-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Chy6M0zRI2QVetnEEfnhs7rJkE80grrg/OnWHrkhGVG0K+1MpvrcfzyJsse0Uevm AN1MS5TV28kpvxLqeXmmDQ== 0000950137-08-007462.txt : 20080515 0000950137-08-007462.hdr.sgml : 20080515 20080515134657 ACCESSION NUMBER: 0000950137-08-007462 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080515 DATE AS OF CHANGE: 20080515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY SHORES BANK CORP CENTRAL INDEX KEY: 0001070523 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 383423227 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-51166 FILM NUMBER: 08835941 BUSINESS ADDRESS: STREET 1: 1030 W. NORTON AVENUE CITY: MUSKEGON STATE: MI ZIP: 49441 BUSINESS PHONE: 2317801800 MAIL ADDRESS: STREET 1: 1030 W. NORTON AVENUE CITY: MUSKEGON STATE: MI ZIP: 49441 10-Q 1 k26782e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2008 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number: 000-51166 COMMUNITY SHORES BANK CORPORATION (Exact name of registration as specified in its charter) MICHIGAN 38-3423227 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
1030 W. NORTON AVENUE, MUSKEGON, MI 49441 (Address of principal executive offices) (Zip Code)
(231) 780-1800 (Registrant's telephone number, including area code) ________________________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. [X] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No At May 12, 2008, 1,468,800 shares of common stock were outstanding. Community Shores Bank Corporation Index
Page No. -------- PART I. Financial Information Item 1. Financial Statements............................... 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 24 Item 4. Controls and Procedures............................ 24 PART II. Other Information Item 1. Legal Proceedings.................................. 25 Item 1A. Risk Factors....................................... 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................................ 25 Item 3. Defaults upon Senior Securities.................... 25 Item 4. Submission of Matters to a Vote of Security Holders......................................... 25 Item 5. Other Information.................................. 25 Item 6. Exhibits........................................... 25 Signatures.................................................. 26
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) COMMUNITY SHORES BANK CORPORATION CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2008 2007 ------------ ------------ ASSETS Cash and due from financial institutions $ 3,838,206 $ 3,329,626 Interest-bearing deposits in other financial institutions 89,297 201,290 Federal funds sold 15,800,000 4,346,000 ------------ ------------ Cash and cash equivalents 19,727,503 7,876,916 Securities Available for sale (at fair value) 13,399,249 13,194,645 Held to maturity (fair value of $6,695,603 at March 31, 2008 and $6,640,297 at December 31, 2007) 6,623,055 6,627,534 ------------ ------------ Total securities 20,022,304 19,822,179 Loans held for sale 2,144,713 2,285,966 Loans 222,651,068 230,219,420 Less: Allowance for loan losses 3,524,600 3,602,948 ------------ ------------ Net loans 219,126,468 226,616,472 Federal Home Loan Bank stock 404,100 404,100 Premises and equipment, net 12,317,909 12,488,593 Accrued interest receivable 1,061,760 1,159,804 Other assets 3,953,249 2,804,033 ------------ ------------ Total assets $278,758,006 $273,458,063 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 17,669,347 $ 16,708,504 Interest bearing 225,097,928 221,241,941 ------------ ------------ Total deposits 242,767,275 237,950,445 Federal funds purchased and repurchase agreements 4,649,338 4,400,611 Federal Home Loan Bank advances 6,000,000 6,000,000 Subordinated debentures 4,500,000 4,500,000 Notes payable 4,200,000 4,206,043 Accrued expenses and other liabilities 836,287 786,639 ------------ ------------ Total liabilities 262,952,900 257,843,738 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; 1,468,800 March 31, 2008 and December 31, 2007 13,296,691 13,296,691 Retained earnings 2,287,476 2,255,543 Accumulated other comprehensive income 220,939 62,091 ------------ ------------ Total shareholders' equity 15,805,106 15,614,325 ------------ ------------ Total liabilities and shareholders' equity $278,758,006 $273,458,063 ============ ============
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, 2008 March 31, 2007 -------------- -------------- Interest and dividend income Loans, including fees $4,145,502 $4,057,022 Securities and FHLB dividends 215,494 201,473 Federal funds sold and other income 84,377 70,669 ---------- ---------- Total interest income 4,445,373 4,329,164 Interest expense Deposits 2,352,255 2,111,491 Repurchase agreements, federal funds purchased, and other debt 22,102 50,999 Federal Home Loan Bank advances and subordinated debentures 220,569 178,407 ---------- ---------- Total interest expense 2,594,926 2,340,897 ---------- ---------- NET INTEREST INCOME 1,850,447 1,988,267 Provision for loan losses 230,716 127,231 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,619,731 1,861,036 Noninterest income Service charges on deposit accounts 231,083 208,395 Gain on sale of loans 144,763 133,891 Gain on sale of securities 0 1,986 Gain on disposal of equipment 0 80 Gain on sale of other real estate owned 142,324 0 Other 124,364 110,764 ---------- ---------- Total noninterest income 642,534 455,116 Noninterest expense Salaries and employee benefits 1,222,387 1,135,722 Occupancy 175,780 143,289 Furniture and equipment 171,562 146,346 Advertising 25,229 57,900 Data processing 114,473 104,680 Professional services 159,654 140,951 Other 369,926 318,209 ---------- ---------- Total noninterest expense 2,239,011 2,047,097 ---------- ---------- INCOME BEFORE FEDERAL INCOME TAXES 23,254 269,055 Federal income tax (benefit) expense (8,679) 40,427 ---------- ---------- NET INCOME $ 31,933 $ 228,628 ========== ========== COMPREHENSIVE INCOME $ 190,781 $ 262,584 Weighted average shares outstanding 1,468,800 1,468,733 ========== ========== Diluted average shares outstanding 1,468,800 1,488,589 ========== ========== Basic earnings per share $ 0.02 $ 0.16 ========== ========== Diluted earnings per share $ 0.02 $ 0.15 ========== ==========
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, 2007 1,466,800 $13,274,098 $3,027,774 $(183,247) $16,118,625 Proceeds from the exercise of stock options 2,000 20,460 20,460 Tax benefit from stock option exercises 1,904 1,904 Comprehensive income: Net income 228,628 228,628 Unrealized gain on securities available-for-sale, net 33,956 33,956 ----------- Total comprehensive income 262,584 --------- ----------- ---------- --------- ----------- BALANCE AT MARCH 31, 2007 1,468,800 $13,296,462 $3,256,402 $(149,291) $16,403,573 ========= =========== ========== ========= =========== BALANCE AT JANUARY 1, 2008 1,468,800 $13,296,691 $2,255,543 $ 62,091 $15,614,325 Comprehensive income: Net income 31,933 31,933 Unrealized gain on securities available-for-sale, net 158,848 158,848 ----------- Total comprehensive income 190,781 --------- ----------- ---------- --------- ----------- BALANCE AT MARCH 31, 2008 1,468,800 $13,296,691 $2,287,476 $ 220,939 $15,805,106 ========= =========== ========== ========= ===========
See accompanying notes to consolidated financial statements. -3- COMMUNITY SHORES BANK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three Months Three Months Ended Ended March 31, 2008 March 31, 2007 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 31,933 $ 228,628 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 230,716 127,231 Depreciation and amortization 175,279 133,767 Net amortization of securities 1,885 3,042 Gain on sale of securities 0 (1,986) Gain on sale of loans (144,763) (133,891) Gain on disposal of equipment 0 (80) Gain on sale of other real estate owned (142,324) 0 Originations of loans for sale (9,075,712) (2,022,282) Proceeds from loan sales 9,361,728 2,185,872 Net change in: Accrued interest receivable and other assets (7,731) (902,955) Accrued interest payable and other liabilities 49,648 (237,367) ----------- ----------- Net cash from (used in) operating activities 480,659 (620,021) CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales 0 494,650 Maturities, prepayments and calls 573,168 1,375,986 Purchases (534,500) (3,404,204) Loan originations and payments, net 5,878,398 1,935,263 Proceeds from the disposal of equipment 0 80 Additions to premises and equipment (4,595) (858,781) Proceeds from the sale of other real estate owned 397,943 0 ----------- ----------- Net cash from (used in) investing activities 6,310,414 (457,006) CASH FLOW FROM FINANCING ACTIVITIES Net change in deposits 4,816,830 3,320,062 Net change in federal funds purchased and repurchase agreements 248,727 1,200,715 Paydowns on notes payable and line of credit (6,043) 0 Net proceeds from stock option exercise 0 20,460 Tax benefit from stock option exercises 0 1,904 ----------- ----------- Net cash from financing activities 5,059,514 4,543,141 ----------- ----------- Net change in cash and cash equivalents 11,850,587 3,466,114 Beginning cash and cash equivalents 7,876,916 9,070,270 ----------- ----------- ENDING CASH AND CASH EQUIVALENTS $19,727,503 $12,536,384 =========== =========== Supplemental cash flow information: Cash paid during the period for Interest $ 2,511,981 $ 2,227,163 Cash paid for federal income tax 0 0 Transfers from loans to foreclosed assets during the period 1,380,890 439,000
See accompanying notes to consolidated financial statements. -4- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS: The unaudited, consolidated financial statements as of and for the three months ended March 31, 2008 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-Q and Article 8 of Regulation S-X 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, 2008 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, 2007. Some items in the prior year financial statements may be reclassified to conform to the current presentation. In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement established a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The Standard is effective for fiscal years beginning after November 15, 2007. The Company adopted this standard on January 1, 2008 and applicable disclosures have been added to the accompanying Notes to Consolidated Financial Statements (see Note 12 on page 11.). In February 2007, FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Liabilities" ("SFAS 159"). This statement allows, but does not require, companies to record certain assets and liabilities at their fair value. The fair value determination is made at the instrument level, so similar assets or liabilities could be partially accounted for using the historical cost method, while other similar assets or liabilities are accounted for using the fair value method. Changes in fair value are recorded through the income statement in subsequent periods. The statement provides for a one time opportunity to transfer existing assets and liabilities to fair value at the point of adoption with a cumulative effect adjustment recorded against equity. After adoption, the election to report assets or liabilities at fair value must be made at the point of their inception. The Company did not elect the fair value option for any of its financial assets or liabilities upon adoption of SFAS 159 on January 1, 2008. -5- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS (Continued): In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that liability be recorded during the service period when split-dollar life insurance agreement continues after participants' employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The issue is effective for fiscal years beginning after December 15, 2007. The impact of the adoption on January 1, 2008 was not material to the Company's consolidated financial statements. 2. SECURITIES The following tables represent the securities held in the Company's portfolio at March 31, 2008 and at December 31, 2007:
Gross Gross Amortized Unrealized Unrealized Fair March 31, 2008 Cost Gains Losses Value - -------------- ---------- ---------- ---------- ----------- Available for sale: US Government and federal agency $206,518 $ 0 $ 4,684,748 Municipal securities 11,515 0 885,308 Mortgage-backed securities 122,837 (6,114) 7,829,193 -------- -------- ----------- 340,870 (6,114) 13,399,249 -------- -------- ----------- Held to maturity: Municipal securities $6,623,055 $ 84,709 $(12,161) $ 6,695,603 ========== ======== ======== ===========
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2007 Cost Gains Losses Value - ----------------- ---------- ---------- ---------- ----------- Available for sale: US Government and federal agency $ 99,050 $(12,012) $ 4,565,235 Municipal securities 6,037 0 345,949 Mortgage-backed securities 35,638 (34,636) 8,283,461 --------- -------- ----------- 140,725 (46,648) 13,194,645 --------- -------- ----------- Held to maturity: Municipal securities $6,627,534 $ 21,865 $ (9,102) $ 6,640,297 ========== ========= ======== ===========
Below is the schedule of maturities for investments held at March 31, 2008:
Available for Sale Held to Maturity Fair Amortized Fair Value Cost Value ------------------ ---------- ---------- Due in one year or less $ 1,008,886 $ -- $ -- Due from one to five years 2,334,254 1,160,917 1,188,789 Due in more than five years 2,226,916 5,462,138 5,506,814 Mortgage-backed 7,829,193 -- -- ----------- ---------- ---------- $13,399,249 $6,623,055 $6,695,603 =========== ========== ==========
-6- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LOANS The components of the outstanding loan balances:
March 31, 2008 December 31, 2007 Balance Balance -------------- ----------------- Commercial $ 88,222,697 $ 86,633,120 Real Estate: Commercial 85,571,193 92,048,614 Residential 16,434,727 15,842,205 Construction 4,759,831 6,264,591 Consumer 27,773,583 29,520,823 ------------ ------------ 222,762,031 230,309,353 Less: allowance for loan losses (3,524,600) (3,602,948) Net deferred loan fees (110,963) (89,933) ------------ ------------ $219,126,468 $226,616,472 ============ ============
Loans held for sale totaled $2,144,713 at March 31, 2008 and $2,285,966 at December 31, 2007. 4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS The following is a summary of activity in the allowance for loan losses for the three month periods ended March 31, 2008 and 2007:
Three Months Three Months Ended Ended 03/31/08 03/31/07 ------------ ------------ Beginning Balance $3,602,948 $2,549,016 Charge-offs Commercial (178,538) (18,827) Real Estate-Commercial (50,000) (25,463) Real Estate-Residential (10,276) 0 Consumer (83,735) (56,730) ---------- ---------- Total Charge-offs (322,549) (101,020) Recoveries Commercial 1,576 2,065 Consumer 11,909 11,183 ---------- ---------- Total Recoveries 13,485 13,248 Provision for loan losses 230,716 127,231 ---------- ---------- Ending Balance $3,524,600 $2,588,475 ========== ==========
-7- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) Impaired loans were as follows:
March 31, December 31, 2008 2007 ----------- ----------- End of period loans with no allocated allowance for loan losses $ 7,918,263 $ 160,264 End of period loans with allocated allowance for loan losses 4,160,211 7,822,922 ----------- ---------- Total $12,078,474 $7,983,186 =========== ========== Amount of the allowance for loan losses allocated $ 1,313,529 $1,136,162
Three Months Three Months Ended Ended 03/31/08 03/31/07 ------------ ------------ Average of impaired loans during the quarter $11,546,904 $1,917,635 Interest income recognized during impairment 193,486 13,006 Cash-basis interest income recognized 45,756 2,380
Non-performing loans were as follows:
March 31, December 31, 2008 2007 ---------- ------------ Loans past due over 90 days still on accrual $ 649,882 $1,484,451 Non-accrual loans 2,975,359 4,532,120
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. 5. PREMISES AND EQUIPMENT Period end premises and equipment were as follows:
March 31, December 31, 2008 2007 ----------- ----------- Land & land improvements $ 5,448,129 $ 5,448,129 Buildings & building improvements 5,948,681 5,948,681 Furniture, fixtures and equipment 3,517,516 3,517,516 Construction in Process 22,290 17,070 ----------- ----------- 14,936,616 14,931,396 Less: accumulated depreciation 2,618,707 2,442,803 ----------- ----------- $12,317,909 $12,488,593 =========== ===========
-8- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. DEPOSITS The components of the outstanding deposit balances at March 31, 2008 and December 31, 2007 were as follows:
March 31, 2008 December 31, 2007 Balance Balance -------------- ----------------- Non-interest bearing Demand $ 17,669,347 $ 16,708,504 Interest bearing Checking 21,837,593 17,598,115 Money Market 26,369,836 19,805,438 Savings 12,609,686 13,275,060 Time, under $100,000 46,536,203 46,844,405 Time, over $100,000 117,744,610 123,718,923 ------------ ------------ Total Deposits $242,767,275 $237,950,445 ============ ============
7. SHORT-TERM BORROWINGS The Company's short-term borrowings typically consist of repurchase agreements and federal funds purchased. The March 31, 2008 and December 31, 2007 information was as follows:
Repurchase Federal Funds Agreements Purchased ---------- ------------- Outstanding at March 31, 2008 $4,649,338 $ 0 Average interest rate at period end 1.35% 0.00% Average balance during period 4,363,118 879 Average interest rate during period 2.02% 3.24% Maximum month end balance during period 4,870,853 0 Outstanding at December 31, 2007 $4,400,611 $ 0 Average interest rate at year end 2.94% 0.00% Average balance during year 5,141,931 3,787,671 Average interest rate during year 3.29% 5.29% Maximum month end balance during year 5,695,329 8,500,000
-9- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. FEDERAL HOME LOAN BANK BORROWINGS The Bank is 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 an additional $1,049,320. Each borrowing requires a direct pledge of securities or loans. At March 31, 2008, the Bank had assets with a market value of $10,117,331 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 2008 2007 ------------- ------------- ---------- ------------ March 24, 2010 5.99 $1,500,000 $1,500,000 November 3, 2010 5.95 2,000,000 2,000,000 December 13, 2010 5.10 2,500,000 2,500,000 ---------- ---------- $6,000,000 $6,000,000
9. SUBORDINATED DEBENTURES 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 and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and was 4.74625% at March 31, 2008. The stated maturity is December 30, 2034. The securities are redeemable at par after five years and are, in effect, guaranteed by the Company. Interest on the subordinated debentures are payable quarterly on March 30th, June 30th, September 30th and December 30th. Under certain circumstances, interest payments may be deferred up to 20 calendar quarters. However, during any such deferrals, interest accrues on any unpaid distributions. The subordinated debentures are carried on the Company's consolidated balance sheet as a liability and the interest expense is recorded on the Company's consolidated statement of income. 10. NOTES PAYABLE The Company has a $5 million revolving line of credit with Fifth Third Bank ("Fifth Third"). The total balance outstanding at March 31, 2008 was $4,200,000 and $4,206,043 at December 31, 2007. The principal balance was paid down $6,043 on February 1, 2008. The outstanding principal bears interest at a rate of 100 basis points below Fifth Third's prime rate, which is currently 5.00%. 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 fee. The note has a maturity date of September 1, 2008. The terms of the note may change at the time of renegotiation but it is management's intention to retain an active line of credit. -10- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. COMMITMENTS AND OFF-BALANCE SHEET RISK Some financial arrangements, 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. Lines and letters of credit have various terms which are generally longer than one year. A summary of the notional and contractual amounts of outstanding financing arrangements with off-balance-sheet risk as of March 31, 2008 and December 31, 2007 follows:
March 31, December 31, 2008 2007 ----------- ------------ Unused lines of credit and letters of credit $34,266,659 $37,760,820 Commitments to make loans 627,646 545,594
Since many of the above commitments on lines of credit and letters of credit expire without being used, the above amounts related to those categories do not necessarily represent future cash commitments. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. 12. FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material. -11- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued) Statement 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate fair value. Securities: The fair values of securities are obtained from a third party who utilizes quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities. Servicing rights: The fair value of SBA servicing rights is obtained from a third party. The individual servicing rights are valued individually taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. Their valuation methodology utilized for the servicing rights begins with generating future cash flows for each servicing asset, based on its unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing the vendors market-based discount rate assumptions. -12- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued) Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at March 31, 2008 Using ------------------------------------------------- Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs March 31, 2008 (Level 1) (Level 2) (Level 3) -------------- ------------------ ------------- ------------ Assets: Available for sale securities $13,399,249 $0 $13,399,249 $0
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at March 31, 2008 Using ------------------------------------------------- Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs March 31, 2008 (Level 1) (Level 2) (Level 3) -------------- ------------------ ------------- ------------ Assets: Servicing assets $ 47,757 $0 47,757 0 Impaired loans 4,160,211 0 0 4,160,211
The following represents impairment charges recognized during the period: Impaired loans, which are collateral dependent loans, had a carrying amount of $4,160,211, with valuation allowance of $1,313,529, resulting in an additional provision for loan losses of $177,367 for the period. 13. REGULATORY MATTERS Banks are subject to regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. 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 a bank is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, a bank may not make a capital distribution if, after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the -13- COMMUNITY SHORES BANK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. REGULATORY MATTERS (Continued) bank at the discretion of the federal regulator. The Bank was designated as well-capitalized under the regulatory framework for prompt corrective action at both March 31, 2008 and December 31, 2007. Actual and required capital amounts and ratios at March 31, 2008 and December 31, 2007 for the 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. 2008 Total Capital (Tier 1 and Tier 2) to risk weighted assets of the Bank $25,848,302 10.67% $19,378,315 8.00% $24,222,894 10.00 Tier 1 (Core) Capital to risk-weighted assets of the Bank 22,814,308 9.42 9,689,158 4.00 14,533,737 6.00 Tier 1 (Core) Capital to average assets of the Bank 22,814,308 8.20 11,124,636 4.00 13,905,796 5.00 December 31. 2007 Total Capital (Tier 1 and Tier 2) to risk weighted assets of the Bank $25,769,355 10.29% $20,031,475 8.00% $25,039,344 10.00 Tier 1 (Core) Capital to risk-weighted assets of the Bank 22,633,618 9.04 10,015,672 4.00 15,023,508 6.00 Tier 1 (Core) Capital to average assets of the Bank 22,633,618 8.44 10,725,198 4.00 13,406,497 5.00
-14- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2008 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, 2008 to that at December 31, 2007. The part labeled Results of Operations discusses the three month period ended March 31, 2008 as compared to the same period of 2007. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of this Form 10-Q. This discussion and analysis and other sections of this 10-Q 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 local real estate values; 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 $5.3 million to $278.8 million at March 31, 2008 from $273.5 million at December 31, 2007. This is a 1.9% increase in assets during the first three months of 2008. Asset growth was funded by deposit growth and consisted mainly of increases in federal funds sold offset by a net decrease in the Bank's loan portfolio. -15- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash and cash equivalents increased by $11.9 million to $19.7 million at March 31, 2008 from $7.9 million at December 31, 2007. This change was mostly reflective of increases in federal funds sold between the above two periods. Total loans (held for investment) decreased $7.5 million and were $222.7 million at March 31, 2008 down from $230.2 million at December 31, 2007. The decrease is evidenced by a decline of $9.8 million in the commercial real estate, construction and consumer loan portfolios partially offset by a $2.2 million growth in the commercial and industrial and residential real estate portfolios. During the quarter one home equity customer made a substantial pay down of $1.5 million. Two commercial real estate notes totaling $4.4 million were refinanced with another financial institution and resulted in $54,000 in collected loan prepayment fees. The Bank's underwriting standards include pricing for risk and profitability which does not always result in the lowest market rate. Although the loss of loans is unfortunate, management feels that adhering to high underwriting standards will be the most prudent tactic, particularly in this economic environment. Other lending activity during the first quarter of 2008 included the origination of $9.1 million of residential mortgage and Small Business Administration ("SBA") loans and the sale of $9.4 million of residential mortgage and SBA loans. The associated gain on the loan sales was $145,000. These results compare favorably to originations of $3.0 million, sales of $3.2 million and gains of $134,000 occurring in 2007's first quarter. A majority of the lending activity in 2008 is the result of the successes of the Bank's mortgage origination team that was hired in the second quarter of 2007. Presently, the commercial and commercial real estate categories of loans comprise 78% of the Bank's total loan portfolio, the same as year-end 2007. There are six experienced commercial lenders on staff devoted to pursuing and originating these types of loans. The Bank's strategic plan included tactics aimed at diversifying its loan portfolio and in the spring of 2007, five mortgage originators were hired to help increase the retail presence of the Bank's defined market area utilizing the enhanced branch network. Since March 2007, portfolio retail loans have increased by over $6 million with total originations exceeding $33 million. A majority of the loans originated are residential mortgages and are sold in the secondary market. So although the first quarter resulted in a net decline in total loans, management remains optimistic about its portfolio diversification tactics and about future retail opportunities in the market place. The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. In addition to product diversification, two other methods used are 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, 2008 are set forth below: - ---------- (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 its 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 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Within Three to One to After Three Twelve Five Five Months Months Years Years Total ----------- ----------- ------------ ----------- ------------ Commercial, financial and other $16,206,122 $36,870,774 $ 32,106,266 $ 3,039,535 $ 88,222,697 Real estate: Commercial 9,336,358 13,253,243 58,771,600 4,099,029 85,460,230 Construction 2,705,183 537,541 17,113 1,499,994 4,759,831 Residential 111,936 379,861 2,362,609 13,580,321 16,434,727 Consumer 1,148,646 4,860,614 18,830,438 2,933,885 27,773,583 ----------- ----------- ------------ ----------- ------------ $29,508,245 $55,902,033 $112,088,026 $25,152,764 $222,651,068 =========== =========== ============ =========== ============ Loans at fixed rates $ 7,456,010 $ 8,755,410 $ 96,744,497 $21,785,675 $134,741,592 Loans at variable rates 22,052,235 47,146,623 15,343,529 3,367,089 87,909,476 ----------- ----------- ------------ ----------- ------------ $29,508,245 $55,902,033 $112,088,026 $25,152,764 $222,651,068 =========== =========== ============ =========== ============
At March 31, 2008, there were 61% of the loan balances carrying a fixed rate and 39% a floating rate and only 11% of the entire portfolio had a contractual maturity longer than five years. During 2007 there was an increase in the concentration of fixed rate loans. Some of the shift is a factor of the types of loans added to the portfolio and some is customer preference. Having a larger concentration of fixed rate loans is helpful in this declining rate environment but both types of loans are useful to protect interest income during periods of interest rate fluctuations. The maturity distribution of the loan portfolio has lengthened with the new focus on the mortgage business line however the focus is on sale into the secondary market. Management only expects to retain 10-15% of residential mortgages originated because of the longer contractual terms involved in mortgage products. In spite of the Bank's risk management program there is still the need to maintain an allowance for loan losses. The loan portfolio is reviewed and analyzed on a regular basis for the purpose of estimating probable incurred credit losses. The analysis of the allowance for loan losses is comprised of two portions: general credit allocations and specific credit allocations. General credit allocations are made to various categories of loans based on loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The specific credit allocation includes a detailed review of a credit resulting in an allocation being made to the allowance. The allowance for loan losses is adjusted accordingly to maintain an adequate level based on the conclusion of the analysis. During the first quarter of 2008, $231,000 was added to the allowance through the provision expense. At March 31, 2008, the allowance totaled $3.5 million or approximately 1.58% of gross loans outstanding. -17- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The allocation of the allowance at March 31, 2008 was as follows:
March 31, 2008 December 31, 2007 -------------------------- -------------------------- Percent of Percent of Allowance Allowance Related to Related to Balance at End of Period Applicable to: Amount Loan category Amount Loan category ---------- ------------- ---------- ------------- Commercial $1,733,744 49.2% $1,687,805 46.9% Real estate: Commercial 1,256,386 35.7 1,331,132 36.9 Residential 128,191 3.6 129,906 3.6 Construction 68,066 1.9 89,672 2.5 Consumer 338,213 9.6 364,433 10.1 ---------- ----- ---------- ----- Total $3,524,600 100.0% $3,602,948 100.0% ========== ===== ========== =====
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, 2008 compared to those at year-end 2007 and the corresponding change related to those two periods.
March 31, December 31, Increase Loans Past Due: 2008 2007 (Decrease) - --------------- ---------- ------------ ---------- 30-59 days $4,589,314 $2,155,411 $2,433,903 60-89 days 899,934 825,107 74,827 90 days and greater 649,882 1,484,451 (834,569) Non accrual loans 2,975,359 4,532,120 (1,556,761)
Since year-end 2007, overall past due and non-accrual loans have increased by $117,000. A majority of the activity is related to an increase in loans 30-59 days past due being partially offset by reductions in loans past due 90 days and greater and non accrual loans. Two loans past due 30-59 days make up 82% of the increase since year-end 2007. One of these loans fell off the past due list when a payment was made on April 1 bringing it current. In the other case, the customer was out of town unexpectedly and missed the closing date for the note renewal. The note was renewed the first week of April and is no longer on the past due list. Another portion of the increase was a commercial loan for $1.1 million which moved from 90 days past due at year end as a result of the borrower making a large payment during the first quarter of 2008 and reducing his number of days past due to 30-59.. Ninety days past due and greater and non-accrual loans decreased $2.4 million since December 31, 2007. Six loans charged off in the first quarter of 2008 comprise over 70% of the decrease. Most of the notes were collateralized by real estate. One loan was collateralized by a high end boat. The collateral from the remaining notes is currently being carried in other assets at market value less costs to sell. -18- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Including the charge off activity above, net charge-offs for the first three months of 2008 were $309,000 which was an increase of $221,000 over net charge-offs of $88,000 recorded for the similar period in 2007. The corresponding ratio of net charge-offs to average loans was 0.54% for the first quarter of 2008 compared to a level of 0.17% for the first quarter of 2007. Given the rise in non performing assets over the past year, it is likely that charge off ratios may remain elevated for a period of time. Even though the allowance balance has decreased, the overall coverage remains consistent from December 31, 2007 to March 31, 2008 due to the decrease in loan balances. Other assets rose $1.1 million since December 31, 2007. As explained above when the collateral supporting a borrowing is relinquished by customers through the collection process; the assets are written down to market value based on a professional appraisal or other common means of valuation and held until they can be sold. The most valuable items being held at March 31, 2008 were six properties and one high end boat. If any relinquished asset is sold for less than it is being held or experiences a decline in market value during the holding period, further losses could result. Deposit balances were $242.7 million at March 31, 2008 up from $237.9 million at December 31, 2007. Total deposit growth since year-end was $4.8 million or 2%. The net change in deposits is not as significant as some of the recorded changes in various individual categories. Non interest bearing deposits grew $961,000 since year-end 2007. Interest bearing checking accounts and money market accounts grew $10.8 million. Growth is due to several of the Bank's large public fund customers increasing their holdings since year-end. Savings and time deposits declined $6.9 million since December 31, 2007. Local time deposits made up $2.7 million of the total and $3.7 million (53%) was brokered deposit maturities. The concentration of brokered deposits to total deposits was reduced to 37% at March 31, 2008 from 39% at December 31, 2007. The Bank strives to continue decreasing its dependency on brokered funds and begin to rely more on local deposits gathered as a result of its enhanced branch network. The shareholders' equity totaled $15.8 million and $15.6 million at March 31, 2008 and December 31, 2007 respectively. The earnings recorded in the quarter were complemented by positive changes in accumulated other comprehensive income (security market value adjustments). RESULTS OF OPERATIONS The net income for the first quarter of 2008 was $32,000, a decline of $197,000 compared to the earnings of $229,000 recorded for the same period in 2007. The corresponding diluted earnings per share were $0.02 for 2008 and $0.15 for 2007. For the first three months of 2008, the annualized return on the Company's average total assets was 0.05%, which is down from 0.37% for the first three months of 2007. The Company's annualized return on average equity was 0.82% for the first quarter of 2008 and 5.64% for the first quarter of 2007. The ratio of average equity to average assets was 5.59% for the quarter ended March 31 2008 and 6.56% at the same period end in 2007. -19- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS One important difference between the operating results of first quarter 2007 and 2008 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: ------------------------------------------------------------------------------- 2008 2007 -------------------------------------- -------------------------------------- Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------------ ---------- ---------- ------------ ---------- ---------- Assets Federal funds sold and interest- bearing deposits with banks $ 11,172,789 $ 84,377 3.02% $ 5,458,212 $ 70,669 5.18% Securities (including FHLB stock)(1) 20,318,598 252,297 4.97 19,036,351 230,751 4.85 Loans (2) 230,778,019 4,145,502 7.19 207,449,258 4,057,022 7.82 ------------ ---------- ------ ------------ ---------- ------ 262,269,406 4,482,176 6.84 231,943,821 4,358,442 7.52 Other assets 16,807,085 15,695,469 ------------ ------------ $279,076,491 $247,639,290 ============ ============ Liabilities and Shareholders' Equity Interest bearing deposits $226,767,840 $2,352,255 4.15 $196,448,803 $2,111,491 4.30 Federal funds purchased and repurchase agreements 4,370,041 22,102 2.02 5,700,707 50,999 3.58 Note Payable, subordinated deben- tures and FHLB Advances 14,702,059 220,569 6.00 10,900,000 178,407 6.55 ------------ ---------- ------ ------------ ---------- ------ 245,839,940 2,594,926 4.22 213,049,510 2,340,897 4.40 Non-interest bearing deposits 17,056,601 ---------- 17,358,213 ---------- Other liabilities 582,747 980,960 Shareholders' Equity 15,597,203 16,250,607 ------------ ------------ $279,076,491 $247,639,290 ============ ============ Net interest income (tax equivalent basis) 1,887,250 2,017,545 Net interest spread on earning assets (tax equivalent basis) 2.62% 3.12% ====== ====== Net interest margin on earning assets (tax equivalent basis) 2.88% 3.48% ====== ====== Average interest-earning assets to average interest-bearing liabilities 106.68% 108.87% ====== ====== Tax equivalent adjustment 36,803 29,278 ---------- ---------- Net interest income $1,850,447 $1,988,267 ========== ==========
The net interest spread on average earning assets decreased 51 basis points to 2.62% since March 31, 2007. The net interest margin decreased by 60 basis points from 3.48% at March 31, 2007 to 2.88% at March 31, 2008. First quarter 2008's net interest income was $1.9 million compared to a figure of $2.0 million for the same three months in 2007. Although the Company reported slightly less total net interest income there was significant net interest margin compression between the two periods. Relative decreases to rates on interest earning assets were not offset by decreases on the liability side of the balance sheet. Decreases to the prime - ---------- (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 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS lending rate of 200 basis points in three months occurred too quickly to be fully absorbed by the rate decreases made on the liability side of the balance sheet. The average rate earned on interest earning assets was 6.84% for the three months ended March 31, 2008 compared to 7.52% for the same period in 2007, a 68 basis point decrease. The main contributing factor was a 63 basis point decrease in the yield on loans, the Bank's largest earning asset category. There was a 201 basis point difference in the average internal prime lending rate between the two periods. Interest expense incurred on deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank advances, notes payable and subordinated debentures decreased by 18 basis points for the first three months of 2008 compared to the first three months of 2007. A majority of the Bank's deposits have structured maturities which makes it harder to affect the same level of deposits by the same magnitude when the prime lending rate declines rapidly. As shown in the table below, over the next twelve months $93.6 million of time deposits will mature and reprice to current market rates. The average rate on these deposits is over 100 basis points higher than current market rates. Management's intent is to improve the Bank's mix of deposits. To assist with this strategy there are two new products being introduced in the second quarter of 2008. The first new product is a health savings account and the second is a premium money market account. By increasing interest bearing checking and savings account balances there will be less of a concentration in term deposits which may help to more easily manage the net interest spread during periods of interest rate fluctuations. As the Bank strives to change its deposit mix and future changes in the Bank's prime lending rate remain uncertain, asset liability management remains 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 Federal Home Loan Bank 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 an ambiguous and somewhat irrational rate environment. -21- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Details of the repricing gap at March 31, 2008 were:
Interest Rate Sensitivity Period ----------------------------------------------------------------------- Within Three to One to After Three Twelve Five Five Months Months Years Years Total ------------ ------------ ------------ ----------- ------------ Earning assets Interest-bearing deposits In other financial institutions $ 89,297 $ 0 $ 0 $ 0 $ 89,297 Federal funds sold 15,800,000 0 0 0 15,800,000 Securities (including FHLB stock) 1,563,793 2,356,899 10,005,732 6,499,980 20,426,404 Loan held for sale 2,144,713 0 0 0 2,144,713 Loans 94,180,501 16,235,808 95,099,194 17,135,565 222,651,068 ------------ ------------ ------------ ----------- ------------ 113,778,304 18,592,707 105,104,926 23,635,545 261,111,482 Interest-bearing liabilities Savings and checking 60,817,115 0 0 0 60,817,115 Time deposits <$100,000 9,823,320 28,098,671 8,619,871 0 46,541,862 Time deposits >$100,000 19,691,351 35,939,358 62,108,242 0 117,738,951 Repurchase agreements and Federal funds purchased 4,649,338 0 0 0 4,649,338 Notes payable, subordinated deben- tures and FHLB advances 14,700,000 0 0 0 14,700,000 ------------ ------------ ------------ ----------- ------------ 109,681,124 64,038,029 70,728,113 0 244,447,266 Net asset (liability) repricing gap $ 4,097,180 $(45,445,322) $ 34,376,813 $23,635,545 $ 16,664,216 ============ ============ ============ =========== ============ Cumulative net asset (liability) Repricing gap $ 4,097,180 $(41,348,142) $ (6,971,329) $16,664,216 ============ ============ ============ ===========
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 decreases 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 down by 25 basis points and every interest earning asset and interest bearing liability on the Company's March 31, 2008 balance sheet repricing in the next twelve months adjusted simultaneously by the same 25 basis points, more liabilities would be affected than assets. The interest rate sensitivity table simply illustrates what the Company is contractually able to change in certain time frames. Since the third quarter of 2007 through May of 2008, the prime lending rate has decreased three hundred basis points. Given the lower inherent rate of liabilities to begin with it is unlikely that funding rates would be reduced by the same level. As a result the net interest margin is compressed in the short term. The provision for loan losses for the first three months of 2008 was $231,000 compared to a figure of $127,000 for the same period in 2007. The expense in the first three months of 2008 was impacted by charge offs and downgrades on commercial and commercial real estate loans. 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. -22- COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Non-interest income recorded in the first quarter of 2008 totaled $643,000. Included in the total was a gain of $143,000 on the sale of foreclosed property. Excluding this one time gain, non interest income was $500,000 and represented a 10% increase over last year's first quarter. Increased service charges on deposits and additional gains on loan sales were experienced in the first quarter of 2008. Non-interest expenses for the first three months of 2008 increased 10% over the same three-month period in 2007. Non interest expense for 2008 was $2.2 million compared to a total of $2.0 million for 2007. The most notable expense changes were in personnel and occupancy and equipment. Increased personnel expenses represented 43% of the rise in non-interest expenses. The expenses totaled $1.2 million in the first quarter of 2008 compared to $1.1 million in the first quarter of 2007. During the latter part of the first quarter of 2008, the Bank reduced its full-time equivalent staff members by six, but for a portion of the first quarter there were more employees than there were during the first quarter of 2007. Occupancy and equipment expenses increased $57,000 between 2007's first quarter and that of 2008. Occupancy and equipment expenses together totaled $347,000 for the first three months of 2008 compared to $290,000 for the similar period in 2007. Depreciation for the Grand Haven branch was included in 2008's first quarter total but was somewhat offset by the elimination of rental expense. The Grand Haven branch occupied a rented space until its branch was completed in August 2007. The Company's property tax expenses have increased because of the reassessment of the land values after the completion of construction on the Norton Shores and North Muskegon branch facilities. Snowplowing expenses were also higher in 2008 because of the record snowfall in February. Other non interest expenses in the first quarter of 2008 increased by $52,000 over the similar period in 2007. The largest item contributing to the increase is a $31,000 increase in loan collection expenses. With the rise in troubled assets, it is likely that expenses in this category may increase. There was a federal tax benefit recorded for the first three months of 2008. The benefit was derived from the Company's net loss recorded in 2007. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for smaller reporting companies. ITEM 4. 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, 2008. 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, 2008. There have been no significant changes in the internal controls over financial reporting during the quarter ended March 31, 2008, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. -23- COMMUNITY SHORES BANK CORPORATION 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 1A. RISK FACTORS Not applicable for smaller reporting companies. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. 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(ii) of the Company's Form 8-K filed July 5, 2006 (SEC file number 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 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on May 15, 2008. COMMUNITY SHORES BANK CORPORATION May 15, 2008 By: /s/ Heather D. Brolick Date ------------------------------------ Heather D. Brolick President and Chief Executive Officer (principal executive officer) May 15, 2008 By: /s/ Tracey A. Welsh Date ------------------------------------ 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(ii) of the Company's Form 8-K filed July 5, 2006 (SEC file number 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.
-26- EX-31.1 2 k26782exv31w1.txt CERTIFICATION Exhibit 31.1 RULE 13A-14(A) CERTIFICATION I, Heather D. Brolick, President and Chief Executive Officer of Community Shores Bank Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Community Shores Bank Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors -27- and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2008 /s/ Heather D. Brolick ---------------------------------------- Heather D. Brolick President and Chief Executive Officer -28- EX-31.2 3 k26782exv31w2.txt CERTIFICATION Exhibit 31.2 RULE 13A-14(A) CERTIFICATION I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of Community Shores Bank Corporation, certify that: 1. I have reviewed this report on Form 10-Q of Community Shores Bank Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and -29- 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2008 /s/ Tracey A. Welsh ---------------------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer -30- EX-32.1 4 k26782exv32w1.txt SECTION 1350 CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended March 31, 2008 (the "Form 10-Q") of Community Shores Bank Corporation (the "Issuer"). I, Heather D. Brolick, President and Chief Executive Officer of the Issuer, certify that to my knowledge: (i) the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 15, 2008 /s/ Heather D. Brolick ---------------------------------------- Heather D. Brolick President and Chief Executive Officer -31- EX-32.2 5 k26782exv32w2.txt SECTION 1350 CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, and accompanies the quarterly report on Form 10-Q for the quarter ended March 31, 2008 (the "Form 10-Q") of Community Shores Bank Corporation (the "Issuer"). I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of the Issuer, certify that to my knowledge: (i) the Form 10-Q fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: May 15, 2008 /s/ Tracey A. Welsh ---------------------------------------- Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer -32- -----END PRIVACY-ENHANCED MESSAGE-----