10KSB 1 k13450e10ksb.txt ANNUAL REPORT OF SMALL BUSINESS DATED DECEMBER 31, 2006 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-KSB [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2006 Commission File No. 000-51166 COMMUNITY SHORES BANK CORPORATION (Name of small business issuer in its charter) MICHIGAN 38-3423227 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1030 W. NORTON AVENUE, MUSKEGON, MICHIGAN 49441 (Address of principal executive offices) (zip code) (231) 780-1800 (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered Common Stock The Nasdaq Stock Market LLC ------------ --------------------------- Securities registered under Section 12(g) of the Exchange Act: None Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ] 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] Issuer's revenue for its most recent fiscal year was approximately $18,007,000. The aggregate market value of voting stock of the registrant held by nonaffiliates was approximately $18,955,000 as of February 28, 2007; based on the average of the closing bid and ask prices ($12.905) on that date. As of March 15, 2007, 1,468,800 shares of Common Stock of the issuer were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Parts I and II Portions of 2006 Annual Report to the Shareholders of the issuer. Part III Portions of the Proxy Statement of the issuer for its May 10, 2007 Annual Meeting Transitional Small Business Disclosure Format YES [ ] NO [X] PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Community Shores Bank Corporation ("the Company"), organized in 1998, is a Michigan corporation and a bank holding company. The Company owns all of the common stock of Community Shores Bank (the "Bank"). The Bank was organized and commenced operations in January, 1999 as a Michigan chartered bank with depository accounts insured by the FDIC to the extent permitted by law. The Bank provides a full range of commercial and consumer banking services primarily in the communities of Muskegon County and Northern Ottawa County. The Bank's services include checking and savings accounts, certificates of deposit, safe deposit boxes, courier service, and loans for commercial and consumer purposes. Community Shores Mortgage Company (the "Mortgage Company") was incorporated on December 13, 2001. The Mortgage Company, a wholly owned subsidiary of the Bank, originates both commercial and residential real estate loans. Most fixed rate residential real estate loans originated are sold to a third party. Commercial and residential real estate loans that are held in the Mortgage Company's portfolio are serviced by the Bank pursuant to a servicing agreement. On September 27, 2002, pursuant to Title I of the Gramm-Leach-Bliley Act, the Company received regulatory approval to become a financial holding company. After becoming a financial holding company the Company created Community Shores Financial Services ("CS Financial Services"). Currently the only source of revenue that CS Financial Services receives is referral fee income from a local insurance agency, Lakeshore Employee Benefits, formerly Lead Financial. Lakeshore Employee Benefits offers, among other things, employer sponsored benefit plans. CS Financial Services has the opportunity to earn a referral fee for each sale of employer sponsored benefits that is transacted by Lakeshore Employee Benefits as a result of a referral made by CS Financial Services. In December of 2004, the Company formed Community Shores Capital Trust I, a Delaware business trust. The Trust is administered by a Delaware trust company, and three individual administrative trustees who are employees and officers of the Company. The Trust was established for the purpose of issuing and selling its preferred securities and common securities and used the proceeds from the sales of those securities to acquire subordinated debentures issued by the Company. A majority of the net proceeds received by the Company was used to pay down the outstanding balance on the Company's line of credit. The remaining proceeds were used to contribute capital to the Bank as well as support the general operating expenses of the Company including the debt service on the Company's subordinated debentures. As of year-end 2006, the Company had total consolidated assets of $247 million. In 2006, the Company achieved its sixth fully profitable year of operations earning $0.89 per diluted share. Year over year earnings per share increased 8.5%. Improvements in the Company's net interest income as well as profits from loan sales positively impacted the bottom line. The Bank's average earning assets grew 7.6% during 2006, which helped improve the Company's net interest income. The increases in gains on loan sales were derived mainly from the sale of Small Business Administration ("SBA")-affiliated loans. Late in 2005, the Bank hired an experienced SBA lender to develop an SBA lending program. The gains are attributed to the sale of the guaranteed portion of floating rate SBA loans originated by the Bank. As a result of our dynamic approach to this business line, the Bank is considered Muskegon's leading SBA lender(1), surpassing the efforts of many large banks in our market. In November 2006, the Bank opened its fourth banking facility located in Norton Shores on Harvey Street. ----------------- (1) According to the 2006 statistics compiled by the United States Small Business Administration. 2 The Company's main office is located at 1030 W. Norton Avenue, Muskegon, Michigan, 49441 and its telephone number is (231) 780-1800. PRODUCTS AND SERVICES The Bank offers a broad range of deposit services, including checking accounts, savings accounts and time deposits of various types. Transaction accounts and time certificates are tailored to the principal market area at rates competitive with those offered in the area. All qualified deposit accounts are insured by the FDIC up to the maximum amount permitted by law. The Bank solicits these accounts from individuals, businesses, schools, associations, churches, nonprofit organizations, financial institutions and government authorities. The Bank also uses alternative funding sources as needed, including advances from the Federal Home Loan Bank and obtaining deposits through a deposit broker. Additionally, the Bank makes available mutual funds and annuities, which are non-insured, through an alliance with Sorrento Pacific. Discount brokerage services are made available to our customers through Sorrento as well. The Bank receives referral fees for customers that open a brokerage account and conduct trades. Real Estate Loans. The Mortgage Company originates residential mortgage loans, which are generally long-term with either fixed or variable interest rates. The Mortgage Company's general policy, which is subject to review by management due to changing market and economic conditions and other factors, is to sell largely all fixed rate residential real estate loans on a servicing released basis in the secondary market, regardless of term or product. The Mortgage Company, based on its lending guidelines, may periodically elect to underwrite and retain certain mortgages in its portfolio. The Bank offers fixed rate home equity loans and variable rate home equity lines of credit, which are usually retained in its portfolio. The retention of variable rate loans in the Bank's loan portfolio helps to reduce the Bank's exposure to fluctuations in interest rates. However, such loans generally pose credit risks different from the risks inherent in fixed rate loans, primarily because as interest rates rise, the underlying payments from the borrowers rise, thereby increasing the potential for default. Personal Loans and Lines of Credit. The Bank makes personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, home improvements and personal investments. The Bank's current policy is to retain substantially all of these loans in its portfolio. Commercial and Commercial Real Estate Loans. Commercial loans are made primarily to small and mid-sized businesses. These loans are and will be both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, purchases of equipment and machinery, financing of inventory and accounts receivable, as well as any other purposes considered appropriate. Substantially all Commercial Real Estate Loan originations have been executed by the Mortgage Company, since March of 2002. The Bank and the Mortgage Company generally look to a borrower's business operations as the principal source of repayment, but will also receive, when appropriate, liens on real estate, security interests in inventory, accounts receivable and other personal property and/or personal guarantees. Although the Bank takes a progressive and competitive approach to lending, it stresses high quality in its loans. The Bank hires an independent company to perform loan review, to help monitor asset quality of the Bank. Any past due loans and identified problem loans are reviewed with the Board of Directors on a regular basis. Regulatory and supervisory loan-to-value limits are established pursuant to Section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991 "FDICIA" for loans secured by, or used to build on or improve, real estate. The Bank's internal limitations follow those limits and in certain cases are more restrictive than those required by the regulators. 3 The Bank has established relationships with correspondent banks and other independent financial institutions to provide other services requested by the Bank's customers, including loan participations where the requested loan amounts exceed the Bank's policies or legal lending limits. COMPETITION The Company's primary market area is Muskegon County and Northern Ottawa County. Northern Ottawa County primarily consists of the cities of Grand Haven, Ferrysburg, Spring Lake and the townships surrounding these areas. There are a number of banks, thrifts and credit union offices located in the Company's market area. Most are branches of larger financial institutions and are not 100% locally owned, with the exception of some credit unions. Competition with the Company also comes from other areas such as finance companies, insurance companies, mortgage companies, brokerage firms and other providers of financial services. Most of the Company's competitors have been in business a number of years longer than the Company and, for the most part, have established customer bases. The Company competes with these older institutions, through its ability to provide quality customer service, along with competitive products and services. EFFECT OF GOVERNMENT MONETARY POLICIES The earnings of the Company are affected by domestic economic conditions and the monetary and fiscal policies of the United States government, its agencies, and the Federal Reserve Board. The Federal Reserve Board's monetary policies have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation, maintain employment, and mitigate economic recession. The policies of the Federal Reserve Board have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. REGULATION AND SUPERVISION As a bank holding company under the Bank Holding Company Act, the Company is required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require. The Company is also subject to examination by the Federal Reserve Board. The Bank Holding Company Act limits the activities of bank holding companies that have not qualified as financial holding companies to banking and the management of banking organizations, and to certain non-banking activities. These non-banking activities include those activities that the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking. These non-banking activities include, among other things: operating a mortgage company, finance company, factoring company; performing certain data processing operations; providing certain investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, nonoperating basis; and providing discount securities brokerage services for customers. With the exception of the activities of the Mortgage Company and the third party arrangements with Lakeshore Employee Benefits and Sorrento Pacific discussed above, neither the Company nor any of its subsidiaries engages in any of the non-banking activities listed above. In September, 2002, the Company's election to become a financial holding company, as permitted by the Bank Holding Company Act, as amended by Title I of the Gramm-Leach-Bliley Act, was accepted by the Federal Reserve Board. In order to continue as a financial holding company, the Company and the Bank must satisfy statutory requirements regarding capitalization, management, and compliance with the Community 4 Reinvestment Act. As a financial holding company, the Company is permitted to engage in a broader range of activities than are permitted to bank holding companies which have not qualified as financial holding companies. Those expanded activities include any activity which the Federal Reserve Board (in certain instances in consultation with the Department of the Treasury) determines, by order or regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity and not to pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Such expanded activities include, among others: insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent, or broker for such purposes; providing financial, investment, or economic advisory services, including advising a mutual fund; and underwriting, dealing in, or making a market in securities. Other than the insurance agency activities of CS Financial Services, neither the Company nor its subsidiaries currently engages in any of the expanded activities. The Bank is subject to restrictions imposed by federal law and regulation. Among other things, these restrictions apply to any extension of credit to the Company or its other subsidiaries, to investments in stock or other securities issued by the Company, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales of certain types of assets to, the Company or its other subsidiaries. Federal law restricts the ability of the Company or its other subsidiaries to borrow from the Bank by limiting the aggregate amount that may be borrowed and by requiring that all the loans be secured in designated amounts by specified forms of collateral. With respect to the acquisition of banking organizations, the Company is generally required to obtain the prior approval of the Federal Reserve Board before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank or bank holding company, if, after the acquisition, the Company would own or control more than 5% of the voting shares of the bank or bank holding company. Acquisitions of banking organizations across state lines are subject to certain restrictions imposed by Federal and state law and regulations. LOAN POLICY The Bank makes loans primarily to individuals and businesses located within the Bank's market area. The loan policy of the Bank states that the function of the lending operation is to provide a means for the investment of funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of qualified businesses and individuals who become customers of the Bank. The Board of Directors of the Bank recognizes that, in the normal business of lending, some losses on loans will be inevitable. These losses will be carefully monitored and evaluated and are recognized as a normal cost of conducting business. The Bank's loan policy anticipates that priorities in extending loans will change from time to time as interest rates, market conditions and competitive factors change. The policy is designed to assist the Bank in managing the business risk involved in extending credit. It sets forth guidelines on a nondiscriminatory basis for lending in accordance with applicable laws and regulations. The policy describes criteria for evaluating a borrower's ability to support debt, including character of the borrower, evidence of financial responsibility, knowledge of collateral type, value and loan to value ratio, terms of repayment, source of repayment, payment history, and economic conditions. The Bank provides oversight and monitoring of lending practices and loan portfolio quality through the use of an Officers Loan Committee (the "Loan Committee"). The Loan Committee members include all commercial lenders, the Chief Lending Officer, the President, and other designated lending personnel. The Loan Committee is presently permitted to approve requests for loans in an amount not exceeding $2,000,000. The Loan Committee may recommend that requests exceeding this amount be approved by a committee of the Board of Directors (the "Executive Loan Committee") whose lending authority is approximately $2,750,000. Loan requests in excess of the Executive Loan Committee limit require the approval of the Board of Directors. The Board of Directors has the maximum lending authority permitted by law. However, generally, the loan policy establishes an "in house" limit slightly lower than the actual legal lending limit. The Bank's general legal 5 lending limit, as of December 31, 2006, was approximately $2,810,000, subject to a higher legal lending limit of approximately $4,683,000 in specific cases with approval by two-thirds of the Bank's Board of Directors. Under Michigan banking law, these amounts would change if the Bank's capital and surplus changed. In addition to the lending authority described above, the Bank's Board of Directors delegates significant authority to officers of the Bank. The Board believes this empowerment enables the Bank to be more responsive to its customers. The President of the Bank, the Chief Lending Officer of the Bank and the President of the Mortgage Company each have been delegated individual authority, where they deem it appropriate, to approve loans up to $1,000,000. Together, their delegated authority, where they deem it appropriate, is $2,000,000. Other officers have been delegated authority to approve loans of lesser amounts, where they deem it appropriate, without approval by the Loan Committee. The loan policy outlines the amount of funds that may be loaned against specific types of collateral. The loan to value ratios for first mortgages on residences are expected to comply with the guidelines of secondary market investors. First mortgages held within the Bank's portfolio are expected to mirror secondary market requirements. In those instances where loan to value ratio exceeds 80%, it is intended that private mortgage insurance will be obtained to minimize the Bank's risk. Loans secured by a second or junior lien generally will be limited to a loan to value ratio of 100%. Loans for improved residential real estate lots generally will not exceed a loan to value ratio of 80%, and loans for unimproved residential sites generally will not exceed a loan to value ratio of 75%. For certain loans secured by real estate, an appraisal of the property offered as collateral, by a state licensed or certified independent appraiser, will be required. The loan policy also provides general guidelines as to collateral, provides for environmental policy review, contains specific limitations with respect to loans to employees, executive officers and directors, provides for problem loan identification, establishes a policy for the maintenance of a loan loss reserve, provides for loan reviews and sets forth policies for mortgage lending and other matters relating to the Bank's lending practices. LENDING ACTIVITY Commercial Loans. The Bank's commercial lending group originates commercial loans primarily in the Western Michigan Counties of Muskegon and Northern Ottawa. Commercial loans are originated by experienced lenders under the leadership of the Chief Lending Officer. Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition and commercial real estate financing, including new construction and land development. Working capital loans that are structured as a line of credit are reviewed periodically in connection with the borrower's year end financial reporting. These loans generally are secured by assets of the borrower and have an interest rate tied to the prime rate. Loans for machinery and equipment purposes typically have a maturity of five to seven years and are fully amortizing. Commercial real estate loans may have an interest rate that is fixed to maturity or floats with a spread to the prime rate or a U.S. Treasury Index. The Bank evaluates many aspects of a commercial loan transaction in order to minimize credit and interest rate risk. Underwriting commercial loans requires an assessment of management, products, markets, cash flow, capital, income and collateral. The analysis includes a review of historical and projected financial results. On certain transactions, where real estate is the primary collateral, and in some cases where equipment is the primary collateral, appraisals are obtained from licensed or certified appraisers. In certain situations, for creditworthy customers, the Bank may accept title reports instead of requiring lenders' policies of title insurance. Commercial real estate lending involves more risk than residential lending, because loan balances are greater and repayment is dependent upon the borrower's operations. The Bank attempts to minimize risk associated with these transactions by generally limiting its exposure to owner operated properties of well known customers or new customers with an established profitable history. In certain cases, risk may be further 6 reduced by (i) limiting the amount of credit to any one borrower to an amount less than the Bank's legal lending limit, and (ii) avoiding certain types of commercial real estate financing. Single Family Residential Real Estate Loans. The Bank originates first mortgage residential real estate loans in its market area according to secondary market underwriting standards. These loans are likely to provide borrowers with a fixed or adjustable interest rate with terms up to 30 years. A majority of the single family residential real estate loans are expected to be sold on a servicing released basis in the secondary market with all interest rate risk and credit risk passed to the purchaser. The Bank and the Mortgage Company may periodically elect to underwrite certain residential real estate loans, generally with maturities of seven years or less, to be held in its own loan portfolio. Consumer Loans. The Bank originates consumer loans for a variety of personal financial needs. Consumer loans are likely to include fixed home equity and equity lines of credit, new and used automobile loans, boat loans, personal unsecured lines of credit, credit cards (through third-party providers to minimize risk) and overdraft protection for checking account customers. Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and, except for home equity lines of credit, usually will involve greater credit risk due to the type and nature of the collateral securing the debt. Strong emphasis is placed on the amount of the down payment, credit quality, employment stability and monthly income. Hazard insurance is obtained (in favor of the Bank) on certain loan types, including automobiles and boats. Consumer loans are generally repaid on a monthly basis with the source of repayment tied to the borrower's periodic income. It is recognized that consumer loan delinquency and losses are dependent on the borrower's continuing financial stability. Job loss, illness and personal bankruptcy may adversely affect repayment. In many cases, repossessed collateral (on a secured consumer loan) may not be sufficient to satisfy the outstanding loan balance. This is a common occurrence due to depreciation of the underlying collateral. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans. Consumer loans are expected to be an important component in the Bank's efforts to meet the credit needs of the communities and customers that it serves. LOAN PORTFOLIO QUALITY The Bank hires an independent firm to help management monitor and validate their ongoing assessment of the credit quality of the Bank's loan portfolio. The independent firm accomplishes this through a sampling of the loan portfolios for both commercial and retail loans. The independent firm also evaluates the loan underwriting, loan approval, loan monitoring, loan documentation, and problem loan administration practices of the Bank. The last loan review was performed in July 2006. The Bank is scheduled to undergo its next review in July of 2007. The Bank has a comprehensive loan grading system for commercial loans. Administered as part of the loan review program, all commercial loans are graded on a nine grade rating system utilizing a standardized grade paradigm that analyzes several critical factors, such as cash flow, management and collateral coverage. All commercial loans are graded at inception and at various intervals thereafter. All commercial loan relationships exceeding $500,000 are formally reviewed at least annually. Watch list credits are formally reviewed monthly. INVESTMENTS Bank Holding Company Investments. The principal investments of the Company are the investments in the common stock of the Bank and the common securities of the Trust. Other funds of the Company may be invested from time to time in various debt instruments. As a bank holding company, the Company is also permitted to make portfolio investments in equity securities and to make equity investments in subsidiaries engaged in a variety of non-banking activities, which include real estate-related activities such as community development, real estate appraisals, arranging equity financing 7 for commercial real estate, and owning and operating real estate used substantially by the Bank or acquired for its future use. In addition, the Company's qualification as a financial holding company enables it to make equity investments in companies engaged in a broader range of financial activities than the Company could do without that qualification. Such expanded activities include insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent, or broker for such purposes; providing financial, investment, or economic advisory services, including advising a mutual fund; and underwriting, dealing in, or making a market in securities. Other than its investment in CS Financial Services, the Company has no plans at this time to make directly any of these equity investments at the bank holding company level. The Company's Board of Directors may, however, alter the investment policy at any time without shareholder approval. In addition, so long as the Company is qualified as a financial holding company, it would be permitted, as part of the business of underwriting or merchant banking activity and under certain circumstances and procedures, to invest in shares or other ownership interests in, or assets of, companies engaged in non-financial activities. In order to make those investments, the Company would be required (i) to become, or to have an affiliate that is, a registered securities broker or dealer or a registered municipal securities dealer, or (ii) to control both an insurance company predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit insurance) or issuing annuities, and a registered investment adviser that furnishes investment advice to an insurance company. The Company does not currently have any securities, insurance, or investment advisory affiliates of the required types, nor does the Company have any current plans to make any of the equity investments described in this paragraph. The Bank's Investments. The Bank may invest its funds in a wide variety of debt instruments and may participate in the federal funds market with other depository institutions. Subject to certain exceptions, the Bank is prohibited from investing in equity securities. Among the equity investments permitted for the Bank under various conditions and subject in some instances to amount limitations, are shares of a subsidiary insurance agency (such as CS Financial Services), mortgage company (such as the Mortgage Company), real estate company, or Michigan business and industrial development company. Under another such exception, in certain circumstances and with prior notice to or approval of the FDIC, the Bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in the acquisition and development of real property for sale, or the improvement of real property by construction or rehabilitation of residential or commercial units for sale or lease. The Bank has no present plans to make such an investment. Real estate acquired by the Bank in satisfaction of or foreclosure upon loans may be held by the Bank for specified periods. The Bank is also permitted to invest in such real estate as is necessary for the convenient transaction of its business. The Bank's Board of Directors may alter the Bank's investment policy without shareholder approval at any time. ENVIRONMENTAL MATTERS The Company does not believe that existing environmental regulations will have any material effect upon the capital expenditures, earnings and competitive position of the Company. EMPLOYEES As of December 31, 2006, the Bank had 61 full-time and 22 part-time employees. No area of the Bank is represented by collective bargaining agents. 8 SELECTED STATISTICAL DATA AND RETURN ON EQUITY AND ASSETS Selected statistical data for the Company is shown for 2006, 2005 and 2004 only. CONSOLIDATED RESULTS OF OPERATIONS:
2006 2005 2004 ------------ ------------ ------------ Interest Income $ 16,489,789 $ 13,538,296 $ 10,316,411 Interest Expense 8,011,846 5,377,328 3,870,929 ------------ ------------ ------------ Net Interest Income 8,477,943 8,160,968 6,445,482 Provision for loan losses 720,701 853,728 460,067 Non interest income 1,517,425 1,263,139 977,806 Non interest expense 7,390,598 6,785,271 5,744,642 ------------ ------------ ------------ Income before income tax expense 1,884,069 1,785,108 1,218,579 Income tax expense (benefit) 568,757 572,427 414,933 ------------ ------------ ------------ Net income $ 1,315,312 $ 1,212,681 $ 803,646 CONSOLIDATED BALANCE SHEET DATA: Total assets $246,980,831 $222,166,351 $193,502,608 Cash and cash equivalents 9,070,270 4,651,459 2,375,615 Securities 18,442,272 18,902,432 16,930,341 Loans held for sale 165,070 0 0 Gross loans 207,432,376 192,644,742 171,451,202 Allowance for loan losses 2,549,016 2,612,581 2,039,198 Other assets 14,419,859 8,580,299 4,784,648 Deposits 214,282,412 190,451,101 158,820,523 Federal funds purchased and repurchase agreements 4,494,614 6,065,010 9,980,778 Federal Home Loan Bank Advances 6,000,000 6,000,000 6,000,000 Notes Payable 400,000 0 0 Subordinated Debentures 4,500,000 4,500,000 4,500,000 Other 1,585,180 650,329 801,975 Shareholders' equity 16,118,625 14,499,911 13,399,332 CONSOLIDATED FINANCIAL RATIOS: Return on average assets 0.57% 0.57% 0.42% Return on average shareholders' equity 8.59% 8.63% 6.17% Average equity to average assets 6.59% 6.60% 6.80% Dividend payout ratio N/A N/A N/A Non performing loans to total loans and leases 0.54% 0.59% 0.44% Tier 1 leverage capital ratio 8.65% 8.73% 9.35% Tier 1 leverage risk-based capital ratio 9.23% 9.48% 10.00% Total risk-based capital ratio 10.37% 10.73% 11.15%
9 SELECTED STATISTICAL DATA AND RETURN ON EQUITY AND ASSETS
Per Share Data: 2006 2005 2004 ---------- ---------- ---------- Net Income: Basic $ 0.91 $ 0.85 $ 0.56 Diluted 0.89 0.82 0.55 Book value at end of period 10.99 10.09 9.37 Dividends declared N/A N/A N/A Weighted average shares outstanding 1,447,485 1,434,185 1,430,000 Diluted average shares outstanding 1,478,168 1,471,939 1,464,362
NET INTEREST EARNINGS
Years Ended December 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 $ 3,115,319 $ 144,855 4.65% $ 2,015,919 $ 62,276 3.09% Securities (1),(2) 19,371,304 843,013 4.35 18,857,818 764,305 4.05 Loans (3) 198,625,907 15,617,761 7.86 184,690,712 12,781,600 6.92 ------------ ----------- ------ ------------ ----------- ------ 221,112,530 16,605,629 7.51 205,564,449 13,608,181 6.62 Other assets 11,058,121 7,466,078 ------------ ------------ $232,170,651 $213,030,527 ============ ============ Liabilities and Shareholders' Equity Interest-bearing deposits $180,734,753 $ 7,044,480 3.90 $160,282,633 $ 4,530,508 2.83 Federal funds purchased and repurchase agreements 7,072,189 271,502 3.84 10,915,239 253,864 2.33 Subordinated debentures, notes Payable and FHLB Advances 10,805,218 695,864 6.44 10,500,000 592,956 5.65 ------------ ----------- ------ ------------ ----------- ------ 198,612,160 8,011,846 4.03 181,697,872 5,377,328 2.96 ----------- ----------- Noninterest-bearing deposits 17,505,342 16,457,530 Other liabilities 743,435 821,761 Shareholders' Equity 15,309,714 14,053,364 ------------ ------------ $232,170,651 $213,030,527 ============ ============ Net interest income (tax equivalent basis) 8,593,783 8,230,853 =========== =========== Net interest spread on earning assets (tax equivalent basis) 3.48% 3.66% ====== ====== Net interest margin on earning assets (tax equivalent basis) 3.89% 4.00% ====== ====== Average interest-earning assets to Average interest-bearing liabilities 111.33% 113.14% ====== ====== Tax equivalent adjustment 115,840 69,885 ----------- ----------- Net Interest Income $ 8,477,943 $ 8,160,968 =========== =========== Years Ended December 31: 2004 Average Average Balance Interest Yield/Rate ------------ ------------ ---------- Assets Federal funds sold and interest bearing deposits with banks $ 3,266,803 $ 34,305 1.05% Securities (1),(2) 17,932,392 623,955 3.48 Loans (3) 162,549,306 9,674,621 5.95 ------------ ------------ ------ 183,748,501 10,332,881 5.62 Other assets 7,735,187 ------------ $191,483,688 ============ Liabilities and Shareholders' Equity Interest-bearing deposits $142,608,273 $ 3,223,957 2.26 Federal funds purchased and repurchase agreements 11,585,877 150,098 1.30 Subordinated debentures, notes Payable and FHLB Advances 8,970,355 496,874 5.54 ------------ ------------ ------ 163,164,505 3,870,929 2.37 ------------ Noninterest-bearing deposits 14,628,041 Other liabilities 666,455 Shareholders' Equity 13,024,687 $191,483,688 ============ Net interest income (tax equivalent basis) 6,461,952 ============ Net interest spread on earning assets (tax equivalent basis) 3.25% ====== Net interest margin on earning assets (tax equivalent basis) 3.52% ====== Average interest-earning assets to Average interest-bearing liabilities 112.62% ====== Tax equivalent adjustment 16,470 ------------ Net Interest Income $ 6,445,482 ============
------------- (1) Includes Federal Home Loan Bank Stock. (2) Adjusted to a fully tax equivalent basis. (3) Includes loans held for sale and non-accrual loans. 10 RATE VOLUME ANALYSIS
Year ended December 31, Year ended December 31, 2006 over 2005 2005 over 2004 Total Volume Rate Total Volume Rate ---------- ---------- ---------- ---------- ---------- ----------- Increase (decrease) in interest income Federal funds sold and interest- bearing deposits with banks $ 82,579 $ 42,869 $ 39,710 $ 27,971 $ (17,337) $ 45,308 Securities (1),(2) 78,708 21,226 57,482 140,350 33,465 106,885 Loans (3) 2,836,161 1,011,212 1,824,949 3,106,979 1,415,536 1,691,443 ---------- ---------- ---------- ---------- ---------- ----------- Net change in interest income 2,997,448 1,075,307 1,922,141 3,275,300 1,431,664 1,843,636 Increase (decrease) in interest expense Interest-bearing deposits 2,513,971 812,716 1,701,255 1,306,551 719,581 586,970 Federal funds purchased and repurchase agreements 17,638 (109,800) 127,438 103,766 (9,157) 112,923 Subordinated debentures, notes payable and FHLB advances 102,908 17,651 85,257 96,082 86,212 9,870 ---------- ---------- ---------- ---------- ---------- ----------- Net change in interest expense 2,634,517 720,567 1,913,950 1,506,399 796,636 709,763 ---------- ---------- ---------- ---------- ---------- ----------- Net change in net interest income $ 362,931 $ 354,740 $ 8,191 $1,768,901 $ 635,028 $ 1,133,873 ========== ========== ========== ========== ========== ===========
INVESTMENT PORTFOLIO The composition of the investment portfolio is detailed in the table below.
Balance at Balance at Balance at December 31, 2006 December 31, 2005 December 31, 2004 ----------------- ----------------- ----------------- U.S. Treasuries $ 0 $ 0 $ 0 U.S. Government and federal agency 4,408,178 5,360,898 5,406,061 Municipals 5,965,351 5,625,140 1,125,097 Mortgage-backed and collateralized mortgage obligations 8,068,743 7,916,394 10,399,184 ----------------- ----------------- ----------------- $ 18,442,272 $ 18,902,432 $ 16,930,342 ================= ================= =================
The maturity schedule of the Company's investment portfolio as well as the weighted average yield for each timeframe is included in the table below.
2006 One Yr or Less 1 - 5 Years Over 5 Years Total -------------------------- -------------- --------------- ------------- ------------ Treasury $ 0 $ 0 $ 0 $ 0 Government Agency 997,763 2,934,862 475,553 4,408,178 Municipals 363,164 1,393,240 4,208,948 5,965,352 Mortgage Backed Securities 318,365 2,320,362 5,430,016 8,068,743 -------------- --------------- ------------- ------------ Total $ 1,679,292 $ 6,648,464 $ 10,114,517 $ 18,442,273 ============== =============== ============= ============ Weighted Average Yield 2.65% 3.99% 4.37% 4.09%
Yields on tax exempt obligations have not been computed on a tax equivalent basis. ---------------- (1) Includes Federal Home Loan Bank Stock. (2) Adjusted to a fully tax equivalent basis. (3) Includes loans held for sale and non-accrual loans. 11 INVESTMENT PORTFOLIO (CONTINUED) The table below lists the security issuers in which the aggregate holding exceeds 10% of the Company's stockholders' equity.
2006 Issuer Book Value Market Value ---------- ------ ---------- ------------ FHLMC $3,138,872 $ 3,079,621 FNMA 6,925,902 6,763,798
LOAN PORTFOLIO The composition of the loan portfolio for each period is detailed in the following table.
December 31, 2006 December 31, 2005 December 31, 2004 December 31, 2003 December 31, 2002 Balance % Balance % Balance % Balance % Balance % ------------------- ------------------- -------------------- -------------------- ------------------- Commercial $ 90,297,059 43.5 $ 85,751,222 44.6 $ 80,385,707 46.9 $ 65,465,085 43.7 62,661,644 44.3 Real estate - Commercial 78,012,565 37.6 68,445,169 35.5 56,484,601 32.9 50,440,113 33.6 44,681,761 31.6 Real estate - Residential 10,172,321 5.0 9,366,098 4.9 7,210,940 4.2 6,213,613 4.1 5,819,289 4.1 Real estate - Construction 1,334,276 0.6 1,636,526 0.8 2,205,563 1.3 3,109,574 2.1 1,853,099 1.3 Consumer 27,616,155 13.3 27,445,727 14.2 25,164,391 14.7 24,721,700 16.5 26,437,827 18.7 ------------ ----- ------------ ----- ------------- ----- ------------- ----- ------------ ----- $207,432,376 100.0 $192,644,742 100.0 $ 171,451,202 100.0 $ 149,950,085 100.0 $141,453,620 100.0 ============ ===== ============ ===== ============= ===== ============= ===== ============ ===== Less allowance for loan losses 2,549,016 2,612,581 2,039,198 1,927,756 1,898,983 ------------ ------------ ------------- ------------- ------------ $204,883,360 $190,032,161 $ 169,412,004 $ 148,022,329 $139,554,637 ============ ============ ============= ============= ============
The non-accrual, past due and restructured loans as of the end of each period are reported below.
December 31 December 31 December 31 December 31 December 31 2006 2005 2004 2003 2002 ----------- ------------ ----------- ----------- ----------- Loans on nonaccrual status $ 401,000 $ 749,000 $ 598,000 $ 116,000 $ 521,000 Loans 90 days or more past due and accruing interest 730,000 379,000 115,000 844,000 317,000 Troubled debt restructuring 0 0 0 0 0 ----------- ------------ ----------- ----------- ----------- $ 1,131,000 $ 1,128,000 $ 753,000 $ 960,000 $ 838,000 =========== ============ =========== =========== ===========
Included below is the 2006 interest information on non-accrual, past due and restructured loans.
2006 ---------- Average of impaired loans during the year $1,090,796 Interest income recognized during impairment 15,602 Cash-basis interest income recognized 10,366
12 LOAN PORTFOLIO (CONTINUED) Below are two tables that summarize the activity in and the allocation of the Allowance for Loan Losses. Activity in the Allowance for Loan Losses:
Twelve Months Twelve Months Twelve Months Twelve Months Twelve Months Ended 12/31/06 Ended 12/31/05 Ended 12/31/04 Ended 12/31/03 Ended 12/31/02 -------------- -------------- -------------- -------------- -------------- Beginning Balance $ 2,612,581 $ 2,039,198 $ 1,927,756 $ 1,898,983 $ 1,535,543 Charge-offs Commercial (548,601) (130,602) (198,941) (177,922) 0 Real Estate - Commercial (54,000) (1,236) (23,408) (251,654) (150,740) Real Estate - Residential (5,234) 0 0 (23,363) 0 Real Estate - Construction 0 0 0 (14,247) 0 Consumer (233,858) (179,218) (222,481) (213,660) (162,781) -------------- -------------- -------------- -------------- -------------- (841,693) (311,056) (444,830) (680,846) (313,521) -------------- -------------- -------------- -------------- -------------- Recoveries Commercial 11,471 (2,799) 60,855 107,749 0 Real Estate - Commercial 0 0 2,165 31,234 6,743 Real Estate - Residential 0 0 0 14,989 0 Real Estate - Construction 0 0 0 0 0 Consumer 45,956 33,510 33,185 61,408 45,378 -------------- -------------- -------------- -------------- -------------- 57,427 30,711 96,205 215,380 52,121 -------------- -------------- -------------- -------------- -------------- Net Charge-offs (784,266) (280,345) (348,625) (465,466) (261,400) -------------- -------------- -------------- -------------- -------------- Provision charged against operating expense 720,701 853,728 460,067 494,239 624,840 -------------- -------------- -------------- -------------- -------------- Ending Balance $ 2,549,016 $ 2,612,581 $ 2,039,198 $ 1,927,756 $ 1,898,983 ============== ============== ============== ============== ==============
Allocation of the Allowance for Loan Losses:
2006 2005 2004 2003 2002 % of % of % of % of % of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- Balance at End of Period Applicable To: Commercial $1,239,909 43.5 $1,460,911 44.6 $1,062,232 46.9 $ 996,728 43.7 $ 862,436 44.3 Real estate - Commercial 943,907 37.6 777,331 35.5 632,459 32.9 576,778 33.6 663,579 31.6 Real estate - Residential 50,862 5.0 46,830 4.9 36,055 4.2 30,708 4.1 43,645 4.1 Real estate - Construction 15,344 0.6 18,820 0.8 25,364 1.3 35,760 2.1 24,090 1.3 Consumer 298,994 13.3 308,689 14.2 283,088 14.7 287,782 16.5 305,233 18.7 Unallocated 0 0.0 0 0.0 0 0.0 0 0.0 0 0 ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- Total $2,549,016 100.0 $2,612,581 100.0 $2,039,198 100.0 $1,927,756 100.0 $1,898,983 100.00 ========== ======== ========== ======== ========== ======== ========== ======== ========== ========
As of both period ends, all loans in the portfolio were domestic; there were no foreign outstandings. For further discussion on the risk elements of the portfolio and the factors considered in determining the amount of the allowance for loan losses and for a table summarizing the scheduled maturities and interest rate sensitivity of the Company's loan portfolio see the table and information in Management's Discussion and Analysis on pages 8 through 10 of the 2006 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report, which are incorporated here by reference. 13 DEPOSITS The table below represents the average balance of deposits by category as well as the average rate. Deposits in Domestic Bank Office:
Average Average Average Average Average Average Balance 2006 Rate 2006 Balance 2005 Rate 2005 Balance 2004 Rate 2004 ------------ --------- ------------ --------- ------------ --------- Non Interest Bearing Demand $ 17,505,342 N/A $ 16,457,530 N/A $ 14,628,041 N/A Interest Bearing Demand 26,340,816 4.95% 33,271,743 2.77% 47,535,611 1.42% Savings 12,927,421 3.03 15,537,817 1.75 14,781,998 1.00 Time Deposits 141,466,516 3.78 111,473,073 2.99 80,290,664 2.99 ------------ --------- ------------ --------- ------------ --------- Total $198,240,095 3.90% $176,740,163 2.83% $157,236,314 2.26% ============ ========= ============ ========= ============ =========
The Company had no foreign banking offices at December 31, 2006. The table below represents the maturity distribution of time deposits of $100,000 or more at December 31, 2006.
Over Six Within Over Three Through Three Through Six Twelve Over Twelve Months Months Months Months Total ------------ ------------ ----------- ------------- ------------ Time Deposits > $100,000 $ 31,777,162 $ 18,300,957 $26,544,718 $ 31,958,134 $108,580,971
14 SHORT-TERM BORROWINGS On December 31, 2006, 2005, and 2004 the consolidated short-term borrowings of the Company consisted of repurchase agreements, but no federal funds purchased. Federal funds purchased are overnight borrowings from various correspondent banks. Repurchase agreements are advances by customers that are not covered by federal deposit insurance. This liability is secured by Bank owned securities, which are pledged on behalf of the repurchase account holders. Details of the Company's holdings at the specified year-ends are as follows:
Repurchase Federal Funds Agreements Purchased ------------- -------------- Outstanding at December 31, 2006 $ 4,494,614 $ 0 Average interest rate at year end 3.34% 0.00% Average balance during year 4,993,710 2,078,479 Average interest rate during year 3.17% 5.46% Maximum month end balance during year 5,758,378 6,700,000 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 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
INTEREST RATE SENSITIVITY The interest sensitivity of the Company's consolidated balance sheet at December 31, 2006 and discussion of interest rate sensitivity are incorporated here by reference to Management's Discussion and Analysis at pages 14 and 15 of the 2006 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report. ITEM 2. DESCRIPTION OF PROPERTY The Company's and Bank's main office is located at 1030 W. Norton Avenue, Roosevelt Park, Michigan, a suburb of Muskegon. The building is approximately 11,500 square feet with a three lane drive-up, including a night depository and ATM. The Bank's second location is at 15190 Newington Drive, Grand Haven, Michigan. The Bank secured a lease on September 1, 1999, which had a term of five years. On April 8, 2004, the Bank exercised its renewal option and extended the lease for an additional three years under the same terms as the original lease. The leased space has 2,075 square feet of office space and one drive-up lane. A stand-alone ATM is also available at the Grand Haven location. In December of 2005, the Bank acquired 1.25 acres of property for $1.13 million and late in the third quarter of 2006 began construction of a new banking facility. The Bank expects to relocate its existing Grand Haven office to this location at 1120 S. Beacon Boulevard, Grand Haven, Michigan, once its lease expires in 2007. 15 For more information on the Company's future lease commitments see Note 11 on page 37 of the 2006 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report, which information regarding lease commitments is incorporated here by reference. The third banking location is at 180 Causeway Road in the City of North Muskegon and is slightly more than 4,000 square feet. The facility has a three lane drive-up, including a night depository and an ATM. In November of 2006, the Bank completed construction of its fourth banking location at Harvey and Mt. Garfield Road, in Norton Shores. The two-story facility is a little less than 20,000 square feet with a three-lane drive-up, including a night depository and an ATM. In October 2006, the Bank finalized the purchase of vacant land located on Apple Avenue at Quarterline in the City of Muskegon. The purchase price of the property was $721,000. The intention of the Bank is to build a fifth banking location. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and the Bank may be involved in various legal proceedings that are incidental to their business. In the opinion of management, neither the Company nor the Bank is a party to any current legal proceedings that are material to the financial condition of the Company or the Bank, either individually or in aggregate. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 2006 to a vote of the Company's shareholders. 16 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES The information listed under the caption "Stock Information" on page 46 of the 2006 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report are incorporated here by reference. EQUITY PLAN COMPENSATION INFORMATION The following table summarizes information, as of December 31, 2006, relating to the Company's compensation plans under which equity securities are authorized for issuance.
Number of securities Number of securities Weighted average remaining available for to be issued upon exercise price of future issuance under equity exercise of outstanding outstanding compensation plans options, options, warrants (excluding securities Plan Category warrants and rights and rights reflected in column (a)) ------------- ----------------------- ----------------- ---------------------------- (a) (b) (c) Equity compensation plans 115,775 $10.74 55,000 approved by security holders (1) Equity compensation plans not 0 0 0 approved by security holders Total 115,775 $10.74 55,000
------------ (1) The plans referred to are the Company's Employee Stock Option Plans of 1998 and 2005 and the Director Stock Option Plans of 2003 and 2005. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The information shown under the caption "Management's Discussion and Analysis" beginning on page 5 of the 2006 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report is incorporated here by reference. 17 ITEM 7. FINANCIAL STATEMENTS The information presented under the captions "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Shareholders' Equity," "Consolidated Statements of Cash Flows," and "Notes to Consolidated Financial Statements," as well as the Report of Independent Registered Public Accounting Firm, Crowe Chizek and Company LLC, dated March 14, 2007, in the 2006 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report is incorporated here by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES As of December 31, 2006, an evaluation was performed under the supervision of and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2006. There have been no significant changes in the internal controls over financial reporting during the quarter ended December 31, 2006, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 8B. OTHER INFORMATION None. 18 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information presented under the captions "Election of Directors-Information about Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its May 10, 2007 annual meeting of shareholders (the "Proxy Statement"), a copy of which will be filed with the Securities and Exchange Commission before the meeting date, is incorporated here by reference. The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee consist of Joy R. Nelson, Bruce C. Rice and Roger W. Spoelman. The Board of Directors has determined that it does not have a member of the Audit Committee that is qualified as an audit committee financial expert, as that term is defined in the rules of the Securities and Exchange Commission. The Board of Directors of the Company believes that the financial sophistication of the Audit Committee is sufficient to meet the needs of the Company and its shareholders. The Company has adopted a Code of Ethics that applies to all of the directors, officers and employees, including the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Code of Ethics is filed as Exhibit 14 to this Report. ITEM 10. EXECUTIVE COMPENSATION The information presented under the caption "Executive Compensation" in the Proxy Statement is incorporated here by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information presented under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated here by reference. The information in Item 5 of this Report under the caption "Equity Plan Compensation Information" is incorporated here by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information presented under the captions "Corporate Governance-Director Independence" and "Transactions with Related Persons" in the Proxy Statement is incorporated here by reference. 19 ITEM 13. 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 no. 333-63769). 3.2 Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company's 8-K filed July 5, 2006 (SEC file no. 000-5166) 10.1 1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company's Registration Statement on Form SB-2 (SEC File no. 333-63769), which became effective on December 17, 1998. * 10.2 First Amendment to 1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company's Registration Statement on Form SB-2 (SEC File no. 333-63769), which became effective on December 17, 1998. * 10.3 Director Stock Option Plan is incorporated by reference to exhibit 10.53 of the Company's December 31, 2003 Form 10-KSB (SEC file no. 333-63769). * 10.4 Agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.4 of the Company's Registration Statement on Form SB-2 (SEC File no. 333-63769) which became effective on December 17, 1998. 10.5 Junior Subordinated Indenture between Community Shores Bank Corporation and Deutsche Bank Trust Company Americas, as Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.20 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166). 10.6 Amended and Restated Trust Agreement among Community Shores Bank Corporation, as Depositor, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and The Administrative Trustees Named Herein as Administrative Trustees dated as of December 17, 2004 is incorporated by reference to exhibit 10.21 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166). 10.7 Guarantee Agreement between Community Shores Bank Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.22 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166). 10.8 Placement Agreement among Community Shores Bank Corporation, Community Shores Capital Trust I and Suntrust Capital Markets, Inc. dated as of December 17, 2004 is incorporated by reference to exhibit 10.23 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
-------------- * Management contract or compensatory plan or arrangement. 20 10.9 Purchase Agreement between Community Shores Bank and POT #103, Inc. is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed May 9, 2005 (SEC file no. 000-51166). 10.10 Development Coordination Agreement with Investment Property Associates, Inc is incorporated by reference to exhibit 10.1 of the Company's May 9, 2005 Form 8-K filed May 10, 2005 (SEC file no. 000-51166). 10.11 2005 Employee Stock Option Plan is incorporated by reference to Appendix A of the Company's proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).* 10.12 2005 Director Stock Option Plan is incorporated by reference to Appendix B of the Company's proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).* 10.13 Form of stock option agreement for options granted under the 2005 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company's Form 8-K filed May 17, 2005 (SEC file no. 000-51166).* 10.14 Form of stock option agreement for options granted to directors under the 2005 Director Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed December 13, 2005.* 10.15 Purchase Agreement between Community Shores Bank and Baumgardner-Hogan Real Estate, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed November 2, 2005 (SEC file number 000-51166). 10.16 Purchase Agreement between Community Shores Bank and Williamsburg Court Apartments, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed November 10, 2005 (SEC file no. 000-51166). 10.17 Replacement Revolving Loan Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2005 is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed December 16, 2005 (SEC file no. 000-51166). 10.18 First Amendment to Revolving Loan Agreement and Cancellation of Pledge Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2005 is incorporated by reference to exhibit 10.2 of the Company's Form 8-K filed December 16, 2005 (SEC file no. 000-51166). 10.19 Development Coordination Agreement with Investment Property Associates, Inc. is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed April 18, 2006 (SEC file no. 000-51166).
------------- * Management contract or compensatory plan or arrangement. 21 10.20 Extension to the agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.2 of the Company's Form 8-K filed July 7, 2006 (SEC File no. 000-51166). 10.21 Addendum #2 to the Buy and Sell Agreement with Baumgardner-Hogan Real Estate, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed May 18, 2006 (SEC File no. 000-51166). 10.22 Addendum #3 to the Buy and Sell Agreement with Baumgardner-Hogan Real Estate, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed July 11, 2006 (SEC File no. 000-51166). 10.23 Extension Revolving Loan Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2006 is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed September 11, 2006 (SEC file no. 000-51166). 10.24 Second Amendment to Revolving Loan Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2006 is incorporated by reference to exhibit 10.2 of the Company's Form 8-K filed September 11, 2006 (SEC file no. 000-51166). 10.25 Addendum #4 to Buy and Sell Agreement with Baumgardner-Hogan Real Estate, LLC extending the contingency period is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed September 27, 2006 (SEC file no. 000-51166). 10.26 Community Shores Bank Corporation Executive Incentive Plan is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed February 2, 2007 (SEC file no. 000-51166)*. 10.27 Summary of 2007 Director Compensation Arrangement. * 13 2006 Annual Report to Shareholders of the Company. Except for the portions of the 2006 Annual Report that are expressly incorporated by reference in this Annual Report on Form 10-KSB, the 2006 Annual Report of the Company shall not be deemed filed as a part of this Annual Report on Form 10-KSB. 14 Code of Ethics is incorporated by reference to exhibit 14 of the Company's December 31, 2003 Form 10-KSB (SEC file no. 333-63769). 21 Subsidiaries of the Issuer. 23 Consent of Independent Registered Public Accounting Firm. 31.1 Rule 13a-14(a) Certification of the principal executive officer
------ * Management contract or compensatory plan or arrangement. 22 31.2 Rule 13a-14(a) Certification of the principal financial officer. 32.1 Section 1350 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Section 1350 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information presented under the caption "Ratification of Appointment of Independent Registered Public Accountants-Principal Accountant Fees and Services" in the Proxy Statement is incorporated here by reference. 23 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2007. COMMUNITY SHORES BANK CORPORATION /s/ Heather D. Brolick ________________________________________________ Heather D. Brolick President, Chief Executive Officer and Secretary In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant, and in the capacities indicated on March 28, 2007. /s/ Gary F. Bogner ____________________________________ _______________________________________ Gary F. Bogner, Chairman Joy R. Nelson, Director /s/ Dennis L. Cherette /s/ Bruce C. Rice ____________________________________ _______________________________________ Dennis L. Cherette, Vice Chairman Bruce C. Rice, Director /s/ Robert L. Chandonnet ____________________________________ _______________________________________ Robert L. Chandonnet, Director Roger W. Spoelman, Director /s/ Steven P. Moreland ____________________________________ _______________________________________ Jonathon L. Smith, Director Steven P. Moreland, Director /s/ Bruce J. Essex ____________________________________ Bruce J. Essex, Director /s/ Heather D. Brolick /s/ Tracey A. Welsh ____________________________________ _______________________________________ Heather D. Brolick, President, Chief Tracey A. Welsh, Senior Vice President, Executive Officer and Director Chief Financial Officer and Treasurer (principal executive officer) (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 June 30, 2004 Form 10-QSB (SEC file no. 333-63769). 3.2 Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company's 8-K filed July 5, 2006 (SEC file no. 000-5166) 10.1 1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company's Registration Statement on Form SB-2 (SEC File no. 333-63769), which became effective on December 17, 1998. * 10.2 First Amendment to 1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company's Registration Statement on Form SB-2 (SEC File no. 333-63769), which became effective on December 17, 1998. * 10.3 Director Stock Option Plan is incorporated by reference to exhibit 10.53 of the Company's December 31, 2003 Form 10-KSB (SEC file no. 333-63769). * 10.4 Agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.4 of the Company's Registration Statement on Form SB-2 (SEC File no. 333-63769) which became effective on December 17, 1998. 10.5 Junior Subordinated Indenture between Community Shores Bank Corporation and Deutsche Bank Trust Company Americas, as Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.20 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166). 10.6 Amended and Restated Trust Agreement among Community Shores Bank Corporation, as Depositor, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and The Administrative Trustees Named Herein as Administrative Trustees dated as of December 17, 2004 is incorporated by reference to exhibit 10.21 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166). 10.7 Guarantee Agreement between Community Shores Bank Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.22 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166). 10.8 Placement Agreement among Community Shores Bank Corporation, Community Shores Capital Trust I and Suntrust Capital Markets, Inc. dated as of December 17, 2004 is incorporated by reference to exhibit 10.23 of the Company's December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
------------- * Management contract or compensatory plan or arrangement. 25 10.9 Purchase Agreement between Community Shores Bank and POT #103, Inc. is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed May 9, 2005 (SEC file no. 000-51166). 10.10 Development Coordination Agreement with Investment Property Associates, Inc is incorporated by reference to exhibit 10.1 of the Company's May 9, 2005 Form 8-K filed May 10, 2005 (SEC file no. 000-51166). 10.11 2005 Employee Stock Option Plan is incorporated by reference to Appendix A of the Company's proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).* 10.12 2005 Director Stock Option Plan is incorporated by reference to Appendix B of the Company's proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).* 10.13 Form of stock option agreement for options granted under the 2005 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company's Form 8-K filed May 17, 2005 (SEC file no. 000-51166).* 10.14 Form of stock option agreement for options granted to directors under the 2005 Director Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed December 13, 2005.* 10.15 Purchase Agreement between Community Shores Bank and Baumgardner-Hogan Real Estate, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed November 2, 2005 (SEC file number 000-51166). 10.16 Purchase Agreement between Community Shores Bank and Williamsburg Court Apartments, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed November 10, 2005 (SEC fileno. 000-51166). 10.17 Replacement Revolving Loan Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2005 is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed December 16, 2005 (SEC file no. 000-51166). 10.18 First Amendment to Revolving Loan Agreement and Cancellation of Pledge Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2005 is incorporated by reference to exhibit 10.2 of the Company's Form 8-K filed December 16, 2005 (SEC file no. 000-51166). 10.19 Development Coordination Agreement with Investment Property Associates, Inc. is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed April 18, 2006 (SEC file no. 000-51166).
-------------- * Management contract or compensatory plan or arrangement. 26 10.20 Extension to the agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.2 of the Company's Form 8-K filed July 7, 2006 (SEC File no. 000-51166). 10.21 Addendum #2 to the Buy and Sell Agreement with Baumgardner-Hogan Real Estate, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed May 18, 2006 (SEC File no. 000-51166). 10.22 Addendum #3 to the Buy and Sell Agreement with Baumgardner-Hogan Real Estate, LLC is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed July 11, 2006 (SEC File no. 000-51166). 10.23 Extension Revolving Loan Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2006 is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed September 11, 2006 (SEC file no. 000-51166). 10.24 Second Amendment to Revolving Loan Agreement between Community Shores Bank Corporation and LaSalle Bank National Association dated August 1, 2006 is incorporated by reference to exhibit 10.2 of the Company's Form 8-K filed September 11, 2006 (SEC file no. 000-51166). 10.25 Addendum #4 to Buy and Sell Agreement with Baumgardner-Hogan Real Estate, LLC extending the contingency period is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed September 27, 2006 (SEC file no. 000-51166). 10.26 Community Shores Bank Corporation Executive Incentive Plan is incorporated by reference to exhibit 10.1 of the Company's Form 8-K filed February 2, 2007 (SEC file no. 000-51166)*. 10.27 Summary of 2007 Director Compensation Arrangement. * 13 2006 Annual Report to Shareholders of the Company. Except for the portions of the 2006 Annual Report that are expressly incorporated by reference in this Annual Report on Form 10-KSB, the 2006 Annual Report of the Company shall not be deemed filed as a part of this Annual Report on Form 10-KSB. 14 Code of Ethics is incorporated by reference to exhibit 14 of the Company's December 31, 2003 Form 10-KSB (SEC file no. 333-63769). 21 Subsidiaries of the Issuer. 23 Consent of Independent Registered Public Accounting Firm. 31.1 Rule 13a-14(a) Certification of the principal executive officer 31.2 Rule 13a-14(a) Certification of the principal financial officer.
------------- * Management contract or compensatory plan or arrangement. 27 32.1 Section 1350 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Section 1350 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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