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.