filed with the Securities and Exchange
Commission is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER INFORMATION.
The information contained under the captions "ELECTION OF DIRECTORS," and
"INFORMATION WITH RESPECT TO NOMINESS" of the Corporation's 2004 Proxy
Statement at page 2 thereof filed with the Securities and Exchange Commission is
incorporated herein by reference in response to this item.
Currently the Estate of Richard E. Calvert, 7784 E. Shore, Traverse City,
Michigan, 49686 is the only person known by the Corporation to own beneficially
more than 5% of the Corporations common shares. As of February 27, 2004, the
Estate of Richard Calvert owned beneficially 96,000 shares or 8.09% of the
outstanding common shares of the Corporation.
23
Share Ownership of Management
Number Percentage of
Name of Beneficial Owner of shares outstanding stock
Dr. David H. Bush 48,600 4.10
Michael H. Blazo 20,012 1.69
Bruce J. Cady 600 0.05
Curt Carter 8,388 0.71
Patrick A. Cronin 2,654 0.22
Thomas K. Butterfield 29,400 2.48
James A. Harrington 41,924 3.53
Ernest W. Lefever 1,518 0.13
Tim Oesch 4,600 0.39
Charles Scheidegger 11,598 0.98
Executive Officers and Directors, as a group, own 169,594 shares or 14.3% of
1,186,472 total outstanding shares of common stock of Corporation as of December
31, 2003.
The Corporation has no equity based compensation plans as defined by, and as
required to be disclosed pursuant to, Item 201(d) of Regulation S-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Transactions and
Relationships" of the Corporation's 2004 Proxy Statement at page 6 thereof filed
with the Securities and Exchange Commission is incorporated herein by reference
in response to this item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from "REPORT
OF THE AUDIT COMMITTEE" and "RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT" of
the registrant's 2004 proxy statement at pages 9 thereof.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following financial statement schedules of the Corporation and Bank
are included in the Annual Report to its stockholders for the year ended 2003
and are incorporated herein by reference in Item 8:
Balance Sheets--December 31, 2003 and 2002 Page 3
Statements of Income--years ended December 31, 2003, 2002 and 2001 Page 5
Statements of Changes in Stockholders' equity--years ended December 31, 2003, 2002 and 2001 Page 4
Statements of Cash Flows--years ended December 31, 2003, 2002 and 2001 Page 6
Notes to Financial Statements Pages 7-14
Report of Independent Public Accountants dated January 23, 2004 Page 15
(a)(2) Financial statement schedules are omitted as they are not required or are
not applicable or because the required information is included in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits Required by Item 601 of Regulation SK
Reference is made to the Exhibit Index which appears on page 27 hereof.
24
(b) Reports on Form 8-K filed or furnished during the fourth quarter of 2003 and
through the date of the filing on this Form 10-K
December 3, 2003 --Form 8-K was filed to report the declaration of the
Corporation's quarterly cash dividend.
March 4, 2004 - Form 8-K was filed to report calendar year 2003
earnings and the declaration of the Corporation's quarterly cash
dividend.
(c) See (a) (3)
(d) Not applicable
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
County Bank Corp
/s/ Joseph H. Black
-----------------------------------------
By:
Joseph H. Black
Treasurer and Chief Financial Officer
Date: March 19, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Curt Carter
Curt Carter, President and Chief
Executive Officer
Date: March 19, 2004
/s/ Joseph H. Black
Joseph H. Black, Treasurer and Chief
Financial Officer
Date: March 19, 2004
/s/ David H Bush
----------------
David H. Bush, Director, Date: March 25, 2004
/s/ James F. Harrington
-----------------------
James F. Harrington, Director, Date: March 25, 2004
/s/ Patrick A. Cronin
---------------------
Patrick A. Cronin, Director, Date: March 24, 2004
/s/ Timothy Oesch
------------------
Timothy Oesch, Director, Date: March 25, 2004
/s/ Thomas K. Butterfield
-------------------------
Thomas K. Butterfield, Director, Date: March 24, 2004
/s/ Ernest W. Lefever
----------------------
Ernest W. Lefever, Director, Date: March 25, 2004
26
EXHIBIT INDEX
EXHIBIT NUMBER [SK REF NUMBER] DESCRIPTION OF DOCUMENT
3.1 Articles of Incorporation of County Bank Corp
(previously filed as Exhibits to the
Corporations registration statement on
form 8-A, filed January 24, 1989 and
incorporated herein by reference).
3.2 Bylaws of County Bank Corp (previously filed
as Exhibits to the Corporations
registration statement on form 8-A, filed
January 24, 1989 and incorporated herein
by reference).
11 Statement regarding computation of per share
earnings. (Incorporated by Reference to
Note 1 of the 2003 Annual Report).
13 Annual Report to Shareholders.
21 List of Subsidiaries. (Incorporated by
Reference to 2003 Annual Report).
23 Consent of Independent Accountants.
31(a) Chief Executive Officer Sarbanes-Oxley Act 302
Certification dated March 19, 2004 for Annual
Report on Form 10-K for the year ended
December 31, 2003.
31(b) Chief Financial Officer Sarbanes-Oxley Act 302
Certification dated March 19, 2004 for Annual
Report on Form 10-K for the year ended
December 31, 2003.
32(a) Certification Pursuant to 18 U.S.C. Section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32(b) Certification Pursuant to 18 U.S.C. Section 1350,
as enacted pursuant to section 906 of the
Sarbanes-Oxely Act of 2002.