-----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, ErsO7s/ohBpyb5e6vALlJS8AJdYetnbbAoe1HF3AVd1uCI5YSQqw45p1GB3mPe0o 8a5ERe+SkT4DCXJNqx57Dg== 0000950124-04-002367.txt : 20040514 0000950124-04-002367.hdr.sgml : 20040514 20040514145048 ACCESSION NUMBER: 0000950124-04-002367 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040514 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: 04806737 BUSINESS ADDRESS: STREET 1: 1838 RUDDIMAN DR CITY: NORTH MUSKEGON STATE: MI ZIP: 49445 BUSINESS PHONE: 2317801800 MAIL ADDRESS: STREET 1: 1838 RUDDIMAN DR CITY: NORTH MUSKEGON STATE: MI ZIP: 49445 10QSB 1 k84970e10qsb.txt QUARTERLY REPORT OF SMALL BUSINESS DATED 03/31/04 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, 2004 [ ] 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] N [ ] At April 30, 2004, 1,430,000 shares of Common Stock of the issuer were outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] Community Shores Bank Corporation Index
Page No. -------- PART I. Financial Information Item 1. Financial Statements.................................................... 1 Item 2. Management's Discussion and Analysis.................................... 13 Item 3. Controls and Procedures................................................. 22 PART II. Other Information Item 1. Legal Proceedings....................................................... 21 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities........................................................ 21 Item 3. Defaults upon Senior Securities......................................... 21 Item 4. Submission of Matters to a Vote of Security Holders..................... 21 Item 5. Other Information....................................................... 21 Item 6. Exhibits and Reports on Form 8-K........................................ 21 Signatures....................................................................... 23
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) COMMUNITY SHORES BANK CORPORATION CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2004 2003 ------------ --------------- ASSETS Cash and due from financial institutions $ 17,644,697 $ 4,751,416 Interest-bearing deposits in other financial institutions 736,440 138,609 Federal funds sold 4,500,000 1,700,000 ------------ --------------- Cash and cash equivalents 22,881,137 6,590,025 Securities Available for sale (at fair value) 18,103,652 24,025,008 Held to maturity (fair value of $231,075 at March 31, 2004 and $250,998 at December 31, 2003) 228,797 249,047 ------------ --------------- Total securities 18,332,449 24,274,055 Loans held for sale 226,000 0 Loans 156,696,392 149,950,085 Less: Allowance for loan losses 1,917,273 1,927,756 ------------ --------------- Net loans 154,779,119 148,022,329 Federal Home Loan Bank stock 425,000 425,000 Premises and equipment, net 2,592,743 2,653,906 Accrued interest receivable 615,095 620,138 Other assets 1,387,462 1,518,689 ------------ --------------- Total assets $201,239,005 $ 184,104,142 ============ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 12,867,142 $ 13,122,112 Interest bearing 156,720,465 137,045,341 ------------ --------------- Total deposits 169,587,607 150,167,453 Federal funds purchased and repurchase agreements 9,209,120 11,915,282 Federal Home Loan Bank advances 6,000,000 6,000,000 Notes payable 2,750,000 2,550,000 Accrued expenses and other liabilities 790,286 835,705 ------------ --------------- Total liabilities 188,337,013 171,468,440 Shareholders' equity Preferred stock, no par value 1,000,000 Shares authorized, none issued 0 0 Common stock, no par value; 9,000,000 shares authorized; 1,430,000 shares issued 12,922,314 12,922,314 Accumulated deficit (134,815) (303,864) Accumulated other comprehensive income 114,493 17,252 ------------ --------------- Total shareholders' equity 12,901,992 12,635,702 ------------ --------------- Total liabilities and shareholders $201,239,005 $ 184,104,142 ============ ===============
See accompanying notes to consolidated financial statements. -1- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2004 March 31, 2003 --------------- -------------- Interest and dividend income Loans, including fees $ 2,283,823 $ 2,295,499 Securities and FHLB dividends 173,717 247,753 Federal funds sold and other income 13,787 11,869 --------------- -------------- Total interest income 2,471,327 2,555,121 Interest expense Deposits 816,993 887,867 Repurchase agreements, federal funds purchased, and other debt 28,170 77,920 Federal Home Loan Bank advances and notes payable 120,535 135,670 --------------- -------------- Total interest expense 965,698 1,101,457 --------------- -------------- NET INTEREST INCOME 1,505,629 1,453,664 Provision for loan losses 56,877 188,990 --------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,448,752 1,264,674 Noninterest income Service charges on deposit accounts 159,929 129,173 Mortgage loan referral fees 20,130 5,185 Gain on sale of loans 5,285 49,314 (Loss) gain on disposition of securities (17,523) 62,681 Other 50,898 53,005 --------------- -------------- Total noninterest income 218,719 299,358 Noninterest expense Salaries and employee benefits 781,540 768,791 Occupancy 80,091 75,820 Furniture and equipment 91,908 115,277 Advertising 26,493 22,355 Data processing 76,379 72,094 Professional services 120,944 66,954 Other 238,896 260,464 --------------- -------------- Total noninterest expense 1,416,251 1,381,755 --------------- -------------- INCOME BEFORE FEDERAL INCOME TAXES 251,220 182,277 Federal income tax expense/(benefit) 82,171 (327,184) --------------- -------------- NET INCOME $ 169,049 $ 509,461 =============== ============== Weighted average shares outstanding 1,430,000 1,350,000 =============== ============== Diluted average shares outstanding 1,462,778 1,350,000 =============== ============== Basic earnings per share $ 0.12 $ 0.38 =============== ============== Diluted earnings per share $ 0.12 $ 0.38 =============== ==============
See accompanying notes to consolidated financial statements. -2- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Accumulated Other Total Common Accumulated Comprehensive Shareholders' Shares Stock Deficit Income (Loss) Equity --------- ------------ ------------ -------------- ------------- BALANCE AT JANUARY 1, 2003 1,330,000 $ 12,123,585 $ (1,367,911) $ 310,199 $ 11,065,873 Proceeds from the sale of stock, net of offering costs 100,000 800,000 800,000 Net income 509,461 509,461 Unrealized loss on securities available-for-sale, net (119,536) (119,536) ------------- Total comprehensive income 389,925 --------- ------------ ------------ -------------- ------------- BALANCE AT MARCH 31, 2003 1,430,000 $ 12,923,585 $ (858,450) $ 190,663 $ 12,255,798 ========= ============ ============ ============== ============= BALANCE AT JANUARY 1, 2004 1,430,000 $ 12,922,314 $ (303,864) $ 17,252 $ 12,635,702 Comprehensive income: Net income 169,049 169,049 Unrealized gain on securities available-for-sale, net 97,241 97,241 ------------- Total comprehensive income 266,290 --------- ------------ ------------ -------------- ------------- BALANCE AT MARCH 31, 2004 1,430,000 $ 12,922,314 $ (134,815) $ 114,493 $ 12,901,992 ========= ============ ============ ============== =============
See accompanying notes to consolidated financial statements. -3- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2004 March 31, 2003 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 169,049 $ 509,461 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 56,877 188,990 Depreciation and amortization 81,023 99,067 Net amortization (accretion) of securities 24,196 (8,750) Net realized (gain) loss on disposition of securities 17,523 (62,681) Net realized gain on sale of loans (5,285) (49,314) Loan originations (634,500) (3,936,400) Proceeds from loan sales 413,785 4,199,114 Net change in: Accrued interest receivable and other assets 86,177 (570,773) Accrued interest payable and other liabilities (45,420) (38,163) -------------- -------------- Net cash from operating activities 163,425 330,551 CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 3,483,765 2,271,377 Maturities, prepayments and calls 4,582,862 15,297,612 Purchases (2,039,405) (17,762,184) Activity in held to maturity securities: Maturities and prepayments 20,000 0 Loan originations and payments, net (6,813,667) (5,775,228) Additions to premises and equipment (19,860) (22,814) -------------- -------------- Net cash used in investing activities (786,305) (5,991,237) CASH FLOW FROM FINANCING ACTIVITIES Net change in deposits 19,420,154 15,670,467 Net change in federal funds purchased and repurchase agreements (2,706,162) (464,849) Draws (paydown) on note payable 200,000 (1,050,000) Net proceeds from stock offering 0 800,000 -------------- -------------- Net cash from financing activities 16,913,992 14,955,618 -------------- -------------- Net change in cash and cash equivalents 16,291,112 9,294,932 Beginning cash and cash equivalents 6,590,025 2,781,994 -------------- -------------- ENDING CASH AND CASH EQUIVALENTS $ 22,881,137 $ 12,076,926 ============== ============== Supplemental cash flow information: Cash paid during the period for Interest $ 837,013 $ 1,180,647 Cash paid for federal income tax $ 0 $ 15,000
See accompanying notes to consolidated financial statements. -4- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION: The unaudited, consolidated financial statements as of and for the three months ended March 31, 2004 include the consolidated results of operations of Community Shores Bank Corporation ("Company") and its wholly-owned subsidiaries, Community Shores Bank ("Bank") and Community Shores Financial Services, and a wholly-owned subsidiary of the Bank, Community Shores Mortgage Company ("Mortgage Company"). These 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, 2004 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-KSB for the period ended December 31, 2003. Some items in the prior year financial statements may be reclassified to conform to the current presentation. 2. STOCK COMPENSATION Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on the net income and the earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Three Months Three Months Ended Ended March 31, 2004 March 31, 2003 -------------- -------------- Net income as reported $ 169,049 $ 509,461 Deduct: stock-based compensation expense determined under fair value based method 5,726 6,659 -------------- -------------- Pro forma net income 163,323 502,802 Basic earnings per share as reported $ 0.12 $ 0.38 Diluted earnings per share as reported $ 0.12 $ 0.38 Pro forma basic earnings per share $ 0.11 $ 0.37 Pro forma diluted earnings per share $ 0.11 $ 0.37
The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date. -5- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. STOCK COMPENSATION-continued
Assumptions: 2003 2002 ------ ------- Risk-free interest rate 3.61% 3.90% Expected option life 8 years 7 years Expected stock price volatility 36% 40% Dividend yield 0% 0% Computed fair value $4.88 $3.58
No options have been granted in 2004. 3. SECURITIES The following tables represent the securities held in the Company's portfolio at March 31, 2004 and at December 31, 2003:
Gross Gross Amortized Unrealized Unrealized Fair March 31, 2004 Cost Gains Losses Value % - -------------- --------- ---------- ---------- ------------ ---- Available for sale: US Government and federal agency $ 9,369 $ (7,802) $ 7,041,590 38.4 Municipal securities 23,406 0 616,812 3.4 Mortgage-backed securities 151,907 (3,406) 10,445,250 57.0 ---------- ---------- ------------ ---- 184,682 (11,208) 18,103,652 98.8 Held to maturity: Municipal securities $ 228,797 2,278 0 231,075 1.2
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2003 Cost Gains Losses Value % - ----------------- --------- ---------- ---------- ------------ ---- Available for sale: US Government and federal agency $ 11,454 $ ( 60,204) $ 12,456,595 51.3 Municipal securities 16,973 (3,598) 607,473 2.5 Mortgage-backed securities 102,318 (40,803) 10,960,940 45.2 ---------- ---------- ------------ ---- 130,745 (104,605) 24,025,008 99.0 Held to maturity: Municipal securities $ 249,047 2,013 (62) 250,998 1.0
Below is the schedule of maturities for investments held at March 31, 2004:
Available for Sale Held to Maturity Fair Amortized Fair Value Cost Value ------------------ --------- -------- Due in one year or less $ 0 $ 58,714 $ 59,048 Due from one to five years 6,375,739 170,083 172,027 Due in more than five years 1,282,664 0 0 Mortgage-backed 10,445,249 0 0 ------------------ --------- -------- $ 18,103,652 $ 228,797 $231,075 ================== ========= ========
-6- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. LOANS Loans increased $6,746,307 since December 31, 2003. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2003 to March 31, 2004 were as follows:
Percent March 31, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) ----------------------- ---------------------- ----------- Commercial $ 71,019,049 45.3% $ 65,576,958 43.7% 8.3% Real Estate: Commercial 50,912,508 32.5 50,440,113 33.6 0.9 Residential 6,308,263 4.0 6,213,613 4.1 1.5 Construction 3,338,951 2.1 3,109,574 2.1 7.4 Consumer 25,233,744 16.1 24,721,700 16.5 2.1 ------------- ----- ------------- ----- 156,812,515 100.0% 150,061,958 100.0 ------------- ----- ------------- ----- Less: allowance for loan losses 1,917,273 1,927,756 Net deferred loan fees 116,123 111,873 ------------- ------------- $ 154,779,119 $ 148,022,329 ============= =============
4. ALLOWANCE FOR LOAN LOSSES The following is a summary of activity in the allowance for loan losses account for the three month periods ended March 31, 2004 and 2003:
Three Months Three Months Ended Ended 03/31/04 03/31/03 --------------- ------------ Beginning Balance $ 1,927,756 $ 1,898,983 Charge-offs Commercial 0 (15,172) Real Estate-Commercial (23,408) (180,333) Real Estate-Residential 0 0 Real Estate-Construction 0 0 Consumer (62,484) (61,339) Recoveries Commercial 2,167 11,384 Real Estate-Commercial 0 12,824 Real Estate-Residential 0 0 Real Estate-Construction 0 0 Consumer 16,365 26,554 Provision for loan losses 56,877 188,990 --------------- ------------ Ending Balance $ 1,917,273 $ 1,881,891 =============== ============
-7- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. DEPOSITS Deposit balances increased $19,420,154 since December 31, 2003. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2003 through March 31, 2004 were as follows:
Percent March 31, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) ----------------------- ------------------- ----------- Non-interest bearing Demand $ 12,867,142 7.6% $ 13,122,112 8.7% (1.9)% Interest bearing Checking 24,862,427 14.7 24,888,664 16.6 (0.1) Money Market 43,916,854 25.9 33,131,065 22.1 32.6 Savings 8,340,948 4.9 7,877,790 5.2 5.9 Time, under $100,000 24,002,298 14.1 21,458,624 14.3 11.9 Time, over $100,000 55,597,938 32.8 49,689,198 33.1 11.9 ----------------------- ------------------- Total Deposits $ 169,587,607 100.0% $150,167,453 100.0% ----------------------- -------------------
6. SHORT-TERM BORROWINGS The Company's short-term borrowings typically consist of repurchase agreements and federal funds purchased. Only repurchase agreements were outstanding at December 31, 2003 and March 31, 2004. There were no federal funds purchased at either period end. Since year-end 2003, repurchase agreements decreased $2,706,162. The March 31, 2004 and December 31, 2003 information was as follows:
Repurchase Federal Funds Agreements Purchased ----------- ------------- Outstanding at March 31, 2004 $ 9,209,120 $ 0 Average interest rate at period end 1.10% 0.00% Average balance during period 9,575,429 593,407 Average interest rate during period 1.11% 1.23% Maximum month end balance during period 10,254,899 0 Outstanding at December 31, 2003 $11,915,282 $ 0 Average interest rate at year end 1.11% 0.00% Average balance during year 15,377,163 2,112,055 Average interest rate during year 1.28% 1.49% Maximum month end balance during year 20,166,404 6,200,000
-8- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 March 31, 2004, the Bank had assets with a market value of $8,968,797 pledged to the Federal Home Loan Bank to support current borrowings. Details of the Bank's outstanding borrowings at both March 31, 2004 and December 31, 2003 are:
Current Maturity Date Interest Rate 2004 2003 ------------- ------------- ---------- ---------- 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 ---------- ---------- $6,000,000 $6,000,000
8. NOTES PAYABLE Since June 28, 2000, the Company has borrowed money 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. The balance of this debt at March 31, 2004 was $2,750,000. On March 30, 2004 the Company borrowed an additional $200,000 from the LLC. A summary of the outstanding note liabilities is given below:
Aggregate Principal Loan from: Amount Current Rate Maturity - ---------- ----------- ------------ ------------- Robert L. Chandonnet $ 200,000 5.50% June 30, 2009 Michael D. Gluhanich $ 100,000 5.50% June 30, 2009 Donald E. Hegedus $ 500,000 5.50% June 30, 2009 John L. Hilt $ 750,000 5.50% June 30, 2009 Community Shores LLC $1,200,000 5.50% June 30, 2009 ----------- ------------ ------------- Total $2,750,000 ----------- ------------ -------------
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 4.00%. 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 -9- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. NOTES PAYABLE-continued the Company. The proceeds from these Notes were used by the Company to cover general operating expenses and to infuse capital into the Bank to maintain a level of capital which is considered well-capitalized according to the 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 another party. Exposure to credit loss if the customer 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 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, 2004 and December 31, 2003 follows:
March 31, December 31, 2004 2003 ------------ ------------ Unused lines of credit and letters of credit $ 30,102,917 $ 29,932,589 Commitments to make loans 351,369 1,225,715
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 on lines of credit and letters of credits expire without being used, the above amounts related to those categories 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. -10- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. REGULATORY MATTERS-continued The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulator approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.
Capital to risk weighted assets Tier 1 Capital Total Tier 1 to average assets ----- ------ ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8 4 4 Undercapitalized 6 3 3
Actual capital levels and minimum required levels at March 31, 2004 for the Company and Bank were:
Minimum Required to Be Well Capitalized Minimum Required Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ---------------------- ---------------------- ------------------------ March 31, 2004 Amount Ratio Amount Ratio Amount Ratio - -------------- ---------------------- ---------------------- ------------------------ Total Capital (Tier 1 and Tier 2) to risk weighted assets Consolidated $ 17,454,772 10.45% $ 13,365,752 8.00% $ 16,707,190 10.00% Bank 17,354,506 10.39 13,364,594 8.00 16,705,743 10.00 Tier 1 (Core) Capital weighted assets Consolidated 12,787,499 7.65 6,682,876 4.00 10,024,314 6.00 Bank 15,437,233 9.24 6,682,297 4.00 10,023,446 6.00 Tier 1 (Core) Capital average assets Consolidated 12,787,499 6.72 7,614,086 4.00 9,517,608 5.00 Bank 15,437,233 8.11 7,613,081 4.00 9,516,351 5.00
The Company and the Bank were in the well-capitalized category at March 31, 2004. The Company is closely monitoring the Bank's growth and for the foreseeable future expects to infuse additional capital as necessary to maintain at least a 10% (well capitalized) total capital to risk weighted assets ratio. Capital contributions may be made to the Bank from an increase in the LLC note payable. -11- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS The discussion below details the financial results of the Company and its wholly owned subsidiaries, the Bank and the Bank's subsidiary, the Mortgage Company, and Community Shores Financial Services through March 31, 2004 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, 2004 to that at December 31, 2003. The part labeled Results of Operations discusses the three month period ended March 31, 2004 as compared to the same period of 2003. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of this Form 10-QSB. This discussion and analysis and other sections of this 10-QSB contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company and Community Shores Financial Services. 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 $17.1 million to $201.2 million at March 31, 2004 from $184.1 million at December 31, 2003. This is a 9.3% increase in assets during the first three months of 2004. Asset growth was funded by deposit growth and was reflected by increases in the loan portfolio and federal funds sold as well as higher balances held at other financial institutions. Cash and cash equivalents increased by $16.3 million to $22.9 million at March 31, 2004 from $6.6 million at December 31, 2003. This increase was the result of an additional $13.5 million being held at other financial institutions. On March 31, 2004, due to a temporary increase in deposits, management chose to leave an additional $14.0 million in its Federal Reserve -12- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS account overnight. The increased balances held in the Bank's other correspondent accounts are simply reflective of the seasonality of some of its larger customers as well as general growth of the Bank's customer base. Finally there was an increase of $2.8 million in federal funds sold. On March 31, 2004, $4.5 million in federal funds were sold compared to $1.7 million being sold on December 31, 2003. The increase is related to fluctuations in the liquidity of the Bank and its customers on those particular days. Securities held decreased $5.9 million since December 31, 2003. During the first quarter Management decided to liquidate four securities with a par value of $3.5 million and an average rate of 1.77% to create liquidity for potential loan growth. The transaction resulted in a small loss of $18,000 being recorded. Management performed analysis on the transaction and determined that the alternative use of the money (to make loans) would recoup the loss in a relatively short period of time. The remaining decrease in the security portfolio is the net result of securities maturing, being called and normal principal repayments. Loans held for sale totaled $226,000 at March 31, 2004 compared to none being held for sale at year-end 2003. The entire balance is made up of real estate mortgage loans. Since opening Community Shores Mortgage Company in March of 2002, mortgage loans are originated by the Mortgage Company and placed in a portfolio of loans held for sale. Usually within 30 days of origination, the loans are sold for a gain to various venders on a servicing released basis. At this time it is not the intention of management to retain fifteen and thirty-year fixed rate mortgage loans due to the risk involved from an asset liability management perspective. Total loans climbed to $156.7 million at March 31, 2004 from $149.9 million at December 31, 2003. Of the $6.8 million increase experienced, 88% occurred in the commercial loan portfolio and 12% occurred in the consumer loan portfolio. The "wholesale" banking focus applied since opening in 1999 continued during the first three months of 2004. Presently, the commercial category of loans comprises 78% of the Bank's total loan portfolio. There are seven experienced commercial lenders on staff devoted to pursuing and originating these types of loans. The level of growth achieved during the first quarter of 2004 is indicative of a strengthening in both the national and local economies. As the marketplace recovers management remains optimistic about future opportunities in the market. -13- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The loan maturities and rate sensitivity of the loan portfolio at March 31, 2004 have been included below:
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ----------- ----------- ----------- ---------- ----------- Commercial, financial and other $21,431,997 $26,527,097 $20,955,978 $1,987,854 $70,902,926 Real estate: Commercial 5,862,757 11,031,216 33,789,247 229,288 50,912,508 Residential 35,585 127,881 790,368 5,354,429 6,308,263 Construction 260,049 3,078,902 0 0 3,338,951 Consumer 2,194,980 3,634,573 16,742,210 2,661,981 25,233,744 ----------- ----------- ----------- ---------- ----------- $29,785,368 $44,399,669 $72,277,803 $10,233,552 $156,696,392 ----------- ----------- ----------- ---------- ----------- Loans at fixed rates $5,620,699 $13,444,531 $51,362,831 $7,535,643 $77,963,704 Loans at variable rates 24,164,669 30,955,138 20,914,972 2,697,909 78,732,688 ----------- ----------- ----------- ---------- ----------- $29,785,368 $44,399,669 $72,277,803 $10,233,552 $156,696,392 ----------- ----------- ----------- ---------- -----------
The loan portfolio is reviewed and analyzed on a regular basis for the purpose of estimating probable incurred credit losses. The allowance for loan losses is adjusted accordingly to maintain an adequate level based on that analysis. At March 31, 2004, the allowance totaled $1.9 million or approximately 1.22% of gross loans outstanding. Management has determined that this is an appropriate level based on their detailed review of the loan portfolio including comparison of allowance levels to those maintained by other institutions with similar, but seasoned loan portfolios. The allocation of the allowance at March 31, 2004 was as follows:
March 31, 2004 December 31, 2003 ---------------------------- ---------------------------- Percent of Percent of Allowance Allowance Related to Related to Balance at End of Period Applicable to: Amount Loan category Amount Loan category ---------------------------- ---------------------------- Commercial $ 993,019 51.8% $ 996,728 51.7% Real estate: Commercial 556,749 29.0 576,778 29.9 Residential 32,934 1.7 30,708 1.6 Construction 38,398 2.0 35,760 1.9 Consumer 296,173 15.5 287,782 14.9 Unallocated 0 0.0 0 0.0 ---------------------------- --------------------------- Total $1,917,273 100.0% $1,927,756 100.0% ============================ ===========================
The credit rating of a significant commercial loan customer was upgraded during the quarter. Based on the methodology of the Bank's allowance for loan loss calculation a lower allocation was necessary. As a result of this change, the ratio of allowance for loan losses to total loans declined to 1.22% from a level of 1.29% at December 31, 2003 in spite of the significant growth in the commercial loan portfolio as a whole. The Chief Lending Officer continues to apply a consistent and reasonable methodology to determine the adequacy of the allowance for loan losses. Management monitors the allocation on a monthly basis and makes necessary -14- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS adjustments to the provision and the allowance based on portfolio concentration levels, actual loss experience and the financial condition of the borrowers. As such, an additional $57,000 was added to the allowance during the first quarter of 2004. At the end of March 2004, loans 30-59 days past due totaled $989,000 up from $776,000 at December 31, 2003. Approximately $316,000 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 $103,000. There was a total of $130,000 past due 60-89 days and $116,000 past due more than 89 days at the end of 2003 compared to $252,000 past due 60-89 days and $48,000 past due more than 89 days after the first three months of 2004. At March 31, 2004, the Bank had thirteen non-accrual loans with an aggregate total of $691,000. The Bank reported non-accrual loans at the end of December 2003 totaling $844,000. There were net charge-offs of $67,000 recorded for the first three months of 2004 which compares favorably to net charge-offs of $206,000 for the similar period in 2003. As the economy shows signs of recovery, annualized, net charge-offs to average loans have decreased (0.17% for the first quarter of 2004) and remain stable at a level that is under 0.20% which is comparable to the levels of similarly sized commercial financial institutions. Deposit balances were $169.6 million at March 31, 2004 up from $150.2 million at December 31, 2003. Interest bearing accounts increased $19.7 million (14%) in the first quarter of 2004. Money market and savings accounts reflected 57% or $11.2 million of the increase. The growth in the money market accounts is a result of several of the Bank's large public fund customers increasing their balances on deposit. Based on their cash flow projections a majority of the increased deposits will be withdrawn in the months of April and May. Due to the short expected duration of the public fund deposits management funded first quarter 2004's loan growth by increasing its time deposit holdings. Time deposits increased $8.5 million in the first three months of 2004. Of this total, 76% or $6.5 million was an increase in brokered deposit holdings. Brokered deposits are time deposits obtained from depositors located outside of the Bank's market area and are placed with the Bank by a deposit broker. The concentration of brokered deposits to total deposits was 31.3% at March 31, 2004 and 31.0% at December 31, 2003. Repurchase agreements and federal funds purchased decreased $2.7 million since December 31, 2003. No federal funds were purchased at either period end. A portion of the decline in repurchase agreements is the effect of customers transferring their balances into the Bank's new Premium Sweep product, the rest is from existing customers decreasing their carrying balances from those held at year-end 2003. The Bank had three Federal Home Loan Bank ("FHLB") putable advances outstanding, totaling $6,000,000, at both March 31, 2004 and December 31, 2003. All three putable advances -15- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS owned by the Bank are eligible for conversion to a floating rate at the option of the FHLB. The FHLB has not exercised its right to convert any of these advances. The putable advances continue to accrue interest at rates of 5.10%, 5.95% and 5.99%. The FHLB has the right to exercise its option every ninety days. At this time, it is not anticipated that any of the advances will convert to a floating rate in the short term however if the economy continues to strengthen, interest rates may go up and the FHLB may be inclined to convert. In the event that any of the three notes convert to a floating rate, management has the right to pay off the note with no pre-payment penalty. As of March 31, 2004, the Company had outstanding borrowings of $2,750,000 from some of its Directors and Community Shores LLC which the Company had used for the purpose of infusing capital into the Bank and to provide cash for the operating expenses of the Company. All of this debt is subordinated to all senior debt of the Company. The notes evidencing the borrowings bear interest at a floating rate and are currently accruing interest at 5.50% per annum. Interest payments are due quarterly on the fifteenth of the month. The next scheduled interest payment is due on July 15, 2004. During 2004's first quarter, the Company borrowed an additional $200,000 from Community Shores LLC. Half of the proceeds were contributed as capital to the Bank and the remaining sum will be used for the operating expenses of the Company. The $100,000 equity contribution enabled the Bank to maintain a well- capitalized regulatory capital ratio at March 31, 2004. At the Company's April Meeting of the Board of Directors, a decision was made to pursue a line of credit with a correspondent bank. Having this type of facility should allow the Company to more flexibly and cost effectively maintain the capital levels of the Bank as the economy recovers and growth opportunities materialize. The line of credit would be considered senior debt and is anticipated to be $5 million. Any outstanding balance is expected to bear interest at a floating rate of 35 basis points below the prime lending rate, which is currently at 4.00%. The line is expected to have a one year maturity. The Company expects to pledge the capital stock of the Bank as collateral. Management expects that the line will be in place by June 2004. RESULTS OF OPERATIONS The net income for the first quarter of 2004 was $169,000 down from the $509,000 recorded for the same period in 2003. The decline in earnings of $340,000 represented a decrease of 67% between the two periods. A substantial factor in 2003's first quarter's earnings was the recognition of a tax benefit of $327,000 during the quarter as management determined the Company no longer needed to carry a valuation allowance with respect to the future tax benefit of temporary differences. 2004's consolidated earnings were fully taxable at a rate of 34%. The corresponding weighted average and diluted earnings per share were $0.12 for 2004's first quarter and $0.38 for the similar period in 2003. In addition to the effect of the tax benefit, per share results were impacted by a privately negotiated stock sale that increased average shares outstanding between the two periods. On a pretax basis the Company's earnings improved $69,000 or 38% for the first quarter of 2004 compared to the first quarter of 2003. For the first three months of 2004, the annualized return on the Company's average total assets was 0.35%. The Company's annualized return on average equity was 5.26% for the first quarter of 2004. At March 31, 2004, the ratio of -16- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS average equity to average assets was 6.74%. The Company's retained deficit was $135,000 at March 31, 2004 compared to $304,000 at December 31, 2003. The following table sets forth certain information relating to the Company's consolidated average interest earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the 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: ------------------------------------------------------------------------------------ 2004 2003 -------------------------------------- ---------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate -------------------------------------- -------------------------------------- Assets Federal funds sold and interest- bearing deposits with banks $ 5,914,725 $ 13,787 0.93% $ 4,005,149 $ 11,869 1.19% Securities (including FHLB stock) 20,611,286 173,717 3.37 25,599,459 247,753 3.87 Loans(1) 155,275,289 2,283,823 5.88 145,029,979 2,295,499 6.33 ------------------------------------ ------------------------------------ 181,801,300 2,471,327 5.44 174,634,587 2,555,121 5.85 Other assets 8,750,537 5,947,493 ------------- ------------- $ 190,551,837 $ 180,582,080 ============= ============= Liabilities and Shareholders' Equity Interest bearing deposits $ 145,402,193 $ 816,993 2.25 $ 127,501,585 $ 887,867 2.79 Federal funds purchased and repurchase agreements 10,168,836 28,170 1.11 21,526,039 77,920 1.45 Notes Payable and Federal Home Loan Bank Advances 8,554,396 120,535 5.64 9,507,778 135,670 5.71 ------------------------------------ ------------------------------------ 164,125,425 965,698 2.35 158,535,402 1,101,457 2.78 ---------- ---------- Non-interest bearing deposits 12,861,677 9,806,996 Other liabilities 707,500 718,192 Shareholders' Equity 12,857,235 11,521,490 ------------- ------------- $ 190,551,837 $ 180,582,080 ============= ============= Net interest income $1,505,629 $1,453,664 ---------- ---------- Net interest spread on earning assets 3.09% 3.07% ======== ====== Net interest margin on earning assets 3.31% 3.33% ======== ====== Average interest-earning assets to Average interest-bearing liabilities 110.77% 110.15% ======== ======
The net interest spread on average earning assets increased 2 basis points to 3.09% since March 31, 2003. The net interest margin declined by 2 basis points from 3.33% at March 31, 2003 to 3.31% at March 31, 2004. First quarter 2004's net interest income was $1.51 million compared to a figure of $1.45 million for the same three months in 2003, a modest increase of $52,000 or 3.6%. The average rate earned on interest earning assets was 5.44% for the three months ended March 31, 2004 compared to 5.85% for the same period in 2003. The main contributing factor was a 45 basis point decrease in the yield on loans, the Bank's largest earning asset category. A portion of the decrease can be attributed to differences in the Bank's internal prime rate. - -------------------- (1) Includes loans held for sale and non-accrual loans. -17- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS There was a 25 basis point difference in the internal prime rate between the two periods shown 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. The prolonged, low rate environment has prompted many established fixed rate customers to request a rate reduction. Management gives careful consideration to each request and takes into account the total relationship (loans and deposits) at stake. All requests granted to retain the relationship adversely affect the overall yield on the loan portfolio. This outcome may sometimes be offset when the customers' associated deposits are at a rate lower than current market rates. Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable decreased 12% for the first three months of 2004 compared to the first three months of 2003. This category totaled $966,000 through March 31, 2004, which was a $136,000 reduction over the total recorded for the same period in 2003. The favorable change in the yield on interest bearing liabilities was achieved as the Bank successfully secured a lower cost of funds in a declining rate environment. The average rate paid on interest-bearing products was 43 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 liquidity and interest rate sensitivity. Liquidity management involves the ability to meet the cash flow requirements of the Company's customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and achieve consistent net interest income through periods of changing interest rates. Asset liability management assists the Company in achieving reasonable and predictable earnings and liquidity by maintaining a balance between interest-earning assets and interest-bearing liabilities. 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. 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. Interest bearing checking and money market accounts are more interest sensitive than long term time deposits and fixed rate FHLB advances. 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. Details of the repricing gap at March 31, 2004 were: -18- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
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 $ 736,440 $ 0 $ 0 $ 0 $ 736,440 Federal funds sold 4,500,000 0 0 0 4,500,000 Securities (including FHLB stock) 1,708,299 3,170,007 8,323,738 5,555,405 18,757,449 Loan held for sale 0 0 0 226,000 226,000 Loans 98,596,321 13,650,649 41,881,116 2,568,306 156,696,392 ------------- ------------- ----------- ----------- ------------ 105,541,060 16,820,656 50,204,854 8,349,711 180,916,281 Interest-bearing liabilities Savings and checking 77,120,229 0 0 0 77,120,229 Time deposits <$100,000 2,645,503 13,636,934 7,719,861 0 24,002,298 Time deposits >$100,000 6,444,279 10,636,172 38,517,487 0 55,597,938 Repurchase agreements and Federal funds purchased 9,209,120 0 0 0 9,209,120 Notes payable and Federal Home Loan bank advances 8,750,000 0 0 0 8,750,000 ------------- ------------- ----------- ----------- ------------ 104,169,131 24,273,106 46,237,348 0 174,679,585 Net asset (liability) repricing gap $ 1,371,929 $ (7,452,450) $ 3,967,506 $ 8,349,711 $ 6,236,696 ------------- ------------- ----------- ----------- ------------ Cumulative net asset (liability) Repricing gap $ 1,371,929 $ (6,080,521) $(2,113,015) $ 6,236,696 ------------- ------------- ----------- -----------
Currently the Bank has a negative twelve month 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, 2004 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. The above table illustrates what the Bank is contractually able to change in certain timeframes. Management believes that certain deposit rates are reaching the bottom limit of what can be paid in today's marketplace. The provision for loan losses for the first three months of 2004 was $57,000 compared to a figure of $189,000 for the same period in 2003. 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 $219,000 and represented a 27% decrease compared to last year's first quarter. In contrast, service charge income was $31,000 higher between 2004's first three months and the similar period in 2003. About $30,000, substantially all of the increase, was related to additional non-sufficient funds charges. Management made an operational change in the way the fees are systematically assessed -19- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS late in 2003. The entire first quarter of 2004 was subject to this new methodology. Management expects this type of fee income to increase as the number of deposit accounts grows. Mortgage loan referral fees and gains on loans sold recorded for the first three months of 2003 were $54,000. For the similar period in 2004 the total was $25,000, a decrease of $29,000. As the economy improves mortgage rates have risen which makes refinancing an existing loan less attractive to customers that have already taken advantage of the historically low rates in the past two years. Management feels that the Bank is not overly dependent on mortgage fees and that the level recognized in 2004's first quarter is reasonable given the changes in the rate environment and the time of the year. In spite of increased rates, there should continue to be a core amount of business derived from new customers and new home purchases. Management expects that for the middle two quarters of 2004, compared to the same quarters of 2003, mortgage fees will be lower, if rates continue to rise. During the first quarter of 2003 four securities were sold for a gain of $63,000. Conversely in the first quarter of 2004, four securities were sold for a loss of $18,000. The $81,000 difference in these transactions is largely responsible for the overall net decrease in non-interest income between the first quarter of 2004 and the same period in 2003. Non-interest expenses for the first three months of 2004 increased 2% over the same three month period in 2003. The figure for 2004 was $1.42 million compared to a total of $1.38 million for 2003. Most categories increased by a modest amount and occurred as a result of the general growth of the Bank. The most notable changes were in the professional services and furniture and equipment expenses. Furniture and equipment expenses were $115,000 for the first quarter of 2003 but declined to $92,000 for the similar three month period in 2004. The decrease of $23,000 occurred when a significant portion of the Bank's fixed assets purchased in 1999 became fully depreciated as the Bank reached its five year anniversary. Although the Bank intends to replace equipment that becomes inoperable there are no plans to make any material furniture or equipment purchases in 2004. The decline in the depreciation expense associated with these categories should continue through 2004. Professional services expenses were $121,000 for the first three months of 2004 compared to $67,000 for the first three months of 2003. Increased accounting and legal fees associated with Sarbanes-Oxley Act compliance are ongoing and expected. An additional source of the increase is legal fees relating to a review and strengthening of the Bylaws and Articles of Incorporation of both the Company and the Bank. Consulting fees, also included in this category, increased by $22,000 between the first three month period in 2004 and that of 2003. Late in 2003, management, with the approval of the Audit Committee, contracted with a firm to provide market research and analysis assistance to management that will be an important element of the Bank's long term strategic plan. During the first quarter of 2003, management concluded that the Company's valuation allowance for deferred tax assets was no longer needed, resulting in a net Federal tax benefit of $327,000 being recognized. Since that time the Company has recorded federal tax expense -20- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS on its earnings. The first quarter of 2004 shows a federal tax expense of $82,000, an effective tax rate of 33%. ITEM 3. CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2004. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were, to the best of their knowledge, effective as of March 31, 2004 with respect to information required to be disclosed by the Company in reports that it files or submits under the Exchange Act. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company, the Bank, the Mortgage Company or Community Shores Financial Services may be involved in various legal proceedings that are incidental to their business. In the opinion of management, the Company, the Bank, the Mortgage Company and Community Shores Financial Services are not a party to any current legal proceedings that are material to their financial condition, either individually or in the aggregate. ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY 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
-21- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
December 17, 1998. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 10-KSB. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated March 30, 2004. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated March 30, 2004. 31 Rule 15d-14(a) Certifications. 32.1 Section 1350 Chief Executive Officer Certification. 32.2 Section 1350 Chief Executive Officer Certification.
(b) Reports on Form 8-K. During the first quarter of 2004, the Company filed the following reports on Form 8-K: (i) Form 8-K dated January 20, 2004, reporting the Company's earnings and other financial results for its fourth quarter of 2003. -22- 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, 2004. 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 Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) -23- EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 10-KSB. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated March 30, 2004. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated March 30, 2004. 31 Rule 15d-14(a) Certifications. 32.1 Section 1350 Chief Executive Officer Certification. 32.2 Section 1350 Chief Executive Officer Certification.
EX-10.1 2 k84970exv10w1.txt SUBORDINATED NOTE PURCHASE AGREEMENT Exhibit 10.1 COMMUNITY SHORES LLC SUBORDINATED NOTE PURCHASE AGREEMENT MARCH 30, 2004 To: Purchaser of a Floating Rate Subordinated Note of Community Shores Bank Corporation, Due June 30, 2009 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, 2009 (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, 2009, 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 US Bank 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, 2004. The Adjusted US Bank Prime Rate is the per annum rate announced from time to time by US Bank 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 US Bank Prime Rate to two percent (2%) per annum above the Adjusted US Bank 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 March 30, 2004, 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, 2003 and 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flow for the year ended December 31, 2003 (inception); 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, 2003 and 2002, and the results of its operations and its cash flows 2 for the year ended December 31, 2003 (inception), in conformity with generally accepted accounting principles. (e) Since December 31, 2003, there has been no material adverse change in the business or financial condition of the Company. (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 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 3 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 US Bank (which entity may also be referred to as US Bank, National Association), and no consent of the Company shall be required for any sale, pledge or transfer to US Bank, or for any sale or transfer in compliance with applicable securities laws to any purchaser upon exercise of any remedy by US Bank 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 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): 4 ______ 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 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 5 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 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 6 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 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 7 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 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. 8 (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 (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 9 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 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 US Bank that bears interest at one-half percent (1/2%) below the per annum rate announced from time to time by US Bank 10 Bank as its prime rate. In the event that Community Shores LLC is required to pay a higher rate of interest to US Bank (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 US Bank (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 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. 11 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 $200,000. 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, 2009 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, 2009, 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 US Bank Prime Rate until the principal of this Note is paid or made available for payment. The Adjusted US Bank Prime Rate is the per annum rate announced from time to time by US Bank 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 US Bank Prime Rate to two percent (2%) per annum above the Adjusted US Bank 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, 2009 (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 3 k84970exv10w2.txt FLOATING RATE SUBORDINATED NOTE EXHIBIT 10.2 Community Shores LLC No. R-______ COMMUNITY SHORES BANK CORPORATION FLOATING RATE SUBORDINATED NOTE DUE JUNE 30, 2009 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, 2009, the principal sum of Two 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, 2004, at the Adjusted U.S. Bank Prime Rate until the principal of this Note is paid or made available for payment. The Adjusted U.S. Bank Prime Rate is the per annum rate announced from time to time by U.S. Bank 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 U.S. Bank Prime Rate to two percent (2%) per annum above the Adjusted U.S. Bank 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, 2009 (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 March 30, 2004, 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: March 30, 2004 COMMUNITY SHORES BANK CORPORATION BY:_________________________________ Jose' A. Infante ITS: Chairman DETROIT 25725-20 546464-3 3 EX-31.1 4 k84970exv31w1.txt RULE 13A-14(A) CERTIFICATION OF CEO Exhibit 31.1 CERTIFICATION I, Jose' A. Infante, Chairman, President and Chief Executive Officer of Community Shores Bank Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Community Shores Bank Corporation (the "small business issuer"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 14, 2004 /s/ Jose' A. Infante ----------------------------------------------- Jose' A. Infante Chairman, President and Chief Executive Officer EX-31.2 5 k84970exv31w2.txt RULE 13A-14(A) CERTIFICATION OF CFO Exhibit 31.2 CERTIFICATION I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of Community Shores Bank Corporation, certify that: 1. I have reviewed this report on Form 10-QSB of Community Shores Bank Corporation (the "small business issuer"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 14, 2004 /s/ Tracey A. Welsh ---------------------------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 6 k84970exv32w1.txt SECTION 1350 CHIEF EXECUTIVE OFFICER CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-QSB for the quarter ended March 31, 2004 (the "Form 10-QSB") of Community Shores Bank Corporation (the "Issuer"). I, Jose' A. Infante, Chairman, President and Chief Executive Officer of the Issuer, certify that: (i) the Form 10-QSB fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 14, 2004 /s/ Jose' A. Infante --------------------------------------- Jose' A. Infante Chairman, President and Chief Executive Officer EX-32.2 7 k84970exv32w2.txt SECTION 1350 CHIEF FINANCIAL OFFICER CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-QSB for the quarter ended March 31, 2004 (the "Form 10-QSB") of Community Shores Bank Corporation (the "Issuer"). I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of the Issuer, certify that: (i) the Form 10-QSB fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 14, 2004 /s/ Tracey A. Welsh --------------------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----