10QSB 1 k05299e10qsb.txt QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 2006 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, 2006 [ ] 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 incorporation or organization) Identification No.)
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, 2006, 1,436,800 shares of Common Stock of the issuer were outstanding. Indicate by check mark whether the registrant is a shell company as defined by Rule 12-b2 of the Exchange Act). Yes No X ----- ----- 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........................ 15 Item 3. Controls and Procedures..................................... 23 PART II. Other Information Item 1. Legal Proceedings........................................... 23 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.. 23 Item 3. Defaults upon Senior Securities............................. 24 Item 4. Submission of Matters to a Vote of Security Holders......... 24 Item 5. Other Information........................................... 24 Item 6. Exhibits.................................................... 24 Signatures.......................................................... 25
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) COMMUNITY SHORES BANK CORPORATION CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2006 2005 ------------ ------------ ASSETS Cash and due from financial institutions $ 3,555,515 $ 4,361,277 Interest-bearing deposits in other financial institutions 76,405 90,182 Federal funds sold 3,900,000 200,000 ------------ ------------ Cash and cash equivalents 7,531,920 4,651,459 Securities Available for sale (at fair value) 13,535,303 13,983,933 Held to maturity (fair value of $5,389,295 at March 31, 2006 and $4,822,327 at December 31, 2005) 5,452,700 4,918,499 ------------ ------------ Total securities 18,988,003 18,902,432 Loans held for sale 241,000 0 Loans 191,674,548 192,644,742 Less: Allowance for loan losses 2,307,087 2,612,581 ------------ ------------ Net loans 189,367,461 190,032,161 Federal Home Loan Bank stock 425,000 425,000 Premises and equipment, net 6,292,954 5,922,886 Accrued interest receivable 939,294 994,219 Other assets 1,293,587 1,238,194 ------------ ------------ Total assets $225,079,219 $222,166,351 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 17,343,816 $ 16,564,735 Interest bearing 177,228,398 173,886,366 ------------ ------------ Total deposits 194,572,214 190,451,101 Federal funds purchased and repurchase agreements 4,229,519 6,065,010 Federal Home Loan Bank advances 6,000,000 6,000,000 Subordinated debentures 4,500,000 4,500,000 Notes payable 200,000 0 Accrued expenses and other liabilities 785,959 650,329 ------------ ------------ Total liabilities 210,287,692 207,666,440 Shareholders' equity Preferred stock, no par value 1,000,000 Shares authorized, none issued 0 0 Common stock, no par value; 9,000,000 shares authorized; 1,436,800 shares issued at both March 31,2006 and Dec 31, 2005 12,999,334 12,998,670 Retained earnings 2,076,052 1,712,462 Accumulated other comprehensive loss (283,859) (211,221) ------------ ------------ Total shareholders' equity 14,791,527 14,499,911 ------------ ------------ Total liabilities and shareholders' equity $225,079,219 $222,166,351 ============ ============
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, 2006 March 31, 2005 -------------- -------------- Interest and dividend income Loans, including fees $3,528,551 $2,822,341 Securities and FHLB dividends 180,316 157,784 Federal funds sold and other income 100,982 15,029 ---------- ---------- Total interest income 3,809,849 2,995,154 Interest expense Deposits 1,538,972 856,329 Repurchase agreements, federal funds purchased, and other debt 34,766 56,549 Federal Home Loan Bank advances and subordinated debentures 161,323 137,751 ---------- ---------- Total interest expense 1,735,061 1,050,629 ---------- ---------- NET INTEREST INCOME 2,074,788 1,944,525 Provision for loan losses 78,153 117,422 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,996,635 1,827,103 Noninterest income Service charges on deposit accounts 238,113 207,836 Mortgage loan referral fees 0 2,120 Net realized gain on sale of loans 4,735 13,711 Loss on disposition of securities (124) 0 Other 77,599 70,972 ---------- ---------- Total noninterest income 320,323 294,639 Noninterest expense Salaries and employee benefits 991,046 846,790 Occupancy 87,298 76,276 Furniture and equipment 96,517 83,667 Advertising 42,857 46,107 Data processing 93,764 87,560 Professional services 127,272 131,982 Other 353,170 295,846 ---------- ---------- Total noninterest expense 1,791,924 1,568,228 ---------- ---------- INCOME BEFORE FEDERAL INCOME TAXES 525,034 553,514 Federal income tax expense 161,444 191,375 ---------- ---------- NET INCOME $ 363,590 $ 362,139 ========== ========== COMPREHENSIVE INCOME $ 290,952 $ 212,229 Weighted average shares outstanding 1,436,800 1,431,307 ========== ========== Diluted average shares outstanding 1,474,279 1,460,589 ========== ========== Basic earnings per share $ 0.25 $ 0.25 ========== ========== Diluted earnings per share $ 0.25 $ 0.25 ========== ==========
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, 2005 1,430,000 $12,922,314 $ 499,781 $ (22,763) $13,399,332 Proceeds from the exercise of stock options 2,800 $ 28,684 28,684 Comprehensive income: Net income 362,139 362,139 Unrealized gain 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 ========= =========== ========== ========= =========== BALANCE AT JANUARY 1, 2006 1,436,800 $12,998,670 $1,712,462 $(211,221) $14,499,911 Stock option vesting expense 664 664 Comprehensive income: Net income 363,590 363,590 Unrealized loss on securities available-for-sale, net (72,638) (72,638) ----------- Total comprehensive income 290,952 --------- ----------- ---------- --------- ----------- BALANCE AT MARCH 31, 2006 1,436,800 $12,999,334 $2,076,052 $(283,859) $14,791,527 ========= =========== ========== ========= ===========
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, 2006 March 31, 2005 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 363,590 $ 362,139 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 78,153 117,422 Depreciation and amortization 69,703 64,684 Net amortization of securities 7,736 8,315 Net realized gain on sale of loans (4,735) (13,711) Net realized loss on disposition of equipment 124 0 Stock option vesting expense 664 0 Originations of loans for sale (589,500) (887,650) Proceeds from loan sales 353,235 901,361 Net change in: Accrued interest receivable and other assets 36,955 89,537 Accrued interest payable and other liabilities 135,630 59,045 ----------- ----------- Net cash from operating activities 451,555 701,142 CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Maturities, prepayments and calls 333,894 465,252 Activity in held to maturity securities: Purchases (537,262) (776,016) Loan originations and payments, net 586,547 (8,211,735) Additions to premises and equipment (439,895) (943,409) ----------- ----------- Net cash used in investing activities (56,716) (9,465,908) CASH FLOW FROM FINANCING ACTIVITIES Net change in deposits 4,121,113 13,152,957 Net change in federal funds purchased and repurchase agreements (1,835,491) (2,076,285) Draws (paydown) on note payable 200,000 0 Net proceeds from stock option exercise 0 28,684 ----------- ----------- Net cash from financing activities 2,485,622 11,105,356 ----------- ----------- Net change in cash and cash equivalents 2,880,461 2,340,590 Beginning cash and cash equivalents 4,651,459 2,375,615 ----------- ----------- ENDING CASH AND CASH EQUIVALENTS $ 7,531,920 $ 4,716,205 =========== =========== Supplemental cash flow information: Cash paid during the period for Interest $ 1,726,387 $ 1,051,023 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, 2006 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, 2006 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, 2005. Some items in the prior year financial statements may be reclassified to conform to the current presentation. 2. STOCK COMPENSATION Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), Accounting for Stock-Based Compensation ("123(R)"), and has included the stock-based employee compensation expense in its income statement for the three months ended March 31, 2006. Prior periods have not been restated. Options to buy stock were granted to officers under the Company's 1998 Employee Stock Option Plan ("the 1998 Employee Plan"), which provided for issue of options for up to 150,000 shares of stock of the Company. The 1998 Employee Plan expired on September 1, 2003. While active, the 1998 Employee Plan stipulated an exercise price of no less than the market price at the date of grant and vesting over three years. On May 12, 2005, the shareholders approved both the 2005 Employee Stock Option Plan ("the 2005 Employee Plan") and the 2005 Director Stock Option Plan ("the 2005 Director Plan"). Details of the individual plans are included in the table below. -5- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. STOCK COMPENSATION (Continued)
2005 Employee Plan 2005 Director Plan ------------------ ------------------ Shares authorized 53,000 20,000 Qualification as incentive plan Yes No Option Price Not less than fair market value on Not less than fair market value on the date of grant the date of grant Vesting period 25% immediately and 25% on the next Immediate three anniversaries (as determined by the Board of Directors) Expiration Up to 10 years from grant date Up to 10 years from grant date
On December 12, 2005, the Director Stock Option Committee of the Board of Directors granted 2,000 options to each of the nine non-employee directors on the Company's Board. Each option has an exercise price of $14.54 per share, which was the fair market value of the Company's common stock as of the grant date. There are 2,000 shares left to be granted. As of March 31, 2006, no awards have been issued under the 2005 Employee Plan. Upon exercise of stock options, the Company issues new shares from its authorized but unissued shares. Activity in issued but unvested options during the quarter was as follows:
Weighted Avg Shares Price ------ ------------ Issued and unvested as of December 31, 2005 281 $10.28 Shares vested during the period (141) 10.28 ---- ------ Issued and unvested as of March 31, 2006 140 10.28
The fair value of the options vested during the first quarter of 2006 was $664.00. The fair value was computed using the following assumptions, which were determined as of the grant date:
2003 ------ Risk-free interest rate 3.61% Expected option life 7 yrs Expected stock price volatility 36.22% Dividend yield 0.00% Computed fair value $ 4.72
Compensation costs for all option plans were as follows:
Three months ended March 31, --------------- 2006 2005 ---- ---- Compensation cost recognized in income $664 $0 Related tax benefit recognized 0 0
-6- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. STOCK COMPENSATION (Continued) The compensation cost yet to be recognized for options that have been awarded but not vested is as follows: Second quarter 2006 $664 ---- Total $664
Below is the activity under all plans:
Three months ended March 31, 2006 Total options outstanding -------------------------------------- Wtd Avg Fair Shares Wtd Avg Price Value ------- ------------- ------------ Options outstanding, beginning of period 155,775 $10.55 $3.65 Forfeited 0 0 Exercised 0 0 Granted 0 0 ------- ------ Options outstanding, end of period 155,775 $10.55 $3.65 Options exercisable, end of period 155,635 $10.55 $3.64
The intrinsic value of options outstanding and options exercisable at March 31, 2006 was $214,970 and $214,776, respectively. The following table illustrates the effect on net income and 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 ended March 31, ------------------- 2006 2005 -------- -------- Net income as reported $363,590 $362,139 Less: Value determined under fair value based method (net of taxes) 664 2,311 Amount expensed in the period (net of taxes) (664) 0 -------- -------- Pro forma net income $363,590 $359,828 ======== ======== Basic earnings per share as reported $ 0.25 $ 0.25 Pro forma basic earnings per share $ 0.25 $ 0.25 Diluted earnings per share as reported $ 0.25 $ 0.25 Pro forma diluted earnings per share $ 0.25 $ 0.25
-7- 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, 2006 and at December 31, 2005:
Gross Gross Amortized Unrealized Unrealized Fair March 31, 2006 Cost Gains Losses Value % -------------- ---------- ---------- ---------- ----------- ---- Available for sale: US Government and federal agency $ 0 $(177,917) $ 5,348,202 28.2 Municipal securities 4,658 (6,596) 705,931 3.7 Mortgage-backed securities 3,935 (254,170) 7,481,170 39.4 ------ --------- ----------- ---- 8,593 (438,683) 13,535,303 71.3 Held to maturity: Municipal securities $5,452,700 2,729 (66,134) 5,389,295 28.7
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2005 Cost Gains Losses Value % ----------------- ---------- ---------- ---------- ----------- ---- Available for sale: US Government and federal agency $ 0 $ (166,450) $ 5,360,898 28.4 Municipal securities 6,009 (7,928) 706,641 3.7 Mortgage-backed securities 5,953 (157,616) 7,916,394 41.9 -------- ---------- ----------- ----- 11,962 (331,994) 13,983,933 74.0 Held to maturity: Municipal securities $4,918,499 2,327 (98,499) 4,822,327 26.0
Below is the schedule of maturities for investments held at March 31, 2006:
Held to Maturity Available for Sale ----------------------------- Fair Amortized Fair Value Cost Value ------------------ ---------------- ---------- Due in one year or less $ 3,444,335 $ 185,072 $ 184,963 Due from one to five years 2,489,867 523,295 517,716 Due in more than five years 119,931 4,744,333 4,686,616 Mortgage-backed 7,481,170 0 0 ----------- ---------- ---------- $13,535,303 $5,452,700 $5,389,295 =========== ========== ==========
-8- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. LOANS The components of the outstanding loan balances, their percentage of the total portfolio and the percentage change from the end of 2005 to March 31, 2006 were as follows:
March 31, 2006 December 31, 2005 Percent -------------------- -------------------- Increase/ Balance % Balance % (Decrease) ------------ ----- ------------ ----- ------------- Commercial $ 81,765,245 42.6% $ 85,883,914 44.6% (4.8)% Real Estate: Commercial 72,189,668 37.6 68,445,169 35.5 5.5 Residential 9,107,903 4.7 9,366,098 4.9 (2.8) Construction 1,876,319 1.0 1,636,526 0.8 14.7 Consumer 26,892,676 14.1 27,445,727 14.2 (2.0) ------------ ----- ------------ ----- 191,831,811 100.0% 192,777,434 100.0 ===== Less: allowance for loan losses (2,307,087) (2,612,581) Net deferred loan fees (157,263) (132,692) ============ ============ $189,367,461 $190,032,161 ============ ============
Loans held for sale totaled $241,000 at March 31, 2006. There were no loans held for sale at December 31, 2005. 5. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS The following is a summary of activity in the allowance for loan losses account for the three month periods ended March 31, 2006 and 2005:
Three Months Three Months Ended Ended 03/31/06 03/31/05 ------------ ------------ Beginning Balance $2,612,581 $2,039,198 Charge-offs Commercial (334,902) 0 Real Estate-Commercial 0 (39,880) Real Estate-Residential 0 0 Real Estate-Construction 0 0 Consumer (70,281) (40,947) ---------- ---------- Total Charge-offs (405,183) (80,827) Recoveries Commercial 6,048 0 Real Estate-Commercial 0 0 Real Estate-Residential 0 0 Real Estate-Construction 0 0 Consumer 15,488 22,371 ---------- ---------- Total Recoveries 21,536 22,371 Provision for loan losses 78,153 117,422 ---------- ---------- Ending Balance $2,307,087 $2,098,164 ========== ==========
-9- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) Impaired loans were as follows:
Three Months Three Months Ended Ended 03/31/06 03/31/05 ------------ ------------ End of period loans with no allocated allowance for loan losses $ -- $ -- End of period loans with allocated allowance for loan losses 1,494,363 2,641,001 ---------- ---------- Total $1,494,363 $2,641,001 ========== ========== Amount of the allowance for loan losses allocated $ 268,225 $ 247,623 Average of impaired loans during the quarter $1,952,655 $ 868,022 Interest income recognized during impairment 18,624 9,894 Cash-basis interest income recognized 12,665 10,407
Non-performing loans were as follows:
Three Months Three Months Ended Ended 03/31/06 03/31/05 ------------ ------------ Loans past due over 90 days still on accrual $ 380,762 $474,706 Non-accrual loans 1,197,921 167,954
Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. 6. PREMISES AND EQUIPMENT Period end premises and equipment were as follows:
March 31, December 31, 2006 2005 ---------- ------------ Land & land improvements $3,744,028 $3,744,028 Buildings & building improvements 1,689,664 1,689,664 Furniture, fixtures and equipment 1,992,669 2,245,604 Construction in Process 672,974 273,738 ---------- ---------- 8,099,335 7,953,034 Less: accumulated depreciation 1,806,381 2,030,148 ---------- ---------- $6,292,954 $5,922,886 ========== ==========
-10- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. DEPOSITS The components of the outstanding deposit balances, their percentage of the total portfolio and the percentage increase from the end of 2005 through March 31, 2006 were as follows:
March 31, 2006 December 31, 2005 Percent -------------------- -------------------- Increase/ Balance % Balance % (Decrease) ------------ ----- ------------ ----- ---------- Non-interest bearing Demand $ 17,343,816 8.9% $ 16,564,735 8.7% 4.7% Interest bearing Checking 25,421,021 13.1 23,465,273 12.3 8.3 Money Market 27,060,324 13.9 17,408,588 9.1 55.4 Savings 14,156,127 7.3 14,432,484 7.6 (1.9) Time, under $100,000 30,947,705 15.9 28,922,830 15.2 7.0 Time, over $100,000 79,643,221 40.9 89,657,191 47.1 (11.2) ------------ ----- ------------ ----- Total Deposits $194,572,214 100.0% $190,451,101 100.0% ============ ===== ============ =====
8. SHORT-TERM BORROWINGS The Company's short-term borrowings typically consist of repurchase agreements and federal funds purchased. The March 31, 2006 and December 31, 2005 information was as follows:
Repurchase Federal Funds Agreements Purchased ----------- ------------- Outstanding at March 31, 2006 $ 4,229,519 $ 0 Average interest rate at period end 3.00% 0.00% Average balance during period 4,937,765 18,333 Average interest rate during period 2.80% 4.55% Maximum month end balance during period 5,170,565 0 Outstanding at December 31, 2005 $ 6,065,010 $ 0 Average interest rate at year end 2.83% 0.00% Average balance during year 7,757,732 3,157,507 Average interest rate during year 1.88% 3.42% Maximum month end balance during year 10,776,372 10,600,000
-11- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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, 2006, the Bank had assets with a market value of $10,101,360 pledged to the Federal Home Loan Bank to support current borrowings. Details of the Bank's outstanding borrowings are:
Current March 31, December 31, Maturity Date Interest Rate 2006 2005 ----------------- ------------- ---------- ------------ 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 7.01% at March 31, 2006. 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. The most recent distribution was paid on March 30th, 2006. 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. NOTES PAYABLE On December 12, 2005, the Company renewed its $5 million revolving line of credit with LaSalle Bank National Association ("LaSalle"). During the first quarter of 2006, the Company drew $200,000 which, is the total balance outstanding at March 31, 2006. The outstanding principal bears interest at a rate of 75 basis points below LaSalle's prime rate, which is currently 7.75%. Interest is owed quarterly in arrears on the first business day of February, May, August, and November until the principal of this note is paid. The borrowings may be prepaid in whole or in part without any prepayment penalty. The proceeds from the $200,000 draw were essentially used for the general operating expenses of the Company. -12- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. 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, 2006 and December 31, 2005 follows:
March 31, December 31, 2006 2005 ----------- ------------ Unused lines of credit and letters of credit $38,822,387 $37,923,303 Commitments to make loans 3,629,440 271,127
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. 13. 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. If adequately capitalized, regulatory 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 Bank was designated as well-capitalized under the regulatory framework for prompt corrective action at both March 31, 2006 and December 31, 2005. -13- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. REGULATORY MATTERS-Continued Actual capital levels and minimum required levels at March 31, 2006 and December 31, 2005 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. 2006 Total Capital (Tier 1 and Tier 2) to risk weighted assets Consolidated $21,882,474 10.69% $16,375,198 8.00% $20,468,997 N/A Bank 21,967,827 10.73 16,373,939 8.00 20,467,424 10.00 Tier 1 (Core) Capital to risk weighted assets Consolidated 19,575,612 9.56 8,187,599 4.00 12,281,398 N/A Bank 19,660,739 9.61 8,186,970 4.00 12,280,454 6.00 Tier 1 (Core) Capital to Average assets Consolidated 19,575,612 8.60 9,109,003 4.00 11,386,253 N/A Bank 19,660,739 8.63 9,107,949 4.00 11,384,936 5.00 December 31. 2005 Total Capital (Tier 1 and Tier 2) to risk weighted assets Consolidated $21,746,410 10.73% $16,231,964 8.00% $20,289,955 N/A Bank 21,683,639 10.70 16,230,267 8.00 20,287,834 10.00 Tier 1 (Core) Capital to risk weighted assets Consolidated 19,211,132 9.48 8,115,982 4.00 12,173,973 N/A Bank 19,148,629 9.44 8,115,134 4.00 12,172,700 6.00 Tier 1 (Core) Capital to Average assets Consolidated 19,211,132 8.73 8,802,457 4.00 11,003,072 N/A Bank 19,148,629 8.70 8,801,143 4.00 11,001,429 5.00
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 both December 31, 2005 and March 31, 2006, the entire $4.5 million was included as tier one. -14- 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, 2006 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, 2006 to that at December 31, 2005. The part labeled Results of Operations discusses the three month period ended March 31, 2006 as compared to the same period of 2005. 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 contain 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. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. 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, among others, 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; the ability of the Company to borrow money or raise additional capital when desired to support future growth; 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 $2.9 million to $225.1 million at March 31, 2006 from $222.2 million at December 31, 2005. This is a 1.3% increase in assets during the first three months of 2006. Asset growth was funded by deposit growth and consisted of increases in federal funds sold and premises and equipment. -15- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Cash and cash equivalents increased by $2.9 million to $7.5 million at March 31, 2006 from $4.6 million at December 31, 2005. This increase was reflective of increases in federal funds sales being offset by decreases to the total balances held with correspondent banks between the above two periods. Loans held for sale were $241,000 at the end of the 2006's first quarter. There were no loans held for sale at year-end 2005. The loans that make up this balance are residential mortgages that the Mortgage Company has agreed to sell to a third party. Total loans (held for investment) decreased $970,000 and were $191.7 million at March 31, 2006 down from $192.6 million at December 31, 2005. The decrease is evidenced by $3.7 million growth in the commercial real estate portfolio, which was offset by a decline of $4.7 million in the commercial and consumer loan portfolios. In January 2006, two large commercial loans paid off. The total principal related to these payoffs was $3.4 million. The largest of the two notes was short term and the payoff was anticipated. Presently, the commercial and commercial real estate categories of loans comprise 80% of the Bank's total loan portfolio, the same as year-end 2005. There are eight experienced commercial lenders on staff devoted to pursuing and originating these types of loans. Management remains optimistic about future opportunities in the market partially due to the current branch expansion initiative. The net decline in the loan portfolio during the first three months of 2006 is not believed to be indicative of future performance. 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, 2006 have been included below:
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ----------- ----------- ------------ ----------- ------------ Commercial, financial and other $23,460,181 $25,021,289 $ 31,498,727 $ 1,725,745 $ 81,705,942 Real estate: Commercial 7,567,335 10,853,882 53,582,971 185,480 72,189,668 Residential 58,183 198,761 1,224,023 7,626,936 9,107,903 Construction 317,110 1,559,209 0 0 1,876,319 Consumer 969,616 4,274,759 18,972,373 2,577,968 26,794,716 ----------- ----------- ------------ ----------- ------------ $32,372,425 $41,907,900 $105,278,094 $12,116,129 $191,674,548 =========== =========== ============ =========== ============ Loans at fixed rates $ 3,369,775 $ 6,353,726 $ 74,040,117 $ 6,180,376 $ 89,943,994 Loans at variable rates 29,002,650 35,554,174 31,237,977 5,935,753 101,730,554 ----------- ----------- ------------ ----------- ------------ $32,372,425 $41,907,900 $105,278,094 $12,116,129 $191,674,548 =========== =========== ============ =========== ============
---------- (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. -16- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS At March 31, 2006, there were 47% of the loan balances carrying a fixed rate and 53% 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, 2006, the allowance totaled $2.3 million or approximately 1.20% of gross loans outstanding. Management has determined that this is an appropriate level based 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, 2006 was as follows:
March 31, 2006 December 31, 2005 -------------------------- -------------------------- Percent of Percent of Allowance Allowance Related to Related to Amount Loan category Amount Loan category ---------- ------------- ---------- ------------- Balance at End of Period Applicable to: Commercial $1,111,468 48.2% $1,460,911 55.9% Real estate: Commercial 827,577 35.9 777,331 29.8 Residential 45,540 2.0 46,830 1.8 Construction 21,578 0.9 18,820 0.7 Consumer 300,924 13.0 308,689 11.8 Unallocated 0 0.0 0 0.0 ---------- ----- ---------- ----- Total $2,307,087 100.0% $2,612,581 100.0% ========== ===== ========== =====
There were charge-offs totaling $405,000 in the first quarter of 2006. A majority of this balance was included in the allowance for loan losses at year-end 2005. As a result of this activity, the ratio of allowance for loan losses to total loans declined to 1.20% from a level of 1.36% at December 31, 2005. 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 $78,000 was added to the allowance during the first quarter of 2006. 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, 2006 compared to those at year-end 2005 and the corresponding change related to those two periods.
March 31, December 31, Increase 2006 2005 (Decrease) ---------- ------------ ----------- Loans Past Due: 30-59 days $ 610,000 $2,423,000 ($1,813,000) 60-89 days 549,000 159,000 390,000 90 days and greater 381,000 379,000 2,000 Non accrual notes 1,198,000 749,000 449,000
-17- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Since year-end 2005, overall past due and non-accrual loans have decreased by $972,000. A majority of the decrease occurred in the 30-59 day category. The elevated sum of loans in this past due category at year-end was caused by a multiplicity of minor factors. Most of the improvement shown above had taken place by January 31, 2006. Contrary to the decline in the 30-59 day past due category, loans past due 60-89 days increased between the two period ends. At March 31, 2006, 51% of the total balance past due in this category was related to one commercial credit. This customer was not past due at year-end 2005. 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 relationship and it is anticipated that the loans will be paid current in the near future. Non-accrual loans increased $449,000 since December 31, 2005. One commercial relationship is mostly responsible for the increase. The loans in the relationship were placed on non-accrual in March of this year when management determined that the collateral supporting the borrowings was not as valuable as the original assessment. The current allocated reserve for these impaired credits is considered adequate based on the most recent assessment. Although the collection process is believed to be sound, there was still the need to charge-off loans. There were net charge-offs of $384,000 recorded for the first three months of 2006. An increase of $326,000 over net charge-offs of $58,000 recorded for the similar period in 2005. The ratio of net charge-offs to average loans increased to a level of .81% for the first quarter of 2006 from 0.13% for the first quarter of 2005. Approximately 78% of the balances charged off were non-accrual loans that had specific allocations in the allowance for loan losses. Although the ratio is the highest in the Bank's history, a significant portion (62%) of the recorded charge-offs in the first quarter were related to the impaired commercial relationship mentioned above. Deposit balances were $194.6 million at March 31, 2006 up from $190.5 million at December 31, 2005. Total deposit growth since year-end was $4.1 million or 2%. The net change in deposits is not as significant as some of the recorded changes in various individual interest-bearing deposit categories. Interest bearing checking accounts and money market accounts grew $11.6 million. Growth is mainly due to several of the Bank's large public fund customers increasing their holdings since year-end. A majority of the deposits are short term and are expected to be used to fund commitments outside of the Bank in the second quarter of 2006. Time deposits under $100,000 rose $2.0 million since year-end 2005. This achievement is the result of consistently advertised rate specials conducted locally in the newspaper and in the branches. Time deposits over $100,000 decreased by $10.0 million during the first quarter of 2006. Both local and brokered deposits are included in this category. 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. No brokered deposits were obtained during the first quarter however there were significant brokered deposit maturities. The net decrease in brokered deposits since year-end was $15.0 million. The concentration of brokered deposits to total deposits was reduced to 26% at March 31, 2006 from 35% at December 31, 2005. The Bank may need to -18- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS solicit brokered funds in the second quarter to attain the liquidity necessary for the upcoming public fund withdrawals as well as anticipated loan fundings. Repurchase agreements and federal funds purchased decreased $1.8 million (30%) from January 1, 2006 through March 31, 2006. 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 2005. The Bank had Federal Home Loan Bank ("FHLB") advances outstanding, totaling $6,000,000, at both March 31, 2006 and December 31, 2005. The balance consists of three separate notes, which are all putable advances. All three instruments currently have rates ranging from 5.10% to 5.99%. All three notes are eligible to convert to a floating rate index at the option of the FHLB (put option). The option is contractually available to the FHLB once each quarter. If the option is exercised, the advance will convert to a floating rate based on a spread to LIBOR. In the event that the FHLB exercises its option and the note is converted, the Bank has the opportunity to repay the advance at that time with no pre-payment penalty. As borrowing rates continue to climb, it is a possibility that the FHLB could exercise the put. The applicable LIBOR rates are monitored every quarter by management to assess the likelihood of the FHLB converting any of the three notes. The scheduled maturities, if the notes are not paid prior to that, are all in 2010. At both March 31, 2006 and December 31, 2005, the Company had $4.5 million of subordinated debentures outstanding resulting from a pooled trust preferred offering on December 17, 2004. In the first quarter of 2006, the Company drew $200,000 on its revolving note with LaSalle Bank National Association. The draw was used for general operating expenses of the Company. Future draws are expected for similar reasons as well as for the purpose of contributing capital to the Bank to maintain a regulatory well-capitalized status. The shareholders' equity totaled $14.8 million and $14.5 million at March 31, 2006 and December 31, 2005 respectively. The earnings recorded in the quarter were partially offset by declines in accumulated other comprehensive income (security market value adjustments). RESULTS OF OPERATIONS The net income for the first quarter of 2006 was $364,000, essentially the same as the $362,000 recorded for the same period in 2005. The corresponding basic and diluted earnings per share for both quarters were $0.25. For the first three months of 2006, the annualized return on the Company's average total assets was 0.64%, which is down slightly from 0.72% for the first three months of 2005. The Company's annualized return on average equity was 9.89% for the first quarter of 2006 and 10.71% for the first quarter of 2005. The ratio of average equity to average assets was 6.46% for the period ended March 31 2006 and 6.69% at the same period end in 2005. -19- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS One important difference between the operating results of first quarter 2005 and 2006 is the net interest income and the corresponding 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.
Three months ended March 31: ------------------------------------------------------------------------------- 2006 2005 -------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------------ ---------- ---------- ------------ ---------- ---------- Assets Federal funds sold and interest- bearing deposits with banks $ 9,116,128 $ 100,982 4.43% $ 1,721,299 $ 10,476 2.43% Securities (including FHLB stock)(1) 19,582,838 208,107 4.25 17,500,210 168,636 3.85 Loans (2) 189,698,326 3,528,551 7.44 176,578,069 2,822,341 6.39 ------------ ---------- ------ ------------ ---------- ------ 218,397,292 3,837,640 7.03 195,799,578 3,001,453 6.13 Other assets 9,327,776 6,340,169 ------------ ------------ $227,725,068 $202,139,747 ============ ============ Liabilities and Shareholders' Equity Interest bearing deposits $180,028,943 $1,538,972 3.42 $149,826,481 $ 856,329 2.29 Federal funds purchased and repurchase agreements 4,956,098 34,766 2.81 13,217,121 56,549 1.71 Note Payable and Federal Home Loan Bank Advances 10,568,889 161,323 6.11 10,500,000 137,751 5.25 ------------ ---------- ------ ------------ ---------- ------ 195,553,930 1,735,061 3.55 173,543,602 1,050,629 2.42 ---------- ---------- Non-interest bearing deposits 17,144,118 14,554,299 Other liabilities 311,044 515,625 Shareholders' Equity 14,715,976 13,526,221 ------------ ------------ $227,725,068 $202,139,747 ============ ============ Net interest income (tax equivalent basis) 2,102,579 1,950,824 Net interest spread on earning assets (tax equivalent basis) 3.48% 3.71% ====== ====== Net interest margin on earning assets (tax equivalent basis) 3.85% 3.99% ====== ====== Average interest-earning assets to Average interest-bearing liabilities 111.68% 112.82% ====== ====== Tax equivalent adjustment 27,791 6,299 ---------- ---------- Net interest income $2,074,788 $1,944,525 ========== ==========
The tax equivalent net interest spread on average earning assets decreased 23 basis points to 3.48% since March 31, 2005. The tax equivalent net interest margin decreased by 14 basis points from 3.99% at March 31, 2005 to 3.85% at March 31, 2006. First quarter 2006's tax equivalent net interest income was $2.1 million compared to a figure of $1.9 million for the same three months in 2005. Although the Company reported more total net interest income there was net interest margin compression between the two periods. Relative increases to loan income from higher internal prime lending rates and more average loans outstanding were not ---------- (1) Adjusted to fully tax equivalent basis. (2) Includes loans held for sale and non-accrual loans. -20- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS as much as the increases experienced on the deposit side from a rate and outstanding balance perspective. The average rate earned on interest earning assets was 7.03% for the three months ended March 31, 2006 compared to 6.13% for the same period in 2005, a 90 basis point increase. The main contributing factor was a 105 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, 2006, 53% of the Bank's loan portfolio was variable compared to 61% at March 31, 2005. A lower concentration level of variable rate loans mean that less loans on the books were able to take advantage of the 199 basis point increase in the internal prime lending rate between the two periods. Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances and Notes Payable increased by 113 basis points for the first three months of 2006 compared to the first three months of 2005. During 2005, there was a significant lag between the timing of loan rate increases and increases in the Bank's cost of funds. Currently deposit rates are rising at a faster pace than lending rates. It is management's belief that once increases to the prime lending rate stabilize, deposit rates will continue to rise for a period of time potentially causing further compression to the Company's net interest margin. 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, 2006 were: -21- 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 $ 76,405 $ 0 $ 0 $ 0 $ 76,405 Federal funds sold 3,900,000 0 0 0 3,900,000 Securities (including FHLB stock) 1,897,774 4,420,348 6,905,259 6,189,622 19,413,003 Loan held for sale 241,000 0 0 0 241,000 Loans 105,257,906 13,185,060 68,825,031 4,406,551 191,674,548 ------------ ------------ ----------- ----------- ------------ 111,373,085 17,605,408 75,730,290 10,596,173 215,304,956 Interest-bearing liabilities Savings and checking 66,637,472 0 0 0 66,637,472 Time deposits <$100,000 5,215,297 17,844,117 7,888,291 0 30,947,705 Time deposits >$100,000 10,810,184 40,123,603 28,507,056 202,378 79,643,221 Repurchase agreements and Federal funds purchased 4,229,519 0 0 0 4,229,519 Notes payable and Federal Home Loan bank advances 10,700,000 0 0 0 10,700,000 ------------ ------------ ----------- ----------- ------------ 97,592,472 57,967,720 36,395,347 202,378 192,157,917 Net asset (liability) repricing gap $ 13,780,613 $(40,362,312) $39,334,943 $10,393,795 $ 23,147,039 ============ ============ =========== =========== ============ Cumulative net asset (liability) Repricing gap $ 13,780,613 $(26,581,699) $12,753,244 $23,147,039 ============ ============ =========== ===========
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 during this period 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, 2006 balance sheet repricing in the next twelve months 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 significant 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 2006 was $78,000 compared to a figure of $117,000 for the same period in 2005. 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 $320,000 and represented a 9% increase compared to last year's first quarter. Service charge income was $30,000 higher between 2006's first three months and the similar period in 2005. Substantially all of the increase was related to additional non-sufficient funds charges related to the Overdraft Privilege program. -22- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Non-interest expenses for the first three months of 2006 increased 14% over the same three-month period in 2005. The figure for 2006 was $1.8 million compared to a total of $1.6 million for 2005. 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 and other expenses. Increased personnel expenses represented 64% of the rise in non-interest expenses. The expenses totaled $991,000 in the first quarter of 2006 compared to $847,000 in the first quarter of 2005. The Bank employed an additional 7 full-time equivalent staff members between the two periods. Other non-interest expenses increased $57,000 between 2005's first quarter and that of 2006. Loan collection and repossession expenses increased $19,000 between the two period ends and there were fees of $17,000 paid to a third party vendor. The vendor that assisted with the implementation of the Bank's Overdraft Privilege program is contractually entitled to a percentage of the revenue earned during the first two years after execution. There were no fees paid in the first quarter of 2005. The fees will continue through the first half of 2007 and are likely to increase if the revenue escalates. The $30,000 decrease in federal tax expense is related to differences in tax free municipal bond holdings between the two period ends. The effective tax rate for the first quarter of 2006 was 31% and in 2005 it was 35%. 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, 2006. 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, 2006. There have been no significant changes in the internal controls over financial reporting during the quarter ended March 31, 2006, 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 and its subsidiaries may be involved in various legal proceedings that are incidental to their business. In the opinion of management, the Company and its subsidiaries 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. -23- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's June 30, 2004 Form 10-QSB (SEC file number 333-63769). 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 Form 10-KSB (SEC file no. 333-63769). 10.1 Development Coordination Agreement with Investment Property Associates, Inc. is incorporated by reference to exhibit 10.1 of the Company's April 18, 2006 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 financial officer. 32.1 Section 1350 Chief Executive Officer Certification. 32.2 Section 1350 Chief Financial Officer Certification.
-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 May 15, 2006. 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) -25- EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION ----------- ------------------- 3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's June 30, 2004 Form 10-QSB (SEC file number 333-63769). 3.2 Bylaws of the Company are incorporated by reference to exhibit 3.2 of the Company's December 31, 2003 Form 10-KSB (SEC file no. 333-63769). 10.1 Development Coordination Agreement with Investment Property Associates, Inc. is incorporated by reference to exhibit 10.1 of the Company's April 18, 2006 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 financial officer. 32.1 Section 1350 Chief Executive Officer Certification. 32.2 Section 1350 Chief Financial Officer Certification.
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