<PAGE> 1
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, 1999
[ ] 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 November 10, 1999, 1,170,000 shares of Common Stock of the issuer were
outstanding
Transitional Small Business Disclosure Format:
Yes No X
---- ----
<PAGE> 2
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
--------
<S> <C> <C>
Item 1. Financial Statements.......................................... 1
Item 2. Management's Discussion and Analysis or
Plan of Operation............................................. 14
PART II. Other Information
Item 1. Legal Proceedings............................................. 21
Item 2. Changes in Securities and Use of Proceeds..................... 21
Item 3. Defaults upon Senior Securities............................... 21
Item 4. Submission of Matters to a Vote of Security Stockholders...... 21
Item 5. Other Information............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 22
Signatures............................................................. 23
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------- ----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,845,776 $ 8,612,377
Federal Funds Sold 2,850,000 0
---------------------- ----------------------
Total cash and cash equivalents 4,695,776 $ 8,612,377
Securities available for sale 8,677,524 0
Total loans 41,417,636 0
Allowance for loan losses 621,300 0
---------------------- ----------------------
Net loans 40,796,336 0
Accrued interest receivable 253,022 11,400
Premises and equipment-net 2,410,934 1,237,489
Other assets 198,182 0
---------------------- ----------------------
Total assets $ 57,031,774 $ 9,861,266
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing $ 2,696,427 $ 0
Interest bearing 42,441,476 0
---------------------- ----------------------
Total 45,137,903 0
Securities sold under agreements to repurchase 2,761,794 0
Accrued expenses and other liabilities 137,984 72,214
---------------------- ----------------------
Total liabilities 48,037,681 72,214
Shareholders' Equity
Preferred Stock, no par value: no shares 0 0
authorized and none issued
Common Stock, no par value: 9,000,000 10,871,211 10,227,604
shares authorized and 1,170,000 shares
outstanding
Unrealized loss on securities available for sale (21,721) 0
Retained Deficit (1,855,398) (438,552)
---------------------- ----------------------
Total shareholders' equity 8,994,092 9,789,052
---------------------- ----------------------
Total liabilities and shareholders' equity $ 57,031,774 $ 9,861,266
====================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------------- ------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest Income
Loans, including fees $ 771,551 $ 1,359,757
Federal Funds Sold 48,157 135,331
Securities, taxable 110,652 285,451
Other 42 14,519
------------------------- ------------------------
Total interest income 930,403 1,795,059
Interest expense
Deposits 478,949 874,086
Secured Borrowings 22,170 39,706
Federal Funds Purchased 421 684
Other 0 0
------------------------- ------------------------
Total interest expense 501,540 914,476
NET INTEREST INCOME 428,863 880,583
Provision for loan losses 154,200 621,300
------------------------- ------------------------
Net interest income after provision for loan losses 274,663 259,283
Noninterest income
Service charge income 19,465 31,667
Mortgage referral income 31,260 68,347
Other 948 9,475
------------------------- ------------------------
Total noninterest income 51,674 109,490
Noninterest expense
Salaries and benefits 355,428 980,098
Occupancy 50,131 141,159
Equipment 61,410 168,344
Legal and professional 111,310 250,240
Supplies 17,411 75,156
Other 28,902 170,621
------------------------- ------------------------
Total noninterest expense 624,592 1,785,618
LOSS BEFORE FEDERAL INCOME TAX (298,256) (1,416,846)
Federal income tax expense 0 0
------------------------- ------------------------
NET LOSS $ (298,256) $ (1,416,846)
========================= ========================
Basic and diluted loss per share $ (0.26) $ (1.22)
========================= ========================
Weighted average shares outstanding $ 1,164,872 $ 1,164,872
========================= ========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------------ -------------------------
<S> <C> <C>
Net Loss $ (298,256) $ (1,416,846)
Other Comprehensive income, net of tax;
Change in unrealized loss on securites 4,005 (21,721)
------------------------ -------------------------
Comprehensive loss $ (600,579) $ (1,438,566)
======================== =========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Securities Total
Common Retained Available for Shareholders'
Stock Earnings Sale Equity
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $ 10,227,604 $ (438,552) $ 0 $ 9,789,052
Net proceeds from IPO over-
allotment, January 21, 1999 643,607 643,607
Net loss for period from
January 1, 1999 through
September 30, 1999 (1,416,846) (1,416,846)
Unrealized loss on
securities available for sale,
net of tax (21,721) (21,721)
----------------- ----------------- ------------------ ------------------
Balance, September 30, 1999 $ 10,871,211 $ (1,855,398) $ (21,721) $ 8,994,092
================= ================= ================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 7
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------------ ------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (298,256) $ (1,416,846)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation and amortization 74,099 204,769
Provision for loan losses 154,200 621,300
Net change in accrued interest receivable (10,210) (241,622)
Net change in other assets (30,628) (198,182)
Net change in accrued expenses and other liabilities (13,155) 65,770
------------------------ ------------------------
Net cash used in operating activities (123,949) (964,809)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in loans (10,298,886) (41,417,636)
Purchase of securities available for sale (2,869,884) (30,112,462)
Proceeds from securities sales and maturities 4,913,217 21,413,217
Purchase of premises and equipment (741,913) (1,378,215)
------------------------ ------------------------
Net cash used in investing activities (8,997,467) (51,495,096)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,108,404 45,137,903
Net increase in securities sold under agreements to repurchase 1,114,177 2,761,794
Net proceeds from IPO Over-allotment 0 643,607
------------------------ ------------------------
Net cash from financing activities 11,222,581 48,543,304
Net change in cash and cash equivalents 2,101,166 (3,916,601)
Cash and cash equivalents, beginning balance 2,594,610 8,612,377
------------------------ ------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,695,776 $ 4,695,776
======================== ========================
Supplemental disclosures of cash flow information
Cash paid during the period for interest $ 474,415 $ 820,955
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 8
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The unaudited financial statements for the three and nine months ended
September 30, 1999 include the consolidated results of operations of
Community Shores Bank Corporation ("Corporation") and its wholly-owned
subsidiary, Community Shores Bank ("Bank"). 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 Corporation'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, 1999 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
Corporation's annual report on Form 10-KSB for the period ended
December 31, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Securities: Securities are classified as held to maturity and carried
at amortized cost when management has the positive intent and ability
to hold them to maturity. Securities are classified as available for
sale when they might be sold before maturity. Securities available for
sale are carried at fair value, with unrealized holding gains and
losses reported in other comprehensive income. Trading securities are
carried at fair value, with changes in unrealized holding gains and
losses included in income. Other securities such as Federal Home Loan
Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount.
Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a decline
in fair value is not temporary.
Loans: Loans are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for
loan losses. Loans held for sale are reported at the lower of cost or
market, on an aggregate basis.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when the loan is impaired or payments are past due over 90
days (180 days for residential mortgages). Payments received on such
loans are reported as principal reductions.
6
<PAGE> 9
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management
estimates the allowance balance required using past loan loss
experience, known and inherent risks in the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations
of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgement,
should be charged-off.
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of
similar nature such as residential mortgage, consumer, and credit card
loans, and on an individual loan basis for other loans. If a loan is
impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows
using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.
Repurchase Agreement: Substantially all repurchase agreement
liabilities represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not
covered by federal deposit insurance.
Comprehensive Income: Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes
unrealized gains and losses on securities available for sale which are
also recognized as separate components of equity.
Industry Segment: Internal financial information is primarily reported
and aggregated in one line of business, banking.
3. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan
losses account:
<TABLE>
<S> <C>
Balance at January 1, 1999 $ 0
Provision for loan losses charged against
operating expense 621,300
-------------
Balance at September 30, 1999 $ 621,300
=============
</TABLE>
7
<PAGE> 10
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. LOANS
Between the opening of Community Shores Bank on January 18, 1999 and
the end of the third quarter, September 30, 1999, $41.4 million of
loans were made to customers. The components of the outstanding
balances and their percentage of the total portfolio is as follows:
<TABLE>
<CAPTION>
September 30, 1999
Balance %
---------------- -------
<S> <C> <C>
Consumer loans $ 3,741,851 9.0%
Commercial, financial and other 17,768,982 42.9
Commercial real estate and
construction 17,500,272 42.3
Residential real estate, mortgages
and construction 2,406,530 5.8
---------------- -------
Total loans $ 41,417,636 100.0%
================ =======
</TABLE>
5. SECURITIES AVAILABLE FOR SALE
The following table represents the securities held in the Corporation's
portfolio at the end of the third quarter:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value %
----------------- ------------- ---------------- ----------------- --------
<S> <C> <C> <C> <C> <C>
US Treasury $ 1,752,752 $ 0 $ (564) $ 1,752,188 20.2%
US Government Agency 4,976,043 (13,235) 4,962,808 57.2
Mortgaged-backed securities,
guaranteed by GNMA 1,982,145 (19,617) 1,962,528 22.6
----------------- ------------- ---------------- ----------------- --------
Total securities at September 30,1999 $ 8,710,941 $ 0 $ (33,416) $ 8,677,524 100.0%
================= ============= ================ ================= ========
</TABLE>
8
<PAGE> 11
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. PREMISES AND EQUIPMENT - NET
Premises and equipment are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
Land and Land Improvements $ 451,740 $ 450,440
Leasehold improvements 84,175 0
Furniture and equipment 673,978 477,119
Construction in progress 1,369,303 309,930
------------------- ------------------
2,579,197 1,237,489
Less accumulated depreciation (168,262) 0
------------------- ------------------
Total net premises and equipment $ 2,410,934 $ 1,237,489
=================== ==================
</TABLE>
Depreciation expense for the first two quarters of 1999 was $53,312
and $56,129. The same expense for the third quarter amounted to
$58,821.
7. DEPOSITS
Community Shores Bank began operations on January 18, 1999. Between
that date and the end of the third quarter, September 30, 1999, deposit
accounts totaling $45.1 million were opened. The components of the
outstanding balances and their percentage of the total portfolio is as
follows:
<TABLE>
<CAPTION>
September 30, 1999
Balance %
----------------- -------
<S> <C> <C>
Noninterest-bearing
Demand $ 2,696,427 6.0%
Interest-bearing
Checking 3,723,752 8.2
Money Market 3,162,861 7.0
Savings 434,809 1.0
Time, under $100,000 15,684,410 34.7
Time, over $100,000 19,435,643 43.1
----------------- -------
Total Deposits $ 45,137,903 100.0%
================= =======
</TABLE>
9
<PAGE> 12
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. BORROWINGS
Information relating to securities sold under agreements to repurchase
follows:
<TABLE>
<CAPTION>
September 30,
1999
-------------------
<S> <C>
Outstanding balance $ 2,761,794
Average interest rate 4.72%
Average balance $ 44,500
Average interest rate 4.64%
Maximum outstanding at any month end $ 2,761,794
</TABLE>
Securities sold under agreements to repurchase (repurchase agreements)
generally have original maturities of less than one year. Repurchase
agreements are treated as financings and the obligations to repurchase
securities sold are reflected as liabilities. Securities involved with
the agreements are recorded as assets of the Bank and are primarily
held in safekeeping by correspondent banks. Repurchase agreements are
offered principally to certain large deposit customers as deposit
equivalent investments.
9. EMPLOYEE BENEFIT PLANS
The Corporation established a 401(k) plan effective January 1, 1999,
covering substantially all its employees. The Corporation's
year-to-date 1999 matching 401(k) contribution charged to expense was
$32,043. The total for the third quarter was $10,248. The percent of
the Corporation's matching contributions to the 401(k) is currently
4.50% and was approved by the Board of Directors in a meeting on
January 26, 1999.
10
<PAGE> 13
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. 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 a third party. Exposure to credit loss if the other
party 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 not 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 financing
instruments with off-balance-sheet risk at September 30, 1999 follows:
<TABLE>
<CAPTION>
September 30,
1999
-----------------
<S> <C>
Letters of credit $ 1,117,500
Commercial unused lines of credit 18,362,669
Consumer unused lines of credit 1,287,908
Residential construction commitments 590,283
</TABLE>
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 expire without being used, the above amounts do not
necessarily represent future cash commitments. No losses are
anticipated as a result of these transactions.
11
<PAGE> 14
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. REGULATORY MATTERS
The Corporation 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.
<TABLE>
<CAPTION>
Capital to risk weighted
assets
------------------------------ Tier 1 Capital
Total Tier 1 to average assets
------------ ------------- ----------------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
</TABLE>
12
<PAGE> 15
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Actual capital levels (in thousand) and minimum required levels for the
Corporation and Bank were:
<TABLE>
<CAPTION>
Actual Adequately Capitalized Well Capitalized
---------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- -------- --------------- ------- --------------- -------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1999
- --------------------------
Total capital (to risk-
weighted assets)
Consolidated $ 9,607,505 20.31% $ 3,784,460 8.00% $ 4,730,574 10.00%
Bank 8,543,504 18.06 3,784,460 8.00 4,730,574 10.00
Tier 1 capital (to risk-
weighted assets)
Consolidated 9,015,813 19.06 1,892,230 4.00 2,838,345 6.00
Bank 7,951,812 16.81 1,892,230 4.00 2,838,345 6.00
Tier 1 capital (to
average assets)
Consolidated 9,015,813 25.59 1,409,043 4.00 1,761,304 5.00
Bank 7,951,812 22.62 1,406,400 4.00 1,758,000 5.00
</TABLE>
The Corporation and the Bank were in the well capitalized category at
September 30, 1999.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
This report 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 Corporation and the
Bank. 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
Corporation 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 Corporation
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.
Community Shores Bank Corporation was incorporated on July 23, 1998 to establish
and own Community Shores Bank which began operations on January 18, 1999. At
this time, management believes that the Bank is likely to have adequate funds to
meet its capital requirements for the near future.
Since opening its doors on January 18, the Bank has seen steady growth. In fact,
during the first nine months of 1999, the assets of Community Shores Bank
Corporation increased from $9,861,266 on December 31, 1998, to $57,031,744 on
September 30, 1999. This represents the total increase in assets of $47,170,508.
Due to the rapid growth experienced since January, it is possible that
management will have to seek additional capital some time in the year 2000.
14
<PAGE> 17
COMMUNITY SHORES BANK CORPORATION
Plan of Operation
(September 30, 1999)
The following table sets forth certain information relating to the Corporation's
consolidated average interest earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
period indicated. Such yields and costs are derived by dividing income or
expenses by the average daily balance of assets or liabilities, respectively,
for the period presented. During the period presented, there were no nonaccrual
loans.
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
Average Average
balance Interest rate
---------------- ------------- ----------
<S> <C> <C> <C>
Assets
Federal funds sold and interest-bearing
deposits with banks $ 3,702,747 $ 135,331 4.87%
Investment securities-available for sale 7,244,920 285,451 5.25
Loans 21,716,099 1,359,757 8.35
---------------- ------------- ----------
32,663,766 1,780,539 7.27
Other assets 2,562,319
----------------
$ 35,226,084
================
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 23,268,982 $ 907,048 5.20
Other borrowings 1,176,448 40,390 4.58
---------------- ------------- ----------
24,445,430 947,438 5.17
Noninterest-bearing deposits 1,663,410
Other liabilities 80,065
Shareholders' Equity 9,037,179
----------------
$ 35,226,084
================
Net interest income $ 833,101
=============
Net interest margin on earning assets 2.10%
==========
</TABLE>
15
<PAGE> 18
COMMUNITY SHORES BANK CORPORATION
Plan of Operation
(September 30, 1999)
The table below illustrates the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1999, which are
expected to mature or reprice in each of the time periods shown (in thousands):
<TABLE>
<CAPTION>
Interest rate sensitivity period
Within Three to One to After
three twelve five five
months months years years Total
--------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 2,850,000 $ 0 $ 0 $ 0 $ 2,850,000
Securities available for sale 2,748,018 0 3,479,323 2,450,183 8,677,524
Loans 9,401,978 1,098,363 26,135,586 4,781,709 41,417,636
--------------- ---------------- --------------- --------------- ---------------
14,999,996 1,098,363 29,614,909 7,231,892 52,945,160
Interest-bearing liabilities
Savings and checking 7,321,423 0 0 0 7,321,423
Time deposits less than $100,000 3,205,129 13,617,315 586,156 0 17,408,600
Time deposits greater than $100,000 8,066,575 9,443,830 201,048 0 17,711,453
Other borrowings 2,761,794 0 0 0 2,761,794
--------------- ---------------- --------------- --------------- ---------------
21,354,921 23,061,145 787,204 0 45,203,270
Net asset (liability) gap $ (6,354,926) $ (21,962,782) $ 28,827,705 $ 7,231,892 $ 7,741,890
=============== ================ =============== =============== ===============
Cumulative net asset (liability) gap $ (6,354,926) $ (28,317,708) $ 509,997 $ 7,741,889
--------------- ---------------- --------------- ---------------
</TABLE>
As expected, cash and cash equivalents decreased in the nine months since
opening. The decrease at September 30, 1999 was $3,916,601. Conversely,
investment securities increased by $8,677,245. This increase was partially
driven by the growth in the Bank's Repurchase Account deposit product, which is
essentially a combined sweep account and repurchase account collateralized by
securities. Also, Mortgage Backed securities were purchased to assist the Bank
in its efforts to obtain a Federal Home Loan Bank membership. Other security
purchases were made to provide collateral for Fed Fund borrowings. All of the
investments in the security portfolio were classified as "available for sale" at
September 30, 1999.
16
<PAGE> 19
COMMUNITY SHORES BANK CORPORATION
Plan of Operation
(September 30, 1999)
As management had expected, the majority of the bank's growth has occurred in
the commercial loan area.
See the loan composite table below:
<TABLE>
<CAPTION>
September 30, 1999
Balance %
---------------- -------
<S> <C> <C>
Consumer loans $ 3,741,851 9.0%
Commercial, financial and other 17,768,982 42.9
Commercial real estate and
construction 17,500,272 42.3
Residential real estate, mortgages
and construction 2,406,530 5.8
---------------- -------
Total loans $ 41,417,636 100.0%
================ =======
</TABLE>
Of the $41.4 million loan portfolio at the end of the third quarter, slightly
more than 85% is held in the commercial loan category. This significant
concentration is in line with our strategy of focusing our initial efforts in
the commercial "wholesale" sector of business due in part to the fact that
commercial customers tend to generate demand deposit growth as well as loan
volume.
The "retail" portion of our loan portfolio, consumer and mortgage loans,
comprise approximately 15% of the September 30, 1999 loan portfolio as
management expected. The Bank continues to pursue secondary market residential
mortgages and primary residence construction loans. Consumer loan volume should
increase at a steady pace and account for a larger percentage of total assets
over time.
17
<PAGE> 20
COMMUNITY SHORES BANK CORPORATION
Plan of Operation
(September 30, 1999)
Detail of the maturities and rate sensitivity of the loan portfolio at
September 30, 1999 have been included below:
<TABLE>
<CAPTION>
Within Three to One to After
three twelve five five
months months years years Total
---------------- --------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Consumer loans $ 806,061 $ 39,951 $ 2,417,853 $ 477,986 $ 3,741,851
Commercial, financial and other 6,866,862 171,222 10,579,510 151,388 17,768,982
Commercial real estate and
construction 1,421,085 654,715 11,789,231 3,635,241 17,500,272
Residential real estate, mortgages
and construction 307,970 232,475 1,348,992 517,094 2,406,531
---------------- --------------- ---------------- -------------- ----------------
$ 9,401,978 $ 1,098,363 $ 26,135,586 $ 4,781,709 $ 41,417,636
================ =============== ================ ============== ================
Loans at fixed rates 408,182 1,098,363 24,510,791 4,781,709 30,799,045
Loans at variable rates 8,993,796 0 1,624,795 0 10,618,591
---------------- --------------- ---------------- -------------- ----------------
$ 9,401,978 $ 1,098,363 $ 26,135,586 $ 4,781,709 $ 41,417,636
================ =============== ================ ============== ================
</TABLE>
Another notable balance sheet change would be the balance recorded in
premises and equipment. This category has risen dramatically due
mostly to the construction of a permanent main office. Construction was
completed at the end of October.
On the liability side of the balance sheet, deposits have grown to
$45.1 million. The components are listed below:
<TABLE>
<CAPTION>
September 30, 1999
Balance %
----------------- -------
<S> <C> <C>
Noninterest-bearing
Demand $ 2,696,427 6.0%
Interest-bearing
Checking 3,723,752 8.2
Money Market 3,162,861 7.0
Savings 434,809 1.0
Time, under $100,000 15,684,410 34.7
Time, over $100,000 19,435,643 43.1
----------------- -------
Total Deposits $ 45,137,903 100.0%
================= =======
</TABLE>
Management has chosen to fund a portion of the rapid loan growth by
obtaining brokered and out-of-state deposits. Brokered deposits are
time deposits obtained from depositors located outside our market area
and are placed with our Bank by a deposit broker. At the end of the
third quarter, brokered deposits totaled $5,069,000 (roughly 11% of
total deposits). The approximate total of non-brokered, out-of-state
deposits was $5,936,000 or 13% of total outstanding deposits at
September 30, 1999. These deposit types have decreased 7 percent since
June 30, 1999.
18
<PAGE> 21
COMMUNITY SHORES BANK CORPORATION
Plan of Operation
(September 30, 1999)
The Bank's reliance on the above deposits is expected to be ongoing. However,
the Bank continues to pursue local business and public deposits in order to
maintain the downward trend in the portfolio concentration levels.
As of September 30, 1999, the Corporation had a retained deficit of $1,855,398.
The losses are primarily the result of preopening fees and expenses as well as a
provision for loan losses of $621,300 made in the first nine months of 1999.
Management believes that the Corporation will generate a net loss for 1999 as a
result of expenditures made to organize and grow the Bank to the size necessary
to generate revenues to exceed the cost of its overhead structure. Significant
ongoing additions to loan loss reserves will also contribute to this deficit due
to the projected increase in the loan portfolio. The expenditures made are
expected to create the infrastructure and lay the foundation for growth in
subsequent years.
On October 30, the temporary facility used since beginning operations was
vacated. On November 1, the Bank's new main office building, located at 1030 W.
Norton Avenue, was opened to the public. Over the next two months, Management
plans to expend the remaining balance of the construction cost related to the
building of the new main office. The remaining cash outlay is expected to be
around $600,000. The total project cost including the land, building and
furniture is expected to be approximately $2.3 million.
Having received all the required regulatory approval to open a second location,
the Corporation secured the lease of a facility at 15190 Newington Drive, Grand
Haven, Michigan. Since September 27, the branch has been serving customers in
Northern Ottawa County.
The Bank presently has the equivalent of 27.5 full-time employees. Management
will continue to review staffing levels to facilitate excellent customer
service.
THE YEAR 2000 ISSUE:
The approach of the year 2000 presents potential problems to businesses that
utilize computers. Some computer systems may not be able to properly interpret
or process dates after December 31, 1999 because they use only two digits to
indicate the year in the date. These computer systems do not properly recognize
a year that begins with "20" instead of the familiar "19". The effects of this
problem may vary from system to system. If not corrected, many computer
applications could fail or create erroneous results.
19
<PAGE> 22
COMMUNITY SHORES BANK CORPORATION
Plan of Operation
(September 30, 1999)
YEAR 2000 READINESS:
The Corporation has obtained information and account processing services and
reports ("Processing Services") from a reputable and experienced company that
provides such services for many financial institutions. The Corporation is
obtaining written assurances from its Processing Services supplier and computer
equipment suppliers that their products are or will be year 2000 ready or
compliant. The Corporation is assessing year 2000 compliance of the Bank and its
vendors. Vendors whose year 2000 compliance may affect the Corporation's
business and operations include its Processing Services supplier, electronic
banking vendors, correspondent banks, utilities and communications companies.
Security systems, heating ventilating, air conditioning and other systems may
also be affected. The Corporation expects to require assurances from commercial
borrowers as to their year 2000 compliance as part the loan application and
review process. A Year 2000 Committee was formed to ensure Year 2000 readiness.
Additionally the Corporation has appointed one of its senior officers to oversee
the committee. During the course of 1999 the committee has been responsible for
testing, verifying and processing all vendor equipment and correspondence. The
Corporation apprises its Board of Directors of the progress being made on a
regular basis.
ANTICIPATED YEAR 2000 COSTS:
Costs to the Corporation related to year 2000 matters are estimated to be less
than $25,000. These costs may include testing of equipment and software
programs, equipment upgrades and customer education. It is difficult to predict
such costs, and additional funds may be needed for expenses relating to year
2000 testing, training, education, system or software failure replacements, or
losses due to vendor or customer failure to be year 2000 compliant.
WORST CASE SCENARIO AND CONTINGENCY PLAN UPDATE:
The failure of the Corporation, its vendors, or customers to successfully
address year 2000 issues could interfere with the Corporation's ability to
operate its business and have a material adverse effect on the Corporation's
financial condition and results of operation. The Corporation has developed a
contingency plan to address year 2000 problems that may occur after December 31,
1999.
20
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Corporation and the Bank may be involved in various legal
proceedings that are incidental to their business. In the opinion of management,
neither the Corporation nor the Bank is a party to any current legal proceedings
that are material to the financial condition of the Corporation or the Bank,
either individually or in the aggregate.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
21
<PAGE> 24
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 Corporation's Registration Statement on Form
SB-2 (Commission File No. 333-63769) that became effective on
December 17, 1998
3.2 Bylaws of the Corporation are incorporated by reference to
exhibit 3.2 of the Corporation's Registration Statement on Form
SB-2 (Commission File No. 333-63769) that became effective on
December 17, 1998
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
Not applicable.
22
<PAGE> 25
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 13, 1999.
COMMUNITY SHORES BANK CORPORATION
By: /s/ Jose' A. Infante
--------------------------------------------
Jose' A. Infante
Chairman of the Board, President and Chief
Executive Officer (principal executive officer)
By: /s/ Tracey A. Welsh
--------------------------------------------
Tracey A. Welsh
(principal financial and accounting officer)
23
<PAGE> 26
EXHIBIT INDEX
Exhibit No. EXHIBIT DESCRIPTION
- ----------- -------------------
3.1 Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Corporation's Registration Statement on Form
SB-2 (Commission File no. 333-63769) that became effective on
December 17, 1998
3.2 Bylaws of the Corporation are incorporated by reference to
exhibit 3.2 of the Corporation's Registration Statement on Form
SB-2 (Commission File No. 333-63769) that became effective on
December 17, 1998
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
01/1/99 to
Return on Equity and Assets Annualized 9/30/99
-------------- ----------------
<S> <C> <C>
Return on average total assets (3.02)% (4.02)%
Return on average equity (11.76) (15.68)
Dividend payout ratio N/A
Average equity to average assets 25.65
Statement of Per Share Earnings
Net Loss $(1,416,846)
============
Average shares outstanding 1,164,872
Basic and diluted loss per share $ (1.22)
------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,845,776
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,850,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,677,524
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 41,417,636
<ALLOWANCE> 621,300
<TOTAL-ASSETS> 57,031,774
<DEPOSITS> 45,137,903
<SHORT-TERM> 2,761,794
<LIABILITIES-OTHER> 137,984
<LONG-TERM> 0
0
0
<COMMON> 10,871,211
<OTHER-SE> (1,855,398)
<TOTAL-LIABILITIES-AND-EQUITY> 57,031,774
<INTEREST-LOAN> 1,359,757
<INTEREST-INVEST> 285,451
<INTEREST-OTHER> 149,850
<INTEREST-TOTAL> 1,795,059
<INTEREST-DEPOSIT> 874,086
<INTEREST-EXPENSE> 914,476
<INTEREST-INCOME-NET> 880,583
<LOAN-LOSSES> 621,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,785,618
<INCOME-PRETAX> (1,416,846)
<INCOME-PRE-EXTRAORDINARY> (1,416,846)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,416,846)
<EPS-BASIC> (1.22)
<EPS-DILUTED> (1.22)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (621,300)
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (621,300)
</TABLE>
