-----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, J2pafTbChaRfz5cHJaYGbkauJOkQOb7NLhyjVAuqU0xPVE+hKlmr5A3e74gq5mNS 7IYindC/nElKfctCJv6RSA== 0000950124-05-003337.txt : 20050516 0000950124-05-003337.hdr.sgml : 20050516 20050516121610 ACCESSION NUMBER: 0000950124-05-003337 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 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: 000-51166 FILM NUMBER: 05832455 BUSINESS ADDRESS: STREET 1: 1030 W. NORTON AVENUE CITY: MUSKEGON STATE: MI ZIP: 49441 BUSINESS PHONE: 2317801800 MAIL ADDRESS: STREET 1: 1030 W. NORTON AVENUE CITY: MUSKEGON STATE: MI ZIP: 49441 10QSB 1 k94881e10qsb.txt QUATERLY REPORT FOR PERIOD ENDED 03/31/05 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 [ ] 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. 000-51166 COMMUNITY SHORES BANK CORPORATION (Exact name of small business issuer as specified in its charter) Michigan 38-3423227 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1030 W. NORTON AVENUE, MUSKEGON, MICHIGAN 49441 (Address of principal executive offices) (231) 780-1800 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At April 30, 2005, 1,432,800 shares of Common Stock of the issuer were outstanding. Transitional Small Business Disclosure Format: Yes [X] No [ ] Community Shores Bank Corporation Index
Page No. -------- PART I. Financial Information Item 1. Financial Statements.......................................... 1 Item 2. Management's Discussion and Analysis.......................... 13 Item 3. Controls and Procedures....................................... 22 PART II. Other Information Item 1. Legal Proceedings............................................. 22 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.... 22 Item 3. Defaults upon Senior Securities............................... 22 Item 4. Submission of Matters to a Vote of Security Holders........... 22 Item 5. Other Information............................................. 22 Item 6. Exhibits...................................................... 23 Signatures............................................................. 24
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) COMMUNITY SHORES BANK CORPORATION CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2005 2004 ------------- ------------- ASSETS Cash and due from financial institutions $ 3,898,736 $ 2,214,088 Interest-bearing deposits in other financial institutions 217,469 161,527 Federal funds sold 600,000 0 ------------- ------------- Cash and cash equivalents 4,716,205 2,375,615 Securities Available for sale (at fair value) 15,830,624 16,530,818 Held to maturity (fair value of $1,170,275 at March 31, 2005 and $409,023 at December 31, 2004) 1,175,029 399,523 ------------- ------------- Total securities 17,005,653 16,930,341 Loans 179,604,481 171,451,202 Less: Allowance for loan losses 2,098,164 2,039,198 ------------- ------------- Net loans 177,506,317 169,412,004 Federal Home Loan Bank stock 425,000 425,000 Premises and equipment, net 3,421,722 2,542,997 Accrued interest receivable 758,998 734,707 Other assets 1,045,343 1,081,944 ------------- ------------- Total assets $ 204,879,238 $ 193,502,608 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 13,623,243 $ 13,153,038 Interest bearing 158,350,237 145,667,485 ------------- ------------- Total deposits 171,973,480 158,820,523 Federal funds purchased and repurchase agreements 7,904,493 9,980,778 Federal Home Loan Bank advances 6,000,000 6,000,000 Subordinated debentures 4,500,000 4,500,000 Accrued expenses and other liabilities 861,020 801,975 ------------- ------------- Total liabilities 191,238,993 180,103,276 Shareholders' equity Preferred stock, no par value 1,000,000 Shares authorized, none issued 0 0 Common stock, no par value; 9,000,000 shares authorized; 1,432,800 and 1,430,000 shares issued at March 31 and Dec 31 12,950,998 12,922,314 Retained earnings 861,920 499,781 Accumulated other comprehensive loss (172,673) (22,763) ------------- ------------- Total shareholders' equity 13,640,245 13,399,332 ------------- ------------- Total liabilities and shareholders' equity $ 204,879,238 $ 193,502,608 ============= =============
See accompanying notes to consolidated financial statements. -1- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 -------------- -------------- Interest and dividend income Loans, including fees $ 2,822,341 $ 2,283,823 Securities and FHLB dividends 162,337 173,717 Federal funds sold and other income 10,476 13,787 -------------- -------------- Total interest income 2,995,154 2,471,327 Interest expense Deposits 856,329 816,993 Repurchase agreements, federal funds purchased, and other debt 56,549 28,170 Federal Home Loan Bank advances and subordinated debentures 137,751 120,535 -------------- -------------- Total interest expense 1,050,629 965,698 -------------- -------------- NET INTEREST INCOME 1,944,525 1,505,629 Provision for loan losses 117,422 56,877 -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,827,103 1,448,752 Noninterest income Service charges on deposit accounts 207,836 159,929 Mortgage loan referral fees 2,120 20,130 Gain on sale of loans 13,711 5,285 Loss on disposition of securities 0 (17,523) Other 70,972 50,898 -------------- -------------- Total noninterest income 294,639 218,719 Noninterest expense Salaries and employee benefits 846,790 781,540 Occupancy 76,276 80,091 Furniture and equipment 83,667 91,908 Advertising 46,107 26,493 Data processing 87,560 76,379 Professional services 131,982 120,944 Other 295,846 238,896 -------------- -------------- Total noninterest expense 1,568,228 1,416,251 -------------- -------------- INCOME BEFORE FEDERAL INCOME TAXES 553,514 251,220 Federal income tax expense 191,375 82,171 -------------- -------------- NET INCOME $ 362,139 $ 169,049 ============== ============== Weighted average shares outstanding 1,431,307 1,430,000 ============== ============== Diluted average shares outstanding 1,460,589 1,462,778 ============== ============== Basic earnings per share $ 0.25 $ 0.12 ============== ============== Diluted earnings per share $ 0.25 $ 0.12 ============== ==============
See accompanying notes to consolidated financial statements. -2- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Accumulated Other Total Common Retained Comprehensive Shareholders' Shares Stock Earnings Income (Loss) Equity --------- ------------ ----------- ------------- ------------- BALANCE AT JANUARY 1, 2004 1,430,000 $ 12,922,314 $ (303,864) $ 17,252 $ 12,635,702 Comprehensive income: Net income 169,049 169,049 Unrealized gain on securities available-for-sale, net 97,241 97,241 ------------- Total comprehensive income 266,290 --------- ------------ ----------- ------------- ------------- BALANCE AT MARCH 31, 2004 1,430,000 $ 12,922,314 $ (134,815) $ 114,493 $ 12,901,992 ========= ============ =========== ============= ============= BALANCE AT JANUARY 1, 2005 1,430,000 $ 12,922,314 $ 499,781 $ (22,763) $ 13,399,332 Proceeds from stock option exercise 2,800 28,684 28,684 Comprehensive income: Net income 362,139 362,139 Unrealized loss on securities available-for-sale, net (149,910) (149,910) ------------- Total comprehensive income 212,229 --------- ------------ ----------- ------------- ------------- BALANCE AT MARCH 31, 2005 1,432,800 $ 12,950,998 $ 861,920 $ (172,673) $ 13,640,245 ========= ============ =========== ============= =============
See accompanying notes to consolidated financial statements. -3- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 362,139 $ 169,049 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 117,422 56,877 Depreciation and amortization 64,684 81,023 Net amortization of securities 8,315 24,196 Net realized loss on disposition of securities 0 17,523 Net realized gain on sale of loans (13,711) (5,285) Loan originations (887,650) (634,500) Proceeds from loan sales 901,361 413,785 Net change in: Accrued interest receivable and other assets 89,537 86,177 Accrued interest payable and other liabilities 59,045 (45,420) --------------- -------------- Net cash from operating activities 701,142 163,425 CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 0 3,483,765 Maturities, prepayments and calls 465,252 4,582,862 Purchases 0 (2,039,405) Activity in held to maturity securities: Maturities and prepayments 0 20,000 Purchases (776,016) Loan originations and payments, net (8,211,735) (6,813,667) Additions to premises and equipment (943,409) (19,860) --------------- -------------- Net cash used in investing activities (9,465,908) (786,305) CASH FLOW FROM FINANCING ACTIVITIES Net change in deposits 13,152,957 19,420,154 Net change in federal funds purchased and repurchase agreements (2,076,285) (2,706,162) Draws (paydown) on note payable 0 200,000 Net proceeds from stock option exercise 28,684 0 --------------- -------------- Net cash from financing activities 11,105,356 16,913,992 --------------- -------------- Net change in cash and cash equivalents 2,340,590 16,291,112 Beginning cash and cash equivalents 2,375,615 6,590,025 --------------- -------------- ENDING CASH AND CASH EQUIVALENTS $ 4,716,205 $ 22,881,137 =============== ============== Supplemental cash flow information: Cash paid during the period for Interest $ 1,051,023 $ 837,013 Cash paid for federal income tax $ 0 $ 0
See accompanying notes to consolidated financial statements. -4- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION: The unaudited, consolidated financial statements as of and for the three months ended March 31, 2005 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"). Community Shores Capital Trust I, ("the Trust") is not consolidated and exists solely to issue capital securities. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company's financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods. The results for the period ended March 31, 2005 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, 2004. Some items in the prior year financial statements may be reclassified to conform to the current presentation. 2. STOCK COMPENSATION Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on the net income and the earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Three Months Three Months Ended Ended March 31, 2005 March 31, 2004 -------------- -------------- Net income as reported $ 362,139 $ 169,049 Deduct: stock-based compensation expense determined under fair value based method 2,311 5,726 -------------- -------------- Pro forma net income 359,828 163,323 Basic earnings per share as reported $ 0.25 $ 0.12 Diluted earnings per share as reported $ 0.25 $ 0.12 Pro forma basic earnings per share $ 0.25 $ 0.11 Pro forma diluted earnings per share $ 0.25 $ 0.11
No options were granted in 2004 and none were granted through March 31, 2005. -5- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. SECURITIES The following tables represent the securities held in the Company's portfolio at March 31, 2005 and at December 31, 2004:
Gross Gross Amortized Unrealized Unrealized Fair March 31, 2005 Cost Gains Losses Value % - ---------------------------------- ----------- ---------- ---------- ------------ ---- Available for sale: US Government and federal agency $ 0 $ (180,159) $ 5,350,873 31.5 Municipal securities 11,551 (7,131) 715,054 4.2 Mortgage-backed securities 18,116 (104,003) 9,764,697 57.4 ---------- ---------- ------------ ---- 29,667 (291,293) 15,830,624 93.1 Held to maturity: Municipal securities $ 1,175,029 4,621 (9,375) 1,170,275 6.9
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2004 Cost Gains Losses Value % - ---------------------------------- ----------- ---------- ---------- ------------ ---- Available for sale: US Government and federal agency $ 0 $ (126,198) $ 5,406,061 31.9 Municipal securities 17,874 (3,626) 725,574 4.3 Mortgage-backed securities 95,801 (18,340) 10,399,183 61.4 ---------- ---------- ------------ ---- 113,675 (148,164) 16,530,818 97.6 Held to maturity: Municipal securities $ 399,523 9,588 (88) 409,023 2.4
Below is the schedule of maturities for investments held at March 31, 2005:
Available for Sale Held to Maturity Fair Amortized Fair Value Cost Value ------------------ ----------- ----------- Due in one year or less $ 0 $ 155,083 $ 155,172 Due from one to five years 4,966,062 0 0 Due in more than five years 1,099,865 1,019,946 1,015,103 Mortgage-backed 9,764,697 0 0 ------------------ ----------- ----------- $ 15,830,624 $ 1,175,029 $ 1,170,275 ================== =========== ===========
-6- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. LOANS Loans increased $8,153,279 since December 31, 2004. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2004 to March 31, 2005 were as follows:
Percent March 31, 2005 December 31, 2004 Increase/ Balance % Balance % (Decrease) ------------- ----- ------------- ----- ---------- Commercial $ 85,252,712 47.5% $ 80,385,707 46.9% 6.1% Real Estate: Commercial 61,198,024 34.1 56,484,601 32.9 8.3 Residential 8,319,675 4.6 7,210,940 4.2 15.4 Construction 521,934 0.3 2,205,563 1.3 (76.3) Consumer 24,312,136 13.5 25,164,391 14.7 (3.4) ------------- ----- ------------- ----- 179,604,481 100.0% 171,451,202 100.0 ===== ===== Less: allowance for loan losses 2,098,164 2,039,198 ------------- ------------- $ 177,506,317 $ 169,412,004 ============= =============
5. ALLOWANCE FOR LOAN LOSSES The following is a summary of activity in the allowance for loan losses account for the three month periods ended March 31, 2005 and 2004:
Three Months Three Months Ended Ended 03/31/05 03/31/04 -------------- --------------- Beginning Balance $ 2,039,198 $ 1,927,756 Charge-offs Commercial 0 0 Real Estate-Commercial (39,880) (23,408) Real Estate-Residential 0 0 Real Estate-Construction 0 0 Consumer (40,947) (62,484) -------------- --------------- Total Charge-offs (80,827) (85,892) Recoveries Commercial 0 2,167 Real Estate-Commercial 0 0 Real Estate-Residential 0 0 Real Estate-Construction 0 0 Consumer 22,371 16,365 -------------- --------------- Total Recoveries 22,371 18,532 Provision for loan losses 117,422 56,877 -------------- --------------- Ending Balance $ 2,098,164 $ 1,917,273 ============== ===============
-7- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. PREMISES AND EQUIPMENT Period end premises and equipment were as follows:
March 31, December 31, 2005 2004 ------------- ------------ Land & land improvements $ 1,677,045 $ 714,450 Buildings & building improvements 1,689,075 1,689,075 Furniture, fixtures and equipment 2,126,332 2,107,237 Construction in Process 50,635 88,916 ------------- ------------ 5,543,087 4,599,678 Less: accumulated depreciation 2,121,365 2,056,681 ------------- ------------ $ 3,421,722 $ 2,542,997 ============= ============
7. DEPOSITS Deposit balances increased $13,152,957 since December 31, 2004. The components of the outstanding balances, their percentage of the total portfolio and the percentage increase from the end of 2004 through March 31, 2005 were as follows:
Percent March 31, 2005 December 31, 2004 Increase/ Balance % Balance % (Decrease) ------------- ----- -------------- ----- ---------- Non-interest bearing Demand $ 13,623,243 7.9% $ 13,153,038 8.3% 3.6% Interest bearing Checking 25,086,765 14.6 22,195,301 14.0 13.0 Money Market 26,831,414 15.6 27,993,852 17.6 (4.2) Savings 12,131,133 7.0 13,654,541 8.6 (11.2) Time, under $100,000 22,100,864 12.9 22,148,114 13.9 (0.2) Time, over $100,000 72,200,061 42.0 59,675,677 37.6 21.0 ------------- ----- -------------- ----- Total Deposits $ 171,973,480 100.0% $ 158,820,523 100.0% ============= ===== ============== =====
8. SHORT-TERM BORROWINGS The Company's short-term borrowings typically consist of repurchase agreements and federal funds purchased. Only repurchase agreements were outstanding at December 31, 2004 and March 31, 2005. There were no federal funds purchased at either period end. Since year-end 2004, repurchase agreements decreased $2,076,285. The March 31, 2005 and December 31, 2004 information was as follows: -8- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SHORT-TERM BORROWINGS (Continued)
Repurchase Federal Funds Agreements Purchased ------------- --------------- Outstanding at March 31, 2005 $ 7,904,493 $ 0 Average interest rate at period end 1.63% 0.00% Average balance during period 9,248,232 3,968,889 Average interest rate during period 1.28% 2.73% Maximum month end balance during period 10,776,372 10,600,000 Outstanding at December 31, 2004 $ 9,980,778 $ 0 Average interest rate at year end 1.24% 0.00% Average balance during year 9,314,156 2,271,721 Average interest rate during year 1.16% 1.86% Maximum month end balance during year 11,480,726 5,550,000
9. FEDERAL HOME LOAN BANK BORROWINGS The Bank was approved in the first quarter of 1999 to be a member of the Federal Home Loan Bank of Indianapolis. Based on its current Federal Home Loan Bank Stock holdings the Bank has the capacity to borrow $8,500,000. Each borrowing requires a direct pledge of securities or loans. At March 31, 2005, the Bank had assets with a market value of $10,848,829 pledged to the Federal Home Loan Bank to support current borrowings. Details of the Bank's outstanding borrowings at both March 31, 2005 and December 31, 2004 are:
Current Maturity Date Interest Rate 2005 2004 - ----------------- ------------- ------------- ------------ 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
10. SUBORDINATED DEBENTURES The subordinated debentures stemmed from a trust preferred security offering. Community Shores Capital Trust I ("the Trust"), a business trust formed by the Company, sold 4,500 Cumulative Preferred Securities ("trust preferred securities") at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase an equivalent amount of subordinated debentures from the Company. The trust preferred securities carry a floating rate of 2.05% over the 3-month LIBOR. This was initially set at 4.55125% and is 5.14% at March 31, 2005. The stated maturity is December 30, 2034. The securities are redeemable at par after five years, with regulatory approval, and are, in effect, guaranteed by the Company. Distributions on the trust preferred securities are payable quarterly on March 30th, June 30th, September 30th and December 30th. -9- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. SUBORDINATED DEBENTURES (Continued) The most recent distribution was paid on March 30th, 2005. Under certain circumstances, distributions may be deferred up to 20 calendar quarters. However, during any such deferrals, interest accrues on any unpaid distributions at a floating rate of 2.05% over the 3-month LIBOR. 11. COMMITMENTS AND OFF-BALANCE SHEET RISK Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are used to meet customer financing needs. These financial instruments 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 provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments to make loans are generally made for periods of 60 days or less. Commitments may expire without being used. A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk as of March 31, 2005 and December 31, 2004 follows:
March 31, December 31, 2005 2004 ------------ ------------- Unused lines of credit and letters of credit $ 36,423,674 $ 33,705,002 Commitments to make loans 297,680 106,322
Since many of the above commitments on lines of credit and letters of credit expire without being used, the above amounts related to those categories do not necessarily represent future cash commitments. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. 12. REGULATORY MATTERS The Company and Bank are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and, additionally for banks, 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. Failure to meet various capital requirements can initiate regulatory action. 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. -10- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. REGULATORY MATTERS-Continued 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. The minimum ratios (for the Company and the Bank) for the classifications well capitalized, adequately capitalized and under capitalized, are as follows:
Capital to risk weighted assets Tier 1 Capital Total Tier 1 to average assets --------- ---------- ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8 4 4 Undercapitalized 6 3 3
Actual capital levels and minimum required levels at March 31, 2005 and December 31, 2004 for the Company and Bank were:
Minimum Required to Be Well Capitalized Minimum Required Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions ---------------------- ---------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio -------------- ----- -------------- ----- ------------- ----- March 31, 2005 Total Capital (Tier 1 and Tier 2) to risk weighted assets Consolidated $ 20,411,084 10.80% $ 15,114,912 8.00% $ 18,893,641 10.00% Bank 19,870,175 10.52 15,109,978 8.00 18,887,473 10.00 Tier 1 (Core) Capital weighted assets Consolidated 18,312,918 9.69 7,557,456 4.00 11,336,184 6.00 Bank 17,772,009 9.41 7,554,989 4.00 11,332,484 6.00 Tier 1 (Core) Capital Average assets Consolidated 18,312,918 9.06 8,087,011 4.00 10,108,764 5.00 Bank 17,772,009 8.79 8,085,148 4.00 10,106,435 5.00 December 31, 2004 Total Capital (Tier 1 and Tier 2) to risk weighted assets Consolidated $ 19,961,293 11.15% $ 14,318,832 8.00% $ 17,898,540 10.00% Bank 18,924,066 10.57 14,317,523 8.00 17,896,903 10.00 Tier 1 (Core) Capital weighted assets Consolidated 17,896,127 10.00 7,159,416 4.00 10,739,124 6.00 Bank 16,884,868 9.43 7,158,761 4.00 10,738,142 6.00 Tier 1 (Core) Capital Average assets Consolidated 17,896,127 9.35 7,659,276 4.00 9,574,095 5.00 Bank 16,884,868 8.73 7,733,178 4.00 9,666,473 5.00
-11- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. REGULATORY MATTERS-Continued The Company and the Bank were designated as well-capitalized under the regulatory framework for prompt corrective action at both March 31, 2005 and December 31, 2004. At both period ends the capital levels of the Company on a consolidated basis included $4.5 million of the subordinated debentures. Federal Reserve guidelines limit the amount of trust preferred securities that can be included in tier one capital of the Company to 25% of total tier one capital. At March 31, 2005, the entire $4.5 million was included as tier one. At December 31, 2004, $4,474,032 was included as tier 1, the remaining balance of $26,968 was included as tier two, a secondary component of total risk based capital. The capital levels of the Bank at March 31, 2005, include $600,000 from the proceeds that were contributed by the Company to the Bank. At year-end 2004 the Bank's capital levels included $200,000 from the proceeds. -12- 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, Community Shores Financial Services and the Bank and the Bank's subsidiary, the Mortgage Company, through March 31, 2005 and is separated into two parts which are labeled, Financial Condition and Results of Operations. The part labeled Financial Condition compares the financial condition at March 31, 2005 to that at December 31, 2004. The part labeled Results of Operations discusses the three month period ended March 31, 2005 as compared to the same period of 2004. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of this Form 10-QSB. This discussion and analysis and other sections of this 10-QSB contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company and Community Shores Financial Services. Words such as "anticipates", "believes", "estimates", "expects", "forecasts", "intends", "is likely", "plans", "projects", variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in the national and local economy; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. FINANCIAL CONDITION Total assets increased by $11.4 million to $204.9 million at March 31, 2005 from $193.5 million at December 31, 2004. This is a 5.9% increase in assets during the first three months of 2005. Asset growth was funded by deposit growth and was reflected by increases in balances held at other financial institutions, the loan portfolio, federal funds sold and premises and equipment. Cash and cash equivalents increased by $2.3 million to $4.7 million at March 31, 2005 from $2.4 million at December 31, 2004. This increase was reflective of selling federal funds and differences in the size of the Bank's cash letter deposit with its correspondent bank on March -13- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS 31. 2005 and December 31, 2004. These increases are related to fluctuations in the liquidity of the Bank and its customers on those particular days. Total loans climbed to $179.6 million at March 31, 2005 from $171.5 million at December 31, 2004. The $8.1 million net increase is evidenced by $9.5 million growth in the commercial and commercial real estate portfolios, $1.1 million growth in the residential real estate portfolio both of which were offset by a decline of $2.5 million in the construction and consumer loan portfolios. The "wholesale" (commercial and commercial real estate) lending focus applied since opening in 1999 continued during the first three months of 2005. Presently, the commercial and commercial real estate categories of loans comprise 82% of the Bank's total loan portfolio. There are seven experienced commercial lenders on staff devoted to pursuing and originating these types of loans. The level of growth achieved during the first quarter of 2005 is indicative of a strengthening in both the national and local economies. As the marketplace recovers management remains optimistic about future opportunities in the market. The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. The main approach is to balance the rate sensitivity of the portfolio and avoid extension risk(1). The loan maturities and rate sensitivity of the loan portfolio at March 31, 2005 have been included below:
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ----------- ----------- ----------- ----------- ------------ Commercial, financial and other $28,264,632 $23,819,132 $31,061,486 $ 2,107,462 $ 85,252,712 Real estate: Commercial 4,704,657 13,907,444 42,397,716 188,207 61,198,024 Residential 50,045 171,452 1,055,270 7,042,908 8,319,675 Construction 94,000 427,934 0 0 521,934 Consumer 1,152,653 3,396,415 17,741,479 2,021,589 24,312,136 ----------- ----------- ----------- ----------- ------------ $34,265,987 $41,722,377 $92,255,951 $11,360,166 $179,604,481 =========== =========== =========== =========== ============ Loans at fixed rates $ 2,878,117 $ 6,028,212 $55,197,244 $ 5,873,428 $ 69,977,001 Loans at variable rates 31,387,870 35,694,165 37,058,707 5,486,738 109,627,480 ----------- ----------- ----------- ----------- ------------ $34,265,987 $41,722,377 $92,255,951 $11,360,166 $179,604,481 =========== =========== =========== =========== ============
At March 31, 2005, there were 39% of the loan balances carrying a fixed rate and 61% a floating rate and only 6% of the entire portfolio had a contractual maturity longer than five years. The loan portfolio is reviewed and analyzed on a regular basis for the purpose of estimating probable incurred credit losses. The allowance for loan losses is adjusted accordingly to maintain an adequate level based on that analysis given the risk characteristics of the loan portfolio. At March 31, 2005, the allowance totaled $2.1 million or approximately 1.17% of gross loans outstanding. Management has determined that this is an appropriate level based - ------------------------------------ (1)Extension risk, as related to loans, exists when booking fixed rate loans with long final contractual maturities. When a customer is contractually allowed longer to return their borrowed principal and rates rise, the Bank is delayed from taking advantage of the opportunity to reinvest the returning principal at the higher market rate. -14- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS on their detailed review of the loan portfolio using a consistent methodology involving loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The allocation of the allowance at March 31, 2005 was as follows:
March 31, 2005 December 31, 2004 ---------------------------- ----------------------------- Percent of Percent of Allowance Allowance Related to Related to Amount Loan category Amount Loan category ----------- ------------- ------------ ------------- Balance at End of Period Applicable to: Commercial $ 1,067,106 50.9% $ 1, 062,232 52.1% Real estate: Commercial 706,860 33.7 632,459 31.0 Residential 41,598 2.0 36,055 1.8 Construction 6,002 .3 25,364 1.2 Consumer 276,598 13.1 283,088 13.9 Unallocated 0 0.0 0 0.0 ----------- ----- ------------ ----- Total $ 2,098,164 100.0% $ 2,039,198 100.0% =========== ===== ============ =====
The credit rating of a significant commercial loan customer was upgraded during the quarter. Based on the methodology of the Bank's allowance for loan loss calculation a lower allocation was necessary. As a result of this change, the ratio of allowance for loan losses to total loans declined to 1.17% from a level of 1.19% at December 31, 2004 in spite of the significant growth in the commercial loan portfolio as a whole. Management monitors the allocation on a monthly basis and makes adjustments to the provision and the allowance based on portfolio concentration levels, actual loss experience and the financial condition of the borrowers. An additional $117,000 was added to the allowance during the first quarter of 2005. Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. Below is a table, which details the past due balances at March 31, 2005 compared to those at year-end 2004 and the corresponding change related to those two periods.
March 31, December 31, Increase 2005 2004 (Decrease) --------- ------------ ---------- Loans Past Due: 30-59 days $ 763,000 $ 541,000 $ 222,000 60-89 days 519,000 306,000 213,000 90 days and greater 475,000 598,000 (123,000) Non accrual notes 168,000 155,000 13,000
Since year-end 2004, overall past due and non-accrual loans have increased by $325,000. A majority of the increase is related to a commercial lending relationship comprised of four loans. The total of these loans is $396,000. At March 31, 2005, three loans were past due 30-59 days and the fourth was past due 60-89 days. None of the four were past due at year-end. The customer is involved in the farming industry, which is highly seasonal and generally slow during the winter months. At this time, there are no losses expected as a result of this -15- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS relationship and it is anticipated that the loans will be paid current in the near future. The increase in commercial past dues was offset by a decline in retail past dues. Retail past due totals generally trend similar to the economy. Although the collection process is believed to be sound, there was still the need to charge-off loans. There were net charge-offs of $58,000 recorded for the first three months of 2005, which compares favorably to net charge-offs of $67,000 for the similar period in 2004. As the economy shows signs of recovery, annualized, net charge-offs to average loans have decreased (0.13% for the first quarter of 2005) and remain stable at a level that is under 0.16% which is comparable to the levels of similarly sized commercial financial institutions. Premises and equipment increased by a net figure of $879,000. The majority of the increase is related to property purchased on February 15, 2005. On that date, the Bank paid $962,595 for a two acre parcel of vacant land for the establishment of the organization's fourth banking location at Harvey and Mt. Garfield Road, in Norton Shores. Construction will begin in late summer and the branch is anticipated to be operational in the third quarter of 2006. In April, the Bank also arranged to purchase a new check-processing machine. The cost is approximately $385,000. The equipment will allow the Bank to offer an enhanced electronic banking experience to its account holders, which should help to retain and attract customers. Management believes that this is a necessary expenditure to allow the Bank to maintain its competitive position in the local marketplace. Deposit balances were $172.0 million at March 31, 2005 up from $158.8 million at December 31, 2004. Total deposit growth since year-end was $13.2 million or 8%. Non-interest bearing and interest bearing checking accounts grew $3.4 million but was mostly offset by declines totaling $2.7 million in money market and savings accounts. Time deposits over $100,000 reflected 95% or $12.5 million of the increase. $8.9 million of the growth in the time deposits over $100,000 is mainly due to several of the Bank's large public fund customers increasing their holdings of time deposits during the quarter. Many of these particular customer certificates have short maturities. Based on their cash flow needs the certificates were written to mature in the second and third quarters of 2005. At maturity, the money is expected to be used to fund commitments outside of the Bank. The additional growth in time deposits is the result of a newspaper advertising campaign conducted locally throughout the month of March and the solicitation of brokered deposits. 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. Although brokered deposits were obtained during the first quarter there were significant brokered deposit maturities. The net increase in brokered deposits since year-end was $432,000. The concentration of brokered deposits to total deposits was 30.7% at March 31, 2005 and 33.0% at December 31, 2004. Repurchase agreements and federal funds purchased decreased $2.1 million (21%) from January 1, 2005 through March 31, 2005. No federal funds were purchased at either period end. The majority of the decline in repurchase agreements is the effect of existing customers decreasing their invested balances from those held at year-end 2004. -16- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The Bank had three Federal Home Loan Bank ("FHLB") putable advances outstanding, totaling $6,000,000, at both March 31, 2005 and December 31, 2004. All three putable advances are eligible to convert to a floating rate index at the option of the FHLB (put option). 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 put 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. The scheduled maturities of the notes is 2010. At March 31, 2005 and December 31, 2004, the Company had subordinated debentures of $4.5 million resulting from a pooled trust preferred offering on December 17, 2004. From the date of the offering through the end of the first quarter, $600,000 of the proceeds had been contributed as capital to the Bank to maintain capital ratios at a designated level of well-capitalized. The shareholders' equity totaled $13.6 million and $13.4 million at March 31, 2005 and December 31, 2004 respectively. The earnings recorded in the quarter were offset by declines in accumulated other comprehensive income (security market value adjustments). For the first three months of 2005, the annualized return on the Company's average total assets was 0.72%, which compares favorably to 0.35% annualized return for the first three months of 2004. The Company's annualized return on average equity was 10.71% for the first quarter of 2005 and 5.26% for the first quarter of 2004. The ratio of average equity to average assets was 6.69% for the period ended March 31 2005. RESULTS OF OPERATIONS The net income for the first quarter of 2005 was $362,000 up from the $169,000 recorded for the same period in 2004. The corresponding basic and diluted earnings per share were $0.25 for 2005's first quarter and $0.12 for the similar period in 2004. The increase in earnings of $193,000 represented an increase of 114% between the two periods. The most important differences between the operating results of first quarter 2004 and 2005 is the net interest income and the net interest margin. The following table sets forth certain information relating to the Company's consolidated average interest earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented. -17- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31: ---------------------------------------------------------------------------------- 2005 2004 --------------------------------------- --------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------------- ---------- ---------- ------------- ---------- ---------- Assets Federal funds sold and interest- bearing deposits with banks $ 1,721,299 $ 10,476 2.43% $ 5,914,725 $ 13,787 0.93% Securities (including FHLB stock) 17,500,210 162,337 3.71 20,611,286 173,717 3.37 Loans (1) 176,578,069 2,822,341 6.39 155,275,289 2,283,823 5.88 ------------- ---------- ------ ------------- ---------- ------ 195,799,578 2,995,154 6.12 181,801,300 2,471,327 5.44 Other assets 6,340,169 8,750,537 ------------- ------------- $ 202,139,747 $ 190,551,837 ============= ============= Liabilities and Shareholders' Equity Interest bearing deposits $ 149,826,481 $ 856,329 2.29 $ 145,402,193 $ 816,993 2.25 Federal funds purchased and repurchase agreements 13,217,121 56,549 1.71 10,168,836 28,170 1.11 Notes Payable and Federal Home Loan Bank Advances 10,500,000 137,751 5.25 8,554,396 120,535 5.64 ------------- ---------- ------ ------------- ---------- ------ 173,543,602 1,050,629 2.42 164,125,425 965,698 2.35 ---------- ---------- Non-interest bearing deposits 14,554,299 12,861,677 Other liabilities 515,625 707,500 Shareholders' Equity 13,526,221 12,857,235 ------------- ------------- $ 202,139,747 $ 190,551,837 ============= ============= Net interest income $1,944,525 $1,505,629 ========== ========== Net interest spread on earning assets 3.70% 3.09% ====== ====== Net interest margin on earning assets 3.97% 3.31% ====== ====== Average interest-earning assets to Average interest-bearing liabilities 112.82% 110.77% ====== ======
The net interest spread on average earning assets increased 61 basis points to 3.70% since March 31, 2004. The net interest margin increased by 66 basis points from 3.31% at March 31, 2004 to 3.97% at March 31, 2005. First quarter 2005's net interest income was $1.94 million compared to a figure of $1.51 million for the same three months in 2004. Additional net interest income of 29% or $439,000 was representative of increases in the Bank's average internal prime lending rate of 143 basis points between the two periods, the repricing lag on deposit rate increases as well as a more leveraged balance sheet overall. The average rate earned on interest earning assets was 6.12% for the three months ended March 31, 2005 compared to 5.44% for the same period in 2004, a 68 basis point increase. The main contributing factor was a 51 basis point increase in the yield on loans, the Bank's largest earning asset category. Internal prime rate changes, no matter what direction, affect interest earned on variable rate loans and new loan volume. At March 31, 2005, 61% of the Bank's loan portfolio was variable and $7.3 million (89%) of 2005's first quarter loan volume was booked into the variable portion of the loan portfolio. Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable increased by 7 basis points for the first three months of 2005 compared to the first three months of 2004. There has been a significant lag between the timing of loan rate increases and increases in the Bank's cost of funds. Another beneficial factor was the refinance of the Company's debt. The subordinated debentures that were issued in December 2004 accrue interest at a lower rate than the notes - ------------------------- (1) Includes non-accrual loans. -18- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS payable that were in place in March 2004. The average rate difference was 39 basis points between the two periods. Both of the above measures have been instrumental in improving the Bank's net interest margin. However, since March local deposit rates have been rising at a marked pace. Much of the effect of the timing lag on deposit rates enjoyed in the first quarter of 2005 has diminished thus it is expected that there will not be as much to be gained from this in future quarters. As the Bank's cost of funds increase and prime rate changes continue being a possibility, asset liability management has become an important tool for assessing and monitoring liquidity and interest rate sensitivity. Liquidity management involves the ability to meet the cash flow requirements of the Company's customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and achieve consistent net interest income through periods of changing interest rates. Asset liability management assists the Company in realizing reasonable and predictable earnings and liquidity by maintaining a balance between interest-earning assets and interest-bearing liabilities. The Company uses a sophisticated computer program to perform analysis of interest rate risk, assist with asset liability management, and model and measure interest rate sensitivity. Interest rate sensitivity varies with different types of earning assets and interest-bearing liabilities. Overnight investments, on which rates change daily, and loans tied to the prime rate, differ considerably from long term investment securities and fixed rate loans. Interest bearing checking and money market accounts are more interest sensitive than long term time deposits and fixed rate FHLB advances. Comparison of the repricing intervals of interest earning assets to interest bearing liabilities is a measure of interest sensitivity gap. Balancing this gap is a continual challenge in a changing rate environment. Details of the repricing gap at March 31, 2005 were: -19- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest Rate Sensitivity Period Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------------ ------------ ------------ ------------- ------------ Earning assets Interest-bearing deposits In other financial institutions $ 217,469 $ 0 $ 0 $ 0 $ 217,469 Federal funds sold 600,000 0 0 0 600,000 Securities (including FHLB stock) 918,929 1,241,036 8,925,424 6,345,264 17,430,653 Loan held for sale 0 0 0 0 0 Loans 105,478,244 11,319,504 58,330,808 4,475,925 179,604,481 ------------ ------------ ------------ ------------- ------------ 107,214,642 12,560,540 67,256,232 10,821,189 197,852,603 Interest-bearing liabilities Savings and checking 64,049,312 0 0 0 64,049,312 Time deposits <$100,000 1,777,342 6,536,197 13,781,997 5,328 22,100,864 Time deposits >$100,000 10,983,002 38,818,808 22,398,251 0 72,200,061 Repurchase agreements and Federal funds purchased 7,904,493 0 0 0 7,904,493 Notes payable and Federal Home Loan bank advances 10,500,000 0 0 0 10,500,000 ------------ ------------ ------------ ------------- ------------ 95,214,149 45,355,005 36,180,248 5,328 176,754,730 Net asset (liability) repricing gap $ 12,000,493 $(32,794,465) $ 31,075,984 $ 10,815,861 $ 21,097,873 ============ ============ ============ ============= ============ Cumulative net asset (liability) Repricing gap $ 12,000,493 $(20,793,972) $ 10,282,012 $ 21,097,873 ============ ============ ============ =============
Currently the Company has a negative twelve month repricing gap which indicates that the Company is liability sensitive in the next twelve month period. This position implies that increases to the national federal funds rate would have more of an impact on interest expense than on interest income if there were a parallel shift in rates. For instance if the Company's internal prime rate went up by 25 basis points and every interest earning asset and interest bearing liability on the Company's March 31, 2005 balance sheet adjusted simultaneously by the same 25 basis points, more liabilities would be affected than assets. At this point in time it would not be prudent to assume that deposit rates will only increase if the national federal funds rate increases. The local marketplace has experienced drastic increases in deposit rates as noted above. The interest rate sensitivity table simply illustrates what the Company is contractually able to change in certain timeframes. The provision for loan losses for the first three months of 2005 was $117,000 compared to a figure of $57,000 for the same period in 2004. Management believes that the allowance level is adequate and justifiable based on the factors discussed earlier (see Financial Condition). Management will continue to review the allowance with the intent of maintaining it at an appropriate level. The provision may be increased or decreased in the future as management continues to monitor the loan portfolio and actual loan loss experience. Non-interest income recorded in the first quarter totaled $295,000 and represented a 35% increase compared to last year's first quarter. Service charge income was $48,000 higher between 2005's first three months and the similar period in 2004. Substantially all of the increase was related to additional non-sufficient funds charges. In December 2004, the Bank rolled out a new program called Overdraft Privilege. The program allows customers to have an -20- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS assigned overdraft limit tied to their checking account within which presentments will be honored and a service charge will be automatically assessed. The entire first quarter of 2005 was subject to this new program. The main risk with Overdraft Privilege is that a customer will not bring their account back to a positive balance within a short period of time causing the Bank to experience increased miscellaneous losses. Management believes that there is adequate oversight of this program by qualified Bank personnel and believes this should help to mitigate escalating losses. Mortgage loan referral fees and gains on loans sold recorded for the first three months of 2005 were $16,000. For the similar period in 2004 the total was $25,000, a decrease of $9,000. As the economy improves mortgage rates have risen which makes refinancing an existing loan less attractive to customers that have already taken advantage of the historically low rates in the past two years. Management feels that the Bank is not overly dependent on mortgage fees and that the level recognized in 2005's first quarter is reasonable given the changes in the rate environment and the time of the year. In spite of increased rates, there should continue to be a core amount of business derived from new customers and new home purchases. In the first quarter of 2004, four securities were sold for a loss of $18,000. There were no security sales in the first quarter of 2005. Other non-interest income increased by $21,000 between the first quarter of 2005 and the similar quarter in 2004. Half of the increase is related to increased commissions on the sale of third party brokerage products. The remainder is due to the Bank's growth. Non-interest expenses for the first three months of 2005 increased 11% over the same three-month period in 2004. The figure for 2005 was $1.57 million compared to a total of $1.42 million for 2004. Most categories increased by a modest amount and occurred as a result of the general growth of the Bank. The most notable expense changes were in personnel, advertising and other expenses. Increased personnel expenses represented 43% of the rise in non-interest expenses. The expenses totaled $847,000 in the first quarter of 2005 compared to $782,000 in the first quarter of 2004. The Bank employed an additional 6 full-time equivalent staff members between the two periods. Advertising expense was $46,000 in the first quarter of 2005, an increase of $20,000 over advertising expenses in the first quarter of 2004. The Bank initiated a significant newspaper campaign throughout a large portion of the first quarter in an attempt to attract local deposits to support anticipated loan growth. Additionally the Bank instituted an image campaign utilizing billboards throughout its marketplace. Management expects to continue both programs throughout the remainder of the year. Other non-interest expenses increased $57,000 between 2004's first quarter and that of 2005. Loan collection and repossession expenses increased $12,000 between the two period ends and there was a $10,000 miscellaneous loss recorded in 2005's first quarter related to the disposition of property that had been previously repossessed. Additionally, in 2005's first quarter there were fees that were associated with moving to NASDAQ smallcap on February 22, 2005. The NASDAQ fees will be ongoing. -21- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS The $109,204 increase in federal tax expense is related to differences in pre-tax income. The effective tax rate for the first quarter of 2005 was 35% and in 2004 it was 33%. ITEM 3. CONTROLS AND PROCEDURES An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2005. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were, to the best of their knowledge, effective as of March 31, 2005. There have been no significant changes in the internal controls over financial reporting during the quarter ended March 31, 2005, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company, the Bank, the Mortgage Company, Community Shores Financial Services or the Trust 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, Community Shores Financial Services and the Trust are not a party to any current legal proceedings that are material to their financial condition, either individually or in the aggregate. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. -22- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS ITEM 6. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ---------------------------------------------------------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 10-KSB. 10.1 Buy and Sell Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated July 19, 2004 is incorporated by reference to exhibit 10.1 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.2 First Amendment to Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated October 19, 2004 is incorporated by reference to exhibit 10.2 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.3 Letter extending contingency period for the Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated December 22, 2004 is incorporated by reference to exhibit 10.3 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.4 Second letter extending contingency period for the Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated January 21, 2005 is incorporated by reference to exhibit 10.4 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.5 Second Amendment to Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated February 15, 2005 is incorporated by reference to exhibit 10.5 of the Company's February 22, 2005 Form 8-K (SEC file no.000- 51166). 31.1 Rule 13a-14(a) Certification of the principal executive officer. 31.2 Rule 13a-14(a) Certification of the principal executive officer. 32.1 Section 1350 Chief Executive Officer Certification. 32.2 Section 1350 Chief Executive Officer Certification.
-23- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 16, 2005. COMMUNITY SHORES BANK CORPORATION By: /s/ Jose' A. Infante -------------------------------------------- Jose' A. Infante Chairman of the Board, President and Chief Executive Officer (principal executive officer) By: /s/ Tracey A. Welsh -------------------------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) -24- EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ---------------------------------------------------------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's Registration Statement on Form SB-2 (Commission File No. 333-63769) that became effective on December 17, 1998. 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 10-KSB. 10.1 Buy and Sell Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated July 19, 2004 is incorporated by reference to exhibit 10.1 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.2 First Amendment to Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated October 19, 2004 is incorporated by reference to exhibit 10.2 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.3 Letter extending contingency period for the Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated December 22, 2004 is incorporated by reference to exhibit 10.3 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.4 Second letter extending contingency period for the Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated January 21, 2005 is incorporated by reference to exhibit 10.4 of the Company's February 22, 2005 Form 8-K (SEC file no. 000-51166). 10.5 Second Amendment to Purchase Agreement between Community Shores Bank Corporation and Norton Shores Hotel LLC dated February 15, 2005 is incorporated by reference to exhibit 10.5 of the Company's February 22, 2005 Form 8-K (SEC file no. 000- 51166). 31.1 Rule 13a-14(a) Certification of the principal executive officer. 31.2 Rule 13a-14(a) Certification of the principal executive officer. 32.1 Section 1350 Chief Executive Officer Certification. 32.2 Section 1350 Chief Executive Officer Certification.
EX-31.1 2 k94881exv31w1.txt SECTION 302 CERTIFICATION OF 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 that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 16, 2005 /s/ Jose' A. Infante --------------------------- Jose' A. Infante Chairman, President and Chief Executive Officer EX-31.2 3 k94881exv31w2.txt SECTION 302 CERTIFICATION OF 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 that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: May 16, 2005 /s/ Tracey A. Welsh ----------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer EX-32.1 4 k94881exv32w1.txt SECTION 906 CERTIFICATION OF PRINCIPAL 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 March 31, 2005 (the "Form 10-QSB") of Community Shores Bank Corporation (the "Issuer"). I, Jose' A. Infante, Chairman, President and Chief Executive Officer of the Issuer, certify that: (i) the Form 10-QSB fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 16, 2005 /s/ Jose' A. Infante -------------------- Jose' A. Infante Chairman, President and Chief Executive Officer EX-32.2 5 k94881exv32w2.txt SECTION 906 CERTIFICATION OF PRINCIPAL 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 March 31, 2005 (the "Form 10-QSB") of Community Shores Bank Corporation (the "Issuer"). I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of the Issuer, certify that: (i) the Form 10-QSB fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 16, 2005 /s/ Tracey A. Welsh ------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----