<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 March 31, 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 May 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> <C>
Item 1. Financial Statements.......................................................... 1
Item 2. Management's Discussion and Analysis or Plan of Operation..................... 15
PART II. Other Information
Item 1. Legal Proceedings............................................................. 19
Item 2. Changes in Securities......................................................... 19
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............................................................................. 21
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------------- -----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from financial institutions $ 2,534,388 $ 1,964,847
Interest-bearing deposits in other financial institutions 23,843 1,727
Federal funds sold 300,000 0
----------------------- -----------------------
Total cash and cash equivalents 2,858,231 1,966,574
Securities available for sale 18,964,829
10,767,804
Loans, net 67,323,813 55,946,379
Federal Home Loan Bank stock 138,200
138,200
Premises and equipment, net 3,411,860 3,469,953
Accrued interest receivable 533,165 326,484
Other assets 130,676 83,533
----------------------- -----------------------
Total assets $ 93,360,774 $ 72,698,927
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing $ 5,684,121 $ 4,074,635
Interest-bearing 62,880,885 51,901,442
----------------------- -----------------------
Total deposits 68,565,006 55,976,077
Federal funds purchased, repurchase agreements
and Federal Home Loan Bank advances 16,315,900 6,934,491
Accrued expenses and other liabilities 260,616 1,253,597
----------------------- -----------------------
Total liabilities 85,141,522 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 (2,495,115) (2,240,334)
Accumulated other comprehensive loss (156,844) (96,115)
----------------------- -----------------------
Total shareholders' equity 8,219,252 8,534,762
----------------------- -----------------------
Total liabilities and shareholders' equity $ 93,360,774 $ 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
Ended Ended
March 31, 2000 March 31, 1999
------------------------- -------------------------
<S> <C> <C>
Interest and dividend income
Loans, including fees $ 1,363,035 $ 96,720
Securities, taxable 229,936 67,864
Federal funds sold, FHLB dividends and other income 24,087 56,720
------------------------- -------------------------
Total interest income 1,617,058 221,304
Interest expense
Deposits 841,875 69,556
Repurchase agreements, federal funds purchased, and
Federal Home Loan Bank advances 134,499 3,235
------------------------- -------------------------
Total interest expense 976,374 72,791
NET INTEREST INCOME 640,684 148,513
Provision for loan losses 172,000 244,400
------------------------- -------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 468,684 (95,887)
Noninterest income
Service charge income 44,964 2,216
Mortgage referral income 15,816 4,787
Other 18,079 939
------------------------- -------------------------
Total noninterest income 78,859 7,942
Noninterest expense
Salaries and employee benefits 467,435 267,520
Occupancy 51,454 45,210
Furniture and equipment 92,227 46,830
Advertising 20,637 15,958
Data Processing 29,014 7,000
Professional services 65,027 47,740
Telephone 10,639 7,554
Supplies 19,232 37,554
Directors and officers insurance 3,061 0
Other 43,598 34,160
------------------------- -------------------------
Total noninterest expense 802,324 509,526
LOSS BEFORE FEDERAL INCOME TAX (254,781) (597,471)
Federal income tax expense 0 0
------------------------- -------------------------
NET LOSS $ (254,781) $ (597,471)
========================= =========================
Basic and diluted loss per share $ (0.22) $ (0.52)
========================= =========================
Weighted average shares outstanding $ 1,170,000 $ 1,154,444
========================= =========================
</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 (597,471) (597,471)
Unrealized loss on
securities available for sale (3,108) (3,108)
----------------
Total comprehensive loss (600,579)
Common stock sale, January 21, 1999 70,000 643,607 643,607
---------------------------------------------------------------------------------
Balance, March 31, 1999 1,170,000 $ 10,871,211 $(1,036,023) $ (3,108) $ 9,832,080
================================================================
Balance, January 1, 2000 1,170,000 $ 10,871,211 $(2,240,334) $ (96,115) $ 8,534,762
Comprehensive loss:
Net loss (254,781) (254,781)
Change in unrealized loss on
securities available for sale (60,729) (60,729)
----------------
Total comprehensive loss (315,510)
---------------------------------------------------------------------------------
Balance, March 31, 2000 1,170,000 $ 10,871,211 $(2,495,115) $ (156,844) $ 8,219,252
=================================================================================
</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 ended Three months ended
March 31, 2000 March 31, 1999
------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (254,781) $ (597,471)
Adjustments to reconcile net loss to net cash
from operating activities
Provision for loan losses
172,000 244,400
Depreciation and amortization 85,768 60,305
Net accretion of securities (21,838) (21,179)
Net change in:
Accrued interest receivable (206,681) (89,040)
Other assets (47,143) (100,848)
Accrued interest payable and other liabilities (992,981) 14,762
------------------------------------------------
Net cash from operating activities (1,265,656) (489,071)
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Sales 0 2,000,000
Maturities, prepayments and cals 29,295 14,500,000
Purchases (8,265,211) (24,212,342)
Loan originations and payments, net (11,549,434) (16,362,933)
Additions to premises and equipment (27,675) (259,552)
------------------------------------------------
Net cash from investing activities (19,813,025) (24,334,827)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 12,588,929 20,246,390
Net change in federal funds purchased and
repurchase agreements 7,881,409 1,031,524
Net change in Federal Home Loan Bank advances 1,500,000 0
Net proceeds from stock offering 643,607
------------------------------------------------
Net cash from financing activities 21,970,338 21,921,521
Net change in cash and cash equivalents 891,657 (2,902,377)
Beginning cash and cash equivalents 1,966,574 8,612,377
------------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 2,858,231 $ 5,710,000
================================================
Supplemental cash flow information:
Cash paid during the period for interest $ 613,752 $ 47,431
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 7
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited financial statements for the three months ended March 31,
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 March 31, 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. 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.
<PAGE> 8
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Agreements: 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 (Loss): Comprehensive income (loss) 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.
<PAGE> 9
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES AVAILABLE FOR SALE
The following table represents the securities held in the Company's portfolio at
the end of the first quarter:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value %
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury $ 1,496,379 $ 0 $ (590) $ 1,495,789 7.9%
US Government Agency 15,709,044 3,601 (106,426) 15,606,219 82.3
Mortgaged-backed securities,
guaranteed by GNMA 1,916,250 0 (53,429) 1,862,821 9.8
-----------------------------------------------------------------------------------
Total securities at March 31, 2000 $ 19,121,673 $ 3,601 $ (160,445) $ 18,964,829 100.0%
===================================================================================
</TABLE>
Securities available for sale increased $8,197,025 during the first quarter of
2000. Below is the schedule of maturities for investments held at March 31,
2000:
<TABLE>
<CAPTION>
Available for sale
Amortized Fair
Cost Value
-------------------------------
<S> <C> <C>
Due in one year or less $ 2,991,253 $ 2,982,664
Due from one to five years 14,214,170 14,119,344
Mortgaged-backed 1,916,250 1,862,821
-------------------------------
$19,121,673 $18,964,829
===============================
</TABLE>
<PAGE> 10
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
Total loans made to customers totaled $11,549,434 since December 31, 1999. The
components of the outstanding balances and their percentage of the total
portfolio for both period ends were as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Balance % Balance %
------------------------- ------------------------
<S> <C> <C> <C> <C>
Commercial, financial and other $ 56,089,338 82.1 % $ 47,570,725 83.8 %
Real estate-construction 1,561,452 2.3 1,445,789 2.5
Real estate-mortgages 2,067,827 3.0 1,957,393 3.4
Installment loans to individuals 8,629,196 12.6 5,824,472 10.3
------------------------- ------------------------
68,347,813 100% 56,798,379 100%
===== =====
Less allowance for loan losses
1,024,000 852,000
---------------- ----------------
$ 67,323,813 $ 55,946,379
================ ================
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses
account since December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 2000 $ 852,000
Charge-offs 0
Recoveries 0
Provision charged against operating expense 172,000
------------------
Balance at March 31, 2000 $ 1,024,000
==================
</TABLE>
<PAGE> 11
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The allocation of the allowance at March 31, 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 $ 915,470 89.4 %
Residential real estate 43,027 4.2
Installment 65,502 6.4
Unallocated 0 0.0
------------------ -------------------------
Total loans $ 1,024,000 100.0 %
================== =========================
</TABLE>
Management has determined this allocation is appropriate based on their estimate
of losses inherent in the various categories within the loan portfolio.
6. PREMISES AND EQUIPMENT - NET
There have been no significant capital expenditures since year-end as such
premises and equipment were comprised of the following at both period ends:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------- ------------------
<S> <C> <C>
Land and land improvements $ 673,240 $ 673,240
Building and building improvements 1,634,921 1,715,842
Furniture, fixtures and equipment 1,392,397 1,363,014
-----------------------------------------
3,700,558 3,752,096
Less accumulated depreciation 288,698 282,143
------------------- ------------------
$ 3,411,860 $ 3,469,953
=================== ==================
</TABLE>
Depreciation expense for the first quarter of 2000 was $89,482. The same expense
for the first quarter of 1999 amounted to $60,305.
<PAGE> 12
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
Deposit balances increased $12,588,929 since December 31, 1999. The components
of the outstanding balances and their percentage of the total portfolio for both
period ends were as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Balance % Balance %
------------------------ ------------------------
<S> <C> <C>
Noninterest-bearing
Demand $ 5,684,121 8.3 % $ 4,074,635 7.3 %
Interest-bearing
Checking 5,651,033 8.2 4,662,155 8.3
Money Market 5,879,071 8.6 3,068,971 5.5
Savings 702,417 1.0 565,741 1.0
Time, under $100,000 26,819,209 39.1 21,084,562 37.7
Time, over $100,000 23,829,155 34.8 22,520,013 40.2
------------------------ ------------------------
Total Deposits $ 68,565,006 100.0 % $ 55,976,077 100.0 %
======================== ========================
</TABLE>
8. BORROWINGS
At March 31, 2000, the Bank's borrowings were made up of repurchase agreements
and a Federal Home Loan Bank advance. As such the first quarter information was
as follows:
<TABLE>
<CAPTION>
Repurchase FHLB
Agreements Advances
------------------- ---------------------
<S> <C> <C>
Outstanding balance $ 14,815,900 $ 1,500,000
Average interest rate 4.87% 5.99%
Average balance $ 10,132,857 $ 197,802
Average interest rate 4.92% 5.99%
Maximum outstanding at any month end $ 14,815,900 $ 1,500,000
</TABLE>
<PAGE> 13
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. INTEREST RATE SENSITIVITY
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. 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.
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 March 31, 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 $ 23,843 $ 0 $ 0 $ 0 $ 23,843
Securities available for sale 500,250 2,482,415 14,119,344 1,862,820 18,964,829
Loans 20,701,475 2,114,548 37,815,871 7,715,919 68,347,813
--------------------------------------------------------------------------------
21,225,568 4,596,963 51,935,215 9,578,739 87,336,485
Interest-bearing liabilities
Savings and checking 12,232,521 0 0 0 12,232,521
Time deposits< $100,000 7,791,499 14,739,692 4,288,018 0 26,819,209
Time deposits>$100,000 13,246,813 10,275,029 307,313 0 23,829,155
Repurchase agreements and
Federal Home Loan Bank Advances 14,815,900 0 0 1,500,000 16,315,900
--------------------------------------------------------------------------------
48,086,733 25,014,721 4,595,331 1,500,000 79,196,785
Net asset (liability) repricing gap $ (26,861,166) $ (20,417,758) $ 47,339,884 $ 8,078,739 $ 8,139,700
================================================================================
Cumulative net asset (liability)
repricing gap $ (26,861,166) $ (47,278,924) $ 60,960 $ 8,139,699
=================================================================
</TABLE>
<PAGE> 14
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE BENEFIT PLANS
The Company established a 401(k) plan effective January 1, 1999, covering
substantially all its employees. The Company's matching 401(k) contribution
charged to expense as of March 31, 2000 was $14,098. The total for the same
quarter in 1999 was $10,113. The percent of the Company's matching contributions
to the 401(k) is currently 4.50% and has not changed since its approval by the
Board of Directors in a meeting on January 26, 1999.
11. COMMITMENTS AND OFF-BALANCE-SHEET RISK
Some financial instruments are used to meet financing needs and to reduce
exposure to interest rate changes. These financial instruments include
commitments to extend credit and standby letters of credit. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount reported
in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional
commitments to guarantee a customer's performance to 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 outstanding financing
instruments with off-balance-sheet risk for the periods March 31, 2000 and
December 31, 1999 follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Letters of credit $ 250,000 $ 278,000
Commercial unused lines of credit 21,328,000 22,513,000
Consumer unused lines of credit 2,133,000 1,570,000
Residential construction commitments 410,000 805,000
</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.
<PAGE> 15
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements administered
by the federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulator approval is required to accept brokered deposits. If undercapitalized,
capital distributions are limited, as is asset growth and expansion, and plans
for capital restoration are required.
<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>
<PAGE> 16
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Actual capital levels (in thousands) and minimum required levels at March 31,
2000 for the Company and Bank were:
<TABLE>
<CAPTION>
Actual Adequately Capitalized Well Capitalized
------------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------- ---------------------- ----------------------
March 31, 2000
- ------------------------
<S> <C> <C> <C>
Total capital (to risk-
weighted assets)
Consolidated $ 9,349,041 12.02 % $ 6,222,763 8.00 % $ 7,778,454 10.00 %
Bank 8,733,088 11.23 6,222,763 8.00 7,778,454 10.00
Tier 1 capital (to risk-
weighted assets)
Consolidated 8,376,096 10.77 3,111,382 4.00 4,667,072 6.00
Bank 7,760,143 9.98 3,111,382 4.00 4,667,072 6.00
Tier 1 capital (to
average assets)
Consolidated 8,376,096 10.03 3,340,038 4.00 4,175,048 5.00
Bank 7,760,143 9.27 3,347,787 4.00 4,184,734 5.00
</TABLE>
The Company and the Bank were in the well capitalized category at March 31,
2000.
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The discussion below details the financial results of the Company and
its wholly owned subsidiary, the Bank, through March 31, 2000 and is separated
into two parts which are labeled, Financial Condition and Results of Operations.
The Financial Condition compares the balance sheets at March 31, 2000 and
December 31, 1999. The Results of Operations compares the three months ended
March 31, 2000 to the three month period ended March 31, 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 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 $20,661,847 to $93,360,774 at March 31, 2000
from $72,698,927 at December 31, 1999. This is a 28% increase in assets during
the first quarter of 2000. Growth is mostly attributable to commercial loan
volume and security purchases. 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 three months of 2000.
<PAGE> 18
Cash and cash equivalents increased by $891,657 to $2,858,231 at March
31, 2000 from $1,966,574 at December 31, 1999. This increase was a result of
federal funds being sold at March 31, 2000 and higher balances on deposit in our
correspondent bank accounts. As a result of the rapid growth since the
commencement of operations, management utilized some of the cash at the holding
company to infuse an additional $425,000 of capital to the Bank to ensure that
regulatory compliance was met as of quarter end. Management expects additional
capital infusions will be needed to continue compliance with these regulatory
requirements. Currently a strategy is being formulated which will allow the
Company to borrow money for future Bank capital infusions. At this time, the
Company has not borrowed any money nor has it entered into any agreement to
borrow money.
Securities available for sale increased $8,197,025 during the first
quarter 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 $68,347,813 at March 31, 2000 from $56,798,379
at December 31, 1999. Of the $11,549,434 increase experienced, 74% occurred in
the commercial loan portfolio. The "wholesale" banking focus used throughout
1999 is still thriving during the first three months of 2000. Presently, the
commercial category of loans comprises 82% of the Bank's total loan portfolio.
There are five experienced commercial lenders on staff devoted to pursuing and
originating these types of loans. Significant growth was experienced on the
"retail" lending side. Installment loans increased $2,804,724, or 48%, 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 the rate of increase to slow during the remaining quarters of 2000.
The loan maturities and rate sensitivity of the loan portfolio at March 31, 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 $5,352,753 $10,527,627 $33,632,642 $6,576,317 $56,089,338
Real estate-construction 300,795 1,260,657 0 0 1,561,452
Real estate-mortgages 0 0 187,339 1,880,488 2,067,827
Installment loans to individuals 246,951 317,992 5,015,713 3,048,540 8,629,196
-------------------------------------------------------------------------------
$5,900,499 $12,106,276 $38,835,693 $11,505,345 $68,347,813
===============================================================================
Loans at fixed rates 711,386 1,968,199 36,561,046 7,346,113 $46,586,744
Loans at variable rates 5,189,113 10,138,077 2,274,647 4,159,232 21,761,069
-------------------------------------------------------------------------------
$5,900,499 $12,106,276 $38,835,693 $11,505,345 $68,347,813
-------------------------------------------------------------------------------
</TABLE>
At March 31, 2000, the allowance totaled $1,024,000 or approximately
1.5% of gross loans booked since commencing operations. Management has
determined this is an appropriate level based on their estimate of losses
inherent in the loan portfolio from comparison with allowance levels maintained
by other institutions with similar, but seasoned loan portfolios. Management
will continue to monitor the allowance for loan loss levels and make necessary
<PAGE> 19
adjustments through the provision for loan losses. As such, an additional
$172,000 was provided for since December 31, 1999. At the end of March, loans
30-59 days past due totaled $538,142 up from $109,000 at December 31,1999.
Additionally, there was one loan for $5,075 that was past due more than 89 days
while there were none past due more than 89 days at December 31, 1999. The Bank
had a single non-accrual loan at March 31, 2000 for $2,148 while there were no
non-accrual loans at December 31, 1999. The Bank recorded no credit losses in
the first quarter of 2000.
Bank premises and equipment decreased $58,093 to $3,411,860 at March
31, 2000 from $3,469,953 at December 31, 1999. Accumulated depreciation and
amortization represented $282,143 at year-end compared to $288,697 at March 31,
2000. No significant capital expenditures have been made in 2000. Fully
depreciated leasehold improvements of approximately $81,000 were written off the
books in January.
Accrued interest receivable increased $206,681 or 63% over year-end
due to the large growth recorded in both securities available for sale and loans
during the first three months of 2000.
Deposit balances were $68,565,006 at March 31, 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 23% of the total deposits reported
were brokered at quarter end compared to 19% at year-end. The increase in
brokered deposits only accounts for 40% of the $12,588,929 increase in total
deposits during the first quarter. Significant growth was also recorded in money
market accounts, as well as regular and interest bearing demand deposit
accounts.
Repurchase agreements increased $9,681,409 since December 31, 1999.
This represents an increase of 189% during the quarter. The growth is
attributable mainly to customers increasing their carrying balances from those
held at year-end (Y2K). 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 interest rate on the advance is
fixed at 5.99% for three years. The Bank has the option to pay off the advance
at that time otherwise the note will convert to a floating rate for an
additional seven years. The final maturity is March 24, 2010.
Accrued expenses and other liabilities decreased $992,981 to $260,616
at March 31, 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 quarter of 2000 and that of 1999 is not exactly
equal in the number of days of operation
<PAGE> 20
because the Bank did not open until January 18, 1999. As such, there were 91
days of operations in the first quarter of 2000 compared to 73 days in the
first quarter of 1999.
The net loss of $254,781 at March 31, 2000 was less than half that
recorded for the same quarter in 1999. The loss for the first quarter of 1999
was $597,471 or $342,690 higher than that shown for the first quarter of 2000.
The Company's retained deficit was $2,495,115 at March 31, 2000 compared to
$2,240,334 at December 31, 1999. Although the retained deficit and net losses
were expected, the operating losses for the first quarter of 2000 were less than
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.
<TABLE>
<CAPTION>
Three months ended March 31, 2000
Average Average
balance Interest rate
---------------------------- --------------- ----------
<S> <C> <C> <C>
Assets
Federal funds sold and interest-bearing
deposits with banks $ 1,691,558 $ 24,087 5.70 %
Investment securities-available for sale 14,013,124 229,936 6.56
Loans 62,736,500 1,363,035 8.69
---------------------------- --------------- ----------
78,441,182 1,617,058 8.25
Other assets 5,059,776
----------------------------
$ 83,500,958
============================
Liabilities and Shareholders' Equity
Interest-bearing deposits $ 60,100,504 $ 841,875 5.60
Federal funds purchased, repurchase agreements
and Federal Home Loan Bank advances 10,797,693 134,499 4.98
---------------------------- --------------- ----------
70,898,197 976,374 5.51
Noninterest-bearing deposits 4,902,352
Other liabilities 348,692
Shareholders' Equity 7,351,717
----------------------------
$ 83,500,958
============================
Net interest income $ 640,684
===============
Net interest margin on earning assets 2.74 %
==========
</TABLE>
The Net interest margin on average earning assets increased 1.60% since
March 31, 1999. Net interest income was $640,684 at March 31, 2000; an increase
of $492,171 over March 31, 1999. Interest income of $1,617,058 was generated
primarily from booking loans, purchasing securities, and selling federal funds.
This was 631% more than the interest income recorded in the first quarter of
1999. Interest expense incurred on deposits, repurchase agreements, federal
funds purchased and Federal Home Loan Bank advances totaled $976,374
<PAGE> 21
at quarter end which is an increase of $903,583 (1,241%) over the same expense
categories in 1999.
The provision for loan losses was $172,000 at March 31, 2000 compared
to $244,400 at March 31, 1999. There was a $72,400 decrease in the provision
booked between the first quarter of 1999 and that of 2000. The allowance
continues to be maintained at 1.5% of gross loans outstanding. Management
believes that this ratio is prudent and justifiable but will continue to review
the reserve to ensure that it is aligned with loss experience. This ratio may be
increased or decreased in the future as management continues to monitor the loan
portfolio and actual loan loss experience.
Non-interest income of $78,859 was recorded as of March 31, 2000.
Service charge income is a major contributor to the increase shown in this
category, representing 60% of the change from 1999's first quarter results to
the first quarter results for 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 also increased 230% over last years first quarter. Although this income
category continues to exceed management's expectations, it is difficult to
predict their future contributions to non-interest income because of their
dependence on interest rates which are subject to market forces.
Non-interest expenses were $802,324 which was an increase of 57% over the first
quarter of 1999. Salaries and benefits comprised 68% of the increase or
$199,915. There were an additional 6 full-time equivalent employees compared to
March 31, 1999. Furniture and equipment expenses increased 48% over last year.
Capital expenditures made throughout 1999 to establish the operational
foundation of the bank caused increased depreciation expense of $29,177 over the
same quarter in 1999. Operating expenses are expected to increase as result of
several technological initiatives being undertaken.
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.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
<PAGE> 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. EXHIBIT DESCRIPTION
- ----------- -------------------
3.1 Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Company's Registration Statement on Form
SB-2 (Commission File No. 333-63769) that became effective
on December 17, 1998
3.2 Bylaws of 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
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
Not applicable.
<PAGE> 23
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 May 15, 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> 24
EXHIBIT INDEX
Exhibit No. EXHIBIT DESCRIPTION
- ----------- -------------------
3.1 Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Company's Registration Statement on Form
SB-2 (Commission File No. 333-63769) that became effective
on December 17, 1998.
3.2 Bylaws of 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.
11 Statement re Computation of Per Share Earnings.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 11
SELECTED RATIOS AND STATEMENT RE COMPUTATION OF
PER SHARE EARNINGS
<TABLE>
<CAPTION>
01/1/00 to
Return on Equity and Assets Annualized 03/31/00
------------ -------------
<S> <C> <C>
Return on average total assets (1.24) % (0.31) %
Return on average equity (13.88) (3.47)
Dividend payout ratio N/A
Average equity to average assets 8.80
Statement of Per Share Earnings
Net Loss $ (254,781)
==============
Average shares outstanding 1,170,000
Basic and diluted loss per share $ (0.22)
==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 154160
<INT-BEARING-DEPOSITS> 23843
<FED-FUNDS-SOLD> 300000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18964829
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 68347813
<ALLOWANCE> 1024000
<TOTAL-ASSETS> 93360774
<DEPOSITS> 68565006
<SHORT-TERM> 14815900
<LIABILITIES-OTHER> 260616
<LONG-TERM> 1500000
0
0
<COMMON> 10871211
<OTHER-SE> (2495115)
<TOTAL-LIABILITIES-AND-EQUITY> 93360774
<INTEREST-LOAN> 1363035
<INTEREST-INVEST> 229936
<INTEREST-OTHER> 24087
<INTEREST-TOTAL> 1617058
<INTEREST-DEPOSIT> 841875
<INTEREST-EXPENSE> 976374
<INTEREST-INCOME-NET> 640684
<LOAN-LOSSES> 172000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 802324
<INCOME-PRETAX> (254781)
<INCOME-PRE-EXTRAORDINARY> (254781)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (254781)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
<YIELD-ACTUAL> 2.74
<LOANS-NON> 2148
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (852000)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (1024000)
<ALLOWANCE-DOMESTIC> (1024000)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
