U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 333-63769
COMMUNITY SHORES BANK CORPORATION
(Exact name of small business issuer as specified in its charter)
Michigan 38-3423227
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1030 W. NORTON AVENUE, MUSKEGON, MICHIGAN 49441
(Address of principal executive offices)
(231) 780-1800
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No___
At October 31, 2003, 1,430,000 shares of Common Stock of the issuer were
outstanding.
Transitional Small Business Disclosure Format:
Yes ___ No X
Community Shores Bank Corporation Index
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements..................................... 1
Item 2. Management's Discussion and Analysis ..................... 12
Item 3. Controls and Procedures................................... 21
PART II. Other Information
Item 1. Legal Proceedings......................................... 21
Item 2. Changes in Securities .................................... 22
Item 3. Defaults upon Senior Securities........................... 22
Item 4. Submission of Matters to a Vote of Security Holders....... 22
Item 5. Other Information......................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................... 22
Signatures......................................................... 23
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 6,255,882 $ 2,722,565
Interest-bearing deposits in other financial institutions 1,568,412 59,429
Federal funds sold 0 0
------------- -------------
Cash and cash equivalents 7,824,294 2,781,994
Securities
Available for sale (at fair value) 25,139,269 26,043,017
Held to maturity (fair value of $296,947 at September 30, 2003 and
$255,178 at December 31, 2002) 294,297 252,567
------------- -------------
Total securities 25,433,566 26,295,584
Loans held for sale 622,800 579,400
Loans 146,168,979 141,453,620
Less: Allowance for loan losses 1,931,635 1,898,983
------------- -------------
Net loans 144,237,344 139,554,637
Federal Home Loan Bank stock 425,000 425,000
Premises and equipment, net 2,657,203 2,910,237
Accrued interest receivable 623,579 661,136
Other assets 1,361,512 257,956
------------- -------------
Total assets $ 183,185,298 $ 173,465,944
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 13,062,690 $ 10,368,525
Interest bearing 128,734,704 122,356,854
------------- -------------
Total deposits 141,797,394 132,725,379
Federal funds purchased and repurchase agreements 17,705,364 19,466,513
Federal Home Loan Bank advances 8,000,000 6,000,000
Notes payable 2,550,000 3,600,000
Accrued expenses and other liabilities 724,179 608,179
------------- -------------
Total liabilities 170,776,937 162,400,071
Shareholders' equity
Preferred stock, no par value 1,000,000
Shares authorized, none issued 0 0
Common stock, no par value; 9,000,000 shares authorized;
2003-1,430,000 shares issued and 2002-1,330,000 shares issued 12,922,314 12,123,585
Accumulated deficit (536,694) (1,367,911)
Accumulated other comprehensive income 22,741 310,199
------------- -------------
Total shareholders' equity 12,408,361 11,065,873
------------- -------------
Total liabilities and shareholders' equity $ 183,185,298 $ 173,465,944
============= =============
See accompanying notes to consolidated financial statements.
- 1 -
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Interest and dividend income
Loans, including fees $ 2,283,122 $ 2,348,426 $ 6,893,526 $ 6,771,187
Securities and FHLB dividends 201,639 285,012 674,942 946,231
Federal funds sold and other income 780 19,356 19,706 103,080
----------- ----------- ----------- -----------
Total interest income 2,485,541 2,652,794 7,588,174 7,820,498
Interest expense
Deposits 803,792 1,028,614 2,591,671 3,149,254
Repurchase agreements, federal funds purchased,
and other debt 46,990 73,180 181,092 230,210
Federal Home Loan Bank advances and notes payable 129,707 143,456 392,134 423,916
----------- ----------- ----------- -----------
Total interest expense 980,489 1,245,250 3,164,897 3,803,380
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,505,052 1,407,544 4,423,277 4,017,118
Provision for loan losses 94,347 154,400 456,337 442,140
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,410,705 1,253,144 3,966,940 3,574,978
Noninterest income
Service charges on deposit accounts 143,334 138,308 418,852 365,661
Mortgage loan referral fees 13,432 5,603 25,818 74,519
Gain on sale of loans 41,410 45,825 158,088 60,108
Gain on disposition of securities 0 0 62,681 0
Other 48,095 44,967 162,864 135,578
----------- ----------- ----------- -----------
Total noninterest income 246,271 234,703 828,303 635,866
Noninterest expense
Salaries and employee benefits 767,888 713,852 2,289,675 1,990,638
Occupancy 71,117 71,268 221,570 212,569
Furniture and equipment 111,867 113,167 339,399 336,165
Advertising 14,768 23,470 55,037 60,348
Data processing 74,228 63,673 221,872 181,359
Professional services 79,106 46,120 224,909 195,425
Other 261,180 220,585 772,529 662,257
----------- ----------- ----------- -----------
Total noninterest expense 1,380,154 1,252,135 4,124,991 3,638,761
----------- ----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAXES 276,822 235,712 670,252 572,083
Federal income tax expense/(benefit) 93,751 0 (160,965) 0
----------- ----------- ----------- -----------
NET INCOME $ 183,071 $ 235,712 $ 831,217 $ 572,083
=========== =========== =========== ===========
Comprehensive Income $ 2,423 $ 293,261 $ 543,759 $ 479,765
=========== =========== =========== ===========
Weighted average shares outstanding 1,430,000 1,269,402 1,403,626 1,215,861
=========== =========== =========== ===========
Diluted average shares outstanding 1,431,804 1,269,402 1,403,626 1,215,861
=========== =========== =========== ===========
Basic earnings per share $ 0.13 $ 0.19 $ 0.59 $ 0.47
=========== =========== =========== ===========
Diluted earnings per share $ 0.13 $ 0.19 $ 0.59 $ 0.47
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
- 2 -
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Other Total
Common Accumulated Comprehensive Shareholders'
Shares Stock Deficit Income (Loss) Equity
------ ----- ------- ------------- ------
BALANCE AT JANUARY 1, 2002 1,170,000 $ 10,871,211 $(2,190,931) $453,808 $ 9,134,088
Proceeds from sale of stock,
net of offering costs 103,750 804,381 804,381
Comprehensive income:
Net Income 572,083 572,083
Unrealized loss on securities
available-for-sale, net (92,318) (92,318)
-----------
Total comprehensive income 479,765
--------- ------------ ----------- -------- -----------
BALANCE, SEPTEMBER 30, 2002 1,273,750 $ 11,675,592 $(1,618,848) $361,490 $10,418,234
========= ============ =========== ======== ===========
BALANCE AT JANUARY 1, 2003 1,330,000 $ 12,123,585 $(1,367,911) $310,199 $11,065,873
Proceeds from the sale of stock,
net of offering costs 100,000 798,729 798,729
Comprehensive income:
Net income 831,217 831,217
Unrealized loss on securities
available-for-sale, net (287,458) (287,458)
-----------
Total comprehensive income 543,759
--------- ------------ ----------- -------- -----------
BALANCE AT SEPTEMBER 30, 2003 1,430,000 $ 12,922,314 $ (536,694) $ 22,741 $12,408,361
========= ============ =========== ======== ===========
See accompanying notes to consolidated financial statements.
- 3 -
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 831,217 $ 572,083
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 456,337 442,140
Depreciation and amortization 265,872 291,963
Net (accretion)/amortization of securities 56,399 (51,652)
Net realized gain on disposition of securities (62,681) 0
Net realized gain on sale of loans (158,088) (60,108)
Loan originations (14,681,710) (9,552,780)
Proceeds from loan sales 14,796,398 8,706,888
Net change in:
Accrued interest receivable and other assets (917,915) (31,852)
Accrued interest payable and other liabilities 115,998 65,051
------------ ------------
Net cash from operating activities 701,827 381,733
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Sales 2,271,377 0
Maturities, prepayments and calls 29,401,506 28,062,888
Purchases (31,248,694) (26,681,307)
Activity in held-to-maturity securities
Maturities 8,571 8,571
Purchases 0 (146,041)
Loan originations and payments, net (5,139,044) (16,809,711)
Additions to premises and equipment (12,838) (119,728)
------------ ------------
Net cash used in investing activities (4,719,122) (15,685,328)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits 9,072,015 24,996,006
Net change in federal funds purchased and
repurchase agreements (1,761,149) (125,962)
Federal Home Loan Bank advance activity:
New advances 2,000,000 1,500,000
Maturities and payments 0 (1,500,000)
Draws (paydown) on note payable (1,050,000) 200,000
Net proceeds from stock offering 798,729 804,381
------------ ------------
Net cash from financing activities 9,059,595 25,874,425
------------ ------------
Net change in cash and cash equivalents 5,042,300 10,570,830
Beginning cash and cash equivalents 2,781,994 2,270,921
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 7,824,294 $ 12,841,751
============ ============
Supplemental cash flow information:
Cash paid during the period for Interest $ 3,198,809 $ 3,707,881
Cash paid for federal income tax $ 240,000 $ 0
See accompanying notes to consolidated financial statements.
- 4 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited, consolidated financial statements as of and for the
three months and nine months ended September 30, 2003 include the
condensed consolidated results of operations of Community Shores Bank
Corporation ("Company") and its wholly-owned subsidiaries, Community
Shores Bank ("Bank") and Community Shores Financial Services, and a
wholly-owned subsidiary of the Bank, Community Shores Mortgage Company
("Mortgage Company"). These condensed consolidated financial statements
have been prepared in accordance with the instructions for Form 10-QSB
and Item 310(b) of Regulation S-B and do not include all disclosures
required by generally accepted accounting principles for a complete
presentation of the Company's financial condition and results of
operations. In the opinion of management, the information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary in order to make the financial statements not misleading and
for a fair representation of the results of operations for such
periods. The results for the period ended September 30, 2003 should not
be considered as indicative of results for a full year. For further
information, refer to the condensed consolidated financial statements
and footnotes included in the Company's annual report on Form 10-KSB
for the period ended December 31, 2002. Some items in the prior year
financial statements were reclassified to conform to the current
presentation.
2. STOCK COMPENSATION
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected
in net income, as all options granted had an exercise price equal to or
greater than the market price of the underlying common stock at date of
grant. The following table illustrates what the effect on the net
income and the basic and diluted earnings per share would be if expense
were measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income as reported $ 183,071 $ 235,712 $ 831,217 $ 572,083
Deduct: stock-based compensation expense
determined under fair value based method 52,687 14,708 66,006 14,708
----------- ----------- ----------- -----------
Pro forma net income 130,384 221,004 765,211 557,375
Basic earnings per share as reported $ 0.13 $ 0.19 $ 0.59 $ 0.47
Diluted earnings per share as reported $ 0.13 $ 0.19 $ 0.59 $ 0.47
Pro forma basic earnings per share $ 0.09 $ 0.17 $ 0.55 $ 0.46
Pro forma diluted earnings per share $ 0.09 $ 0.17 $ 0.55 $ 0.46
- 5 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. STOCK COMPENSATION-continued
The pro forma effects are computed using option pricing models, using
the following weighted-average assumptions as of grant date.
Assumptions: 2003 2002
---- ----
Risk-free interest rate 3.61% 3.90%
Expected option life 8 years 7 years
Expected stock price volatility 36% 40%
Dividend yield 0% 0%
Computed fair value $4.88 $3.58
3. SECURITIES
The following tables represent the securities held in the Company's
portfolio at September 30, 2003 and at December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2003 Cost Gains Losses Value
------------------ ---- ----- ------ -----
Available for sale:
US Government and federal agency $ 33,240 $ (67,012) $ 12,974,042
Municipal securities 15,776 0 235,435
Mortgage-backed securities 106,187 (53,733) 11,929,792
------------ ------------ ------------
$ 155,203 $ (120,745) $ 25,139,269
Held to maturity:
Municipal securities $ 294,297 $ 2,665 $ (15) $ 296,947
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2002 Cost Gains Losses Value
Available for sale:
US Government and federal agency $ 190,701 $ (2,490) $ 17,669,155
Municipal securities 13,572 0 233,200
Mortgage-backed securities 268,215 0 8,140,662
------------ ------------ ------------
$ 472,488 $ (2,490) $ 26,043,017
Held to maturity:
Municipal securities $ 252,567 $ 2,611 $ 0 $ 255,178
4. LOANS
Loans increased $4,715,359 since December 31, 2002. The components of
the outstanding balances, their percentage of the total portfolio and
the percentage increase from the end of 2002 to September 30, 2003 were
as follows:
- 6 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. LOANS-continued
Percent
September 30, 2003 December 31, 2002 Increase/
Balance % Balance % (Decrease)
---------------------- --------------------- ----------
Commercial $ 64,038,651 43.8% $ 62,751,937 44.3% 2.0%
Real Estate:
Commercial 48,458,663 33.1 44,681,761 31.6 8.4
Residential 6,388,933 4.4 5,819,289 4.1 9.8
Construction 2,790,976 1.9 1,853,099 1.3 50.6
Consumer 24,609,164 16.8 26,437,827 18.7 (6.9)
---------- ---- ---------- ----
146,286,387 100.0% 141,543,913 100.0
----------- ===== ----------- =====
Less: allowance for loan losses 1,931,635 1,898,983
Net deferred loan fees 117,408 90,293
------- ------
$ 144,237,344 $ 139,554,637
============= =============
5. ALLOWANCE FOR LOAN LOSSES
The following is a summary of activity in the allowance for loan losses
account for the three and nine month periods ended September 30, 2003
and 2002:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
09/30/03 09/30/02 09/30/03 09/30/02
-------- -------- -------- --------
Beginning Balance $ 2,004,119 $ 1,771,825 $ 1,898,983 $ 1,535,543
Charge-offs (178,378) (99,487) (608,864) (177,547)
Recoveries 11,547 6,754 185,179 33,356
Provision for loan losses 94,347 154,400 456,337 442,140
----------- ----------- ----------- -----------
Ending Balance $ 1,931,635 $ 1,833,492 $ 1,931,635 $ 1,833,492
=========== =========== =========== ===========
6. DEPOSITS
Deposit balances increased $9,072,015 since December 31, 2002. The
components of the outstanding balances, their percentage of the total
portfolio and the percentage increase from the end of 2002 through
September 30, 2003 were as follows:
Percent
September 30, 2003 December 31, 2002 Increase/
Balance % Balance % (Decrease)
----------------- ---------------- ----------
Non-interest bearing
Demand $13,062,690 9.2% $ 10,368,525 7.8% 26.0%
Interest bearing
Checking 23,114,399 16.3 21,103,272 15.9 9.5
Money Market 36,088,448 25.4 27,704,511 20.9 30.3
Savings 3,912,495 2.8 3,475,918 2.6 12.6
Time, under $100,000 24,207,622 17.1 36,823,915 27.7 (34.3)
Time, over $100,000 41,411,740 29.2 33,249,238 25.1 24.5
------------- ----- ------------ -----
Total Deposits $ 141,797,394 100.0% $132,725,379 100.0%
============= ===== ============ =====
- 7 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SHORT-TERM BORROWINGS
Both federal funds purchased and repurchase agreements were outstanding
at December 31, 2002. At September 30, 2003, the Company's short-term
borrowings were made up of repurchase agreements only. Since year-end
2002, repurchase agreements decreased $811,149. The September 30, 2003
and December 31, 2002 information was as follows:
Repurchase Federal Funds
Agreements Purchased
Outstanding at September 30, 2003 $17,705,364 $ 0
Average interest rate at period end 1.14% 0.00%
Average balance during period 15,078,693 1,265,217
Average interest rate during period 1.33% 1.52%
Maximum month end balance during period 20,166,404 6,200,000
Outstanding at December 31, 2002 $18,516,513 $ 950,000
Average interest rate at year end 1.45% 1.80%
Average balance during year 15,756,905 767,397
Average interest rate during year 1.88% 1.82%
Maximum month end balance during year 18,988,514 2,000,000
8. FEDERAL HOME LOAN BANK BORROWINGS
The Bank was approved in the first quarter of 1999 to be a member of
the Federal Home Loan Bank of Indianapolis. Based on its current
Federal Home Loan Bank Stock holdings the Bank has the capacity to
borrow $8,500,000. Each borrowing requires a direct pledge of cash,
securities or loans. At September 30, 2003, the Bank has $1,500,000 on
deposit at the Federal Home Loan Bank, in addition to securities with a
market value of $7,534,668 pledged to support current borrowings.
Details of the Bank's outstanding borrowings at both September 30, 2003
and December 31, 2002 are:
Current
Maturity Date Interest Rate 2003 2002
- ------------- ------------- ---- ----
November 3, 2003 1.53 $2,000,000 $ 0
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
---------- ----------
$8,000,000 $6,000,000
- 8 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. NOTES PAYABLE
Since June 28, 2000, the Company has borrowed a total of $3,600,000
from four of its Directors and Community Shores LLC, paying back a
portion in the first quarter of this year. Community Shores LLC (the
"LLC") was formed by 7 of the Company's Directors for the purpose of
obtaining and lending money to the Company. The members of the LLC are
David C. Bliss, Gary F. Bogner, Robert L. Chandonnet, Dennis L.
Cherette, Bruce J. Essex, Michael D. Gluhanich and Jose A. Infante. Two
of the LLC members, Mr. Gluhanich and Mr. Chandonnet, lent money
directly as well as taking part in the LLC. The balance of this debt at
September 30, 2003 was $2,550,000. A summary of the outstanding note
liabilities is given below:
Loan from: Aggregate
Principal
Amount Current Rate Maturity
------ ------------ --------
Robert L. Chandonnet $ 200,000 5.50% June 30, 2009
Michael D. Gluhanich $ 100,000 5.50% June 30, 2009
Donald E. Hegedus $ 500,000 5.50% June 30, 2009
John L. Hilt $ 750,000 5.50% June 30, 2009
Community Shores LLC $1,000,000 5.50% June 30, 2009
----------
Total $2,550,000
==========
The rate on the above notes is floating and is officially defined as
1.50% over the US Bank, N.A. Prime rate. US Bank's current prime rate
is 4.00%. Interest is owed quarterly in arrears on the fifteenth of
April, July, October and January until the principal of these Notes is
paid or made available for payment. The notes may be prepaid without
any prepayment penalty with at least one day's prior written notice.
The principal and interest related to these Notes is expressly
subordinated to any and all senior debt of the Company. The proceeds
from these Notes were used by the Company to cover general operating
expenses and to infuse capital into the Bank to maintain sufficient
capital ratios to comply with banking regulations.
10. INCOME TAXES
There were no federal taxes accrued in the first nine months of 2002
however there was a federal tax benefit of $161,000 for the similar
period in the current year. During the first quarter of 2003,
management concluded that the Company's valuation allowance for
deferred tax assets was no longer needed, resulting in a net federal
tax benefit of $327,000 being recognized. During the Company's first
years of operation, losses were recorded but no tax benefit was
reflected. Since becoming profitable the Company has used this deferred
tax valuation allowance to offset the federal tax liability and expense
that otherwise would have been recorded.
- 9 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMMITMENTS AND OFF-BALANCE SHEET RISK
Some financial instruments are used to meet financing needs and to
reduce exposure to interest rate changes. These financial instruments
include commitments to extend credit and standby letters of credit.
These involve, to varying degrees, credit and interest-rate risk in
excess of the amount reported in the financial statements. Commitments
to extend credit are agreements to lend to a customer as long as there
is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are
conditional commitments to guarantee a customer's performance to
another party. Exposure to credit loss if the customer does not perform
is represented by the contractual amount for commitments to extend
credit and standby letters of credit. Collateral or other security is
normally obtained for these financial instruments prior to their use,
and many of the commitments are expected to expire without being used.
A summary of the notional and contractual amounts of outstanding
financing instruments with off-balance-sheet risk as of September 30,
2003 and December 31, 2002 follows:
September 30, December 31,
2003 2002
---- ----
Unused lines of credit and letters of credit $ 31,750,148 $ 33,779,249
Commitments to make loans 115,006 541,138
Commitments to make loans generally terminate one year or less from the
date of commitment and may require a fee. Since many of the above
commitments on lines of credit and letters of credits expire without
being used, the above amounts related to those categories do not
necessarily represent future cash commitments. No losses are
anticipated as a result of these transactions.
12. REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements
administered by the federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-
balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases.
Failure to meet various capital requirements can initiate regulatory
action that could have a direct material effect on the financial
statements. The prompt corrective action regulations provide five
classifications, including well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulator
approval is required to accept brokered deposits. If undercapitalized,
capital distributions are limited, as is asset growth and expansion,
and plans for capital restoration are required.
- 10 -
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. REGULATORY MATTERS-continued
Capital to risk weighted
assets Tier 1 Capital
Total Tier 1 to average assets
------------ ----------- -----------------------
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
Actual capital levels and minimum required levels at September 30, 2003
for the Company and Bank were:
Minimum Required to
Be Well Capitalized
Minimum Required Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
September 30, 2003
Total Capital (Tier 1
and Tier 2) to risk
weighted assets
Consolidated $ 16,867,255 10.63% $ 12,699,646 8.00% $ 15,874,557 10.00%
Bank 16,684,931 10.51 12,696,336 8.00 15,870,420 10.00
Tier 1 (Core) Capital
weighted assets
Consolidated 12,385,620 7.80 6,349,823 4.00 9,524,734 6.00
Bank 14,753,295 9.30 6,348,168 4.00 9,522,252 6.00
Tier 1 (Core) Capital
average assets
Consolidated 12,385,620 6.71 7,382,753 4.00 9,228,441 5.00
Bank 14,753,295 8.00 7,381,179 4.00 9,226,473 5.00
The Company and the Bank were in the well-capitalized category at
September 30, 2003. The Company is closely monitoring the Bank's growth
and for the foreseeable future expects to infuse additional capital as
necessary to maintain at least a 10% (well capitalized) total capital
to risk weighted assets ratio. Capital contributions may be made to the
Bank from the remaining proceeds received by the Company from the
private sales of Company stock made between May 2002 and March 2003 or
an increase in the LLC note payable. There is an additional $1.0
million available from these resources.
- 11 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The discussion below details the financial results of the Company and its wholly
owned subsidiaries, the Bank and Community Shores Financial Services, and the
Bank's subsidiary, the Mortgage Company through September 30, 2003 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 September 30, 2003 to that at December 31, 2002. The part labeled
Results of Operations discusses the three month and nine month periods ended
September 30, 2003 as compared to the same periods of 2002. Both parts should be
read in conjunction with the interim condensed consolidated financial statements
and footnotes included in Item 1 of this Form 10-QSB.
This discussion and analysis and other sections of this 10-QSB contains
forward-looking statements that are based on management's beliefs, assumptions,
current expectations, estimates and projections about the financial services
industry, the economy, and about the Company, the Bank, the Mortgage Company and
Community Shores Financial Services. Words such as "anticipates", "believes",
"estimates", "expects", "forecasts", "intends", "is likely", "plans",
"projects", variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
intended to be covered by the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. The Company undertakes no obligation to
update, amend, or clarify forward looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; changes in the national and local economy; and other factors, including
risk factors, referred to from time to time in filings made by the Company with
the Securities and Exchange Commission. These are representative of the Future
Factors that could cause a difference between an ultimate actual outcome and a
preceding forward-looking statement.
FINANCIAL CONDITION
Total assets increased to $183.2 million from $173.5 million at December 31,
2002. This is a 6% increase in assets during the first nine months of 2003.
Asset growth was funded by deposit growth and Federal Home Loan Bank advances
and was reflected by an increase in loan volume as well as higher balances held
at other financial institutions. Management continues to focus on small- to
medium-sized business customers, the original strategy since opening in January
1999.
Cash and cash equivalents increased by $5.0 million to $7.8 million at September
30, 2003 from $2.8 million at December 31, 2002. This increase was the result of
an additional $3.5
- 12 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
million being held at other financial institutions. The increase in balances
held in the Bank's correspondent account is mostly reflective of the difference
in the size of the daily deposit made to the lead correspondent on September 30,
2003 compared to that made on December 31, 2002. The daily deposit consists of
checks drawn on other banks that have been deposited by customers and are in the
process of clearing. Typically as the Bank's customer base increases one would
see a natural growth in the daily deposit. Finally, there was an additional $1.5
million held in an interest bearing account at the Federal Home Loan Bank. The
Federal Home Loan Bank is the primary safekeeping agent for the Bank's
investments. The Bank's account balance increased by the proceeds of securities
that matured or were called and had not been reinvested.
Total loans climbed to $146.2 million at September 30, 2003 from $141.5 million
at December 31, 2002. The $4.7 million increase experienced was comprised of
commercial and commercial real estate loan growth being offset by a net decline
in consumer, residential real estate and construction loans. The "wholesale" or
commercial banking focus applied since opening in 1999 continued during the
first nine months of 2003. Presently, the commercial category of loans comprises
77% of the Bank's total loan portfolio. There are five experienced commercial
lenders on staff devoted to pursuing and originating these types of loans. For a
majority of the first nine months of 2003, both the national and local economies
as a whole were relatively weak. During that time, loan volume was soft in spite
of the favorable interest rate environment. Management believes that recent
economic indicators are pointing to marketplace recovery. As a result Management
is optimistic about future opportunities in the Bank's market.
The loan portfolio is reviewed and analyzed on a regular basis for the purpose
of estimating probable incurred credit losses. The allowance for loan losses is
adjusted accordingly to maintain an adequate level based on that analysis. At
September 30, 2003, the allowance totaled $1.9 million or 1.32% of gross loans
outstanding. Management has determined that this is an appropriate level based
on their detailed review of the loan portfolio including comparison of allowance
levels to those maintained by other institutions with similar, but seasoned loan
portfolios. The allocation of the allowance at September 30, 2003 was as
follows:
September 30, 2003 December 31, 2002
------------------ -----------------
Percent of Percent of
Allowance Allowance
Balance at End of Period Applicable to: Related to Related to
Amount Loan category Amount Loan category
------ ------------- ------ -------------
Commercial $ 981,201 50.8% $ 862,436 45.4%
Real estate:
Commercial 561,206 29.0 663,579 34.9
Residential 31,945 1.7 43,645 2.3
Construction 32,096 1.7 24,090 1.3
Consumer 308,679 16.0 305,233 16.1
Unallocated 16,508 0.8 0 0.0
---------- ----- ---------- -----
Total $1,931,635 100.0% $1,898,983 100.0%
========== ===== ========== =====
- 13 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management continues to monitor the allocation and make necessary adjustments to
the provision and the allowance based on portfolio concentration levels, actual
loss experience, past due balances and the financial condition of the borrowers.
As such, an additional $456,000 was added to the allowance in the first nine
months of 2003.
At the end of September 2003, loans 30-59 days past due totaled $479,000 down
from $629,000 at December 31, 2002. This change of $150,000 is the result of an
increase in commercial loan past due balances of $63,000 being offset by a
$213,000 decrease in retail past dues.
There was a total of $740,000 past due 60-89 days and $317,000 past due more
than 89 days at the end of 2002 compared to $166,000 past due 60-89 days and
$476,000 past due more than 89 days after the first nine months of 2003. There
is one commercial loan for $198,000 that is past due more than 89 days and the
Bank is beginning foreclosure. Based on recent appraisals, the property is well
collateralized and the Bank does not anticipate incurring a loss.
At September 30, 2003, the Bank had eight non-accrual loans with an aggregate
principal balance of $650,000. The Bank reported non-accrual loans at the end of
December 2002 totaling $521,000. There were net charge-offs of $144,000 recorded
for the first nine months of 2002 compared to $424,000 for the same period in
2003. Although the Banks non-accrual notes and charge offs have increased since
opening, Management believes it to be related to the natural seasoning of the
portfolio coupled with the weak economic environment of the last eighteen
months.
Other assets increased $1.1 million primarily due to the Company and the Bank
adjusting their deferred tax accounts to recognize the future benefit of
temporary existing differences and eliminate the previously recorded valuation
allowance no longer deemed needed. Another component is other real estate owned
which has increased $300,000.
Deposit balances were $141.8 million at September 30, 2003 up from $132.7
million at December 31, 2002. Non-interest bearing checking increased $2.7
million or 26% since 2002 year-end. The growth in accounts of this type is
partially due to a marketing campaign that is targeted towards small business
customers. Since April there have been eighty-six new small business account
relationships established as a result. The marketing campaign is scheduled to
continue through year-end. Management believes that initiatives of this type, if
successful, will be significant in lowering the Bank's cost of funds and
improving its net interest margin.
Interest bearing accounts increased $6.4 million (5%) in the first nine months
of 2003. Interest bearing checking and money market accounts reflected a $10.4
million increase, which was partially offset by a decrease in time and savings
deposits of $4.0 million. The growth in the money market accounts is a result of
current customers keeping higher balances on deposit on September 30 and of time
deposit customers using maturing certificate monies to open new money market
accounts. In the current rate environment, the money market product offers
liquidity and a rate of return similar to time deposits without a withdrawal
penalty. The migration from time deposits is expected to continue until the
market rates offered on time deposits begin to increase.
- 14 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
A favorable outcome of the increase in local deposits is that management is able
to report a decrease in the concentration of brokered deposits from 30% at
year-end 2002 to 27% at September 30, 2003. Brokered deposits are time deposits
obtained from depositors located outside of the Bank's market area and are
placed with the Bank by a deposit broker. It is a goal of management to actively
work towards reducing brokered deposit concentration levels.
Repurchase agreements and federal funds purchased together decreased $1.8
million since December 31, 2002. No federal funds were purchased on September
30, 2003 compared to $950,000 purchased at year-end 2002. The remaining decline
is attributable to existing repurchase customers decreasing their carrying
balances from those held at year-end.
The Bank had four Federal Home Loan Bank ("FHLB") advances outstanding on
September 30, 2003, totaling $8.0 million compared to three totaling $6.0
million at December 31, 2002. On May 6, 2003, the Bank increased its borrowings
outstanding by $2.0 million. The note evidencing the $2.0 million increase is at
a fixed rate of 1.53% for six months. The advance was used to offset a reduction
in customer repurchase account balances.
As of September 30, 2003, the Company had outstanding borrowings of $2,550,000
from some of its Directors and Community Shores LLC which the Company had used
for the purpose of infusing capital into the Bank and to provide cash for the
operating expenses of the Company. All of this debt is subordinated to all
senior debt of the Company. The notes evidencing the borrowings bear interest at
a floating rate and are currently accruing interest at 5.50% per annum. Interest
payments are due quarterly on the fifteenth of the month. The next scheduled
interest payment is due on January 15, 2004. During 2003's first quarter, the
Company chose to prepay its borrowings from Community Shores LLC in the amount
of $1,050,000. A portion of the cash used for the paydown came from stock
offering proceeds. It is the intention of management that all of the outstanding
notes maintain a maturity that is five years or longer for favorable tier two
risk based capital treatment. As such each note was extended in the third
quarter for an additional year to 2009.
During the first nine months of 2003, the Company's shareholders' equity
increased $1.3 million. Part of this increase resulted from March 14, 2003's
sale of 100,000 shares of unregistered common stock to one investor. The sale
was made at a price of $8.00 per share in cash. This strategy for increasing
capital has been used by the Company several times since May 2002. Funds
resulting from these stock sales are often contributed to the Bank to maintain a
well-capitalized risk based capital ratio but another use is the above mentioned
subordinated debt paydown. In any quarter that the Bank's risk weighted asset
growth rate exceeded its growth in capital, the Company contributed equity.
These equity contributions enable the Bank to maintain a well- capitalized
regulatory capital ratio. During the first nine months of 2003, $200,000 was
contributed to the Bank's equity account to maintain a well-capitalized risk
based capital position.
RESULTS OF OPERATIONS
The net income for the first nine months of 2003 was $831,000, which compares
favorably to the net income of $572,000 recorded in the first three quarters of
2002. The increase in earnings of $259,000 in the first three quarters of 2003
was an improvement of 45% over
- 15 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
reported net income for the same nine months of last year. A substantial factor
in driving the improvement was the recognition of a tax benefit of $327,000
during the first quarter as management determined the Company no longer needed
to carry a valuation allowance with respect to the future tax benefit of
temporary differences. The Company's consolidated earnings are now fully
taxable. As such the net income for the third quarter of 2003 was $183,000 after
taxes of $94,000 while income for the same period in 2002 was $236,000 with no
taxes. On a pretax basis the Company's third quarter earnings improved $41,000
or 17% from 2002 to 2003.
For the third quarter and first nine months of 2003, the annualized return on
the Company's average total assets was .40% and .60% respectively. The Company's
return on average equity was 5.91% for the third quarter of 2003 and 9.19% for
the first nine months. At September 30, 2003, the ratio of average equity to
average assets was 6.71% for the third quarter and 6.57% for the first nine
months of 2003. The Company's retained deficit was $537,000 at September 30,
2003 compared to $1.4 million at December 31, 2002. The main contributing factor
to the above results is the tax benefit recorded in the first quarter of 2003.
The following table sets forth certain information relating to the Company's
consolidated average interest earning assets and interest bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing annualized
income or expenses by the average daily balance of assets or liabilities,
respectively, for the periods presented.
Nine months ended September 30:
-------------------------------
2003 2002
---------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Assets
Federal funds sold and interest-
bearing deposits with banks $ 2,389,829 $ 19,706 1.10% $ 8,100,029 $ 103,080 1.70%
Securities (including FHLB stock) 26,129,019 674,942 3.44 23,945,942 946,231 5.27
Loans(1) 148,298,434 6,893,526 6.20 128,085,640 6,771,187 7.05
------------ ----------- ---- ------------- ---------- ----
176,817,282 7,588,174 5.72 160,131,611 7,820,498 6.51
Other assets 6,780,167 6,524,190
------------ -------------
$183,597,449 $ 166,655,801
============ =============
Liabilities and Shareholders' Equity
Interest bearing deposits $ 131,406,435 $ 2,591,671 2.63 $ 121,161,755 $3,149,254 3.47
Federal funds purchased and
repurchase agreements 17,843,903 181,092 1.35 15,497,033 230,210 1.98
Note Payable and Federal Home
Loan Bank Advances 9,976,557 392,134 5.24 9,611,722 423,916 5.88
------------ ----------- ---- ------------- ---------- ----
159,226,895 3,164,897 2.65 146,270,510 3,803,380 3.47
---------- ----------
Non-interest bearing deposits 11,584,244 10,031,176
Other liabilities 731,466 691,766
Shareholders' Equity 12,054,844 9,662,349
------------- -------------
$ 183,597,449 $ 166,655,801
============= =============
Net interest income $4,423,277 $ 4,017,118
========== ===========
Net interest spread on earning assets 3.07% 3.04%
====== ======
Net interest margin on earning assets 3.34% 3.34%
====== ======
Average interest-earning assets to Average
interest-bearing liabilities 111.05% 109.48%
====== ======
- --------
(1) Includes loans held for sale and non-accrual loans.
- 16 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The net interest spread on average earning assets increased 3 basis points to
3.07% since September 30, 2002, however the net interest margin remained flat at
3.34% for both September 30, 2002 and 2003. Year to date net interest income was
$4.4 million in 2003 compared to a figure of $4.0 million for the same nine
months in 2002, an increase of $406,000 or 10%.
The average rate earned on interest earning assets was 5.72% for the nine months
ended September 30, 2003 compared to 6.51% for the same period in 2002. The main
underlying factor was an 85 basis point decrease in the yield on loans, the
Bank's largest earning asset category. A portion of the decrease can be
attributed to differences in the Bank's internal prime rate. There was a more
than 50 basis point difference in the internal prime rate between the two
periods shown above. All changes, no matter what direction, to the Bank's
internal prime rate affect interest earned on variable rate loans and new loan
volume. Additionally, the prolonged, low rate environment has prompted many
established fixed rate customers to request a rate reduction. Management gives
careful consideration to each request and takes into account the total
relationship (loans and deposits) at stake. All requests granted to retain the
relationship adversely affect the overall yield on the loan portfolio. This
outcome may sometimes be offset when the customers' associated deposits are at a
rate lower than current market rates.
Interest expense incurred on deposits, repurchase agreements, federal funds
purchased, Federal Home Loan Bank advances and Notes Payable decreased 17% for
the first nine months of 2003 compared to the first nine months of 2002. This
category totaled $3.2 million through September 30, 2003, which was a $638,000
reduction over the total recorded for the same period in 2002. The favorable
change in the yield on interest bearing liabilities was achieved as the Bank
successfully secured a lower cost of funds in a declining rate environment. The
average rate paid on interest-bearing products was 82 basis points less than
what was paid a year earlier. The Bank will continue to monitor local
competitor's deposit rates and adjust its offering rates as it deems
appropriate.
The quarter to quarter comparison of consolidated average interest earning
assets and interest bearing liabilities and average yield on assets and average
cost of liabilities for the third quarter ended September 30, 2003 and 2002 is
in the table below. An analysis of the net interest income shows that the Bank
was able to decrease its interest expense by more than its reduction in interest
income. Thus, net interest income improved by $98,000. In spite of this positive
outcome, there was a decrease in the Bank's net interest margin of 11 basis
points from the third quarter of 2002 to the same period in 2003. Much of the
explanation lies in the 75 basis point internal prime rate difference that
existed between the quarters.
- 17 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended September 30:
--------------------------------
2003 2002
---------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
Assets
Federal funds sold and interest-
bearing deposits with banks $ 729,584 $ 780 .43% $ 4,576,060 $ 19,356 1.69%
Securities (including FHLB stock) 26,705,189 201,639 3.02 22,254,005 285,012 5.12
Loans(1) 149,459,855 2,286,122 6.12 133,562,972 2,348,426 7.03
------------ ------------ ---- ------------ ------------ ----
176,894,628 2,488,541 5.62 160,393,037 2,652,794 6.62
Other assets 7,805,796 5,949,343
------------ ------------
$184,700,424 $166,342,380
============ ============
Liabilities and Shareholders' Equity
Interest bearing deposits $131,338,660 $ 803,792 2.45 $120,067,131 $ 1,028,614 3.43
Federal funds purchased and
repurchase agreements 16,343,910 46,990 1.15 15,054,306 73,180 1.94
Note Payable and Federal Home
Loan Bank Advances 10,550,000 129,707 4.92 9,600,000 143,456 5.98
------------ ------------ ---- ------------ ------------ ----
158,232,570 980,489 2.48 144,721,437 1,245,250 3.44
------------ ------------
Non-interest bearing deposits 13,173,021 10,575,151
Other liabilities 902,359 765,594
Shareholders' Equity 12,392,474 10,280,198
------------ ------------
$184,700,424 $166,342,380
============ ============
Net interest income $ 1,505,052 $ 1,407,544
============ ============
Net interest spread on earning assets 3.15% 3.17%
======= =======
Net interest margin on earning assets 3.40% 3.51%
======= =======
Average interest-earning assets to Average
interest-bearing liabilities 111.8% 110.8%
======= =======
Determining whether prime rate changes on the loan side of the balance sheet can
be fully offset by similar changes to deposit rates is possible through analysis
of the Bank's interest rate sensitivity position. In general, asset liability
management is an important tool for assessing and monitoring liquidity and
interest rate sensitivity within the Bank's balance sheet. Rate environments
such as the one that this country has experienced since 2001 makes asset
liability management especially challenging. Liquidity management involves the
ability to meet the cash flow requirements of the Company's customers. These
customers may be either borrowers with credit needs or depositors wanting to
withdraw funds. Management of interest rate sensitivity attempts to avoid widely
varying net interest margins and achieve consistent net interest income through
periods of changing interest rates. Asset liability management assists the
Company in achieving reasonable and predictable earnings and liquidity by
maintaining a balance between interest-earning assets and interest-bearing
liabilities.
The Company uses a sophisticated computer program to perform analysis of
interest rate risk, assist with asset liability management, and model and
measure interest rate sensitivity. Interest rate sensitivity varies with
different types of earning assets and interest-bearing liabilities. Overnight
investments, on which rates change daily, and loans tied to the prime
- --------
(1) Includes loans held for sale and non-accrual loans.
- 18 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
rate, differ considerably from long term investment securities and fixed rate
loans. Interest bearing checking and money market accounts are more interest
sensitive than long term time deposits and fixed rate FHLB advances. Comparison
of the repricing intervals of interest earning assets to interest bearing
liabilities is a measure of interest sensitivity gap. Balancing this gap is a
continual challenge in a changing rate environment. Details of the repricing gap
at September 30, 2003 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 $ 1,568,412 $ 0 $ 0 $ 0 $ 1,568,412
Federal funds sold 0 0 0 0 0
Securities (including FHLB stock) 660,247 1,864,500 19,783,062 3,550,757 25,858,566
Loan held for sale 0 0 0 622,800 622,800
Loans 88,692,753 12,134,401 43,504,105 1,837,720 146,168,979
------------ ------------ ------------ ------------ ------------
90,921,412 13,998,901 63,287,167 6,011,277 174,218,757
Interest-bearing liabilities
Savings and checking 63,115,342 0 0 0 63,115,342
Time deposits <$100,000 5,376,866 7,912,824 10,917,932 0 24,207,622
Time deposits >$100,000 2,241,313 12,675,297 26,495,130 0 41,411,740
Repurchase agreements and
Federal funds purchased 17,705,364 0 0 0 17,705,364
Notes payable and Federal Home
Loan bank advances 10,550,000 0 0 0 10,550,000
------------ ------------ ------------ ------------ ------------
98,988,885 20,588,121 37,413,062 0 156,990,068
Net asset (liability) repricing gap $ (8,067,473) $ (6,589,220) $ 25,874,105 $ 6,011,277 $ 17,228,689
============ ============ ============ ============ ============
Cumulative net asset (liability)
Repricing gap $ (8,067,473) $(14,656,693) $ 11,217,412 $ 17,228,689
============ ============ ============= =============
Currently the Bank has a negative twelve month repricing gap which indicates
that the Bank is liability sensitive. This position implies that increases or
decreases to the national federal funds rate would have more of an impact on
interest expense than on interest income if there were a parallel shift in
rates. Theoretically, a parallel shift in rates means that if the Bank's
internal prime rate goes up or down by 25 basis points, every interest earning
asset and interest bearing liability on the Bank's September 30, 2003 balance
sheet will adjust simultaneously by the same 25 basis points. The above table
illustrates what the Bank is contractually able to change in certain timeframes.
Management believes that certain deposit rates are reaching the bottom limit of
what can be paid in today's marketplace and future downward changes to national
federal funds rates may not be readily realized by reduced deposit rates.
The provision for loan losses for the third quarter and the first nine months of
2003 were $94,000 and $456,000 compared to figures of $154,000 and $442,000 for
the same periods in 2002. 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
- 19 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
increased or decreased in the future as management continues to monitor the loan
portfolio and actual loan loss experience.
Non-interest income recorded in the third quarter totaled $246,000 and
represented an increase of 5% over last year's third quarter. Through September
30, 2003, non-interest income was $828,000 compared to a figure of $636,000 for
the first nine months of 2002. Service charge income was $53,000 higher for the
first nine months of 2003. About $30,000 of the year over year increase was
related to non-sufficient funds charges which is typically a symptom of a weak
economic environment. Increases experienced in this type of fee income are not
guaranteed and should not be counted on for significant contributions to future
earnings. The other portion of the increase is from service charges on deposits.
Management believes that increases to fee income of this type will continue to
increase as a result of growth in the number of deposit accounts.
On a year to date basis, mortgage loan referral fees and gain on loan sales
totaled $184,000 compared to $135,000 being recorded through September 30 of
2002, an increase of 37%. It is difficult to predict future contributions of
mortgage related fee income to non-interest income because of its dependence on
interest rates, which are subject to market forces. At this time mortgage rates
have risen and reduced mortgage loan applications. Fee income from this source
is anticipated to be very modest in the remaining quarter of 2003.
During the first quarter of 2003 four securities were sold for a gain of
$62,681. The securities sold totaled approximately $2.3 million. The Bank chose
to sell the securities when a repurchase agreement customer with a balance of
nearly $3 million opted to permanently transfer the entire balance to a money
market account. Once the switch was made the securities were no longer needed
for pledging purposes and the Bank liquidated the securities to fund expected
loan growth.
Other non-interest income consists of a variety of categories that are volume
based transactions (including wire transfer, debit card, and ACH fees). As the
customer base of the Bank grows these fees are expected to increase. Fees of
this type increased just over $27,000 when comparing the first nine months of
2003 to that of 2002.
Non-interest expenses for the first nine months of 2003 increased 13% over the
same period in 2002. The figure for 2003 was $4.1 million compared to a total of
$3.6 million for 2002. Of the $486,000 total increase, salaries and benefits
comprised 62%. In addition to the rising cost of benefits and annual salary
adjustments there were an average of 2.5 more full-time equivalent employees
between the same nine month periods of 2002 and 2003. Additions to staff are
made to support the growth of the Bank from both a sales and operational
standpoint.
Total data processing expenses for the third quarter and first nine months of
2003 were $74,000 and $222,000 compared to $64,000 and $181,000 for the similar
periods in 2002. Data processing expenses, which are transaction based, have
increased as a result of the Bank's expanding customer base as well as the
addition of an internet banking product. On September 30, 2003 the Bank had 514
personal and business internet customers which is 209 more than the number
reported at September 30, 2002. The operational expense of internet and
telephone banking transactions falls in the data processing category. In
general, data
- 20 -
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
processing expenses are a permanent component of a financial institution's
overhead and would be expected to increase with the general growth of the Bank.
Professional services expenses were $225,000 for the first nine months of 2003
compared to $195,000 for the first nine months of 2002. Beginning in January of
2003, the Company separated its internal and external audit functions, as
required by the Sarbanes-Oxley Act of 2002, thus retaining two public accounting
firms. This change in processes is partially responsible for the increase. In
general, these costs are also expected to increase as the Bank ages and becomes
a more mature and complex financial institution.
The line item showing other non-interest expenses for the first nine months of
2003 has increased $110,000 compared to the same period in 2002. Repo and
collection fees, one of the expenses in this category, was responsible for a
large portion of the increase. As the loan portfolio seasons and the weak
economy persists, it is logical that more money would be spent to address
problem loans. As mentioned earlier, the Bank has taken measures to enhance its
collection process, including the hiring of a full time collection officer. Repo
and collection fees were $72,000 for the first nine months of 2003 compared
$35,000 for the first nine months of 2002.
There were no federal taxes accrued in the first nine months of 2002 however
there was a Federal tax benefit of $161,000 for the similar period in the
current year. During the first quarter of 2003, management concluded that the
Company's valuation allowance for deferred tax assets was no longer needed,
resulting in a net Federal tax benefit of $327,184 being recognized. During the
Company's first years of operation, losses were recorded but no tax benefit was
reflected. Since becoming profitable the Company has used this deferred tax
valuation allowance to offset the federal tax liability and expense that
otherwise would have been recorded. The gross benefit received in the first
quarter of 2003 was reduced by the second and third quarter's Federal tax
expense of $166,000, or 34% of its earnings in those quarters.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of September 30, 2003. 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 September 30, 2003 with respect to information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company, the Bank, the Mortgage Company or Community
Shores Financial Services may be involved in various legal proceedings that are
incidental to their business. In the opinion of management, the Company, the
Bank, the Mortgage Company and Community Shores Financial Services are not a
party to any current legal proceedings that are material to their financial
condition, either individually or in the aggregate.
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ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's
Registration Statement on Form SB-2 (Commission File No. 333-63769) that became
effective on December 17, 1998.
3.2 Bylaws of Community Shores Bank Corporation (as amended and restated October 29, 2003)
that became effective on October 29, 2003.
10.1 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due
June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation
and John L. Hilt, acting through his IRA, dated August 27, 2003.
10.2 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Donald E. Hegedus dated August 27, 2003.
10.3 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Michael D. Gluhanich dated August 27, 2003.
10.4 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Robert L. Chandonnet dated August 27, 2003.
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10.5 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Community Shores LLC dated August 27, 2003.
31.1 Rule 15d-14(a) Certification of the principal executive officer.
31.2 Rule 15d-14(a) Certification of the principal financial officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
(b) Reports on Form 8-K.
During the third quarter of 2003, the Company filed the following
reports on Form 8-K:
(i) Form 8-K dated October 2, 2003, reporting a change in the
organizational structure of the Company's bank subsidiary.
(ii) Form 8-K dated October 23, 2003 reporting the Company's earnings
and other financial results for its third quarter of 2003.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on November 14, 2003.
COMMUNITY SHORES BANK CORPORATION
By: /s/ Jose' A. Infante
--------------------------------------------
Jose' A. Infante
Chairman of the Board and Chief
Executive Officer (principal executive officer)
By: /s/ Tracey A. Welsh
---------------------------------------------
Tracey A. Welsh
Chief Financial Officer and Vice President
(principal financial and accounting officer)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
3.1 Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company's
Registration Statement on Form SB-2 (Commission File No. 333-63769) that became
effective on December 17, 1998.
3.2 Bylaws of Community Shores Bank Corporation (as amended and restated October 29, 2003)
that became effective on October 29, 2003.
10.1 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note due
June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores Bank Corporation
and John L. Hilt, acting through his IRA, dated August 27, 2003.
10.2 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Donald E. Hegedus dated August 27, 2003.
10.3 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Michael D. Gluhanich dated August 27, 2003.
10.4 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Robert L. Chandonnet dated August 27, 2003.
10.5 First Amendment to Community Shores Bank Corporation Floating Rate Subordinated Note
due June 30, 2008 and Subordinated Note Purchase Agreement between Community Shores
Bank Corporation and Community Shores LLC dated August 27, 2003.
31.1 Rule 15d-14(a) Certification of the principal executive officer.
31.2 Rule 15d-14(a) Certification of the principal financial officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
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