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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, 2004
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 whether the registrant is an accelerated filer (as
defined by rule 12b-2 of the act).
Yes [ ] No [X]
The aggregate market value of the voting shares of stock held by nonaffiliates
of the registrant was $52,118,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
There are 1,118,315 shares of common stock ($5.00 par value) outstanding as of
December 31, 2004.
The following documents are incorporated into the 10-K by reference:
The Annual Report to Shareholders, December 31, 2004, Part I, Part II.
Proxy statement dated March 28, 2005, Part III.
County Bank Corp
Table of Contents
Form 10-K items
Item 1. Business 3-15
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16-19
Item 7a.. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Disagreements on Accounting and Financial Disclosure 21
Item 9A. Controls and Procedures 21
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
Item 14. Principal Accountant Fees and Services 22
Item 15. Exhibits, Financial Schedules and Reports on Form 8-K 23
Signatures and Certifications 25
Total Pages: 28
Form 10-K
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 composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition,
2
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 Main (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 2004. Total assets grew to $253,261,000
on December 31, 2004, while total deposits grew to $216,812,000. Total assets
grew 1.8% while total deposits grew .9%. These growth percentages were less than
the previous year. The Federal Reserve Board increased interest rates 25 basis
points five times during the second half of 2004 after lowering rates 25 basis
points one time in 2003. Customers responded slowly to the increased rate
volatility and continued choosing more traditional savings deposit categories.
The Corporation expects accelerated growth through 2005.
The Corporation offers commercial banking services through the Bank at the main
office and the seven 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
three 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 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, Oppenheimer and Edward D. Jones & Co. A number of other
securities brokers serve the County through Flint offices. Comerica Bank
3
operates a Comerimart branch in a local grocery store. The local telephone book
lists twelve financial planners and thirty five mortgage brokers.
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- 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.
4
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 divided
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 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:
5
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, it's Tier 1 and total capital ratios must be 6% and 10% on
a risk-adjusted basis, respectively. At December 31, 2004, the Corporation met
both requirements, with Tier 1 and total capital equal to 15.7% and 17.8% 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, 2004 was 11.0%.
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. 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
6
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, 2004, 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.
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)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.
7
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 121 and 122 on December 31,
2004 and 2003, 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 (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.
8
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 (%)
2004 2003 2002 2004 2003 2002 2004 2003 2002
Interest margin analysis as a % of average earning
assets
Assets
Securities:
US Gov't & agencies $ 25,466 $ 23,795 $28,271 $ 911 $ 882 $ 1,379 3.6% 3.7% 4.9%
State and political subdivisions* 32,839 30,865 29,451 2,152 2,126 2,133 6.6% 6.9% 7.2%
Other securities 6,465 6,462 5,614 186 207 238 2.9% 3.2% 4.2%
-------- -------- -------- ------- ------- ------- --- --- ---
Total investment securities 64,770 61,122 63,336 3,249 3,215 3,750 5.0% 5.3% 6.6%
Federal funds sold 7,595 14,196 7,300 97 151 117 1.3% 1.1% 1.6%
Loans:
Commercial loans* 103,291 97,389 93,008 6,418 6,312 6,433 6.2% 6.5% 6.9%
Real estate mortgages 25,368 27,422 25,844 1,458 1,752 1,963 5.7% 6.4% 7.6%
Consumer loans 33,024 30,197 29,579 1,965 2,047 2,293 6.0% 6.8% 7.8%
-------- -------- -------- ------- ------- ------- --- --- ---
Total loans 161,683 155,008 148,431 9,841 10,111 10,689 6.1% 6.5% 7.2%
-------- -------- -------- ------- ------- ------- --- --- ---
Total average earning assets $234,048 $230,326 $219,067 13,187 13,477 14,556 5.6% 5.9% 6.6%
======== ======== ======== ------- ------- ------- --- --- ---
Total average assets $252,847 $247,978 $236,227
======== ======== ========
Interest bearing liabilities:
Deposits:
NOW account deposits $ 65,392 $ 63,181 $ 67,003 524 460 857 0.8% 0.7% 1.3%
Savings deposits 54,748 54,525 45,801 335 437 650 0.6% 0.8% 1.4%
Time deposits over $100,000 14,158 12,681 11,932 425 422 470 3.0% 3.3% 3.9%
Other time deposits 43,249 44,606 45,826 1,216 1,454 1,825 2.8% 3.3% 4.0%
-------- -------- -------- ------- ------- ------- --- --- ---
Total deposits 177,547 174,993 170,562 2,500 2,773 3,802 1.4% 1.6% 2.2%
Other borrowed funds 2,022 63
Federal funds purchased 143 - 13 2 - - - - -
-------- -------- -------- ------- ------- ------- --- --- ---
Total interest bearing liabilities 179,712 174,993 170,575 2,565 2,773 3,802 1.4% 1.6% 2.2%
------- ------- ------- --- --- ---
Demand deposits 40,096 39,554 35,399
Other liabilities 2,961 2,643 2,155
Stockholders' equity 30,078 30,788 28,098
-------- -------- --------
Total liabilities and stockholders' equity $252,847 $247,978 $236,227
======== ======== ========
Interest expense as a % of average earning assets 1.1% 1.2% 1.7%
--- --- ---
Net interest margin/net interest yield as a %
of average earning assets $10,622 $10,704 $10,754 4.5% 4.6% 4.9%
======= ======= ======= === === ===
Net interest yield as a % of average assets 4.2% 4.3% 4.6%
=== === ===
* A tax adjustment of $775, $781 and $825 has been added to 2004, 2003 and 2002
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.
9
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.
2004 vs 2003 2003 vs 2002
Change Change Change Change Change Change
in in in Total in in in Total
Rate/volume variance analysis Volume Rate Rate/volume Volume Rate Rate/volume
Assets
Securities:
US Gov't & agencies $ 62 $ (31) $ (2) $ 29 $ (218) $ (331) $ 52 $ (497)
State and political subdivisions 136 (103) (7) 26 102 (104) (5) (7)
Other securities - (21) - (21) 36 (58) (9) (31)
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities 198 (155) (9) 34 (80) (493) 38 (535)
Federal funds sold (70) 30 (14) (54) 111 (39) (38) 34
Loans:
Commercial loans 383 (261) (16) 106 303 (405) (19) (121)
Real estate mortgages (131) (176) 13 (294) 120 (312) (19) (211)
Consumer loans 192 (250) (24) (82) 48 (288) (6) (246)
------- ------- ------- ------- ------- ------- ------- -------
Total loans 444 (687) (27) (270) 471 (1,005) (44) (578)
------- ------- ------- ------- ------- ------- ------- -------
Total average earning assets 572 (812) (50) (290) 502 (1,537) (44) (1,079)
------- ------- ------- ------- ------- ------- ------- -------
Interest bearing liabilities:
NOW account deposits 16 46 2 64 (49) (369) 21 (397)
Savings deposits 2 (103) (1) (102) 124 (283) (54) (213)
Time deposits over $100,000 49 (41) (5) 3 30 (73) (5) (48)
Other time deposits (44) (200) 6 (238) (49) (331) 9 (371)
------- ------- ------- ------- ------- ------- ------- -------
Total deposits 23 (298) 2 (273) 56 (1,056) (29) (1,029)
Other borrowed funds 63 63
Federal funds purchased - - 2 2 - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total interest bearing liabilities 23 (298) 67 (208) 56 (1,056) (29) (1,029)
------- ------- ------- ------- ------- ------- ------- -------
Net Interest Income $ 549 $ (514) $ (117) $ (82) $ 446 $ (481) $ (15) $ (50)
======= ======= ======= ======= ======= ======= ======= =======
II. Investment Portfolio
A. Book values of the investment portfolio (000's)
2004 2003 2002
U.S. Treasury securities and obligations of
U.S. government corporations of agencies $14,558 $13,035 $ 6,077
Obligations of states and political subdivisions 32,421 32,046 29,377
Other securities 5,706 5,777 6,029
Mortgage backed securities 9,761 14,396 17,788
------- ------- -------
Total securities $62,446 $65,254 $59,271
======= ======= =======
10
B. Maturity distribution of the investment portfolio.
2004 Book Value
(000's) Yield (%)
US Government securities
Maturity distribution:
One year or less $ 1,266 5.33
Over one year through five years 13,292 3.64
Over five years through ten years - -
Over ten years -
State and political subdivisions*
Maturity distribution:
One year or less 2,189 6.96
Over one year through five years 14,053 6.11
Over five years through ten years 15,955 6.17
Over ten years 224 6.03
Mortgage-backed securities 9,761 3.68
Other securities 5,706 2.41
*Yields are presented on a Federal tax equivalent basis and are adjusted for a 34% income tax basis.
III. Loan Portfolio
A. Types of loans
2004 2003 2002 2001 2000
Commercial $ 18,080 $ 21,060 $ 19,925 $ 17,470 $ 21,176
Commercial Mortgage 67,505 57,810 52,321 46,072 33,186
Real Estate Mortgage 32,604 37,164 39,246 38,499 40,687
Installment 36,902 35,156 30,121 24,083 25,253
Construction 12,243 10,524 13,702 16,929 16,674
-------- -------- -------- -------- --------
Total Loans $167,334 $161,714 $155,315 $143,053 $136,976
======== ======== ======== ======== ========
B. Maturities and sensitivities of loans to changes in interest rates as of
December 31, 2004 (000's).
Commercial Loans
Fixed rate loans with a maturity of:
Three months or less $ 984
Over three months through twelve months 460
One year through five years 2,837
Over five years 386
-----------
Total fixed rate loans 4,667
Floating rate loans with a repricing frequency of:
Quarterly or more frequently 13,413
-----------
Total commercial loans $ 18,080
===========
Commercial Real estate mortgages
Fixed rate loans with a maturity of:
Three months or less $ 1,129
Over three months through twelve months 5,827
One year through five years 48,101
Over five years 1,148
-----------
Total fixed rate loans 56,205
Floating rate loans with a repriceing frequency of :
Quarterly or more frequently 11,300
-----------
Total commercial loans $ 67,505
===========
11
Real estate construction loans
Fixed rate loans with a maturity of:
Three months or less $ 525
Over three months through twelve months 1,565
One year through five years -
Over five years -
-----------
Total fixed rate loans 2,090
Floating rate loans with a repriceing frequency of :
Quarterly or more frequently 10,153
-----------
Total commercial loans $ 12,243
===========
C. Risk Elements
1. Non accrual, past due, and restructured loans (000's)
12/31/04 12/31/03 12/31/02 12/31/01 12/31/00
Loans 90 days past due and still accruing
Commercial loans $ - $ 37 $ 801 $ 19 $ 5
Real estate loans - 79 - 80 -
Installment loans - 30 28 72 69
------ ------ ------ ------ ------
Total loans 90 days pas due $ - $ 146 $ 829 $ 171 $ 74
====== ====== ====== ====== ======
Non accruing loans
Commercial loans $ 625 $ 597 $ 458 $ 577 $1,177
Real estate loans - 151 - 85 163
Installment loans 65 101 108 225
------ ------ ------ ------ ------
Total non accruing loans $ 690 $ 748 $ 559 $ 770 $1,565
====== ====== ====== ====== ======
There were no restructured loans.
For the year ended 2004, if the loans reported as non accrual had earned at the
contracted interest rate, $43,300 of interest income would have been recorded.
No interest income was recorded on these loans in 2004.
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.
2. Potential problem loans
Management has not identified any potential problem loans where circumstances
indicate that a loan may be reported under Item III.C.1.
Foreign outstandings
Not applicable
3. Loan concentrations
As of December 31, 2004, there were no loan concentrations other than those
categories already reported that exceed 10% of total loans.
12
D. Other interest bearing assets
As of December 31, 2004, there was no other interest bearing asset 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)
2004 2003 2002 2001 2000
Balance at beginning of the period $2,136 $2,165 $2,139 $1,951 $1,913
Charge offs:
Commercial 97 17 12 28 172
Real estate - 3 - - -
Installment 55 73 113 77 91
Construction - - - - -
------ ------ ------ ------ ------
Total charge offs 152 93 125 105 263
Recoveries:
Commercial 10 5 2 87 42
Real estate - - - - -
Installment 18 24 19 11 19
Construction - - - - -
------ ------ ------ ------ ------
Total recoveries 28 29 21 98 61
------ ------ ------ ------ ------
Net charge offs 124 64 104 7 202
Provision charged to earnings - 35 130 195 240
------ ------ ------ ------ ------
Balance at the end of the period $2,012 $2,136 $2,165 $2,139 $1,951
====== ====== ====== ====== ======
Ratio of net charge offs during the period to
average loans during the period 0.08% 0.04% 0.07% 0.01% 0.15%
Net charged off loans totaled $124,000 during 2004. One commercial credit
composed $85,000 of the net charged off loans. The balance of the charged off
amounts continue to be deficiency balances related to the repossession on
Consumer credits. Management's review of these credits indicates that risks
assumed at the time the loans were made appear to be reasonable. Continued low
losses in the loan portfolio and moderate growth in the loan portfolio enabled
management to conclude that funding of the reserve for loan losses was not
necessary in 2004.
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.
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 judgment 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.
13
B. Allocation of the allowance for loan losses (000's)
Real
Commercial estate
Balances: Commercial Mortgage Mortgage Installment Construction Unallocated Total
December 31, 2004 $ 212 $ 790 $ 143 $ 500 $ 88 $ 279 $ 2,012
% of loans in category 10.8% 40.3% 19.5% 22.1% 7.3% 100.0%
December 31, 2003 $ 414 $ 737 $ 212 $ 131 $ 100 $ 542 $ 2,136
% of loans in category 13.0% 35.8% 23.0% 21.7% 6.5% 100.0%
December 31, 2002 $ 259 $ 682 $ 43 $ 122 $ 95 $ 964 $ 2,165
% of loans in category 12.8% 33.7% 25.3% 19.4% 8.8% 100.0%
December 31, 2001 $ 240 $ 632 $ 15 $ 289 $ 95 $ 1,500 $ 2,139
% of loans in category 12.2% 32.2% 26.9% 16.8% 11.8% 99.9%
December 31, 2000 $ 255 $ 398 $ 30 $ 159 $ 124 $ 985 $ 1,951
% of loans in category 15.5% 24.2% 29.7% 18.4% 12.2% 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 $ 2,903
Over three through six months 2,050
Over six months through twelve months 2,976
Over twelve months 6,965
-------
$14,894
=======
E. Not applicable
VI. Return on Equity and Assets
2004 2003 2002
Return on assets (%) 1.44 1.47 1.62
Return on equity (%) 12.0 11.9 13.6
Dividend payout ratio (%) 46.2 44.5 39.2
Equity to assets ratio (%) 11.9 12.6 12.2
VI. Short-term Borrowings
Not applicable
14
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
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
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
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Refer to Page 17 of the accompanying Annual Report to Stockholders
15
ITEM 6. SELECTED FINANCIAL DATA
Refer to Page 16 of the accompanying Annual Report to Stockholders, except for:
(000's)
2004 2003 2002 2001 2000
Total Assets $253,261 $248,662 $240,316 $232,195 $225,258
Long Term Debt 3,060 - - - -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICY AND ESTIMATES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, and
the Company follows general practices within the industries in which it
operates. At times, the application of these principles requires Management to
make assumptions, estimates and judgments that affect the amounts reported in
the financial statements and accompanying notes. These assumptions, estimates
and judgments are based on information available as of the date of the financial
statements. As this information changes, the financial statements could reflect
different assumptions, estimates and judgments. Certain policies inherently have
a greater reliance on assumptions, estimates and judgments and as such have a
greater possibility of producing results that could be materially different than
originally reported. Examples of critical assumptions, estimates and judgments
are when assets and liabilities are required to be recorded at fair value, when
a decline in the value of an asset not required to be recorded at fair value
warrants an impairment write-down or valuation reserve to be established, or
when an asset or liability must be recorded contingent upon a future event.
All significant accounting policies followed by the Company are presented in
Note 1 to the consolidated financial statements. These policies, along with the
disclosures presented in the notes to the consolidated financial statements and
in the management discussion and analysis of financial condition and results of
operations, provide information on how significant assets and liabilities are
valued and how those values are determined for the financial statements. Based
on the valuation techniques used and the sensitivity of financial statement
amounts to assumptions, estimates and judgments underlying those amounts,
management has identified the determination of the Allowance for Loan and Lease
Losses (ALLL) as the accounting area that requires the most subjective or
complex judgments, and as such could be the most subject to revision as new
information becomes available.
The ALLL represents management's estimate of credit losses inherent in the
Bank's loan portfolio at the report date. The estimate is a composite of a
variety of factors including past experience, collateral value, and the general
economy. ALLL includes a specific portion, a formula driven portion, and a
general nonspecific portion. The collection and ultimate recovery of the book
value of the collateral, in most cases, is beyond our control.
For more information regarding the estimates and calculations used to establish
the ALLL, please see Note 1 to the consolidated financial statements provided
herewith.
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
2004 2003 2002 2001 2000
Interest income $12,413 $12,696 $13,731 $15,052 $15,578
Interest expense 2,565 2,774 3,802 5,583 6,460
------- ------- ------- ------- -------
Net interest income 9,848 9,922 9,929 9,469 9,118
Provision for possible loan losses - 35 130 195 240
------- ------- ------- ------- -------
Net interest income after provision for
possible loan losses 9,848 9,887 9,799 9,274 8,878
Other income 3,016 2,813 2,731 2,482 2,245
Other expense 8,134 7,926 7,507 7,091 6,693
------- ------- ------- ------- -------
Income before provision for Federal income tax 4,730 4,774 5,023 4,665 4,430
Provision for Federal income tax 1,108 1,123 1,207 1,150 1,129
------- ------- ------- ------- -------
Net income $ 3,622 $ 3,651 $ 3,816 $ 3,515 $ 3,301
======= ======= ======= ======= =======
Per share:
Net income $ 3.18 $ 3.08 $ 3.22 $ 2.96 $ 2.78
======= ======= ======= ======= =======
Dividends declared $ 1.47 $ 1.37 $ 1.26 $ 3.65 $ 1.04
======= ======= ======= ======= =======
Summary of Operations 2004 by quarter
4th qtr 3rd qtr 2nd qtr 1st qtr
Interest income $3,234 $3,070 $3,074 $3,035
Interest expense 711 645 593 616
------ ------ ------ ------
Net interest income 2,523 2,425 2,481 2,419
Provision for possible loan losses - - - -
------ ------ ------ ------
Net interest income after provision for
possible loan losses 2,523 2,425 2,481 2,419
Other income 862 678 818 658
Other expense 1,964 2,035 2,099 2,036
------ ------ ------ ------
Income before provision for Federal income tax 1,421 1,068 1,200 1,041
Provision for Federal income tax 361 236 285 226
------ ------ ------ ------
Net income $1,060 $ 832 $ 915 $ 815
====== ====== ====== ======
Per share:
Net Income $ 0.95 $ 0.74 $ 0.80 $ 0.69
====== ====== ====== ======
16
Dividends declared $ 0.67 $ 0.27 $ 0.27 $ 0.26
====== ====== ====== ======
Summary of Operations 2003 by quarter
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 $ 0.81
====== ====== ====== ======
Dividends declared $ 0.65 $ 0.24 $ 0.24 $ 0.24
====== ====== ====== ======
Net interest income
The Federal Reserve Corporation's Open Market Committee increased rates twenty
five basis points five times during the last six months of 2004. Deposit, loan
and securities yields declined during the year as instruments renewed at lower
rates during the first six months of the year. Customers continued to choose the
traditional deposit categories such as Every Day Interest Statement Savings
accounts and Money Market Deposit accounts. Commercial loan demand moderated
during the year with balances falling early in the year and gaining strength
late in the year. Stable rates reduced borrower demand to refinance mortgages.
Increasing short term interest rates in the last two quarters had minimal impact
on mortgage rates and demand continued to be weak. 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. Home equity lines of
credit continue to be a replacement for the traditional consumer loan. The
Corporation's interest margin declined during 2004. The return on average
earning assets declined .3% while the total deposit cost dropped .2%. Interest
expense as a percent of average earning assets declined .1%. The Bank's net
interest yield on a Federal tax equivalent (FTE) basis was 4.2% in 2004 compared
to 4.3% in 2003. 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 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 $124,000 in 2004. Net charged off loans recorded in 2003 were $64,000.
Provisions for possible loan losses were $0 in 2004 and $35,000 for 2003. The
ratio of reserve for possible loan losses to gross loans equaled 1.2% and 1.3%
in 2004 and 2003, respectively.
17
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 7.2% during
2004. Trust income increased .07% as a result primarily of market gains in the
fourth quarter. Service fees on deposit accounts increased 10.7% as a result of
the introduction of the Courtesy Overdraft Service. Customers have responded
positively to this payment of limited overdrafts to customers that handle their
accounts in an appropriate manner. Other income categories increased 1.1%.Gains
on sale of mortgages and mortgage servicing rights income dropped off
significantly as a result of low demand for refinancing, but this was offset by
gains on the sale of other real estate as a number of loan problems were settled
in the Corporations favor. The Corporation served as landlord of the Lyric Mall,
a downtown office complex acquired a number of years ago as settlement for a
loan. A buyer appeared in 2004 and the Corporation accepted the reasonable
offer.
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 2.6% during 2004. Personnel expense increased
3.7% compared to 9.6% in 2003. Occupancy expenses increased 9.2% as a result of
remodeling expenses and increased costs of software related to the introduction
of Internet banking. Other expenses declined 3.6% for the year. Legal expenses
and loan and collection expenses were reduced in 2004.
FINANCIAL CONDITION
Average assets for the Corporation totaled $ 253,847,000, $247,978,000, and
$236,227,000 in 2004, 2003 and 2002 respectively. The 2.4% growth in average
assets follows a 5.0% growth in 2003. Average loans grew 4.3% while average
interest bearing deposits grew 1.5%. The average securities portfolio increased
by 5.8%. Accordingly, short term Federal funds investments decline 46.5% on
average. Average earning assets grew 1.7% compared to average total deposit
growth of 1.4%.
Liquidity
The Corporation generated most of its cash flow from operating activities in
2005. Increases in the loan portfolio absorbed the net proceeds of maturities
and calls in the investment portfolio and increased deposits. Remaining cash
flow funded dividends to the Stockholders and payments on a note to Comerica
Bank, resulting in a slight increase in Cash and Cash Equivalents.
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 Bank's historical performance and strong capital ratios
reflect the continued ability to provide the required cash flows. The
anticipated cash needs of the Corporation are for the payment of annual
dividends to current stockholders, the payment of principal and interest on a
loan with Comerica Bank and the minimal expenses of the Corporation. Anticipated
payments on the loan total $170,000 plus accrued interest each quarter.
Dividends upstreamed to the Corporation were $2,086,000 in 2004 and $1,649,000
in 2003.
The estimated market value of U.S. Government securities and U.S. Agency
securities available-for-sale totaled 10.6% of total deposits on December 31,
2004. The percentage for 2003 was 11.8%. 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.
18
CAPITAL
The Corporation has 573 stockholders representing 1,118,315 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 12.0% for 2004 and 11.9% in
2003. 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 17.8%
on December 31, 2004 and was 19.5% on December 31, 2003. 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 2004 and in 2003. Cash dividends totaled $1,662,000 in 2004 and
$1,625,000 in 2003. Dividends per share equaled $1.47 in 2004 and $1.37 in 2003.
The Corporation normally pays dividends at a rate between 35% to 50% of net
income. The Corporation expects to pay dividends in that range in the future.
The Corporation redeemed 68,157 shares of common stock from the estate of its
largest stockholder during 2004. The Corporation arranged a loan with Comerica
Bank to fund this purchase. The shares purchased were retired. The Corporation
did not issue any authorized shares of stock in 2004 or 2003.
OFF - BALANCE SHEET ARRANGEMENTS
Refer to foot note 11 on page 13 of the Annual Report to Stockholders 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 might not be drawn upon to the total extent to which the
Corporation is committed.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
PAYMENT DUE BY PERIOD
-------------------------------------------------------------------
LESS THAN 1 1-3 YEARS 3-5 YEARS MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 3,060 $ 680 $ 1,360 $ 1,020 -
- -------------------------------------------------------------------------------------------------------------
Capital Lease Obligations -
- -------------------------------------------------------------------------------------------------------------
Operating Lease Obligations -
- -------------------------------------------------------------------------------------------------------------
Purchase Obligations -
- -------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP -
- -------------------------------------------------------------------------------------------------------------
Total $ 3,060 $ 680 $ 1,360 $ 1,020 -
- -------------------------------------------------------------------------------------------------------------
Definitions:
(A) Long-Term Debt Obligation means a payment obligation under long-term
borrowings referenced in FASB Statement of Financial Accounting Standards No. 47
Disclosure of Long-Term Obligations (March 1981), as may be modified or
supplemented.
(B) Capital Lease Obligation means a payment obligation under a lease classified
as a capital lease pursuant to FASB Statement of Financial Accounting Standards
No. 13 Accounting for Leases (November 1976), as may be modified or
supplemented.
(C) Operating Lease Obligation means a payment obligation under a lease
classified as an operating lease and disclosed pursuant to FASB Statement of
Financial Accounting Standards No. 13 Accounting for Leases (November 1976), as
may be modified or supplemented.
(D) Purchase Obligation means an agreement to purchase goods or services that is
enforceable and legally binding on the registrant that specifies all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to variations in interest rates, exchange rates,
equity price risk and commodity prices. The Company does not maintain a trading
account for any class of financial instrument, and is not currently subject to
currency exchange rate risk, equity price risk or commodity price risk. The
Company's market risk is composed primarily of interest rate risk. The major
source of the Company's interest rate risk is the difference in the maturity and
repricing characteristics between the Company's core banking assets and
liabilities -- loans and deposits. This difference, or mismatch, poses a risk to
net interest income. Most significantly, the Company's core banking assets and
liabilities are mismatched with respect to repricing frequency, maturity and/or
index. Most of the Company's commercial loans, for example, reprice rapidly in
response to changes in short-term interest. In contrast, many of the Company's
consumer deposits reprice slowly, if at all, in response to changes in market
interest rates.
The Company's Senior Management is responsible for reviewing the interest rate
sensitivity position of the Company and establishing policies to monitor and
limit exposure to interest rate risk. The guidelines established by senior
management are approved by the Company's Board of Directors. The primary goal of
the asset/liability management function is to maximize net interest income
within the interest rate risk limits set by approved guidelines. Techniques used
include both interest rate gap management and simulation modeling that measures
the effect of rate changes on net interest income and market value of equity
under different rate scenarios. The interest rate gap analysis schedule
quantifies the asset/liability static sensitivity as of December 31, 2004.
Rate sensitivity analysis (000's), December 31, 2004
Repricing period in days 0-30 31-90 91-180 181-365 0-365 0ver 365
Rate sensitive assets (RSA):
Federal fund sold $ 3,500 $ - $ - $ - $ 3,500 $ -
Investment securities 4,916 1,405 1,811 4,889 13,021 51,436
Loans 53,634 1,839 3,092 13,188 71,753 95,581
------- -------- -------- --------- --------- --------
Total rate sensitive assets 62,050 3,244 4,903 18,077 88,274 147,017
Rate sensitive liabilities
(RSL):
Demand deposits 33,463 - - - 33,463 31,303
Savings deposits 21,573 - - - 21,573 32,607
Time deposits 6,175 5,980 9,708 10,041 31,904 25,349
------- -------- -------- --------- --------- --------
Total rate sensitive
liabilities 61,211 5,980 9,708 10,041 86,940 89,259
Repricing gap (RSA-RSL) $ 839 $ (2,736) $ (4,805) $ 8,036 $ 1,334 $ 57,758
======= ======== ======== ========= ========= ========
As a percent of capital 2.5% 8.2% -14.3% 24.0% 4.0% 172.1%
As a percent of total assets 3.3% 1.1% -1.9% 3.2% 0.5% 22.8%
19
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, 2004
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 $ 24 $ 16 $ 8 $ (8) $ (16) $ (24)
As a percent of net int income 0.4% 0.2% 0.1% -0.1% -0.2% -0.4%
As a percent of net income 1.0% 0.6% 0.3% -0.3% -0.6% -1.0%
As a percent of net int income(FTE) 0.2% 0.2% 0.1% -0.1% -0.2% -0.2%
As a percent of net income (FTE) 0.6% 0.4% 0.2% -0.2% -0.4% -0.6%
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.
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
17 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.
Pursuant to Exchange Act Rule 13a-15, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2004. 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
December 31, 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 December 31, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
20
PART III
The information called for under the items within this part is included in
County Bank Corp's March 28, 2005 Proxy Statement and is incorporated herein by
reference, as follows:
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 28, 2005 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 60 Employee 38 years
Officer President & Chief Executive Officer 16 years
Present term 16 years
Bruce J. Cady 52 Employee 6 years
Officer Vice President 6 years
Present term 6 years
Laird A. Kellie 59 Employee 22 years
Officer Secretary 16 years
Present term 16 years
Joseph H. Black 55 Employee 15 years
Officer Treasurer & Chief Financial Officer 15 years
Present term 15 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 Corporation's
2005 Proxy Statement at pages 4-6 thereof filed with the Securities and Exchange
Commission is incorporated herein by reference in response to this item.
21
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 NOMINEES" 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.
Share Ownership of Management
Percentage
of
Number outstanding
Director of shares stock
Dr. David H. Bush 48,600 4.35
Michael H. Blazo 20,012 1.79
Bruce J. Cady 600 0.05
Curt Carter 8,388 0.75
Patrick A. Cronin 2,654 0.24
Thomas K. Butterfield 29,200 2.61
James A. Harrington 43,102 3.85
Ernest W. Lefever 1,718 0.15
Tim Oesch 4,700 0.42
Charles Scheidegger 11,598 1.04
Laird Kellie 200 0.02
Executive Officers and Directors, as a group, own 170,772 shares or 15.3% of
1,118,315 total outstanding shares of common stock of Corporation as of December
31, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Transactions and
Relationships" of the Corporation's 2005 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. CONTROLS AND PROCEDURES.
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 2005 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 2004
and are incorporated herein by reference in Item 8:
Balance Sheets--December 31, 2004 and 2003 Page 3
Statements of Income--years ended December 31, 2004, 2003 and 2002 Page 5
Statements of Changes in Stockholders' equity -- years ended December 31, 2004, 2003 and 2002 Page 4
Statements of Cash Flows--years ended December 31, 2004, 2003 and 2002 Page 6
Notes to Financial Statements Pages 7-14
Report of Independent Public Accountants dated February 8, 2005 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.
22
(a)(3) Exhibits Required by Item 601 of Regulation SK Reference is made to the
Exhibit Index which appears on page 27 hereof.
(b) Reports on Form 8-K filed or furnished during the fourth quarter of 2004 and
through the date of the filing on this Form 10-K
December 6, 2004 --Form 8-K was filed to report the declaration of
the Corporation's quarterly cash dividend.
March 1, 2005 - Form 8-K was filed to report calendar year 2004
earnings and the declaration of the Corporation's quarterly cash
dividend. (c) See (a) (3)
(d) Not applicable
23
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 25, 2005
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 25, 2005
/s/ Joseph H. Black
Joseph H. Black, Treasurer and Chief
Financial Officer
Date: March 25, 2005
/s/ James F. Harrington
- -----------------------
James F. Harrington, Director, Date: March 28, 2005
/s/ Patrick A. Cronin
- ---------------------
Patrick A. Cronin, Director, Date: March 25, 2005
/s/ Timothy Oesch
- -----------------
Timothy Oesch, Director, Date: March 28, 2005
/s/ Thomas K. Butterfield
- -------------------------
Thomas K. Butterfield, Director, Date: March 28, 2005
/s/ Ernest W. Lefever
- ---------------------
Ernest W. Lefever, Director, Date: March 28, 2005
/s/ Michael H. Blazo
- --------------------
Michael H. Blazo, Director, March 25, 2005
24
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 2004 Annual Report).
13 Annual Report to Shareholders.
21 List of Subsidiaries. (Incorporated by
Reference to 2004 Annual Report).
31(a) ' Chief Executive Officer Sarbanes-Oxley Act 302
Certification dated March 23, 2005 for Annual
Report on Form 10-K for the year ended
December 31, 2004.
31(b) Chief Financial Officer Sarbanes-Oxley Act 302
Certification dated March 23, 2005 for Annual
Report on Form 10-K for the year ended
December 31, 2004.
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.
25