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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2008
Commission File No. 000-33373
COMMUNITY CENTRAL BANK CORPORATION
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(Exact name of small business issuer as specified in its charter)
Michigan 38-3291744
- ------------------------------ ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
100 North Main Street, PO Box 7, Mount Clemens, MI 48046-0007
-------------------------------------------------------------
(Address of principal executive offices and zip code)
(586) 783-4500
--------------------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicated by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 11, 2008
----------- ------------------------------
Common Stock 3,734,781 Shares
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COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2008 2007
(Unaudited)
---------- -----------
(In thousands)
Assets
Cash and due from banks $ 8,471 $ 6,183
Federal funds sold 5,700 3,000
--------- ---------
Cash and Cash Equivalents 14,171 9,183
--------- ---------
Trading securities at fair value option 17,442 20,115
Securities available for sale, at fair value 72,492 66,809
Securities held to maturity, at amortized cost 1,775 977
FHLB stock 5,877 5,527
Residential mortgage loans held for sale 1,930 4,848
Loans
Commercial real estate 272,018 264,685
Commercial and industrial 35,021 33,039
Residential real estate 56,911 60,799
Home equity lines of credit 21,018 20,906
Consumer loans 8,490 9,754
Credit card loans 758 729
--------- ---------
Total Loans 394,216 389,912
Allowance for credit losses (7,019) (6,403)
--------- ---------
Net Loans 387,197 383,509
--------- ---------
Net property and equipment 9,210 8,704
Accrued interest receivable 2,257 2,535
Other real estate 2,025 854
Goodwill 1,381 1,381
Intangible assets, net of amortization 94 107
Cash surrender value of Bank Owned Life insurance 10,774 10,514
Other assets 5,694 5,242
--------- ---------
Total Assets $ 532,319 $ 520,305
========= =========
2
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2008 2007
(Unaudited)
----------- ------------
(In thousands, except share data)
Liabilities
Deposits
Noninterest bearing demand deposits $ 40,357 $ 31,647
NOW and money market accounts 50,509 53,467
Savings deposits 13,554 9,326
Time deposits 225,696 234,195
--------- ---------
Total deposits 330,116 328,635
--------- ---------
Repurchase agreements and fed funds purchased 32,928 32,659
Federal Home Loan Bank advances ($5.0 million
at fair value at 12-31-07) 117,510 104,495
Accrued interest payable 978 1,018
Other liabilities 3,026 2,637
ESOP note payable 11 36
Subordinated debentures (all instruments at
fair value) 14,548 17,597
--------- ---------
Total Liabilities 499,117 487,077
--------- ---------
Stockholders' Equity
Common stock -- 9,000,000 shares authorized;
3,734,781 shares issued and outstanding at
6-30-2008 and 3,733,081 at 12-31-2007 32,109 32,071
Retained earnings 2,028 1,797
Unearned employee benefit (11) (36)
Accumulated other comprehensive (loss) income (924) (604)
--------- ---------
Total Stockholders' Equity 33,202 33,228
--------- ---------
Total Liabilities and Stockholders' Equity $ 532,319 $ 520,305
========= =========
3
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
------- ------- -------- --------
(In thousands, except per share data)
Interest Income
Loans (including fees) $ 6,373 $ 6,885 $ 12,864 $ 13,737
Taxable securities 942 805 1,768 1,472
Tax exempt securities 147 413 376 747
Federal funds sold 54 131 309 386
------- ------- -------- --------
Total Interest Income 7,516 8,234 15,317 16,342
------- ------- -------- --------
Interest Expense
Deposits 2,965 3,434 6,345 7,154
Repurchase agreements and fed funds purchased 289 233 520 393
Federal Home Loan Bank advances 1,248 975 2,474 1,896
ESOP loan interest expense 1 2 1 4
Subordinated debentures 216 559 507 953
------- ------- -------- --------
Total Interest Expense 4,719 5,203 9,847 10,400
------- ------- -------- --------
Net Interest Income 2,797 3,031 5,470 5,942
Provision for credit losses 884 175 2,984 225
------- ------- -------- --------
Net Interest Income after Provision 1,913 2,856 2,486 5,717
------- ------- -------- --------
Noninterest Income
Fiduciary income 98 111 206 198
Deposit service charges 142 92 274 180
Realized gains (losses) on available for
sale securities 49 (13) 110 (13)
Change in fair value of assets/liabilities
carried at fair value under SFAS 159 872 (72) 3,011 156
Mortgage banking income 430 594 880 1,348
Other income 568 433 878 694
------- ------- -------- --------
Total Noninterest Income 2,159 1,145 5,359 2,563
------- ------- -------- --------
Noninterest Expense
Salaries, benefits, and payroll taxes 1,835 1,903 3,667 4,046
Premises and fixed asset expense 452 465 913 917
Other operating expense 1,471 1,038 2,735 1,903
------- ------- -------- --------
Total Noninterest Expense 3,758 3,406 7,315 6,866
------- ------- -------- --------
Income Before Taxes 314 595 530 1,414
Provision for income taxes 39 59 15 220
------- ------- -------- --------
Net Income $ 275 $ 536 $ 515 $ 1,194
======= ======= ======== ========
4
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Per share data:
Basic earnings $ 0.07 $ 0.14 $ 0.14 $ 0.30
Diluted earnings $ 0.07 $ 0.14 $ 0.14 $ 0.30
======= ======= ======== ========
Cash Dividends $ 0.02 $ 0.06 $ 0.08 $ 0.12
======= ======= ======== ========
5
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
------- ------- -------- --------
(In thousands)
Net Income as Reported $ 275 $ 536 $ 515 $ 1,194
Other Comprehensive (Loss), Net of Tax
Change in unrealized losses on securities
Available for sale (868) (1,003) (320) (695)
------- ------- -------- --------
Comprehensive Income $ (593) $ (467) $ 195 $ 499
======= ======= ======== ========
6
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Six Months Ended June 30,
2008 2007
-------- ---------
(In thousands)
Operating Activities
Net income $ 515 $ 1,194
Adjustments to reconcile net income to net cash flow
from operating activities:
Net amortization of security premium 51 96
Net gain on sales and call of securities (110) 13
Net gain on financial instruments at fair value (3,011) (156)
Provision for credit losses 2,984 225
Depreciation expense 336 356
Deferred income tax expense 15 44
SFAS 123R option expense 28 14
ESOP compensation expense 25 29
(Increase) decrease in accrued interest receivable 278 5
(Increase) decrease in other assets (2,659) (1,128)
(Increase) decrease in accrued interest payable (39) (258)
Increase in other liabilities 389 154
Increase (decrease) in loans held for sale 2,918 891
-------- ---------
Net Cash Provided by Operating Activities 1,720 1,479
Investing Activities
Maturities, calls, sales and prepayments of securities
available for sale 47,607 33,906
Purchase of securities available for sale (52,612) (25,309)
Maturities, calls, sales and prepayment of trading securities -- 909
Transfer to trading securities -- (26,642)
Maturities, calls, and prepayments of held to
maturity securities 2,602 25
Purchases of held to maturity securities (1,265) --
Increase in loans (6,671) 63
Purchases of property and equipment (842) (44)
Proceeds from sale of property and equipment -- 60
-------- ---------
Net Cash Used in Investing Activities (11,181) (17,032)
Financing Activities
Net (decrease) increase in demand and savings deposits 9,980 10,902
Net (decrease) increase in time deposits (8,499) (34,139)
Net increase (decrease) in borrowings 270 13,983
Issuance of subordinated debentures -- 18,557
Redemption of subordinated debentures -- (10,310)
Net proceeds from FHLB advances 13,000 2,000
Payment of ESOP debt (25) (29)
Stock option exercise/award 14 73
Cash dividends paid (284) (473)
Repurchase of common stock (7) (2,434)
-------- ---------
Net Cash Provided (Used) by Financing Activities 14,449 (1,870)
-------- ---------
(Decrease) increase in Cash and Cash Equivalents 4,988 (17,423)
Cash and Cash Equivalents at the Beginning of the Year 9,183 24,726
-------- ---------
Cash and Cash Equivalents at the End of the Period $ 14,171 $ 7,303
======== =========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 9,886 $ 10,657
Federal Taxes Paid $ -- $ 175
Loans transferred to other real estate owned $ 1,242 $ --
======== =========
7
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
COMMUNITY CENTRAL BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The financial statements of Community Central Bank Corporation (the
"Corporation") include the consolidation of its direct and indirect
subsidiaries: Community Central Bank (the "Bank") and Community Central
Mortgage Company, LLC (the "Mortgage Company").
The Corporation's Consolidated Balance Sheets are presented as of June 30,
2008 and December 31, 2007, and Consolidated Statements of Income and
Comprehensive Income for the three and six month periods ended June 30,
2008 and 2007, and Consolidated Statements of Cash Flow for the six months
ended June 30, 2008 and 2007. These unaudited financial statements are for
interim periods, and do not include all disclosures normally provided with
annual financial statements. The interim statements should be read in
conjunction with the financial statements and footnotes contained in the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.
In the opinion of management, the interim statements referred to above
contain all adjustments (consisting of normal, recurring items) necessary
for a fair presentation of the financial statements. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the full year.
2. The accounting and reporting policies of the Corporation conform to
accounting principles generally accepted in the United States of America
and general practices within the banking industry. The following describes
the critical accounting policies, which are employed in the preparation of
financial statements.
Allowance for Loan Losses: The allowance for loan losses is maintained at
a level considered by management to be adequate to absorb 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, current economic conditions that may affect
the borrower's ability to pay, and other subjective factors. The
determination of the allowance is also based on regulatory guidance. This
guidance includes, but is not limited to, generally accepted accounting
principles, and guidance issued from other regulatory bodies such as the
joint policy statement issued by the Federal Financial Institutions
Examination Council.
3. On February 13, 2007, Community Central Bank Corporation issued $18.0
million aggregate liquidation amount of cumulative trust preferred
securities through Community Central Capital Trust II, a statutory trust
formed by the Corporation for the purpose of issuing the securities (the
"Trust II 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.
4. In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123R "Sharebased 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 value
previously calculated for disclosure purposes. Prior periods have not been
restated.
The Corporation did not grant any options during the six months ended June
30, 2008 or 2007. The total amount of options outstanding at June 30, 2008
was 286,993 shares at a weighted average exercise price of $9.10 per
share. During the second quarter of 2008, no options were exercised.
8
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The Corporation recognized compensation expense, using the Black Scholes
option-pricing model, of $14,000 and $28,000 for the second quarter and
six months ended June 30, 2008, respectively, for the options vesting in
2008 and $7,000 and $14,000 for the second quarter and six months ended
June 30, 2007, respectively, for the options vesting in 2007, in each case
based on the fair market value of the grant date. The net income and
earnings per share for the second quarters of 2008 and 2007 and six months
ended June 30, 2008 and 2007, on a pro forma basis, are disclosed for
comparison below.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
------ ------ ------ -------
(in thousands, except per share data)
Net income, as reported $ 275 $ 536 $ 515 $ 1,194
Add: Stock-based employee compensation expense,
net of related tax effects, included in reported
net income (14) (7) (28) (14)
Deduct: Total stock-based employee and director
compensation expense under fair value based
methods of awards, net of related tax effects 14 7 28 14
------ ------ ------ -------
Pro forma net income $ 275 $ 536 $ 515 $ 1,194
====== ====== ====== =======
Earnings per share
Basic $ 0.07 $ 0.14 $ 0.14 $ 0.30
Diluted $ 0.07 $ 0.14 $ 0.14 $ 0.30
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model.
9
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
5. 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 Corporation utilizes fair value measurements to record fair value
adjustments to certain assets and liabilities and to determine fair value
disclosures. Additionally, from time to time, the Corporation may be required to
record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets. These nonrecurring
fair value adjustments typically involve application of lower of cost or market
accounting or write-downs of individual assets.
Fair Value Hierarchy
Under SFAS 157, the Corporation groups assets and liabilities at fair value in
three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value.
These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments
traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
Level 3 Valuation contains unobservable input(s) and is used to the extent
observable inputs are not available, thereby allowing for situations
in which there is little, if any, market activity. Level 3
instruments typically include, in addition to unobservable or Level
3 components, observable components.
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
originally 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. 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.
10
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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 did not extinguish any FHLB advances before
stated maturity. At June 30, 2008, all FHLB advances selected for SFAS 159
accounting treatment had matured. 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. 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.
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 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 is considered by management to be reflective of the
current assessments as to the market for fixed rate trust preferred and
subordinated debentures of similar duration. During several quarterly periods,
the 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 June 30, 2008 to
the overall fair value measurement, to continue to report the subordinated
debentures under 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.
The second quarter of 2008 resulted in 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, of $872,000 million on a
pretax basis or $575,000 after tax. This net gain from fair value reporting
under SFAS 159 was primarily
11
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
attributable to the change in fair value on the Corporation's subordinated
debenture. Since the issuance of the SFAS 159, the dramatic widening of market
credit spreads experienced for trust preferred security issuances has continued
to favorably impact the fair value measurement of the Corporation's subordinated
debenture through June 30, 2008. 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 net change in the fair value of financial assets and liabilities as
measured under the fair value option under SFAS 159 for the first six months of
2008 was $3.0 million with the majority of the change attributable to the
Corporation's subordinated debenture.
12
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The table below contains the fair value measurement at June 30, 2008 using the
identified valuations and the changes in fair value for the six months ended
June 30, 2008 for items measured at fair value pursuant to election of the fair
value option.
Changes in fair value for
six months ended
June 30, 2008 measured
at fair value pursuant to
Fair Value Measurement at election of the fair value
June 30, 2008 Option
---------------------------------------------------------- --------------------------
Fair Value Significant Other Significant Other Gains or Losses
Measurements Observable Inputs Unobservable Inputs in noninterest income
Description 06/30/2008 (Level 2) (Level 3) pretax income
- ----------- ------------ ----------------- ------------------- --------------------------
(in thousands of dollars)
Trading Securities $ 17,442 $ 17,442 -- $ (70)
Interest rate swap hedging securities (493) (493) -- 48
Federal Home Loan Bank Advances -- -- -- (14)
Subordinated Debentures 14,548 -- 14,548 3,049
Interest rate swap hedging
subordinated debentures 665 665 -- (2)
--------- -------- ------ --------
$ 3,011
========
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 six
month period ended June 30, 2008 (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
- -------------------------------------------------------------------------------------------------------------
Changes in unrealized
For the six month gains and (losses)
period ended Total Purchases related to
June 30, 2008 Fair value, realized/unrealized issuances Transfers in and/or Fair value, financial instruments
(in millions) January 1, 2008 gains/(losses) settlements, net out of Level 3 June 30, 2008 held at June 30, 2008
- ----------------------------------------------------------------------------------------------------------------------------------
Subordinated
Debentures 17,597 -- -- -- 14,548 3,049
13
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Assets Measured at Fair Value on a Nonrecurring Basis
IMPAIRED LOANS
The Corporation does not record loans at fair value on a recurring basis.
However, from time to time, a loan is considered impaired and an allowance for
loan losses is established. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms
of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
114, "Accounting by Creditors for Impairment of a Loan." The fair value of
impaired loans is estimated using primarily collateral value. Those impaired
loans not requiring an allowance represent loans for which the fair value of the
expected repayments or collateral exceed the recorded investments in such loans.
The fair value of the collateral is based on an observable market price, current
appraised value and management's estimates of collateral and other market
conditions. Due to the lack of market transactions, volatility in pricing and
other factors, some of which may be unobservable, the Corporation recorded the
impaired loans as nonrecurring Level 3.
OTHER REAL ESTATE OWNED
Other real estate owned assets are adjusted to fair value upon transfer of the
loans to foreclosed assets. Subsequently, other real estate owned assets are
carried at the lower of carrying value or fair value. Fair value is based upon
independent market prices, appraised values of the collateral or management's
estimation of the value of the collateral. The fair value of the collateral is
based on an observable market price, a current appraised value, or management's
estimates. Due to the lack of transactions, volatility in pricing and other
factors, some of which may be unobservable, the Corporation recorded other real
estate owned as nonrecurring Level 3.
The following table presents assets measured at fair value on a nonrecurring
basis at June 30, 2008.
Quoted Prices in
Active Markets for Significant Other Significant Total Losses for
Balance at Identical Assets Observable Inputs Unobservable Inputs six months ended
Assets June 30, 2008 (Level 1) (Level 2) (Level 3) June 30, 2008
- ---------------- ------------- ------------------ ------------------ ----------------- ----------------
Impaired loans
accounted for
under FAS 114 20,162 -- -- 20,162 2,448
Other real estate owned 2,025 -- -- 2,025 269
14
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion compares the financial condition of the Corporation and
its wholly owned subsidiaries at June 30, 2008 and December 31, 2007 and the
results of operations for the six months ended June 30, 2008 and 2007. This
discussion should be read in conjunction with the financial statements and
statistical data presented elsewhere in this report. This report contains
forward-looking statements 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 ("Future
Factors") 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:
the credit risks of lending activities, including changes in the level and trend
of loan delinquencies and write-offs; changes in general economic conditions,
either nationally or in our market areas; changes in the levels of general
interest rates, deposit interest rates, our net interest margin and funding
sources; fluctuations in the demand for loans, the number of unsold homes and
other properties and fluctuations in real estate values in our market areas;
results of examinations of us by the Federal Deposit Insurance Corporation,
Michigan Office of Financial and Insurance Services or other regulatory
authorities, including the possibility that any such regulatory authority may,
among other things, require us to increase our reserve for loan losses or to
write-down assets; our ability to control operating costs and expenses; our
ability to successfully integrate any assets, liabilities, customers, systems,
and management personnel we have acquired or may in the future acquire into our
operations and our ability to realize related revenue synergies and cost savings
within expected time frames and any goodwill charges related thereto; our
ability to manage loan delinquency rates; our ability to retain key members of
our senior management team; costs and effects of litigation, including
settlements and judgments; increased competitive pressures among financial
services companies; changes in consumer spending, borrowing and savings habits;
legislative or regulatory changes that adversely affect our business; adverse
changes in the securities markets; inability of key third-party providers to
perform their obligations to us; changes in accounting policies and practices,
as may be adopted by the financial institution regulatory agencies or the
Financial Accounting Standards Board; other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing,
products and services and other risks detailed in the Corporation's reports
filed with the Securities and Exchange Commission, including the Annual Report
on Form 10-K for the fiscal year ended December 31, 2007.
15
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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 four full service
facilities, in Mount Clemens, Rochester Hills, Grosse Pointe Farms and Grosse
Pointe Woods, Michigan. Community Central Mortgage Company, LLC, a subsidiary of
the 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 we earn 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 we pay 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.
Our results of 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 our customer base. We have 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 we deploy earning assets. The competitive
environment among the Bank, other financial institutions and financial service
providers 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 our relative cost of funds and thus
negatively impact our net interest income.
We recorded a $884,000 provision for loan losses for the second quarter of 2008.
A significant portion of this provision related to collateral impairment, the
result of declining property values reflecting Michigan's economic conditions.
The specific allowance associated with residential builder loans was $2.8
million at June 30, 2008. Total residential builder loans represent
approximately 5% of our total loan portfolio at June 30, 2008.
Nonperforming assets to total assets increased to 4.15% at June 30, 2008
compared to 3.56% at December 31, 2007. The increase in nonperforming assets for
the first six months of 2008 was primarily attributable to several additional
loan relationships that management felt were experiencing financial difficulties
and should be placed into nonaccrual loan status. A portion of these loans had
experienced various loan payment difficulties, but were not over 90 days past
due at June 30, 2008.
We continue to see competitive deposit rates offered from local financial
institutions within the geographic proximity of the Bank which could have the
effect of increasing our costs of funds to a level higher than management
projects. We continue 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 we have 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.
One of our business objectives has been the diversification of revenue from
interest income. Our Wealth and Trust divisions have been providing us with a
diversified source of fee income. The addition of a new branch location in
Grosse Pointe Woods, Michigan, which opened in June 2008, will represent the
second branch location in this
16
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
upscale market of southeastern Michigan. We continue to focus on strategies to
increase our market share of core deposits as well as wealth and trust services.
Assets under management of our trust and wealth management divisions continue to
grow and totaled $155.8 million at the end of June 2008.
ASSETS
At June 30, 2008, the Corporation's total assets were $532.3 million, an
increase of $12.0 million, or 2.3%, from December 31, 2007. The largest segment
of asset growth for the six months ended June 30, 2008, occurred in federal
funds and investment securities available for sale. Total assets decreased in
the second quarter of 2008 $14.4 million. The decrease was principally due to
declines in federal funds sold of $10.8 million and declines in the combined
investment portfolios of $3.6 million. Total loans net of the allowance for
credit losses and residential mortgage loans held for sale were relatively
unchanged from March 31, 2008, increasing $862,000 in the second quarter. The
small increase in total loan growth was due in part to the economic weakness in
the local economy and the Corporation's desire to only lend to those customers
with deposit and other banking product relationships.
Total loans increased $4.3 million or 1.1% to $394.2 million at June 30, 2008
from $389.9 million at December 31, 2007. Loan growth was comprised primarily of
commercial real estate loans, which increased $7.3 million or 2.8% from December
31, 2007 to June 30, 2008. Total commercial real estate loans represent 69.0% of
the total loan portfolio. This is consistent with the current and historical
commercial loan focus of the Corporation. The Corporation had approximately
$147.5 million in outstanding loans at June 30, 2008, to borrowers in the real
estate rental and properties management industries, representing approximately
54.2% of the total commercial real estate portfolio. All other segments of the
loan portfolio decreased for the first six months with the largest decline
occurring in the residential mortgage portfolio which decreased $3.9 million.
The decrease in the residential mortgage portfolio was purposeful as management
sought to sell most of its new mortgage originations primarily to Fannie Mae and
other investors in the secondary market and runoff was allowed to occur in the
portfolio. During the first six months of 2008, we originated $39.9 million of
residential mortgage loans, retaining only $1.1 million in our portfolio. During
this period we experienced pay-downs and pay-offs of $5.0 million. Additionally,
the Corporation further tightened its underwriting guidelines, which had the
effect of limiting new loan volume. Generally, these changes included reductions
in the allowable loan to value ratio on mortgage loans.
Most of the residential mortgage portfolio comprises adjustable rate mortgages,
which at June 30, 2008 represented $42.4 million or 74.4% of the total
residential portfolio. Residential mortgage loans which the Corporation retains
in portfolio comprise primarily loans with borrowers whom the Corporation has
other banking relationships with, as well as loans with attributes deemed to
match the Corporation's rate risk profile. Home equity lines of credit ("HELOC")
totaled $21.0 million at June 30, 2008, and remained relatively unchanged for
the first six months of 2008. As with our residential mortgage loan portfolio,
management has intentionally limited growth in this segment of the portfolio
given the real estate environment in southeastern Michigan. New underwriting
guidelines for our HELOC loans carried in portfolio limit loan to values,
including prior liens, to 85% of appraised value of the real estate. This
represents a change from the prior loan to value level of 95%.
The consumer loan portfolio, comprising primarily boat loans, totaled $8.5
million at June 30, 2008, a decrease of $1.3 million from December 31, 2007. The
decrease was comprised of $120,000 in charge offs to the allowance and the
transfer of $470,000 into repossessed collateral status. The remainder of the
decrease was attributable to runoff in the portfolio. The Corporation continues
to monitor this portion of the loan portfolio as it has experienced increased
delinquencies and repossessions. The increase in delinquencies and repossessions
are attributable to local economic conditions.
17
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The major components of the loan portfolio for loans held for sale and loans in
the portfolio are as follows:
June 30, Percentage December 31, Percentage Net Net
2008 of total loans 2007 of total loans Change Change %
--------- -------------- ------------ -------------- -------- --------
(in thousands, except percentages)
Loans held for sale:
Residential real estate $ 1,930 $ 4,848 $ (2,918) (60.2%)
========= ===== ========= ======== ======== ======
Loans held in the portfolio:
Commercial real estate $ 272,018 69.0% $ 264,685 67.9% $ 7,333 2.8%
Commercial and industrial 35,021 8.9 33,039 8.5 1,982 6.0
Residential real estate 56,911 14.4 60,799 15.6 (3,888) (6.4)
Home equity lines 21,018 5.3 20,906 5.4 112 0.5
Consumer loans 8,490 2.2 9,754 2.4 (1,264) (13.0)
Credit cards 758 0.2 729 0.2 29 4.0
--------- ----- --------- -------- -------- ------
$ 394,216 100.0% $ 389,912 100.0% $ 4,304 1.1%
========= ===== ========= ======== ======== ======
The investment security portfolio, excluding FHLB stock, totaled $91.7 million
at June 30, 2008, compared to $87.9 million at December 31, 2007, and was
comprised of securities held as available for sale, held to maturity and held as
trading. Securities available for sale, the largest portion of our investment
portfolio, increased $5.7 million or 8.5% to $72.5 million at June 30,2008 from
December 31, 2007. The largest change in the portfolio occurred in the
collateralized mortgage obligation ("CMO") portfolio which increased $20.1
million from December 31, 2007 and ended June 30, 2008 at $26.9 million. The CMO
portfolio is comprised of US agency and Government National Mortgage Association
("GNMA") securities which carry the full faith and credit of the United States
Government. The mortgage backed agency portfolio increased $6.7 million for the
first six months of 2008. The net change in this segment of the available for
sale security portfolio was again comprised of primarily GNMA securities. The
municipal security portfolio totaled $12.6 million at June 30, 2008, which was a
decrease of $17.0 million from December 31, 2007. During the first quarter of
2008, the Corporation sold approximately 36% of the bank qualified municipal
bond portfolio to decrease volatility in this type of investment due to the
dramatic changes in the municipal insurance market. Additionally, the portfolio
of municipal bonds was reduced for federal income tax considerations.
At June 30, 2008, we had unrealized losses of $1.4 million in our available for
sale portfolio. This represents a $480,000 decrease in the market value from
December 31, 2007. The unfavorable decrease in market value was attributable to
an increase in interest rates and the widening of credit spreads on mortgage
backed instruments. The total net gain from the sale of available for sale
securities totaled $110,000 for the first six months of 2008 and was the result
of portfolio restructuring activity. The Corporation has the intent and ability
to hold the securities classified under available for sale for the foreseeable
future and declines in fair value are primarily due to increased market interest
rates.
The Corporation has less than one percent of its total investment portfolio
including those in trading, available for sale and held to maturity, in
non-agency investments.
The securities classified as held for trading totaled $17.4 million as of June
30, 2008. The average effective duration of the trading portfolio as of June 30,
2008 was approximately 1.86 years, with an average life of 1.49 years and a
weighted average coupon rate of 4.71%. Management decided to classify the
original securities at January 1, 2007, under SFAS 159 because of the
characteristics of the instruments, giving the Corporation the option and
ability 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 June 30, 2008 comprised $11.3 million of U.S. Agency
debentures with an effective duration of 1.7 years and $6.1 million in U.S.
agency collateralized mortgage obligations (CMOs) with an effective duration of
1.1 years. All of the
18
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CMOs held in the trading portfolio pass the stress testing recommended by the
Federal Financial Institutions Examination Council with relatively short average
lives under differing rate scenarios.
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 the 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
periodically reviews the structure of hedge to evaluate the risks of changes in
interest rates under various rate scenarios. 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.
19
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
A summary of nonperforming assets is as follows:
June 30, December 31,
2008 2007
--------- ------------
(Dollars in thousands)
Nonaccrual loans:
Commercial real estate $ 17,305 $ 14,379
Commercial and industrial 103 146
Residential real estate 1,629 2,053
Home equity lines 545 354
Consumer loans 481 30
Credit cards -- --
--------- --------
Total nonaccrual loans 20,063 16,962
Accruing loans delinquent more than 90 days:
Commercial real estate $ -- $ --
Commercial and industrial -- --
Residential real estate -- 654
Home equity lines -- 44
Consumer loans -- --
Credit cards 7 25
--------- --------
Total accruing loans delinquent more than 90 days 7 723
--------- --------
Total nonperforming loans 20,070 17,685
Other real estate owned
Commercial real estate 858 319
Residential real estate 1,167 535
--------- --------
Total other real estate owned 2,025 854
--------- --------
Total nonperforming assets $ 22,095 $ 18,539
========= ========
Total nonperforming loans as a
percentage of total loans 5.09% 4.54%
========= ========
Total nonperforming assets as a percentage
of total assets 4.15% 3.56%
========= ========
At June 30, 2008, nonperforming loans, which represents nonaccruing loans and
those loans past due 90 days or more and still accruing interest, totaled $20.1
million compared to $17.7 million at December 31, 2007, an increase of $2.4
million. The primary reason for the increase was attributable to an increase in
nonaccruing commercial real estate loans of $2.9 million for the first six
months of 2008. The largest portion of this increase was related to one
commercial real estate credit that had irregular loan payments, but was less
than 90 days past due at June 30, 2008. Management felt that given the economic
conditions in southeastern Michigan that the borrower would have difficulty in
continuing a regular payment stream. Management believes to be adequately
covered with the collateral of this particular loan. Net charge offs for the
first six months of 2008 totaled $2.4 million, of which $1.6 million was
specifically attributable to builder developer loans for which specific reserves
had been established in prior periods. Total nonperforming assets as a
percentage of total assets was 4.15% at June 30, 2008, compared to 3.56% at
December 31, 2007. The allowance for loan losses at June 30, 2008 was $7.0
million, or 1.78% of total loans and 34.97% of nonperforming loans, versus $6.4
million, or 1.64% and 36.2% at December 31, 2007, respectively. Nonperforming
residential mortgage loans decreased $424,000 for the first six months of 2008
as the Corporation continued to dispose of residential real estate collateral
positions. The majority of the consumer loans classified as nonaccrual are
comprised of boat loans. The delinquency level of these loans has increased over
prior periods. The
20
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
relative size of the boat loan portfolio totals 2.2% of the entire loan
portfolio at June 30, 2008. Other real estate owned (OREO) was $2.0 million at
June 30, 2008. The Corporation has valuation reserves established on certain
OREO properties. The largest segment of OREO is comprised of commercial real
estate of $858,000. The remaining properties in OREO comprise residential real
estate from a builder developer loan of $534,000 and residential properties
acquired through foreclosure of $633,000.
The following table shows an analysis of the allowance for loans losses:
Six Months Ended Year Ended
June 30, December 31,
2008 2007
---------------- ------------
(Dollars in thousands)
Balance at beginning of the period $ 6,403 $ 3,815
Charge-offs:
Commercial real estate 1,705 338
Commercial and industrial 154 110
Residential real estate 157 106
Home equity lines 163 131
Consumer loans 186 382
Credit cards 21 33
-------- -------
Total charge-offs $ 2,386 $ 1,100
-------- -------
Recoveries:
Commercial real estate -- --
Commercial and industrial 15 12
Residential real estate -- --
Home equity lines -- --
Consumer loans 2 69
Credit cards 1 7
-------- -------
Total recoveries $ 18 $ 88
-------- -------
Net charge-offs (recoveries) 2,368 1,012
-------- -------
Provision charged to earnings 2,984 3,600
-------- -------
Balance at end of the period $ 7,019 $ 6,403
======== =======
Net charge-offs (net recoveries) during the period
to average loans outstanding during the period on
an annualized basis 1.21% 0.27%
Allowance as a percentage of total portfolio loans 1.78% 1.64%
The allowance for loan losses as a percentage of total loans remained relatively
unchanged at June 30, 2008, compared to December 31, 2007. The Corporation
performs a detailed quarterly review of the allowance for loan 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 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
21
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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.
22
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
LIABILITIES
At June 30, 2008, total deposits increased $1.5 million or 0.5% to $330.1
million from $328.6 million at December 31, 2007. The increase was primarily due
to an $8.7 million or 27.5% increase in noninterest bearing demand deposits. The
increase was due in part to the continued emphasis on growth in this important
area of core deposit and the addition of branch locations. Additionally, the
Corporation has continued to focus on complete commercial lending relationships
that include core deposits as part of the overall approval process. Time
deposits $100,000 and above decreased $5.1 million or 2.6%. The largest
contributor of the decrease in large time deposits was decreases in Municipal
time deposits of $16.2 million during the first six months of 2008. Time
deposits under $100,000 also decreased $3.3 million or 8.5% due to decreases
attributable to the local interest rate environment. Money market accounts
decreased $6.6 million or 17.2% from December 31, 2007 to June 30, 2008 due to
withdrawals from the indexed money market product which is tied to the six
months treasury rate. Management attributes this decline to customers seeking
higher rate products, as the indexed rate fell below 2 percent based on market
rate conditions.
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 same 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 has had the affect of increasing the
cost of funds to a level higher than management originally projected. The
Corporation continues to utilize wholesale forms of funding earning assets
through the Federal Home Loan Bank and brokered CDs to balance both interest
rate risk and the overall cost of funds. Brokered and internet CDs are based on
nationwide interest rate structure, typically at what is considered to be a
premium interest rate. The local competition for CD products has intensified and
the Corporation has found this type of whole funding to often effectively
compete with the rates offered for similar term retail CD products of local
community and regional banks.
The major components of deposits are as follows:
June 30, Percentage December 31, Percentage Net Net
2008 of total deposits 2007 of total deposits Change Change %
--------- ----------------- ------------ ----------------- -------- --------
(Dollars in Thousands)
Noninterest bearing demand $ 40,357 12.2% $ 31,647 9.6% $ 8,710 27.5%
NOW accounts 18,590 5.6 14,907 4.5 3,683 24.7
Money market accounts 31,919 9.7 38,560 11.7 (6,641) (17.2)
Savings deposits 13,554 4.1 9,326 2.8 4,228 45.3
Time deposits under $100,000 36,034 10.9 39,395 12.0 (3,361) (8.5)
Time deposits $100,000 and
over 189,662 57.5 194,800 59.4 (5,138) (2.6)
--------- ------ --------- ----- -------- ------
Total deposits $ 330,116 100.00% $ 328,635 100.0% $ 1,481 0.5%
========= ====== ========= ===== ======== ======
23
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Short term borrowings at June 30, 2008, consisted of short term FHLB advances of
$18.8 million at face value and securities sold with an agreement to repurchase
them the following day of $13.9 million. Following are details of our short term
borrowings for the dates indicated:
June 30, December 31,
2008 2007
----------- ------------
(Dollars in thousands)
Amount outstanding at end of period
Short-term repurchase agreements $ 13,928 $ 13,659
Short-term FHLB advances $ 18,810 $ 23,795
Weighted average interest rate on ending balance
Short-term repurchase agreements 2.00% 3.00%
Short-term FHLB advances 3.76% 4.14%
Maximum amount outstanding at any month end
during the period
Short-term repurchase agreements $ 11,974 $ 14,932
Short-term FHLB advances $ 18,810 $ 23,795
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. During
the second quarter of 2008 the repurchase agreement accrued at an interest rate
of 4.95% and continued without call notification.
In June 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
$243.5 million and $240.1 million at June 30, 2008 and 2007, respectively.
Long-term advances were comprised of 31 advances with maturities ranging from
August 2009 to June 2016.
FHLB advances outstanding at June 30, 2008 were as follows:
Face Value Average rate
of obligation at end of period
------------- ----------------
(Dollars in thousands)
Short-term FHLB advances $ 18,810 3.76%
Long-term FHLB advances 98,700 4.42%
------------- ----------------
$ 117,510 4.31%
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
originally represented $16 million in total. At June 30, 2008, all instruments
previously elected for SFAS 159 had matured.
24
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
LIQUIDITY AND CAPITAL RESOURCES
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 $25.5 million of
available borrowing capacity under 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 time
certificates of deposit. We anticipate that we will have sufficient funds
available to meet our future commitments. As of June 30, 2008, unused
commitments totaled $73.5 million. The Bank has $150.1 million in time deposits
coming due within the next twelve months from June 30, 2008, which includes
brokered, internet and municipal time deposits. At June 30, 2008, the Bank had
$139.8 million in brokered certificates of deposit, of which $76.9 million is
due within one year or less. Additionally, at June 30, 2008, municipal time
deposits and internet time deposits were $17.2 million and $1.8 million,
respectively. Municipal time deposits typically have maturities less than three
months. All of the $1.8 million of internet certificates of deposit mature in
one year or less.
On May 20, 2008, the Corporation's Board of Directors declared a quarterly cash
dividend of $0.02 per common share, payable July 1, 2008, to shareholders of
record June 1, 2008. This represents the Corporation's 24th consecutive
quarterly, cash dividend paid to stockholders.
Following are selected capital ratios for the Corporation and the Bank as of the
dates indicated, along with the minimum regulatory capital requirement for each
item. Capital requirements for bank holding companies are set by the Federal
Reserve Board. In many cases, bank holding companies are expected to operate at
capital levels higher than the minimum requirement.
June 30, December 31, Minimum Ratio
2008 2007 for Capital
--------------- --------------- Adequacy Ratio to be
Capital Ratio Capital Ratio Purposes "Well Capitalized"
------- ----- ------- ----- ------------- ------------------
Tier 1 capital to risk-weighted assets
Consolidated $43,321 10.30% $42,932 10.29% 4% NA
Bank only 42,755 10.18% 42,889 10.32% 4% 6%
Total capital to risk-weighted assets
Consolidated $55,792 13.26% $55,430 13.28% 8% NA
Bank only 48,035 11.44% 48,199 11.57% 8% 10%
Tier I capital to average assets
Consolidated $43,321 8.09% $42,932 8.37% 4% NA
Bank only 42,755 8.00% 42,889 8.39% 4% 5%
Management believes that the current capital position as well as net income from
operations, loan repayments and other sources of funds will be adequate to meet
our short and long term liquidity needs.
25
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The following table shows the changes in stockholders' equity for the six months
ended June 30, 2008:
Unearned Accumulated Other
Common Retained Employee Comprehensive Total
Stock Earnings Benefits Income/(Loss) Equity
----------- -------- ---------- ---------------- ---------
Beginning balance, January 1, 2008 $ 32,071 $ 1,797 $ (36) $ (604) $ 33,228
Cash dividend -- (284) -- -- (284)
Stock awards 17 -- -- -- 17
SFAS 123R expensing of options 28 -- -- -- 28
Net income -- 515 -- -- 515
Release of ESOP shares -- -- 25 -- 25
Repurchase of common stock (7) -- -- -- (7)
Change in unrealized gain/loss -- -- -- (320) (320)
----------- -------- ---------- ---------------- ---------
Balance June 30, 2008 $ 32,109 $ 2,028 $ (11) $ (924) $ 33,202
=========== ======== ========== ================ =========
Stockholder's equity was $33.2 million as of June 30, 2008. Total stockholder's
equity was relatively unchanged from December 31, 2007. Increases in equity from
net income of $515,000 were offset with decreases from cash dividends for the
first six months of $284,000 and decreases in accumulated comprehensive income
of $320,000 from the net decrease in the market value of the available for sale
security portfolio.
NET INTEREST INCOME
Net interest income before the provision for loan losses for the second quarter
of 2008 was $2.8 million, a decrease of $234,000 or 7.7% from the second quarter
of 2007. Significantly affecting net interest income was the reversal of
interest on new loans placed into nonaccrual status, as well as existing loans
in nonaccrual status. This constituted a substantial portion of the decline in
net interest income for the quarterly comparison. Net interest margin declined
44 basis points from 2.72% for the quarter ended June 30, 2007 to 2.28% for the
quarter ended June 30, 2008. The net interest margin was negatively affected by
the significant decreases in overnight federal funds interest rates and
corresponding drop in the prime interest rate. The overnight federal funds rate
declined 325 basis points from June 30, 2007 to June 30, 2008 affecting prime
rate loans and negatively affecting the net interest margin in the near term, as
the Corporation's Asset/Liability position is somewhat asset sensitive in a
three month or less time frame. This historically large series of Federal
Reserve interest rate cuts has outpaced our ability to reduce our funding costs
as rapidly, as a significant portion of the funding base is comprised of time
deposits. The price competition for deposits has also exacerbated margin
pressures. Once short term rates stabilize, the Corporation expects to see
improvement in the net interest margin.
Net interest income before the provision for loan losses for the first six
months of 2008 was $5.5 million, a decrease of $472,000 or 7.9% from the first
six months of 2007. Those factors responsible for the decrease in net interest
income and margin for the second quarter ended June 30, 2008 compared to June
30, 2007 also contributed to the declines for the first six months of 2008
compared to 2007.
26
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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.
Three Months Ended Six Months Ended
June 30, 2008 vs. 2007 June 30, 2008 vs. 2007
------------------------------------ ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In
---------------------- ---------------------
Total Volume Rate Total Volume Rate
and Both and Both
--------- --------- --------- -------- -------- -------
(In Thousands)
Earning Assets - Interest Income
Loans $ (512) $ 486 $ (998) ($873) $ (1,349) 476
Securities (129) (90) (39) (75) (191) 116
Federal funds sold (77) 3 (80) (77) (85) 8
--------- --------- --------- -------- -------- -------
Total (718) 399 (1,117) (1,025) (1,625) 600
--------- --------- --------- -------- -------- -------
Deposits and Borrowed Funds
- Interest Expense
NOW and money market accounts (429) (59) (370) (730) (1,053) 323
Savings deposits (9) 11 (20) (49) (73) 24
Time deposits (31) 262 (293) (29) (867) 838
Other borrowings 330 306 24 704 719 (15)
Capitalized lease obligation
and ESOP loan (2) (2) -- (3) (4) 1
Subordinated debentures (343) (105) (238) (446) (406) (40)
--------- --------- --------- -------- -------- -------
Total (484) 413 (897) (553) (1,684) 1,131
--------- --------- --------- -------- -------- -------
Net Interest Income ($234) ($14) ($220) ($472) $ 59 $ (531)
========= ========= ========= ======== ======== =======
The average yield earned on interest earning assets for the second quarter of
2008 was 5.98% compared to 6.92% for the second quarter of 2007. The average
yield earned on the total loan portfolio, which contains both loans held for
sale and investment for 2008 was 6.46% compared to 7.56% during the second
quarter of 2007. The overall decrease in the loan portfolio yield was
attributable to the decrease in prime interest rates. The commercial, commercial
real estate and home equity line loans that repriced with prime interest rate
changes totaled approximately $122.9 million at June 30, 2008. Also contributing
to the decline in loan yields was the higher level of reversal of interest on
new loans placed into nonaccrual status, as well as existing loans in nonaccrual
status, both of which significantly reduced overall yields.
The average rate paid on interest bearing liabilities for the second quarter of
2008 was 4.09% compared to 4.80% in the second quarter of 2007. The decrease in
average rate was due to the overall rate paid on interest bearing liabilities,
primarily as a result of the decrease in overall market interest rates. The rate
paid on time deposits decreased to 4.56% for the second quarter of 2008, from
5.10% for the same time period in 2007, as a result of the decrease in short
term interest rates although the highly competitive interest rates paid amongst
local financial institutions has had an effect of keeping these rates higher
than would have historically been expected. The decrease in the average rate for
NOW and money market accounts for 2008 was primarily attributable to the drop in
short term interest rates, with the average rate moving to 1.43% during the
second quarter of 2008 compared to 3.78% in the second quarter of 2007. The
average rate paid on savings accounts also decreased, moving to 1.77% for the
second quarter of 2008 from 2.45% in the second quarter of 2007. The rate paid
on FHLB advances and repurchase agreements remained relatively unchanged as
these instruments have relatively long maturities. The average rate paid on the
subordinated debenture decreased in the second quarter of 2008 to 4.68% from
7.90%. The overall decrease in interest rate paid on the subordinated debenture
was the result of the redemption of the subordinated debenture in June 2007,
replaced with a subordinated debenture with a relatively lower interest rate.
The Corporation also utilizes an interest rate swap hedging the subordinated
debenture which has further reduced the rate.
27
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The average yield earned on interest earning assets for the six months ended
2008 was 6.04% compared to 6.87% for the first six months of 2007. The average
yield earned on the total loan portfolio, including loans held for sale, was
6.56% during the six months ended June 30, 2008 compared to 7.50% during the
comparable period in 2007. The overall decrease in the loan portfolio yield was
attributable to those factors detailed above.
The average rate paid on interest bearing liabilities for the first six months
of 2008 was 4.22% compared to 4.80% in the first six months of 2007. The
decrease in average rate was due to the overall rate paid on interest bearing
liabilities, primarily as a result of the decrease in overall market interest
rates. The rate paid on time deposits decreased to 4.69% for the first six
months of 2008, from 5.09% for the same time period in 2007, as a result of the
decrease in short term interest rates, although the highly competitive interest
rates paid amongst local financial institutions has had an effect of keeping
these rates higher than would have historically been expected. The decrease in
the average rate for NOW and money market accounts for 2008 was primarily
attributable to the drop in short term interest rates, with the average rate
moving to 1.83% during the first six months of 2008 compared to 3.86% in the
first six months of 2007. The average rate paid on savings accounts also
decreased, moving to 1.80% for the first six months of 2008 from 2.55% in the
first six months of 2007. The rate paid on FHLB advances and repurchase
agreements remained relatively unchanged as many of these instruments have
relatively long maturities. The average rate paid on the subordinated debenture
decreased in the first six months of 2008 to 5.49% from 7.96%. The overall
decrease in interest rate paid on the subordinated debenture was the result of
the redemption of the subordinated debenture in June 2007, replaced with a
subordinated debenture with a relatively lower interest rate. The Corporation
also utilizes an interest rate swap hedging the subordinated debenture which has
further reduced the rate.
28
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
AVERAGE BALANCE SHEET
The following tables show the Corporation's consolidated average balances of
assets, liabilities, and stockholders' equity; the amount of interest income or
interest expense and the average yield or rate for each major category of
interest earning asset and interest bearing liability, and the net interest
margin, for the three and six month periods ended June 30, 2008 and 2007.
Average loans are presented net of unearned income, gross of the allowance for
loan losses. Interest on loans includes loan fees
Three Months Ended June 30,
---------------------------------------------------------------------------
2008 2007
----------------------------------- ----------------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
--------- --------- --------- --------- --------- --------
(In thousands)
Assets
Loans $ 396,698 $ 6,373 6.46% $ 365,327 $ 6,885 7.56%
Securities 98,381 1,089 4.43 102,308 1,218 4.76
Federal funds sold 10,220 54 2.13 9,603 131 5.47
---------- --------- --------- --------- --------- ---------
Total Earning Assets/
Total Interest Income 505,299 7,516 5.98 477,238 8,234 6.92
---------- --------- --------- --------- --------- ---------
Cash and due from banks 8,281 7,203
All other assets 24,462 23,453
---------- ---------
Total Assets $ 538,042 $ 507,894
========== =========
Liabilities and Equity
NOW and money market accounts $ 47,364 168 1.43 $ 63,292 597 3.78
Savings deposits 14,282 63 1.77 11,785 72 2.45
Time deposits 241,273 2,734 4.56 217,328 2,765 5.10
FHLB advances and repurchase
agreements 143,045 1,538 4.32 114,285 1,208 4.24
ESOP loan 19 -- 6.00 74 2 8.13
Subordinated debentures 18,557 216 4.68 28,378 559 7.90
---------- --------- --------- --------- --------- --------
Total Interest Bearing Liabilities/
Total Interest Expense /
Interest Rate Spread 464,540 4,719 4.09 435,142 5,203 4.80
---------- --------- --------- --------- --------- --------
Noninterest bearing demand deposits 38,112 33,938
All other liabilities 1,451 3,235
Stockholders' equity 33,939 35,579
---------- ---------
Total Liabilities and
Stockholder's Equity $ 538,042 $ 507,894
========== =========
Net Interest Income $ 2,797 $ 3,031
========= =========
Net Interest Spread 1.89% 2.12%
========= ========
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.22% 2.55%
========= ========
Net Interest Margin
(fully taxable equivalent) 2.28% 2.72%
========= ========
29
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Six Months Ended June 30,
------------------------------------- ------------------------------------
2008 2007
------------------------------------- ----------------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
--------- --------- --------- --------- --------- --------
(In thousands)
Assets
Loans $ 394,338 $ 12,864 6.56% $ 369,354 $ 13,737 7.50%
Securities 93,948 2,144 4.56 94,932 2,219 4.67
Federal funds sold 21,040 309 2.95 14,810 386 5.26
---------- --------- --------- --------- --------- --------
Total Earning Assets/
Total Interest Income 509,326 15,317 6.04 479,096 16,342 6.87
---------- --------- --------- --------- --------- --------
Cash and due from banks 8,309 7,226
All other assets 24,187 23,210
---------- ---------
Total Assets $ 541,822 $ 509,532
========== =========
Liabilities and Equity
NOW and money market accounts $ 50,743 463 1.83 $ 62,331 1,193 3.86
Savings deposits 12,652 113 1.80 12,818 162 2.55
Time deposits 247,170 5,770 4.69 229,621 5,799 5.09
FHLB advances and repurchase
agreements 140,444 2,993 4.29 108,032 2,289 4.27
ESOP loan 25 1 8.04 82 4 9.84
Subordinated debentures 18,557 507 5.49 24,129 953 7.96
---------- --------- --------- --------- --------- --------
Total Interest Bearing Liabilities/
Total Interest Expense /
Interest Rate Spread 469,591 9,847 4.22 437,013 10,400 4.80
---------- --------- --------- --------- --------- --------
Noninterest bearing demand deposits 36,142 33,474
All other liabilities 2,268 3,011
Stockholders' equity 33,821 36,034
---------- ---------
Total Liabilities and
Stockholder's Equity $ 541,822 $ 509,532
========== =========
Net Interest Income $ 5,470 $ 5,942
========= =========
Net Interest Spread 1.82% 2.07%
========= ========
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.16% 2.49%
========= ========
Net Interest Margin
(fully taxable equivalent) 2.23% 2.66%
========= ========
30
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PROVISION FOR LOAN LOSSES
We recorded an $884,000 provision for loan losses in the second quarter of 2008,
based upon management's review of the risks inherent in the loan portfolio and
the level of our allowance for loan losses. The provision for loan losses for
the first six months of 2008 was $3.0 million reflecting a higher provision
level in the first quarter of 2008. A substantial portion of both provision and
loan charge-offs in the first quarter of 2008 related to builder developer loans
for which specific reserves had been established in prior quarter periods. Total
nonperforming assets as a percentage of total assets was 4.15% at June 30, 2008,
compared to 4.28% at March 31, 2008 and 3.56% at December 31, 2007. The
allowance for loan losses at June 30, 2008 was $7.0 million, or 1.78% of total
loans and 34.97% of nonperforming loans, versus $6.4 million, or 1.64% and
36.21% at December 31, 2007, respectively.
NONINTEREST INCOME
Noninterest income was $2.2 million for the second quarter of 2008, increasing
$1.0 million, or 88.6%, from the second quarter of 2007. The increase was
primarily related to favorable net changes in the fair market value of assets
and liabilities measured under Statement of Financial Accounting Standards (SFAS
159). The increase was largely attributable to the fair value of the
subordinated debenture connected with the February 2007 Trust Preferred
Issuance. The net change in fair value which was largely associated with the
subordinated debenture and the corresponding interest rate swap totaled $872,000
in unrealized gains for the second quarter of 2008, as recorded in other income.
The net change in fair value under SFAS 159 for the first six months of 2008 was
$3.0 million with the majority of the change attributable to the Corporation's
subordinated debenture. The widening of market credit spreads for trust
preferred securities experienced in the first and second quarter of 2008
increased the relative fair value of this financial liability dramatically. The
Corporation hedges against changes in interest rates with an 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 than we
are currently experiencing. Changes in credit spreads are not easily predictable
and may cause adverse changes in the fair value of this instrument and a
possible loss of income in the future.
Fiduciary income from trust services totaled $98,000 for the second quarter of
2008, a decrease of $13,000 or 11.7% from the second quarter of 2007, as the
second quarter of 2007 reflected extraordinary fees which were not present in
the second quarter of 2008. The extraordinary fees were based on a particular
trust situation requiring additional billable hours. Deposit service charge
income of $142,000 for the second quarter of 2008, increased $50,000, or 54.3%,
from compared to the second quarter of 2007, primarily from increased service
charge fees from primarily overdraft balances and a broadened branch base.
Mortgage banking income decreased $164,000 or 27.6% to $430,000 for the second
quarter of 2008 compared $594,000 for the comparable quarter last year. The
decrease in mortgage banking income was the result of fewer residential loan
originations and lower gains on the sale of residential mortgage loans in the
secondary market. The slow down in new home purchases contributed to this
decline. Net realized gains from the sale of securities was $49,000 for the
second quarter of 2008 and was attributable to restructuring activities in the
available for sale security portfolio. Other interest income totaled $568,000
for the second quarter of 2008, increasing $135,000 or 31.2% compared to the
second quarter in 2007, primarily from increases in gains on the disposal of
Other Real Estate Owned, cash surrender value of Bank Owned Life Insurance and
fee income from wealth management services.
Noninterest income was $5.4 million for the first six months of 2008, increasing
$2.8 million, or 109.1%, from the first six months of 2007. The increase was
largely attributable to the aforementioned net change in fair value over the six
month period. Fiduciary income from trust services of $206,000 for the first six
months of 2008, increased $8,000 or 4.0% from the first six months of 2007,
slowing from prior periods due to a management change and departmental
realignment. Deposit service charge income of $274,000 for the first six months
of 2008, increased $94,000, or 52.2%, compared to the first six months of 2007,
primarily from increased service charge fees and a broadened branch base.
Mortgage banking income decreased $468,000 or 34.7% to $880,000 for the six
months ended June 30, 2008 compared to $594,000 for the comparable period last
year. The decrease in mortgage banking income was the result of fewer
residential loan originations and lower gains on the sale of residential
mortgage loans in the secondary market. The slow down in new home purchases
contributed to this decline. Net realized gains from the sale of securities were
$110,000 for the first six months of 2008 and were attributable to restructuring
activities in the available for sale security portfolio. Other interest income
totaled $878,000 for the first six months of 2008, increasing $184,000 or 26.5%
based on the factors detailed above for the second quarter of 2008.
31
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
NONINTEREST EXPENSE
Noninterest expense was $3.8 million for the second quarter of 2008, increasing
$352,000 or 10.3% from the second quarter of 2007. Salary and benefits totaled
$1.8 million for the second quarter of 2008, a decrease of $68,000 or 3.6%
compared to the same time period last year. The decrease in salary and benefits
was due to reductions in staffing levels throughout the organization. The
decrease in salary and benefits was offset by an increase in other operating
expense. Other operating expense totaled $1.5 million for the second quarter of
2008, an increase of $433,000 or 41.7%, compared to the second quarter of 2007.
The increase in other operating expense primarily resulted from valuation costs
associated with property obtained in foreclosure, legal expense on loan workouts
and the increase in FDIC insurance expense, which in the aggregate represented
$430,000 or substantially all of the INCREASE. Net occupancy expense totaled
$452,000 for the second quarter of 2008, a $13,000 or 2.8% decrease compared to
the second quarter of 2007. The additional costs of establishment and operations
of the newly established Grosse Pointe Woods branch location were more than
offset by decreases in overhead caused by the closure of residential loan
production offices during the second quarter of 2007.
Noninterest expense was $7.3 million for the first six months of 2008,
increasing $449,000 or 6.5%, again resulting from increases in valuation costs
incurred on foreclosed property and other workout related costs which exceeded
cost-savings achieved in other expense areas.
PROVISION FOR INCOME TAXES
The federal income tax expense was $39,000 for the second quarter of 2008
compared to a federal income tax expense of $59,000 in the second quarter of
2007. The change was primarily attributable to a lower level of pretax income,
primarily from the large loan loss provision for the second quarter of 2008
compared to the second quarter of 2007. Additionally, permanent differences
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 federal income tax expense was $15,000 for the first six months of 2008
compared to a federal income tax expense of $220,000 in the first six months of
2007. The change was primarily attributable to a lower level of pretax income,
primarily from the large loan loss provision for the first six months of 2008
compared to the second quarter of 2007. Additionally, as noted above for the
second quarter, permanent differences 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) decreased the federal income tax provision for
the first six months of 2008.
32
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
ASSET/LIABILITY MANAGEMENT
The Asset Liability Management Committee ("ALCO"), which meets at least
quarterly, is responsible for reviewing interest rate sensitivity position and
establishing policies to monitor and limit exposure to interest rate risk.
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.
33
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The following table presents an analysis of our interest-sensitivity static gap
position at June 30, 2008. All interest-earning assets and interest-bearing
liabilities are shown based on the earlier of their contractual maturity or
repricing date adjusted by forecasted repayment and decay rates. Asset
prepayment and liability decay rates are selected after considering the current
rate environment, industry prepayment and decay rates and our historical
experience. At June 30, 2008, we are considered asset sensitive in the time
interval of the first three months. We are also considered to be slightly
liability sensitive at the one year accumulated gap position.
After Three After One
Within Months But Year But After
Three Within One Within Five
Months Year Five Years Years Total
--------- ----------- ---------- --------- ---------
(Dollars in thousands)
Interest earning assets:
Federal funds sold and
interest bearing cash $ 5,700 $ -- $ -- $ -- $ 5,700
Securities 8,714 6,738 38,977 38,678 93,107
FHLB stock -- 5,877 -- -- 5,877
Portfolio loans and
held for resale 122,886 57,591 175,302 38,437 394,216
-------- ----------- ---------- --------- ---------
Total 137,300 70,206 214,279 77,115 $ 498,900
-------- ----------- ---------- --------- =========
Interest bearing liabilities:
NOW and money market
accounts 26,651 8,025 14,237 1,596 50,509
Savings deposits 813 3,524 9,217 -- 13,554
Jumbo time deposits 35,830 85,432 68,199 200 189,661
Time deposits < $100,000 9,983 18,839 6,345 868 36,035
Repurchase agreements 13,928 19,000 -- -- 32,928
FHLB advances 12,000 6,810 72,500 26,200 117,510
ESOP payable 11 -- -- -- 11
Subordinated debentures 18,557 -- -- -- 18,557
-------- ----------- ---------- --------- ---------
Total 117,773 141,630 170,498 28,864 $ 458,765
-------- ----------- ---------- --------- =========
Interest rate sensitivity gap $ 19,527 $ (71,424) $ 43,781 $ 48,251
Cumulative interest rate
sensitivity gap $ (51,897) $ (8,116) $ 40,135
Interest rate sensitivity gap
ratio 1.17 0.50 1.26 2.67
Cumulative interest rate
sensitivity gap ratio 0.80 0.98 1.09
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.
34
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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 June 30, 2008, 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 (6.09%)
Interest rates up 200 basis points (3.18%)
Interest rates up 100 basis points (1.19%)
Base case --
Interest rates down 100 basis points 1.03%
Interest rates down 200 basis points 1.30%
Interest rates down 300 basis points (2.13%)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Asset/Liability Management" discussion under Part I, Item 2. above.
ITEM 4T. CONTROLS AND PROCEDURES
An evaluation of the Corporation's disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities and Exchange Act of 1934 ("Act")) as
of June 30, 2008, was carried out under the supervision and with the
participation of the Corporation's Chief Executive Officer, Chief Financial
Officer and several other members of the Corporation's senior management. The
Corporation's Chief Executive Officer and Chief Financial Officer concluded that
the Corporation's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Corporation in the reports it files or submits under the Act is (i) accumulated
and communicated to the Corporation's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
There have been no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended
June 30, 2008, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
The Corporation intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material non-financial information concerning the Corporation's
business. While the Corporation believes the present design of its disclosure
controls and procedures is effective to achieve its goal, future events
affecting its business may cause the Corporation to modify its disclosures and
procedures.
35
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
CHANGES IN ECONOMIC CONDITIONS OR INTEREST RATES MAY NEGATIVELY AFFECT OUR
EARNINGS, CAPITAL AND LIQUIDITY.
The results of operations for financial institutions, including our bank,
may be materially and adversely affected by changes in prevailing local and
national economic conditions, including declines in real estate market values,
rapid increases or decreases in interest rates and changes in the monetary and
fiscal policies of the federal government. Our profitability is heavily
influenced by the spread between the interest rates we earn on investments and
loans and the interest rates we pay on deposits and other interest-bearing
liabilities. Substantially all our loans are to businesses and individuals in
Southeastern Michigan and any decline in the economy of this area could
adversely affect us. Like most banking institutions, our net interest spread and
margin will be affected by general economic conditions and other factors that
influence market interest rates and our ability to respond to changes in these
rates. At any given time, our assets and liabilities may be such that they are
affected differently by a given change in interest rates.
OUR CREDIT LOSSES COULD INCREASE AND OUR ALLOWANCE FOR CREDIT LOSSES MAY NOT BE
ADEQUATE TO COVER ACTUAL LOAN LOSSES.
The risk of nonpayment of loans is inherent in all lending activities and
nonpayment, if it occurs, may have a material adverse affect on our earnings and
overall financial condition as well as the value of our common stock. We make
various assumptions and judgments about the collectability of our loan portfolio
and provide an allowance for potential losses based on a number of factors. If
our assumptions are wrong, our allowance for credit and lease losses may not be
sufficient to cover our losses, thereby having an adverse effect on our
operating results, and may cause us to increase the allowance in the future. The
actual amount of future provisions for credit losses cannot now be determined
and may exceed the amount of past provisions. Additionally, federal banking
regulators, as an integral part of their supervisory function, periodically
review our allowance for credit losses. These regulatory agencies may require us
to increase our provision for credit losses or to recognize further loan or
lease charge-offs based upon their judgments, which may be different from ours.
Any increase in the allowance for credit losses could have a negative effect on
our net income, financial condition and results of operations. For the six
months ended June 30, 2008 we recorded a provision for loan losses of $3.0
million compared to $225,000 for the six months ended June 30, 2007, which
reduced our results of operations for first six months of 2008. We also recorded
net loan charge-offs of $2.4 million for the six months ended June 30, 2008
compared to $309,000 for the six months ended June 30, 2007. We are experiencing
increasing loan delinquencies and credit losses. Generally, our non-performing
loans and assets reflect operating difficulties of individual borrowers
resulting from weakness in the economy of the Southeastern Michigan. In
addition, slowing sales have been a contributing factor to the increase in
non-performing loans as well as the increase in delinquencies. At June 30, 2008
our total non-performing loans had increased to $20.1 million compared to $5.3
million at June 30, 2007. Our portfolio is concentrated primarily in Commercial
Real Estate loans which represented 69.0% of total loans at June 30, 2008. While
construction and land development loans represented 5.4% of our total loan
portfolio at June 30, 2008 they represented 58.8% of our non-performing assets
at that date. If current trends in the housing and real estate markets continue,
we expect that we will continue to experience increased delinquencies and credit
losses in many parts of the loan portfolio. Moreover, if a national recession
occurs we expect that it would negatively impact economic conditions in our
market areas further and that we could experience higher delinquencies and
credit losses.
A DOWNTURN IN THE REAL ESTATE MARKET COULD HURT OUR BUSINESS.
Downturns in the real estate market hurt our business because many of our
loans are secured by real estate. Our ability to recover on defaulted loans by
selling the real estate collateral is diminished, and we are more likely to
suffer losses on defaulted loans. As of June 30, 2008, approximately 89% of the
book value of our loan portfolio
36
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
consisted of loans secured by various types of real estate. Substantially all of
our real property collateral is located in Michigan. If there is a further
decline in real estate values, especially in Michigan, the collateral for our
loans will provide less security.
REPAYMENT OF OUR COMMERCIAL REAL ESTATE LOANS AND OUR COMMERCIAL AND INDUSTRIAL
LOANS IS OFTEN DEPENDENT ON THE BORROWER'S BUSINESS, ITS CASH FLOW AND OUR
COLLATERAL.
Commercial real estate lending typically involves higher principal amounts
than other types of lending, and the repayment of these loans may be dependent,
in part, on sufficient income from the properties securing the loans to cover
operating expenses and debt service. Because payments on loans secured by
commercial real estate often depend upon the successful operation and management
of the properties, repayment of such loans may be affected by factors outside
the borrower's control, such as adverse conditions in the real estate market or
the economy or changes in government regulation. If the cash flow from the
project is reduced, the borrower's ability to repay the loan and the value of
the security for the loan may be impaired.
Repayment of our commercial and industrial loans is often dependent on
cash flow of the borrower, which may be unpredictable, and collateral securing
these loans may fluctuate in value. Our commercial loans are primarily made
based on the cash flow of the borrower and secondarily on the value of the
underlying collateral provided by the borrower. Most often, this collateral is
accounts receivable, inventory, equipment or real estate. In the case of loans
secured by accounts receivable, the availability of funds for the repayment of
these loans may be substantially dependent on the ability of the borrower to
collect amounts due from its customers. Other collateral securing loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business. Adverse changes in local economic
conditions impacting our business borrowers can be expected to have a negative
effect on our results of operations and capital.
RECENT NEGATIVE DEVELOPMENTS IN THE FINANCIAL INDUSTRY AND CREDIT MARKETS MAY
CONTINUE TO ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Negative developments beginning in the latter half of 2007 in the
sub-prime mortgage market and the securitization markets for such loans,
together with substantially increased oil prices and other factors, have
resulted in uncertainty in the financial markets in general and a related
general economic downturn, which have continued in 2008. Many lending
institutions, including us, have experienced substantial declines in the
performance of their loans, including construction and land loans, multifamily
loans, commercial loans and consumer loans. Moreover, competition among
depository institutions for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many
construction and land, commercial and multifamily and other commercial loans and
home mortgages have declined and may continue to decline. Bank and holding
company stock prices have been negatively affected, as has the ability of banks
and holding companies to raise capital or borrow in the debt markets compared to
recent years. These conditions may have a material adverse effect on our
financial condition and results of operations. In addition, as a result of the
foregoing factors, there is a potential for new federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and
bank regulatory agencies are expected to be very aggressive in responding to
concerns and trends identified in examinations, including the expected issuance
of formal enforcement orders. Negative developments in the financial industry
and the impact of new legislation in response to those developments could
restrict our business operations, including our ability to originate or sell
loans, and adversely impact our results of operations and financial condition.
LIQUIDITY RISK COULD IMPAIR OUR ABILITY TO FUND OPERATIONS AND JEOPARDIZE OUR
FINANCIAL CONDITION.
Liquidity is essential to our business. An inability to raise funds
through deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities or the terms of which are acceptable
to us could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Factors that could detrimentally impact
our access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans are
concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil
faced by banking organizations and the continued deterioration in credit
markets.
37
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
IF EXTERNAL FUNDS WERE NOT AVAILABLE, THIS COULD ADVERSELY IMPACT OUR GROWTH AND
PROSPECTS.
We rely on advances from the Federal Home Loan Bank ("FHLB") of
Indianapolis, other borrowings and brokered time deposits to fund our
operations. Although we have historically been able to replace maturing advances
as necessary, we might not be able to replace such funds in the future if, among
other things, our results of operations or financial condition or the results of
operations or financial condition of the FHLB of Indianapolis or market
conditions were to change. Although we consider such sources of funds adequate
for our liquidity needs, there can be no assurance in this regard and we may be
compelled or elect to seek additional sources of financing in the future.
Likewise, we may seek additional debt in the future to achieve our long-term
business objectives, in connection with future acquisitions or for other
reasons. There can be no assurance additional borrowings, if sought, would be
available to us or, if available, would be on favorable terms. We have utilized
and expect to continue to utilize out-of-area brokered deposits to support our
asset growth. These deposits are generally a higher cost source of funds when
compared to the interest rates that we would have to offer in our local markets
to generate a commensurate level of funds. If additional financing sources are
unavailable or not available on reasonable terms, our financial condition,
results of operations and future prospects could be materially adversely
affected.
WE MAY ELECT OR BE COMPELLED TO SEEK ADDITIONAL CAPITAL IN THE FUTURE, BUT THAT
CAPITAL MAY NOT BE AVAILABLE WHEN IT IS NEEDED.
We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations. In addition, we may elect
to raise additional capital to support our business or to finance acquisitions,
if any, or we may otherwise elect or to raise additional capital. In that
regard, a number of financial institutions have recently raised considerable
amounts of capital as a result of deterioration in their results of operations
and financial condition arising from the turmoil in the mortgage loan market,
deteriorating economic conditions, declines in real estate values and other
factors. Should we be required by regulatory authorities to raise additional
capital, we may seek to do so through the issuance of, among other things, our
common stock or preferred stock.
Our ability to raise additional capital, if needed, will depend on
conditions in the capital markets, economic conditions and a number of other
factors, many of which are outside our control, and on our financial
performance. Accordingly, we cannot assure you of our ability to raise
additional capital if needed or on terms acceptable to us. If we cannot raise
additional capital when needed, it may have a material adverse effect on our
financial condition, results of operations and prospects.
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL OVER FINANCIAL
REPORTING, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR
PREVENT FRAUD, AND, AS A RESULT, INVESTORS AND DEPOSITORS COULD LOSE CONFIDENCE
IN OUR FINANCIAL REPORTING, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, THE TRADING PRICE OF OUR COMMON STOCK AND OUR ABILITY TO ATTRACT
ADDITIONAL DEPOSITS.
In connection with the enactment of the Sarbanes-Oxley Act of 2002 ("Act")
and the implementation of the rules and regulations promulgated by the SEC, we
document and evaluate our internal control over financial reporting in order to
satisfy the requirements of Section 404 of the Act. This requires us to prepare
an annual management report on our internal control over financial reporting,
including among other matters, management's assessment of the effectiveness of
internal control over financial reporting and an attestation report by our
independent auditors addressing these assessments. If we fail to identify and
correct any deficiencies in the design or operating effectiveness of our
internal control over financial reporting or fail to prevent fraud, current and
potential shareholders and depositors could lose confidence in our internal
controls and financial reporting, which could materially adversely affect our
business, financial condition and results of operations, the trading price of
our common stock and our ability to attract additional deposits.
WE RELY HEAVILY ON OUR MANAGEMENT AND OTHER KEY PERSONNEL, AND THE LOSS OF ANY
OF THEM MAY ADVERSELY EFFECT OUR OPERATIONS.
The Corporation and subsidiaries continue to be dependent upon the
services of our management team, including the executive officers named in Part
I of this Form 10-K and other senior managers and commercial
38
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
lenders. Losing one or more members of management could adversely affect our
operations. The Corporation has key man life insurance in the form of Bank Owned
Life Insurance on selected executive officers, but this insurance is only
applicable on the death of one or more of these individuals.
OUR FUTURE SUCCESS IN DEPENDENT ON OUR ABILITY TO COMPETE EFFECTIVELY IN THE
HIGHLY COMPETITIVE BANKING INDUSTRY.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. We
compete for deposits, loans and other financial services with numerous
Michigan-based and out-of-state banks, thrifts, credit unions, investment banks
and other financial institutions as well as other entities which provide
financial services. Some of the financial institutions and financial services
organizations with which we compete are not subject to the same degree of
regulation as we are. Most of our competitors have been in business for many
years, have established customer bases, are larger, and have substantially
higher lending limits than we do. The financial services industry is also likely
to become more competitive as further technological advances enable more
companies to provide financial services. These technological advances may
diminish the importance of depository institutions and other financial
intermediaries in the transfer of funds between parties.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION, AND ANY REGULATORY CHANGES
MAY ADVERSELY AFFECT US.
The banking industry is heavily regulated under both federal and state
law. These regulations are primarily intended to protect customers, not our
creditors or shareholders. As a bank holding company, we are also subject to
extensive regulation by the Federal Reserve, in addition to other regulatory and
self-regulatory organizations. Our ability to establish new facilities or make
acquisitions is conditioned upon the receipt of the required regulatory
approvals from these organizations. Regulations affecting banks and financial
services companies undergo continuous change, and we cannot predict the ultimate
effect of such changes, which could have a material adverse effect on our
profitability or financial condition.
WE CONTINUALLY ENCOUNTER TECHNOLOGICAL CHANGES, AND WE MAY HAVE FEWER RESOURCES
THAN OUR COMPETITORS TO CONTINUE TO INVEST IN TECHNOLOGICAL IMPROVEMENTS.
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. The Corporation's
future success will depend, in part, on our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations. Many of our competitors have substantially greater resources to
invest in technological improvements. There can be no assurance that we will be
able to effectively implement new technology-driven products and services or be
successful in marketing such products and services to our customers.
OUR ARTICLES OF INCORPORATION AND BY-LAWS AND MICHIGAN LAWS CONTAIN CERTAIN
PROVISIONS THAT COULD MAKE A TAKEOVER MORE DIFFICULT.
Our articles of incorporation and by-laws, and the laws of Michigan,
include provisions which are designed to provide our board of directors with
time to consider whether a hostile takeover offer is in the best interest of the
Corporation and our shareholders. These provisions, however, could discourage
potential acquisition proposals and could delay or prevent a change in control.
The provisions also could diminish the opportunities for a holder of our common
stock to participate in tender offers, including tender offers at a price above
the then-current price for our common stock. These provisions could also prevent
transactions in which our shareholders might otherwise receive a premium for
their shares over then current market prices, and may limit the ability of our
shareholders to approve transactions that they may deem to be in their best
interests.
The Michigan Business Corporation Act contains provisions intended to
protect shareholders and prohibit or discourage certain types of hostile
takeover activities. In addition to these provisions and the provisions of our
articles of incorporation and by-laws, Federal law requires the Federal Reserve
Board's approval prior to acquisition of "control" of a bank holding company.
All of these provisions may have the effect of delaying or preventing a
39
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
change in control at the company level without action by our shareholders, and
therefore, could adversely affect the price of our common stock.
OUR ABILITY TO PAY DIVIDENDS IS LIMITED BY LAW AND CONTRACT.
We are a holding company and substantially all of our assets are held by
our bank. Our ability to continue to make dividend payments to our shareholders
will depend primarily on available cash resources at the holding company and
dividends from our bank. Dividend payments or extensions of credit from our bank
are subject to regulatory limitations, generally based on capital levels and
current and retained earnings, imposed by regulatory agencies with authority
over our bank. The ability of our bank to pay dividends is also subject to its
profitability, financial condition, capital expenditures and other cash flow
requirements. We are also prohibited from paying dividends on our common stock
if the required payments on our subordinated debentures have not been made. We
cannot assure you that our bank will be able to pay dividends to us in the
future.
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK.
The price of our common stock has been, and will likely continue to be,
subject to fluctuations based on, among other things, economic and market
conditions for bank holding companies and the stock market in general, as well
as changes in investor perceptions of our company. The issuance of new shares of
our common stock also may affect the market for our common stock.
Our common stock is traded on the NASDAQ Global Market under the symbol
"CCBD." The development and maintenance of an active public trading market
depends upon the existence of willing buyers and sellers, the presence of which
is beyond our control. While we are a publicly-traded company, the volume of
trading activity in our stock is still relatively limited. Even if a more active
market develops, there can be no assurance that such a market will continue, or
that our shareholders will be able to sell their shares at or above the offering
price.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 15, 2008, Community Central Bank Corporation held its Annual Meeting of
Stockholders ("Meeting"). The following matters were voted on at the Meeting.
Election of the following persons as directors of the Corporation for terms to
expire in 2011:
NOMINEE VOTES FOR VOTES WITHHELD TOTAL
- ------- --------- -------------- ---------
Gebran S. Anton 2,715,808 442,950 3,732,081
Joseph F. Jeannette 2,727,260 431,137 3,732,081
John W. Stroh, III 2,732,052 426,345 3,732,081
The following are the names of the directors (and remaining term) whose term in
office continued after the Meeting: Joseph Catenacci (2009); Salvatore Cottone
(2010); Celestina Giles (2009); James T. Mestdagh (2010); Dean S. Petitpren
(2010); and David A. Widlak (2009).
ITEM 5. OTHER INFORMATION.
Not applicable
40
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
ITEM 6. EXHIBITS.
See Exhibit Index attached.
41
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on August 14, 2008.
COMMUNITY CENTRAL BANK CORPORATION
By: /s/ DAVID A. WIDLAK
------------------------------
David A. Widlak;
President and CEO
(Principal Executive Officer)
By: /s/ RAY T. COLONIUS
------------------------------
Ray T. Colonius;
Treasurer
(Principal Financial and Accounting
Officer)
42
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 Articles of Incorporation are incorporated by reference to Exhibit
3.1 of the Corporation's Registration Statement on Form SB-2 (SEC
File No. 333-04113).
3.2 Bylaws, as amended, of the Corporation are incorporated by reference
to Exhibit 3 of the Corporation's Current Quarterly Report on Form
8-K filed on September 19, 2007 (SEC File No.000-33373)
4.1 Specimen of Stock Certificate of Community Central Bank Corporation
is incorporated by reference to Exhibit 4.2 of the Corporation's
Registration Statement on Form SB-2 (SEC File No. 333-04113).
10.1 1996 Employee Stock Option Plan is incorporated by reference to
Exhibit 10.1 of the Corporation's Registration Statement on Form
SB-2 (SEC File No. 333-04113).
10.2 2000 Employee Stock Option Plan is incorporated by reference to
Exhibit 10.6 of the Corporation's Annual Report filed with the SEC
on Form 10-KSB for the year ended December 31, 2000 (SEC File No.
000-33373).
10.3 2002 Incentive Plan is incorporated by reference to Exhibit 10.7 of
the Corporation's Annual Report filed with the SEC on Form 10-KSB
for the year ended December 31, 2001 (SEC File No. 000-33373).
10.4 Community Central Bank Supplemental Executive Retirement Plan, as
amended, and Individual Particpant Agreements are incorporated by
reference to Exhibit 10.6 of the Corporation's Annual Report on Form
10-K filed with the SEC for the year ended December 31, 2006 (SEC
File No. 000-33373).
10.5 Community Central Bank Death Benefit Plan, as amended, is
incorporated by reference to Exhibit 10.7 of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2006 (SEC
File No. 000-33373).
10.6 Form of Incentive Stock Option Agreement incorporated by reference
to Exhibit 99.1 of the Corporation's Current Report on Form 8-K
filed with the SEC on March 25, 2005. (SEC File No.000-33373)
10.7 Form of Non-qualified Stock Option Agreement is incorporated by
reference to the Corporation's Current Report on Form 8-K filed on
January 17, 2006. (SEC File No. 000-33373)
10.8 Summary of Current Director Fee Arrangements is incorporated by
reference to Exhibit 10.10 of the Corporation's Annual Report filed
with the SEC on Form 10-KSB for the year ended December 31, 2004.
(SEC File No. 000-33373)
11 Computation of Per Share Earnings
31.1 Rule 13a - 14(a) Certification (Chief Executive Officer)
31.2 Rule 13a - 14(a) Certification (Chief Financial Officer)
32 Rule 1350 Certifications
43