-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CeTmr+4gcrEgKfEZc+frSNiQ21hG4wmnXzhzupRtCXFTKCjz3K/VNKhRzdkARfJE G0ZUsgHG27yib1HOE8INgg== 0000950124-02-001819.txt : 20020515 0000950124-02-001819.hdr.sgml : 20020515 20020515111224 ACCESSION NUMBER: 0000950124-02-001819 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY SHORES BANK CORP CENTRAL INDEX KEY: 0001070523 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383423227 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 333-63769 FILM NUMBER: 02649089 BUSINESS ADDRESS: STREET 1: 1838 RUDDIMAN DR CITY: NORTH MUSKEGON STATE: MI ZIP: 49445 BUSINESS PHONE: 6167448082 MAIL ADDRESS: STREET 1: 1838 RUDDIMAN DR CITY: NORTH MUSKEGON STATE: MI ZIP: 49445 10QSB 1 k69653e10qsb.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 [ ] 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 April 30, 2002, 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 I. Financial Information Page No. -------- Item 1. Financial Statements .................................. 1 Item 2. Management's Discussion and Analysis or Plan of Operation............................................ 11 PART II. Other Information Item 1. Legal Proceedings....................................... 20 Item 2. Changes in Securities .................................. 20 Item 3. Defaults upon Senior Securities......................... 20 Item 4. Submission of Matters to a Vote of Security Holders..... 20 Item 5. Other Information....................................... 20 Item 6. Exhibits and Reports on Form 8-K........................ 20 Signatures....................................................... 22 ---------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2002 2001 ------------- ------------- (Unaudited) ASSETS Cash and due from financial institutions $ 6,091,400 $ 2,191,280 Interest-bearing deposits in other financial institutions 70,461 79,641 Federal funds sold 6,250,000 0 ------------- ------------- Total cash and cash equivalents 12,411,861 2,270,921 Securities Available for sale (at fair value) 34,241,824 24,671,925 Held to maturity (fair value of $60,000 at March 31, 2002) 60,000 60,000 ------------- ------------- Total securities 34,301,824 24,731,925 Loans 124,660,237 118,115,580 Less: Allowance for loan losses 1,675,599 1,535,543 ------------- ------------- Net loans 122,984,638 116,580,037 Federal Home Loan Bank stock 425,000 425,000 Premises and equipment, net 3,112,831 3,173,724 Accrued interest receivable 694,911 703,433 Other assets 397,822 306,236 ------------- ------------- Total assets $ 174,328,887 $ 148,191,276 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non interest-bearing $ 9,945,750 $ 9,217,298 Interest-bearing 127,665,265 100,931,036 ------------- ------------- Total deposits 137,611,015 110,148,334 Federal funds purchased and repurchase agreements 17,556,381 18,964,598 Federal Home Loan Bank advances 6,000,000 6,000,000 Notes payable 3,500,000 3,400,000 Accrued expenses and other liabilities 669,374 544,256 ------------- ------------- Total liabilities 165,336,770 139,057,188 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 issued and outstanding 10,871,211 10,871,211 Retained deficit (2,025,261) (2,190,931) Accumulated other comprehensive income 146,167 453,808 ------------- ------------- Total shareholders' equity 8,992,117 9,134,088 ------------- ------------- Total liabilities and shareholders' equity $ 174,328,887 $ 148,191,276 ============= =============
See accompanying notes to condensed consolidated financial statements. -1- COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
March 31, March 31, 2002 2001 ---------- ---------- INTEREST AND DIVIDEND INCOME Loans, including fees $2,159,850 $2,218,522 Securities 326,999 319,317 Federal funds sold, FHLB dividends and other income 67,991 100,199 ---------- ---------- Total interest income 2,554,840 2,638,038 INTEREST EXPENSE Deposits 1,078,248 1,440,499 Repurchase agreements and federal funds purchased and other debt 84,986 109,131 Federal Home Loan Bank advances and notes payable 138,876 135,766 ---------- ---------- Total interest expense 1,302,110 1,685,396 NET INTEREST INCOME 1,252,730 952,642 Provision for loan losses 127,800 101,500 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,124,930 851,142 Noninterest income Service charges on deposit accounts 99,673 97,739 Mortgage loan referral fees 44,935 35,553 Gain on disposition of securities 0 5,036 Other 41,843 28,493 ---------- ---------- Total noninterest income 186,451 166,821 Noninterest expense Salaries and employee benefits 619,423 557,565 Occupancy 71,376 60,148 Furniture and equipment 110,867 112,940 Advertising 14,211 22,020 Data Processing 57,126 40,968 Professional services 42,284 55,674 Other 230,423 164,852 ---------- ---------- Total noninterest expense 1,145,710 1,014,167 INCOME BEFORE INCOME TAXES 165,671 3,796 Federal income tax expense 0 0 ---------- ---------- NET INCOME $ 165,671 $ 3,796 ========== ========== Weighted average shares outstanding 1,170,000 1,170,000 ========== ========== Basic and diluted income per share $ 0.14 $ 0.00 ========== ==========
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, January 1, 2001 1,170,000 $ 10,871,211 $ (2,619,299) $ 241,334 $ 8,493,246 Comprehensive Income: Net Income 3,796 3,796 Unrealized gain on securities available for sale 175,815 175,815 ------------ Total comprehensive income 179,611 -------------------------------------------------------------------------------- Balance, March 31, 2001 1,170,000 $ 10,871,211 $ (2,615,503) $ 417,149 $ 8,672,857 ================================================================================ Balance, January 1, 2002 1,170,000 $ 10,871,211 $ (2,190,932) $ 453,808 $ 9,134,087 Comprehensive loss: Net Income 165,671 165,671 Unrealized loss on securities available for sale (307,641) (307,641) ------------ Total comprehensive loss (141,970) -------------------------------------------------------------------------------- Balance, March 31, 2002 1,170,000 $ 10,871,211 $ (2,025,261) $ 146,167 $ 8,992,117 ================================================================================
See accompanying notes to condensed consolidated financial statements. -3- COMMUNITY SHORES BANK CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three months Three months ended ended March 31, 2002 March 31, 2001 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 165,671 $ 3,796 Adjustments to reconcile net income (loss) to net cash from operating activities Provision for loan losses 127,800 101,500 Depreciation and amortization 96,353 105,609 Net accretion of securities (16,014) (36,143) Net realized gain on disposition of securities 0 (5,036) Net change in: Accrued interest receivable and other assets (83,064) 35,213 Accrued interest payable and other liabilities 49,820 183,792 ------------ ------------ Net cash from operating activities 340,566 388,731 CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 0 0 Maturities, prepayments and calls 3,212,888 3,028,220 Purchases (12,999,117) (2,997,111) Loan originations and payments, net (6,532,401) (5,551,817) Additions to premises and equipment (35,460) (135,762) ------------ ------------ Net cash used in investing activities (16,354,090) (5,656,470) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 27,462,681 9,874,405 Net change in federal funds purchased and repurchase agreements (1,408,217) 1,888,613 Federal Home Loan Bank activity: New Advances 1,500,000 0 Maturities and payments (1,500,000) 0 Net proceeds from note payable 100,000 850,000 ------------ ------------ Net cash from financing activities 26,154,464 12,613,018 Net change in cash and cash equivalents 10,140,940 7,345,279 Beginning cash and cash equivalents 2,270,921 6,262,326 ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 12,411,861 $ 13,607,605 ============ ============ Supplemental cash flow information: Cash paid during the period for interest $ 1,253,489 $ 1,551,117
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 ended March 31, 2002 include the condensed consolidated results of operations of Community Shores Bank Corporation ("Company") and its wholly-owned subsidiaries, Community Shores Bank ("Bank") and Community Shores Mortgage Company ("Mortgage Company"). These condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods. The results for the period ended March 31, 2002 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, 2001. 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 March 31, 2002 and at December 31, 2001:
Gross Gross Amortized Unrealized Unrealized Fair (Unaudited) Cost Gains Losses Value % - ------------------------------------------------------------------------------------------------------------- Available for sale: US Treasuries $ 11,487,618 0 (5,190) $ 11,482,428 33.5% US Government and federal agency 10,648,307 292,006 (28,428) 10,911,885 31.8 Municipal securities 219,584 0 (676) 218,908 0.6 Mortgaged-backed securities 11,664,850 52,418 (88,665) 11,628,603 33.9 --------------------------------------------------------------------- 34,020,359 344,424 (122,959) 34,241,824 99.8 Held to maturity: Municipal securities 60,000 0 0 60,000 0.2 --------------------------------------------------------------------- Total securities at March 31, 2002 $ 34,080,359 $ 344,424 $ (122,959) $ 34,301,824 100.0% =====================================================================
-5- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. SECURITIES-continued
Gross Gross Amortized Unrealized Unrealized Fair (Unaudited) Cost Gains Losses Value % - ------------------------------------------------------------------------------------------------------------ Available for sale: US Treasuries $ 499,955 0 (273) $ 499,682 2.0% US Government and federal agency 12,129,428 391,297 (12,849) 12,507,876 50.6 Municipal securities 219,579 0 (2,212) 217,367 0.9 Mortgaged-backed securities 11,369,155 115,988 (38,143) 11,447,000 46.3 -------------------------------------------------------------------- 24,218,117 507,285 (53,477) 24,671,925 99.8 Held to maturity: Municipal securities 60,000 0 0 60,000 0.2 -------------------------------------------------------------------- Total securities at December 31, 2001 $ 24,278,117 $ 507,285 $ (53,477) $ 24,731,925 100.0% ====================================================================
Securities increased $9,569,899 during the first three months of 2002. Below is the schedule of maturities for investments held at March 31, 2002:
Securities available for sale Securities held to maturity Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------------------------------------------------------------------- Due in one year or less $15,383,527 $15,437,751 $ - $ - Due from one to five years 6,752,399 6,956,562 0 0 Due in more than five years 219,584 218,909 0 0 Mortgage-backed and Municipal 11,664,849 11,628,602 60,000 60,000 --------------------------------------------------------- $34,020,359 $34,241,824 $ 60,000 $ 60,000 =========================================================
3. LOANS Loans increased $6,544,657 since December 31, 2001. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2001 to the end of the first quarter of 2002 were as follows:
Percent March 31, 2002 December 31, 2001 Increase/ Balance % Balance % (Decrease) ---------------- ------------------ ---------- Commercial, financial and other $94,348,582 75.7 % $89,258,193 75.6 % 5.7 % Real estate-construction 2,954,040 2.4 3,081,361 2.6 (4.1) Real estate-mortgages 4,034,393 3.2 3,761,403 3.2 7.3 Installment loans to individuals 23,323,222 18.7 22,014,623 18.6 5.9 -------------------- --------------------- 124,660,237 100.0 % 118,115,580 100.0 % ===== ===== Less allowance for loan losses 1,675,599 1,535,543 -------------- -------------- $ 122,984,638 $ 116,580,037 ============== ==============
-6- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. ALLOWANCE FOR LOAN LOSSES The following is a summary of activity in the allowance for loan losses account for the three month period ended March 31, 2002 and 2001:
Three Months Three Months Ended Ended (Unaudited) 03/31/02 03/31/01 ----------------------------------------------- ---------------- ---------------- Beginning Balance $1,535,543 $1,269,050 Charge-offs (10,624) (72,321) Recoveries 22,880 22,865 Provision charged against operating expense 127,800 101,500 ---------------- ---------------- Ending Balance $1,675,599 $1,321,094 ================ ================
5. DEPOSITS Deposit balances increased $27,462,681 since December 31, 2001. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2001 to the end of the first quarter of 2002 were as follows:
Percent March 31, 2002 December 31, 2001 Increase/ Balance % Balance % (Decrease) ----------------------- --------------------- --------- Noninterest-bearing Demand $ 9,945,750 7.2 % $ 9,217,298 8.4 % 42.1 % Interest-bearing Checking 33,644,275 24.5 20,979,462 19.0 241.8 Money Market 22,052,133 16.0 18,612,647 16.9 165.4 Savings 2,732,384 2.0 2,332,538 2.1 195.2 Time, under $100,000 32,116,471 23.3 30,913,935 28.1 1.6 Time, over $100,000 37,120,002 27.0 28,092,454 25.5 (7.7) ----------------------- -------------------- Total Deposits $ 137,611,015 100.0 % $ 110,148,334 100.0 % ======================= ====================
6. SHORT-TERM BORROWINGS Both federal funds purchased and repurchase agreements were outstanding at December 31, 2001. At March 31, 2002, the Bank's short-term borrowings were made up of repurchase agreements only. In the three month period since December 31, 2001 outstanding borrowings decreased $1,408,217. The March 31, 2002 and December 31, 2001 information was as follows: -7- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. SHORT-TERM BORROWINGS-continued
Repurchase Federal Funds Agreements Purchased ---------- --------- Outstanding at March 31, 2002 $ 17,556,381 $ 0 Average interest rate at period end 1.93% 0.00% Average balance during period 15,234,208 1,200,000 Average interest rate during period 2.07% 2.09% Maximum month end balance during period 17,556,381 0 Outstanding at December 31, 2001 $ 12,264,598 $ 6,700,000 Average interest rate at year end 2.04% 1.82% Average balance during year 12,282,957 1,053,836 Average interest rate during year 3.36% 3.16% Maximum month end balance during year 14,589,092 6,700,000
7. FEDERAL HOME LOAN BANK BORROWINGS The Bank was approved in the first 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 $6,123,889 pledged to the Federal Home Loan Bank to support current borrowings. Details of the Bank's outstanding borrowings at both March 31, 2002 and December 31, 2001 are:
Current Interest Maturity Date: Rate March 31, 2002 December 31, 2001 --------------------- -------- -------------- ----------------- 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 $6,000,000 $ 6,000,000 ============== ================
8. NOTES PAYABLE Since June 28, 2000, the Company borrowed $3,500,000 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 -8- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. NOTES PAYABLE-continued 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 6.25% June 30, 2007 Michael D. Gluhanich $ 100,000 6.25% June 30, 2007 Donald E. Hegedus $ 500,000 6.25% June 30, 2007 John L. Hilt $ 750,000 6.25% June 30, 2007 Community Shores LLC $1,950,000 6.25% June 30, 2007 ---------------------------------------------------------------------- Total $3,500,000 ----------------------------------------------------------------------
The rate on the above notes is floating and is officially defined as 1.50% over the US Bank, N.A. Prime rate. US Bank's current prime rate is 4.75%. Interest is owed quarterly in 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 March 31, 2002 and December 31, 2001 follows: -9- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. COMMITMENTS AND OFF-BALANCE SHEET RISK-continued
March 31, 2002 December 31, 2002 2001 (Unaudited) -------------- --------------- Letters of credit $ 255,000 $ 306,000 Commercial unused lines of credit 23,215,000 23,700,000 Consumer unused lines of credit 3,958,000 3,329,000 Residential construction commitments 378,000 749,000
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. 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
-10- COMMUNITY SHORES BANK CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. REGULATORY MATTERS-continued Actual capital levels and minimum required levels at March 31, 2002 for the Company and Bank were:
Actual Adequately Capitalized Well Capitalized -------------------------- ---------------------------- ------------------------ March 31,2002 Amount Ratio Amount Ratio Amount Ratio -------------------------- ---------------------------- ------------------------ ------------------------- Total capital (to risk- weighted assets) Consolidated $ 14,021,549 10.38 % $ 10,802,391 8.00 % $ 13,502,989 10.00 % Bank 13,980,417 10.35 10,801,511 8.00 13,501,889 10.00 Tier 1 capital (to risk- weighted assets) Consolidated 8,845,950 6.55 5,401,195 4.00 8,101,793 6.00 Bank 12,304,817 9.11 5,400,755 4.00 8,101,133 6.00 Tier 1 capital (to average assets) Consolidated 8,845,950 5.28 6,704,373 4.00 8,380,466 5.00 Bank 12,304,817 7.34 6,703,933 4.00 8,379,916 5.00
The Company and the Bank were in the well capitalized category at March 31, 2002. The Company is closely monitoring the Bank's growth and expects to infuse additional capital as necessary to maintain at least a 10% (well capitalized) total capital to risk weighted assets ratio. 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 subsidiaries, the Bank and the Mortgage Company, through March 31, 2002 and is separated into two parts which are labeled, Financial Condition and Results of Operations. The part labeled Financial Condition compares the financial condition at March 31, 2002 to that at December 31, 2001. The part labeled Results of Operations discusses the three month period ended March 31, 2002 as compared to the same period of 2001. 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. -11- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS 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, the Bank and the Mortgage Company. Words such as "anticipates", "believes", "estimates", "expects", "forecasts", "intends", "is likely", "plans", "projects", variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in the national and local economy; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. FINANCIAL CONDITION Total assets increased by $26,137,611 to $174,328,887 at March 31, 2002 from $148,191,276 at December 31, 2001. This is an 18% increase in assets during the first three months of 2002. 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 increased by $10,140,940 to $12,411,861 at March 31, 2002 from $2,270,921 at December 31, 2001. This increase was the result of an additional $3,900,120 being held at other financial institutions as well as an increase in federal funds sold. The Bank's reserve requirement at the Federal Reserve Bank had increased significantly due to various intra-period deposits in interest-bearing demand accounts. Additionally there was $6,250,000 in federal funds sold on March 31, 2002 compared to none being sold on December 31, 2001. Securities held increased by $9,569,899 in the first quarter of 2002. The majority of the purchases were driven by unexpected, short-term liquidity and general growth in the Bank's repurchase agreement account holdings. A repurchase agreement is not considered a deposit -12- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS 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 March 31, 2002, there were unpledged securities in the Bank's investment portfolio with a fair market value of approximately $10,200,000. Total loans climbed to $124,660,237 at March 31, 2002 from $118,115,580 at December 31, 2001. Of the $6,544,657 increase experienced, 78% occurred in the commercial loan portfolio and 20% occurred in the installment loan portfolio. The "wholesale" banking focus applied since opening in 1999 continued during the first three months of 2002. Presently, the commercial category of loans comprises 76% of the Bank's total loan portfolio. There are five 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 $1,308,599 or 6%, over the balance reported at December 31, 2001. Growth in this category was mostly the result of new business in direct and indirect automobile loans and home equity loans. Overall, the growth in total loans was above expectations. Management is optimistic about additional volume in the remaining quarters of 2002 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. The loan maturities and rate sensitivity of the loan portfolio at March 31, 2002 have been included below:
Within Three to One to After three twelve five five months months years years Total ------------------------------------------------------------------------ Commercial, financial and other $ 20,717,374 $ 20,583,777 $ 50,438,454 $ 2,608,977 $ 94,348,582 Real estate-construction 1,697,473 1,256,567 0 0 2,954,040 Real estate-mortgages 21,236 73,068 675,888 3,264,201 4,034,393 Installment loans to individuals 1,842,846 3,105,801 15,645,783 2,728,792 23,323,222 ------------------------------------------------------------------------ $ 24,278,929 $ 25,019,213 $ 66,760,125 $ 8,601,970 $124,660,237 ======================================================================== Loans at fixed rates 4,932,459 3,263,018 50,062,924 8,253,044 $ 66,511,445 Loans at variable rates 19,346,470 21,756,195 16,697,201 348,926 58,148,792 ------------------------------------------------------------------------ $ 24,278,929 $ 25,019,213 $ 66,760,125 $ 8,601,970 $124,660,237 ========================================================================
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 March 31, 2002, the allowance totaled $1,675,599 or approximately 1.34% 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 -13- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS comparison of allowance levels maintained by other institutions with similar, but seasoned loan portfolios. The allocation of the allowance at March 31, 2002 was as follows:
March 31, 2002 December 31, 2001 Percent of Percent of allowance allowance Balance at End of Period Applicable to: related to related to Amount loan category Amount loan category ---------- ------------- ---------- ------------- Commercial $1,317,098 78.6 % $1,180,208 76.9 % Residential real estate 68,660 4.1 68,268 4.4 Installment 289,841 17.3 287,067 18.7 Unallocated 0 0.0 0 0.0 ---------- ------------- ---------- ------------- Total $1,675,599 100.0 % $1,535,543 100.0 % ========== ============= ========== =============
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 $127,800 was provided for since December 31, 2001. At the end of March 2002, loans 30-59 days past due totaled $1,725,431 up from $735,005 at December 31, 2001. Approximately $1,088,000 of the increase in these past due balances was related to commercial loans which was partially offset by a decrease in retail past dues of $100,000. There was a total of $171,980 past due 60-89 days and $316,532 past due more than 89 days at the end of 2001 compared to $762,365 past due 60-89 days and $225,435 past due more than 89 days at the end of the first quarter of 2002. Although the percentage of loans past due has increased in most categories since December 31, 2001, 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. At March 31, 2002 the Bank had four non-accrual notes with an aggregate total of $316,417. The Bank had no non-accrual loans at the end of December 2001. Net charge-offs recorded in 2001 were $128,527. In the first three months of 2002, the Bank had net recoveries of $12,256. Bank premises and equipment decreased $60,893 to $3,112,831 at March 31, 2002 from $3,173,724 at December 31, 2001. Accumulated depreciation and amortization represented $1,001,789 at year-end compared to $1,098,142 at March 31, 2002. No significant capital expenditures were made in the first quarter of 2002. Other assets increased $91,586 from December 31, 2001 to March 31, 2002. The Bank's prepaid expenses were responsible for all of the increase. In general, prepaid expenses are at their lowest point at year-end and highest at the beginning of the year. Deposit balances were $137,611,015 at March 31, 2002 up from $110,148,334 at December 31, 2001. The increase in -14- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS the categories of interest-bearing checking and money market accounts was $16,104,299 for the first quarter of 2002. The growth was mostly due to an increase in balances on deposit by several existing public fund customers. Based on the cash flow projections of these particular customers it is anticipated that a large portion of their balances on deposit will be used in the month of May. Time deposits and savings accounts increased $10,629,930 or 15% since December 31, 2001. Occasionally management chooses to fund a portion of the Bank's loan growth by obtaining brokered deposits. Brokered deposits went from 23% to 24% of total deposits during the quarter. Brokered deposits are time deposits obtained from depositors located outside of our market area and are placed with the Bank by a deposit broker. Conversely, in January the Bank conducted a time deposit promotion in honor of its third anniversary and was able to attract approximately $5,489,000 of local money during the four-week campaign. Repurchase agreements increased $5,291,783 since December 31, 2001. This represents an increase of 43% for the first three months of 2002. The growth is attributable to existing 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 was $6,000,000 at both March 31, 2002 and December 31, 2001. On January 9, 2002, the Bank arranged to borrow $1,500,000 for 180 days at a variable rate. The proceeds were used to resolve a short-term liquidity deficit at the beginning of 2002. The loan was repaid on January 22, 2002. In March, two of the three putable advances owned by the Bank were eligible for conversion to a floating rate at the option of the FHLB. The FHLB did not exercise its right in either case. The putable advances of $2,500,000 and $1,500,000 continue to accrue interest at rates of 5.10% and 5.99% respectively. 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 March 31, 2002, the Company had borrowed $3,500,000 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. The current balance is $100,000 more than the outstanding balance on December 31, 2001. This debt is subordinated to all senior debt of the Company. The notes have a floating rate and are currently accruing interest at 6.25% per annum. Interest payments are due quarterly on the fifteenth of the month. The next scheduled interest payment is due on July 15, 2002. Based on anticipated asset growth rates for the next three quarters, the Bank is expecting to need additional funds beyond the growth in its retained earnings to maintain a well capitalized capital ratio. The Company has evaluated several possible strategies to effectively increase capital levels. During the first half of May of 2002, the Company obtained $200,000 of capital. The Company intends to obtain more capital in the near future and to contribute the $200,000 and most of the additional capital to the Bank to maintain the desired capital ratio. -15- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS The net income for the first quarter of 2002 was $165,671 which compares favorably to the net income of $3,796 recorded in the first quarter of 2001. For the first quarter of 2002, the annualized return on the Company's average total assets and average equity was .40% and 7.24% respectively. At March 31, 2002, the ratio of average equity to average assets was 5.46%. The Company's retained deficit was $2,025,261 at March 31, 2002 compared to $2,190,931 at December 31, 2001. The actual operating results for the first three months of 2002 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.
Three months ended March 31: 2002 2001 Average Average Average Average balance Interest rate balance Interest rate -------------------------------------- --------------------------------------- Assets Federal funds sold and interest-bearing deposits with other financial institutions $ 14,637,192 $ 61,702 1.69 % $ 6,930,913 $ 94,281 5.44 % Investment securities 24,147,955 333,288 5.52 19,664,024 325,235 6.62 Loans 121,393,351 2,159,850 7.12 98,836,295 2,218,522 8.98 ------------------------------------ -------------------------------------- 160,178,498 2,554,840 6.38 125,431,232 2,638,038 8.41 Other assets 7,430,830 6,434,242 ------------- ------------- $ 167,609,328 $ 131,865,474 ============= ============= Liabilities and Shareholders' Equity Interest-bearing deposits $ 122,258,027 $1,078,248 3.53 $ 97,244,838 $1,440,499 5.93 Federal funds purchased and repurchase agreements 16,434,208 84,986 2.07 10,718,634 109,131 4.07 Note payable and Federal Home Loan Bank advances 9,655,556 138,876 5.75 8,049,444 135,766 6.75 ------------------------------------ -------------------------------------- 148,347,791 1,302,110 3.51 116,012,916 1,685,396 5.81 Noninterest-bearing deposits 9,401,795 6,458,283 Other liabilities 712,793 886,236 Shareholders' Equity 9,146,949 8,508,039 ------------- ------------- $ 167,609,328 $ 131,865,474 ============= ============= Net interest income $ 1,252,730 $ 952,642 =========== ========= Net interest spread on earning assets 2.87 % 2.60 % ==== ==== Net interest margin on earning assets 3.13 % 3.04 % ==== ====
-16- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The net interest spread on average earning assets increased .27 to 2.87 since March 31, 2001.The net interest margin improved 9 basis points from 3.04% at March 31, 2001 to 3.13% at March 31, 2002. Year to date net interest income was $1,252,730 compared to a figure of $952,642 for the same three months in 2001, an increase of $300,088 or 32%. Interest income recorded for the first three months was generated primarily from booking loans, purchasing securities, and selling federal funds. Interest income through March 31, 2002 was $2,554,840 compared to $2,638,038 recorded for the same three month period in 2001. The net decrease reflects 3% less interest income recorded so far in 2002 compared to 2001. The reduction is a direct result of an average difference in the Bank's internal prime rate of approximately 3.87%. The average rate earned on interest-earning assets was 6.38% at March 31, 2002 compared to 8.41% at March 31, 2001. This decrease of 203 basis points resulted primarily from the changes in the Bank's internal prime rate mentioned above. All changes, no matter what direction, to the Bank's internal prime rate affect interest earned on variable rate loans and new loan volume. At March 31, 2002, 47% of the Bank's loan portfolio was variable and average loans outstanding had increased $22,557,056 over the same period end one-year earlier. Additionally, interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable decreased 23% for the quarter. This category totaled $1,302,110 for the first three months of 2002 which was a $383,286 reduction over the total recorded for the same period in 2001. The favorable change in the net interest margin is directly attributable to the Bank's success in securing a lower cost of funds in a declining rate environment. The average rate paid on interest-bearing products was 230 basis points less than what was paid a year earlier. As the Bank's cost of funds declines and prime rate changes continue 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. -17- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Details of the repricing gap at March 31, 2002 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 $ 70,461 $ 0 $ 0 $ 0 $ 70,461 Federal funds sold 6,250,000 0 0 0 6,250,000 Securities (including FHLB stock) 13,727,443 5,491,898 12,216,152 3,291,331 34,726,824 Loans 67,664,438 7,229,982 47,187,570 2,578,247 124,660,237 -------------------------------------------------------------------------- 87,712,342 12,721,880 59,403,722 5,869,578 165,707,522 Interest-bearing liabilities Savings and checking 58,428,792 0 0 0 58,428,792 Time deposits< $100,000 4,096,492 8,407,611 19,612,368 0 32,116,471 Time deposits>$100,000 7,190,616 13,861,767 16,067,619 0 37,120,002 Repurchase agreements and Federal funds purchased 17,556,381 0 0 0 17,556,381 Notes payable and Federal Home Loan Bank advances 7,500,000 0 2,000,000 0 9,500,000 -------------------------------------------------------------------------- 94,772,281 22,269,378 37,679,987 0 154,721,646 Net asset (liability) repricing gap $ (7,059,939) $ (9,547,498) $ 21,723,735 $ 5,869,578 $ 10,985,876 ========================================================================== Cumulative net asset (liability) repricing gap $ (7,059,939) $(16,607,437) $ 5,116,298 $ 10,985,876 ===========================================================
Currently the Bank has a negative repricing gap which indicates that the bank is liability sensitive. This position implies that decreases to the national federal funds rate would have more of an impact on interest expense than on interest income if there were a parallel shift in rates. For instance if the Bank's internal prime rate went down by 25 basis points and every interest earning asset and interest bearing liability on the Bank's March 31, 2002 balance sheet adjusted simultaneously by the same 25 basis points, more liabilities would be affected than assets. At this point in time it would not be prudent to assume that future reductions in the Bank's internal prime could be completely absorbed by reductions to the Bank's deposit rates. Some deposit rates are reaching the bottom limit of what can be paid. The provision for loan losses for the first quarter of 2002 was $127,800 compared to a figure of $101,500 for the same period in 2001. 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 with the intent of maintaining it 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 first quarter totaled $186,451 and represented an increase of 12% over last year's first quarter. Although service charge income appeared to remain -18- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS relatively flat between 2002's first quarter and the similar quarter in 2001, the small increase accounted for 10% of the overall increase in non-interest income. Additionally, 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 first quarter ended March 31, 2002 were $9,382 more than the same period in 2001. Comparing the similar quarter, fees of this type improved 26% over 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. Other non-interest income consists of a variety of categories. The ones showing the most dramatic improvement from last years first quarter to this years were commissions on credit life insurance sold, debit card fee income and credit card interchange income. The total increase amongst these were roughly $6,000 or 31% of the improvement in non-interest income. Non-interest expenses for the first three months of 2002 increased 13% over the same period in 2001. The figure for the first quarter of 2002 was $1,145,710 compared to a total of $1,014,167 for the first three months of 2001. Salaries and benefits comprised 47% of the first quarter increase. There were an additional 6 full-time equivalent employees at March 31, 2002 compared to March 31, 2001. Occupancy and furniture and equipment expenses grew $9,155 (5%) for the first three months of 2002 compared to the similar periods in 2001. An increase in property taxes for the Bank's main office was mostly the cause of this fluctuation. Advertising expense actually decreased by $7,809 from the first quarter of 2002 compared to the first quarter of 2001. During last year's first quarter the Bank incurred additional costs to announce the grand opening of its North Muskegon location. As expected, data processing expenses have increased as a result of the Bank's expanding customer base. This category has grown 39% in the first three months of 2002 compared to the same period in 2001 and is responsible for 12% of the total increase in non-interest expenses so far this year. Expenses of this nature are an unavoidable cost of doing business for a financial institution. Professional services expense decreased by $13,390 when comparing the first three months of 2002 with the similar period one year ago. Legal expenses incurred by the Corporation have been lower in 2002 by $11,000. The line item showing other non-interest expenses has increased $65,571 compared to the similar quarter in 2001. In 2001, the Bank began paying its directors a fee for attending scheduled Board and Committee meetings. By March 31, 2002, the Bank had paid $13,900 in director's fees verses $5,700 being paid in 2001. The change in this category accounts for 13% of the increase in other non-interest expense. Another category of other non-interest expense that has increased is correspondent bank service charges. An additional $7,786 has been paid through March of 2002 compared to the first three months of 2001. Due to the general growth of the Bank it is expected that the number of items processed on a daily basis will proportionately increase and cause charges of this type to climb. In the first three months of 2002 the Bank accrued State of Michigan Business Taxes of $11,284 compared to none being accrued for the same time period in 2001. No Federal Income Tax accruals were made for either the first quarter of 2002 or that of 2001. Given the fact that the Corporation is now profitable the net operating losses accumulated in the first years of operation are being used to offset the tax liability on current profits. At this time it is estimated that the net operating losses will continue offsetting income throughout 2002. -19- 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. 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. 3.3 First Amendment to the Bylaws of the Company dated December 19, 2001. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated February 25, 2002. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated February 25, 2002. -20- (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. -21- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 14, 2002. 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 Chief Financial Officer and Vice President (principal financial and accounting officer) -22- EXHIBIT INDEX EXHIBIT NO. 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. 3.3 First Amendment to the Bylaws of the Company dated December 19, 2001. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated February 25, 2002. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated February 25, 2002. -23- EX-3.3 3 k69653ex3-3.txt FIRST AMENDMENT TO BYLAWS EXHIBIT 3.3 December 19, 2001 RESOLUTION OF THE BOARD OF DIRECTORS OF COMMUNITY SHORES BANK CORPORATION AMENDING THE BYLAWS OF COMMUNITY SHORES BANK CORPORATION Amending Article II, Section 2 of the Bylaws RESOLVED, that Section 2 of Article II of the Bylaws of the Corporation is amended to read in full as follows: "SECTION 2. ANNUAL MEETINGS. Annual meetings of the shareholders shall be held each year at such time on such business day in the month of April or May as may be designated by the board of directors, or if no such designation is made, at 2 p.m. on the second Thursday in May, or if that day is a legal holiday, then on the next succeeding business day at such place and time as shall be fixed by the board of directors." EX-10.1 4 k69653ex10-1.txt SUBORDINATED NOTE PURCHASE AGREEMENT EXHIBIT 10.1 Community Shores LLC SUBORDINATED NOTE PURCHASE AGREEMENT FEBRUARY 25, 2002 To: Purchaser of a Floating Rate Subordinated Note of Community Shores Bank Corporation, Due June 30, 2007 Community Shores Bank Corporation, a Michigan corporation (the "Company"), whose address is 1030 W. Norton Avenue, Muskegon, Michigan 49441, agrees with you ("you") as follows: 1. The Note. The Company intends to issue up to $4,000,000 of its Floating Rate Subordinated Notes due June 30, 2007 (the "Floating Rate Subordinated Notes"). The Company has taken all necessary action to authorize the execution and delivery of this Agreement and the sale and issuance to you under this Agreement of one of its Floating Rate Subordinated Notes, in the principal amount (which together with Floating Rate Subordinated Notes previously issued to you and expected to be issued to you in the future, is not less than $100,000) designated by you on the signature page of this Agreement (the "Note"). The Note will be in substantially the form set forth as Exhibit A to this Agreement. The Note will be dated as of the Closing Date (defined below), and mature on June 30, 2007, unless the maturity date is extended by written agreement of the Company and you. The Note will bear interest on its unpaid principal balance at the Adjusted Firstar Prime Rate from the Closing Date until payment in full, payable quarterly in arrears on April 15, July 15, October 15, and January 15 of each year, for the immediately preceding quarter, commencing April 15, 2002. The Adjusted Firstar Prime Rate is the per annum rate announced from time to time by Firstar Bank, N.A. as its prime rate, or if that rate is not practical to determine for any period, then during such period the prime rate prevailing at the time in the State of Michigan, plus in either case one and one-half percent (1 1/2%) per annum. Interest on overdue interest will be payable on demand at the rate of ten percent (10%) per annum. During the continuance of any Event of Default the per annum rate of interest payable on the unpaid principal balance of the Note will increase from the Adjusted Firstar Prime Rate to two percent (2%) per annum above the Adjusted Firstar Prime Rate. The Note will be unsecured and will not be convertible into capital stock of the Company. The Note may be prepaid in whole or in part prior to maturity, without any prepayment fee, at any time at the election of the Company, upon at least one (1) days prior written notice to you. THE NOTE WILL BE ISSUED IN REGISTERED FORM ONLY AND WILL BE TRANSFERABLE ONLY AS PROVIDED IN THIS AGREEMENT. THE NOTE WILL NOT BE ELIGIBLE AS COLLATERAL FOR LOANS FROM THE COMPANY'S SUBSIDIARY, COMMUNITY SHORES BANK (THE "BANK"). THE NOTE IS NOT A DEPOSIT OR OTHER OBLIGATION OF THE BANK. THE NOTE IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. 2. Purchase and Sale of the Note. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties set forth in this Agreement, you agree to purchase from the Company, and the Company agrees to issue and sell to you, a Note, in the aggregate principal amount you have designated on the signature page of this Agreement, upon delivery by you, at or prior to the Closing Date, of the purchase price specified in Section 3. The Company will initially issue to you one Note registered in your name and payable to you in the aggregate principal amount of the Note being purchased by you. 3. Closing. The Closing under this Agreement will take place at the main office of the Company at 1030 W. Norton Avenue, Muskegon, Michigan 49441, at 9:00 a.m., on February 25, 2002, or on such other date and time as may be mutually agreed upon between you and the Company (such date and time is called the "Closing Date"). Unless otherwise mutually agreed between you and the Company, at the Closing the Company will deliver the Note to you against payment by you, by delivery to the Company of cash, a personal check, bank cashier's check, or wire transfer, for 100% of the aggregate principal amount of the Note to be sold and delivered to you (the "Purchase Price"). 4. Representations and Warranties of the Company. The Company represents and warrants to you as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan. (b) The Company is duly authorized to conduct its current business and has all requisite corporate power and authority to own and operate its properties and assets (including the voting capital stock of the Bank), and to carry on its business; except to the extent that the Company's failure to be so authorized or have such power or authority would not be expected to have a material adverse effect on the Company. (c) The Company is duly authorized to enter into this Agreement, to issue and sell the Note, and to perform the terms of this Agreement and of the Note. (d) The Company has furnished to you its audited consolidated balance sheets as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flow for the year ended December 31, 1999 and the period from July 23, 1998 (inception) through December 31, 1998; together with the report thereon of Crowe Chizek and Company LLP, independent auditors for the Company. Such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended 2 December 31, 1999 and for the period from July 23, 1998 (inception) through December 31, 1998, in conformity with generally accepted accounting principles. (e) Since December 31, 1999, there has been no material adverse change in the business or financial condition of the Company, except to the extent disclosed in the Company's Quarterly Report to the Securities and Exchange Commission for the quarter ended September 30, 2000, a copy of which has been provided to you, or to the extent that the Company's operations since December 31, 1999 have used cash or generated a loss, or require that the Company or the Bank have additional capital to satisfy applicable bank regulatory requirements. (f) There are no actions, suits, proceedings or investigations pending before any court or governmental agency, or, to the Company's knowledge, threatened before any such court or governmental agency, which the Company expects will result in any judgment, order, decree or liability having a material adverse effect upon the business or financial condition of the Company, or which questions the validity of the Note or this Agreement. (g) The Company has filed all federal, state, local and other tax returns required by law to be filed by it, and all taxes shown to be due and all additional assessments shown to be due, have been paid by the Company; except to the extent that the failure to make any such filing or payment would not be expected to have a material adverse effect on the Company. (h) The Company is not in default under, nor is it violating any term of its Articles of Incorporation or its Bylaws, or any term or condition of any agreement, lease, contract, instrument, judgment, decree, or order applicable to it, where such default or violation would be expected to have a material adverse effect on the Company. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated by this Agreement, nor compliance with the provisions of this Agreement and of the Note, will result in any default under or violation of any term or condition of any agreement, lease, contract, instrument, judgment, decree, or order applicable to it, where such default or violation would be expected to have a material adverse effect on the Company, or in the creation of any mortgage, lien, charge, or encumbrance upon any of the properties and assets of the Company, where such mortgage, lien, charge or encumbrance would be expected to have a material adverse effect on the Company. (i) There exists no condition, event or act which would constitute an Event of Default, as defined in Section 9 of this Agreement, or which, after notice or lapse of time or both, would constitute such an Event of Default. 5. Representations, Warranties and Covenants of the Purchaser. You are aware that the Company intends to issue the Note and the other Floating Rate Subordinated Notes pursuant to an exemption from registration under Rule 506 of Regulation D or Section 4(2) of the Securities Act of 1933 (the "Securities Act"), and 3 under Section 402(b)(9) of the Michigan Uniform Securities Act (the "Michigan Act"), or without registration under the Michigan Act in reliance on Section 18 of the Securities Act. In determining whether these exemptions from registration under the Securities Act, the Michigan Act, or other applicable securities laws, are available, the Company is relying upon your representations, warranties and covenants contained in this Agreement, and upon those of other purchasers of the Company's Floating Rate Subordinated Notes. You represent and warrant to, and agree with, the Company as follows: (a) You are acquiring the Note solely for your own account, for investment and not with a view to any further sale or distribution of the Note. (b) The Note has not been registered under the Securities Act, the Michigan Act, or any other state securities act, and will not be sold or otherwise transferred without registration under the Securities Act, the Michigan Act, and any other applicable state securities act, or an exemption from registration. You recognize that the certificate representing the Note will bear a restrictive legend providing that no sale or other transfer may be made without registration under federal and state securities laws or an exemption from registration. The records of the Company will also be marked to note the restrictions on transfer of the Note referred to in this Section. (c) In addition to the restrictions on transfer set forth in subsection (b) above, you agree that you will give the Company at least 10 business days (or such shorter period as the Company may agree to) advance notice of any proposed sale, pledge, or other transfer of the Note or of any interest in the Note; and will not sell, pledge or otherwise transfer the Note, or any interest in the Note, without the written consent of the Company; except that no consent of the Company shall be required for any sale of the Note to any person who is a member of the Board of Directors of the Company at the time of the sale, or that is an entity all of the equity owners of which are members of the Board of Directors of the Company at the time of the sale, and provided further that this Note may be pledged to Firstar Bank, N.A. (which entity may also be referred to as Firstar Bank, National Association), and no consent of the Company shall be required for any sale, pledge or transfer to Firstar Bank, N.A., or for any sale or transfer in compliance with applicable securities laws to any purchaser upon exercise of any remedy by Firstar Bank, N.A. in connection with any such pledge. The Company may decline to grant its consent for any reason, or no reason. (d) The Note was not offered to you by means of any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium, or broadcast over television or radio, or any other form of general solicitation or advertising. Materials submitted to you in connection with the purchase of the Note were received by you at least 48 hours before this Agreement was signed. (e) You have not paid or agreed to pay any commission to any person for soliciting you to purchase the Note; and you are not aware any other person 4 making any agreement to pay, or paying any commission in connection with the sale of any Floating Rate Subordinated Note. (f) You are an "accredited investor" as that term is defined in Regulation D under the Securities Act, because (check the clause that applies): ________ You are a member of the Board of Directors of the Company; or ________ You are a limited liability company, all of the members of which are member of the Board of Directors of the Company; or ________ You are an individual retirement account, the sole owner of which is a member of the Board of Directors of the Company; or ___X____ Describe your basis for being an accredited investor All of your members are members of the Board of Directors of the Company. (g) All communication with you regarding the purchase of the Note has occurred in the State of Michigan; and if you are an individual, you are a bona fide resident of the State of Michigan, and if you are an entity, your principal office is located in the State of Michigan. (h) You have full power and authority, and have taken, and if you are an entity, your members, shareholders, directors, trustees or other governing bodies have taken all action necessary to authorize the purchase of the Note, and you have obtained the consent or approval of all governmental agencies or bodies whose consent or approval is required for your purchase of the Note. Your purchase of the Note does not violate any law, rule or regulation to which you are subject nor the terms of any agreement or undertaking to which you are a party. 6. Payment, Registration and Transfer of the Note. The Company may make all payments on account of the principal of the Note and any interest thereon directly by check duly mailed or delivered to you at your address set forth in the register referred to in this Section 6, without any presentment or notation of payment, notwithstanding any provisions to the contrary in the Note with respect to the place and manner of payment. Any amount of principal so paid on the Note shall be regarded as having been retired and cancelled at the time of payment. When all principal of and interest on the Note has been fully paid, the Note shall be surrendered to the Company and shall be retired and cancelled. The Company will cause to be kept at its principal office a register in which shall be entered the name and address of the holder of the Note, the particulars of the Note, and of all transfers of the Note. The person in whose name the Note shall be so registered shall be deemed and treated as the owner of the Note for all purposes of 5 this Agreement and the Company shall not be affected by any notice to the contrary. Payment of or on account of the principal of and interest on the Note shall be made only to or upon the written order of the registered owner. For the purpose of any request, direction, consent, or waiver under this Agreement, the Company may deem and treat the registered owner of the Note as the owner of the Note without production of the Note. Subject to compliance with the requirements of Sections 5(b) and 5(c) of this Agreement, the holder of the Note may at any time prior to maturity or payment in full of the Note transfer the Note by surrender of the Note at the principal office of the Company with an appropriate instrument of transfer, and the Company shall, without expense to such holder or transferee, execute and deliver to the transferee a new Note registered in the name of such transferee in principal amount equal to the unpaid principal amount of the Note so transferred. All Notes so issued upon transfers or exchanges shall have the same maturity and rate of interest, contain the same provisions, and be subject to the same terms and conditions as the Note so surrendered, including all of the provisions of this Agreement. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Note, and, if requested by the Company, upon delivery of an indemnity agreement or security reasonably satisfactory to the Company, the Company will issue a new Note of like tenor and amount in lieu of such lost, stolen, destroyed or mutilated Note. References in this Agreement to the Note shall include any Note issued pursuant to this Section 6. 7. Subordination. The Company, for itself, its successors and assigns, covenants and agrees, and each original and successor holder of the Note by his acceptance thereof likewise covenants and agrees that, notwithstanding any other provision of this Agreement or the Note, the payment of the principal of and interest on the Note shall be subordinated in right of payment, to the extent and in the manner set forth in this Agreement, to the prior payment in full of all of the Company's Senior Debt. "Senior Debt" means (a) all obligations and liabilities of the Company for borrowed money or purchased money, whether direct or indirect, absolute or contingent, joint, several or joint and several, secured or unsecured, due or to become due, now existing or later arising, (b) all similar obligations of the Company arising from off-balance sheet guarantees and direct credit substitutes, and (c) all obligations of the Company associated with derivative products such as interest and foreign exchange rate contracts, commodity contracts, and similar arrangements; to the extent, in each case, they are not by their terms made subordinate and junior to or on a parity with the Note, provided, however, that the obligations evidenced by the Company's Floating Rate Subordinated Notes that are now outstanding or later issued shall not constitute Senior Debt. The Note is not superior in right of payment to the other Floating Rate Subordinated Notes, but instead shall rank pari passu with all of the other Floating Rate Subordinated Notes for all purposes. The Note is senior to the Company's capital stock and in the event of any liquidation or insolvency of the Company would 6 be eligible to receive payments out of the Company's assets before any payments to the Company's shareholders with respect to the capital stock. In the event of any bankruptcy, insolvency or similar proceedings or any receivership, liquidation, reorganization or other similar proceedings relative to the Company or to its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company or the distribution or marshalling of its assets or any composition with creditors of the Company, whether or not involving insolvency of the Company, then and in such event: (i) all obligations of the Company to which the Note is subordinated in right of payment shall be paid in full before any payment or distribution of any character shall be made on account of the Note; (ii) any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities, to which the holder of the Note would be entitled except for the provisions of this Section 7 shall be paid or delivered by the person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Debt or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Debt may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Debt held or represented by each, to the extent necessary to make payment in full of all Senior Debt remaining unpaid after giving effect to any concurrent payment or distribution to the holders of such Senior Debt; and (iii) in the event that, notwithstanding the foregoing, any payment by, or distribution of assets of, the Company of any kind or character, whether in cash, property or securities shall be received by the holder of the Note before all Senior Debt is paid in full, such payment or distribution shall be held in trust for the benefit of, and shall be paid over to the holders of such Senior Debt or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Debt may have been issued, ratably as aforesaid, for application to the payment of all Senior Debt remaining unpaid until all such Senior Debt shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt. Subject to the payment in full of all Senior Debt, the holder of the Note shall be subrogated to the rights of the holders of the Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt until all amounts owing on the Note shall be paid in full, and as between the Company, its creditors other than holders of Senior Debt, and the holder of the Note no such payment or distribution made to the holders of Senior Debt by virtue of this Section 7 which otherwise would have been made to the holder of the Note shall be deemed to be a payment on account of the Senior Debt, it being understood that the provisions of this Section 7 are intended solely for the purpose of defining the relative 7 rights of the holder of the Note, on the one hand, and the holders of the Senior Debt, on the other hand. In the event that any default occurs in the payment of the principal of (and premium, if any) or interest on any Senior Debt, and if thereafter judicial proceedings shall have been instituted with respect to such defaulted payment, or if the maturity of any Senior Debt is accelerated by any holder thereof upon a default with respect thereto and such acceleration has not been rescinded or said accelerated Senior Debt has not been paid, then, and during the continuance of either of such events, no payment of principal or interest on the Note shall be made by the Company or demanded or accepted by any holder of the Note who has received notice from the Company or from a holder of such Senior Debt of either of such events. In case any payment or distribution shall be paid or delivered to any holder of the Note who has received notice of either of the events specified in the preceding sentence, in violation or contravention of the provisions of this subordination, such payment or distribution shall be held in trust for and paid and delivered to the holders of such Senior Debt until they shall have been paid in full. No present or future holder of Senior Debt shall be prejudiced in his right to enforce subordination of the Note by any failure to act on the part of the Company. The subordination provisions of this Section 7 are solely for the purpose of defining the relative rights of the holders of Senior Debt on the one hand and the holder of the Note on the other hand, and nothing herein shall impair, as between the Company and the holder of the Note, the obligation of the Company, which is unconditional and absolute, to pay to such holder the principal of and interest on the Note in accordance with its terms, nor shall anything in this Agreement prevent the holder of the Note from exercising all remedies in this Agreement or otherwise permitted by applicable law upon the occurrence of an Event of Default under this Agreement (subject to the rights, if any, of the holders of Senior Debt to receive cash, property or securities otherwise payable or deliverable to the holder of the Note). 8. Covenants of the Company. The Company covenants and agrees that, so long as the Note is outstanding, it will perform and observe the following covenants and provisions: (a) The Company will pay the principal of and interest on the Note at the time and place and in the manner stated in the Note. (b) The Company will not sell all or substantially all of its assets unless the purchaser agrees to be liable for the payment of all of the Company's obligations under the Note. (c) The Company will not consolidate with or merge into any other corporation or entity or permit any other corporation or entity to consolidate with or merge into the Company; provided that the foregoing shall not apply to any 8 consolidation or merger to which the Company is a party if the Company is the surviving corporation, or the surviving corporation agrees to be liable for the payment of all of the Company's obligations under the Note. (d) The Company will provide, within 20 days after written request or request in person at the main office of the Company, to the holder of the Note a copy of the consolidated balance sheet of the Company as of the end of the most recently completed fiscal year of the Company and a consolidated statement of income for such fiscal year, in reasonable detail and prepared in accordance with generally accepted accounting principles. Such financial statements will be available to the holder of the Note on or after the 90th day following the end of each fiscal year of the Company. (e) During any period that an Event of Default exists and is continuing under this Agreement, the Company will not make any payment of principal of or interest on any other Floating Rate Subordinated Note unless the Company makes a payment of principal or interest on the Note in an amount such that the payments of principal and interest made on the Floating Rate Subordinated Notes outstanding at that time are pro rata, based on the principal and interest then due on each respective Floating Rate Subordinated Note compared to the principal and interest then due on all of the Floating Rate Subordinated Notes. (f) The Company will, from time to time, within ten (10) days after submission of a written request for payment, reimburse you for all reasonable out-of-pocket costs, including legal fees and expenses, incurred by you in connection with the preparation or review of this Agreement, the Note, any amendment or proposed amendment to this Agreement or the Note, or any related documents, or in analyzing or enforcing any of your rights under this Agreement or the Note, or in connection with any claim or inquiry brought by any shareholder of the Company or by any bank regulatory organization, in connection with this Agreement, the Note, or any of the related transactions. (g) Within five (5) days after the Closing, the Company will pay to you an amount equal to one percent (1%) of the Purchase Price as a closing fee. 9. Defaults. Each of the following events shall constitute an "Event of Default" under this Agreement: (a) If the Company shall default in the payments of any part of the principal of the Note when the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise; and the default continues for more than (ten) 10 days after the holder of the Note provides written notice of the default to the Company; or 9 (b) If the Company shall default in the payment of any installment of interest on the Note, and the default continues for more than (fifteen) 15 days after the holder of the Note provides written notice of the default to the Company; or (c) If the Company shall default in the performance or observance of any of the terms, covenants, or conditions of this Agreement or the Note, and such default shall continue for more than thirty (30) days after the holder of the Note provides written notice of the default to the Company; or (d) If any representation or warranty made by the Company in this Agreement shall prove to have been false or incorrect in any material respect on the date as of which it was made; or (e) If the Company shall default in the payment of any principal of or interest on any Floating Rate Subordinated Note other than the Note, or upon any Senior Debt aggregating more than $100,000 in amount; and such default continues unremedied for more than fifteen (15) days after notice by the holder or holders of any such Floating Rate Subordinated Notes or Senior Debt to the Company of such default; or (f) The Commissioner of the Michigan Office of Financial and Insurance Services, the Board of Governors of the Federal Reserve System, or the Federal Deposit Insurance Corporation, or any other regulatory authority having jurisdiction shall take possession of the properties, assets, and business of the Bank or appoint a receiver or conservator of the Bank; or (g) Any action or proceeding shall be commenced by or against the Company or the Bank for reorganization, liquidation or similar relief under the Bankruptcy Code, or any other bankruptcy, reorganization or insolvency law or statute, and shall remain undismissed for 30 days. If an Event of Default under paragraphs (f) or (g) above shall occur and be continuing, the Note shall, without further action on the part of the holder or any other person, automatically and immediately become due and payable. If an Event of Default under paragraphs (a), (b), (c), (d) or (e) above shall occur and be continuing, then the holder of the Note shall have the option (unless such event shall have been remedied) to pursue such remedies as are permitted upon default under applicable law. In the event that the Note become due and payable automatically as provided for in the first sentence of this paragraph, then, subject to the subordination provisions of Section 7 of this Agreement, the Note shall immediately mature and become due and payable without presentment, demand, protest or further notice of any kind, all of which are expressly waived. No delay on the part of the holder of the Note in exercising any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other rights, power or privilege under this Agreement. 10 10. Adjustment of Interest Rate and Fees. You and the Company acknowledge that Community Shores LLC, one of the intended purchasers of a Floating Rate Subordinated Note, intends to initially fund its purchase of a Floating Rate Subordinated Note with a loan from Firstar Bank, N.A. that bears interest at one-half percent (1/2%) below the per annum rate announced from time to time by Firstar Bank as its prime rate. In the event that Community Shores LLC is required to pay a higher rate of interest to Firstar Bank, N.A. (or another lender) for money that it uses to fund (or continue funding) its Floating Rate Subordinated Note, the Company agrees that during any period that a higher rate is in effect for such funding, the Company will pay you an additional amount as interest such that the interest rate paid on the Note will be at a rate that is not less than two percent (2%) per annum above the rate of interest payable by Community Shores LLC to fund its Floating Rate Subordinated Note. In addition, to the extent that Community Shores LLC is required to pay any fees to Firstar Bank, N.A. (or another lender) in connection with its obtaining of money to fund (or continue to fund) its Floating Rate Subordinated Note, the Company will upon request by Community Shores LLC, promptly reimburse Community Shores LLC for the amount of such fees that it has paid. 11. Amendments, Waivers and Consents. Changes or additions to this Agreement may be made, and compliance with any covenant or provision herein set forth may be omitted or waived, if the Company shall obtain consent thereto in writing from the holder of Note. No change in or addition to Section 7 of this Agreement, or waiver of compliance with the provisions of Section 7, shall in any way affect the existing rights of creditors of the Company outstanding at the time of any such change, addition or waiver. Any consent may be given subject to the satisfaction of conditions stated in the document setting forth or accompanying the consent. 12. Survival of Representations and Warranties. All representations and warranties contained in this Agreement are made in writing by the Company in connection with the transactions contemplated by this Agreement, are made as of the date of this Agreement, and shall survive the execution and delivery of this Agreement and of the Note. 13. Notices. Any notice or demand which by any provision of this Agreement is required or provided to be given shall be deemed to have been sufficiently given or served for all purposes when actually delivered, or if earlier, three business days after being sent by registered or certified United States mail, return receipt requested, and postage prepaid, to the applicable party at the address set forth opposite the signature of such party below or at such other address with respect to either party as such party shall notify the other in writing. 14. Benefits. All of the terms and provisions of this Agreement shall bind and inure to the benefit of the parties to this Agreement and their respective successors and assigns, including all assignees and subsequent holders of the Note; provided that despite any assignment or transfer of the Note the Company shall be 11 entitled to treat as the owner of the Note the holder designated as payee on the records maintained by the Company unless and until the Company shall have received the tender of the Note for transfer as provided for in Section 6 hereof. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without regard to choice of law principles of such State. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which, when executed and delivered shall be an original, but such counterparts shall together constitute one and the same instrument. [The remainder of this page is intentionally left blank.] 12 If you agree with the above, please sign this Agreement and return it to the Company, at which time this Agreement will become and evidence a binding agreement between the Company and you as of the date and year first above written. Very truly yours, COMMUNITY SHORES BANK CORPORATION Address of Company: 1030 W. Norton Avenue Muskegon, Michigan 49441 By:___________________________ Attention: Chairman of the Jose' A. Infante Board, President and Chairman of the Board, and Chief Executive President and Chief Executive Officer Officer PURCHASER This Agreement is hereby accepted and agreed to: Address of Purchaser: COMMUNITY SHORES LLC 1030 W. Norton Avenue Purchaser Muskegon, Michigan 49441 By: Jose' A. Infante, ________________________________ Its: Manager AMOUNT OF NOTE TO BE PURCHASED $100,000.00. 13 EXHIBIT A FORM OF FLOATING RATE SUBORDINATED NOTE The Note shall be in substantially the form set forth in this Exhibit, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by resolution of the Board of Directors of the Company or by the officer or officers executing the Note, as evidenced by his, her, or their execution of the Note. No. R-______ COMMUNITY SHORES BANK CORPORATION FLOATING RATE SUBORDINATED NOTE DUE JUNE 30, 2006 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, THE MICHIGAN UNIFORM SECURITIES ACT, OR THE SECURITIES LAWS OF ANY OTHER STATE. THIS NOTE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, THE MICHIGAN UNIFORM SECURITIES ACT, AND ANY OTHER APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS NOTE IS SUBJECT TO RESTRICTIONS ON SALE, PLEDGE AND OTHER TRANSFERS SET FORTH IN AN AGREEMENT BETWEEN THE HOLDER AND ISSUER OF THIS NOTE, INCLUDING RESTRICTIONS REQUIRING, IN MOST CASES, THE ISSUER'S CONSENT PRIOR TO ANY SALE, PLEDGE OR OTHER TRANSFER. THIS NOTE IS NOT A DEPOSIT OR OTHER OBLIGATION OF COMMUNITY SHORES BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THIS NOTE IS SUBORDINATE TO THE CLAIMS OF CERTAIN OTHER CREDITORS OF THE COMPANY, IS INELIGIBLE TO SECURE A LOAN FROM COMMUNITY SHORES BANK, AND IS UNSECURED. Community Shores Bank Corporation, a Michigan corporation (the "Company"), for value received, hereby promises to pay to or permitted registered assigns, on June 30, 2006, the principal sum of ______________________________________________ Dollars and to pay interest on the unpaid principal amount of this Note from the date of this Note or from the most recent Interest Payment Date to which interest hereon has been paid or duly provided 14 for, whichever is later, quarterly in arrears on the 15th day of April, July, October, and January (each an "Interest Payment Date") in each year commencing on ___________ 15, 200__, at the Adjusted Firstar Prime Rate until the principal of this Note is paid or made available for payment. The Adjusted Firstar Prime Rate is the per annum rate announced from time to time by Firstar Bank, N.A. as its prime rate, or if that rate is not practical to determine for any period than during such period the prime rate prevailing at the time in the State of Michigan, plus in either case one and one-half percent (1 1/2%) per annum. Interest on overdue interest will be payable on demand at the rate of ten percent (10%) per annum. During the continuance of any Event of Default (as defined in the Purchase Agreement referred to below) the per annum rate of interest payable on the unpaid principal balance of this Note will increase from the Adjusted Firstar Prime Rate to two percent (2%) per annum above the Adjusted Firstar Prime Rate. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will be paid to the person in whose name this Note is registered at the close of business on the Regular Record Date for such interest which shall be the 15th day (whether or not a business day) of the calendar month immediately preceding an Interest Payment Date, notwithstanding the cancellation of this Note upon any transfer or exchange of this Note subsequent to such Regular Record Date and prior to such Interest Payment Date. The principal of and interest on this Note shall be payable at the principal office of the Company in Muskegon County, Michigan; provided, however, that payment of interest or principal may be made at the option of the Company by check mailed to the address of the person entitled to the payment as such address may appear on the Note Register. All such payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. This Note may be prepaid in whole or in part prior to maturity, without any prepayment fee, at any time at the election of the Company, upon at least one (1) days prior written notice to the person in whose name this Note is registered. This Note is one of a duly authorized issue of subordinated notes of the Company designated as its Floating Rate Subordinated Notes Due June 30, 2006 (the "Floating Rate Subordinated Notes"), limited in aggregate principal amount to $4,000,000. This Note is issued under and pursuant to a Subordinated Note Purchase Agreement dated ___________________________, by and between the Company and the initial registered owner of this Note (the "Purchase Agreement") to which Purchase Agreement and any amendments to it reference is made for a description of the rights, limitations of rights, obligations, and duties of the Company and the person in whose name this Note is registered, and the terms upon which the Notes are, and are to be, registered and delivered. The payment of principal of and interest on this Note is expressly subordinated, as provided in the Purchase Agreement to the payment of any and all Senior Debt of 15 the Company, as defined in the Purchase Agreement, which includes all obligations of the Company for borrowed or purchased money, whether outstanding at the date of the Purchase Agreement or subsequently incurred, other than obligations evidenced by the Company's Floating Rate Subordinated Notes that are now outstanding or later issued. This Note is not superior in right of payment to the other Floating Rate Subordinated Notes, but instead shall rank pari passu with all of the other Floating Rate Subordinated Notes. This Note is issued subject to such provisions of the Purchase Agreement, and each holder of this Note, by accepting the same, agrees to and shall be bound by such provisions. This Note is issuable only as a registered Note without coupons in minimum denominations of $1,000. No service charge will be made for any transfer or exchange of this Note, but the Company will require payment of a sum sufficient to cover any tax or other governmental charge payable in connection with any transfer or exchange. The Company may treat the person in whose name this Note is registered as the owner of this Note for the purpose of receiving payment and for all other purposes whether or not this Note is overdue, and the Company shall not be affected by any notice to the contrary. As provided in the Purchase Agreement and subject to certain limitations set forth in the Purchase Agreement, this Note is transferable on the Note Register of the Company, upon surrender of this Note for transfer at the principle office of the Company in Muskegon County, Michigan, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company, duly executed by, the registered holder of this Note. The interest rate payable on this Note may be increased under certain circumstances as provided for in Section 10 of the Purchase Agreement. No reference in this Note to the Purchase Agreement and no provisions of this Note or of the Purchase Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay, the principal of and interest on this Note at the time and place, at the rate and in the currency prescribed in this Note. Community Shores Bank Corporation has caused this Note to be executed in its corporate name by the manual signature of its duly authorized officer. Date: __________________ COMMUNITY SHORES BANK CORPORATION BY: ___________________________________ ITS: ______________________________ 16 EX-10.2 5 k69653ex10-2.txt FLOATING RATE SUBORDINATED NOTE EXHIBIT 10.2 Community Shores LLC No. R-______ COMMUNITY SHORES BANK CORPORATION FLOATING RATE SUBORDINATED NOTE DUE JUNE 30, 2007 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, THE MICHIGAN UNIFORM SECURITIES ACT, OR THE SECURITIES LAWS OF ANY OTHER STATE. THIS NOTE MAY NOT BE SOLD OR OTHERWISE TRANSFERRED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, THE MICHIGAN UNIFORM SECURITIES ACT, AND ANY OTHER APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS NOTE IS SUBJECT TO RESTRICTIONS ON SALE, PLEDGE AND OTHER TRANSFERS SET FORTH IN AN AGREEMENT BETWEEN THE HOLDER AND ISSUER OF THIS NOTE, INCLUDING RESTRICTIONS REQUIRING, IN MOST CASES, THE ISSUER'S CONSENT PRIOR TO ANY SALE, PLEDGE OR OTHER TRANSFER. THIS NOTE IS NOT A DEPOSIT OR OTHER OBLIGATION OF COMMUNITY SHORES BANK AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THIS NOTE IS SUBORDINATE TO THE CLAIMS OF CERTAIN OTHER CREDITORS OF THE COMPANY, IS INELIGIBLE TO SECURE A LOAN FROM COMMUNITY SHORES BANK, AND IS UNSECURED. Community Shores Bank Corporation, a Michigan corporation (the "Company"), for value received, hereby promises to pay to *** COMMUNITY SHORES LLC, A MICHIGAN LIMITED LIABILITY COMPANY *** or permitted registered assigns, on June 30, 2007, the principal sum of One Hundred Thousand Dollars and to pay interest on the unpaid principal amount of this Note from the date of this Note or from the most recent Interest Payment Date to which interest hereon has been paid or duly provided for, whichever is later, quarterly in arrears on the 15th day of April, July, October, and January (each an "Interest Payment Date") in each year commencing on April 15, 2002, at the Adjusted Firstar Prime Rate until the principal of this Note is paid or made available for payment. The Adjusted Firstar Prime Rate is the per annum rate announced from time to time by Firstar Bank, N.A. as its prime rate, or if that rate is not practical to determine for any period than during such period the prime rate prevailing at the time in the State of Michigan, plus in either case one and one-half percent (1 1/2 %) per annum. Interest on overdue interest will be payable on demand at the rate of ten percent (10%) per annum. During the continuance of any Event of Default (as defined in the Purchase Agreement referred to below) the per annum rate of interest payable on the unpaid principal balance of this Note will increase from the Adjusted Firstar Prime Rate to two percent (2%) per annum above the Adjusted Firstar Prime Rate. The interest so payable and punctually paid or duly provided for on any Interest Payment Date will be paid to the person in whose name this Note is registered at the close of business on the Regular Record Date for such interest which shall be the 15th day (whether or not a business day) of the calendar month immediately preceding an Interest Payment Date, notwithstanding the cancellation of this Note upon any transfer or exchange of this Note subsequent to such Regular Record Date and prior to such Interest Payment Date. The principal of and interest on this Note shall be payable at the principal office of the Company in Muskegon County, Michigan; provided, however, that payment of interest or principal may be made at the option of the Company by check mailed to the address of the person entitled to the payment as such address may appear on the Note Register. All such payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. This Note may be prepaid in whole or in part prior to maturity, without any prepayment fee, at any time at the election of the Company, upon at least one (1) days prior written notice to the person in whose name this Note is registered. This Note is one of a duly authorized issue of subordinated notes of the Company designated as its Floating Rate Subordinated Notes Due June 30, 2007 (the "Floating Rate Subordinated Notes"), limited in aggregate principal amount to $4,000,000. This Note is issued under and pursuant to a Subordinated Note Purchase Agreement dated February 25, 2002, by and between the Company and the initial registered owner of this Note (the "Purchase Agreement") to which Purchase Agreement and any amendments to it reference is made for a description of the rights, limitations of rights, obligations, and duties of the Company and the person in whose name this Note is registered, and the terms upon which the Notes are, and are to be, registered and delivered. The payment of principal of and interest on this Note is expressly subordinated, as provided in the Purchase Agreement to the payment of any and all Senior Debt of the Company, as defined in the Purchase Agreement, which includes all obligations of the Company for borrowed or purchased money, whether outstanding at the date of the Purchase Agreement or subsequently incurred, other than obligations evidenced by the Company's Floating Rate Subordinated Notes that are now outstanding or later issued. This Note is not superior in right of payment to the other Floating Rate Subordinated Notes, but instead shall rank pari passu with all of the other Floating Rate Subordinated 2 Notes. This Note is issued subject to such provisions of the Purchase Agreement, and each holder of this Note, by accepting the same, agrees to and shall be bound by such provisions. This Note is issuable only as a registered Note without coupons in minimum denominations of $1,000. No service charge will be made for any transfer or exchange of this Note, but the Company will require payment of a sum sufficient to cover any tax or other governmental charge payable in connection with any transfer or exchange. The Company may treat the person in whose name this Note is registered as the owner of this Note for the purpose of receiving payment and for all other purposes whether or not this Note is overdue, and the Company shall not be affected by any notice to the contrary. As provided in the Purchase Agreement and subject to certain limitations set forth in the Purchase Agreement, this Note is transferable on the Note Register of the Company, upon surrender of this Note for transfer at the principle office of the Company in Muskegon County, Michigan, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company, duly executed by, the registered holder of this Note. The interest rate payable on this Note may be increased under certain circumstances as provided for in Section 10 of the Purchase Agreement. No reference in this Note to the Purchase Agreement and no provisions of this Note or of the Purchase Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay, the principal of and interest on this Note at the time and place, at the rate and in the currency prescribed in this Note. Community Shores Bank Corporation has caused this Note to be executed in its corporate name by the manual signature of its duly authorized officer. Date: February 25, 2002 COMMUNITY SHORES BANK CORPORATION BY: ___________________________________ ITS: ______________________________ 3 -----END PRIVACY-ENHANCED MESSAGE-----