ITEM 1. Business
General
Community Shores Bank Corporation (“the Company"), organized in 1998, is a Michigan corporation and a bank holding company. The Company owns all of the common stock of Community Shores Bank (the "Bank"). The Bank was organized and commenced operations in January, 1999 as a Michigan chartered bank with depository accounts insured by the FDIC to the extent permitted by law. The Bank provides a full range of commercial and consumer banking services primarily in the communities of Muskegon County and Northern Ottawa County. The Bank's services include checking and savings accounts, certificates of deposit, electronic banking services, safe deposit boxes, courier service, and loans for commercial and consumer purposes.
Community Shores Mortgage Company (the “Mortgage Company”) was incorporated on December 13, 2001. The Mortgage Company, a wholly owned subsidiary of the Bank, can originate both commercial and residential real estate loans. Most fixed rate residential real estate loans originated by the Mortgage Company are sold to a third party. Commercial and residential real estate loans that are held in the Mortgage Company’s portfolio are serviced by the Bank pursuant to a servicing agreement.
In October of 2010, the Mortgage Company created a wholly-owned subsidiary named Berryfield Development, LLC (“Berryfield”). The entity’s sole purpose is to oversee the development and sale of vacant lots that have been foreclosed on by the Mortgage Company.
On September 27, 2002, pursuant to Title I of the Gramm-Leach-Bliley Act, the Company received regulatory approval to become a financial holding company. After becoming a financial holding company the Company created Community Shores Financial Services, Inc. (“CS Financial Services”). Currently the only source of revenue that CS Financial Services receives is referral fee income from a local insurance agency, Lakeshore Employee Benefits. Lakeshore Employee Benefits offers, among other things, employer sponsored benefit plans. CS Financial Services has the opportunity to earn a referral fee for each sale of employer sponsored benefits that is transacted by Lakeshore Employee Benefits as a result of a referral made by CS Financial Services. On April 16, 2009, the Company withdrew its election to be a financial holding company. The election was acknowledged by the Federal Reserve Bank of Chicago (“FRB”). The passive income derived from CS Financial Services affiliation with Lakeshore Employee Benefits is unaffected by this change.
In December of 2004, the Company formed Community Shores Capital Trust I, a Delaware business trust (“the Trust”). The Trust is administered by a Delaware trust company, and two individual administrative trustees who are employees and officers of the Company. The Trust was established for the purpose of issuing and selling its preferred securities and common securities and used the proceeds from the sales of those securities to acquire subordinated debentures issued by the Company. A majority of the net proceeds received by the Company was used to pay down the outstanding balance on the Company’s line of credit. The remaining proceeds were used to contribute capital to the Bank as well as support the general operating expenses of the Company including the debt service on the Company’s subordinated debentures.
The Company's main office is located at 1030 W. Norton Avenue, Muskegon, Michigan, 49441 and its telephone number is (231) 780-1800.
Recent Developments
In the first quarter of 2016, the Company successfully completed a Rights Offering which commenced in the fourth quarter of 2015 and a concurrent private placement (See Note 12). On March 28, 2016, after receiving Federal Reserve Bank of Chicago (“FRB”) approval to repay the interest due on the Company’s subordinated debentures and to increase the ownership percentages of certain investors in relation to the guidelines of the FRB Change in Bank Control Act, the Company received gross proceeds of approximately $5.0 million from these two transactions. On the same date, the Company’s note payable with 1030 Norton LLC converted to 670,153 common shares, relieving the Company of any future interest payments. Two days later, on March 30, 2016, the Company repaid $722,000 of interest on its subordinated debentures and brought its obligations current. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into the Bank, enhancing its regulatory capital position.
In light of the improvements to the Company’s financial condition and the strengthened capital position of the Bank as a result of the capital raise, the FRB publicly announced the termination of its Written Agreement with the Company on March 16, 2017. The Written Agreement was included as Exhibit 10.1 to the Company’s Form 8-K filed December 21, 2010.
Going forward, the FRB has requested that the Company obtain written approval at 30 days prior to declaring or paying a dividend on any class of its stock; increasing its debt, including the issuance of trust preferred securities; or redeeming any Company stock.
Products and Services
The Bank offers a broad range of deposit services, including checking accounts, savings accounts and time deposits of various types. Transaction accounts and time certificates are tailored to the principal market area at rates competitive with those offered in the area. Electronic banking services such as ACH, online bill pay, mobile banking, including mobile capture, are offered to both personal and business customers. All qualified deposit accounts are insured by the FDIC up to the maximum amount permitted by law. The Bank solicits these accounts from individuals, businesses, schools, associations, churches, nonprofit organizations, financial institutions and government authorities. The Bank also uses alternative funding sources as needed, including advances from the Federal Home Loan Bank and obtaining deposits through an internet deposit listing service. Additionally, the Bank makes available mutual funds, annuities and brokerage services, which are not FDIC insured, through a networking arrangement with Cetera Advisor Networks LLC (Cetera).
Real Estate Loans. The Bank originates residential mortgage loans, which are generally long-term with either fixed or variable interest rates. The general operating policy, which is subject to review by management due to changing market and economic conditions and other factors, is to sell a majority of the fixed rate residential real estate loans originated. Generally loan sales are on a servicing-released basis in the secondary market, regardless of term or product. The Bank, based on its lending guidelines, may elect to underwrite and retain certain mortgages in its portfolio. The Bank also offers fixed rate home equity loans and variable rate home equity lines of credit, which are usually retained in its portfolio.
The retention of variable rate loans in the Bank's loan portfolio helps to reduce the Bank's exposure to fluctuations in interest rates. However, such loans generally pose credit risks different from the risks inherent in fixed rate loans, primarily because as interest rates rise, the underlying payments from the borrowers rise, thereby increasing the potential for default.
Personal Loans and Lines of Credit. The Bank makes personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, home improvements and personal investments. The Bank's current policy is to retain substantially all of these loans in its portfolio.
Commercial and Commercial Real Estate Loans. Commercial loans are made primarily to small and mid-sized businesses. These loans are and will be both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, purchases of equipment and machinery, financing of inventory and accounts receivable, as well as any other purposes considered appropriate. From March 2002 through December 2007, substantially all Commercial Real Estate Loan originations were executed by the Mortgage Company; however both the Bank and the Mortgage Company have a portfolio of Commercial Real Estate loans. Both entities generally look to a borrower's business operations as the principal source of repayment, but will also receive, when appropriate, liens on real estate, security interests in inventory, accounts receivable and other personal property or personal guarantees.
The Bank has established relationships with other independent financial institutions to provide other services requested by the Bank’s customers, and loan participations where the requested loan amounts exceed the Bank's policies or legal lending limits.
Competition
The Company’s primary market area is Muskegon County and Northern Ottawa County, Michigan, and may include contiguous counties as well. Northern Ottawa County primarily consists of the cities of Grand Haven, Ferrysburg, Spring Lake and the townships surrounding these areas. There are a number of banks, thrifts and credit union offices located in the Company’s market area. Most are branches of larger financial institutions with the exception of some credit unions. Competition with the Company also comes from other areas such as finance companies, insurance companies, mortgage companies, brokerage firms and other providers of financial services. Most of the Company’s competitors have been in business a number of years longer than the Company and, for the most part, have established customer bases. The Company competes with these older institutions, through its ability to provide quality customer service, along with competitive products and services.
Effect of Government Monetary Policies
The earnings of the Company are affected by domestic economic conditions and the monetary and fiscal policies of the United States government, its agencies, and the Federal Reserve Board. The Federal Reserve Board’s monetary policies have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation, maintain employment, and mitigate economic recession. The policies of the Federal Reserve Board have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.
Regulation and Supervision
Banks and bank holding companies, among other financial institutions are regulated under federal and state law. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Dodd Frank Act, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the USA PATRIOT Act, the FACT Act, the Gramm-Leach-Bliley Act, the Sarbanes Oxley Act, the Bank Secrecy Act, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. Our growth and earnings performance may be impacted by the statues administrated by, and the regulations and policies of, various governmental regulatory authorities. Those regulatory authorities include, but are not limited to, the FRB, the FDIC, the Michigan Department of Insurance and Financial Services, the Internal Revenue Service and state taxing authorities. The effect of such statutes, regulations and policies, and any changes thereto, can be significant and cannot necessarily be predicted.
As a bank holding company under the Bank Holding Company Act, the Company is required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require. The Company is also subject to examination by the Federal Reserve Board.
The Bank Holding Company Act limits the activities of bank holding companies that have not qualified as financial holding companies to banking and the management of banking organizations, and to certain non-banking activities. These non-banking activities include those activities that the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking. These non-banking activities include, among other things: operating a mortgage company, finance company, factoring company; performing certain data processing operations; providing certain investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; and providing discount securities brokerage services for customers. With the exception of the activities of the Mortgage Company and the third party arrangements with Lakeshore Employee Benefits and Cetera discussed above, neither the Company nor any of its subsidiaries engages in any of the non-banking activities listed above.
The Bank is subject to restrictions imposed by federal law and state law and regulation. Among other things, these restrictions apply to any extension of credit to the Company or its other subsidiaries, to investments in stock or other securities issued by the Company, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales of certain types of assets to, the Company or its other subsidiaries. Federal law restricts the ability of the Company or its other subsidiaries to borrow from the Bank by limiting the aggregate amount that may be borrowed and by requiring that all the loans be secured in designated amounts by specified forms of collateral. Michigan banking laws place restrictions on various aspects of banking, including branching, payment of dividends, loan interest rates and capital and surplus requirements.
With respect to the acquisition of banking organizations, the Company is generally required to obtain the prior approval of the Federal Reserve Board before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank or bank holding company, if, after the acquisition, the Company would own or control more than 5% of the voting shares of the bank or bank holding company. Acquisitions of banking organizations across state lines are subject to certain restrictions imposed by Federal and state law and regulations.
Loan Policy
The Bank makes loans primarily to individuals and businesses located within the Bank's market area. The loan policy of the Bank states that the function of the lending operation is to provide a means for the investment of funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of qualified businesses and individuals who become customers of the Bank. The board of directors of the Bank recognizes that, in the normal business of lending, some losses on loans will be inevitable. These losses will be carefully monitored and evaluated and are recognized as a normal cost of conducting business. The Bank's loan policy anticipates that priorities in extending loans will change from time to time as interest rates, market conditions and competitive factors change. The policy is designed to assist the Bank in managing the business risk involved in extending credit. It sets forth guidelines on a nondiscriminatory basis for lending in accordance with applicable laws and regulations. The policy describes criteria for evaluating a borrower's ability to support debt, including the character of the borrower, evidence of financial responsibility, knowledge of collateral type, value and loan to value ratio, terms of repayment, source of repayment, payment history, portfolio concentrations and economic conditions.
The Bank provides oversight and monitoring of lending practices and loan portfolio quality through the use of an Officers Loan Committee (the "Loan Committee"). The Loan Committee members include all commercial lenders, the Chief Lending Officer, the Credit Administrator, the President, and other designated credit personnel. The Loan Committee is presently permitted to approve requests for loans in an amount not exceeding $2,000,000. The Loan Committee may recommend that requests exceeding this amount be approved by the Executive Loan Committee which consists of certain members of senior management and at least three board members. The Executive Loan Committee has a lending authority of $2,750,000. Loan requests in excess of the Executive Loan Committee limit require the approval of the Board of Directors.
The Board of Directors has the maximum lending authority permitted by law. However, generally, the loan policy establishes an "in house" limit slightly lower than the actual legal lending limit. The Bank's “in house” limit, as of December 31, 2016, was approximately $4,000,000, subject to a higher legal lending limit of approximately $5,327,500 in specific cases with approval by two-thirds of the Bank's Board of Directors. Under Michigan banking law, these amounts would change if the Bank's capital and surplus changed.
In addition to the lending authority described above, the Bank's Board of Directors delegates significant authority to officers of the Bank. The Board believes this empowerment enables the Bank to be more responsive to its customers. The President of the Bank has been delegated individual authority to approve loans up to $1,000,000. The Chief Lending Officer and Credit Administrator have been delegated individual authority to approve loans up to $500,000. The President may, in certain situations, authorize up to $2,750,000 with the addition of the Chief Lending Officer or the Credit Administrator. Any approval granted under this authority shall be immediately reported to the Executive Loan Committee and reviewed at their next scheduled meeting Other officers have been delegated individual authority to approve loans of lesser amounts, where they deem it appropriate, without approval by the Loan Committee.
The loan policy outlines the amount of funds that may be loaned against specific types of collateral. The loan to value ratio for first mortgages on residences are expected to comply with the guidelines of secondary market investors. First mortgages held within the Bank's portfolio are expected to mirror secondary market requirements. In those instances where loan to value ratio exceeds 80%, it is intended that private mortgage insurance will be obtained to minimize the Bank's risk. For certain loans secured by real estate, an appraisal of the property offered as collateral, by a state licensed or certified independent appraiser will be required.
The loan policy also provides general guidelines as to collateral, provides for environmental policy review, contains specific limitations with respect to loans to employees, executive officers and directors, provides for problem loan identification, establishes a policy for the maintenance of a loan loss reserve, provides for loan reviews and sets forth policies for mortgage lending and other matters relating to the Bank's lending practices.
Lending Activity
Commercial Loans. The Bank's commercial lending group originates commercial loans primarily in the western Michigan Counties of Muskegon and Northern Ottawa, but may include contiguous counties as well. Commercial loans are originated by experienced lenders under the leadership of the Chief Lending Officer. Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition and commercial real estate financing, including new construction and land development.
Working capital loans that are structured as a line of credit are reviewed periodically. These loans generally are secured by assets of the borrower and have an interest rate tied to either the Bank’s internal prime rate or national prime rate. Loans for machinery and equipment purposes typically have a maturity of five to seven years and are fully amortizing. Commercial real estate loans may have an interest rate that is fixed to maturity or floats with a spread to either the Bank’s internal prime rate or the national prime rate.
The Bank evaluates many aspects of a commercial loan transaction in order to minimize credit and interest rate risk. Underwriting commercial loans requires an assessment of management, products, markets, cash flow, capital, income and collateral. The analysis includes a review of historical and projected financial results. On certain transactions, where real estate is the primary collateral, and in some cases where equipment is the primary collateral, appraisals are obtained from licensed or certified appraisers. In certain situations, for creditworthy customers, the Bank may accept title reports instead of requiring lenders' policies of title insurance.
Commercial real estate lending involves more risk than residential lending, because loan balances are greater and repayment is dependent upon the borrower's operations. The Bank attempts to minimize risk associated with these transactions by generally limiting its exposure to non-owner operated properties of well-known customers or new customers with an established history of profitability.
Single Family Residential Real Estate Loans. The Bank originates first mortgage residential real estate loans in its market area according to secondary market underwriting standards. These loans are likely to provide borrowers with a fixed or adjustable interest rate with terms up to 30 years. A majority of the single family residential real estate loans are expected to be sold on a servicing-released basis in the secondary market with all interest rate risk and credit risk passed to the purchaser. The Bank may periodically elect to underwrite certain residential real estate loans to be held in its own loan portfolio.
Consumer Loans. The Bank originates consumer loans for a variety of personal financial needs. Consumer loans are likely to include fixed home equity and equity lines of credit, new and used automobile loans, boat loans, personal unsecured lines of credit, credit cards and overdraft protection for checking account customers. Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and usually will involve greater credit risk due to the type and nature of the collateral securing the debt. Strong emphasis is placed on the amount of the down payment, credit quality, employment stability, monthly income and appropriate insurance coverage.
Consumer loans are generally repaid on a monthly basis with the source of repayment tied to the borrower's periodic income. It is recognized that consumer loan delinquency and losses are dependent on the borrower's continuing financial stability. Job loss, illness and personal bankruptcy may adversely affect repayment. In many cases, repossessed collateral (on a secured consumer loan) may not be sufficient to satisfy the outstanding loan balance. This is a common occurrence due to depreciation of the underlying collateral. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans. Consumer loans are expected to be an important component in the Bank's efforts to meet the credit needs of the communities and customers that it serves.
Loan Portfolio Quality
The Bank hires an independent accounting firm to help management monitor and validate their ongoing assessment of the credit quality of the Bank’s loan portfolio. The independent firm accomplishes this through a sampling of loans in the portfolio. The 2016 assessment included a sampling of loans from the commercial and commercial real estate portfolios. Retail loans were not reviewed in the 2016 due to the smaller overall concentration. The independent accounting firm also evaluates the loan underwriting, loan approval, loan monitoring, loan documentation, and problem loan administration practices of the Bank. For 2016, the loan review occurred in the fourth quarter.
The Bank has a comprehensive loan grading system for commercial and commercial real estate loans. Administered as part of the loan review program, all commercial and commercial real estate loans are graded on a nine grade rating system utilizing a standardized grade paradigm that analyzes several critical factors, such as cash flow, management and collateral coverage. The loans are graded at inception, renewal and at various other intervals. All commercial and commercial real estate loan relationships exceeding $500,000 are formally reviewed at least annually. Watch list credits exceeding $100,000 are formally reviewed quarterly.
Investments
Bank Holding Company Investments. The principal investments of the Company are the investments in the common stock of the Bank and the common securities of the Trust. Other funds of the Company may be invested from time to time in various debt instruments.
As a bank holding company, the Company is also permitted to make portfolio investments in equity securities and to make equity investments in subsidiaries engaged in a variety of non-banking activities. Among the permitted non-banking activities are real estate-related activities such as community development, real estate appraisals, arranging equity financing for commercial real estate, and owning and operating real estate used substantially by the Bank or acquired for its future use. The Company has no plans at this time to make directly any of these equity investments at the bank holding company level. The Company's board of directors may, however, alter the investment policy at any time without shareholder approval.
The Bank’s Investments. The Bank may invest its funds in a wide variety of debt instruments and may participate in the federal funds market with other depository institutions. Subject to certain exceptions, the Bank is prohibited from investing in equity securities. Among the equity investments permitted for the Bank under various conditions and subject in some instances to amount limitations, are shares of a subsidiary insurance agency, mortgage company (such as the Mortgage Company), real estate company, or Michigan business and industrial development company. Under another such exception, in certain circumstances and with prior notice to or approval of the FDIC, the Bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in the acquisition and development of real property for sale, or the improvement of real property by construction or rehabilitation of residential or commercial units for sale or lease. Real estate acquired by the Bank in satisfaction of or foreclosure upon loans may be held by the Bank for specified periods. The Bank is also permitted to invest in such real estate as is necessary for the convenient transaction of its business. The Bank’s board of directors may alter the Bank’s investment policy without shareholder approval at any time.
Environmental Matters
The Company does not believe that existing environmental regulations will have any material effect upon the capital expenditures, earnings and competitive position of the Company.
Employees
As of December 31, 2016, the Bank had 51 full-time and 23 part-time employees. No Bank employees are represented by collective bargaining agents.
Selected Statistical Data and Return on Equity and Assets
Selected statistical data for the Company is shown for 2016 and 2015.
Consolidated Results of Operations:
1 Includes proceeds of $4,767,405 from the issuance of 1,962,711 shares in a capital raise - see Note 12 to the Consolidated Financial statements.
2 Includes derivative recognition of ($426,667) or ($0.29) per share - see Note 11 to the Consolidated Financial Statements.
Consolidated Financial Ratios:
Net Interest Earnings
A table demonstrating the net interest earnings of the Company for 2016 and 2015 and a discussion of net interest earnings are incorporated here by reference to Management’s Discussion and Analysis at pages 14 through 22 of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
1 Includes proceeds of $4,767,405 from the issuance of 1,962,711 shares in a capital raise - see Note 12 to the Consolidated Financial statements.
2 Includes derivative recognition of ($426,667) or ($0.29) per share - see Note 11 to the Consolidated Financial Statements.
Rate Volume Analysis
Investment Portfolio
The composition of the investment portfolio is detailed in the table below.
1 Includes loans held for sale and non-accrual loans.
Investment Portfolio (continued)
The maturity schedule of the Company’s investment portfolio as well as the weighted average yield for each timeframe is included in the table below.
Yields on tax exempt obligations have not been computed on a tax equivalent basis.
The table below lists the security issuers in which the aggregate holding exceeds 10% of the Bank’s stockholders’ equity as of December 31, 2016.
Loan Portfolio
The composition of the loan portfolio for each period is detailed in the following table.
The non-accrual, past due and restructured loans as of the end of each period are reported below.
Loan Portfolio (continued)
Included below is the 2016 and 2015 interest information on impaired loans.
Below are two tables that summarize the activity in and the allocation of the Allowance for Loan Losses.
Activity in the Allowance for Loan Losses:
Loan Portfolio (continued)
Allocation of the Allowance for Loan Losses:
As of all period ends, all loans in the portfolio were domestic; there were no foreign outstandings. For further discussion of the risk elements of the portfolio and the factors considered in determining the amount of the allowance for loan losses see information in Management’s Discussion and Analysis on pages 6 through 10 of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this report.
For a table summarizing the scheduled maturities and interest rate sensitivity of the Company’s loan portfolio see the table and information in Management’s Discussion and Analysis on pages 23 through 25 of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
Deposits
The table below represents the average balance of deposits by category as well as the average rate.
Deposits in Domestic Bank Offices:
The Company had no foreign banking offices at December 31, 2016.
The table below represents the maturity distribution of time deposits of $100,000 or more at December 31, 2016.
Short-term Borrowings
On December 31, 2016 and 2015, the Company’s short-term borrowings outstanding consisted entirely of repurchase agreements. The Company utilized its line of credit with the FHLB one time during fiscal year 2016. Repurchase agreements are advances by customers that are not covered by federal deposit insurance. This obligation of the Bank is secured by bank-owned securities held by a third-party safekeeping agent.
Details of the Company’s holdings for each period are as follows:
Interest Rate Sensitivity
The interest sensitivity of the Company’s consolidated balance sheet at December 31, 2016 and discussion of interest rate sensitivity are incorporated here by reference to Management’s Discussion and Analysis at pages 23 through 25 of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
ITEM 1A.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required for smaller reporting companies.
ITEM 2.
ITEM 2. Properties
The Company’s and Bank’s main office is located at 1030 W. Norton Avenue, Roosevelt Park, Michigan, a suburb of Muskegon. The building is approximately 11,500 square feet with a three lane drive-up, including a night depository and ATM.
The Bank’s second location is at 1120 S. Beacon Boulevard, Grand Haven, Michigan. The Grand Haven branch has 4,374 square feet of office space. The facility has a three lane drive-up, including a night depository and an ATM.
The third banking location is at 180 Causeway Road in the City of North Muskegon and is slightly more than 4,000 square feet. The facility has a three lane drive-up, including a night depository and an ATM.
The Bank’s fourth banking location is at 5797 Harvey Street in Norton Shores. The two-story facility is a little less than 20,000 square feet with a three-lane drive-up, including a night depository and an ATM. Our Harvey Branch location contains more usable space than what is needed for our current banking operations. This excess space, totaling approximately 10,200 square feet, is leased to unrelated businesses.
The Company owns each of its offices.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and the Bank may be involved in various legal proceedings that are incidental to their business, such as loan workouts and foreclosures. In the opinion of management, neither the Company nor the Bank is a party to any current legal proceedings that are material to the financial condition of the Company or the Bank, either individually or in aggregate.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The required information is listed under the caption “Stock Information” on pages 84-85 of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The required information is listed under the caption “Selected Financial Information” on the inside front cover of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The required information is shown under the caption “Management’s Discussion and Analysis” beginning on page 1 of the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is presented under the captions “Consolidated Balance Sheets,” “Consolidated Statements of Income,” “Consolidated Statements of Comprehensive Income,” “Consolidated Statements of Changes in Shareholders’ Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements,” as well as the Report of Independent Registered Public Accounting Firm, BDO USA LLP, dated March 30, 2017, in the 2016 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 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. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2016.
The management of Community Shores Bank Corporation is responsible for establishing and maintaining an effective system of internal control over financial reporting. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and circumvention or overriding of controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management of Community Shores Bank Corporation assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992). Based on our assessment we believe that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered independent public accounting firm pursuant to Section 404(c) of the Sarbanes-Oxley Act.
There have been no significant changes in our internal control over financial reporting during the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Dated: March 30, 2017
/s/ Heather D. Brolick
Heather D. Brolick
President and Chief Executive Officer
/s/ Tracey A. Welsh
Tracey A. Welsh
Senior Vice President, Chief Financial Officer and Treasurer
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information presented under the captions “Election of Directors-Information about Directors, Nominees and Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement is incorporated here by reference to the Company’s Proxy Statement to be filed within 120 days of December 31, 2016.
The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee consist of Gary F. Bogner, Bruce J. Essex and Julie K. Greene. The Board of Directors has determined that it does not have a member of the Audit Committee that is qualified as an audit committee financial expert, as that term is defined in the rules of the Securities and Exchange Commission. The Board of Directors of the Company believes that the financial sophistication of the Audit Committee is sufficient to meet the needs of the Company and its shareholders.
The Company has adopted a Code of Ethics that applies to all of the directors, officers and employees, including the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Code of Ethics is filed as Exhibit 14 to this Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information presented under the caption “Executive Compensation” in the Proxy Statement is incorporated here by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information presented under the caption “Stock Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated here by reference.
Equity Plan Compensation Information
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR INDEPENDENCE
The information presented under the captions “Corporate Governance-Director Independence” and “Transactions with Related Persons” in the Proxy Statement is incorporated here by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information presented under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm-Principal Accountant Fees and Services” in the Proxy Statement is incorporated here by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements. The following financial statements and reports of independent registered public accounting firms of the Company and its subsidiaries are filed as part of this report:
Report of Independent Registered Public Accounting Firm dated March 29, 2017 - BDO USA, LLP
Consolidated Balance Sheets - December 31, 2016 and 2015
Consolidated Statements of Income - Years ended December 31, 2016 and 2015
Consolidated Statements of Comprehensive Income - Years ended December 31, 2016 and 2015
Consolidated Statements of Changes in Shareholders’ Equity - Years ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows - Years ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Not applicable
(b) Exhibits:
The Exhibit Index following the signature pager hereto is incorporated by reference under this item.
ITEM 16. FORM 10-K SUMMARY
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 30, 2017.
COMMUNITY SHORES BANK CORPORATION
/s/ Heather D. Brolick
Heather D. Brolick
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2017.
/s/ Gary F. Bogner
/s/ Bruce J. Essex
Gary F. Bogner, Chairman of the Board
Bruce J. Essex, Director
(non-officer)
/s/ Heather D. Brolick
/s/ Julie K. Greene
Heather D. Brolick, President, Chief Executive Officer and Director (principal executive officer)
Julie K. Greene, Director
/s/ Stanley L. Boelkins
/s/ Tracey A. Welsh
Stanley L. Boelkins, Director
Tracey A. Welsh, Senior Vice President, Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer)
/s/ Robert L. Chandonnet
Robert L. Chandonnet, Vice Chairman of the Board (non-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 no. 333-63769).
3.2
Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s 8-K filed July 5, 2006 (SEC file no. 000-5166).
10.1
Junior Subordinated Indenture between Community Shores Bank Corporation and Deutsche Bank Trust Company Americas, as Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.20 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.2
Amended and Restated Trust Agreement among Community Shores Bank Corporation, as Depositor, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and The Administrative Trustees Named Herein as Administrative Trustees dated as of December 17, 2004 is incorporated by reference to exhibit 10.21 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.3
Guarantee Agreement between Community Shores Bank Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.22 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.4
Placement Agreement among Community Shores Bank Corporation, Community Shores Capital Trust I and Suntrust Capital Markets, Inc. dated as of December 17, 2004 is incorporated by reference to exhibit 10.23 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.5
Summary of Director Compensation Arrangement.*
10.6
Written Agreement dated December 16, 2010, effective December 16, 2010, by and between Community Shores Bank Corporation and the Federal Reserve Bank of Chicago is incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed December 21, 2010 (SEC file no. 000-51166).
10.7
Convertible Secured Note Purchase Agreement, Note and Pledge Agreement between Community Shores Bank Corporation and 1030 Norton LLC dated March 20, 2013 is incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed March 25,2013 (SEC file no. 000-5166).
10.8
Amendment to Convertible Secured Note purchase Agreement dated March 18, 2015, incorporated by reference to exhibit 10.20 of the Company’s form 8-K (SEC file no. 000-5166) filed March 20, 2015.
10.9
Agreement between Fiserv Solutions, LLC. and Community Shores Bank dated June 11, 2015, incorporated by reference to exhibit 10.21 of the Company’s form 8-K (SEC file no. 000-51166) filed June 16, 2015.
10.10
Debt Conversion Agreement dated October 2, 2015, incorporated by reference to exhibit 10.1 of the Company’s form 8-K (SEC file no. 00-51166) filed October 2, 2015.
10.11
Director Share Purchase and Rights Offering Backstop Agreement dated October 2, 2015, incorporated by reference to exhibit 10.3 of the Company’s form 8-K (SEC file no. 000-51166) filed October 2, 2015.
10.12
Shareholder Share Purchase and Rights Offering Backstop Agreement dated October 2, 2015, incorporated by reference to exhibit 10.4 of the Company’s form 8-K (SEC file no. 000-51166) filed October 2, 2015.
10.13
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.
10.14
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.
10.15
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.
2016 Annual Report to Shareholders of the Company. Except for the portions of the 2016 Annual Report that are expressly incorporated by reference in this Annual Report on Form 10-K, the 2016 Annual Report of the Company shall not be deemed filed as a part of this Annual Report on Form 10-K.
Code of Ethics
Subsidiaries of the registrant.
23.1
Consent of BDO USA, LLP.
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 Certification of the Chief Executive Officer.
32.2
Section 1350 Certification of the Chief Financial Officer.