10QSB 1 k66003e10qsb.txt QUARTERLY REPORT DATED 09/30/01 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 September 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 November 1, 2001, 1,170,000 shares of Common Stock of the issuer were outstanding. Transitional Small Business Disclosure Format: Yes No X ------ ------ Community Shores Bank Corporation Index PART 1. Financial Information Page No. Item I. Financial Statements .................................. 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...................................... 22 Item 6. Exhibits and Reports on Form 8-K....................... 22 Signatures...................................................... 24 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2001 2000 --------------- ------------- (Unaudited) ASSETS Cash and due from financial institutions $ 3,185,215 $ 3,533,107 Interest-bearing deposits in other financial institutions 69,657 29,219 Federal funds sold 100,000 2,700,000 --------------- ------------- Total cash and cash equivalents 3,354,872 6,262,326 Securities Available for sale (at fair value) 21,864,930 19,858,021 Held to maturity (at amortized cost) 60,000 0 ---------------- -------------- Total securities 21,924,930 19,858,021 Loans, net 112,345,057 94,381,474 Federal Home Loan Bank stock 425,000 300,000 Premises and equipment, net 3,263,758 3,367,996 Accrued interest receivable 714,361 817,405 Other assets 342,679 163,214 --------------- ------------- Total assets $ 142,370,657 $ 125,150,436 =============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non interest-bearing $ 9,051,329 $ 7,000,732 Interest-bearing 99,862,604 90,886,408 --------------- ------------- Total deposits 108,913,933 97,887,140 Repurchase agreements 12,787,783 9,986,742 Federal Home Loan Bank advances 8,000,000 6,000,000 Notes Payable 3,100,000 2,005,000 Accrued expenses and other liabilities 508,480 778,308 --------------- ------------- Total liabilities 133,310,196 116,657,190 Shareholders' Equity Preferred Stock, no par value: 1,000,000 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 (2,418,334) (2,619,299) Accumulated other comprehensive income 607,584 241,334 --------------- ------------- Total shareholders' equity 9,060,461 8,493,246 --------------- ------------- Total liabilities and shareholders' equity $ 142,370,657 $ 125,150,436 =============== =============
See accompanying notes to condensed consolidated financial statements. -1- COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended 09/30/01 09/30/00 09/30/01 09/30/00 ------------ ------------ ----------- ----------- Interest and dividend income Loans, including fees $ 2,274,785 $ 1,962,650 $ 6,715,460 $ 5,016,580 Securities 315,698 310,398 947,882 846,881 Federal funds sold, FHLB dividends and other income 39,611 82,785 201,396 127,102 ----------- ----------- ----------- ----------- Total interest income 2,630,094 2,355,833 7,864,738 5,990,563 Interest expense Deposits 1,187,406 1,353,631 3,936,056 3,255,019 Repurchase agreements and federal funds purchased 120,964 135,423 343,880 416,609 Federal Home Loan Bank advances and notes payable 150,546 54,090 438,637 101,583 ----------- ----------- ----------- ----------- Total interest expense 1,458,916 1,543,144 4,718,573 3,773,211 NET INTEREST INCOME 1,171,178 812,689 3,146,165 2,217,352 Provision for loan losses 101,300 85,500 294,020 408,500 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,069,878 727,189 2,852,145 1,808,852 Noninterest income Service charge income 54,229 62,006 263,431 158,892 Mortgage referral income 45,021 21,991 127,354 60,753 Gain on disposition of securities 0 618 5,036 618 Other 34,682 21,284 91,308 71,440 ----------- ----------- ----------- ----------- Total noninterest income 133,932 105,899 487,129 291,703 Noninterest expense Salaries and employee benefits 560,079 504,984 1,665,360 1,403,003 Occupancy 67,636 55,990 191,696 154,130 Furniture and equipment 118,067 97,717 344,447 292,003 Advertising 5,279 26,787 41,913 68,588 Data Processing 47,152 29,119 139,610 83,245 Professional services 74,893 110,838 225,892 261,319 Telephone 10,698 8,770 33,769 27,696 Supplies 18,781 16,074 57,642 48,824 Directors and officers insurance 3,012 3,012 9,036 8,970 Other 132,902 85,816 428,944 179,288 ----------- ----------- ----------- ----------- Total noninterest expense 1,038,499 939,107 3,138,309 2,527,066 INCOME (LOSS) BEFORE FEDERAL INCOME TAX 165,311 (106,019) 200,965 (426,511) Federal income tax expense 0 0 0 0 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 165,311 $ (106,019) $ 200,965 $ (426,511) =========== =========== =========== =========== Basic and diluted earnings (loss) per share $ 0.14 $ (0.09) $ 0.17 $ (0.36) =========== =========== =========== =========== 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- 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 (426,511) (426,511) Change in unrealized loss on securities available for sale 83,864 83,864 ----------- Total comprehensive loss (342,647) --------------------------------------------------------------------------------- Balance, September 30, 2000 1,170,000 $ 10,871,211 $ (2,666,845) $ (12,251) $ 8,192,115 ================================================================================= Balance, January 1, 2001 1,170,000 $ 10,871,211 $ (2,619,299) $ 241,334 $ 8,493,246 Comprehensive Income: Net income 200,965 200,965 Change in unrealized gain on securities available for sale 366,250 366,250 ----------- Total comprehensive income 567,215 --------------------------------------------------------------------------------- Balance, September 30, 2001 1,170,000 $ 10,871,211 $ (2,418,334) $ 607,584 $ 9,060,461 =================================================================================
See accompanying notes to condensed consolidated financial statements. -3- COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended 9/30/01 9/30/00 9/30/01 9/30/00 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 165,311 $ (106,019) $ 200,965 $ (426,511) Adjustments to reconcile net loss to net cash from operating activities Provision for loan losses 101,300 85,500 294,020 408,500 Depreciation and amortization 109,944 92,277 323,000 272,689 Net accretion of securities (29,799) (36,059) (107,442) (90,736) Net realized gain on security dispositions 0 (618) (5,036) (618) Net change in: Accrued interest receivable (19,786) (35,346) 103,044 (364,616) Other assets (164,817) (491,469) (179,465) (571,217) Accrued expenses and other liabilities 88,525 319,394 (269,828) (557,129) ------------ ------------ ------------ ------------ Net cash from (used in) operating activities 250,678 (172,340) 359,258 (1,329,638) CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 0 2,582,884 0 2,582,884 Maturities, prepayments and calls 8,050,356 1,052,030 14,583,913 1,631,908 Purchases (9,922,931) (4,629,994) (16,112,094) (12,895,205) Activity in held to maturity securities: Purchases 0 0 (60,000) 0 Loan originations and payments, net (9,650,498) (6,219,646) (18,257,603) (31,109,041) Purchase of Federal Home Loan Bank stock 0 0 (125,000) (71,800) Additions to premises and equipment (21,486) (31,804) (218,762) (105,982) ------------ ------------ ------------ ------------ Net cash used in investing activities (11,544,559) (7,246,530) (20,189,546) (39,967,236) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 3,464,205 2,714,638 11,026,793 34,787,543 Net change in federal funds purchased and repurchase agreements 290,137 2,128,793 2,801,041 5,495,935 Federal Home Loan Bank activity: New Advances 2,000,000 0 4,500,000 9,600,000 Maturities and payments (2,500,000) 0 (2,500,000) (8,100,000) Net proceeds from Note Payable 100,000 0 1,095,000 1,585,000 ------------ ------------ ------------ ------------ Net cash from financing activities 3,354,342 4,843,431 16,922,834 43,368,478 Net change in cash and cash equivalents (7,939,539) (2,575,439) (2,907,454) 2,071,604 Beginning cash and cash equivalents 11,294,411 5,710,000 6,262,326 1,966,574 ------------ ------------ ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 3,354,872 $ 3,134,561 $ 3,354,872 $ 4,038,178 ============ ============ ============ ============ Supplemental cash flow information: Cash paid during the period for interest $ 1,310,430 $ 1,223,763 $ 4,243,051 $ 3,177,223
See accompanying notes to condensed consolidated financial statements. -4- 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 nine months ended September 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 September 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 September 30, 2001 and at December 31, 2000:
Gross Gross Amortized Unrealized Unrealized Fair (Unaudited) Cost Gains Losses Value % ----------------------------------------------------------------------------------------------------------------------------- Available for sale: US Government Agency $ 11,557,763 460,272 0 $ 12,018,035 54.8% Municipal securities 219,560 0 0 219,560 1.0 Mortgaged-backed securities 9,480,023 159,294 (11,982) 9,627,335 43.9 --------------------------------------------------------------------- 21,257,346 619,566 (11,982) 21,864,930 99.7 Held to maturity: Municipal securities 60,000 60,000 0.3 --------------------------------------------------------------------- Total securities at September 30, 2001 $ 21,317,346 $619,566 $(11,982) $ 21,924,930 100.0% ===================================================================== Gross Gross Amortized Unrealized Unrealized Fair 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- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Securities increased $2,066,909 during the first nine months of 2001. Below is the schedule of maturities for investments held at September 30, 2001:
Securities held September 30, 2001 Amortized Fair (Unaudited) Cost Value --------------------------------------------------------------------------------- Due in one year or less $ 5,883,482 $ 5,977,736 Due from one to five years 5,674,281 6,040,299 Due in five years or more 279,560 279,560 Mortgage-backed 9,480,023 9,627,335 -------------------------------- $ 21,317,346 $ 21,924,930 ================================
3. LOANS Loans increased $18,174,320 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 third quarter of 2001 were as follows:
September 30, 2001 December 31, 2000 Percent Balance Balance Increase/ (Unaudited) % % (Decrease) -------------------------- ------------------------- ----------- Commercial, financial and other $ 87,070,479 76.5% $75,292,915 78.7% 15.6% Real estate-construction 3,164,922 2.8 3,504,764 3.7 (9.7) Real estate-mortgages 3,839,580 3.3 2,946,608 3.1 30.3 Installment loans to individuals 19,749,863 17.4 13,906,237 14.5 42.0 ------------------------ ----------------------- 113,824,844 100.0% 95,650,524 100.0% ===== ===== Less allowance for loan losses 1,479,787 1,269,050 ------------ ----------- $112,345,057 $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 nine month periods ended September 30, 2001 and 2000:
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended (Unaudited) 09/30/01 09/30/00 09/30/01 09/30/00 ----------------------------- ------------ ------------ ----------- ----------- Beginning Balance $ 1,382,199 $ 1,167,989 $ 1,269,050 $ 852,000 Charge-offs (5,063) 0 (116,370) (7,011) Recoveries 1,351 0 33,087 0 Provision charged against operating expense 101,300 85,500 294,020 408,500 ------------ ----------- ----------- ----------- Ending Balance $ 1,479,787 $ 1,253,489 $ 1,479,787 $ 1,253,489 ============ =========== =========== ===========
-6- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. DEPOSITS Deposit balances increased $11,026,793 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 third quarter of 2001 were as follows:
September 30, 2001 December 31, 2000 Percent Balance Balance Increase/ (Unaudited) % % (Decrease) --------------------------- -------------------------- ---------- Noninterest-bearing Demand $ 9,051,329 8.3% $ 7,000,732 7.2% 29.3% Interest-bearing Checking 23,002,231 21.1 9,843,874 10.1 133.7 Money Market 18,165,118 16.7 8,309,449 8.4 118.6 Savings 1,754,782 1.6 925,688 0.9 89.6 Time, under $100,000 29,262,450 26.9 31,598,937 32.3 (7.4) Time, over $100,000 27,678,023 25.4 40,208,460 41.1 (31.2) -------------------------------- ------------------------ Total Deposits $ 108,913,933 100.0 % $ 97,887,140 100.0% ================================ ========================
6. SHORT-TERM BORROWINGS At September 30, 2001 and December 31, 2000, the Bank's short-term borrowings were made up of repurchase agreements only. In the nine month period since December 31, 2000 outstanding borrowings increased $2,801,041. The September 30, 2001 and December 31, 2000 information was as follows:
Repurchase Agreements September 30, December 31, 2001 2000 (Unaudited) ------------ ------------ Outstanding balance $ 12,787,783 $ 9,986,742 Average interest rate 2.88% 4.75% Average balance $ 11,443,001 $10,809,223 Average interest rate paid 3.78% 4.82% Maximum outstanding at any month end $ 13,590,011 $14,815,900
-7- 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 $8,741,862 pledged to the Federal Home Loan Bank to support current borrowings. Details of the Bank's outstanding borrowings at both September 30, 2001 and December 31, 2000 are:
Current Interest September 30, 2001 December 31, 2000 Maturity Date: Rate (Unaudited) ------------------ ------------ ------------------ ----------------- March 27, 2002 3.50 $2,000,000 $ - 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 $8,000,000 $6,000,000 ========== ==========
8. NOTES PAYABLE Since June 28, 2000, the Company borrowed $3,100,000 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:
---------------------------------------------------------------------------------- Loan from: Aggregate Current Rate Maturity Principal Amount ---------------------------------------------------------------------------------- Robert L. Chandonnet $ 200,000 7.00% June 30, 2007 Michael D. Gluhanich $ 100,000 7.00% June 30, 2007 Donald E. Hegedus $ 500,000 7.00% June 30, 2007 John L. Hilt $ 750,000 7.00% June 30, 2007 Community Shores LLC $1,550,000 7.00% June 30, 2007 ---------------------------------------------------------------------------------- Total $3,100,000 ----------------------------------------------------------------------------------
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 5.50%. Interest is owed quarterly in -8- 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 September 30, 2001 and December 31, 2000 follows:
September 30, December 31, 2001 2000 (Unaudited) (Unaudited) ----------------- ------------------ Letters of credit $ 1,143,000 $ 306,000 Commercial unused lines of credit 28,895,000 23,700,000 Consumer unused lines of credit 5,020,000 3,329,000 Residential construction commitments 565,000 749,000
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- 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 September 30, 2001 for the Company and Bank were:
Actual Adequately Capitalized Well Capitalized ---------------------- ------------------------ ------------------------ September 30, 2001 Amount Ratio Amount Ratio Amount Ratio (Unaudited) ---------------------- ------------------------ ------------------------ ------------------------ Total capital (to risk- weighted assets) Consolidated $ 13,032,664 10.41 % $ 10,012,280 8.00 % $ 12,515,350 10.00 % Bank 13,050,883 10.43 10,012,280 8.00 12,515,350 10.00 Tier 1 capital (to risk- weighted assets) Consolidated 8,452,877 6.75 5,006,140 4.00 7,509,210 6.00 Bank 11,571,096 9.25 5,006,140 4.00 7,509,210 6.00 Tier 1 capital (to average assets) Consolidated 8,452,877 6.23 5,431,085 4.00 6,788,857 5.00 Bank 11,571,096 8.52 5,431,085 4.00 6,788,857 5.00
-10- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company and the Bank were in the well capitalized category at September 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 September 30, 2001 the Bank had a ratio of 8.16%. 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 September 30, 2001 and is separated into two parts which are labeled, Financial Condition and Results of Operations. The Financial Condition compares the period ended September 30, 2001 to that which ended on December 31, 2000. The Results of Operations discusses both the three month and nine month periods ended September 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- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION Total assets increased by $17,220,221 to $142,370,657 at September 30, 2001 from $125,150,436 at December 31, 2000. This is a 14% increase in assets during the first nine months of 2001. Growth is mostly attributable to an increase in the Bank's security portfolio 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 decreased by $2,907,454 to $3,354,872 at September 30, 2001 from $6,262,326 at December 31, 2000. This decrease was mostly the result of $2,600,000 less in federal funds being sold on September 30, 2001 compared to the amount being sold on December 31, 2000. The Bank's balances held at other financial institutions decreased $307,454 during the same period. Securities held increased by $2,066,909 in the first three quarters of 2001. The majority of the purchases were driven by growth in customer 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. If the repurchase balances continue to increase, the purchase of additional Treasuries and Agencies will be required to fulfill the collateralization requirement. As of September 30, 2001 the Bank owned two municipal securities. Both of these municipal securities were acquired in transactions that were intended to support community initiatives within Muskegon County. The general obligation note funded in April was marked held to maturity and is the only item in the Bank's held to maturity portfolio. As of September 30, 2001, these municipal securities were the only two unpledged securities in the Bank's investment portfolio. Total loans climbed to $113,824,844 at September 30, 2001 from $95,650,524 at December 31, 2000. Of the $18,174,320 increase experienced, 65% occurred in the commercial loan portfolio and 32% occurred in the installment loan portfolio. The "wholesale" banking focus applied throughout 1999 and 2000 continued during the first nine months of 2001. Presently, the commercial category of loans comprises 77% 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 $5,843,626 or 42%, 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 on target with expectations. Management is optimistic about additional volume in the remaining quarter of 2001 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- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The loan maturities and rate sensitivity of the loan portfolio at September 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 $9,342,637 $21,847,234 $49,341,179 $6,539,429 $87,070,479 Real estate-construction 1,021,885 2,143,037 0 0 3,164,922 Real estate-mortgages 0 149,753 267,758 3,422,069 3,839,580 Installment loans to individuals 1,288,379 235,232 12,824,937 5,401,315 19,749,863 --------------------------------------------------------------------------------- $11,652,901 $24,375,256 $62,433,874 $15,362,813 $113,824,844 ================================================================================= Loans at fixed rates 2,025,040 3,379,905 52,040,356 7,594,491 $65,039,792 Loans at variable rates 9,627,861 20,995,351 10,393,518 7,768,322 48,785,052 --------------------------------------------------------------------------------- $11,652,901 $24,375,256 $62,433,874 $15,362,813 $113,824,844 =================================================================================
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 September 30, 2001, the allowance totaled $1,479,787 or approximately 1.30% 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 September 30, 2001 was as follows:
Percent of allowance Balance at End of Period Applicable to: related to Amount loan category --------------- ----------------- Commercial $1,121,672 75.8 % Residential real estate 74,688 5.0 Installment 283,427 19.2 Unallocated 0 0.0 --------------- --------------- Total loans $1,479,787 100.0 % =============== ===============
-13- 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 $294,020 was provided for since December 31, 2000. At the end of September 2001, loans 30-59 days past due totaled $1,125,838 up from $355,290 at December 31, 2000. Approximately $831,000 of the increase in these past due balances was related to commercial loans which was offset by a decrease in mortgage loan past dues of $108,000. 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 $435,315 past due 60-89 days at the end of 2001's third quarter compared to $9,473 past due 60-89 days at December 31, 2000. There were no loans past due more than 89 days at December 31, 2000 but at September 30, 2001 there were three notes totaling $11,998. The Bank had no non-accrual loans at the end of either period. Net charge-offs recorded in 2000 were $86,950. In the first nine months of 2001, net charge-offs were $83,283. Bank premises and equipment decreased $104,238 to $3,263,758 at September 30, 2001 from $3,367,996 at December 31, 2000. Accumulated depreciation and amortization represented $566,367 at year-end compared to $889,366 at September 30, 2001. No significant capital expenditures were made in the first three quarters of 2001. Deposit balances were $108,913,933 at September 30, 2001 up from $97,887,140 at December 31, 2000. Last year management chose to fund a portion of the Bank's 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 $4,433,908. Approximately 20% of the total deposits reported were brokered at September 30, 2001 compared to 27% at year-end. The increase in local deposits was $15,460,706. 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 and the addition of several new public fund customers. During the third quarter several jumbo (greater than $99,000) time deposit customers chose to deposit their money into a money market account after maturity of their certificates due to the favorable rates. Repurchase agreements increased $2,801,041 since December 31, 2000. This represents an increase of 28% for the first nine 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 $8,000,000 from the $6,000,000 shown last year-end. On September 28, 2001, the Bank arranged to borrow $2,000,000 for 180 days at a variable rate. The proceeds were used to resolve a short-term liquidity deficit created from the funding of several new loans in the last weeks of the quarter. The Bank repaid this $2,000,000 borrowing on October 2, 2001. On September 24, 2001 a putable advance with a balance of $1,500,000 -14- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS and a rate of 5.99% was eligible to convert to a floating rate at the option of the FHLB. The FHLB did not exercise its right and the note continues to accrue interest at a rate of 5.99%. On December 12, 2001 a second putable advance for $2,000,000 is eligible for conversion to a floating rate at the option of the FHLB. Going forward the FHLB will have the right to exercise its option on both notes every ninety days. In the event that either 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 either advance will convert to a floating rate given the nature of the current rate environment. As of September 30, 2001, the Company had borrowed $3,100,000 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 $1,095,000 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 7.00%. Interest payments are due quarterly on the fifteenth of the month. The next scheduled interest payment is due on January 15, 2002. 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. Because the Company does not control Community Shores LLC, and it is not obligated to loan additional funds to the Company, at this time management is evaluating several other possible strategies to effectively increase capital. RESULTS OF OPERATIONS The net income for the third quarter of 2001 was $165,311 which compares favorably to the net loss of $106,019 recorded in the third quarter of 2000. At September 30, 2001, the Company's year to date net income of $200,965 was an improvement of 147% over last years reported loss of $426,511 for the same nine month period. For the third quarter and first three quarters of 2001, the annualized return on the Company's average total assets was .47% and .20% respectively. The annualized return on average equity was 7.52% for the quarter and 3.09% for the first nine months of 2001. At September 30, 2001, the ratio of average equity to average assets was 6.29% for the quarter and 6.38% for the preceding nine months of 2001. The Company's retained deficit was $2,418,334 at September 30, 2001 compared to $2,619,299 at December 31, 2000. The actual operating results for the third quarter and the first nine months 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 annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented. -15- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
Nine months ended September 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 $ 5,085,942 $ 181,889 4.77 % $ 2,475,608 $ 116,129 6.25 % Investment securities 20,112,675 967,389 6.41 17,379,920 857,854 6.58 Loans 103,716,254 6,715,460 8.63 74,205,631 5,016,580 9.01 --------------------------------------- ------------------------------------- 128,914,871 7,864,738 8.13 94,061,159 5,990,563 8.49 Other assets 6,862,260 5,268,182 ---------------- -------------- $ 135,777,131 $99,329,341 ================ ============== Liabilities and Shareholders' Equity Interest-bearing deposits $ 97,298,005 $3,936,056 5.39 $71,673,381 $3,255,019 6.06 Federal funds purchased and repurchase agreements 12,105,822 343,880 3.79 11,340,050 416,609 4.90 Note payable and Federal Home Loan Bank advances 8,763,388 438,637 6.67 1,886,609 101,583 7.18 --------------------------------------- ------------------------------------- 118,167,215 4,718,573 5.32 84,900,040 3,773,211 5.93 Noninterest-bearing deposits 8,222,661 5,854,985 Other liabilities 726,039 418,740 Shareholders' Equity 8,661,216 8,155,576 ---------------- -------------- $ 135,777,131 $99,329,341 ================ ============== Net interest income $3,146,165 $2,217,352 ============ ============== Net interest spread on earning assets 2.81 % 2.56 % ========== ======== Net interest margin on earning assets 3.25 % 3.14 % ========== =========
The net interest spread on average earning assets increased .25% to 2.81% since September 30, 2000. The net interest margin improved 11 basis points from 3.14% at September 30, 2000 to 3.25% at September 30, 2001. Year to date net interest income was $3,146,165 compared to a figure of $2,217,352 for the same nine months in 2000, an increase of $928,813 or 42%. Interest income recorded for the first nine months was generated primarily from booking loans, purchasing securities, and selling federal funds. Year to date Interest income through September 30, 2001 was $7,864,738 compared to $5,990,563 recorded for the same nine month period in 2000. The year to date figure reflects 31% 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 $4,718,573 for the first nine months of 2001. This category has increased $945,362 (25%) compared to the first nine months 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 favorable change in the net interest margin is directly attributable to the repricing of approximately $13,000,000 of brokered deposits since March of this year. As the brokered deposits matured the Bank was able to replace them with lower costing funds. To a lesser -16- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS 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 400 basis points which in turn has caused the Bank's internal prime rate to decrease from 9.50% to 5.50%. The impact of prime rate decreases is negative on the interest income generated on variable rate loan products. At September 30, 2001 only 43% 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 positive effect overall on the Company's net interest spread and net interest margin through the next quarter. This expectation is based on the fact that in the next three months nearly $21,000,000 in time deposits are expected to reprice to current market rates thus lowering interest expense and improving net interest income. It is anticipated that the effect of the decrease in interest expense will outweigh the loss of interest income on variable rate loans which may also reprice. Illustrated below is a table that shows a quarter to quarter comparison of the Company's net interest margin.
Three months ended September 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 $ 3,484,386 $ 31,845 3.66 % $ 4,852,379 $ 78,299 6.45 % Investment securities 20,757,324 323,463 6.23 19,005,112 314,884 6.63 Loans 108,783,838 2,274,785 8.36 84,786,780 1,962,650 9.26 ------------------------------------- --------------------------------------- 133,025,548 2,630,093 7.91 108,644,271 2,355,833 8.67 Other assets 6,895,757 5,678,594 -------------- ---------------- $ 139,921,305 $ 114,322,865 ============== ================ Liabilities and Shareholders' Equity Interest-bearing deposits $ 97,931,869 $1,187,406 4.85 $ 85,084,968 $1,353,631 6.36 Federal funds purchased and repurchase agreements 13,736,257 120,964 3.52 11,251,560 135,423 4.81 Note payable and Federal Home Loan Bank advances 9,180,434 150,546 6.56 2,606,739 54,090 8.30 ------------------------------------- --------------------------------------- 120,848,560 1,458,916 4.83 98,943,267 1,543,144 6.24 Noninterest-bearing deposits 9,811,729 6,645,504 Other liabilities 463,845 554,727 Shareholders' Equity 8,797,171 8,179,367 -------------- ---------------- $ 139,921,305 $ 114,322,865 ============== ================ Net interest income $1,171,177 $ 812,689 ============= ============= Net interest spread on earning assets 3.08 % 2.44 % ========== ========== Net interest margin on earning assets 3.52 % 2.99 % ========== ==========
-17- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS An analysis of this year's and last year's third quarter shows that the maturities of time deposits particularly brokered deposits is affecting the cost of funds in a positive way. The yield on interest earning liabilities has improved by 1.41 while the yield on interest earning assets has only decreased by 76 basis points in spite of the many rate reductions made to the Federal Funds rate since January 2001. Overall the net interest spread was 64 basis points higher for this year's third quarter compared to last year's similar quarter. The net interest margin improved 53 basis points from September 30, 2001 compared to September 30, 2000. This is the largest quarterly improvement in margin in the history of the Bank. Management considers this a major achievement when considering that prime rate decreased 75 basis points during the quarter. As the Bank's cost of funds declines and prime rate changes being 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- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Details of the repricing gap at September 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 $ 69,657 $ 0 $ 0 $ 0 $ 69,657 Federal Funds Sold 100,000 0 0 0 100,000 Securities 2,008,461 3,969,274 8,259,645 7,687,550 21,924,930 Loans 47,249,001 4,297,858 54,569,095 7,708,890 113,824,844 ----------------------------------------------------------------------------------- 49,427,119 8,267,132 62,828,740 15,396,440 135,919,431 Interest-bearing liabilities Savings and checking 42,963,168 0 0 0 42,963,168 Time deposits<$100,000 6,206,042 13,923,973 11,117,214 0 31,247,229 Time deposits>$100,000 14,543,223 13,183,681 3,943,999 0 31,670,903 Repurchase agreements 12,787,783 0 0 0 12,787,783 Notes Payable and Federal Home Loan Bank Advances 9,100,000 0 2,000,000 0 11,100,000 ----------------------------------------------------------------------------------- 85,600,216 27,107,654 17,061,213 0 129,769,083 Net asset (liability) repricing gap $(36,173,097) $(18,840,522) $45,767,527 $ 15,396,440 $ 6,150,348 =================================================================================== Cumulative net asset (liability) repricing gap $(36,173,097) $(55,013,619) $(9,246,092) $ 6,150,348 ===================================================================
Given the current rate environment management believes that it is beneficial to earnings to have a repricing gap that is liability sensitive. The provision for loan losses for the third quarter and the nine months ended September 30, 2001 were $101,300 and $294,020 respectively compared to figures of $85,500 and $408,500 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 third quarter totaled $133,932 and represented an increase of 26% over last year's third quarter. Through September 30, 2001, non-interest income was $487,129 compared to a figure of $291,703 for the first nine months of 2000. Service charge income is a major contributor to the increase shown in this category, representing 53% of the increase in 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 -19- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS referral fees. Fees earned for the third quarter and nine months ended September 30, 2001 were more than double compared to the same periods in 2000. Comparing the similar quarter, fees shown of $45,021 were an improvement of $23,030 over last year. The first three quarters of the year reflects an increase of $66,601 (110%) over the first nine months of last year. It is difficult to predict future contributions of 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 nine months of 2001 increased 24% over the same period in 2000. The figure for the first three quarters of 2001 was $3,138,309 compared to a total of $2,527,066 for the first nine months of 2000. The third quarter expenses also increased over last year's third quarter by a total of $99,392. Salaries and benefits comprised 43% of the year to date increase and 55% of the third quarter increase. There were an additional 8 full-time equivalent employees at September 30, 2001 compared to September 30, 2000. Occupancy and furniture and equipment expenses grew $31,996 (32%) for the third quarter and $90,010 (15%) for the first nine months of 2001 compared to the similar periods in 2000. General growth as well as the opening of the Bank's third branch in North Muskegon was directly responsible for these additions to staff and capital assets. As expected, data processing expenses have grown as a result of the Bank's expanding customer base. This category has grown 68% in the first nine months of 2001 compared to the first nine months of 2000 and is responsible for 9% of the increase in non-interest expenses on a year to date basis. Expenses of this nature are an unavoidable cost of doing business for a financial institution. The Bank is currently working to renegotiate a long-term data processing contract to take advantage of multiple service discounts and to lock into controlled fee increases over the next five years. The line item showing other non-interest expenses has increased $47,086 compared to the similar quarter in 2000 and $249,656 compared to the same nine month period last year. The increase in loan expenses is responsible for 19% of the year to date increase in other non-interest expense. In the first nine months of this year, the Bank has spent $19,107 on loan collection and reposession fees versus the $2,034 spent during the first nine months of 2000. As the loan portfolio grows, expenses of this nature are to be expected. In 2001, the Bank began paying its directors a fee for attending scheduled Board and Committee meetings. On a year to date basis, the Bank has paid $17,100 in directors' fees, verses nothing being paid in 2000. The change in this category accounts for 7% of the increase in other non-interest expense. Another category of non-interest expense that has increased 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. Both loss situations were reported to the police, however it is unlikely at this point that a recovery will be made. On a year to date basis, there were $23,249 of recorded branch losses. This figure compares unfavorably to an amount of $1,340 recorded from January through September of 2000. As a result of an increase in booked losses, the Branch Policy and Procedures were enhanced during the third quarter specifically to aid in preventing future losses similar in nature to those experienced during the summer. Other non-interest expenses that are included in this line item are regulator examination fees, outside services and postage, all of which have increased proportionately as a result of the general growth of the Bank. Beginning in 2001, it is likely that there will be some State of Michigan Business Tax liability for the Bank as a result of its first full year of positive monthly earnings. -20- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS In June 2001, the Financial Accounting Standards Board "FASB" issued Statement of Financial Accounting Standards "SFAS" No. 141, "Business Combinations." SFAS 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only have an impact on the financial statements if the Company enters into a business combination. This change did not effect the Company's financial statements because no business combinations were entered into during the third quarter of 2001. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. The Company is required to adopt this statement on January 1, 2002, and early adoption is not permitted. The adoption of this statement is not expected to have a material impact on the financial statements. 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 Not applicable. -21- 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. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated July 12, 2001. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated July 12, 2001. 10.3 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Donald E. Hegedus dated September 26, 2001. 10.4 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and John L. Hilt, acting through his IRA, dated September 26, 2001. 10.5 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Community Shores LLC dated September 26, 2001. 10.6 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Michael D. Gluhanich dated September 26, 2001. 10.7 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Robert L. Chandonnet dated September 26, 2001. -22- (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. -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 November 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) -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. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated July 12, 2001. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated July 12, 2001. 10.3 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Donald E. Hegedus dated September 26, 2001. 10.4 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and John L. Hilt, acting through his IRA, dated September 26, 2001. 10.5 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Community Shores LLC dated September 26, 2001. 10.6 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Michael D. Gluhanich dated September 26, 2001. 10.7 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due June 30, 2006 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation and Robert L. Chandonnet dated September 26, 2001. -25-