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 September 30, 2008
Commission File No. 000-33373
COMMUNITY CENTRAL BANK CORPORATION
(Exact name of small business issuer as specified in its charter)
Michigan 38-3291744
(State or other jurisdiction of (IRS Employer Identification No.)
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 November 13, 2008
- ------------ --------------------------------
Common Stock 3,734,781 Shares
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30,
2008 December 31,
(Unaudited) 2007
------------- ------------
(In thousands)
Assets
Cash and due from banks $ 15,988 $ 6,183
Federal funds sold 22,500 3,000
-------- --------
Cash and Cash Equivalents 38,488 9,183
-------- --------
Trading securities at fair value option 17,375 20,115
Securities available for sale, at fair value 65,498 66,809
Securities held to maturity, at amortized cost 1,770 977
FHLB stock 5,877 5,527
Residential mortgage loans held for sale 1,362 4,848
Loans
Commercial real estate 276,109 264,685
Commercial and industrial 36,676 33,039
Residential real estate 54,933 60,799
Home equity lines of credit 21,379 20,906
Consumer loans 8,274 9,754
Credit card loans 809 729
-------- --------
Total Loans 398,180 389,912
Allowance for credit losses (7,796) (6,403)
-------- --------
Net Loans 390,384 383,509
-------- --------
Net property and equipment 9,246 8,704
Accrued interest receivable 2,393 2,535
Other real estate 2,161 854
Goodwill 1,381 1,381
Intangible assets, net of amortization 88 107
Cash surrender value of Bank Owned Life insurance 10,878 10,514
Other assets 6,023 5,242
-------- --------
Total Assets $552,924 $520,305
======== ========
2
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED BALANCE SHEETS
September 30,
2008 December 31,
(Unaudited) 2007
------------- ------------
(In thousands, except share data)
Liabilities
Deposits
Noninterest bearing demand deposits $ 42,811 $ 31,647
NOW and money market accounts 48,996 53,467
Savings deposits 21,403 9,326
Time deposits 247,797 234,195
-------- --------
Total deposits 361,007 328,635
-------- --------
Repurchase agreements and fed funds purchased 35,164 32,659
Federal Home Loan Bank advances ($5.0 million
at fair value at 12-31-07) 105,510 104,495
Accrued interest payable 1,121 1,018
Other liabilities 2,966 2,637
ESOP note payable 3 36
Subordinated debentures (all instruments at
fair value) 13,699 17,597
-------- --------
Total Liabilities 519,470 487,077
-------- --------
Stockholders' Equity
Common stock -- 9,000,000 shares authorized;
3,734,781 shares issued and outstanding at
9-30-2008 and 3,733,081 at 12-31-2007 32,123 32,071
Retained earnings 2,058 1,797
Unearned employee benefit (3) (36)
Accumulated other comprehensive (loss) income (724) (604)
-------- --------
Total Stockholders' Equity 33,454 33,228
-------- --------
Total Liabilities and Stockholders' Equity $552,924 $520,305
======== ========
3
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
------- ------ ------- -------
(In thousands, except per share data)
Interest Income
Loans (including fees) $6,378 $7,177 $19,242 $20,914
Taxable securities 954 774 2,722 2,246
Tax exempt securities 141 350 517 1,097
Federal funds sold 64 155 373 541
------ ------ ------- -------
Total Interest Income 7,537 8,456 22,854 24,798
------ ------ ------- -------
Interest Expense
Deposits 2,887 3,607 9,233 10,761
Repurchase agreements and fed funds purchased 304 245 823 638
Federal Home Loan Bank advances 1,218 1,038 3,692 2,934
ESOP loan interest expense -- 1 1 5
Subordinated debentures 195 315 702 1,268
------ ------ ------- -------
Total Interest Expense 4,604 5,206 14,451 15,606
------ ------ ------- -------
Net Interest Income 2,933 3,250 8,403 9,192
Provision for credit losses 1,084 775 4,068 1,000
------ ------ ------- -------
Net Interest Income after Provision 1,849 2,475 4,335 8,192
------ ------ ------- -------
Noninterest Income
Fiduciary income 82 124 288 322
Deposit service charges 109 105 383 285
Realized gains (losses) on available for sale securities 84 (31) 195 (44)
Change in fair value of assets/liabilities carried
at fair value under SFAS 159 1,109 1,005 4,120 1,161
Mortgage banking income 461 494 1,341 1,842
Other income 250 138 1,127 832
------ ------ ------- -------
Total Noninterest Income 2,095 1,835 7,454 4,398
------ ------ ------- -------
Noninterest Expense
Salaries, benefits, and payroll taxes 1,884 1,981 5,551 6,027
Premises and fixed asset expense 444 427 1,357 1,344
Other operating expense 1,549 1,077 4,284 2,980
------ ------ ------- -------
Total Noninterest Expense 3,877 3,485 11,192 10,351
------ ------ ------- -------
Income Before Taxes 67 825 597 2,239
Provision (Benefit) for income taxes (37) 228 (22) 448
------ ------ ------- -------
Net Income $ 104 $ 597 $ 619 $ 1,791
====== ====== ======= =======
4
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Per share data*:
Basic earnings $0.03 $0.16 $0.17 $0.46
Diluted earnings $0.03 $0.16 $0.17 $0.46
===== ===== ===== =====
Cash Dividends $0.02 $0.06 $0.10 $0.18
===== ===== ===== =====
5
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
---- ------ ----- ------
(In thousands)
Net Income as Reported $104 $ 597 $ 619 $1,791
Other Comprehensive Income, Net of Tax
Change in unrealized losses on securities
Available for sale 200 434 (120) (217)
---- ------ ----- ------
Comprehensive Income $304 $1,031 $ 499 $1,574
==== ====== ===== ======
6
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended
September 30,
-------------------
2008 2007
-------- --------
Operating Activities (In thousands)
Net income $ 619 $ 1,791
Adjustments to reconcile net income to net cash flow
from operating activities:
Net amortization of security premium 60 161
Net gain on sales and call of securities (195) 44
Net gain on financial instruments at fair value (4,120) (1,161)
Provision for credit losses 4,068 1,000
Depreciation expense 504 532
Deferred income tax expense 306 272
SFAS 123R option expense 42 22
ESOP compensation expense 33 47
Decrease (increase) in accrued interest receivable 142 (183)
Decrease (increase) in other assets 2,737 (2,118)
Increase (decrease) in accrued interest payable 103 (77)
Increase in other liabilities 328 633
Increase in loans held for sale 3,486 223
-------- --------
Net Cash Provided by Operating Activities 8,113 1,186
Investing Activities
Maturities, calls, sales and prepayments of securities available for sale 61,721 45,591
Purchase of securities available for sale (65,538) (30,338)
Maturities, calls, sales and prepayment of trading securities 2,646 6,329
Transfer to trading securities -- (26,642)
Maturities, calls, and prepayments of held to maturity securities 119 29
Purchases of held to maturity securities (1,265) (138)
Increase in loans (10,943) (9,950)
Purchases of property and equipment (1,045) (75)
Proceeds from sale of property and equipment -- 60
-------- --------
Net Cash Used in Investing Activities (14,305) (15,134)
Financing Activities
Net increase in demand and savings deposits 18,770 20,272
Net (decrease) increase in time deposits 13,602 (33,932)
Net increase in borrowings 2,506 18,243
Issuance of subordinated debentures -- 18,557
Redemption of subordinated debentures -- (10,310)
FHLB advances 13,000 23,000
Repayment of FHLB advances (12,000) (16,000)
Payment of ESOP debt (33) (47)
Stock option exercise/award 17 131
Cash dividends paid (358) (703)
Repurchase of common stock (7) (3,367)
-------- --------
Net Cash Provided (Used) by Financing Activities 35,497 15,844
-------- --------
Increase in Cash and Cash Equivalents 29,305 1,896
Cash and Cash Equivalents at the Beginning of the Year 9,183 24,726
-------- --------
Cash and Cash Equivalents at the End of the Period $ 38,488 $ 26,622
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 14,451 $ 15,683
Federal Taxes Paid $ -- $ 175
Transfers from loans to other real estate owned $ 3,854 $ 768
======== ========
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 September
30, 2008 and December 31, 2007, and Consolidated Statements of Income and
Comprehensive Income for the three and nine month periods ended September
30, 2008 and 2007, and Consolidated Statements of Cash Flow for the nine
months ended September 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 nine months ended
September 30, 2008 or 2007. The total amount of options outstanding at
September 30, 2008 was 286,993 shares at a weighted average exercise price
of $9.10 per share. During the third 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 $42,000 for the three and nine months
ended September 30, 2008, respectively, for the options vesting in 2008 and
$7,000 and $22,000 for the three and nine months ended September 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 three and nine months ended September 30, 2008 and 2007, on a pro
forma basis, are disclosed for comparison below.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2008 2007 2008 2007
----- ----- ----- ------
(in thousands, except per share data)
Net income, as reported $ 104 $ 597 $ 619 $1,791
Add: Stock-based employee compensation expense,
net of related tax effects, included in reported
net income (14) (7) (42) (22)
Deduct: Total stock-based employee and director
compensation expense under fair value based
methods of awards, net of related tax effects 14 7 42 22
----- ----- ----- ------
Pro forma net income $ 104 $ 597 $ 619 $1,791
===== ===== ===== ======
Earnings per share
Basic $0.03 $0.16 $0.17 $ 0.46
Diluted $0.03 $0.16 $0.17 $ 0.46
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 the 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 September 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 third 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 $1.1 million on a
pretax basis or $732,000 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 September 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 nine months of
2008 was $4.1 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 September 30, 2008 using
the identified valuations and the changes in fair value for the nine months
ended September 30, 2008 for items measured at fair value pursuant to election
of the fair value option.
Changes in fair value for
the nine months ended
September 30, 2008 measured
at fair value pursuant to
Fair Value Measurement at election of the fair value
September 30, 2008 Option
------------------------- ---------------------------
Fair Value Significant Other Significant Other Gains or Losses
Measurements Observable Inputs Unobservable Inputs in noninterest income
Description 09/30/2008 (Level 2) (Level 3) pretax income
- --------------------------------------- ------------ ------------------------- ------------------- ---------------------------
(in thousands of dollars)
Trading Securities $17,375 $17,375 -- ($10)
Securities available for sale 65,498 65,498 -- --
Interest rate swap hedging securities (564) (564) -- (23)
Federal Home Loan Bank Advances -- -- -- (14)
Subordinated Debentures 13,699 -- 13,699 3,898
Interest rate swap hedging subordinated
debentures 937 937 -- 269
------- ------- ------ ------
$4,120
======
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 nine
month period ended September 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 nine month gains and (losses)
period ended Total Purchases Transfers related to financial
September 30, 2008 Fair value, realized/unrealized issuances in and/or out Fair value, instruments held at
(in millions) January 1, 2008 gains/(losses) settlements, net of Level 3 September 30, 2008 September 30, 2008
- ------------------ --------------- ------------------- ---------------- ------------- ------------------ ---------------------
Subordinated
Debentures 17,597 -- -- -- 13,699 3,898
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 September 30, 2008.
Quoted Prices in
Active Markets for Significant Other Significant Total Losses for the
Balance at Identical Assets Observable Inputs Unobservable Inputs nine months ended
Assets September 30, 2008 (Level 1) (Level 2) (Level 3) September 30, 2008
- ----------------------- ------------------ ------------------ ----------------- ------------------- --------------------
Impaired loans
accounted for
under FAS 114 20,602 -- -- 20,602 3,148
Other real estate owned 2,161 -- -- 2,161 450
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 September 30, 2008 and December 31, 2007 and
the results of operations for the nine months ended September 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 our 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 $1.1 million provision for loan losses for the third 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
$2.1 million at September 30, 2008. Total residential builder loans represent
approximately 3.8% of our total loan portfolio at September 30, 2008.
Nonperforming assets to total assets increased to 5.00% at September 30, 2008
compared to 3.61% at December 31, 2007, and 4.15% for the immediately preceding
quarter ended June 30, 2008. The increase in nonperforming assets for the first
nine 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, some of which were not over 90
days past due at September 30, 2008. Increases were also due to an increase in
loans classified as restructured troubled debt which increased $3.3 million from
December 31, 2007.
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.
16
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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 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 $148.3 million at the
end of September 2008.
ASSETS
At September 30, 2008, the Corporation's total assets were $552.9 million, an
increase of $32.6 million, or 6.3%, from December 31, 2007. The largest segment
of asset growth for the nine months ended September 30, 2008, occurred in
federal funds sold. Total assets increased in the third quarter of 2008 by $20.6
million. The increase was principally due to increases in federal funds sold of
$19.5 million, as the Corporation increased liquidity to provide safety in the
volatile environment. Total loans net of the allowance for credit losses and
residential mortgage loans held for sale increased $3.2 million in the third
quarter with the majority of the increase occurring in commercial real estate.
The relatively 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 $8.3 million, or 2.1%, to $398.2 million at September 30,
2008 from $389.9 million at December 31, 2007. Loan growth was comprised
primarily of commercial real estate loans, which increased $11.4, million or
4.3%, from December 31, 2007 to September 30, 2008. Total commercial real estate
loans represent 69.3% of the total loan portfolio. This is consistent with the
current and historical commercial loan focus of the Corporation. Approximately
70% of the commercial real estate loans are owner occupied in the loan
portfolio. The Corporation had approximately $152.9 million in outstanding loans
at September 30, 2008, to borrowers in the real estate rental and properties
management industries, representing approximately 55.3% of the total commercial
real estate portfolio. The largest decrease in the total loan portfolio occurred
in the residential mortgage portfolio, which decreased $5.9 million, or 9.6%
from December 31, 2007.
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 nine months of 2008, we originated $55.2 million of
residential mortgage loans, retaining only $4.4 million in our portfolio. During
this period, we experienced pay-downs and pay-offs of $10.3 million.
Additionally, the Corporation further tightened its underwriting guidelines,
which had the effect of limiting new loan volume, which included a reduction in
the allowable loan to value ratio on mortgage loans.
The majority of the residential mortgage portfolio comprises adjustable rate
mortgages, which at September 30, 2008 represented $40.9 million, or 74.5%, 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, as well as loans with
attributes deemed to match the Corporation's rate risk profile. Home equity
lines of credit ("HELOC") totaled $21.4 million at September 30, 2008, and
remained relatively unchanged for the first nine 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 the
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 $8.3
million at September 30, 2008, a decrease of $1.5 million from December 31,
2007. The decrease was comprised of $226,000 in charge offs to the allowance and
the transfer of $627,000 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:
September 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 $ 1,362 $ 4,848 ($3,486) (71.9)%
======== ===== ======== ===== ======== =====
Loans held in the portfolio:
Commercial real estate $276,109 69.3% $264,685 67.9% $ 11,424 4.3%
Commercial and industrial 36,676 9.2 33,039 8.5 3,637 11.0
Residential real estate 54,933 13.8 60,799 15.6 (5,866) (9.6)
Home equity lines 21,379 5.4 20,906 5.4 473 2.3
Consumer loans 8,274 2.1 9,754 2.4 (1,480) (15.2)
Credit cards 809 0.2 729 0.2 80 11.0
-------- ----- -------- ----- -------- -----
$398,180 100.0% $389,912 100.0% $ 8,268 2.1%
======== ===== ======== ===== ======== =====
The investment security portfolio, excluding FHLB stock, totaled $84.6 million
at September 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, decreased $1.3 million or 2.0% to $65.5 million at September 30, 2008
from December 31, 2007. The largest change in the portfolio occurred in the
collateralized mortgage obligation ("CMO") portfolio, which increased $20.9
million from December 31, 2007 and ended September 30, 2008 at $26.8 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 decreased $1.9
million for the first nine months of 2008. The net change in this segment of the
available for sale security portfolio was again comprised of primarily FNMA
securities. The municipal security portfolio totaled $12.2 million at September
30, 2008, which was a decrease of $16.6 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 September 30, 2008, we had unrealized losses of $1.1 million in our available
for sale portfolio. This represents a $176,000 decrease in the market value from
December 31, 2007. The 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 $194,000 for the first nine 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
September 30, 2008. The average effective duration of the trading portfolio as
of September 30, 2008 was approximately 1.2 years, with an average life of 1.55
years and a weighted average coupon rate of 4.73%. 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 to 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, the shape of the treasury yield curve, and
management expectations on short term interest rates. The trading portfolio as
of September 30, 2008 comprised $11.2 million of U.S. Agency debentures with an
effective duration of 1.4 years and $6.2 million in U.S.
18
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
agency collateralized mortgage obligations ("CMOs") with an effective duration
of 1.0 years. All of the 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 the 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 the 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:
September 30, December 31,
2008 2007
------------- ------------
(Dollars in thousands)
Nonaccrual loans:
Construction and land development $10,916 $ 9,746
Commercial real estate 6,619 4,633
Commercial and industrial 98 146
Residential real estate 2,591 2,053
Home equity lines 756 354
Consumer loans 703 30
Credit cards -- --
------- -------
Total nonaccrual loans 21,683 16,962
Accruing loans delinquent more than 90 days:
Construction and land development $ -- $ --
Commercial real estate -- --
Commercial and industrial 295 --
Residential real estate -- 654
Home equity lines -- 44
Consumer loans -- --
Credit cards -- 25
------- -------
Total accruing loans delinquent more than 90 days 295 723
Troubled debt restructured loans:
Construction and land development $ -- $ --
Commercial real estate 2,375 --
Commercial and industrial 388 --
Residential real estate 744 253
Home equity lines -- --
Consumer loans -- --
Credit cards -- --
------- -------
Total troubled debt restructured loans 3,507 253
------- -------
Total nonperforming loans 25,485 17,938
Other real estate owned
Construction and land development 1,348 --
Commercial real estate 213 319
Residential real estate 600 535
------- -------
Total other real estate owned 2,161 854
------- -------
Total nonperforming assets $27,646 $18,792
======= =======
Total nonperforming loans as a
percentage of total loans 6.40% 4.60%
======= =======
Total nonperforming assets as a percentage
of total assets 5.00% 3.61%
======= =======
20
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
At September 30, 2008, loans totaling $12.7 million were not included in the
non-performing asset table above where known information about possible credit
problems of borrowers caused management to have serious doubts as to the ability
of borrowers to fully comply with present loan repayment terms and which may
result in disclosure of such loans in the future. This compares with $14.7
million at December 31, 2007 of such loans.
At September 30, 2008, nonperforming loans, which represents nonaccruing loans,
troubled restructured debt and those loans past due 90 days or more and still
accruing interest, totaled $25.5 million compared to $17.9 million at December
31, 2007, an increase of $7.6 million. Total nonperforming loans as a percentage
of total loans was 6.40% at September 30, 2008, compared to 4.60% at December
31, 2007. The primary reason for the increase was attributable to an increase in
nonaccruing commercial real estate loans of $4.6 million for the first nine
months of 2008. Net charge offs for the first nine months of 2008 totaled $2.7
million, of which $1.9 million was specifically attributable to builder
developer loans for which specific reserves had been established in prior
periods. During the quarter of 2008, the Corporation modified loans which met
the classification of troubled debt restructuring. At September 30, 2008 these
loans totaled $3.5 million. These loans were less than 90 days past due. The
allowance for loan losses at September 30, 2008 was $7.8 million, or 1.96% of
total loans, and 30.59% of nonperforming loans, versus $6.4 million, or 1.64%
and 35.7% at December 31, 2007, respectively. Nonperforming residential mortgage
loans increased $829,000 for the first nine months of 2008. 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 boat loan
portfolio totals 2.0% of the entire loan portfolio at September 30, 2008. Other
real estate owned (OREO) increased $1.3 million, or 153%, to $2.1 million at
September 30, 2008 from $854,000 at December 31, 2007. The Corporation has
valuation reserves established on certain OREO properties. The largest segment
of OREO is comprised of residential real estate and land from builder developers
of $1.3 million. The remaining properties in OREO comprise residential real
estate of $600,000 and commercial real estate acquired through foreclosure of
$213,000. Total nonperforming assets as a percentage of total assets increased
to 5.00% at September 30, 2008, from 3.61% at December 31, 2007, as a result of
increases in primarily nonaccruing loans, loans classified under troubled debt
restructuring and to a lesser extent an increase in other real estate owned.
21
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The following table shows an analysis of the allowance for loans losses:
Nine Months Ended Year Ended
September 30, December 31,
2008 2007
----------------- ------------
(Dollars in thousands)
Balance at beginning of the period $6,403 $3,815
Charge-offs:
Construction and land development 1,925 --
Commercial real estate 190 338
Commercial and industrial 154 110
Residential real estate 255 106
Home equity lines 163 131
Consumer loans 226 382
Credit cards 33 33
------ ------
Total charge-offs $2,946 $1,100
------ ------
Recoveries:
Commercial real estate 217 --
Commercial and industrial 47 12
Residential real estate -- --
Home equity lines -- --
Consumer loans 5 69
Credit cards 2 7
------ ------
Total recoveries $ 271 $ 88
------ ------
Net charge-offs (recoveries) 2,675 1,012
------ ------
Provision charged to earnings 4,068 3,600
------ ------
Balance at end of the period $7,796 $6,403
====== ======
Net charge-offs (net recoveries) during the period
to average loans outstanding during the period on
an annualized basis 0.91% 0.27%
Allowance as a percentage of total portfolio loans 1.96% 1.64%
The allowance for loan losses increased $1.4 million, or 21.7%, from December
31, 2007, compared to September 30, 2008. As September 30, 2008, the allowance
as a percentage of total loans remained was 1.96%, compared to 1.64% at 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
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 September 30, 2008, total deposits increased $32.4 million or 9.9% to $361.0
million from $328.6 million at December 31, 2007. The increase was due to an
$11.2 million or 35.3% increase in noninterest bearing demand deposits and an
increase in total savings accounts of $12.0 million or 129.5%, as customers
utilized savings accounts for liquidity management. The increase in demand
deposits and savings also resulted from our continued emphasis on growth in this
important area of core deposits and the addition of branch locations. Moreover,
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 increased $11.9 million or 6.1%. The
largest contributor of the increase in large time deposits was increases of
individuals and corporations of $17.5 million, coupled with brokered CDs of
$18.2 million, offset by declines in municipal time deposits of $24.1 million
during the first nine months of 2008. The decline in municipal time deposits was
due in part to the difficult economic environment for municipalities and the
Bank's unwillingness to pay premium rates for short-term time deposits as many
local institutions have. Time deposits under $100,000 increased $1.7 million or
4.4% due to a special rate on a promotional time deposit product paid by the
Bank. The premium rate was competitive in the local market place, but did not
exceed other financial institutions offerings. Money market accounts decreased
$7.8 million or 20.2% from December 31, 2007 to September 30, 2008 due to
withdrawals from the indexed money market product which is tied to the six month
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 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:
September 30, Percentage December 31, Percentage Net Net
2008 of total deposits 2007 of total deposits Change Change %
------------- ----------------- ------------ ----------------- ------- --------
(Dollars in Thousands)
Noninterest bearing demand $ 42,811 11.9% $ 31,647 9.6% $11,164 35.3%
NOW accounts 18,234 5.1 14,907 4.5 3,327 22.3
Money market accounts 30,762 8.5 38,560 11.7 (7,798) (20.2)
Savings deposits 21,403 5.9 9,326 2.8 12,077 129.5
Time deposits under $100,000 41,142 11.4 39,395 12.0 1,747 4.4
Time deposits $100,000 and
over 206,655 57.2 194,800 59.4 11,855 6.1
-------- ------ -------- ----- ------- -----
Total deposits $361,007 100.00% $328,635 100.0% $32,372 9.9%
======== ====== ======== ===== ======= =====
23
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Short term borrowings at September 30, 2008, consisted of FHLB advances of $13.8
million at face value and securities sold with an agreement to repurchase them
the following day of $16.2 million. Following are details of our short term
borrowings for the dates indicated:
September 30, December 31,
2008 2007
------------- ------------
(Dollars in thousands)
Amount outstanding at end of period
Short-term repurchase agreements $16,164 $13,659
Short-term FHLB advances $13,810 $23,795
Weighted average interest rate on ending balance
Short-term repurchase agreements 2.00% 3.00%
Short-term FHLB advances 4.39% 4.14%
Maximum amount outstanding at any month end
during the period
Short-term repurchase agreements $16,164 $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.
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
$235.9 million and $236.6 million at September 30, 2008 and 2007, respectively.
Long-term advances were comprised of 28 advances with maturities ranging from
October 2009 to June 2016.
FHLB advances outstanding at September 30, 2008 were as follows:
Face Value Average rate
of obligation at end of period
------------- ----------------
(Dollars in thousands)
Short-term FHLB advances $ 13,810 4.39%
Long-term FHLB advances 91,700 4.40%
-------- ----
$105,510 4.40%
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 September 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 $4.0 million
in available unsecured federal funds borrowing facilities, and $35.0 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 September 30, 2008, unused
commitments totaled $80.8 million. The Bank has $150.4 million in time deposits
coming due within the next twelve months from September 30, 2008, which includes
brokered, internet and municipal time deposits. At September 30, 2008, the Bank
had $143.2 million in brokered certificates of deposit, of which $72.6 million
is due within one year or less. Additionally, at September 30, 2008, municipal
time deposits and internet time deposits were $10.2 million and $1.1 million,
respectively. Municipal time deposits typically have maturities less than three
months. All of the $1.1 million of internet certificates of deposit mature in
one year or less.
On August 21, 2008, the Corporation's Board of Directors declared a quarterly
cash dividend of $0.02 per common share, payable October 1, 2008, to
shareholders of record on September 2, 2008. This represents the Corporation's
26th 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.
September 30, December 31, Minimum Ratio
2008 2007 for Capital
-------------- ---------------- Adequacy Ratio to be
Capital Ratio Capital Ratio Purposes "Well Capitalized"
------- ----- ------- ------- ------------- ------------------
Tier I capital to risk-weighted assets
Consolidated $43,407 10.17% $42,932 10.29% 4% NA
Bank only 43,355 10.17% 42,889 10.32% 4% 6%
Total capital to risk-weighted assets
Consolidated $55,922 13.10% $55,430 13.28% 8% NA
Bank only 48,721 11.43% 48,199 11.57% 8% 10%
Tier I capital to average assets
Consolidated $43,407 8.05% $42,932 8.37% 4% NA
Bank only 43,355 8.06% 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 nine
months ended September 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 -- (358) -- -- (358)
Stock awards 17 -- -- -- 17
SFAS 123R expensing of options 42 -- -- -- 42
Net income -- 619 -- -- 619
Release of ESOP shares -- -- 33 -- 33
Repurchase of common stock (7) -- -- -- (7)
Change in unrealized gain/loss -- -- -- (120) (120)
------- ------ ---- ----- -------
Balance at September 30, 2008 $32,123 $2,058 ($3) ($724) $33,454
======= ====== ==== ===== =======
Stockholders' equity was $33.5 million as of September 30, 2008. Total
stockholders' equity was relatively unchanged from December 31, 2007. Increases
in equity from net income of $619,000 were offset with decreases from cash
dividends for the first nine months of $358,000 and decreases in accumulated
comprehensive income of $120,000 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 third quarter
of 2008 was $2.9 million, a decrease of $317,000 or 9.8% from the third 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
47 basis points from 2.83% for the quarter ended September 30, 2007 to 2.36% for
the quarter ended September 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 275 basis points from September 30, 2007 to September 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 nine
months of 2008 was $8.4 million, a decrease of $789,000 or 8.6% from the first
nine months of 2007. Those factors responsible for the decrease in net interest
income and margin for the third quarter ended September 30, 2008 compared to
September 30, 2007 also contributed to the declines for the first nine 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 Nine Months Ended
September 30, 2008 vs. 2007 September 30, 2008 vs. 2007
--------------------------- ---------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes In Due to Changes In
------------------- -------------------
Volume Volume
Total and Both Rate Total and Both Rate
----- -------- ------- ------- -------- ------
(In Thousands)
Earning Assets - Interest Income
Loans ($799) $ 364 ($1,163) ($1,672) $1,234 (2,906)
Securities (29) (1) (28) (104) (23) (81)
Federal funds sold (91) 6 (97) (168) 90 (258)
----- ----- ------- ------- ------ ------
Total (919) 369 (1,288) (1,944) 1,301 (3,245)
----- ----- ------- ------- ------ ------
Deposits and Borrowed Funds - Interest Expense
NOW and money market accounts (500) (82) (418) (1,232) (192) (1,040)
Savings deposits 7 26 (19) (41) 26 (67)
Time deposits (227) 199 (426) (255) 623 (878)
Other borrowings 239 254 (15) 943 949 (6)
ESOP loan (1) (1) -- (4) (3) (1)
Subordinated debentures (120) 7 (127) (566) (130) (436)
----- ----- ------- ------- ------ ------
Total (602) 403 (1,005) (1,155) 1,273 (2,428)
----- ----- ------- ------- ------ ------
Net Interest Income ($317) ($34) ($283) ($789) $ 28 ($817)
===== ===== ======= ======= ====== ======
The average yield earned on interest earning assets for the third quarter of
2008 was 5.91% compared to 6.96% for the third quarter of 2007. The average
yield earned on the total loan portfolio, which contains both loans held for
sale and investment for 2008, was 6.39% compared to 7.63% during the third
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 $136.0 million at September 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 third quarter of
2008 was 3.92% compared to 4.70% in the third 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 4.36% for the third quarter of 2008, from
5.12% 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 1.45% during the
third quarter of 2008 compared to 3.80% in the third quarter of 2007. The
average rate paid on savings accounts also decreased, moving to 1.67% for the
third quarter of 2008 from 2.36% in the third 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 third quarter of 2008 to 4.18% from
7.00%. 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 nine months ended
2008 was 6.00% compared to 6.90% for the first nine months of 2007. The average
yield earned on the total loan portfolio, including loans held for sale, was
6.50% during the nine months ended September 30, 2008 compared to 7.55% 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 nine months
of 2008 was 4.12% compared to 4.76% in the first nine 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 4.58% for the first nine
months 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 1.71% during the first nine months of 2008 compared to 3.84% in the
first nine months of 2007. The average rate paid on savings accounts also
decreased, moving to 1.76% for the first nine months of 2008 from 2.49% in the
first nine 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 nine months of 2008 to 5.05% from 7.70%. The overall
decrease in interest rate paid on the subordinated debenture was the result of
the redemption of the subordinated debenture in June 2007 with funds from a new
subordinated debenture with a 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 nine month periods ended September 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 September 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 $397,111 $6,378 6.39% $373,056 $7,177 7.63%
Securities 96,414 1,095 4.55 96,391 1,124 4.66
Federal funds sold 14,140 64 1.80 13,005 155 4.76
-------- ------ ---- -------- ------ ----
Total Earning Assets/
Total Interest Income 507,665 7,537 5.91 482,452 8,456 6.96
-------- ------ ---- -------- ------ ----
Cash and due from banks 8,684 7,689
All other assets 24,564 23,872
-------- --------
Total Assets $540,913 $514,013
======== ========
Liabilities and Equity
NOW and money market accounts $ 48,162 175 1.45 $ 70,547 675 3.80
Savings deposits 17,358 73 1.67 11,113 66 2.36
Time deposits 240,957 2,639 4.36 221,948 2,866 5.12
FHLB advances and repurchase agreements 142,481 1,522 4.25 118,360 1,283 4.30
ESOP loan 7 -- 6.00 62 1 6.40
Subordinated debentures 18,557 195 4.18 17,857 315 7.00
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities/
Total Interest Expense / Interest Rate Spread 467,522 4,604 3.92 439,887 5,206 4.70
-------- ------ ---- -------- ------ ----
Noninterest bearing demand deposits 40,150 36,757
All other liabilities 83 3,322
Stockholders' equity 33,158 34,047
-------- --------
Total Liabilities and Stockholders' Equity $540,913 $514,013
======== ========
Net Interest Income $2,933 $3,250
====== ======
Net Interest Spread 1.99% 2.27%
==== ====
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.30% 2.68%
==== ====
Net Interest Margin
(fully taxable equivalent) 2.36% 2.83%
==== ====
29
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Nine Months Ended September 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 $395,269 $19,242 6.50% $370,601 $20,914 7.55%
Securities 94,776 3,239 4.56 95,423 3,343 4.67
Federal funds sold 18,724 373 2.66 14,202 541 5.09
-------- ------- ---- -------- ------- ----
Total Earning Assets/
Total Interest Income 508,769 22,854 6.00 480,226 24,798 6.90
-------- ------- ---- -------- ------- ----
Cash and due from banks 8,435 7,382
All other assets 24,313 23,434
-------- --------
Total Assets $541,517 $511,042
======== ========
Liabilities and Equity
NOW and money market accounts $ 49,876 637 1.71 $ 65,100 1,869 3.84
Savings deposits 14,232 187 1.76 12,244 228 2.49
Time deposits 245,084 8,409 4.58 227,036 8,664 5.10
FHLB advances and repurchase agreements 141,129 4,515 4.27 111,513 3,572 4.28
ESOP loan 19 1 7.03 75 5 8.91
Subordinated debentures 18,557 702 5.05 22,015 1,268 7.70
-------- ------- ---- -------- ------- ----
Total Interest Bearing Liabilities/
Total Interest Expense / Interest Rate Spread 468,897 14,451 4.12 437,983 15,606 4.76
-------- ------- ---- -------- ------- ----
Noninterest bearing demand deposits 37,468 34,579
All other liabilities 1,554 3,115
Stockholders' equity 33,598 35,365
-------- --------
Total Liabilities and Stockholders' Equity $541,517 $511,042
======== ========
Net Interest Income $ 8,403 $ 9,192
======= =======
Net Interest Spread 1.88% 2.14%
==== ====
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.20% 2.56%
==== ====
Net Interest Margin
(fully taxable equivalent) 2.27% 2.71%
==== ====
30
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PROVISION FOR LOAN LOSSES
We recorded a $1.1 million provision for loan losses in the third 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 nine months of 2008 was $4.1 million, compared to $1.0 million for
the nine months ended September 30, 2007. Total nonperforming assets as a
percentage of total assets was 5.00% at September 30, 2008, compared to 4.20% at
June 30, 2008 and 3.61% at December 31, 2007. The allowance for loan losses at
September 30, 2008 was $7.8 million, or 1.96% of total loans and 30.59% of
nonperforming loans, versus $6.4 million, or 1.64% and 35.70% at December 31,
2007, respectively.
NONINTEREST INCOME
Noninterest income was $2.1 million for the third quarter of 2008, increasing
$260,000, or 14.2%, from the third 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 $1.1
million in unrealized gains for the third quarter of 2008, as recorded in other
income. The net change in fair value under SFAS 159 for the first nine months of
2008 was $4.1 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, second and third quarters
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 $82,000 for the third quarter of
2008, a decrease of $42,000 or 33.9% from the third quarter of 2007, as the
third quarter of 2007 reflected extraordinary fees which were not present in the
third quarter of 2008 and market values of assets under management fell
affecting the assessable base for trust fees. The extraordinary fees were based
on a particular trust situation requiring additional billable hours. Deposit
service charge income of $109,000 for the third quarter of 2008 increased
$4,000, or 3.8%, compared to the third quarter of 2007, primarily from increased
deposit levels and a broadened branch base. Mortgage banking income decreased
$33,000 or 6.7%, to $461,000 for the third quarter of 2008 compared to $494,000
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 $84,000 for the third quarter of 2008 and was attributable to
restructuring activities in the available for sale security portfolio. Other
interest income totaled $250,000 for the third quarter of 2008, increasing
$112,000 or 81.2% compared to the third 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 $7.5 million for the first nine months of 2008,
increasing $3.1 million, or 69.5%, from the first nine months of 2007. The
increase was largely attributable to the aforementioned net change in fair value
over the nine month period. Fiduciary income from trust services of $288,000 for
the first nine months of 2008 decreased $34,000 or 10.6% from the first nine
months of 2007, declining from prior periods due to a management change and
departmental realignment and lower market values of assessable assets. Deposit
service charge income of $383,000 for the first nine months of 2008 increased
$98,000, or 34.4%, compared to the first nine months of 2007, primarily from
increased service charge fees and a broadened branch base. Mortgage banking
income decreased $501,000 or 27.2%, to $1.3 million for the nine months ended
September 30, 2008 compared to $1.8 million 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 $194,000 for the
first nine months of 2008 and were attributable to restructuring activities in
the available for sale security portfolio. Other interest income totaled $1.1
million for the first nine months of 2008, increasing $296,000 or 35.6% based on
the factors detailed above for the third quarter of 2008.
31
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
NONINTEREST EXPENSE
Noninterest expense was $3.9 million for the third quarter of 2008, increasing
$392,000 or 11.2%, from the third quarter of 2007. Salary and benefits totaled
$1.9 million for the third quarter of 2008, a decrease of $97,000 or 4.9%,
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 third quarter of
2008, an increase of $472,000 or 43.8%, compared to the third quarter of 2007.
The increase in other operating expense was attributable to valuation costs
associated with property obtained in foreclosure, which aggregated to $512,000,
coupled with an increase in FDIC insurance premiums of $61,000. Net occupancy
expense increased $17,000, or 4.0%, to $444,000 for the third quarter of 2008,
compared to $427,000 for the third quarter of 2007, primarily due to the newly
established Grosse Pointe Woods branch location, The increase was partially
offset by decreases in overhead caused by the closure of residential loan
production offices during the second quarter of 2007.
Noninterest expense was $11.2 million for the first nine months of 2008,
increasing $841,000 or 8.1%, 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.
Our deposit insurance premiums during the three and nine months ended September
30, 2008 totaled $135,000 and $274,000 respectively, compared to $74,000 and
$94,000 for the same periods in 2007. Those premiums are expected to increase in
2009 due to recent strains on the Federal Deposit Insurance Corporation deposit
insurance fund due to the cost of large bank failures and increase in the number
of troubled banks. The current rates for Federal Deposit Insurance Corporation
assessments have ranged from 5 to 43 basis points, depending on the health of
the insured institution. The Federal Deposit Insurance Corporation has proposed
increasing the current deposit insurance assessment rates uniformly for all
institutions by 7 basis points (to a range from 12 to 50 basis points) for the
first quarter of 2009. The proposed rule would also alter the way the FDIC
calculates federal deposit insurance assessment rates beginning in the second
quarter of 2009 and thereafter. The FDIC also proposed that it could increase
assessment rates in the future without formal rulemaking.
PROVISION FOR INCOME TAXES
We recorded a federal income tax benefit of $37,000 for the third quarter of
2008 compared to a federal income tax expense of $228,000 in the third quarter
of 2007. The change was primarily attributable to a lower level of pretax income
for the third quarter of 2008 compared to the third 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.
We recorded a federal income tax benefit of $22,000 for the first nine months of
2008 compared to a federal income tax expense of $448,000 in the first nine
months of 2007. The change was primarily attributable to a lower level of pretax
income for the first nine months of 2008 compared to the third quarter of 2007.
Additionally, as noted above, 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) resulted in the recorded tax
benefit.
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 September 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 September 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 $ 22,500 $ -- $ -- $ -- $ 22,500
Securities 11,920 7,878 41,604 24,335 85,737
FHLB stock -- 5,877 -- -- 5,877
Portfolio loans and
held for resale 136,435 50,233 174,684 38,190 399,542
-------- -------- -------- ------- --------
Total 170,855 63,988 216,288 62,525 $513,656
-------- -------- -------- ------- ========
Interest bearing liabilities:
NOW and money market
accounts 25,704 7,817 13,937 1,538 48,996
Savings deposits 1,284 5,565 14,554 -- 21,403
Jumbo time deposits 46,163 77,585 82,707 200 206,655
Time deposits < $100,000 8,606 18,040 13,740 756 41,142
Repurchase agreements 16,164 19,000 -- -- 35,164
FHLB advances 2,810 11,000 65,500 26,200 105,510
ESOP payable 3 -- -- -- 3
Subordinated debentures 18,557 -- -- -- 18,557
-------- -------- -------- ------- --------
Total 119,291 139,007 190,438 28,694 $477,430
-------- -------- -------- ------- ========
Interest rate sensitivity gap $ 51,564 ($75,019) $ 25,850 $33,831
Cumulative interest rate
sensitivity gap ($23,455) $ 2,395 $36,226
Interest rate sensitivity gap
ratio 1.43 0.46 1.14 2.18
Cumulative interest rate
sensitivity gap ratio 0.91 1.01 1.08
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 September 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 (9.68%)
Interest rates up 200 basis points (5.18%)
Interest rates up 100 basis points (2.45%)
Base case --
Interest rates down 100 basis points 2.40%
Interest rates down 200 basis points 2.51%
Interest rates down 300 basis points 2.39%
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 September 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
September 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 nine
months ended September 30, 2008 we recorded a provision for loan losses of $4.1
million compared to $1.2 million for the nine months ended September 30, 2007,
which reduced our results of operations for first nine months of 2008. We also
recorded net loan charge-offs of $2.7 million for the nine months ended
September 30, 2008 compared to $1.0 million for the nine months ended September
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 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
September 30, 2008, our total non-performing loans had increased to $25.5
million compared to $17.9 million at September 30, 2007. Our portfolio is
concentrated primarily in commercial real estate loans which represented 69.3%
of total loans at September 30, 2008. While construction and land development
loans represented 7.1% of our total loan portfolio at September 30, 2008, these
loans represented 42.8% 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 September 30, 2008, approximately 88.5%
of the book value of our loan
36
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
portfolio 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 services. 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 the
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 the
continued economic downturn nationally during 2008, have resulted in uncertainty
in the financial markets in general. 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, land, commercial, 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. Continued,
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.
DIFFICULT MARKET CONDITIONS AND ECONOMIC TRENDS HAVE ADVERSELY AFFECTED OUR
INDUSTRY AND OUR BUSINESS.
Dramatic declines in the housing market, with decreasing home prices and
increasing delinquencies and foreclosures, have negatively impacted the credit
performance of mortgage and construction loans and resulted in significant
writedowns of assets by many financial institutions, including us. General
downward economic trends, reduced availability of commercial credit and
increasing unemployment have negatively impacted the credit performance of
commercial and consumer credit, resulting in additional writedowns. Concerns
over the stability of the financial markets and the economy have resulted in
decreased lending by financial institutions to their customers and to each
other. This market turmoil and tightening of credit has led to increased
delinquencies, lack of customer confidence, increased market volatility and
widespread reduction in general business activity. Financial institutions have
experienced decreased access to deposits or borrowings. The resulting economic
pressure on
37
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
consumers and businesses and the lack of confidence in the financial markets has
adversely affected our business, financial condition, results of operations and
stock price.
Our ability to assess the creditworthiness of customers and to estimate the
losses inherent in our credit exposure is made more difficult and complex under
these difficult market and economic conditions. We also expect to face increased
regulation and government oversight as a result of these downward trends. This
increased government action may increase our costs and limit our ability to
pursue certain business opportunities. We also may be required to pay even
higher FDIC premiums than the recently increased level, because financial
institution failures resulting from the depressed market conditions have
depleted and may continue to deplete the FDIC insurance fund and reduce the
FDIC's ratio of reserves to insured deposits.
We do not expect these difficult conditions to improve in the near future.
A worsening of these conditions would likely exacerbate the adverse effects of
these difficult market and economic conditions on us, our customers and the
other financial institutions in our market. As a result, we may experience
increases in foreclosures, delinquencies and customer bankruptcies, as well as
more restricted access to funds.
RECENT LEGISLATIVE AND REGULATORY INITIATIVES TO ADDRESS THESE DIFFICULT MARKET
AND ECONOMIC CONDITIONS MAY NOT STABILIZE THE U.S. BANKING SYSTEM.
The recently enacted Emergency Economic Stabilization Act of 2008 ("EESA")
authorizes the U.S. Department of the Treasury ("Treasury Department") to
purchase from financial institutions and their holding companies up to $700
billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program
("TARP"). The purpose of TARP is to restore confidence and stability to the U.S.
banking system and to encourage financial institutions to increase their lending
to customers and to each other. The Treasury Department has allocated $250
billion towards the TARP Capital Purchase Program ("CPP"). Under the CPP,
Treasury will purchase debt or equity securities from participating
institutions. The TARP also will include direct purchases or guarantees of
troubled asset of financial institutions. Our Board of Directors is currently
evaluating whether or not to participate in the CPP.
EESA also increased FDIC deposit insurance on most accounts from $100,000
to $250,000. This increase is in place until the end of 2009 and is not covered
by deposit insurance premiums paid by the banking industry. In addition, the
FDIC has implemented two temporary programs to provide deposit insurance for the
full amount of most non-interest bearing transaction accounts through the end of
2009 and to guarantee certain unsecured debt of financial institutions and their
holding companies through June 2012. Financial institutions have until December
5, 2008 to opt out of these two programs. We expect to participate only in the
program that provides unlimited deposit insurance coverage through December 31,
2009 for noninterest-bearing transaction accounts (typically business checking
accounts) and certain funds swept into noninterest-bearing savings accounts.
Under that program, we will pay a 10 basis points fee (annualized) on the
balance of each covered account in excess of $250,000, while the extra deposit
insurance is in place. At September 30, 2008, we had $93.7 million in such
accounts in excess of $250,000.
The purpose of these legislative and regulatory actions is to stabilize the
volatility in the U.S. banking system. EESA, TARP and the FDIC's recent
regulatory initiatives may not have the desired effect. If the volatility in the
market and the economy continue or worsen, our business, financial condition,
results of operations, access to funds and the price of our stock could be
materially and adversely impacted.
OUR EXPENSES WILL INCREASE AS A RESULT OF INCREASES IN FDIC INSURANCE PREMIUMS
The Federal Deposit Insurance Corporation ("FDIC") imposes an assessment
against institutions for deposit insurance. This assessment is based on the risk
category of the institution and ranges from 5 to 43 basis points of the
institution's deposits. Federal law requires that the designated reserve ratio
for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of
estimated insured deposits. If this reserve ratio drops below 1.15% or the FDIC
expects it to do so within six months, the FDIC must, within 90 days, establish
and implement a plan to restore the designated reserve ratio to 1.15% of
estimated insured deposits within five years (absent extraordinary
circumstances).
38
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Recent bank failures coupled with deteriorating economic conditions have
significantly reduced the deposit insurance fund's reserve ratio. As of June 30,
2008, the designated reserve ratio was 1.01% of estimated insured deposits at
March 31, 2008. As a result of this reduced reserve ratio, on October 16, 2008,
the FDIC published a proposed rule that would restore the reserve ratios to its
required level. The proposed rule would raise the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range
from 12 to 50 basis points) for the first quarter of 2009. The proposed rule
would also alter the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009 and thereafter.
Under the proposed rule, the FDIC would first establish an institution's
initial base assessment rate. This initial base assessment rate would range,
depending on the risk category of the institution, from 10 to 45 basis points.
The FDIC would then adjust the initial base assessment (higher or lower) to
obtain the total base assessment rate. The adjustments to the initial base
assessment rate would be based upon an institution's levels of unsecured debt,
secured liabilities, and brokered deposits. The total base assessment rate would
range from 8 to 77.5 basis points of the institution's deposits. There can be no
assurance that the proposed rule will be implemented by the FDIC or implemented
in its proposed form.
These actions will significantly increase the Company's non-interest
expense in 2009 and in future years as long as the increased premiums are in
place.
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 the 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.
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 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
39
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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 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
40
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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 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
41
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS.
See Exhibit Index attached.
42
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 November 13, 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)
43
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 Participant 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
44