UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ________________
Commission File Number: 000-51166
COMMUNITY SHORES BANK CORPORATION
(Exact name of registration as specified in its charter)
MICHIGAN 38-3423227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1030 W. NORTON AVENUE, MUSKEGON, MI 49441
(Address of principal executive offices) (Zip Code)
(231) 780-1800
(Registrant's telephone number, including area code)
_____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ]Yes [X] No
At August 4, 2008, 1,468,800 shares of common stock were outstanding.
Community Shores Bank Corporation Index
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements ...................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................. 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ............................................ 28
Item 4. Controls and Procedures ................................... 28
PART II. Other Information
Item 1. Legal Proceedings ......................................... 29
Item 1A. Risk Factors ............................................. 29
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ............................................... 29
Item 3. Defaults upon Senior Securities ........................... 29
Item 4. Submission of Matters to a Vote of Security Holders ....... 29
Item 5. Other Information ......................................... 30
Item 6. Exhibits .................................................. 30
Signatures ........................................................ 31
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2008 2007
------------ ------------
(unaudited)
ASSETS
Cash and due from financial institutions $ 4,384,505 $ 3,329,626
Interest-bearing deposits in other financial institutions 57,900 201,290
Federal funds sold 8,245,000 4,346,000
------------ ------------
Total cash and cash equivalents 12,687,405 7,876,916
Securities
Available for sale (at fair value) 12,624,510 13,194,645
Held to maturity (fair value of $6,555,724 at June 30, 2008 and
$6,640,297 at December 31, 2007) 6,618,577 6,627,534
------------ ------------
Total securities 19,243,087 19,822,179
Loans held for sale 1,288,292 2,285,966
Loans 218,327,250 230,219,420
Less: Allowance for loan losses 3,397,169 3,602,948
------------ ------------
Net loans 214,930,081 226,616,472
Federal Home Loan Bank stock 404,100 404,100
Premises and equipment, net 12,174,452 12,488,593
Accrued interest receivable 943,828 1,159,804
Other assets 3,676,296 2,804,033
------------ ------------
Total assets $265,347,541 $273,458,063
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 18,080,753 $ 16,708,504
Interest bearing 212,148,621 221,241,941
------------ ------------
Total deposits 230,229,374 237,950,445
Federal funds purchased and repurchase agreements 4,158,428 4,400,611
Federal Home Loan Bank advances 6,000,000 6,000,000
Subordinated debentures 4,500,000 4,500,000
Notes Payable 4,200,000 4,206,043
Accrued expenses and other liabilities 647,103 786,639
------------ ------------
Total liabilities 249,734,905 257,843,738
Shareholders' equity
Preferred Stock, no par value: 1,000,000 shares
authorized and none issued 0 0
Common Stock, no par value: 9,000,000 shares authorized;
1,468,800 June 30, 2008 and December 31, 2007 13,296,691 13,296,691
Retained Earnings 2,298,319 2,255,543
Accumulated other comprehensive income 17,626 62,091
------------ ------------
Total shareholders' equity 15,612,636 15,614,325
------------ ------------
Total liabilities and shareholders' equity $265,347,541 $273,458,063
============ ============
See accompanying notes to consolidated financial statements.
-1-
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
Ended Ended Ended Ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
------------- ------------- ------------- -------------
INTEREST AND DIVIDEND INCOME
Loans, including fees $3,669,248 $4,268,819 $7,814,750 $8,325,841
Securities 213,074 218,331 428,568 419,804
Federal funds sold, FHLB dividends and other income 66,978 47,671 151,355 118,340
---------- ---------- ---------- ----------
Total interest income 3,949,300 4,534,821 8,394,673 8,863,985
INTEREST EXPENSE
Deposits 2,061,904 2,209,884 4,414,159 4,321,375
Repurchase agreements and federal funds purchased 14,462 89,508 36,564 140,507
Federal Home Loan Bank advances and notes payable 184,278 178,500 404,847 356,907
---------- ---------- ---------- ----------
Total interest expense 2,260,644 2,477,892 4,855,570 4,818,789
NET INTEREST INCOME 1,688,656 2,056,929 3,539,103 4,045,196
Provision for loan losses 153,368 268,100 384,084 395,331
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,535,288 1,788,829 3,155,019 3,649,865
Noninterest income
Service charges on deposit accounts 251,970 238,662 483,053 447,057
Gain on sale of loans 110,736 70,689 255,499 204,580
Gain on sale of securities 0 0 0 1,986
Gain on disposal of equipment 0 0 0 80
Gain on disposal of other real estate 0 0 142,324 0
Other 241,589 114,809 365,953 225,573
---------- ---------- ---------- ----------
Total noninterest income 604,295 424,160 1,246,829 879,276
Noninterest expense
Salaries and employee benefits 1,196,539 1,285,974 2,418,926 2,421,696
Occupancy 151,651 140,286 327,431 283,575
Furniture and equipment 171,082 163,653 342,644 309,999
Advertising 30,198 32,928 55,427 90,828
Data processing 121,690 112,716 236,163 217,396
Professional services 120,491 131,631 280,145 272,582
Other 358,232 341,377 728,158 659,586
---------- ---------- ---------- ----------
Total noninterest expense 2,149,883 2,208,565 4,388,894 4,255,662
INCOME (LOSS) BEFORE INCOME TAXES (10,300) 4,424 12,954 273,479
Federal income tax expense (benefit) (21,143) (13,353) (29,822) 27,074
---------- ---------- ---------- ----------
NET INCOME $ 10,843 $ 17,777 $ 42,776 $ 246,405
========== ========== ========== ==========
Comprehensive income (loss) $ (192,470) $ (113,257) $ (1,689) $ 149,327
========== ========== ========== ==========
Weighted average shares outstanding 1,468,800 1,468,800 1,468,800 1,468,767
========== ========== ========== ==========
Diluted average shares outstanding 1,468,800 1,481,462 1,468,800 1,485,129
========== ========== ========== ==========
Basic EPS $ 0.01 $ 0.01 $ 0.03 $ 0.17
========== ========== ========== ==========
Diluted EPS $ 0.01 $ 0.01 $ 0.03 $ 0.17
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
-2-
COMMUNITY SHORES BANK CORPORATION
STATEMENT OF CHANGES OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Other Total
Common Retained Comprehensive Shareholders'
Shares Stock Earnings Income (Loss) Equity
--------- ----------- ---------- ------------- -------------
BALANCE AT JANUARY 1, 2007 1,466,800 $13,274,098 $3,027,774 $(183,247) $16,118,625
Proceeds from the exercise of stock
options 2,000 20,460 20,460
Tax benefit from option exercise 1,904 1,904
Comprehensive income:
Net income 246,405 246,405
Unrealized loss on securities
available-for-sale (97,078) (97,078)
-----------
Total comprehensive income 149,327
--------- ----------- ---------- --------- -----------
BALANCE AT JUNE 30, 2007 1,468,800 $13,296,462 $3,274,179 $(280,325) $16,290,316
========= =========== ========== ========= ===========
BALANCE AT JANUARY 1, 2008 1,468,800 $13,296,691 $2,255,543 $ 62,091 $15,614,325
Comprehensive loss:
Net income 42,776 42,776
Unrealized loss on securities
available-for-sale (44,465) (44,465)
-----------
Total comprehensive loss (1,689)
--------- ----------- ---------- --------- -----------
BALANCE AT JUNE 30, 2008 1,468,800 $13,296,691 $2,298,319 $ 17,626 $15,612,636
========= =========== ========== ========= ===========
See accompanying notes to consolidated financial statements.
-3-
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASHFLOW
(UNAUDITED)
Six Months Six Months
Ended Ended
June 30, 2008 June 30, 2007
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 42,776 $ 246,405
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 384,084 395,331
Depreciation and amortization 349,393 289,376
Net amortization of securities 4,803 3,775
Gain on sale of securities 0 (1,986)
Gain on sale of loans (255,499) (204,580)
Gain on disposal of equipment 0 (80)
Gain on disposal of other real estate owned (142,324) 0
Loans originated for sale (15,787,941) (11,221,902)
Proceeds from loan sales 17,041,114 11,057,950
Net change in:
Accrued interest receivable and other assets 611,223 (123,557)
Accrued interest payable and other liabilities (139,536) (604,310)
------------ ------------
Net cash from (used in) operating activities 2,108,093 (163,578)
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available for sale securities:
Sales 0 494,650
Maturities, prepayments and calls 1,041,419 2,209,330
Purchases (534,500) (3,404,204)
Loan originations and payments, net 9,802,083 (14,451,690)
Additions to premises and equipment (35,252) (1,537,583)
Proceeds from the disposal of equipment 0 80
Proceeds from the sale of other real estate owned 397,943 0
------------ ------------
Net cash used in investing activities 10,671,693 (16,689,417)
CASH FLOW FROM FINANCING ACTIVITIES
Net change in deposits (7,721,071) 13,832,563
Net change in federal funds purchased and
repurchase agreements (242,183) 524,067
Other borrowing activity:
Draws on note payable and line of credit 0 400,000
Paydown on note payable (6,043) 0
Tax benefit from exercise of stock options 0 1,904
Net proceeds from exercise of stock options 0 20,460
------------ ------------
Net cash from financing activities (7,969,297) 14,778,994
Net change in cash and cash equivalents 4,810,489 (2,074,001)
Beginning cash and cash equivalents 7,876,916 9,070,270
------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 12,687,405 $ 6,996,269
============ ============
Supplemental cash flow information:
Cash paid during the period for interest $ 4,793,824 $ 2,330,440
Cash paid during the period for federal income tax 0 250,000
Transfers from loans to foreclosed assets 1,500,224 349,000
See accompanying notes to consolidated financial statements.
-4-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS:
The unaudited, consolidated financial statements as of and for the three
months and six months ended June 30, 2008 include the consolidated results
of operations of Community Shores Bank Corporation ("Company") and its
wholly-owned subsidiaries, Community Shores Bank ("Bank") and Community
Shores Financial Services, and a wholly-owned subsidiary of the Bank,
Community Shores Mortgage Company ("Mortgage Company"). Community Shores
Capital Trust I ("the Trust") is not consolidated and exists solely to
issue capital securities. These consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and Article 8 of
Regulation S-X 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, 2008 should not be considered as indicative of results for a full
year. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form
10-KSB for the period ended December 31, 2007. Some items in the prior year
financial statements may be reclassified to conform to the current
presentation.
In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements (SFAS 157). This statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement established a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
Standard is effective for fiscal years beginning after November 15, 2007.
The Company adopted this standard on January 1, 2008 and applicable
disclosures have been added to the accompanying Notes to Consolidated
Financial Statements (see Note 12 on page 12).
In February 2007, FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Liabilities" ("SFAS 159"). This statement allows, but
does not require, companies to record certain assets and liabilities at
their fair value. The fair value determination is made at the instrument
level, so similar assets or liabilities could be partially accounted for
using the historical cost method, while other similar assets or liabilities
are accounted for using the fair value method. Changes in fair value are
recorded through the income statement in subsequent periods. The statement
provides for a one time opportunity to transfer existing assets and
liabilities to fair value at the point of adoption with a cumulative effect
adjustment recorded against equity. After adoption, the election to report
assets or liabilities at fair value must be made at the point of their
inception. The Company did not elect the fair value option for any of its
financial assets or liabilities upon adoption of SFAS 159 on January 1,
2008.
-5-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS (Continued):
In September 2006, the FASB Emerging Issues Task Force finalized Issue No.
06-4, Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue
requires that liability be recorded during the service period when
split-dollar life insurance agreement continues after participants'
employment or retirement. The required accrued liability will be based on
either the post-employment benefit cost for the continuing life insurance
or based on the future death benefit depending on the contractual terms of
the underlying agreement. The issue is effective for fiscal years beginning
after December 15, 2007. The impact of the adoption on January 1, 2008 was
not material to the Company's consolidated financial statements.
2. SECURITIES
The following tables represent the securities held in the Company's
portfolio at June 30, 2008 and at December 31, 2007:
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2008 Cost Gains Losses Value
---------------------------------- ----------- ---------- ---------- -----------
Available for sale:
US Government and federal agency $ 83,833 $ 0 $ 4,562,096
Municipal securities 5,795 (9,914) 868,297
Mortgage-backed securities 25,666 (78,673) 7,194,117
--------- ---------- -----------
$115,294 $(88,587) $12,624,510
Held to maturity:
Municipal securities $6,618,577 $ 15,243 $(78,096) $ 6,555,724
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2007 Cost Gains Losses Value
----------------------------------- ----------- ---------- ---------- -----------
Available for sale:
US Government and federal agency $ 99,050 $(12,012) $ 4,565,235
Municipal securities 6,037 0 345,949
Mortgage-backed securities 35,638 (34,636) 8,283,461
-------- -------- -----------
140,725 (46,648) 13,194,645
Held to maturity:
Municipal securities $6,627,534 $ 21,865 $ (9,102) $ 6,640,297
As a result of the lack of liquidity in the capital markets, the fair value
of securities has declined since December 31, 2007. The Company evaluates
securities for other-than-temporary impairment on a quarterly basis. No
unrealized losses have been recognized into income as a result. In
performing the evaluation, consideration is given to the length of time and
the extent to which the fair value has been less than cost, the intent and
ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value and
whether the securities are issued by the federal government or its
agencies.
-6-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SECURITIES (Continued)
At June 30, 2008, twenty debt securities had unrealized losses with
aggregate depreciation of 1.52% from the Company's amortized cost basis.
Eight of the twenty securities are issued by government agencies. As the
Company has the ability to hold these debt securities until maturity, or
for the foreseeable future if classified as available for sale, no declines
are deemed to be other-than-temporary.
Below is the schedule of maturities for securities held at June 30, 2008:
Held to Maturity
Available for Sale -----------------------
Fair Amortized Fair
Value Cost Value
------------------ ---------- ----------
Due in one year or less $ 1,228,071 $ 0 $ 0
Due from one to five years 3,051,560 1,780,452 1,791,243
Due in more than five years 1,150,762 4,838,125 4,764,481
Mortgage-backed 7,194,117 0 0
----------- ---------- ----------
$12,624,510 $6,618,577 $6,555,724
----------- ---------- ----------
3. LOANS
The components of the outstanding loan balances:
June 30, 2008 December 31, 2007
-------------- -----------------
Commercial $ 83,171,642 $ 86,633,120
Real Estate:
Commercial 87,081,406 92,048,614
Residential 16,379,487 15,842,205
Construction 2,545,883 6,264,591
Consumer 29,248,964 29,520,823
------------ ------------
Subtotal: 218,427,382 230,309,353
Allowance for loan losses (3,397,169) (3,602,948)
Net deferred loan fees (100,132) (89,933)
------------ ------------
Loans, Net $214,930,081 $226,616,472
============ ============
Loans held for sale totaled $1,288,292 at June 30, 2008 and $2,285,966 at
December 31, 2007.
-7-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
The following is a summary of activity in the allowance for loan losses
account for the three and six month periods ended June 30, 2008 and 2007:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/08 6/30/07 6/30/08 06/30/07
------------ ------------ ---------- -----------
Beginning Balance 3,524,600 $2,588,475 3,602,948 $2,549,016
Charge-offs
Commercial (19,436) (7,823) (197,974) (26,650)
Real Estate-Commercial (193,825) 0 (243,825) (25,463)
Real Estate-Residential (28,325) 0 (38,601) 0
Consumer (72,152) (60,840) (155,887) (117,569)
---------- ---------- ---------- ----------
Total Charge-offs (313,738) (68,663) (636,287) (169,682)
---------- ---------- ---------- ----------
Recoveries
Commercial 20,244 2,558 21,820 4,624
Consumer 12,695 5,633 24,604 16,814
---------- ---------- ---------- ----------
Total Recoveries 32,939 8,191 46,424 21,438
---------- ---------- ---------- ----------
Net Charge-Offs (280,799) (60,472) (589,863) (148,244)
---------- ---------- ---------- ----------
Provision for loan losses 153,368 268,100 384,084 395,331
---------- ---------- ---------- ----------
Ending Balance $3,397,169 $2,796,103 $3,397,169 $2,796,103
========== ========== ========== ==========
Impaired loans were as follows:
06/30/08 12/31/07
----------- -----------
End of period loans with no allocated allowance for loan losses $10,060,908 $ 160,264
End of period loans with allocated allowance for loan losses $ 6,369,934 7,822,922
----------- -----------
Total $16,430,842 $7,983,186
=========== ===========
Amount of the allowance for loan losses allocated $ 1,377,077 $1,136,162
Since December 31, 2007, outstanding loans with no allocated allowance for loans
losses have increased by $10.1 million. As customers remit their 2007 financial
statements and they are analyzed by the lending staff, many relationships have
been deemed impaired. Approximately, 90 percent of the increase in impaired
loans with no allocated allowance is a result of poor financial performance last
year. The identified loans are well secured and the corresponding collateral
analysis supports a loan loss reserve allocation of zero.
-8-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/08 6/30/07 6/30/08 6/30/07
------------ ------------ ----------- ----------
Average of impaired loans during the period: $14,279,597 $2,305,410 $12,913,251 $2,111,522
Interest income recognized during impairment: 255,442 19,557 448,928 32,555
Cash-basis interest income recognized: 56,776 5,344 94,745 5,344
Non-performing loans were as follows:
06/30/08 12/31/07
------------ ------------
Loans past due over 90 days still on accrual: $ 108,349 $1,484,451
Non-accrual loans: $4,155,965 $4,532,120
Non-performing loans and impaired loans are defined differently. Some loans
may be included in both categories, whereas other loans may only be
included in one category.
5. PREMISES AND EQUIPMENT
Period end premises and equipment were as follows:
June 30, December 31,
2008 2007
----------- ------------
Land & land improvements $ 5,448,129 $ 5,448,129
Buildings & building improvements 5,959,371 5,948,681
Furniture, fixtures and equipment 3,536,613 3,517,516
Construction in Process 23,576 17,070
----------- -----------
14,967,689 14,931,396
Less: accumulated depreciation 2,793,237 2,442,803
----------- -----------
$12,174,452 $12,488,593
=========== ===========
6. DEPOSITS
The components of the outstanding deposit balances at June 30, 2008 and
December 31, 2007 were as follows:
June 30, 2008 December 31, 2007
Balance Balance
-------------- -----------------
Non-interest bearing
Demand $ 18,080,753 $ 16,708,504
Interest bearing
Checking 26,075,650 17,598,115
Money Market 26,551,437 19,805,438
Savings 13,827,438 13,275,060
Time, under $100,000 41,461,053 46,844,405
Time, over $100,000 104,233,043 123,718,923
------------ ------------
Total Deposits $230,229,374 $237,950,445
============ ============
-9-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. SHORT-TERM BORROWINGS
The Company's short-term borrowings typically consist of repurchase
agreements and federal funds purchased. The June 30, 2008 and December 31,
2007 information was as follows:
Repurchase Federal Funds
Agreements Purchased
---------- -------------
Outstanding at June 30, 2008 $4,158,428 $ 0
Average interest rate at period end 1.25% 0.00%
Average balance during year 4,379,805 440
Average interest rate during year 1.67% 3.24%
Maximum month end balance during year 4,870,853 0
Outstanding at December 31, 2007 $4,400,611 $ 0
Average interest rate at year end 2.94% 0.00%
Average balance during year 5,141,931 3,787,671
Average interest rate during year 3.29% 5.29%
Maximum month end balance during year 5,695,329 8,500,000
8. FEDERAL HOME LOAN BANK BORROWINGS
The Bank is 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 an additional $1,981,003. Each borrowing requires a
direct pledge of securities or loans. At June 30, 2008, the Bank had assets
with a market value of $10,065,151 pledged to the Federal Home Loan Bank to
support current borrowings. All three advances are at fixed interest rates
with the FHLB having the option to convert to a floating rate index.
Details of the Bank's outstanding borrowings are:
Current June 30, December 31,
Maturity Date Interest Rate 2008 2007
----------------- ------------- ---------- ------------
March 24, 2010 5.99 1,500,000 1,500,000
November 3, 2010 5.95 2,000,000 2,000,000
December 13, 2010 5.10 2,500,000 2,500,000
---------- -----------
$6,000,000 $6,000,000
-10-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. SUBORDINATED DEBENTURES
Community Shores Capital Trust I ("the Trust"), a business trust formed by
the Company, sold 4,500 Cumulative Preferred Securities ("trust preferred
securities") at $1,000 per security in a December 2004 offering. The
proceeds from the sale of the trust preferred securities were used by the
Trust to purchase an equivalent amount of subordinated debentures from the
Company. The trust preferred securities and subordinated debentures carry a
floating rate of 2.05% over the 3-month LIBOR and was 4.85063% at June 30,
2008. The stated maturity is December 30, 2034. The securities are
redeemable at par after five years and are, in effect, guaranteed by the
Company. Interest on the subordinated debentures are payable quarterly on
March 30th, June 30th, September 30th and December 30th. Under certain
circumstances, interest payments may be deferred up to 20 calendar
quarters. However, during any such deferrals, interest accrues on any
unpaid distributions. The subordinated debentures are carried on the
Company's consolidated balance sheet as a liability and the interest
expense is recorded on the Company's consolidated statement of income.
10. NOTES PAYABLE
The Company has a $5 million revolving line of credit with Fifth Third Bank
("Fifth Third"). The total balance outstanding at June 30, 2008 was
$4,200,000 and $4,206,043 at December 31, 2007. The principal balance was
paid down $6,043 on February 1, 2008. The outstanding principal bears
interest at a rate of 100 basis points below Fifth Third's prime rate. The
current interest rate on the outstanding principal balance is 4.00%.
Interest is owed quarterly in arrears on the first business day of
February, May, August, and November until the principal of this note is
paid. The borrowings may be prepaid in whole or in part without any
prepayment fee. The note has a maturity date of September 1, 2008. The
terms of the note may change at the time of renegotiation but it is
management's intention to retain an active line of credit.
11. COMMITMENTS AND OFF-BALANCE SHEET RISK
Some financial instruments are used to meet financing needs and to reduce
exposure to interest rate changes. These financial instruments include
commitments to extend credit and standby letters of credit. These involve,
to varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the commitment, and generally have fixed
expiration dates. Standby letters of credit are conditional commitments to
guarantee a customer's performance to another party. Exposure to credit
loss, if the customer does not perform, is represented by the contractual
amount for commitments to extend credit and standby letters of credit.
Collateral or other security is normally obtained for these financial
instruments prior to their use, and many of the commitments are expected to
expire without being used.
-11-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)
A summary of the notional and contractual amounts of outstanding financing
instruments with off-balance-sheet risk as of June 30, 2008 and December
31, 2007 follows:
June 30, December 31,
2008 2007
----------- ------------
Unused lines of credit and letters of credit $34,278,375 $37,760,820
Commitments to make loans 643,328 545,594
Commitments to make loans generally terminate one year or less from the
date of commitment and may require a fee. Since many of the above
commitments on lines of credit and letters of credits expire without being
used, the above amounts related to those categories do not necessarily
represent future cash commitments.
12. FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued Statement No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective
Date of FASB Statement No. 157. This FSP delays the effective date of FAS
157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value on a recurring basis (at
least annually), to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. The impact of adoption was not
material.
Statement 157 defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
Statement 157 establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
-12-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued)
Level 3: Significant unobservable inputs that reflect a reporting entity's
own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
The Company used the following methods and significant assumptions to
estimate fair value.
Securities: The fair values of securities are obtained from a third party
who utilizes quoted prices on nationally recognized securities exchanges or
matrix pricing, which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the securities'
relationship to other benchmark quoted securities.
Servicing rights: The fair value of SBA servicing rights is obtained from a
third party. The individual servicing rights are valued individually taking
into consideration the original term to maturity, the current age of the
loan and the remaining term to maturity. Their valuation methodology
utilized for the servicing rights begins with generating future cash flows
for each servicing asset, based on its unique characteristics and
market-based assumptions for prepayment speeds. The present value of the
future cash flows are then calculated utilizing the vendor's market-based
discount rate assumptions.
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements at June 30, 2008 Using
--------------------------------------------------
Quoted Significant
Prices in Other Significant
Active Markets for Observable Unobservable
Identical Assets Inputs Inputs
June 30, 2008 (Level 1) (Level 2) (Level 3)
------------- ------------------ ------------- -------------
Assets:
Available for sale securities $12,624,510 $0 $12,624,510 $0
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
Fair Value Measurements at June 30, 2008 Using
--------------------------------------------------
Quoted Significant
Prices in Other Significant
Active Markets for Observable Unobservable
Identical Assets Inputs Inputs
June 30, 2008 (Level 1) (Level 2) (Level 3)
------------- ------------------ ------------- -------------
Assets:
Servicing assets $ 48,594 $0 $48,594 $ 0
Impaired loans 6,369,934 0 0 6,369,934
-13-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued)
The following represents impairment charges recognized during the period:
Impaired loans, which are collateral dependent loans, are measured for
impairment using the fair value of the collateral and had a carrying amount
of $6,369,934, with valuation allowance of $1,377,077, resulting in an
additional provision for loan losses of $63,548 for the period. The fair
values of the collateral on those loans were determined primarily using
independent appraisals and are adjusted for anticipated disposition costs.
13. REGULATORY MATTERS
Banks are subject to regulatory capital requirements administered by the
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations, involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet various capital
requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If a
bank is not well capitalized, regulatory approval is required to accept
brokered deposits. Subject to limited exceptions, a bank may not make a
capital distribution if, after making the distribution, it would be
undercapitalized. If a bank is undercapitalized, it is subject to being
closely monitored by its principal federal regulator, its asset growth and
expansion are restricted, and plans for capital restoration are required.
In addition, further specific types of restrictions may be imposed on the
bank at the discretion of the federal regulator. The Bank was designated as
well capitalized under the regulatory framework for prompt corrective
action at both June 30, 2008 and December 31, 2007.
Actual and required capital amounts and ratios at June 30, 2008 and
December 31, 2007 for the Bank were:
Minimum Required to
Be Well Capitalized
Minimum Required Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ------------ ----- ----------- ------
June 30, 2008
Total Capital (Tier 1
and Tier 2) to
risk weighted assets
of the Bank $25,389,039 10.84% $ 18,743,814 8.00% $23,429,767 10.00%
Tier 1 (Core) Capital
to risk-weighted
assets of the Bank 22,454,535 9.58 9,371,907 4.00 14,057,860 6.00
Tier 1 (Core) Capital
to average assets
of the Bank 22,454,535 8.33 10,781,683 4.00 13,477,103 5.00
-14-
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. REGULATORY MATTERS (Continued)
December 31, 2007
Total Capital (Tier 1
and Tier 2) to
risk weighted assets
of the Bank $25,769,355 10.29% $20,031,475 8.00% $25,039,344 10.00%
Tier 1 (Core) Capital
to risk-weighted
assets of the Bank 22,633,618 9.04 10,015,672 4.00 15,023,508 6.00
Tier 1 (Core) Capital
to average assets
of the Bank 22,633,618 8.44 10,725,198 4.00 13,406,497 5.00
-15-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 subsidiaries, the Bank and Community Shores Financial Services, and the
Bank's subsidiary, the Mortgage Company, through June 30, 2008 and is separated
into two parts which are labeled, Financial Condition and Results of Operations.
The part labeled Financial Condition compares the financial condition at June
30, 2008 to that at December 31, 2007. The part labeled Results of Operations
discusses the three month and six month periods ended June 30, 2008 as compared
to the same periods of 2007. Both parts should be read in conjunction with the
interim consolidated financial statements and footnotes included in Item 1 of
Part I of this Form 10-Q.
This discussion and analysis and other sections of this Form 10-Q contain
forward-looking statements that are based on management's beliefs, assumptions,
current expectations, estimates and projections about the financial services
industry, the economy, and about the Company, the Bank, the Mortgage Company and
Community Shores Financial Services. Words such as "anticipates", "believes",
"estimates", "expects", "forecasts", "intends", "is likely", "plans",
"projects", variations of such words and similar expressions are intended to
identify such forward-looking statements. These forward-looking statements are
intended to be covered by the safe-harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") that are difficult to predict with regard to timing, extent,
likelihood and degree of occurrence. Therefore, actual results and outcomes may
materially differ from what may be expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update,
amend, or clarify forward looking statements, whether as a result of new
information, future events (whether anticipated or unanticipated), or otherwise.
Future Factors include, among others, changes in interest rates and interest
rate relationships; demand for products and services; the degree of competition
by traditional and non-traditional competitors; changes in banking regulation;
changes in tax laws; changes in prices, levies, and assessments; the impact of
technological advances; governmental and regulatory policy changes; the outcomes
of contingencies; trends in customer behavior as well as their ability to repay
loans; changes in local real estate values; changes in the national and local
economy; the ability of the Company to borrow money or raise additional capital
when desired to support future growth 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 decreased by $8.1 million to $265.3 million at June 30, 2008 from
$273.5 million at December 31, 2007. This is a 3.0% decrease in assets during
the first six months of 2008. Balance sheet changes consisted of loan paydowns
and decreases in deposits. Since year-
-16-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
end 2007 loan decreases have been greater than that of deposits resulting in a
$3.9 million increase in federal funds sold.
Cash and cash equivalents increased by $4.8 million to $12.7 million at June 30,
2008 from $7.9 million at December 31, 2007. This change was mostly reflective
of increases in federal funds sold between the above two periods.
The Bank's investment portfolio was $19.2 million at June 30, 2008 compared to
$19.8 million at December 31, 2007. There have been very few security
transactions in the first six months of the year. In general, the Bank has a
simplistic portfolio consisting of municipals, government agencies and some
mortgage backed securities. As a result of the lack of liquidity in the capital
markets, the fair value of securities has declined since year-end. The Company
evaluates securities for other-than-temporary impairment on a quarterly basis.
No unrealized losses have been recognized into income as a result. At June 30,
2008, twenty debt securities had unrealized losses with aggregate depreciation
of 1.52% from the Company's amortized cost basis. Eight of the twenty securities
are issued by government agencies. As the Company has the ability to hold these
debt securities until maturity, or for the foreseeable future if classified as
available for sale, no declines are deemed to be other-than-temporary.
Total loans (held for investment) decreased $11.9 million and were $218.3
million at June 30, 2008 down from $230.2 million at December 31, 2007. The
decrease is evidenced by a decline of $12.3 million in the commercial,
commercial real estate, construction and consumer loan portfolios partially
offset by a $.4 million growth in the residential real estate portfolio. During
the first six months of 2008, two customers made large pay downs on lines of
credit; a home equity customer paid $1.5 million and a commercial customer paid
$2.4 million. One commercial participation note for $2.8 million was bought back
by the lead financial institution. Four commercial real estate notes totaling
$6.0 million were refinanced with other financial institutions. There were
collected prepayment fees totaling $65,000 on three of the notes. The Bank's
underwriting standards include pricing for risk and profitability which does not
always result in the lowest market rate. Although the loss of loan volume is
unfortunate, management feels that adhering to high underwriting standards will
be the most prudent tactic, particularly in this economic environment.
Other lending activity during the first half of 2008 included the origination of
$15.8 million of residential mortgage and Small Business Administration ("SBA")
loans and the sale of $17.0 million of residential mortgage and SBA loans. The
associated gain on the loan sales was $255,000. These results compare favorably
to originations of $11.2 million, sales of $11.1 million and gains of $205,000
occurring in the first half of 2007. A majority of the lending activity in 2008
is the result of the successes of the Bank's mortgage origination team that was
hired in the second quarter of 2007.
Presently, the commercial and commercial real estate categories of loans
comprise 78% of the Bank's total loan portfolio, the same as year-end 2007.
There are six experienced commercial lenders on staff devoted to pursuing and
originating these types of loans. The Bank's strategic plan includes tactics
aimed at diversifying its loan portfolio. In the spring of 2007, five mortgage
originators were hired to help increase the Bank's retail presence in it's
defined market area
-17-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
utilizing the enhanced branch network. Since March 2007, portfolio retail loans
have increased by over $6.3 million with total originations exceeding $48
million. A majority of the loans originated are residential mortgages and are
sold in the secondary market. So although the second quarter resulted in a net
decline in total loans, management remains optimistic about its portfolio
diversification tactics and about future retail opportunities in the market
place.
The Company attempts to mitigate interest rate risk in its loan portfolio in
many ways. In addition to product diversification, two other methods used are to
balance the rate sensitivity of the portfolio and avoid extension risk(1). The
loan maturities and rate sensitivity of the loan portfolio at June 30, 2008 are
set forth below:
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
----------- ----------- ------------ ----------- ------------
Commercial, financial and other $24,021,683 $24,969,581 $ 29,405,013 $ 4,775,365 $ 83,171,642
Real estate:
commercial 13,531,534 13,355,916 58,269,157 1,824,667 86,981,274
construction 586,137 1,105,042 42,789 811,915 2,545,883
mortgages 209,624 401,418 2,491,921 13,276,524 16,379,487
Consumer 2,371,683 4,111,972 17,798,389 4,966,920 29,248,964
----------- ----------- ------------ ----------- ------------
$40,720,661 $43,943,929 $108,007,269 $25,655,391 $218,327,250
=========== =========== ============ =========== ============
Loans at fixed rates 3,540,713 15,007,990 95,104,064 22,360,943 136,013,710
Loans at variable rates 37,179,948 28,935,939 12,903,205 3,294,448 82,313,540
----------- ----------- ------------ ----------- ------------
$40,720,661 $43,943,929 $108,007,269 $25,655,391 $218,327,250
=========== =========== ============ =========== ============
At June 30, 2008, there were 62% of the loan balances carrying a fixed rate and
38% a floating rate, and only 12% of the entire portfolio had a contractual
maturity longer than five years. During 2007 there was an increase in the
concentration of fixed rate loans. Some of the shift is a factor of the types of
loans added to the portfolio and some is customer preference. The maturity
distribution of the loan portfolio has lengthened with the current focus on the
mortgage business line, however the focus is on sale into the secondary market.
Management only expects to retain 10-15% of residential mortgages originated
because of the longer contractual terms generally involved in mortgage products.
Having a larger concentration of fixed rate loans is helpful in a declining rate
environment but both types of loans are useful to protect interest income during
periods of interest rate fluctuations.
In addition to the Bank's risk management program, there is a need to maintain
an allowance for loan losses. The loan portfolio is reviewed and analyzed on a
regular basis for the purpose of estimating probable incurred credit losses. The
analysis of the allowance for loan losses is comprised of two portions: general
credit allocations and specific credit allocations. General credit allocations
are made to various categories of loans based on loan ratings, delinquency
trends, historical loss experience as well as current economic conditions. The
specific credit
----------
(1) Extension risk, as related to loans, exists when booking fixed rate loans
with long final contractual maturities. When a customer is contractually
allowed longer to return its borrowed principal and rates rise, the Bank is
delayed from taking advantage of the opportunity to reinvest the returning
principal at the higher market rate.
-18-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
allocation includes a detailed review of a credit resulting in an allocation
being made to the allowance. The allowance for loan losses is adjusted
accordingly to maintain an adequate level based on the conclusion of the
analysis. There are occasions when an impaired loan requires no allocated
allowance for loan losses. At June 30, 2008 there were $10.1 million in
outstanding loans with no allocated allowance for loans losses. As customers
remit their 2007 financial statements and they are analyzed by the lending
staff, many relationships have been deemed impaired. Approximately, 90 percent
of the increase in impaired loans with no allocated allowance is a result of
poor financial performance last year. The identified loans are well secured and
the corresponding collateral analysis supports a loan loss reserve allocation of
zero.
During the first half of 2008, $384,000 was added to the allowance through the
provision expense. At June 30, 2008, the allowance totaled $3.4 million or
approximately 1.56% of gross loans outstanding, compared to 1.57% at December
31, 2007.
The allocation of the allowance at June 30, 2008 was as follows:
June 30, 2008 December 31, 2007
-------------------------- --------------------------
Percent of Percent of
Allowance Allowance
Related to Related to
Balance at End of Period Applicable to: Amount Loan Category Amount Loan Category
---------- ------------- ---------- -------------
Commercial $1,807,053 53.3% $1,687,805 46.9%
Real estate:
Commercial 1,081,672 31.8 1,331,132 36.9
Residential 118,928 3.5 129,906 3.6
Construction 35,133 1.0 89,672 2.5
Consumer 354,383 10.4 364,433 10.1
---------- ----- ---------- -----
Total $3,397,169 100.0% $3,602,948 100.0%
========== ===== ========== =====
Another factor considered in the assessment of the adequacy of the allowance is
the quality of the loan portfolio from a past due standpoint. Below is a table,
which details the past due balances at June 30, 2008 compared to those at
year-end 2007 and the corresponding change related to those two periods.
Increase
Loans Past Due: June 30, 2008 December 31, 2007 (Decrease)
------------------- ------------- ----------------- -----------
30-59 days $2,326,674 $2,155,411 $ 171,263
60-89 days 287,956 825,107 (537,151)
90 days and greater 108,349 1,484,451 (1,376,102)
Non accrual loans 4,155,965 4,532,120 (376,155)
From year-end 2007 to June 30, 2008, overall past due and non-accrual loans have
decreased by $2.1 million. A majority of the activity is related to reductions
in 60 days or more past due and non-accrual loans being partially offset by an
increase in loans past due 30-59 days.
-19-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Loans past due sixty to eighty-nine days and ninety days past due and greater
and non-accrual loans decreased $2.3 million from December 31, 2007 to June 30,
2008. Six loans charged off in the first half of 2008 comprise over 70% of the
decrease. Most of the notes were collateralized by real estate. One loan was
collateralized by a high end boat. The collateral from the former notes is
currently being carried in other assets at market value less costs to sell. At
the time of charge off there was $221,000 in previously allocated reserves on
the commercial real estate notes.
Including the charge off activity above, net charge-offs for the second quarter
and first half of 2008 were $281,000 and $590,000 which was an increase of
$221,000 over net charge-offs of $60,000 recorded for the second quarter of 2007
and $442,000 more than the $148,000 charged off in the first six months of 2007.
The corresponding ratio of net charge-offs to average loans was 0.51% and 0.52%
for the second quarter and first half of 2008 compared to levels of 0.11% and
0.14% for the similar periods in 2007. Given the rise in non performing assets
over the past year, it is likely that charge off ratios may remain elevated for
a period of time. Even though the allowance balance has decreased, the overall
coverage remains consistent from December 31, 2007 to June 30, 2008 due to the
decrease in loan balances.
Other assets rose $872,000 since December 31, 2007. When the collateral
supporting a borrowing is relinquished by customers through the collection
process; the assets are written down to market value based on a professional
appraisal or other common means of valuation and held until they can be sold. At
June 30, 2008 there were nine properties and one high end boat being held for
sale. If any relinquished asset is sold for less than it is being held or
experiences a decline in market value during the holding period, further losses
could result.
Deposit balances were $230.2 million at June 30, 2008 down from $237.9 million
at December 31, 2007. Total deposit erosion since year-end was $7.7 million or
3%. Non interest bearing deposits grew $1.4 million since year-end 2007.
Interest bearing checking accounts, money market and savings balances rose $15.8
million. Growth is due to several of the Bank's large public fund customers
increasing their holdings since year-end. The growth in the above products was
more than offset by a $24.9 million decline in time deposits since December 31,
2007. Local time deposits made up $14.1 million of the total decline and $10.8
million was brokered deposit maturities. The concentration of brokered deposits
to total deposits was reduced to 35% at June 30, 2008 from 39% at December 31,
2007. The Bank strives to continue decreasing its dependency on brokered funds
and begin to rely more on local deposits gathered as a result of its expanded
branch network.
The shareholders' equity totaled $15.6 million at both June 30, 2008 and
December 31, 2007. The earnings recorded in the first half of the year were
offset by a negative change in accumulated other comprehensive income (security
market value adjustments).
RESULTS OF OPERATIONS
The net income for the first six months of 2008 was $43,000 which was $204,000
less than the similar period in 2007. The corresponding basic and diluted
earnings per share for the first six months of 2008 were $0.03 compared to $0.17
for 2007. Year to date 2008 earnings were
-20-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
impacted by a lower net interest income coupled with higher depreciation costs
associated with the new branch building in the Grand Haven market.
The Company recorded net income of $11,000 for the second quarter of 2008 while
the same period in 2007 netted earnings of $18,000. The corresponding basic and
diluted earnings per share were $.01 for both 2007 and 2008.
For the first six months and second quarter of 2008, the annualized return on
the Company's average total assets was 0.03% and 0.02%, respectively, which is
down from 0.20% and 0.03% annualized return for the same periods in 2007. The
Company's annualized return on average equity was 0.55% and 0.28% for the first
six months and second quarter of 2008 and 3.01% and 0.44% for the first six
months and second quarter of 2007. The ratio of average equity to average assets
was 5.69% and 5.77% for the first six months and second quarter of 2008 and
6.52% and 6.48% for the same periods in 2007.
As mentioned above, significant differences between the operating results of the
first six months of 2007 and 2008 are the net interest income and the
corresponding net interest margin. The following table sets forth certain
information relating to the Company's consolidated average interest earning
assets and interest bearing liabilities and reflects the average yield on assets
and average cost of liabilities for the periods indicated. Such yields and costs
are derived by dividing annualized income or expenses by the average daily
balance of assets or liabilities, respectively, for the periods presented.
-21-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six months ended June 30,
--------------------------------------------------------------------
2008 2007
--------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ ---------- ------- ------------ ---------- -------
Assets
Federal funds sold and interest-
bearing deposits with other
financial institutions $ 12,229,117 $ 151,355 2.48% $ 4,549,622 $ 118,340 5.20%
Securities 20,206,816 503,665 4.99 19,498,116 477,577 4.90
Loans (including held for sale and
non accrual) 225,799,177 7,814,750 6.92 210,442,056 8,325,841 7.91
------------ ---------- ------ ------------ ---------- ------
258,235,110 8,469,770 6.56 234,489,794 8,921,758 7.61
Other assets 16,840,158 16,136,163
------------ ------------
$275,075,268 $250,625,957
============ ============
Liabilities and Shareholders' Equity
Interest-bearing deposits $221,553,070 $4,414,159 3.98 $197,416,818 $4,321,375 4.38
Federal funds purchased,
repurchase agreements and Federal
Reserve Bank borrowings 4,383,266 36,564 1.67 7,108,569 140,507 3.95
Subordinated Debentures, Note
Payable and Federal Home Loan
Bank Advances 14,701,029 404,847 5.51 10,904,396 356,907 6.55
------------ ---------- ------ ------------ ---------- ------
240,637,365 4,855,570 4.04 215,429,783 4,818,789 4.47
---------- ----------
Non-interest bearing deposits 18,109,919 17,869,184
Other liabilities 679,573 984,419
Shareholders' Equity 15,648,411 16,342,571
------------ ------------
$275,075,268 $250,625,957
============ ============
Net interest income (tax equivalent
basis) 3,614,200 4,102,969
Net interest spread on earning assets
(tax equivalent basis) 2.52% 3.14%
====== ======
Net interest margin on earning assets
(tax equivalent basis) 2.80% 3.50%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 107.31% 108.85%
====== ======
Tax equivalent adjustment 75,097 57,773
---------- ----------
Net interest income $3,539,103 $4,045,196
========== ==========
The tax equivalent net interest spread on average earning assets decreased 62
basis points to 2.52% since June 30, 2007. The tax equivalent net interest
margin decreased by 70 basis points from 3.50% at June 30, 2007 to 2.80% at June
30, 2008. The tax equivalent net interest income for the first six months of
2008 was $3.6 million compared to a figure of $4.1 million for the same six
months in 2007. The Company recorded $489,000 less net interest income although
there were $23.7 million more average earning assets on the books. The net
interest margin compression between the two periods was mostly a result of
significant decreases in the Bank's average prime lending rate between the first
six months of 2007 compared to the similar period in 2008.
The average rate earned on interest earning assets was 6.56% for the six months
ended June 30, 2008 compared to 7.61% for the same period in 2007. The main
contributing factor was the 99 basis point decrease in the yield on loans, the
Bank's largest earning asset category. The Bank's average internal prime rate
was 259 basis points lower between the first six months of
-22-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2008 and that of 2007. The drastic decrease in the prime lending rate was
somewhat offset by the fact that the Bank's concentration of variable rate loans
has decreased over the last twelve months from 43% at June 30, 2007 to 38% at
June 30, 2008 but the speed at which the lending rates fell over the last twelve
months was not fully offset by rate reductions on the funding side.
Interest expense incurred on deposits, repurchase agreements, federal funds
purchased, Federal Home Loan Bank advances and Notes Payable decreased by 43
basis points for the first six months of 2008 compared to the first six months
of 2007. A majority of the Bank's deposits have structured maturities which
makes it harder to affect the same level of deposits by the same magnitude
during periods of rapid rate decline. As shown in the interest sensitivity table
on page 24, from July 1, 2008 through June 30, 2009, $87.1 million of time
deposits will mature and potentially reprice to current market rates. The
weighted average rate on these deposits is over 70 basis points higher than
current market rates. Based on the current financial environment and local
competition, it is likely that these deposits will only reprice on average 30-50
basis points less. Although this is helpful for net interest margin improvement
in the short term it is management's long term goal to adjust the mix of
deposits to be less heavily dependent on time deposits. Demand type accounts
generally cost less. Slowly the Bank's branching system is making progress
towards increasing demand account relationships. In the past twelve months the
number of demand and savings accounts has increased by nearly 5%.
The quarter-to-quarter comparison of consolidated average interest earning
assets and interest bearing liabilities and average yield on assets and average
cost of liabilities for the second quarter ended June 30, 2008 and 2007 is in
the table below.
-23-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three months ended June 30,
--------------------------------------------------------------------------
2008 2007
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------------ ---------- ---------- ------------ ---------- ----------
Assets
Federal funds sold and interest-
bearing deposits with other
financial institutions $ 13,285,444 $ 66,978 2.02% $ 3,651,018 $ 47,671 5.22%
Securities 20,095,034 251,367 5.00 19,954,807 246,826 4.95
Loans (including held for sale
and non accrual) 220,820,334 3,669,248 6.65 213,401,967 4,268,819 8.00
------------ ---------- ------ ------------ ---------- ----
254,200,812 3,987,593 6.27 237,007,792 4,563,316 7.70
Other assets 16,802,463 16,568,921
------------ ------------
$271,003,275 $253,576,713
============ ============
Liabilities and Shareholders' Equity
Interest-bearing deposits $216,338,298 $2,061,904 3.81 $198,374,197 $2,209,884 4.46
Federal funds purchased,
repurchase agreements and Federal
Reserve Bank borrowings 4,396,492 14,462 1.32 8,500,961 89,508 4.21
Subordinated Debentures, Note
Payable and Federal Home
Loan Bank Advances 14,700,000 184,278 5.01 10,908,791 178,500 6.55
------------ ---------- ------ ------------ ---------- ----
235,434,790 2,260,644 3.84 217,783,949 2,477,892 4.55
---------- ----------
Non-interest bearing deposits 19,163,239 18,374,538
Other liabilities 776,398 987,842
Shareholders' Equity 15,628,848 16,430,384
------------ ------------
$271,003,275 $253,576,713
============ ============
Net interest income (tax equivalent
basis) 1,726,949 2,085,424
Net interest spread on earning assets
(tax equivalent basis) 2.43% 3.15%
====== ======
Net interest margin on earning assets
(tax equivalent basis) 2.72% 3.52%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 107.97% 108.83%
====== ======
Tax equivalent adjustment 38,293 28,495
---------- ----------
Net interest income $1,688,656 $2,056,929
========== ==========
Similar to the comparison of the year to date net interest income results above;
there was a decrease in tax equivalent net interest income between the second
quarter results of 2008 and that of 2007. Tax equivalent net interest income
decreased by $358,000 in spite of the fact that there was $17.2 million more
average earning assets between the second quarter of 2008 and the second quarter
of 2007. The tax equivalent net interest spread and margin declined by 72 and 80
basis points respectively between the second quarter of 2007 and the similar
period in 2008. The results were the effect of a 143 basis point decline in the
yield earned on interest earning assets between the two periods partially offset
by a 71 basis point decrease in the Company's cost of funds between the second
quarter of 2007 and that of 2008. The Bank's internal prime lending rate has
been stable since May, and considering repricing opportunities in the next 90
days and barring any further prime rate reductions, these factors should have a
favorable effect on next quarter's net interest spread and margin.
As the Bank strives to change its deposit mix and future changes in the Bank's
internal prime lending rate are uncertain, asset liability management remains an
important tool for assessing
-24-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
and monitoring liquidity and interest rate sensitivity. Liquidity management
involves the ability to meet the cash flow requirements of the Company's
customers. These customers may be either borrowers with credit needs or
depositors wanting to withdraw funds. Management of interest rate sensitivity
attempts to avoid widely varying net interest margins and achieve consistent net
interest income through periods of changing interest rates. Asset liability
management assists the Company in realizing reasonable and predictable earnings
and liquidity by maintaining a balance between interest-earning assets and
interest-bearing liabilities.
The Company uses a sophisticated computer program to perform analysis of
interest rate risk, assist with asset liability management, and model and
measure interest rate sensitivity. Interest rate sensitivity varies with
different types of earning assets and interest-bearing liabilities. Overnight
investments, of which rates change daily, and loans tied to the prime rate,
differ considerably from long term investment securities and fixed rate loans.
Interest bearing checking and money market accounts are more interest sensitive
than long term time deposits and fixed rate FHLB advances. Comparison of the
repricing intervals of interest earning assets to interest bearing liabilities
is a measure of interest sensitivity gap. Balancing this gap is a continual
challenge in a highly competitive and changing rate environment. Details of the
repricing gap at June 30, 2008 were:
Interest Rate Sensitivity Period
-----------------------------------------------------------------------
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------------ ------------ ------------ ----------- ------------
Earning assets
Interest-bearing deposits
in other financial institutions $ 57,900 $ 0 $ 0 $ 0 $ 57,900
Federal Funds Sold 8,245,000 0 0 0 8,245,000
Securities (including FHLB stock) 772,326 2,276,848 11,530,269 5,067,744 19,647,187
Loans Held for Sale 6,909 26,634 164,063 1,090,686 1,288,292
Loans(1) 88,924,601 19,035,989 93,282,724 17,083,936 218,327,250
------------ ------------ ------------ ----------- ------------
98,006,736 21,339,471 104,977,056 23,242,366 247,565,629
Interest-bearing liabilities
Savings and checking 66,454,525 0 0 0 66,454,525
Time deposits <$100,000 11,442,761 20,041,975 10,144,083 0 41,628,819
Time deposits >$100,000 26,939,067 28,722,368 48,403,841 0 104,065,276
Repurchase agreements and
Federal funds purchased 4,158,428 0 0 0 4,158,428
Subordinated Debt and Federal
Home Loan Bank Advances 14,700,000 0 0 0 14,700,000
------------ ------------ ------------ ----------- ------------
123,694,781 48,764,343 58,547,924 0 231,007,048
Net asset (liability) repricing gap $(25,688,045) $(27,424,872) $ 46,429,132 $23,242,366 $ 16,558,581
============ ============ ============ =========== ============
Cumulative net asset (liability)
Repricing gap $(25,688,045) $(53,112,917) $ (6,683,785) $16,558,581
============ ============ ============ ===========
Currently the Company has a negative twelve month repricing gap which indicates
that the Company is liability sensitive in the next twelve month period. This
position implies that
----------
(1) Includes non accrual loans.
-25-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
decreases to the national federal funds rate would have more of an impact on
interest expense than on interest income during this period if there were a
parallel shift in rates. For instance if the Company's internal prime rate went
down by 25 basis points and every interest earning asset and interest bearing
liability on the Company's June 30, 2008 balance sheet repricing in the next
twelve months adjusted simultaneously by the same 25 basis points, more
liabilities would be affected than assets. The interest rate sensitivity table
simply illustrates what the Company is contractually able to change in certain
time frames. Since the beginning of the third quarter of 2007 through July of
2008, the prime lending rate has decreased 325 basis points. Given the lower
inherent rate of liabilities to begin with it is unlikely that funding rates
would be reduced by the same 325 basis points. As a result the net interest
margin is compressed until there is an equal effect on both earning assets and
earning liabilities.
The provision for loan losses for the second quarter and the first six months of
2008 were $153,000 and $384,000 compared to figures of $268,000 and $395,000 for
the same periods in 2007. In 2007 the loan portfolio was growing so the expenses
covered loan growth as well as increased allocations for declining asset
quality. Conversely, the expenses for the second quarter and first six months of
2008 were mostly the result of charge offs and downgrades on existing commercial
and commercial real estate loans. Loan charge-offs made during the second
quarter and first six months of 2008 exceeded the provision expense because
there was already allocated loan loss reserves for these impaired credits prior
to the charge off occurring. During the last twelve months there has been an
increase in non performing and identified troubled credits. The ratio of
non-performing loans(1) as a percentage of total loans has nearly doubled.
Increased provision expense made to address this decline in credit quality has
increased the ratio of the allowance for loan losses to total loans from 1.26%
at June 30, 2007 to 1.56% at June 30, 2008. Management believes that the
allowance level is adequate and justified based on the factors discussed earlier
(see Financial Condition). Management will continue to review the allowance with
the intent of maintaining it at an appropriate level. The provision may be
increased or decreased in the future as management continues to monitor the loan
portfolio and actual loan loss experience.
Non-interest income recorded in the first six months of 2008 totaled $1.2
million and represented a 42% increase compared to last year's first six months
total, which was $879,000. Included in the total was a gain of $143,000 on the
sale of foreclosed property as well as $118,000 received from a court settlement
on foreclosed property written off in 2006. Excluding these items, non interest
income was $986,000 and represented a 12% increase over last year's second
quarter. Gain on loan sales was $51,000 more in the first half of 2008 compared
to the same period in 2007. There was an increase in gains on mortgage loan
sales of $135,000 offset by an $ 84,000 decrease in gain on sales of SBA loans.
Additionally there was an increase in fees earned on the Bank's overdraft
protection product mostly attributable to a larger deposit customer base and the
weakening economy.
Non-interest income for the second quarter of 2008 was $180,000 more than the
$424,000 recorded in the same quarter of 2007. A significant portion of the
increase is derived from the $118,000 miscellaneous income from the court
settlement referenced above, however there
----------
(1) Non performing loans are defined as those that are past due 90 days or more
or are on non accrual.
-26-
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
were also higher gains on mortgage loan sales of $51,000 between the second
quarter of 2008 and that of 2007.
Non-interest expenses for the first six months of 2008 were $4.4 million
compared to a total of $4.3 million for 2007, an increase of 3%. The second
quarter non-interest expense total was $2.1 million for 2008 and $2.2 million
for 2007, a decrease of 3%. The notable variances among the individual
categories were in the areas of salaries and benefits, occupancy and equipment
expenses and FDIC insurance premiums which fall into the other expense category.
Salaries and benefit expenses totaled $2.4 million for the first six months of
2008, roughly the same as the similar period in 2007. During the first quarter
of 2008 the Bank implemented a reduction in work force decreasing its average
full time equivalent staff by seven. As a result of this action salaries and
benefit expenses were $89,000 less in the second quarter of 2008 compared to the
second quarter of 2007.
Occupancy and equipment expenses for the first six months of 2008 totaled
$670,000 and were $76,000 more than the $594,000 recorded for the first six
months of 2007. These expenses totaled $323,000 for the second quarter of 2008
which was $19,000 more than the second quarter of 2007. Depreciation for the
Grand Haven branch was included in 2008's first half totals but not in 2007's
recorded expenses. A newly constructed branch facility in Grand Haven was
completed in August 2007. Prior to construction the branch rented space.
Other non interest expenses in the first half of 2008 increased by $69,000 over
the similar period in 2007. FDIC insurance premiums were $104,000 more between
the two periods. When the FDIC decided to raise its premiums, the calculated
assessments were larger for newer financial institutions (deNovo) that had never
contributed to the FDIC's insurance reserves. Community Shores Bank is
considered one of those banks. It is anticipated that the higher premiums will
continue throughout 2008. Another factor was the $52,000 increase in loan
collection expenses. With the rise in troubled assets, it is likely that
expenses in this category may increase.
There was a federal tax benefit recorded for the first half and second quarter
of 2008. The federal tax benefit for both periods was due to the proportion of
tax free municipal bond income to consolidated pre-tax income.
-27-
COMMUNITY SHORES BANK CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation
of the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of June 30, 2008. Based on the evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were, to the best of their knowledge, effective as of
June 30, 2008. There have been no significant changes in the internal controls
over financial reporting during the quarter ended June 30, 2008, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
-28-
COMMUNITY SHORES BANK CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries may be involved in various
legal proceedings that are incidental to their business. In the opinion of
management, the Company and its subsidiaries are not a party to any current
legal proceedings that are material to their financial condition, either
individually or in the aggregate.
ITEM 1A. RISK FACTORS
Not applicable for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 May 8, 2008, the Company's shareholders voted to
elect three Class I Directors, Gary F. Bogner, Robert L. Chandonnet, and
Jonathan L. Smith, each for a three year term expiring at the annual meeting of
the shareholders of the Company in 2011. The results of the election were as
follows:
Votes Votes Votes Broker Non-
Nominee For Withheld Abstained Votes
-------------------- --------- -------- --------- -----------
Gary F. Bogner 1,033,946 204,470 0 0
Robert L. Chandonnet 1,100,536 137,880 0 0
Jonathan L. Smith 1,102,216 136,200 0 0
In addition to the reelection of Messrs. Bogner, Chandonnet and Smith as
directors, the terms for the following directors (who were not up for election)
continued after the annual meeting: Heather D. Brolick, Bruce J. Essex, Steven
P. Moreland, Bruce C. Rice and Roger W. Spoelman.
Finally, shareholders voted to ratify the appointment of Crowe Chizek and
Company LLC as the Company's independent registered public accountants for 2008.
The result of the vote was as follows:
Votes Votes Votes Broker Non-
For Against Abstained votes
--------- ------- --------- -----------
1,196,083 41,886 450 0
-29-
COMMUNITY SHORES BANK CORPORATION
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- ------------------------------------------------------------------
3.1 Articles of Incorporation are incorporated by reference to exhibit
3.1 of the Company's June 30, 2004 Form 10-QSB (SEC file number
333-63769).
3.2 Bylaws of the Company are incorporated by reference to exhibit
3(ii) of the Company's Form 8-K filed July 5, 2006 (SEC file
number 000-51166).
31.1 Rule 13a-14(a) Certification of the principal executive officer.
31.2 Rule 13a-14(a) Certification of the principal financial officer.
32.1 Section 1350 Chief Executive Officer Certification.
32.2 Section 1350 Chief Financial Officer Certification.
-30-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY SHORES BANK CORPORATION
August 14, 2008 By: /s/ Heather D. Brolick
--------------- ------------------------------------
Date Heather D. Brolick
President and Chief Executive Officer
(principal executive officer)
August 14, 2008 By: /s/ Tracey A. Welsh
--------------- ------------------------------------
Date Tracey A. Welsh
Senior Vice President, Chief Financial
Officer and Treasurer (principal
financial and accounting officer)
-31-
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- ------------------------------------------------------------------
3.1 Articles of Incorporation are incorporated by reference to exhibit
3.1 of the Company's June 30, 2004 Form 10-QSB (SEC file number
333-63769).
3.2 Bylaws of the Company are incorporated by reference to exhibit
3(ii) of the Company's Form 8-K filed July 5, 2006 (SEC file
number 000-51166).
31.1 Rule 13a-14(a) Certification of the principal executive officer.
31.2 Rule 13a-14(a) Certification of the principal financial officer.
32.1 Section 1350 Chief Executive Officer Certification.
32.2 Section 1350 Chief Financial Officer Certification.
-32-