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EX-31 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORPexh_311.htm
EX-31 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORPexh_312.htm
EX-32 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORPexh_321.htm
EX-32 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORPexh_322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

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.
Yes [X] 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 [  ] 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 [  ] No [X]

At May 12, 2011, 1,468,800 shares of common stock were outstanding.
 
 
 

 
Community Shores Bank Corporation Index
 

 

 
 

 
PART I – FINANCIAL INFORMATION

FINANCIAL STATEMENTS (UNAUDITED)

COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
ASSETS
           
Cash and due from financial institutions
  $ 2,266,480     $ 2,074,301  
Interest-bearing deposits in other financial institutions
    28,193,508       21,565,572  
Total cash and cash equivalents
    30,459,988       23,639,873  
Securities available for sale (at fair value)
    35,583,067       36,503,903  
Loans held for sale
    3,012,189       1,263,263  
Loans
    162,117,482       165,243,881  
Less: Allowance for loan losses
    5,255,868       4,791,907  
Net loans
    156,861,614       160,451,974  
Federal Home Loan Bank stock
    479,800       479,800  
Premises and equipment, net
    10,740,220       10,874,176  
Accrued interest receivable
    708,703       781,334  
Foreclosed assets
    3,872,996       3,382,594  
Other assets
    677,399       568,580  
Total assets
  $ 242,395,976     $ 237,945,497  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Non-interest-bearing
  $ 42,093,347     $ 33,326,683  
Interest-bearing
    181,341,093       185,936,494  
Total deposits
    223,434,440       219,263,177  
Federal funds purchased and repurchase agreements
    8,407,631       7,460,795  
Federal Home Loan Bank advances
    0       0  
Notes payable
    5,000,000       5,000,000  
Accrued expenses and other liabilities
    912,151       875,738  
Total liabilities
    242,254,222       237,099,710  
Shareholders’ equity
               
Preferred Stock, no par value: 1,000,000 shares
               
authorized and none issued
    0       0  
Common Stock, no par value: 9,000,000 shares authorized;
               
1,468,800 issued and outstanding
    13,296,691       13,296,691  
Retained deficit
    (13,351,241 )     (12,617,022 )
Accumulated other comprehensive income
    196,304       166,118  
Total shareholders’ equity
    141,754       845,787  
Total liabilities and shareholders’ equity
  $ 242,395,976     $ 237,945,497  
                 
 
See accompanying notes to consolidated financial statements.
 
- 1 -

 
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
March 31, 2011
   
March 31, 2010
 
Interest and dividend income
           
Loans, including fees
  $ 2,565,081     $ 2,805,607  
Securities
    214,163       211,435  
Federal funds sold, FHLB dividends and other income
    17,445       7,459  
Total interest income
    2,796,689       3,024,501  
Interest expense
               
Deposits
    811,595       1,107,977  
Repurchase agreements, federal funds purchased, and other debt
    11,502       20,571  
Federal Home Loan Bank advances and notes payable
    102,890       184,532  
Total interest expense
    925,987       1,313,080  
                 
Net Interest Income
    1,870,702       1,711,421  
Provision for loan losses
    704,505       529,081  
                 
Net Interest Income After Provision for Loan Losses
    1,166,197       1,182,340  
Non-interest income
               
Service charges on deposit accounts
    176,813       174,533  
Gain on sale of loans
    157,560       45,906  
Gain on sale of securities
    0       79,814  
Loss on sale of foreclosed assets
    (799 )     (8,689 )
Other
    185,936       193,271  
Total non-interest income
    519,510       484,835  
                 
Non-interest expense
               
Salaries and employee benefits
    1,025,340       1,032,156  
Occupancy
    181,361       165,616  
Furniture and equipment
    132,486       159,128  
Advertising
    9,345       18,165  
Data processing
    132,406       122,779  
Professional services
    94,838       124,650  
Foreclosed asset impairment
    167,866       24,655  
Other
    676,284       460,431  
Total non-interest expense
    2,419,926       2,107,580  
                 
Loss Before Federal Income Taxes
    (734,219 )     (440,405 )
Federal income tax expense (benefit)
    0       0  
Net Loss
  $ (734,219 )   $ (440,405 )
                 
Comprehensive Loss
  $ (704,033 )   $ (430,812 )
                 
Weighted average shares outstanding
    1,468,800       1,468,800  
Diluted average shares outstanding
    1,468,800       1,468,800  
Basic loss per share
  $ (0.50 )   $ (0.30 )
Diluted loss per share
  $ (0.50 )   $ (0.30 )
 
See accompanying notes to consolidated financial statements.
 
- 2 -

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
                     
Accumulated
       
                     
Other
   
Total
 
         
Common
   
Retained
   
Comprehensive
   
Shareholders’
 
   
Shares
   
Stock
   
Deficit
   
Income
   
Equity
 
                               
Balance at January 1, 2010
    1,468,800     $ 13,296,691     $ (3,734,295 )   $ 177,595     $ 9,739,991  
                                         
Comprehensive loss:
                                       
Net loss
                    (440,405 )             (440,405 )
Unrealized gain on securities
                                       
available for sale
                            9,593       9,593  
Total comprehensive loss
                                    (430,812 )
                                         
Balance at March 31, 2010
    1,468,800     $ 13,296,691     $ (4,174,700 )   $ 187,188     $ 9,309,179  
                                         
                                         
Balance at January 1, 2011
    1,468,800     $ 13,296,691     $ (12,617,022 )   $ 166,118     $ 845,787  
                                         
Comprehensive loss:
                                       
Net loss
                    (734,219 )             (734,219 )
Unrealized gain on securities
                                       
available for sale
                            30,186       30,186  
Total comprehensive loss
                                    (704,033 )
                                         
Balance at March 31, 2011
    1,468,800     $ 13,296,691     $ (13,351,241 )   $ 196,304     $ 875,973  

See accompanying notes to consolidated financial statements.

 
- 3 -

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
 
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
March 31, 2011
   
March 31, 2010
 
Cash flows from operating activities
           
Net loss
  $ (734,219 )   $ (440,405 )
Adjustments to reconcile net loss to net cash
               
from operating activities:
               
Provision for loan losses
    704,505       529,081  
Depreciation and amortization
    133,711       161,505  
Net amortization of securities
    63,444       36,330  
Net realized gain on sale of securities
    0       (79,814 )
Net realized gain on sale of loans
    (157,560 )     (45,906 )
Net realized loss on sale of foreclosed assets
    799       8,689  
Foreclosed asset impairment
    167,866       24,655  
Originations of loans for sale
    (7,327,907 )     (2,776,126 )
Proceeds from loan sales
    5,736,541       3,281,621  
Net change in:
               
Accrued interest receivable and other assets
    (36,188 )     115,664  
Accrued interest payable and other liabilities
    36,413       46,370  
Net cash from (used in) operating activities
    (1,412,595 )     861,664  
Cash flows from investing activities
               
Activity in available for sale securities:
               
Sales
    0       3,751,027  
Maturities, prepayments and calls
    3,920,664       3,469,445  
Purchases
    (3,033,086 )     (9,654,156 )
Loan originations and payments, net
    2,219,028       1,172,721  
Additions to premises and equipment, net
    245       (84,396 )
Proceeds from the sale of foreclosed assets
    7,760       53,104  
Net cash from (used in) investing activities
    3,114,611       (1,292,255 )
Cash flows from financing activities
               
Net change in deposits
    4,171,263       21,936,871  
Net change in federal funds purchased and
               
repurchase agreements
    946,836       1,873,248  
Repayment of FHLB advance
    0       (1,500,000 )
Net cash from (used in) financing activities
    5,118,099       22,310,119  
Net change in cash and cash equivalents
    6,820,115       21,879,528  
Beginning cash and cash equivalents
    23,639,873       2,824,088  
Ending cash and cash equivalents
  $ 30,459,988     $ 24,703,616  
Supplemental cash flow information:
               
Cash paid during the period for interest
  $ 444,124     $ 1,298,830  
Transfers from loans to foreclosed assets
    687,717       544,364  
Transfers from securities held to maturity to available for sale
    0       5,839,614  
Foreclosed asset sales financed by the Company
    20,890       71,019  
 
See accompanying notes to consolidated financial statements.
 
- 4 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
BASIS OF PRESENTATION AND RECENT DEVELOPMENTS:

The unaudited, consolidated financial statements as of and for the three months ended March 31, 2011 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, 2011 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, 2010. Some items in the prior year financial statements may be reclassified to conform to the current presentation.

In July 2010, the FASB issued an Accounting Standards Update, “Receivables: Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of this update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. An entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The update makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables and the aging of past due financing receivables at the end of the reporting period by class of financing receivables. For public entities, the disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010 and have been added to Note 3. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The effect of adopting this new guidance is disclosure-related only and had no impact on the Company’s results of operations.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”, an amendment to the topic “Receivables”.  Given the recent economic downturn, the volume of debt restructured (modified) by creditors has increased. This ASU is expected to give additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  This ASU is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
 
 
- 5 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued):

Since 2008, the Company has experienced consolidated losses stemming from deterioration in credit quality and real estate values requiring the need for large loan loss provisions and impairments of foreclosed real estate. As a result primarily of the sustained losses, the Bank’s capital ratios declined. The Bank was deemed under capitalized at December 31, 2010 according to regulatory capital standards, with a total risk based capital ratio of 7.06%. The Bank’s first quarter loss reduced the total risk based capital ratio to 6.84% at March 31, 2011.

As a result of deteriorating asset quality, poor earnings and falling capital ratios, the Bank endured additional regulatory scrutiny and entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the State of Michigan’s Office of Financial and Insurance Regulation (“OFIR”), its primary regulators, on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The
Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR. Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet this requirement within the required 90-day period and remains out of compliance with the Consent Order as of March 31, 2011.
 
The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has limited resources with which to support the capital needs of the Bank. The Company’s main liquidity resource is its cash account balance of approximately $132,000.
 
 
- 6 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued):

On January 3, 2011, the Company was not able to repay its $5 million term loan when it came due. The Company does not have the resources to pay the outstanding principal and does not expect to have it in the near future. The Company did not make the last three contractual quarterly interest payments. The total interest due to Fifth Third at year-end 2010 was $153,410. The Company continues to accrue interest on the term loan and at March 31, 2011, the total interest due Fifth Third was $228,487. Since the Company presently does not have sufficient funds to pay off the term loan’s principal and accrued interest, Fifth Third has a right to foreclose on the Bank’s stock which collateralizes the term loan.

The Company’s net losses, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Consent Order, and the provisions of the Written Agreement creates an uncertainty about the Company’s ability to
continue as a going concern. As a result of such uncertainty, our auditors added an explanatory paragraph to their opinion on the Company’s December 31, 2010 consolidated financial statements expressing substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

2.
SECURITIES AVAILABLE FOR SALE:

The following tables represent the securities held in the Company’s portfolio at March 31, 2011 and at December 31, 2010:
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
                         
US Treasury
  $ 4,034,734     $ 5,727     $ (930 )   $ 4,039,531  
US Government and federal agency
    13,668,240       174,396       (15,523 )     13,827,113  
Municipals
    3,177,917       68,004       (1,726 )     3,244,195  
Mortgage-backed and collateralized
                               
mortgage obligations– residential
    14,288,643       223,199       (39,614 )     14,472,228  
    $ 35,169,534     $ 471,326     $ (57,793 )   $ 35,583,067  


         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
                         
US Treasury
  $ 1,004,240     $ 6,854     $ 0     $ 1,011,094  
US Government and federal agency
    16,696,952       222,261       (10,497 )     16,908,716  
Municipals
    3,179,898       62,864       (4,468 )     3,238,294  
Mortgage-backed and collateralized
                         
mortgage obligations– residential
    15,239,466       236,840       (130,507 )     15,345,799  
    $ 36,120,556     $ 528,819     $ (145,472 )   $ 36,503,903  
 
 
- 7 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.
SECURITIES AVAILABLE FOR SALE (Continued):

The amortized cost and fair value of the securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment fees.  Below is the schedule of contractual maturities for securities held at March 31, 2011:

       
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Due in one year or less
  $ 2,412,416     $ 2,425,631  
Due from one to five years
    16,712,784       16,890,802  
Due from five to ten years
    1,755,691       1,794,406  
Due in more than ten years
    0       0  
Mortgage-backed and collateralized
               
mortgage obligations – residential
    14,288,643       14,472,228  
    $ 35,169,534     $ 35,583,067  

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, 2011 and December 31, 2010:

   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
March 31, 2011
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
US Treasuries
  $ 3,030,391     $ (930 )   $ 0     $ 0     $ 3,030,391     $ (930 )
US Government and federal agency
    3,984,477       (15,523 )     0       0       3,984,477       (15,523 )
Municipals
    352,985       (1,726 )     0       0       352,985       (1,726 )
Mortgage-backed and
                                               
collateralized mortgage
                                               
obligations - residential
    8,044,852       (39,614 )     0       0       8,044,852       (39,614 )
    $ 15,412,705     $ (57,793 )   $ 0     $ 0     $ 15,412,705     $ (57,793 )
                                                 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
December 31, 2010
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
US Government and federal agency
  $ 2,489,266     $ (10,497 )   $ 0     $ 0     $ 2,489,266     $ (10,497 )
Municipals
    350,532       (4,468 )     0       0       350,532       (4,468 )
Mortgage-backed and
                                               
collateralized mortgage
                                               
obligations - residential
    7,887,368       (130,507 )     0       0       7,887,368       (130,507 )
    $ 10,727,166     $ (145,472 )   $ 0     $ 0     $ 10,727,166     $ (145,472 )

 
Periodically the Company will implement a strategy to realize market value gains within its securities portfolio to supplement earnings and capital. In 2011’s first quarter, the Company had no security sales. In the first quarter of 2010 the Company sold securities and realized a net gain of $79,814. Proceeds from the sales were $3,751,027. There were no gross losses realized on the sale.
 
 
- 8 -

 
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. The investment securities portfolio is evaluated for OTTI following guidance issued by FASB.
 
In determining OTTI under the FASB model, 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 entity 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, 2011, twenty-five debt securities had unrealized losses with aggregate depreciation of 0.37% from the Company’s amortized cost basis, all of which had been in a continuous loss for less than twelve months. Most of the securities are issued by government or government sponsored agencies and to a lesser extent municipal securities.

Mortgage-backed and Collateralized Mortgage Obligation Securities

At March 31, 2011, 100% of the mortgage-backed and collateralized mortgage obligation securities 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. The unrealized loss associated with these securities was 0.49% at March 31, 2011. Because the decline in fair value is attributable to changes in interest rates and illiquidity, 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, 2011.
 
 
- 9 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.
LOANS

Outstanding loan balances by portfolio segment and class were as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Commercial
  $ 58,547,470     $ 58,416,643  
Commercial Real Estate:
               
General
    56,603,106       58,996,411  
Construction
    9,359,374       8,782,762  
Consumer:
               
Lines of credit
    15,587,977       15,954,866  
Other
    2,818,811       3,087,409  
Credit card
    510,220       520,095  
Residential
    18,726,265       19,534,704  
      162,153,223       165,292,890  
Less:  Allowance for loan losses
    (5,255,868 )     (4,791,907 )
Net deferred loan fees
    (35,741 )     (49,009 )
Loans, net
  $ 156,861,614     $ 160,451,974  

Loans held for sale totaled $3,012,189 at March 31, 2011 and $1,263,263 at December 31, 2010.
 
 
- 10 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The following is a summary of activity in the allowance for loan losses account for the three month periods ended March 31, 2011 and 2010:

   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
Allowance for loan losses:
           
Beginning balance
  $ 4,791,907     $ 3,782,132  
Charge-offs
    (283,397 )     (1,014,632 )
Recoveries
    42,853       20,985  
Provision for loan losses
    704,505       529,081  
Ending balance
  $ 5,255,868     $ 3,317,566  

The following table presents the activity in the allowance for loan losses for the first quarter of 2011 by portfolio segment and the recorded investment in loans by portfolio segment based on impairment method at March 31, 2011 and December 31, 2010:

March 31, 2011
 
Commercial
   
Commercial
Real Estate
   
Consumer
   
Residential
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,218,865     $ 2,896,176     $ 546,603     $ 130,263     $ 4,791,907  
      Charge-offs
    (134,701 )     (88,238 )     (60,458 )     0       (283,397 )
      Recoveries
    27,648       3,498       11,707       0       42,853  
      Provision for loan losses
    49,094       393,603       133,464       128,344       704,505  
    Ending balance
  $ 1,160,906     $ 3,205,039     $ 631,316     $ 258,607     $ 5,255,868  
                                         
    Ending allowance balance attributable to loans:
                                       
      Individually evaluated for impairment
  $ 139,094     $ 2,176,621     $ 177,287     $ 143,186     $ 2,636,188  
      Collectively evaluated for impairment
    1,021,812       1,028,418       454,029       115,421       2,619,680  
            Total ending allowance balance
  $ 1,160,906     $ 3,205,039     $ 631,316     $ 258,607     $ 5,255,868  
                                         
Loans:
                                       
      Individually evaluated for impairment
  $ 4,712,309     $ 8,861,899     $ 337,975     $ 883,555     $ 14,795,738  
      Collectively evaluated for impairment
    54,044,661       57,415,496       18,629,486       17,892,830       147,982,473  
            Total ending loans balance
  $ 58,756,970     $ 66,277,395     $ 18,967,461     $ 18,776,385     $ 162,778,211  
 
 
 
- 11 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

December 31, 2010
 
Commercial
   
Commercial
Real Estate
   
Consumer
   
Residential
   
Total
 
Allowance for loan losses:
                             
Ending allowance balance attributable to loans:
                             
Individually evaluated for impairment
  $ 195,684     $ 1,789,936     $ 85,233     $ 49,145     $ 2,119,998  
Collectively evaluated for impairment
    1,023,181       1,106,240       461,370       81,118       2,671,909  
Total ending allowance balance
  $ 1,218,865     $ 2,896,176     $ 546,603     $ 130,263     $ 4,791,907  
                                         
Loans:
                                       
Individually evaluated for impairment
  $ 4,276,850     $ 8,405,141     $ 307,307     $ 1,339,741     $ 14,329,039  
Collectively evaluated for impairment
    54,326,131       59,724,688       19,096,341       18,508,671       151,655,831  
Total ending loans balance
  $ 58,602,981     $ 68,129,829     $ 19,403,648     $ 19,848,412     $ 165,984,870  
 
 
- 12 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents loans individually evaluated for impairment by class of loans at March 31, 2011 and December 31, 2010:

         
Unpaid
         
Average
   
Interest
   
Interest Income
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
   
Cash Basis
 
March 31, 2011
 
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Recognized
 
With no related allowance recorded:
                                   
Commercial
  $ 4,196,360     $ 4,194,212     $ 0     $ 3,955,325     $ 21,231     $ 20,373  
Commercial Real Estate:
                                               
General
    1,897,094       1,897,272       0       2,099,458       1,858       1,748  
Construction
    458,001       458,001       0       482,221       0       0  
Consumer:
                                               
Lines of credit
    80,506       80,506       0       82,200       298       0  
Other
    18,900       18,900       0       18,900       0       0  
Residential
    193,851       194,367       0       348,433       1,895       1,895  
Subtotal
  $ 6,844,712     $ 6,843,258     $ 0     $ 6,986,537     $ 25,282     $ 24,016  
                                                 
With an allowance recorded:
                                               
Commercial
  $ 515,949     $ 513,733     $ 139,094     $ 595,863     $ 7,164     $ 6,854  
Commercial Real Estate:
                                               
General
    4,320,184       4,305,083       964,492       3,722,050       38,128       27,697  
Construction
    2,186,620       2,186,620       1,212,129       2,160,400       0       0  
Consumer:
                                               
Lines of credit
    188,005       187,643       133,623       203,284       1,086       1,060  
Other
    45,648       45,524       38,748       46,081       367       367  
Credit card
    4,916       4,916       4,916       3,630       0       0  
Residential
    689,704       700,076       143,186       550,782       1,037       1,037  
Subtotal
  $ 7,951,026     $ 7,943,595     $ 2,636,188     $ 7,282,090     $ 47,782     $ 37,015  
Total
  $ 14,795,738     $ 14,786,853     $ 2,636,188     $ 14,268,627     $ 73,064     $ 61,031  
 
 
- 13 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

         
Unpaid
       
   
Recorded
   
Principal
   
Related
 
December 31, 2010
 
Investment
   
Balance
   
Allowance
 
With no related allowance recorded:
                 
Commercial
  $ 3,692,148     $ 3,689,868     $ 0  
Commercial Real Estate:
                       
General
    2,684,164       2,681,391       0  
Construction
    664,866       664,866       0  
Consumer:
                       
Lines of credit
    108,274       108,274       0  
Other
    18,900       18,900       0  
Residential
    848,983       849,457       0  
Subtotal
  $ 8,017,335     $ 8,012,756     $ 0  
                         
With an allowance recorded:
                       
Commercial
  $ 584,702     $ 582,331     $ 195,684  
Commercial Real Estate:
                       
General
    3,088,254       3,078,481       575,175  
Construction
    1,967,857       1,967,857       1,214,761  
Consumer:
                       
Lines of credit
    131,515       131,149       42,799  
Other
    45,829       45,696       39,645  
Credit card
    2,789       2,789       2,789  
Residential
    490,758       490,385       49,145  
Subtotal
  $ 6,311,704     $ 6,298,688     $ 2,119,998  
Total
  $ 14,329,039     $ 14,311,444     $ 2,119,998  
 
Non-performing loans and impaired loans are defined differently.  Some loans may be included in both categories, whereas other loans may only be included in one category.  Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
 
 
- 14 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans at March 31, 2011 and December 31, 2010:

   
March 31, 2011
   
December 31, 2010
 
         
Recorded
         
Recorded
 
         
Investment >
         
Investment >
 
         
90 Days and
         
90 Days and
 
   
Non Accrual
   
Accruing
   
Non Accrual
   
Accruing
 
Commercial
  $ 1,708,032     $ 0     $ 1,316,168     $ 0  
Commercial Real Estate:
                               
General
    2,755,448       0       3,143,819       0  
Construction
    2,644,621       0       2,632,723       0  
Consumer:
                               
Lines of credit
    213,453       0       214,489       0  
Other
    437       0       0       1,776  
Credit card
    0       0       0       0  
Residential
    614,461       0       748,166       0  
Total
  $ 7,936,452     $ 0     $ 8,055,365     $ 1,776  
 
 
- 15 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

The following table presents the aging of the recorded investment in past due loans by class of loans at March 31, 2011 and December 31, 2010:

               
Greater Than 90
                   
   
30-59 Days Past
   
60-89 Days Past
   
Days and Non
               
Total Recorded
 
March 31, 2011
 
Due
   
Due
   
Accrual
   
Total Past Due
   
Current
   
Investment
 
Commercial
  $ 297,113     $ 121,284     $ 1,708,032     $ 2,126,429     $ 56,630,541     $ 58,756,970  
Commercial Real Estate:
                                               
General
    661,882       326,585       2,755,448       3,743,915       53,149,339       56,893,254  
Construction
    0       0       2,644,621       2,644,621       6,739,520       9,384,141  
Consumer:
                                               
Lines of credit
    21,831       0       213,453       235,284       15,428,074       15,663,358  
Other
    893       0       437       1,330       2,792,553       2,793,883  
Credit card
    0       1,630       0       1,630       508,590       510,220  
Residential
    451,729       0       614,461       1,066,190       17,710,195       18,776,385  
Total
  $ 1,433,448     $ 449,499     $ 7,936,452     $ 9,819,399     $ 152,958,812     $ 162,778,211  
                                                 
                                                 
                   
Greater Than 90
                         
   
30-59 Days Past
   
60-89 Days Past
   
Days and Non
                   
Total Recorded
 
December 31, 2010
 
Due
   
Due
   
Accrual
   
Total Past Due
   
Current
   
Investment
 
Commercial
  $ 627,034     $ 0     $ 1,316,168     $ 1,943,202     $ 56,659,779     $ 58,602,981  
Commercial Real Estate:
                                               
General
    157,637       217,803       3,143,819       3,519,259       55,802,388       59,321,647  
Construction
    0       0       2,632,723       2,632,723       6,175,459       8,808,182  
Consumer:
                                               
Lines of credit
    79,191       35,460       214,489       329,140       15,619,003       15,948,143  
Other
    12,054       0       1,776       13,830       2,921,580       2,935,410  
Credit card
    0       0       0       0       520,095       520,095  
Residential
    94,404       0       748,166       842,570       19,005,842       19,848,412  
Total
  $ 970,320     $ 253,263     $ 8,057,141     $ 9,280,724     $ 156,704,146     $ 165,984,870  
 
 
- 16 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

Troubled Debt Restructurings:

The Company has allocated $1,953,316 of specific reserves on $7,910,305 of  loans to customers whose terms have been modified in troubled debt restructurings as of March 31, 2011 and $447,947 on $5,370,581 as of December 31, 2010. The Company has also committed $1,136,781 to two customers whose loans are classified as a troubled debt restructuring as of March 31, 2011. As of December 31, 2010, there was $1,146,342 committed to those customers. These customers are paying as agreed on those loans.

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. Once a loan becomes a 5W or higher the loan grade will be reanalyzed once a quarter to assess the borrowers compliance with Bank’s documented action plan. In addition to these methods for assigning loan grades, changes may occur through the external loan review or regulatory exam process. The loan grades are as follows:

1.  
Exceptional. Loans with an exceptional credit rating.
2.  
Quality. Loans with excellent sources of repayment that conform, in all respects, to Bank policy and regulatory requirements. These are loans for which little repayment risk has been identified
3.  
Above Average. Loans with above average sources of repayment and minimal identified credit or collateral exceptions and minimal repayment risk.
4.  
Average. Loans with average sources of repayment that materially conform to Bank policy and regulatory requirements. Repayment risk is considered average.
5.  
Acceptable. Loans with acceptable sources of repayment and risk.
5W.  
Watch. 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.
 
 
- 17 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4. 
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by 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,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
1   $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
2     582,361       583,364       0       0       0       0  
3     1,714,115       1,722,896       3,398,840       3,443,220       30,289       30,927  
4     20,363,874       21,109,601       17,297,781       17,362,231       3,110,369       2,727,615  
5     23,033,370       19,659,157       21,158,122       24,656,543       3,558,961       1,702,025  
5W     1,003,591       1,687,613       5,025,745       4,399,618       0       1,484,710  
6     6,679,840       9,349,408       5,423,268       4,777,202       0       190,333  
7     3,923,874       3,292,002       2,930,112       2,328,376       39,901       39,849  
8     1,455,945       1,198,940       1,659,386       2,354,457       2,644,621       2,632,723  
Total
  $ 58,756,970     $ 58,602,981     $ 56,893,254     $ 59,321,647     $ 9,384,141     $ 8,808,182  

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 on page 16 of this document, and by payment activity.  The following tables present the recorded investment in residential and consumer loans based on payment activity as of March 31, 2011 and December 31, 2010:
 
   
Residential
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Performing
  $ 17,892,830     $ 18,508,671  
Impaired
    883,555       1,339,741  
Total
  $ 18,776,385     $ 19,848,412  

 
   
Consumer – Lines of credit
   
Consumer – Other
   
Consumer – Credit card
 
   
March 31,
   
December 31,
   
March 31,
   
December 31,
   
March 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
Performing
  $ 15,394,847     $ 15,708,354     $ 2,729,335     $ 2,870,681     $ 505,304     $ 517,306  
Impaired
    268,511       239,789       64,548       64,729       4,916       2,789  
Total
  $ 15,663,358     $ 15,948,143     $ 2,793,883     $ 2,935,410     $ 510,220     $ 520,095  
 
 
- 18 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5.
FORECLOSED ASSETS
 
Foreclosed asset activity:

   
March 31,
   
March 31,
 
   
2011
   
2010
 
Beginning of year
  $ 3,382,594     $ 6,440,916  
Additions
    687,717       544,364  
Proceeds from sales
    (28,650 )     (124,123 )
Losses from sales
    (799 )     (8,689 )
Direct write-downs
    (167,866 )     (24,655 )
End of period
  $ 3,872,996     $ 6,827,813  
 
               
Expenses related to foreclosed assets include:
               
Operating expenses, net of rental income
  $ 50,041     $ 17,769  

6. 
PREMISES AND EQUIPMENT

Period end premises and equipment were as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Land & land improvements
  $ 5,447,328     $ 5,447,328  
Buildings & building improvements
    6,132,163       6,132,163  
Furniture, fixtures and equipment
    3,652,390       3,652,390  
Construction in process
    17,618       17,618  
      15,249,499       15,249,499  
Less:  accumulated depreciation
    4,509,279       4,375,323  
    $ 10,740,220     $ 10,874,176  

7.
DEPOSITS

The components of the outstanding deposit balances at March 31, 2011 and December 31, 2010 were as follows:
 
   
March 31,
   
December 31,
 
   
2011
   
2010
 
Non-interest-bearing DDA
  $ 42,093,347     $ 33,326,683  
Interest-bearing DDA
    22,805,784       23,944,608  
Money market
    19,494,064       18,493,059  
Savings
    9,926,111       7,388,395  
Time, under $100,000
    77,403,173       78,893,224  
Time, over $100,000
    51,711,961       57,217,208  
Total Deposits
  $ 223,434,440     $ 219,263,177  
 
 
- 19 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.
DEPOSITS (Continued):

Brokered deposits totaled $33,854,000 at March 31, 2011 and $37,307,000 at December 31, 2010. Since the Bank was not categorized as “well capitalized” at March 31, 2011 and is under a Consent Order, a regulatory waiver is required to accept, renew or rollover brokered deposits. The Bank has not issued brokered deposits since January of 2010. At March 31, 2011, maturities of brokered deposits were as follows:

Due in 3 months or less
$7,884,000
Due in 3-12 months
$22,508,000
Due in one or more years
$3,462,000

8.
SHORT-TERM BORROWINGS

The Company’s short-term borrowings typically consist of repurchase agreements and borrowings from the FRB Discount Window. There were no borrowings from the FRB Discount Window since January 2010. The March 31, 2011 and December 31, 2010 information was as follows:

   
Repurchase
   
Discount
 
   
Agreements
   
Window
 
             
Outstanding at March 31, 2011
  $ 8,407,631     $ 0  
Average interest rate at period end
    0.75 %     0.00  
Average balance during period
    7,033,456       0  
Average interest rate during period
    0.65 %     0.00  
Maximum month end balance during period
    8,407,631       0  
                 
Outstanding at December 31, 2010
  $ 7,460,795     $ 0  
Average interest rate at year-end
    0.72 %     0.00  
Average balance during year
    8,598,005       315,425  
Average interest rate during year
    0.86 %     0.50  
Maximum month end balance during year
    10,132,049       0  
 
9.
FEDERAL HOME LOAN BANK BORROWINGS:

The Bank is a member of the Federal Home Loan Bank of Indianapolis.  Based on its current Federal Home Loan Bank Stock holdings and collateral, the Bank has the capacity to borrow $8,940,213 through the use of its $5 million line of credit or a standard advance. Each borrowing requires a direct pledge of securities and or loans. At March 31, 2011, the Bank had securities with a market value of $10,150,076 pledged to the Federal Home Loan Bank for future borrowings. At March 31, 2011 and December 31, 2010 there was no balance outstanding on the line of credit nor were there any outstanding advances.
 
 
- 20 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
10.
SUBORDINATED DEBENTURES

The Trust, a business trust formed by the Company, sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase an equivalent amount of subordinated debentures from the Company. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and was 2.36% at March 31, 2011 and 2.35% at December 31, 2010. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par on any interest payment date and are, in effect, guaranteed by the Company. Interest on the subordinated debentures are payable quarterly on March 30th, June 30th, September 30th and December 30th. The Company is not considered the primary beneficiary of the Trust (variable interest entity), therefore the Trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability, and the interest expense is recorded on the Company’s consolidated statement of income.

The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued, give the Company the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing.  The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities. In May 2010, the Company exercised its option to defer regularly scheduled quarterly interest payments beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010. The Company’s deferral of interest does not constitute an event of default.

During the deferral period, interest will continue to accrue on the subordinated debentures.  Also, the deferred interest will accrue interest.  At the expiration of the deferral period, all accrued and unpaid interest will be due and payable and a corresponding amount of distributions will be payable on the trust preferred securities.

The indenture under which the subordinated debentures were issued prohibits certain actions by the Company during the deferral period.  Among other things, and subject to certain exceptions, during the deferral period, the Company is prohibited from declaring or paying any dividends or distributions on, or redeeming, purchasing, acquiring or making any liquidation payment with respect to, any shares of its capital stock.  Although the Company has not determined the duration of the deferral period, as of December 16, 2010, under the FRB Written Agreement, the Company is prohibited from making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval. At March 31, 2011, the accrued interest payable on the subordinated debentures was $114,765.

11.
NOTES PAYABLE

On January 3, 2011, the Company’s $5,000,000 term loan with Fifth Third Bank (“Fifth Third”) matured. The loan is in default, and the Company does not have the resources to pay the outstanding principal and accrued interest and does not expect to have it in the near future. Under the terms of the note, Fifth Third has the right to foreclose on the Bank’s stock which collateralizes the loan. The Company continues to accrue interest at the rate of the term loan at maturity which was 6.00%, 275 basis points above Fifth Third’s prime rate. On March 31, 2011, there was $228,000 of unpaid interest compared to $155,000 at December 31, 2010.
 
 
- 21 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
12.
COMMITMENTS AND OFF-BALANCE SHEET RISK

Some financial instruments are used to meet financing needs and to reduce exposure to interest rate changes.  These financial instruments include commitments to extend credit and standby letters of credit.  These involve, to varying degrees, credit and interest-rate risk in excess of the amount reported in the financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates.  Standby letters of credit are conditional commitments to guarantee a customer’s performance to another party.  Exposure to credit loss, if the customer does not perform, is represented by the contractual amount for commitments to extend credit and standby letters of credit.  Collateral or other security is normally obtained for these financial instruments prior to their use and many of the commitments are expected to expire without being used.

A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk as of March 31, 2011 and December 31, 2010 follows:

   
March 31, 2011
   
December 31, 2010
 
             
 Unused lines of credit and letters of credit
  $ 28,040,262     $ 26,119,226  
 Commitments to make loans
    100,440       95,470  

Commitments to make loans generally terminate one year or less from the date of commitment and may require a fee.  Since many of the above commitments on lines of credit and letters of credits expire without being used, the above amounts related to those categories do not necessarily represent future cash disbursements.

13. 
FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. 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.

 
- 22 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
13.
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 rights: The fair value of SBA servicing rights is obtained from a third party using assumptions provided by the Company. The individual servicing rights are valued individually taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. Their 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 fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals, broker market opinions or internal evaluations. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Foreclosed Assets:  Nonrecurring adjustments to certain 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, broker market opinions or internal evaluations. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Adjustments of the carrying amount utilizing this process result in a Level 3 classification.
 
 
- 23 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
13.
FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a recurring basis are summarized below for the periods ended March 31, 2011 and December 31, 2010:

         
Fair Value Measurements Using
 
         
Quoted Prices
   
Significant
       
         
in Active
   
Other
   
Significant
 
         
Markets for
   
Observable
   
Unobservable
 
         
Identical Assets
   
Inputs
   
Inputs
 
March 31, 2011
 
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Available for sale securities:
                       
US Treasury
  $ 4,039,531     $ 4,039,531     $ 0     $ 0  
US Government and
                               
federal agency
    13,827,113       0       13,827,113       0  
Municipal securities
    3,244,195       0       3,244,195       0  
Mortgage-backed and
                               
collateralized mortgage
                               
obligations– residential
    14,472,228       0       14,472,228       0  
                                 
Servicing assets
    82,239       0       82,239       0  
                                 
                                 
December 31, 2010
                               
Available for sale securities:
                               
US Treasury
  $ 1,011,094     $ 1,011,094     $ 0     $ 0  
US Government and
                               
federal agency
    16,908,716       1,000,000       15,908,716       0  
Municipal securities
    3,238,294       0       3,238,294       0  
Mortgage-backed and
                               
collateralized mortgage
                               
obligations– residential
    15,345,799       0       15,345,799       0  
                                 
Servicing assets
    38,858       0       38,858       0  

 
 
- 24 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
13.
FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a non-recurring basis are summarized below for the periods ended March 31, 2011 and December 31, 2010:
 
             
         
Significant
 
         
Unobservable
 
         
Inputs
 
   
Total
   
(Level 3)
 
March 31, 2011
           
Impaired loans:
           
Commercial
  $ 374,639     $ 374,639  
Commercial Real Estate:
               
General
    3,340,591       3,340,591  
Construction
    974,491       974,491  
Consumer:
               
Lines of credit
    54,020       54,020  
Other
    6,776       6,776  
Residential
    556,890       556,890  
Foreclosed assets:
               
Commercial Real Estate:
               
General
    1,548,792       1,548,792  
Construction
    2,005,831       2,005,831  
Residential
    187,456       187,456  
                 
December 31, 2010
               
Impaired loans:
               
Commercial
  $ 386,647     $ 386,647  
Commercial Real Estate:
               
General
    2,503,306       2,503,306  
Construction
    753,096       753,096  
Consumer:
               
Lines of credit
    88,350       88,350  
Other
    6,051       6,051  
Residential
    441,240       441,240  
Foreclosed assets:
               
Commercial Real Estate:
               
General
    1,061,170       1,061,170  
Construction
    2,005,831       2,005,831  
Residential
    163,786       163,786  

During the first quarter of 2011, there was a transfer of two agencies with a fair value of $991,568 at March 31, 2011 from Level 1 to Level 2.  There were no significant transfers between Level 1 and Level 2 during 2010.

 
- 25 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
13.
FAIR VALUE MEASUREMENTS (Continued)

The following two paragraphs describe the impairment charges recognized during the period:

Collateral dependent impaired loans are measured using the fair value of the collateral. At March 31, 2011, such impaired loans had a balance of $7,943,595, with a valuation allowance of $2,636,188 compared to impaired loans with a balance of $6,298,688 and a valuation allowance of $2,119,998 at December 31, 2010. The fair values of the collateral on these loans were determined generally using independent appraisals, broker market opinions or internal evaluations which were adjusted for anticipated disposition costs. The impairment charges, recorded to the provision for loan losses, on collateral dependent loans were $516,000 for the first quarter of 2011.

At March 31, 2011 and December 31, 2010, foreclosed assets carried a fair value of $3,742,079 and $3,230,787 respectively. During the three month period ended March 31, 2011, seven properties included in this total were written down by $167,866. There were also two properties totaling $687,717 (at fair value) added to other real estate owned during the first three months of 2011. The fair value of other real estate owned was determined primarily using independent appraisals, broker market opinions or internal evaluations which were adjusted for anticipated disposition costs.

Carrying amount and estimated fair values of financial instruments not previously presented were as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
         
(in thousands)
       
Financial assets
                       
Cash and cash equivalents
  $ 30,460     $ 30,460     $ 23,640     $ 23,640  
Loans held for sale
    3,012       3,019       1,263       1,273  
Loans, net (including impaired)
    156,862       149,038       160,452       154,484  
FHLB stock
    480       N/A       480       N/A  
Accrued interest receivable
    709       709       781       781  
                                 
Financial liabilities
                               
Deposits
    223,434       227,194       219,263       220,711  
Federal funds purchased and
                               
repurchase agreements
    8,408       8,408       7,461       7,461  
Subordinated debentures
    4,500       2,930       4,500       3,172  
Notes payable
    5,000       2,500       5,000       2,500  
Accrued interest payable
    451       451       362       362  


 
- 26 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.
FAIR VALUE MEASUREMENTS (Continued)
 
The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk including consideration for widening credit spreads.  Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values.  Fair value of loans held for sale is based on market quotes.  Fair value of debt is based on current rates for similar financing.  It was not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Estimated fair value for other financial instruments and off-balance sheet loan commitments are considered to approximate carrying value.

14.
INCOME TAXES

Accounting guidance related to income taxes requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified.  The continuing recent losses resulting from the distressed operating environment in Michigan have significantly restricted our ability under the accounting rules to rely on projections of future taxable income to support the recovery of our deferred tax assets. Consequently, we determined it necessary to carry a valuation allowance against our entire net deferred tax asset.  The valuation allowance against our deferred tax assets may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required.  We will continue to monitor our deferred tax assets quarterly for changes affecting their realizability.

15.
REGULATORY MATTERS

Banks are subject to regulatory capital requirements administered by the federal banking agencies.  Since the Company is a one bank holding company with consolidated assets less than $500 million, regulatory minimum capital ratios are applied only to the Bank.  Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet various capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is not well capitalized, regulatory approval is required to accept brokered deposits.  Subject to limited exceptions, a bank may not make a capital distribution if, after making the distribution, it

 
- 27 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
15. 
REGULATORY MATTERS (Continued)

would be undercapitalized.  If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, acquisitions, new activities, new branches, payment of dividends or management fees are prohibited and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the bank at the discretion of the federal regulator. The Bank was in the undercapitalized category at both March 31, 2011 and December 31, 2010.

Actual capital amounts and ratios for the Bank and required capital amounts and ratios for the Bank to be adequately capitalized and to be at the level mandated by the Consent Order at March 31, 2011 and December 31, 2010 were:

                               
                               
               
Minimum Required
   
Minimum Required
 
               
For Capital
   
Under
 
   
Actual
   
Adequacy Purposes
   
Consent Order
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
March 31, 2011
                                   
Total Capital (Tier 1 and
                                   
Tier 2) to risk-weighted
                                   
    assets of the Bank
  $ 11,857,913       6.84 %   $ 13,868,719       8.00 %   $ 19,069,489       11.00 %
Tier 1 (Core) Capital
                                               
    to risk-weighted
                                               
    assets of the Bank
    9,652,791       5.57       6,934,360       4.00       N/A       N/A  
Tier 1 (Core) Capital
                                               
    to average assets
                                               
    of the Bank
    9,652,791       4.03       9,582,876       4.00       20,363,611       8.50  
                                                 
                                                 
                                                 
 
               
Minimum Required
   
Minimum Required
 
               
For Capital
   
Under
 
   
Actual
   
Adequacy Purposes
   
Consent Order
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
                                     
December 31, 2010
                                   
Total Capital (Tier 1 and
                                   
Tier 2) to risk-weighted
                                   
    assets of the Bank
  $ 12,501,302       7.06 %   $ 14,173,103       8.00 %   $ 19,488,017       11.00 %
Tier 1 (Core) Capital
                                               
    to risk-weighted
                                               
    assets of the Bank
    10,254,935       5.79       7,086,552       4.00       N/A       N/A  
Tier 1 (Core) Capital
                                               
    to average assets
                                               
    of the Bank
    10,254,935       4.25       9,646,274       4.00       20,498,333       8.50  

Federal Reserve guidelines limit the amount of allowance for loan losses that can be included in Tier 2 capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At March 31, 2011, only $2,205,122 was counted as Tier 2 capital and $3,050,746 was disallowed.  At December 31, 2010, $2,246,366 was counted as Tier 2 capital and $2,545,541 was disallowed.

 
- 28 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
15. 
REGULATORY MATTERS (Continued)

The Bank’s Consent Order with the FDIC and the OFIR, its primary banking regulators, became effective on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR.

The Consent Order, among other things, requires the Bank to implement a written profit plan, a written contingency funding plan, a written plan to reduce the Bank's reliance on brokered deposits, a comprehensive strategic plan; and to develop an analysis and assessment of the Bank's management needs.  Under the Consent Order, the Bank is required to maintain higher capital levels than requested under prompt corrective action and the Bank may not declare or pay any dividend without the prior written consent of the regulators.

Prior to the issuance of the Consent Order, the Bank's Board of Directors and management had already commenced initiatives and strategies to address a number of the requirements of the Consent Order. The Bank continues to work in cooperation with its regulators.  Our ability to fully comply with all of the requirements of the Consent Order, including maintaining specified capital levels, is not entirely within our control, and is not assured. Our ability to comply with the requirements of the Consent Order may be affected by many factors, including the availability of capital and other funds, the extent of repayment of loans by borrowers, declines in the value of collateral including real estate, the Bank's ability to realize on collateral, actions that may be taken by our lender in connection with our matured $5,000,000 term loan, and actions by bank regulators. Failure to comply with provisions of the Consent Order may result in further regulatory action that could have a material adverse effect on us and our shareholders, as well as the Bank.

As of October 1, 2010, the Bank had retained a third party consultant, acceptable to the regulators, who was hired to develop a written analysis and assessment of the Bank’s management needs for the purpose of providing qualified management for the Bank. The consultant completed the analysis by the December 1, 2010 deadline. On January 6, the FDIC and OFIR acknowledged the timely filing of the report and concurred with the consultant, that the members of the present executive management team have the ability, experience and qualifications to perform their respective duties in a capable manner. No changes in the Bank’s management were recommended.

The Bank’s Board of Directors continues to participate in the governance of the Bank and has developed a program for monitoring compliance with the Consent Order. The template is updated periodically as necessary and is distributed to all Board members for discussion at the monthly board meeting.

There were several directives related to loans contained in the Consent Order. The Bank was ordered to charge off all loans classified as “loss” by the FDIC during the March 2010 examination. The charge offs were completed as directed. The Bank was prohibited from extending additional credit to any impaired borrower. The Bank is in compliance with this mandate. The Bank was asked to develop, implement and submit to the FDIC, written action plans to reduce the risk position in impaired credits. All action plans have been submitted to the FDIC. Management continues to update the action plans and is working diligently to reduce the risk position as outlined in each action plan. All recommended loan and collection policy revisions have been adopted and submitted to the FDIC.

 
- 29 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
15.
REGULATORY MATTERS (Continued)

Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not in compliance with this requirement at December 31, 2010 or March 31, 2011. Management continues to explore options to raise the capital required for full compliance. At March 31, 2011, a capital contribution of $10,700,000 would have been needed to meet the capital ratios specified in the Consent Order.

Under the Consent Order the Bank is restricted from declaring or paying dividends without prior written authorization of the FDIC. The Bank was in full compliance with this restriction.

The Bank was ordered to adopt, implement and adhere to a realistic, comprehensive written profit plan and budget for 2011. The Bank adopted a written profit plan and budget for 2011 on November 17, 2010. Management intends on informing the Board on a monthly basis as to how the Bank’s performance compared to the budget.

Per the Consent Order the Board must be given the opportunity to evaluate the adequacy of the allowance for loan losses prior to the submission of any reports of condition and statements of income to the FDIC. The Board is given the opportunity each month to review the details of the allowance for loan loss calculation and the resulting provision expense and to provide feedback to management as to the sufficiency.

As required by the Consent Order, the Bank adopted a detailed liquidity plan on November 17, 2010 which provided for intended liquidity sources to meet the Bank’s assessed liquidity needs over the time horizons of 6, 12 and 18 months. A significant portion of the upcoming funding needs are related to the brokered deposit maturities discussed below.

As a condition of the Consent Order, the Bank is unable to accept brokered deposits. On October 27, 2010, the Board, as required by the Consent Order, approved a written plan to reduce the Bank’s reliance on brokered deposits. The plan to reduce brokered deposits includes details of the volume and maturities of the existing brokered deposits over the next eight quarters and includes a specific strategy to fund their maturities.

Since the beginning of the year, the Bank has been able to replace maturing brokered deposits with local deposits, including internet based time deposits and core deposits. The plan to reduce brokered deposits mainly consists of continuing this successful strategy. Management does not believe the restriction on issuing brokered deposits imposes a significant liquidity problem for the Bank. Monthly written progress reports will be provided to the Board.

 
- 30 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
16. 
OTHER COMPREHENSIVE INCOME

Other comprehensive income (loss) components and related tax effects were as follows:

   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
March 31, 2011
   
March 31, 2010
 
             
Unrealized holding gains on held to maturity securities
           
    transferred to available for sale
  $ 0     $ 28,192  
Unrealized holding gains on available for sale securities
    30,380       61,215  
Less reclassification adjustments for (gains) and losses later
               
    recognized in income
    (194 )     (79,814 )
                 
Net unrealized gain (loss)
    30,186       9,593  
Tax effect
    0       0  
                 
Other comprehensive income (loss)
  $ 30,186     $ 9,593  
 
 
- 31 -

 
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, 2011 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, 2011 to that at December 31, 2010. The part labeled Results of Operations discusses the three month period ended March 31, 2011 as compared to the same period of 2010. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of Part I of this Form 10-Q.

This discussion and analysis of financial condition and results of operations, and other sections of the Annual Report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company, Berryfield and CS Financial Services.  Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include, among others, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economy; the ability of the Company to borrow money or raise additional capital to maintain or increase its or the Bank’s capital position or when desired to support future growth; action that Fifth Third may take in connection with its $5.0 million term loan to the Company, the repayment of which is now overdue; lack of adequate cash by the Company to continue its business or pay its debts; failure to comply with provisions of the Consent Order or Written Agreement may result in further regulatory action that could have a material adverse effect on us and our shareholders, as well as the Bank; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission.  These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. These risks and uncertainties should be considered when evaluating forward-looking statements. Undue reliance should not be placed on such statements.

The overall economic environment remains challenging but appears to be stabilizing. The state of Michigan’s financial health remains in question which tends to exacerbate the national economic weaknesses. Unemployment

 
- 32 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
in Muskegon and Ottawa counties appears to have stabilized but remains at a critical level. At March 31, 2011, unemployment was 11.1% for Muskegon County and 9.3% for Ottawa County. In addition to high unemployment, property values are irrational because of the current supply and demand and they are often directionally unpredictable even to third party professionals. In general property values have declined but there have been pockets of stabilization. Unfortunately a large portion of the difficulty in the financial market centers on the low real estate valuations coupled with the lack of sales and construction activity. The negative effect of this downturn in real estate has adversely affected the credit markets and the ability to actively lend based on a risk-centered underwriting process. It is unlikely that these trends will be reversed quickly but it is encouraging that there have been signs of stabilization which may bolster consumer confidence and eventually translate into more real estate activity and climbing valuations.

The declining property valuations have contributed to the credit issues experienced by the Bank. As a result of these and other issues, the Bank has recorded operating losses since 2008. The deteriorating condition of the asset quality of the Bank warranted regulatory intervention. The Bank has entered into a Consent Order with the FDIC and the OFIR, its primary banking regulators, which became effective on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR.

Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet this requirement within the required 90-day period and remains out of compliance with the Consent Order as of March 31, 2011.
 
The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company complies 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

 
- 33 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above. The Company currently has limited resources with which to support the capital needs of the Bank. The Company’s main liquidity resource is its cash account balance of approximately $132,000.
 
On January 3, 2011, the Company’s $5,000,000 term loan with Fifth Third Bank (“Fifth Third”) matured. The loan is in default, and the Company does not have the resources to pay the outstanding principal and accrued interest and does not expect to have it in the near future. Under the terms of the note, Fifth Third has the right to foreclose on the Bank’s stock which collateralizes the loan. Management met with Fifth Third on February 17, 2011, to discuss the term loan. Fifth Third indicated that it is interested in having the term loan be part of a comprehensive recapitalization plan but that it has no intention, in the short term, to foreclose on the stock of the Bank.

The Company’s net losses, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Consent Order, and the provisions of the Written Agreement creates an uncertainty about the Company’s ability to continue as a going concern. The financial statements in this Form 10-Q do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
 
FINANCIAL CONDITION

Total assets increased by $4.5 million to $242.4 million at March 31, 2011 from $237.9 million at December 31, 2010. This is a 1.9% increase in assets during the first three months of 2011. Balance sheet growth was funded by deposit growth and consisted mainly of increases in cash held in interest bearing bank accounts offset somewhat by a net decrease in the Bank’s loan portfolio.

Cash and cash equivalents increased by $6.9 million to $30.5 million at March 31, 2011 from $23.6 million at December 31, 2010. This change was mostly reflective of increases in balances held in bank accounts between the above two periods. Balances kept at the FRB increased $6.6 million since year-end 2010. The increase in liquidity is driven largely by the seasonal fluctuation in the balances of several of the Bank’s public fund customers. Although these depositors are expected to reduce their balances in the second quarter, it is the goal of management to maintain elevated on balance sheet liquidity to accommodate upcoming brokered deposit maturities and to provide for unexpected cash needs. Over the last couple of years, the core principles of cash management have been greatly affected by the current rate and regulatory environment and the need to preserve capital. Balances held at the FRB are given a preferential risk rating when computing regulatory risk based capital ratios. The risk rating is lower than either federal funds or other correspondent bank balances. So when the FRB began paying interest on excess deposits in 2008, it became a prudent capital preservation strategy to keep excess liquidity on deposit at the FRB. Additionally, regulatory agencies have emphatically encouraged banks to proactively strengthen both on and off balance sheet funding resources in order to be perceived as operating in a safe and sound manner given the dramatic increase in bank failures. All of these factors contributed to management’s ongoing decision to maintain a high FRB balance.

Securities decreased $921,000 since December 31, 2010. Investment activity in the first three months of the year included purchases of $3.0 million and maturities, pre-payments and calls of $3.9 million. In 2010, the Bank liquidated a portion of its municipal portfolio. Prior to the sale, several of the securities sold were transferred out of the held to maturity portfolio into the available for sale portfolio. As a result, the Company needed to transfer all of its remaining held to maturity securities into the available for sale portfolio in order to comply with

 
- 34 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
accounting guidance. The carrying amount of the securities transferred was $5,839,614. Of that total, $3,551,506 were sold. The remaining $2,288,108 had an unrealized gain of $28,192 that was recorded through other comprehensive income upon transfer.

Maintaining the unencumbered portion of the Bank’s security portfolio at a level that complies with its internal policy is typically the driving force behind investment activity. The Bank strives to have between 10% and 20% of its investment portfolio unpledged. Although the portfolio decreased since year-end 2010, the unencumbered portion was within the range desired by management. At March 31, 2011 there were securities with a market value of $28.7 million pledged to secure public fund customers, the Federal Reserve Discount Window (“Discount Window”), Federal Home Loan Bank (“FHLB”) overdraft line of credit, and customer repurchase agreements leaving 19.4% of its portfolio unencumbered. On December 31, 2010, 20.0% of investments were unencumbered. In order to provide opportunity for additional pledging, to secure access to future liquidity and to maximize the return on the Bank’s deposits, securities are being strategically purchased. It is likely that the Bank will make additional security purchases in 2011.

The fair value of investments has received much scrutiny over the past three years. The plight of the bond market in general and the weakened position of several government sponsored entities have affected market values. At March 31, 2011, there were 25 securities with an unrealized loss; none of these unrealized losses were longer than 12 months. The securities were not deemed to have other-than-temporary impairment. At March 31, 2011, the unrealized losses totaled approximately $58,000 on securities with an amortized cost of $15.5 million. To reduce exposure to loss (both realized and unrealized) the investment policy has prudent diversification principles; one of them being issuer concentration. There were no holdings of securities of any one issuer, other than the U.S. Government and federal agencies, in an amount greater than 10% of the Bank’s shareholders’ equity. The entire investment portfolio remains strong with an overall unrealized gain of $414,000 at March 31, 2011.

Loans held for sale activity during the first three months of 2011 included $7.3 million of loan originations and $5.7 million of loan sales. The associated gain on the loan sales was $158,000. A majority of the gains recorded in the first quarter were related to the sale of the guaranteed portion of three Small Business Administration (“SBA”) loans.  These SBA loans totaling $2.4 million were sold for a gain of $124,000. Loan sale activity in the first quarter of 2010 consisted of only residential mortgage loans.

Total loans (held for investment) decreased $3.1 million and were $162.1 million at March 31, 2011 down from $165.2 million at December 31, 2010. The decrease in the commercial real estate portfolio comprised 58% of the overall decline. The overall decrease in the loan portfolio did not change the concentration. At March 31, 2011 the concentration of commercial and commercial real estate loans was 77%, and roughly the same as year-end 2010.  The wholesale focus of the Bank has remained since opening in 1999. Unfortunately, the economic crisis has severely affected many borrowers in the Company’s two largest portfolio segments causing a significant increase in the Bank’s overall risk profile.

To help mitigate the credit risk stemming from the economic condition of the country in general and Michigan specifically, the Bank continues to develop and educate lenders and credit staff, and to invest time into the design and overall strengthening of the Company’s credit risk assessment processes. 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

 
- 35 -

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

There is a very detailed process that has been developed by the Bank to estimate credit risk. The process is discussed at length in Note 1 to the Company’s December 31, 2010 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 utilizing the specified process. Basically, the analysis of the allowance for loan losses is comprised of two portions: general credit allocations and specific credit allocations. General credit allocations are made to various categories of loans based on loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The specific credit allocation includes a detailed review of a borrower and its entire relationship resulting in an allocation being made to the allowance for that particular borrower.  A loan becomes specifically identified when, based on current information and events related to that particular borrower, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement.

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 a collateral analysis that supports a loan loss reserve allocation of zero.

At March 31, 2011, the allowance for loan losses totaled $5.3 million. During the first three months of 2011, $705,000 was added to the allowance through the provision expense. At year-end 2010, the allowance for loan losses was $4.8 million. The ratio of allowance to gross loans outstanding increased to a level of 3.24% at March 31, 2011 compared to 2.90% at year-end 2010.

The allocation of the allowance at March 31, 2011 and December 31, 2010 was as follows:

   
March 31, 2011
   
December 31, 2010
 
         
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
  $ 1,160,906       36.1 %   $ 1,218,865       35.3 %
    Commercial Real Estate
    3,205,039       40.7       2,896,176       41.0  
    Consumer
    631,316       11.7       546,603       11.9  
    Residential
    258,607       11.5       130,263       11.8  
Total
  $ 5,255,868       100 %   $ 4,791,907       100 %

The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 1.77% at March 31, 2011, an increase of one basis point from year-end 2010.  At year-end 2010, the general component of the allowance for loan losses was 1.76% of total non-specifically identified loans.
 
At March 31, 2011, the allowance contained $2,636,000 in specific allocations for impaired loans whereas at December 31, 2010 there was $2,120,000 specifically allocated. There was $14.8 million of unpaid principal on

 
- 36 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
impaired loans at March 31, 2011 compared to $14.3 million at year-end 2010. At March 31, 2011, there was $6.8 million of unpaid overdue principal on impaired loans requiring no reserves, a decrease of $1,169,000 since year-end 2010.  Nearly 60 percent of this decrease was the result of two loans being charged off in the first quarter of 2011 and moved to foreclosed assets.

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 2010 to March 31, 2011, the recorded investment in past due and non-accrual loans has increased by $539,000. This was evidenced by a $658,000 increase in the recorded investment in past due loans being partially offset by an $119,000 decrease in the recorded investment in non-accrual loans in the first three months of 2011.

The recorded investment of loans past due 30-59 days was $1,433,000 at March 31, 2011; an increase of $463,000 since December 31, 2010. Three loans comprise 78% of the total.  Two of the three loans became current in April. The third customer is expected to become current in May.

The recorded investment of loans past due 60-89 days increased $196,000 since year-end 2010 and was $449,000 at March 31, 2011. Two loans (one customer) make up 98% of the total past due at the end of March 2011. The Bank worked with the customer and provided short term payment relief using a temporary debt restructure. As of the end of April, the borrower was current under the new payment terms.

There were no loans past due 90 days and greater at March 31, 2011. There was $2,000 past due 90 days and greater at year-end 2010.

Non-accrual notes were $7.9 million at March 31, 2011 which was a decrease of $119,000 compared to non-accrual notes of $8.0 million at December 31, 2010.

Overall net charge-offs for the first quarter of 2011 were $241,000. The corresponding ratio of net charge-offs to average loans for the first quarter of 2011 was 0.58%. The net charge-offs for the first quarter of 2010 were $994,000. The resulting ratio of net charge-offs to average loans for the first quarter of 2011 was 2.18%. Although the current ratios are not comparable to normal historical charge off ratios, it is encouraging that there has been a significant decrease compared to the quarterly ratios reported in 2010. Nonetheless, it is likely that charge off ratios may remain elevated until there is a widespread improvement in the economic condition of the state of Michigan and the specific market areas in which the Bank operates--Muskegon and northern Ottawa counties.

Another risk identified by the Company is interest rate risk. The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. In addition to product diversification, two other methods used are to balance the rate sensitivity of the portfolio and avoid extension risk1.
 
_____________
 
 
1 Extension risk, as related to loans, exists when booking fixed rate loans with long final contractual maturities. When a customer is contractually allowed longer to return its borrowed principal and rates rise, the Bank is delayed from taking advantage of the opportunity to reinvest the returning principal at the higher market rate.

 
- 37 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The loan maturities and rate sensitivity of the loan portfolio at March 31, 2011 are set forth below:

   
Within
   
Three to
   
One to
   
After
       
   
Three
   
Twelve
   
Five
   
Five
       
   
Months
   
Months
   
Years
   
Years
   
Total
 
                               
    Commercial
  $ 9,441,051     $ 25,033,208     $ 20,691,125     $ 3,346,345     $ 58,511,729  
    Commercial Real Estate:
                                       
      General
    7,143,509       8,826,441       37,866,962       2,766,194       56,603,106  
      Construction
    1,344,288       4,168,388       3,797,399       49,299       9,359,374  
    Consumer:
                                       
      Lines of credit
    348,048       1,673,123       6,848,682       6,718,124       15,587,977  
      Other
    104,693       279,647       1,953,894       480,577       2,818,811  
      Credit card
    57,450       178,373       274,397       0       510,220  
    Residential
    142,780       289,281       10,889       18,283,315       18,726,265  
    $ 18,581,819     $ 40,448,461     $ 71,443,348     $ 31,643,854     $ 162,117,482  
Loans at fixed rates
  $ 10,351,379     $ 24,866,600     $ 59,058,541     $ 22,571,630     $ 116,848,150  
Loans at variable rates
    8,230,440       15,581,861       12,384,807       9,072,224       45,269,332  
    $ 18,581,819     $ 40,448,461     $ 71,443,348     $ 31,643,854     $ 162,117,482  

At March 31, 2011, there were 72% of the loan balances carrying a fixed rate and 28% 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 paid off or have been added to the portfolio and some of the change is related to customer preference at the time of renewal. It is likely that future rate movements will be rising given the extended period of low rates that has existed over the past few years. As a result of the current mix of the loan portfolio, management will be challenged to improve loan income in a rising rate environment.

The maturity distribution of the loan portfolio has lengthened over the last several years but still remains at a level which is within the parameters determined to be acceptable by management. Contributing to the change in distribution is the increase in the mortgage loan portfolio over the past several years. Typically management strives to retain only 10-15% of residential mortgages originated because of the longer contractual terms generally associated with mortgage products. At March 31, 2011, approximately 20% of the entire loan portfolio had a contractual maturity longer than five years. To control extension risk mostly associated with the mortgage business line, management remains focused on originating loans saleable into the secondary market.

Foreclosed assets were $3,873,000 at March 31, 2011 which was an increase of $490,000 since December 31, 2010. These assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. These properties are held until they can be sold. During the first three months of 2011, two properties were added and one property sold. At March 31, 2011 there were 33 real estate holdings and at December 31, 2010 there were 32 real estate holdings.

 
- 38 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Deposit balances were $223.4 million at March 31, 2011 up from $219.2 million at December 31, 2010. Total deposit growth since year-end was $4.2 million or 2%. Non-interest bearing deposits increased $8.8 million since year-end 2010 while interest bearing accounts decreased by $4.6 million.

The nearly $9 million increase in non-interest bearing deposits occurred for three reasons. The first being the usual seasonal fluctuation in several of the Bank’s public fund customer balances. The second reason for an increase in non-interest bearing balances was from an existing customer substantially increasing their balances since year-end. The final reason for the increase in non-interest bearing deposits was a shift in the account type preferred by existing customers as a result of a change in FDIC insurance programs. On December 31, 2010, the FDIC discontinued its program which offered full insurance coverage on low interest transaction accounts. This change motivated several large customers to switch their interest bearing accounts to non-interest bearing accounts at the beginning of the year.

The decrease in interest-bearing accounts stemmed from a decline in interest bearing checking accounts and time deposits offset by an increase in money market and savings accounts. Interest bearing checking balances decreased by $1.1 million for the reason described above. Money market and savings balances rose by $3.5 million in the first quarter of 2011 as a result of several existing business customers increasing their balances since year-end 2010. Time deposits declined by a net figure of $7.0 million as accounts matured and were not replaced. Over half of the decrease in time deposits was related to one brokered deposit maturity for $3.5 million. Since the Bank has not been categorized as “well capitalized” since June 30, 2010, a regulatory waiver is required to accept, renew or rollover brokered deposits. Additionally, the Bank’s Consent Order with the FDIC prohibits the use of brokered deposits. The Bank has not issued any brokered deposits since January of 2010. At March 31, 2011, the concentration of brokered deposits to total deposits was 15%; a decrease of 2% since December 31, 2010 when the concentration was 17%. For more information related to future maturities of brokered deposits see Note 7.

Repurchase agreement balances were $7.5 million at December 31, 2010 and $8.4 million at March 31, 2011; an increase of $947,000. A repurchase agreement is treated like a short-term borrowing of the Bank. To secure the short-term borrowing (repurchase agreement), balances held by customers are collateralized by high quality government securities held in a sub-account within the Bank’s security portfolio. The increase in the balance between the two period ends was from existing repurchase customers keeping more money in their accounts. This banking product has also gotten more utilization since the FDIC program changed on December 31, 2010. Customers with investable dollars exceeding the FDIC limits are utilizing this account type because they are seeking higher interest rates while mitigating their risk.

Shareholders’ equity totaled $142,000 on March 31, 2011 and $845,000 on December 31, 2010. The operating losses recorded in the first three months of 2011 were partially offset by an increase in accumulated other comprehensive income (security market value adjustments).

As a result of the significant losses incurred in the last few years, the Bank’s capital ratios have declined. At March 31, 2011, the Bank’s total risk based capital ratio was 6.84% and its tier one to average assets ratio was 4.03%.  The Bank’s total risk based capital ratio at December 31, 2010 was 7.06%. Its tier one to average assets ratio was 4.25% at year-end 2010.

 
- 39 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Under the Consent Order, the Bank is required to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%.   The Consent Order capital requirements were effective beginning with the December 31, 2010 capital reporting period.  The Bank was not in compliance with required capital ratios at either the December or March capital reporting period. In order to attain the level of capital required by the Consent Order, the Bank would have needed additional capital of $10,700,000 on March 31, 2011 based on its asset mix and size. This is an increase of $450,000 compared to the $10,250,000 that would have been needed on December 31, 2010.

RESULTS OF OPERATIONS

The net loss for the first three months of 2011 was $734,000 which was $294,000 more than the loss recorded for the first quarter of 2010. The corresponding basic and diluted loss per share for the first three months of 2011 was $(0.50). The basic and diluted loss per share for the first three months of 2010 was $(0.30).

The losses recorded in the first three months of 2011, have been directly tied to increased expenses related to administering troubled assets and higher FDIC insurance premiums. The loan loss provision, foreclosed asset impairments and other collection expenses totaled $1.0 million for the first quarter of 2011. For the similar period in 2010 the same expenses totaled $655,000. FDIC premiums were $181,000 more in the first quarter of 2011 compared to the first quarter of 2010. These increases were offset slightly by an improvement in net interest income and non interest income.

For the first three months of 2011, the annualized return on the Company’s average total assets was (1.23)% compared to (0.73)% for the first three months of 2010. The Company’s annualized return on average equity was (375.12)% for the first three months of 2011 and (16.28)% for the first three months of 2010.
 
 
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
A majority of the Company’s revenue is its net interest income. The net interest income and corresponding net interest margin were better for the first three months of 2011 than the same period in 2010 mostly as a result of improvements made to the Company’s cost of average funds. 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,
 
   
2011
   
2010
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
Assets
                                   
Federal funds sold and interest-
                                   
    bearing deposits with banks
  $ 22,922,886     $ 13,694       0.24 %   $ 9,096,118     $ 5,422       0.24 %
    Securities
    36,549,057       231,646       2.54       28,642,857       241,220       3.37  
    Loans (including held for sale
                                               
    and non accrual)
    165,999,072       2,565,081       6.18       182,555,777       2,805,607       6.15  
      225,471,015       2,810,421       4.99       220,294,752       3,052,249       5.54  
    Other assets
    14,126,330                       20,629,566                  
    $ 239,597,345                     $ 240,924,318                  
Liabilities and Shareholders’ Equity
                                               
    Interest-bearing deposits
  $ 181,014,112     $ 811,595       1.79 %   $ 183,853,617     $ 1,107,977       2.41 %
    Federal funds purchased, repur-
                                               
    chase agreements and Federal
                                               
      Reserve Bank borrowings
    7,033,456       11,502       0.65       8,452,582       20,571       0.97  
    Subordinated Debentures, notes
                                               
    payable and FHLB advances
    9,500,000       102,890       4.33       15,366,667       184,532       4.80  
      197,547,568       925,987       1.87       207,672,866       1,313,080       2.53  
    Non-interest-bearing deposits
    40,668,116                       21,728,258                  
    Other liabilities
    598,751                       699,350                  
    Shareholders’ Equity
    782,910                       10,823,844                  
    $ 239,597,345                     $ 240,924,318                  
Net interest income (tax equivalent
                                               
basis)
            1,884,434                       1,739,169          
Net interest spread on earning assets
                                               
(tax equivalent basis)
                    3.12 %                     3.01 %
Net interest margin on earning
                                               
assets (tax equivalent basis)
                    3.34 %                     3.16 %
Average interest-earning assets to average interest-
                                         
bearing liabilities
                    114.14 %                     106.08 %
Tax equivalent adjustment
            13,732                       27,748          
Net interest income
          $ 1,870,702                     $ 1,711,421          
 
 
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The tax equivalent net interest spread on average earning assets increased 11 basis points to 3.12% in the past twelve months. The tax equivalent net interest margin increased by 18 basis points from 3.16% for the first three months of 2010 to 3.34% for the first three months of 2011. The tax equivalent net interest income for the first three months of 2011 was $1.9 million compared to a figure of $1.7 million for the same three months in 2010. The Company recorded $145,000 more net interest income. There were $5.2 million more average earning assets on the books in the first quarter of 2011 compared to the first quarter of 2010. Yet it was not the $5.2 million growth in average earning assets that bolstered the net interest margin improvement. The net interest margin improved primarily because of a change in the mix of funding resources and a decrease in the yield paid on interest bearing liabilities.

The average rate earned on interest earning assets was 4.99% for the three months ended March 31, 2011 compared to 5.54% for the same period in 2010. The main contributing factor was a change in the mix of interest earning assets. Interest bearing accounts at other banks now comprises a larger percentage of interest earning assets. In an effort to increase the Company’s on balance sheet liquidity, the Bank has chosen to leave more on deposit at the FRB. This category is the lowest yielding of all interest earning assets and it comprised 10% of average earning assets for the first quarter of 2011. It comprised just 4% in the first quarter of 2010.

Also contributing to the decreased yield on average earning assets is the marked decrease in the yield earned on the investment portfolio. Throughout last year, as securities matured and several securities were sold, the replacement securities purchased yielded lower rates as a result of differences in the rate environment.

Offsetting the changes in the mix of earning assets and the declining yield on the investment portfolio, there was a 3 basis point increase in the yield on loans, the Bank’s largest earning asset category. A portion of the increase is related to differences in the amount of interest reversed on loans that were either charged off or placed on non accrual in each three month period. In the first quarter of 2011, $11,000 was reversed. In the first quarter of 2010, $51,000 was reversed. Another difference is pricing on loans as they come up for renewal during the year. Although the Bank’s average internal prime rate was the same in both three month periods, the risk factors within each deal are being heavily evaluated and the resulting renewal rate is often higher.

Fortunately, decreases to the overall yield on interest earning assets were more than offset by rate reductions on the funding side. Management spends a significant amount of time managing the continued improvement in the cost of funds, especially in light of the restrictions placed by the Consent Order. The first notable contributing factor is the increase in non-interest bearing funds. On average there was $18.9 million more in non-interest bearing deposits between the first quarter of 2011 and the first quarter of 2010. Additionally, interest expense incurred on rate-bearing liabilities improved by 66 basis points when comparing the first three months of 2011 to that of the similar period of 2010; a majority of the improvement was a 92 basis point reduction in the average rate paid on the time deposit portfolio over the last twelve months. As time deposits are maturing, the Bank has been successful at securing lower rates on new and renewed deposits.

Finally, the Company’s average rate paid on notes payable and FHLB advances decreased by 47 basis points between the first quarter of 2011 and the first quarter of 2010. The Bank repaid its FHLB advances in the second quarter of 2010 so there were no FHLB advances outstanding in the first quarter of 2011 compared to $5.9 million outstanding in the first quarter of 2010 carrying a weighted average rate of 5.60%.

 
- 42 -

 
COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
In general the rate environment remains at historically low levels and management is continually challenged to improve its mix of assets and its net interest income, asset liability management remains an important tool for assessing interest rate sensitivity; it also provides a tool for monitoring liquidity. Liquidity management involves the ability to meet the cash flow requirements of the Company’s customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and achieve consistent net interest income through periods of changing interest rates.

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

Details of the repricing gap at March 31, 2011 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
  $ 28,193,508     $ 0     $ 0     $ 0     $ 28,193,508  
    Securities (including FHLB stock)
    4,598,567       4,407,777       21,713,047       5,343,476       36,062,867  
    Loans held for sale
    9,707       142,918       166,125       2,693,439       3,012,189  
    Loans
    63,810,555       24,005,836       56,389,452       17,911,639       162,117,482  
      96,612,337       28,556,531       78,268,624       25,948,554       229,386,046  
Interest-bearing liabilities
                                       
    Savings and checking
    52,225,959       0       0       0       52,225,959  
    Time deposits <$100,000
    5,089,509       23,163,125       49,150,539       0       77,403,173  
    Time deposits >$100,000
    12,774,441       33,031,493       5,906,027       0       51,711,961  
    Repurchase agreements and
                                       
      Federal funds purchased
    8,407,631       0       0       0       8,407,631  
    Subordinated debt and Federal
                                       
      Home Loan Bank advances
    9,500,000       0       0       0       9,500,000  
      87,997,540       56,194,618       55,056,566       0       199,248,724  
Net asset (liability) repricing gap
  $ 8,614,797     $ (27,638,087 )   $ 23,212,058     $ 25,948,554     $ 30,137,322  
Cumulative net asset (liability)
                                       
      repricing gap
  $ 8,614,797     $ (19,023,290 )   $ 4,188,768     $ 30,137,322          

Currently the Company has a negative twelve month repricing gap which indicates that the Company is liability sensitive in the next twelve month period. This position implies that more rate bearing products have an opportunity to reprice during this period. If the rate environment remains flat, a negative repricing gap should be

 
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
helpful for further reduction to the Company’s overall interest expense and potential increases to net interest income and margin. Conversely, if rates begin to rise, the negative repricing position implies that more rate bearing liabilities could reprice compared to earning assets which would likely decrease net interest income outcomes.  The interest rate sensitivity table simply illustrates what the Company is contractually able to change in certain time frames.

The provision for loan losses for the first quarter of 2011 was $705,000 compared to $529,000 for the first three months of 2010. The provision expenses are associated with changes in historical loss calculations, economic condition as well as loan charge offs and downgrades. A methodical assessment of these factors generates the reserves required for the risk in the Bank’s loan portfolio. Over the past few years, general allocations to the loan loss reserve have increased as a result of the weakening economy and more emphasis being placed on recent loss history. Specific allocations to the loan loss reserve have also increased. At March 31, 2011, the allowance for loan loss included specific allocations of $2.6 million. At March 31, 2010 specific allocations were $1.2 million.

The allowance for loan losses is an estimate. Management believes that the allowance level is adequate and justified based on the factors discussed earlier (see Financial Condition). Management will continue to review the allowance with the intent of maintaining it at an appropriate level. The provision may be increased or decreased in the future as management continues to monitor the loan portfolio, actual loan loss experience and the environmental factors related to lending and collateral.

Non-interest income recorded in the first three months of 2011 was $520,000 compared to $485,000 recorded for the similar period in 2010. There were two primary differences between the two periods. Included in 2010’s first three month total were security gains of $80,000 from the sale of a majority of the Bank’s municipal portfolio. Recorded securities gains of $194 were included in the first quarter of 2011; the result of an agency security being called early. Offsetting the differences in the gains on securities sales was an increase of $112,000 in gains on the sale of loans. In the first quarter of 2011, the Company sold the guaranteed portion of three SBA loans which resulted in a gain of $124,000.

Non-interest expenses for the first three months of 2011 were $2.4 million. Non-interest expenses for the first three months of 2010 were $2.1 million. The notable variances among the individual categories were in the areas of foreclosed asset impairment charges, FDIC insurance premiums and loan collection expenses which both fall into the other expense category.

There were foreclosed asset impairment charges of $168,000 in the first quarter of 2011. These results compare to $25,000 in the first quarter of 2010. During the time that foreclosed real properties are waiting to be sold, there will be occasions that the Bank will need to reevaluate the individual market value of each property. If there is evidence that the fair value has declined since the last evaluation, the Bank will incur an impairment charge in order to properly reflect the fair value of the asset at the end of the reporting period. The uncertain economic environment continues to have a detrimental effect on property values. As such, it is likely that foreclosed real property impairment charges will continue. At March 31, 2011, there were 33 foreclosed assets totaling $3.9 million.

Other non-interest expenses in the first three months of 2011 were $676,000 compared to $460,000 in the first three months of 2010. There was a $216,000 increase between the two periods. There were two main differences. Expenses related to troubled assets were $32,000 more in the first quarter of 2011 compared to the same period in 2010 and there was an $181,000 increase in FDIC insurance premiums paid between the same two periods.

 
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COMMUNITY SHORES BANK CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Expenses related to foreclosed assets will remain elevated as long as the Bank continues to have a portfolio of foreclosed assets. The 117% increase in FDIC insurance premiums between the two period ends was due to the fact that the Bank was in a higher FDIC risk category due to its deteriorating capital position and its Consent Order. The FDIC premiums totaled $336,000 for the first quarter of 2011 and $155,000 for the first quarter of 2010.

There was no income tax expense in either the first quarter of 2011 or that of 2010.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

 ITEM 4.
CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2011. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective as of March 31, 2011. There have been no significant changes in the internal controls over financial reporting during the quarter ended March 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

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 affect on their financial condition, either individually or in the aggregate.

RISK FACTORS

Not applicable for smaller reporting companies.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company made no unregistered sale of equity securities, and did not purchase any of its equity securities, during the quarter ended March 31, 2011.

Holders of Company common stock are entitled to receive cash dividends to the extent that they are declared from time to time by the Company's Board of Directors.  To date, the Company's Board of Directors has never declared a cash dividend.  The Company may only pay cash dividends out of funds that are legally available for that purpose.  The Company is a holding company and substantially all of its assets are held by its subsidiaries.  The Company's ability to pay cash dividends to its shareholders depends primarily on the Bank's ability to pay cash dividends to the Company.  Cash dividend payments and extensions of credit to the Company from the Bank are

 
- 45 -

 
COMMUNITY SHORES BANK CORPORATION
 
subject to legal and regulatory limitations, generally based on capital levels and current and retained earnings, imposed by law and regulatory agencies with authority over the Bank.  The ability of the Bank to pay cash dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements.

Under the terms of the subordinated debentures that the Company issued to the Trust, the Company is precluded from paying cash dividends on the Company's common stock if an event of default has occurred and is continuing under the subordinated debentures, or if the Company has exercised its right to defer payments of interest on the subordinated debentures, until the deferral ends.  In May of 2010, the Company gave notice that it was deferring the regularly scheduled quarterly interest payments on the subordinated debentures beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010.  So until the deferral ends, the terms of the subordinated debentures preclude the Company from paying any dividends on the common stock.  If the Company had any preferred stock outstanding, it would similarly be precluded from paying any dividend on the preferred stock.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

RESERVED

OTHER INFORMATION

None.

EXHIBITS

EXHIBIT NO.
EXHIBIT DESCRIPTION
   
3.1
Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company’s June 30, 2004 Form 10-QSB (SEC file number 333-63769).
   
3.2
Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s Form 8-K filed July 5, 2006 (SEC file number 000-51166).
   
31.1
Rule 13a-14(a) Certification of the principal executive officer.
   
31.2
Rule 13a-14(a) Certification of the principal financial officer.
   
32.1
Section 1350 Chief Executive Officer Certification.
   
32.2
Section 1350 Chief Financial Officer Certification.


 
- 46 -

 
 


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 13, 2011                                                         By:  /s/ Heather D. Brolick
        Date                                                                Heather D. Brolick
President and Chief Executive Officer
(principal executive officer)



May 13, 2011                                                         By:  /s/ Tracey A. Welsh
       Date                                                                 Tracey A. Welsh
Senior Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)

 



 
- 47 -

 
 
EXHIBIT INDEX



EXHIBIT NO.
EXHIBIT DESCRIPTION
   
3.1
Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company’s June 30, 2004 Form 10-QSB (SEC file number 333-63769).
   
3.2
Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s Form 8-K filed July 5, 2006 (SEC file number 000-51166).
   
31.1
Rule 13a-14(a) Certification of the principal executive officer.
   
31.2
Rule 13a-14(a) Certification of the principal financial officer.
   
32.1
Section 1350 Chief Executive Officer Certification.
   
32.2
Section 1350 Chief Financial Officer Certification.

 
 
 
 
-48-