-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sfwe+tylWTgH8wQ8us83oPwqekeA/jji/2gW+VgvVtvPraWQFFEvKKGUUr5r4CFr s0QmlTrA1N20ipozz9Osgw== 0000950124-00-003251.txt : 20000516 0000950124-00-003251.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950124-00-003251 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY SHORES BANK CORP CENTRAL INDEX KEY: 0001070523 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383423227 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 333-63769 FILM NUMBER: 633927 BUSINESS ADDRESS: STREET 1: 1838 RUDDIMAN DR CITY: NORTH MUSKEGON STATE: MI ZIP: 49445 BUSINESS PHONE: 6167448082 MAIL ADDRESS: STREET 1: 1838 RUDDIMAN DR CITY: NORTH MUSKEGON STATE: MI ZIP: 49445 10QSB 1 FORM 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File No. 333-63769 COMMUNITY SHORES BANK CORPORATION (Exact name of small business issuer as specified in its charter) Michigan 38-3423227 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1030 W. NORTON AVENUE, MUSKEGON, MICHIGAN 49441 (Address of principal executive offices) (616) 780-1800 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] At May 1, 2000, 1,170,000 shares of Common Stock of the issuer were outstanding Transitional Small Business Disclosure Format: Yes [ ] No [X] 2 Community Shores Bank Corporation Index
PART 1. Financial Information Page No. -------- Item 1. Financial Statements.......................................................... 1 Item 2. Management's Discussion and Analysis or Plan of Operation..................... 15 PART II. Other Information Item 1. Legal Proceedings............................................................. 19 Item 2. Changes in Securities......................................................... 19 Item 3. Defaults upon Senior Securities............................................... 20 Item 4. Submission of Matters to a Vote of Security Holders........................... 20 Item 5. Other Information............................................................. 20 Item 6. Exhibits and Reports on Form 8-K.............................................. 20 Signatures............................................................................. 21
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2000 1999 ----------------------- ----------------------- (Unaudited) ASSETS Cash and due from financial institutions $ 2,534,388 $ 1,964,847 Interest-bearing deposits in other financial institutions 23,843 1,727 Federal funds sold 300,000 0 ----------------------- ----------------------- Total cash and cash equivalents 2,858,231 1,966,574 Securities available for sale 18,964,829 10,767,804 Loans, net 67,323,813 55,946,379 Federal Home Loan Bank stock 138,200 138,200 Premises and equipment, net 3,411,860 3,469,953 Accrued interest receivable 533,165 326,484 Other assets 130,676 83,533 ----------------------- ----------------------- Total assets $ 93,360,774 $ 72,698,927 ======================= ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non interest-bearing $ 5,684,121 $ 4,074,635 Interest-bearing 62,880,885 51,901,442 ----------------------- ----------------------- Total deposits 68,565,006 55,976,077 Federal funds purchased, repurchase agreements and Federal Home Loan Bank advances 16,315,900 6,934,491 Accrued expenses and other liabilities 260,616 1,253,597 ----------------------- ----------------------- Total liabilities 85,141,522 64,164,165 Shareholders' Equity Preferred Stock, no par value: no shares 0 0 authorized and none issued Common Stock, no par value: 9,000,000 10,871,211 10,871,211 shares authorized and 1,170,000 shares outstanding Retained deficit (2,495,115) (2,240,334) Accumulated other comprehensive loss (156,844) (96,115) ----------------------- ----------------------- Total shareholders' equity 8,219,252 8,534,762 ----------------------- ----------------------- Total liabilities and shareholders' equity $ 93,360,774 $ 72,698,927 ======================= =======================
See accompanying notes to condensed consolidated financial statements. 4 COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Three Months Ended Ended March 31, 2000 March 31, 1999 ------------------------- ------------------------- Interest and dividend income Loans, including fees $ 1,363,035 $ 96,720 Securities, taxable 229,936 67,864 Federal funds sold, FHLB dividends and other income 24,087 56,720 ------------------------- ------------------------- Total interest income 1,617,058 221,304 Interest expense Deposits 841,875 69,556 Repurchase agreements, federal funds purchased, and Federal Home Loan Bank advances 134,499 3,235 ------------------------- ------------------------- Total interest expense 976,374 72,791 NET INTEREST INCOME 640,684 148,513 Provision for loan losses 172,000 244,400 ------------------------- ------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 468,684 (95,887) Noninterest income Service charge income 44,964 2,216 Mortgage referral income 15,816 4,787 Other 18,079 939 ------------------------- ------------------------- Total noninterest income 78,859 7,942 Noninterest expense Salaries and employee benefits 467,435 267,520 Occupancy 51,454 45,210 Furniture and equipment 92,227 46,830 Advertising 20,637 15,958 Data Processing 29,014 7,000 Professional services 65,027 47,740 Telephone 10,639 7,554 Supplies 19,232 37,554 Directors and officers insurance 3,061 0 Other 43,598 34,160 ------------------------- ------------------------- Total noninterest expense 802,324 509,526 LOSS BEFORE FEDERAL INCOME TAX (254,781) (597,471) Federal income tax expense 0 0 ------------------------- ------------------------- NET LOSS $ (254,781) $ (597,471) ========================= ========================= Basic and diluted loss per share $ (0.22) $ (0.52) ========================= ========================= Weighted average shares outstanding $ 1,170,000 $ 1,154,444 ========================= =========================
See accompanying notes to condensed consolidated financial statements. 5 COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Accumulated Other Total Common Retained Comprehensive Shareholders' Shares Stock Deficit Income (Loss) Equity --------------------------------------------------------------------------------- Balance at January 1, 1999 1,100,000 $ 10,227,604 $ (438,552) $ 0 $ 9,789,052 Comprehensive loss: Net loss (597,471) (597,471) Unrealized loss on securities available for sale (3,108) (3,108) ---------------- Total comprehensive loss (600,579) Common stock sale, January 21, 1999 70,000 643,607 643,607 --------------------------------------------------------------------------------- Balance, March 31, 1999 1,170,000 $ 10,871,211 $(1,036,023) $ (3,108) $ 9,832,080 ================================================================ Balance, January 1, 2000 1,170,000 $ 10,871,211 $(2,240,334) $ (96,115) $ 8,534,762 Comprehensive loss: Net loss (254,781) (254,781) Change in unrealized loss on securities available for sale (60,729) (60,729) ---------------- Total comprehensive loss (315,510) --------------------------------------------------------------------------------- Balance, March 31, 2000 1,170,000 $ 10,871,211 $(2,495,115) $ (156,844) $ 8,219,252 =================================================================================
See accompanying notes to condensed consolidated financial statements. 6 COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Three months ended Three months ended March 31, 2000 March 31, 1999 ------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (254,781) $ (597,471) Adjustments to reconcile net loss to net cash from operating activities Provision for loan losses 172,000 244,400 Depreciation and amortization 85,768 60,305 Net accretion of securities (21,838) (21,179) Net change in: Accrued interest receivable (206,681) (89,040) Other assets (47,143) (100,848) Accrued interest payable and other liabilities (992,981) 14,762 ------------------------------------------------ Net cash from operating activities (1,265,656) (489,071) CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 0 2,000,000 Maturities, prepayments and cals 29,295 14,500,000 Purchases (8,265,211) (24,212,342) Loan originations and payments, net (11,549,434) (16,362,933) Additions to premises and equipment (27,675) (259,552) ------------------------------------------------ Net cash from investing activities (19,813,025) (24,334,827) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 12,588,929 20,246,390 Net change in federal funds purchased and repurchase agreements 7,881,409 1,031,524 Net change in Federal Home Loan Bank advances 1,500,000 0 Net proceeds from stock offering 643,607 ------------------------------------------------ Net cash from financing activities 21,970,338 21,921,521 Net change in cash and cash equivalents 891,657 (2,902,377) Beginning cash and cash equivalents 1,966,574 8,612,377 ------------------------------------------------ ENDING CASH AND CASH EQUIVALENTS $ 2,858,231 $ 5,710,000 ================================================ Supplemental cash flow information: Cash paid during the period for interest $ 613,752 $ 47,431
See accompanying notes to condensed consolidated financial statements. 7 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The unaudited financial statements for the three months ended March 31, 2000 include the condensed consolidated results of operations of Community Shores Bank Corporation ("Company") and its wholly-owned subsidiary, Community Shores Bank ("Bank"). These condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods. The results for the period ended March 31, 2000 should not be considered as indicative of results for a full year. For further information, refer to the condensed consolidated financial statements and footnotes included in the Company's annual report on Form 10-KSB for the period ended December 31, 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Trading securities are carried at fair value, with changes in unrealized holding gains and losses included in income. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Loans: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days (180 days for residential mortgages). Payments received on such loans are reported as principal reductions. 8 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgement, should be charged-off. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity. Industry Segment: Internal financial information is primarily reported and aggregated in one line of business, banking. 9 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. SECURITIES AVAILABLE FOR SALE The following table represents the securities held in the Company's portfolio at the end of the first quarter:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value % ------------------------------------------------------------------------------------ US Treasury $ 1,496,379 $ 0 $ (590) $ 1,495,789 7.9% US Government Agency 15,709,044 3,601 (106,426) 15,606,219 82.3 Mortgaged-backed securities, guaranteed by GNMA 1,916,250 0 (53,429) 1,862,821 9.8 ----------------------------------------------------------------------------------- Total securities at March 31, 2000 $ 19,121,673 $ 3,601 $ (160,445) $ 18,964,829 100.0% ===================================================================================
Securities available for sale increased $8,197,025 during the first quarter of 2000. Below is the schedule of maturities for investments held at March 31, 2000:
Available for sale Amortized Fair Cost Value ------------------------------- Due in one year or less $ 2,991,253 $ 2,982,664 Due from one to five years 14,214,170 14,119,344 Mortgaged-backed 1,916,250 1,862,821 ------------------------------- $19,121,673 $18,964,829 ===============================
10 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. LOANS Total loans made to customers totaled $11,549,434 since December 31, 1999. The components of the outstanding balances and their percentage of the total portfolio for both period ends were as follows:
March 31, 2000 December 31, 1999 Balance % Balance % ------------------------- ------------------------ Commercial, financial and other $ 56,089,338 82.1 % $ 47,570,725 83.8 % Real estate-construction 1,561,452 2.3 1,445,789 2.5 Real estate-mortgages 2,067,827 3.0 1,957,393 3.4 Installment loans to individuals 8,629,196 12.6 5,824,472 10.3 ------------------------- ------------------------ 68,347,813 100% 56,798,379 100% ===== ===== Less allowance for loan losses 1,024,000 852,000 ---------------- ---------------- $ 67,323,813 $ 55,946,379 ================ ================
5. ALLOWANCE FOR LOAN LOSSES The following is a summary of the activity in the allowance for loan losses account since December 31, 1999:
Balance at January 1, 2000 $ 852,000 Charge-offs 0 Recoveries 0 Provision charged against operating expense 172,000 ------------------ Balance at March 31, 2000 $ 1,024,000 ==================
11 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The allocation of the allowance at March 31, 2000 was as follows:
Percent of allowance Balance at End of Period Applicable to: related to Amount loan category ------------------ ------------------------- Commercial $ 915,470 89.4 % Residential real estate 43,027 4.2 Installment 65,502 6.4 Unallocated 0 0.0 ------------------ ------------------------- Total loans $ 1,024,000 100.0 % ================== =========================
Management has determined this allocation is appropriate based on their estimate of losses inherent in the various categories within the loan portfolio. 6. PREMISES AND EQUIPMENT - NET There have been no significant capital expenditures since year-end as such premises and equipment were comprised of the following at both period ends:
March 31, December 31, 2000 1999 ------------------- ------------------ Land and land improvements $ 673,240 $ 673,240 Building and building improvements 1,634,921 1,715,842 Furniture, fixtures and equipment 1,392,397 1,363,014 ----------------------------------------- 3,700,558 3,752,096 Less accumulated depreciation 288,698 282,143 ------------------- ------------------ $ 3,411,860 $ 3,469,953 =================== ==================
Depreciation expense for the first quarter of 2000 was $89,482. The same expense for the first quarter of 1999 amounted to $60,305. 12 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. DEPOSITS Deposit balances increased $12,588,929 since December 31, 1999. The components of the outstanding balances and their percentage of the total portfolio for both period ends were as follows:
March 31, 2000 December 31, 1999 Balance % Balance % ------------------------ ------------------------ Noninterest-bearing Demand $ 5,684,121 8.3 % $ 4,074,635 7.3 % Interest-bearing Checking 5,651,033 8.2 4,662,155 8.3 Money Market 5,879,071 8.6 3,068,971 5.5 Savings 702,417 1.0 565,741 1.0 Time, under $100,000 26,819,209 39.1 21,084,562 37.7 Time, over $100,000 23,829,155 34.8 22,520,013 40.2 ------------------------ ------------------------ Total Deposits $ 68,565,006 100.0 % $ 55,976,077 100.0 % ======================== ========================
8. BORROWINGS At March 31, 2000, the Bank's borrowings were made up of repurchase agreements and a Federal Home Loan Bank advance. As such the first quarter information was as follows:
Repurchase FHLB Agreements Advances ------------------- --------------------- Outstanding balance $ 14,815,900 $ 1,500,000 Average interest rate 4.87% 5.99% Average balance $ 10,132,857 $ 197,802 Average interest rate 4.92% 5.99% Maximum outstanding at any month end $ 14,815,900 $ 1,500,000
13 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. INTEREST RATE SENSITIVITY Asset liability management aids the Company in achieving reasonable and predictable earnings and liquidity while maintaining a balance between interest earning assets and interest bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of the Company's customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and achieve consistent net interest income through periods of changing interest rates. Interest rate sensitivity varies with different types of earning assets and interest bearing liabilities. Overnight investments, on which rates change daily, and loans tied to the prime rate, differ considerably from long term investment securities and fixed rate loans. Time deposits over $100,000 and money market accounts are more interest sensitive than regular savings accounts. Comparison of the repricing intervals of interest earning assets to interest bearing liabilities is a measure of interest sensitivity gap. Balancing this gap is a continual challenge in a changing rate environment. The Company uses a sophisticated computer program to perform analysis of interest rate risk, assist with asset liability management, and model and measure interest rate sensitivity. Details of the gap at March 31, 2000 were:
Interest rate sensitivity period Within Three to One to After three twelve five five months months years years Total -------------------------------------------------------------------------------- Earning assets Interest-bearing deposits in other financial institutions $ 23,843 $ 0 $ 0 $ 0 $ 23,843 Securities available for sale 500,250 2,482,415 14,119,344 1,862,820 18,964,829 Loans 20,701,475 2,114,548 37,815,871 7,715,919 68,347,813 -------------------------------------------------------------------------------- 21,225,568 4,596,963 51,935,215 9,578,739 87,336,485 Interest-bearing liabilities Savings and checking 12,232,521 0 0 0 12,232,521 Time deposits< $100,000 7,791,499 14,739,692 4,288,018 0 26,819,209 Time deposits>$100,000 13,246,813 10,275,029 307,313 0 23,829,155 Repurchase agreements and Federal Home Loan Bank Advances 14,815,900 0 0 1,500,000 16,315,900 -------------------------------------------------------------------------------- 48,086,733 25,014,721 4,595,331 1,500,000 79,196,785 Net asset (liability) repricing gap $ (26,861,166) $ (20,417,758) $ 47,339,884 $ 8,078,739 $ 8,139,700 ================================================================================ Cumulative net asset (liability) repricing gap $ (26,861,166) $ (47,278,924) $ 60,960 $ 8,139,699 =================================================================
14 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. EMPLOYEE BENEFIT PLANS The Company established a 401(k) plan effective January 1, 1999, covering substantially all its employees. The Company's matching 401(k) contribution charged to expense as of March 31, 2000 was $14,098. The total for the same quarter in 1999 was $10,113. The percent of the Company's matching contributions to the 401(k) is currently 4.50% and has not changed since its approval by the Board of Directors in a meeting on January 26, 1999. 11. COMMITMENTS AND OFF-BALANCE-SHEET RISK Some financial instruments are used to meet financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest-rate risk in excess of the amount reported in the financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates. Standby letters of credit are conditional commitments to guarantee a customer's performance to a third party. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit. Collateral or other security is normally not obtained for these financial instruments prior to their use, and many of the commitments are expected to expire without being used. A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk for the periods March 31, 2000 and December 31, 1999 follows:
March 31, December 31, 2000 1999 ----------------- ------------------ Letters of credit $ 250,000 $ 278,000 Commercial unused lines of credit 21,328,000 22,513,000 Consumer unused lines of credit 2,133,000 1,570,000 Residential construction commitments 410,000 805,000
Commitments to make loans generally terminate one year or less from the date of commitment and may require a fee. Since many of the above commitments expire without being used, the above amounts do not necessarily represent future cash commitments. No losses are anticipated as a result of these transactions. 15 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulator approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
Capital to risk weighted assets ----------------------- Tier 1 Capital Total Tier 1 to average assets ----------- --------- --------------------- Well capitalized 10 % 6 % 5 % Adequately capitalized 8 4 4 Undercapitalized 6 3 3
16 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Actual capital levels (in thousands) and minimum required levels at March 31, 2000 for the Company and Bank were:
Actual Adequately Capitalized Well Capitalized ------------------------- ---------------------- ---------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------- ---------------------- ---------------------- March 31, 2000 - ------------------------ Total capital (to risk- weighted assets) Consolidated $ 9,349,041 12.02 % $ 6,222,763 8.00 % $ 7,778,454 10.00 % Bank 8,733,088 11.23 6,222,763 8.00 7,778,454 10.00 Tier 1 capital (to risk- weighted assets) Consolidated 8,376,096 10.77 3,111,382 4.00 4,667,072 6.00 Bank 7,760,143 9.98 3,111,382 4.00 4,667,072 6.00 Tier 1 capital (to average assets) Consolidated 8,376,096 10.03 3,340,038 4.00 4,175,048 5.00 Bank 7,760,143 9.27 3,347,787 4.00 4,184,734 5.00
The Company and the Bank were in the well capitalized category at March 31, 2000. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The discussion below details the financial results of the Company and its wholly owned subsidiary, the Bank, through March 31, 2000 and is separated into two parts which are labeled, Financial Condition and Results of Operations. The Financial Condition compares the balance sheets at March 31, 2000 and December 31, 1999. The Results of Operations compares the three months ended March 31, 2000 to the three month period ended March 31, 1999. Both parts should be read in conjunction with the interim consolidated condensed financial statements and footnotes included in Item 1 of this Form 10-QSB. This discussion and analysis of financial condition and results of operations, and other sections of the 10-QSB 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 Company 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. The Company 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 include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in the national and local economy; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. FINANCIAL CONDITION Total assets increased by $20,661,847 to $93,360,774 at March 31, 2000 from $72,698,927 at December 31, 1999. This is a 28% increase in assets during the first quarter of 2000. Growth is mostly attributable to commercial loan volume and security purchases. Management continues to focus on small- to medium-sized business customers, the original strategy since opening in January 1999. Next quarter, the Company anticipates continued growth but does not believe that the rate of increase will be equivalent to that experienced in the first three months of 2000. 18 Cash and cash equivalents increased by $891,657 to $2,858,231 at March 31, 2000 from $1,966,574 at December 31, 1999. This increase was a result of federal funds being sold at March 31, 2000 and higher balances on deposit in our correspondent bank accounts. As a result of the rapid growth since the commencement of operations, management utilized some of the cash at the holding company to infuse an additional $425,000 of capital to the Bank to ensure that regulatory compliance was met as of quarter end. Management expects additional capital infusions will be needed to continue compliance with these regulatory requirements. Currently a strategy is being formulated which will allow the Company to borrow money for future Bank capital infusions. At this time, the Company has not borrowed any money nor has it entered into any agreement to borrow money. Securities available for sale increased $8,197,025 during the first quarter of 2000. Security purchases were driven by growth in repurchase agreements. A repurchase agreement is not considered a deposit by the FDIC and is not FDIC insured. The liability is treated more like a borrowing of the Bank. To secure the borrowing (repurchase agreement) balances held by customers are typically collateralized by high quality government securities held within the Bank's security portfolio. At the end of 1999, there were few unpledged securities in the Bank's portfolio which required us to purchase additional Treasuries and Agencies to fulfill the collateralization requirement. Total loans climbed to $68,347,813 at March 31, 2000 from $56,798,379 at December 31, 1999. Of the $11,549,434 increase experienced, 74% occurred in the commercial loan portfolio. The "wholesale" banking focus used throughout 1999 is still thriving during the first three months of 2000. Presently, the commercial category of loans comprises 82% of the Bank's total loan portfolio. There are five experienced commercial lenders on staff devoted to pursuing and originating these types of loans. Significant growth was experienced on the "retail" lending side. Installment loans increased $2,804,724, or 48%, over the balance reported at December 31, 1999. A large portion of this growth was the result of new business in indirect automobile loans and the financing of secured leases. Strength in home equity financing also continued during the quarter. Overall, the growth in total loans exceeded expectations however management anticipates the rate of increase to slow during the remaining quarters of 2000. The loan maturities and rate sensitivity of the loan portfolio at March 31, 2000 have been included below:
Within Three to One to After three twelve five five months months years years Total ------------------------------------------------------------------------------- Commercial, financial and other $5,352,753 $10,527,627 $33,632,642 $6,576,317 $56,089,338 Real estate-construction 300,795 1,260,657 0 0 1,561,452 Real estate-mortgages 0 0 187,339 1,880,488 2,067,827 Installment loans to individuals 246,951 317,992 5,015,713 3,048,540 8,629,196 ------------------------------------------------------------------------------- $5,900,499 $12,106,276 $38,835,693 $11,505,345 $68,347,813 =============================================================================== Loans at fixed rates 711,386 1,968,199 36,561,046 7,346,113 $46,586,744 Loans at variable rates 5,189,113 10,138,077 2,274,647 4,159,232 21,761,069 ------------------------------------------------------------------------------- $5,900,499 $12,106,276 $38,835,693 $11,505,345 $68,347,813 -------------------------------------------------------------------------------
At March 31, 2000, the allowance totaled $1,024,000 or approximately 1.5% of gross loans booked since commencing operations. Management has determined this is an appropriate level based on their estimate of losses inherent in the loan portfolio from comparison with allowance levels maintained by other institutions with similar, but seasoned loan portfolios. Management will continue to monitor the allowance for loan loss levels and make necessary 19 adjustments through the provision for loan losses. As such, an additional $172,000 was provided for since December 31, 1999. At the end of March, loans 30-59 days past due totaled $538,142 up from $109,000 at December 31,1999. Additionally, there was one loan for $5,075 that was past due more than 89 days while there were none past due more than 89 days at December 31, 1999. The Bank had a single non-accrual loan at March 31, 2000 for $2,148 while there were no non-accrual loans at December 31, 1999. The Bank recorded no credit losses in the first quarter of 2000. Bank premises and equipment decreased $58,093 to $3,411,860 at March 31, 2000 from $3,469,953 at December 31, 1999. Accumulated depreciation and amortization represented $282,143 at year-end compared to $288,697 at March 31, 2000. No significant capital expenditures have been made in 2000. Fully depreciated leasehold improvements of approximately $81,000 were written off the books in January. Accrued interest receivable increased $206,681 or 63% over year-end due to the large growth recorded in both securities available for sale and loans during the first three months of 2000. Deposit balances were $68,565,006 at March 31, 2000 up from $55,976,077 at December 31, 1999. Management has chosen to fund a portion of the rapid loan growth by obtaining brokered deposits. Brokered deposits are time deposits obtained from depositors located outside of our market area and are placed with the Bank by a deposit broker. Approximately 23% of the total deposits reported were brokered at quarter end compared to 19% at year-end. The increase in brokered deposits only accounts for 40% of the $12,588,929 increase in total deposits during the first quarter. Significant growth was also recorded in money market accounts, as well as regular and interest bearing demand deposit accounts. Repurchase agreements increased $9,681,409 since December 31, 1999. This represents an increase of 189% during the quarter. The growth is attributable mainly to customers increasing their carrying balances from those held at year-end (Y2K). Federal funds purchased were reduced to zero from a balance of $1,800,000 at year-end however the Bank borrowed $1,500,000 from the Federal Home Loan Bank on March 24, 2000. The interest rate on the advance is fixed at 5.99% for three years. The Bank has the option to pay off the advance at that time otherwise the note will convert to a floating rate for an additional seven years. The final maturity is March 24, 2010. Accrued expenses and other liabilities decreased $992,981 to $260,616 at March 31, 2000 from $1,253,597 at December 31, 1999. Included in 1999's year-end balance were two US Agency securities purchased on December 30, 1999 with a par value of $1,000,000. The securities settled on January 4, 2000. RESULTS OF OPERATIONS It should be mentioned that comparative information on the results of operations between the first quarter of 2000 and that of 1999 is not exactly equal in the number of days of operation 20 because the Bank did not open until January 18, 1999. As such, there were 91 days of operations in the first quarter of 2000 compared to 73 days in the first quarter of 1999. The net loss of $254,781 at March 31, 2000 was less than half that recorded for the same quarter in 1999. The loss for the first quarter of 1999 was $597,471 or $342,690 higher than that shown for the first quarter of 2000. The Company's retained deficit was $2,495,115 at March 31, 2000 compared to $2,240,334 at December 31, 1999. Although the retained deficit and net losses were expected, the operating losses for the first quarter of 2000 were less than management's internal, budgeted goal. The following table sets forth certain information relating to the Company's consolidated average interest earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the period indicated. Such yields and costs are derived by dividing income or expenses by the average daily balance of assets or liabilities, respectively, for the period presented.
Three months ended March 31, 2000 Average Average balance Interest rate ---------------------------- --------------- ---------- Assets Federal funds sold and interest-bearing deposits with banks $ 1,691,558 $ 24,087 5.70 % Investment securities-available for sale 14,013,124 229,936 6.56 Loans 62,736,500 1,363,035 8.69 ---------------------------- --------------- ---------- 78,441,182 1,617,058 8.25 Other assets 5,059,776 ---------------------------- $ 83,500,958 ============================ Liabilities and Shareholders' Equity Interest-bearing deposits $ 60,100,504 $ 841,875 5.60 Federal funds purchased, repurchase agreements and Federal Home Loan Bank advances 10,797,693 134,499 4.98 ---------------------------- --------------- ---------- 70,898,197 976,374 5.51 Noninterest-bearing deposits 4,902,352 Other liabilities 348,692 Shareholders' Equity 7,351,717 ---------------------------- $ 83,500,958 ============================ Net interest income $ 640,684 =============== Net interest margin on earning assets 2.74 % ==========
The Net interest margin on average earning assets increased 1.60% since March 31, 1999. Net interest income was $640,684 at March 31, 2000; an increase of $492,171 over March 31, 1999. Interest income of $1,617,058 was generated primarily from booking loans, purchasing securities, and selling federal funds. This was 631% more than the interest income recorded in the first quarter of 1999. Interest expense incurred on deposits, repurchase agreements, federal funds purchased and Federal Home Loan Bank advances totaled $976,374 21 at quarter end which is an increase of $903,583 (1,241%) over the same expense categories in 1999. The provision for loan losses was $172,000 at March 31, 2000 compared to $244,400 at March 31, 1999. There was a $72,400 decrease in the provision booked between the first quarter of 1999 and that of 2000. The allowance continues to be maintained at 1.5% of gross loans outstanding. Management believes that this ratio is prudent and justifiable but will continue to review the reserve to ensure that it is aligned with loss experience. This ratio may be increased or decreased in the future as management continues to monitor the loan portfolio and actual loan loss experience. Non-interest income of $78,859 was recorded as of March 31, 2000. Service charge income is a major contributor to the increase shown in this category, representing 60% of the change from 1999's first quarter results to the first quarter results for 2000. Management believes that the service charge portion of non-interest income will continue to increase in future quarters due to anticipated growth in the number of deposit accounts. Mortgage loan referral fees also increased 230% over last years first quarter. Although this income category continues to exceed management's expectations, it is difficult to predict their future contributions to non-interest income because of their dependence on interest rates which are subject to market forces. Non-interest expenses were $802,324 which was an increase of 57% over the first quarter of 1999. Salaries and benefits comprised 68% of the increase or $199,915. There were an additional 6 full-time equivalent employees compared to March 31, 1999. Furniture and equipment expenses increased 48% over last year. Capital expenditures made throughout 1999 to establish the operational foundation of the bank caused increased depreciation expense of $29,177 over the same quarter in 1999. Operating expenses are expected to increase as result of several technological initiatives being undertaken. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company and the Bank may be involved in various legal proceedings that are incidental to their business. In the opinion of management, neither the Company nor the Bank is a party to any current legal proceedings that are material to the financial condition of the Company or the Bank, either individually or in the aggregate. ITEM 2. CHANGES IN SECURITIES Not applicable. 22 ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit No. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule (b) Reports on Form 8-K. Not applicable. 23 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 May 15, 2000. COMMUNITY SHORES BANK CORPORATION By: /s/ Jose' A. Infante --------------------------------------------------- Jose' A. Infante Chairman of the Board, President and Chief Executive Officer (principal executive officer) By: /s/ Tracey A. Welsh --------------------------------------------------- Tracey A. Welsh (principal financial and accounting officer) 24 EXHIBIT INDEX Exhibit No. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998. 11 Statement re Computation of Per Share Earnings. 27 Financial Data Schedule. EX-11 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 SELECTED RATIOS AND STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
01/1/00 to Return on Equity and Assets Annualized 03/31/00 ------------ ------------- Return on average total assets (1.24) % (0.31) % Return on average equity (13.88) (3.47) Dividend payout ratio N/A Average equity to average assets 8.80 Statement of Per Share Earnings Net Loss $ (254,781) ============== Average shares outstanding 1,170,000 Basic and diluted loss per share $ (0.22) ==============
EX-27 3 FINANCIAL DATA SCHEDULE
9 3-MOS DEC-31-2000 MAR-31-2000 154160 23843 300000 0 18964829 0 0 68347813 1024000 93360774 68565006 14815900 260616 1500000 0 0 10871211 (2495115) 93360774 1363035 229936 24087 1617058 841875 976374 640684 172000 0 802324 (254781) (254781) 0 0 (254781) (.22) (.22) 2.74 2148 0 0 0 (852000) 0 0 (1024000) (1024000) 0 0
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