10QSB 1 k64483e10qsb.txt QUARTERLY REPORT 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 June 30, 2001 [ ] 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) (231) 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 August 1, 2001, 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 I. Condensed Consolidated Financial Statements (Unaudited)...................... 1 Item 2. Management's Discussion and Analysis or Plan of Operation..................................................................... 11 PART II. Other Information Item 1. Legal Proceedings............................................................. 21 Item 2. Changes in Securities ........................................................ 21 Item 3. Defaults upon Senior Securities............................................... 21 Item 4. Submission of Matters to a Vote of Security Holders........................... 21 Item 5. Other Information............................................................. 21 Item 6. Exhibits and Reports on Form 8-K.............................................. 22 Signatures............................................................................. 23
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2001 2000 ------------- ------------- (Unaudited) ASSETS Cash and due from financial institutions $ 7,766,440 $ 3,533,107 Interest-bearing deposits in other financial institutions 27,971 29,219 Federal funds sold 3,500,000 2,700,000 ------------ ------------ Total cash and cash equivalents 11,294,411 6,262,326 Securities Available for sale (at fair value) 19,763,057 19,858,021 Held to maturity (at amortized cost) 60,000 0 ------------ ------------ Total securities 19,823,057 19,858,021 Loans, net 102,795,859 94,381,474 Federal Home Loan Bank stock 425,000 300,000 Premises and equipment,net 3,352,216 3,367,996 Accrued interest receivable 694,575 817,405 Other assets 177,862 163,214 ------------ ------------ Total assets $138,562,980 $125,150,436 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non interest-bearing $ 11,994,210 $ 7,000,732 Interest-bearing 93,455,518 90,886,408 ------------ ------------ Total deposits 105,449,728 97,887,140 Federal funds purchased and repurchase agreements 12,497,646 9,986,742 Federal Home Loan Bank advances 8,500,000 6,000,000 Notes Payable 3,000,000 2,005,000 Accrued expenses and other liabilities 419,955 778,308 ------------ ------------ Total liabilities 129,867,329 116,657,190 Shareholders' Equity Preferred Stock, no par value: 1,000,000 shares authorized and none issued 0 0 Common Stock, no par value: 9,000,000 shares authorized and 1,170,000 shares outstanding 10,871,211 10,871,211 Retained deficit (2,583,645) (2,619,299) Accumulated other comprehensive income 408,085 241,334 ------------ ------------ Total shareholders' equity 8,695,651 8,493,246 ------------ ------------ Total liabilities and shareholders' equity $138,562,980 $125,150,436 ============ ============
See accompanying notes to condensed consolidated financial statements. - 1 - 4 COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Three Months Six Months Six Months Ended Ended Ended Ended 06/30/01 06/30/00 06/30/01 06/30/00 ------------ ------------ ------------ ------------ Interest and dividend income Loans, including fees $ 2,222,153 $ 1,690,895 $ 4,440,675 $ 3,053,930 Securities 312,867 309,296 632,184 536,483 Federal funds sold, FHLB dividends and other income 61,586 17,481 161,785 44,317 ------------ ------------ ------------ ------------ Total interest income 2,596,606 2,017,672 5,234,644 3,634,730 Interest expense Deposits 1,308,151 1,059,513 2,748,650 1,901,388 Repurchase agreements and federal funds purchased 113,785 149,682 222,916 281,186 Federal Home Loan Bank advances and notes payable 152,325 44,498 288,091 47,493 ------------ ------------ ------------ ------------ Total interest expense 1,574,261 1,253,693 3,259,657 2,230,067 NET INTEREST INCOME 1,022,345 763,979 1,974,987 1,404,663 Provision for loan losses 91,220 151,000 192,720 323,000 ------------ ------------ ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 931,125 612,979 1,782,267 1,081,663 Noninterest income Service charge income 111,463 51,922 209,202 96,886 Mortgage referral income 46,780 22,946 82,333 38,762 Gain on disposition of securities 0 0 5,036 0 Other 28,133 32,077 56,626 50,156 ------------ ------------ ------------ ------------ Total noninterest income 186,376 106,945 353,197 185,804 Noninterest expense Salaries and employee benefits 547,716 430,584 1,105,281 898,019 Occupancy 63,912 46,686 124,060 98,140 Furniture and equipment 113,440 102,059 226,380 194,286 Advertising 14,614 25,189 36,634 41,801 Data Processing 51,490 25,112 92,458 54,126 Professional services 95,325 108,000 150,999 150,481 Telephone 9,699 8,287 23,071 18,926 Supplies 18,941 13,517 38,861 32,750 Directors and officers insurance 3,012 2,897 6,024 5,958 Other 167,494 23,304 296,042 93,472 ------------ ------------ ------------ ------------ Total noninterest expense 1,085,643 785,635 2,099,810 1,587,959 INCOME (LOSS) BEFORE FEDERAL INCOME TAX 31,858 (65,711) 35,654 (320,492) Federal income tax expense 0 0 0 0 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 31,858 $ (65,711) $ 35,654 $ (320,492) ============ ============ ============ ============ Basic and diluted earnings (loss) per share $ 0.03 $ (0.06) $ 0.03 $ (0.27) ============ ============ ============ ============ Weighted average shares outstanding 1,170,000 1,170,000 1,170,000 1,170,000 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. - 2 - 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, 2000 1,170,000 $ 10,871,211 $ (2,240,334) $ (96,115) $ 8,534,762 Comprehensive Loss: Net loss (320,492) (320,492) Change in unrealized loss on securities available for sale (49,676) (49,676) ------------ Total comprehensive loss (370,168) --------- ------------ ------------ ------------ ------------ Balance, June 30, 2000 1,170,000 $ 10,871,211 $ (2,560,826) $ (145,791) $ 8,164,594 ========= ============ ============ ============ ============ Balance, January 1, 2001 1,170,000 $ 10,871,211 $ (2,619,299) $ 241,334 $ 8,493,246 Comprehensive income: Net income 35,654 35,654 Change in unrealized gain on securities available for sale 166,751 166,751 ------------ Total comprehensive income 202,405 --------- ------------ ------------ ------------ ------------ Balance, June 30, 2001 1,170,000 $ 10,871,211 $ (2,583,645) $ 408,085 $ 8,695,651 ========= ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. - 3 - 6 COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Three Months Six Months Six Months Ended Ended ended Ended 06/30/01 06/30/00 06/30/01 06/30/00 ------------ ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 31,858 $ (65,711) $ 35,654 $ (320,492) Adjustments to reconcile net loss to net cash from operating activities Provision for loan losses 91,220 151,000 192,720 323,000 Depreciation and amortization 107,447 94,644 213,056 180,412 Net accretion of securities (41,500) (32,839) (77,643) (54,677) Net realized gain on security dispositions 0 0 (5,036) 0 Net change in: Accrued interest receivable 21,146 (122,589) 122,830 (329,270) Other assets 51,823 (32,605) (14,648) (79,748) Accrued expenses and other liabilities (542,145) 116,458 (358,353) (876,523) ------------ ------------ ------------ ------------ Net cash from (used in) operating activities (280,151) 108,358 108,580 (1,157,298) CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Maturities, prepayments and calls 3,505,337 550,583 6,533,557 579,878 Purchases (3,192,052) 0 (6,189,163) (8,265,211) Activity in held to maturity securities: Purchases (60,000) 0 (60,000) 0 Loan originations and payments, net (3,055,288) (13,339,961) (8,607,105) (24,889,395) Purchase of Federal Home Loan Bank stock (125,000) (71,800) (125,000) (71,800) Additions to premises and equipment (61,514) (46,503) (197,276) (74,178) ------------ ------------ ------------ ------------ Net cash used in investing activities (2,988,517) (12,907,681) (8,644,987) (32,720,706) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits (2,311,817) 19,483,976 7,562,588 32,072,905 Net change in federal funds purchased and repurchase agreements 622,291 (4,514,267) 2,510,904 3,367,142 Federal Home Loan Bank activity: New Advances 2,500,000 8,100,000 2,500,000 9,600,000 Maturities and payments 0 (8,100,000) 0 (8,100,000) Net proceeds from Note Payable 145,000 0 995,000 1,085,000 ------------ ------------ ------------ ------------ Net cash from financing activities 955,474 14,969,709 13,568,492 38,025,047 Net change in cash and cash equivalents (2,313,194) 2,170,386 5,032,085 4,147,043 Beginning cash and cash equivalents 13,607,605 5,710,000 6,262,326 1,966,574 ------------ ------------ ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 11,294,411 $ 7,880,386 $ 11,294,411 $ 6,113,617 ============ ============ ============ ============ Supplemental cash flow information: Cash paid during the period for interest $ 2,141,748 $ 1,339,708 $ 2,932,621 $ 1,953,460
See accompanying notes to condensed consolidated financial statements. - 4 - 7 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION: The unaudited financial statements as of and for the three months and six months ended June 30, 2001 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 June 30, 2001 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, 2000. Some items in the prior year financial statements were reclassified to conform to the current presentation. 2. SECURITIES The following tables represent the securities held in the Company's portfolio at June 30, 2001 and at December 31, 2000:
Gross Gross Amortized Unrealized Unrealized Fair (Unaudited) Cost Gains Losses Value % ----------- ------------ ---------- ---------- ------------ ----- Available for sale: US Government Agency $ 13,533,528 357,142 (529) $ 13,890,141 70.1% Mortgaged-backed securities 5,821,443 59,805 (8,332) 5,872,916 29.6 ------------ ------- ------- ------------ ----- 19,354,971 416,947 (8,861) 19,763,057 99.7 Held to maturity: Municipal securities 60,000 0 0 60,000 0.3 ------------ ------- ------- ------------ ----- Total securities at June 30, 2001 $ 19,414,971 $416,947 $(8,861) $ 19,823,057 100.0% ============ ======== ======== ============ ======
Gross Gross Amortized Unrealized Unrealized Fair (Unaudited) Cost Gains Losses Value % ----------- ------------ ---------- ---------- ------------ ----- Available for sale: US Government Agency $ 17,845,529 205,228 (3,754) $ 18,047,003 90.9% Mortgaged-backed securities 1,771,158 39,860 0 1,811,018 9.1 ------------ ------- ------- ------------ ----- $ 19,616,687 245,088 (3,754) $ 19,858,021 100.0 Held to maturity: Municipal securities 0 0 0 0 0.0 ------------ ------- ------- ------------ ----- Total securities at December 31, 2000 $ 19,616,687 $245,088 $(3,754) $ 19,858,021 100.0% ============ ======== ======== ============ ======
-5- 8 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Securities decreased $34,964 during the first six months of 2001. Below is the schedule of maturities for investments held at June 30, 2001:
Securities held -------------------------------- June 30, 2001 Amortized Fair (Unaudited) Cost Value ------------- ----------- ----------- Due in one year or less $ 6,481,055 $ 6,537,660 Due from one to five years 7,052,473 7,352,481 Due in five years or more 60,000 60,000 Mortgage-backed 5,821,443 5,872,916 ----------- ----------- $19,414,971 $19,823,057 =========== ===========
3. LOANS Loans increased $8,527,534 since December 31, 2000. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2000 to the end of the second quarter of 2001 were as follows:
June 30, 2001 ------------------------ December 31, 2000 Percent Balance --------------------- Increase/ (Unaudited) % Balance % (Decrease) ------------ ----- ----------- ----- -------- Commercial, financial and other $ 81,298,978 78.0 % $75,292,915 78.7 % 8.0 % Real estate-construction 3,117,192 3.0 3,504,764 3.7 (11.1) Real estate-mortgages 3,608,511 3.5 2,946,608 3.1 22.5 Installment loans to individuals 16,153,377 15.5 13,906,237 14.5 16.2 ------------ ----- ----------- ----- 104,178,058 100.0 % 95,650,524 100.0 % ===== ===== Less allowance for loan losses 1,382,199 1,269,050 ------------ ----------- $102,795,859 $94,381,474 ============ ===========
4. ALLOWANCE FOR LOAN LOSSES The following is a summary of activity in the allowance for loan losses account for the three and six month periods ended June 30, 2001 and 2000:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended (Unaudited) 06/30/01 06/30/00 06/30/01 06/30/00 ---------- ----------- ----------- ----------- ------------ Beginning Balance $ 1,321,094 $ 1,024,000 $ 1,269,050 $ 852,000 Charge-offs (38,986) (7,011) (111,307) (7,011) Recoveries 8,871 0 31,736 0 Provision charged against operating expense 91,220 151,000 192,720 323,000 ----------- ----------- ----------- ------------ Ending Balance $ 1,382,199 $ 1,167,989 $ 1,382,199 $ 1,167,989 =========== =========== =========== ============
-6- 9 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. DEPOSITS Deposit balances increased $7,562,588 since December 31, 2000. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2000 to the end of the second quarter of 2001 were as follows:
June 30, 2001 -------------------------- December 31, 2000 Percent Balance --------------------- Increase/ (Unaudited) % Balance % (Decrease) ----------- ------ ------------ ------ ---------- Noninterest-bearing Demand $ 11,994,210 11.4% $ 7,000,732 7.2% 71.3% Interest-bearing Checking 19,266,801 18.3 9,843,874 10.1 95.7 Money Market 9,820,027 9.3 8,309,449 8.4 18.2 Savings 1,450,558 1.4 925,688 0.9 56.7 Time, under $100,000 31,247,229 29.6 31,598,937 32.3 (1.1) Time, over $100,000 31,670,903 30.0 40,208,460 41.1 (21.2) ------------ ----- ----------- ----- Total Deposits $105,449,728 100.0% $97,887,140 100.0% ============ ===== =========== =====
6. SHORT-TERM BORROWINGS At June 30, 2001 and December 31, 2000, the Bank's short-term borrowings were made up of repurchase agreements only. In the six month period since December 31, 2000 outstanding borrowings increased $2,510,904. As such the June 30, 2001 and December 31, 2000 information was as follows:
Repurchase Agreements ----------------------------- June 30, December 31, 2001 2000 (Unaudited) -------------- ------------ Outstanding balance $ 12,497,646 $ 9,986,742 Average interest rate 3.70% 4.75% Average balance $ 10,848,363 $ 10,809,223 Average interest rate paid 3.97% 4.82% Maximum outstanding at any month end $ 12,497,646 $ 14,815,900
- 7 - 10 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FEDERAL HOME LOAN BANK BORROWINGS The Bank was approved in the third quarter of 1999 to be a member of the Federal Home Loan Bank of Indianapolis. Based on its current Federal Home Loan Bank Stock holdings the Bank has the capacity to borrow $8,500,000. Each borrowing requires a direct pledge of securities or loans. At this time, the Bank has securities with a market value of $8,303,772 pledged to the Federal Home Loan Bank to support current borrowings. Details of the Bank's outstanding borrowings at both June 30, 2001 and December 31, 2000 are:
Current Interest June 30, 2001 Maturity Date: Rate (Unaudited) December 31, 2000 -------------- -------- ------------- ----------------- December 26, 2001 4.30 $ 2,500,000 $ -- March 24, 2010 5.99 1,500,000 1,500,000 November 3, 2010 5.95 2,000,000 2,000,000 December 13, 2010 5.10 2,500,000 2,500,000 ----------- ----------- Total outstanding at $ 8,500,000 $ 6,000,000 =========== ===========
8. NOTES PAYABLE Since June 28, 2000, the Company borrowed $3,000,000 from four of its Directors and Community Shores LLC. Community Shores LLC (the "LLC") was formed by 7 of the Company's Directors for the purpose of obtaining and lending money to the Company. The members of the LLC are David C. Bliss, Gary F. Bogner, Robert L. Chandonnet, Dennis L. Cherette, Bruce J. Essex, Michael D. Gluhanich and Jose A. Infante. Two of the LLC members lent money directly as well as taking part in the LLC. A summary of the loans is given below:
Aggregate Current Maturity Principal Rate Loan from: Amount ---------- ------------ ------------- ------------- Robert L. Chandonnet $ 200,000 8.25 % June 30, 2006 Michael D. Gluhanich $ 100,000 8.25 % June 30, 2006 Donald E. Hegedus $ 500,000 8.25 % June 30, 2006 John L. Hilt $ 750,000 8.25 % June 30, 2006 Community Shores LLC $ 1,450,000 8.25 % June 30, 2006 ----------- Total $ 3,000,000 ===========
The rate on the above notes is floating and is officially defined as 1.50% over the Firstar Bank, N.A. Prime rate. Firstar's current prime rate is 6.75%. Interest is owed quarterly in - 8 - 11 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) arrears on the fifteenth of April, July, October and January until the principal of these Notes is paid or made available for payment. The notes may be prepaid without any prepayment penalty with at least one day's prior written notice. The principal and interest related to these Notes is expressly subordinated to any and all senior debt of the Company. The proceeds from these Notes were primarily used to infuse capital into the Bank to maintain sufficient capital ratios to comply with banking regulations. 9. 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 as of June 30, 2001 and December 31, 2000 follows:
June 30, December 31, 2001 2000 (Unaudited) (Unaudited) ----------- ------------ Letters of credit $ 1,302,000 $ 306,000 Commercial unused lines of credit 27,915,000 23,700,000 Consumer unused lines of credit 4,983,000 3,329,000 Residential construction commitments 857,000 749,000
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. - 9 - 12 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. 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
Actual capital levels (in thousands) and minimum required levels at June 30, 2001 for the Company and Bank were:
Actual Adequately Capitalized Well Capitalized June 30, 2001 ---------------------- ----------------------- ----------------------- (Unaudited) Amount Ratio Amount Ratio Amount Ratio ------------- ------------ ----- ----------- -------- ------- -------- Total capital (to risk- weighted assets) Consolidated $ 12,669,765 10.90 % $ 9,295,563 8.00 % $ 11,619,454 10.00 % Bank 12,670,969 10.90 9,295,563 8.00 11,619,454 10.00 Tier 1 capital (to risk- weighted assets) Consolidated 8,287,566 7.13 4,647,782 4.00 6,971,672 6.00 Bank 11,288,770 9.72 4,647,782 4.00 6,971,672 6.00 Tier 1 capital (to average assets) Consolidated 8,287,566 6.20 5,346,828 4.00 6,683,535 5.00 Bank 11,288,770 8.45 5,346,828 4.00 6,683,535 5.00
- 10 - 13 COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company and the Bank were in the well capitalized category at June 30, 2001. The Bank was given an additional requirement by the regulators at the time of approval. For the first three years after opening, a Tier 1 capital to total assets ratio of 8.00% must be maintained. At June 30, 2001 the Bank had a ratio of 8.17%. The Company is closely monitoring the Bank's growth and expects to infuse additional capital as necessary to comply with this requirement. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The discussion below details the financial results of the Company and its wholly owned subsidiary, the Bank, through June 30, 2001 and is separated into two parts which are labeled, Financial Condition and Results of Operations. The Financial Condition compares the period ended June 30, 2001 to that which ended on December 31, 2000. The Results of Operations discusses both the three month and six month periods ended June 30, 2001 as compared to the same periods of 2000. Both parts should be read in conjunction with the interim condensed consolidated financial statements and footnotes included in Item 1 of this Form 10-QSB. This discussion and analysis and other sections of this 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. - 11 - 14 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION Total assets increased by $13,412,544 to $138,562,980 at June 30, 2001 from $125,150,436 at December 31, 2000. This is a 11% increase in assets during the first six months of 2001. Growth is mostly attributable to an increase in the Bank's balances held at other financial institutions and loan volume. Management continues to focus on small- to medium-sized business customers, the original strategy since opening in January 1999. Cash and cash equivalents increased by $5,032,085 to $11,294,411 at June 30, 2001 from $6,262,326 at December 31, 2000. This increase was mostly the result of a large deposit of customer checks drawn on other banks being made to the Bank's account with Bank One on the last day of the quarter. Balances due from other financial institutions increased $4,233,333 over the amount held at December 31, 2000. This situation is not a regular occurrence. The balances on deposit with our correspondent banks, in fact, have averaged only $3,071,631 for the first six months of the year. Federal funds sold increased $800,000 during the same period. Securities held decreased slightly by $34,964, in the first two quarters of 2001. In April the Bank funded a general obligation note to a local municipality for $60,000. This municipal security was marked held to maturity and is the only item in the Bank's held to maturity portfolio. Additional security purchases may be required periodically throughout 2001. Purchases will be driven by growth in repurchase agreements. A repurchase agreement is not considered a deposit by the FDIC and is therefore not eligible for FDIC insurance coverage. The recorded liability is treated like a short-term borrowing of the Bank. To secure the short-term borrowing (repurchase agreement), balances held by customers are typically collateralized by high quality government securities held within the Bank's security portfolio. At the June 30, 2001, there were no unpledged securities in the Bank's investment portfolio. If the repurchase balances increase the purchase of additional Treasuries and Agencies will be required to fulfill the collateralization requirement. Total loans climbed to $104,178,058 at June 30, 2001 from $95,650,524 at December 31, 2000. Of the $8,527,534 increase experienced, 70% occurred in the commercial loan portfolio. The "wholesale" banking focus used throughout 1999 and 2000 continued during the first six months of 2001. Presently, the commercial category of loans comprises 78% of the Bank's total loan portfolio. There are four experienced commercial lenders on staff devoted to pursuing and originating these types of loans. Growth was also experienced on the "retail" lending side. Installment loans increased $2,247,140 or 16%, over the balance reported at December 31, 2000. Growth in this category was the result of new business in direct and indirect automobile loans, the financing of secured leases and home equity loans. Overall, the growth in total loans was below expectations but management is working to increase the volume of loans during the remaining quarters of 2001 and is optimistic given the favorable interest rate environment and the opportunities in the Bank's market resulting from the acquisition of a competitor bank by an out-of-state bank holding company. - 12 - 15 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The loan maturities and rate sensitivity of the loan portfolio at June 30, 2001 have been included below:
Within Three to One to After three twelve five five months months years years Total ----------- ----------- ----------- ------------ ----------- Commercial, financial and other $10,120,286 $18,030,249 $46,639,669 $ 6,508,774 $ 81,298,978 Real estate-construction 1,407,889 1,709,303 0 0 3,117,192 Real estate-mortgages 0 150,228 322,246 3,136,037 3,608,511 Installment loans to individuals 708,866 359,281 10,663,281 4,421,949 16,153,377 ----------- ----------- ----------- ------------ ------------ $12,237,041 $20,249,061 $57,625,196 $14,066,760 $104,178,058 =========== =========== =========== ============ ============ Loans at fixed rates 2,596,308 2,369,471 50,497,367 7,588,841 $ 63,051,987 Loans at variable rates 9,640,733 17,879,590 7,127,829 6,477,919 41,126,071 ----------- ----------- ----------- ------------ ------------ $12,237,041 $20,249,061 $57,625,196 $14,066,760 $104,178,058 =========== =========== =========== ============ ============
The loan portfolio is reviewed and analyzed on a regular basis for the purpose of estimating probable credit losses. The allowance for loan losses is adjusted accordingly to maintain an adequate level to absorb probable losses given the risk characteristics of the loan portfolio. At June 30, 2001, the allowance totaled $1,382,199 or approximately 1.33% of gross loans outstanding. Management has determined that this is an appropriate level based on their estimate of losses inherent in the loan portfolio after their detailed review as well as from comparison of allowance levels maintained by other institutions with similar, but seasoned loan portfolios. The allocation of the allowance at June 30, 2001 was as follows:
Percent of allowance related to Balance at End of Period Applicable to: Amount loan category ---------- ------------- Commercial $1,073,703 77.7% Residential real estate 71,943 5.2 Installment 236,553 17.1 Unallocated 0 0.0 ---------- ----- Total loans $1,382,199 100.0% ========== =====
- 13 - 16 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Given the size and composition of the bank's loan portfolio and its concentration of commercial loans, this allocation is felt to be in line with the banking industry's historical loan loss experience. Management will continue to monitor the allocation and make necessary adjustments based on portfolio concentration levels, actual loss experience and the financial condition of the borrowers. As such, an additional $192,720 was provided for since December 31, 2000. At the end of June 2001, loans 30-59 days past due totaled $1,037,505 up from $355,290 at December 31, 2000. Approximately $362,000 of the increase in these past due balances were related to commercial loans and $171,000 were related to consumer loans. Although the percentage of loans 30-59 days past due has increased significantly since December 31, 2000, management feels that it is all in the normal seasoning of the portfolio and that our past due statistics are in line with our peer banks. There was a total of $53,281 past due 60-89 days and none past due more than 89 days at June 30, 2001 compared to $9,473 past due 60-89 days and none in the more than 89 days category at December 31, 2000. The Bank had no non-accrual loans at either June 30, 2001 or December 31, 2000. The Bank recorded net charge-offs of $86,950 in 2000. In the first six months of 2001, net charge-offs were $79,571. Bank premises and equipment decreased $15,780 to $3,352,216 at June 30, 2001 from $3,367,996 at December 31, 2000. Accumulated depreciation and amortization represented $566,367 at year-end compared to $779,422 at June 30, 2001. No significant capital expenditures were made in the first half of 2001. Deposit balances were $105,449,728 at June 30, 2001 up from $97,887,140 at December 31, 2000. Last year management chose 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. During the first half of 2001, balances of this type decreased $11,682,968. Approximately 14% of the total deposits reported were brokered at June 30, 2001 compared to 27% at year-end. The increase in local deposits was $19,245,556. The growth in the categories of interest-bearing checking and money market accounts was due in part to an increase in balances on deposit by several existing public fund customers but also from the addition of new customers. Also on the last day of the quarter, a new public fund customer opened a sizeable jumbo (greater than $100,000) certificate of deposit. Repurchase agreements increased $2,510,904 since December 31, 2000. This represents an increase of 25% for the first six months of 2001. The growth is attributable to customers increasing their carrying balances from those held at year-end as well as the addition of new customers using this banking product. The Bank's Federal Home Loan Bank ("FHLB") advances outstanding increased to $8,500,000 from the $6,000,000 shown last year-end. On June 29, 2001, the Bank arranged to borrow $2,500,000 for 180 days at a variable rate. The proceeds were used to resolve a short-term liquidity deficit created when a brokered certificate of deposit matured on June 21, 2001. By July 2, 2001 the Bank had already repaid the borrowing. On June 26, 2001 a putable advance with a balance of $1,500,000 and a rate of 5.99% was eligible to convert to a floating rate at the option of the FHLB. - 14 - 17 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The FHLB did not exercise its right and the note remains accruing interest at a rate of 5.99%. Going forward the FHLB will have the right to exercise its option every ninety days. In the event that the note converts to a floating rate, management has the right to pay off the note with no pre-payment penalty. At this time it is not anticipated that the advance will convert to a floating rate given the nature of the current rate environment. As of June 30, 2001, the Company had borrowed $3,000,000 from some of its Directors and Community Shores LLC for the purpose of infusing capital into the Bank and to provide cash for the operating expenses of the Company. This balance is $995,000 more than the outstanding balance on December 31, 2000. This debt is subordinated to all senior debt of the Company. The notes have a floating rate and are currently accruing interest at 8.25%. Interest payments are due quarterly on the fifteenth of the month. The next scheduled interest payment is due on October 15, 2001. Based on current asset growth rates the Bank is expecting to be able to support its own growth through the increase in its retained earnings from monthly operating profits. In the event that the Bank's rate of growth exceeds the growth in its retained earnings, the Company expects to request additional funds from Community Shores LLC and to contribute the additional funds to the Bank to maintain the required capital ratio. The Company does not control Community Shores LLC, and it is not obligated to loan additional funds to the Company. RESULTS OF OPERATIONS The net income for the second quarter of 2001 was $31,858 which compares favorably to the net loss of $65,711 recorded in the second quarter of 2000. At June 30, 2001, the Company's year to date income of $35,654 was an improvement of 111% over last years reported loss of $320,492 for the same six month period. For the second quarter and first half of 2001, the annualized return on the Company's average total assets was .09% and .05% respectively. The annualized return on average equity was 1.47% for the quarter and .83% for the first six months of 2001. At June 30, 2001, the ratio of average equity to average assets was 6.39% for the quarter and 6.43% for the preceding six months. The Company's retained deficit was $2,583,645 at June 30, 2001 compared to $2,619,299 at December 31, 2000. The actual operating results for the second quarter and the first half of 2001 were better than management's internal, budgeted goal. The main contributing factor to the above results is the improvement in net interest income. The following tables 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 periods indicated. Such yields and costs are derived by dividing income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented. - 15 - 18 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
Six months ended June 30: ----------------------------------------------------------------------------- 2001 2000 ------------------------------------ ---------------------------------- Average Average Average Average balance Interest rate balance Interest rate ------------- ---------- ------- ---------- ----------- -------- Assets Federal funds sold and interest-bearing deposits with other financial institutions $ 5,899,993 $ 150,044 5.09 % $ 1,274,163 $ 37,830 5.94 % Investment securities 19,785,008 643,925 6.51 16,384,133 542,970 6.63 Loans 101,140,465 4,440,675 8.78 68,856,917 3,053,930 8.87 ------------- ----------- ------- ------------ ----------- -------- 126,825,466 5,234,644 8.25 86,515,213 3,634,730 8.40 Other assets 6,845,233 5,234,987 ------------- ------------ $ 133,670,699 $ 91,750,200 ============= ============ Liabilities and Shareholders' Equity Interest-bearing deposits $ 96,923,518 $ 2,748,650 5.67 $ 64,894,520 $ 1,901,388 5.86 Federal funds purchased and repurchase agreements 11,277,092 222,916 3.95 12,038,058 281,186 4.67 Note payable and Federal Home Loan Bank advances 8,546,160 288,091 6.74 860,742 47,493 11.04 ------------- ----------- ------- ------------ ----------- -------- 116,746,770 3,259,657 5.58 77,793,320 2,230,067 5.73 Noninterest-bearing deposits 7,467,260 5,455,381 Other liabilities 859,307 349,400 Shareholders' Equity 8,597,362 8,152,099 ------------- ------------ $ 133,670,699 $ 91,750,200 ============= ============ Net interest income $ 1,974,987 $ 1,404,663 Net interest spread on earning assets 2.67 % 2.67 % ======= ======== Net interest margin on earning assets 3.11 % 3.25 % ======= ========
The net interest spread on average earning assets remained at 2.67% since June 30, 2000. The net interest margin changed 14 basis points from 3.25% at June 30, 2000 to 3.11% at June 30, 2001. Year to date net interest income was $1,974,987 compared to a figure of $1,404,663 for the same six months in 2000, an increase of $570,324 or 41%. Interest income recorded for the half was generated primarily from booking loans, purchasing securities, and selling federal funds. Year to date Interest income through June 30, 2001 was $5,234,644 compared to $3,634,730 recorded for the same six month period in 2000. The year to date figure reflects 44% more interest income in 2001 compared to 2000. Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable totaled $3,259,657 for the first six months of 2001. This category has increased $1,020,590 (46%) compared to the first half of 2000. The significant increases shown in both interest income and interest expense over last year are largely attributable to the growth of both interest earning assets and interest bearing liabilities. The unfavorable change in the net interest margin is partially due to the increased cost incurred to attract brokered deposits which - 16 - 19 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS were used to fund a large portion of last year's asset growth. As the brokered deposits mature the Bank is able to replace the deposits with lower costing funds which will likely have a positive effect on its net interest margin. To a lesser degree there has been some impact on the margin resulting from changes in the Bank's internal prime rate. Since January 2001 the Federal Reserve has decreased the national Federal Funds rate by 275 basis points which in turn has caused the Bank's internal prime rate to decrease from 9.50% to 6.75%. The impact of prime rate decreases is negative on the interest income generated on variable rate loan products. At June 30, 2001 only 39% of the Bank's loan portfolio was variable. Conversely, it is expected that the declining interest rate environment that the economy is now experiencing will have a significant but positive effect on the Company's net interest spread and net interest margin in the next two quarters. This expectation is based on the fact that in the next twelve months nearly $48,000,000 in time deposits are expected to reprice to current market rates thus lowering interest expense and improving net interest income. Illustrated below is a table that shows a quarter to quarter comparison of the Company's net interest margin.
Three months ended June 30: ---------------------------------------------------------------------------------- 2001 2000 ---------------------------------------- -------------------------------------- Average Average Average Average balance Interest rate balance Interest rate ------------- ----------- ------- ------------ ----------- -------- Assets Federal funds sold and interest-bearing deposits with other financial institutions $ 4,880,403 $ 55,763 4.57 % $ 856,767 $ 13,743 6.42 % Investment securities 20,304,723 318,690 6.28 18,755,142 313,034 6.68 Loans 103,419,314 2,222,153 8.59 74,977,335 1,690,895 9.02 ------------- ----------- ------- ------------ ----------- -------- 128,604,440 2,596,606 8.08 94,589,244 2,017,672 8.53 Other assets 6,851,647 5,410,198 ------------- ------------ $ 135,456,087 $ 99,999,442 ============= ============ Liabilities and Shareholders' Equity Interest-bearing deposits $ 96,605,731 $ 1,308,151 5.42 $ 70,563,976 $ 1,059,513 6.01 Federal funds purchased and repurchase agreements 11,829,414 113,785 3.85 12,169,633 149,682 4.92 Note payable and Federal Home Loan Bank advances 9,037,418 152,325 6.74 2,830,274 44,498 6.29 ------------- ----------- ------- ------------ ----------- -------- 117,472,563 1,574,261 5.36 85,563,883 1,253,693 5.86 Noninterest-bearing deposits 8,465,150 6,033,262 Other liabilities 832,671 346,466 Shareholders' Equity 8,685,703 8,055,831 ------------- ------------ $ 135,456,087 $ 99,999,442 ============= ============ Net interest income $ 1,022,345 $ 763,979 =========== =========== Net interest spread on earning assets 2.72 % 2.67 % ======= ======== Net interest margin on earning assets 3.18 % 3.23 % ======= ========
- 17 - 20 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS An analysis of this year's and last year's second quarter will show that the maturities of brokered deposits is affecting the cost of funds in a positive way. The yield on interest earning liabilities has improved by .50 while the yield on interest earning assets has only decreased by .45 in spite of the many rate reductions made to the Federal Funds rate since January 2001. Overall the net interest spread was higher (.05) for this year's second quarter compared to last year's similar quarter. Conversely the net interest margin was lower by the same amount (.05) but the gap is narrowing. As the Bank's cost of funds declines and prime rate changes are always a possibility, asset liability management has become an important tool for assessing and monitoring interest rate sensitivity. 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. 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. 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. - 18 - 21 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Details of the repricing gap at June 30, 2001 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 $ 27,971 $ 0 $ 0 $ 0 $ 27,971 Federal Funds Sold 3,500,000 0 0 0 3,500,000 Securities 2,498,220 3,982,834 7,052,473 6,714,530 20,248,057 Loans 43,825,548 7,213,053 50,398,669 2,740,788 104,178,058 ------------ ------------ ------------ ------------ ------------- 49,851,739 11,195,887 57,451,142 9,455,318 127,954,086 Interest-bearing liabilities Savings and checking 30,537,386 0 0 0 30,537,386 Time deposits less than $100,000 6,206,042 13,923,973 11,117,214 0 31,247,229 Time deposits greater than $100,000 14,543,223 13,183,681 3,943,999 0 31,670,903 Repurchase agreements 12,497,646 0 0 0 12,497,646 Notes Payable and Federal Home Loan Bank Advances 7,000,000 2,500,000 2,000,000 0 11,500,000 ------------ ------------ ------------ ------------ ------------- 70,784,297 29,607,654 17,061,213 0 117,453,164 Net asset (liability) repricing gap $(20,932,558) $(18,411,767) $ 40,389,929 $ 9,455,318 $ 10,500,922 ============ ============ ============ ============ ============= Cumulative net asset (liability) repricing gap $(20,932,558) $(39,344,325) $ 1,045,604 $ 10,500,922 ============ ============ ============ ============
The provision for loan losses for the second quarter and the six months ended June 30, 2001 were $91,220 and $192,720 respectively compared to figures of $151,000 and $323,000 for the same periods in 2000. Management believes that the allowance level is adequate and justifiable based on the factors discussed earlier (see Financial Condition). Management will continue to review the allowance to make sure that it is maintained at an appropriate level. The provision may be increased or decreased in the future as management continues to monitor the loan portfolio and actual loan loss experience. Non-interest income recorded in the second quarter totaled $186,376 and represented an increase of 74% over last year's second quarter. Through June 30, 2001, non-interest income was $353,197 compared to a figure of $185,804 for the first six months of 2000. Service charge income is a major contributor to the increase shown in this category, representing 75% of the change from 2000's second quarter results and 67% of the year to date results. 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. Improving as well were mortgage loan referral fees. Fees earned for the second quarter and six months ended June 30, 2001 were higher than the same - 19 - 22 COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS periods in 2000. Comparing the similar quarter, fees shown of $46,780 were an improvement of $23,834 over last year. The first half of the year shows an increase of $43,571 (112%) over the first half of last year. It is difficult to predict future contributions by mortgage loan referral fees to non-interest income because of their dependence on interest rates which are subject to market forces. Historically, however, it is true that in a declining rate environment, it can be expected that mortgage loan activity would increase. Non-interest expenses for the first half of 2001 increased 32% over the same period in 2000. The figure for the first six months of 2001 was $2,099,810 compared to a total of $1,587,959 for the first half of 2000. The second quarter expenses also increased over last year's second quarter by a total of $300,008. Salaries and benefits comprised 40% of the year to date increase and 39% of the second quarter increase. There were an additional 9 full-time equivalent employees at June 30, 2001 compared to June 30, 2000. Occupancy and furniture and equipment expenses grew $28,607 (10%) for the second quarter and $58,014 (11%) for the first half. General growth as well as the opening of the Bank's second branch in North Muskegon was directly responsible for these additions to staff and capital assets. The line item showing other non-interest expenses has increased $144,190 compared to the similar quarter in 2000 and $202,570 compared to the same six month period last year. The increase in loan expenses is responsible for 18% of the year to date increase. In the first six months of this year, the Bank has spent $17,652 on loan collection and repossession fees versus the $481 spent during the first six months of 2000. As the loan portfolio grows, expenses of this nature are to be expected. Another category of non-interest expense that has been unusually large is branch losses. Unfortunately the Bank was subject to two criminal incidents in the second quarter of 2001 that resulted in losses totaling approximately $15,000. This figure compares unfavorably to an amount of $117 recorded from January through June of 2000. Although management feels that the branch policies and procedures in place are adequate and should protect the Bank from undue loss, we have begun to analyze each loss situation and will evaluate whether any policies and procedures should be revised to aid in preventing future losses of a similar nature. Both loss situations were reported to the police however, it is unlikely at this point that a recovery will be made. Other non-interest expenses that are included in this line item are promotional expense, regulator examination fees, outside service and director fees, all of which have increased proportionately as a result of the general growth of the Bank. Beginning January 1, 2001, a new accounting standard required all derivatives be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This change did not have any effect on the Company's financial statements because there were no derivatives holdings during the second quarter of 2001. - 20 - 23 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At its Annual Meeting held on April 19, 2001, the Company's stockholders voted to elect three directors, David C. Bliss, Bruce J. Essex, and John L. Hilt, each for a three year term expiring at the Annual Meeting of the stockholders of the Company in 2004. The results of the Election were as follows:
Votes Votes Votes Broker-Non Nominee For Withheld Abstained Votes ------- --------- -------- --------- ---------- David C. Bliss 1,057,100 100 0 0 Bruce J. Essex 1,057,100 100 0 0 John L. Hilt 1,057,100 100 0 0
The terms for the following directors (who were not up for election) continued after the Annual Meeting: Gary F. Bogner, John C. Carlyle, Robert L. Chandonnet, Dennis L. Cherette, Michael D. Gluhanich, Donald E. Hegedus, Jose A. Infante and Joy R. Nelson. ITEM 5. OTHER INFORMATION Not applicable. - 21 - 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (10) 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. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated April 13, 2001. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated April 13, 2001.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. - 22 - 25 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2001. 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) - 23 - 26 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. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated April 13, 2001. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated April 13, 2001.
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