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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
COUNTY BANK CORP
FORM 10-Q
For the Quarter ended June 30, 2004
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter ended June 30, 2004
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 1,118,315 shares of common stock outstanding as of June 30, 2004
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and the Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Item 4. Controls and Procedures 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports of Form 8-K 11
All items except those set forth above are inapplicable and have been omitted.
SIGNATURES 15
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, 2003.
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
2004 2003
ASSETS
Cash and cash equivalents $ 17,825 $ 14,072
Investment securities held to maturity 21,688 23,167
Investment securities available for sale 42,634 42,590
Other securities 541 541
-------- --------
Total investment securities 64,863 66,298
Loans 162,227 161,714
Less: Reserve for possible loan losses 2,025 2,136
-------- --------
Net loans 160,202 159,578
Bank premises and equipment 6,145 6,052
Interest receivable and other assets 2,902 2,662
-------- --------
TOTAL ASSETS $251,937 $248,662
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 40,355 $ 39,463
Interest bearing demand 64,394 64,103
Savings 54,516 54,694
Time 58,269 56,711
-------- --------
Total deposits 217,534 214,971
Other Borrowed Funds 3,431 -
Interest payable and other liabilities 2,266 2,337
-------- --------
TOTAL LIABILITIES 223,231 217,308
STOCKHOLDERS' EQUITY
Common Stock-$5.00 par value, 3,000,000 shares
authorized and 1,118,315 and 1,186,472 shares
outstanding at June 30, 2004 and December 31,
2003, respectively 5,592 5,932
Surplus 8,634 8,634
Undivided profits 12,650 14,621
Unrealized gains and losses on securities available
for sale 1,830 2,167
-------- --------
TOTAL STOCKHOLDERS' EQUITY 28,706 31,354
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $251,937 $248,662
======== ========
4
CONSOLIDATED INCOME STATEMENTS
(in thousands)
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30 June 30
2004 2003 2004 2003
INTEREST INCOME
Interest and fees on loans $2,416 $2,590 $4,804 $5,230
Interest on investments: taxable 274 264 554 552
Interest on investments: nontaxable 361 344 714 690
Interest on Federal funds sold 22 51 37 84
------ ------ ------ ------
TOTAL INTEREST INCOME 3,073 3,249 6,109 6,556
INTEREST EXPENSE
Demand deposits 103 122 207 256
Savings deposits 74 124 167 241
Time deposits 405 482 822 986
Interest on Federal funds purchased - - 2 -
Other borrowed funds 11 - 11 -
------ ------ ------ ------
TOTAL INTEREST EXPENSE 593 728 1,209 1,483
------ ------ ------ ------
NET INTEREST INCOME 2,480 2,521 4,900 5,073
Provision for possible loan losses - 15 - 30
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 2,480 2,506 4,900 5,043
OTHER INCOME
Service fees on loan and deposit accounts 306 292 605 586
Other 513 399 871 763
------ ------ ------ ------
TOTAL OTHER INCOME 819 691 1,476 1,349
OTHER EXPENSES
Salaries and employee benefits 1,299 1,229 2,599 2,445
Net occupancy expense 254 235 509 476
Other 546 508 1,027 992
------ ------ ------ ------
TOTAL OTHER EXPENSE 2,099 1,972 4,135 3,913
INCOME BEFORE PROVISION FOR FEDERAL
INCOME TAX 1,200 1,225 2,241 2,479
Provision for Federal income tax 285 290 511 590
------ ------ ------ ------
NET INCOME 915 935 1,730 1,889
====== ====== ====== ======
EARNINGS PER SHARE
Net income $ 0.81 $ 0.79 $ 1.49 $ 1.59
Cash dividend declared $ 0.27 $ 0.24 $ 0.53 $ 0.48
5
Consolidated Statement of Comprehensive Income
(in thousands)
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30 June 30
2004 2003 2004 2003
------- ------- ------- -------
Net Income $ 915 $ 935 $ 1,730 $ 1,889
Other Comprehensive income (loss):
Change in unrealized gain in securities available for
sale, net of tax (797) 383 (337) 314
------- ------- ------- -------
Comprehensive income $ 118 $ 1,318 $ 1,393 $ 2,203
======= ======= ======= =======
Consolidated Statement of Changes in Stockholders' Equity
(in thousands)
Total
Common Retained Accumulated Shareholders'
Stock Earnings OCI Equity
-------- -------- ----------- ------------
Balance - December 31, 2003 $ 5,932 $ 23,255 $ 2,167 $ 31,354
Net Income - 1,730 - 1,730
Change in unrealized gain on securities available for
sale net of tax - - (337) (337)
Repurchase of Common Stock (340) (3,091) - (3,431)
Cash dividends - (610) - (610)
-------- -------- -------- --------
Balance - June 30, 2004 $ 5,592 $ 21,284 $ 1,830 $ 28,706
======== ======== ======== ========
6
STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
June 30
2004 2003
Cash flows from operating activities
Net income $ 1,730 $ 1,889
Adjustments to reconcile net income to net cash
provided from operating activities
Depreciation 221 206
Provision for loan losses - 30
Net amortization and accretion of securities 80 121
Net change in accrued interest receivable (240) (29)
Net change in accrued interest payable and other 103 134
-------- --------
Net cash provided by operating activities 1,894 2,351
Cash flows form investing activities
Proceeds from calls of investment securities: AFS 5,670 2,097
Proceeds from maturities of investment
securities: AFS - 3,986
Proceeds from calls of investment securities: HTM 964 513
Proceeds from maturities of investment
securities: HTM 599 1,116
Purchase of investment securities: AFS (6,313) (7,608)
Purchase of investment securities: HTM (76) (2,043)
Net (increase) decrease in loans (624) 1,174
Premises and equipment expenditures (314) (725)
-------- --------
Net cash used in investing activities (94) (1,490)
Cash flows from financing activities
Net increase in interest bearing and
non-interest bearing demand accounts 1,183 72
Net increase in savings and time deposits 1,380 3,471
Proceeds from issuance of long term debt 3,431 -
Payment to repurchase common stock (3,431) -
Cash dividends paid (610) (569)
-------- --------
Net cash provided from financing activities 1,953 2,974
-------- --------
Net increase in cash and equivalents 3,753 3,835
Cash and equivalents at beginning of year 14,072 20,251
-------- --------
Cash and equivalents at end of period $ 17,825 $ 24,086
======== ========
Cash paid for:
Interest $ 1,199 $ 1,520
Income taxes $ 478 $ 634
7
NOTE 1. INVESTMENTS
(in thousands)
The carrying amount and approximate market value of securities held to maturity
were as follows
June 30,
2004
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Obligations of states and political subdivisions $19,998 $ 788 $ 80 $20,706
Mortgage-backed securities 1,690 45 - 1,735
------- ------- ------- -------
Total $21,688 $ 833 $ 80 $22,441
======= ======= ======= =======
The carrying amount and approximate market value of securities held to maturity
were as follows
December 31, 2003
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Obligations of states and political subdivisions $21,182 $ 1,287 $ 19 $22,450
Mortgage-backed securities 1,985 61 - 2,046
------- ------- ------- -------
Total $23,167 $ 1,348 $ 19 $24,496
======= ======= ======= =======
The carrying amount and approximate market value of securities available for
sale were as follows
June 30,
2004
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 $14,032 $ - $ 343 $13,689
Obligations of states and political subdivisions 12,686 335 164 12,857
Corporate securities 2,923 2,987 18 5,892
Mortgage-backed securities 10,220 119 143 10,196
------- ------- ------- -------
Total $39,861 $ 3,441 $ 668 $42,634
======= ======= ======= =======
The carrying amount and approximate market value of securities available for
sale were as follows
December 31,2003
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 $13,035 $ 16 $ 150 $12,901
Obligations of states and political subdivisions 10,864 562 45 11,381
Corporate securities 2,940 2,836 35 5,741
Mortgage-backed securities 12,468 184 85 12,567
------- ------- ------- -------
Total $39,307 $ 3,598 $ 315 $42,590
======= ======= ======= =======
8
NOTE 2. LOANS
(in thousands)
6/30/2004 12/31/2003
Commercial $ 17,365 $ 26,180
Commercial Real estate mortgage 72,529 64,288
Real estate mortgage 36,076 37,164
Installment 28,739 23,555
Construction 7,518 10,527
-------- --------
Total loans $162,227 $161,714
======== ========
Transactions in the reserve for possible loan losses were as follows for the
three months ended March 31:
2004 2003
Beginning balance at beginning of period $ 2,136 $ 2,165
Provision charged to earnings - 15
Loans charged off 117 21
Recoveries 6 13
-------- --------
Balance at end of the period $ 2,025 $ 2,172
======== ========
Reserve as a percent of total loans 1.25% 1.34%
Loans outstanding to executive officers, directors, principal $ 4,830 $ 3,631
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 first quarter. Loan
demand increased moderately during the second quarter. Net loans increased
$624,000 in the first six months. Mortgage loan activity declined as a result of
stable to rising interest rates and remains soft. The demand for traditional
consumer loans continues to decline. Home equity lines of credit increased, but
did not offset decreases in other loan categories.
Savings and time deposits increased $1,380,000 while interest bearing and
non-interest bearing demand deposits increased $1,179,000 during the first six
months of the year. Deposit customers are waiting for increases in deposit rates
and continue to seek safety for their principal.
Activity in the investment portfolio moderated. Cash flow from mortgage backed
securities declined as a result of increasing interest rates and reduced
refinancing activity. Municipal investments remained stable as maturities and
calls were reinvested. The Corporation is shortening its securities investment
targets in anticipation of rising rates. The Corporation determined to increase
liquidity during the first quarter and consequently reduced its investment
activity. The Corporation continues to seek investment opportunities to
supplement income but remain liquid enough to meet loan demand.
9
Capital Resources
The Corporation increased liquidity during the first quarter in anticipation of
the need to purchase up to 96,000 shares of stock from the estate of its largest
shareholder. The Corporation purchased 68,157 shares from the estate at a price
of $50.35 per share on April 16, 2004 and does not anticipate the purchase of
any additional shares. The shares were retired and no plans exist to reissue
them at the current time. The Corporation arranged to borrow the funds necessary
to complete the purchase.
The Corporation paid a quarterly dividend of $.26 per share during the first and
$.27 per share on a reduced number of shares during the second quarter. The
Corporation paid $.55 per share through two quarters based on the current
1,118,315 shares outstanding. 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 17.7% on June 30, 2004 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.
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 slight recovery of loan demand
increased the Bank's loan to deposit ratio from 73.1% on March 31, 2004 to 74.9%
on June 30, 2004. The Bank regained some non accrued interest as the result of
the resolution of some nonperforming loans. Consequently, the quarterly FTE
interest margin as percent of average assets for the second quarter grew to 4.24
from 4.18 in the first quarter. The interest spread grew to 4.28%. Management
anticipates that the Federal Reserve Bank will increase interest rates over the
few quarters and pressure on the interest margin will ease as variable interest
rates increase. However, time and indexed deposit rates tend to increase in
anticipation in these rate increases. Loan rates are carefully negotiated to
maintain margin, particularly when fixed rate financing is requested. Other
income increased during the second quarter as a result of gains on the sale of
other real estate. Other expense categories performed at the comparable levels
to previous years. The Bank's return on average assets was 1.45% 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 loan volumes, the
level and composition of non-accrual, past due and renegotiated or reduced rate
loans, current economic conditions, estimated market value of any underlying
collateral, adverse conditions that may effect a borrower's ability to repay,
and an evaluation of each borrower's credit worthiness. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information comes to light. 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 $108,000 in the second quarter of 2004. Management did not fund 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
10
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.
The Corporation purchased and retired 68,157 stares of stock at a total price of
$3,431,000 by borrowing funds from a correspondent bank. The anticipated demand
on liquidity will be less than $200,000 per quarter for the next five years.
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, 2003. There have been no events or changes to the
Corporations' assets and liabilities that significantly alter those risk
disclosures.
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, 2004, 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, 2004,
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, 2004, 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 AND REPORTS OF FORM 8-K
A) Exhibits
B) A form 8-K was filed on April 26, 2004 in response to regulation FD
disclosing the repurchase of 68,157 shares of stock by the Corporation. A
form 8-K was filed on June 2, 2004 in response to regulation FD containing
a press release relative to the payment of the second quarter dividend.
11
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, 2004
COUNTY BANK CORP
/s/ Joseph H. Black
-------------------------
Joseph H. Black
Treasurer and Chief
Financial Officer
12
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