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 March 31, 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 May 16, 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	41
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
	Item 4.	Controls and Procedures	53
PART II.	Other Information
	Item 1.	Legal Proceedings	54
	Item 1A.	Risk Factors	54
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
	Item 3.	Defaults upon Senior Securities	55
	Item 4.	Mine Safety Disclosures	55
	Item 5.	Other Information	55
	Item 6.	Exhibits	55
	Signatures		56

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

		March 31,				December 31,
		2016				2015
ASSETS
Cash and due from financial institutions		$	1,924,089			$	2,791,553
Interest-bearing deposits in other financial institutions			29,118,310				15,108,399
Total cash and cash equivalents			31,042,399				17,899,952
Securities available for sale (at fair value)			23,015,556				25,209,733
Loans held for sale			183,600				0
Loans			123,054,398				122,741,728
Less: Allowance for loan losses			1,705,044				1,671,416
Net loans			121,349,354				121,070,312
Federal Home Loan Bank stock (at cost)			300,500				300,500
Premises and equipment, net			8,742,889				8,820,502
Accrued interest receivable			397,210				369,442
Foreclosed assets			1,999,770				2,211,327
Net deferred tax asset			4,072,703				4,260,165
Other assets			721,428				879,367
Total assets		$	191,825,409			$	181,021,300
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing		$	35,747,523			$	39,236,718
Interest-bearing			133,026,072				121,944,921
Total deposits			168,773,595				161,181,639
Repurchase agreements			4,124,930				4,921,023
Subordinated debentures			4,500,000				4,500,000
Note payable			0				1,280,000
Derivative liability			0				426,667
Accrued expenses and other liabilities			450,890				1,149,544
Total liabilities			177,849,415				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 shares outstanding at March 31, 2016 and 1,468,800 shares outstanding at December 31, 2015			19,627,967				13,296,691
Retained deficit			(5,729,555	)			(5,705,469	)
Accumulated other comprehensive income (loss)			77,582				(28,795	)
Total shareholders’ equity			13,975,994				7,562,427
Total liabilities and shareholders’ equity		$	191,825,409			$	181,021,300

 

See accompanying notes to consolidated financial statements.

 

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended				Three Months Ended
		March 31, 2016				March 31, 2015
Interest and dividend income
Loans, including fees		$	1,520,753			$	1,656,679
Securities (including FHLB dividends)			84,707				109,919
Federal funds sold and other income			19,876				4,294
Total interest and dividend income			1,625,336				1,770,892
Interest expense
Deposits			161,538				173,382
Repurchase agreements and other short-term debt			4,399				8,548
Federal Home Loan Bank advances and notes payable			60,477				55,534
Total interest expense			226,414				237,464
Net Interest Income			1,398,922				1,533,428
Provision for loan losses			0				0
Net Interest Income After Provision for Loan Losses			1,398,922				1,533,428
Non-interest income
Service charges on deposit accounts			121,890				136,234
Gain on sale of loans			33,701				32,335
Gain on sale of foreclosed assets			34,881				50,340
Other			191,840				188,012
Total non-interest income			382,312				406,921
Non-interest expense
Salaries and employee benefits			1,010,864				1,010,481
Occupancy			155,736				165,687
Furniture and equipment			87,997				84,066
Advertising			3,803				8,037
Data processing			118,521				165,125
Professional services			98,589				95,816
FDIC insurance			67,113				101,455
Other			275,105				260,415
Total non-interest expense			1,817,728				1,891,082
Income (Loss) Before Federal Income Taxes			(36,494	)			49,267
Federal income tax expense (benefit)			(12,408	)			16,752
Net Income (Loss)		$	(24,086	)		$	32,515
Basic average shares outstanding			1,584,530				1,468,800
Diluted average shares outstanding			1,584,530				1,468,800
Basic earnings (loss) per share		$	(0.02	)		$	0.02
Diluted earnings (loss) per share		$	(0.02	)		$	0.02

 

See accompanying notes to consolidated financial statements.

 

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended				Three Months Ended
		March 31, 2016				March 31, 2015
Net income (loss)		$	(24,086	)		$	32,515
Other comprehensive income:
Unrealized holding gains on available for sale securities			161,178				90,366
Less reclassification adjustments for unrealized gains later recognized in income			0				0
			161,178				90,366
Tax effect			(54,801	)			(30,725	)
Other comprehensive income, net of tax			106,377				59,641
Comprehensive income		$	82,291			$	92,156

 

See accompanying notes to consolidated financial statements.

 

 

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 income											32,515								32,515
Other comprehensive income															59,641				59,641
Balance at March 31, 2015			1,468,800			$	13,296,691			$	(4,912,352	)		$	(211,246	)		$	8,173,093
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				3,292,183												3,292,183
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 loss											(24,086	)							(24,086	)
Other comprehensive income															106,377				106,377
Balance at March 31, 2016			4,101,664				19,627,967			$	(5,729,555	)		$	77,582			$	13,975,994

 

See accompanying notes to consolidated financial statements.

 

 

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended				Three Months Ended
		March 31, 2016				March 31, 2015
Cash flows (used in) from operating activities
Net income (loss)		$	(24,086	)		$	32,515
Adjustments to reconcile net income (loss) to net cash (used in) from operating activities:
Depreciation and amortization			92,981				91,755
Net amortization of securities			56,441				74,313
Net realized gain on sale of loans			(33,701	)			(32,335	)
Net realized gain on sale of foreclosed assets			(34,881	)			(50,340	)
Originations of loans for sale			(1,549,050	)			(1,438,320	)
Proceeds from loans originated for sale			1,399,151				1,378,555
Deferred federal income tax expense (benefit)			(12,408	)			50,299
Net change in:
Accrued interest receivable and other assets			130,173				(133,196	)
Accrued interest payable and other liabilities			(698,654	)			128,817
Net cash (used in) from operating activities			(674,034	)			102,063
Cash flows from investing activities
Activity in available for sale securities:
Maturities, prepayments and calls			2,298,914				1,673,954
Loan originations and payments, net			(279,042	)			1,998,406
Additions to premises and equipment, net			(15,368	)			(19,528	)
Proceeds from the sale of foreclosed assets			246,438				50,340
Net cash from investing activities			2,250,942				3,703,172
Cash flows from financing activities
Net change in deposits			7,591,956				8,486,952
Repayment of note payable			(8	)			0
Net change in repurchase agreements			(796,093	)			(2,565,150	)
Proceeds from rights offering, net of issuance cost			3,292,183				0
Proceeds from private placement			1,477,501				0
Net cash from financing activities			11,565,539				5,921,802
Net change in cash and cash equivalents			13,142,447				9,727,037
Beginning cash and cash equivalents			17,899,952				7,935,522
Ending cash and cash equivalents		$	31,042,399			$	17,662,559
Supplemental cash flow information:
Cash paid during the period for interest		$	916,582			$	207,801
Non-cash financing activities:
Note payable conversion to common stock, including derivative			1,561,592				0

 

See accompanying notes to consolidated financial statements.

 

 

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 ended March 31, 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 March 31, 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.

 

 

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 quarter 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.

 

 

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.

 

 

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 as of March 31, 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 that require transition guidance 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 did not 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. This amendment of this update are intended to simplify the presentation of deferred income taxes and required that deferred tax assets and liabilities be classified as non-current in a classified statement of financial position. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of this guidance did not 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 to and involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity of liabilities, 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 did not 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 adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

 

 

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 of ASU 2016-01is 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.

 

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 statements.

 

RECENT DEVELOPMENTS

 

In the first quarter of 2016, the Company successfully completed a Rights Offering which was begun 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 obligations current. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into the Bank, enhancing its regulatory capital position.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SECURITIES AVAILABLE FOR SALE

 

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

 

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
March 31, 2016		Cost				Gains				Losses				Value
US Treasury		$	1,505,223			$	7,980			$	0			$	1,513,203
US Government and federal agency			10,520,196				36,666				(302	)			10,556,560
Municipals			0				0				0				0
Mortgage-backed and collateralized mortgage obligations– residential			10,872,588				105,108				(31,903	)			10,945,793
		$	22,898,007			$	149,754			$	(32,205	)		$	23,015,556

 

						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 March 31, 2016:

 

		Amortized				Fair
		Cost				Value
Due in one year or less		$	5,522,871			$	5,533,648
Due from one to five years			6,502,548				6,536,115
Due from five to ten years			0				0
Due in more than ten years			0				0
Mortgage-backed and collateralized mortgage obligations – residential			10,872,588				10,945,793
		$	22,898,007			$	23,015,556

 

 

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 March 31, 2016 and December 31, 2015:

 

		Less than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
March 31, 2016		Value				Losses				Value				Losses				Value				Losses
US Government and federal agency		$	1,003,938			$	(302	)		$	0			$	0			$	1,003,938			$	(302	)
Mortgage-backed and collateralized mortgage obligations - residential			252,174				(1,041	)			4,043,865				(30,862	)			4,296,039				(31,903	)
		$	1,256,112			$	(1,343	)		$	4,043,865			$	(30,862	)		$	5,299,977			$	(32,205	)

 

		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	)

 

No securities were sold in the three months ended March 31, 2016 or March 31, 2015.

 

 

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 March 31, 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 March 31, 2016, 10 debt securities had unrealized losses with aggregate depreciation of 0.60% from the amortized cost basis; seven of the 10 had unrealized losses greater than 12 months.

 

Five of the 10 securities, which had an unrealized loss at March 31, 2016, are issued by government agencies and five are 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 March 31, 2016.

 

At March 31, 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.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.

SECURITIES AVAILABLE FOR SALE (Continued)

 

Securities pledged at March 31, 2016 had a carrying amount of $18,646,564 and were pledged to secure public fund customers, customer repurchase agreements and, to a much lesser extent, potential borrowings at the FRB Discount Window. 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 March 31, 2016 and December 31, 2015 were as follows:

 

		March 31, 2016				December 31, 2015
Commercial		$	45,830,677			$	48,287,124
Commercial Real Estate:
General			49,702,811				48,327,074
Construction			2,884,801				2,189,127
Consumer:
Lines of credit			5,368,489				5,296,097
Other			1,089,481				1,167,709
Credit card			431,064				473,048
Residential			17,803,060				17,051,151
Net deferred loan fees			(55,985	)			(49,602	)
			123,054,398				122,741,728
Less:  Allowance for loan losses			(1,705,044	)			(1,671,416	)
Loans, net		$	121,349,354			$	121,070,312

 

 

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 month periods ended March 31, 2016 and 2015 by portfolio segment:

 

Three Months Ended March 31, 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			0				0				(5,545	)			0				0				(5,545	)
Recoveries			10,403				0				28,770				0				0				39,173
Provision for loan losses			23,313				21,093				(30,839	)			4,456				(18,023	)			0
Ending balance		$	556,274			$	453,238			$	314,571			$	215,109			$	165,852			$	1,705,044

 

Three Months Ended March 31, 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				(392,397	)			(477	)			0				0				(392,874	)
Recoveries			17,100				0				5,344				0				0				22,444
Provision for loan losses			(4,902	)			(46,353	)			(3,977	)			2,222				53,010				0
Ending balance		$	512,974			$	409,839			$	294,929			$	206,707			$	183,293			$	1,607,742

 

 

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 March 31, 2016 and December 31, 2015:

 

March 31, 2016		Commercial				Commercial Real Estate				Consumer				Residential				Unallocated				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	267,455			$	49,855			$	140,265			$	72,892			$	0			$	530,467
Collectively evaluated for impairment			288,819				403,383				174,306				142,217				0				1,008,725
Unallocated			0				0				0				0				165,852				165,852
Total ending allowance balance		$	556,274			$	453,238			$	314,571			$	215,109			$	165,852			$	1,705,044
Loans:
Individually evaluated for impairment		$	2,434,178			$	5,171,540			$	299,317			$	725,925			$	0			$	8,630,960
Collectively evaluated for impairment			43,487,419				47,504,899				6,614,733				17,123,354				0				114,730,405
Total ending loans balance		$	45,921,597			$	52,676,439			$	6,914,050			$	17,849,279			$	0			$	123,361,365

 

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

 

 

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 March 31, 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.

 

		Recorded				Unpaid Principal				Related
March 31, 2016		Investment				Balance				Allowance
With no related allowance recorded:
Commercial		$	1,360,802			$	1,422,820			$	0
Commercial Real Estate:
General			5,059,465				6,216,535				0
Consumer:
Lines of credit			103,534				103,231				0
Other			0				0				0
Residential			411,152				442,821				0
Subtotal		$	6,934,953			$	8,185,407			$	0
With an allowance recorded:
Commercial		$	1,073,376			$	1,076,703			$	267,455
Commercial Real Estate:
General			112,075				148,165				49,855
Consumer:
Lines of credit			185,326				184,589				129,918
Other			10,457				10,347				10,347
Residential			314,773				320,968				72,892
Subtotal		$	1,696,007			$	1,740,772			$	530,467
Total		$	8,630,960			$	9,926,179			$	530,467

 

 

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 an 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

 

 

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 March 31, 2016 and December 31, 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
March 31, 2016		Investment				Recognized				Interest Recognized
With no related allowance recorded:
Commercial		$	1,365,742			$	11,931			$	11,931
Commercial Real Estate:
General			5,125,816				48,818				45,376
Consumer:
Lines of credit			74,035				1,715				1,644
Other			0				0				0
Residential			412,248				411				411
Subtotal		$	6,977,841			$	62,875			$	59,362
With an allowance recorded:
Commercial		$	1,029,929			$	10,486			$	5,090
Commercial Real Estate:
General			112,075				0				0
Consumer:
Lines of credit			215,910				2,295				2,166
Other			14,425				321				219
Residential			315,177				3,235				2,176
Subtotal		$	1,687,516			$	16,337			$	9,651
Total		$	8,665,357			$	79,212			$	69,013

 

 

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
March 31, 2015		Investment				Recognized				Interest Recognized
With no related allowance recorded:
Commercial		$	1,386,096			$	12,983			$	12,983
Commercial Real Estate:
General			2,972,875				50,983				43,492
Consumer:
Lines of credit			87,646				0				0
Other			0				0				0
Residential			159,049				465				465
Subtotal		$	4,605,666			$	64,431			$	56,940
With an allowance recorded:
Commercial		$	421,864			$	5,629			$	4,926
Commercial Real Estate:
General			1,055,540				0				0
Consumer:
Lines of credit			276,595				4,534				4,447
Other			11,314				0				0
Residential			392,307				4,212				4,212
Subtotal		$	2,157,620			$	14,375			$	13,585
Total		$	6,763,286			$	78,806			$	70,525

 

 

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 March 31, 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		$	0			$	0			$	0			$	0			$	45,817,535			$	45,817,535
Commercial Real Estate:
General			0				0				0				0				48,929,161				48,929,161
Construction			0				0				0				0				2,885,720				2,885,720
Consumer:
Lines of credit			48,607				0				0				48,607				5,300,742				5,349,349
Other			0				0				0				0				1,094,340				1,094,340
Credit card			0				0				0				0				431,064				431,064
Residential			263,839				0				0				263,839				17,461,046				17,724,885
Total		$	312,446			$	0			$	0			$	312,446			$	121,919,608			$	122,232,054

 

										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		$	36,742			$	54,223			$	0			$	90,965			$	13,097			$	104,062
Commercial Real Estate:
General			0				0				113,290				113,290				748,268				861,558
Construction			0				0				0				0				0				0
Consumer:
Lines of credit			0				0				26,091				26,091				13,206				39,297
Other			0				0				0				0				0				0
Credit card			0				0				0				0				0				0
Residential			49,912				0				74,482				124,394				0				124,394
Total		$	86,654			$	54,223			$	213,863			$	354,740			$	774,571			$	1,129,311

 

 

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

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

Troubled Debt Restructurings:

 

A loan is considered to be a Troubled Debt Restructure (“TDR”) when the Bank grants a concession to the borrower that it would not normally consider because the borrower is experiencing financial difficulty. The concession is typically a modification of one or more of the terms such as a rate reduction below the current market rate for new debt with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not cover the interest; financing concessions; or a permanent reduction of the recorded investment of the loan.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed utilizing the Company’s internal underwriting policy.

 

The Company has allocated $399,830 of specific reserves on $7,960,592 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2016 and $401,072 on $7,965,816 of unpaid principal balance of loans as of December 31, 2015. At March 31, 2016, the Company had an additional $74,691 in performing loans outstanding to two of those customers. As of December 31, 2015, there was $75,776 committed to the same two customers.

 

There were no new TDRs that occurred during the three month periods ended March 31, 2016 and 2015.

 

For the three month period ended March 31, 2016, there was one troubled debt restructuring that experienced a payment default within 12 months following the modification. Below is a table which presents the loan by class:

 

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

 

For the three month period ended March 31, 2015, there were no troubled debt restructurings that experienced a payment default within 12 months following the modification.

 

 

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.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4.

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

 

As of March 31, 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
		March 31,				December 31,				March 31,				December 31,				March 31,				December 31,
		2016				2015				2016				2015				2016				2015
1		$	820,899			$	871,535			$	0			$	0			$	0			$	0
2			0				0				1,667,939				1,698,136				0				0
3			11,880,459				12,001,827				5,796,293				4,599,484				0				65,780
4			11,534,044				12,742,910				14,747,518				14,367,694				261,099				264,961
5			16,437,896				18,581,320				14,828,830				15,120,148				936,375				371,762
5M			2,480,194				1,426,772				2,507,645				3,940,477				198,041				0
6			728,142				798,475				9,179,157				7,472,404				1,490,205				1,490,636
7			2,026,802				1,939,064				201,524				333,169				0				0
8			13,161				13,869				861,813				869,371				0				0
Total		$	45,921,597			$	48,375,772			$	49,790,719			$	48,400,883			$	2,885,720			$	2,193,139

 

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 March 31, 2016 and December 31, 2015:

 

		Residential
		March 31,				December 31,
		2016				2015
Performing		$	17,123,354			$	16,368,778
Impaired			725,925				729,178
Total		$	17,849,279			$	17,097,956

 

		Consumer – Lines of credit								Consumer – Other								Consumer – Credit card
		March 31,				December 31,				March 31,				December 31,				March 31,				December 31,
		2016				2015				2016				2015				2016				2015
Performing		$	5,099,786			$	5,021,480			$	1,083,883			$	1,156,291			$	431,064			$	473,048
Impaired			288,860				292,970				10,457				16,353				0				0
Total		$	5,388,646			$	5,314,450			$	1,094,340			$	1,172,644			$	431,064			$	473,048

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5.

FORECLOSED ASSETS

 

Foreclosed asset activity at March 31:

 

		March 31,				March 31,
		2016				2015
Beginning of year		$	2,211,327			$	2,238,997
Additions			0				0
Reductions from sales			(211,557	)			0
Direct write-downs			0				0
End of period		$	1,999,770			$	2,238,997
Expenses related to foreclosed assets include:
Operating expenses, net of rental income		$	26,973			$	67,194

 

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.

 

The adoption of new accounting guidance related to foreclosed assets resulted in one residential real estate property totaling $30,000 being classified as other real estate owned at December 31, 2015 earlier than it would have under previous guidance. There was no early recognition of residential real estate property during the first quarter of 2016.

 

6.

PREMISES AND EQUIPMENT

 

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

 

		March 31,				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			3,321,595				3,314,126
			14,356,967				14,349,498
Less:  accumulated depreciation			5,614,078				5,528,996
		$	8,742,889			$	8,820,502

 

Depreciation expenses were $92,981 and $91,755 for the three months ended March 31, 2016 and 2015, respectively.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7.

DEPOSITS

 

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

 

		March 31,				December 31,
		2016				2015
Non-interest-bearing DDA		$	35,747,523			$	39,236,718
Interest-bearing DDA			37,862,146				36,675,745
Money market			30,896,840				21,992,206
Savings			27,329,987				24,446,559
Time, under $100,000			27,267,509				29,272,313
Time, over $100,000			9,669,590				9,558,098
Total Deposits		$	168,773,595			$	161,181,639

 

Time deposits of $250,000 or more were $1,379,702 at March 31, 2016 and $1,377,420 at December 31, 2015. There were no brokered deposits at either March 31, 2016 or December 31, 2015.

 

8.

SHORT-TERM BORROWINGS

 

The Company’s short-term borrowings outstanding consisted entirely of repurchase agreements at March 31, 2016 and December 31, 2015. The Company utilized its line of credit with the FHLB for overnight liquidity support only during 2015. Information regarding repurchase agreements and borrowings from the FHLB is summarized below:

 

		Repurchase				Borrowings
		Agreements				from FHLB
Outstanding at March 31, 2016		$	4,124,930			$	0
Average interest rate at period end			0.41	%			0	%
Average balance during period			4,205,557				0
Average interest rate during period			0.42	%			0	%
Maximum month end balance during period			4,829,527				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

 

The Bank had securities of $4,229,398 pledged to repurchase agreements at March 31, 2016 and $5,341,286 pledged at December 31, 2015. The Company had approximately $2.6 million of residential mortgage loans pledged to support its line of credit with the FHLB at March 31, 2016.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8.

SHORT-TERM BORROWINGS (Continued)

 

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:

 

Fair Market Value of Securities Pledged to Repurchase Agreements		March 31, 2016				December 31, 2015
U.S. Treasury and agency securities		$	0			$	458,700
Asset-backed securities			3,392,829				4,002,129
Other			836,569				880,457
Total		$	4,229,398			$	5,341,286

 

Another source of short-term borrowings is available through the Federal Reserve Discount Window (“Discount Window”). At March 31, 2016, collateral pledged for Discount Window borrowings consisted of $363,075 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 Federal Home Loan Bank (“FHLB”) of Indianapolis. Based on its current FHLB stock holdings and collateral, the Bank has the capacity to borrow $2,940,485 at March 31, 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 $6,312,942 pledged at March 31, 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 March 31, 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 2.68% at March 31, 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 30^th, June 30^th, September 30^th and December 30^th. 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.

 

 

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.

 

The Company is now current in its interest obligation and the holders of the trust preferred securities has waived the event of default. 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.

 

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.

 

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.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  

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 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 and offering costs of $235,000).

 

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 were no issuance costs associated with the private placements.

 

 

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 March 31, 2016 and December 31, 2015 follows:

 

		March 31, 2016				December 31, 2015
Unused lines of credit		$	27,013,036			$	24,532,524
Unused standby letters of credit			1,362,000				1,362,000
Commitments to make loans			71,300				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.

 

 

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, net book value per the borrower’s financial statements, or aging reports. To determine the fair value, these values are adjusted or discounted based on several factors, including but not limited to: the Bank’s historical losses within that particular asset category; knowledge of the collateral, including age and condition; and changes in market conditions from the time of the valuation, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Foreclosed Assets: Commercial and residential real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. Fair values are generally based on recent real estate appraisals or internal evaluations. Management may add discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments of the carrying amount utilizing this process result in a Level 3 classification.

 

 

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 March 31, 2016 and December 31, 2015:

 

						Fair Value Measurements Using
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
March 31, 2016		Total				(Level 1)				(Level 2)				(Level 3)
Available for sale securities:
US Treasury		$	1,513,203			$	1,513,203			$	0			$	0
US Government and federal agency			10,556,560				0				10,556,560				0
Municipals			0				0				0				0
Mortgage-backed and collateralized mortgage obligations– residential			10,945,793				0				10,945,793				0
Total		$	23,015,556			$	1,513,203			$	21,502,353			$	0
Servicing assets		$	5,151			$	0			$	5,151			$	0

 

						Fair Value Measurements Using
						Quoted Prices				Significant
						in Active				Other				Significant
						Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
December 31, 2015		Total				(Level 1)				(Level 2)				(Level 3)
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 quarter of 2016 or 2015.

 

 

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 March 31, 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)
March 31, 2016
Impaired loans1:		$	1,643,043			$	0			$	0			$	1,643,043
Foreclosed assets:			1,999,770				0				0				1,999,770
Total		$	3,642,813			$	0			$	0			$	3,642,813

 

						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

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.

FAIR VALUE MEASUREMENTS (Continued)

 

The following tables present information as of March 31, 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
March 31, 2016		Technique		Inputs		of Inputs
				Adjustments for differences between
Impaired loans		Sales comparison approach		comparable sales		(25)-19	%
		Income approach		Capitalization rate		9.5-12.5	%
				Adjustments for differences between
Foreclosed assets		Sales comparison approach		comparable sales		0-10	%

 

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

 

 

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 March 31, 2016 Using
		Carrying
		Amount				Level 1				Level 2				Level 3				Total
		(in thousands)
Financial assets
Cash and cash equivalents		$	31,042			$	31,042			$	0			$	0			$	31,042
Loans held for sale			184				0				188				0				188
Loans, net (including impaired)			121,349				0				0				118,753				118,753
FHLB stock			301				N/A				N/A				N/A				N/A
Accrued interest receivable			397				4				86				307				397
Financial liabilities
Deposits			168,774				0				164,692				0				164,692
Repurchase agreements			4,125				0				4,125				0				4,125
Subordinated debentures			4,500				0				0				3,232				3,232
Notes payable			0				0				0				0				0
Accrued interest payable			23				0				23				0				23

 

						Fair Value Measurements
						at December 31, 2015 Using
		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

 

 

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) Loans

 

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

(c) FHLB stock

 

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

 

(d) Deposits

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 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.

 

(e) 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.

 

(f) Subordinated debentures and Notes payable

 

The fair values of the Company’s subordinated debentures and notes payable are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements and consideration of the Company’s liquidity, resulting in a Level 3 classification.

 

(g) Accrued interest receivable/payable

 

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, 2 or 3 classification, depending on the associated asset or liability.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15.

FAIR VALUE MEASUREMENTS (Continued)

 

(h) Off-balance sheet instruments

 

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

 

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 had a net loss for the quarter, 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 March 31, 2016.

 

There were no unrecognized tax benefits at March 31, 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 2011.

 

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.

 

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 capital rules that became effective on January 1, 2015, there was a requirement for a capital buffer to be phased in over three years beginning in 2016. 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.

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.

REGULATORY MATTERS (Continued)

 

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.

 

Actual capital amounts and ratios for the Bank and, required capital amounts and ratios for the Bank to be well capitalized at March 31, 2016 and December 31, 2015 were:

 

																		Minimum Required to Be
										Minimum Required								Well Capitalized Under
										For Capital								Prompt Corrective Action
		Actual								Adequacy Purposes								Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
March 31, 2016
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank		$	14,368,854				10.64	%		$	6,077,259				4.50	%		$	8,778,263				6.50	%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank			16,069,688				11.90				10,804,017				8.00				13,505,021				10.00
Tier 1 (Core) Capital to risk-weighted assets of the Bank			14,368,854				10.64				8,103,012				6.00				10,804,017				8.00
Tier 1 (Core) Capital to average assets of the Bank			14,368,854				8.06				7,133,545				4.00				8,916,931				5.00

 

 

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17.

REGULATORY MATTERS (Continued)

 

																		Minimum Required to Be
										Minimum Required								Well Capitalized Under
										For Capital								Prompt Corrective Action
		Actual								Adequacy Purposes								Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2015
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 March 31, 2016, $1,700,835 was counted as Tier 2 capital and $4,209 was disallowed. At December 31, 2015, the full allowance for loan loss balance of $1,671,416 was counted as Tier 2 capital and nothing was disallowed.

 

 

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 March 31, 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 March 31, 2016 to that at December 31, 2015. The part labeled Results of Operations discusses the three month period ending March 31, 2016 as compared to the same period 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 was begun 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 obligations current. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into the Bank, enhancing its regulatory capital position.

 

 

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 $191.8 million at March 31, 2016 compared to $181.0 million at December 31, 2015. Asset growth occurring in the first three months of 2016 stemmed primarily from increases to customer deposit accounts and proceeds from the Rights Offering which in turn drove up the Company’s balance on deposit at the FRB.

 

Cash and cash equivalents increased by $13.1 million to $31.0 million at March 31, 2016 from $17.9 million at December 31, 2015. The Bank’s FRB balance increased $14.0 million since year-end 2015 and was $29.1 million on March 31, 2016. The increase in balance was driven largely by an increase in customer deposit balances but also included proceeds from investment maturities and the Company’s capital contribution to the Bank. Although excess liquidity is a conservative posture, it is detrimental to earnings. 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. Approximately a third of the excess liquidity noted above will be utilized when the Company’s public fund customers reduce their balances in the second quarter; remaining excess funds will be used to fund loan originations and to repay upcoming time deposit maturities.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

The Bank’s security portfolio was $23.0 million at March 31, 2016 and $25.2 million at December 31, 2015. Investment activity in the first three months of the year consisted of maturities, prepayments and calls totaling $2.3 million offset by an increase in fair value of $161,000.

 

Although the investment portfolio is declining, the Bank seeks to diligently manages 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 March 31, 2016, 19% of the investment portfolio was unencumbered. This outcome is slightly lower than the 20% unpledged position that existed on December 31, 2015.

 

At March 31, 2016, securities with an amortized cost of $18.6 million were pledged to public fund customers, the FRB discount window and customer repurchase agreements, down from $20.2 million at year-end 2015.

 

Investment portfolio quality continues to receive scrutiny. The market value of the portfolio is impacted by national and global economic news. During the first three months of 2016, the investment portfolio had net unrealized gains of $161,000. Although the entire investment portfolio had a net unrealized gain of $118,000 at March 31, 2016, there were 10 securities with an amortized cost of $5.3 million having an unrealized loss of $32,000. See Note 2 for information regarding 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 March 31, 2016.

 

Loans held for sale activity during the first three months of 2016 included $1.6 million of loan originations and $1.4 million of sales. The associated gain on the loan sales was $34,000. There were $184,000 of loans held for sale at March 31, 2016 and none at December 31, 2015.

 

Total loans (held for investment) increased $313,000 and were $123.1 million at March 31, 2016 up slightly from $122.7 million at December 31, 2015. A net decrease in the commercial, commercial real estate and consumer segments was more than offset by growth in the residential segment since year-end 2015. Although the local market is very competitive, management believes the Bank’s lending area is positioned to grow the portfolio in 2016 in a manner that assesses multiple risk factors in conjunction with expected rate of return and related capital allocation.

 

Diligent attention to the credit quality of the current portfolio as well as the expected growth will continue. 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.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

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 March 31, 2016, the allowance for loan losses totaled $1.7 million approximately; the same as at year-end 2015. The allowance for loan loss increased by $34,000 and is the result of recoveries of $39,000 and charge-offs of $5,000 for the first three months of 2016. At March 31, 2016, the ratio of allowance to gross loans outstanding was 1.39% compared to 1.36% at year-end 2015.

 

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

 

		March 31, 2016								December 31, 2015
						Percent of								Percent of
						Loans in Each								Loans in Each
Balance at End of Period						Category to								Category to
Applicable to:		Amount				Total Loans				Amount				Total Loans
Commercial		$	556,274				37.2	%		$	522,558				39.3	%
Commercial Real Estate			453,238				42.7				432,145				41.2
Consumer			314,571				5.6				322,185				5.6
Residential			215,109				14.5				210,653				13.9
Unallocated			165,852				N/A				183,875				N/A
Total		$	1,705,044				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 March 31, 2016, a decrease of 1 basis point from year-end 2015. At March 31, 2016, there were $166,000 of unallocated reserves in the allowance for loan losses while unallocated reserves were $184,000 at December 31, 2015.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

At March 31, 2016, the allowance contained $530,000 in specific allocations for impaired loans whereas at December 31, 2015 there was $465,000 specifically allocated. The increase resulted from two loans becoming specifically identified and fully reserved during the first quarter of 2016. In total, there was $8.6 million of recorded investment on impaired loans at March 31, 2016 compared to $8.7 million 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 16 impaired loans requiring no reserve at March 31, 2016. At March 31, 2016, the recorded investment on impaired loans requiring no reserves was $6.9 million, or 80% 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 $1.7 million at both March 31, 2016 and 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. From year-end 2015 to March 31, 2016, the recorded investment in accruing past due and non-accrual loans decreased by $303,000. This was evidenced by a $245,000 decrease in the recorded investment in past due loans and a $58,000 decrease in the recorded investment in non-accrual loans in the first three months of 2016.

 

The recorded investment of accruing loans past due 30-59 days was $312,000 at March 31, 2016; a $138,000 decrease since December 31, 2015. There were four loans past due 30-59 days at March 31, 2016.

 

There were no loans past due 60-89 days still accruing interest at March 31, 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 March 31, 2016 or December 31, 2015.

 

Although the Bank’s loan payment delinquency is low, 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 $1.1 million at March 31, 2016; down $58,000 from year-end 2015. There are 11 non-accrual notes at March 31, 2016 and no non-accrual notes are secured by undeveloped real estate. At March 31, 2016, there were specific allocations of $222,000 in the allowance for any estimated collateral deficiency on non-accrual loans.

 

There were net recoveries of $34,000 for the first quarter of 2016 and the ratio of annualized net charge-offs was (0.11)% to average loans. Conversely, there were net charge-offs of $370,000 for the first quarter of 2015. The ratio of annualized net charge-offs to average loans associated with these charge-offs was 1.14% for the first three months of 2015.

 

 

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 March 31, 2016 are set forth below:

 

		Within				Three to				One to				After
		Three Months				Twelve Months				Five Years				Five Years				Total
Commercial		$	9,383,890			$	9,960,313			$	17,557,403			$	8,873,086			$	45,774,692
Commercial Real Estate:
General			3,477,239				4,212,776				35,322,287				6,690,509				49,702,811
Construction			260,138				1,687,600				937,063				0				2,884,801
Consumer:
Lines of credit			22,041				195,232				2,731,294				2,419,922				5,368,489
Other			29,268				35,952				856,660				167,601				1,089,481
Credit card			48,932				151,269				230,863				0				431,064
Residential			503,349				1,186,572				18,229				16,094,910				17,803,060
		$	13,724,857			$	17,429,714			$	57,653,799			$	34,246,028			$	123,054,398
Loans at fixed rates		$	3,426,144			$	5,236,101			$	48,109,867			$	24,311,821			$	81,083,933
Loans at variable rates			10,298,713				12,193,613				9,543,932				9,934,207				41,970,465
		$	13,724,857			$	17,429,714			$	57,653,799			$	34,246,028			$	123,054,398

 

At March 31, 2016, 66% of the Bank’s loan balances carried a fixed rate and 34% 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 March 31, 2016, approximately 28% of the entire loan portfolio had a contractual maturity longer than five years; the same percentage 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. Nearly half 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 36% 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 balloon of five years, minimizing the extension risk.

 

¹ Extension risk, as related to loans, exists when booking fixed rate loans with long final contractual maturities. When a customer is contractually allowed longer to return its borrowed principal and rates rise, the Bank is delayed from taking advantage of the opportunity to reinvest the returning principal at the higher market rate.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

Foreclosed assets were $2.0 million at March 31, 2016; down slightly since December 31, 2015. Foreclosed assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. There were two property sales and two lot sales during the first three months of 2016. The net gains realized on these sales weas $35,000. No properties were added in the first quarter of 2016. At March 31, 2016, foreclosed assets consisted of 19 real estate holdings, two fewer than at December 31, 2015.

 

Deposit balances were $168.8 million at March 31, 2016 up from $161.2 million at December 31, 2015. Typically the Bank experiences a notable seasonal fluctuation in the deposit accounts of its largest public fund customers in the first quarter of each year. Public fund deposits rose $7.9 million since year-end 2015. Partially offsetting the public fund increase was a $1.9 million decrease in the time deposit portfolio in the first three months of 2016. The time deposit portfolio was deliberately contracted in an effort to reduce excess liquidity at the FRB. In April, public fund balances were reduced by approximately $10.0 million. The withdrawals are in line with the expected seasonality of these customers.

 

Repurchase agreement balances were $4.1 million at March 31, 2016 and $4.9 million at December 31, 2015, a decrease of $796,000. The decline between the two period ends was primarily the result of existing customers decreasing their balance.

 

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 $699,000 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.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

Shareholders’ equity was approximately $14.0 million on March 31, 2016. On December 31, 2015, the balance was $7.6 million. The net increase of $6.4 million was made up of $6.3 million of new capital from common stock transactions, accumulated other comprehensive income (security market value adjustments) of $106,000 reduced slightly by a net loss of $24,000 recorded in the first three months of 2016.

 

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 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 enables 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 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 March 31, 2016 were 4,101,664 compared to 1,468,800 at December 31, 2015. The book value per share was $3.41 at March 31, 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. At March 31, 2016, the Bank’s total risk-based capital ratio was 11.90% and its Tier 1 to average assets ratio was 8.06% compared to 9.46% and 6.71%, respectively, at December 31, 2015.

 

RESULTS OF OPERATIONS

 

For the first three months of 2016 there was a net loss of $24,000 which was $57,000 less than net income of $33,000 recorded for the first three months of 2015. Net loss in the first quarter of 2016 was less than the same quarter of the previous year as a result of lower net interest income from the decline in the loan portfolio over the last twelve months. The basic and diluted loss per share for the first three months of 2016 were $(0.02). The basic and diluted earnings per share for the first three months of 2015 were $0.02.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

For the first three months of 2016, the annualized return on the Company’s average total assets was (0.05)% compared to 0.07% for the first three months of 2015. The annualized return on average equity was (1.21)% for the first quarter of 2016; down from an annualized return on average equity of 1.59% for the same period in 2015.

 

As mentioned above, there has been a decrease in the loan portfolio in the past twelve months having a negative impact on the Company’s interest income; its largest source of revenue. For the first three months of 2016 compared to the similar period in 2015 the mix of earning assets was less favorable resulting in a lower net interest margin for the first quarter of 2016 compared to the like period a year ago.

 

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.

 

		Three Months ended March 31,
		2016												2015
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Assets
Federal funds sold and interest-bearing deposits with banks		$	16,003,536			$	19,876				0.50	%		$	7,302,670			$	4,294				0.24	%
Securities			24,556,120				85,439				1.39				31,453,161				115,492				1.47
Loans (including held for sale and non accrual)			123,996,419				1,520,753				4.91				130,111,449				1,656,679				5.09
Total interest earning assets			164,556,075				1,626,068				3.95				168,867,280				1,776,465				4.21
Other assets			17,289,821												17,497,938
		$	181,845,896											$	186,365,218
Liabilities and Shareholders’ Equity
Interest-bearing deposits		$	126,312,340			$	161,538				0.51	%		$	129,984,817			$	173,382				0.53	%
Repurchase agreements			4,205,557				4,399				0.42				7,299,398				8,548				0.47
Subordinated debentures and notes payable			5,723,736				60,477				4.23				5,780,000				55,534				3.84
Total interest bearing liabilities			136,241,633				226,414				0.66				143,064,215				237,464				0.66
Non-interest-bearing deposits			36,251,636												34,602,559
Other liabilities			1,391,922												540,216
Shareholders’ Equity			7,960,705												8,158,228
		$	181,845,896											$	186,365,218
Net interest income (tax equivalent basis)							1,399,654												1,539,001
Net interest spread on earning assets (tax equivalent basis)											3.29	%											3.55	%
Net interest margin on earning assets (tax equivalent basis)											3.40	%											3.65	%
Average interest-earning assets to average interest-bearing liabilities											120.78	%											118.04	%
Tax equivalent adjustment							732												5,573
Net interest income							1,398,922												1,533,428

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

For the first quarter of 2016, the net interest spread on average earning assets was 3.29% falling 26 basis points in the past 12 months. The net interest margin on a fully tax equivalent basis decreased by 25 basis points over the same twelve month period. For the first three months of 2016, the Company’s net interest margin was 3.40% compared to 3.65% for the first three months of 2015. Net interest income for the first three months of 2016 was $1.4 million compared to a figure of $1.5 million for the same three months in 2015.

 

The average rate earned on interest earning assets was 3.95% for the three month period ending March 31, 2016 compared to 4.21% for the same period in 2015. When comparing the two periods, total earning assets were less and the mix of earning assets included a smaller concentration of loans and investments. Essentially, the differences in the loan portfolio had the largest impact on the reduction in interest income. The loan portfolio was $6.1 million less in the first quarter of 2016 compared to the first quarter of 2015. A large portion of the reduction occurred in the second half of 2015. There were a variety of reasons for the decline including, competitive factors, a turnover in lending personnel and customer liquidity. Management recognizes the importance the loan portfolio and its impact on the Company’s earnings and will continue to focus sales efforts on growing this segment of earning assets.

 

The Company’s cost of funds on interest-bearing liabilities was 0.66% in the first quarter of 2016; the same as the first quarter of 2015. Over the past year, the Company has been successful in reducing its concentration of funding from time deposits, typically the funding source accruing the highest interest rates. In the past year, the Company’s time deposit portfolio has been reduced by $22.5 million. Management believes that other deposit account segments are slower to experience rate increases in a rising rate environment so the change in the mix of deposits should benefit the Company in the future.

 

There was a 39 basis point increase to the average rate on subordinated debentures and notes payable. The Company’s subordinated debentures are floating rate and increasing rates are likely to continue given the current economic climate. The Company’s note payable bore a fixed rate of 8% prior to converting to equity on March 28, 2016. The Company’s cost of funds from non-deposit sources should be reduced going forward.

 

Throughout the next three quarters of 2016, management will remain focused on reducing its interest earning balance at the Federal Reserve by repaying time deposits and funding loans. Successes in these areas will likely raise the Company’s net interest margin to one that is above the first quarter of 2016.

 

To plan for net interest margin improvement and to understand potential outcomes when rates increase or decrease in future periods, asset liability management continues to be an important tool for assessing opportunities for improvement and 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.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

Details of the repricing gap at March 31, 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		$	29,118,310			$	0			$	0			$	0			$	29,118,310
Securities (including FHLB stock)			2,668,254				6,150,767				13,511,251				985,784				23,316,056
Loans held for sale			0				0				0				183,600				183,600
Loans			42,693,728				10,360,992				52,202,040				17,797,638				123,054,398
			74,480,292				16,511,759				65,713,291				18,967,022				175,672,364
Interest-bearing liabilities
Savings and checking			96,088,973				0				0				0				96,088,973
Time deposits <$100,000			7,033,191				9,996,694				10,237,624				0				27,267,509
Time deposits >$100,000			1,948,959				3,782,711				3,937,920				0				9,669,590
Repurchase agreements and other borrowings			4,124,930				0				0				0				4,124,930
Subordinated debenture and other borrowings			4,500,000				0				0				0				4,500,000
			113,696,053				13,779,405				14,175,544				0				141,651,002
Net asset (liability) repricing gap		$	(39,215,761	)		$	2,732,354			$	51,537,747			$	18,967,022			$	34,021,362
Cumulative net asset (liability) repricing gap		$	(39,215,761	)		$	(36,483,407	)		$	15,054,340			$	34,021,362

 

Currently, the Company has a negative 12 month repricing gap which indicates that the Company is liability sensitive in the next 12 month period. This position implies that more rate bearing liability products have an opportunity to reprice during this period. If the rate environment begins to increase like the Federal Open Market Committee of the Federal Reserve System has forecasted, a negative repricing gap may negatively impact the Bank’s cost of funds and overall interest expense, however it is unknown whether the reduction will be successfully offset by loan growth and the repricing opportunities for loans scheduled to renew. 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 three 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.

 

 

COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS

 

Non-interest income recorded in the first three months of 2016 was $382,000 compared to $407,000 recorded for the similar period in 2015. Service charges on deposits and gains on the sale of foreclosed assets provided the largest difference when comparing the two quarters. The Bank’s overdraft income declined over the past year. Overdraft income was $10,000 less between the first quarter of 2016 and that of 2015. The Bank attributes a portion of the difference to the improving economy. Management is analyzing other fee opportunities on deposits to boost service fee revenue going forward.

 

Net gains on foreclosed asset sales were $35,000 in the first quarter of 2016; $15,000 less than 2015’s first quarter. Although there were more sales in the first quarter of 2016, the sales in 2015 were from a development that was heavily impaired at foreclosure so the basis in the properties sold was lower making higher gains possible.

 

Non-interest expenses for the first three month period of 2016 were $1.8 million; $73,000 less than the first three months of 2015. The two largest categories contributing to the net difference were data processing and FDIC insurance.

 

Data processing expenses were $119,000 in the first three months of 2016. These expenses were $165,000 in the first three months 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 quarter of 2016 reflected a $46,000 savings over the same quarter in 2015 prior 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.

 

FDIC insurance expenses were $67,000 for the first quarter of 2016 and $101,000 for the first quarter of 2015. The $34,000 reduction in the Bank’s FDIC premium accruals were due to a strengthened regulatory capital position and improved risk profile. Management expects to see a further reduction in FDIC premiums as a result of the Bank’s regulatory capital ratios and the recent $3.35 million capital infusion from the Company.

 

As a result of the Company’s net loss for the first three months of 2016, there was a tax benefit of $12,000 accrued. Conversely, the Company recorded federal income tax expense of $17,000 in the first quarter of 2015.

 

 

COMMUNITY SHORES BANK CORPORATION

 

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable for smaller reporting companies.

 

ITEM 4.          CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2016, an evaluation was performed under the supervision of and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.  Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures are effective to ensure that information to be disclosed by the Company in reports that it files or submits under  the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is (a) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (b) accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding disclosure.

 

Changes in Internal Control over Financial Reporting

 

Under SEC rules we were required to furnish a report by our management on our internal control over financial reporting in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  In the course of our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015, we identified a material weakness in our internal control over financial reporting related to our controls over the appropriate reporting of non-routine transactions.  Specifically, we did not have appropriate controls in place to ensure that there was proper classification of deferred income taxes related to deferred tax expense and accumulated other comprehensive loss. This material weakness resulted in a misstatement which occurred in conjunction with the 2014 reversal of our deferred tax valuation allowance.  The material weakness in our internal control over financial reporting, was described in Item 9A, Controls and Procedures, of our Annual Report on Form 10-K for the year ended December 31, 2015.

 

During the first quarter of 2016, the material weakness that existed as of December 31, 2015 was evaluated and internal control procedures and processes applicable to financial reporting with respect to taxes have been revised.  Additional controls were instituted including a specific control related to reviewing the reconciliation and validation of the tax component of accumulated other comprehensive income.  These additional controls were tested for operating effectiveness in conjunction with the March 31, 2016 financial reporting close process and found to be functioning appropriately.  As such, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that the consolidated financial statements included in this 10-Q present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United State of America (“GAAP”).

 

 

COMMUNITY SHORES BANK CORPORATION

 

Except as noted above, there has been no change to our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have 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

 

The Company initiated a Rights Offering in October 2015. The Rights Offering consisted of a distribution of nontransferable subscription rights to its shareholders of record as of October 12, 2015. 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, net of issuance costs. Concurrent with the closing of the Rights Offering, the Company sold 579,412 shares of Common Stock through a private placement exempt under Rule 506 of Regulation D at $2.55 per share. These sales were made exclusively to four accredited investors. Also on March 28, 2016, the Company issued 670,153 shares of Common Stock in satisfaction of senior debt totaling $1,280,000 at $1.91 per share to 1030 Norton LLC. The debt conversion transaction was also made under Rule 506 of Regulation D exclusively to an accredited investor.

 

The proceeds from the equity sales were used to increase the Company’s liquidity, repay deferred and overdue interest on its subordinated debentures and contribute capital to the Bank.

 

 

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.

 

 

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
May 16, 2016	By:	/s/ Heather D. Brolick
Date	Heather D. Brolick
	President and Chief Executive Officer
	(principal executive officer)
May 16, 2016	By:	/s/ Tracey A. Welsh
Date	Tracey A. Welsh
	Senior Vice President, Chief Financial Officer, Secretary and Treasurer
	(principal financial and accounting officer)

 

 

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).
10.1		Notification Terminating Consent Order effective December 16, 2015, incorporated by reference to exhibit 10.1 of the Company’s form 8-K (SEC file no. 000-51166) filed January 4, 2016.
10.2		Supplemental Share Purchase Agreement between Community Shores Bank Corporation and Robert L. Chandonnet dated January 13, 2016, incorporated by reference to exhibit 10.1 of the Company’s form 8-K (SEC file no. 000-51166) filed January 4, 2016.
10.3		Supplemental Share Purchase Agreement between Community Shores Bank Corporation and Bruce J. Essex dated January 13, 2016, incorporated by reference to exhibit 10.2 of the Company’s form 8-K (SEC file no. 000-51166) filed January 4, 2016.
10.4		Supplemental Share Purchase Agreement between Community Shores Bank Corporation and Bruce J. Essex, Jr. dated January 13, 2016, incorporated by reference to exhibit 10.2 of the Company’s form 8-K (SEC file no. 000-51166) filed January 4, 2016.
10.5		Notification of Termination of Thornapple’s Backstop Agreement dated January 8, 2016, incorporated by reference to exhibit 10.4 of the Company’s form 8-K (SEC file no. 000-51166) filed January 14, 2016.
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.