Exhibit 13
COMMUNITY CENTRAL BANK
CORPORATION
Report of Independent Registered Public
Accounting Firm
and
Stockholder Report
December 31, 2007
(PLANTE & MORAN, PLLC LOGO) PLANTE & MORAN, PLLC
Suite 500
2601 Cambridge Court
Auburn Hills, MI 48326
Tel: 248.375.7100
Fax: 248.375.7101
plantemoran.com
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Community Central Bank Corporation
We have audited the accompanying consolidated balance sheet of Community Central
Bank Corporation as of December 31, 2007 and 2006, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for the years ended December 31, 2007, 2006 and 2005. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Corporation is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Community Central Bank Corporation as of December 31, 2007 and 2006, and the
results of its operations for the years ended December 31, 2007, 2006 and 2005,
in conformity with accounting principles generally accepted in the United States
of America.
As disclosed in Note 21 to the consolidated financial statements, the
Corporation adopted Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, in 2007.
Our audit was conducted for the purpose of forming an opinion on the
consolidated basic financial statements taken as a whole. The information
contained in Notes 4 and 5, pertaining to 2004 and 2003, is presented for the
purpose of additional analysis and is not a required part of the consolidated
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the consolidated basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the consolidated basic financial statements taken as a whole.
/s/ PLANTE & MORAN, PLLC
Auburn Hills, Michigan
March 17, 2008
(PRAXITY MEMBER LOGO)
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED BALANCE SHEET
December 31,
-------------------
Assets 2007 2006
- ------ -------- --------
(In thousands)
Cash and Cash Equivalents
Cash and due from banks (Note 2) $ 6,183 $ 11,026
Federal funds sold 3,000 13,700
-------- --------
Total Cash and Cash Equivalents 9,183 24,726
Trading securities at fair value option (Note 3) 20,115 --
Securities available for sale, at fair value (Note 3) 66,809 80,916
Securities held to maturity, at amortized cost (Note 3) 977 1,017
FHLB stock 5,527 4,540
Residential mortgage loans held for sale 4,848 3,441
Loans (Note 4)
Commercial real estate 264,685 236,399
Commercial and industrial 33,039 28,393
Residential real estate 60,799 72,517
Home equity lines of credit 20,906 17,614
Consumer loans 9,754 11,666
Credit card loans 729 693
-------- --------
Total Loans 389,912 367,282
Allowance for credit losses (Note 5) (6,403) (3,815)
-------- --------
Net Loans 383,509 363,467
Net property and equipment (Note 6) 8,704 9,225
Accrued interest receivable 2,535 2,599
Other real estate 854 108
Goodwill (Note 1) 1,381 1,381
Intangible assets, net of amortization (Note 1) 107 145
Cash surrender value of Bank Owned Life Insurance (Note 13) 10,514 10,163
Other assets (Note 16) 5,242 3,300
-------- --------
Total Assets $520,305 $505,028
======== ========
The accompanying notes are an integral part of the financial statements.
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED BALANCE SHEET
December 31,
---------------------------------
Liabilities 2007 2006
- ----------- ------- --------
(In thousands, except share data)
Deposits
Noninterest bearing demand deposits $ 31,647 $ 33,331
NOW and money market accounts 53,467 59,339
Savings deposits 9,326 10,569
Time deposits (Note 7) 234,195 252,617
-------- --------
Total Deposits 328,635 355,856
Repurchase agreements (Note 8) 32,659 15,688
Federal Home Loan Bank advances ($5.0 million at
fair value option at 12-31-2007) (Note 9) 104,495 83,528
Accrued interest payable 1,018 1,257
Other liabilities (Note 13) 2,637 1,629
ESOP note payable (Note 10) 36 95
Subordinated debentures (at fair value option at
12-31-2007) (Note 11) 17,597 10,310
-------- --------
Total Liabilities 487,077 468,363
Stockholders' Equity (Note 12)
Common stock (No par value; 9,000,000 shares,
authorized, and 3,733,081 and 4,021,246 issued and
outstanding at December 31, 2007 and December 31, 2006,
respectively) 32,071 33,220
Retained earnings 1,797 4,303
Unearned employee benefit (Note 13) (36) (95)
Accumulated other comprehensive loss (604) (763)
-------- --------
Total Stockholders' Equity 33,228 36,665
-------- --------
Total Liabilities and Stockholders' Equity $520,305 $505,028
======== ========
The accompanying notes are an integral part of the financial statements.
2
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
-------------------------------------
2007 2006 2005
------- ------- -------
(In thousands, except per share data)
Interest Income
Loans (including fees) $27,904 $26,732 $21,120
Taxable securities 3,018 3,203 2,294
Tax exempt securities 1,402 1,241 613
Federal funds sold 601 299 203
------- ------- -------
Total Interest Income 32,925 31,475 24,230
Interest Expense
NOW and money market accounts 2,335 1,176 612
Savings deposits 308 299 343
Time deposits 11,495 12,111 6,733
Repurchase agreements and fed funds purchased 912 432 245
Federal Home Loan Bank advances 4,059 3,936 2,865
ESOP loan interest expense 6 10 11
Subordinated debentures 1,620 928 746
------- ------- -------
Total Interest Expense 20,735 18,892 11,555
------- ------- -------
Net Interest Income 12,190 12,583 12,675
Provision for credit losses (Note 5) 3,600 550 100
------- ------- -------
Net Interest Income after provision for credit losses 8,590 12,033 12,575
Noninterest Income
Fiduciary income 437 289 133
Deposit service charges 419 357 297
Net realized security (loss) gain (Note 3) (74) 8 56
Change in fair value of assets/liabilities
carried at fair value 1,392 -- --
Mortgage banking income 2,365 3,376 3,752
Other income 1,153 905 571
------- ------- -------
Total Noninterest Income 5,692 4,935 4,809
Noninterest Expense
Salaries, benefits and payroll taxes (Note 13) 7,898 8,768 7,689
Net occupancy expense (Note 14) 1,806 1,865 1,635
Other operating expense (Note 15) 4,149 3,876 3,808
------- ------- -------
Total Noninterest Expense 13,853 14,509 13,132
------- ------- -------
Income Before Taxes 429 2,459 4,252
Provision for Income Tax (Benefit) Expense (Note 16) (295) 363 1,179
------- ------- -------
Net Income $ 724 $ 2,096 $ 3,073
======= ======= =======
The accompanying notes are an integral part of the financial statements.
3
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(continued)
Year Ended December 31,
-------------------------------------
2007 2006 2005
----- ----- -----
(In thousands, except per share data)
Per share data:*
Basic earnings $0.19 $0.52 $0.80
Diluted earnings $0.19 $0.51 $0.78
Cash Dividends $0.24 $0.24 $0.21
* Per share data has been retroactively adjusted to reflect the issuance of
stock dividends.
4
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 31,
-------------------------
2007 2006 2005
----- ------- -------
(In thousands)
Net Income as Reported $ 724 $2,096 $3,073
Other Comprehensive Income
Change in unrealized net gain (loss) on securities
available for sale, net of tax of ($70) in 2007,
($7) in 2006, and ($328) in 2005 (136) (44) (630)
----- ------ ------
Comprehensive Income $ 588 $2,052 $2,443
===== ====== ======
The accompanying notes are an integral part of the financial statements.
5
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Unearned Other
Common Retained Employee Comprehensive Total
Stock Earnings Benefits Income (Loss) Equity
------- -------- -------- ------------- -------
(In thousands)
Balance January 1, 2005 $20,774 $ 5,111 ($205) ($ 89) $25,591
Cash dividend -- (742) -- -- (742)
Stock options exercised/awards 108 -- -- -- 108
Rights Offering 5,275 -- -- -- 5,275
Stock dividend (Note 12) 2,197 (2,197) -- -- --
Net income for 2005 -- 3,073 -- -- 3,073
Release of ESOP shares 50 -- 57 -- 107
RPFC merger 2,750 -- -- -- 2,750
Other comprehensive income -- -- -- (630) (630)
------- ------- ----- ----- -------
Balance December 31, 2005 $31,154 $ 5,245 ($148) ($719) $35,532
Cash dividend -- (918) -- -- (918)
Stock options exercised/awards 252 -- -- -- 252
Compensation-stock options 23 -- -- -- 23
Stock dividend (Note 12) 2,120 (2,120) -- -- --
Net income for 2006 -- 2,096 -- -- 2,096
Release of ESOP shares 22 -- 53 -- 75
Repurchase of common stock (351) -- -- -- (351)
Other comprehensive income -- -- -- (44) (44)
------- ------- ----- ----- -------
Balance December 31, 2006 $33,220 $ 4,303 ($ 95) ($763) $36,665
Cumulative effect of adoption of SFAS 159 -- (420) -- 295 (125)
Cash dividend -- (931) -- -- (931)
Stock options exercised/awards 341 -- -- -- 341
Compensation-stock options 31 -- -- -- 31
Stock dividend (Note 12) 1,879 (1,879) -- -- --
Net income for 2007 -- 724 -- -- 724
Release of ESOP shares -- -- 59 -- 59
Repurchase of common stock (3,400) -- -- -- (3,400)
Other comprehensive income -- -- -- (136) (136)
------- ------- ----- ----- -------
Balance December 31, 2007 $32,071 $ 1,797 ($ 36) ($604) $33,228
======= ======= ===== ===== =======
The accompanying notes are an integral part of the financial statements.
6
COMMUNITY CENTRAL BANK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
Year Ended December 31,
---------------------------------
2007 2006 2005
--------- --------- ---------
(In thousands)
Operating Activities
Net income $ 724 $ 2,096 $ 3,073
Adjustments to reconcile net income to net
cash flow from operating activities:
Net amortization of security premium 207 187 309
Net loss on available for sale securities 74 (8) (56)
Net gain on instruments at fair value (1,392) -- --
Provision for credit losses 3,600 550 100
Depreciation expense 705 718 560
Deferred income tax (benefit) expense (950) (24) (305)
ESOP compensation expense 59 75 107
Compensation-stock options 31 23 --
Decrease (increase) in accrued interest receivable 64 (477) (731)
(Increase) decrease in other assets (1,651) (187) (1,200)
(Decrease) increase in accrued interest payable (239) 319 158
Increase in other liabilities 1,008 647 38
Loans originated held for sale (109,956) (119,934) (142,072)
Loans sold held for sale 108,548 120,779 144,277
(Increase) decrease in other real estate (746) 4 569
--------- --------- ---------
Net Cash Provided By Operating Activities 86 4,768 4,827
Investing Activities
Sales, maturities, calls and prepayments of
securities available for sale 55,952 33,537 23,320
Purchases of securities available for sale (41,999) (30,506) (55,169)
Maturities, calls, sales and prepayments of trading
securities 13,606 -- --
Transfer and purchase of trading securities (33,402) -- --
Maturities, calls, and prepayments of held to
maturity securities 36 158 65
Purchases of held to maturity securities (987) (295) (1,085)
Increase in loans (23,641) (32,646) (28,727)
Purchases of property and equipment (184) (1,190) (2,392)
Proceeds from sale of property and equipment 60 -- --
Purchase of Bank Owned Life Insurance -- -- (2,000)
--------- --------- ---------
Net Cash Used in Investing Activities (30,559) (30,942) (65,988)
Financing Activities
Net (decrease) increase in demand and savings
deposits (8,799) 17,261 (7,087)
Net (decrease) increase in time deposits (18,422) 24,222 42,604
Net increase in short term borrowings 16,971 2,504 1,692
Issuance of subordinate debentures 18,557 -- --
Redemption of subordinate debentures (10,310) -- --
FHLB advances 43,000 38,700 50,900
FHLB advance repayments (22,018) (41,717) (27,715)
Payment of ESOP debt (59) (53) (57)
Rights/Public Stock Offering -- -- 5,275
Stock options exercised 341 252 108
Cash dividends paid (931) (918) (742)
Repurchase of stock (3,400) (351) --
--------- --------- ---------
Net Cash Provided by Financing Activities 14,930 39,900 64,978
Increase (decrease) in Cash and Cash Equivalents (15,543) 13,726 3,817
Cash and Cash Equivalents at the Beginning of the
Period 24,726 11,000 7,183
--------- --------- ---------
Cash and Cash Equivalents at the End of the Period $ 9,183 $ 24,726 $ 11,000
========= ========= =========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 20,974 $ 18,892 $ 11,555
Federal Taxes Paid $ 300 $ 175 $ 1,740
Loans transferred to other real estate owned $ 878 $ 263 $ 555
========= ========= =========
7
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Community Central Bank Corporation (the
"Corporation") conform to accounting principles generally accepted in the United
States of America. Management is required to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates and assumptions. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of foreclosed real estate, and deferred tax assets.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Corporation and its wholly-owned subsidiaries, Community Central
Bank (the "Bank") and Community Central Mortgage Company, LLC ("the Mortgage
Company"). All significant intercompany transactions are eliminated in
consolidation. The ownership structure of the Mortgage Company consists of two
members, Community Central Bank and Community Central Bank Corporation, owning
99% and 1% of the Mortgage Company, respectively.
NATURE OF OPERATIONS: Community Central Bank Corporation is the bank holding
company for Community Central Bank in Mount Clemens, Michigan. The Bank opened
for business in October 1996 and serves businesses and consumers across Macomb,
Oakland, Wayne and St. Clair counties with a full range of lending, deposit,
trust, wealth management and Internet banking services. The Bank operates three
full service facilities in Mount Clemens, Rochester Hills and Grosse Pointe,
Michigan. Community Central Mortgage Company, LLC, a subsidiary of the
Corporation and Bank, operates locations servicing the Detroit metropolitan area
and northwest Indiana. River Place Trust and Community Central Wealth Management
are divisions of Community Central Bank. Community Central Insurance Agency, LLC
is a wholly owned subsidiary of Community Central Bank.
TRADING SECURITIES: Those securities the Corporation has elected to report at
fair value under the fair value option are reported as trading securities
pursuant to SFAS 159 even though management did not acquire the securities
principally for the purpose of selling them in the near term. The change in the
fair value of these securities is recorded in current earnings.
SECURITIES: On the balance sheet, securities held to maturity are stated at
cost, adjusted for amortization of premium and accretion of discount. Securities
classified as available for sale are those that may be sold in the future to
meet investment objectives of quality, liquidity and yield, and to avoid
significant market deterioration. Securities available for sale are reported at
estimated fair value. Unrealized gain or loss on securities available for sale
is recorded (net of tax) as a component of other comprehensive income in the
equity section of the balance sheet. Gain or loss on sales or calls of
securities is computed based on the amortized cost of the specific security.
FEDERAL HOME LOAN BANK STOCK: Federal Home Loan Bank Stock ("FHLB Stock") is
considered a restricted investment security and is carried at cost. Purchases
and sales of FHLB stock are made directly with the FHLB at par value.
LOANS: Loans are generally reported at the principal amount outstanding.
Non-refundable loan origination fees and certain direct loan origination costs
are deferred and included in interest income over the term of the related loan
as a yield adjustment. Interest on loans is accrued and credited to income based
upon the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid interest accrued is reversed. Interest accruals are
generally resumed when all delinquent principal and/or interest has been brought
current or the loan becomes both well secured and in the process of collection.
LOANS HELD FOR SALE: Loans held for sale consist of residential mortgage loans
with maturities of 15 to 30 years. Such loans are recorded at the lower of
aggregate cost or estimated fair value.
8
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR CREDIT LOSSES: The allowance for credit losses is maintained at a
level considered by management to be adequate to absorb probable losses inherent
in existing loans and loan commitments. The adequacy of the allowance is based
on evaluations that take into consideration such factors as prior loss
experience, changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific impaired or problem loans and
commitments, and current economic conditions that may affect the borrower's
ability to pay.
FORECLOSED ASSETS: Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value as of the date of the
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation, generally computed
using a declining balance method, is charged to operations over the estimated
useful lives of the assets. Leasehold improvements are amortized over the terms
of their respective leases or the estimated useful lives of the improvements,
whichever is shorter.
GOODWILL: Goodwill results from business acquisitions and represents the excess
of the purchase price over the fair value of the acquired tangible assets and
liabilities and identifiable intangible asset. Goodwill is assessed annually for
impairment and any such impairment will be recognized in the period identified.
As of December 31, 2007, the goodwill intangible asset of $1,381,000 had no
impairment at December 31, 2007 and 2006.
INTANGIBLES: The core deposit intangible of $5,000 as of December 31, 2007
consists of core deposit intangible assets arising from an acquisition. The
assets were measured at fair value and are being amortized on an accelerated
method over their estimated useful lives. Amortization expense of $15,000 was
recognized in 2007. Under accelerated amortization, the core deposit intangible
is expected to be fully amortized by 2008.
OTHER INTANGIBLE ASSETS: The other intangible assets of $102,000 as of December
31, 2007 consist of an intangible generated from an acquisition. The intangible
is associated with customer relationships, which will be amortized straight-line
over their estimated useful lives. Amortization expense of $23,000 was
recognized in 2007. Under the straight-line method, the intangible asset is
expected to be fully amortized by 2012.
INTEREST RATE SWAPS: The Corporation utilizes interest rate swaps to better
manage certain risks including interest rate risk and the risks associated with
hedging on balance sheet financial assets and financial liabilities accounted
for under the SFAS 157 and SFAS 159, the Fair Value Measurement and the Fair
Value Option for Financial Assets and Financial Liabilities. The interest rate
swaps are also accounted for under SFAS 157 and SFAS 159.
STOCK OPTION PLAN AND ADOPTION OF SFAS 123R: In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement No. 123R "Share-based
Payment" ("SFAS 123R"), a revision to Statement No. 123, "Accounting for
Stock-Based Compensation." This standard requires the Corporation to measure the
cost of employee services received in exchange for equity awards, including
stock options, based on the grant date fair calculated value of the awards.
The Corporation adopted the provisions of SFAS 123R as of January 1, 2006. The
standard provides for a modified prospective application. Under this method, the
Corporation began recognizing compensation cost for equity based compensation
for all new or modified grants after the date of adoption. In addition, the
Corporation is recognizing the unvested portion of the grant date fair value of
awards issued prior to adoption based on the fair values previously calculated
for disclosure purposes. Prior periods have not been restated.
EARNINGS PER SHARE: Basic earnings per share are based on the weighted average
number of shares outstanding during the period. For earnings per share,
committed-to-be-released and allocated shares of the "ESOP" are considered
outstanding. Diluted earnings per share are adjusted for the dilutive effects of
stock options, where applicable. All share amounts have been retroactively
adjusted to reflect the issuance of stock dividends.
9
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average shares reconciliation is as follows:
Year Ended December 31,
------------------------
2007 2006 2005
------- ----- ------
(In thousands of shares)
Basic 3,833 4,014 3,822
Effect of stock options 42 67 98
----- ----- -----
Diluted 3,875 4,081 3,920
===== ===== =====
COMPREHENSIVE INCOME: Accounting principles generally require that recognized
revenue, expense, gain and loss be included in net income. Certain changes in
assets and liabilities, such as unrealized gain or loss on securities available
for sale, are reported as a separate component of equity. Such items, along with
net income, are components of comprehensive income. Accumulated other
comprehensive income at December 31, 2007, 2006 and 2005 consisted solely of
unrealized gain and losses on available for sale securities, net of tax.
RECENT ACCOUNTING PRONOUNCEMENTS:
EMERGING ISSUES TASK FORCE ISSUE 06-4 - ACCOUNTING FOR DEFERRED COMPENSATION AND
POSTRETIREMENT BENEFIT ASPECTS OF ENDORSEMENT SPLIT-DOLLAR LIFE INSURANCE
ARRANGEMENTS - In September 2006, the Emerging Issues Task Force Issue 06-4
(EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements was ratified.
EITF 06-4 Addresses accounting for separate agreements which split life
insurance policy benefits between an employer and employee. The Issue requires
the employer to recognize a liability for future benefits payable to the
employee under these agreements. The effects of applying EITF 06-4 must be
recognized through either a change in accounting principle through an adjustment
to equity or through the retrospective application to all prior periods. For
calendar year companies, EITF 06-4 is effective beginning January 1, 2008. The
Corporation is currently evaluating the impact of the adoption of this
accounting pronouncement. The Corporation does not have split-dollar life
insurance arrangements.
10
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) CASH AND DUE FROM BANKS
The Bank is required to maintain cash on hand or noninterest bearing deposits
with the Federal Reserve Bank, based on a percentage of the Bank's deposits. The
requirement is met using a combination of vault cash and deposits made using a
pass-through relationship with a correspondent bank. As of December 31, 2007,
$25,000 in reserves was required.
(3) SECURITIES
The following table shows the amortized cost and estimated fair value of the
Corporation's security portfolios as of the dates indicated:
December 31, 2007
-------------------------------------
Unrealized
Amortized --------------- Fair
Cost Gains Losses Value
--------- ----- ------- -------
(In thousands)
Securities Available for Sale
United States Government agencies $ 5,669 $ 85 $ -- $ 5,754
Mortgage backed securities 25,150 81 (143) 25,088
Collateralized mortgage obligations 6,773 12 (106) 6,679
Municipal securities 29,632 26 (861) 28,797
Mutual fund 500 -- (9) 491
------- ---- ------- -------
Total Securities Available for Sale 67,724 204 (1,119) 66,809
------- ---- ------- -------
Held to Maturity Securities
Municipal securities 95 3 -- 98
Trust Preferred securities 250 -- -- 250
Mortgage backed securities 632 1 (7) 626
------- ---- ------- -------
Total Held to Maturity Securities 977 4 (7) 974
------- ---- ------- -------
Total Securities $68,701 $208 ($1,126) $67,783
======= ==== ======= =======
The following table shows those securities the Corporation has elected to report
at fair value under the fair value option are reported as trading securities
pursuant to SFAS 159 even though management did not acquire the securities
principally for the purpose of selling them in the near term. The change in the
fair value of these securities is recorded in current earnings.
December 31, 2007
-----------------
Fair Value
-----------------
Trading Securities
United States Government agencies $13,396
Collateralized mortgage obligations 6,719
-------
Total Trading Securities Held at Fair Value $20,115
=======
11
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
-------------------------------------
Unrealized
Amortized --------------- Fair
Cost Gains Losses Value
--------- ----- ------- -------
(In thousands)
Securities Available for Sale
United States Government agencies $19,453 $-- ($243) $19,210
Mortgage backed securities 19,331 21 (293) 19,059
Collateralized mortgage obligations 11,273 17 (182) 11,108
Municipal securities 31,515 25 (486) 31,054
Mutual fund 500 -- (15) 485
------- --- ------- -------
Total Securities Available for Sale 82,072 63 (1,219) 80,916
------- --- ------- -------
Held to Maturity Securities
Municipal securities 105 3 -- 108
Trust Preferred securities 250 -- (10) 240
Mortgage backed securities 662 1 (18) 645
------- --- ------- -------
Total Held to Maturity Securities 1,017 4 (28) 993
------- --- ------- -------
Total Securities $83,089 $67 ($1,247) $81,909
======= === ======= =======
December 31, 2005
-------------------------------------
Unrealized
Amortized --------------- Fair
Cost Gains Losses Value
--------- ----- ------- -------
(In thousands)
Securities Available for Sale
United States Government agencies $24,170 $ -- ($355) $23,815
Mortgage backed securities 25,503 35 (372) 25,166
Collateralized mortgage obligations 10,936 5 (214) 10,727
Municipal securities 24,168 61 (249) 23,980
Mutual fund 500 -- (11) 489
------- ---- ------- -------
Total Securities Available for Sale 85,277 101 (1,201) 84,177
------- ---- ------- -------
Held to Maturity Securities
Municipal securities 115 4 -- 119
Trust Preferred securities 250 -- (6) 244
Mortgage backed securities 729 2 (9) 722
------- ---- ------- -------
Total Held to Maturity Securities 1,094 6 (15) 1,085
------- ---- ------- -------
Total Securities $86,371 $107 ($1,216) $85,262
======= ==== ======= =======
For the years ended December 31, 2007, 2006 and 2005, proceeds from sales of
securities available for sale amounted to $9.4 million, $11.8 million and $15.2
million, respectively. Gross realized gains amounted to $23,000, $54,000 and
$90,000, respectively. Gross realized losses amounted to $97,000, $46,000 and
$34,000, respectively.
12
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows information pertaining to securities with gross
unrealized losses at December 31, 2007 and 2006, aggregated by investment
category and length of time that individual security has been in continuous loss
position. Unrealized losses on securities have not been recognized into income
because the issuers' bonds are of high credit quality. We have the intent and
ability to hold the securities for the foreseeable future and the decline in
fair value is primarily due to increased market interest rates.
December 31, 2007
-------------------------------------------
Less than 12 Months Over 12 Months
-------------------- --------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ------- ---------- -------
(In thousands)
Securities Available for Sale
United States Government agencies $ -- $ -- $ -- $ --
Mortgage backed securities (56) 8,297 (87) 8,589
Collateralized mortgage obligations (5) 1,965 (101) 2,509
Municipal securities (465) 9,213 (396) 14,781
Mutual funds -- -- (9) 491
------ ------- ------ -------
Total Securities Available for Sale ($526) $19,475 ($593) $26,370
====== ======= ====== =======
As of December 31, 2007, the unrealized loss on held to maturity securities was
$6,000 and was in an unrealized loss position for over twelve months.
December 31, 2006
-------------------------------------------
Less than 12 Months Over 12 Months
-------------------- --------------------
Gross Gross
Unrealized Fair Unrealized Fair
Losses Value Losses Value
---------- ------- ---------- -------
(In thousands)
Securities Available for Sale
United States Government agencies $ -- $ -- ($243) $18,255
Mortgage backed securities (5) 779 (288) 15,935
Collateralized mortgage obligations -- 289 (182) 8,052
Municipal securities (181) 12,532 (305) 14,125
Mutual funds -- -- (15) 485
------ ------- ------- -------
Total Securities Available for Sale ($186) $13,600 ($1,033) $56,852
====== ======= ======= =======
As of December 31, 2006, the unrealized loss on held to maturity securities was
$28,000 and was in an unrealized loss position for less than twelve months.
13
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturity distribution of the investment portfolio as of December 31, 2007, 2006
and 2005 with weighted average yields to maturity. This schedule does not
include those trading securities carried at fair value.
2007 2006 2005
------------------------- ------------------------- -------------------------
Amortized Fair Yield Amortized Fair Yield Amortized Fair Yield
Cost Value (%) Cost Value (%) Cost Value (%)
--------- ------- ----- --------- ------- ----- --------- ------- -----
(In thousands)
U.S. Government debentures
One year or less 2,102 2,123 5.40% 4,099 4,067 4.14% 7,358 7,253 3.26%
Over 1 year through five years 2,606 2,643 4.88% 12,122 11,958 4.64% 9,984 9,840 4.47%
Over 5 years through 10 years 961 988 5.32% 3,232 3,185 5.32% 6,828 6,722 5.34%
Over ten years -- -- -- -- -- --
------- ------- ---- ------- ------- ---- ------- ------ ----
5,669 5,754 5.15% 19,453 19,210 4.65% 24,170 23,815 4.35%
State and political subdivisions *
One year or less 697 696 4.60% 753 743 4.55% 140 140 6.28%
Over 1 year through five years 2,964 2,952 4.54% 3,700 3,632 4.78% 2,179 2,141 4.81%
Over 5 years through 10 years 4,323 4,292 5.79% 4,871 4,849 5.87% 4,398 4,367 5.90%
Over ten years 21,743 20,955 6.26% 22,296 21,938 6.66% 17,566 17,451 6.60%
------- ------- ---- ------- ------- ---- ------- ------ ----
29,727 28,895 5.98% 31,620 31,162 6.27% 24,283 24,099 6.31%
U.S. government mortgage-backed
and collateralized mortgage
obligations 32,555 32,393 5.12% 31,266 30,812 4.92% 37,168 36,615 4.40%
Mutual Fund (CRA Qualified) 500 491 4.20% 500 485 3.98% 500 489 3.98%
Trust Preferred securities 250 250 8.50% 250 240 8.50% 250 244 8.50%
------- ------- ---- ------- ------- ---- ------- ------- ----
Total securities $68,701 $67,783 5.50% $83,089 $81,909 5.38% $86,371 $85,262 5.02%
======= ======= ==== ======= ======= ==== ======= ======= ====
Memo:
Total variable rate securities
Included above 8,687 8,671 9,918 9,797 12,625 12,419
* weighted yield on state and political subdivisions is calculated on a
taxable equivalent basis and is based on yield to maturity of the
instruments.
The preceding table shows securities generally by contractual maturity. Actual
maturities may differ from contractual maturities because issuers (or underlying
borrowers) may have the right to call or prepay obligations.
Investment securities of $45.6 million were pledged at December 31, 2007 to
secure short term repurchase agreements and partially secure Federal Home Loan
Bank advances.
14
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS
Certain directors and executive officers of the Corporation and their associates
are loan customers of the Bank. Such loans were made in the ordinary course of
business and do not involve more than a normal risk of collectibility. The
outstanding loan balance for these persons amounted to $7,371,000 and $7,678,000
at December 31, 2007 and 2006, respectively. The total unused commitments
related to these loans were $3,072,000 at December 31, 2007. During 2007, new
loans and advances were $1,952,000, while repayments totaled $2,259,000.
The Bank grants loans to customers who reside primarily in Macomb, St. Clair and
Oakland Counties. Although the Bank has a diversified loan portfolio, a
substantial portion of the local economy has traditionally been dependent upon
the automotive industry. Additionally, the Bank had approximately $144.5 million
in outstanding loans at December 31, 2007, to commercial borrowers in the real
estate rental and property management industry.
LOAN PORTFOLIO
The following table sets forth the composition of our loan portfolios as of the
dates indicated. The loan amounts in the table reflect amounts before deductions
for loans in process, deferred loan fees and discounts and allowance for credit
losses.
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
(In thousands)
Commercial real estate (1) $264,685 $236,399 $201,348(2) $166,686 $149,769
Commercial and industrial 33,039 28,393 26,753(2) 40,614 39,330
Residential real estate 60,799 72,517 74,601 64,240 60,046
Home equity lines 20,906 17,614 18,545 18,864 11,217
Consumer loans 9,754 11,666 13,054 14,377 9,844
Credit cards 729 693 650 658 622
-------- -------- -------- -------- --------
Total loans $389,912 $367,282 $334,951 $305,439 $270,828
======== ======== ======== ======== ========
(1) Included in the category of commercial real estate in the above table are
real estate construction loans totaling $47.8 million, $42.4 million, $40.6
million, $18.2 million and $13.2 million for the years ended 2007, 2006,
2005, 2004 and 2003, respectively.
(2) Approximately $12 million of the commercial and industrial loan portfolio
was reclassified during the first quarter of 2005 as commercial real estate
loans.
Commercial (and multi-family) real estate loans make up the largest component of
our loan portfolio. Loans secured by commercial and multi-family real estate
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Commercial and multi-family real
estate loans typically involve large balances to single borrowers or groups of
related borrowers. Because payments on loans secured by commercial and
multi-family real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to adverse conditions in the real estate market or the economy. If the
cash flow from the project is reduced (for example, if leases are not obtained
or renewed), the borrower's ability to repay the loan may be impaired. We
attempt to minimize the risks associated with these transactions by generally
limiting our commercial real estate lending to well-known customers or new
customers whose businesses have an established profitable history. In many
cases, risk is further reduced by limiting the amount of credit to any one
borrower to an amount less than our legal lending limit and avoiding certain
types of commercial real estate financing.
Our commercial and industrial business lending activities have encompassed loans
with a variety of purposes and security, including loans to finance inventory
and equipment. Commercial and industrial business loans generally involve
different risks than residential and commercial mortgage loans. Commercial and
industrial business loans are of higher risk and typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself, rather than on the value of the real estate that secures mortgage loans.
15
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the nominal interest rate sensitivity of
selected loan portfolios at December 31, 2007. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The table does not reflect the effects of interest rate
adjustments and possible repayments.
Commercial and industrial loans due during the years ending December 31,
(In thousands)
--------------
2008 $15,473
2009 to 2012 15,983
2013 and thereafter 1,583
-------
Total loans $33,039
=======
The total amount of commercial and industrial loans due after December 31, 2008
which have fixed interest rates is $15.1 million, while the total amount of
these loans due after such date which have floating or adjustable interest rates
is $2.5 million. Some of these loans may have floor interest rate levels which
are reported as fixed interest rate loans.
Real estate construction loans due
during the years ending December 31,
(In thousands)
--------------
2008 $29,783
2009 to 2012 18,065
2013 and thereafter --
-------
Total loans $47,848
=======
The total amount of construction loans due after December 31, 2008 which have
fixed interest rates is $12.5 million and $5.6 million in loans due after such
date which have floating or adjustable interest rates.
16
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ALLOWANCE FOR CREDIT LOSSES
A summary of the activity in the allowance for credit losses is as follows:
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars, in thousands)
Balance at beginning of the period $3,815 $3,580 $3,377 $3,573 $3,377
Charge-offs:
Commercial real estate 338 -- 181 -- --
Commercial and industrial 110 248 57 2,040 38
Residential real estate 106 21 103 61 18
Home equity lines 131 21 -- -- --
Consumer loans 382 40 171 71 64
Credit cards 33 13 12 44 3
------ ------ ------ ------ ------
Total charge-offs 1,100 343 524 2,216 123
------ ------ ------ ------ ------
Recoveries:
Commercial real estate -- -- 1 -- --
Commercial and industrial 12 14 606 1 19
Residential real estate -- 8 -- -- --
Home equity lines -- -- -- -- --
Consumer loans 69 5 18 18 24
Credit cards 7 1 2 1 1
------ ------ ------ ------ ------
Total recoveries 88 28 627 20 44
------ ------ ------ ------ ------
Net charge-offs 1,012 315 (103) 2,196 79
------ ------ ------ ------ ------
Provision charged to earnings 3,600 550 100 2,000 275
------ ------ ------ ------ ------
Balance at the end of the period $6,403 $3,815 $3,580 $3,377 $3,573
====== ====== ====== ====== ======
As a percentage of total portfolio loans 1.64% 1.04% 1.07% 1.11% 1.32%
Ratio of net charge-offs (net recoveries)
during the period to average
loans during the period 0.27% 0.09% (0.03%) 0.74% 0.03%
The loan portfolio has been reviewed and analyzed for the purpose of estimating
probable credit losses inherent in the loan portfolio. The Corporation performs
a detailed quarterly review of the allowance for credit losses. The Corporation
evaluates those loans classified as substandard, under its internal risk rating
system, on an individual basis for impairment under SFAS 114. The level and
allocation of the allowance is determined primarily on management's evaluation
of collateral value, less the cost of disposal, for loans reviewed in this
category. The remainder of the total loan portfolio is segmented into
homogeneous loan pools with similar risk characteristics for evaluation under
SFAS 5. The Corporation uses factors such as, historical portfolio losses,
national and local economic trends and levels of delinquency to determine the
appropriate level and allocation of the allowance for loans in this grouping.
The Corporation's policy dictates that specifically identified credit losses be
recognized immediately by a charge to the allowance for credit losses.
Management believes that the present allowance is adequate, based on the broad
range of considerations listed above.
The Corporation considers a loan impaired when it is probable that not all of
the interest and principal will be collected in accordance with the contractual
terms of the loan agreement. Consistent with this definition, all nonaccrual and
reduced-rate loans (with the exception of residential mortgage loans and
consumer loans) are considered impaired. The Corporation had $18.5 million in
loans and other real estate owned classified as nonperforming at December 31,
2007 and $4.8 million at December 31, 2006.
17
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
The following table contains reserve allocations for types of loans for the
years presented.
Commercial Commercial Residential Home Equity Consumer Credit
Real Estate and Industrial Real Estate Lines Loans Cards Unallocated Total
----------- -------------- ----------- ----------- -------- ------ ----------- ------
(Dollars in thousands)
Balances:
December 31, 2007 $4,360 $ 302 $ 824 $396 $314 $ 50 $ 157 $6,403
% of loans in category 67.8% 8.5% 15.6% 5.4% 2.5% 0.2% 100.0%
December 31, 2006 $1,741 $ 499 $ 931 $436 $155 $ 26 $ 27 $3,815
% of loans in category 64.4% 7.7% 19.7% 4.8% 3.2% 0.2% 100.0%
December 31, 2005 $1,526 $ 594 $ 993 $138 $154 $ 24 $ 151 $3,580
% of loans in category 60.1% 8.0% 22.3% 5.5% 3.9% 0.2% 100.0%
December 31, 2004 $ 805 $1,673 $ 441 $ 94 $205 $ 30 $ 129 $3,377
% of loans in category 54.6% 13.3% 21.0% 6.2% 4.7% 0.2% 100.0%
December 31, 2003 $2,015 $1,025 $ 181 $ 8 $ 80 $ 17 $ 247 $3,573
% of loans in category 55.3% 14.5% 22.2% 4.1% 3.6% 0.3% 100.0%
LEGAL LENDING LIMIT
Pursuant to state regulations, the Bank is limited in the amount that it may
lend to a single borrower. As of December 31, 2007, the legal lending limit was
approximately $4.8 million or 15% of capital and surplus of the Bank; however,
that limit can be increased (for individual loans) to approximately $8.0 million
or 25% of capital and surplus, with two-thirds approval of the Board of
Directors.
18
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONPERFORMING ASSETS
The table below sets forth the amounts and categories of nonperforming assets in
our loan portfolio. See "Loans" and "Allowance for Credit Losses" under Notes 4
and 5 of Notes to Consolidated Financial Statements. For all years presented, we
have had no troubled debt restructuring, which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than market rates.
December 31,
------------------------------------------
2007 2006 2005 2004 2003
------- ------ ------ ------ -----
(In thousands)
Nonaccrual loans
Commercial real estate $14,379 $2,711 $1,637 $ 220 $ 277
Commercial and industrial 146 646 985 305 88
Residential real estate 2,053 -- 67 16 --
Home equity lines 354 -- -- -- --
Consumer loans 30 -- -- -- --
Credit cards -- -- -- -- --
------- ------ ------ ------ -----
Total 16,962 3,357 2,689 541 365
Accruing loans delinquent more
than 90 days
Commercial real estate $ -- $ -- $ -- $ -- $ --
Commercial and industrial -- -- -- -- --
Residential real estate 654 876 621 100 116
Home equity lines 44 336 -- -- --
Consumer loans -- 160 1 124 1
Credit cards 25 1 1 10 2
------- ------ ------ ------ -----
Total 723 1,373 623 234 119
------- ------ ------ ------ -----
Total nonperforming loans 17,685 4,730 3,312 775 484
Other real estate owned
Commercial real estate 319 -- -- 681 363
Residential real estate 535 108 112 -- --
------- ------ ------ ------ -----
Total 854 108 112 681 363
------- ------ ------ ------ -----
Total nonperforming assets $18,539 $4,838 $3,424 $1,456 $ 847
======= ====== ====== ====== =====
Total nonperforming loans as a
percentage of total loans 4.54% 1.29% 0.99% 0.25% 0.18%
Total nonperforming assets as a
percentage of total assets 3.56% 0.96% 0.74% 0.37% 0.24%
The Corporation did not recognize any interest income in 2007, 2006 and 2005 on
those loans classified as nonaccruing for the period ended December 31, 2007,
2006 and 2005. The amount of interest that would have been recognized on those
loans classified as nonaccruing, if the loans were in accrual status during that
same time period was $332,000, $140,000 and $39,000 during the periods of 2007,
2006 and 2005, respectively.
Nonperforming loans without a related allowance for credit losses totaled $3.4
million and $68,000 for the periods ended December 31, 2007 and 2006,
respectively. Nonperforming loans with a related allowance for credit losses
totaled $13.5 million and $3.3 million for the periods ended December 31, 2007
and 2006, respectively. The related allowance for nonperforming loans for the
period ended December 31, 2007 and 2006 was $3.8 million and $208,000,
respectively. Total nonperforming loans averaged $16.7 million in 2007, $3.4
million in 2006 and $1.8 million in 2005.
19
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31 is as follows:
2007 2006
------ ------
(In thousands)
Land $1,340 $1,340
Buildings and improvements 5,883 5,869
Building construction in process 93 --
Leasehold improvements 746 585
Furniture and equipment 4,435 4,533
Vehicles 42 56
------ ------
12,539 12,383
Less accumulated depreciation and amortization 3,835 3,158
------ ------
Net property and equipment $8,704 $9,225
====== ======
(7) TIME DEPOSITS
As of December 31, 2007, scheduled maturities of all time deposits are as
follows:
Year ending December 31, (In thousands)
- ------------------------ --------------
2008 $158,586
2009 48,991
2010 25,325
2011 1,035
2012 258
Subsequent years --
--------
Total time deposits $234,195
========
The following table depicts the maturity distribution of certificates of deposit
with balances of $100,000 or more at December 31, 2007.
(In thousands)
--------------
Three months or less $ 37,070
Over three months to twelve months 90,252
Over one year to three years 67,278
Over three years 200
--------
Total time deposits of $100,000 or more $194,800
========
20
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SHORT TERM BORROWINGS
Short term borrowings at December 31, 2007, consisted of short term FHLB
advances of $23.8 million and short term securities sold with an agreement to
repurchase of $13.7 million. Repurchase agreements generally mature within one
day. Following are details of short term borrowings for the dates or periods
indicated:
During the first quarter of 2007, the Corporation borrowed $19 million in a
wholesale structured repurchase agreement with an interest rate tied to the
three month Libor rate, less 250 basis points adjusted quarterly, until March 3,
2008 when the borrowing changes to a fixed interest rate of 4.95% until March 2,
2017. The repurchase agreement is callable quarterly after March 2, 2008.
2007 2006 2005
------- ------- -------
(Dollars in thousands)
Amount outstanding at end of year
Short-term Repurchase agreements $13,659 $15,688 $13,184
Short-term FHLB advances $23,795 $14,000 $26,700
Weighted average interest rate on ending balance
Short-term Repurchase agreements 3.00% 3.15% 2.50%
Short-term FHLB advances 4.14% 3.92% 3.60%
Maximum amount outstanding at any month end
during the year
Short-term Repurchase agreements $14,932 $21,832 $21,711
Short-term FHLB advances $23,795 $26,700 $26,700
Average amount outstanding during the year
Short-term Repurchase agreements $13,330 $13,443 $11,668
Short-term FHLB advances $19,831 $11,500 $22,775
Weighted average interest rate
Short-term Repurchase agreements 3.10% 2.91% 1.99%
Short-term FHLB advances 4.16% 3.76% 3.22%
21
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) FHLB ADVANCES
In June of 2001, the Corporation started to borrow long-term advances from the
FHLB to fund fixed rate instruments and to attempt to minimize the interest rate
risk associated with certain fixed rate commercial mortgage loans and investment
securities. The advances are collateralized by residential and commercial
mortgage loans under a blanket collateral agreement totaling approximately
$233.3 million and $132.1 million at December 31, 2007 and 2006, respectively.
The advances are also secured by specific investment securities with an
amortized cost of $11.0 million and $28.0 million and fair market values of
$11.1 million and $27.6 million at December 31, 2007 and 2006, respectively. All
advances at December 31, 2007, with the exception of variable rate advances
representing $12 million, were short-term and had prepayment penalties. All
advances have final maturities without callable provisions.
FHLB advances outstanding were as follows:
December 31, 2007 December 31, 2006
--------------------------- --------------------------
Ending Average rate Ending Average rate
Balance at end of period Balance at end of period
-------- ---------------- ------- ----------------
(Dollars in thousands)
Short-term FHLB advances $ 23,795 4.14% $14,000 3.92%
Long-term FHLB advances $ 80,700 4.70% 69,528 4.73%
-------- ---- ------- ----
$104,495 4.57% $83,528 4.60%
Long-term advances were comprised of 36 advances with maturities ranging from
June 2009 to June 2016.
The principal maturities of long-term advances outstanding at December 31, 2007
are as follows:
Year ending December 31, (In thousands)
- ------------------------ --------------
2009 $19,000
2010 21,000
2011 5,500
2012 7,000
Subsequent years 28,200
-------
Total $80,700
=======
Effective January 1, 2007, the Corporation has elected early adoption of SFAS
159 for all FHLB advances maturing in 18 months from January 1, 2007, which
represented originally $16 million in total. At December 31, 2007, the fair
value of the selected advances reported at fair value was $4,986,000 (face value
$5.0 million). The overall weighted yield of these FHLB advances was 3.73% at
December 31, 2007. Management believed that the selected instruments at the
initial election partially served as a hedge for those securities recorded as
trading from the transfer from available for sale under SFAS 159.
22
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) ESOP NOTE PAYABLE
In 1999, the ESOP entered into a 10 year variable rate note payable with an
outside financial institution as a part of the Bank's employee stock ownership
plan ("ESOP"). The dividends paid by the Corporation to date on unearned shares
of common stock held by the ESOP can and have been used to repay the note,
resulting in expected maturity of the note in 2008. In addition, the note is
floating at prime rate which was 7.25% at December 31, 2007. The Corporation has
guaranteed the loan, with the ESOP stock pledged as collateral. In addition, the
Bank has issued a letter of credit supporting the note payable. Since ESOP debt
is guaranteed by the Corporation, it is reflected on the consolidated balance
sheet as a liability with a related amount shown as a reduction in the
stockholders' equity. Dividends paid by the Corporation on unallocated shares of
common stock held by the ESOP can be used to repay the loan used to purchase the
Corporation's common stock at the discretion of the plan administrator. In 2007,
$9,000 was paid from accumulated dividends on unallocated shares on the ESOP
note payable in addition to the scheduled loan payments.
As of December 31, 2007, scheduled maturities of the ESOP note payable are as
follows:
(In thousands)
--------------
2008 $36
---
$36
===
23
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) SUBORDINATED DEBENTURES
On February 13, 2007, Community Central Capital Trust II (Trust II), a statutory
trust formed by the Corporation for the purpose of issuing trust preferred
securities, issued $18,000,000 aggregate liquidation amount of cumulative trust
preferred securities. The Trust II securities bear a fixed distribution rate of
6.71% per annum through March 6, 2017, and thereafter will bear a floating
distribution rate equal to 90-day LIBOR plus 1.65%. The Trust II securities are
redeemable at the Corporation's option, in whole or in part, at par beginning
March 6, 2017, and if not sooner redeemed, mature on March 6, 2037. The Trust II
securities were sold in a private transaction exempt from registration under the
Securities Act of 1933, as amended. The gross proceeds of the offering were used
to purchase junior subordinated debentures from the Corporation totaling
$18,557,000.
On June 29, 2007, the Corporation redeemed $10.0 million of the subordinated
debentures issued to Community Central Capital Trust I (and as a result the
Trust I preferred securities).
The trust preferred securities may constitute up to 25% of tier I capital. Any
amount in excess of this limit may be included as tier 2 capital. At December
31, 2007, $10.7 million of the trust preferred issuance was included in the
Corporation's tier 1 capital, with the remaining $7.3 million included in tier 2
capital.
(12) STOCKHOLDERS' EQUITY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet these
requirements can initiate certain mandatory (and possible additional
discretionary) actions by regulators. These actions, if undertaken, could have a
material effect on the Corporation's financial position. Under capital adequacy
guidelines, the Corporation and the Bank must meet specific capital requirements
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items. Capital amounts are also subject to qualitative
judgments by the regulators about individual components, risk-weightings, and
other factors.
Quantitative measures established by regulation require the Corporation and the
Bank to maintain minimum amounts and ratios of Tier I capital and total capital
(as defined in the regulations) to risk-weighted assets. The Corporation and the
Bank are also subject to a minimum Tier I leverage ratio expressed as a
percentage of quarterly average assets (as defined). The Corporation is further
subject to leverage ratios consisting of primary capital and total capital as a
percentage of assets at period end. Management believes, as of December 31,
2007, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject and is considered "well capitalized".
On April 17, 2007, Community Central Bank Corporation declared a 5% stock
dividend, payable on June 1, 2007 to stockholders of record on May 1, 2007. The
outstanding numbers of shares, earnings per share, exercise price data and
common stock price data have been adjusted to reflect this dividend. Retained
earnings and common stock were adjusted to reflect the stock dividend as
indicated in the Consolidated Statement of Changes in Stockholders' Equity.
24
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the Corporation's and the Bank's actual capital
amounts and ratios as of December 31, as well as certain minimum requirements:
2007 2006 Minimum Ratio Ratio
-------------- -------------- for Capital to be
Capital Ratio Capital Ratio Adequacy Purposes "Well Capitalized"
------- ----- ------- ----- ----------------- ------------------
(In thousands)
Tier I capital to risk-weighted assets
Consolidated $42,932 10.29% $45,878 11.68% 4% NA
Bank only 42,889 10.32% 43,677 11.14% 4% 6%
Total capital to risk-weighted assets
Consolidated 55,430 13.28% 49,693 12.65% 8% NA
Bank only 48,199 11.57% 47,486 12.11% 8% 10%
Tier I capital to average assets
Consolidated 42,932 8.37% 45,878 9.01% 4% NA
Bank only 42,889 8.39% 43,671 8.60% 4% 5%
25
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) BENEFIT PLANS
DEFINED CONTRIBUTION PLAN - The Corporation has a 401(k) defined contribution
savings plan for employees. Employer contributions are discretionary and are
determined annually by the Board of Directors. Employer contributions of
$69,000, $72,000 and $72,000 were paid or accrued for the periods ended December
31, 2007, 2006 and 2005.
EMPLOYEE STOCK OWNERSHIP PLAN - During the second quarter of 1999, the Bank
established an employee stock ownership plan ("ESOP") for the benefit of
eligible employees. As of December 31, 2007, the plan had a total of 76,190
shares of the Corporation's stock. This represented both committed-to-be
released shares and unearned shares. Under the plan, the shares of stock
committed-to-be released into all participants' accounts are directly
proportional to the ratio of the principal reductions to the total original
principal amount. Dividends paid by the Corporation on common stock held by the
ESOP, as committed-to-be released, are allocated proportionately to the number
of shares of each participant. Dividends paid by the Corporation on unearned
shares of common stock held by the ESOP can be used to repay the loan or used to
purchase the Corporation's common stock at the discretion of the plan
administrator. Under Statement of Position 93-6, "Employer's Accounting for
Employee Stock Ownership Plans", the compensation expense recognized was based
on the fair value of the committed-to-be released shares which was $60,000 for
2007. As of December 31, 2007, 69,020 shares were committed-to-be released, with
7,170 remaining unearned. The value of unearned shares as of December 31, 2007,
was $45,000.
The ESOP borrowed $500,000 from a bank to purchase shares of the Corporation
stock (see Note 10). The ESOP intends to repay the loan (plus interest) using
Bank contributions.
Information regarding the ESOP transactions for the years ended December 31 is
as follows:
2007 2006 2005
---- ---- ----
(In thousands)
Amounts paid by ESOP for:
Debt repayment * $59 $53 $57
Interest $ 6 $10 $11
Other $ 4 $12 $11
Amounts received from the Corporation as:
Contributions $69 $72 $72
- ----------
* Includes debt repayment in 2007, 2006 and 2005 from cash contained in ESOP
from accumulated dividends.
26
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN - The Corporation sponsors a
non-qualifying defined benefit plan to provide supplemental retirement benefits
for certain key executives. The plan which started in April 2003, benefiting two
current and one former executive officers, has a minimum benefit upon retirement
for each participant of $75,000 and the maximum benefit is 50% of the average of
the three highest years of compensation. Effective August 2005, the Corporation
added two additional executive officers to the plan. The benefit payable upon
retirement for these two additional executives is $50,000 each. The following
table sets forth the plan activity and other information as of and for the year
ended December 31, 2007.
2007
--------------
(In thousands)
Plan assets at fair value $ --
Benefit obligation 1,676
--------
Overfunded (underfunded) status ($1,676)
========
Pension liability
--------
Net pension costs $ 356
--------
Change in minimum liability $ 356
========
Actuarial comparisons:
Weighted average discount rate 7.0%
Increase in future compensation levels 5.0%
To fund the supplemental retirement benefit obligation, the Corporation has
purchased insurance policies on the lives of the participants with the
Corporation as the owner and beneficiary of the policies. At December 31, 2007,
the cash surrender value of all bank owned life insurance policies on the
participants amounted to $10.5 million. There were no supplemental retirement
benefits paid by the plan during 2007.
STOCK OPTION PLANS - The Corporation currently has three active stock plans.
Under the 1996 and 2000 Employee Stock Option Plans ("Employee Plans"), the
Corporation is authorized to grant options to key employees for up to 58,564 and
66,000 shares of common stock, respectively. No options are presently available
for grant under the 1996 and 2000 Employee Stock Option Plan although options to
purchase 52,839 shares of Corporation common stock were outstanding and
unexercised as of December 31, 2007. Under the 2002 Incentive Plan, as amended
in 2005, up to 46,305 shares were available for grant to directors and 341,195
for grant to employees. In December 2007, 47,500 stock options were granted to
employees with terms of 10 years under the 2002 Incentive Plan. As part of the
annual stock award provision of the 2002 Incentive Plan, 300 shares of common
stock were awarded to each Director for a total of 2,700 shares. At December 31,
2007, 82,961 shares were available to employees and 27,600 shares to directors
under all remaining plans. The shares awarded were recorded as director and
employee compensation expense, respectively. Under all plans, the exercise price
of each option equals the market price of the Corporation's common stock at the
date of grant.
27
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation recognizes compensation expense using the Black Scholes option
pricing model. The volatility assumption used in the Black Scholes formula is
based on the volatility of Community Central Bank Corporation common stock,
which is traded on the NASDAQ Global Market. The weighted average assumptions
used in the Black Scholes model are noted in the table at the bottom of the
page. The Corporation uses historic data to estimate option exercise and
employee termination within the valuation model. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant. The Corporation has estimated the fair
value of the options issued in December 2007 at $2.43 per share. The options
become exercisable on January 1, 2008 for 20% of shares covered under the
agreement and for an additional 20% of the shares annually thereafter.
Compensation expense connected with these options will be recognized at an
annual rate of $27,000 from 2008 through 2012 for a total of $111,000. The
forfeiture rate is assumed to be 4.00% of the total compensation expense. The
Corporation will recognize compensation expense evenly over the requisite
service period in future years through 2012. Options issued in 2005 and 2004 had
an estimated fair value of $4.66 and $4.44 per share, respectively, The
Corporation recognized $31,000 in compensation expense for those options vesting
after the date of adoption of SFAS No. 123R under the modified prospective
method. There is no remaining compensation expense associated with this group of
options in future years since they are fully vested. No tax expense was
recognized as the options were incentive stock options.
Year Ended December 31,
-----------------------
2007 2006 2005
----- ------ ------
(In thousands, except
per share data)
Net income, as reported $ 724 $2,096 $3,073
Add: Stock-based employee compensation expense,
net of related tax effects, included in reported net income 31 23 --
Deduct: Total stock-based employee
and director compensation expense
under fair value based methods of
awards, net of related tax effects (31) (23) (377)
----- ------ ------
Pro forma net income $ 724 $2,096 $2,696
===== ====== ======
Earnings per share
Basic - as reported $0.19 $ 0.52 $ 0.80
Basic - pro forma $0.19 $ 0.52 $ 0.71
Diluted - as reported $0.19 $ 0.51 $ 0.78
Diluted - pro forma $0.19 $ 0.51 $ 0.69
Earnings per share have been retroactively adjusted to reflect the issuance of
stock dividends.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions.
Year Ended December 31,
---------------------------
2007 2006 2005
------- ------- -------
Dividend yield or expected dividends 3.24% 2.06% 1.49%
Riskfree interest rate 4.20% 4.80% 4.50%
Expected life 10 yrs. 10 yrs. 10 yrs.
Expected volatility 34.50% 19.19% 22.66%
28
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the stock option activity for the periods indicated
and the stock options outstanding at the end of such periods:
Year Ended December 31,
--------------------------------------------------------------------------------------
2007 2006 2005
---------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding, beginning of period 330,272 $ 8.93 315,510 $ 8.56 263,210 $ 7.55
Granted 47,500 7.59 48,300 10.76 66,701 12.24
Exercised (56,638) 5.57 (26,647) 6.82 (11,621) 6.58
Forfeited (34,141) 11.19 (6,891) 13.01 (2,780) 9.48
------- ------ ------- ------ ------- ------
Outstanding, end of year 286,993(a) $ 9.10 330,272 $ 8.93 315,510 $ 8.56
======= ====== ======= ====== ======= ======
The following table shows summary information about stock options outstanding at
December 31, 2007:
Stock Options Outstanding Stock Options Exercisable
- ----------------------------------------------------------------- ----------------------------
Weighted Average Weighted
Range of Number Remaining Weighted Average Number of Average Exercise
Exercise Prices of Shares Contractual Life Exercise Price Shares Price
- --------------- --------- ---------------- ---------------- --------- ----------------
$4.30 4,534 2.0 years $ 4.30 4,534 $ 4.30
4.52 5,331 2.8 years 4.52 5,331 4.52
4.98 8,794 3.3 years 4.98 8,794 4.98
4.71 15,516 3.4 years 4.71 15,516 4.71
4.96 6,078 3.5 years 4.96 6,078 4.96
6.99 - 7.34 33,517 4.4 years 7.00 33,517 7.00
8.28 6,078 5.5 years 8.28 6,078 8.28
9.82 - 10.31 25,529 5.9 years 9.84 25,529 9.84
11.15 44,352 6.9 years 11.15 44,352 11.15
13.15 3,583 7.6 years 13.15 3,583 13.15
11.98 44,706 7.9 years 11.98 44,706 11.98
10.76 41,475 9.0 years 10.76 -- --
7.59 47,500 9.9 years 7.59 -- --
------- ------ ------- ------
286,993 $ 9.10 198,018 9.11
======= ====== ======= ======
All share number and exercise price data have been adjusted to reflect the
issuance of stock dividends.
(a) The aggregate intrinsic value of options outstanding and exercisable as of
December 31, 2007 was ($829,000) and ($574,000), respectively, based on the
share price of $6.21 for Community Central Bank Corporation common stock at
December 31, 2007. The total intrinsic value of options exercised during
the years ended December 31, 2007, 2006 and 2005 was $152,000, $108,000 and
$70,000, respectively. The federal income tax benefit from the exercise of
nonqualified stock options in 2007 was $1,000.
29
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) LEASES
Operating expense includes rentals on leased facilities and certain equipment in
the amount of $339,000, $422,000 and $380,000 for 2007, 2006 and 2005,
respectively. Following is a schedule of future minimum rental payments required
under operating leases that have remaining lease terms in excess of one year as
of December 31, 2007:
Year ending December 31, (In thousands)
- ------------------------ --------------
2008 $ 245
2009 217
2010 218
2011 169
2012 165
Subsequent years 620
------
Total minimum rental payments $1,634
======
(15) OTHER OPERATING EXPENSE
The following is a summary of significant components of other operating expense
for the periods indicated:
Year Ended December 31,
------------------------
2007 2006 2005
------ ------ ------
(In thousands)
Advertising, business development and
public relations $ 528 $ 645 $ 672
Data processing 625 549 479
Professional and regulatory fees 417 425 438
Legal fees 288 316 439
Director fees 283 316 302
Printing and supplies 172 165 173
Telephone 177 214 152
Loan closing 113 171 89
Other insurance 127 131 121
Deposit insurance 283 41 35
Single business tax 128 87 97
Other 1,008 816 811
------ ------ ------
Total other operating expense $4,149 $3,876 $3,808
====== ====== ======
30
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) TAXES ON INCOME
The Corporation and the Bank file a consolidated federal income tax return.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Corporation's assets and
liabilities. The income tax expense for the years ended December 31 consists of
the following:
2007 2006 2005
----- ---- ------
(In thousands)
Current expense $ 655 $387 $1,484
Deferred (benefit) expense (950) (24) (305)
----- ---- ------
Total income expense ($295) $363 $1,179
===== ==== ======
The temporary differences and carryforwards which comprise deferred tax assets
and liabilities at December 31 are as follows:
2007 2006
------ ------
(In thousands)
Deferred tax assets
Provision for loan losses $1,626 $ 722
Depreciation 82 131
SERP Expense 570 449
Unrealized net loss on securities available for sale 311 393
NOL carryforward 24 72
Intangible asset amortization 74 71
Mortgage subsidiary accumulated timing differences 232 155
Other 38 17
------ ------
2,957 2,010
Valuation allowance for deferred tax assets -- --
Deferred tax liabilities
Financial instruments at fair value option (194) --
Original issue discount (70) (104)
Accretion (35) (30)
FHLB dividends (104) (104)
Net deferred loan fees (6) (16)
Goodwill amortization (105) (75)
Other (147) (59)
------ ------
(661) (388)
------ ------
Net deferred tax asset $2,296 $1,622
====== ======
31
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's effective tax rates differ from the statutory federal tax
rates. The following is a summary of such differences:
Year Ended December 31,
-----------------------
2007 2006 2005
----- ----- ------
(In thousands)
Provision at statutory federal income tax rate $ 146 $ 836 $1,446
Nondeductible expenditures 62 43 47
Tax exempt municipal interest (384) (399) (212)
Increase in cash surrender value of bank owned
life insurance (119) (117) (102)
----- ----- ------
Provision at effective federal income tax rate ($295) $ 363 $1,179
===== ===== ======
32
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices for similar instruments or
estimated using discounted cash flow analysis. The discount rates used are
estimated using comparable market rates for similar types of instruments
adjusted to be commensurate with the credit risk, overhead costs and optionality
of such instruments. Considerable judgment is inherently required to interpret
market data to develop the estimates of fair value. Accordingly, the estimates
presented below do not necessarily represent amounts that the Corporation could
realize in a current market exchange. The following methods and assumptions were
used to estimate the fair value of financial instruments:
CASH AND CASH EQUIVALENTS: For these short term instruments, the carrying amount
is a reasonable estimate of fair value.
SECURITIES, FEDERAL HOME LOAN BANK STOCK: For marketable debt securities,
estimated fair value is based on quoted market prices or dealer quotes. The
carrying value of FHLB stock approximate fair value based on their redemption
provisions.
LOANS: For variable rate loans with no significant change in credit risk since
loan origination, the carrying amount is a reasonable estimate of fair value.
For all other loans, including fixed rate loans, the fair value is estimated
using a discounted cash flow analysis, using interest rates currently offered on
similar loans to borrowers with similar credit ratings and for the same
remaining maturities. The resulting value is reduced by an estimate of losses
inherent in the portfolio.
RESIDENTIAL MORTGAGES HELD FOR SALE: The estimated fair value of residential
mortgages held for sale is the carrying amount. The duration of the portfolio is
typically within two weeks or less and a commitment of sale has already occurred
when the loans are funded.
DEPOSITS: The estimated fair value of demand deposits, certain money market
deposits, and savings deposits is the amount payable on demand at the reporting
date. The fair value of fixed maturity time deposits is estimated using the
rates currently offered for deposits of similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES: The estimated fair value of Federal Home Loan
Bank advances is estimated using rates currently offered for funding sources of
similar remaining maturities.
REPURCHASE AGREEMENTS: The estimated fair value of short term borrowings is the
carrying amount, since they mature the next day.
ACCRUED INTEREST: Accrued interest receivable and payable are short term in
nature; therefore, their carrying amount approximates fair value.
ESOP NOTE PAYABLE: The ESOP note payable floats at prime rate; therefore, its
carrying amount approximates fair value.
SUBORDINATED DEBENTURES: Subordinated debentures are based on current rates for
similar financing.
COMMITMENTS: The fair value of commitments is estimated using the fees currently
charged to enter into similar arrangements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
The majority of commitments to extend credit and letters of credit would result
in loans with a market rate of interest if funded. The fair value of these
commitments is not material.
INTEREST RATE SWAPS: The fair value of interest rate swaps is based on pricing
models, such as Bloomberg and other appropriate valuation models.
33
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The recorded carrying amounts and estimated fair values of the Corporation's
financial instruments at December 31 are as follows:
2007 2006
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In thousands)
Financial Assets
Cash and cash equivalents $ 9,183 $ 9,183 $ 24,726 $ 24,726
Trading securities (a) 20,115 20,115 -- --
Securities 67,786 67,783 81,933 81,909
FHLB stock 4,540 4,540
Residential mortgages held for sale 4,848 4,848 3,441 3,441
Loans, net of allowance 383,509 394,431 363,467 365,905
Accrued interest receivable 2,535 2,535 2,599 2,599
Interest rate swap 668 668 -- --
Financial Liabilities
Demand and savings deposits 94,440 94,440 103,239 103,239
Time deposits 234,195 237,614 252,617 251,910
Repurchase agreements 32,659 32,659 15,688 15,688
Federal Home Loan Bank advances (b) 104,495 102,558 83,528 80,869
Accrued interest payable 1,018 1,018 1,257 1,257
ESOP note payable 36 36 95 95
Subordinated debentures (a) 17,597 17,597 10,310 10,550
Interest rate swap 541 541 -- --
(a) Carried at fair value under SFAS 159, "The Fair Value Option for Financial
Assets and Liabilities" for entire category.
(b) Carried at fair value under SFAS 159, "The Fair Value Option for Financial
Assets and Liabilities" for specific instruments totaling $5.0 million of
the category. The remaining instruments were valued under a similar method,
but not recorded at fair value of the Corporation's financial statements.
34
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) OFF-BALANCE SHEET RISK
The Corporation is party to financial instruments with off-balance sheet risk in
the normal course of business, to meet financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and financial guarantees. These
instruments involve, to varying degrees, elements of credit and interest rate
risk that are not recognized in the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations of any conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Fees from issuing these commitments to extend
credit are recognized over the period to maturity. Since a portion of the
commitments is expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case by case basis.
The amount of collateral obtained upon extension of credit is based on
management's credit evaluation of customers. The Corporation also has legally
binding commitments to extend credit in the form of loans that have been
approved but not yet closed. These funds are normally disbursed unless the
customer fails to comply with closing requirements.
Standby letters of credit are issued in connection with agreements between
customers and a third party. If the customer fails to comply with the agreement,
the counterparty may enforce the standby letter of credit as a remedy. Credit
risk arises from the possibility that the customer may not be able to repay the
Corporation after the letter of credit is enforced.
A summary of commitments not recorded on the balance sheet at December 31 is as
follows:
2007 2006
------- -------
(In thousands)
Unused home equity lines of credit $ 9,293 8,973
Unused credit card lines 1,701 1,687
Unused portion of construction lines of credit 16,463 26,945
Unused portion of all other credit lines 52,950 55,566
Standby letters of credit 1,047 763
------- -------
Total outstanding commitments $81,454 $93,934
======= =======
(19) RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Banking regulations place certain restrictions on dividends paid and loans or
advances made by the Bank to the Corporation. The total amount of dividends
which may be paid at any date is generally limited to the retained earnings of
the Bank. However, dividends paid by the Bank would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
standards. At December 31, 2007, the Bank's retained earnings available for the
payment of dividends totaled $11.9 million. Accordingly, $32.1 million of the
Corporation's investment in the Bank was restricted at December 31, 2007. Loans
and advances made by the Bank to the Corporation are generally limited to 10
percent of the Bank's stock and surplus. Accordingly, at December 31, 2007, Bank
funds available for loans or advances to the Corporation amounted to $3.2
million.
35
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) PARENT-ONLY FINANCIAL STATEMENTS
The following condensed financial information presents the financial condition
of Community Central Bank Corporation, the Parent Holding Company, (the
"Parent") only, along with the results of its operations and its cash flow. The
Parent has recorded its investment in the Bank and Community Central Capital
Trust II at cost, plus the undistributed surplus of the Bank since it was
formed. The Parent recognizes undistributed income of the Bank as noninterest
income, and undistributed losses as noninterest expense. The Parent-only
financial information should be read in conjunction with the Corporation's
consolidated financial statements.
PARENT-ONLY BALANCE SHEET
December 31,
-----------------
2007 2006
------- -------
(In thousands)
Assets
Cash $ 5,764 $ 1,972
Investment in subsidiary 43,929 44,449
Investment in unconsolidated subsidiary 557 310
Other assets 1,257 801
------- -------
Total Assets $51,507 $47,532
======= =======
Liabilities and Stockholders' Equity
Due to subsidiary $ 682 $ 557
Subordinated debentures 17,597 10,310
------- -------
Total Liabilities 18,279 10,867
Common stock 32,071 33,220
Retained earnings 1,797 4,303
Unearned employee benefit (36) (95)
Accumulated other comprehensive income (604) (763)
------- -------
Total Stockholders' Equity 33,228 36,665
------- -------
Total Liabilities and Stockholders' Equity $51,507 $47,532
======= =======
36
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT-ONLY STATEMENT OF OPERATIONS
Year Ended December 31,
------------------------
2007 2006 2005
------ ------ ------
(In thousands)
Operating Income
Interest income $ 391 $ 76 $ 67
------ ------ ------
Total Interest Income 391 76 67
Dividend from subsidiary 1,400 1,400 1,175
------ ------ ------
Total Interest and Dividend Income 1,791 1,476 1,242
Interest Expense
Subordinated debentures 1,621 929 746
------ ------ ------
Net interest (loss) income 170 547 496
Change in fair value under SFAS 159 1,811 -- --
Other expense 865 932 972
------ ------ ------
Total Operating Expense 865 932 972
------ ------ ------
Loss Before Taxes and Undistributed
Income of Subsidiary 1,116 (385) (476)
Income tax benefit (83) (597) (561)
------ ------ ------
Loss (Income) Before Share in
Undistributed Income of Subsidiary 1,199 212 85
Share of undistributed (loss) income of subsidiary (475) 1,884 2,988
------ ------ ------
Net Income $ 724 $2,096 $3,073
====== ====== ======
37
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT-ONLY STATEMENT OF CASH FLOW
Year Ended December 31,
----------------------------
2007 2006 2005
-------- ------- -------
(In thousands)
Operating Activities
Net income $ 724 $ 2,096 $ 3,073
Adjustments to reconcile net income to
net cash flow from operating activities
Net gain on instruments at fair value (1,811) -- --
Undistributed income of subsidiary 475 (1,884) (2,988)
Decrease (Increase) in other assets 156 (18) 94
Increase (decrease) increase in other liabilities 125 239 75
-------- ------- -------
Net Cash (Used in) Provided by Operating Activities (331) 433 254
Investing Activities
Capital contribution to subsidiaries (133) 63 (3,134)
Cash paid for River Place Financial Corporation -- -- (512)
-------- ------- -------
Net Cash Provided by (Used in) Investing Activities (133) 63 (3,646)
Financing Activities
Stock options exercised/awards 341 252 108
Rights offering -- -- 5,275
Issuance of subordinated debentures 18,557 -- --
Redemption of subordinated debentures (10,310) -- --
Cash dividend paid (932) (918) (742)
Repurchase of stock (3,400) (351) --
-------- ------- -------
Net Cash (Used in) Provided by Financing Activities 4,256 (1,017) 4,641
-------- ------- -------
(Decrease) Increase in Cash 3,792 (521) 1,249
Cash at the Beginning of the Period 1,972 2,493 1,244
-------- ------- -------
Cash at the End of the Period $ 5,764 $ 1,972 $ 2,493
======== ======= =======
38
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(21) FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES
In February 2007, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159).
The statement permitted an entity to immediately elect the fair value
option for existing eligible items. While not required to adopt the new
standard until 2008, the Corporation elected to adopt it in the first
quarter of 2007. The Corporation was also required to simultaneously adopt
all the requirements under SFAS 157, Fair Value Measurements. As a result
of the Corporation's adoptions, certain financial instruments were valued
at fair value using the fair value option. The cumulative reduction to
opening retained earnings from adopting these standards was approximately
$420,000. Partially offsetting the total net charge to retained earnings
was the increase in capital from the reversal of other comprehensive income
from the transfer of the unrealized losses on available for sale securities
which had an affect of an increase in capital of $295,000. Therefore, the
total net after tax decrease in stockholder's equity was $125,000 from the
early adoption of SFAS 159 and concurrent adoption of SFAS 157 as of
January 1, 2007.
The following table shows the balance sheet effect of the adoption of SFAS 159.
Balance Sheet Net Balance Sheet
1/1/07 prior adjustment 1/1/07 after
Description to adoption upon adoption after adoption of FVO
- ----------- ------------- ------------- ---------------------
(in thousands of dollars)
Securities (a) $ 27,024 ($447) $ 26,577
Federal Home Loan Bank Advances (16,000) 247 (15,753)
Subordinated Debentures (b) (10,055) (437) (10,492)
-------- ----- --------
Pretax cumulative effect of SFAS 159 (637)
Increase in deferred tax asset 217
-----
Cumulative effect of adoption of SFAS 159
(charged to retained earnings) ($420)
=====
(a) Although the initial adoption of FAS 159 was made to certain available
for sale securities, the impact was to decrease the Corporation's
Accumulated Other Comprehensive Loss by $295,000 for the unrealized
losses on the securities which were previously recognized in
Accumulated Other Comprehensive Loss, net of taxes of $152,000.
(b) The carrying amount includes $255,000 in unamortized deferred issuance
costs on the subordinated debenture from the issuance of the Community
Central Capital Trust I. As a result of the early adoption of SFAS 159
the difference between the carrying amount and the fair value was
removed and included in the cumulative effect adjustment above.
Management has elected the fair value option for the following reasons for each
of the eligible items or group of similar eligible items.
Investment Securities and FHLB Advances:
The election of SFAS 159 and SFAS 157 treatment for existing eligible investment
securities was based on multiple factors which included the desire to utilize
the Federal Home Loan Bank advance portfolio to offset volatility with the
investment portfolio. Approximately $27.0 million of investment securities were
selected for early adoption of SFAS 159 based primarily on the relatively short
overall duration in the selected instruments. The overall effective duration of
the instruments was 1.8 years based on current market interest rates. Many of
the instruments have early call provisions, which based on current interest rate
expectations have a high degree of probability to be called.
39
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Some instruments have been pre-refunded with certainty of maturity expected. The
investments selected are primarily comprised of agency debentures and short
callable bank qualified tax exempt municipal bonds. The selected securities will
be categorized under trading portfolio status. Management believes that it has
more options of balance sheet management under the fair value option, including
the management of volatility caused by the embedded options within these
instruments. The short overall duration of the selected instruments, coupled
with the utilization of FHLB advances as an attempt to hedge the risk, should
mitigate large swings in fair values that will be recorded in the income
statement as part of adoption of SFAS 159 and SFAS 157. Management cannot
predict future interest rates and is reliant on forecasts and models to make
decisions regarding interest rate and fair value risk.
The election of SFAS 159 treatment for the selected FHLB advances was based on
management's choice to provide a natural hedge against the securities selected
under SFAS 159. The FHLB advances were selected for the fair value option based
on the maturity ranges within the FHLB portfolio of advances. All maturities
within 18 months from the early adoption date of January 1, 2007 were selected
regardless of the instruments' interest rates. The selected FHLB advances had a
net unrealized gain position as of January 1, 2007 and March 31, 2007 and were
selected solely as a natural balance sheet hedge for the investment portfolio
elected under SFAS 159. The decrease in the unrealized loss position of the
selected investments and the income recognized under SFAS 159 for the first
three months of 2007 was completely offset by a corresponding decrease in
unrealized gains within the selected FHLB advances. In the second quarter of
2007, management reviewed the selected instruments, the changes in overall
market interest rates, the treasury yield curve and the structure of the
embedded call options of the investments. Management felt that FHLB advances
alone would not accurately hedge the investments. In May 2007, the Corporation
acquired an interest rate swap to better hedge the fair value of the portfolio.
The notional value of the interest rate swap was $18 million for a duration of
three years, which approximated the overall duration of the trading portfolio
under SFAS 159. Under the interest rate swap, the bank receives the three month
libor rate and pays a fixed rate of 5.275%, which is the average weighted yield
of the hedged portfolio at the inception of the interest rate swap. During the
fourth quarter of 2007, the Corporation restructured many of the instruments
originally selected during the early adoption of SFAS 159. The resulting
portfolio better matched the Corporation's asset liability position.
Additionally, should management and the ALCO committee, believe other balance
sheet strategies will better position the Bank and Corporation, other
transactions could be considered including the sale of investments classified
under trading status. Management has no intent to extinguish, before stated
maturity, any FHLB advances. It is the intent of management for the foreseeable
future to utilize fair value option on selected investment securities, or like
kind dollars on disposal.
Subordinated Debentures:
Management elected the fair value option for both its subordinated debentures.
Management considers the subordinated debentures a critical component for future
growth and wishes to utilize interest rate swaps to hedge the risk of this
longer term liability and critical form of regulatory capital. Management
elected SFAS 159 accounting treatment for interest rate swaps because it was
less complex than alternative methods and therefore suitable for a community
bank with limited resources. The subordinated debenture for $10.3 million that
was issued in June 2002 and maturing June 2032, callable June 30, 2007, was an
eligible instrument for the early adoption of the fair value option as of
January 1, 2007. The pretax accumulated adjustment from the recognition of fair
value on this instrument was $437,000. The carrying amount of the instrument
included $255,000 in unamortized deferred issuance costs on the subordinated
debenture which is included in the aforementioned pretax adjustment. Management
has elected the fair value option on the subordinated debenture which was issued
on February 13, 2007 for $18.6 million. Additionally, an interest rate swap for
a like kind notional value was secured, in part, to reduce any volatility
associated with the recognition of the fair value option under SFAS 159. Under
the interest rate swap the Corporation has agreed to receive a fixed rate of
6.71% and pay Libor plus 170 basis points. The debenture carries an interest
rate fixed for 10 years at 6.71%, and was originally based on a ten year
treasury interest rate swap of 5.06%, plus 165 basis points and was prior to the
settlement of the interest rate swap hedging market fluctuations.
Management has the intent to utilize the fair value option on selected financial
assets and liabilities on a go forward basis.
40
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuations of the instruments measured under Fair Value Measurement SFAS 157
for 2007 were measured under a market approach using matrix pricing investment
for investment securities and the income approach using observable data for the
liabilities reported under the Fair Value Option SFAS 159. The inputs were
observable for the assets and liabilities interest rate on commonly quoted
intervals based on similar assets and liabilities for level 2 instruments.
Community Central Bank Corporation does not have a credit rating through any
major credit research credit rating facilities. The Pooled Trust Preferred
Market from which a basis for pricing on the subordinated debenture is arrived
at is reflective of changes in the commercial banking environment. The pricing
of the subordinated debenture at 300 bps over the respective treasury swap rate
is considered by management to be reflective of the current assessments as to
commercial banks in general. Primarily during the last quarter of 2007, the
Pooled Trust Preferred Market reflected only a small base of participants in the
market place. The disarray in the credit markets contributed to the lack of
market transactions in this financial instrument. A determination was made,
based upon the significance of unobservable parameters as of December 31, 2007
to the overall fair value measurement, to transfer the subordinated debentures
previously reported under level 2 significant other observable inputs to level 3
significant unobservable inputs. In addition to the unobservable components, or
level 3 components, observable components that can be validated to external
sources are part of the validation methodology.
In 2007, the net change in the fair value of financial assets and liabilities,
as measured under the fair value option under Statement of Financial Accounting
Standards (SFAS) 159, totaled $1.4 million on a pretax basis or $919,000 after
tax. This increase was primarily attributable to a net unrealized increase in
fair value on the Corporation's subordinated debenture which was issued for $18
million in February of this year and was an instrument chosen for this
accounting treatment as part of the early adoption of this accounting standard.
The dramatic widening market credit spreads experienced in the third quarter for
trust preferred security issuances in the marketplace increased the relative
fair value of this financial liability. The Corporation hedges and protects
itself from changes in interest rates with an interest rate swap. The hedge does
not cover changes in credit spreads which typically occur over longer time
periods. Changes in market conditions are not predictable and changes in credit
spreads will cause changes in the fair value of this instrument and a possible
loss in income.
The table below contains the fair value measurement at December 31, 2007 using
the identified valuations. Additionally, the changes in fair value for the
twelve month period ended December 31, 2007 for items measured at fair value
pursuant to election of the fair value option.
Changes in
fair value for
Twelve months ended
December 31, 2007
measured at fair
value pursuant to
Fair Value Measurement at election of the
December 31, 2007 fair value Option
------------------------------------------------------ ---------------------
Fair Value Significant Other Significant Other Gains or Losses
Measurements Observable Inputs Unobservable Inputs in noninterest income
Description 12/31/2007 (Level 2) (Level 3) pretax income
- ----------- ------------ ----------------- ------------------- ---------------------
(in thousands of dollars)
Trading Securities $20,115 $20,115 -- $ 356
Securities available for sale 66,809 66,809
Interest rate swap hedging securities (541) (541) -- (541)
Federal Home Loan Bank Advances 4,986 4,986 -- (234)
Subordinated Debentures 17,597 -- 17,597 960
Interest rate swap hedging subordinated
debentures 668 668 -- 668
Redeemed subordinated debentures -- -- -- 183
------- ------- ------ ------
$1,392
======
41
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest income and interest expense of the respective financial instruments
have been recorded in the consolidated statement of income based on the category
of financial instrument.
CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS
The table below includes a rollforward of the balance sheet amounts for the year
ended December 31, 2007 (including the change in fair value), for financial
instruments classified by the Corporation within level 3 of the valuation
hierarchy. When a determination is made to classify a financial instrument
within level 3, the determination is based upon the significance of the
unobservable parameters to the overall fair value measurement. However, level 3
financial instruments typically include, in addition to the unobservable or
level 3 components, observable components (that is, components that can be
validated to external sources); accordingly, the gains and losses in the table
below include changes in fair value due in part to observable factors that are
part of the valuation methodology. Also, the Corporation attempts to risk manage
the observable components of level 3 financial instruments using derivative
positions that are classified within level 2 of the valuation hierarchy; as
these level 2 risk management instruments are not included below, the gains or
losses in the tables do not reflect the effect of the Corporation's risk
management activities related to such level 3 instruments.
Fair value measurements using significant unobservable inputs (a)
Changes in unrealized
Purchases gains and (losses)
For the year ended Total issuances Transfers in related to financial
December 31, 2007 Fair value, realized/unrealized settlements, and/or Fair value, instruments held at
(in millions) January 1, 2007 gains/(losses) net out of Level 3 December 31, 2007 December 31, 2007
- ------------------ --------------- ------------------- ------------ -------------- ----------------- ---------------------
Subordinated
Debentures -- -- -- 17,597(a) 17,597 960
(a) Represented a net asset transfer from level 2 significant other observable
inputs.
42
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements throughout that are based on
management's beliefs, assumptions, current expectations, estimates and
projections about the financial services industry, the economy, and about the
Corporation and the Bank. Words such as anticipates, believes, estimates,
expects, forecasts, intends, is likely, plans, projects, variations of such
words and similar expressions are intended to identify such forward-looking
statements. These forward-looking statements are intended to be covered by the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict with regard
to timing, extent, likelihood and degree of occurrence. Actual results and
outcomes may materially differ from what may be expressed or forecasted in the
forward-looking statements. The Corporation undertakes no obligation to update,
amend, or clarify forward looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future factors that could cause actual results to differ materially from the
results anticipated or projected include, but are not limited to, the following:
expected cost savings and synergies from our acquisition activities might not be
realized within the expected time frames, and costs or difficulties related to
integration matters might be greater than expected; expenses associated with the
implementation of our trust and wealth management services might be greater than
expected, whether due to a possible need to hire more employees than anticipated
or other costs incurred in excess of budgeted amounts; the credit risks of
lending activities, including changes in the level and direction of loan
delinquencies and write-offs and changes in estimates of the adequacy of the
allowance for loan losses; competitive pressures among depository institutions;
interest rate movements and their impact on customer behavior and net interest
margin; the impact of repricing and competitor's pricing initiatives on loan and
deposit products; the ability to adapt successfully to technological changes to
meet customers' needs and development in the market place; our ability to access
cost-effective funding; changes in financial markets; changes in economic
conditions in general and particularly as related to the automotive and related
industries in the Detroit metropolitan area; new legislation or regulatory
changes, including but not limited to changes in federal and/or state tax laws
or interpretations thereof by taxing authorities; changes in accounting
principles, policies or guidelines; and our future acquisitions of other
depository institutions or lines of business.
43
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXECUTIVE SUMMARY
Community Central Bank Corporation is the holding company for Community Central
Bank (the "Bank") in Mount Clemens, Michigan. The Bank opened for business in
October 1996 and serves businesses and consumers across Macomb, Oakland, St.
Clair and Wayne counties with a full range of lending, deposit, trust, wealth
management, and Internet banking services. The Bank operates three full service
facilities, in Mount Clemens, Rochester Hills and Grosse Pointe, Michigan.
Community Central Mortgage Company, LLC, a subsidiary of the Corporation and
Bank, operates locations servicing the Detroit metropolitan area, and northwest
Indiana. River Place Trust and Community Central Wealth Management are divisions
of Community Central Bank. Community Central Insurance Agency, LLC is a wholly
owned subsidiary of Community Central Bank. The Corporation's common shares
trade on The NASDAQ Global Market under the symbol "CCBD."
Our results of operations depend largely on net interest income. Net interest
income is the difference in interest income the Corporation earns on
interest-earning assets, which comprise primarily commercial and residential
real estate loans, and to a lesser extent commercial business and consumer
loans, and the interest the Corporation pays on our interest-bearing
liabilities, which are primarily deposits and borrowings. Management strives to
match the repricing characteristics of the interest earning assets and interest
bearing liabilities to protect net interest income from changes in market
interest rates and changes in the shape of the yield curve.
The results of our operations may also be affected by local and general economic
conditions. The largest geographic segment of our customer base is in Macomb
County, Michigan. The economic base of the County continues to diversify from
the automotive service sector although the impact of the restructuring of the
American automobile companies has a direct impact on southeastern Michigan. A
slowdown in the local and statewide economy has produced increased financial
strain on segments of the Bank's customer base. The Bank has experienced
increased delinquency levels and losses in its loan portfolio, primarily with
residential developer loans, residential real estate loans, and home equity and
consumer loans. Further downturns in the local economy may affect the demand for
commercial loans and related small to medium business related products. This
could have a significant impact on how the Corporation deploys earning assets.
The competitive environment among other financial institutions and financial
service providers and the Bank in the Macomb, Oakland, Wayne and St. Clair
counties of Michigan may affect the pricing levels of various deposit products.
The impact of competitive rates on deposit products may increase the relative
cost of funds for the Corporation and thus negatively impact net interest
income.
In 2007, the Corporation recorded a $3.6 million provision to the allowance for
credit losses. A significant portion of this provision related collateral
impairment, the result of declining property values reflecting Michigan's
economic conditions. Several long-term local residential builders who are
customers of the Bank were adversely affected by the Michigan economic downturn.
Residential developer loans represented approximately 5% or $20.3 million of our
total loan portfolio at December 31, 2007. The specific allowance for those loan
identified requiring reserves in this group was $2.9 million.
The Corporation's nonperforming assets to total assets increased to 3.56% at
December 31, 2007 compared to 0.96% at December 31, 2006, primarily as the
result of the classification of the residential developer loans as nonaccrual.
At December 31, 2007, $9.7 million of approximately $20.3 million of the
Corporation's residential developer loans were classified as nonaccrual loans.
Nonaccrual residential developer loans comprised 57% of the Corporation's total
nonaccrual loans at December 31, 2007. The Corporation continues to carefully
monitor the performance of all of its loans. The allowance for loan losses
compared to total loans was 1.64% and the allowance for loan losses to
nonperforming loans was 36.21% at December 31, 2007.
The Corporation continues to see competitive deposit rates offered from local
financial institutions within the geographic proximity of the Bank which could
have the effect of increasing the costs of funds to a level higher than
management projects. The Corporation continues to utilize wholesale forms of
funding earning assets through the FHLB and brokered certificates of deposit to
balance both interest rate risk and the overall cost of funds. Brokered and
internet certificates of deposit are based on a nationwide interest rate
structure, typically at what is considered to be a premium interest rate. The
local competition for certificates of deposit products has intensified and the
Bank
44
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
has found this type of wholesale funding to often effectively compete with the
rates offered for similar term retail certificates of deposit products of local
community and regional banks.
A business plan objective has been the diversification of revenue from interest
income. The Wealth and Trust divisions have been providing an increased source
of fee income for the Corporation. Total revenue from Wealth and Trust services
amounted to $686,000 in 2007 versus $328,000 in 2006, or an increase of 109%.
The addition of a new branch location in Grosse Pointe Woods, Michigan, which is
anticipated to open this spring, will represent the second branch location in
this upscale market of Southeastern Michigan. The Corporation continues to work
on cost controls throughout our organization as evidenced by total noninterest
expense decreasing 4.5% in 2007. In 2007, the mortgage company subsidiary closed
loan production offices in Rockford, Illinois and Raleigh, North Carolina whose
origination activity was not commensurate with the level of overhead. The Bank
and Corporation are both "well-capitalized" and have regulatory capital
available for growth.
45
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SELECTED FINANCIAL INFORMATION
The following table sets forth the Selected Consolidated Financial
Statements for the period reported.
Selected Financial Condition Data
For the Year Ended December 31,
----------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
(In thousands)
Total assets $520,305 $505,028 $462,012 $391,538 $357,876
Trading securities at fair
value option 20,115 -- -- -- --
Securities available for sale 66,809 80,916 84,177 51,425 57,135
Securities held to maturity 977 1,017 1,094 1,161 895
Gross loans 389,912 367,282 334,951 305,439 270,828
Allowance for credit losses 6,403 3,815 3,580 3,377 3,573
Total deposits 328,635 355,856 314,373 278,856 255,356
FHLB advances 104,495 83,528 86,545 63,360 54,374
Repurchase agreements 32,659 15,688 13,184 11,492 12,836
Subordinated debentures 17,597 10,310 10,310 10,310 10,000
Total stockholders' equity 33,228 36,665 35,532 25,591 23,776
Summary of Operations
For the Year Ended December 31,
-----------------------------------------------
2007 2006 2005 2004 2003
------- ------- ------- ------- -------
(In thousands, except per share data)
Interest income $32,925 $31,475 $24,230 $19,725 $16,420
Interest expense 20,735 18,892 11,555 7,936 7,033
------- ------- ------- ------- -------
Net interest income 12,190 12,583 12,675 11,789 9,387
Provision for credit losses 3,600 550 100 2,000 275
Non-interest income 5,692 4,935 4,809 6,546 8,415
Non-interest expense 13,853 14,509 13,132 13,346 14,582
------- ------- ------- ------- -------
Income before taxes 429 2,459 4,252 2,989 2,945
Provision for income tax
(benefit) expense (295) 363 1,179 782 840
------- ------- ------- ------- -------
Net income $ 724 $ 2,096 $ 3,073 $ 2,207 $ 2,105
======= ======= ======= ======= =======
Per share data:*
Basic earnings $ 0.19 $ 0.52 $ 0.80 $ 0.68 $ 0.65
Diluted earnings $ 0.19 $ 0.51 $ 0.78 $ 0.66 $ 0.64
Dividend declared $ 0.24 $ 0.24 $ 0.21 $ 0.20 $ 0.20
* Per share data has been retroactively adjusted to reflect the issuance of
stock dividends.
46
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Selected Financial Ratios
For the Year Ended December 31,
-----------------------------------------
2007 2006 2005 2004 2003
------ ----- ------ ------ ------
Total nonperforming assets as a
percentage of total assets 3.56% 0.96% 0.74% 0.37% 0.24%
Total nonperforming loans as a
percentage of total loans 4.54% 1.29% 0.99% 0.25% 0.18%
Total allowance for credit losses
as a percentage of total portfolio
loans 1.64% 1.04% 1.07% 1.11% 1.32%
Total allowance for credit losses
as a percentage of nonperforming
loans 36.21% 80.66% 108.09% 435.74% 738.22%
Return on average assets 0.14% 0.42% 0.72% 0.57% 0.65%
Return on average equity 2.06% 5.82% 9.43% 8.98% 9.20%
Net interest margin 2.68% 2.83% 3.23% 3.31% 3.10%
Dividend payout ratio 128.59% 43.8% 24.15% 25.87% 25.70%
Average equity to average assets 6.86% 7.25% 7.61% 6.34% 7.06%
47
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ASSETS
At December 31, 2007, the Corporation's total assets were $520.3 million, an
increase of $15.3 million, or 3.0% from December 31, 2006. The largest segment
of asset growth for the year ended occurred in the loan portfolio, which
increased $22.6 million. Cash and cash equivalents decreased $15.4 million with
a $10.7 million decrease occurring in federal funds sold. Trading securities
increased $20.1 million in 2007 upon the early adoption of SFAS 157 and 159 and
was partially offset by declines in securities available for sale of $14.1
million.
Commercial real estate loans increased $28.3 million in 2007 or 12.0% over 2006.
The growth in the commercial real estate portfolio is consistent with the
Corporation's commercial lending focus. The Corporation believes that the staff
of seasoned commercial lenders and referrals from the board of directors
actively involved in the local business community has contributed to the growth
of the commercial real estate portfolio in a competitive lending environment.
Commercial and industrial loans at December 31, 2007 totaled $33.0 million, an
increase of $4.6 million or 16.4% over the year ended December 31, 2006.
Commercial and industrial loans as a percentage of total loans comprised 8.5% at
December 31, 2007, a slight increase from 7.7% of total loans at December 31,
2006. The Corporation has historically had a lower percentage of loans in the
commercial and industrial type loans compared to commercial real estate loans as
it concentrates its level of lending expertise in the commercial real estate
sector. A continued downturn in the local economy may affect the demand for
commercial loans and business related products.
The residential mortgage loan portfolio totaled $60.8 million at December 31,
2007, a decrease of $11.7 million, or 16.2%, from 2006. The decrease in
residential mortgage loans coincided with the Corporation's strategic plan to
decrease the amount of relatively lower yielding residential mortgage loans and
increase the level of higher yielding commercial loans. Adjustable rate loans
represented $46.4 million, or 76.3%, of the total residential mortgage loan
portfolio at December 31, 2007. Residential mortgage loans are made principally
as an accommodation to our business banking customers. Adjustable rate
residential mortgage loans are held in the loan portfolio while longer duration,
15 year and 30 year fixed residential loans are typically sold, to manage the
Corporation's interest rate risk profile. The home equity lines of credit
("HELOC") totaled $20.9 million, or 5.4% of total loans, at December 31, 2007,
an increase of $3.3 million from 2006. This portfolio product is tied to Wall
Street Journal prime interest rate. These loans are fully secured by real estate
and are generally originated with loan to values (including all prior liens) up
to 95% of the appraised value of the real estate.
Consumer loans (excluding HELOCs and credit card loans) totaled $9.7 million at
December 31, 2007, a decrease of $1.9 million from December 31, 2006, as
management intentionally sought to reduce the Corporation's exposure in this
portfolio. The largest portion of the consumer loan portfolio is comprised of
boat loans. The Corporation's geographic proximity to Lake St. Clair and the
lending experience in this area have been contributors to this segment of the
portfolio. In 2005, the Corporation offered less competitive interest rates on
boat loans to reduce potential credit exposure in the area as the current
downturns in the local economy has adversely affect borrower's ability to repay
the outstanding loan, coupled with the potential decrease in collateral value.
At December 31, 2007, boat loans comprised approximately $8.5 million, or 87.6%
of the consumer loan portfolio and 2.2% of total loans compared to $10.0
million, or 85.6% of the consumer portfolio and 3.3% of total loans at December
31, 2006.
Credit card loans ended December 31, 2007 at $729,000, which was almost
unchanged from $693,000 at December 31, 2006. The Corporation continues to book
credit card loans as a customer accommodation and does not actively market this
product.
Mortgage loans held for sale totaled $4.8 million at December 31, 2007 compared
to $3.4 million at December 31, 2006. The mortgage loans were originated by the
Bank's mortgage subsidiary. The increase in total mortgages held for sale at
December 31, 2007 compared to December 31, 2006 was due to timing differences in
the final disposition and funding of sales, as the actual volume of sales
activity had slowed approximately 30% in 2007 compared to 2006. The slow down in
mortgage loan origination is reflective of the regional and national slowdown in
refinance activity as well as the slow down of purchased homes in Southeastern
Michigan. Loans closed generally remain in loans held for sale for less than 30
days in duration. Loans are normally committed for sale before funding takes
place.
48
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The investment security portfolio totaled $87.8 million at December 31, 2007,
compared to $81.9 million at December 31, 2006, and was comprised of securities
held as available for sale, held to maturity and held as trading.
Total securities available for sale decreased $14.1 million from December 31,
2006 to $66.8 million at December 31, 2007. The decrease was partially
attributable to the adoption of Financial Accounting Standards Fair Value Option
SFAS 159. The Corporation reclassified a total of $27.0 million of available for
sale securities as trading securities in the first quarter of 2007 under SFAS
159 and the classification of trading portfolio. The trading portfolio totaled
$20.1 million as of December 31, 2007. This decrease in the available for sale
portfolio was partially offset by the addition of mortgage backed securities
from the securitization of $8.2 million in mortgages comprising 15 year fixed
rate loans. At December 31, 2007, the available for sale portfolio had net
unrealized losses of $915,000 or approximately 1.35% of the aggregate portfolio.
At December 31, 2006, the net unrealized losses in the available for sale
portfolio were $1.2 million or 1.42% of the aggregate portfolio. As of December
31, 2007, the available for sale portfolio comprised $5.8 million in US agency
debentures, $28.8 million in bank qualified tax exempt municipal bonds, $31.8
million in U.S. agency mortgage backed securities, including collateralized
mortgage obligations and $491,000 in a CRA fund invested in mortgage backed
obligations. U.S. agencies are primarily pledged against repurchase agreements
and advances from the Federal Home Loan Bank of Indianapolis. The largest net
change in securities categories between 2007 and 2006 occurred in the U.S.
agency debentures decreasing $13.5 million from maturities calls and sales. The
reduction in these instruments intended to reduce the negative convexity of
these instruments, as a result of the call features of the instruments.
Unrealized losses have not been recognized into income, except for those
securities classified under trading under SFAS 159 the fair value option,
because of the issuers' bonds are of high credit quality. The Corporation has
the intent and ability to hold the securities classified under available for
sale for the foreseeable future and declines in the fair value is primarily due
to increased market interest rates.
The trading portfolio totaled $20.1 million as of December 31, 2007. The average
effective duration of the trading portfolio as of December 31, 2007 was
approximately 2.51 years and an average life of 3.14 years, with a weighted
average coupon rate of 4.84%. Management decided to classify the original
securities at January 1, 2007, under SFAS 159 because of the characteristics of
the instruments, which included the optionality and the ability of the
Corporation to hedge the instruments utilizing above market value Federal Home
Loan Bank advances. Furthermore, in adopting SFAS 159, the Corporation was able
to utilize the fair value option on off balance sheet hedges and account for the
hedges in a manner which is less complex than was previously available under
GAAP. Other reasons influencing management's decision to classify the selected
instruments under SFAS 159 include overall ALCO strategies and the shape of the
treasury yield curve and management expectations on short term interest rates.
The trading portfolio as of December 31, 2007 comprised $13.4 million of U.S.
Agency debentures with an effective duration of 2.96 years and $6.7 million in
U.S. agency collateralized mortgage obligations (CMOs) with an effective
duration of 1.6 years. All of the CMOs held in the trading portfolio pass the
FFIEC stress test with relatively short average lives under differing rate
scenarios. During the third quarter, the Corporation sold the municipal bond
portfolio segment of this portfolio to reduce its exposure to alternative
minimum tax considerations.
In May 2007, the Corporation acquired an interest rate swap to better hedge the
fair value of the portfolio. The notional value of the interest rate swap was
$18 million for duration of three years, which approximated the overall duration
of the trading portfolio under SFAS 159. Under the interest rate swap the bank
receives the three month libor rate and pays a fixed rate of 5.275%, which is
the average weighted yield of the hedged portfolio at the inception of the
interest rate swap. The interest rate swap is accounted for under the Fair Value
Option for Financial Assets and Liabilities (SFAS 159) and therefore no formal
hedge accounting under SFAS 133 is applicable. The Corporation is currently
reviewing the structure of the hedge and is considering restructuring a portion
of the trading portfolio to better provide protection in a falling short term
rate environment and provide protection to a lesser extent in a rising rate
environment.
49
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
At December 31, 2007, nonperforming loans, which consists of nonaccruing loans
and loans past due 90 days or more and still accruing interest, totaled $17.7
million compared to $4.7 million at December 31, 2006, an increase of $13.0
million. At December 31, 2007, other real estate owned comprised $854,000. The
primary reason for the increase in nonperforming loans at December 31, 2007
compared to December 31, 2006, was related to increases in nonperforming
commercial real estate loans which increased $11.7 million from December 31,
2006. The majority of this increase was attributable to the classification of
$9.7 million of residential developer loans in the fourth quarter of 2007.
Nonaccrual residential developer loans comprised 57% of the Corporation's total
nonaccrual loans at December 31, 2007. Residential developer loans represented
approximately 5% or $20.3 million of the total loan portfolio at December 31,
2007. The specific allowance for those loans we identified requiring reserves in
this group was $2.9 million. Nonaccrual loans in the category of commercial and
industrial totaled $146,000 at December 31, 2007, and decreased $500,000 from
December 31, 2007. Residential, home equity and consumer type loans had $2.1
million, $354,000 and $30,000 classified as nonaccrual at December 31, 2007
compared to no amounts in 2006. The increase in nonaccrual for these consumer
based loans was indicative of the worsening economic conditions in Southeastern
Michigan over the corresponding period. The Corporation's nonperforming assets
to total assets increased to 3.56% at December 31, 2007 compared to 0.96% at
December 31, 2006 primarily as the result of the addition of the residential
developer loans. The Corporation continues to carefully monitor the performance
of all of its loans. The allowance for loan losses compared to total loans at
December 31, 2007 was 1.64% and the allowance for loan losses to nonperforming
loans at that date was 36.21%.
For additional information on our nonperforming assets, see nonperforming assets
under Note 5 of the Notes to Consolidated Financial Statements.
Commercial loans and lease financing receivables are to be reported as being in
nonaccrual status if: (a) they are maintained on a cash basis because of
deterioration in the financial position of the borrower, (b) payment in full of
interest or principal is not expected, or (c) principal or interest has been in
default for a period of 90 days or more. If it can be documented that the loan
obligation is both well secured and in the process of collection, the loan may
stay on accrual status. However, if the loan is not brought current before
becoming 120 days past due, the loan should be reported as non-accrual. Any
exceptions to automatic non-accrual status at 90 days must be approved in
writing by the Senior Loan Officer and the Chief Financial Officer. A
non-accrual asset may be restored to an accrual status when none of its
principal or interest is due and unpaid, when it otherwise becomes well secured,
and in the process of collection. A debt is "well-secured" if it is secured (1)
by collateral in the form of liens on or pledges of real or personal property,
including securities, that have a realizable value sufficient to discharge the
debt (including accrued interest) in full, or (2) by the guaranty of a
financially responsible party. A debt is "in the process of collection" if
collection of the debt is proceeding in due course either through legal action,
including judgment enforcement procedures, or, in appropriate circumstances,
through collection efforts not involving legal action which are reasonably
expected to result in repayment of the debt or in its restoration to a current
status in the near future, generally within the next 90 days. Residential
mortgages and other consumer loans may accrue interest if the principal or
interest has been in default for more than 90 days if the loan is well secured
and in the process of collection.
The allowance for credit losses as a percentage of total loans was 1.64% at
December 31, 2007 versus 1.04% at December 31, 2006. The large increase in the
reserve percentage was primarily attributable to an increase in impaired loans
with collateral deficiency. Management evaluates the condition of the loan
portfolio on a quarterly basis to determine the adequacy of the allowance for
credit losses. Management's evaluation of the allowance is further based on
consideration of actual loss experience, the present and prospective financial
condition of borrowers, adequacy of collateral, industry concentrations within
the portfolio, and general economic conditions. Management believes that the
present allowance is adequate, based on the broad range of considerations listed
above.
Net loan charge offs to average loans for the year ended December 31, 2007
totaled 0.27%, compared to 0.09% for the year ended December 31, 2006. Total
loan charge-offs for 2007 were $1.1 million, compared with $343,000 in loan
charge-offs in 2006. Total recoveries in 2007 were $88,000 compared with total
recoveries of $28,000 in 2006. The largest increase in charge offs occurred in
the consumer loan area primarily attributable to boat loans. In 2007, 59% of all
charge offs occurred in consumer and residential real estate loans. This is in
contrast to historical trends,
50
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
whereby consumer type loans comprised a relatively small percentage of charge
offs. The increase is attributable to the worsening economic conditions in
Southeastern Michigan.
During 2007, we increased the reserve allocations in the allowance for credit
losses for commercial real estate loans, by $2.6 million primarily as the result
of the residential developer loans previously mentioned. This represented the
largest increase with the exception of the category of consumer loans which more
than doubled from the previous year moving up to $314,000 in total allocated
reserves, despite the decrease in the total outstanding balance in this
category. At December 31, 2007, the specific allowance for consumer loans was
3.22% compared to 1.33% at December 31, 2006. Again, this increase was
attributable to the worsening economic conditions in Southeastern Michigan and
known impairment in the portfolio. The allowance for credit losses increased
$2.6 in 2007 totaling $6.4 million. These changes in reserve allocations between
the types of loans were the result of changes in impairment as defined under
SFAS 114 and under SFAS 5. The Corporation performs a detailed quarterly review
of the allowance for credit losses. The Corporation evaluates those loans
classified substandard under its internal risk rating system, on an individual
basis for impairment under SFAS 114.
The level of allocation of the allowance is determined primarily on management's
evaluation of collateral value, less the cost of disposal, for the loans
reviewed in this category. The remainder of the loan portfolio is segmented into
loan pools with similar risk characteristics for evaluation under SFAS 5.
The primary risk element considered by management regarding each consumer and
residential real estate loan is lack of timely payment. Management has a
reporting system that monitors past due loans and has adopted policies to pursue
its creditor's rights in order to preserve the Bank's position. The primary risk
elements concerning commercial and industrial loans and commercial real estate
loans are the financial condition of the borrower, the sufficiency of
collateral, and lack of timely payment. Management has a policy of requesting
and reviewing annual financial statements from its commercial loan customers and
periodically reviews existence of collateral and its value.
At December 31, 2007, loans totaling $14.7 million were not included in the
non-performing asset table contained in Note 5 of the Notes to Consolidated
Financial Statements where the known information about possible credit problems
of borrowers caused management to have serious doubts as to the ability of the
borrowers to fully comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
Although management believes that the allowance for credit losses is adequate to
absorb losses as they arise, there can be no assurance that the Bank will not
sustain losses in any given period that could be substantial in relation to the
size of the allowance for credit losses. It must be understood that inherent
risks and uncertainties related to the operation of a financial institution
require management to depend on estimates, appraisals and evaluations of loans
to prepare the Corporation's financial statements. Changes in economic
conditions and the financial prospects of borrowers may result in changes to the
estimates, appraisals and evaluations used. In addition, if circumstances and
losses differ substantially from management's assumptions and estimates, the
allowance for loan losses may not be sufficient to absorb all future losses and
net income could be significantly impacted.
51
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIABILITIES
During the year ended December 31, 2007, total deposits decreased $27.2 million
to $328.6 million. The decrease in deposits was attributable to a decrease in
money market accounts of $6.7 million and time deposits of $18.4 million. The
decrease in money market accounts was due in part to the general declines in
interest rate experienced in the fourth quarter of 2007. Customers which were
sensitive to declines in interest rates withdrew funds from these accounts as
they were tied to the six month Treasury bill. Time deposits decreased $18.4
million to $234.2 million at December 31, 2007. The decrease in time deposits
was attributable to time deposits of $100,000 and over and was primarily due to
deposits generated in the Bank's branches comprising larger jumbo deposits of
individuals and municipalities. Brokered and internet deposits included in the
category of time deposits over $100,000, comprised $125.0 million and $1.8
million, respectively. These deposits increased in total $13.4 million during
2007, as the Bank funded with the least expensive source of funding available.
Time deposits under $100,000 decreased $6.2 million in 2007, due in part to the
very competitive rate environment amongst local financial institutions.
Noninterest bearing deposits, primarily business related checking accounts,
decreased $1.7 million, or 5.1% at December 31, 2007 compared to December 31,
2006. This was primarily the result of timing difference, as no related decrease
occurred in the total number of demand deposit accounts. The competitive rate
environment amongst local financial institutions has made the Corporation decide
in some cases not to raise the interest rate on the deposit product at the time
frequency or level to match or exceed interest rates given by local financial
institutions. The Corporation continues to see competitive deposit rates offered
by local financial institutions within the geographic proximity of the Bank,
which could have the affect of increasing the cost of funds to a level higher
than management projects. While the Bank will continue its focus on generating
local deposits, it will continue to use Federal Home Loan Bank ("FHLB") advances
and brokered certificates of deposit to fund assets growth as a viable
alternative to local deposits to balance both interest rate risk and the overall
cost of funds. Brokered and internet certificates of deposit are based on a
nationwide interest rate structure, typically at what is considered to be
premium interest rate. The local competition for certificates of deposit
products has continued to be strong and the Bank has found wholesale funding to
often effectively compete with the rates offered for similar term retail
certificates of deposit products of local community and regional banks.
The following table shows the balance of specific deposit categories and the
percentage of each category compared to total deposits.
December 31, 2007 December 31, 2006
--------------------- ---------------------
Balance Percentage Balance Percentage
-------- ---------- -------- ----------
(in thousands, except percent)
Noninterest bearing demand $ 31,647 9.6% $ 33,331 9.4%
NOW accounts-interest bearing checking 14,907 4.5 14,084 4.0%
Money Market 38,560 11.7 45,255 12.7%
Savings 9,326 2.8 10,569 3.0%
Time deposits under $100,000 39,395 12.0 45,608 12.8%
Time deposits $100,000 and over 194,800 59.4 207,009 58.1%
-------- ----- -------- -----
Total deposits $328,635 100.0% $355,856 100.0%
======== ===== ======== =====
Short-term borrowings increased $7.8 million to $37.4 million at December 31,
2007 from December 31, 2006, due primarily to an increase in short term FHLB
advances of $9.8 million. Repurchase agreements are based on the seasonal needs
for funds to the commercial and municipal customers who utilize the program and
may vary in total size dependent upon the customer's needs. At December 31,
2007, short-term FHLB advances totaled $23.8 million and short-term repurchase
agreements totaled $13.7 million. The weighted average interest rate on the
ending balance of the short-term borrowings at December 31, 2007 was 3.73%.
In June 2001, the Corporation started to borrow long-term advances from the FHLB
to fund fixed rate investments, as part of its efforts to manage the interest
rate risk associated with certain fixed rate commercial mortgage loans and
52
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
investment securities. These advances are secured under a blanket security
agreement by first mortgage loans and the pledging of certain securities. The
total FHLB advances were comprised of $23.8 million in short term advances with
a weighted average rate of 4.14% and long term advances of $80.7 million with a
weighted average rate of 4.70%. The aggregate weighted rate of the entire FHLB
advance portfolio was 4.57% with a weighted average remaining maturity of 3.5
years as of December 31, 2007. Long-term advances comprised 36 advances maturing
from April 2008 to June 2016.
STOCKHOLDERS' EQUITY
Stockholder's equity was $33.2 million as of December 31, 2007, resulting in a
decrease of $3.4 million from December 31, 2006. The decrease in stockholder's
equity was primarily attributable to the repurchase of common stock totaling
$3.4 million for the twelve months ended December 31, 2007. Net income of
$724,000 for 2007 was more than offset the decrease in retained earnings from
the cash dividend. Additional decreases in stockholder's equity occurred from
the $420,000 charge to retained earnings resulting from the adoption of
Financial Accounting Standards "Fair Value Option" SFAS. Accumulated other
comprehensive income decreased in the unrealized loss position by $159,000 as
the available for sale investment portfolio increased in relative value over the
respective period. Option exercised in 2007 increased stockholder's equity
$341,000. The release of "ESOP" shares under the Bank plan increased
stockholder's equity $59,000 in 2007. Unrealized losses have not been recognized
into income because the issuers' bonds are of high credit quality. The
Corporation has the intent and the ability to hold the securities for the
foreseeable future and the decline in the fair value during 2007 was primarily
due to increased market interest rates. Management believes, as of December 31,
2007, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject and is considered "well capitalized."
On April 17, 2007, Community Central Bank Corporation declared a 5% stock
dividend, payable on June 1, 2007 to stockholders of record on May 1, 2007. The
outstanding number of shares, earnings per share, exercise price data and common
stock price data have been adjusted to reflect this dividend. Retained earnings,
common stock and additional paid-in-capital were adjusted to reflect the stock
dividend as indicated in the Consolidated Statement of Changes in Stockholders'
Equity.
53
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET INTEREST INCOME
The following table shows the dollar amount of changes in net interest income
for each major category of interest earning asset and interest bearing
liability, and the amount of change attributable to changes in average balances
(volume) or average rates for the periods shown. Variances that are jointly
attributable to both volume and rate changes have been allocated to the volume
component.
Year Ended Year Ended
December 31, 2007 vs. 2006 December 31, 2006 vs. 2005
-------------------------- ----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Changes In Due to Changes In
----------------- -------------------
Volume Volume
Total and Both Rate Total and Both Rate
------ -------- ------ ------ -------- --------
(In Thousands)
Earning Assets - Interest Income
Loans $1,172 $ 731 $ 441 $5,612 $2,946 $ 2,666
Securities (24) (100) 76 1,537 1,162 375
Federal funds sold 302 305 (3) 96 (12) 108
------ ------- ------ ------ ------ --------
Total 1,450 936 514 7,245 4,096 3,149
------ ------- ------ ------ ------ --------
Deposits and Borrowed Funds - Interest Expense
NOW and money market accounts 1,159 791 368 564 41 523
Savings deposits 9 (11) 20 (44) (115) 71
Time deposits (616) (1,671) 1,055 5,378 2,590 2,788
Other borrowings 603 667 (64) 1,258 674 584
Capitalized lease obligation and ESOP loan (4) (5) 1 (1) (5) 4
Subordinated debentures 692 820 (128) 182 -- 182
------ ------- ------ ------ ------ --------
Total 1,843 591 1,252 7,337 3,185 4,152
------ ------- ------ ------ ------ --------
Net Interest Income ($393) $ 345 ($738) ($92) $ 911 ($1,003)
====== ======= ====== ====== ====== ========
Net interest income was $12.2 million for the year ended December 31, 2007, a
decrease of $393,000 or 3.1%, compared to the year ended December 31, 2006. Net
interest margin, as measured on a tax equivalent basis, was 2.68% for 2007
compared with 2.83% in 2006. The decrease in net interest margin was primarily
the result of higher deposit funding costs as a result of higher overall
interest costs from February 2007 to June 2007 before the redemption of the
subordinated debentures in 2007 and the reversal of interest accrued on loans
placed into nonaccrual status during 2007. Additionally, the flat treasury yield
curve experienced for most of 2007 produced an interest rate environment that
results in lower incremental interest rate spreads on new loan and investment
growth.
The increase in interest income was attributable to both an increase in loan
volume and in the higher overall yield earned on loans as a result of an
increase in market interest rates. The slight decrease in interest income from
securities for the same time period was primarily attributable to a decrease in
volume, partially offset by an increase in income from an increase in the
aggregate yield of the security portfolio from maturities and restructuring. The
increase in interest expense from 2007 compared to 2006 was largely due to
interest expense on now and money market accounts primarily related to volume
and interest expense related to subordinated debentures. Interest expense
increased from the subordinated debentures was due to the Corporation's issuance
of an additional $18 million of subordinated debentures in February 2007 and the
overall rate paid on the outstanding debentures during the year. In June of
2007, the Corporation redeemed $10 million of previously issued subordinated
debentures bearing a higher interest rate than the newly issued debentures,
which will help reduce the cost of funds moving forward. Interest expense
associated with time deposits decreased $616,000 in 2007 compared to 2006 from
volume and was offset by increase in borrowing from the FHLB which led to an
increase of $692,000 from an increase in volume but a decrease in overall rate.
54
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net interest income was $12.6 million for the year ended December 31, 2006, a
decrease of $92,000 or 0.73% over the year ended December 31, 2005. Net interest
margin, as measured on a tax equivalent basis, was 2.83% for 2006 compared with
3.23% in 2005. The decrease in net interest margin was primarily the result of
higher deposit funding costs in a highly competitive deposit pricing
environment. During 2006, the decrease in lower yielding core deposit accounts
was one of the primarily drivers of net interest margin compression.
Additionally, the flat yield curve produced an interest rate environment that
results in lower incremental interest rate spreads on new loan and investment
growth.
The increase in interest income was attributable to both an increase in loan
volume and in the higher overall yield earned on loans as a result of an
increase in market interest rates. The increase in interest income from
securities for the same time period was primarily attributable to an increase in
volume, as most of the securities have fixed interest rates. The increase in
interest expense from 2006 compared to 2005 was largely due to interest expense
time deposits, which increased $5.4 million. The increase in interest expense
associated with time deposits was evenly attributable to the $24.2 million
increase in time deposits and the increased rates paid on time deposits that
repriced during 2006. The increase in interest expense from time deposits
represented 73.3% of the total increase in interest expense. The increase in
interest expense from other borrowings, which primarily comprises FHLB advances,
was $1.3 million with the increase attributable evenly to volume and rate.
The average yield on earning assets for 2007 was 6.84% compared to 6.74% in
2006. The average yield on the total loan portfolio, which contains both loans
held for sale and investment for 2007 was 7.45% compared to 7.33% in 2006. At
the end of 2007, the Community Central Bank prime rate stood at 7.25%. During
the fourth quarter of 2007, the Federal Open Market Committee of the Federal
Reserve lowered the overnight Federal funds rate from 5.25% where it had started
at the beginning of 2007 to 4.25% at the end of 2007, or a 1% reduction which
did not have a material affect on the yield for the total year. The commercial,
commercial real estate and home equity line loan portfolios that reprice with
prime interest rate changes totaled approximately $142 million and were the
primary driver for the increase in total loan yield during 2007. The
Corporation's security portfolio had an average non-tax adjusted yield of 4.67%
during 2007, although yield climbed through 2007, with the ending weighted
average taxable equivalent yield to maturity at December 31, 2007 totaling
5.50%. At December 31, 2007, $8.7 million of the total investment portfolio was
variable rate.
The average rate paid on interest bearing liabilities in 2007 was 4.72% compared
to 4.45% in 2006. The increase in the average rate was due to the overall rate
paid on interest bearing liabilities due to the increase in overall market
interest rates. The increase in the average yield for NOW and money market
accounts for 2007 was primarily attributable to the introduction of a premium
rate based money market account, with an average yield of 3.66% in 2007 versus
2.79% in 2006. The average yield paid on savings also increased slightly, moving
to 2.50% in 2007, from 2.34% in 2006 as the result of the introduction of a high
balance savings product. The average yield on time deposits increased due to the
increase in market rates and the repricing characteristics of this deposit
category. The yield on the total time deposit portfolio increased to 5.09% in
2007 from 4.68% in 2006. The yield on FHLB advances and repurchase agreements
decreased to 4.29% in 2007 from 4.35% in 2006 due to the repricing of variable
advances and the decrease in the interest rate paid on repurchase agreements
from the addition of wholesale structured repurchase agreements totaling $19
million in balances. The average rate paid on the subordinated debenture
decreased in 2007 to 7.76% from 9.00%, reflecting the Corporation's issuance of
$18 million of subordinated debenture with an overall lower interest rate of
6.71% compared to the redemption in June of the Corporations subordinated debt
which averaged 9.00% in 2006.
The average yield on earning assets for 2006 was 6.74% compared to 6.03% in
2005. The average yield on the total loan portfolio, which contains both loans
held for sale and investment for 2006 was 7.33% compared to 6.51% in 2005. In
2006, the Federal Open Market Committee of the Federal Reserve Bank increased
the overnight federal funds rate four times. At the end of 2006, the Community
Central Bank prime rate stood at 8.25%. The commercial, commercial real estate
and home equity line loan portfolios that reprice with prime interest rate
changes totaled approximately $140 million and the primary driver for the
increase in total loan yield during 2006. The Corporation's security portfolio
had an average non-tax adjusted yield of 4.59% during 2006, although yield
climbed through 2006, with the ending weighted average taxable equivalent yield
to maturity at December 31, 2006 totaling 5.38%. At December 31, 2006, $9.8
million of the total investment portfolio was variable rate based in nature.
55
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The average rate paid on interest bearing liabilities in 2006 was 4.45% compared
to 3.24% in 2005. The increase in the average rate was due to the overall rate
paid on interest bearing liabilities due to the increase in overall market
interest rates. The increase in the average yield for NOW and money market
accounts for 2006 was primarily attributable to the introduction of a premium
rate based NOW account, with the average yield to 2.790% in 2006 versus 1.50% in
2005. The average yield paid on savings also increased moving to 2.34% in 2006
from 1.94% in 2005, from the introduction of a high balance savings product. The
average yield on time deposits increased due to the increase in market rates and
the repricing characteristics of this deposit category. The yield on the total
time deposit portfolio increased to 4.68% in 2006 from 3.31% in 2005. The yield
on FHLB advances and repurchase agreements increased to 4.35% in 2006 from 3.66%
in 2005 due to new advances, repricing of variable advances and the increase in
the interest rate paid on repurchase agreements moving to 3.15% at the end of
2006 from 2.50% at the end of 2005. The average rate paid on the subordinated
debenture increased in 2006 to 9.00% from 7.24%, closely tracking the overall
increase in short-term market interest rates in 2005. This instrument is priced
quarterly based on the three month libor rate.
56
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table shows the Corporation's consolidated average balances of
assets, liabilities, and equity. The table also details the amount of interest
income or interest expense and the average yield or rate for each category of
interest earning asset or interest bearing liability, and the net interest
margin for the periods indicated. The average balance of securities represents
amortized cost. Nonaccruing loans are included in the average loans outstanding
with no yield associated with them.
Year Ended December 31,
-------------------------------------------------------------------------------------
2007 2006 2005
--------------------------- --------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(In thousands)
Assets
Loans $374,502 $27,904 7.45% $364,593 $26,732 7.33% $324,290 $21,120 6.51%
Securities 94,669 4,420 4.67 96,720 4,444 4.59 71,472 2,907 4.07
Federal funds sold 12,003 601 5.01 5,906 299 5.06 6,142 203 3.31
-------- ------- -------- ------- -------- -------
Total Earning Assets/
Total Interest Income/
Average Yield 481,174 32,925 6.84 467,219 31,475 6.74 401,904 24,230 6.03
------- ------- ------
Cash and due from banks 7,173 7,308 7,441
All other assets 23,523 22,661 18,812
-------- -------- --------
Total Assets $511,870 $497,188 $428,157
======== ======== ========
Liabilities and Equity
NOW and money market accounts $ 63,773 2,335 3.66 $ 42,210 1,176 2.79 $ 40,703 612 1.50
Savings deposits 12,321 308 2.50 12,761 299 2.34 17,664 343 1.94
Time deposits 225,934 11,495 5.09 258,664 12,111 4.68 203,170 6,733 3.31
FHLB advances and repurchase
Agreements 115,962 4,971 4.29 100,494 4,368 4.35 85,048 3,110 3.66
ESOP loan 67 6 8.96 121 10 8.26 179 11 6.15
Subordinated debentures 20,880 1,620 7.76 10,310 928 9.00 10,310 746 7.24
-------- ------- -------- ------- -------- -------
Total Interest Bearing Liabilities/
Total Interest Expense/Average
Interest Rate Spread 438,937 20,735 4.72 424,560 18,892 4.45 357,074 11,555 3.24
-------- -------- --------
Noninterest bearing demand deposits 34,594 34,064 36,485
All other liabilities 3,234 2,540 2,002
Stockholders' equity 35,105 36,024 32,596
-------- -------- --------
Total Liabilities and Stockholders'
Equity $511,870 $497,188 $428,157
======== ======== ========
Net Interest Income $12,190 $12,583 $12,675
======= ======= =======
Net interest rate spread 2.12% 2.29% 2.79%
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.53% 2.69% 3.15%
Taxable equivalent 2.68% 2.83% 3.23%
57
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PROVISION FOR CREDIT LOSSES
The provision for credit losses for the year ended December 31, 2007 was $3.6
million, an increase of $3.1 million from 2006. The increase in the provision
was due primarily to impairment on residential builder loans and the continued
economic softening of the southeastern area of Michigan. The provision for
credit losses for the year ended December 31, 2006 was $550,000, an increase of
$450,000 from 2005. See Management's Discussion and Analysis of Financial
Condition and Results of Operations- Assets for a more detailed discussion.
NONINTEREST INCOME
Noninterest income for 2007 was $5.7 million, an increase of $757,000 or 13.3%
from 2006. This increase was primarily attributable to the net change in the
fair value of financial assets and liabilities as measured under the fair value
option under Statement of Financial Accounting Standards (SFAS) 159, which
totaled $1.4 million on a pretax basis or $919,000 after tax. The Corporation
issued an $18 million subordinated debenture in February, 2007 and this
instrument was chosen for fair value accounting treatment as part of the early
adoption of the new accounting standard which led to the increase in income. The
dramatic widening of market credit spreads experienced in the third quarter
increased the relative fair value of this financial liability dramatically. The
Corporation hedges and protects itself from changes in interest rates with an
off balance sheet interest rate swap which is also accounted for under SFAS 159.
The hedge does not cover changes in credit spreads, which typically occur over
much longer periods of time then we are currently experiencing. Changes in
credit spreads are not easily predictable and changes in credit spreads may
cause adverse changes in the fair value of this instrument and a possible loss
of income in the future. Income from the gains on the sale of residential
mortgages of $2.4 million, decreased $1.0 million from 2006, or 29.9% and was
reflective of the decline in home sales experienced in the Midwest region.
Wealth and Trust Management income, which includes fiduciary income and fees and
commission on wealth management, totaled $686,000 in 2007 versus $328,000 in
2006, or an increase of 109%. Deposit service charge income of $419,000,
increased $62,000, or 17.4% from 2006 primarily from increased service charge
fees and a broadened branch base. Net realized losses from the sale of
securities were $74,000 for 2007 and were attributable to restructuring
activities in the available for sale security portfolio.
Noninterest income for 2006 of $4.9 million increased $126,000, or 2.6% from
2005 Increases in fiduciary income, deposit service charges and other fee based
revenue were offset by declines in fee income experienced from mortgage banking
activities. Total fiduciary income in 2006 of $289,000 increased $156,000 over
2005. The increase in 2006 was primarily due to a full year's income from this
division, versus six months in 2005, as the trust operations started on June 30,
2005, upon the acquisition of River Place Financial Corporation. Total deposit
service charges of $357,000 increased 20.2% over 2005 due in part to an
overdraft program initiated in November of 2005. Net realized security gains
were $8,000 in 2006, which was a decrease of $48,000 from 2005. Other income was
$905,000 in 2006, which was an increase of $334,000 from 2005. The increase was
primarily attributable to servicing income, gains on the sale of portfolio loans
during 2006 and fee income from wealth management services.
58
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NONINTEREST EXPENSE
Noninterest expense was $13.9 million for 2007, a decrease of 4.5% or $656,000
from 2006. Salaries, benefits and payroll taxes of $7.9 million represented the
largest decline in noninterest expense, declining $807,000, or 9.9% from 2006.
This was attributable to reductions in staffing levels within the mortgage
company subsidiary, coupled with an overall reduction in mortgage company
origination commissions as the result of lower mortgage origination volumes.
Included in total salary, benefits and payroll taxes was a $108,000 net charge
recorded in the third quarter of 2007 for severance costs related to the
previously disclosed departure of the Bank's President, Ronald Reed. Mr. Reed's
responsibilities were assumed by Mr. Widlak, the Corporation's Chief Executive
Officer. Premises and fixed asset expense of $1.8 million during 2007 decreased
$59,000, or 3.2% from the prior period. The decrease in premises and fixed asset
expense was attributable to a reduction in mortgage loan production offices in
2007 as the mortgage subsidiary significantly downsized operations to parallel
the local and national decrease in mortgage origination activity. The decrease
in lease expense and other costs associated with loan production offices were
partially offset by increases in utility costs on operating branch facilities.
Other operating expense of $4.2 million increased $273,000 or 7.0% during 2007.
The largest increases in this category occurred in data processing costs of
$625,000 which increased $76,000 primarily as a result of increased compliance
with regulatory requirements and safeguards to customer information. FDIC
insurance expense of $283,000 increased $242,000 from the change in the
assessment period and calculation of assessment compared to 2006. This was the
largest increase in other operating expense and represents the majority of the
increase.
Total salaries, benefits and payroll taxes in 2006, increased $1.1 million, or
14.0% over 2005. The largest component of the increase was attributable to the
trust and wealth management operations, which had a respective increase in
salaries, payroll and benefits of $421,000. The Corporation started the wealth
management division in early 2006 with a high level executive and support staff.
The increase in salary expense in the trust division was partially due to a full
year's salary and benefit expense in 2006 compared to a partial year in 2005, as
the trust division started July 1, 2005. Additionally, a high-level executive
was added in 2006 as the replacement for the retiring division head.
Additionally, the new branch location established in 2006 in Grosse Pointe,
Michigan added an additional $190,000 in payroll expense in 2006 as the branch
was staffed with a regional banking executive and branch staff. Salaries,
benefits and payroll taxes related to the Mortgage Company decreased $229,000 in
2006, with the decrease related to reduced level of commission related expense
on lower origination of mortgages from the previous year. The remainder of the
increase was attributable to merit increases, increases in health care costs and
an increase in the supplemental executive retirement plan over the prior year.
The SERP accrual increased due in part to factors including the amount of
participants accrued for over the full year. The Corporation has used Bank Owned
Life Insurance to informally fund the SERP and offset the expense of providing
the SERP plan to key executives.
Net occupancy expense of $1.9 million, increased $230,000 or 14.1% over 2005.
The increase was largely due to an increase in rent in other occupancy related
costs of new mortgage loan production offices started in 2006 in different
states. Additionally, the Bank opened a new branch location in Grosse Pointe,
Michigan, which started operations in June 2006. Increases in utility costs
during 2006, were offset by reductions in equipment service agreement costs.
Total other operating expense of $3.9 million increased $68,000 or 1.8% over
2005, with the significant changes highlighted below. Data processing expense
was $549,000 in 2006, which was an increase of $70,000 or 14.6%. The increase
was attributable to upgrades in technology required to meet regulatory
requirements and increased expense related with branch expansion. Telephone
expense was $214,000 for 2006, which was an increase of $62,000 or 40.8%. The
increase was attributable to costs related with the voice over IP system the
Corporation has expanded to all branches and loan production offices in 2006,
which should reduce these expenses in the future. Legal expenses were $316,000
in 2006, which was a reduction of $123,000 from 2005. The decrease in legal
expenses in 2006 was due in part to the additional legal costs related to the
River Place Financial Inc., acquisition in 2005.
59
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME TAXES
We had a federal income tax benefit of $295,000 for 2007 compared to a federal
income tax expense of $363,000 in 2006. The change was primarily attributable to
a lower level of pretax income, primarily from the large loan loss provision in
2007 over 2006, coupled with a permanent difference arising from tax exempt
income due to investments in bank qualified tax-exempt securities and the Bank's
ownership in bank owned life insurance (BOLI). The increase in cash surrender
value of BOLI is exempt from federal income tax.
The provision for federal income taxes of $363,000 for 2006 decreased $816,000
or 69.2%, from the federal income tax provision in 2005. The decrease was
primarily attributable to a lower level of pretax income in 2006 over 2005,
coupled with a lower effective tax rate. The effective tax rate for 2006 and
2005 was 14.8%and 27.7%, respectively. The statutory tax rate for the
Corporation is 34%. The lower effective tax rate is primarily due to investments
in bank qualified tax-exempt securities and the Bank's ownership in bank owned
life insurance (BOLI). The increase in cash surrender value of BOLI is exempt
from federal income tax.
LIQUIDITY AND CAPITAL RESOURCES; ASSET/LIABILITY MANAGEMENT
The liquidity of a bank allows it to provide funds to meet loan requests, to
accommodate possible outflows of deposits, and to take advantage of other
investment opportunities. Funding of loan requests providing for liability
outflows and managing interest rate margins require continuous analysis to
attempt to match the maturities and repricing of specific categories of loans
and investments with specific types of deposits and borrowings. Bank liquidity
depends upon the mix of the banking institution's potential sources and uses of
funds. The major sources of liquidity for the Bank have been deposit growth,
federal funds sold, loans and securities which mature within one year, and sales
of residential mortgage loans. Additional liquidity is provided by $27.5 million
in available unsecured federal funds borrowing facilities and a $150.0 million
secured line of credit with the FHLB. Large deposit balances which might
fluctuate in response to interest rate changes are closely monitored. These
deposits consist mainly of jumbo certificates of deposit. We anticipate that we
will have sufficient funds available to meet our future commitments. As of
December 31, 2007, unused commitments comprised $81.5 million. The Bank has
$234.2 million in time deposits coming due within the next twelve months from
December 31, 2007. At December 31, 2007, the Bank had $125.0 million in brokered
certificates of deposit, of which $66.9 million is due within one year or less.
The Bank will continue to use brokered certificates and other wholesale funding
sources for replacement sources of matured funds. Additionally, at December 31,
2007, municipal time deposits and internet time deposits were $33.4 million and
$1.8 million, respectively. Municipal time deposits typically have maturities
less than three months. On February 19, 2008, the Corporation's Board of
Directors declared the Corporation's twenty fourth consecutive quarterly cash
dividend of $0.06 per common share, payable April 1, 2008, to shareholders of
record March 3, 2008.
The largest uses and sources of cash and cash equivalents for the Corporation
for the year ended December 31, 2007, as noted in the Consolidated Statement of
Cash Flow, were centered primarily on the uses of cash in investing activities
and the net cash provided by financing activities. The uses of cash in investing
activities were largely due to the increase in loans of $23.6 million, with the
remaining use of funds attributable to net increase in the trading, available
for sale and held to maturity investment portfolios. Somewhat offsetting the
uses of cash in investing activities, was the area of cash provided from
financing activities which included net increases short term borrowing of $16.7
million and increases in FHLB advances, net of repayments of $21.0 million. The
issuance of subordinated debentures net of a redemption provided $8.2 million
from financing activities. Partially offsetting the increases in net cash
provided from financing activities was decreases in demand and savings of $8.8
million and decreases in time deposits of $18.4 million. The net cash provided
in operating activities was $86,000. Total cash and cash equivalents at the end
of December 31, 2007 was $9.2 million, which was a decrease of $15.5 million
from December 31, 2006.
60
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off-Balance Sheet Arrangements. As of December 31, 2007, we have not
participated in any material unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special entities.
The Corporation does have significant commitments to fund loans in the ordinary
course of business. These commitments and resulting off balance sheet risk are
further discussed in Note 18 of the Corporation's Consolidated Financial
Statements.
Contractual Obligations.
Payments Due by Period
-----------------------------------------------
Less than 1-3 3.5 More than
Total 1 Year Years Years 5 Years
------- --------- ----- ----- ---------
(In thousands)
Long term debt (1) $18,593 $ 36 $ 45 -- $18,558
Capital lease obligations -- -- -- -- --
Operating leases (2) 1,333 250 383 $289 411
Other contractual obligations (3) 384 384
(1) Includes $36,000 of long term debt from a Note payable on the Bank's
employee stock ownership plan (see Note 10 to the Consolidated Financial
Statements) and $18.6 million of subordinated debentures (see Note 11 to
the Consolidated Financial Statements).
(2) See Note 14 to the Consolidated Financial Statements.
(3) Remaining contract with core processing provider for IT services.
61
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Managing rates on earning assets and interest bearing liabilities focuses on
maintaining stability in the net interest margin, an important factor in
earnings growth and stability. Emphasis is placed on maintaining a controlled
rate sensitivity position to avoid wide swings in margins and to manage risk due
to changes in interest rates.
The Corporation's Asset Liability Committee ("ALCO") meets periodically. Some of
the major areas of focus of the ALCO incorporate the following overview
functions: review the interest rate risk sensitivity of the Bank to measure the
impact of changing interest rates on the Bank's net interest income, review the
liquidity position through various measurements, review current and projected
economic conditions and the corresponding impact on the Bank, ensure that
capital and adequacy of the allowance for loan losses are maintained at proper
levels to sustain growth, monitor the investment portfolio, recommend policies
and strategies to the Board that incorporate a better balance of our interest
rate risk, liquidity, balance sheet mix and yield management, and review the
current balance sheet mix and proactively determine the future product mix.
The Corporation currently utilizes two quantitative tools to measure and monitor
interest rate risk: static gap analysis and net interest income simulation
modeling. Each of these interest rate risk measurements has limitations, but
management believes when these tools are evaluated together, they provide a
balanced view of the exposure the Corporation has to interest rate risk.
Interest sensitivity gap analysis measures the difference between the assets and
liabilities repricing or maturing within specific time periods. An
asset-sensitive position indicates that there are more rate-sensitive assets
than rate-sensitive liabilities repricing or maturing within specific time
periods, which would generally imply a favorable impact on net interest income
in periods of rising interest rates and a negative impact in periods of falling
rates. A liability-sensitive position would generally imply a negative impact on
net interest income in periods of rising rates and a positive impact in periods
of falling rates.
Gap analysis has limitations because it cannot measure precisely the effect of
interest rate movements and competitive pressures on the repricing and maturity
characteristics of interest-earning assets and interest-bearing liabilities. In
addition, a significant portion of our adjustable-rate assets have limits on
their minimum and maximum yield, whereas most of our interest-bearing
liabilities are not subject to these limitations. As a result, certain assets
and liabilities indicated as repricing within a stated period may in fact
reprice at different times and at different volumes, and certain adjustable-rate
assets may reach their yield limits and not reprice.
62
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table presents an analysis of our interest-sensitivity gap
position at December 31, 2007. All interest-earning assets and interest-bearing
liabilities are shown based on the earlier of their contractual maturity or
repricing date adjusted by forecasted prepayment and decay rates, our historical
experience, and the repricing and prepayment characteristics of portfolios
acquired through acquisition.
After Three After One
Within Months But Year But After
Three Within Within Five
Months One Year Five Years Years Total
-------- ----------- ---------- -------- --------
(In thousands)
Interest earning assets
Federal funds sold $ 3,000 $ -- $ -- $ -- $ 3,000
Securities, at amortized cost 22,833 9,649 24,897 31,437 88,816
FHLB stock -- 5,527 -- -- 5,527
Loans (including held for sale) 142,019 64,801 151,587 36,353 394,760
-------- --------- -------- -------- --------
Total 167,852 79,977 176,484 67,790 $492,103
========
Interest bearing liabilities
NOW and money market accounts 31,742 7,732 12,065 1,928 53,467
Savings deposits 560 2,425 6,342 -- 9,327
Jumbo time deposits 37,070 90,252 67,278 200 194,800
Time deposits < $100,000 13,133 18,131 7,038 1,093 39,395
Repurchase agreements 33,039 -- -- -- 33,039
FHLB 12,000 11,810 52,500 28,200 104,510
Capitalized lease obligation and
ESOP loan 36 -- -- -- 36
Subordinated debentures 18,557 -- -- -- 18,557
-------- --------- -------- -------- --------
Total 146,137 130,350 145,223 31,421 $453,131
-------- --------- -------- -------- ========
Rate sensitivity gap $ 21,715 ($ 50,373) $ 31,261 $ 36,369
======== ========= ======== ========
Cumulative rate sensitivity gap ($ 28,658) $ 2,603 $ 38,972
========= ======== ========
Rate sensitivity gap ratio 1.15x 0.61x 1.22x 2.16x
Cumulative rate sensitivity gap ratio 0.90x 1.01x 1.09x
63
COMMUNITY CENTRAL BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Bank also evaluates interest rate risk using a simulation model. The use of
simulation models to assess interest rate risk is an accepted industry practice,
and the results of the analysis are useful in assessing the vulnerability of the
Bank's net interest income to changes in interest rates. However, the
assumptions used in the model are oversimplifications and not necessarily
representative of the actual impact of interest rate changes. The simulation
model assesses the direction and magnitude of variations in net interest income
resulting from potential changes in market interest rates. Key assumptions in
the model include prepayment speeds of various loan and investment assets; cash
flows and maturities of interest-sensitive assets and liabilities, and changes
in market conditions impacting loan and deposit volumes and pricing. These
assumptions are inherently uncertain, and subject to fluctuation and revision in
a dynamic environment. Therefore, the model cannot precisely estimate future net
interest income or exactly predict the impact of higher or lower interest rates.
Actual results may differ from simulated results due to, among other factors,
the timing, magnitude and frequency of interest rate changes, changes in market
conditions and management's pricing decisions and customer reactions to those
decisions.
On a quarterly basis, the net interest income simulation model is used to
quantify the effects of hypothetical changes in interest rates on the Bank's net
interest income over a projected twelve-month period. The model permits
management to evaluate the effects of shifts in the Treasury yield curve, upward
and downward, on net interest income expected in a stable interest rate
environment.
As of December 31, 2007, the table below reflects the impact the various
instantaneous parallel shifts in the yield curve would have on net interest
income over a twelve month period of time from the base forecast. Interest rate
risk is a potential loss of income and/or potential loss of economic value of
equity. Rate sensitivity is the measure of the effect of changing interest rates
on the Bank's net interest income or the net interest spread. The policy of the
Bank shall be to risk no more than 10% of its net interest income in a changing
interest rate scenario of +/- 200 basis points over a one-year simulation
period. Furthermore, no more than 15% of net interest income can be projected at
risk in a scenario of +/- 300 basis points over a one-year simulation period.
Percentage Change
Interest Rate Scenario In Net Interest Income
---------------------- ----------------------
Interest rates up 300 basis points (0.94%)
Interest rates up 200 basis points (0.59%)
Interest rates up 100 basis points (0.38%)
Base Case --
Interest rates down 100 basis points 1.56%
Interest rates down 200 basis points 3.10%
Interest rates down 300 basis points (2.92%)
APPLICATION OF CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR CREDIT LOSSES: The Corporation performs a detailed quarterly
review of the allowance for credit losses. The Corporation evaluates those loans
classified as substandard, under its internal risk rating system, on an
individual basis for impairment under SFAS 114. The level and allocation of the
allowance is determined primarily on management's evaluation of collateral
value, less the cost of disposal, for loans reviewed in this category. The
remainder of the total loan portfolio is segmented into homogeneous loan pools
with similar risk characteristics for evaluation under SFAS 5. The Corporation
uses factors such as, historical portfolio losses, national and local economic
trends and levels of delinquency to determine the appropriate level and
allocation of the allowance for loans in this grouping. The Corporation's policy
dictates that specifically identified credit losses be recognized immediately by
a charge to the allowance for credit losses.
Inherent risks and uncertainties related to determination of adequacy of the
allowance for credit losses require management to depend on estimates,
appraisals and evaluations of loans to prepare the analysis. Changes in economic
conditions and the financial prospects of borrowers may result in changes to the
estimates, appraisals and evaluations used. In addition, if circumstances and
losses differ substantially from management's assumptions and estimates, the
allowance for credit losses may not be sufficient to absorb all future losses
and net income could be significantly impacted.
64
COMMUNITY CENTRAL BANK CORPORATION
STOCKHOLDER INFORMATION
SEC FORM 10-K
Copies of the Corporation's annual report on Form 10-K, as filed with the
Securities and Exchange Commission are available to stockholders without charge,
upon written request. Please mail your request to Ray T. Colonius; Corporate
Treasurer, Community Central Bank Corporation, 120 North Main Street, Mount
Clemens, MI 48043.
STOCK INFORMATION
The common stock of Community Central Bank Corporation trades on The NASDAQ
Global Market under the ticker symbol "CCBD." At December 31, 2007, there were
3,733,081 shares of Community Central Bank Corporation common stock issued and
outstanding and approximately 500 shareholders of record.
The following table presents the quarterly range of high and low sales prices of
Community Central Bank Corporation common stock for 2006 and 2007, as well as
the dividends declared during the stated periods. The price information set
forth in the table was reported by The NASDAQ Global Market. Our cash dividend
payout policy is continually reviewed by management and the Board of Directors.
Dividend payment decisions are made after considering a variety of factors,
including earnings, financial condition, market considerations and regulatory
restrictions. The Corporation relies significantly upon dividends originating
from the Bank to accumulate cash for payment of dividends to our stockholders.
Restrictions of dividend payments from the Bank are described in Note 19 of the
Notes to Consolidated Statements included in this Annual Report.
2007 Cash
--------------- Dividends
Quarter High Low Declared
- ------- ------ ------ ---------
Fourth $ 8.99 $ 6.10 $.06
Third 9.57 7.30 .06
Second 11.35 9.00 .06
First 12.25 10.25 .06
2006 Cash
--------------- Dividends
Quarter High Low Declared
- ------- ------ ------ ---------
Fourth $11.43 $10.25 $.06
Third 11.43 9.90 .06
Second 11.29 10.79 .06
First 12.46 10.15 .06
Price information has been retroactively adjusted to reflect the issuance of
stock dividends
65
COMMUNITY CENTRAL BANK CORPORATION
STOCKHOLDER INFORMATION
PRIMARY MARKET MAKERS
Hill, Thompson, Magid & Co., Inc. Howe Barnes Hoefer and Arnett
15 Exchange Place Investment, Inc.
Jersey City, NJ 07302-3912 222 South Riverside Plaza, 7th Floor
Chicago, IL 60606
Knight Securities, L.P. UBS Capital Markets, L.P.
545 Washington Blvd. 111 Pavosia Avenue East
Jersey City, NJ 07310 Jersey City, NJ 07310
STOCK REGISTRAR AND TRANSFER AGENT
Computershare Trust Company, N.A.
PO Box 43010
Providence, RI 02940-3010
Shareholder Inquiries 1-800-426-5523
www.computershare.com
INDEPENDENT AUDITOR
Plante & Moran, PLLC
2601 Cambridge Ct., Suite 500
Auburn Hills, MI 48326
LEGAL COUNSEL
Silver, Freedman & Taff, LLP
3299 K Street, NW, Suite 100
Washington D.C. 20007
INFORMATION
News media representatives and those seeking additional information about the
Corporation should contact Ray T. Colonius, Corporate Treasurer, at (586)
783-4500, or by writing him at 120 North Main Street, Mount Clemens, MI 48043.
ANNUAL MEETING
This year's annual meeting of stockholders will be held at 9:00 a.m., on
Tuesday, April 15, 2008, at Best Western Concorde Inn, 44315 Gratiot Avenue,
Clinton Township, MI 48036.
66