-----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, WLljJ+iWUP4J3PDrWPvrFvDg1pC+/bkVG/SxxETYygBxFJvkRPbMOIuh6+WMD9oY +9nbyDawwLi0I/Pz8GBHkA== 0000950124-04-003806.txt : 20040813 0000950124-04-003806.hdr.sgml : 20040813 20040813121027 ACCESSION NUMBER: 0000950124-04-003806 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 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: 04972687 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 k86713e10qsb.txt QUARTERLY REPORT OF SMALL BUSINESS DATED JUNE 30, 2004 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 No___ At July 31, 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 ......................................... 12 Item 3. Controls and Procedures....................................................... 22 PART II. Other Information Item 1. Legal Proceedings............................................................. 22 Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities 22 Item 3. Defaults upon Senior Securities............................................... 22 Item 4. Submission of Matters to a Vote of Security Holders........................... 22 Item 5. Other Information............................................................. 23 Item 6. Exhibits and Reports on Form 8-K.............................................. 23 Signatures............................................................................. 25
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) COMMUNITY SHORES BANK CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2004 2003 ------------- ------------- (unaudited) ASSETS Cash and due from financial institutions $ 3,785,525 $ 4,751,416 Interest-bearing deposits in other financial institutions 404,420 138,609 Federal funds sold 0 1,700,000 ------------- ------------- Cash and cash equivalents 4,189,945 6,590,025 Securities Available for sale (at fair value) 15,872,080 24,025,008 Held to maturity (fair value of $465,562 at June 30, 2004 and $250,998 at December 31, 2004) 464,548 249,047 ------------- ------------- Total securities 16,336,628 24,274,055 Loans held for sale 89,000 Loans 160,773,838 149,950,085 Less: Allowance for loan losses 2,067,443 1,927,756 ------------- ------------- Net loans 158,706,395 148,022,329 Federal Home Loan Bank stock 425,000 425,000 Premises and equipment, net 2,578,284 2,653,906 Accrued interest receivable 619,047 620,138 Other assets 1,492,989 1,518,689 ------------- ------------- Total assets $ 184,437,288 $ 184,104,142 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 13,208,299 $ 13,122,112 Interest bearing 139,256,845 137,045,341 ------------- ------------- Total deposits 152,465,144 150,167,453 Federal funds purchased and repurchase agreements 9,540,566 11,915,282 Federal Home Loan Bank advances 6,000,000 6,000,000 Notes payable 2,950,000 2,550,000 Accrued expenses and other liabilities 716,216 835,705 ------------- ------------- Total liabilities 171,671,926 171,468,440 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; 2003 & 2002-1,430,000 shares issued 12,922,314 12,922,314 Accumulated deficit 19,501 (303,864) Accumulated other comprehensive income (176,453) 17,252 ------------- ------------- Total shareholders' equity 12,765,362 12,635,702 ------------- ------------- Total liabilities and shareholders' equity $ 184,437,288 $ 184,104,142 ============= =============
See accompanying notes to consolidated financial statements. - 1 - COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------- ------------- ------------- ------------- Interest and dividend income Loans, including fees $ 2,317,827 $ 2,314,905 $ 4,601,650 $ 4,610,404 Securities and FHLB dividends 126,590 225,550 300,307 473,303 Federal funds sold and other income 11,507 7,057 25,294 18,926 ----------- ----------- ----------- ----------- Total interest income 2,455,924 2,547,512 4,927,251 5,102,633 Interest expense Deposits 809,318 900,012 1,626,311 1,787,879 Repurchase agreements, federal funds purchased, and other debt 26,128 56,182 54,298 134,102 Federal Home Loan Bank advances and notes payable 123,306 126,757 243,841 262,427 ----------- ----------- ----------- ----------- Total interest expense 958,752 1,082,951 1,924,450 2,184,408 ----------- ----------- ----------- ----------- NET INTEREST INCOME 1,497,172 1,464,561 3,002,801 2,918,225 Provision for loan losses 158,397 173,000 215,274 361,990 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,338,775 1,291,561 2,787,527 2,556,235 Noninterest income Service charges on deposit accounts 167,290 146,345 327,219 275,518 Mortgage loan referral fees 15,449 7,201 35,579 12,386 Gain on sale of loans 9,303 67,364 14,588 116,678 Gain on disposition of securities 10,923 0 (6,600) 62,681 Other 69,090 61,764 119,988 114,769 ----------- ----------- ----------- ----------- Total noninterest income 272,055 282,674 490,774 582,032 Noninterest expense Salaries and employee benefits 789,410 752,996 1,570,950 1,521,787 Occupancy 74,559 74,633 154,650 150,453 Furniture and equipment 90,542 112,255 182,450 227,532 Advertising 12,688 17,914 39,181 40,269 Data processing 79,769 75,550 156,148 147,644 Professional services 92,186 78,849 213,130 145,803 Other 232,729 250,885 471,625 511,349 ----------- ----------- ----------- ----------- Total noninterest expense 1,371,883 1,363,082 2,788,134 2,744,837 ----------- ----------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAXES 238,947 211,153 490,167 393,430 Federal income tax expense/(benefit) 84,631 72,468 166,802 (254,716) ----------- ----------- ----------- ----------- NET INCOME $ 154,316 $ 138,685 $ 323,365 $ 648,146 =========== =========== =========== =========== Comprehensive income (loss) $ (136,630) $ 151,411 $ 129,660 $ 541,336 =========== =========== =========== =========== Weighted average shares outstanding 1,430,000 1,430,000 1,430,000 1,390,221 =========== =========== =========== =========== Diluted average shares outstanding 1,467,309 1,430,000 1,447,594 1,390,221 =========== =========== =========== =========== Basic earnings per share $ 0.11 $ 0.10 $ 0.23 $ 0.47 =========== =========== =========== =========== Diluted earnings per share $ 0.11 $ 0.10 $ 0.22 $ 0.47 =========== =========== =========== ===========
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 sale of stock, net of offering costs 100,000 798,729 798,729 Comprehensive income: Net Income 648,146 648,146 Unrealized loss on securities available-for-sale, net (106,810) (106,810) ------------ Total comprehensive income 541,336 --------- ------------ ------------ ------------ ------------ BALANCE, JUNE 30, 2003 1,430,000 $ 12,922,314 $ (719,765) $ 203,389 $ 12,405,938 ========= ============ ============ ============ ============ BALANCE AT JANUARY 1, 2004 1,430,000 $ 12,922,314 $ (303,864) $ 17,252 $ 12,635,702 Comprehensive income: Net income 323,365 323,365 Unrealized loss on securities available-for-sale, net (193,705) (193,705) ------------ Total comprehensive income 129,660 --------- ------------ ------------ ------------ ------------ BALANCE AT JUNE 30, 2004 1,430,000 $ 12,922,314 $ 19,501 $ (176,453) $ 12,765,362 ========= ============ ============ ============ ============
See accompanying notes to consolidated financial statements. - 3 - COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Six Months Ended Ended June 30, 2004 June 30, 2003 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 323,365 $ 648,146 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 215,274 361,990 Depreciation and amortization 154,307 198,283 Net (accretion)/amortization of securities 60,370 12,860 Net realized gain on disposition of securities 6,600 (62,681) Net realized gain on sale of loans (14,588) (116,678) Loan originations (1,299,900) (10,729,250) Proceeds from loan sales 1,225,488 10,880,027 Net change in: Accrued interest receivable and other assets 126,580 (707,894) Accrued interest payable and other liabilities (119,490) 112,653 ------------ ------------ Net cash from operating activities 678,006 597,456 CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 7,678,458 2,271,377 Maturities, prepayments and calls 6,626,198 24,541,763 Purchases (6,511,638) (26,262,585) Activity in held-to-maturity securities Maturities 28,571 8,571 Purchases (244,625) Loan originations and payments, net (10,899,340) (8,938,925) Purchase of Federal Home Loan Bank Stock 0 ------------ ------------ Additions to premises and equipment (78,685) (37,235) ------------ ------------ Net cash used in investing activities (3,401,061) (8,417,034) CASH FLOW FROM FINANCING ACTIVITIES Net change in deposits 2,297,691 15,133,109 Net change in federal funds purchased and repurchase agreements (2,374,716) (5,380,278) Federal Home Loan Bank advance activity: New advances 0 2,000,000 Maturities and payments 0 0 Draws (paydown) on note payable 400,000 (1,050,000) Net proceeds from stock offering 0 798,729 ------------ ------------ Net cash from financing activities 322,975 11,501,560 ------------ ------------ Net change in cash and cash equivalents (2,400,080) 3,681,982 Beginning cash and cash equivalents 6,590,025 2,781,994 ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 4,189,945 $ 6,463,976 ============ ============ Supplemental cash flow information: Cash paid during the period for Interest $ 1,906,823 $ 2,261,654 Cash paid for federal income tax $ 210,000 $ 115,000
- 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 and six months ended June 30, 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 June 30, 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 were 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 what the effect on the net income and the earnings per share would be if expense were measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2003 June 30, 2004 June 30, 2004 June 30, 2003 ------------- ------------- ------------- ------------- Net income as reported $ 154,316 $ 138,685 $ 323,365 $ 648,146 Deduct: stock-based compensation expense determined under fair value based method 5,726 6,659 11,453 13,318 ----------- ----------- ----------- ----------- Pro forma net income 148,590 132,026 311,912 634,828 Basic earnings per share as reported $ .11 $ .10 $ .23 $ .47 Diluted earnings per share as reported $ .11 $ .10 $ .22 $ .47 Pro forma basic earnings per share $ .10 $ .09 $ .22 $ .46 Pro forma diluted earnings per share $ .10 $ .09 $ .21 $ .46
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 June 30, 2004 and at December 31, 2003:
Gross Gross Amortized Unrealized Unrealized Fair June 30, 2004 Cost Gains Losses Value - ------------- -------- -------- --------- ----------- Available for sale: US Government and federal agency $ 0 $(204,392) $ 5,831,275 Municipal securities 10,913 (7,911) 595,717 Mortgage-backed securities 20,996 (86,959) 9,445,088 -------- --------- ----------- $ 31,909 $(299,262) $15,872,080 Held to maturity: Municipal securities $464,548 $ 1,109 $ (105) $ 465,552
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 Municipal securities 16,973 (3,598) 607,473 Mortgage-backed securities 102,318 (40,803) 10,960,940 -------- --------- ----------- $130,745 $(104,605) $24,025,008 Held to maturity: Municipal securities $249,047 $ 2,013 $ (62) $ 250,998
Below is the schedule of maturities for investments held at June 30, 2004:
Available for Sale Held to Maturity Fair Amortized Fair Value Cost Value ----------- -------- -------- Due in one year or less $ - $164,220 $164,529 Due from one to five years 5,456,234 55,756 56,398 Due in more than five years 970,758 244,572 244,625 Mortgage-backed 9,445,088 0 0 ----------- -------- -------- $15,872,080 $464,548 $465,552 =========== ======== ========
- 6 - COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. LOANS Loans increased $10,823,753 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 June 30, 2004 were as follows:
Percent June 30, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) ------------- ----- ------------- ----- ---------- Commercial $ 73,358,674 45.6% $ 65,576,958 43.7% 4.0% Real Estate: Commercial 51,444,775 32.0 50,440,113 33.6 12.3 Residential 7,163,414 4.5 6,213,613 4.1 8.6 Construction 3,496,896 2.2 3,109,574 2.1 16.8 Consumer 25,431,389 15.8 24,721,700 16.5 (0.5) ------------- ----- ------------- ----- 160,895,148 100.0% 150,061,958 100.0 ------------- ===== ------------- ===== Less: allowance for loan losses 2,067,443 1,927,756 Net deferred loan fees 121,310 111,873 ------------- ------------- $ 158,706,395 $ 148,022,329 ============= =============
5. ALLOWANCE FOR LOAN LOSSES The following is a summary of activity in the allowance for loan losses account for the three and six month periods ended June 30, 2004 and 2003:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended 06/30/04 06/30/03 06/30/04 06/30/03 ----------- ----------- ----------- ----------- Beginning Balance $ 1,917,273 $ 1,881,891 $ 1,927,756 $ 1,898,983 Charge-offs Commercial - (85,553) - (281,058) Real estate-commercial - - (23,408) - Real estate-residential - - - - Real estate-construction - - - - Consumer (12,745) (88,089) (75,229) (149,428) ----------- ----------- ----------- ----------- Total Charge-offs (12,745) (173,642) (98,637) (430,486) Recoveries Commercial - - 2,167 11,384 Real estate-commercial 2,166 104,909 2,166 117,733 Real estate-residential - - - - Real estate-construction - - - - Consumer 2,352 17,961 18,717 44,515 ----------- ----------- ----------- ----------- Total Recoveries 4,518 122,870 23,050 173,632 Provision for loan losses 158,397 173,000 215,274 361,990 ----------- ----------- ----------- ----------- Ending Balance $ 2,067,443 $ 2,004,119 $ 2,067,443 $ 2,004,119 =========== =========== =========== ===========
- 7 - COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. DEPOSITS Deposit balances increased $2,297,691 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 June 30, 2004 were as follows:
Percent June 30, 2004 December 31, 2003 Increase/ Balance % Balance % (Decrease) ------------- ----- ------------ ----- ---------- Non-interest bearing Demand $13,208,299 8.7% $ 13,122,112 8.7% 0.7% Interest bearing Checking 22,920,035 15.0 24,888,664 16.6 (7.9) Money Market 34,612,711 22.7 33,131,065 22.1 23.8 Savings 9,756,355 6.4 7,877,790 5.3 23.8 Time, under $100,000 21,976,948 14.4 21,458,624 14.3 2.4 Time, over $100,000 49,990,796 32.8 49,689,198 33.1 0.6 ------------- ----- ------------ ----- Total Deposits $ 152,465,144 100.0% $150,167,453 100.0% ============= ===== ============ =====
7. SHORT-TERM BORROWINGS Both federal funds purchased and repurchase agreements were outstanding at June 30, 2004. At December 31, 2003, the Company's short-term borrowings were made up of repurchase agreements only. Since year-end 2003, repurchase agreements decreased $4,474,716. The June 30, 2004 and December 31, 2003 information was as follows:
Repurchase Federal Funds Agreements Purchased ------------ ------------- Outstanding at June 30, 2004 $ 7,440,566 $ 2,100,000 Average interest rate at period end 1.10% 1.44% Average balance during period 9,130,956 679,670 Average interest rate during period 1.10% 1.22% Maximum month end balance during period 10,377,045 3,000,000 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. 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 June 30, 2004, the Bank had assets with a market value of $10,023,713 pledged to the Federal Home Loan Bank to support - 8 - COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. FEDERAL HOME LOAN BANK BORROWINGS-continued current borrowings. Details of the Bank's outstanding borrowings at both June 30, 2004 and December 31, 2003 are:
Current June 30, December 31, 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
9. NOTES PAYABLE Since June 28, 2000, the Company has borrowed from four of its Directors, one of whom is no longer a Director, 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 June 30, 2004 was $2,950,000. Since December 31, 2003, the Company has borrowed an additional $400,000 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 5.75% June 30, 2009 Michael D. Gluhanich $ 100,000 5.75% June 30, 2009 Donald E. Hegedus $ 500,000 5.75% June 30, 2009 John L. Hilt $ 750,000 5.75% June 30, 2009 Community Shores LLC $1,400,000 5.75% June 30, 2009 ---------- Total $2,950,000 ==========
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 4.25%. Interest is owed quarterly in arrears on the fifteenth of April, July, October and January until the principal of these Notes is paid or made available for payment. The notes may be prepaid without any prepayment penalty with at least one day's prior written notice. The principal and interest related to these Notes is expressly subordinated to any and all senior debt of the Company. The proceeds from these Notes were 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 - COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. 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 June 30, 2004 and December 31, 2003 follows:
June 30, December 31, 2004 2003 ------------ ------------ Unused lines of credit and letters of credit $ 32,790,540 $ 29,932,589 Commitments to make loans 111,102 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. 12. REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulator approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. - 10 - COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 June 30, 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 ---------------------- ---------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- ----- ------------- ----- ------------ ----- June 30. 2004 Total Capital (Tier 1 and Tier 2) to risk weighted assets Consolidated $ 17,959,258 10.59% $ 13,566,744 8.00% $ 16,958,430 10.00% Bank 17,764,142 10.48 13,561,836 8.00 16,952,296 10.00 Tier 1 (Core) Capital to risk weighted assets Consolidated 12,941,815 7.63 6,783,372 4.00 10,175,058 6.00 Bank 15,696,699 9.26 6,780,918 4.00 10,171,377 6.00 Tier 1 (Core) Capital to average assets Consolidated 12,941,815 6.79 7,624,067 4.00 9,530,084 5.00 Bank 15,696,699 8.23 7,631,978 4.00 9,539,973 5.00
The Company and the Bank were in the well-capitalized category at June 30, 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. See further discussion in the Financial Condition section of the Management Discussion and Analysis concerning the Company's sources for future capital contributions to the Bank. - 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 Community Shores Financial Services, and the Bank's subsidiary, the Mortgage Company through June 30, 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 June 30, 2004 to that at December 31, 2003. The part labeled Results of Operations discusses the three month and six month periods ended June 30, 2004 as compared to the same periods 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 remained relatively the same since December 31, 2003 increasing just $333,000 to $184.4 million in the first six months of 2004. Although asset growth was insignificant, the overall mix of earning assets strengthened as the loan portfolio increased and the investment portfolio decreased. Cash and cash equivalents decreased by $2.4 million to $4.2 million at June 30, 2004 from $6.6 million at December 31, 2003. The net decrease in balances held at other institutions is reflective of the difference in the size of the daily deposit made to the lead correspondent bank on June 30, 2004 compared to that made on December 31, 2003. The largest factor in the - 12 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS decrease is that there were no federal funds sold on June 30, 2004 compared to $1.7 million being sold on December 31, 2003. Securities held decreased $7.9 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. This transaction resulted in an $18,000 loss being recorded. In the second quarter Management approved and executed a security swap transaction, which resulted in a net gain of $11,000. In the deal, nine mortgage related securities totaling $4.4 million were sold and three new securities were purchased for $4.5 million. In addition to the gain, the earnings stream on the new securities is forecasted to be more stable and slightly higher. The remaining investment portfolio reduction of $4.4 million is the result of securities maturing, being called or receiving principal repayments. The proceeds were primarily used to fund loans. Total loans climbed to $160.8 million at June 30, 2004 from $150.0 million at December 31, 2003. Of the $10.8 million increase experienced, 81% occurred in the commercial and commercial real estate portfolio. Presently, the commercial category of loans comprises 78% of the Bank's total loan portfolio. There are seven commercial lenders on staff devoted to pursuing and originating these types of loans. The rate of loan growth was just 7% for the first six months of the year, however the true level of new relationships in the first half of the year was higher than what the net number reflects. As a result of the competitive lending environment there were several large commercial loan payoffs experienced since December 2003. In spite of the marketplace pressure, management remains optimistic about future opportunities and is encouraged by the strengthening in the local economy. The loan maturities and rate sensitivity of the loan portfolio at June 30, 2004 have been included below:
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ----------- ----------- ----------- ----------- ------------ Commercial, financial and other $17,089,762 $30,507,846 $23,526,762 $ 2,112,994 $ 73,237,364 Real estate: Commercial 8,873,010 7,339,644 34,858,908 373,213 51,444,775 Residential 44,616 152,023 935,758 6,031,017 7,163,414 Construction 2,090,412 1,403,911 2,573 - 3,496,896 Installment loans to individuals 2,718,861 3,618,051 16,685,875 2,408,602 25,431,389 ----------- ----------- ----------- ----------- ------------ $30,816,661 $43,021,475 $76,009,876 $10,925,826 $160,773,838 =========== =========== =========== =========== ============ Loans at fixed rates $11,380,121 $8,151,245 $55,305,041 $ 8,269,264 $ 83,105,671 Loans at variable rates 19,436,540 34,870,230 20,704,835 2,656,562 77,668,167 ----------- ----------- ----------- ----------- ------------ $30,816,661 $43,021,475 $76,009,876 $10,925,826 $160,773,838 =========== =========== =========== =========== ============
At June 30, 2004, 48% of the Bank's loan portfolio was comprised of variable rate loans. On July 1, 2004 the Bank's internal prime rate increased 25 basis points and a majority of the - 13 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS variable loans repriced. Additionally new volume fixed or variable will be positively impacted by this event. As the economy continues to strengthen, the outlook for future increases to the Bank's internal prime rate are likely. The Chief Lending Officer continues to apply a consistent and reasonable methodology to determine the adequacy of the allowance for loan losses. The allocation is reviewed on a monthly basis and necessary adjustments are made to the provision and the allowance based on portfolio concentration levels, actual loss experience, past due balances and the financial condition of the borrowers. As such, an additional $215,000 was added to the allowance in the first six months of 2004. At June 30, 2004, the allowance totaled $2.1 million or 1.29% of gross loans outstanding. Management has determined that this is an appropriate level based on their detailed review (outlined above) 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 June 30, 2004 and December 31, 2003 were as follows:
June 30, 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 $ 1,125,231 54.5% $ 996,728 51.7% Real estate: Commercial 573,145 27.7 576,778 29.9 Residential 35,817 1.7 30,708 1.6 Construction 40,214 1.9 35,760 1.9 Consumer 293,036 14.2 287,782 14.9 Unallocated 0 0.0 0 0.0 ----------- ----- ---------- ----- Total $ 2,067,443 100.0% $1,927,756 100.0% =========== ===== ========== =====
At the end of June 2004, loans 30-59 days past due totaled $722,000 down from $774,000 at December 31, 2003. Notes past due 60-89 days at the end of 2003 were $130,000 compared to $510,000 after the first six months of 2004. The entire 60-89 days past due balance at year-end 2003 was comprised of retail loans. Having no commercial loans past due 60-89 days on December 31, 2003 was highly unusual. The $380,000 rise in total loans past due 60-89 days was comprised of increases in both the retail and commercial categories. Specifically, retail past dues of 60-89 days rose $226,000 and commercial by $154,000. A majority of the retail increase was from two loans. One loan was paid off in July and the other has started making payments. On the commercial side, three loans make up the total. In July, one of the notes, representing 42% of the commercial amount past due, paid off. At the end of 2003, loans past due more than 89 days totaled $116,000 compared to $297,000 at June 30, 2004. The $181,000 rise in this past due category consists mostly of three - 14 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS commercial notes. One of the three has a specific allocation in the Bank's reserve for loan losses and is likely to be written off in the third quarter of the year. Another loan is in foreclosure and management is closely monitoring the third loan. At June 30, 2004, the Bank had twelve non-accrual loans with an aggregate principal balance of $663,000. The Bank reported eleven non-accrual loans at the end of December 2003 totaling $844,000. There were net charge-offs of $76,000 recorded for the first six months of 2004 compared to $257,000 for the same period in 2003. Deposit balances were $152.5 million at June 30, 2004 up from $150.2 million at December 31, 2003. The increase in savings balances accounted for 82% of the overall change in total deposits for the first six months of 2004. As discussed in the Company's annual report on Form 10-KSB for the period ended December 31, 2003, the Bank has continued with its plan to transfer customers from the repurchase product into the new Premium Sweep product. This activity primarily affects the Bank's savings balances. As existing customers transfer out of the repurchase product into Premium Sweep, the Bank is able to reduce its investment portfolio and use the proceeds to fund loans thus improving its interest income. Both time deposit balances and brokered deposit concentration levels remained essentially the same on June 30, 2004 compared to year-end 2003. The concentration of brokered deposits was 31% at year-end 2003 compared to 30% at June 30, 2004. 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. Since opening, the Bank has had the opportunity to grow loans at a much faster pace than local deposits. In this case, management has chosen not to sacrifice the opportunity to grow loans even when it means using this funding vehicle. There is an internal policy limit on the concentration level of brokered deposits to total deposits that is monitored closely. It will remain a goal of management to actively work towards reducing brokered deposit concentration levels as the Bank matures. Repurchase agreements and federal funds purchased together decreased $2.4 million since December 31, 2003. Federal funds purchased on June 30, 2004 were $2.1 million compared to none purchased at year-end 2003. Repurchase balances declined $4.5 million in the first six months of 2004. A portion of this decrease is a result of customers transferring into the Premium Sweep account (discussed above) and the rest is due to existing repurchase customers decreasing their carrying balances from those held at year-end. The Bank had three Federal Home Loan Bank ("FHLB") putable advances outstanding, totaling $6,000,000, at both June 30, 2004 and December 31, 2003. All three putable advances 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 as interest rates continue to rise 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 fee. - 15 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS As of June 30, 2004, the Company had notes payable of $2,950,000 from some of its current and past 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 5.75% per annum. Interest payments are due quarterly on the fifteenth of the month. The next scheduled interest payment is due on October 15, 2004. During the first half of 2004, the Company has borrowed $400,000 from Community Shores LLC. Some of the proceeds ($100,000) were contributed as capital to the Bank in the first quarter. The equity contribution enabled the Bank to maintain a well-capitalized regulatory capital ratio at March 31, 2004.The remaining sum has been and will be used for the operating expenses of the Company. 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. On July 29, 2004, documents were signed securing a $5,000,000 line of credit with LaSalle National Bank. Any outstanding balance on the line of credit will be considered senior debt and will bear interest at a floating rate of 35 basis points below the prime lending rate, which is currently at 4.25%. The line has a one year maturity. The Company pledged the capital stock of the Bank as collateral. 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. RESULTS OF OPERATIONS The net income for the first six months of 2004 was $323,000 down from the net income of $648,000 recorded in the first two quarters of 2003. The corresponding diluted earnings per share were $.22 for the first six months of 2004 and $.47 for the similar period in 2003. The decline in earnings of $325,000 in the first two quarters of 2004 represented a decrease of 50% between the two periods. A substantial factor in 2003's earnings was the recognition of a tax benefit of $327,000 in the first quarter as management determined the Company no longer needed to carry a valuation allowance with respect to the future tax benefit of temporary differences. Since the second quarter of 2003, the consolidated earnings of the Company have been fully taxable at a rate of 34%. Net income for the second quarter of 2004 was $154,000 while income for the same period in 2003 was $139,000. The Company's second quarter earnings improved $16,000 or 11% from 2003 to 2004. For the second quarter and first six months of 2004, the annualized return on the Company's average total assets was .32% and .34% respectively. The Company's return on average equity was 4.76% for the second quarter of 2004 and 5.01% for the first six months. The ratio of average equity to average assets was 6.79% for the second quarter and 6.77% for the first six months of 2004. The Company's retained earnings were $20,000 at June 30, 2004 compared to a retained deficit of $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 - 16 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS derived by dividing annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented.
Six months ended June 30: ---------------------------------------------------------------------------------- 2004 2003 -------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------------- ----------- ---------- ------------- ---------- ---------- Assets Federal funds sold and interest- bearing deposits with banks $ 5,463,511 $ 25,294 0.93% 3,233,711 $ 18,926 1.17% Securities (including FHLB stock) 19,051,906 300,307 3.15 25,831,245 473,303 3.66 Loans (1) 157,513,492 4,601,650 5.84 147,708,098 4,610,404 6.24 ------------- ----------- ------ ------------- ---------- ------ 182,028,909 4,927,251 5.41 176,773,054 5,102,633 5.77 Other assets 8,659,643 6,263,374 ------------- ------------- $ 190,688,552 $ 183,036,428 ============= ============= Liabilities and Shareholders' Equity Interest bearing deposits $ 145,622,218 $ 1,626,311 2.23 $ 131,440,885 $1,787,879 2.72 Federal funds purchased and repurchase agreements 9,810,626 54,298 1.11 18,606,332 134,102 1.44 Note Payable and Federal Home Loan Bank Advances 8,653,297 243,841 5.64 9,645,857 262,427 5.44 ------------- ----------- ------ ------------- ---------- ------ 164,086,141 1,924,450 2.35 159,693,074 2,184,408 2.74 ----------- ---------- Non-interest bearing deposits 13,004,328 10,781,034 Other liabilities 687,078 639,863 Shareholders' Equity 12,911,005 11,922,457 ------------- ------------- $ 190,688,552 $ 183,036,428 ============= ============= Net interest income $ 3,002,801 $2,918,225 =========== ========== Net interest spread on earning assets 3.07% 3.03% ====== ====== Net interest margin on earning assets 3.30% 3.30% ====== ====== Average interest-earning assets to Average interest-bearing liabilities 110.93% 110.70% ====== ======
The net interest spread on average earning assets increased 4 basis points to 3.07% since June 30, 2003. The net interest margin remained the same for June 30, 2004 and June 30, 2003 at 3.30%. Year to date net interest income was $3.0 million in 2004 compared to a figure of $2.9 million for the same six months in 2003, an increase of $84,576 or 2.90%. The average rate earned on interest earning assets was 5.41% for the six months ended June 30, 2004 compared to 5.77% for the same period in 2003. The main contributing factor was a 40 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. There was a 24 basis point difference in the internal prime rate between the two periods shown above. Another ongoing factor is the competitive local marketplace. During the prolonged, low rate environment many fixed rate customers obtained lower rate offers from other banks in the area and in turn requested matching rates from Community Shores Bank. All rate reductions granted to retain a loan relationship adversely affect the overall yield on the portfolio. Management carefully considers each request and takes into account the total relationship at stake (loan and deposits). - -------------------------- (1) Includes loans held for sale and non-accrual loans. - 17 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The outlook for loan yields and interest income is positive as a result of the Bank's 25 basis point internal prime rate increase on July 1, 2004. As discussed earlier, this will not only affect a significant portion of the existing portfolio it will affect new loan volume. Since rates do not normally shift in a parallel manner, the Bank is likely to benefit from the additional interest income for a period of time without experiencing an equal increase in its cost of funds. The benefit derived should be evident in a higher net interest margin. Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable decreased 12% for the first six months of 2004 compared to the first six months of 2003. Total interest expense was $1.9 million for the six-month period ending June 30, 2004, which was a $260,000 reduction over the total recorded for the first six months of 2003. The favorable change in the yield paid on interest bearing liabilities and repurchase agreements was responsible for the lower cost of funds. The average rate paid on interest-bearing products in the first half of 2004 was 49 basis points less than what was paid for the same period one year earlier. The rate paid to repurchase agreement customers declined 33 basis points between the similar periods. The rate environment is changing and it is likely that the Bank will need to increase its rates in the near future. As always, local competitor's deposit rates will be closely monitored and offering rates will be increased as deemed appropriate. The quarter-to-quarter comparison of consolidated average interest earning assets and interest bearing liabilities and average yield on assets and average cost of liabilities for the second quarter ended June 30, 2004 and 2003 is in the table below. An analysis of the net interest income shows that the Bank was able to decrease its interest expense by more than its reduction in interest income. Thus, net interest income improved by $33,000. As a result of this positive outcome, there was a small increase in the Bank's net interest margin of 2 basis points between the second quarter of 2004 and the same period in 2003. This was notable considering that a 25 basis point difference in the internal prime lending rate existed between the two periods. The increase to the internal prime lending rate on July 1, 2004 is expected to have a positive effect on interest income in future periods and could potentially improve the net interest margin as well. - 18 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended June 30: ---------------------------------------------------------------------------------- 2004 2003 -------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------------- ----------- ---------- ------------- ---------- ---------- Assets Federal funds sold and interest- bearing deposits with banks $ 5,012,296 $ 11,507 0.92% $ 2,470,750 $ 7,057 1.14% Securities (including FHLB stock) 17,492,525 126,590 2.89 26,060,485 225,550 3.46 Loans (1) 159,752,716 2,317,827 5.80 150,356,788 2,314,905 6.16 ------------- ----------- ------ ------------- ---------- ------ 182,257,537 2,455,924 5.39 178,888,023 2,547,512 5.70 Other assets 8,560,570 6,575,729 ------------- ------------- $ 190,818,107 $ 185,463,752 ============= ============= Liabilities and Shareholders' Equity Interest bearing deposits $ 145,842,243 $ 809,318 2.22 $ 135,341,820 $ 900,012 2.66 Federal funds purchased and repurchase agreements 9,452,417 26,128 1.11 15,718,708 56,182 1.43 Note Payable and Federal Home Loan Bank Advances 8,752,198 123,306 5.64 9,780,769 126,757 5.18 ------------- ----------- ------ ------------- ---------- ------ 164,046,858 958,752 2.34 160,841,297 1,082,951 2.69 ----------- ---------- Non-interest bearing deposits 13,149,018 11,744,370 Other liabilities 667,667 562,343 Shareholders' Equity 12,954,564 12,315,742 ------------- ------------- $ 190,818,107 $ 185,463,752 ============= ============= Net interest income $ 1,497,172 $1,464,561 =========== ========== Net interest spread on earning assets 3.05% 3.01% ====== ====== Net interest margin on earning assets 3.29% 3.27% ====== ====== Average interest-earning assets to Average interest-bearing liabilities 111.10% 111.22% ====== ======
As internal prime rate increases and an increased cost of funds 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 - -------------------------- (1) Includes loans held for sale and non-accrual loans. - 19 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS this gap is a continual challenge in a changing rate environment. Details of the repricing gap at June 30, 2004 were:
Interest Rate Sensitivity Period Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------------ ------------ ------------ ------------ ------------ Earning assets Interest-bearing deposits In other financial institutions $ 404,420 $ 0 $ 0 $ 0 $ 404,420 Federal funds sold 0 0 0 0 0 Securities (including FHLB stock) 1,061,294 2,986,829 6,962,062 5,751,443 16,761,628 Loan held for sale 0 0 0 89,000 89,000 Loans 100,344,200 11,029,148 45,747,597 3,652,894 160,773,839 ------------ ------------ ------------ ------------ ------------ 101,809,914 14,015,977 52,709,659 9,493,337 178,028,887 Interest-bearing liabilities Savings and checking 67,289,101 0 0 0 67,289,101 Time deposits <$100,000 4,514,873 10,249,312 7,212,763 0 21,976,948 Time deposits >$100,000 5,145,614 8,922,711 35,922,471 0 49,990,796 Repurchase agreements and Federal funds purchased 9,540,566 0 0 0 9,540,566 Notes payable and Federal Home Loan bank advances 8,950,000 0 0 0 8,950,000 ------------ ------------ ------------ ------------ ------------ 95,440,154 19,172,023 43,135,234 0 157,747,411 Net asset (liability) repricing gap $ 6,369,760 $ (5,156,046) $ 9,574,425 $ 9,493,337 $ 20,281,476 ============ ============ ============ ============ ============ Cumulative net asset (liability) Repricing gap $ 6,369,760 $ 1,213,714 $ 10,788,139 $ 20,281,476 ============ ============ ============ ============
Currently the Bank has a positive twelve month repricing gap which indicates that the Bank is slightly asset sensitive. This position implies that increases to the national federal funds rate would have more of an impact on interest income than on interest expense if there were a parallel shift in rates. For instance if the Bank's internal prime rate goes up by 25 basis points and every interest earning asset and interest bearing liability on the Bank's June 30, 2004 balance sheet adjusted simultaneously by the same 25 basis points, more assets would be affected than liabilities. An asset sensitive position is typically beneficial in periods of rising rates. The provision for loan losses for the second quarter and the first six months of 2004 were $158,000 and $215,000 compared to figures of $173,000 and $362,000 for the same periods 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 second quarter totaled $272,000 and represented a decrease of 4% compared to last year's second quarter. Between the two periods, mortgage related fees decreased by $50,000 but were mostly offset by increases in service charge income and gains on security transactions. - 20 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Through June 30, 2004, non-interest income was $491,000 compared to a figure of $582,000 for the first six months of 2003. Service charge income was $52,000 higher between 2004's first half and the similar period in 2003. Substantially all of the increase was related to non-sufficient funds charges. Management made an operational change late in 2003 in the way the fees are systematically assessed. It is believed that fee income of this type will continue to increase in future quarters due to anticipated growth in the number of deposit accounts. On a year to date basis, mortgage loan referral fees and gain on loan sales totaled $50,000 compared to $129,000 being recorded through June 30 of 2003, a decrease of 61%. 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 in spite of increased rates, there should continue to be a core amount of business derived from new customers and new home purchases. However, this source of non-interest income is likely to be lower in the remaining quarters of 2004 as compared to the similar quarters of 2003. During the first half of 2003 four securities were sold for a gain of $63,000. Conversely, the security transactions (discussed in Financial Condition) in the first half of 2004 resulted in a loss of $7,000. The $70,000 difference in these outcomes contributed to lower non-interest income between the six month periods. Non-interest expenses for the first six months of 2004 were $2.8 million compared to a total of $2.7 million for 2003, a relatively insignificant increase. The second quarter non-interest expense total was $1.4 million for both 2003 and 2004. Although the totals in both cases are comparable there were some notable variances among the individual categories. On average there were an additional 3.5 full-time equivalent employees between the same six month periods of 2003 and 2004. These additions resulted in a modest increase to salaries and benefits expense of 3%. Additions to staff are made to support the growth of the Bank from both a sales and operational standpoint. Furniture and equipment expenses have decreased 20% in the first half of 2004 compared to the similar period in 2003. This category is comprised mainly of depreciation expense. A significant portion of the office equipment that was purchased when the Bank opened in 1999 became fully depreciated at the end of 2003. Professional services expenses were $213,000 for the first half of 2004 compared to $146,000 for the first six months of 2003, a 46% increase. Additional 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 $35,000 between the first two quarters of 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. - 21 - COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The line item showing other non-interest expenses for the first six months of 2004 has decreased $40,000 compared to the same period in 2003. The most significant item supporting the decrease was a reduction in correspondent bank service charges of $17,000. The Bank adopted a different cash management program since the fourth quarter of 2003. The reduction in fees is most noticeable during periods of inflated liquidity. In the first five months of 2004 the Bank held the seasonal deposits of several public fund customers. 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 on its earnings. The first half of 2004 shows a federal tax expense of $167,000, an effective tax rate of 34%. 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 June 30, 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 June 30, 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 None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At its Annual Meeting held on May 13, 2004, the Company's shareholders voted to elect two directors, Bruce J. Essex and John L. Hilt each for a three year term expiring at the Annual Meeting of the shareholders of the Company in 2007. The results of the election were as follows: - 22 -
Votes Votes Votes Broker Non- Nominee For Withheld Abstained Votes - ------- --------- -------- --------- ----- Bruce J. Essex 1,295,028 45,365 0 0 John L. Hilt 1,295,028 45,365 0 0
The terms for the following directors (who were not up for election) continued after the Annual Meeting: Gary F. Bogner, John C. Carlyle, Robert L. Chandonnet, Dennis L. Cherette, Michael D. Gluhanich, Jose A. Infante and Joy R. Nelson. Additionally, shareholders voted on a proposal to amend Article IV of the Articles of Incorporation of the Company. The proposed amendment to Article IV related to the Board of Directors, including among other things, requirements for changes to the size of the Board, criteria for removal for cause, and requirements for shareholder nominations and recommendations to the Board of Directors. The adoption of the amendment would have required the affirmative vote of the holders of at least two-thirds of the shares entitled to vote at the Annual Meeting. The proposed amendment to Article IV received a majority of the votes cast at the meeting, but was not adopted because it did not receive the required vote of two-thirds of the shares. The result of the vote was as follows:
Votes Votes Votes For Withheld Abstained - ------- -------- --------- 809,874 22,770 60,760
Also, shareholders voted on a proposal to add a new Article X to the Articles of Incorporation of the Company. Article X, among other things, specifies requirements for the Board of Director's evaluation of specified major transactions involving the Company before such transactions can be approved or recommended by the Board of Directors. Approval of the amendment of the Articles of Incorporation to add new Article X required the affirmative vote of a majority of the shares entitled to vote at the Annual Meeting. The amendment to add Article X received the affirmative vote of the required number of the shares and was adopted. The result of the vote was as follows:
Votes Votes Votes For Withheld Abstained - ------- -------- --------- 782,344 47,300 63,760
ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - 23 - (a) Exhibits:
Exhibit No. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 10-KSB. 3.3 First Amendment to the Bylaws of the Company dated December 19, 2001 is incorporated by reference to exhibit 3.3 of the Company's March 31, 2002 10-QSB. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated June 30, 2004. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated June 30, 2004. 31.1 Rule 15d-14(a) Certification of the principal executive officer. 31.2 Rule 15d-14(a) Certification of the principal financial officer. 32.1 Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. During the second quarter of 2004, the Company filed the following reports on Form 8-K: (i) Form 8-K dated April 20, 2004, reporting the Company's earnings and other financial results for its first quarter of 2004. - 24 - SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 13, 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 Chief Financial Officer and Senior Vice President (principal financial and accounting officer) - 25 - EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 3.1 Articles of Incorporation. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 10-KSB. 3.3 First Amendment to the Bylaws of the Company dated December 19, 2001 is incorporated by reference to exhibit 3.3 of the Company's March 31, 2002 10-QSB. 10.1 Subordinated Note Purchase Agreement between Community Shores LLC and Community Shores Bank Corporation dated June 30, 2004. 10.2 Floating Rate Subordinated Note issued to Community Shores LLC by Community Shores Bank Corporation dated June 30, 2004. 31.1 Rule 15d-14(a) Certification of the principal executive officer. 31.2 Rule 15d-14(a) Certification of the principal financial officer. 32.1 Section 1350 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Section 1350 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-3.1 2 k86713exv3w1.txt ARTICLES OF INCORPORATION EXHIBIT 3.1 - -------------------------------------------------------------------------------- MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES - CORPORATION, SECURITIES & LAND DEVELOPMENT BUREAU FILED Date Received July 21, 1998 Effective Date JUL 23 1998 ------------------- --------------- ADMINISTRATOR Corporate Identification Number 5 2 7 - 4 1 0 MI DEPARTMENT OF CONSUMER -------- ------- & INDUSTRY SERVICES CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU - -------------------------------------------------------------------------------- ARTICLES OF INCORPORATION OF COMMUNITY SHORES BANK CORPORATION These Articles of Incorporation are signed by the incorporator for the purpose of forming a profit corporation pursuant to the provisions of Act 284, Public Acts of 1972, as amended, as follows: ARTICLE I Name The name of the corporation is Community Shores Bank Corporation. ARTICLE II Corporate Purpose The purpose or purposes for which the corporation is formed are to serve as a bank holding company registered under the Bank Holding Company Act of 1956, being 12 U.S.C. Sections 1841 to 1850 (as amended from time to time, and including any successor statutes) and to engage in any activity within the purposes for which corporations may be formed under the Business Corporation Act of Michigan. ARTICLE III Capital Stock The total number of shares of all classes of stock which the corporation shall have authority to issue is 10,000,000 shares which shall be divided into two classes as follows; (1) 1,000,000 shares of Preferred Stock (Preferred Stock); and (2) 9,000,000 shares of Common Stock (Common Stock). The designations and the powers, preferences and relative, participating optional or other special rights, and the qualifications limitations or restrictions of the above classes of stock shall be as follows: A. PREFERRED STOCK 1. Shares of Preferred Stock may be issued in one or more series at such time or times and for such consideration or considerations as the Board of Directors may determine. 2. The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, but not to exceed one vote per share, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restriction thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated and expressed in these Articles of Incorporation, or any amendment thereto, including (but without limiting the generality of the foregoing) the following: (a) The designation of such series and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by action of the Board of Directors. (b) The dividend rate or rates on the shares of such series and the preference or relation which such dividends shall bear to the dividends payable on any other class of capital stock or on any other series of Preferred Stock, the terms and conditions upon which and the periods in respect of which dividends shall be payable, whether and upon what condition such dividends shall be cumulative and, if cumulative, the date or dates from which dividends shall accumulate. (c) Whether the shares of such series shall be redeemable, and, if redeemable, whether redeemable for cash, property or rights, including securities of any other corporations, at the option of either the holder or the corporation or upon the happening of a specified event, the limitations and restrictions with respect to such redemption, the time or times when, the price or prices or rate or rates at which, the adjustments with which and the manner in which such 2 shares shall be redeemable, including the manner of selecting shares of such series for redemption if less than all shares are to be redeemed. (d) The rights to which the holders of shares of such series shall be entitled, and the preferences, if any, over any other series (or of any other series over such series), upon the voluntary or involuntary liquidation, dissolution, distribution or winding up of the corporation, which rights may vary depending on whether such liquidation, dissolution, distribution or winding up is voluntary or involuntary, and, if voluntary, may vary at different dates. (e) Whether the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund, and, if so, whether and upon what conditions such purchase, retirement or sinking fund shall be cumulative or noncumulative, the extent to which and the manner in which such fund shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof. (f) Whether the shares of such series shall be convertible into, or exchangeable for, at the option of either the holder or the corporation or upon the happening of a specified event, shares of any other class or of any other series of any class of capital stock of the corporation, and, if so convertible or exchangeable, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange. (g) The voting powers, full and/or limited, if any, of the shares of such series, and whether and under what conditions the shares of such series (alone or together with the shares of one or more other series having similar provisions) shall be entitled to vote separately as a single class, for the election of one or more directors, or additional directors of the corporation in case of dividend arrearages or other specified events, or upon other matters. (h) Whether the issuance of any additional shares of such series, or of any shares of any other series, shall be subject to restrictions as to issuance, or as to the powers, preferences or rights of any such other series. (i) Any other preferences, privileges and powers and relative, participating, option or other special rights, and qualifications, limitations or restrictions of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of these Articles of Incorporation. 3. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock pursuant to this Section A, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. In no event shall the Preferred Stock be entitled to more than one vote in respect of each share of stock. 4. Shares of Preferred Stock redeemed, converted, exchanged, purchased, retired or surrendered to the corporation, or which have been issued and reacquired in any manner, may, upon 3 compliance with any applicable provisions of the Business Corporation Act of the State of Michigan, be given the status of authorized and unissued shares of Preferred Stock and may be reissued by the Board of Directors as part of the series of which they were originally a part or may be reclassified into and reissued as part of a new series or as a part of any other series, all subject to the protective conditions or restrictions of any outstanding series of Preferred Stock. B. COMMON STOCK 1. Except as otherwise required by law or by any amendment to these Articles of Incorporation, each holder of Common Stock shall have one vote for each share of stock held by him of record on the books of the corporation on all matters voted upon by the shareholders. 2. Subject to the preferential dividend rights, if any, applicable to shares of Preferred Stock and subject to applicable requirements, if any, with respect to the setting aside of sums for purchase, retirement or sinking funds for Preferred Stock, the holders of Common Stock shall be entitled to receive, to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors. 3. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of Preferred Stock, holders of Common Stock shall be entitled to receive all of the remaining assets of the corporation of whatever kind available for distribution to shareholders ratably in proportion to the number of shares of Common Stock held by them respectively. The Board of Directors may distribute in kind to the holders of Common Stock such remaining assets of the corporation or may sell, transfer or otherwise dispose of all or any part of such remaining assets to any other corporation, trust or entity, or any combination thereof, and may sell all or any part of the consideration so received and distribute any balance thereof in kind to holders of Common Stock. The merger or consolidation of the corporation into or with any other corporation, or the merger of any other corporation into it, or any purchase or redemption of shares of stock of the corporation of any class, shall not be deemed to be a dissolution, liquidation of winding up of the corporation for the purposes of this paragraph. 4. Such numbers of shares of Common Stock as may from time to time be required for such purpose shall be reserved for issuance (i) upon conversion of any shares of Preferred Stock or any obligation of the corporation convertible into shares of Common Stock which is at the time outstanding or issuable upon exercise of any options or warrants at the time outstanding and (ii) upon exercise of any options, warrants or rights at the time outstanding to purchase shares of Common Stock. ARTICLE IV Board of Directors A. Number, Election and Term of Directors. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors. The number of directors of the 4 corporation shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors of the corporation, except that the minimum number of directors shall be fixed at no less than 6 and the maximum number of directors shall be fixed at no more than 15. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly equal in number as possible, of one-third of the total number of directors constituting the entire Board of Directors. Initially, Class I directors shall be elected for a one-year term, Class II directors for a two-years term and Class III directors for a three-year term. At each succeeding annual meeting of shareholders, beginning in 1999, successors of the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. B. Shareholder Nomination of Director Candidates. Nominations for election to the Board of Directors of the corporation at a meeting of shareholders may be made by the Board of Directors, on behalf of the Board of Directors by any nominating committee appointed by the Board of Directors, or by any shareholder of the corporation entitled to vote for the election of directors at the meeting. Nominations, other than those made by or on behalf of the Board of Directors, shall be made by notice in writing delivered to or mailed, postage prepaid, and received by the Secretary of the corporation at least 60 days but no more than 90 days prior to the anniversary date of the immediately preceding Annual Meeting of Shareholders. The notice shall set forth (i) the name and address of the shareholder who intends to make the nomination; (ii) the name, age, business address and, if known, residence address of each nominee; (iii) the principal occupation or employment of each nominee; (iv) the number of shares of stock of the corporation which are beneficially owned by each nominee and by the nominating shareholder; (v) any other information concerning the nominee that must be disclosed by nominees in a proxy solicitation pursuant to Regulation 14A of the Securities Exchange Act of 1934 (or any subsequent provisions replacing such Regulation); and (vi) the executed consent of each nominee to serve as a director of the corporation, if elected. The chairman of the meeting of shareholders may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedures, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded. C. Newly Created Directorships and Vacancies. Newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum, or by a sole remaining director. Any director of any class chosen to fill a vacancy in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the next annual meeting for the year in which his or her term expires and until such director's successor shall have been elected and qualified. D. Removal. Any director may be removed from office only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of all the shares of the corporation entitled to vote generally in the election of directors, voting together as a single class. 5 E. Preferred Stock. Notwithstanding the foregoing paragraphs, whenever the holders of any one or more classes or series of Preferred Stock issued by the corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Articles of Incorporation applicable thereto. The then authorized number of directors of the corporation shall be increased by the number of additional directors to be elected, and such directors so elected shall not be divided into classes pursuant to this Article unless expressly provided by such terms. F. Amendment or Repeal. Notwithstanding anything contained in these Articles of Incorporation or the By-laws of the corporation to the contrary, the affirmative vote of the holders of at least 66 2/3% of the voting power of all the shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, repeal or adopt any provision inconsistent with the purpose and intent of this Article. ARTICLE V Directors' Liability A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) a violation of Section 551(1) of the Michigan Business Corporation Act, or (iv) for any transaction from which the director derived any improper personal benefit. If the Michigan Business Corporation Act is amended after the date of these Articles of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Michigan Business Corporation Act, as so amended. Any repeal or modification of the foregoing paragraph by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE VI Indemnification Directors and officers of the corporation shall be indemnified as of right to the fullest extent now or hereafter permitted by law in connection with any actual or threatened civil, criminal, administrative or investigative action, suit or proceeding (whether brought by or in the name of the corporation, a subsidiary, or otherwise) arising out of their service to the corporation or a subsidiary, or to another organization at the request of the corporation or a subsidiary. Persons who are not directors or officers of the corporation may be similarly indemnified in respect of such service to the extent authorized at any time by the Board of Directors of the corporation. The 6 corporation may purchase and maintain insurance to protect itself and any such director, officer or other person against any liability asserted against him and incurred by him in respect of such service whether or not the corporation would have the power to indemnify him against such liability by law or under the provisions of this paragraph. The provisions of this paragraph shall be applicable to directors, officers and other persons who have ceased to render such service, and shall inure to the benefit of the heirs, executors, and administrators of the directors, officers and other persons referred to in this paragraph. ARTICLE VII Shareholder Action Except as otherwise required by law, any action required or permitted to be taken on or after December 31, 1998 by any shareholders of the corporation must be effected at a duly called annual or special meeting of such shareholders and may not be effected by any consent in writing by such shareholders. Except as may be otherwise required by law, special meetings of shareholders of the corporation may be called only by the Board of Directors or the Chairman of the Board. Notwithstanding anything contained in these Articles of Incorporation or the By-laws of the corporation to the contrary, the affirmative vote of at least 66 2/3% of the voting power of all the shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or adopt any provision inconsistent with the purpose and intent of this Article. ARTICLE VIII Registered Office and Agent The address of the initial registered office of the corporation is: 500 Woodward Avenue, Suite 4000, Detroit, Michigan 48226. The name of the resident agent is: Jerome M. Schwartz. 7 ARTICLE IX Incorporator The name and address of the incorporator of the corporation is as follows: Jerome M. Schwartz Dickinson Wright PLLC 500 Woodward Avenue, Suite 4000 Detroit, Michigan 48226 I, the incorporator, sign my name this 20th day of July, 1998. /s/ Jerome M. Schwartz ------------------------------- Incorporator, Jerome M. Schwartz Fees remitted by and document to be returned to: Jerome M. Schwartz Dickinson Wright PLLC 500 Woodward Avenue, Suite 4000 Detroit, Michigan 48226 8 - -------------------------------------------------------------------------------- MICHIGAN DEPARTMENT OF LABOR & ECONOMIC GROWTH BUREAU OF COMMERCIAL SERVICES - -------------------------------------------------------------------------------- Date Received (FOR BUREAU USE ONLY) - ---------------------------- This document is effective on the date filed, unless a subsequent effective date within 90 days after received date is stated in the document.
- -------------------------------------------------------------------------------- Name FILED Jerome M. Schwartz JUN 17 2004 - -------------------------------------------------------------------------------- Address Administrator Dickinson Wright PLLC, 500 Woodward Avenue, Suite 4000 Bureau of Commercial Services - -------------------------------------------------------------------------------- -------------------------------------------------- City State Zip Code Detroit Michigan 48226 EFFECTIVE DATE: - --------------------------------------------------------------------------------- --------------------------------------------------
Document will be returned to the name and address you enter above. If left blank document will be mailed to the registered office. CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of Act 284, Public Acts of 1972, (profit corporations), the undersigned corporation executes the following Certificate: - -------------------------------------------------------------------------------- 1. The present name of the corporation is: Community Shores Bank Corporation 2. The identification number assigned by the Bureau is: 527410 - -------------------------------------------------------------------------------- 3. The Articles of Incorporation are hereby amended by adding a new Article X, which is set forth in the attached Annex A. - -------------------------------------------------------------------------------- 4. The foregoing amendment to the Articles of Incorporation was duly adopted on the 13th day of May, 2004 by the shareholders at a meeting where the necessary votes were cast in favor of the amendment. - -------------------------------------------------------------------------------- Signed this 28th day of May, 2004 COMMUNITY SHORES BANK CORPORATION By: /s/ Jose' A. Infante ------------------------ Name: Jose' A. Infante Title: Chairman of the Board, President and Chief Executive Officer - --------------------------------------------------------------------------------
Name of organization remitting fees: Preparer's name and business telephone number: Dickinson Wright PLLC Jerome M. Schwartz Dickinson Wright PLLC (313) 223-3500
2 ANNEX A ARTICLE X Approval of Business Reorganizations A. PROPOSALS. The Board of Directors shall not approve, adopt, or recommend any proposal of any party other than this corporation to make a tender or exchange offer for any equity security of this corporation or to engage in any Business Reorganization, as defined in this Article, (a "Proposal") unless and until it shall have first evaluated the Proposal in view of this Article. B. COMPLIANCE WITH LAWS. The Board of Directors shall determine in its judgment whether the Proposal would be in substantial compliance with all applicable laws. In evaluating a proposal to determine whether it would be in substantial compliance with law, the Board of Directors shall consider all aspects of the Proposal, including the manner in which the offer is proposed to be made, the documents proposed for the communication of the Proposal, and the effects and consequences of the Proposal, if consummated, in light of the laws of the United States of America and affected states. In connection with this evaluation, the Board may seek and rely upon the opinion of legal counsel, and may test the legality of the proposed offer in any state, federal, or foreign court, or before any state, federal, or foreign administrative agency, which may have jurisdiction. If the Board of Directors determines, in its judgment, that a Proposal would be in substantial compliance with all applicable laws, the Board of Directors shall then evaluate the proposal and determine whether the proposal is in the best interest of this corporation and its shareholders. The Board of Directors shall not approve, adopt, or recommend any Proposal which, in its judgment, would not be in the best interests of this corporation and its shareholders. C. EVALUATION OF PROPOSALS. In evaluating a Proposal to determine whether it would be in the best interests of this corporation and its shareholders, the Board of Directors may, in exercising its judgment, consider all factors which it deems relevant including, without limitation: 1. The fairness of the consideration to be received by this corporation and its shareholders under the Proposal, taking into account the trading price of this corporation's stock immediately prior to the announcement of the proposed offer, the historical trading prices of this corporation's stock, the price that might be achieved in a negotiated sale of this corporation as a whole, premiums over the trading price of their securities in transactions which have been proposed or offered to other companies in the past in connection with similar offers, and the future prospects of this corporation; 2. The possible social and economic impact of the Proposal and its consummation on this corporation and its subsidiaries and their employees, customers, and depositors; 3. The possible social and economic impact of the Proposal and its consummation on the communities in which this corporation and its subsidiaries operate or are located; 4. The business, financial condition, safety, soundness, and earning prospects of the offering party, including, but not limited to, debt service and other existing or likely financial obligations of the offering party; 5. The competence, experience, and integrity of the offering party and its management; and 6. The intentions of the offering party regarding the use of the assets of this corporation to finance the transaction. D. REQUIRED APPROVAL. In addition to the requirements of any applicable statute, the affirmative vote of not less than 66 2/3% of the total votes entitled to be cast in an election of Directors shall be required for the approval or authorization of any Business Reorganization; provided, however, that such additional voting requirement shall not be applicable if the Business Reorganization has been approved by (i) an affirmative vote of at least 50% of the entire Board of Directors, and (ii) an affirmative vote of 50% of the Continuing Directors. E. DEFINITION. For purposes of this Article: 1. "Business Reorganization" shall mean: (a) Any merger, consolidation or share exchange of this corporation with or into another entity; (b) Any sale, exchange, lease, mortgage, pledge, transfer, or other disposition (in a single transaction or a series of related transactions) of all or substantially all of the assets of this corporation; (c) Any liquidation or dissolution of this corporation; (d) Any reorganization or recapitalization of this corporation which would result in a change of control of this corporation; or (e) Any transactions or series of related transactions having, directly or indirectly, the same effect as any of the foregoing; or any agreement, contract, or other arrangement providing for any of the foregoing. 2. "Continuing Director" means a member of the Board of Directors who was either (i) first elected or appointed as a director prior to the date that this Article X became effective, or (ii) subsequently elected or appointed as a director if such director was nominated or appointed by a majority of the then Continuing Directors. F. AMENDMENT OR REPEAL. Notwithstanding anything contained in these Articles of Incorporation or the Bylaws of the corporation to the contrary, the affirmative vote of the holders of at least 66 2/3% of the voting power of all the shares of the corporation entitled to vote 2 generally in the election of directors, voting together as a single class, shall be required to alter, amend, repeal or adopt any provision inconsistent with the purpose and intent of this Article. 3 EX-10.1 3 k86713exv10w1.txt SUBORDINATED NOTE PURCHASE AGREEMENT DATED JUNE 30, 2004 EXHIBIT 10.1 COMMUNITY SHORES LLC SUBORDINATED NOTE PURCHASE AGREEMENT JUNE 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 October 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 June 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: /s/ Jose' A. Infante Attention: Chairman of the ------------------------- Board, President and Jose' A. Infante and Chief Executive Chairman of the Board, Officer President and Chief Executive 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, /s/ 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 June 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 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: June 30, 2004 COMMUNITY SHORES BANK CORPORATION BY: ___________________________________ ITS: ________________________________ 16 EX-10.2 4 k86713exv10w2.txt FLOATING RATE SUBORDINATED NOTE DUE JUNE 30, 2009 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 October 15, 2004, 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 June 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: June 30, 2004 COMMUNITY SHORES BANK CORPORATION BY: /s/ Jose' A. Infante ------------------------------ Jose' A. Infante ITS: Chairman 3 EX-31.1 5 k86713exv31w1.txt RULE 15D-14(A) CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER 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 (the small business issuer's fourth fiscal quarter in the case of an annual report) 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: August 13, 2004 /s/ Jose' A. Infante ---------------------------------- Jose' A. Infante Chairman, President and Chief Executive Officer EX-31.2 6 k86713exv31w2.txt RULE 15D-14(A) CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER 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 (the small business issuer's fourth fiscal quarter in the case of an annual report) 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: August 13, 2004 /s/ Tracey A. Welsh -------------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 7 k86713exv32w1.txt SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER 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 June 30, 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: August 13, 2004 /s/ Jose' A. Infante ---------------------------- Jose' A. Infante Chairman, President and Chief Executive Officer EX-32.2 8 k86713exv32w2.txt SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 June 30, 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: August 13, 2004 /s/ Tracey A. Welsh ---------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----