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EX-32.2 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORPv452767_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORPv452767_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORPv452767_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORPv452767_ex31-1.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, 2016  

 

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 x No

 

At November 14, 2016, 4,101,664 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 48
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 64
       
  Item 4. Controls and Procedures 64
       
PART II. Other Information  
       
  Item 1. Legal Proceedings 64
       
  Item 1A. Risk Factors 64
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
       
  Item 3. Defaults upon Senior Securities 65
       
  Item 4. Mine Safety Disclosures 65
       
  Item 5. Other Information 65
       
  Item 6. Exhibits 65
       
  Signatures 66

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2016   2015 
   (unaudited)   (audited) 
ASSETS          
Cash and due from financial institutions  $3,037,331   $2,791,553 
Interest-bearing deposits in other financial institutions   13,996,521    15,108,399 
Total cash and cash equivalents   17,033,852    17,899,952 
Term deposit   100,000    0 
Securities available for sale (at fair value)   19,108,072    25,209,733 
Loans held for sale   0    0 
Loans   131,496,371    122,741,728 
Less: Allowance for loan losses   1,624,718    1,671,416 
Net loans   129,871,653    121,070,312 
Federal Home Loan Bank stock (at cost)   300,500    300,500 
Premises and equipment, net   8,567,278    8,820,502 
Accrued interest receivable   355,479    369,442 
Foreclosed assets   1,699,027    2,211,327 
Net deferred tax assets   4,008,707    4,260,165 
Other assets   573,515    879,367 
Total assets  $181,618,083   $181,021,300 
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits          
Non-interest-bearing  $43,523,397   $39,236,718 
Interest-bearing   114,180,321    121,944,921 
Total deposits   157,703,718    161,181,639 
Repurchase agreements   4,853,589    4,921,023 
Subordinated debentures   4,500,000    4,500,000 
Notes payable   0    1,280,000 
Derivative liability   0    426,667 
Accrued expenses and other liabilities   453,283    1,149,544 
Total liabilities   167,510,590    173,458,873 
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; 4,101,664 issued and outstanding at September 30, 2016 and 1,468,800 issued and outstanding at December 31, 2015   19,625,689    13,296,691 
Retained deficit   (5,606,459)   (5,705,469)
Accumulated other comprehensive income (loss)   88,263    (28,795)
Total shareholders’ equity   14,107,493    7,562,427 
Total liabilities and shareholders’ equity  $181,618,083   $181,021,300 

 

See accompanying notes to consolidated financial statements.

 

 - 1 - 

 

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Three Months   Three Months   Nine Months   Nine Months 
   Ended   Ended   Ended   Ended 
   September 30,   September 30,   September 30,   September 30, 
   2016   2015   2016   2015 
Interest and dividend income                    
Loans, including fees  $1,553,794   $1,549,915   $4,649,603   $4,810,245 
Securities (including FHLB dividends)   67,038    89,928    226,370    296,951 
Federal funds sold and other income   27,108    13,796    69,240    21,571 
Total interest and dividend income   1,647,940    1,653,639    4,945,213    5,128,767 
Interest expense                    
Deposits   155,127    176,666    473,976    512,758 
Repurchase agreements and other short-term debt   4,221    5,019    12,520    19,726 
Federal Home Loan Bank advances and notes payable   32,037    57,359    123,931    169,382 
Derivative valuation adjustment   0    0    0    426,667 
Total interest expense   191,385    239,044    610,427    1,128,533 
Net Interest Income   1,456,555    1,414,595    4,334,786    4,000,234 
Provision for loan losses   0    0    0    0 
Net Interest Income After Provision for Loan Losses   1,456,555    1,414,595    4,334,786    4,000,234 
Non-interest income                    
Service charges on deposit accounts   105,626    145,500    335,005    423,583 
Gain on sale of loans   50,703    22,993    121,422    94,969 
Gain on sale of foreclosed assets   20,822    38,020    167,835    146,524 
Gain on sale of premises and equipment   0    0    0    750 
Other   196,625    219,133    604,676    603,812 
Total non-interest income   373,776    425,646    1,228,938    1,269,638 
Non-interest expense                    
Salaries and employee benefits   978,099    984,606    2,971,133    2,976,434 
Occupancy   156,446    153,750    459,075    464,646 
Furniture and equipment   89,191    90,021    278,687    256,098 
Advertising   3,309    6,042    9,512    18,333 
Data processing   131,283    133,955    370,289    471,096 
Professional services   85,146    408,886    306,923    590,157 
Foreclosed asset impairment   49,119    14,596    134,533    78,101 
FDIC insurance   45,145    70,777    172,731    273,827 
Other   225,282    283,535    715,743    750,212 
Total non-interest expense   1,763,020    2,146,168    5,418,626    5,878,904 
Income (Loss) Before Federal Income Taxes   67,311    (305,927)   145,098    (609,032)
Federal income tax expense (benefit)   22,886    (104,015)   46,088    (207,071)
Net Income (Loss)  $44,425   $(201,912)  $99,010   $(401,961)
Basic average shares outstanding   4,101,664    1,468,800    3,265,682    1,468,800 
Diluted average shares outstanding   4,101,664    1,468,800    3,265,682    1,468,800 
Basic (loss) earnings per share  $0.01   $(0.14)  $0.03   $(0.27)
Diluted (loss) earnings per share  $0.01   $(0.14)  $0.03   $(0.27)

 

See accompanying notes to consolidated financial statements.

 

 - 2 - 

 

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

   Three Months   Three Months   Nine Months   Nine Months 
   Ended   Ended   Ended   Ended 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
                 
Net income (loss)  $44,425   $(201,912)  $99,010   $(401,961)
                     
Other comprehensive income (loss):                    
Unrealized holding gains (losses) on available for sale securities   (31,472)   37,071    177,361    39,006 
Less reclassification adjustments for unrealized gains later recognized in income   0    0    0    0 
    (31,472)   37,071    177,361    39,006 
Tax effect   10,701    (12,604)   (60,303)   (13,263)
Other comprehensive income (loss), net of tax   (20,771)   24,467    117,058    25,743 
                     
Comprehensive income (loss)  $23,654   $(177,445)  $216,068   $(376,218)

 

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, 2015   1,468,800   $13,296,691   $(4,944,867)  $(270,887)  $8,080,937 
                          
Net loss             (401,961)        (401,961)
Other comprehensive income                  25,743    25,743 
                          
Balance at September 30, 2015   1,468,800   $13,296,691   $(5,346,828)  $(245,144)  $7,704,719 
                          
Balance at January 1, 2016   1,468,800   $13,296,691   $(5,705,469)  $(28,795)  $7,562,427 
                          
Proceeds from rights offering, net of issuance costs   1,383,299    3,289,905              3,289,905 
Proceeds from private placement   579,412    1,477,501              1,477,501 
Note payable conversion, including derivative liability, net of taxes   670,153    1,561,592              1,561,592 
Net income             99,010         99,010 
Other comprehensive income                  117,058    117,058 
                          
Balance at September 30, 2016   4,101,664   $19,625,689   $(5,606,459)  $88,263   $14,107,493 

 

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, 2016   September 30, 2015 
Cash flows from operating activities          
Net income (loss)  $99,010   $(401,961)
Adjustments to reconcile net income (loss) to net cash from operating activities:          
Depreciation and amortization   274,821    277,171 
Net amortization of securities   160,543    216,204 
Net realized gain on sale of loans   (121,422)   (94,969)
Net realized gain on sale of foreclosed assets   (167,835)   (146,524)
Net realized gain on sale of premises and equipment   0    (750)
Foreclosed asset impairment   134,533    78,101 
Originations of loans for sale   (4,929,350)   (3,672,475)
Proceeds from loan sales   4,951,772    3,915,344 
Deferred federal income tax expense (benefit)   46,088    (190,985)
Valuation adjustment on derivative   0    426,667 
Net change in:          
Accrued interest receivable and other assets   319,815    141,179 
Accrued interest payable and other liabilities   (696,261)   173,263 
Net cash from operating activities   71,714    720,265 
Cash flows from investing activities          
Maturities, prepayments and calls of available for sale securities   6,118,479    6,472,197 
Purchase of a term deposit   (100,000)   0 
Loan originations and payments, net   (8,791,360)   5,663,442 
Redemption of Federal Home Loan Bank stock   0    87,900 
Proceeds from the disposal of equipment   0    750 
Additions to premises and equipment, net   (21,597)   (79,479)
Proceeds from the sale of foreclosed assets   634,621    190,398 
Net cash from (used by) investing activities   (2,159,857)   12,335,208 
Cash flows from financing activities          
Net change in deposits   (3,477,921)   9,680,597 
Repayment of note payable   (8)   0 
Net change in repurchase agreements   (67,434)   (3,736,519)
Proceeds from rights offering, net of issuance cost   3,289,905    0 
Proceeds from private placement   1,477,501    0 
Net cash from financing activities   1,222,043    5,944,078 
Net change in cash and cash equivalents   (866,100)   18,999,551 
Beginning cash and cash equivalents   17,899,952    7,935,522 
Ending cash and cash equivalents  $17,033,852   $26,935,073 
Supplemental cash flows information:          
Cash paid during the period for interest  $1,241,700   $610,520 
Cash paid during the period for federal income tax   0    0 
Non-cash financing activities:          
Transfers from loans to foreclosed assets   89,019    246,382 
Transfers from loans held for sale to loans held for investment   99,000    0 
Transfers from foreclosed assets to SBA receivable   0    7,627 
Note payable conversion to common stock, including derivative and net of taxes   1,561,592    0 

 

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, 2016 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, 2016 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, 2015. 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, 1-4 family and 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 reassessed 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 2016.

 

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.

 

 - 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 experienced directly impacts the general allocations to the consumer classes. Similar to the commercial segment, charge-off activity in the consumer segment has been lessening, thus reducing the calculated historical loss factor assigned to the general allocations.

 

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. Similar to the commercial, charge-off activity in the residential segment has been lessening, thus reducing the calculated historical loss factor assigned to the general allocations.

 

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 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)

 

There was no material change in these operating doctrines during the nine months ended September 30, 2016.

 

ADOPTION OF NEW ACCOUNTING STANDARDS:

 

In June 2015, FASB issued ASU 2015-10, Technical Corrections and Improvements. This ASU contains amendments that will clarify and affect a variety of Topics in the FASB Accounting Standards Codification. The amendments in this Update require transition guidance and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. All other amendments will be effective upon the issuance of this guidance. The adoption of this guidance is being evaluated but is not expected to have a material effect on the Company’s financial position or results of operations.

 

In November 2015, FASB issued ASU 2015-17, Income Taxes; Balance Sheet Classification of Deferred Taxes. The amendments in this Update are intended to simplify the presentation of deferred income taxes and requires that deferred tax assets and liabilities be classified as non-current in a classified statement of financial position. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of this guidance is being evaluated but is not expected to have a material effect on the Company’s financial position or results of operations.

 

In March 2016, FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU is part of the Simplification Initiative and involves several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or a liability, and classification on the statement of cash flows. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of this guidance is being evaluated but is not expected to have a material effect on the Company’s financial position or results of operations.

 

NEWLY ISSUED NOT YET EFFECTIVE ACCOUNTING STANDARDS:

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2016, with three transition methods available – full retrospective, retrospective and cumulative effect approach.  At the July 9, 2015 FASB meeting, the FASB voted to delay the effective date by one year. The Company is in process of evaluating this new ASU to determine the potential impact on the Company’s financial position and/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 January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. One such amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The presentation addresses financial statement users’ feedback that presenting the total change in fair value of a liability in net income reduced the decision usefulness of an entity’s net income when it had a deterioration in its credit worthiness. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The new guidance must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

 

In February 2016, the FASB issued ASU 2016-02 "Leases." From the lessee's perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

 

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses" which introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses.  The new accounting standard allows a financial institution to leverage its current internal credit risk systems as a framework for estimating expected credit losses. For public business entities (PBE) that are U.S. SEC filers, the new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is in process of evaluating this new ASU to determine the potential impact on the Company’s financial position and/or results of operations.

 

 - 10 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force).  This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle.  The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods.  The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

 

Other issued but not yet effective accounting standards were reviewed and management has concluded that none apply or will be material to the Company’s financial statement.

 

RECENT DEVELOPMENTS

 

In the first quarter of 2016, the Company successfully completed a Rights Offering which commenced in the fourth quarter of 2015 and a concurrent private placement (See Note 13). On March 28, 2016, after receiving FRB approval to repay the interest due on the Company’s subordinated debentures and to increase the ownership percentages of certain investors in relation to the guidelines of the FRB Change in Bank Control Act, the Company received gross proceeds of approximately $5.0 million from two transactions. On the same date, the Company’s note payable with 1030 Norton LLC converted to 670,153 common shares, relieving the Company of any future interest payments. Two days later, on March 30, 2016, the Company repaid $722,000 of interest on its subordinated debentures and brought its interest obligations on this debt current through March 31, 2016. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into the Bank, enhancing its regulatory capital position.

 

On April 27, 2016, the Company’s Board of Directors voted to again defer interest payments on its subordinated debentures in order to preserve its cash for general operations and potential capital support for the Bank as it grows. The deferral of interest does not constitute an event of default. 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, 2016. As of September 30, 2016, the accrued and unpaid interest owed on the subordinated debentures was $64,144.

 

2.SECURITIES AVAILABLE FOR SALE

 

The following tables represent the securities held in the Company’s portfolio at September 30, 2016 and at December 31, 2015:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
September 30, 2016  Cost   Gains   Losses   Value 
                 
US Treasury  $1,503,778   $4,582   $0   $1,508,360 
US Government and federal agency   7,980,037    24,090    0    8,004,127 
Mortgage-backed and collateralized mortgage obligations– residential   9,490,524    109,035    (3,974)   9,595,585 
   $18,974,339   $137,707   $(3,974)  $19,108,072 

 

 - 11 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SECURITIES AVAILABLE FOR SALE (Continued)

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
December 31, 2015  Cost   Gains   Losses   Value 
                 
US Treasury  $1,505,941   $5,387   $0   $1,511,328 
US Government and federal agency   11,545,640    13,215    (14,235)   11,544,620 
Municipals   710,000    966    0    710,966 
Mortgage-backed and collateralized mortgage obligations– residential   11,491,781    64,103    (113,065)   11,442,819 
   $25,253,362   $83,671   $(127,300)  $25,209,733 

 

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, 2016:

 

   Amortized   Fair 
   Cost   Value 
Due in one year or less  $6,475,872   $6,490,641 
Due from one to five years   3,007,943    3,021,846 
Due from five to ten years   0    0 
Due in more than ten years   0    0 
Mortgage-backed and collateralized mortgage obligations – residential   9,490,524    9,595,585 
   $18,974,339   $19,108,072 

 

 - 12 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SECURITIES AVAILABLE FOR SALE (Continued)

 

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, 2016 and December 31, 2015:

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
September 30, 2016  Value   Losses   Value   Losses   Value   Losses 
Mortgage-backed and collateralized mortgage obligations - residential  $218,097   $(1,318)  $965,524   $(2,656)  $1,183,621   $(3,974)
   $218,097   $(1,318)  $965,524   $(2,656)  $1,183,621   $(3,974)

 

   Less than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
December 31, 2015  Value   Losses   Value   Losses   Value   Losses 
US Government and federal agency  $5,453,848   $(14,235)  $0   $0   $5,453,848   $(14,235)
Mortgage-backed and collateralized mortgage obligations - residential   4,842,868    (38,336)   3,268,525    (74,729)   8,111,393    (113,065)
   $10,296,716   $(52,571)  $3,268,525   $(74,729)  $13,565,241   $(127,300)

 

The Bank was holding one municipal security at December 31, 2015. The security had a maturity of May 2018. The security was called in January of 2016.

 

No securities were sold in the three or nine months ended September 30, 2016 or September 30, 2015.

 

 - 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, 2016 and December 31, 2015, 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, 2016, four debt securities had unrealized losses with aggregate depreciation of 0.33% from the amortized cost basis; three of the four had unrealized losses greater than 12 months.

 

Three of the four securities, which had an unrealized loss at September 30, 2016, are issued by government agencies and one is issued by a government-sponsored entity. It is likely 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, 2016.

 

At September 30, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than U.S. Government and federal agencies, in an amount greater than 10% of common stock and surplus.

 

 - 14 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.SECURITIES AVAILABLE FOR SALE (Continued)

 

Securities pledged at September 30, 2016 had a carrying amount of $14,778,836 and were pledged to secure public fund customers and customer repurchase agreements. Pledged securities at December 31, 2015 had a carrying amount of $20,201,813.

 

3.LOANS

 

Outstanding loan balances by portfolio segment and class at September 30, 2016 and December 31, 2015 were as follows:

 

   September 30, 2016   December 31, 2015 
Commercial  $48,824,798   $48,287,124 
Commercial Real Estate:          
General   50,702,719    48,327,074 
Construction   6,892,119    2,189,127 
Consumer:          
Lines of credit   5,312,221    5,296,097 
Other   1,206,031    1,167,709 
Credit card   464,378    473,048 
Residential   18,176,771    17,051,151 
Net deferred loan fees   (82,666)   (49,602)
    131,496,371    122,741,728 
Less: Allowance for loan losses   (1,624,718)   (1,671,416)
Loans, net  $129,871,653   $121,070,312 

 

 - 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, 2016 and 2015 by portfolio segment:

 

Three Months Ended September 30, 2016  Commercial   Commercial
Real Estate
   Consumer   Residential   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $582,411   $460,602   $263,890   $211,914   $119,764   $1,638,581 
Charge-offs   0    0    (21,831)   0    0    (21,831)
Recoveries   5,700    0    2,268    0    0    7,968 
Provision for loan losses   (27,547)   50,168    3,717    (10,977)   (15,361)   0 
Ending balance  $560,564   $510,770   $248,044   $200,937   $104,403   $1,624,718 

 

Three Months Ended September 30, 2015  Commercial   Commercial
Real Estate
   Consumer   Residential   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $529,851   $426,628   $276,099   $196,789   $144,006   $1,573,373 
Charge-offs   0    0    (138)   0    0    (138)
Recoveries   11,600    33    131,044    0    0    142,677 
Provision for loan losses   (68,267)   (344)   (107,264)   26,577    149,298    0 
Ending balance  $473,184   $426,317   $299,741   $223,366   $293,304   $1,715,912 

 

 - 16 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

Nine Months Ended September 30, 2016  Commercial   Commercial
Real Estate
   Consumer   Residential   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $522,558   $432,145   $322,185   $210,653   $183,875   $1,671,416 
Charge-offs   (69,664)   (21,871)   (61,124)   0    0    (152,659)
Recoveries   45,253    25,710    34,998    0    0    105,961 
Provision for loan losses   62,417    74,786    (48,015)   (9,716)   (79,472)   0 
Ending balance  $560,564   $510,770   $248,044   $200,937   $104,403   $1,624,718 

 

Nine Months Ended September 30, 2015  Commercial   Commercial
Real Estate
   Consumer   Residential   Unallocated   Total 
Allowance for loan losses:                              
Beginning balance  $500,776   $848,589   $294,039   $204,485   $130,283   $1,978,172 
Charge-offs   0    (429,212)   (14,225)   0    0    (443,437)
Recoveries   38,500    33    142,644    0    0    181,177 
Provision for loan losses   (66,092)   6,907    (122,717)   18,881    163,021    0 
Ending balance  $473,184   $426,317   $299,741   $223,366   $293,304   $1,715,912 

 

 - 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, 2016 and December 31, 2015:

 

September 30, 2016  Commercial   Commercial
Real Estate
   Consumer   Residential   Unallocated   Total 
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment  $286,825   $0   $80,200   $67,871   $0   $434,896 
Collectively evaluated for impairment   273,739    510,770    167,844    133,066    0    1,085,419 
Unallocated   0    0    0    0    104,403    104,403 
Total ending allowance balance  $560,564   $510,770   $248,044   $200,937   $104,403   $1,624,718 
                               
Loans:                              
Individually evaluated for impairment  $2,326,779   $5,091,554   $166,880   $530,409   $0   $8,115,622 
Collectively evaluated for impairment   46,552,624    52,582,041    6,837,875    17,689,958    0    123,662,498 
Total ending loans balance  $48,879,403   $57,673,595   $7,004,755   $18,220,367   $0   $131,778,120 

 

December 31, 2015  Commercial   Commercial
Real Estate
   Consumer   Residential   Unallocated   Total 
Allowance for loan losses:                              
Ending allowance balance attributable to loans:                              
Individually evaluated for impairment  $198,222   $49,855   $145,955   $71,460   $0   $465,492 
Collectively evaluated for impairment   324,336    382,290    176,230    139,193    0    1,022,049 
Unallocated   0    0    0    0    183,875    183,875 
Total ending allowance balance  $522,558   $432,145   $322,185   $210,653   $183,875   $1,671,416 
                               
Loans:                              
Individually evaluated for impairment  $2,327,065   $5,332,786   $309,323   $729,178   $0   $8,698,352 
Collectively evaluated for impairment   46,048,707    45,261,236    6,650,819    16,368,778    0    114,329,540 
Total ending loans balance  $48,375,772   $50,594,022   $6,960,142   $17,097,956   $0   $123,027,892 

 

 - 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, 2016 and December 31, 2015. The recorded investment includes unpaid principal balance net of interest payments applied to principal (non-accrual loans only) as well as accrued interest receivable, deferred fees and costs. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

 

September 30, 2016  Recorded
Investment
   Unpaid Principal
Balance
   Related
Allowance
 
With no related allowance recorded:               
Commercial  $1,347,890   $1,407,648   $0 
Commercial Real Estate:               
 General   5,091,554    6,069,152    0 
Consumer:               
 Lines of credit   36,201    36,139    0 
 Other   0    0    0 
Residential   220,771    253,352    0 
 Subtotal  $6,696,416   $7,766,291   $0 
                
With a related allowance recorded:               
Commercial  $978,889   $992,531   $286,825 
Commercial Real Estate:               
 General   0    0    0 
Consumer:               
 Lines of credit   109,549    109,050    59,183 
 Other   21,130    21,016    21,017 
Residential   309,638    317,941    67,871 
 Subtotal  $1,419,206   $1,440,538   $434,896 
Total  $8,115,622   $9,206,829   $434,896 

 

 - 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, 2015  Investment   Balance   Allowance 
With no related allowance recorded:               
Commercial  $1,376,371   $1,435,861   $0 
Commercial Real Estate:               
 General   5,220,711    6,381,061    0 
Consumer:               
 Lines of credit   15,740    15,740    0 
 Other   0    0    0 
Residential   414,528    446,950    0 
 Subtotal  $7,027,350   $8,279,612   $0 
With a related allowance recorded:               
Commercial  $950,694   $957,412   $198,222 
Commercial Real Estate:               
 General   112,075    148,165    49,855 
Consumer:               
 Lines of credit   277,230    276,275    129,617 
 Other   16,353    16,338    16,338 
Residential   314,650    321,821    71,460 
 Subtotal  $1,671,002   $1,720,011   $465,492 
Total  $8,698,352   $9,999,623   $465,492 

 

 - 20 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

The following tables present the average recorded investment of loans individually evaluated for impairment by class of loans as of September 30, 2016 and 2015 and the associated interest income. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

 

   Three Months   Three Months   Three Months 
   Average Recorded   Interest Income   Cash Basis 
September 30, 2016  Investment   Recognized   Interest Recognized 
With no related allowance recorded:               
Commercial  $1,352,250   $21,801   $13,593 
Commercial Real Estate:               
 General   5,052,992    124,372    47,673 
Consumer:               
 Lines of credit   65,622    806    850 
 Other   0    0    0 
Residential   178,928    593    352 
 Subtotal  $6,649,792   $147,572   $62,468 
                
With a related allowance recorded:               
Commercial  $980,259   $5,793   $5,793 
Commercial Real Estate:               
 General   19,333    0    0 
Consumer:               
 Lines of credit   132,489    2,201    1,972 
 Other   22,245    404    306 
Residential   309,966    3,217    3,217 
 Subtotal  $1,464,292   $11,615   $11,288 
Total  $8,114,084   $159,187   $73,756 

 

 - 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, 2015  Investment   Recognized   Interest Recognized 
With no related allowance recorded:               
Commercial  $1,332,829   $12,534   $12,534 
Commercial Real Estate:               
 General   5,525,724    54,728    57,025 
Consumer:               
 Lines of credit   15,905    0    0 
 Other   0    0    0 
Residential   422,240    401    401 
 Subtotal  $7,296,698   $67,663   $69,960 
                
With a related allowance recorded:               
Commercial  $430,920   $5,626   $5,676 
Commercial Real Estate:               
 General   37,470    0    0 
Consumer:               
 Lines of credit   254,100    3,640    3,717 
 Other   11,208    0    0 
Residential   316,262    2,299    2,383 
 Subtotal  $1,049,960   $11,565   $11,776 
Total  $8,346,658   $79,228   $81,736 

 

 - 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, 2016  Investment   Recognized   Interest Recognized 
With no related allowance recorded:               
Commercial  $1,360,761   $45,597   $37,254 
Commercial Real Estate:               
 General   5,053,479    219,861    143,162 
Consumer:               
 Lines of credit   83,212    4,753    4,753 
 Other   0    0    0 
Residential   327,585    1,383    1,142 
 Subtotal  $6,825,037   $271,594   $186,311 
                
With a related allowance recorded:               
Commercial  $1,004,450   $26,179   $26,179 
Commercial Real Estate:               
 General   62,721    0    0 
Consumer:               
 Lines of credit   167,765    6,207    5,898 
 Other   16,893    1,078    949 
Residential   312,930    9,662    9,662 
 Subtotal  $1,564,759   $43,126   $42,688 
Total  $8,389,796   $314,720   $228,999 

 

 - 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, 2015  Investment   Recognized   Interest Recognized 
With no related allowance recorded:               
Commercial  $1,413,541   $38,499   $38,499 
Commercial Real Estate:               
 General   5,471,768    156,773    156,773 
Consumer:               
 Lines of credit   44,369    0    0 
 Other   0    0    0 
Residential   275,598    1,322    1,322 
 Subtotal  $7,205,276   $196,594   $196,594 
                
With a related allowance recorded:               
Commercial  $428,710   $16,910   $16,257 
Commercial Real Estate:               
 General   364,337    0    0 
Consumer:               
 Lines of credit   275,605    12,319    12,289 
 Other   11,166    0    0 
Residential   358,373    9,784    8,793 
 Subtotal  $1,438,191   $39,013   $37,339 
Total  $8,643,467   $235,607   $233,933 

 

 - 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, 2016:

 

           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  $156,830   $0   $0   $156,830   $48,692,995   $48,849,825 
Commercial Real Estate:                              
 General   0    0    0    0    50,781,088    50,781,088 
 Construction   0    0    0    0    6,892,507    6,892,507 
Consumer:                              
 Lines of credit   0    0    0    0    5,329,893    5,329,893 
 Other   18,731    0    0    18,731    1,191,753    1,210,484 
 Credit card   4,150    0    0    4,150    460,228    464,378 
Residential   0    0    0    0    18,105,460    18,105,460 
 Total  $179,711   $0   $0   $179,711   $131,453,924   $131,633,635 

 

           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   $17,771   $17,771   $11,807   $29,578 
Commercial Real Estate:                              
 General   0    0    0    0    0    0 
 Construction   0    0    0    0    0    0 
Consumer:                              
 Lines of credit   0    0    0    0    0    0 
 Other   0    0    0    0    0    0 
 Credit card   0    0    0    0    0    0 
Residential   0    0    48,858    48,858    66,049    114,907 
 Total  $0   $0   $66,629   $66,629   $77,856   $144,485 

 

 - 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, 2015:

 

           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  $2,755   $0   $0   $2,755   $48,359,211   $48,361,966 
Commercial Real Estate:                              
 General   184,598    93,311    0    277,909    47,122,559    47,400,468 
 Construction   0    0    0    0    2,193,139    2,193,139 
Consumer:                              
 Lines of credit   0    0    0    0    5,273,114    5,273,114 
 Other   0    0    0    0    1,166,822    1,166,822 
 Credit card   0    12,481    0    12,481    460,567    473,048 
Residential   263,553    0    0    263,553    16,708,219    16,971,772 
 Total  $450,906   $105,792   $0   $556,698   $121,283,631   $121,840,329 

 

           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   $13,806   $13,806 
Commercial Real Estate:                              
 General   0    0    113,290    113,290    887,125    1,000,415 
 Construction   0    0    0    0    0    0 
Consumer:                              
 Lines of credit   0    0    41,336    41,336    0    41,336 
 Other   0    0    5,822    5,822    0    5,822 
 Credit card   0    0    0    0    0    0 
Residential   50,702    75,482    0    126,184    0    126,184 
 Total  $50,702   $75,482   $160,448   $286,632   $900,931   $1,187,563 

 

 - 26 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

The recorded investment of non-accrual loans decreased $1,043,078 in the first nine months of 2016. One note with a recorded investment of $921,532 at December 31, 2015 returned to accruing status in September 2016. During the third quarter management re-evaluated this credit. Since its last evaluation several things had occurred; the value of the property had increased (per a recent professional appraisal), a new tenant was secured (increasing the occupancy rate and cashflow coverage) as well as a consistent repayment history while it was on non-accrual. The loan is graded a 6 and is carefully watched by the Bank’s credit administration staff.

 

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 $415,351 of specific reserves on $7,802,979 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2016 and $401,072 on $7,965,816 of unpaid principal balance of loans as of December 31, 2015. As of September 30, 2016, there was $234,668 committed to three customers. As of December 31, 2015, there was $75,776 committed to two customers.

 

 - 27 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

The following tables present loans by class modified as troubled debt restructurings that occurred during the three and nine month periods ended September 30, 2016:

 

       Pre-Modification   Post-Modification 
       Outstanding Recorded   Outstanding Recorded 
Three Months Ended September 30, 2016  Number of Loans   Investment   Investment 
Troubled Debt Restructurings:               
Residential   1   $83,310   $83,882 
 Total   1   $83,310   $83,882 

 

       Pre-Modification   Post-Modification 
       Outstanding Recorded   Outstanding Recorded 
Nine Months Ended September 30, 2016  Number of Loans   Investment   Investment 
Troubled Debt Restructurings:               
Commercial   1   $15,107   $15,107 
Commercial Real Estate:               
 General   1    58,194    58,194 
Consumer:               
 Other   1    11,566    11,566 
Residential   1    83,310    83,882 
 Total   4   $168,177   $168,749 

 

For the three month period ending September 30, 2016, one loan was modified. The borrower received a reduced payment for six months and following that time will have an interest rate below the current market rate. This modification will provide payment relief while the borrower markets the home for sale.

 

In addition to the above modification, there were three others which occurred in the first six months of the year. Two modifications involved a stated interest rate below the current market rate for a period of 7 and 21 years and one other involved a reduced payment for nine months or less.

 

For the nine month period ended September 30, 2016, there were no charge-offs related to troubled debt restructurings. As of September 30, 2016, an additional $50,569 of specific reserves were established on these troubled debt restructurings.

 

 - 28 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

The following tables present loans by class modified as troubled debt restructurings that occurred during the three and nine month periods ended September 30, 2015:

 

       Pre-Modification   Post-Modification 
       Outstanding Recorded   Outstanding Recorded 
Three Months Ended September 30, 2015  Number of Loans   Investment   Investment 
Troubled Debt Restructurings:               
Commercial   1   $20,017   $19,685 
 Total   1   $20,017   $19,685 
                
       Pre-Modification   Post-Modification 
       Outstanding Recorded   Outstanding Recorded 
Nine Months Ended September 30, 2015  Number of Loans   Investment   Investment 
Troubled Debt Restructurings:               
Commercial   1   $20,017   $19,685 
Residential   1    272,800    272,800 
 Total   2   $292,817   $292,485 

 

In both the three and nine month periods ending September 30, 2015, the modifications involved financing concessions ranging from 22 months to 19 years, however, there were no charge-offs related to the troubled debt restructurings.

 

In the nine month period ending September 30, 2015, an additional $20,000 of specific reserves were established on loans modified as troubled debt restructurings.

 

For the three and nine month periods ending September 30, 2016 there was one troubled debt restructuring that experienced a payment default within 12 months following the modification. For the three and nine month periods ending September 30, 2015 there were no troubled debt restructurings that experienced a payment default. Below is a table which presents information for the loans that defaulted in 2016:

 

       Recorded Investment 
   Number of Loans   at time of default 
Troubled Debt Restructurings          
That Subsequently Defaulted:          
Commercial   1   $18,301 
Total   1   $18,301 

 

 - 29 - 

 

 

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. 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.

 

 - 30 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

As of September 30, 2016 and December 31, 2015, 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, 
   2016   2015   2016   2015   2016   2015 
1  $2,147,936   $871,535   $0   $0   $0   $0 
2   0    0    1,608,193    1,698,136    0    0 
3   11,286,481    12,001,827    5,591,834    4,599,484    439,015    65,780 
4   14,371,113    12,742,910    15,446,493    14,367,694    2,515,567    264,961 
5   15,692,661    18,581,320    15,388,803    15,120,148    2,443,081    371,762 
5M   2,759,947    1,426,772    2,732,979    3,940,477    0    0 
6   687,310    798,475    8,362,179    7,472,404    1,494,844    1,490,636 
7   1,922,286    1,939,064    1,650,087    333,169    0    0 
8   11,669    13,869    520    869,371    0    0 
Total  $48,879,403   $48,375,772   $50,781,088   $48,400,883   $6,892,507   $2,193,139 

 

In the first quarter of 2016, there was a $1.4 million commercial real estate loan secured by Class A medical office space that was downgraded to a 6 because of weak cashflow and deficient collateral coverage. At December 31, 2015, this commercial real estate loan was in the 5M risk category. During the third quarter, this loan was downgraded further to a risk category 7 because of the extent of delinquent property taxes. Since the beginning of the year, management has increased its oversight of this credit and will continue to work with the borrower to ensure that the current leases are renewed and well-managed and that excess cash from the leases is used to repay the outstanding property tax balance.

 

In the third quarter of 2016, a commercial real estate loan that was in risk category 8 at December 31, 2015 was upgraded to a 6. Previous to the upgrade the loan was on non-accrual. Management noted several developments since its last risk rating; in addition to years of consistent payments while on non-accrual, the value of the property had increased (per a recent professional appraisal) and a new tenant was secured (increasing the occupancy rate and cashflow coverage). In spite of these improved factors, the loan is being carefully watched by the Bank’s credit administration staff.

 

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, 2016 and December 31, 2015:

 

   Residential 
   September 30,   December 31, 
   2016   2015 
Performing  $17,689,958   $16,368,778 
Impaired   530,409    729,178 
Total  $18,220,367   $17,097,956 

 

 - 31 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

   Consumer – Lines of credit   Consumer – Other   Consumer – Credit card 
   September 30,   December 31,   September 30,   December 31,   September 30,   December 31, 
   2016   2015   2016   2015   2016   2015 
Performing  $5,184,143   $5,021,480   $1,189,354   $1,156,291   $464,378   $473,048 
Impaired   145,750    292,970    21,130    16,353    0    0 
Total  $5,329,893   $5,314,450   $1,210,484   $1,172,644   $464,378   $473,048 

 

5.FORECLOSED ASSETS

 

Foreclosed asset activity:

 

   September 30,   December 31, 
   2016   2015 
Beginning of year  $2,211,327   $2,238,997 
Additions   89,019    349,357 
Reductions from sales   (466,786)   (142,288)
Direct write-downs   (134,533)   (193,976)
Transfer to SBA receivable   0    (40,763)
End of period  $1,699,027   $2,211,327 

 

Foreclosed asset expenses, net of rental income were $68,312 for the first nine months of 2016 and $136,812 for the similar period in 2015.

 

A significant portion of the operating expenses is related to property taxes paid on the foreclosed assets. These amounts can vary from year-to-year depending on the number and types of foreclosed properties as well as the timing of the payments.

 

6.PREMISES AND EQUIPMENT

 

Period end premises and equipment were as follows at September 30, 2016 and December 31, 2015:

 

   September 30,   December 31, 
   2016   2015 
Land & land improvements  $4,703,312   $4,703,312 
Buildings & building improvements   6,332,060    6,332,060 
Furniture, fixtures and equipment   3,226,403    3,314,126 
    14,261,775    14,349,498 
Less: accumulated depreciation   5,694,497    5,528,996 
   $8,567,278   $8,820,502 

 

Depreciation expenses were $274,821 and $277,171 for the nine months ended September 30, 2016 and 2015, respectively.

 

 - 32 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.DEPOSITS

 

The components of the outstanding deposit balances at September 30, 2016 and December 31, 2015 were as follows:

 

   September 30,   December 31, 
   2016   2015 
Non-interest-bearing DDA  $43,523,397   $39,236,718 
Interest-bearing DDA   37,224,894    36,675,745 
Money market   22,616,941    21,992,206 
Savings   24,814,240    24,446,559 
Time, under $100,000   19,562,155    29,272,313 
Time, over $100,000   9,962,091    9,558,098 
Total Deposits  $157,703,718   $161,181,639 

 

Time deposits of $250,000 or more were $1,384,860 at September 30, 2016 and $1,377,420 at December 31, 2015. There were no brokered deposits at either September 30, 2016 or December 31, 2015.

 

8.SHORT-TERM BORROWINGS

 

The Company’s short-term borrowings outstanding consisted entirely of repurchase agreements at September 30, 2016 and December 31, 2015. The Company utilized its line of credit with the Federal Home Loan Bank (“FHLB”) of Indianapolis for overnight liquidity support during 2015 and used its overnight line once in 2016 for contingency plan testing purposes. Information regarding repurchase agreements and borrowings from the FHLB is summarized below:

 

   Repurchase   Borrowings 
   Agreements   from FHLB 
         
Outstanding at September 30, 2016  $4,853,589   $0 
 Average interest rate at period end   0.41%   0%
 Average balance during period   4,068,171    365 
 Average interest rate during period   0.41%   0.34%
 Maximum month end balance during period   4,853,589    0 
           
Outstanding at December 31, 2015  $4,921,023   $0 
 Average interest rate at year-end   0.42%   0%
 Average balance during year   5,411,588    135,068 
 Average interest rate during year   0.44%   0.37%
 Maximum month end balance during year   8,829,269    0 

 

 - 33 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8.SHORT-TERM BORROWINGS (Continued)

 

The Bank had securities of $3,724,027 pledged to repurchase agreements at September 30, 2016 and $5,341,286 pledged at December 31, 2015. The Company had approximately $2.5 million of residential mortgage loans pledged to support its line of credit with the FHLB at September 30, 2016.

 

The potential risk associated with the Repurchase Agreements and related pledge collateral, including obligations arising from a decline in fair value of the pledged collateral, are minimal due to the fact that the Repurchase Agreements pertain to overnight borrowings and therefore not subject to fluctuations in fair market value. The following table represents the type of securities pledged to the Repurchase Agreements:

 

Securities Pledged to Repurchase Agreements  September 30, 2016   December 31, 2015 
U.S. Treasury and agency securities  $501,073   $458,700 
Asset-backed securities   2,507,118    4,002,129 
Other   715,836    880,457 
 Total  $3,724,027   $5,341,286 

 

Another source of short-term borrowings is available through the Federal Reserve Discount Window (“Discount Window”). At September 30, 2016, collateral pledged for Discount Window borrowings consisted of $1,379,915 in home equity loans while at December 31, 2015 the collateral pledged consisted of $332,768 in home equity loans, one security valued at $661,271 and one USDA loan valued at $3,408,161. The borrowing capacity decreased in the first quarter of 2016 due to the USDA loan no longer fulfilling the pledge requirements of the FRB and the security that was pledged was called. Also occurring in the first quarter of 2016, the Bank was upgraded from the secondary to the primary credit program. The primary credit program awards more value for pledged collateral and also borrowings are fully directed by the Bank and do not require regulator approval.

 

9.FEDERAL HOME LOAN BANK BORROWINGS

 

The Bank is a member of the FHLB of Indianapolis. Based on its current FHLB stock holdings and collateral, the Bank has the capacity to borrow $2,389,516 at September 30, 2016. Each borrowing requires a direct pledge of securities and/or loans. To support potential borrowings with the FHLB, the Bank had loans with a carrying value of $5,582,125 pledged at September 30, 2016 and $7,511,449 pledged at year-end 2015. The Bank uses a portion of the loans pledged to the FHLB as collateral for a $2,000,000 overdraft line of credit. The remaining pledged loans are available to collateralize longer term FHLB borrowings. The Bank had no balance outstanding on the line of credit or other borrowings with the FHLB at either September 30, 2016 or December 31, 2015.

 

10.SUBORDINATED DEBENTURES

 

The Trust, as discussed 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 2.89% at September 30, 2016 and 2.65% at December 31, 2015. 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.

 

 - 34 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10.SUBORDINATED DEBENTURES (Continued)

 

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 exercised its option to defer each regularly scheduled interest payment from June 2010 through March 2015. The Company’s deferral of interest during that period did not constitute an event of default.

 

The last allowable deferral period was March 30, 2015. All accrued and unpaid interest was due and payable and a corresponding amount of distributions was payable on the trust preferred securities on June 30, 2015. The Company did not have the liquidity to pay the interest owed at that time. On March 30, 2016, the Company remitted an interest payment of approximately $722,000 (which consisted of $673,000 of accrued interest and $49,000 of interest on the deferred interest) curing the interest payment default utilizing proceeds from its Rights Offering and concurrent private placement discussed in Note 13.

 

On April 27, 2016, the Company’s Board of Directors voted to again defer interest payments in order to preserve its cash for general operations and potential capital support for the Bank as it grows. The deferral of interest does not constitute an event of default. 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, 2016. As of September 30, 2016, the accrued and unpaid interest owed on the subordinated debentures was $64,144.

 

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. The proceeds of the senior debt were used to settle a defaulted note with another financial institution, to fund general operations and to make interest payments until the repayment or maturity of the note. The note bore interest at a fixed rate of 8.00% per annum until paid in full. While the note was outstanding, interest was paid quarterly, in arrears. The note was 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 note maturity was extended for another two year period in the first quarter of 2015. As a result, the note’s maturity became March 31, 2017.

 

 - 35 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11.NOTES PAYABLE (Continued)

 

The Company’s note payable with 1030 Norton LLC included a beneficial conversion feature allowing repayment of the outstanding principal with common stock instead of cash at a discount of 25% below the general offering price should an offering of stock be carried out by the Company. On October 2, 2015, the Company entered into a Debt Conversion Agreement with 1030 Norton LLC. The Debt Conversion Agreement provided that 1030 Norton LLC would convert the principal balance of its note into shares of common stock of the Company at a conversion price of $1.91 per share, which

equaled 75% of the per share purchase price established by the Board of Directors of the Company in connection with its Rights Offering.

 

The note payable conversion to equity was completed on March 28, 2016 simultaneously with the closing of the Rights Offering. The balance of the note payable was settled in exchange for 670,153 shares of stock issued to the members of 1030 Norton LLC and a check for $7.77 due to fractional shares. Upon consummation of the conversion, the Company made a final interest payment of $24,747 and 1030 Norton LLC released the Company’s pledge of 100% of the shares of Community Shores Bank.

 

12.DERIVATIVE LIABILITY

 

The beneficial conversion feature embedded in the Company’s note payable to 1030 Norton LLC was recorded as a liability through interest expense for the Company during 2015. At June 30, 2015, the conditions for the conversion were met and the liability was recorded. The value of the liability was established at $426,667, which represented a 25% per share discount on the stock to be issued in exchange for the outstanding note payable from the price per share of the Company’s stock established in the Rights Offering.

 

Similar to the related note payable discussed in Note 11, the derivative liability, net of related deferred tax, was reclassified to shareholder’s equity at conversion on March 28, 2016.

 

13.SHAREHOLDER’S EQUITY

 

Sale of Common Stock

 

The Company initiated a Rights Offering in October 2015 with the intention of increasing the Company’s liquidity, repaying deferred and overdue interest on its subordinated debentures and contributing capital to the Bank.

 

The Rights Offering consisted of a distribution of nontransferable subscription rights to its shareholders of record as of October 12, 2015. Each shareholder of record received 1.7488 rights for each share of the Company’s common stock they owned as of the record date. Each right enabled its holder to purchase one share of the Company’s common stock at a price of $2.55 per share. Additionally, rights holders were given an oversubscription privilege to subscribe for a portion of the Rights Offering shares that were not purchased by other rights holders. The shares of the Company’s Common Stock sold in the Rights Offering totaled 1,383,299. The Rights Offering was closed on March 28, 2016 and garnered proceeds of approximately $3,300,000 (gross proceeds of $3,527,000 net of offering costs of $237,000).

 

Concurrent with the closing of the Rights Offering, the Company finalized the sale of 579,412 shares of Common Stock through a private placement, also at $2.55 per share. Total proceeds received from this transaction were approximately $1,500,000. There was no issuance cost associated with the private placements.

 

 - 36 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14.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, 2016 and December 31, 2015 follows:

 

   September 30, 2016   December 31, 2015 
         
 Unused lines of credit  $29,802,655   $24,532,524 
 Unused standby letters of credit   318,000    1,362,000 
 Commitments to make loans   457,425    357,900 

 

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.

 

15.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’s 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.

 

 - 37 - 

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.FAIR VALUE MEASUREMENTS (Continued)

 

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 Assets: 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.

 

Non-real estate collateral may be valued using appraisals, independent valuation tools 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.

 

 - 38 - 

 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a recurring basis are summarized below as of September 30, 2016 and December 31, 2015:

 

       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, 2016                    
Available for sale securities:                    
US Treasury  $1,508,360   $1,508,360   $0   $0 
US Government and federal agency   8,004,127    0    8,004,127    0 
Municipals   0    0    0    0 
Mortgage-backed and collateralized mortgage obligations– residential   9,595,585    0    9,595,585    0 
Total  $19,108,072   $1,508,360   $17,599,712   $0 
                     
Servicing assets  $1,895   $0   $1,895   $0 

 

       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) 
December 31, 2015                    
Available for sale securities:                    
US Treasury  $1,511,328   $1,511,328   $0   $0 
US Government and federal agency   11,544,620    0    11,544,620    0 
Municipals   710,966    0    710,966    0 
Mortgage-backed and collateralized mortgage obligations– residential   11,442,819    0    11,442,819    0 
Total  $25,209,733   $1,511,328   $23,698,405   $0 
                     
Servicing assets  $5,151   $0   $5,151   $0 

 

There were no transfers between levels during the first three quarters of 2016 or 2015. 

 

 - 39 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.FAIR VALUE MEASUREMENTS (Continued)

 

Assets measured at fair value on a non-recurring basis are summarized below for the periods ended September 30, 2016 and December 31, 2015:

 

       Quoted Prices in   Significant     
       Active Markets for   Other Observable   Significant 
       Identical Assets   Inputs   Unobservable Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
September 30, 2016                    
Impaired loans1:  $1,784,804   $0   $0   $1,784,804 
Foreclosed assets:   1,699,027    0    0    1,699,027 
Total  $3,483,831   $0   $0   $3,483,831 

 

       Quoted Prices in   Significant     
       Active Markets for   Other Observable   Significant 
       Identical Assets   Inputs   Unobservable Inputs 
   Total   (Level 1)   (Level 2)   (Level 3) 
December 31, 2015                    
Impaired loans1:  $1,728,358   $0   $0   $1,728,358 
Foreclosed assets:   2,211,327    0    0    2,211,327 
Total  $3,939,685   $0   $0   $3,939,685 

 

 

1 Collateral dependent

 

 - 40 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.FAIR VALUE MEASUREMENTS (Continued)

 

The following tables present information as of September 30, 2016 and December 31, 2015 about significant unobservable inputs related to the Bank’s individually material Level 3 financial assets, by class, measured on a non-recurring basis:

 

   Valuation  Significant Unobservable  Range 
September 30, 2016  Technique  Inputs  of Inputs 
Impaired loans  Sales comparison approach  Adjustments for differences between comparable sales   (25)-19%
   Income approach  Capitalization rate   9-12.5%
            
Foreclosed assets  Sales comparison approach  Adjustments for differences between comparable sales   (17)-14%

 

   Valuation  Significant Unobservable  Range 
December 31, 2015  Technique  Inputs  of Inputs 
Impaired loans  Sales comparison approach  Adjustments for differences between comparable sales   (25)-19%
   Income approach  Capitalization rate   9.5-12.5%
            
Foreclosed assets  Sales comparison approach  Adjustments for differences between comparable sales   (25)-10%

 

 - 41 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.FAIR VALUE MEASUREMENTS (Continued)

 

The carrying amounts and estimated fair values of financial instruments not previously presented above are as follows:

 

       Fair Value Measurements 
       at September 30, 2016 
   Carrying                 
   Amount   Level 1   Level 2   Level 3   Total 
   (in thousands) 
Financial assets                         
Cash and cash equivalents  $17,034   $17,034   $0   $0   $17,034 
Term deposit   100    0    101    0    101 
Loans held for sale   0    0    0    0    0 
Loans, net (including impaired)   129,872    0    0    129,898    129,898 
FHLB stock   301    N/A    N/A    N/A    N/A 
Accrued interest receivable   355    4    70    281    355 
                          
Financial liabilities                         
Deposits   157,704    0    152,060    0    152,060 
Repurchase agreements   4,854    0    4,854    0    4,854 
Subordinated debentures   4,500    0    0    4,676    4,676 
Notes payable   0    0    0    0    0 
Accrued interest payable   82    0    18    64    82 

 

       Fair Value Measurements 
       at December 31, 2015 
   Carrying                 
   Amount   Level 1   Level 2   Level 3   Total 
   (in thousands) 
Financial assets                         
Cash and cash equivalents  $17,900   $17,900   $0   $0   $17,900 
Loans held for sale   0    0    0    0    0 
Loans, net (including impaired)   121,070    0    0    118,273    118,273 
FHLB stock   301    N/A    N/A    N/A    N/A 
Accrued interest receivable   369    5    78    286    369 
                          
Financial liabilities                         
Deposits   161,182    0    153,487    0    153,487 
Repurchase agreements   4,921    0    4,921    0    4,921 
Subordinated debentures   4,500    0    0    3,172    3,172 
Notes payable   1,280    0    0    1,707    1,707 
Accrued interest payable   734    0    20    198    218 

 

 - 42 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.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) Term Deposits

 

Fair values for term deposits are estimated using a discounted cash flows calculation that applies the interest rates currently being offered over the term of the deposit resulting in a Level 2 classification.

 

(c) 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.   

 

(d)  FHLB stock

 

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

(e) 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 2 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.

 

(f) Repurchase agreements and other short-term borrowings

 

The carrying amounts of borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

 

(g) 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.

 

 - 43 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.FAIR VALUE MEASUREMENTS (Continued)

 

(h) 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.

 

(i) 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.

 

16.INCOME TAXES

 

The realization of deferred tax assets is largely dependent upon future taxable income, future reversals of existing taxable temporary differences, and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, all available positive and negative evidence is considered, including taxable income in carry-back years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. 

 

Although the Company’s income is marginal, the outlook for future earnings is positive. Considering the reduction in debt expense and significant operational expenses such as data processing and various insurances as well as a strong loan pipeline and capital to support growth, management concluded that no valuation allowance on the Company’s net deferred tax asset was necessary at September 30, 2016. Net operating losses will begin expiring in 2030 and continue through 2035.

 

There were no unrecognized tax benefits at September 30, 2016 or December 31, 2015, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months. The Company is subject to examination by the Internal Revenue Service for years after 2012.

 

17.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.

 

 - 44 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.REGULATORY MATTERS (Continued)

 

The five prompt corrective action classifications are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. For instance, if a bank is not well capitalized, regulatory approval is required to accept brokered deposits. And generally, 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.

 

Under final Basel III capital rules that became effective on January 1, 2015, there was a requirement for a capital conservation buffer of 2.5% of risk-weighted assets to be phased in over four years at an incremental rate of 0.625% each year beginning in 2016. When fully phased in, this will result in a minimum CET1 ratio of 7%, a minimum total capital to risk-weighted asset ratio of 10.5%, and a minimum Tier 1 capital to risk-weighted asset ratio of 8.5%. Banks that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases, and on the payment of discretionary bonuses to senior executive management. As of September 30, 2016, the capital conservation buffer was 3.67%.

 

On March 31, 2016, following a $3.35 million contribution of capital from the Company, the Bank’s capital ratios were elevated to a level of well-capitalized, according to prompt corrective action regulations. On that date, the Bank’s total risk-based capital ratio was 11.90% and its Tier 1 to average assets ratio was 8.06%; both above the minimum required to be well-capitalized.

 

The Bank was considered adequately capitalized at year-end 2015. At December 31, 2015, the Bank’s total risk-based capital ratio was 9.46% and its Tier 1 to average assets ratio was 6.12%; both well above the minimum required for capital adequacy.

 

 - 45 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.REGULATORY MATTERS (Continued)

 

Following a capital contribution of $125,000 from the Company on September 30, 2016, the actual capital amounts and ratios for the Bank and, required capital amounts and ratios for the Bank to be well capitalized at September 30, 2016 and December 31, 2015 were:

 

                   Minimum Required 
                   to Be Well 
           Minimum Required   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
September 30, 2016  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank  $14,772,290    10.52%  $6,320,427    4.50%  $9,129,506    6.50%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank   16,397,008    11.67    11,236,314    8.00    14,045,393    10.00 
Tier 1 (Core) Capital to risk-weighted assets of the Bank   14,772,290    10.52    8,427,236    6.00    11,236,314    8.00 
Tier 1 (Core) Capital to average assets of the Bank   14,772,290    8.03    7,362,130    4.00    9,202,663    5.00 

 

 - 46 - 

 

 

COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.REGULATORY MATTERS (Continued)

 

                   Minimum Required 
                   to Be Well 
           Minimum Required   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
December 31, 2015  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank  $11,112,069    8.22%  $6,082,087    4.50%  $8,785,237    6.50%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank   12,783,486    9.46    10,812,599    8.00    13,515,749    10.00 
Tier 1 (Core) Capital to risk-weighted assets of the Bank   11,112,069    8.22    8,109,449    6.00    10,812,599    8.00 
Tier 1 (Core) Capital to average assets of the Bank   11,112,069    6.12    7,257,858    4.00    9,072,322    5.00 

 

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 both September 30, 2016 and December 31, 2015, the entire allowance for loan loss was counted as Tier 2 capital; nothing was disallowed. The allowance for loan losses was $1,624,718 at September 30, 2016 and $1,671,416 at December 31, 2015.

 

 - 47 - 

 

 

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, 2016 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, 2016 to that at December 31, 2015. The part labeled Results of Operations discusses the three and nine month periods ending September 30, 2016 as compared to the same periods of 2015. 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 Form 10-Q contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company, 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 Company’s ability to generate future taxable income; 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 Written Agreement may result in further regulatory action that could have a material adverse effect on the Company and its 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.

 

In the first quarter of 2016, the Company successfully completed a Rights Offering which commenced in the fourth quarter of 2015 and a concurrent private placement (See Note 13). On March 28, 2016, after receiving FRB approval to repay the interest due on the Company’s subordinated debentures and to increase the ownership percentages of certain investors in relation to the guidelines of the FRB Change in Bank Control Act, the Company received gross proceeds of approximately $5.0 million from these two transactions. On the same date, the Company’s note payable with 1030 Norton LLC converted to 670,153 common shares, relieving the Company of any future interest payments. Two days later, on March 30, 2016, the  Company repaid $722,000 of interest on its subordinated debentures and brought its obligations current. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into the Bank, enhancing its regulatory capital position.

 

 - 48 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The recent capital raise allowed the Company to improve its financial condition and to strengthen the capital position of the Bank. However, the Written Agreement between the Company and the FRB, which became effective on December 16, 2010, remains in effect. 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.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

 

There have been no material changes to the application of critical accounting estimates and policies that were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements and our Annual Report on 10-K for the fiscal year ended December 31, 2015.

 

FINANCIAL CONDITION

 

Total assets were $181.6 million at September 30, 2016 compared to $181.0 million at December 31, 2015. Total assets increased by $597,000 in the first nine months of the year. Proceeds from the Rights Offering and investment maturities were used to fund loans and maturing non-local time deposits.

 

Cash and cash equivalents decreased by $866,000 to $17.0 million at September 30, 2016 from $17.9 million at December 31, 2015. The Bank’s FRB balance which was $15.1 million at year-end 2015 and was $14.0 million on September 30, 2016. 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 liquidity at the FRB is expected to be reduced in the last quarter of the year due to the deposit activities of the Bank’s public fund customers as well as upcoming loan originations.

 

 - 49 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Bank’s security portfolio was $19.1 million at September 30, 2016 and $25.2 million at December 31, 2015. Investment activity in the first nine months of the year consisted of maturities, prepayments and calls in addition to net amortization totaling $6.3 million offset by an increase in fair value of $177,000.   

 

Although the investment portfolio is declining, the Bank seeks to diligently manage unencumbered securities to ensure there are enough available to meet parameters required by several of the Bank’s operating policies. Unencumbered securities are those that are not pledged to any other entity. As such, they serve as a key source of collateral or potential liquidity for the Bank. The level of unpledged securities is formally assessed monthly. Maintaining an adequate level of pledgeable assets 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, 2016, 23% of the investment portfolio was unencumbered. This outcome is higher than required and also higher than the 20% unpledged position that existed on December 31, 2015. The increase in unencumbered investments was due to the release of approximately $4 million of pledged investments. The Bank had originally pledged several of its investments to two of its public fund deposit customers when the Bank was under a regulatory Consent Order. The securities were released in the second quarter of 2016 after the public fund customers were notified of the Consent Order’s termination. Because of the depth of the Bank’s loan pipeline, management expects the size of the investment portfolio will continue to be reduced as investments mature with the proceeds likely being used to fund loans.

 

As a result of the release of the pledged securities above and decreases in customer repurchase agreement balances, the amortized cost of securities pledged to public fund customers, the FRB discount window and customer repurchase agreements, decreased to $14.8 million from $20.2 million at year-end 2015.

 

In the financial services industry, investment portfolio quality typically receives scrutiny when instruments within the portfolio are higher risk. The Bank monitors the quality of the Company’s portfolio actively however the instruments held by the Company are deemed to be traditional and conservative from a risk standpoint; nonetheless, the fair value of even those investments can be impacted by national and global economic news. During the first nine months of the year, the portfolio’s fair value increased. At year-end there were net unrealized losses on the entire portfolio of $44,000 and at September 30, 2016 the portfolio had net unrealized gains of $133,000.  Essentially during the first nine months of 2016, the investment portfolio’s fair value improved by a net figure of $177,000. Although the investment portfolio has a net unrealized gain at September 30, 2016, there were four securities with an amortized cost of $1.2 million having an unrealized loss of $4,000. See Note 2 for information regarding this change as well as the Company’s assessment of other than temporary impairment on these investments.

 

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, 2016.

 

Loans held for sale activity during the first nine months of 2016 included $4.9 million of loan originations and $5.0 million of sales. The associated gain on the loan sales was $121,000. There were no loans held for sale at September 30, 2016 or December 31, 2015. During the third quarter of 2016, a $99,000 loan that was held for sale on June 30, 2016 was moved to the loans held for investment.

 

 - 50 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Total loans (held for investment) increased $8.8 million and were $131.5 million at September 30, 2016 up from $122.7 million at December 31, 2015. Since 2015 the Bank has experienced growth in all categories of loans except credit cards which had a small decrease. Although the local market is very competitive, management believes the Bank’s lending area is positioned to continue growing its loan portfolio in 2016 and will do so in a manner that assesses multiple risk factors in conjunction with expected rate of return and related capital allocation.

 

Management will continue to pay careful attention to the credit quality of the current portfolio while seeking to increase loan growth. The lending staff regularly monitors the loan portfolio and adheres to a well-designed credit risk assessment process. In spite of these efforts, 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 annual 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.

 

The analysis of the allowance for loan losses is comprised of 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’s situation.  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.

 

The allowance for loan losses is adjusted accordingly to maintain an adequate level based on the conclusion of the general and specific analysis. 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.

 

At September 30, 2016, the allowance for loan losses totaled $1.6 million; nearly the same as at year-end 2015. The allowance for loan loss decreased by $47,000 and is the result of charge-offs of $153,000 and recoveries of $106,000 for the first nine months of 2016. At September 30, 2016, the ratio of allowance to gross loans outstanding was 1.24% compared to 1.36% at year-end 2015. The decrease was attributable to an increase in loan balances and a decrease in net charge-offs in the first nine months of 2016, which resulted in lower historical loss factors.

 

 - 51 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The allocation of the allowance at September 30, 2016 and December 31, 2015 was as follows:

 

   September 30, 2016   December 31, 2015 
       Percent of       Percent of 
       Loans in Each       Loans in Each 
       Category to       Category to 
   Amount   Total Loans   Amount   Total Loans 
Balance at End of Period                    
Applicable to:                    
Commercial  $560,564    37.1%  $522,558    39.3%
Commercial Real Estate   510,770    43.8    432,145    41.2 
Consumer   248,044    5.3    322,185    5.6 
Residential   200,937    13.8    210,653    13.9 
Unallocated   104,403    N/A    183,875    N/A 
Total  $1,624,718    100.0%  $1,671,416    100.0%

 

The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 0.88% at September 30, 2016, a decrease of one basis point from year-end 2015.  At September 30, 2016, there was approximately $104,000 of unallocated reserves in the allowance for loan losses while unallocated reserves were approximately $184,000 at December 31, 2015. In the second quarter of 2016, a portion of the unallocated reserves were used to increase the specific allocation of an individually identified loan.

 

At September 30, 2016, the allowance contained $435,000 in specific allocations for impaired loans whereas at December 31, 2015 there was $465,000 specifically allocated. In total, there was $8.1 million of recorded investment on impaired loans at September 30, 2016 compared to $8.7 million at year-end 2015. In the first three quarters of 2016, several specifically identified loans were charged off; one of the loans carried a specific allocation of $50,000 at year-end 2015.   

 

Not all specifically identified loans require an allocation of reserves. After a loan is specifically identified and an evaluation of the collateral or expected repayment is completed, typically a charge-off is made so that the remaining principal is the current value of the assigned collateral or expected repayment, therefore no further reserve is required. There were 15 impaired loans requiring no reserve at September 30, 2016. At September 30, 2016, the recorded investment on impaired loans requiring no reserves was $6.7 million, or 83% of the recorded investment of specifically identified loans. This outcome is similar to $7.0 million requiring no reserves at year-end 2015 or 81% of the recorded investment of specifically identified loans.

 

Specifically identified loans requiring reserves had a recorded investment of $1.4 million September 30, 2016 and $1.7 million at year-end 2015. The decrease is partially a result of the charge-offs on specifically identified loans occurring since year-end 2015.

 

Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. Overall from year-end 2015 to September 30, 2016, the recorded investment in accruing past due and non-accrual loans changed significantly. The recorded investment in past due loans still accruing interest decreased by $377,000 and the recorded investment in non-accrual loans decreased by $1.0 million.

 

 - 52 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The recorded investment of accruing loans past due 30-59 days was $180,000 at September 30, 2016; a $271,000 decrease since December 31, 2015. There were five loans past due 30-59 days at September 30, 2016. Substantially all of the amount was associated with one loan with a recorded investment of $157,000 which matured and the renewal was not completed until after September 30.

 

There were no loans past due 60-89 days still accruing interest at September 30, 2016 compared to a recorded investment of $106,000 at December 31, 2015.

 

There were no loans still accruing interest with a recorded investment past due 90 days and greater at either September 30, 2016 or December 31, 2015.

 

Although the Bank’s loan payment delinquency is low in both recorded investment and number of loans, the credit review process will continue to be stringent. Of course, it is possible that past due loan payments could fluctuate in future periods despite these efforts.

 

The recorded investment of non-accrual loans totaled $144,000 at September 30, 2016; down $1.0 million from year-end 2015. The reduction was primarily concentrated in three loans. Two loans were remediated and returned to an accruing status and two loans were charged off and the real estate collateral was moved to foreclosed assets. There are four non-accrual notes remaining at September 30, 2016 and none are secured by undeveloped real estate. At September 30, 2016, there were specific allocations of $72,000 in the allowance for any estimated collateral deficiency on non-accrual loans.

 

There were net charge-offs of $47,000 for the first nine months of 2016 and the ratio of annualized net charge-offs was 0.05% to average loans. For the first nine months of 2015, there were net loan charge-offs of $262,000 and a ratio of annualized net charge-offs to average loans of 0.27%.

 

There were net charge-offs of $14,000 for the third quarter of 2016 and a ratio of annualized net charge-offs to average loans of 0.04%. For the third quarter of 2015, there were net recoveries of $143,000.

 

A majority of the recorded charge-offs made in both years were related to specific allocations on previously impaired loans. In this case, increases to the ratios between the like periods are not necessarily indicative of deteriorating credit quality.

 

 - 53 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.

 

The loan maturities and rate sensitivity of the loan portfolio at September 30, 2016 are set forth below:

 

   Within   Three to   One to   After     
   Three Months   Twelve Months   Five Years   Five Years   Total 
Commercial  $6,889,409   $12,284,806   $18,658,364   $10,909,553   $48,742,132 
Commercial Real Estate:                         
General   2,611,127    9,374,596    32,079,459    6,637,537    50,702,719 
Construction   1,678,701    1,012,893    3,048,905    1,151,620    6,892,119 
Consumer:                         
Lines of credit   83,276    173,123    2,284,180    2,771,642    5,312,221 
Other   42,333    70,780    839,415    253,503    1,206,031 
Credit card   52,783    163,060    248,535    0    464,378 
Residential   1,818,554    993,468    2,334    15,362,415    18,176,771 
   $13,176,183   $24,072,726   $57,161,192   $37,086,270   $131,496,371 
Loans at fixed rates  $5,251,754   $8,968,845   $45,191,135   $25,100,039   $84,511,773 
Loans at variable rates   7,924,429    15,103,881    11,970,057    11,986,231    46,984,598 
   $13,176,183   $24,072,726   $57,161,192   $37,086,270   $131,496,371 

 

At September 30, 2016, 64% of the Bank’s loan balances carried a fixed rate and 36% carried 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. 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, 2016, approximately 28% of the entire loan portfolio had a contractual maturity longer than five years; the same as year-end 2015. 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. Over 40% of the loans in the greater than five year contractual maturity category are residential mortgage loans. Statistically, loans of this type do not normally 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 that is booked into the held for investment portfolio. Another 33% of the total of loans with a contractual maturity of five years or more are guaranteed by government sponsored agencies; Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”). Of these loans, 97% are either variable rate or have a scheduled rate reset within five years, minimizing the extension risk.

 

 
1Extension 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.

 

 - 54 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Foreclosed assets were $1.7 million at September 30, 2016; down over $512,000 since December 31, 2015. Foreclosed assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. There were four property and six lot sales during the first nine months of 2016. The net gain realized on these sales was $168,000. Two properties were added in the first three quarters of 2016. At September 30, 2016, foreclosed assets consisted of 19 real estate holdings, two fewer than at December 31, 2015.

 

Deposit balances were $157.7 million at September 30, 2016 down from $161.2 million at December 31, 2015. The decline in deposit balances was due to a $9.3 million decrease in time deposits since year-end 2015; essentially all of which were internet time deposits. The time deposit portfolio was deliberately contracted in an effort to reduce excess liquidity at the FRB. All other deposit categories increased from year-end 2015 to September 30, 2016; the largest being demand deposits which rose $4.3 million. The increase is in all categories is primarily from existing customers increasing their account balance since year-end 2015.

 

Repurchase agreement balances were $4.9 million at both September 30, 2016 and December 31, 2015.

 

The Company’s $1,280,000 note payable to 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 was extinguished on March 28, 2016 simultaneous to the closing of the Company’s Rights Offering. The balance of the note payable was settled in exchange for 670,153 and shares of stock issued to the members of 1030 Norton LLC and a check for $7.77 due to fractional shares. Upon consummation of the conversion, the Company made a final interest payment of $24,747 and 1030 Norton LLC released the Company’s pledge of 100% of the shares of Community Shores Bank.

 

In 2015, the Company recorded a derivative liability stemming from the conversion right embedded in the Company’s note payable to 1030 Norton LLC once the Company initiated a plan to raise capital via a sale of common stock. The value of the liability was established at $426,667, which represented a 25% per share discount on the stock to be issued in exchange for the outstanding note payable from the price per share of the Company established in the Rights Offering. Similar to the related note payable, the derivative liability, net of related deferred tax, was reclassified to shareholder’s equity at conversion on March 28, 2016.

 

Accrued interest expenses and other liabilities decreased $696,000 since year-end 2015. The decrease is mainly attributable to the Company’s repayment of deferred and overdue interest on its subordinated debentures. On March 30, 2016, utilizing proceeds from the Rights Offering, the Company remitted an interest payment of approximately $722,000; $673,000 of accrued interest and $49,000 of interest on the deferred interest curing the interest payment default.

 

On April 27, 2016, the Company’s Board of Directors voted to again defer interest payments on its subordinated debentures in order to preserve its cash for general operations and potential capital support for the Bank as it grows. As such, it is expected that the accrued interest balance will increase during the deferral period. The deferral of interest does not constitute an event of default. The accrued and unpaid interest was $64,000 at September 30, 2016.

 

Shareholders’ equity was approximately $14.1 million on September 30, 2016. On December 31, 2015, the balance was $7.6 million. The net increase of $6.5 million was made up of $6.3 million of new capital from common stock transactions, earnings of $99,000 and accumulated other comprehensive income (security market value adjustments) of $117,000.

 

 - 55 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The $6.3 million of additional capital stemmed from a series of transactions related to a Rights Offering launched by the Company in October 2015. The purpose of the Rights Offering was to increase the Company’s liquidity to allow repayment of the deferred and overdue interest on the Company’s subordinated debentures as well as allow a contribution of capital to the Bank so that it would achieve a well-capitalized regulatory capital level.

 

The Company sold a total of 1,383,299 shares of the Company’s Common Stock in the Rights Offering. The Company closed the Rights Offering on March 28, 2016 and garnered net proceeds of approximately $3,300,000.

 

Concurrent with the closing of the Rights Offering, the Company closed on the sale of 579,412 shares of Common Stock through a private placement, also at $2.55 per share. Total proceeds received from this transaction were approximately $1,500,000. There were no issuance costs associated with the private placements.

 

Additionally, the Rights Offering permitted the conversion feature of the Company’s note payable to activate. At the close of the Rights Offering, the note payable and the derivative liability, net of taxes, were settled in exchange for 670,153 shares of stock. This transaction added $1,561,000 to equity. 

 

Total shares outstanding at September 30, 2016 were 4,101,664 compared to 1,468,800 at December 31, 2015. The book value per share was $3.44 at September 30, 2016 compared to $5.15 at December 31, 2015.

 

The largest portion of the Rights Offering proceeds was used to contribute capital to the Bank. On March 31, 2016, the Company contributed $3.35 million of capital to the Bank. As a result, the Bank’s regulatory capital ratio rose to a level of well capitalized according to prompt corrective action guidance.  Although the Bank continues to be well capitalized, the Company made an additional capital contribution of $125,000 in the third quarter to support current and anticipated asset growth. At September 30, 2016, the Bank’s total risk-based capital ratio was 11.67% and its Tier 1 to average assets ratio was 8.03% compared to 9.46% and 6.12%, respectively, at December 31, 2015.

  

RESULTS OF OPERATIONS

 

There was net income of $99,000 recorded for the first three quarters of 2016. The corresponding basic and diluted income per share for the first nine months of 2016 were $0.03. Conversely in the first three quarters of 2015, there was a net loss of $402,000 stemming from a derivative valuation recognition of $427,000 recorded in the second quarter (see Note 12) and a professional services expense of $409,000 recorded in the third quarter which included a fee paid to a third party for assistance in renegotiating the Bank’s data processing contract. The third party’s fee for performing this service was based on the Bank’s imputed savings over the new contract. The basic and diluted loss per share for the first nine months of 2015 were $(0.27).

 

The Company had net income of $44,000 and basic and diluted earnings per share of $0.01 in the third quarter of 2016. Because of the above noted fee paid to a third party for negotiating the Bank’s data processing contract, the Company’s net loss recorded for the third quarter of 2015 was $202,000. The corresponding basic and diluted loss per share for the second quarter of 2015 were $(0.14).

 

 - 56 - 

 

 

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

For the first nine months of 2016, the annualized return on the Company’s average total assets was 0.07% compared to (0.29)% for the first nine months of 2015. For the third quarter of 2016, the annualized return on the Company’s average assets was 0.09%. For the third quarter of 2015, the annualized return on the Company’s average total assets was (0.42)%.

 

The annualized return on the Company’s average equity was positive for the first nine months and third quarter of 2016 at levels of 1.10% and 1.26%, respectively. For the first nine months of 2015, the annualized return on the Company’s average equity was (6.65)% and was (10.22)% for the third quarter of 2015.

 

A primary component of the Company’s revenue is its net interest income. The Company’s net interest income was more for the first nine months of 2016 compared to the similar period in 2015 and the net interest margin was higher. 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, 
   2016   2015 
   Average       Average   Average       Average 
   Balance   Interest   Rate   Balance   Interest   Rate 
Assets                              
Federal funds sold and interest-bearing deposits with banks  $18,469,639   $69,240    0.50%  $11,851,037   $21,571    0.24%
Securities   22,668,137    227,102    1.34    29,429,921    310,478    1.41 
Loans (including held for sale and non accrual)   125,715,308    4,649,603    4.93    127,715,922    4,810,245    5.02 
Total interest earning assets   166,853,084    4,945,945    3.95    168,996,880    5,142,294    4.06 
Other assets   16,975,843              17,757,285           
   $183,828,927             $186,754,165           
Liabilities and Shareholders’ Equity                              
Interest-bearing deposits  $123,884,523   $473,976    0.51%  $130,414,610   $512,758    0.52%
Repurchase agreements   4,068,536    12,520    0.41    5,931,630    19,726    0.44 
Subordinated debentures and note payable   4,906,424    123,931    3.37    5,780,000    596,049    13.75 
Total interest bearing liabilities   132,859,483    610,427    0.61    142,126,240    1,128,533    1.06 
Non-interest-bearing deposits   38,147,565              35,478,467           
Other liabilities   788,523              1,089,403           
Shareholders’ Equity   12,033,356              8,060,055           
   $183,828,927             $186,754,165           
Net interest income (tax equivalent basis)        4,335,518              4,013,761      
Net interest spread on earning assets (tax equivalent basis)             3.34%             3.00%
Net interest margin on earning assets (tax equivalent basis)             3.46%             3.17%
Average interest-earning assets to average interest-bearing liabilities             125.59%             118.91%
Tax equivalent adjustment        732              13,527      
Net interest income       $4,334,786             $4,000,234      

 

 - 57 - 

 

 

 

 

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The net interest spread on average earning assets increased 34 basis points to 3.34% in the past twelve months. The net interest margin increased by 29 basis points and was 3.46% for the first nine months of 2016 compared to 3.17% for the first nine months of 2015. The net interest income for the first nine months of 2015 was $4.0 million compared to a figure of $4.3 million for the same nine months in 2016. The derivative valuation adjustment lowered 2015’s results by $427,000. Without the recognition, the net interest income would have been $105,000 more than the net interest figure for the first nine months of 2016. The reduction in net interest income is mostly due to fewer earning assets and a less profitable mix. For the first three quarters of 2016, average earning assets were $2.1 million less than the first three quarters of 2015 and the loan and investment portfolios were $8.7 million less while interest bearing deposits with other financial institutions, mainly the FRB, was $6.6 million more.

 

The average rate earned on interest earning assets was 3.95% for the nine month period ending September 30, 2016; an 11 basis point erosion compared to 4.06% for the same period in 2015. The decrease was primarily due to detrimental changes to the earning asset composition. Specifically, average investments were reduced by 23% and loans were reduced by 2%. Changes to the loan portfolio impacts net interest income more than anything else since it is the Company’s largest earning asset category. The $2.0 million reduction in the loan portfolio stemmed from customer repayments. In addition to a smaller loan portfolio, there was also a reduction in the yield. As the credit markets recover, financial institutions are more actively soliciting new business making the rate environment more competitive. In order to retain current relationships and attract new ones, sometimes the Bank has to offer rates that are lower than the average portfolio rate. The average rate earned on the loan portfolio was 4.93% in the first three quarters of 2016, a reduction of nine basis points compared to the first three quarters of 2015. Lower rates are not being automatically offered on renewals or new business. To maintain the quality of the loan portfolio, each rate decision takes into consideration the strength of the loan from an underwriting standpoint. Lower rates are used selectively based on the risk characteristics of the credit.

 

Without the additional $427,000 of interest expense on the note payable, the Company’s cost of funds for the first nine months of 2016 would have improved by five basis points when compared to the first nine months of 2015.

 

Driving the reduction, was the elimination of the Company’s note payable in the first quarter of 2016 (see Note 11). The note payable carried an interest rate of 8%. The Company continues to decrease the rate paid on interest bearing deposits by focusing on a reduction in the concentration of internet time deposits. In the first nine months of the year, internet time deposits decreased by $9.3 million. The average rate on these maturities was 0.84%.

 

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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, 2016 and 2015 is in the table below.

 

   Three Months ended September 30, 
   2016   2015 
   Average       Average   Average       Average 
   Balance   Interest   Rate   Balance   Interest   Rate 
Assets                              
Federal funds sold and interest- bearing deposits with banks  $21,556,681   $27,108    0.50%  $22,087,237   $13,796    0.25%
Securities   20,867,610    67,038    1.29    27,149,207    93,586    1.38 
Loans (including held for sale                              
and non accrual)   127,856,117    1,553,794    4.86    124,809,078    1,549,915    4.97 
Total interest earning assets   170,280,408    1,647,940    3.87    174,045,522    1,657,297    3.81 
Other assets   16,922,812              18,140,307           
   $187,203,220             $192,185,829           
Liabilities and Shareholders’ Equity                              
Interest-bearing deposits  $121,770,387   $155,127    0.51%  $134,751,246   $176,666    0.52%
Repurchase agreements   4,161,666    4,221    0.41    4,699,204    5,019    0.43 
Subordinated debentures and note payable   4,500,000    32,037    2.85    5,780,000    57,359    3.97 
Total interest bearing liabilities   130,432,053    191,385    0.59    145,230,450    239,044    0.66 
Non-interest-bearing deposits   42,173,645              37,538,607           
Other liabilities   491,035              1,513,297           
Shareholders’ Equity   14,106,487              7,903,475           
   $187,203,220             $192,185,829           
Net interest income (tax equivalent basis)        1,456,555              1,418,253      
Net interest spread on earning assets (tax equivalent basis)             3.28%             3.15%
Net interest margin on earning assets (tax equivalent basis)             3.42%             3.26%
Average interest-earning assets to average interest-bearing liabilities             130.55%             119.84%
Tax equivalent adjustment        0              3,658      
Net interest income       $1,456,555             $1,414,595      

 

Net interest income increased $42,000 in the third quarter of 2016 over the similar period in 2015. Similarly, both the net interest spread and net interest margin increased. The net interest spread was 3.28% for the third quarter of 2016; increasing 13 basis points compared to the third quarter in 2015. The net interest margin for the third quarter of 2016 was 3.42% compared to 3.26% for the third quarter of 2015.

 

The yield on earning assets rose six basis points between the third quarter of 2016 and the third quarter in 2015. The rate on interest bearing deposits at other financial institutions doubled; increasing from 25 basis points a year ago to 50 basis points for all quarters of 2016. In December 2015, the Federal Open Market Committee (FOMC) of the Federal Reserve System raised the Federal Funds Rate 25 basis points. Another factor in the improvement is an increase in the concentration of loans relative to total earning assets. Loans are the highest earning asset category. In the third quarter of 2016 loans represented 75% of earning assets while in the third quarter of 2015 the amount was 72%. The gain came mostly from a reduction in the investment portfolio.

 

 - 59 - 

 

  

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The average rate paid on interest bearing liabilities improved seven basis points between the two quarters. The average rate paid on interest bearing liabilities was 66 basis points for the third quarter of 2015 but was 59 basis points for the third quarter of 2016. The third quarter cost of funds benefited from the elimination of the 8% note payable in the first quarter of 2016. The blended rate paid on subordinated debentures and note payable was 112 basis points lower in the third quarter of 2016.  

 

Management expects the Company’s net interest margin to increase in the last quarter of 2016. Extra liquidity in interest bearing deposits with other financial institutions will decline as the Bank funds loans and repays maturing internet time deposits. If implemented as planned, these tactics should provide a favorable movement in the concentration of earning assets as well as lower the Company’s cost of funds.

 

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 a sophisticated computer program to perform analysis of interest rate risk, assist with asset liability management, and model and measure interest rate sensitivity. Interest rate sensitivity varies with different types of earning assets and interest-bearing liabilities.  Overnight investments, of which rates change daily, and loans tied to the prime rate, differ considerably from long term investment securities and fixed rate loans.  Interest bearing checking and money market accounts are more interest sensitive than long term time deposits and fixed rate FHLB advances. Comparison of the repricing intervals of interest earning assets to interest bearing liabilities is a measure of interest sensitivity gap.  Balancing this gap is a continual challenge in a highly competitive and changing rate environment.

 

 - 60 - 

 

  

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Details of the repricing gap at September 30, 2016 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  $14,096,520   $0   $0   $0   $14,096,520 
Securities (including FHLB stock)   3,768,898    6,214,817    9,280,124    144,733    19,408,572 
Loans held for sale   0    0    0    0    0 
Loans   49,730,794    14,447,525    48,493,432    18,824,620    131,496,371 
    67,596,212    20,662,342    57,773,556    18,969,353    165,001,463 
Interest-bearing liabilities                         
Savings and checking   84,656,075    0    0    0    84,656,075 
Time deposits <$100,000   5,802,971    5,933,694    7,825,490    0    19,562,155 
Time deposits >$100,000   1,223,692    3,701,235    5,037,164    0    9,962,091 
Repurchase agreements and Federal funds purchased   4,853,589    0    0    0    4,853,589 
Notes payable and other borrowings   4,500,000    0    0    0    4,500,000 
    101,036,327    9,634,929    12,862,654    0    123,533,910 
Net asset (liability) repricing gap  $(33,440,115)  $11,027,413   $44,910,902   $18,969,353   $41,467,553 
Cumulative net asset (liability) repricing gap  $(33,440,115)  $(22,412,702)  $22,498,200   $41,467,553      

 

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. Recent interpretation of the information from the FOMC of the Federal Reserve System has leaned towards raising rates; because the Company’s gap position is negative, 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. The local market rates often play a large part in the movement of rates on liabilities.

 

There was no provision for loan losses for the first nine months of 2016 or 2015. The provision expense is associated with changes in historical loss calculations, economic conditions (local and national) as well as delinquency, net charge offs or recoveries 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 2016 was essentially $1.2 million for both periods with just a $41,000 net difference between the two period ends. The category changing the most for the first three quarters of 2016 as compared to 2015 was revenue from service charge on deposit accounts. Service charge income was $89,000 less for the first nine months of 2016. Fees from overdrafts were $78,000 less in the first three quarters of 2016 compared to the same three quarters in 2015. Overdraft revenue has been declining since 2015. There are many reasons surrounding the reduction, including a stronger local economy. Management is currently reviewing other deposit account fees to see if anything can be changed to help replace the declining revenue from overdrafts.

 

Conversely, gains from the sale of residential mortgage loans and foreclosed properties were more in the first three quarters of 2016 compared to the first three quarters of 2015. The Bank hired an additional mortgage lender in the first quarter of 2016. As a result of this increase in resources, the Bank’s gain on the sale of mortgage loans was $121,000 for the first nine months of 2016; $26,000 more than the gains of $95,000 recorded for the same period in 2015. Likewise, gains on the sale of foreclosed properties were $168,000 for the first three quarters of 2016 compared to $147,000 for the similar period in 2015. Although the benefit from this revenue is helpful, foreclosed asset gains are not predictable and will likely decline as the Bank’s inventory of foreclosed properties diminishes.

 

Non-interest income for the third quarter of 2016 was $374,000 compared to $426,000 of non-interest income in the third quarter of 2015. Service charges on deposit accounts experienced a decrease of $35,000 in overdraft fees. Additionally, gains on foreclosed properties were $17,000 less. Other non-interest income was $23,000 less due to a reduction in brokerage income. In 2015, there were several new account sales that netted large commissions.

 

Non-interest expenses for the first three quarters of 2016 were $5.4 million; $460,000 less than the total for the first three quarters of 2015. Data processing expenses were $370,000 for the first three quarters of 2016. These expenses were $471,000 in the first three quarters of 2015. Late in the second quarter of 2015, the Bank renegotiated its core data processing contract. The lower fee schedule began in the third quarter of 2015 and will be in effect for 72 months. The first three quarters of 2016 reflected a $98,000 savings over the same period in 2015 due to the new fee schedule. Management anticipates that the savings over the life of the contract will be over $1.8 million at the Bank’s current size and mix of electronic products. These savings could be offset by growth in the customer base as well as the addition of new technology.  

 

Professional services expenses for the first nine months of 2016 were $307,000 compared to $590,000 for the first nine months of 2015. In the third quarter of 2015, the Bank paid a $319,000 fee to a third party to negotiate its data processing contract. The fee for performing this service was based on the imputed savings over the life of the contract; estimated to be over $1.8 million over 72 months. In 2016, the Bank’s audit expense increased compared to prior years a portion of which was related to additional audit work required to restate its 2014 audited financial statements.

 

Foreclosed asset impairments were $135,000 for the first three quarters of 2016. Foreclosed asset impairments were $78,000 for the first three quarters of 2015. The $57,000 increase in this category was mostly associated with a $58,000 reduction on a single property. The decline was based on a value arrived at through a professional appraisal. The other impairments making up the total expense for the first nine months of the year are smaller and spread over a variety of properties.

 

 - 62 - 

 

  

COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FDIC insurance expenses were $173,000 for the first three quarters of 2016 and $274,000 for the first three quarters of 2015. The $101,000 reduction in the Bank’s FDIC premium accruals was due to a strengthened regulatory capital position and improved risk profile as well as a change in the FDIC’s assessment process.

 

The FDIC assessment calculation changed on June 30, 2016 because the Deposit Insurance Fund Reserve Ratio rose to a target level triggering the FDIC to make three major changes to deposit insurance assessments. The changes involved creating three tiers of assessment rates; one for newly established banks; one for banks over $10 billion in consolidated assets and one for banks up to $10 billion in consolidated assets. The revised rates for small banks equated to lower premium assessments beginning in the third quarter of 2016. It is anticipated that the Bank would save roughly $18,000 per quarter based on its size at September 30, 2016.

  

Non-interest expenses for the third quarter of 2016 were $1.8 million and were $2.1 million for the third quarter of 2015. The largest item contributing to the $383,000 reduction occurred in the professional services category. In 2015, when professional services totaled $409,000 for the quarter, there was a third party vendor fee of $319,000 paid. As described above, the fee was related to the renegotiation of the Bank’s data processing contract.

 

Similar to the differences noted above in the discussion of the nine month results of 2016 compared to that of 2015, there were third quarter increases in foreclosed asset impairments and decreases in FDIC insurance expenses. Foreclosed asset impairments were $35,000 more for the third quarter of 2016 compared to the third quarter of 2015 and FDIC insurance expenses were $26,000 less when comparing the same periods.

 

Other non-interest expenses were $225,000 for the third quarter of 2016; $58,000 less than the third quarter of 2015 when other non-interest expenses were $283,000. More than 50% of the reduction in this category was associated with a decline in expenses incurred to administrate non-performing loans. These expenses decreased $30,000 when comparing the two quarters. As the Bank’s credit quality improves and the number of properties decline, this trend would be expected.

 

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COMMUNITY SHORES BANK CORPORATION

 

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, 2016. 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, 2016.

 

Changes in Internal Control

 

There were no changes to our internal control over financial reporting during the fiscal quarter ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

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

 

None.

 

 - 64 - 

 

  

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

 

The Exhibit Index following the signature page hereto is incorporated by reference under this item.

 

 - 65 - 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

  COMMUNITY SHORES BANK CORPORATION
     
November 14, 2016 By:   /s/ Heather D. Brolick
Date Heather D. Brolick
  President and Chief Executive Officer
  (principal executive officer)

 

November 14, 2016 By:   /s/ Tracey A. Welsh
Date Tracey A. Welsh
  Senior Vice President, Chief Financial Officer, Secretary and Treasurer  
  (principal financial and accounting officer)

 

 - 66 - 

 

  

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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