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 June 30, 2007
[ ] 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
----- -----
Indicate by check mark whether the registrant is a shell company as defined by
Rule 12-b2 of the Exchange Act).
Yes No X
----- -----
At July 31, 2007, 1,468,800 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................ 14
Item 3. Controls and Procedures............................. 25
PART II. Other Information
Item 1. Legal Proceedings................................... 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................................... 26
Item 6. Exhibits ........................................... 26
Signatures.................................................. 27
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
2007 2006
------------ ------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 4,268,013 $ 3,398,155
Interest-bearing deposits in other financial institutions 78,256 72,115
Federal funds sold 2,650,000 5,600,000
------------ ------------
Total cash and cash equivalents 6,996,269 9,070,270
Securities
Available for sale (at fair value) 13,742,318 13,184,437
Held to maturity (fair value of $5,103,491 at June 30, 2007 and
$5,219,555 at December 31, 2006) 5,251,301 5,257,835
------------ ------------
Total securities 18,993,619 18,442,272
Loans available for sale 533,602 165,070
Loans 221,386,822 207,432,376
Less: Allowance for loan losses 2,796,103 2,549,016
------------ ------------
Net loans 218,590,719 204,883,360
Federal Home Loan Bank stock 404,100 404,100
Premises and equipment, net 12,207,028 10,958,821
Accrued interest receivable 1,239,181 1,249,680
Other assets 2,340,324 1,807,258
------------ ------------
Total assets $261,304,842 $246,980,831
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 19,519,568 $ 17,179,082
Interest bearing 208,595,407 197,103,330
------------ ------------
Total deposits 228,114,975 214,282,412
Federal funds purchased and repurchase agreements 5,018,681 4,494,614
Federal Home Loan Bank advances 6,000,000 6,000,000
Subordinated debentures 4,500,000 4,500,000
Notes Payable 800,000 400,000
Accrued expenses and other liabilities 580,870 1,185,180
------------ ------------
Total liabilities 245,014,526 230,862,206
Shareholders' equity
Preferred Stock, no par value: 1,000,000 shares
Authorized and none issued 0 0
Common Stock, no par value: 9,000,000 shares authorized;
1,468,800 and 1,466,800 shares issued at June 30,2007 and
December 31, 2006 13,296,462 13,274,098
Retained Earnings 3,274,179 3,027,774
Accumulated other comprehensive loss (280,325) (183,247)
------------ ------------
Total shareholders' equity 16,290,316 16,118,625
------------ ------------
Total liabilities and shareholders' equity $261,304,842 $246,980,831
============ ============
See accompanying notes to consolidated financial statements.
-1-
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
Ended Ended Ended Ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $4,268,819 $3,841,279 $8,325,841 $7,369,830
Securities 218,331 179,724 419,804 360,040
Federal funds sold, FHLB dividends and other income 47,671 18,757 118,340 119,739
---------- ---------- ---------- ----------
Total interest income 4,534,821 4,039,760 8,863,985 7,849,609
INTEREST EXPENSE
Deposits 2,209,884 1,678,261 4,321,375 3,217,233
Repurchase agreements and federal funds purchased 89,508 75,917 140,507 110,683
Federal Home Loan Bank advances and notes payable 178,500 172,417 356,907 333,740
---------- ---------- ---------- ----------
Total interest expense 2,477,892 1,926,595 4,818,789 3,661,656
NET INTEREST INCOME 2,056,929 2,113,165 4,045,196 4,187,953
Provision for loan losses 268,100 223,599 395,331 301,752
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
Noninterest income 1,788,829 1,889,566 3,649,865 3,886,201
Service charges on deposit accounts 238,662 256,176 447,057 494,289
Mortgage loan referral fees 0 1,437 0 1,437
Gain on sale of loans 70,689 11,668 204,580 16,403
Gain on sale of securities 0 0 1,986 0
Gain on disposal of equipment 0 0 80 (124)
Other 114,809 86,636 225,573 164,235
---------- ---------- ---------- ----------
Total noninterest income 424,160 355,917 879,276 676,240
Noninterest expense
Salaries and employee benefits 1,285,974 947,030 2,421,696 1,938,076
Occupancy 140,286 87,776 283,575 175,074
Furniture and equipment 163,653 101,737 309,999 198,254
Advertising 32,928 40,935 90,828 83,792
Data processing 112,716 102,514 217,396 196,278
Professional services 131,631 130,519 272,582 257,791
Other 341,377 344,119 659,586 697,289
---------- ---------- ---------- ----------
Total noninterest expense 2,208,565 1,754,630 4,255,662 3,546,554
INCOME BEFORE INCOME TAXES 4,424 490,853 273,479 1,015,887
Federal income tax expense (benefit) (13,353) 148,859 27,074 310,303
---------- ---------- ---------- ----------
NET INCOME $ 17,777 $ 341,994 $ 246,405 $ 705,584
========== ========== ========== ==========
Comprehensive (loss) income $ (113,257) $ 305,259 $ 149,327 $ 596,211
========== ========== ========== ==========
Weighted average shares outstanding 1,468,800 1,436,800 1,468,767 1,436,800
========== ========== ========== ==========
Diluted average shares outstanding 1,481,462 1,461,201 1,485,129 1,468,181
========== ========== ========== ==========
Basic EPS $ 0.01 $ 0.24 $ 0.17 $ 0.49
========== ========== ========== ==========
Diluted EPS $ 0.01 $ 0.23 $ 0.17 $ 0.48
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
-2-
COMMUNITY SHORES BANK CORPORATION
STATEMENT OF CHANGES OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Shares Stock Earnings Income (Loss) Equity
--------- ----------- ---------- ------------- -------------
BALANCE AT JANUARY 1, 2006 1,436,800 $12,998,670 $1,712,462 $(211,221) $14,499,911
Stock option compensation expense 1,328 1,328
Comprehensive income:
Net income 705,584 705,584
Unrealized loss on securities
available-for-sale, net (109,373) (109,373)
-----------
Total comprehensive income 596,211
--------- ----------- ---------- --------- -----------
BALANCE AT JUNE 30, 2006 1,436,800 $12,999,998 $2,418,046 $(320,594) $15,097,450
========= =========== ========== ========= ===========
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 option exercise 1,904 1,904
Comprehensive loss:
Net income 246,405 246,405
Unrealized loss on securities
available-for-sale (97,078) (97,078)
-----------
Total comprehensive income 149,327
--------- ----------- ---------- --------- -----------
BALANCE AT JUNE 30, 2007 1,468,800 $13,296,462 $3,274,179 $(280,325) $16,290,316
========= =========== ========== ========= ===========
See accompanying notes to consolidated financial statements.
-3-
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOW
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 2007 June 30, 2006
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 246,405 $ 705,584
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 395,331 301,752
Depreciation and amortization 289,376 143,276
Net amortization of securities 3,775 15,037
Net realized gain on disposition of securities (1,986) 0
Net realized gain on sale of loans (204,580) (16,403)
Net realized (gain) loss on disposition of equipment (80) 124
Loans originated for sale (11,221,902) (1,123,700)
Proceeds from loan sales 11,057,950 1,140,103
Stock option compensation expense 0 1,328
Net change in:
Accrued interest receivable and other assets (123,557) (40,342)
Accrued interest payable and other liabilities (604,310) (48,863)
------------ -----------
Net cash from (used in) operating activities (163,578) 1,077,896
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Sales 494,650 0
Maturities, prepayments and calls 2,209,330 765,594
Purchases (3,404,204) 0
Activity in held-to-maturity securities:
Maturities 0 185,000
Purchases 0 (537,262)
Loan originations and payments, net (14,451,690) (6,885,397)
Additions to premises and equipment (1,537,503) (988,157)
------------ -----------
Net cash from investing activities (16,689,417) (7,460,222)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits 13,832,563 14,724,342
Net change in federal funds purchased and
repurchase agreements 524,067 (1,162,601)
Other borrowing activity:
Draws on note payable and line of credit 400,000 400,000
Tax benefit from exercise of stock options 1,904 0
Net proceeds from exercise of stock options 20,460 0
------------ -----------
Net cash used in financing activities 14,778,994 13,961,741
Net change in cash and cash equivalents (2,074,001) 7,579,415
Beginning cash and cash equivalents 9,070,270 4,651,459
------------ -----------
ENDING CASH AND CASH EQUIVALENTS $ 6,996,269 $12,230,874
============ ===========
Supplemental cash flow information:
Cash paid during the period for interest $ 2,330,440 $ 3,674,224
Cash paid during the period for federal income tax 250,000 250,000
Transfers from loans to foreclosed assets $ 349,000 $ 22,000
See accompanying notes to consolidated financial statements.
-4-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS:
The unaudited, consolidated financial statements as of and for the three
months and six months ended June 30, 2007 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"). These consolidated
financial statements have been prepared in accordance with the instructions
for Form 10-QSB and Item 310(b) of Regulation S-B and do not include all
disclosures required by generally accepted accounting principles for a
complete presentation of the Company's financial condition and results of
operations. In the opinion of management, the information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary in order to make the financial statements not misleading and for
a fair representation of the results of operations for such periods. The
results for the period ended June 30, 2007 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,
2006. Some items in the prior year financial statements were reclassified
to conform to the current presentation.
The Financial Accounting Standards Board ("FASB") Interpretation 48,
Accounting for Uncertainty in Income Taxes ("FIN 48"), was adopted as of
January 1, 2007. A tax position is recognized as a benefit only if it is
"more likely than not" that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had
no affect on the Company's consolidated financial statements. The Company
is only subject to examinations of federal taxing authorities for years
after 2002.The Company and its subsidiaries are subject to U.S. federal
income tax. The Company is no longer subject to examination by taxing
authorities for years before 2002. The Company does not expect the total
amount of unrecognized tax benefits to significantly increase in the next
twelve months. The Company recognizes interest and/or penalties related to
income tax matters in income tax expense. The Company did not have any
amounts accrued for interest and penalties at January 1, 2007.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets" ("SFAS 156"). SFAS 156 addresses the accounting for
recognized servicing assets and servicing liabilities related to certain
transfers of the servicer's financial assets and for acquisitions or
assumptions of obligations to service financial assets that do not relate
to the financial assets of the servicer and its related parties. SFAS 156
requires that all recognized servicing assets and servicing liabilities are
initially measured at fair value, and subsequently measured at either fair
value or by applying an amortization method for each class of recognized
servicing assets and servicing liabilities. SFAS 156 was adopted as of
January 1, 2007 and the Company has chosen the fair value method of
measurement. The adoption of SFAS 156 had no material effect on the
Company's consolidated financial statements.
-5-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS (Continued):
In February 2006, FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Liabilities" ("SFAS 159"). Adoption of SFAS 159 is
required for January 1, 2008. Early adoption was allowed, effective to
January 1, 2007, if that election was made by April 30, 2007. 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 early
adoption of SFAS 159 and has not yet determined which, if any, assets or
liabilities may be reported using the fair value accounting method. As
such, the Company has not yet determined the impact that the adoption of
this statement may have on the Company's consolidated financial statements.
2. SECURITIES
The following tables represent the securities held in the Company's
portfolio at June 30, 2007 and at December 31, 2006:
Gross Gross
Amortized Unrealized Unrealized
June 30, 2007 Cost Gains Losses Fair Value
- ------------- ---------- ---------- ---------- -----------
Available for sale:
US Government and federal agency $ 996 $(123,887) $ 4,355,241
Municipal securities 1,539 (1,844) 339,578
Mortgage-backed securities 352 (301,892) 9,047,499
------ --------- -----------
$2,887 $(427,623) $13,742,318
Held to maturity:
Municipal securities $5,251,301 $ 0 $(147,810) $ 5,103,491
Gross Gross
Amortized Unrealized Unrealized
December 31, 2006 Cost Gains Losses Fair Value
- ------------- ---------- ---------- ---------- -----------
Available for sale:
US Government and federal agency $ 6,015 $(108,742) $ 4,408,178
Municipal securities 4,500 (2,778) 707,516
Mortgage-backed securities 5,452 (182,094) 8,068,743
------- --------- -----------
15,967 (293,614) 13,184,437
Held to maturity:
Municipal securities $5,257,835 $ 2,552 $ (40,832) $ 5,219,555
-6-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SECURITIES (Continued)
Below is the schedule of maturities for securities held at June 30, 2007:
Available Held to Maturity
for Sale -----------------------
Fair Amortized Fair
Value Cost Value
----------- ---------- ----------
Due in one year or less $ 0 $ 0 $ 0
Due from one to five years 3,152,800 1,166,384 1,151,081
Due in more than five years 1,542,019 4,084,917 3,952,410
Mortgage-backed 9,047,499 0 0
----------- ---------- ----------
$13,742,318 $5,251,301 $5,103,491
=========== ========== ==========
3. LOANS
The components of the outstanding loan balances:
June 30, December 31,
2007 2006
------------ ------------
Commercial $ 88,344,630 $ 90,422,689
Real Estate:
Commercial 87,722,686 78,012,565
Residential 14,098,954 10,172,321
Construction 2,806,743 1,334,276
Consumer 28,559,229 27,616,155
------------ ------------
Subtotal: 221,532,242 207,558,006
Allowance for loan losses (2,796,103) (2,549,016)
Net deferred loan fees (145,420) (125,630)
------------ ------------
Loans, Net $218,590,719 $204,883,360
============ ============
Loans held for sale totaled $533,602 at June 30, 2007 and $165,070 at
December 31, 2006.
-7-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The following is a summary of activity in the allowance for loan losses
account for the three and six month periods ended June 30, 2007 and 2006:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/07 06/30/06 6/30/07 06/30/06
------------ ------------ ---------- ----------
Beginning Balance 2,588,475 $2,307,087 2,549,016 $2,612,581
Charge-offs
Commercial (7,823) (45,705) (26,650) (380,607)
Real Estate-Commercial 0 0 (25,463) 0
Real Estate-Residential 0 0 0 0
Real Estate-Construction 0 0 0 0
Consumer (60,840) (74,099) (117,569) (144,380)
---------- ---------- ---------- ----------
Total Charge-offs (68,663) (119,804) (169,682) (524,987)
---------- ---------- ---------- ----------
Recoveries
Commercial 2,558 1,872 4,624 7,920
Real Estate-Commercial 0 0 0 0
Real Estate-Residential 0 0 0 0
Real Estate-Construction 0 0 0 0
Consumer 5,633 24,011 16,814 39,499
---------- ---------- ---------- ----------
Total Recoveries 8,191 25,883 21,438 47,419
---------- ---------- ---------- ----------
Net Charge-Offs (60,472) (93,921) (148,244) (477,568)
---------- ---------- ---------- ----------
Provision for loan losses 268,100 223,599 395,331 301,752
---------- ---------- ---------- ----------
Ending Balance $2,796,103 $2,436,765 $2,796,103 $2,436,765
========== ========== ========== ==========
Impaired loans were as follows:
06/30/07 12/31/06
----------- ----------
Period-end loans with no specific allocated allowance for loan losses: -- $ 244,329
Period-end loans with specific allowance for loan losses: $2,382,403 1,209,023
---------- ----------
Total: $2,382,403 $1,453,352
========== ==========
Amount of the allowance for loan losses specifically allocated: $ 292,478 $ 230,856
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/07 6/30/06 06/30/07 6/30/06
------------ ------------ ---------- ----------
Average of impaired loans during the period: $2,305,410 $1,267,694 $2,111,522 $1,421,969
Interest income recognized during impairment: 19,557 4,286 32,555 14,450
Cash-basis interest income recognized: 5,344 9,789 5,344 10,148
-8-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):
Non-performing loans were as follows:
06/30/07 12/31/06
--------- --------
Loans past due over 90 days still on accrual: $ 862,267 $729,965
Non-accrual loans: $1,493,452 $400,597
Non-accrual loans increased $1.1 million since December 31, 2006. Three
commercial relationships comprise the entire balance. The collateral
supporting the borrowings in all three cases is real estate. The current
allowance allocations for these impaired loans are considered adequate
based on expected loss on disposition of collateral.
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:
June 30, December 31,
2007 2006
----------- ------------
Land & land improvements $ 5,143,014 $ 4,913,807
Buildings & building improvements 4,817,643 4,069,215
Furniture, fixtures and equipment 3,362,296 2,922,359
Construction in Process 1,203,611 1,082,722
----------- -----------
14,526,564 12,988,103
Less: accumulated depreciation 2,319,536 2,029,282
----------- -----------
$12,207,028 $10,958,821
=========== ===========
6. DEPOSITS
The components of the outstanding deposit balances at June 30, 2007 and
December 31, 2006 were as follows:
June 30, 2007 December 31,
Balance 2006 Balance
------------- ------------
Non-interest bearing
Demand $ 19,519,568 $ 17,179,082
Interest bearing
Checking 27,916,697 18,606,890
Money Market 22,196,614 17,648,173
Savings 15,652,527 13,113,050
Time, under $100,000 44,984,652 39,154,246
Time, over $100,000 97,844,917 108,580,971
------------ ------------
Total Deposits $228,114,975 $214,282,412
============ ============
-9-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SHORT-TERM BORROWINGS
The Company's short-term borrowings typically consist of repurchase
agreements and federal funds purchased. The June 30, 2007 and December 31,
2006 information was as follows:
Repurchase Federal Funds
Agreements Purchased
---------- -------------
Outstanding at June 30, 2007 $5,018,681 $ 0
Average interest rate at year end 3.35% 0.00%
Average balance during year 5,088,956 2,019,613
Average interest rate during year 3.34% 5.49%
Maximum month end balance during year 5,695,329 3,900,000
Outstanding at December 31, 2006 $4,494,614 $ 0
Average interest rate at year end 3.34% 0.00%
Average balance during year 4,993,710 2,078,479
Average interest rate during year 3.17% 5.46%
Maximum month end balance during year 5,758,378 6,700,000
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 $6,900,000.
Each borrowing requires a direct pledge of securities or loans. At June 30,
2007, the Bank had assets with a market value of $9,616,138 pledged to the
Federal Home Loan Bank to support current borrowings. Details of the Bank's
outstanding borrowings at both June 30, 2007 and December 31, 2006 are:
Current June 30, December 31,
Maturity Date Interest Rate 2007 2006
- ----------------- ------------- ---------- ------------
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
The subordinated debentures stemmed from a trust preferred security
offering. Community Shores Capital Trust I ("the Trust"), a business trust
formed by the Company, sold 4,500 Cumulative Preferred Securities ("trust
preferred securities") at $1,000 per security in a December 2004 offering.
The proceeds from the sale of the trust preferred securities were used by
the Trust to purchase an equivalent amount of subordinated debentures from
the Company. The trust preferred securities carry a floating rate of 2.05%
over the 3-month LIBOR. This was initially set at 4.55125% and is 7.41% at
June 30, 2007. The stated maturity is December 30, 2034. The securities are
redeemable at par on any interest payment date on or after December 30,
2009 with
-10-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SUBORDINATED DEBENTURES (Continued)
regulatory approval, if then required, and are, in effect, guaranteed by
the Company. Distributions on the trust preferred securities are payable
quarterly on March 30th, June 30th, September 30th and December 30th.
The most recent distribution was paid on July 2, 2007 because June 30, 2007
fell on a weekend. Under certain circumstances, distributions may be
deferred up to 20 calendar quarters. However, during any such deferrals,
interest accrues on any unpaid distributions at a floating rate of 2.05%
over the 3-month LIBOR.
10. NOTES PAYABLE
The Company has a $5 million revolving line of credit with LaSalle Bank
National Association ("LaSalle"). The total balance outstanding at June 30,
2007 was $800,000 and at December 31, 2006 was $400,000. There was no
activity related to the line in the first quarter of 2007. On June 29,
2007, the Company drew $400,000 to support its general operating expenses
and to contribute capital to the Bank. The outstanding principal bears
interest at a rate of 90 basis points below LaSalle's prime rate, which is
currently 8.25%. Interest is owed quarterly in arrears on the first
business day of February, May, August, and November on the outstanding
principal balance of this line of credit. The borrowings may be prepaid in
whole or in part without any prepayment penalty.
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 June 30, 2007 and December
31, 2006 follows:
June 30, December 31,
2007 2006
----------- ------------
Unused lines of credit and letters of credit $37,480,366 $39,135,932
Commitments to make loans 1,054,530 816,646
-11-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)
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.
12. INCOME TAXES
Federal tax expense was lower in the first half of 2007 compared to the
first six months of 2006. The decrease is not only related to lower pre-tax
income but also to an adjustment that occurred in the first quarter of 2007
when the Company reevaluated its federal tax accruals and concluded that
tax liabilities needed to be modified reducing federal tax expense recorded
in that quarter by $36,000. The federal tax benefit that was recorded in
the second quarter of 2007 was due to the proportion of tax free municipal
bond income to consolidated pre-tax income.
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
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration are required.
The Bank was designated as well-capitalized under the regulatory framework
for prompt corrective action at both June 30, 2007 and December 31, 2006.
-12-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. REGULATORY MATTERS (Continued)
Actual and required capital amounts and ratios at June 30, 2007 and
December 31, 2006 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
----------- ----- ----------- ----- ----------- -----
June 30, 2007
Total Capital (Tier 1
and Tier 2) to risk
weighted assets of
the Bank $24,469,967 10.21% $19,173,370 8.00% $23,966,712 10.00
Tier 1 (Core) Capital
to risk-weighted
assets of the Bank 21,673,865 9.04% 9,586,685 4.00% 14,380,027 6.00
Tier 1 (Core) Capital
to average assets
of the Bank 21,673,865 8.55% 10,140,909 4.00% 12,676,136 5.00
December 31, 2006
Total Capital (Tier 1
and Tier 2) to risk
weighted assets of
the Bank $23,532,791 10.45% $18,020,232 8.00% $22,525,290 10.00
Tier 1 (Core) Capital
to risk-weighted
assets of the Bank 20,983,775 9.32 9,010,116 4.00 13,515,174 6.00
Tier 1 (Core) Capital
to average assets
of the Bank 20,983,775 8.73 9,618,321 4.00 12,022,901 5.00
-13-
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 June 30, 2007 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 June
30, 2007 to that at December 31, 2006. The part labeled Results of Operations
discusses the three month and six month periods ended June 30, 2007 as compared
to the same periods of 2006. Both parts should be read in conjunction with the
interim consolidated financial statements and footnotes included in Item 1 of
this Form 10-QSB.
This discussion and analysis and other sections of this Form 10-QSB contain
forward-looking statements that are based on management's beliefs, assumptions,
current expectations, estimates and projections about the financial services
industry, the economy, and about the Company, the Bank, the Mortgage Company and
Community Shores Financial Services. Words such as "anticipates", "believes",
"estimates", "expects", "forecasts", "intends", "is likely", "plans",
"projects", variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
intended to be covered by the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update,
amend, or clarify forward looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include, among others, changes in interest rates and interest
rate relationships; demand for products and services; the degree of competition
by traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; changes in the national and local economy; 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 $14.3 million to $261.3 million at June 30, 2007 from
$247.0 million at December 31, 2006. This is a 5.8% increase in assets during
the first six months of 2007. Asset growth was funded by deposit growth and was
reflected by increases in the loan portfolio and premises and equipment.
-14-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash and cash equivalents decreased by $2.1 million to $7.0 million at June 30,
2007 from $9.1 million at December 31, 2006. This decrease was the net effect of
increased balances held at other financial institutions being offset by a
decrease in federal funds sold. Changes in these balances are related to
fluctuations in the liquidity of the Bank and its customers on those particular
days.
Total loans climbed to $221.4 million at June 30, 2007 from $207.4 million at
December 31, 2006. The $14.0 million net increase is comprised of $7.6 million
growth in the commercial and commercial real estate portfolios and $5.4 million
growth in residential mortgage and construction loans. The Bank still maintains
a focus on commercial lending. However one of the Bank's recent initiatives was
to increase its mortgage lending presence in the local marketplace. To execute
this strategy, the Bank recruited six well-known, experienced mortgage
originators. As in the past, it is the Bank's intention to sell in the secondary
market a majority of the residential real estate loans originated, however there
will be situations that will require the Bank to retain a loan for its own
portfolio. Even with the recent growth in the residential portfolio, commercial
and commercial real estate categories of loans still comprise nearly 80% of the
Bank's total loan portfolio.
Other lending activity during the first six months of 2007 included the
origination of $1.9 million Small Business Association ("SBA") loans and the
sale of $1.8 million of SBA loans. The associated gain with the sale
transactions was $136,000. There were no SBA loans sold in the first half of
2006. The Bank's SBA lending program was developed in the second half of 2006
and consists mainly of selling the guaranteed portion of floating rate SBA loans
that the Bank originates. The Bank retains the unguaranteed portion which is
generally 20% to 25% of the outstanding principal.
The Company attempts to mitigate interest rate risk in its loan portfolio in
many ways. The main approach is to balance the rate sensitivity of the portfolio
and manage extension risk(1). The loan maturities and rate sensitivity of the
loan portfolio at June 30, 2007 are included below:
Within Three to
Three Twelve One to After
Months Months Five Years Five Years Total
----------- ----------- ------------ ----------- ------------
Commercial, financial and other $30,430,248 $22,261,515 $ 33,405,460 $ 2,101,987 $ 88,199,210
Real estate:
Commercial 7,532,467 24,742,220 52,730,125 2,717,874 87,722,686
Construction 241,868 2,107,225 167,529 290,121 2,806,743
Mortgages 261,643 315,845 1,964,302 11,557,164 14,098,954
Consumer 1,848,219 4,610,263 19,210,142 2,890,605 28,559,229
----------- ----------- ------------ ----------- ------------
$40,314,445 $54,037,068 $107,477,558 $19,557,751 $221,386,822
=========== =========== ============ =========== ============
Loans at fixed rates 4,924,691 13,477,608 92,833,935 14,729,335 $125,965,569
Loans at variable rates 35,389,754 40,559,460 14,643,623 4,828,416 95,421,253
----------- ----------- ------------ ----------- ------------
$40,314,445 $54,037,068 $107,477,558 $19,557,751 $221,386,822
=========== =========== ============ =========== ============
- ----------
(1) Extension risk, as related to loans, exists when booking fixed rate loans
with long final contractual maturities. When a customer is contractually
allowed longer to return their borrowed principal and rates rise, the Bank
is delayed from taking advantage of the opportunity to reinvest the
returning principal at the higher market rate.
-15-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
At June 30, 2007, 57% of the loan balances carried a fixed rate and 43% a
floating rate and only 9% of the entire portfolio had a contractual maturity
longer than five years.
The loan portfolio is reviewed and analyzed on a regular basis for the purpose
of estimating probable incurred credit losses. The allowance for loan losses is
adjusted accordingly to maintain an adequate level based on that analysis given
the risk characteristics of the loan portfolio. At June 30, 2007, the allowance
totaled $2.8 million or approximately 1.26% of gross loans outstanding.
Management has determined that this is an appropriate level based on its
detailed review of the loan portfolio using a consistent methodology involving
loan ratings, delinquency trends, historical loss experience as well as current
economic conditions.
The allocation of the allowance at June 30, 2007 was as follows:
June 30, 2007 December 31, 2006
-------------------------- --------------------------
Percent of Percent of
Allowance Allowance
Related to Related to
Balance at End of Period Applicable to: Amount Loan Category Amount Loan Category
---------- ------------- ---------- -------------
Commercial $1,277,245 45.7% $1,239,909 48.7%
Real estate:
Commercial 1,123,034 40.2 943,907 37.0
Residential 69,646 2.5 50,862 2.0
Construction 32,278 1.1 15,344 0.6
Consumer 293,900 10.5 298,994 11.7
---------- ----- ---------- -----
Total $2,796,013 100.0% $2,549,016 100.0%
========== ===== ========== =====
The ratio of allowance for loan losses to total loans increased to 1.26% from a
level of 1.23% at December 31, 2006. The increase is directly related to the
$1.1 million increase in non-accrual loans since year-end 2006 as well as an
increase in the Bank's holdings of unguaranteed SBA loans. Management continues
to monitor the allocations on a monthly basis and makes adjustments to the
provision and the allowance based on portfolio concentration levels, actual loss
experience and the financial condition of the borrowers. An additional $395,000
was added to the allowance through provision for loan losses during the first
half of 2007 with $268,000 being added in the second quarter.
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 June 30, 2007 compared to those at
year-end 2006 and the corresponding change, related to those two periods.
Increase
Loans Past Due: June 30, 2007 December 31, 2006 (Decrease)
- --------------- ------------- ----------------- ----------
30-59 days $ 473,724 $1,407,140 $ (933,416)
60-89 days 565,004 885,689 (320,685)
90 days and greater 862,267 729,965 132,302
Non accrual loans $1,493,452 $ 400,597 $1,092,855
-16-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Since year-end 2006, overall past due and non-accrual loans have decreased by
$29,000. A majority of the activity is related to loans moving out of various
past due categories and being reclassed into the non-accrual category.
Non-accrual loans increased $1.1 million since December 31, 2006. Three
commercial relationships comprise the entire increase. The collateral supporting
the borrowings in all three cases is real estate. The current reserve
allocations for these loans are considered adequate based on expected loss on
disposition of collateral.
Although the collection process is believed to be sound, there was still the
need to charge-off loans. Annualized net charge-offs to average loans was 0.14%
for the first half of 2007, down significantly from 0.25% for the first half of
2006. There were net charge-offs of $148,000 recorded for the first six months
of 2007, which is much lower than net charge-offs of $478,000 for the similar
period in 2006. Approximately 75% of the balances charged off in the first half
of 2006 were non-accrual loans that had specific allocations in the allowance
for loan losses. More than half (61%) of the recorded charge-offs in the first
half of 2006 were related to one impaired commercial relationship.
Bank premises and equipment increased $1.2 million during the first half of
2007. A small portion of the increase was the remaining costs associated with
the completion of the North Muskegon branch building which became operational on
January 5, 2007. The other costs are construction billings for the Grand Haven
Branch. In August 2007, it is management's intention to relocate the Grand Haven
banking office to a new building at US-31 and Taylor Street.
Other assets rose $533,000 since December 31, 2006. The largest item
contributing to the change is the addition of $349,000 in other real estate
owned between the two period ends. Other real estate owned is comprised of
properties relinquished by customers through the collection process. As
properties are added to other real estate owned they are written down to market
value (less estimated selling costs) based on a professional appraisal or other
common means of valuation. Currently there are 5 properties being held. There
have been two properties added and one disposition since December 31, 2006. The
largest addition during the first half of 2007 was a residence in the Grand
Haven area. If any property in this category is sold for less than it is being
held, further losses could result.
Deposit balances were $228.1 million at June 30, 2007 up from $214.3 million at
December 31, 2006. Total deposit growth since year-end was $13.8 million or
6.4%. Increases were recorded in all types of accounts except time deposits
greater than $100,000.
Deposit growth is due to several of the Bank's large public fund customers
increasing their holdings since year-end as well as contributions from the
enhanced branch system. Since year-end 2007, non-interest bearing checking
accounts increased 13.6% while interest bearing checking accounts and savings
accounts grew $16.4 million. Local time deposits grew $11.2 million in the first
six months of 2007. As a result of the growth of local deposits the Bank was
able to reduce its concentration of brokered deposits. Brokered deposits are
time deposits obtained from depositors located outside of the Bank's market area
and are placed with the Bank by a deposit broker. Since December 31, 2006, the
Bank decreased its total balance of brokered deposits by $16.2 million and the
ratio of brokered deposits to total deposits
-17-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
decreased from 37% at December 31, 2006 to a level of 27% at June 30, 2007. The
Bank hopes to continue decreasing its dependency on brokered funds as its
branching network in the local market expands.
The notes payable balance consists of draws on the Company's revolving line of
credit with LaSalle. The balance increased $400,000 since December 31, 2006 as a
result of a draw made on June 29, 2007. The proceeds were used for general
operating expenses of the Company and to contribute capital to the Bank to
ensure that it maintained a well-capitalized regulatory status. Future draws are
expected for similar reasons.
The shareholders' equity totaled $16.3 million and $16.1 million at June 30,
2007 and December 31, 2006 respectively. The earnings recorded in the first half
of the year were offset by increases in accumulated other comprehensive loss
(security market value adjustments).
RESULTS OF OPERATIONS
The net income for the first six months of 2007 was $246,000 which was $459,000
less than the similar period in 2006. The corresponding basic and diluted
earnings per share for the first half of 2007 was $0.17 compared to $0.49 and
$0.48 respectively for 2006. Year to date 2007 earnings were impacted by a lower
net interest margin coupled with higher personnel and depreciation costs
associated with two new branch buildings--one in a new market and one
replacement building and the undertaking of a mortgage initiative.
Net income for the second quarter of 2007 was $18,000 while net income for the
same period in 2006 was $342,000. The corresponding basic and diluted earnings
per share for the second quarter of 2007 were $0.01 compared to $0.24 and $0.23
for the similar period in 2006. These results are indicative of the significant
investments the Company has made in branch facilities over the past nine months
as well as our recent recruitment of five mortgage originators. Although neither
strategic initiative has realized a consistent return, both initiatives are
currently meeting the initial strategic projections of management.
For the first six months and second quarter of 2007, the annualized return on
the Company's average total assets was 0.20% and 0.03%, respectively, which is
down from 0.62% and 0.60% annualized return for the same periods in 2006. The
Company's annualized return on average equity was 3.01% and 0.44% for the first
half and second quarter of 2007 and 9.46% and 9.11% for the first half and
second quarter of 2006. The ratio of average equity to average assets was 6.52%
and 6.48% for the first half and second quarter of 2007 and 6.56% and 6.63% for
the same periods in 2006.
As mentioned above, significant differences between the operating results of the
first half of 2006 and 2007 are 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.
-18-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Six months ended June 30,
--------------------------------------------------------------------------
2007 2006
----------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------- ------- ------------ ----------- -------
Assets
Federal funds sold and interest-
bearing deposits with other
financial institutions $ 4,549,622 $ 118,340 5.20% $ 5,323,322 $ 119,739 4.50%
Securities 19,498,116 477,577 4.90 19,547,407 413,319 4.23
Loans (including held for sale) 210,442,056 8,325,841 7.91 192,757,663 7,369,830 7.65
------------ ---------- ------ ------------ ---------- ------
234,489,794 8,921,758 7.61 217,628,392 7,902,888 7.26
Other assets 16,136,163 9,690,770
------------ ------------
$250,625,957 $227,319,162
============ ============
Liabilities and Shareholders' Equity
Interest-bearing deposits $197,416,818 $4,321,375 4.38 $177,769,552 $3,217,233 3.62
Federal funds purchased and
repurchase agreements 7,108,569 140,507 3.95 6,397,191 110,683 3.46
Subordinated Debentures, Note
Payable and Federal Home Loan
Bank Advances 10,904,396 356,907 6.55 10,641,436 333,740 6.27
------------ ---------- ------ ------------ ---------- ------
215,429,783 4,818,789 4.47 194,808,179 3,661,656 3.76
---------- ----------
Non-interest bearing deposits 17,869,184 17,152,794
Other liabilities 984,419 445,095
Shareholders' Equity 16,342,571 14,913,094
------------ ------------
$250,625,957 $227,319,162
============ ============
Net interest income (tax equivalent
basis) 4,102,969 4,241,232
Net interest spread on earning assets
(tax equivalent basis) 3.14% 3.50%
====== ======
Net interest margin on earning assets
(tax equivalent basis) 3.50% 3.90%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 108.85% 111.71%
====== ======
Tax equivalent adjustment (57,773) (53,279)
---------- ----------
Net interest income $4,045,196 $4,187,953
========== ==========
The tax equivalent net interest spread on average earning assets decreased 36
basis points to 3.14% since June 30, 2006. The tax equivalent net interest
margin decreased by 40 basis points from 3.90% at June 30, 2006 to 3.50% at June
30, 2007. The tax equivalent net interest income for the first half of 2007 was
$4.1 million compared to a figure of $4.2 million for the same six months in
2006. The Company recorded $143,000 less net interest income although there were
$16.9 million more average earning assets on the books. The net interest margin
compression between the two periods was mostly a result of increased cost of
funds between the first half of 2006 compared to the similar period in 2007.
Relative increases to loan income from higher internal prime lending rates and
more average loans outstanding were not enough to offset the 76 basis point
increase in expense experienced on the deposit side from a rate and outstanding
balance perspective.
The average rate earned on interest earning assets was 7.61% for the six months
ended June 30, 2007 compared to 7.26% for the same period in 2006, a 35 basis
point increase. The main contributing factor was a 26 basis point increase in
the yield on loans, the Bank's largest earning asset category. The Bank's
internal prime rate was 59 basis points higher between the
-19-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
first six months of 2007 and that of 2006. Internal prime rate changes, no
matter what direction, affect interest earned on variable rate loans and new
loan volume. Typically the Bank's loan portfolio is fairly balanced between
fixed and floating rate loans however over the last year customers have
preferred fixed rate terms causing the concentration of floating rate loans to
be reduced to 43% as of June 30, 2007. As of June 30, 2006 the concentration was
51%.
Interest expense incurred on deposits, repurchase agreements, federal funds
purchased, Federal Home Loan Bank advances and Notes Payable increased by 71
basis points for the first six months of 2007 compared to the first six months
of 2006. During 2006, there was a significant lag between the timing of loan
rate increases and increases in the Bank's cost of funds. For the first half of
2007, deposit rates continued to rise while lending rates remained stable.
Management believes that the Bank's enhanced branching system will over time
help adjust the mix of the Bank's outstanding deposits towards one that has a
higher concentration of lower costing funds which should positively affect the
Company's net interest margin.
-20-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 second quarter ended June 30, 2007 and 2006 is in
the table below.
Three months ended June 30,
-------------------------------------------------------------------------------
2007 2006
-------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ---------- ---------- ------------ ---------- ----------
Assets
Federal funds sold and interest-
bearing deposits with other
financial institutions $ 3,651,018 $ 47,671 5.22% $ 1,572,197 $ 18,757 4.77%
Securities 19,954,807 246,826 4.95 19,512,364 205,212 4.21
Loans (including held for sale) 213,401,967 4,268,819 8.00 195,783,381 3,841,279 7.85
------------ ---------- ------ ------------ ---------- ------
237,007,792 4,563,316 7.70 216,867,942 4,065,248 7.50
Other assets 16,568,921 10,043,454
------------ ------------
$253,576,713 $226,911,396
============ ============
Liabilities and Shareholders' Equity
Interest-bearing deposits $198,374,197 $2,209,884 4.46 $175,534,990 $1,678,261 3.82
Federal funds purchased and
repurchase agreements 8,500,961 89,508 4.21 7,822,448 75,917 3.88
Subordinated Debentures, Note
Payable and Federal Home
Loan Bank Advances 10,908,791 178,500 6.55 10,781,319 172,417 6.40
------------ ---------- ------ ------------ ---------- ------
217,783,949 2,477,892 4.55 194,138,757 1,926,595 3.97
---------- ----------
Non-interest bearing deposits 18,374,538 17,161,374
Other liabilities 987,842 577,672
Shareholders' Equity 16,430,384 15,033,593
------------ ------------
$253,576,713 $226,911,396
============ ============
Net interest income (tax equivalent
basis) 2,085,424 2,138,653
Net interest spread on earning assets
(tax equivalent basis) 3.15% 3.53%
====== ======
Net interest margin on earning assets
(tax equivalent basis) 3.52% 3.94%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 108.83% 111.71%
====== ======
Tax equivalent adjustment (28,495) (25,488)
---------- ----------
Net interest income $2,056,929 $2,113,165
========== ==========
Similar to the comparison of the net interest income results of the first half
of 2006 to that of the first half of 2007, there was a decrease in tax
equivalent net interest income between the two quarters and there was net
interest margin compression. Tax equivalent net interest income decreased by
$53,000 in spite of the fact that there was $20.1 million more average earning
assets between the second quarter of 2007 and the second quarter of 2006. The
tax equivalent net interest spread and margin declined by 38 and 42 basis points
respectively between the second quarter of 2006 and the similar period in 2007.
The internal prime lending rate was 28 basis points more in the second quarter
of 2007 compared to the same quarter in 2006, however this difference was more
than offset by a 58 basis point increase in the Company's cost of funds between
the same two periods.
As the Bank's cost of funds increases and prime rate changes are always a
possibility, asset liability management has become an important tool for
assessing and monitoring liquidity and
-21-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, of which rates change daily, and loans tied to the prime rate,
differ considerably from long term investment securities and fixed rate loans.
Interest bearing checking and money market accounts are more interest sensitive
than long term time deposits and fixed rate FHLB advances. Comparison of the
repricing intervals of interest earning assets to interest bearing liabilities
is a measure of interest sensitivity gap. Balancing this gap is a continual
challenge in an ambiguous and somewhat irrational rate environment. Details of
the repricing gap at June 30, 2007 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 $ 78,256 $ 0 $ 0 $ 0 $ 78,256
Federal Funds Sold 2,650,000 0 0 0 2,650,000
Securities (including FHLB stock) 941,577 1,976,396 10,853,206 5,626,540 19,397,719
Loans Held for Sale 0 0 0 533,602 533,602
Loans 100,221,442 19,526,426 89,561,007 12,077,947 221,386,822
------------ ------------ ------------ ----------- ------------
103,891,275 21,502,822 100,414,213 18,238,089 244,046,399
Interest-bearing liabilities
Savings and checking 65,765,838 0 0 0 65,765,838
Time deposits <$100,000 12,276,594 30,233,198 2,474,860 0 44,984,652
Time deposits >$100,000 23,676,455 41,264,380 32,904,082 0 97,844,917
Repurchase agreements and
Federal funds purchased 5,018,681 0 0 0 5,018,681
Subordinated Debt and Federal
Home Loan Bank Advances 11,300,000 0 0 0 11,300,000
------------ ------------ ------------ ----------- ------------
118,037,568 71,497,578 35,378,942 0 224,914,088
Net asset (liability) repricing gap $(14,146,293) $(49,994,756) $ 65,035,271 $18,238,089 $ 19,132,311
============ ============ ============ =========== ============
Cumulative net asset (liability)
Repricing gap $(14,146,293) $(64,141,049) 894,222 $19,132,311
============ ============ ============ ===========
Currently the Company has a negative twelve month repricing gap which indicates
that the Company is liability sensitive in the next twelve month period. This
position implies that increases to the national federal funds rate would have
more of an impact on interest expense than on interest income during this period
if there were a parallel shift in rates. For instance if the Company's internal
prime rate went up by 25 basis points and every interest earning asset and
interest bearing liability on the Company's June 30, 2007 balance sheet
repricing in the
-22-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
next twelve months adjusted simultaneously by the same 25 basis points, more
liabilities would be affected than assets. At this point in time it would not be
prudent to assume that deposit rates will only increase if the national federal
funds rate increases. The local marketplace has experienced significant
increases in deposit rates as noted above. The interest rate sensitivity table
simply illustrates what the Company is contractually able to change in certain
timeframes. Management has taken measures, such as increasing and enhancing its
branch facilities, to reallocate the mix of the Bank's deposits to be more
favorably distributed in the lower costing account categories.
The provision for loan losses for the second quarter and the first six months of
2007 were $268,000 and $395,000 compared to figures of $224,000 and $302,000 for
the same periods in 2006. Management believes that the allowance level is
adequate and justified based on the factors discussed earlier (see Financial
Condition). Management will continue to review the allowance with the intent of
maintaining it at an appropriate level. The provision may be increased or
decreased in the future as management continues to monitor the loan portfolio
and actual loan loss experience.
Non-interest income recorded in the first half of 2007 totaled $879,000 and
represented a 30% increase compared to last year's first half total, which was
$676,000. The main underlying factor was an increase in gains on SBA and
mortgage loan sales recorded. In the first half of 2007, the gains on sales of
these products totaled $188,000 compared to $16,000 recorded in the first half
of 2006. 72% of the increase is attributable to gains on SBA loan sales. The
Bank developed its SBA lending program in 2006 but there were no recorded gains
until the third quarter of that year. Increases to gain on loan sales were
slightly offset by a decline in fees earned on the Bank's overdraft protection
product mostly caused by lower commercial customer use than in the past.
Non-interest income for the second quarter of 2007 was $68,000 more than the
$356,000 recorded in the same quarter of 2006. A significant portion (61%) of
the increase came from the newly implemented mortgage initiative with gains on
mortgage loans sales improving $42,000 compared to the second quarter of 2006.
Non-interest expenses for the first six months of 2007 were $4.3 million
compared to a total of $3.5 million for 2006, an increase of 20%. The second
quarter non-interest expense total was $2.2 million for 2007 and $1.8 million
for 2006. The notable variances among the individual categories were in the
areas of salaries and benefits and occupancy and equipment expenses.
On average there were an additional 18.7 full-time equivalent employees during
the first six months of 2007 compared to the same period of 2006. These
additions as well as general staff compensation increases resulted in a 25%
growth in total salaries and benefits expense. Additions to staff were made for
the newly created fourth branch facility as well as to support the growth of the
Bank from both a sales and operational standpoint. The recently implemented
mortgage initiative added nine full-time equivalent employees in the second
quarter of 2007. The $484,000 increase in salaries and benefits between the
first half of 2007 and the similar period in 2006 accounted for 68% of the
increase in total non interest expenses.
-23-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the second quarter of 2007, salaries and benefits were $339,000 higher than
the similar period in 2006. For that period the difference in full-time
equivalent people was 22.5. The salaries and benefits expenses recorded for the
second quarter of 2007 included recruiting expenses associated with the mortgage
initiative. In January 2008, the six mortgage originators currently on staff
will be moving to an entirely commission-based salary program.
Occupancy and equipment expenses were $593,000 and $304,000 for the first half
and second quarter of 2007 respectively compared to $373,000 and $190,000 for
the first half and second quarter of 2006. The increases between the four
periods is directly related to depreciation expense from the construction of a
fourth banking location which became operational in the fourth quarter of 2006
as well as the construction of a replacement banking facility in North Muskegon
which opened in January of 2007.
Federal tax expense was lower in the first half of 2007 compared to the first
six months of 2006. The decrease is not only related to lower pre-tax income but
also to an adjustment that occurred in the first quarter of 2007 when the
Company reevaluated its federal tax accruals and concluded that tax liabilities
needed to be modified reducing federal tax expense recorded in that quarter by
$36,000. The federal tax benefit that was recorded in the second quarter of 2007
was due to the proportion of tax free municipal bond income to consolidated
pre-tax income.
-24-
COMMUNITY SHORES BANK CORPORATION
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 June 30, 2007. 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
June 30, 2007 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its annual meeting held on May 10, 2007, the Company's shareholders voted to
elect three Class III Directors, Heather D. Brolick, Bruce J. Essex, and Bruce
C. Rice, each for a three year term expiring at the annual meeting of the
shareholders of the Company in 2010. The results of the election were as
follows:
Votes Votes Votes Broker Non-
Nominee For Withheld Abstained Votes
- ------- --------- -------- --------- -----------
Heather D. Brolick 1,149,491 109,628 0 209,681
Bruce J. Essex 1,111,822 147,297 0 209,681
Bruce C. Rice 1,110,411 148,708 0 209,681
-25-
COMMUNITY SHORES BANK CORPORATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS-continued
The terms for the following directors (who were not up for election) continued
after the annual meeting: Gary F. Bogner, Robert L. Chandonnet, Dennis L.
Cherette, Steven P. Moreland, Joy R. Nelson, Jonathan L. Smith and Roger W.
Spoelman.
Additionally, shareholders voted to approve the Executive Incentive Plan as it
was presented in the Company's 2007 proxy statement. The result of the vote was
as follows:
Votes Votes Votes Broker Non-
For Against Abstained votes
- ------- ------- --------- -----------
710,470 191,359 14,726 552,245
Finally, shareholders voted to ratify the appointment of Crowe Chizek and
Company LLC as the Company's independent registered public accountants for 2007.
The result of the vote was as follows:
Votes Votes Votes Broker Non-
For Against Abstained votes
- --------- ------- --------- -----------
1,212,704 46,166 250 209,680
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------
3.1 Articles of Incorporation of the Company 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 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
-26-
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 August 14, 2007.
COMMUNITY SHORES BANK CORPORATION
By: /s/ Heather D Brolick
--------------------------------------
Heather D. Brolick
President and Chief Executive Officer
(principal executive officer)
By: /s/ Tracey A. Welsh
--------------------------------------
Tracey A. Welsh
Senior Vice President, Chief Financial
Officer and Treasurer (principal
financial and accounting officer)
-27-
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------
3.1 Articles of Incorporation of the Company 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 Certification of Chief Executive
32.2 Section 1350 Certification of Chief Financial Officer
-28-