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EX-32.2 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORP | v394269_ex32-2.htm |
EX-31.2 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORP | v394269_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORP | v394269_ex31-1.htm |
EX-32.1 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORP | v394269_ex32-1.htm |
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 September 30, 2014 _______________________________________________
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 incorporation or organization) | (I.R.S. Employer 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 all 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes x 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.
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 xNo
At November 11, 2014, 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 | 45 | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 61 | |
Item 4. | Controls and Procedures | 61 | |
PART II. | Other Information | ||
Item 1. | Legal Proceedings | 62 | |
Item 1A. | Risk Factors | 62 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 62 | |
Item 3. | Defaults upon Senior Securities | 63 | |
Item 4. | Mine Safety Disclosures | 63 | |
Item 5. | Other Information | 63 | |
Item 6. | Exhibits | 63 | |
Signatures | 64 |
PART I – FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
(unaudited) | (audited) | |||||||
ASSETS | ||||||||
Cash and due from financial institutions | $ | 2,622,656 | $ | 3,758,535 | ||||
Interest-bearing deposits in other financial institutions | 13,762,943 | 13,374,206 | ||||||
Total cash and cash equivalents | 16,385,599 | 17,132,741 | ||||||
Securities available for sale (at fair value) | 32,879,110 | 31,230,246 | ||||||
Loans held for sale | 260,500 | 240,055 | ||||||
Loans | 128,823,229 | 131,554,244 | ||||||
Less: Allowance for loan losses | 1,977,232 | 2,809,642 | ||||||
Net loans | 126,845,997 | 128,744,602 | ||||||
Federal Home Loan Bank stock (at cost) | 450,800 | 450,800 | ||||||
Premises and equipment, net | 9,139,860 | 9,145,467 | ||||||
Accrued interest receivable | 457,032 | 466,538 | ||||||
Foreclosed assets | 2,131,846 | 2,558,299 | ||||||
Other assets | 979,823 | 810,590 | ||||||
Total assets | $ | 189,530,567 | $ | 190,779,338 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Deposits | ||||||||
Non-interest-bearing | $ | 32,316,595 | $ | 33,313,136 | ||||
Interest-bearing | 135,791,065 | 138,626,729 | ||||||
Total deposits | 168,107,660 | 171,939,865 | ||||||
Federal funds purchased and repurchase agreements | 10,767,084 | 8,428,046 | ||||||
Subordinated debentures | 4,500,000 | 4,500,000 | ||||||
Notes payable | 1,280,000 | 1,280,000 | ||||||
Accrued expenses and other liabilities | 921,268 | 968,558 | ||||||
Total liabilities | 185,576,012 | 187,116,469 | ||||||
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 issued and outstanding | 13,296,691 | 13,296,691 | ||||||
Retained deficit | (9,022,763 | ) | (9,276,599 | ) | ||||
Accumulated other comprehensive loss | (319,373 | ) | (357,223 | ) | ||||
Total shareholders’ equity | 3,954,555 | 3,662,869 | ||||||
Total liabilities and shareholders’ equity | $ | 189,530,567 | $ | 190,779,338 |
See accompanying notes to consolidated financial statements.
- 1 - |
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Interest and dividend income | ||||||||||||||||
Loans, including fees | $ | 1,633,617 | $ | 1,701,576 | $ | 5,069,430 | $ | 5,292,942 | ||||||||
Securities | 108,848 | 127,222 | 338,041 | 421,821 | ||||||||||||
Federal funds sold, FHLB dividends and other income | 13,335 | 8,283 | 36,677 | 26,596 | ||||||||||||
Total interest and dividend income | 1,755,800 | 1,837,081 | 5,444,148 | 5,741,359 | ||||||||||||
Interest expense | ||||||||||||||||
Deposits | 201,672 | 226,945 | 627,278 | 757,995 | ||||||||||||
Repurchase agreements, federal funds purchased, and other debt | 12,974 | 14,193 | 36,941 | 43,919 | ||||||||||||
Federal Home Loan Bank advances and notes payable | 56,078 | 55,947 | 166,172 | 143,985 | ||||||||||||
Total interest expense | 270,724 | 297,085 | 830,391 | 945,899 | ||||||||||||
Net Interest Income | 1,485,076 | 1,539,996 | 4,613,757 | 4,795,460 | ||||||||||||
Provision for loan losses | 0 | 0 | 0 | 0 | ||||||||||||
Net Interest Income After Provision for Loan Losses | 1,485,076 | 1,539,996 | 4,613,757 | 4,795,460 | ||||||||||||
Non-interest income | ||||||||||||||||
Service charges on deposit accounts | 139,561 | 152,341 | 436,282 | 463,644 | ||||||||||||
Gain on sale of loans | 38,182 | 39,602 | 102,892 | 166,766 | ||||||||||||
Gain on sale of foreclosed assets | 38,821 | 136,786 | 129,353 | 181,163 | ||||||||||||
Gain on the extinguishment of debt | 0 | 0 | 0 | 5,262,653 | ||||||||||||
Other | 219,099 | 162,479 | 622,964 | 480,204 | ||||||||||||
Total non-interest income | 435,663 | 491,208 | 1,291,491 | 6,554,430 | ||||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 957,730 | 952,400 | 2,875,631 | 2,779,445 | ||||||||||||
Occupancy | 154,353 | 168,241 | 479,760 | 484,510 | ||||||||||||
Furniture and equipment | 82,512 | 96,796 | 238,944 | 294,995 | ||||||||||||
Advertising | 13,586 | 11,427 | 34,899 | 35,538 | ||||||||||||
Data processing | 171,239 | 156,105 | 492,943 | 456,844 | ||||||||||||
Professional services | 113,037 | 63,357 | 284,141 | 268,169 | ||||||||||||
Foreclosed asset impairment | 0 | 32,791 | 70,028 | 141,531 | ||||||||||||
FDIC insurance | 115,577 | 107,123 | 329,178 | 331,191 | ||||||||||||
Other | 271,793 | 318,616 | 845,888 | 948,521 | ||||||||||||
Total non-interest expense | 1,879,827 | 1,906,856 | 5,651,412 | 5,740,744 | ||||||||||||
Income Before Federal Income Taxes | 40,912 | 124,348 | 253,836 | 5,609,146 | ||||||||||||
Federal income tax expense | 0 | 0 | 0 | 105,000 | ||||||||||||
Net Income | $ | 40,912 | $ | 124,348 | $ | 253,836 | $ | 5,504,146 | ||||||||
Basic average shares outstanding | 1,468,800 | 1,468,800 | 1,468,800 | 1,468,800 | ||||||||||||
Diluted average shares outstanding | 1,468,800 | 1,468,800 | 1,468,800 | 1,468,800 | ||||||||||||
Basic earnings per share | $ | 0.03 | $ | 0.08 | $ | 0.17 | $ | 3.75 | ||||||||
Diluted earnings per share | $ | 0.03 | $ | 0.08 | $ | 0.17 | $ | 3.75 |
See accompanying notes to consolidated financial statements.
- 2 - |
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months | Three Months | Nine Months | Nine Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, 2014 | September 30, 2013 | September 30,2014 | September 30, 2013 | |||||||||||||
Net income | $ | 40,912 | $ | 124,348 | $ | 253,836 | $ | 5,504,146 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized holding gains (losses) on available for sale securities | (123,981 | ) | 50,370 | 46,044 | (494,691 | ) | ||||||||||
Less reclassification adjustments for unrealized gains later recognized in income | 0 | 0 | (7,409 | )1 | 0 | |||||||||||
(123,981 | ) | 50,370 | 38,635 | (494,691 | ) | |||||||||||
Tax effect | (16,396 | ) | 0 | (785 | ) | 0 | ||||||||||
Total other comprehensive income (loss) | (140,377 | ) | 50,370 | 37,850 | (494,691 | ) | ||||||||||
Comprehensive income (loss) | $ | (99,465 | ) | $ | 174,718 | $ | 291,686 | $ | 5,009,455 |
1 Appears on condensed consolidated statement of income as a gain on sale of securities.
See accompanying notes to consolidated financial statements.
- 3 - |
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Common | Retained | Comprehensive | Shareholders’ | |||||||||||||||||
Shares | Stock | Deficit | Income (Loss) | Equity | ||||||||||||||||
Balance at January 1, 2013 | 1,468,800 | $ | 13,296,691 | $ | (14,816,593 | ) | $ | 280,806 | $ | (1,239,096 | ) | |||||||||
Net income | 5,504,146 | 5,504,146 | ||||||||||||||||||
Other comprehensive loss | (494,691 | ) | (494,691 | ) | ||||||||||||||||
Balance at September 30, 2013 | 1,468,800 | $ | 13,296,691 | $ | (9,312,447 | ) | $ | (213,885 | ) | $ | 3,770,359 | |||||||||
Balance at January 1, 2014 | 1,468,800 | $ | 13,296,691 | $ | (9,276,599 | ) | $ | (357,223 | ) | $ | 3,662,869 | |||||||||
Net income | 253,836 | 253,836 | ||||||||||||||||||
Other comprehensive income | 37,850 | 37,850 | ||||||||||||||||||
Balance at September 30, 2014 | 1,468,800 | $ | 13,296,691 | $ | (9,022,763 | ) | $ | (319,373 | ) | $ | 3,954,555 |
See accompanying notes to consolidated financial statements.
- 4 - |
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2014 | September 30, 2013 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 253,836 | $ | 5,504,146 | ||||
Adjustments to reconcile net income to net cash | ||||||||
from operating activities: | ||||||||
Depreciation and amortization | 257,940 | 308,010 | ||||||
Net amortization of securities | 222,327 | 287,298 | ||||||
Net realized gain on sale of securities | (7,409 | ) | 0 | |||||
Net realized gain on sale of loans | (102,892 | ) | (166,766 | ) | ||||
Net realized gain on sale of foreclosed assets | (129,353 | ) | (181,163 | ) | ||||
Net realized gain on sale of premises and equipment | 0 | (1,000 | ) | |||||
Net realized gain on the extinguishment of debt | 0 | (5,262,653 | ) | |||||
Foreclosed asset impairment | 70,028 | 141,531 | ||||||
Originations of loans for sale | (3,831,981 | ) | (7,291,857 | ) | ||||
Proceeds from loan sales | 3,914,428 | 7,617,841 | ||||||
Net change in: | ||||||||
Accrued interest receivable and other assets | (160,512 | ) | (33,408 | ) | ||||
Accrued interest payable and other liabilities | (47,290 | ) | 31,850 | |||||
Net cash from operating activities | 439,122 | 953,829 | ||||||
Cash flows from investing activities | ||||||||
Activity in available for sale securities: | ||||||||
Sales | 661,182 | 0 | ||||||
Maturities, prepayments and calls | 5,222,839 | 7,177,793 | ||||||
Purchases | (7,709,168 | ) | 0 | |||||
Loan originations, net | 1,601,268 | 2,051,555 | ||||||
Additions to premises and equipment, net | (252,333 | ) | (55,476 | ) | ||||
Proceeds from the disposal of equipment | 0 | 1,000 | ||||||
Proceeds from the sale of foreclosed assets | 783,115 | 760,328 | ||||||
Net cash from investing activities | 306,903 | 9,935,200 | ||||||
Cash flows from financing activities | ||||||||
Net change in deposits | (3,832,205 | ) | (20,608,034 | ) | ||||
Net change in federal funds purchased (sold) and repurchase agreements | 2,339,038 | (1,217,685 | ) | |||||
Other borrowing activity: | ||||||||
Repayment of note payable | 0 | (500,000 | ) | |||||
Issuance of senior debt | 0 | 1,280,000 | ||||||
Net cash (used in) financing activities | (1,493,167 | ) | (21,045,719 | ) | ||||
Net change in cash and cash equivalents | (747,142 | ) | (10,156,690 | ) | ||||
Beginning cash and cash equivalents | 17,132,741 | 20,297,115 | ||||||
Ending cash and cash equivalents | $ | 16,385,599 | $ | 10,140,425 | ||||
Supplemental cash flows information: | ||||||||
Cash paid during the period for interest | $ | 748,202 | $ | 864,706 | ||||
Cash paid during the period for federal income tax | 86,000 | 0 | ||||||
Transfers from loans to foreclosed assets | 346,837 | 614,485 | ||||||
Transfers from loans held for sale to portfolio | 0 | 5,881,651 | ||||||
Foreclosed asset sales financed by the Bank | 49,500 | 14,333 |
See accompanying notes to consolidated financial statements.
- 5 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS |
BASIS OF PRESENTATION: The unaudited, consolidated financial statements as of and for the three months and nine months ended September 30, 2014 include the consolidated results of operations of Community Shores Bank Corporation (“Company”) and its wholly-owned subsidiaries, Community Shores Financial Services (“CS Financial Services”), and Community Shores Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Community Shores Mortgage Company (the “Mortgage Company”) and the Mortgage Company’s wholly-owned subsidiary, Berryfield Development, LLC (“Berryfield”). 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 September 30, 2014 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-K for the period ended December 31, 2013. Some items in the prior year financial statements may be reclassified to conform to the current presentation.
LOAN POLICY: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. The loan portfolio consists of the following segments:
Commercial- Loans to businesses that are sole proprietorships, partnerships, limited liability companies and corporations. These loans are for commercial, industrial, or professional purposes. The risk characteristics of these loans vary based on the borrowers business and industry as repayment is typically dependent on cash flows generated from the underlying business.
Commercial Real Estate- Loans to individuals or businesses that are secured by improved and unimproved vacant land, farmland, commercial real property, multifamily residential properties, and all other conforming, nonresidential properties. Proceeds may be used for land acquisition, development or construction. These loans typically fall into two general categories: property that is owner occupied and income or investment property. Owner occupied commercial real estate loans typically involve the same risks as commercial and industrial loans however, the underlying collateral is the real estate which is subject to changes in market value after the loan’s origination. Adverse economic events and changes in real estate market valuations generally describe the risks that accompany commercial real estate loans involving income or investment property. The ability of the borrower to repay tends to depend on the success of the underlying project or the ability of the borrower to sell or lease the property at certain anticipated values.
Consumer- Term loans or lines of credit for the purchase of consumer goods, vehicles or home improvement. The risk characteristics of the loans in this segment vary depending on the type of collateral, however repayment is expected from an individual continuing to generate a cash flow that supports the calculated payment obligation. Secondary support could involve liquidation of collateral.
- 6 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued) |
Residential- Loans to purchase or refinance single family residences. The risks associated with this segment are similar to the risks for consumer loans as far as individual payment obligations however, the underlying collateral is the real estate. Real estate is subject to changes in market valuation and can be unstable for a variety of reasons.
For all loan segments, interest income is accrued on the unpaid principal using the interest method assigned to the loan product 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. A loan is moved to non-accrual status when it is past due over 90 days unless the loan is well secured and in the process of collection. If a loan is not past due but deemed to be impaired it may also be moved to non-accrual status. These rules apply to loans in all segments. However, certain classes of loans in the consumer segment may simply get charged-off as opposed to moving to non-accrual status.
All interest accrued but not received for a loan placed on non-accrual is reversed against interest income at the time the loan is assigned non-accrual status. Payments received on such loans are applied to principal when there is doubt about recovering the full principal outstanding. Loans are eligible to return to accrual status after six months of timely payment and future payments are reasonably assured.
The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and from recoveries of previously charged-off loans and decreased by charge-offs.
The allowance for loan loss analysis is performed monthly. Management’s methodology consists of specific and general components. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent 12 quarters. The historical loss experience is recalculated at the end of each quarter. This actual loss experience is supplemented with current economic factors based on the risks present for each portfolio segment. These current economic factors are also revisited at the end of each quarter and include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; quality of loan review system; degree of oversight by the Board of Directors; national and local economic trends and conditions; industry conditions; competition and legal and regulatory requirements; and effects of changes in credit concentrations. There were no significant changes to this methodology in the first three quarters of 2014.
For the commercial and commercial real estate portfolio segments, the historical loss is tracked by original loan grade. The Bank utilizes a numeric grading system for commercial and commercial real estate loans. Grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation and the estimated collateral values. The description of the loan grade criteria is included in Note 4. In recent periods, with charge-off activity lessening, the calculated historical loss factor assigned to general allocations was considerably reduced. The reduction was large enough that management chose to define and implement a minimum loss percentage for these segments. The minimum loss percentage is meant to ensure adequate coverage for incurred losses in loan pools.
- 7 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued) |
Within the commercial and industrial, and commercial real estate portfolios, there are classes of loans with like risk characteristics that are periodically segregated because management has determined that the historical losses or current factors are unique and ought to be considered separately from the entire segment.
For the consumer segment, historical loss experience is based on the actual loss history of the following four classes; general consumer loans, personal lines of credit, home equity lines of credit and credit cards. The level of delinquencies and charge-off experience directly impacts the general allocations to the consumer classes.
For the residential segment, loss experience is not segregated by grades or classes. The level of delinquencies, charge-off experience, and direction of real estate values directly impacts the general allocations to the residential real estate segment.
The specific component of the allowance for loan losses relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Any loan within a segment can be considered for individual impairment if it meets the above criteria. 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. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported net, at the fair value of the collateral less costs to sell.
Allocations of the allowance may be made for specific loans and groups, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan balances are generally charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Statutorily, the Bank must charge-off bad debt that reaches delinquency of 360 days. In the case of an impaired loan, management typically charges off any portion of the debt that is unsecured based on an internal analysis of future cash flows and or collateral.
- 8 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued) |
RECENT DEVELOPMENTS:
In January 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-04, Receivables- Trouble Debt Restructurings by Creditors (Topic 205). ASU 2014-04 clarifies when a creditor should be considered to have received physical possession of residential real estate property during a foreclosure. ASU 2014-04 establishes a loan receivable should be derecognized and the real estate property recognized upon the creditor obtaining legal title to the residential real estate property upon completion of foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan. The provisions of ASU 2014-04 are effective for annual periods beginning after December 15, 2014. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update create a new Topic 606 in the FASB Accounting Standard Codification ® (“ASC” or “Codification”). In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when the revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with customers to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this guidance is not expected to have a material effect on the Company’s financial position of results of operations.
In June 2014, FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU requires two accounting changes. First, repurchase-to-maturity transactions will be accounted for as secured borrowing transactions on the balance sheet, rather than sales. Second, for repurchase financing arrangements, the ASU requires separate accounting for a transfer of a financial asset executed contemporaneously with (or in contemplation of) a repurchase agreement with the same counterparty, which also will generally result in secured borrowing accounting for the repurchase agreement. The ASU also introduces new disclosures to increase transparency about the types of collateral pledged for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The ASU also requires a transferor to disclose information about transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the transferee. The accounting changes and disclosure for certain transactions accounted for as a sale are effective for the first interim period beginning in 2015. The disclosure for transactions accounted for as secured borrowings is required for interim periods beginning after March 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.
- 9 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued) |
In August 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. ASU 2014-14 requires creditors to reclassify loans that are within the scope of the ASU to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned. The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. The new guidance is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.
FASB also issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. This update requires an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. However, to the extent that a net operating loss carryforward or a tax credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit is to be presented in the statement of financial position as a liability. No new recurring disclosures are required. The amendments are effective for public business entities for annual periods beginning after December 15, 2013, and interim periods within those periods. The amendments are to be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.
The Company continued its trend of profitability, reporting consolidated earnings of $254,000 or $0.17 per common share for the first nine months of 2014 and $41,000 or $0.03 per common share for the third quarter of 2014. Conversely, total assets declined slightly as a result of loan repayments and a like reduction in customer deposits. Through earnings and a reduction in risk-weighted assets since year-end 2013, the total risk-based capital ratio of the Bank grew 43 basis points to 8.91%. The Bank continues to be considered adequately capitalized according to regulatory capital standards.
In spite of the improved financial outcome for the last several quarters, the Company remains subject to additional regulatory scrutiny, as described immediately below, following significant consolidated losses from 2007 through 2011, which resulted primarily from deteriorating asset quality during that recessionary period.
On September 2, 2010, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the State of Michigan’s Department of Insurance and Financial Services (“DIFS”), its primary regulators. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DIFS. Under the Consent Order, the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet these requirements within the required 90-day period and remained out of compliance with the Consent Order as of September 30, 2014.
- 10 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued) |
The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), one of the Company’s primary regulators. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has limited resources with which to assist the Bank in achieving the capital level required by the Consent Order. At present, the Company’s sole liquidity resource is its cash account balance which, as of September 30, 2014, was approximately $373,000.
Failure to comply with the stipulated capital levels of the Consent Order or the provisions of the Written Agreement may subject the Bank to further regulatory enforcement action.
- 11 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SECURITIES AVAILABLE FOR SALE |
The following tables represent the securities held in the Company’s portfolio at September 30, 2014 and at December 31, 2013:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
September 30, 2014 | Cost | Gains | Losses | Value | ||||||||||||
US Treasury | $ | 2,514,385 | $ | 14,287 | $ | 0 | $ | 2,528,672 | ||||||||
US Government and federal agency | 15,208,298 | 60,363 | (32,463 | ) | 15,236,198 | |||||||||||
Municipals | 1,060,673 | 7,524 | 0 | 1,068,197 | ||||||||||||
Mortgage-backed and collateralized mortgage obligations– residential | 14,093,444 | 118,377 | (165,778 | ) | 14,046,043 | |||||||||||
$ | 32,876,800 | $ | 200,551 | $ | (198,241 | ) | $ | 32,879,110 |
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2013 | Cost | Gains | Losses | Value | ||||||||||||
US Treasury | $ | 2,525,481 | $ | 16,551 | $ | 0 | $ | 2,542,032 | ||||||||
US Government and federal agency | 15,823,511 | 90,497 | (46,602 | ) | 15,867,406 | |||||||||||
Municipals | 1,563,394 | 27,747 | 0 | 1,591,141 | ||||||||||||
Mortgage-backed and collateralized mortgage obligations– residential | 11,354,185 | 132,797 | (257,315 | ) | 11,229,667 | |||||||||||
$ | 31,266,571 | $ | 267,592 | $ | (303,917 | ) | $ | 31,230,246 |
- 12 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SECURITIES AVAILABLE FOR SALE (Continued) |
The amortized cost and fair value of the securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment fees. Below is the schedule of contractual maturities for securities held at September 30, 2014:
Amortized | Fair | |||||||
Cost | Value | |||||||
Due in one year or less | $ | 4,529,499 | $ | 4,556,097 | ||||
Due from one to five years | 14,253,857 | 14,276,970 | ||||||
Due from five to ten years | 0 | 0 | ||||||
Due in more than ten years | 0 | 0 | ||||||
Mortgage-backed and collateralized mortgage obligations – residential | 14,093,444 | 14,046,043 | ||||||
$ | 32,876,800 | $ | 32,879,110 |
Below is the table of securities with unrealized losses, aggregated by investment category and length of time such securities were in an unrealized loss position at September 30, 2014 and December 31, 2013:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
September 30, 2014 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
US Government and federal agency | $ | 3,007,905 | $ | (8,883 | ) | $ | 2,962,330 | $ | (23,580 | ) | $ | 5,970,235 | $ | (32,463 | ) | |||||||||
Mortgage-backed and collateralized mortgage obligations - residential | 5,328,656 | (37,443 | ) | 4,830,438 | (128,335 | ) | 10,159,094 | (165,778 | ) | |||||||||||||||
$ | 8,336,561 | $ | (46,326 | ) | $ | 7,792,768 | $ | (151,915 | ) | $ | 16,129,329 | $ | (198,241 | ) |
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2013 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
US Government and federal agency | $ | 2,439,145 | $ | (38,342 | ) | $ | 1,031,280 | $ | (8,260 | ) | $ | 3,470,425 | $ | (46,602 | ) | |||||||||
Mortgage-backed and collateralized mortgage obligations - residential | 5,604,925 | (191,440 | ) | 1,473,265 | (65,875 | ) | 7,078,190 | (257,315 | ) | |||||||||||||||
$ | 8,044,070 | $ | (229,782 | ) | $ | 2,504,545 | $ | (74,135 | ) | $ | 10,548,615 | $ | (303,917 | ) |
There was one security sold in the nine months ended September 30, 2014. Proceeds from the sale were $661,182 with a gain of $7,409 realized. No securities were sold in the three months ended September 30, 2014. No securities were sold in the nine or three months ended September 30, 2013.
- 13 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SECURITIES AVAILABLE FOR SALE (Continued) |
Other-Than-Temporary-Impairment
Management evaluates securities for other than temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
At September 30, 2014, all of the mortgage-backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. At September 30, 2014, 28 debt securities had unrealized losses with aggregate depreciation of 1.21% from the amortized cost basis. Six of the 28 securities are issued by government agencies and 22 are issued by a government-sponsored entity. It is more likely than not that these debt securities will be retained given the fact that they are pledged to various public funds. The reported decline in value is not material and is deemed to be market driven. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2014.
- 14 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. | LOANS |
Outstanding loan balances by portfolio segment and class at September 30, 2014 and December 31, 2013 were as follows:
September 30, 2014 | December 31, 2013 | |||||||
Commercial | $ | 49,539,436 | $ | 47,081,426 | ||||
Commercial Real Estate: | ||||||||
General | 53,694,501 | 57,101,939 | ||||||
Construction | 2,080,928 | 2,065,308 | ||||||
Consumer: | ||||||||
Lines of credit | 6,557,112 | 7,737,439 | ||||||
Other | 1,537,576 | 1,560,384 | ||||||
Credit card | 459,859 | 451,009 | ||||||
Residential | 15,011,126 | 15,611,082 | ||||||
Net deferred loan fees | (57,309 | ) | (54,343 | ) | ||||
128,823,229 | 131,554,244 | |||||||
Less: Allowance for loan losses | (1,977,232 | ) | (2,809,642 | ) | ||||
Loans, net | $ | 126,845,997 | $ | 128,744,602 |
- 15 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS |
The following tables present the activity in the allowance for loan losses for the three and nine month periods ended September 30, 2014 and 2013 by portfolio segment:
Three Months Ended September 30, 2014 | Commercial | Commercial Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 428,247 | $ | 1,468,382 | $ | 390,000 | $ | 229,779 | $ | 225,152 | $ | 2,741,560 | ||||||||||||
Charge-offs | (2,929 | ) | (777,974 | ) | (5,966 | ) | 0 | 0 | (786,869 | ) | ||||||||||||||
Recoveries | 18,300 | 0 | 4,241 | 0 | 0 | 22,541 | ||||||||||||||||||
Provision for loan losses | 13,682 | 97,769 | (67,709 | ) | (27,417 | ) | (16,325 | ) | 0 | |||||||||||||||
Ending balance | $ | 457,300 | $ | 788,177 | $ | 320,566 | $ | 202,362 | $ | 208,827 | $ | 1,977,232 |
Three Months Ended September 30, 2013 | Commercial | Commercial Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 439,993 | $ | 1,920,587 | $ | 419,511 | $ | 157,406 | $ | 349,777 | $ | 3,287,274 | ||||||||||||
Charge-offs | (25,794 | ) | 0 | (225,308 | ) | (193,596 | ) | 0 | (444,698 | ) | ||||||||||||||
Recoveries | 19,656 | 0 | 7,804 | 0 | 0 | 27,460 | ||||||||||||||||||
Provision for loan losses | (51,133 | ) | (105,707 | ) | 209,672 | 250,712 | (303,544 | ) | 0 | |||||||||||||||
Ending balance | $ | 382,722 | $ | 1,814,880 | $ | 411,679 | $ | 214,522 | $ | 46,233 | $ | 2,870,036 |
- 16 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Nine Months Ended September 30, 2014 | Commercial | Commercial Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 339,048 | $ | 1,713,193 | $ | 424,824 | $ | 227,767 | $ | 104,810 | $ | 2,809,642 | ||||||||||||
Charge-offs | (23,819 | ) | (941,666 | ) | (54,690 | ) | (115,585 | ) | 0 | (1,135,760 | ) | |||||||||||||
Recoveries | 277,250 | 2,557 | 23,543 | 0 | 0 | 303,350 | ||||||||||||||||||
Provision for loan losses | (135,179 | ) | 14,093 | (73,111 | ) | 90,180 | 104,017 | 0 | ||||||||||||||||
Ending balance | $ | 457,300 | $ | 788,177 | $ | 320,566 | $ | 202,362 | $ | 208,827 | $ | 1,977,232 |
Nine Months Ended September 30, 2013 | Commercial | Commercial Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Beginning balance | $ | 582,198 | $ | 2,266,302 | $ | 331,459 | $ | 203,018 | $ | 0 | $ | 3,382,977 | ||||||||||||
Charge-offs | (66,047 | ) | (25,025 | ) | (263,905 | ) | (248,195 | ) | 0 | (603,172 | ) | |||||||||||||
Recoveries | 75,856 | 0 | 14,375 | 0 | 0 | 90,231 | ||||||||||||||||||
Provision for loan losses | (209,285 | ) | (426,397 | ) | 329,750 | 259,699 | 46,233 | 0 | ||||||||||||||||
Ending balance | $ | 382,722 | $ | 1,814,880 | $ | 411,679 | $ | 214,522 | $ | 46,233 | $ | 2,870,036 |
- 17 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2014 and December 31, 2013:
September 30, 2014 | Commercial | Commercial
Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 115,089 | $ | 387,378 | $ | 179,233 | $ | 98,680 | $ | 0 | $ | 780,380 | ||||||||||||
Collectively evaluated for impairment | 342,211 | 400,799 | 141,333 | 103,682 | 0 | 988,025 | ||||||||||||||||||
Unallocated | 0 | 0 | 0 | 0 | 208,827 | 208,827 | ||||||||||||||||||
Total ending allowance balance | $ | 457,300 | $ | 788,177 | $ | 320,566 | $ | 202,362 | $ | 208,827 | $ | 1,977,232 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,838,347 | $ | 6,718,604 | $ | 390,321 | $ | 854,868 | $ | 0 | $ | 9,802,140 | ||||||||||||
Collectively evaluated for impairment | 47,800,175 | 49,147,281 | 8,194,340 | 14,201,045 | 0 | 119,342,841 | ||||||||||||||||||
Total ending loans balance | $ | 49,638,522 | $ | 55,865,885 | $ | 8,584,661 | $ | 15,055,913 | $ | 0 | $ | 129,144,981 |
December 31, 2013 | Commercial | Commercial
Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 28,705 | $ | 1,302,677 | $ | 191,887 | $ | 87,635 | $ | 0 | $ | 1,610,904 | ||||||||||||
Collectively evaluated for impairment | 310,343 | 410,516 | 232,937 | 140,132 | 0 | 1,093,928 | ||||||||||||||||||
Unallocated | 0 | 0 | 0 | 0 | 104,810 | 104,810 | ||||||||||||||||||
Total ending allowance balance | $ | 339,048 | $ | 1,713,193 | $ | 424,824 | $ | 227,767 | $ | 104,810 | $ | 2,809,642 | ||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,165,730 | $ | 6,784,821 | $ | 518,428 | $ | 1,127,955 | $ | 0 | $ | 9,596,934 | ||||||||||||
Collectively evaluated for impairment | 46,016,674 | 52,490,365 | 9,267,130 | 14,524,492 | 0 | 122,298,661 | ||||||||||||||||||
Total ending loans balance | $ | 47,182,404 | $ | 59,275,186 | $ | 9,785,558 | $ | 15,652,447 | $ | 0 | $ | 131,895,595 |
- 18 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2014 and December 31, 2013. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.
Recorded | Unpaid Principal | Related | ||||||||||
September 30, 2014 | Investment | Balance | Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,451,607 | $ | 1,448,079 | $ | 0 | ||||||
Commercial Real Estate: | ||||||||||||
General | 5,126,153 | 5,191,046 | 0 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 0 | 0 | 0 | |||||||||
Other | 557 | 557 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 247,003 | 311,867 | 0 | |||||||||
Subtotal | $ | 6,825,320 | $ | 6,951,549 | $ | 0 | ||||||
With a related allowance recorded: | ||||||||||||
Commercial | $ | 386,740 | $ | 398,973 | $ | 115,089 | ||||||
Commercial Real Estate: | ||||||||||||
General | 1,592,451 | 2,330,203 | 387,378 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 375,403 | 374,635 | 164,908 | |||||||||
Other | 14,361 | 14,325 | 14,325 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 607,865 | 614,425 | 98,680 | |||||||||
Subtotal | $ | 2,976,820 | $ | 3,732,561 | $ | 780,380 | ||||||
Total | $ | 9,802,140 | $ | 10,684,110 | $ | 780,380 |
- 19 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Recorded | Unpaid Principal | Related | ||||||||||
December 31, 2013 | Investment | Balance | Allowance | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,049,046 | $ | 1,059,514 | $ | 0 | ||||||
Commercial Real Estate: | ||||||||||||
General | 714,377 | 744,958 | 0 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 107,750 | 255,128 | 0 | |||||||||
Other | 47,106 | 109,603 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 343,859 | 554,300 | 0 | |||||||||
Subtotal | $ | 2,262,138 | $ | 2,723,503 | $ | 0 | ||||||
With a related allowance recorded: | ||||||||||||
Commercial | $ | 116,684 | $ | 116,194 | $ | 28,705 | ||||||
Commercial Real Estate: | ||||||||||||
General | 6,070,444 | 6,069,393 | 1,302,677 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 296,004 | 294,323 | 155,095 | |||||||||
Other | 67,568 | 67,406 | 36,792 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 784,096 | 791,471 | 87,635 | |||||||||
Subtotal | $ | 7,334,796 | $ | 7,338,787 | $ | 1,610,904 | ||||||
Total | $ | 9,596,934 | $ | 10,062,290 | $ | 1,610,904 |
- 20 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Non-performing loans, from a past due and accrual status, and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. However, non-accrual loans and loans past due 90 days still on accrual are all individually classified impaired loans.
Three Months | Three Months | Three Months | ||||||||||
Average Recorded | Interest Income | Cash Basis | ||||||||||
September 30, 2014 | Investment | Recognized | Interest Recognized | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,354,845 | $ | 12,205 | $ | 9,913 | ||||||
Commercial Real Estate: | ||||||||||||
General | 5,165,179 | 64,547 | 63,255 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 64,792 | 0 | 0 | |||||||||
Other | 622 | 0 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 248,415 | 0 | 0 | |||||||||
Subtotal | $ | 6,833,853 | $ | 76,752 | $ | 73,168 | ||||||
With a related allowance recorded: | ||||||||||||
Commercial | $ | 501,237 | $ | 4,522 | $ | 4,522 | ||||||
Commercial Real Estate: | ||||||||||||
General | 1,680,955 | 0 | 0 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 315,554 | 4,583 | 4,570 | |||||||||
Other | 28,996 | 0 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 608,613 | 7,791 | 5,898 | |||||||||
Subtotal | $ | 3,135,355 | $ | 16,896 | $ | 14,990 | ||||||
Total | $ | 9,969,208 | $ | 93,648 | $ | 88,158 |
- 21 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Three Months | Three Months | Three Months | ||||||||||
Average Recorded | Interest Income | Cash Basis | ||||||||||
September 30, 2013 | Investment | Recognized | Interest Recognized | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,104,010 | $ | 7,911 | $ | 5,315 | ||||||
Commercial Real Estate: | ||||||||||||
General | 2,343,382 | 26,440 | 26,440 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 7,159 | 0 | 0 | |||||||||
Other | 42,295 | 0 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 292,817 | 563 | 563 | |||||||||
Subtotal | $ | 3,789,663 | $ | 34,914 | $ | 32,318 | ||||||
With a related allowance recorded: | ||||||||||||
Commercial | $ | 133,788 | $ | 1,493 | $ | 1,493 | ||||||
Commercial Real Estate: | ||||||||||||
General | 4,513,623 | 30,960 | 30,960 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 286,416 | 2,953 | 2,296 | |||||||||
Other | 62,352 | 476 | 474 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 560,146 | 4,879 | 3,677 | |||||||||
Subtotal | $ | 5,556,325 | $ | 40,761 | $ | 38,900 | ||||||
Total | $ | 9,345,988 | $ | 75,675 | $ | 71,218 |
- 22 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Nine Months | Nine Months | Nine Months | ||||||||||
Average Recorded | Interest Income | Cash Basis | ||||||||||
September 30, 2014 | Investment | Recognized | Interest Recognized | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,139,932 | $ | 27,048 | $ | 24,756 | ||||||
Commercial Real Estate: | ||||||||||||
General | 4,505,766 | 178,618 | 168,296 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 89,827 | 0 | 0 | |||||||||
Other | 8,454 | 268 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 357,249 | 0 | 0 | |||||||||
Subtotal | $ | 6,101,228 | $ | 205,934 | $ | 193,052 | ||||||
With a related allowance recorded: | ||||||||||||
Commercial | $ | 913,524 | $ | 11,440 | $ | 11,440 | ||||||
Commercial Real Estate: | ||||||||||||
General | 3,602,123 | 0 | 0 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 303,475 | 13,259 | 12,717 | |||||||||
Other | 42,522 | 38 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 637,301 | 23,119 | 18,252 | |||||||||
Subtotal | $ | 5,498,945 | $ | 47,856 | $ | 42,409 | ||||||
Total | $ | 11,600,173 | $ | 253,790 | $ | 235,461 |
- 23 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Nine Months | Nine Months | Nine Months | ||||||||||
Average Recorded | Interest Income | Cash Basis | ||||||||||
September 30, 2013 | Investment | Recognized | Interest Recognized | |||||||||
With no related allowance recorded: | ||||||||||||
Commercial | $ | 1,406,983 | $ | 28,936 | $ | 26,460 | ||||||
Commercial Real Estate: | ||||||||||||
General | 2,369,993 | 78,459 | 78,459 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 60,136 | 0 | 0 | |||||||||
Other | 26,438 | 0 | 0 | |||||||||
Credit card | 0 | 0 | 0 | |||||||||
Residential | 191,531 | 1,671 | 1,671 | |||||||||
Subtotal | $ | 4,055,081 | $ | 109,066 | $ | 106,590 | ||||||
With a related allowance recorded: | ||||||||||||
Commercial | $ | 326,595 | $ | 13,895 | $ | 13,540 | ||||||
Commercial Real Estate: | ||||||||||||
General | 4,517,192 | 92,370 | 92,370 | |||||||||
Construction | 0 | 0 | 0 | |||||||||
Consumer: | ||||||||||||
Lines of credit | 183,031 | 6,696 | 5,141 | |||||||||
Other | 92,557 | 1,411 | 1,411 | |||||||||
Credit card | 299 | 0 | 0 | |||||||||
Residential | 513,278 | 14,479 | 10,988 | |||||||||
Subtotal | $ | 5,632,952 | $ | 128,851 | $ | 123,450 | ||||||
Total | $ | 9,688,033 | $ | 237,917 | $ | 230,040 |
- 24 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
The following tables present the aging of the recorded investment in past due and non-accrual loans by class of loans as of September 30, 2014:
Greater Than 90 | Total Accruing | Total Recorded | ||||||||||||||||||||||
30-59 Days Past | 60-89 Days Past | Days Past | Past Due | Current | Investment of | |||||||||||||||||||
Accruing Loans | Due | Due | Due | Loans | Accruing Loans | Accruing Loans | ||||||||||||||||||
Commercial | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 49,621,996 | $ | 49,621,996 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
General | 0 | 0 | 0 | 0 | 51,744,880 | 51,744,880 | ||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 2,083,146 | 2,083,146 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Lines of credit | 118,137 | 0 | 0 | 118,137 | 6,369,110 | 6,487,247 | ||||||||||||||||||
Other | 3,477 | 0 | 0 | 3,477 | 1,537,198 | 1,540,675 | ||||||||||||||||||
Credit card | 7,811 | 0 | 0 | 7,811 | 452,048 | 459,859 | ||||||||||||||||||
Residential | 0 | 266,792 | 0 | 266,792 | 14,575,662 | 14,842,454 | ||||||||||||||||||
Total | $ | 129,425 | $ | 266,792 | $ | 0 | $ | 396,217 | $ | 126,384,040 | $ | 126,780,257 |
Greater Than 90 | Total | Current | Total Non-Accrual | |||||||||||||||||||||
30-59 Days Past | 60-89 Days Past | Days Past | Non-Accrual | Non-Accrual | Recorded | |||||||||||||||||||
Non-Accrual Loans | Due | Due | Due | Past Due Loans | Loans | Investment | ||||||||||||||||||
Commercial | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 16,526 | $ | 16,526 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
General | 0 | 0 | 499,476 | 499,476 | 1,538,383 | 2,037,859 | ||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Lines of credit | 0 | 0 | 93,803 | 93,803 | 0 | 93,803 | ||||||||||||||||||
Other | 398 | 0 | 2,679 | 3,077 | 0 | 3,077 | ||||||||||||||||||
Credit card | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Residential | 0 | 0 | 0 | 0 | 213,459 | 213,459 | ||||||||||||||||||
Total | $ | 398 | $ | 0 | $ | 595,958 | $ | 596,356 | $ | 1,768,368 | $ | 2,364,724 |
- 25 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
The following tables present the aging of the recorded investment in past due and non-accrual loans by class of loans as of December 31, 2013:
Greater Than 90 | Total Accruing | Total Recorded | ||||||||||||||||||||||
30-59 Days Past | 60-89 Days Past | Days Past | Past Due | Current | Investment of | |||||||||||||||||||
Accruing Loans | Due | Due | Due | Loans | Accruing Loans | Accruing Loans | ||||||||||||||||||
Commercial | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 47,146,126 | $ | 47,146,126 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
General | 0 | 0 | 0 | 0 | 54,827,857 | 54,827,857 | ||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 2,071,737 | 2,071,737 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Lines of credit | 0 | 101,022 | 0 | 101,022 | 7,640,301 | 7,741,323 | ||||||||||||||||||
Other | 1,583 | 10,824 | 0 | 12,407 | 1,500,086 | 1,512,493 | ||||||||||||||||||
Credit card | 0 | 0 | 0 | 0 | 451,009 | 451,009 | ||||||||||||||||||
Residential | 62,333 | 2,241 | 0 | 64,574 | 15,098,466 | 15,163,040 | ||||||||||||||||||
Total | $ | 63,916 | $ | 114,087 | $ | 0 | $ | 178,003 | $ | 128,735,582 | $ | 128,913,585 |
Greater Than 90 | Total | Current | Total Non-Accrual | |||||||||||||||||||||
30-59 Days Past | 60-89 Days Past | Days Past | Non-Accrual | Non-Accrual | Recorded | |||||||||||||||||||
Non-Accrual Loans | Due | Due | Due | Past Due Loans | Loans | Investment | ||||||||||||||||||
Commercial | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 36,278 | $ | 36,278 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
General | 0 | 0 | 0 | 0 | 2,375,592 | 2,375,592 | ||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Consumer: | ||||||||||||||||||||||||
Lines of credit | 0 | 0 | 25,568 | 25,568 | 0 | 25,568 | ||||||||||||||||||
Other | 0 | 25,360 | 0 | 25,360 | 29,805 | 55,165 | ||||||||||||||||||
Credit card | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Residential | 97,482 | 0 | 224,185 | 321,667 | 167,740 | 489,407 | ||||||||||||||||||
Total | $ | 97,482 | $ | 25,360 | $ | 249,753 | $ | 372,595 | $ | 2,609,415 | $ | 2,982,010 |
- 26 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Troubled Debt Restructurings:
A loan is considered to be a Troubled Debt Restructure (“TDR”) when the Bank grants a concession to the borrower that it would not normally consider because the borrower is experiencing financial difficulty. The concession is typically a modification of one or more of the terms such as a rate reduction below the current market rate for new debt with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not cover the interest; financing concessions; or a permanent reduction of the recorded investment of the loan.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed utilizing the Company’s internal underwriting policy.
The Company has allocated $732,128 of specific reserves on $7,820,822 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2014 and $1,539,865 on $8,452,163 of unpaid principal balance of loans as of December 31, 2013. At September 30, 2014, the Company had an additional $176,714 in performing loans outstanding to one of those customers. As of December 31, 2013, there was $180,557 committed to one customer.
In the three month period ended September 30, 2014, there were no loans modified as troubled debt restructurings and no charge-offs as part of a troubled debt restructuring.
For the nine month period ended September 30, 2014 the loans modified as troubled debt restructurings are shown below.
Pre-Modification | Post-Modification | |||||||||||
Outstanding Recorded | Outstanding Recorded | |||||||||||
Nine Months Ended September 30, 2014 | Number of Loans | Investment | Investment | |||||||||
Troubled Debt Restructurings: | ||||||||||||
Commercial | 1 | $ | 249,249 | $ | 275,116 | |||||||
Commercial Real Estate: | 1 | 2,413,000 | 2,413,000 | |||||||||
General | ||||||||||||
Total | 2 | $ | 2,662,249 | $ | 2,688,116 |
In the nine month period ending September 30, 2014, the modifications involved financing concessions on amortizing notes ranging from 10 months to 12 months however, there were no charge-offs related to the troubled debt restructurings.
In the nine month period ending September 30, 2014, an additional $48,000 of specific reserves were established on loans modified as troubled debt restructurings since year-end 2013.
- 27 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
In the three month period ended September 30, 2013, there were no loans modified as troubled debt restructurings and no charge-offs as part of a troubled debt restructuring.
Pre-Modification | Post-Modification | |||||||||||
Outstanding Recorded | Outstanding Recorded | |||||||||||
Nine Months Ended September 30, 2013 | Number of Loans | Investment | Investment | |||||||||
Troubled Debt Restructurings: | ||||||||||||
Commercial | 1 | $ | 143,136 | $ | 133,425 | |||||||
Consumer: | ||||||||||||
Lines of credit | 2 | 137,893 | 137,893 | |||||||||
Total | 3 | $ | 281,029 | $ | 271,318 |
In the nine month period ended September 30, 2013, there were $9,711 of charge-offs related to troubled debt restructuring arrangements and an additional $38,913 of specific reserves were established on these troubled debt restructurings.
Generally, a modified loan is considered to be in payment default when the borrower is not performing according to the renegotiated terms.
For the three and nine month periods ended September 30, 2014 there was one troubled debt restructuring that experienced a payment default within 12 months following the modification. The payment default occurred in the second quarter. Below is a table which presents that loan by class:
Recorded Investment | ||||||||
Number of Loans | at time of default | |||||||
Troubled Debt Restructurings | ||||||||
That Subsequently Defaulted: | ||||||||
Commercial | 1 | $ | 196,340 | |||||
Total | 1 | $ | 196,340 |
The troubled debt restructuring that subsequently defaulted described above did not result in any additional charge-offs and there were no specific reserves on the remaining balance as of September 30, 2014.
For the three and nine month periods ending September 30, 2013 there were no troubled debt restructurings that experienced a payment default within 12 months following the modification.
- 28 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
Credit Quality Indicators:
The Bank utilizes a numeric grading system for commercial and commercial real estate loans to indicate the strength of the credit. At origination, grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation including cash flow analysis and the estimated collateral values. The loan grade is reassessed at each renewal or amendment but any credit may receive a review based on lender identification of changes in the situation or behavior of the borrower. All commercial and commercial real estate loans exceeding $500,000 are formally reviewed at least annually. Once a loan is graded a 5M or greater number, and is over $100,000, the loan grade will be analyzed once a quarter to assess the borrower’s compliance with the Bank’s documented action plan. In addition to these methods for assigning loan grades, changes may occur through the external loan review or regulatory exam process. The loan grades are as follows:
1. | Exceptional. Loans with an exceptional credit rating. |
2. | Quality. Loans with excellent sources of repayment that conform, in all respects, to Bank policy and regulatory requirements. These are loans for which little repayment risk has been identified. |
3. | Above Average. Loans with above average sources of repayment and minimal identified credit or collateral exceptions and minimal repayment risk. |
4. | Average. Loans with average sources of repayment that materially conform to Bank policy and regulatory requirements. Repayment risk is considered average. |
5. | Acceptable. Loans with acceptable sources of repayment and risk. | ||
5M. | Monitor. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated. |
6. | Special Mention. Loans that have potential weaknesses and deserve close attention. If uncorrected, further deterioration is likely. Risk of non payment is above average. |
7. | Substandard. Loans that are inadequately protected by the borrower’s capacity to pay or the collateral pledged. Risk of non payment is high. |
8. | Doubtful. Loans in this grade have identified weaknesses that make full repayment highly questionable and improbable. |
When a loan is downgraded to a nine, it is considered a loss and is charged-off in full.
- 29 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued) |
As of September 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the recorded investment by risk category and class of loans is as follows:
Commercial Real Estate | Commercial Real Estate | |||||||||||||||||||||||
Commercial | General | Construction | ||||||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
1 | $ | 16,001 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
2 | 0 | 94,676 | 0 | 0 | 0 | 0 | ||||||||||||||||||
3 | 9,905,657 | 8,623,409 | 5,871,715 | 5,524,989 | 0 | 0 | ||||||||||||||||||
4 | 15,028,905 | 13,898,810 | 21,490,412 | 18,675,411 | 364,140 | 441,114 | ||||||||||||||||||
5 | 18,675,266 | 17,539,364 | 16,573,291 | 20,604,611 | 327,069 | 233,302 | ||||||||||||||||||
5M | 2,849,564 | 4,255,639 | 4,462,085 | 5,114,931 | 1,391,937 | 1,397,321 | ||||||||||||||||||
6 | 1,689,407 | 1,699,009 | 3,085,397 | 4,908,058 | 0 | 0 | ||||||||||||||||||
7 | 1,457,131 | 1,052,903 | 626,924 | 229,576 | 0 | 0 | ||||||||||||||||||
8 | 16,591 | 18,594 | 1,672,915 | 2,145,873 | 0 | 0 | ||||||||||||||||||
Total | $ | 49,638,522 | $ | 47,182,404 | $ | 53,782,739 | $ | 57,203,449 | $ | 2,083,146 | $ | 2,071,737 |
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of September 30, 2014 and December 31, 2013:
Residential | ||||||||
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
Performing | $ | 14,201,046 | $ | 14,524,492 | ||||
Impaired | 854,867 | 1,127,955 | ||||||
Total | $ | 15,055,913 | $ | 15,652,447 |
Consumer – Lines of credit | Consumer – Other | Consumer – Credit card | ||||||||||||||||||||||
September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
Performing | $ | 6,205,733 | $ | 7,363,137 | $ | 1,528,834 | $ | 1,452,984 | $ | 459,859 | $ | 451,009 | ||||||||||||
Impaired | 375,317 | 403,754 | 14,918 | 114,674 | 0 | 0 | ||||||||||||||||||
Total | $ | 6,581,050 | $ | 7,766,891 | $ | 1,543,752 | $ | 1,567,658 | $ | 459,859 | $ | 451,009 |
- 30 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. | FORECLOSED ASSETS |
Foreclosed asset activity at September 30:
September 30, | September 30, | |||||||
2014 | 2013 | |||||||
Beginning of year | $ | 2,558,299 | $ | 2,806,781 | ||||
Additions | 346,837 | 614,485 | ||||||
Reductions from sales | (703,262 | ) | (593,498 | ) | ||||
Direct write-downs | (70,028 | ) | (141,531 | ) | ||||
End of period | $ | 2,131,846 | $ | 2,686,237 | ||||
Expenses related to foreclosed assets include: | ||||||||
Operating expenses, net of rental income | $ | 121,921 | $ | 189,268 |
6. | PREMISES AND EQUIPMENT |
Period end premises and equipment were as follows at September 30, 2014 and December 31, 2013:
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
Land & land improvements | $ | 4,701,611 | $ | 4,700,464 | ||||
Buildings & building improvements | 6,214,970 | 6,201,507 | ||||||
Furniture, fixtures and equipment | 3,576,335 | 3,864,940 | ||||||
14,492,916 | 14,766,911 | |||||||
Less: accumulated depreciation | 5,353,056 | 5,621,444 | ||||||
$ | 9,139,860 | $ | 9,145,467 |
- 31 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. | DEPOSITS |
The components of the outstanding deposit balances at September 30, 2014 and December 31, 2013 were as follows:
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
Non-interest-bearing DDA | $ | 32,316,595 | $ | 33,313,136 | ||||
Interest-bearing DDA | 29,805,564 | 24,861,560 | ||||||
Money market | 22,792,147 | 19,202,665 | ||||||
Savings | 12,429,737 | 10,214,719 | ||||||
Time, under $100,000 | 61,606,343 | 74,352,652 | ||||||
Time, over $100,000 | 9,157,274 | 9,995,133 | ||||||
Total Deposits | $ | 168,107,660 | $ | 171,939,865 |
There were no brokered deposits at either September 30, 2014 or December 31, 2013. Since the Bank was not categorized as “well capitalized” at September 30, 2014 and is under a Consent Order, a regulatory waiver is required to accept, renew or rollover brokered deposits. The Bank has not issued brokered deposits since January of 2010.
8. | SHORT-TERM BORROWINGS |
The Company’s short-term borrowings consisted entirely of repurchase agreements in 2014 and 2013. Information regarding repurchase agreements at September 30, 2014 and December 31, 2013 is summarized below:
Repurchase | ||||
Agreements | ||||
Outstanding at September 30, 2014 | $ | 10,767,084 | ||
Average interest rate at period end | 0.49 | % | ||
Average balance during period | 9,250,418 | |||
Average interest rate during period | 0.53 | % | ||
Maximum month end balance during period | 10,767,084 | |||
Outstanding at December 31, 2013 | $ | 8,428,046 | ||
Average interest rate at year-end | 0.56 | % | ||
Average balance during year | 9,706,847 | |||
Average interest rate during year | 0.58 | % | ||
Maximum month end balance during year | 10,878,256 |
9. | FEDERAL HOME LOAN BANK BORROWINGS |
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis. Based on its current FHLB stock holdings and collateral, the Bank has the capacity to borrow $3,292,164. Each borrowing requires a direct pledge of securities and or loans. To support potential borrowings with the FHLB, the Bank had residential loans with a carrying value of $7,494,597 pledged at September 30, 2014 and $3,709,600 pledged at year-end 2013. The Bank had no outstanding borrowings with the FHLB at either September 30, 2014 or December 31, 2013.
- 32 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. | FEDERAL HOME LOAN BANK BORROWINGS (Continued) |
At September 30, 2014, the Bank used a portion of the residential loans pledged to the Federal Home Loan Bank to collateralize a $2,000,000 overdraft line of credit. At September 30, 2014, there was no balance outstanding on the line of credit.
10. | SUBORDINATED DEBENTURES |
The Trust, as defined in Note 1, 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 2.28% at September 30, 2014 and 2.30% at December 30, 2013. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by the Company. Interest on the subordinated debentures is payable quarterly on March 30th, June 30th, September 30th and December 30th. The Company is not considered the primary beneficiary of the Trust (under the variable interest entity rules), therefore the Trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability, and the interest expense is recorded on the Company’s consolidated statement of income.
The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued, give the Company the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities. In May 2010, the Company exercised its option to defer regularly scheduled quarterly interest payments beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010. The Company has exercised its option to defer each regularly scheduled interest payment since that time. The Company’s deferral of interest does not constitute an event of default.
During the deferral period, interest will continue to accrue on the subordinated debentures. Also, the deferred interest will accrue interest. At the expiration of the deferral period, all accrued and unpaid interest will become immediately due and payable. The 20th quarter of the allowable deferral period will be March 30, 2015 making all accrued and unpaid interest due on June 30, 2015. The accrued interest payable on the subordinated debentures was $532,560 at September 30, 2014, and $444,042 at December 31, 2013 and is included in accrued interest expense and other liabilities on the consolidated balance sheets at September 30, 2014 and December 31, 2013.
The indenture under which the subordinated debentures were issued prohibits certain actions by the Company during the deferral period. Among other things, during the deferral period and subject to certain exceptions, the Company is prohibited from declaring or paying any dividends or distributions on, or redeeming, purchasing, acquiring or making any liquidation payment with respect to, any shares of its capital stock. Additionally, under the FRB Written Agreement, issued December 16, 2010, the Company, without prior FRB approval, is prohibited from making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities.
- 33 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. | NOTES PAYABLE |
On March 20, 2013, the Company, with approval from the FRB, borrowed $1,280,000 from 1030 Norton LLC, a Michigan limited liability company owned by nine individuals; three directors of the Company, Gary F. Bogner, Robert L. Chandonnet and Bruce J. Essex, one former director and five local businessmen. On the same day, $500,000 of the proceeds were used to settle, in full, a defaulted debt with a financial institution1. The remaining proceeds of the senior debt are being used for interest carry, general operations and potential capital support for the Bank. The note bears interest at a fixed rate of 8.00% per annum until paid in full. Interest is payable quarterly, in arrears. The note matures on March 31, 2015. The note is secured by a pledge of all of the issued and outstanding shares of the Bank as evidenced by a pledge agreement between the Company and 1030 Norton LLC. The accrued interest at September 30, 2014 was approximately $26,000. The entire interest balance due was paid on October 1, 2014.
12. | COMMITMENTS AND OFF-BALANCE SHEET RISK |
Some financial instruments are used to meet financing needs and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit and standby letters of credit. These involve, to varying degrees, credit and interest-rate risk in excess of the amount reported in the financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment and generally have fixed expiration dates. Standby letters of credit are conditional commitments to guarantee a customer’s performance to another party. Exposure to credit loss, if the customer does not perform, is represented by the contractual amount for commitments to extend credit and standby letters of credit. Collateral or other security is normally obtained for these financial instruments prior to their use and many of the commitments are expected to expire without being used.
A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk as of September 30, 2014 and December 31, 2013 follows:
September 30, 2014 | December 31, 2013 | |||||||
Unused lines of credit and letters of credit | $ | 23,358,957 | $ | 22,576,236 | ||||
Commitments to make loans | 3,379 | 243,721 |
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 credit expire without being used, the above amounts related to those categories do not necessarily represent future cash disbursements.
1 The book value of the liability was $5,763,000 resulting in a gain of $5,263,000 which appears in the condensed consolidated statement of income as a gain on extinguishment of debt.
- 34 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS |
Fair value is 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. A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s placement in the hierarchy is based on the lowest level of input that is significant to the fair value estimate. There are 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.
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 (Level 1 inputs) or matrix pricing (Level 2 inputs), 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 using assumptions provided by the Company. 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. The valuation methodology utilized for the servicing rights begins with projecting 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 a market-based discount rate assumption. These inputs are generally observable in the marketplace resulting in a Level 2 classification.
Impaired Loans: The method used to determine the valuation of impaired loans depends on the anticipated source of repayment. Collateral dependent impaired loans with specific allocations of the allowance for loan losses are measured using the fair value of the collateral which is generally based on recent real estate appraisals or internal evaluations. Management may add discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Such adjustments can be significant and result in a Level 3 classification of the inputs for determining fair value.
- 35 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS (Continued) |
Non-real estate collateral may be valued using appraisals, independent valuation tools, net book value per the borrower’s financial statements, or aging reports. To determine the fair value, these values are adjusted or discounted based on several factors, including but not limited to: the Bank’s historical losses within that particular asset category; knowledge of the collateral, including age and condition; and changes in market conditions from the time of the valuation, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Foreclosed Assets: Commercial and residential real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. Fair values are generally based on recent real estate appraisals or internal evaluations. Management may add discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments of the carrying amount utilizing this process result in a Level 3 classification.
- 36 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS (Continued) |
Assets measured at fair value on a recurring basis are summarized below as of September 30, 2014 and December 31, 2013:
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2014 | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
US Treasury | $ | 2,528,672 | $ | 2,528,672 | $ | 0 | $ | 0 | ||||||||
US Government and federal agency | 15,236,198 | 0 | 15,236,198 | 0 | ||||||||||||
Municipals | 1,068,198 | 0 | 1,068,198 | 0 | ||||||||||||
Mortgage-backed and collateralized mortgage obligations– residential | 14,046,042 | 0 | 14,046,042 | 0 | ||||||||||||
Total | $ | 32,879,110 | $ | 2,528,672 | $ | 30,350,438 | $ | 0 | ||||||||
Servicing assets | $ | 34,699 | $ | 0 | $ | 34,699 | $ | 0 | ||||||||
December 31, 2013 | ||||||||||||||||
Available for sale securities: | ||||||||||||||||
US Treasury | $ | 2,542,032 | $ | 2,542,032 | $ | 0 | $ | 0 | ||||||||
US Government and federal agency | 15,867,406 | 0 | 15,867,406 | 0 | ||||||||||||
Municipals | 1,591,141 | 0 | 1,591,141 | 0 | ||||||||||||
Mortgage-backed and collateralized mortgage obligations– residential | 11,229,667 | 0 | 11,229,667 | 0 | ||||||||||||
Total | $ | 31,230,246 | $ | 2,542,032 | $ | 28,688,214 | $ | 0 | ||||||||
Servicing assets | $ | 37,217 | $ | 0 | $ | 37,217 | $ | 0 |
There were no transfers between levels during the third quarter of 2014 or 2013.
- 37 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS (Continued) |
Assets measured at fair value on a non-recurring basis are summarized below for the periods ended September 30, 2014 and December 31, 2013:
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Observable | Significant | ||||||||||||||
Identical Assets | Inputs | Unobservable Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
September 30, 2014 | ||||||||||||||||
Impaired loans1: | $ | 5,522,189 | $ | 0 | $ | 0 | $ | 5,522,189 | ||||||||
Foreclosed assets: | 2,131,846 | 0 | 0 | 2,131,846 | ||||||||||||
Total | $ | 7,654,035 | $ | 0 | $ | 0 | $ | 7,654,035 |
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Observable | Significant | ||||||||||||||
Identical Assets | Inputs | Unobservable Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
December 31, 2013 | ||||||||||||||||
Impaired loans1: | $ | 6,645,389 | $ | 0 | $ | 0 | $ | 6,645,389 | ||||||||
Foreclosed assets: | 2,558,299 | 0 | 0 | 2,558,299 | ||||||||||||
Total | $ | 9,203,688 | $ | 0 | $ | 0 | $ | 9,203,688 |
1 Collateral dependent
- 38 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS (Continued) |
The carrying amounts and estimated fair values of financial instruments not previously presented above are as follows:
Fair Value Measurements | ||||||||||||||||||||
Carrying | at September 30, 2014 | |||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 16,386 | $ | 16,386 | $ | 0 | $ | 0 | $ | 16,386 | ||||||||||
Loans held for sale | 261 | 0 | 265 | 0 | 265 | |||||||||||||||
Loans, net (including impaired) | 126,846 | 0 | 0 | 123,068 | 123,068 | |||||||||||||||
FHLB stock | 451 | N/A | N/A | N/A | N/A | |||||||||||||||
Accrued interest receivable | 457 | 12 | 123 | 322 | 457 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 168,108 | 90,231 | 70,994 | 0 | 161,225 | |||||||||||||||
Federal funds purchased and repurchase agreements | 10,767 | 0 | 10,767 | 0 | 10,767 | |||||||||||||||
Subordinated debentures | 4,500 | 0 | 0 | 1,125 | 1,125 | |||||||||||||||
Notes payable | 1,280 | 0 | 0 | 1,280 | 1,280 | |||||||||||||||
Accrued interest payable | 589 | 5 | 25 | 159 | 189 |
Fair Value Measurements | ||||||||||||||||||||
Carrying | at December 31, 2013 | |||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 17,133 | $ | 17,133 | $ | 0 | $ | 0 | $ | 17,133 | ||||||||||
Loans held for sale | 240 | 0 | 246 | 0 | 246 | |||||||||||||||
Loans, net (including impaired) | 128,745 | 0 | 0 | 122,235 | 122,235 | |||||||||||||||
FHLB stock | 451 | N/A | N/A | N/A | N/A | |||||||||||||||
Accrued interest receivable | 467 | 8 | 117 | 342 | 467 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | 171,940 | 79,596 | 84,785 | 0 | 164,381 | |||||||||||||||
Federal funds purchased and repurchase agreements | 8,428 | 0 | 8,428 | 0 | 8,428 | |||||||||||||||
Subordinated debentures | 4,500 | 0 | 0 | 1,125 | 1,125 | |||||||||||||||
Notes payable | 1,280 | 0 | 0 | 1,280 | 1,280 | |||||||||||||||
Accrued interest payable | 506 | 4 | 32 | 137 | 173 |
- 39 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS (Continued) |
The methods and assumptions, not previously presented above, used to estimate fair values are described as follows:
(a) Cash and cash equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
(b) Loans
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
(c) FHLB stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(d) Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(e) Federal funds purchased and repurchase agreements
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.
(f) Subordinated debentures and Notes payable
The fair values of the Company’s subordinated debentures and notes payable are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements and consideration of the Company’s liquidity, resulting in a Level 3 classification.
(g) Accrued interest receivable/payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification, depending on the associated asset or liability.
- 40 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. | FAIR VALUE MEASUREMENTS (Continued) |
(h) Off-balance sheet instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
14. | INCOME TAXES |
Accounting guidance related to income taxes requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, the Company considers both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified. Consequently, the Company determined it is necessary to carry a valuation allowance against our entire net deferred tax asset each reporting period since 2009.
The realization of the Company’s deferred tax assets is largely dependent upon the ability to generate future income. Although the Company recognized a profit in 2012, 2013 and the first three quarters of 2014, there must be a consistent trend of operational profitability in order to support the realization of deferred tax assets. The full valuation allowance against deferred tax assets may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required. The Company will continue to monitor our deferred tax assets quarterly for changes affecting their realizability.
As a result of the large gain on the extinguishment of debt in 2013, the Company recorded income tax expense from operations in the amount of $105,000. This amount represented projected taxable earnings subject to alternative minimum taxation which may fluctuate in future periods with changes in operating results.
There were no unrecognized tax benefits at September 30, 2014 and December 31, 2013, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months.
As of December 31, 2013, the Company has a net operating loss carry-forward of $7,466,000 to be utilized to offset future taxable income that will begin expiring in 2029.
The Company was subject to a State of Michigan, Department of Treasury, Michigan Business Tax Audit for the fiscal years of 2008 through 2011. On April 3, 2014, the Company was officially notified that there was no discrepancy found in its reported tax liability.
- 41 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. | REGULATORY MATTERS |
Banks are subject to regulatory capital requirements administered by the federal banking agencies. Since the Company is a one bank holding company with consolidated assets less than $500 million, regulatory minimum capital ratios are applied only to the Bank. 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, acquisitions, new activities, new branches, payment of dividends or management fees are prohibited 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 in the adequately capitalized category at both September 30, 2014 and December 31, 2013.
Actual capital amounts and ratios for the Bank and required capital amounts and ratios for the Bank to be adequately capitalized and to be at the level mandated by the Consent Order at September 30, 2014 and December 31, 2013 were:
Minimum Required | Minimum Required | |||||||||||||||||||||||
For Capital | Under | |||||||||||||||||||||||
Actual | Adequacy Purposes | Consent Order | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
September 30, 2014 | ||||||||||||||||||||||||
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank | $ | 11,888,348 | 8.91 | % | $ | 10,676,266 | 8.00 | % | $ | 14,679,866 | 11.00 | % | ||||||||||||
Tier 1 (Core) Capital to risk-weighted assets of the Bank | 10,216,366 | 7.66 | 5,338,133 | 4.00 | N/A | N/A | ||||||||||||||||||
Tier 1 (Core) Capital to average assets of the Bank | 10,216,366 | 5.22 | 7,823,512 | 4.00 | 16,624,964 | 8.50 |
- 42 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. | REGULATORY MATTERS (Continued) |
Minimum Required | Minimum Required | |||||||||||||||||||||||
For Capital | Under | |||||||||||||||||||||||
Actual | Adequacy Purposes | Consent Order | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2013 | ||||||||||||||||||||||||
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank | $ | 11,420,073 | 8.48 | % | $ | 10,769,246 | 8.00 | % | $ | 14,807,713 | 11.00 | % | ||||||||||||
Tier 1 (Core) Capital to risk-weighted assets of the Bank | 9,723,466 | 7.22 | 5,384,623 | 4.00 | N/A | N/A | ||||||||||||||||||
Tier 1 (Core) Capital to average assets of the Bank | 9,723,466 | 5.24 | 7,423,426 | 4.00 | 15,774,781 | 8.50 |
Federal Reserve guidelines limit the amount of allowance for loan losses that can be included in Tier 2 capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At September 30, 2014, only $1,671,982 was counted as Tier 2 capital and $305,250 was disallowed. At December 31, 2013, $1,696,607 was counted as Tier 2 capital and $1,113,035 was disallowed.
The Bank’s Consent Order with the FDIC and the DIFS, its primary banking regulators, became effective on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DIFS.
The Consent Order required the Bank to implement a written profit plan, a written contingency funding plan, a written plan to reduce the Bank's reliance on brokered deposits, a comprehensive strategic plan; to develop an analysis and assessment of the Bank's management needs and action plans for classified loans. All of these required items were completed. The only outstanding directive under the Consent Order is attaining the requested capital levels.
Under the Consent Order, the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not in compliance with this requirement at September 30, 2014 or December 31, 2010, 2011, 2012 or 2013. Management continues to explore options to raise the capital required for full compliance. At September 30, 2014, a capital contribution of $6,409,000 would have been needed to meet the capital ratios specified in the Consent Order.
- 43 - |
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. | REGULATORY MATTERS (Continued) |
The Bank continues to work in cooperation with its regulators; however the ability to fully comply with the specified capital levels, is not entirely within the Company’s control, and is not assured due to the availability of capital or other funds and actions taken by regulators. Failure to comply with provisions of the Consent Order may result in further regulatory action that could have a material adverse effect on the Company and its shareholders, as well as the Bank. As long as the Consent Order remains, the Bank is restricted from declaring or paying dividends without prior written authorization of the FDIC. The Bank is in full compliance with this restriction.
- 44 - |
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, and Berryfield, the Mortgage Company’s subsidiary, through September 30, 2014 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 September 30, 2014 to that at December 31, 2013. The part labeled Results of Operations discusses the three month and nine month periods ending September 30, 2014 as compared to the same periods of 2013. 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 of financial condition and results of operations, and other sections of the Annual Report 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, Berryfield and CS 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 or actions by bank regulators; 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 to maintain or increase its or the Bank’s capital position or when desired to support future growth; failure to comply with provisions of the Consent Order or Written Agreement may result in further regulatory action that could have a material adverse effect on us and our shareholders, as well as the Bank; 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. These risks and uncertainties should be considered when evaluating forward-looking statements. Undue reliance should not be placed on such statements.
The Company has returned to profitability but the overall banking environment remains challenging particularly from an interest rate standpoint. Economic indicators appear to be getting better. Locally, unemployment rates are declining but definitely remain at elevated levels. At September 30, 2014, unemployment was 6.1% for Muskegon County and 4.5% for Ottawa County which is better than unemployment rates of 8.5% for Muskegon County and 6.2% for Ottawa County at September 30, 2013. Additionally, local property values are generally holding and in some areas increasing.
- 45 - |
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Although these signs of progress in the economic climate are encouraging, the effects of the extended downturn from 2007 through 2011 had an adverse effect on the financial health of the Bank. Poor earnings stemming primarily from deteriorating asset quality eroded the Bank’s capital and corresponding regulatory capital ratios subjecting it to additional regulatory scrutiny, as detailed below under the caption “Regulatory Matters.”
In management’s view the most pressing issue confronting the Company is the need for additional capital. As of September 30, 2014, the Company has a cash balance of approximately $373,000, which at present is the Company’s only assured source of liquidity due to the regulatory constraints on the Bank’s ability to declare dividends, as described below under the caption “Regulatory Matters.” Despite the improved health of the Bank, in order to remain solvent beyond the first quarter of 2015, the Company will require either an infusion of capital or a renegotiation of terms prior to the maturity of its senior debt on March 31, 2015 (See Note 11 to the Company’s Consolidated Financial Statements for additional details) and its deferred interest on its subordinated debentures and associated trust preferred securities which comes due on June 30, 2015 (see Note 10 to the Company’s Consolidated Financial Statements for additional details). Management and the Board of Directors are actively seeking financing alternatives, including an infusion of capital and a modification, expansion or extension of the senior debt. Regulatory approval will be required in order amend our senior debt and in order to use the proceeds of any capital that we raise to pay deferred interest on our trust preferred securities. For additional details, see the section captioned “Regulatory Matters” below. Nonetheless, we cannot be certain that we will be successful in these efforts, or we will be able to obtain the required capital, extension of credit or regulatory approval.
REGULATORY MATTERS
On September 2, 2010, the Bank entered into a Consent Order with the FDIC and the State of Michigan’s DIFS, its primary regulators. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DIFS. Under the Consent Order, the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet these requirements within the required 90-day period and remained out of compliance with the Consent Order as of September 30, 2014.
The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the FRB, the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has limited resources with which to assist the Bank in achieving the capital level required by the Consent Order. At present, the Company’s sole liquidity resource is its cash account balance which, as of September 30, 2014, was approximately $373,000.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Failure to comply with the provisions of the Consent Order or the Written Agreement may subject the Bank to further regulatory enforcement action.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES: The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as disclosures found elsewhere in this Form 10-Q are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The allowance for loan losses, income taxes and foreclosed assets are deemed critical due to the required level of management judgment and the use of estimates that are particularly susceptible to significant change in the near term.
Allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans and loan groupings, assessments of the impact of current and anticipated economic conditions on the portfolio and historical loss experience. See the Financial Condition section of Management’s Discussion and Analysis and Notes 1 and 4 to the Company’s consolidated financial statements for additional information.
Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and anticipated economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income. Management has discussed the development of this critical accounting estimate with the Board of Directors and the Audit Committee.
Income Taxes. Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net deferred tax assets are recorded to the extent it is believed that they will more likely than not be realized. In making such a determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results. In the event it is determined that deferred income tax assets are in excess of their realizable amount, an adjustment to the valuation allowance would be made which would increase the provision for income taxes.
In determining the possible realization of deferred tax assets, future taxable income from operations exclusive of reversing temporary differences and tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire is considered.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company had no unrecognized tax positions at either September 30, 2014 or December 31, 2013.
Interest and penalties related to unrecognized tax benefits are recognized within the federal income tax expense (benefit) line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.
Foreclosed Assets. Foreclosed assets are acquired through or instead of loan foreclosure and are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. During the time that foreclosed assets are waiting to be sold, there will be occasions that the Bank will need to re-evaluate the individual market values of each asset. If there is evidence that the fair value has declined since the last evaluation, the Bank will incur an impairment charge in order to properly reflect the estimated fair value of the asset at the end of the reporting period. On a quarterly basis, the Bank’s Credit Department analyzes foreclosed asset values to determine the level at which they should be held on the Company’s books.
FINANCIAL CONDITION
Total assets were $189.5 million at September 30, 2014 compared to $190.8 million at December 31, 2013. The slight asset decline occurring in the first nine months of 2014 stemmed from loan repayments which funded decreases to customer deposit accounts.
Cash and cash equivalents decreased by $747,000 to $16.4 million at September 30, 2014 from $17.1 million at December 31, 2013. The Bank’s non-interest bearing correspondent bank balance was responsible for the decline. The FRB balance is the largest component of cash and cash equivalents and was over $13 million at both period ends. Typically, a balance at the FRB of between $7 and $10 million is enough to cover the liquidity needs of the Bank’s operations as well as provide a comfortable cushion for unexpected events. The excess funds are expected to be used to fund loans or to repay a portion of upcoming time deposit maturities.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Bank’s security portfolio was $32.9 million at September 30, 2014 and $31.2 million at December 31, 2013. Investment activity in the first nine months of the year consisted of maturities, prepayments and calls totaling $5.2 million, purchases totaling $7.7 million and one security sale for $661,000. The sale resulted in a gain of roughly $7,400. The security was sold because it no longer met the criteria of the Bank’s Investment Policy.
The securities portfolio is a key source of liquidity for the Bank. Given the Bank’s regulatory standing, off-balance-sheet borrowing facilities are significantly limited, forcing the Bank to resort to on-balance-sheet sources. Accordingly, it remains critical to maintain the unencumbered portion of the Bank’s security portfolio at a level equal to or perhaps above its general internal policy depending on assessed liquidity needs. The level of unpledged securities is regularly monitored and needs are formally assessed monthly. Maintaining an adequate level of pledgeable or saleable securities is one of the driving forces behind investment activity. Typically the Bank aims to leave between 10% and 20% of its investment portfolio unpledged. At September 30, 2014, 20% of the investment portfolio was unencumbered. This outcome is higher than the 15% unpledged position that existed on December 31, 2013. In the third quarter of 2014, $3 million of securities were purchased to cover future pledging needs due to contractual maturities within the next 90 days.
At September 30, 2014, securities with an amortized cost of $26.2 million were pledged to public fund customers, the FRB discount window and customer repurchase agreements.
Investment portfolio quality has received much scrutiny over the past several years. The value of the portfolio is impacted by national and global economic news. During the first nine months of 2014, the investment portfolio went from a net unrealized loss to a net unrealized gain position. The $38,000 change in value was made up of a $46,000 unrealized gain offset by $7,000 of realized gain and estimated taxes of $1,000. Although the portfolio had a net unrealized gain position of $2,000 at September 30, 2014, there were 28 securities with an amortized cost of $16.3 million having an unrealized loss of $198,000; 12 of the 28 had an unrealized loss longer than 12 months however, none were determined to have other than temporary impairment.
To reduce exposure to future loss (both realized and unrealized) the Bank intends to adhere to the diversification principles outlined in the investment policy and limit issuer concentrations. Besides fully guaranteed U.S. government and federal agency securities, there were no holdings of securities of any one issuer in an amount greater than 10% of the Bank’s common stock and surplus at September 30, 2014.
Loans held for sale activity during the first nine months of 2014 included $3.8 million of loan originations and $3.9 million of loan sales. The associated gain on the loan sales was $103,000. There were $261,000 of loans held for sale at September 30, 2014 and $240,000 held for sale at December 31, 2013. Mortgage lending activity related to refinancing is flat. A majority of the Bank’s mortgage lending activity in 2014 has been driven by purchases. Although mortgage rates continue to be low, the extended duration of the low rate environment has afforded a large share of customers the opportunity to refinance.
Total loans (held for investment) decreased $2.8 million and were $128.8 million at September 30, 2014 down from $131.6 million at December 31, 2013. Large decreases in the commercial real estate, consumer and residential portfolios were somewhat offset by increases in the commercial portfolio. Two large loans repaid, one was impaired at year-end 2013 and one impaired loan was reduced as a result of a charge off of the specifically allocated portion. The consumer reduction stemmed from both home equity and residential mortgage repayments. A majority of the reduction in these areas are from borrowers refinancing with other financial institutions. On the other hand, growth in commercial loans was from new customer relationships in the first nine months of 2014.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In spite of the changes in the commercial and commercial real estate portfolios, the concentration of commercial and commercial real estate loans was 82% similar to a level of 81% at year-end 2013. The outcome is in line with the Bank’s wholesale focus which has been maintained since opening in 1999. In spite of decreases to key loan portfolio segments of the Company’s balance sheet, one of the loan repayments had a notable impact on the quality of the loan portfolio since it was impaired at year-end 2013 and held a specific allocation of $158,000. The $2.4 million loan repaid in July.
Credit quality remains a priority of the Company. The lending staff diligently monitors the loan portfolio and adheres to a well-designed credit risk assessment process. Nonetheless, the Bank is still exposed to credit risk. Simply put, credit risk is the risk of borrower nonpayment typically on loans although it can be applicable to the investment portfolio as well. In both cases, avoiding portfolio concentrations in any one type of credit or in a specific industry helps to decrease risk; however, the risk of nonpayment for any reason exists with respect to all loans and investments. The Bank recognizes that credit losses will be experienced and will vary with, among other things, general economic conditions; the creditworthiness of the borrower over the term of the debt; and in the case of a collateralized loan, the quality of the collateral.
The Bank has developed a detailed process to estimate credit risk. The process is discussed at length in Note 1 to the Company’s financial statements. At each period end, the balance in the allowance for loan losses is based on management’s estimation of probable incurred credit losses. The estimation is the result of loan portfolio analysis completed utilizing a detailed methodology prescribed in the Bank’s credit procedures. Management reviews and analyzes the loan portfolio 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 allocation includes a detailed review of a borrower and its entire relationship resulting in an allocation being made to the allowance for that particular borrower. A loan becomes specifically identified when, based on current information and events related to that particular borrower, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Specifically identified loans are individually evaluated for impairment. There are occasions when a specifically identified loan requires no allocated allowance for loan losses. To have no allocated allowance for loan loss, a specifically identified loan must be well secured and have either a collateral analysis or a present value of cash flow analysis that supports a loan loss reserve allocation of zero.
After completion of the general and specific analysis, the allowance for loan losses is adjusted accordingly to maintain an adequate level. A third portion can arise if after completion of the analysis it is found that the existing balance in the allowance for loan losses is higher than what is required for the total general and specific portions. When this occurs, the third portion is considered unallocated.
At September 30, 2014, the allowance for loan losses totaled $2.0 million. At year-end 2013, the allowance for loan losses was $2.8 million. The ratio of allowance to gross loans outstanding decreased to a level of 1.53% at September 30, 2014 compared to 2.14% at year-end 2013.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The allocation of the allowance at September 30, 2014 and December 31, 2013 was as follows:
September 30, 2014 | December 31, 2013 | |||||||||||||||
Percent of | Percent of | |||||||||||||||
Loans in Each | Loans in Each | |||||||||||||||
Balance at End of Period | Category to | Category to | ||||||||||||||
Applicable to: | Amount | Total Loans | Amount | Total Loans | ||||||||||||
Commercial | $ | 457,300 | 38.4 | % | $ | 339,048 | 35.7 | % | ||||||||
Commercial Real Estate | 788,177 | 43.3 | 1,713,193 | 45.0 | ||||||||||||
Consumer | 320,566 | 6.6 | 424,824 | 7.4 | ||||||||||||
Residential | 202,362 | 11.7 | 227,767 | 11.9 | ||||||||||||
Unallocated | 208,827 | N/A | 104,810 | N/A | ||||||||||||
Total | $ | 1,977,232 | 100.0 | % | $ | 2,809,642 | 100.0 | % |
The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 0.83% at September 30, 2014, a decrease of 6 basis points from the year-end 2013 amount of 0.89%. Management feels that the trend of the general component of the allowance for loan losses is in line with improvement in the local economy, local unemployment and the overall improvement in the credit quality of the loan portfolio.
At September 30, 2014, there were $209,000 of unallocated reserves in the allowance for loan losses compared to $105,000 at December 31, 2013. The increase of $104,000 stemmed in part from a large recovery of a previously charged off loan that occurred in the first quarter of 2014.
At September 30, 2014, the allowance contained $780,000 in specific allocations for impaired loans compared to $1.6 million at December 31, 2013. There was $9.8 million of recorded investment on impaired loans at September 30, 2014, compared to $9.6 million at year-end 2013. The decrease in specific allocations was mainly the result of a charge-off totaling $738,000 on a single impaired credit.
As in the case above, specifically identified loans may have charge-offs after the time of their initial impairment. Depending on the credit, the charge-off may reduce principal to the current value of assigned collateral or expected repayment, therefore requiring no further reserve. Specifically identified loans requiring no reserves rose to 70% of the recorded investment of total specifically identified loans at September 30, 2014; up from 24% at year-end 2013. At September 30, 2014, the recorded investment on impaired loans requiring no reserves was $6.8 million, an increase of $4.6 million since year-end 2013. Two relationships were mainly responsible for the change. One impaired relationship for $1.6 million required a specific allocation at year-end 2013 but none at March 31, 2014. During the first three months of 2014, the borrower payments reduced principal enough to remove the allocation. The specific allocation associated with the loan was $7,000 at year-end 2013. The second relationship increasing this category was a large relationship that was impaired during the first quarter of 2014 in a troubled debt restructure transaction. The relationship totaled $2.7 million.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recorded investment on specifically identified loans requiring reserves was $3.0 million at September 30, 2014 compared to $7.3 million at year-end 2013. The $4.3 million decrease in recorded investment stemmed primarily from the $1.6 million impaired relationship mentioned above and from an impaired relationship for $2.4 million that was repaid in the third quarter of 2014.
Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. From year-end 2013 to September 30, 2014, the recorded investment in accruing past due and non-accrual loans decreased by $399,000 driven by a $218,000 increase in the recorded investment in past due loans and a $617,000 decrease in the recorded investment in non-accrual loans.
The recorded investment of accruing loans past due 30-59 days was $129,000 at September 30, 2014; an increase of $66,000 since December 31, 2013. There were six loans past due 30-59 days at September 30, 2014, four of which were paid current in October.
There were two accruing loans past due 60-89 days at September 30, 2014 totaling $267,000 compared to $114,000 at December 31, 2013. The largest loan 60-89 days past due represented 82% of the balance and was paid current in October.
There were no accruing loans with a recorded investment past due 90 days and greater at either September 30, 2014 or year-end 2013.
Although the amount of past due loans has increased compared to prior periods, a majority of the increase is essentially related to eight credits, five of which are now current. Management will continue its efforts to maintain a stringent credit review process; however, it is possible that past dues could fluctuate further in future periods.
The recorded investment of non-accrual loans totaled $2.4 million at September 30, 2014 and $3.0 million at year-end 2013, none of which are secured by undeveloped real estate. At September 30, 2014, there were specific allocations of $416,000 in the allowance for any estimated collateral deficiency on non-accrual loans.
The Bank had net charge-offs of $764,000 in the third quarter of 2014 and $832,000 for the first nine months of the year. More than 93% of the third quarter charge-offs were related to a single impaired credit. Year-to-date net charge-offs were impacted by a $250,000 recovery recorded in the first quarter when the Bank prevailed in a lawsuit related to a previously charged off credit. The ratio of annualized net charge-offs to average loans was 2.36% for the third quarter of 2014 and 0.84% for the first nine months of 2014.
Net charge-offs for the third quarter of 2013 were $417,000 and were $513,000 for the first nine months of 2013. The resulting ratio of net charge-offs to average loans for the third quarter of 2013 was 1.30% and was 0.52% for the first nine months of 2013.
Another risk identified by the Company is interest rate risk. 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 risk1.
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. |
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The loan maturities and rate sensitivity of the loan portfolio at September 30, 2014 are set forth below:
Within | Three to | One to | After | |||||||||||||||||
Three Months | Twelve Months | Five Years | Five Years | Total | ||||||||||||||||
Commercial | $ | 6,108,065 | $ | 14,552,192 | $ | 20,351,511 | $ | 8,470,359 | $ | 49,482,127 | ||||||||||
Commercial Real Estate: | ||||||||||||||||||||
General | 3,257,261 | 8,193,144 | 36,176,938 | 6,067,158 | 53,694,501 | |||||||||||||||
Construction | 132,299 | 1,385,786 | 562,843 | 0 | 2,080,928 | |||||||||||||||
Consumer: | ||||||||||||||||||||
Lines of credit | 437,433 | 203,230 | 2,469,869 | 3,446,580 | 6,557,112 | |||||||||||||||
Other | 114,943 | 52,949 | 886,816 | 482,868 | 1,537,576 | |||||||||||||||
Credit card | 51,703 | 160,658 | 247,498 | 0 | 459,859 | |||||||||||||||
Residential | 350,000 | 34,656 | 0 | 14,626,470 | 15,011,126 | |||||||||||||||
$ | 10,451,704 | $ | 24,582,615 | $ | 60,695,475 | $ | 33,093,435 | $ | 128,823,229 | |||||||||||
Loans at fixed rates | $ | 5,252,638 | $ | 14,663,025 | $ | 46,097,743 | $ | 24,685,317 | $ | 90,698,723 | ||||||||||
Loans at variable rates | 5,199,066 | 9,919,590 | 14,597,732 | 8,408,118 | 38,124,506 | |||||||||||||||
$ | 10,451,704 | $ | 24,582,615 | $ | 60,695,475 | $ | 33,093,435 | $ | 128,823,229 |
At September 30, 2014, there were 70% of the loan balances carrying a fixed rate and 30% a floating rate. Since 2008, the Bank’s concentration of fixed rate loans has been increasing. Some of the shift is a factor of the types of loans that have been paid off or have been added to the portfolio and some of the change is related to customer preference at the time of renewal. It is likely that future rate movements will be rising given the extended period of low rates that has existed over the past few years. As a result of the current mix of the loan portfolio, management will be challenged to improve loan income in a rising rate environment.
The maturity distribution of the loan portfolio has lengthened over the last several years but still remains at a level which is within the parameters determined to be acceptable by management. At September 30, 2014, approximately 26% of the entire loan portfolio had a contractual maturity longer than five years; the same as at year-end 2013. To control extension risk, management tries to ensure that loans with a longer contractual maturity are either floating rate or have a repricing or balloon date that is much shorter than the amortization period. A majority of the loans in the greater than five year contractual maturity are residential mortgage loans. Statistically, it has been shown that loans of this type do not generally remain on the books until maturity as a result of customer repricing opportunities or changes in circumstance. Additionally, the mortgage staff remains focused on originating loans saleable into the secondary market, thus minimizing the number of loans that are booked into the held for investment portfolio.
Foreclosed assets were $2.1 million at September 30, 2014, which was a decrease of $427,000 since December 31, 2013. These assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. There were eight lot and seven property sales during the first nine months of 2014 and five properties were added. There were net gains on the sales of $129,000. Foreclosed assets consisted of 21 real estate holdings at September 30, 2014 and 23 at December 31, 2013.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deposit balances were $168.1 million at September 30, 2014 down from $171.9 million at December 31, 2013. The $3.8 million decrease was driven mostly from interest bearing deposits decreasing by $2.8 million.
Although the net decline was relatively small, the activities within various categories of interest bearing accounts were significant. Since year-end 2013, time deposits decreased $13.6 million; a majority of the maturities were non-local, internet deposits. Neutralizing this significant decrease, interest-bearing checking, money market and savings balances together increased $10.7 million. Over 81% of the increase in interest-bearing checking and money market balances is from the seasonal activities of the Bank’s long-standing public fund customers since year-end 2013.
Repurchase agreement balances were $10.8 million at September 30, 2014 and $8.4 million at December 31, 2013, an increase of $2.4 million. The increase between the two period ends was primarily the result of several existing customers increasing their balance since year-end 2013.
Shareholders’ equity was approximately $4.0 million on September 30, 2014 and $3.7 million on December 31, 2013. The net increase of $292,000 was made up of net income recorded in the first nine months of 2014 and a reduction in accumulated other comprehensive loss (security market value adjustments). The book value per share was $2.69 at September 30, 2014.
Under the Consent Order, the Bank is required to maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not in compliance with required capital ratios at September 30, 2014. In order to attain the level of capital required by the Consent Order, the Bank would have needed additional capital of $6,409,000 on September 30, 2014 based on its asset mix and size. This is $358,000 more than the $6,051,000 that would have been needed on December 31, 2013. The increase in average assets since year-end 2013 increased the capital need.
RESULTS OF OPERATIONS
Net income recorded for the first nine months of 2014 was $254,000; $5.2 million less than net income recorded for the similar period in 2013 that included a $5.3 million gain on debt extinguishment. The corresponding basic and diluted earnings per share for the first nine months of 2014 was $0.17. The basic and diluted earnings per share for the first nine months of 2013 was $3.75; $3.58 per share of which was attributable to the aforementioned gain on the debt extinguishment.
Net income for the third quarter of 2014 was $41,000, which was $83,000 less than net income of $124,000 recorded for the third quarter of 2013. The corresponding basic and diluted earnings per share for the third quarter of 2014 was $0.03. The basic and diluted earnings per share for the third quarter of 2013 was $0.08.
For the first nine months of 2014, the annualized return on the Company’s average total assets was 0.17% compared to 3.74% for the first nine months of 2013 which was greatly impacted by the aforementioned gain on the debt extinguishment occurring in 2013’s first quarter. For the third quarter of 2014, the annualized return on the Company’s average total assets was 0.08%. For the third quarter of 2013, the annualized return on the Company’s average assets was 0.26%.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the first three quarters of 2014, the annualized return on the Company’s average equity was 8.58%. For the third quarter of 2014, the annualized return on the Company’s average equity was 4.08%. The Company’s average shareholders’ equity became positive in the first quarter of 2013 after recording the $5.3 million debt extinguishment gain on March 20, 2013. The low equity average and the high net income greatly inflated the annualized return on equity results for 2013. For the first nine months of 2013, the annualized return on shareholders’ equity was 296.6%. Since the average equity was positive for the entire third quarter of 2013, the annualized return on shareholders’ equity results were normalized at a level of 13.57%.
A primary component of the Company’s revenue is its net interest income. The Company’s net interest income and net interest margin were less for the first nine months of 2014 compared to the similar period in 2013. 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.
Nine Months ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | $ | 19,940,848 | $ | 36,677 | 0.25 | % | $ | 14,785,764 | $ | 26,596 | 0.24 | % | ||||||||||||
Securities | 30,922,972 | 338,041 | 1.46 | 37,751,706 | 421,821 | 1.49 | ||||||||||||||||||
Loans (including held for sale and non accrual) | 131,707,627 | 5,069,430 | 5.13 | 130,419,135 | 5,292,942 | 5.41 | ||||||||||||||||||
Total interest earning assets | 182,571,447 | 5,444,148 | 3.98 | 182,956,605 | 5,741,359 | 4.18 | ||||||||||||||||||
Other assets | 13,125,064 | 13,081,968 | ||||||||||||||||||||||
$ | 195,696,511 | $ | 196,038,573 | |||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||
Interest-bearing deposits | $ | 141,551,359 | $ | 627,278 | 0.59 | % | $ | 141,193,801 | $ | 757,995 | 0.72 | % | ||||||||||||
Repurchase agreements | 9,250,418 | 36,941 | 0.53 | 9,996,881 | 43,919 | 0.59 | ||||||||||||||||||
Subordinated debentures and notes payable | 5,780,000 | 166,172 | 3.83 | 5,414,286 | 143,985 | 3.55 | ||||||||||||||||||
Total interest bearing liabilities | 156,581,777 | 830,391 | 0.71 | 156,604,968 | 945,899 | 0.81 | ||||||||||||||||||
Non-interest-bearing deposits | 34,316,792 | 34,499,333 | ||||||||||||||||||||||
Other liabilities | 851,280 | 2,460,712 | ||||||||||||||||||||||
Shareholders’ Equity | 3,946,662 | 2,473,560 | ||||||||||||||||||||||
$ | 195,696,511 | $ | 196,038,573 | |||||||||||||||||||||
Net interest income | 4,613,757 | 4,795,460 | ||||||||||||||||||||||
Net interest spread on earning assets | 3.27 | % | 3.37 | % | ||||||||||||||||||||
Net interest margin on earning assets | 3.37 | % | 3.49 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 116.60 | % | 116.83 | % |
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The net interest spread on average earning assets decreased 10 basis points to 3.27% in the past twelve months. The net interest margin decreased by 12 basis points from 3.49% for the first nine months of 2013 to 3.37% for the first nine months of 2014. The net interest income for the first nine months of 2014 was $4.6 million compared to $4.8 million for the same period in 2013. Earning assets were roughly the same between the two periods however, the mix of earning assets was more favorable in 2013; there were 3% more earning assets comprised of either loans or securities. In the first nine months of 2014, the cash at the Federal Reserve, the lowest earning asset category, was higher. As a result of having less net interest income and a less favorable earning asset mix, the net interest margin declined. The erosion stemmed primarily from a 20 basis point reduction in the average rate earned on the Company’s earning assets which was partially offset by an 10 basis point reduction in the yield paid on interest bearing liabilities.
The average rate earned on interest earning assets was 3.98% for the nine month period ending September 30, 2014 compared to 4.18% for the same period in 2013. The decline was caused by both rate and earning asset composition differences. The average rate earned on deposits at other financial institutions and the securities portfolio remained similar for both periods, however, the concentration of these earning assets was different. In 2013’s first three quarters there were more securities and a lower balance on deposit at other financial institutions. In addition to these differences, there was a reduction in the yield on the loan portfolio, the Company’s largest earning asset category. The average rate earned on the loan portfolio was 5.13% in the first three quarters of 2014, a reduction of 28 basis points compared to the first three quarters of 2013. As the credit markets recover, financial institutions are more actively soliciting new business making the rate environment more competitive. In order to attract new customers and retain current ones, sometimes the Bank has to offer rates that are lower than the average portfolio rate. Each rate decision takes into consideration the quality of the loan from an underwriting standpoint. Lower rates are not being automatically offered on renewals or new business. Lower rates are used selectively based on the risk characteristics of the credit.
Decreases to the overall yield on interest earning assets were partially offset by rate reductions on the funding side. Over the past twelve months, the cost of funds improved 10 basis points. The main contributing factor was a 13 basis point improvement in the rate paid on interest bearing deposits when comparing the first nine months of 2014 to that of the similar period of 2013; a majority of the improvement was the result of a seven basis point reduction in the average rate paid on the time deposit portfolio over the last twelve months. As time deposits are maturing, the Bank has been successful at securing lower rates and longer maturities if the deposits need to be replaced.
Additionally, there were improvements in the average rate paid on repurchase agreements between the first three quarters of 2014 and the first three quarters of 2013. The average rate paid on repurchase agreements was six basis points less. Conversely, there were increases to the average rate on subordinated debentures and notes payable. The average rate paid on subordinated debentures and notes payable increased by 28 basis points due to the difference in the rate on notes payable between the two nine month periods.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 third quarter ended September 30, 2014 and 2013 is in the table below.
Three Months ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Federal funds sold and interest-bearing deposits with banks | $ | 21,459,597 | $ | 13,335 | 0.25 | % | $ | 13,570,152 | $ | 8,283 | 0.24 | % | ||||||||||||
Securities | 31,190,920 | 108,848 | 1.40 | 35,038,321 | 127,222 | 1.45 | ||||||||||||||||||
Loans (including held for sale and non accrual) | 129,293,609 | 1,633,617 | 5.05 | 128,391,263 | 1,701,576 | 5.30 | ||||||||||||||||||
Total interest earning assets | 181,944,126 | 1,755,800 | 3.86 | 176,999,736 | 1,837,081 | 4.15 | ||||||||||||||||||
Other assets | 13,666,946 | 13,070,572 | ||||||||||||||||||||||
$ | 195,611,072 | $ | 190,070,308 | |||||||||||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||
Interest-bearing deposits | $ | 140,162,812 | $ | 201,672 | 0.58 | % | $ | 136,331,382 | $ | 226,945 | 0.67 | % | ||||||||||||
Repurchase agreements | 10,116,939 | 12,974 | 0.51 | 9,905,021 | 14,193 | 0.57 | ||||||||||||||||||
Subordinated debentures and notes payable | 5,780,000 | 56,078 | 3.88 | 5,780,000 | 55,947 | 3.87 | ||||||||||||||||||
Total interest bearing liabilities | 156,059,751 | 270,724 | 0.69 | 152,016,403 | 297,085 | 0.78 | ||||||||||||||||||
Non-interest-bearing deposits | 34,534,207 | 33,450,338 | ||||||||||||||||||||||
Other liabilities | 1,007,340 | 948,697 | ||||||||||||||||||||||
Shareholders’ Equity | 4,009,774 | 3,654,870 | ||||||||||||||||||||||
$ | 195,611,072 | $ | 190,070,308 | |||||||||||||||||||||
Net interest income | 1,485,076 | 1,539,996 | ||||||||||||||||||||||
Net interest spread on earning assets | 3.17 | % | 3.37 | % | ||||||||||||||||||||
Net interest margin on earning assets | 3.26 | % | 3.48 | % | ||||||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 116.59 | % | 116.43 | % |
Net interest income decreased $55,000 in the third quarter of 2014 compared to the similar period in 2013. Accordingly, the net interest spread on average earning assets declined by 20 basis points and was 3.17% compared to a spread of 3.37% for the third quarter of 2013. Similarly, the net interest margin for the third quarter of 2014 decreased 22 basis points against the comparable period in 2013. The net interest margin for the third quarter of 2014 was 3.26% compared to 3.48% for the third quarter of 2013. There was a 29 basis point decline in the yield on earning assets between the third quarter of 2014 and the same quarter in 2013, there was also a reduction in yield paid on interest-bearing liabilities of nine basis points between the same two periods.
The average rate earned on interest earning assets was 3.86% for the three month period ending September 30, 2014, compared to 4.15% for the same period in 2013. The two biggest earning asset categories, securities and loans, each had a decline in yield when comparing the third quarter of 2014 to the similar period of 2013. The 25 basis point reduction to the average rate earned on the loan portfolio was the largest factor in the overall decrease. Seventeen basis points of the decline were driven by the repayment of two large loans during the quarter. The weighted average rate for these two relationships was 5.39%. One of the loans was impaired at year-end 2013 and had a positive impact on the loan quality statistics of the Bank. In spite of the reduction in interest income, management believes that the improvement in the quality of the loan portfolio from the repayment of the impaired loan was worth the incremental loss to interest income assuming a new origination is made at a lower rate.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Similar to the decrease to the overall yield on interest earning assets, there was a nine basis point decline in the Company’s cost of funds. The main contributing factor was a nine basis point improvement in the rate paid on interest bearing deposits when comparing the third quarter of 2014 to that of the similar period in 2013; the entire improvement was linked to a 11 basis point reduction in the average rate paid on the time deposit portfolio between the two periods.
Management will continue to seek ways to improve the cost of funds but it is unlikely that decreases will be enough to offset potential reductions in the average rate earned on earning assets. As such, management expects that the net interest margin may continue to decrease in future quarters.
In general, the rate environment remains at historically low levels and management is continually challenged to improve its mix of assets and its net interest income, thus asset liability management remains an important tool for assessing interest rate sensitivity; it also provides a tool for monitoring liquidity. 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.
The Company uses sophisticated software tools 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.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the repricing gap at September 30, 2014 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 | $ | 13,762,943 | $ | 0 | $ | 0 | $ | 0 | $ | 13,762,943 | ||||||||||
Securities (including FHLB stock) | 2,791,060 | 6,807,245 | 21,497,651 | 2,233,954 | 33,329,910 | |||||||||||||||
Loans held for sale | 0 | 0 | 0 | 260,500 | 260,500 | |||||||||||||||
Loans | 47,980,257 | 16,456,974 | 47,145,210 | 17,240,788 | 128,823,229 | |||||||||||||||
64,534,260 | 23,264,219 | 68,642,861 | 19,735,242 | 176,176,582 | ||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||
Savings and checking | 65,027,448 | 0 | 0 | 0 | 65,027,448 | |||||||||||||||
Time deposits <$100,000 | 8,739,062 | 16,630,975 | 36,236,306 | 0 | 61,606,343 | |||||||||||||||
Time deposits >$100,000 | 1,512,512 | 4,233,315 | 3,411,447 | 0 | 9,157,274 | |||||||||||||||
Repurchase agreements and Federal funds purchased | 10,767,084 | 0 | 0 | 0 | 10,767,084 | |||||||||||||||
Notes payable and other borrowings | 4,500,000 | 1,280,000 | 0 | 0 | 5,780,000 | |||||||||||||||
90,546,106 | 22,144,290 | 39,647,753 | 0 | 152,338,149 | ||||||||||||||||
Net asset (liability) repricing gap | $ | (26,011,846 | ) | $ | 1,119,929 | $ | 28,995,108 | $ | 19,735,242 | $ | 23,838,433 | |||||||||
Cumulative net asset (liability) repricing gap | $ | (26,011,846 | ) | $ | (24,891,917 | ) | $ | 4,103,191 | $ | 23,838,433 |
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 more rate bearing products have an opportunity to reprice during this period. If the rate environment remains flat like the Federal Open Market Committee of the Federal Reserve System has forecasted, a negative repricing gap should be helpful for further reduction to the Company’s overall interest expense, however it is unknown whether the reduction will offset the repricing opportunities for loans scheduled to renew. Nonetheless, if the Company’s gap position remains negative when interest rates begin to rise, there will likely be a negative effect on net interest income. The interest rate sensitivity table above simply illustrates what the Company is contractually able to change in certain time frames.
There was no provision for loan losses for the first three quarters of 2013 or the first three quarters of 2014. The provision expense is associated with changes in historical loss calculations, economic condition (local and national) as well as delinquency, charge offs and changes to credit quality grades; up and down. A methodical assessment of these factors generates the reserves required for the risk in the Bank’s loan portfolio and the required provision expense. Management will continue to review the allowance with the intent of maintaining it at an appropriate level for the portfolio’s credit quality and perceived risk factors. The provision for loan losses is an estimate and may be increased or decreased in the future.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-interest income recorded in the first nine months of 2014 was $1.3 million compared to $6.6 million recorded for the similar period in 2013. The difference stemmed mainly from a $5.3 million gain on the debt extinguishment. On March 20, 2013, the Company, with approval from the FRB, borrowed $1,280,000 from 1030 Norton LLC, a Michigan limited liability company owned by nine individuals including three directors of the Company; Gary F. Bogner, Robert L. Chandonnet, and Bruce J. Essex. On the same day, $500,000 of the proceeds were used to settle, in full, a defaulted debt of $5.8 million with a financial institution resulting in a gain of $5.3 million.
Other differences in non-interest income stemmed from lower service charge income, fewer gains on the sale of foreclosed assets and fewer residential real estate loans originated for sale. Service charges on deposit accounts decreased $27,000 and were $436,000 for the first nine months of 2014. Overdraft income was $25,000 less between the first three quarters of 2014 and the first three quarters of 2013.
Additionally, in the first nine months of 2014, foreclosed asset sales netted the Company $129,000 in gains while the foreclosed asset sales for the same period in 2013 resulted in net gains of $181,000. During the first three quarters of 2014, gains on residential real estate sales were $103,000 and were $64,000 less than the same period in 2013. Although the rate environment continues to be very conducive to mortgage lending activity, less of the results are refinance activity placing more emphasis on purchases.
Other non-interest income was $615,000 for the first three quarters of 2014 and $479,000 for the first three quarters of 2013. The difference of $136,000 stems largely from additional rental income at the Bank’s Harvey branch location. In the fourth quarter of 2013, the Bank leased out a large portion of its second floor. The rented space on the first floor of the Harvey branch was the same for both periods.
Non-interest income for the third quarter of 2014 was $436,000 compared to $491,000 of non-interest income in the third quarter of 2013. There were two primary contributing factors: differences in gains on the sale of foreclosed assets and differences in rental income. Gains on the sale of foreclosed properties were $98,000 more in the third quarter of 2013. Conversely, other non-interest income, specifically rental income from the leased space at the Harvey location was $31,000 more in the third quarter of 2014.
Non-interest expenses for the first nine months of 2014 were $5.7 million; $89,000 less than the total for the first nine months of 2013. Increases to salary, benefits and data processing expenses were more than offset by decreases to foreclosed asset impairments, equipment depreciation and collection expenses.
Non-interest expenses approximated $1.9 million for the third quarter of 2014, the same total as the third quarter of 2013; however there were small differences in the details. As a result of further improvement in property values, there were no foreclosed assets impairment charges recorded in the third quarter of 2014 compared to $33,000 in the same quarter of 2013. Other positive outcomes were lower occupancy expenses, mainly utilities, and lower collection expenses. The improvement in the aforementioned categories more than offset a $50,000 increase in professional services expenses between the third quarter of 2014 and that of 2013. During the third quarter of 2014, the Bank used the services of two parties to assist with its capital planning strategies and regulatory capital stress testing.
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
There was no income tax expense recorded for the first nine months of 2014. As a result of the large gain on the extinguishment of debt in 2013, the Company recorded income tax expense from operations in the amount of $105,000. This amount represents projected taxable earnings subject to alternative minimum taxation from that gain. Additionally, the gain on the extinguishment of debt resulted in a $4.2 reduction of net operating loss carry forward tax attributes. Even so, the Company’s net operating loss carry forward remaining was over $7 million at year-end 2013.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable for smaller reporting companies.
ITEM 4. | CONTROLS AND PROCEDURES |
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
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 September 30, 2014. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.
There have been no changes in the internal control over financial reporting during the quarter ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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COMMUNITY SHORES BANK CORPORATION
ITEM 1. | LEGAL PROCEEDINGS |
In the opinion of management, the Company and its subsidiaries are not a party to any current legal proceedings that are expected to have a material adverse effect on 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 |
The Company made no unregistered sale of equity securities, and did not purchase any of its equity securities, during the quarter ended September 30, 2014.
Holders of Company common stock are entitled to receive cash dividends to the extent that they are declared from time to time by the Company's Board of Directors. To date, the Company's Board of Directors has never declared a cash dividend. The Company may only pay cash dividends out of funds that are legally available for that purpose. The Company is a holding company and substantially all of its assets are held by its subsidiaries. The Company's ability to pay cash dividends to its shareholders depends primarily on the Bank's ability to pay cash dividends to the Company. Cash dividend payments and extensions of credit to the Company from the Bank are subject to legal and regulatory limitations, generally based on capital levels and current and retained earnings, imposed by law and regulatory agencies with authority over the Bank. The ability of the Bank to pay cash dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements. Under the Consent and Written Agreement, the Bank is precluded from paying dividends to the Company and the Company may not receive dividends from the Bank.
Under the terms of the subordinated debentures that the Company issued to the Trust, the Company is precluded from paying cash dividends on the Company's common stock if an event of default has occurred and is continuing under the subordinated debentures, or if the Company has exercised its right to defer payments of interest on the subordinated debentures, until the deferral ends. Commencing in May of 2010, the Company gave notice that it was deferring the regularly scheduled quarterly interest payments on the subordinated debentures beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010. So until the deferral ends, the terms of the subordinated debentures preclude the Company from paying any dividends on the common stock (see Note 10 to the Company’s Consolidated Financial Statements for additional details). If the Company had any preferred stock outstanding, it would similarly be precluded from paying any dividend on the preferred stock.
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COMMUNITY SHORES BANK CORPORATION
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
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. |
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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 | ||
November 14, 2014 | By: | /s/ Heather D. Brolick |
Date | Heather D. Brolick | |
President and Chief Executive Officer | ||
(principal executive officer) | ||
November 14, 2014 | By: | /s/ Tracey A. Welsh |
Date | Tracey A. Welsh | |
Senior Vice President, Chief Financial Officer and Treasurer | ||
(principal financial and accounting officer) |
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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. |
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