<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 June 30, 2000
[ ] 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)
(616) 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 August 1, 2000, 1,170,000 shares of Common Stock of the issuer were
outstanding
Transitional Small Business Disclosure Format:
Yes No X
---- ----
<PAGE> 2
Community Shores Bank Corporation Index
<TABLE>
<CAPTION>
PART 1. Financial Information Page No.
--------------------- --------
<S> <C>
Item 1. Financial Statements......................................................... 1
Item 2. Management's Discussion and Analysis or Plan of
Operations................................................................... 12
PART II. Other Information
Item 1. Legal Proceedings............................................................. 19
Item 2. Changes in Securities ........................................................ 20
Item 3. Defaults upon Senior Securities............................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................... 20
Item 5. Other Information............................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................. 20
Signatures............................................................................. 22
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------------- -----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 1,542,583 $ 1,964,847
Interest-bearing deposits in other financial institutions 71,034 1,727
Federal funds sold 4,500,000 0
----------------------- -----------------------
Total cash and cash equivalents 6,113,617 1,966,574
Securities available for sale 18,458,138 10,767,804
Loans, net 80,512,774 55,946,379
Federal Home Loan Bank stock 210,000 138,200
Premises and equipment,net 3,363,719 3,469,953
Accrued interest receivable 655,754 326,484
Other assets 163,281 83,533
----------------------- -----------------------
Total assets $ 109,477,283 $ 72,698,927
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing $ 6,702,890 $ 4,074,635
Interest-bearing 81,346,092 51,901,442
----------------------- -----------------------
Total deposits 88,048,982 55,976,077
Federal funds purchased and repurchase agreements 10,301,633 6,934,491
Federal Home Loan Bank advances 1,500,000 0
Notes Payable 1,085,000 0
Accrued expenses and other liabilities 377,074 1,253,597
----------------------- -----------------------
Total liabilities 101,312,689 64,164,165
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 10,871,211
shares authorized and 1,170,000 shares
outstanding
Retained deficit (2,560,826) (2,240,334)
Accumulated other comprehensive loss (145,791) (96,115)
----------------------- -----------------------
Total shareholders' equity 8,164,594 8,534,762
----------------------- -----------------------
Total liabilities and shareholders' equity $ 109,477,283 $ 72,698,927
======================= =======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans, including fees $ 1,690,895 $ 491,486 $ 3,053,930 $ 588,206
Securities, taxable 313,034 19,310 542,970 87,174
Federal funds sold, FHLB dividends and other income 13,743 132,556 37,830 189,276
---------------- --------------- ---------------- ------------
Total interest income 2,017,672 643,352 3,634,730 864,656
Interest expense
Deposits 1,059,513 325,581 1,901,388 395,137
Repurchase agreements, federal funds purchased, and
Federal Home Loan Bank advances 194,180 14,564 328,679 17,799
---------------- --------------- ---------------- ------------
Total interest expense 1,253,693 340,145 2,230,067 412,936
NET INTEREST INCOME 763,979 303,207 1,404,663 451,721
Provision for loan losses 151,000 222,700 323,000 467,100
---------------- --------------- ---------------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 612,979 80,507 1,081,663 (15,379)
Noninterest income
Service charge income 51,922 9,986 96,886 12,202
Mortgage referral income 22,946 32,300 38,762 37,087
Other 32,077 7,588 50,156 8,527
---------------- --------------- ---------------- ------------
Total noninterest income 106,945 49,874 185,804 57,816
Noninterest expense
Salaries and employee benefits 430,584 357,150 898,019 624,670
Occupancy 46,686 45,818 98,140 91,028
Furniture and equipment 102,059 60,104 194,286 106,934
Advertising 21,164 17,205 41,801 33,163
Data Processing 25,112 8,267 54,126 15,267
Professional services 85,454 1,490 150,481 49,230
Telephone 8,287 8,109 18,926 15,663
Supplies 13,518 20,191 32,750 57,745
Directors and officers insurance 2,897 0 5,958 0
Other 49,874 133,167 93,472 167,327
---------------- --------------- ---------------- ------------
Total noninterest expense 785,635 651,501 1,587,959 1,161,027
LOSS BEFORE FEDERAL INCOME TAX (65,711) (521,120) (320,492) (1,118,590)
Federal income tax expense 0 0 0 0
---------------- --------------- ---------------- ------------
NET LOSS $ (65,711) $ (521,120) $ (320,492) $(1,118,590)
================ =============== ================ ============
Comprehensive Net Loss $ (54,658) $ (557,590) $ (370,168) $(1,158,169)
================ =============== ================ ============
Basic and diluted loss per share $ (0.06) $ (0.45) $ (0.27) $ (0.96)
================ =============== ================ ============
Weighted average shares outstanding 1,170,000 1,170,000 1,170,000 1,162,265
================ =============== ================ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Shares Stock Deficit Income (Loss) Equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 1,100,000 $10,227,604 $ (438,552) $ 0 $9,789,052
Comprehensive loss:
Net loss (1,118,590) (1,118,590)
Unrealized loss on
securities available for sale (39,579) (39,579)
---------------
Total comprehensive loss (1,158,169)
Common stock sale, January 21, 1999 70,000 643,607 643,607
----------------------------------------------------------------------------------
Balance, June 30, 1999 1,170,000 $10,871,211 $(1,557,142) $ (39,579) $9,274,490
==================================================================================
Balance, January 1, 2000 1,170,000 $10,871,211 $(2,240,334) $ (96,115) $8,534,762
Comprehensive loss:
Net loss (320,492) (320,492)
Change in unrealized loss on
securities available for sale (49,676) (49,676)
---------------
Total comprehensive loss (370,168)
----------------------------------------------------------------------------------
Balance, June 30, 2000 1,170,000 $10,871,211 $(2,560,826) $ (145,791) $8,164,594
==================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (65,711) $ (521,120) $ (320,492) $ (1,118,590)
Adjustments to reconcile net loss to net cash
from operating activities
Provision for loan losses 151,000 222,700 323,000 467,100
Depreciation and amortization 94,644 70,367 180,412 130,671
Net accretion of securities (32,839) (9,068) (54,677) (30,247)
Net change in:
Accrued interest receivable (122,589) (142,372) (329,270) (231,412)
Other assets (32,605) (66,706) (79,748) (167,554)
Accrued interest payable and other
liabilities 116,458 64,163 (876,523) 78,925
----------------- ----------------- ----------------- -------------------
Net cash from (used in) operating
activities 108,358 (382,036) (1,157,298) (871,107)
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Sales 0 0 0 2,000,000
Maturities, prepayments and calls 550,583 0 579,878 14,500,000
Purchases 0 (2,999,989) (8,265,211) (27,212,331)
Loan originations and payments, net (13,339,961) (14,755,817) (24,889,395) (31,118,750)
Purchase of Federal Home Loan Bank stock (71,800) 0 (71,800) 0
Additions to premises and equipment (46,503) (376,750) (74,178) (636,302)
----------------- ----------------- ----------------- -------------------
Net cash from investing activities (12,907,681) (18,132,556) (32,720,706) (42,467,383)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 19,483,976 14,783,109 32,072,905 35,029,499
Net change in federal funds purchased and
repurchase agreements (4,514,267) 616,093 3,367,142 1,647,617
Federal Home Loan Bank activity:
New Advances 8,100,000 0 9,600,000 0
Maturities and payments (8,100,000) 0 (8,100,000) 0
Net proceeds from Note Payable 1,085,000 0 1,085,000 0
Net proceeds from Stock Offering 0 0 0 643,607
----------------- ----------------- ----------------- -------------------
Net cash used in financing activities 16,054,709 15,399,202 38,025,047 37,320,723
Net change in cash and cash equivalents 3,255,386 (3,115,390) 4,147,043 (6,017,767)
Beginning cash and cash equivalents 2,858,231 5,710,000 1,966,574 8,612,377
----------------- ----------------- ----------------- -------------------
ENDING CASH AND CASH EQUIVALENTS $ 6,113,617 $ 2,594,610 $ 6,113,617 $ 2,594,610
================= ================= ================= ===================
Supplemental cash flow information:
Cash paid during the period for interest $ 1,339,708 $ 299,108 $ 1,953,460 $ 346,539
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 7
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited financial statements as of and for the three months and
six months ended June 30, 2000 include the condensed consolidated
results of operations of Community Shores Bank Corporation ("Company")
and its wholly-owned subsidiary, Community Shores Bank ("Bank"). These
condensed consolidated financial statements have been prepared in
accordance with the instructions for Form 10-QSB and Item 310(b) of
Regulation S-B and do not include all disclosures required by generally
accepted accounting principles for a complete presentation of the
Company's financial condition and results of operations. In the opinion
of management, the information reflects all adjustments (consisting
only of normal recurring adjustments) which are necessary in order to
make the financial statements not misleading and for a fair
representation of the results of operations for such periods. The
results for the period ended June 30, 2000 should not be considered as
indicative of results for a full year. For further information, refer
to the condensed consolidated financial statements and footnotes
included in the Company's annual report on Form 10-KSB for the period
ended December 31, 1999.
2. SECURITIES AVAILABLE FOR SALE
The following table represents the securities held in the Company's
portfolio at the end of the second quarter:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Unaudited Cost Gains Losses Value %
---------------------------- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
US Treasury $ 997,843 $ 155 $ (188) $ 997,810 5.4 %
US Government Agency 15,738,954 2,481 (114,170) 15,627,265 84.7
Mortgaged-backed securities,
guaranteed by GNMA 1,867,132 0 (34,069) 1,833,063 9.9
-------------------------------------------------------------------------------
Total securities at June 30, 2000 $ 18,603,929 $2,636 $ (148,427) $ 18,458,138 100.0 %
===============================================================================
</TABLE>
Securities available for sale increased $7,690,334 during the first
half of 2000. Below is the schedule of maturities for investments held
at June 30, 2000:
<PAGE> 8
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Available for sale
Amortized Fair
Unaudited Cost Value
-------------------------- -------------------------------------
<S> <C> <C>
Due in one year or less $ 3,016,066 $ 3,002,493
Due from one to five years 13,720,731 13,622,582
Mortgage-backed 1,867,132 1,833,063
-------------------------------------
$ 18,603,929 $ 18,458,138
=====================================
</TABLE>
3. LOANS
Loans made to customers totaled $22,882,384 since December 31, 1999.
The components of the outstanding balances, their percentage of the
total portfolio and the percentage increase from the end of 1999 to the
end of the second quarter of 2000 were as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 Percent
Balance Balance Increase/
(Unaudited) % (Unaudited) % (Decrease)
------------------------- ------------------------------- -------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and other $65,904,428 80.7 % $ 47,570,725 83.8 % 38.5 %
Real estate-construction 2,186,315 2.7 1,445,789 2.5 51.2
Real estate-mortgages 2,666,955 3.2 1,957,393 3.4 36.3
Installment loans to individuals 10,923,065 13.4 5,824,472 10.3 87.5
------------------------- -------------------------------
81,680,763 100.0 % 56,798,379 100.0 %
======== ========
Less allowance for loan losses 1,167,989 852,000
----------------- -----------------------
$80,512,774 $ 55,946,379
================= =======================
</TABLE>
4. ALLOWANCE FOR LOAN LOSSES
The following is a summary of activity in the allowance for loan losses
account for the six month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
(Unaudited)
------------------ ---------------
<S> <C> <C>
Beginning Balance, January 1, $ 852,000 $ 0
Charge-offs (7,011) 0
Recoveries 0 0
Provision charged against operating expense 323,000 467,100
------------------ ---------------
Ending Balance, June 30, $ 1,167,989 $ 467,100
================== ===============
</TABLE>
<PAGE> 9
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. DEPOSITS
Deposit balances increased $32,072,905 since December 31, 1999. The
components of the outstanding balances, their percentage of the total
portfolio and the percentage increase from the end of 1999 to the end
of the second quarter of 2000 were as follows:
<TABLE>
<CAPTION>
June 30, 2000 Percent
Balance % December 31, 1999 Increase/
(Unaudited) Balance % (Decrease)
-------------------------- -------------------------- -------------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing
Demand $ 6,702,890 7.6 % $ 4,074,635 7.3 % 64.5 %
Interest-bearing
Checking 5,768,095 6.6 4,662,155 8.3 23.7
Money Market 5,836,645 6.6 3,068,971 5.5 90.2
Savings 714,446 0.8 565,741 1.0 26.3
Time, under $100,000 29,035,545 33.0 21,084,562 37.7 37.7
Time, over $100,000 39,991,361 45.4 22,520,013 40.2 77.6
-------------------------- --------------------------
Total Deposits $88,048,982 100.0 % $55,976,077 100.0 %
========================== ==========================
</TABLE>
6. BORROWINGS
At June 30, 2000, the Bank's borrowings were made up of repurchase
agreements only. As such the second quarter information was as follows
(Unaudited):
<TABLE>
<CAPTION>
Repurchase
Agreements
-------------------
<S> <C>
Outstanding balance $ 10,301,633
Average interest rate 4.77%
Average balance $ 10,729,816
Average interest rate 4.88%
Maximum outstanding at any month end $ 14,815,900
</TABLE>
7. FEDERAL HOME LOAN BANK BORROWINGS
The Bank was approved in the third 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 $2,700,000. Each borrowing requires a direct pledge of
securities or loans. At this time, the Bank has $2,941,805 in
securities pledged to the Federal Home Loan Bank to support borrowings
to our full capacity. Details of the Bank's outstanding borrowings at
June 30, 2000 are:
<PAGE> 10
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Maturity Date Interest Rate June 30, 2000 December 31, 1999
------------- ------------- ------------- -----------------
<S> <C> <C> <C>
March 24, 2010 5.99% Fixed $1,500,000 $0
</TABLE>
8. NOTES PAYABLE
On June 28, 2000, the Company borrowed $1,085,000 from four of its
Directors. A summarization of the four notes is given below:
<TABLE>
<CAPTION>
---------------------------------- ---------------- ---------------- --------------------------------------------------
Note Due to: Principal Current Rate Maturity
---------------------------------- ---------------- ---------------- --------------------------------------------------
<S> <C> <C> <C>
Robert L. Chandonnet $140,000 11.0% June 30, 2006
Michael D. Gluhanich $ 70,000 11.0% June 30, 2006
Donald E. Hegedus $350,000 11.0% June 30, 2006
John L. Hilt $525,000 11.0% June 30, 2006
---------------------------------- ---------------- ---------------- --------------------------------------------------
</TABLE>
The rate on these notes is floating and is officially defined as 1.50%
over the Firstar Bank, N.A. Prime rate. Firstar's current prime rate is
9.50%. Interest is owed quarterly in arrears on the fifteenth of April,
July, October and January until the principal of these Notes is paid or
made available for payment. The notes may be prepaid without any
prepayment penalty with at least one days prior written notice. The
principal and interest related to these Notes is expressly subordinated
to any and all Senior Debt of the Company. The proceeds from these
Notes were used to infuse capital into the Bank to ensure that
sufficient capital ratios are maintained according to banking
regulations.
9. 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.
<PAGE> 11
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the notional and contractual amounts of outstanding
financing instruments with off-balance-sheet risk for the periods June
30, 2000 and December 31, 1999 follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Letters of credit $ 428,000 $ 278,000
Commercial unused lines of credit 20,125,000 22,513,000
Consumer unused lines of credit 3,827,000 1,570,000
Residential construction commitments 621,000 805,000
</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.
10. REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements
administered by the federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings,
and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can
initiate regulatory action that could have a direct material effect on
the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial
condition. If adequately capitalized, regulator approval is required to
accept brokered deposits. If undercapitalized, capital distributions
are limited, as is asset growth and expansion, and plans for capital
restoration are required.
<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>
Actual capital levels (in thousands) and minimum required levels at
June 30, 2000 for the Company and Bank were:
<PAGE> 12
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Actual Adequately Capitalized Well Capitalized
------------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000
(Unaudited)
-------------------------
Total capital (to risk-
weighted assets)
Consolidated $ 10,525,163 11.65 % $ 7,227,516 8.00 % $ 9,034,395 10.00 %
Bank 10,152,030 11.24 7,227,516 8.00 9,034,395 10.00
Tier 1 capital (to risk-
weighted assets)
Consolidated 8,310,386 9.20 3,613,758 4.00 5,420,637 6.00
Bank 9,022,253 9.99 3,613,758 4.00 5,420,637 6.00
Tier 1 capital (to
average assets)
Consolidated 8,310,386 9.06 3,670,008 4.00 4,587,510 5.00
Bank 9,022,253 9.83 3,670,008 4.00 4,587,510 5.00
</TABLE>
The Company and the Bank were in the well capitalized category at June 30, 2000.
The Bank was given an additional requirement by the regulators at the time of
approval. For the first three years after opening, a Tier 1 capital to total
assets ratio of 8.00% must be maintained. At June 30, 2000 the Bank had a ratio
of 8.24%. The Company is closely monitoring the Bank's growth and will be
infusing additional capital as necessary to comply with this requirement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion below details the financial results of the Company and
its wholly owned subsidiary, the Bank, through June 30, 2000 and is separated
into two parts which are labeled, Financial Condition and Results of Operations.
The Financial Condition compares the period ended June 30, 2000 to that which
ended on December 31, 1999. The Results of Operations discusses both the three
month and six month periods ended June 30, 2000 to the same periods of 1999.
Both parts should be read in conjunction with the interim consolidated condensed
financial statements and footnotes included in Item 1 of this Form 10-QSB.
This discussion and analysis of financial condition and results of
operations, and other sections of the 10-QSB contains forward-looking statements
that are based on management's beliefs, assumptions, current expectations,
estimates and projections about the financial services industry, the economy,
and about the Company 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
<PAGE> 13
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to predict
with regard to timing, extent, likelihood and degree of occurrence. The Company
undertakes no obligation to update, amend, or clarify forward looking
statements, whether as a result of new information, future events (whether
anticipated or unanticipated), or otherwise.
Future Factors include changes in interest rates and interest rate
relationships; demand for products and services; the degree of competition by
traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; changes in the national and local economy; and other factors, including
risk factors, referred to from time to time in filings made by the Company with
the Securities and Exchange Commission. These are representative of the Future
Factors that could cause a difference between an ultimate actual outcome and a
preceding forward-looking statement.
FINANCIAL CONDITION
Total assets increased by $36,778,356 to $109,477,283 at June 30, 2000
from $72,698,927 at December 31, 1999. This is a 51% increase in assets during
the first half of 2000. Growth is mostly attributable to tremendous
commercial loan volume and growth in the bank's securities portfolio. Management
continues to focus on small- to medium-sized business customers, the original
strategy since opening in January 1999. Next quarter, the Company anticipates
continued growth but does not believe that the rate of increase will be
equivalent to that experienced in the first six months of 2000.
Cash and cash equivalents increased by $4,147,043 to $6,113,617 at June
30, 2000 from $1,966,574 at December 31, 1999. This increase was a result of
federal funds of $4,500,000 being sold at June 30, 2000.
Securities available for sale increased $7,690,334 during the first
half of 2000. Security purchases were driven by growth in repurchase agreements.
A repurchase agreement is not considered a deposit by the FDIC and is not FDIC
insured. The liability is treated more like a borrowing of the Bank. To secure
the borrowing (repurchase agreement) balances held by customers are typically
collateralized by high quality government securities held within the Bank's
security portfolio. At the end of 1999, there were few unpledged securities in
the Bank's portfolio which required us to purchase additional Treasuries and
Agencies to fulfill the collateralization requirement.
Total loans climbed to $81,680,763 at June 30, 2000 from $56,798,379 at
December 31,1999. Of the $24,882,384 increase experienced, 74% occurred in the
commercial loan portfolio. The "wholesale" banking focus used throughout 1999 is
still thriving during the first six months of 2000. Presently, the commercial
category of loans comprises 81% of the Bank's total
<PAGE> 14
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
loan portfolio. There are five experienced commercial lenders on staff devoted
to pursuing and originating these types of loans. Significant growth was also
experienced on the "retail" lending side. Installment loans increased
$5,098,593, or 88%, over the balance reported at December 31, 1999. A large
portion of this growth was the result of new business in indirect automobile
loans and the financing of secured leases. Strength in home equity financing
also continued during the quarter. Overall, the growth in total loans exceeded
expectations however management anticipates that the rate of increase will slow
during the remaining quarters of 2000. The loan maturities and rate sensitivity
of the loan portfolio at June 30, 2000 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>
Commercial, financial and other $6,177,525 $16,053,193 $37,863,558 $ 5,810,152 $65,904,428
Real estate-construction 173,467 2,012,848 0 0 2,186,315
Real estate-mortgages 0 0 186,612 2,480,343 2,666,955
Installment loans to individuals 431,429 287,837 6,538,246 3,665,553 10,923,065
-------------------------------------------------------------------------------
$6,782,421 $18,353,878 $44,588,416 $11,956,048 $81,680,763
===============================================================================
Loans at fixed rates 1,152,155 2,878,158 42,024,705 6,795,834 $52,850,852
Loans at variable rates 5,630,266 15,475,720 2,563,711 5,160,214 28,829,911
------------------------------------------------------------------------------
$6,782,421 $18,353,878 $44,588,416 $11,956,048 $81,680,763
===============================================================================
</TABLE>
The loan portfolio is reviewed and analyzed on a regular basis for the
purpose of estimating probable credit losses. The allowance is adjusted
accordingly to maintain an adequate level to absorb probable losses given the
risk characteristics of the loan portfolio. At June 30, 2000, the allowance
totaled $1,167,989 or approximately 1.43% of gross loans outstanding. Management
has determined this is an appropriate level based on their estimate of losses
inherent in the loan portfolio after their detailed review as well as from
comparison with allowance levels maintained by other institutions with similar,
but seasoned loan portfolios. The allocation of the allowance at June 30, 2000
was as follows:
<TABLE>
<CAPTION>
Percent of
allowance
Balance at End of Period Applicable to: related to
Amount loan category
------------------ ---------------
<S> <C> <C>
Commercial $946,072 81.0 %
Residential real estate 58,399 5.0
Installment 163,518 14.0
Unallocated 0 0.0
------------------ ---------------
Total loans $1,167,989 100.0 %
================== ===============
</TABLE>
<PAGE> 15
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Given the size and composition of the bank's loan portfolio and its
concentration of commercial loans, this allocation is felt to be in line with
the banking industry's historical loan loss experience. Management will continue
to monitor the allocation and make necessary adjustments based on portfolio
concentration levels, actual loss experience and the financial condition of the
borrowers. As such, an additional $323,000 was provided for since December 31,
1999. At the end of June, loans 30-59 days past due totaled $121,432 up from
$109,000 at December 31,1999. There were none past due more than 89 days at
either June 30, 2000 or December 31, 1999. The Bank had no non-accrual loans at
June 30, 2000 or at December 31, 1999. The Bank recorded no credit losses in
1999. In the second quarter of 2000, two loans were charged off. The principal
balances of these charge-offs aggregated $7,011.
Bank premises and equipment decreased $106,234 to $3,363,719 at June
30, 2000 from $3,469,953 at December 31, 1999. Accumulated depreciation and
amortization represented $282,143 at year-end compared to $379,627 at June 30,
2000. No significant capital expenditures were made in the first half of 2000.
Fully depreciated leasehold improvements and software totaling approximately
$83,000 were written off the books earlier this year.
Accrued interest receivable increased $329,270 or 101% over year-end
due to the large growth recorded in both securities available for sale and loans
during the first six months of 2000.
Deposit balances were $88,048,982 at June 30, 2000 up from $55,976,077
at December 31, 1999. Management has chosen to fund a portion of the rapid loan
growth by obtaining brokered deposits. Brokered deposits are time deposits
obtained from depositors located outside of our market area and are placed with
the Bank by a deposit broker. Approximately 34% of the total deposits reported
were brokered at June 30, 2000 compared to 19% at year-end. The increase in
brokered deposits only accounts for 55% of the $32,072,905 increase in total
deposits during the first half of the year. Significant growth was also recorded
in money market accounts, as well as regular and interest bearing demand deposit
accounts.
Repurchase agreements increased $5,167,142 since December 31, 1999.
This represents an increase of 101% during the first half of 2000. The growth is
attributable mainly to customers increasing their carrying balances from those
held at year-end. Federal funds purchased were reduced to zero from a
balance of $1,800,000 at year-end however the Bank borrowed $1,500,000 from the
Federal Home Loan Bank on March 24, 2000. The putable advance is fixed at 5.99%
for three years unless the Federal Home Loan Bank exercises its one time option
to call the note on March 24, 2001. At this time Management anticipates that the
advance will be called. In the event that the note is not called the Bank has
the option to pay off the advance at the end of three years with no pre-payment
penalty otherwise the note will convert to a floating rate for an additional
seven years. The contractual final maturity barring any of these is March 24,
2010.
<PAGE> 16
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
On June 28, 2000, the Company borrowed $1,085,000 from four of its
Directors for the purpose of infusing capital into the Bank. This debt is
subordinated to all Senior Debt of the Company. The notes have a floating rate
and are currently accruing interest at 11.00%. Interest payments are due
quarterly on the fifteenth of the month. The next scheduled interest payment is
due on October 15, 2000.
Accrued expenses and other liabilities decreased $876,523 to $377,074
at June 30, 2000 from $1,253,597 at December 31, 1999. Included in 1999's
year-end balance were two US Agency securities purchased on December 30, 1999
with a par value of $1,000,000. The securities settled on January 4, 2000.
RESULTS OF OPERATIONS
It should be mentioned that comparative information on the results of
operations between the first half of 2000 and that of 1999 is not exactly equal
in the number of days of operation because the Bank did not open until January
18, 1999. As such, there were 182 days of operations in 2000 compared to 164
days in 1999.
The net operating loss for the second quarter of 2000 was $65,711
($0.06 per share) which compares favorably to the net loss of $521,120 ($0.45
per share) recorded in 1999. The year-to-date net loss of $320,492 at June 30,
2000 was less than a third of that recorded for the same period in 1999. The
loss at June 30, 1999 was $1,118,520 or $798,098 higher than that shown in 2000.
The return on the Company's average total assets was (.35) % for the first half
of 2000 and (.70) % annualized. The return on average equity was (3.93) % and
(7.86) % annualized. At June 30, 2000 the ratio of average equity to average
assets was 8.89%. The Company's retained deficit was $2,560,826 at June 30, 2000
compared to $2,240,334 at December 31, 1999. Although the retained deficit and
net losses were expected, the operating results for the first half of 2000 have
exceeded management's internal, budgeted goal.
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 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.
<PAGE> 17
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
Six months ended June 30, 2000
Average Average
balance Interest rate
---------------------------- --------------- ----------
<S> <C> <C> <C>
Assets
Federal funds sold and interest-bearing
deposits with banks $ 1,274,163 $ 37,830 5.94 %
Investment securities-available for sale 16,384,133 542,970 6.63
Loans 68,856,917 3,053,930 8.87
---------------------------- --------------- ----------
86,515,213 3,634,730 8.40
Other assets 5,234,987
----------------------------
$ 91,750,200
============================
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 64,894,520 $ 1,901,388 5.86
Federal funds purchased, repurchase agreements,
Federal Home Loan Bank advance 12,880,915 327,701 5.09
Note Payable 17,885 978 10.94
---------------------------- --------------- ----------
77,793,320 2,230,067 5.73
Noninterest-bearing deposits 5,455,381
Other liabilities 349,400
Shareholders' Equity 8,326,360
----------------------------
$ 91,924,461
============================
Net interest income $ 1,404,663
===============
Net interest spread on earning assets 2.67 %
==========
Net interest margin on earning assets 3.25 %
==========
</TABLE>
The Net interest margin on average earning assets increased 0.67% since
June 30, 1999. For the quarter, net interest income was $763,979 compared to a
figure of $303,207 for the same quarter in 1999. Year to date net interest
income was $1,404,663 at June 30, 2000; an increase of $952,942 over June 30,
1999. Interest income generated during the quarter and year to date was
generated primarily from booking loans, purchasing securities, and selling
federal funds. Interest income for the second three month period of 2000 was
$2,017,672 compared to $643,352 recorded in 1999. For the first six months of
2000, the Company had recorded $3,634,730 of interest income compared to
$864,656 at June 30, 1999. The six month figures reflect 320% more interest
income in 2000 compared to 1999. Interest expense incurred on deposits,
repurchase agreements, federal funds purchased, Federal Home Loan Bank advances
and Notes Payable totaled $1,253,693 for the quarter and $2,230,067 year to
date. This category has increased $913,548 (269%) for the quarter and $1,817,131
(440%) year to date compared to 1999.
<PAGE> 18
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
As the Bank's cost of funds continues to rise and prime rate changes
are always a possibility, asset liability management has become an important
tool for assessing interest rate sensitivity. 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 aids the Company in achieving reasonable and predictable
earnings and liquidity while maintaining a balance between interest earning
assets and interest bearing liabilities. 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.
Interest rate sensitivity varies with different types of earning assets
and interest bearing liabilities. Overnight investments, on which rates change
daily, and loans tied to the prime rate, differ considerably from long term
investment securities and fixed rate loans. Time deposits over $100,000 and
money market accounts are more interest sensitive than regular savings accounts.
Comparison of the repricing intervals of interest earning assets to interest
bearing liabilities is a measure of interest sensitivity gap. Balancing this gap
is a continual challenge in a changing rate environment. 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. Details of the gap at June 30, 2000 were:
<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
Interest-bearing deposits
in other financial institutions $ 71,304 $ 0 $ 0 $ 0 $ 71,304
Federal Funds Sold 4,500,000 0 0 0 4,500,000
Securities available for sale 997,810 2,004,683 13,622,582 2,043,063 18,668,138
Loans 29,648,086 7,873,478 23,294,491 20,864,708 81,680,763
-----------------------------------------------------------------------------------
35,217,200 9,878,161 36,917,073 22,907,771 100,420,205
Interest-bearing liabilities
Savings and checking 12,319,186 0 0 0 12,319,186
Time deposits< $100,000 5,016,987 19,660,530 4,358,021 0 29,035,538
Time deposits>$100,000 11,927,346 25,938,948 2,125,064 0 39,991,358
Repurchase agreements and
Federal Home Loan Bank Advances 10,301,633 1,500,000 0 0 11,801,633
Notes Payable 1,085,000 0 0 0 1,085,000
-----------------------------------------------------------------------------------
40,650,152 47,099,478 6,483,085 0 94,232,715
Net asset (liability) repricing gap $ (5,432,952) $ (37,221,317) $ 30,433,988 $ 22,907,771 $ 6,187,490
===================================================================================
Cumulative net asset (liability)
repricing gap $ (5,432,952) $ (42,654,269) $(12,220,281) $ 10,687,490
====================================================================
</TABLE>
<PAGE> 19
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The provision for loan losses was $151,000 for the quarter and $323,000
for six months in 2000 compared to $222,700 and $467,100 at June 30, 1999.
Management believes that the allowance level is adequate and justifiable based
on the factors discussed earlier (see Financial Condition). Management will
continue to review the allowance to make sure that it is maintained 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 second quarter of 2000 was $106,945
which reflects a $57,071 increase over the same period in 1999. On a year to
date basis this category has increased 221% over 1999's figure of $57,816.
Service charge income is a major contributor to the increase shown in this
category, representing 73% of the change from 1999's second quarter results to
those at June 30, 2000. Management believes that the service charge portion of
non-interest income will continue to increase in future quarters due to
anticipated growth in the number of deposit accounts. Mortgage loan referral
fees were actually $9,354 lower in this three month period of 2000 compared to
1999. On a year to date basis, Mortgage loan referral fees are basically even
with the income that was recorded in 1999. It is difficult to predict future
contributions by Mortgage loan referral fees to non-interest income because of
their dependence on interest rates which are subject to market forces.
For the second quarter, non-interest expenses were $785,635 which was
an increase of 21% over the second quarter of 1999. Non-interest expenses for
the six month period, totaled $1,587,959 in 2000 compared to $1,161,027 in 1999.
Salaries and benefits comprised 64% of the year to date increase or $273,349.
There were an additional 7.5 full-time equivalent employees compared to June 30,
1999. Furniture and equipment expenses are responsible for 20% of the increase
over last year. Capital expenditures made throughout 1999 to establish the
operational foundation of the bank caused increased depreciation expense of
$70,972 in 2000 compared to the first half of 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and the Bank may be involved in various legal
proceedings that are incidental to their business. In the opinion of management,
neither the Company nor the Bank is a party to any current legal proceedings
that are material to the financial condition of the Company or the Bank, either
individually or in the aggregate.
<PAGE> 20
ITEM 2. CHANGES IN SECURITIES
Not applicable.
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 April 20, 2000, the Company's stockholders voted
to elect four directors, John C. Carlyle, Dennis L. Cherette, Michael D.
Gluhanich, and Donald E. Hegedus, each for a three year term expiring at the
Annual Meeting of the stockholders of the Company in 2003. The results of the
Election were as follows:
<TABLE>
<CAPTION>
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
Votes Votes Votes Broker-Non
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
Nominee For Withheld Abstained Votes
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
<S> <C> <C> <C> <C>
John C. Carlyle 1,126,795 2,000 0 0
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
Dennis L. Cherette 1,126,795 2,000 0 0
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
Michael D. Gluhanich 1,126,795 2,000 0 0
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
Donald E. Hegedus 1,126,795 2,000 0 0
-------------------------------- -------------------- ------------------------ ------------------------- ------------------------
</TABLE>
The terms for the following directors (who were not up for election) continued
after the Annual Meeting: David C. Bliss, Gary F. Bogner, Robert L. Chandonnet,
Bruce J. Essex, John L. Hilt, Jose A. Infante and Joy R. Nelson.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(10) Exhibits:
Exhibit No. EXHIBIT DESCRIPTION
----------- -------------------
3.1 Articles of Incorporation are incorporated by reference
to exhibit 3.1 of the Company's Registration Statement
on Form SB-2 (Commission File No. 333-63769) that became
effective on
<PAGE> 21
December 17, 1998
3.2 Bylaws of the Company are incorporated by reference to
exhibit 3.2 of the Company's Registration Statement on
Form SB-2 (Commission File No. 333-63769) that became
effective on December 17, 1998.
10 a (i) Subordinated Note Purchase Agreement between Robert L.
Chandonnet and Community Shores Bank Corporation dated
June 27,2000.
10 a (ii) Floating Rate Subordinated Note issued to Robert L.
Chandonnet by Community Shores Bank Corporation dated
June 28, 2000.
10 b (i) Subordinated Note Purchase Agreement between
Michael D. Gluhanich and Community Shores Bank
Corporation dated June 27,2000.
10 b (ii) Floating Rate Subordinated Note issued to Michael D.
Gluhanich by Community Shores Bank Corporation dated
June 28, 2000.
10 c (i) Subordinated Note Purchase Agreement between Donald E.
Hegedus and Community Shores Bank Corporation dated June
27,2000.
10 c (ii) Floating Rate Subordinated Note issued to Donald E.
Hegedus by Community Shores Bank Corporation dated June
28, 2000.
10 d (i) Subordinated Note Purchase Agreement, between John L.
Hilt, acting through his individual retirement account,
and Community Shores Bank Corporation dated June 27,
2000.
10 d (ii) Floating Rate Subordinated Note issued to John L. Hilt,
acting through his individual retirement account, and
Community Shores Bank Corporation date June 28, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8K were filed during the quarter for which this
report is filed.
<PAGE> 22
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, 2000.
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)
<PAGE> 23
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10 a (i) Subordinated Note Purchase Agreement between Robert L.
Chandonnet and Community Shores Bank Corporation dated June
27,2000.
10 a (ii) Floating Rate Subordinated Note issued to Robert L.
Chandonnet by Community Shores Bank Corporation dated June
28, 2000.
10 b (i) Subordinated Note Purchase Agreement issued to Michael D.
Gluhanich by Community Shores Bank Corporation dated June
27,2000.
10 b (ii) Floating Rate Subordinated Note issued to Michael D.
Gluhanich by Community Shores Bank Corporation dated June 28,
2000.
10 c (i) Subordinated Note Purchase Agreement issued to Donald E.
Hegedus by Community Shores Bank Corporation dated June
27,2000.
10 c (ii) Floating Rate Subordinated Note issued to Donald E. Hegedus
by Community Shores Bank Corporation dated June 28, 2000.
10 d (i) Subordinated Note Purchase Agreement, between John L. Hilt,
acting through his individual retirement account, and
Community Shores Bank Corporation dated June 27,2000.
10 d (ii) Floating Rate Subordinated Note issued to John L. Hilt,
acting through his individual retirement account, and
Community Shores Bank Corporation date Juned 28, 2000.
27 Financial Data Schedule.
