ITEM 1. BUSINESS
County Bank Corp, a one bank holding company, was formed on January 3, 1989 by converting and exchanging, except for the shares of dissenting shareholders, each share of Lapeer County Bank & Trust Co. (the Bank) into one share of County Bank Corp (the Corporation). As a result, the Corporation became the sole shareholder and parent of the Bank.
The Bank was chartered in 1902, is headquartered in Lapeer, MI., and serves all of Lapeer County (the County) and portions of surrounding counties. Lapeer has an approximate population of 6,500 people, while the County has in excess of 75,000 people. Lapeer is located 60 miles north of metropolitan Detroit, the largest city in Michigan, 30 miles north of Pontiac, MI., and 20 miles east of Flint, MI.
The Corporation serves the County through the subsidiary Bank at seven locations. The main office is located at 83 W. Nepessing St., in downtown Lapeer. A drive-in location is located at the corner of Pine St. and Clay St., across from the main office. A full service office is located in the south end of Lapeer at 637 south M-24. Attica Township is served by a full service Attica Office located at 4515 Imlay City Rd. Full service offices are located in Elba Township at 5508 Davison Road and in Metamora Township on M-24, south of Lapeer. One Automated Teller Machines located Lapeer Regional Hospital, 1375 N. Main St., Lapeer. The Bank opened a full service branch located in a grocery store at Bryan's Market, 6002 N. Lapeer Rd., North Branch, MI.
The Corporation offers commercial banking services through the Bank at the main office and the six branches throughout the County. The customer base extends to all sections of the County and includes all segments of the population, including individuals, retail businesses, farming operations, and industrial plants. This locally-owned full service bank offers all traditional deposit and loan services. The Trust department, with full trust powers, is in its third decade of providing customers with employee benefit plans, estate planning services, and complete trust services.
The Corporation faces substantial competition for financial services. Our chief competitor is First of America Bank-Southeast, which has six branches throughout the County. Independent Bank Corp. of Ionia, MI. acquired Pioneer Bank and Kingston Bank which operate three locations in the Bank's market area. In 1997 Independent Bank Corp opened a loan production office in a Lapeer shopping center. First Chicago-NBD Bank, NA has a branch office north of the city limits of Lapeer. Citizens Commercial and Savings Bank of Flint also has a branch in the County. Tri-County Bank has offices in Imlay City and Almont. CSB Bank of Capac has an office in Imlay City and Oxford Bank opened an in Dryden. There are two offices of Citizen's Federal Savings and Loan. The County is served by two credit unions, Lapeer County School Employees Credit Union and the Lapeer County Community Credit Union. There are three securities brokers, First of Michigan Corp., Paine Webber & Co., and Edward D. Jones & Co. A number of other securities brokers serve the County through Flint offices. Comerica Bank operates a Comerimart branch in a local grocery store.
The Corporation is regulated as a bank holding company by the Board of Governors of the Federal Reserve System pursuant to the terms of the Bank Holding Company Act of 1956. This act requires the approval of the Federal Reserve Board before the Corporation may acquire or merge with any other banking institution, limits the activities that the Corporation may engage in to activities so closely related to banking or managing or controlling banks as to be a proper incident thereto, and
County Bank Corp 1997 10-K Page 1
prohibits the Corporation from acquiring an interest in a bank located outside the state in which the operations of its subsidiaries are principally conducted, unless such acquisition is specifically authorized by the state in which the acquired bank is located. In November 1985, the State of Michigan passed legislation to allow interstate banking with neighboring states which also have laws that permit interstate banking. The Corporation is obligated to comply with the regulations of the Securities and Exchange Commission. As a state member institution, the Bank is obligated to comply with the regulations of the Federal Reserve Board and the regulations of the Financial Institutions Bureau (FIB) of the State of Michigan. The Financial Institutions Bureau of the State of Michigan has the authority to examine and regulate the Bank and works closely with the Federal Reserve Bank of Chicago coordinating alternate examinations of the Bank. The FIB has the authority to issue cease and desist orders against unsafe and unsound banking practices, and the authority to close a bank in the event it should become insolvent. In addition, the Bank's business is directly affected by the monetary policies of the Board of Governors of the Federal Reserve System. The Bank's deposits are insured by the Federal Deposit Insurance Corporation.
The Federal Deposit Insurance Corporation Improvement Act of 1991 creates a new statutory framework that applies to every insured depository institution a system of supervisory actions indexed to the capital level of the individual institution. The purpose of the statutory provision is to resolve the problems of insured depository institutions at the least possible long term loss to the deposit insurance fund. Five capital categories have been established from well capitalized to critically undercapitalized. Each category below well capitalized brings an increasing number of supervisory actions intended to strengthen the institution. These actions range from limitations on the acceptance of brokered deposits to requiring dismissal of management, divestiture of institutions by the parent, approval of capital distributions, and more. In addition, regulatory authority is expanded by the development of operating and management standards, review of executive compensation, increased accounting principles, and increased independence of Audit committees. The number of full time equivalent employees totaled 120 and 117 on December 31, 1997 and 1996 respectively.
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* A tax adjustment of $473, $449, and $465 has been added to 1997, 1996 and 1995 income respectively to reflect the impact of a 34% Federal income tax rate in each year. Non accruing loans are reported in their related categories and reduce the related yields.
Guide 3. Statistical Disclosures:
I. Distribution of Assets, Liabilities and Stockholder's Equity; Interest Rates and Interest Differential.
Refer to Table I and Table II for a presentation of the information required by this item.
II. Investment Portfolio
Refer to Footnote 3 of the accompanying financial statements on page 9 of the Annual Report to shareholders for the information required by this item, except for:
Weighted average yields on a tax equivalent basis:
County Bank Corp 1997 10-K Page 3
III. Loan Portfolio
A. Types of Loans Refer to Footnote 4 of the accompanying financial statements on page 10 of the Annual Report to shareholders for the information required by this item.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates as of December 31, 1997. (000's)
C. Risk Elements.
1. Nonaccrual, Past Due and Restructured Loans. (000's)
There were no restructured loans.
For the year ended 1997, if the loans reported as nonaccrual loans had earned at the contracted interest rate, $87,000 of interest income would have been recorded. No interest income was recorded on these loans in 1997.
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It is the policy of the Corporation to place loans on a nonaccruing status when management feels that a significant risk of non-repayment exists. Criteria for evaluating repayment risk will include the borrowers payment history, past due status, and financial condition. Loans on which the required payment of principal or interest has not been received within 90 days of the due date are placed on nonaccrual status.
2. Potential Problem Loans.
As of December 31, 1997 management identified seven potential problem loans in the commercial loan portfolio. The seven loans totaled $655,000 and management allocated $70,000 of the allowance for loan losses for these credits.
3. Foreign Outstandings
Not Applicable
4. Loan Concentrations
As of December 31, 1997 there were no loan concentrations other than those categories already reported that exceed 10% of total loans.
D. Other Interest Bearing Assets
As of December 31, 1997, there was no other interest bearing assets that would have been classified 90 days past due and still accruing if it were a loan.
IV. Summary of Loan Loss Experience
Analysis of Allowance for Loan Losses (000's)
Net Charged off loans resulted in net recoveries of $32,000 in 1997. Loan growth continued to be strong in 1997. Management allocated $120,000 from earnings to maintain a strong loan to deposit ratio of 1.58%
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Net charged off loans totaled $2,000 in 1996. The Reserve for loan losses totaled 1.53% of total loans on December 31, 1996. Management provided $120,000 from earnings to the reserve in order to maintain the high level of protection. Loans have been growing aggressively, and management intends to maintain a high quality portfolio with solid protection for the future.
B. Allocation of the Allowance for Loan Losses (000's)
V. Deposits
A. Refer to Item I of the Guide 3 statistical disclosures for a presentation of the information required by this item.
B. Not applicable
C. Not applicable
D. Maturities of time certificates of deposits of $100,000 or more. (000's)
E. Not applicable
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VII. Short-Term Borrowings Not applicable
ITEM 2.
ITEM 2. PROPERTY
The following is a tabulation of facilities owned by the Bank.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceeding is pending to which the Corporation or the Bank is party, or of which any of their property is the subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
The information called for by the items within this part is included in the Corporation's Annual Report to shareholders for the year ended December 31, 1997, and is incorporated herein by reference, as follows:
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Page 15, except for: (000's)
County Bank Corp 1997 10-K Page 8
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
EARNINGS
Major components of the operating results of the Corporation for 1997, 1996, and 1995 are presented in the accompanying table, Summary of Operations. A discussion of these results is presented in greater detail in subsequent pages.
Summary of Operations
Net Interest Income
The Bank experinced strong loan demand on 1997. Total growth in loans was 5.2%. This is less than the11.7% growth the Bank experienced in 1996. The Bank sold $1,671,000 of mortgages and $1,729,000 if student loans to the seconcday markets. Total loan grwoth adjusted for these sales was 8.1%. Deposit growth was 4.1%. Most growth took place in demand deposit and interestbearing demand deposit categories. Both categories increased 8% over 1996 year end balances. The Bank's loan to deposit ratio increased to 75.9%. Net interest yield on a Federal tax equivalent (FTE) basis as a percent of average assets was 4.9%, 4.8% and 4.8% for 1997, 1996 and 1995, respectively. The FTE adjustment is derived by deviding tax exempt interest interest income by .66 to reflect the Corporation's 34% tax rate.
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Rate sensitivity analysis (000's), December 31, 1996
In the above table, scheduled payments on loans and securities are included at the earlier of their next scheduled principal reduction or repricing opportunity.
Provision for Possible Loan Losses
Management realizes that loan losses cannot be predicted with absolute certainty. The Corporation adheres to a loan review procedure that identifies loans that may develop into problem credits. The adequacy of the reserve for possible loan losses is evaluated against the listings that result from the review procedure, historical net loan loss experience, current and projected loan volumes, the level and composition of non-accrual, past due and renegotiated or reduced rate loans, current and anticipated economic conditions, and an evaluation of each borrower's credit worthiness. Based on these factors, management determines the amount of the provision for possible loan losses needed to maintain an adequate reserve for possible loan losses. The amount of the provision for possible loan losses is recorded as current expense and may be greater or less than the actual net charged off loans.
Activity related to the reserve for possible loan losses resutled in net recoveries of $32,000 in 1997. Net charged off loans were $2,000 in 1996, and $177,000 in 1995. Provisions for possible loan losses were $120,000, $120,000 and $240,000 for the respective periods. The ratio of reserve for possible loan lossed to gross loans was 1.6%, 1.5% and 1.6% on December 31, 1997, 1996 and 1995, respectively.
Non-interest Income
Non-interest income is composed of trust department income, service charges on deposit accounts, fees for providing other services to customers, gains on securities sales and other income. Service charges on deposit accounts declined 5.1% in 1997 following a 3.5% increase in 1996. Nonsufficient funds and overdraft fee income declined although demand accounts and balances increased. Service charges on demand accounts decreased as customers chose accounts where fees are offset by deposit balances. Other income declined 7.5% in 1997 primarily due to the high volume of other income posted in 1996. The Bank posted a recovery of previously accrued expenses of $70,000 provided to cover environmental costs of a property in other real estate that carried no book value. The property was sold in 1997 for $20,000 with
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limited environmental costs. Other income in 1996 increased 28.1% as a result of the repayment of two loans that were previously carried as nonaccrual loans. The customers were on the way to working out their problems and the loans were renewed on an accrual basis. The interest that was earned during the period of nonaccrual was capitalized in the renewed loan. This interest was carried in the general ledger as deferred credits until the customers fully established their improved repayment capability. The deferred credits were recorded as income on an interest basis as the new loans were repaid. Both properties were sold, and the Bank recovered all of its investment. The deferred credits were booked directly to other income rather than interest income so that comparative yield calculations would not be distorted. The total amount of deferred credits posted to other income total $242,000.
Non-interest expense
Major components of non-interest expense are salaries and employee benefits, occupancy and equipment expenses, and other operating expenses. Salaries and employee benefits, the largest component of non-interest expense, increased 4.2% in 1997 after a 4.0% increase in 1996. Full time equivalent employees increased to 120 at year end 1997 from 117 at year end 1996. Occupancy expenses increased 26.3% after a 4.8% increase in 1996. This was primarily the result of increased depreciation expenses as a result of remodeling older areas of the Bank's main office building and expenses of conversion to a new computer system in late 1997. Other expenses decreased by 1.3%.
The Corporation recognizes potential risk if data processing systems important to its operations and the operations of key suppliers fail to properly recognize the year 2000. Consequently, the Corporation is analyzing the risks and measuring the costs of mitigating the risks. The Corporation does not believe further costs to avoid the risks will be significant.
FINANCIAL CONDITION
Average assets for the Corporation totaled $181,270,000, $172,312,000 and $165,081,000 for 1997, 1996, and 1995, respectively. This 5.1% growth in average assets improved from 4.4% in 1996. The increase was supported by 4.8% growth in average deposits. Average loans grew 8.3% in 1997. The Corporation continues to increase the loans to deposits ratio resulting in increased interest margins and net income.
Liquidity
The anticipated liquidity requirements of the Corporation can be met by upstreaming dividends from the subsidiary Bank. Refer to footnote 11 of the accompanying financial statements for a discussion of the restrictions on undivided profits of the subsidiary. The anticipated cash needs of the Corporation are for the payment of dividends to current stockholders. Dividends upstreamed to the Corporation were $1,009,000 in 1997 and $908,000 in 1996.
The estimated value of U.S. Government and U.S. Government Agency securities totaled 17.1% of total deposits on December 31, 1997. This percentage for 1996 was 20.4. The Corporation is able to meet normal demands for liquidity through loan repayments, securities payments and deposit growth.
CAPITAL
The Corporation's return on equity reached 15.0% in 1997, a slight decline from the 15.8% return achieved in 1996 and the 15.5% return earned in 1995. Effective December 31, 1992 the Bank is required to maintain capital in excess of 8.0% of risk-based assets as defined by the Federal reserve Board. Refer to footnote 13 of the accompanying financial statements for a tabular presentation of the Corporations capital adequacy.
The Corporation's Board of Directors declared a $4.00 per share cash dividend to shareholders of record on April 10, 1998 to be paid on April 24, 1998 at its March 18, 1998 Board meeting. This one time cash dividend recognizes the support of the Corporations' shareholders, acknowledges the Corporations high levels of capital and still maintains protection for our depositors.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pages 3-13
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ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
The information called for by the items within this part is included in County Bank Corp's 1997 Proxy Statement and is incorporated herein by reference, as follows:
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pages 3-4 except for:
11. EXECUTIVE COMPENSATION.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Page 2.
Executive Officers and Directors, as a group, own 63,413 shares or 10.69% of the 593,236 total outstanding shares of common stock of the Corporation as of December 31, 1997.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) The following financial statements of the Corporation and the Bank are included in the Annual Report to its shareholders for the year ended 1997 and are incorporated herein by reference in Item 8:
(a)(2) Not applicable.
(a)(3) The following exhibits are required to be filed with this report by item 14(c):
(3) Articles of Incorporation and By-laws (previously filed as Exhibits to the Corporation's registration statement on form 8-A, filed January 24, 1989 and incorporated herein by reference).
(13) Annual Report to Shareholders for the year ended December 31, 1997 (filed herewith)
(22) Subsidiary of Registrant: Lapeer County Bank & Trust Co., a Michigan corporation.
(23) Consent of Experts and Counsel: Letter of consent from Plante & Moran, LLP Dated March 25, 1998
(b) No reports on form 8-K were filed during the last quarter of the year covered by this report.
(c) See (a)(3)
(d) Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
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Exhibit Index -------------