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, 2007
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 incorporation (IRS Employer Identification No.)
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, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
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 9, 2007
----- -------------------------------
Common Stock 3,736,579 Shares
1
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
September 30, December 31,
2007 2006
(Unaudited)
------------- ------------
(In thousands)
Assets
Cash and due from banks $ 9,922 $ 11,026
Federal funds sold 16,700 13,700
-------- --------
Cash and Cash Equivalents 26,622 24,726
Trading securities at fair value option 20,028 --
Securities available for sale, at fair value 65,000 80,916
Securities held to maturity, at amortized cost 984 1,017
FHLB stock 4,678 4,540
Residential mortgage loans held for sale 3,218 3,441
Loans
Commercial real estate 250,554 236,399
Commercial and industrial 35,676 28,393
Residential real estate 59,599 72,517
Home equity lines of credit 19,553 17,614
Consumer loans 10,382 11,666
Credit card loans 697 693
-------- --------
Total Loans 376,461 367,282
Allowance for credit losses (4,044) (3,815)
-------- --------
Net Loans 372,417 363,467
-------- --------
Net property and equipment 8,768 9,225
Accrued interest receivable 2,782 2,599
Other real estate 876 108
Goodwill 1,381 1,381
Intangible assets, net of amortization 115 145
Cash surrender value of Bank Owned Life insurance 10,385 10,163
Other assets 3,988 3,300
-------- --------
Total Assets $521,242 $505,028
======== ========
(continued)
2
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2007 2006
(Unaudited)
------------- ------------
(In thousands, except share data)
Liabilities
Deposits
Noninterest bearing demand deposits $ 37,919 $ 33,331
NOW and money market accounts 70,567 59,339
Savings deposits 15,025 10,569
Time deposits 218,685 252,617
-------- --------
Total deposits 342,196 355,856
-------- --------
Repurchase agreements and fed funds purchased 33,932 15,688
Federal Home Loan Bank advances ($11.0 million
at fair value option at 9-30-2007) 90,479 83,528
Accrued interest payable 1,180 1,257
Other liabilities 2,262 1,629
ESOP note payable 48 95
Subordinated debentures (at fair value option
at 9-30-2007) 17,196 10,310
-------- --------
Total Liabilities 487,293 468,363
-------- --------
Stockholders' Equity
Common stock -- 9,000,000 shares authorized;
3,696,886 shares issued and outstanding at
9-30-2007 and 3,829,758 at 12-31-2006 31,885 33,220
Retained earnings 3,092 4,303
Unearned employee benefit (48) (95)
Accumulated other comprehensive (loss) income (980) (763)
-------- --------
Total Stockholders' Equity 33,949 36,665
-------- --------
Total Liabilities and Stockholders' Equity $521,242 $505,028
======== ========
3
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
------ ------ ------- -------
(In thousands, except per share data)
Interest Income
Loans (including fees) $7,177 $6,959 $20,914 $19,697
Taxable securities 774 822 2,246 2,402
Tax exempt securities 350 335 1,097 934
Federal funds sold 155 105 541 166
------ ------ ------- -------
Total Interest Income 8,456 8,221 24,798 23,199
------ ------ ------- -------
Interest Expense
Deposits 3,607 3,706 10,761 9,681
Repurchase agreements and fed funds purchased 245 117 638 305
Federal Home Loan Bank advances 1,038 995 2,934 2,983
ESOP loan interest expense 1 3 5 8
Subordinated debentures 315 244 1,268 691
------ ------ ------- -------
Total Interest Expense 5,206 5,065 15,606 13,668
------ ------ ------- -------
Net Interest Income 3,250 3,156 9,192 9,531
Provision for credit losses 775 75 1,000 250
------ ------ ------- -------
Net Interest Income after Provision 2,475 3,081 8,192 9,281
------ ------ ------- -------
Noninterest Income
Fiduciary income 124 70 322 202
Deposit service charges 105 95 285 265
Realized gains (losses) on available for sale
securities (31) (3) (44) (3)
Change in fair value of assets/liabilities
carried at fair value under SFAS 159 1,005 -- 1,161 --
Mortgage banking income 494 810 1,842 2,630
Other income 138 283 832 665
------ ------ ------- -------
Total Noninterest Income 1,835 1,255 4,398 3,759
------ ------ ------- -------
Noninterest Expense
Salaries, benefits, and payroll taxes 1,981 2,186 6,027 6,357
Premises and fixed asset expense 427 473 1,344 1,386
Other operating expense 1,077 951 2,980 2,924
------ ------ ------- -------
Total Noninterest Expense 3,485 3,610 10,351 10,667
------ ------ ------- -------
Income Before Taxes 825 726 2,239 2,373
Provision for income taxes 228 116 448 429
------ ------ ------- -------
Net Income $ 597 $ 610 $ 1,791 $ 1,944
====== ====== ======= =======
(continued)
4
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Per share data*:
Basic earnings $0.16 $0.15 $0.46 $0.48
Diluted earnings $0.16 $0.15 $0.46 $0.48
===== ===== ===== =====
Cash Dividends $0.06 $0.06 $0.18 $0.18
===== ===== ===== =====
* Per share data has been retroactively adjusted for 2007 stock dividend.
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,
------------------ -----------------
2007 2006 2007 2006
------ ---- ------ ------
(In thousands)
Net Income as Reported $ 597 $610 $1,791 $1,944
Other Comprehensive Income, Net of Tax
Change in unrealized losses on securities
Available for sale 434 (97) (217) (225)
------ ---- ------ ------
Comprehensive Income $1,031 $513 $1,574 $1,719
====== ==== ====== ======
6
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended
September 30,
-------------------
2007 2006
-------- --------
(In thousands)
Operating Activities
Net income $ 1,791 $ 1,944
Adjustments to reconcile net income to net cash flow
from operating activities:
Net amortization of security premium 161 144
Net gain on sales and call of securities 44 3
Net gain on financial instruments at fair value (1,161) --
Provision for credit losses 1,000 250
Depreciation expense 532 531
Deferred income tax expense 272 216
SFAS 123R option expense 22 17
ESOP compensation expense 47 44
(Increase) decrease in accrued interest receivable (183) (496)
(Increase) decrease in other assets (2,118) (452)
Increase (decrease) in accrued interest payable (77) 719
Increase in other liabilities 633 375
Increase in loans held for sale 223 1,558
-------- --------
Net Cash Provided by Operating Activities 1,186 4,853
Investing Activities
Maturities, calls, sales and prepayments of securities
available for sale 45,591 13,072
Purchase of securities available for sale (30,338) (26,347)
Maturities, calls, sales and prepayment of trading
securities 6,329 --
Transfer to trading securities (26,642) --
Maturities, calls, and prepayments of held to maturity
securities 29 55
Purchases of held to maturity securities (138) (299)
Increase in loans (9,950) (36,072)
Purchases of property and equipment (75) (877)
Proceeds from sale of property and equipment 60 --
-------- --------
Net Cash Used in Investing Activities (15,134) (50,468)
Financing Activities
Net increase in demand and savings deposits 20,272 9,219
Net (decrease) increase in time deposits (33,932) 41,837
Net increase in borrowings 18,243 8,648
Issuance of subordinated debentures 18,557 --
Redemption of subordinated debentures (10,310) --
FHLB advances 23,000 35,700
Repayment of FHLB advances (16,000) (41,700)
Payment of ESOP debt (47) (44)
Stock option exercise/award 131 235
Cash dividends paid (703) (687)
Repurchase of common stock (3,367) (175)
-------- --------
Net Cash Provided (Used) by Financing Activities 15,844 53,033
-------- --------
Increase in Cash and Cash Equivalents 1,896 7,418
Cash and Cash Equivalents at the Beginning of the Year 24,726 11,000
-------- --------
Cash and Cash Equivalents at the End of the Period $ 26,622 $ 18,418
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 15,683 $ 12,949
Federal Taxes Paid $ 175 $ 185
Transfers from loans to other real estate owned $ 768 $ 162
======== ========
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, 2007 and December 31, 2006, and Consolidated Statements of Income and
Comprehensive Income for the nine month periods ended September 30, 2007
and 2006, and Consolidated Statements of Cash Flow for the nine months
ended September 30, 2007 and 2006. 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, 2006.
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 Capital Trust II (Trust II), a
statutory trust formed by the Corporation for the purpose of issuing trust
preferred securities, issued $18,000,000 aggregate liquidation amount of
cumulative trust preferred securities. The Trust II securities bear a fixed
distribution rate of 6.71% per annum through March 6, 2017, and thereafter
will bear a floating distribution rate equal to 90-day LIBOR plus 1.65%.
The Trust II securities are redeemable at the Corporation's option, in
whole or in part, at par beginning March 6, 2017, and if not sooner
redeemed, mature on March 6, 2037. The Trust II securities were sold in a
private transaction exempt from registration under the Securities Act of
1933, as amended. The gross proceeds of the offering were used to purchase
junior subordinated debentures from the Corporation totaling $18,557,000.
On June 29, 2007, the Corporation redeemed $10.0 million of the
subordinated debentures issued to Community Central Capital Trust I (and as
a result the Trust I preferred securities).
The trust preferred securities may constitute up to 25% of tier I capital.
Any amount in excess of this limit may be included as tier 2 capital. At
September 30, 2007, $11.1 million of the the trust preferred issuance was
included in the Corporation's tier 1 capital, with the remaining $6.9
million included in tier 2 capital.
4. In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-based
Payment, (SFAS 123R), which requires entities to measure the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions).
The cost is recognized as an expense over the period during which the
employee is required to provide service in exchange for the award, which is
usually the vesting period. As required by SFAS 123R, as with SFAS 123, the
Corporation is required to estimate the fair value of all stock
8
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
options on each grant date, using an appropriate valuation approach such as
the Black-Scholes option pricing model. The provisions of this statement
were effective for the Corporation beginning January 1, 2006.
The Corporation did not issue options during the nine months ended
September 30, 2007 or 2006. The total amount of options outstanding at
September 30, 2007 was 313,313 shares at a weighted average exercise price
of $9.03 per share. During the nine months ended September 30, 2007, 15,608
options were exercised at an exercise price of $6.79 per share. The
Corporation recognized compensation expense, using the Black Scholes
option-pricing model, of $7,000 and $22,000 for the third quarter and nine
months ended September 30, 2007, respectively for the options vesting in
2007 based on the fair market value of the grant date. The net income and
earnings per share for the third quarter and nine months ended September
30, 2006, on a pro forma basis, are disclosed for comparison below.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
----- ----- ------ ------
(in thousands, except per share data)
Net income, as reported $ 597 $ 610 $1,791 $1,944
Add: Stock-based employee compensation expense,
net of related tax effects, included in reported
net income (7) (6) (22) (18)
Deduct: Total stock-based employee and director
compensation expense under fair value based
methods of awards, net of related tax effects 7 6 22 18
----- ----- ------ ------
Pro forma net income $ 597 $ 610 $1,791 $1,944
===== ===== ====== ======
Earnings per share
Basic $0.16 $0.15 $ 0.46 $ 0.48
Diluted $0.16 $0.15 $ 0.46 $ 0.48
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option pricing model.
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 provides for an entity to adopt early and elect the fair
value option for existing eligible items as of the beginning of a fiscal
year that begins on or before November 15, 2007. The entity must also adopt
all the requirements under SFAS 157, the Fair Value Measurement. As a
result of the Corporation's adoptions, certain financial instruments were
valued at a fair value classification. The adoption of the fair value
standards had a net positive after tax impact of approximately $150,000 on
first quarter earnings. The cumulative reduction to opening retained
earnings from adopting these standards was approximately $420,000.
Partially offsetting the total net charge to retained earnings was the
increase in capital from the reversal of other comprehensive income from
the transfer of the unrealized losses on available for sale securities
which had an affect of an increase in capital of $295,000. Therefore, the
total net after tax decrease in stockholder's equity was $125,000 from the
early adoption of SFAS 159 and concurrent adoption of SFAS 157 as of
January 1, 2007.
6. New Accounting Pronouncements: We adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN
48"), on January 1, 2007. The adoption of FIN 48 had no affect on the
financial statements. Should the accrual of any interest or penalties
relative to unrecognized tax benefits be
9
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
necessary, or the impact of the new Michigan Business Tax, we will record
such accruals in our income tax accounts; no such accruals exist as of
September 30, 2007, nor were deemed necessary.
The following table shows the balance sheet effect of the early adoption of SFAS
159.
Balance Sheet Net Balance Sheet
1/1/07 prior adjustment 1/1/07 after
Description to adoption upon adoption after adoption of FVO
----------- ------------- ------------- ---------------------
(in thousands of dollars)
Securities 27,024 (447) 26,577
Federal Home Loan Bank Advances (16,000) 247 (15,753)
Subordinated Debentures (a) (10,055) (437) (10,492)
------- ---- -------
Pretax cumulative effect of SFAS 159 (637)
Increase in deferred tax asset 217
----
Cumulative effect of adoption of SFAS 159
(charged to retained earnings) 420
====
(a) The carrying amount includes $255,000 in unamortized deferred issuance
costs on the subordinated debenture from the issuance of the Community
Central Capital Trust I. As a result of the early adoption of SFAS 159 the
difference between the carrying amount and the fair value was removed and
included in the cumulative effect adjustment above.
Management has elected the fair value option based on the following reasons for
each of the eligible items or group of similar eligible items.
Investment Securities and FHLB Advances:
The election of SFAS 159 and SFAS 157 treatment for existing eligible investment
securities was based on multiple factors which included the desire to utilize
the Federal Home Loan Bank advance portfolio to offset volatility with the
investment portfolio. Approximately $27.0 million of investment securities were
selected for early adoption of SFAS 159 based primarily on the relatively short
overall duration in the selected instruments. The overall effective duration of
the instruments was 1.8 years based on current market interest rates. Many of
the instruments have early call provisions, which based on current interest rate
expectations have a high degree of probability to be called. Some instruments
have been pre-refunded with certainty of maturity expected. The investments
selected are primarily comprised of agency debentures and short callable bank
qualified tax exempt municipal bonds. The selected securities will be
categorized under trading portfolio status. Management believes that it has more
options of balance sheet management under the fair value option, including the
management of volatility caused by the embedded options within these
instruments. The short overall duration of the selected instruments, coupled
with the utilization of FHLB advances as an attempt to hedge the risk, should
mitigate large swings in fair values that will be recorded in the income
statement as part of adoption of SFAS 159 and SFAS 157. Management cannot
predict future interest rates and is reliant on forecasts and models to make
decisions regarding interest rate and fair value risk.
The election of SFAS 159 treatment for the selected FHLB advances was based on
management's choice to provide a natural hedge against the securities selected
under SFAS 159. The FHLB advances were selected for the fair value option based
on the maturity ranges within the FHLB portfolio of advances. All maturities
within 18 months from the early adoption date of January 1, 2007 were selected
regardless of the instruments' interest rates. The selected FHLB advances had a
net unrealized gain position as of January 1, 2007 and March 31, 2007 and were
selected solely as a natural balance sheet hedge for the investment portfolio
elected under SFAS 159. The decrease in the unrealized loss position of the
selected investments and the income recognized under SFAS 159 for the first
three
10
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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. 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 any FHLB advances as they represent interest rates
which are lower than current equivalent market rates. It is the intent of
management for the foreseeable future to utilize fair value option on selected
investment securities, or like kind dollars on disposal.
Subordinated Debentures:
Management elected the fair value option for both its subordinated debentures.
Management considers the subordinated debentures a critical component for future
growth and wishes to utilize interest rate swaps to hedge the risk of this
longer term liability and critical form of regulatory capital. Under SFAS 159,
hedge accounting has become less complex and therefore available to a community
bank with limited resources. The subordinated debenture for $10.3 million that
was issued in June 2002 and maturing June 2032, callable June 30, 2007, was an
eligible instrument for the early adoption of the fair value option as of
January 1, 2007. The pretax accumulated adjustment from the recognition of fair
value on this instrument was $437,000. The carrying amount of the instrument
included $255,000 in unamortized deferred issuance costs on the subordinated
debenture which is included in the aforementioned pretax adjustment. Management
has elected the fair value option on the subordinated debenture which was issued
on February 13, 2007 for $18.6 million. Additionally, an interest rate swap for
a like kind notional value was secured 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.
Any reductions in overall carrying costs, aside from changes in fair value,
occurring on any financial asset or liability measured under SFAS 157 and SFAS
159 during the first nine months of 2007 was the result of normal pay downs,
maturities and calls of the various financial instruments. 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 the first nine months of 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.
In the third quarter the net change in the fair value of financial assets and
liabilities as measured under the fair value option under Statement of Financial
Accounting Standards (SFAS) 159, totaled $1.0 million on a pretax basis or
$663,000 after tax. This increase was primarily attributable to a net unrealized
increase in fair value on the Corporation's subordinated debenture which was
issued for $18 million in February of this year and was an instrument chosen for
this accounting treatment as part of the early adoption of this accounting
standard. The dramatic widening market credit spreads experienced in the third
quarter for trust preferred security issuances in the marketplace increased the
relative fair value of this financial liability. The Corporation hedges and
protects itself from changes in interest rates with an off balance sheet
interest rate swap also accounted for under SFAS 159. 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.
11
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The table below contains the fair value measurement at September 30, 2007 using
the identified valuations. Additionally, the changes in fair value for the nine
month period ended September 30, 2007 for items measured at fair value pursuant
to election of the fair value option.
Changes in fair value for
nine months ended
September 30, 2007 measured
At fair value pursuant to
Fair Value Measurement at Election of the fair value
September 30, 2007 Option
-------------------------------- ---------------------------
Fair Value Significant Other Other Gains or Losses
Measurements Observable Inputs in noninterest income
Description 09/30/2007 (Level 2) pretax income
----------- ------------ ----------------- ---------------------------
(in thousands of dollars)
Trading Securities 20,028 20,028 125
Interest rate swap hedging securities (201) (201) (201)
Federal Home Loan Bank Advances 10,951 10,951 (199)
Subordinated Debentures 17,196 17,196 1,361
Interest rate swap hedging subordinated debentures (108) (108) (108)
Redeemed subordinated debentures -- -- 183
------ ------ -----
1,161
=====
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.
The Corporation is not aware of any discernable change in instrument specific
credit risk with no change reflected in earnings related to such risk.
12
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, 2007 and December 31, 2006 and
the results of operations for the three and nine months ended September 30, 2007
and 2006. 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:
expected cost savings and synergies from our acquisition activities might not be
realized within the expected time frames, and costs or difficulties related to
integration matters might be greater than expected; expenses associated with the
implementation of our trust and wealth management services might be greater than
expected, whether due to a possible need to hire more employees than anticipated
or other costs incurred in excess of budgeted amounts; the credit risks of
lending activities, including changes in the level and direction of loan
delinquencies and write-offs and changes in estimates of the adequacy of the
allowance for loan losses; competitive pressures among depository institutions;
interest rate movements and their impact on customer behavior and net interest
margin; the impact of repricing and competitor's pricing initiatives on loan and
deposit products; the ability to adapt successfully to technological changes to
meet customers' needs and development in the market place; our ability to access
cost-effective funding; changes in financial markets; changes in economic
conditions in general and particularly as related to the automotive and related
industries in the Detroit metropolitan area; new legislation or regulatory
changes, including but not limited to changes in federal and/or state tax laws
or interpretations thereof by taxing authorities; changes in accounting
principles, policies or guidelines; and our future acquisitions of other
depository institutions or lines of business.
EXECUTIVE SUMMARY
Community Central Bank Corporation is the holding company for Community Central
Bank (the "Bank") in Mount Clemens, Michigan. The Bank opened for business in
October 1996 and serves businesses and consumers across Macomb, Oakland, St.
Clair and Wayne counties with a full range of lending, deposit, trust, wealth
management, and Internet banking services. The Bank operates three full service
facilities, in Mount Clemens, Rochester Hills and Grosse Pointe, Michigan.
Community Central Mortgage Company, LLC, a subsidiary of the Corporation and
Bank, operates locations servicing the Detroit metropolitan area, and northwest
Indiana. River Place Trust and Community Central Wealth Management are divisions
of Community Central Bank. Community Central Insurance Agency, LLC is a wholly
owned subsidiary of Community Central Bank. The Corporation's common shares
trade on The NASDAQ Global Market under the symbol "CCBD."
Our results of operations depend largely on net interest income. Net interest
income is the difference in interest income the Corporation earns on
interest-earning assets, which comprise primarily commercial and residential
real estate loans, and to a lesser extent commercial business and consumer
loans, and the interest the Corporation pays on our interest-bearing
liabilities, which are primarily deposits and borrowings. Management strives to
match the repricing characteristics of the interest earning assets and interest
bearing liabilities to protect net interest income from changes in market
interest rates and changes in the shape of the yield curve.
The results of our operations may also be affected by local and general economic
conditions. The largest geographic segment of our customer base is in Macomb
County, Michigan. The economic base of the County continues to diversify from
the automotive service sector although the impact of the restructuring of the
American automobile companies has a direct impact on southeastern Michigan. A
slowdown in the local and statewide economy has
13
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
produced increased financial strain on segments of the Bank's customer base. The
Bank has experienced increased delinquency levels in its loan portfolio which
has been more pronounced in the residential real estate portfolio and home
equity loans. Further downturns in the local economy may affect the demand for
commercial loans and related small to medium business related products. This
could have a significant impact on how the Corporation deploys earning assets.
The competitive environment among other financial institutions and financial
service providers and the Bank in the Macomb, Oakland, Wayne and St. Clair
counties of Michigan may affect the pricing levels of various deposit products.
The impact of competitive rates on deposit products may increase the relative
cost of funds for the Corporation and thus negatively impact net interest
income.
The Corporation continues to see competitive deposit rates offered from local
financial institutions within the geographic proximity of the Bank which could
have the effect of increasing the costs of funds to a level higher than
management projects. The Corporation continues to utilize wholesale forms of
funding earning assets through the FHLB and brokered certificates of deposit to
balance both interest rate risk and the overall cost of funds. Brokered and
internet certificates of deposit are based on a nationwide interest rate
structure, typically at what is considered to be a premium interest rate. The
local competition for certificates of deposit products has intensified and the
Bank has found this type of wholesale funding to often effectively compete with
the rates offered for similar term retail certificates of deposit products of
local community and regional banks.
The Corporation has continued the strategy to diversify revenue from credit
related sources through the growth in the Trust and Wealth Management division,
which ended the quarter at $172 million in assets under management, up 9.8% from
the prior year. The Corporation continues to build this component of the revenue
base. Fiduciary income increased 77.1%, coupled with fees and commission income
from wealth management which increased 371.4%, totaled $190,000 for the third
quarter of 2007, compared with $84,000 the third quarter last year.
In the third quarter we made a provision for loan losses totaling $775,000,
which was an increase of $700,000 from the third quarter last year. The increase
was due in part to the declines in real estate collateral values and
management's review of risks inherent in the loan portfolio. Nonperforming
assets, including other real estate owned, have remained relatively stable,
ending the quarter at 1.05% of total assets and just below last quarter's 1.06%.
This was a slight increase compared to 0.96% at December 31, 2006. The
Corporation continues to carefully monitor the loan portfolio in the difficult
economic environment that has produced a depressed real estate market in the
region. Net income was positively affected by the changes in fair value on
certain financial instruments accounted for under the fair value option
Statement of Accounting Standards 159 (SFAS 159). This change had a significant
impact on our profit for the quarter and offset the higher loan loss provision.
Total loans increased $9.2 million or 2.5% from the beginning of the year. The
slower growth was reflective of a change in loan mix, which is consistent with
our strategic plan. Total commercial loans increased $21.4 million during the
first nine month of 2007, with residential and other retail portfolios
decreasing by $12.2 million through runoff and sales. The Corporation continues
to focus on generation of core deposits. Noninterest bearing demand deposits
increased $4.6 million or 13.8% compared to December 31, 2006, with much of the
growth attributable to the Grosse Pointe Farms branch which opened in June of
2006. Total deposits of $342.2 million decreased $13.7 million during the first
nine months of 2007. The decrease was substantially due to a $29.6 million
decrease in jumbo time deposits. The decrease in jumbo time deposits was due to
maturities of higher cost municipal and brokered deposits. Partially offsetting
the decrease in jumbo time deposits was an increase of other deposits of $15.9
million representing noninterest bearing demand, money market and savings
accounts.
In early June of 2006, the Bank opened a full service branch located in Grosse
Pointe Farms, Michigan. Grosse Pointe Farms, Michigan is an upscale, suburban
community on the shores of Lake St. Clair in southeastern Michigan. The Bank has
appointed a regional President for the Grosse Pointe region who is a veteran
banker who has ties to the local community. The branch facility is staffed with
a branch manager and customer service representatives, as well as a commercial
loan officer. The upscale demographics of the surrounding area appear to be well
suited for establishing new relationships for trust and wealth management.
14
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
ASSETS
At September 30, 2007, the Corporation's total assets were $521.2 million which
was an increase of $16. 2 million, or 3.2% from December 31, 2006. Total loans
of $376.5 million increased $9.2 million, or 2.5% for the first nine months of
2007. Increases in commercial real estate loans, commercial and industrial loans
and home equity loans of $14.2 million, $7.2 million and $1.9 million,
respectively, were offset by decreases in the residential mortgage portfolio of
$12.9 million and the consumer portfolio of $1.3 million. The changes coincide
with the Corporation's strategic plan to change the relative loan mix by
reducing the portion of lower yielding residential mortgages and increasing the
relative mix of higher yielding commercial loans. Additionally, management
wishes to reduce those loan portfolios it believes are currently more sensitive
to local economic conditions, and thereby avoid possible credit quality issues
related to the portfolios. At September 30, 2007, the largest component of the
total loan portfolio was commercial real estate which was $250.6 million, or
66.5% of the total loan portfolio. At September 30, 2007, commercial and
industrial loans were $35.7 million, or 9.5% of the total loan portfolio. The
residential mortgage portfolio was $59.6 million, or 15.8% of the total
portfolio.
Most of the residential mortgage portfolio comprises adjustable rate mortgages,
which represented $42.0 million, or 70.5%, of the total residential portfolio.
Those residential mortgage loans the Corporation considered to be held for
investment in the residential portfolio comprise both banking relationships and
other attributes deemed to match with the Corporation's interest rate risk
profile. Home equity lines of credit ("HELOC") totaled $19.6 million at
September 30, 2007, an increase of $1.9 million from December 31, 2006. This
portfolio product is tied to the Wall Street Journal prime interest rate. These
loans are fully secured by real estate and are generally originated with loan to
value ratios (including prior liens) up to 95% of the appraised value of the
real estate. The consumer portfolio ended September 30, 2007 at $10.4 million, a
decrease of $1.3 million, primarily from pay downs in the portfolio. The largest
portion of the consumer loan portfolio comprises loans for marine craft. The
Corporation's geographic proximity to Lake St. Clair and the lending experience
in this area have been contributors to this segment of the portfolio. In 2005,
the Corporation offered less competitive interest rates on marine craft loans to
reduce exposure in the area. This change contributed to the decline in the
overall consumer portfolio. At September 30, 2007, loans for marine craft
comprised approximately $8.9 million, or 85.6% of the consumer portfolio and
2.4% of total loans. Credit card loans totaled $697,000 at September 30, 2007.
The Corporation continues to book credit card loans as a customer accommodation
and does not actively market this product.
Additionally, the Corporation had approximately $84.4 million in outstanding
loans at September 30, 2007, to borrowers in the real estate rental and
properties management industries, representing approximately 33.7% of the total
commercial real estate portfolio. At September 30, 2007, this particular
concentration of loans had no individual loans classified in nonaccrual status.
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
2007 of total loans 2006 of total loans Change Change %
------------- --------------- ------------ -------------- --------- --------
(in thousands, except percentages)
Loans held for sale:
Residential real estate $ 3,218 $ 3,441 ($223) (6.5%)
======== ======== ======== ===== ======== =====
Loans held in the portfolio:
Commercial real estate $250,554 66.5% $236,399 64.4% $ 14,155 6.0%
Commercial and industrial 35,676 9.5 28,393 7.7 7,283 25.7
Residential real estate 59,599 15.8 72,517 19.7 (12,918) (17.8)
Home equity lines 19,553 5.2 17,614 4.8 1,939 11.0
Consumer loans 10,382 2.8 11,666 3.2 (1,284) (11.0)
Credit cards 697 0.2 693 0.2 4 0.6
-------- -------- -------- ----- -------- -----
$376,461 100.0% $367,282 100.0% $ 9,179 2.5%
======== ======== ======== ===== ======== =====
15
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Total securities available for sale decreased $15.9 million from December 31,
2006 to $65.0 million at September 30, 2007. The decrease was partially
attributable to the adoption of Financial Accounting Standards Fair Value Option
SFAS 159. The Corporation reclassified a total of $27.0 million of available for
sale securities as trading securities in the first quarter of 2007 under SFAS
159 and the classification of trading portfolio. This represented $20.0 million
as of September 30, 2007. This decrease in the available for sale portfolio was
partially offset by the addition of mortgage backed securities from the
securitization of $8.2 million in mortgages comprising 15 year fixed rate loans.
The average effective duration of the trading portfolio as of September 30, 2007
was approximately 2.13 years and an average life of 2.36 years, with a weighted
average coupon rate of 4.99%. Management decided to classify the securities
under SFAS 159 because of the characteristics of the instruments, which included
the optionality and the ability of the Corporation to hedge the instruments
utilizing above market value Federal Home Loan Bank advances. Furthermore, in
adopting SFAS 159, the Corporation will be able to, in the future, utilize the
fair value option on off balance sheet hedges and account for the hedges in a
manner which is less complex than was previously available under GAAP. Other
reasons influencing management's decision to classify the selected instruments
under SFAS 159 include overall ALCO strategies and the shape of the treasury
yield curve and management expectations on short term interest rates. The
trading portfolio is primarily comprised of $16.3 million of U.S. Agency
debentures with an effective duration of 2.0 years and $3.7 million in
collateralized mortgage obligations (CMOs) and mortgage backed securities (MBS)
with an effective duration of 2.7 years. All of the CMOs held in the trading
portfolio pass the FFIEC stress test with relatively short average lives under
differing rate scenarios. During the third quarter, the Corporation sold the
municipal bond portfolio segment of this portfolio to reduce its exposure to
alternative minimum tax considerations.
In May 2007, the Corporation acquired an interest rate swap to better hedge the
fair value of the portfolio. The notional value of the interest rate swap was
$18 million for 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. The interest rate swap is accounted for under the Fair
Value Option for Financial Assets and Liabilities (SFAS 159) and therefore no
formal hedge accounting under SFAS 133 is applicable. The Corporation is
currently reviewing the structure of the hedge and is considering restructuring
a portion of the trading portfolio to better provide protection in a falling
short term rate environment and provide protection to a lesser extent in a
rising rate environment.
At September 30, 2007, the available for sale portfolio had net unrealized
losses of $1.5 million or approximately 2.2% of the aggregate portfolio. At
December 31, 2006, the net unrealized losses in the available for sale portfolio
was $1.2 million. As of September 30, 2007, the available for sale portfolio
comprised $3.6 million in US agency debentures, $29.2 million in bank qualified
tax exempt municipal bonds, $31.7 million in US agency mortgage backed
securities, including collateralized mortgage obligations and $483,000 in a CRA
fund invested in mortgage backed obligations. The Corporation has the intent and
ability to hold the securities classified under available for sale for the
foreseeable future and declines in the fair value is primarily due to increased
market interest rates.
16
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
A summary of nonperforming assets is as follows:
September 30, December 31,
2007 2006
------------- ------------
(Dollars in thousands)
Nonaccrual loans:
Commercial real estate $3,244 $2,711
Commercial and industrial 121 646
Residential real estate 642 --
Home equity lines 132 --
Consumer loans 255 --
Credit cards -- --
------ ------
Total nonaccrual loans 4,394 3,357
Accruing loans delinquent more than 90 days:
Commercial real estate $ -- $ --
Commercial and industrial -- --
Residential real estate 55 876
Home equity lines 21 336
Consumer loans 145 160
Credit cards -- 1
------ ------
Total accruing loans delinquent more than 90 days 221 1,373
------ ------
Total nonperforming loans 4,615 4,730
Other real estate owned
Commercial real estate 319 --
Residential real estate 557 108
------ ------
Total other real estate owned 876 108
------ ------
Total nonperforming assets $5,491 $4,838
====== ======
Total nonperforming loans as a
percentage of total loans 1.23% 1.29%
====== ======
Total nonperforming assets as a percentage
of total assets 1.05% 0.96%
====== ======
At September 30, 2007, nonperforming loans, which represents nonaccruing loans
and those loans past due 90 days or more and still accruing interest, totaled
$4.6 million compared to $4.7 million at December 31, 2006, a decrease of
$115,000. Nonaccruing loans of $4.4 million increased $1.0 million from December
31, 2006. The increase in nonaccrual loans was partially attributable to the
movement of loans previously classified as accruing loans delinquent more than
90 days to nonaccrual loans in the loan categories of residential mortgages
comprising $642,000, home equity lines of credit totaling $132,000 and other
consumer loans of $255,000. These consumer based loans were placed into
nonaccrual status based on regular evaluations of delinquent loans. A
determination was made of the collectability based on the borrower's ability to
repay and real estate values, which have been declining in the Bank's geographic
lending area as well as other collateral determinations.
17
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,
2007 2006
----------------- ------------
(Dollars in thousands)
Balance as beginning of the period $3,815 $3,580
Charge-offs:
Commercial real estate 201 --
Commercial and industrial 110 248
Residential real estate 106 21
Home equity lines 131 21
Consumer loans 241 40
Credit cards 27 13
------ ------
Total charge-offs $816 $343
------ ------
Recoveries:
Commercial real estate -- --
Commercial and industrial 8 14
Residential real estate -- 8
Home equity lines -- --
Consumer loans 33 5
Credit cards 4 1
------ ------
Total recoveries $45 $28
------ ------
Net charge-offs (recoveries) 771 315
------ ------
Provision charged to earnings 1,000 550
------ ------
Balance at end of the period $4,044 $3,815
====== ======
Net charge-offs during the period to
to average loans outstanding during the period on
an annualized basis 0.28% 0.09%
Allowance as a percentage of total portfolio loans 1.07% 1.04%
The allowance for loan losses as a percentage of total loans remained relatively
unchanged at September 30, 2007, compared to December 31, 2006. 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. The increased
provision for the nine months ended September 30, 2007, over the full year 2006
was due in part to estimated declines in real estate collateral values and is
based upon management's review of the risks inherent in the loan portfolio and
the level of our allowance for loan losses.
18
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
LIABILITIES
Total deposits of $342.2 million decreased $13.7 million during the first nine
months of 2007. The decrease was substantially due to a $29.6 million decrease
in time deposits $100,000 and over. The decrease in time deposits was due to
maturities of higher cost municipal time deposits and brokered time deposits.
Partially offsetting the decrease in time deposits was an increase of $20.3
million from December 31, 2006, in deposits, representing checking, NOW, money
market and savings accounts. Noninterest bearing demand deposits increased $4.6
million for the first nine months of 2007 primarily due to increased growth from
the Grosse Pointe branch. NOW accounts decreased $1.3 million during the same
time period from seasonal fluctuations. Money market savings deposits totaled
$57.8 million and increased $12.6 million. The growth in money market accounts
was attributable to a new indexed money market product with a competitive
interest rate tied to the six month Treasury bill. Total savings accounts
increased $4.4 million due to short term deposit needs of the customer. Total
time deposits under $100,000 decreased $4.3 million. The competitive rate
environment amongst local financial institutions has made the Corporation decide
in some cases not to raise the interest rate on the deposit product at the same
frequency or level to match or exceed interest rates given by other local
financial institutions. The Corporation continues to see competitive deposit
rates offered by local financial institutions within the geographic proximity of
the Bank, which could have the affect of increasing the cost of funds to a level
higher than management projects. 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 Bank 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
2007 of total deposits 2006 of total deposits Change Change %
------------- ----------------- ------------ ----------------- -------- --------
(Dollars in Thousands)
Noninterest bearing demand $ 37,919 11.1% $ 33,331 9.4% $ 4,588 13.8%
NOW accounts 12,731 3.7 14,084 3.9 (1,353) (9.6)
Money market accounts 57,836 16.9 45,255 12.7 12,581 27.8
Savings deposits 15,025 4.4 10,569 3.0 4,456 42.2
Time deposits under $100,000 41,322 12.1 45,608 12.8 (4,286) (9.4)
Time deposits $100,000 and
over 177,363 51.8 207,009 58.2 (29,646) (14.3)
-------- ------ -------- ----- -------- -----
Total deposits 342,196 100.00% 355,856 100.0% (13,660) (3.8%)
======== ====== ======== ===== ======== =====
19
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Short term borrowings at September 30, 2007 consisted of short term FHLB
advances of $15.0 million and securities sold with an agreement to repurchase
them the following day of $14.9 million. Following are details of our short term
borrowings for the dates indicated:
September 30, December 31,
2007 2006
------------- ------------
(Dollars in thousands)
Amount outstanding at end of period
Short-term repurchase agreements $14,932 $15,688
Short-term FHLB advances $14,951 $14,000
Weighted average interest rate on ending balance
Short-term repurchase agreements 3.15% 3.15%
Short-term FHLB advances 4.29% 3.92%
Maximum amount outstanding at any month end
during the period
Short-term repurchase agreements $14,932 $21,832
Short-term FHLB advances $21,000 $26,700
During the first quarter of 2007, the Corporation borrowed $19 million in a
wholesale structured repurchase agreement with an interest rate tied to the
three month Libor rate, less 250 basis points adjusted quarterly, until March 3,
2008 when the borrowing changes to a fixed interest rate of 4.95% until March 2,
2017. The repurchase agreement is callable quarterly after March 2, 2008.
In June 2001, the Corporation started to borrow long-term advances from the FHLB
to fund fixed rate instruments and to minimize the interest rate risk associated
with certain fixed rate mortgage instruments and investment securities. These
advances are secured under a blanket security agreement by first mortgage loans
and the pledging of certain securities. Long-term advances comprised 29 advances
with maturities from July 2008 to June 2016.
FHLB advances outstanding at September 30, 2007 were as follows:
Fair Value Face Value Average rate
at end of period of obligation at end of period
---------------- ------------- ----------------
(Dollars in thousands)
Short-term FHLB advances $14,951 $15,000 4.29%
Long-term FHLB advances 75,528 75,528 4.74%
------- ------- ----
$90,479 $90,528 4.66%
The Corporation has elected early adoption of SFAS 159 for all FHLB advances
maturing in 18 months from January 1, 2007, which represented $11 million in
total. At September 30, 2007, the fair value of the selected advances was $11.0
million. The overall weighted yield of these FHLB advances was 3.71% at
September 30, 2007. Management believes that the selected instruments will
partially serve as a hedge for those securities recorded as trading from the
transfer from available for sale under SFAS 159.
20
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 in deposits, and to take advantage of other
investment opportunities. Funding of loan requests, providing for possible
deposit outflows, and managing interest rate risk require continuous analysis to
match the maturities 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 $63.3 million in available
unsecured federal funds borrowing facilities, and a $150.0 million secured line
of credit with the FHLB. Large deposit balances which might fluctuate in
response to interest rate changes are closely monitored. These deposits consist
mainly of jumbo time certificates of deposit. We anticipate that we will have
sufficient funds available to meet our future commitments. As of September 30,
2007, unused commitments comprised $87.9 million. The Bank has $154.3 million in
time deposits coming due within the next twelve months from September 30, 2007,
which includes brokered, internet and municipal time deposits. At September 30,
2007, the Bank had $106.5 million in brokered certificates of deposit, of which
$57.4 million is due within one year or less. Additionally, at September 30,
2007, municipal time deposits and internet time deposits were $28.5 million and
$1.8 million, respectively. Municipal time deposits typically have maturities
less than three months. $677,000 of internet certificates of deposit mature in
one year or less.
The largest uses and sources of cash and cash equivalents for the Corporation
for the nine months ended September 30, 2007, as noted in the Consolidated
Statement of Cash Flow, were centered primarily on the uses of cash in investing
activities. The uses of cash in investing activities of $15.1 million were
largely due to the increase in available for sale securities, with the largest
portion comprised of securitized mortgage loans. The largest segments of the net
change in net cash provided by financing activities of $15.8 million, comprised
of increases in demand and savings accounts of $20.3 million, other borrowing
from wholesale repurchase agreements of $18.2 million, and the issuance of
subordinated debentures of $18.6 million. Offsetting these increases in
financing activities were decreases in time deposits of $33.9 million, and a
decrease of $10.3 million from the redemption of the subordinated debenture due
June 30, 2007. The net cash provided in operating activities was $1.2 million,
which was largely attributable to net income of $1.8 million and in increase in
the provision for loan losses of $1 million offset by an increase in other real
estate owned of $768,000 and other assets of $1.3 million. Total cash and cash
equivalents at the end of September 30, 2007 was $26.6 million, which was a
increase of $8.2 million from December 31, 2006.
On August 15, 2007, the Corporation's Board of Directors declared the
Corporation's twenty-second consecutive quarterly cash dividend of $0.06 per
common share, payable October 1, 2007, to shareholders of record September 4,
2007.
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
2007 2006 for Capital
--------------- --------------- Adequacy Ratio to be
Capital Ratio Capital Ratio Purposes "Well Capitalized"
------- ----- ------- ----- ------------- ------------------
Total capital to risk-weighted assets
Consolidated $55,302 13.42% $49,693 12.65% 8% NA
Bank only 48,272 11.73% 47,486 12.11% 8% 10%
Tier I capital to risk-weighted assets
Consolidated $44,344 10.76% $45,878 11.68% 4% NA
Bank only 44,228 10.75% 43,677 11.14% 4% 6%
Tier I capital to average assets
Consolidated $44,344 8.65% $45,878 9.01% 4% NA
Bank only 44,228 8.66% 43,671 8.60% 4% 5%
21
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
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. Management currently has no plans to
raise additional capital.
The following table shows the changes in stockholders' equity for the three
months ended September 30, 2007:
Unearned Accumulated Other
Common Retained Employee Comprehensive Total
Stock Earnings Benefits Income/(Loss) Equity
------- -------- -------- ----------------- -------
Beginning balance, January 1, 2007 $33,220 $ 4,303 ($95) ($763) $36,665
Cumulative effective of adoption of SFAS 159 -- (420) -- -- (420)
Cash dividend -- (703) -- -- (703)
Stock dividend 1,879 (1,879) -- -- --
Stock option exercise 131 -- -- -- 131
SFAS 123R expensing of options 22 -- -- -- 22
Net income -- 1,791 -- -- 1,791
Release of ESOP shares -- -- 47 -- 47
Repurchase of common stock (3,367) -- -- -- (3,367)
Change in unrealized gain/loss -- -- -- (217) (217)
------- ------- ---- ----- -------
Balance September 30, 2007 $31,885 $ 3,092 ($48) ($980) $33,949
======= ======= ==== ===== =======
Stockholder's equity was $33.9 million as of September 30, 2007. This was a
decrease of $2.7 million from December 31, 2006. The decrease in stockholder's
equity was primarily attributable to the repurchase of common stock totaling
$3.4 million for the nine months ended September 30, 2007. Net income of
$1,791,000 for the nine months of 2007 partially offset the decrease in retained
earnings from the cash and stock dividend. Additional decreases in stockholder's
equity occurred from the $420,000 charge to retained earnings from the adoption
of Financial Accounting Standards "Fair Value Option" SFAS 159. The change in
other comprehensive losses of $217,000 was due to the net change in after tax
decreases in the available for sale security portfolio. Unrealized losses have
not been recognized into income because the issuers' bonds are high credit
quality. The Corporation has the intent and the ability to hold the securities
for the foreseeable future and the decline in the fair value during the first
nine months of 2007 was primarily due to increased market rates.
NET INTEREST INCOME
Net interest income for the third quarter of 2007 was $3.3 million, an increase
of 3.0% from the third quarter of 2006. Net interest margin for the third
quarter of 2007 was 2.83% compared to 2.72% for the second quarter of 2007 and
2.77% for the third quarter of 2006. Net interest margin increased 11 basis
points over the second quarter of 2007, from the realignment of earning assets
and the de-emphasis of time deposit funding. The increase in interest income for
the third quarter of 2007 of $235,000 compared to the third quarter of 2006 was
primarily due to the increased interest rates on loans from the repricing of
fixed rate commercial mortgage loans up for renewal and secondarily from an
increase in volume and rate on the investment portfolio. Increases in various
categories of interest expense were primarily driven by increases in interest
rates paid on deposits and other borrowings as the specific instrument was set
to reprice or mature. The largest contributor to the growth in interest expense
during the third quarter was due to the Corporation's issuance of $18 million of
subordinated debentures. The Corporation also redeemed $10 million of previously
issued subordinated debentures bearing a higher interest rate than the newly
issued debentures, which will help reduce the cost of funds moving forward. The
increase in interest expense of $141,000 or 2.8% for the third quarter of 2007
compared to the third quarter last year was primarily the result of rate related
variances in time deposits of $181,000 for the same period. Additionally, volume
related increases in interest expense from NOW, money market accounts and FHLB
and repurchase accounts were offset by decreases in volume from time deposits.
The increase in interest expense associated with FHLB advances and wholesale
repurchase agreements
22
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
totaled $171,000 and were primarily related to volume, as the overall yield for
on borrowings was 4.30% which was below our total weighted cost of funds.
Net interest income for the first nine months of 2007 was $9.2 million compared
to $9.5 million for the first nine months of 2006. Net interest margin was 2.71%
for the first nine months of 2007 compared to 2.89% for the nine months ended
2006.
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, September 30,
2007 vs. 2006 2007 vs. 2006
------------------------ --------------------------
Increase Increase
(Decrease) Due (Decrease) Due
to Changes In to Changes In
---------------- -----------------
Volume Volume
Total and Both Rate Total and Both Rate
----- -------- ----- ------ -------- ------
(In thousands)
Earning Assets - Interest Income
Loans $ 218 $ 19 $ 199 $1,217 $ 741 $ 476
Securities (33) (32) (1) 7 (109) 116
Federal funds sold 50 60 (10) 375 367 8
----- ----- ----- ------ ----- ------
Total 235 47 188 1,599 999 600
----- ----- ----- ------ ----- ------
Deposits and Borrowed Funds - Interest Expense
NOW and money market accounts 413 317 96 1,188 865 323
Savings deposits (9) (10) 1 26 2 24
Time deposits (503) (685) 182 (134) (972) 838
FHLB and repo sweeps 171 186 (15) 284 299 (15)
ESOP (2) (1) (1) (3) (4) 1
Subordinated debentures 71 133 (62) 577 617 (40)
----- ----- ----- ------ ----- ------
Total 141 (60) 201 1,938 807 1,131
----- ----- ----- ------ ----- ------
Net Interest Income $ 94 $ 107 ($13) ($339) $ 192 ($531)
===== ===== ===== ====== ===== ======
The average yield earned on interest earning assets for the third quarter of
2007 was 6.96% compared to 6.82% for the third quarter of 2006. The average
yield earned on the total loan portfolio, which contains both loans held for
sale and investment, was 7.63% during the third quarter of 2007 compared to
7.42% during the third quarter of 2006. The overall increase in the loan
portfolio yield was due in part to the repricing of commercial real estate loans
up for renewal. The Corporation typically originates commercial real estate
loans for terms of 3 to 5 years with amortizations ranging from 10 to 25 years.
The Corporation's security portfolio had an average non-tax adjusted yield of
4.66% during the third quarter of 2007, compared to 4.67% for the third quarter
of 2006.
The average yield on earning assets for the first nine months of 2007 was 6.90%
compared to 6.70% for the first nine months of 2006. The average yield on the
total loan portfolio, which contains both loans held for sale and loans held for
investment, was 7.55% for the nine months ended September 30, 2007 compared to
7.29% during the same period of 2006. The overall increase in the loan portfolio
yield was due to the repricing of fixed rate commercial real estate loans up for
renewal, coupled with an increase from prime sensitive loans, as prime sensitive
loans reflected a full year to date effect of a prime rate of 8.25% during 2007
versus a partial year in 2006, when prime was increasing from 7.25% at the
beginning of the year. The Corporation's security portfolio had an average
non-tax adjusted yield
23
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
of 4.67% during the first nine months of 2007, compared to 4.56% for the same
period in 2006, as new securities added to the portfolio reflected the increase
in market rates over that same relative period, coupled with and secondarily,
the increase in the variable rate mortgage backed securities.
The average rate paid on interest bearing liabilities for the third quarter of
2007 was 4.70% compared to 4.60% in the third quarter of 2006. The increase in
average rate was due to the overall rate paid on interest bearing liabilities,
primarily as a result of the increase in overall market interest rates, but was
somewhat offset by the lower overall yield paid on the current subordinated
debenture. The rate paid on the total time deposit portfolio increased to 5.12%
for the third quarter of 2007, from 4.86% for the same time period in 2006 and
was driven by highly competitive interest rates paid among local financial
institutions. The increase in the average rate for NOW and money market accounts
for 2007 was primarily attributable to the introduction of a premium rate based
NOW account, with the average rate moving to 3.80% during the third quarter of
2007 versus 2.78% in the third quarter of 2006. The rate paid on FHLB advances
and repurchase agreements decreased slightly to 4.30% in the third quarter of
2007 from 4.36% in the third quarter of 2006. The relative portion of this
category contained higher levels of lower yielding repurchase agreements in 2007
compared to 2006. At September 30, 2007, the FHLB portfolio had a weighted
average maturity of 4.0 years and an overall weighted average interest rate of
4.67%. The average rate paid on the subordinated debenture decreased in the
third quarter of 2007 to 7.00% from 9.39% in the third quarter of 2006. The
overall rate paid on the subordinated debentures decreased due to the new $18.6
million issuance which bears interest at a rate of 6.71% compared to the rate
payable on the previously issued subordinated debentures which carried until
redemption a rate equal to three month Libor plus 365 basis points, or an
average rate equal to 9.39% for the third quarter of 2006. An interest rate swap
with a notional value of $18.0 million carries an interest rate receivable of
6.71%, and an interest rate payable of 170 basis points over the three month
Libor rate producing the overall yield noted in the table below of 7.04%.
The average rate paid interest bearing liabilities for the first nine months of
2007 was 4.76% compared to 4.35% in the first nine months of 2006. The increase
in average rate was due to the overall rate paid on interest bearing liabilities
and was due to the increase in overall market interest rates. The overall
increase in interest bearing deposits and liabilities for the first nine months
ended September 30, 2007 over the same time period in 2006 was due to the same
factors as mentioned above for the third quarter of 2007.
24
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, 2007 and 2006.
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,
-------------------------------------------------------------
2007 2006
----------------------------- -----------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
-------- -------- ------- -------- -------- -------
(In thousands)
Assets
Loans $373,056 $7,177 7.63% $372,009 $6,959 7.42%
Securities 96,391 1,124 4.66 99,067 1,157 4.67
Federal funds sold 13,005 155 4.76 7,994 105 5.21
-------- ------ ---- -------- ------ ----
Total Earning Assets/
Total Interest Income 482,452 8,456 6.96 479,070 8,221 6.82
-------- ------ ---- -------- ------ ----
Cash and due from banks 7,689 8,648
All other assets 23,872 23,020
-------- --------
Total Assets $514,013 $510,738
======== ========
Liabilities and Equity
NOW and money market accounts $70,547 675 3.80 $37,375 262 2.78
Savings deposits 11,113 66 2.36 12,788 75 2.33
Time deposits 221,948 2,866 5.12 275,136 3,369 4.86
FHLB advances and repurchase
agreements 118,360 1,283 4.30 101,116 1,112 4.36
ESOP loan 62 1 6.40 113 3 8.25
Subordinated debentures 17,857 315 7.00 10,310 244 9.39
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities/
Total Interest Expense / Interest
Rate Spread 439,887 5,206 4.70 436,838 5,065 4.60
-------- ------ ---- -------- ------ ----
Noninterest bearing demand deposits 36,757 35,072
All other liabilities 3,322 2,758
Stockholders' equity 34,047 36,070
-------- --------
Total Liabilities and Stockholder's
Equity $514,013 $510,738
======== ========
Net Interest Income $3,250 $3,156
====== ======
Net Interest Spread 2.27% 2.22%
==== ====
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.68% 2.62%
==== ====
Net Interest Margin
(fully taxable equivalent) 2.83% 2.77%
==== ====
25
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
Nine Months Ended September 30,
-------------------------------------------------------------
2007 2006
----------------------------- -----------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
-------- -------- ------- -------- -------- -------
(In thousands)
Assets
Loans $370,601 $20,914 7.55% $361,061 $19,697 7.29%
Securities 95,423 3,343 4.67 97,440 3,336 4.56
Federal funds sold 14,202 541 5.09 4,457 166 4.98
-------- ------- ---- -------- ------ ----
Total Earning Assets/
Total Interest Income 480,226 24,798 6.90 462,958 23,199 6.70
-------- ------- ---- -------- ------ ----
Cash and due from banks 7,382 7,108
All other assets 23,434 22,598
-------- --------
Total Assets $511,042 $492,664
======== ========
Liabilities and Equity
NOW and money market accounts $65,100 1,869 3.84 $38,328 681 2.38
Savings deposits 12,244 228 2.49 12,219 202 2.21
Time deposits 227,036 8,664 5.10 257,406 8,798 4.57
FHLB advances and repurchase
agreements 111,513 3,572 4.28 101,769 3,288 4.32
ESOP loan 75 5 8.91 128 8 7.90
Subordinated debentures 22,015 1,268 7.70 10,310 691 8.96
-------- ------- ---- -------- ------ ----
Total Interest Bearing Liabilities/
Total Interest Expense /
Interest Rate Spread 437,983 15,606 4.76 420,160 13,668 4.35
-------- ------- ---- -------- ------ ----
Noninterest bearing demand deposits 34,579 34,260
All other liabilities 3,115 2,432
Stockholders' equity 35,365 35,812
-------- --------
Total Liabilities and Stockholder's
Equity $511,042 $492,664
======== ========
Net Interest Income $ 9,192 $9,531
======= ======
Net Interest Spread 2.14% 2.35%
==== ====
Net Interest Margin (Net Interest
Income/Total Earning Assets) 2.56% 2.75%
==== ====
Net Interest Margin
(fully taxable equivalent) 2.71% 2.89%
==== ====
26
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PROVISION FOR LOAN LOSSES
A $775,000 provision for loan losses was taken in the third quarter of 2007.
This was an increase of $600,000 from the second quarter of 2007 and a $700,000
increase from the third quarter of 2006. The increased provision was due in part
to estimated declines in real estate collateral values and is 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 credit losses for the nine
months ended September 30, 2007 was $1.0 million compared to $250,000 for the
nine months ended September 30, 2006. The increase in provision was attributable
to those factors described above. Net loan charge-offs for the first nine months
of 2007 totaled 28 basis points on an annualized basis. The allowance for loan
losses was $4.0 million at September 30, 2007, or 1.07% of total loans versus
$3.8 million or 1.04% at December 31, 2006.
NONINTEREST INCOME
Noninterest income in the third quarter of 2007 was $1.8 million, an increase of
$580,000 compared to the third quarter of 2006. This increase was primarily
attributable to a net change in the fair value of financial assets and
liabilities as measured under the fair value option under Statement of Financial
Accounting Standards (SFAS) 159, which totaled $1.0 million on a pretax basis or
$663,000 after tax. This increase was primarily attributable to a net unrealized
increase in fair value on the Corporation's subordinated debenture which was
issued for $18 million in February of this year and was an instrument chosen for
this accounting treatment as part of the early adoption of this accounting
standard. The dramatic widening market credit spreads experienced in the third
quarter for trust preferred security issuances in the marketplace increased the
relative fair value of this financial liability. The Corporation hedges and
protects itself from changes in interest rates with an off balance sheet
interest rate swap also accounted for under SFAS 159. 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 valuations of instruments measured under the fair value measurement
SFAS 157 were measured under a market approach using matrix pricing for the
investment securities and the income approach on observable data for financial
liabilities reported under the fair value option SFAS 159. Income from the gains
on the sale of residential mortgages of $494,000 decreased $316,000 from the
third quarter, or 39.0% and was reflective of the decline in home sales
experienced in the Midwest region. The Trust and Wealth Management division
ended the quarter at $172 million in assets under management, up 9.8% from the
prior quarter. Fiduciary income which increased 77.1%, coupled with fees and
commission income from wealth management which increased 371.4%, totaled
$190,000 for the third quarter of 2007, compared with $84,000 the third quarter
last year. Deposit service charge income of $105,000, increased $10,000 or 10.5%
for the third quarter ended 2007 compared to the same time period last year due
to an increase in transactional accounts from the Grosse Pointe Branch location.
Net unrealized losses of $31,000 for the third quarter of 2007 on the available
for sale portfolio related to restructuring activities.
Noninterest income for the nine months ended 2007 was $4.4 million compared to
$3.8 million for the nine months ended 2006. Fiduciary income of $322,000
increased $120,000, or 59.4% for the first nine months of 2007 compared to the
first nine months of 2006. The increase in fiduciary income was related to
increases in assets under management over the same respective time period.
Deposit service charge income of $285,000 increased $20,000 or 7.5% due to new
accounts primarily the result of the new branch location in Grosse Pointe Farms.
The net change in the fair value option for the nine months ended September 30,
2007 was $1.2 million, reflecting the total of all net fair value changes of all
financial instruments measured including interest rate swaps used as hedges.
Mortgage banking income of $1.8 million for the nine months ended September 30,
2007 decreased $788,000 from the nine months ended September 30, 2006 due to
lower gains on the sale of residential mortgages as the result of the continued
decline in housing sales in the Southeastern Michigan area.
NONINTEREST EXPENSE
Noninterest expense was $3.5 million for the third quarter of 2007, a decrease
of 3.5% or $125,000 from the third quarter of 2006. Salaries, benefits and
payroll taxes decreased $205,000, or 9.4%, to $2.0 million primarily from a
reduction in mortgage company origination commissions. The decrease over the
prior period would have been larger, but it included a $108,000 net charge for
severance costs related to the previously disclosed departure of the Bank's
27
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
President, Ronald Reed, and the departure of some mortgage company personnel.
Mr. Reed's responsibilities were assumed by Mr. Widlak, the Corporation's Chief
Executive Officer. Net occupancy expense of $427,000 decreased $46,000, or 9.7%
compared to the third quarter of 2006 due to decreases in mortgage loan
origination office locations during the comparable period. Other operating
expense of $1.1 million increased $126,000 or 13.2% for the comparable quarterly
period from increases in legal, audit and the scheduled increase in FDIC
insurance premiums. Noninterest expense was $10.4 million for the first nine
months of 2007, a decrease of 3.0% or $316,000 resulting primarily from
reductions in salary and benefits.
PROVISION FOR INCOME TAXES
The provision for federal income taxes of $228,000 for the third quarter of 2007
increased $112,000 from the federal income tax provision for the third quarter
of 2006. The increase was primarily attributable to a lower level of tax exempt
municipal bonds and a slight decrease in bank owned life insurance (BOLI) income
over the same respective time period. This was coupled with a higher level of
pretax income over the respective period. The increase in cash surrender value
of BOLI is exempt from federal income tax. The statutory tax rate of the
Corporation is 34%.
The provision for federal income taxes of $448,000 for the nine months ended
September 30, 2007 increased $19,000 over the first nine months of 2006. The
effective tax rate for the first nine months of 2007 was 20.0% compared to 18.1%
for the first nine months of 2006.
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.
Currently two quantitative tools are used 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 our
exposure to interest rate risk.
Static 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.
Static 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 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.
28
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
The following table presents an analysis of our interest-sensitivity static gap
position at September 30, 2007. All interest-earning assets and interest-bearing
liabilities are shown based on the earlier of their contractual maturity or
repricing date adjusted by forecasted 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, 2007, we are considered slightly liability
sensitive in the time interval of the first three months. We are also considered
to be somewhat 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 $ 16,700 $ -- $ -- $ -- $ 16,700
Securities, including
Trading 21,449 8,401 21,567 36,080 87,497
FHLB stock -- 4,678 -- -- 4,678
Portfolio loans and
held for resale 119,986 68,425 152,981 38,287 379,679
-------- -------- -------- ------- --------
Total 158,135 81,504 174,548 74,367 $488,554
======== ======== ======== ======= ========
Interest bearing liabilities:
NOW and money market
accounts 47,032 9,094 11,549 2,892 $ 70,567
Indexed money market -- -- -- -- --
Savings deposits 902 3,906 10,217 -- 15,025
Jumbo time deposits 46,845 74,827 55,691 -- 177,363
Time deposits < $100,000 10,619 21,978 8,725 -- 41,322
Repurchase agreements 33,932 -- -- -- 33,932
FHLB advances 5,952 9,000 49,376 26,200 90,528
ESOP payable 48 -- -- -- 48
Subordinated debentures 18,557 -- -- -- 18,557
-------- -------- -------- ------- --------
Total 163,887 118,805 135,558 29,092 $447,342
======== ======== ======== ======= ========
Interest rate sensitivity gap ($5,752) ($37,301) $ 38,990 $45,275
Cumulative interest rate
sensitivity gap ($43,053) ($4,063) $41,212
Interest rate sensitivity gap
ratio 0.96 0.69 1.29 2.56
Cumulative interest rate
sensitivity gap ratio 0.85 0.99 1.09
The Bank also evaluates interest rate risk using a simulation model. The use of
simulation models to assess interest rate risk is an accepted industry practice,
and the results of the analysis are useful in assessing the vulnerability of the
Bank's net interest income to changes in interest rates. However, the
assumptions used in the model are oversimplifications and not necessarily
representative of the actual impact of interest rate changes. The simulation
model assesses the direction and magnitude of variations in net interest income
resulting from potential changes in market interest rates. Key assumptions in
the model include prepayment speeds of various loan and investment assets; cash
flows and maturities of interest-sensitive assets and liabilities, and changes
in market conditions impacting loan and deposit volumes and pricing. These
assumptions are inherently uncertain, and subject to fluctuation and revision in
a dynamic environment. Therefore, the model cannot precisely estimate future net
interest income or exactly predict the impact of higher or lower interest rates.
Actual results may differ from simulated results due to, among other factors,
the timing, magnitude, and frequency of interest rate changes, changes in market
conditions and management's pricing decisions, and customer reactions to those
decisions. The table does not include balance sheet adjustments recorded under
the fair value option SFAS 159.
29
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.
The table below, as of September 30, 2007, based on the most recent available
analysis, 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 (2.61%)
Interest rates up 200 basis points (1.10%)
Interest rates up 100 basis points (0.43%)
Base case --
Interest rates down 100 basis points 2.04%
Interest rates down 200 basis points 3.95%
Interest rates down 300 basis points 4.53%
ITEM 3. 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, 2007, 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, 2007, 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.
30
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
No material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Stock Repurchases - The following table sets forth information about the
Corporation's purchases of its outstanding Common Stock during the quarter ended
September 30, 2007.
MAXIMUM
NUMBER (OR
TOTAL NUMBER APPROXIMATE
OF SHARES DOLLAR VALUE)
(OR UNITS) OF SHARES
PURCHASED (OR UNITS)
AVERAGE AS PART OF THAT MAY YET
TOTAL NUMBER PRICE PUBLICLY BE PURCHASED
OF SHARES PAID PER ANNOUNCED UNDER THE
(OR UNITS) SHARE PLANS OR PLANS OR
PERIOD PURCHASED (1) (OR UNIT) PROGRAMS (3) PROGRAMS (3)
------ ------------- --------- ------------ -------------
July 1, 2007 - July 31, 2007 -- -- -- 126,839
August 1, 2007 - August 31, 2007 40,655 8.26 40,655 86,184
September 1, 2007 - September 30, 2007 67,616 8.81 67,616 18,568
(1) All shares reported in the above table were purchased through publicly
announced share repurchase programs.
(2) On June 7, 2007, the Corporation announced a share repurchase program to
repurchase up to 5% (193,289 shares) of its outstanding common stock in the
open market or privately negotiated transactions over the next twelve month
period.
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.
Cash Dividend - On August 15, 2007, the Corporation's Board of Directors
declared the Corporation's twenty-second quarterly cash dividend of $0.06 per
common share, payable October 1, 2007, to shareholders of record September 4,
2007.
ITEM 6. EXHIBITS.
See Exhibit Index attached.
31
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, 2007
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)
32
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) which became effective on September 23, 1996
3.2 Bylaws of the Corporation are incorporated by reference to Exhibit 3.2
of the Corporation's Quarterly Report on Form 10-QSB filed with the
SEC for the quarter ended June 30, 2004 (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) which
became effective on September 23, 1996
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) which became effective September 23, 1996
10.2 1996 Stock Option Plan for Nonemployee Directors is incorporated by
reference to Exhibit 10.2 of the Corporation's Registration Statement
on Form SB-2 (SEC File No. 333-04113) which became effective September
23, 1996
10.3 1999 Stock Option Plan for Directors in incorporated by reference to
Exhibit 10.5 of the Corporation's Annual Report filed with the SEC on
Form 10-KSB for the year ended December 31, 1999 (SEC File No.
000-33373)
10.4 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)
10.5 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)
10.6 Community Central Bank Supplemental Executive Retirement Plan is
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)
10.7 Community Central Bank Death Benefit Plan is incorporated by reference
to Exhibit 10.7 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)
10.8 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)
10.9 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)
10.10 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)
33
COMMUNITY CENTRAL BANK CORPORATION
FORM 10-Q (continued)
10.11 The foregoing description of the Separation Agreement is qualified in
its entirety by reference to the complete terms and conditions of the
Separation Agreement, which is attached as Exhibit 10.11 to this
Quarterly Report on Form 10-Q and is incorporated herein by reference
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
34