COMMUNITY SHORES BANK CORP - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORP	v466825_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORP	v466825_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORP	v466825_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORP	v466825_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2017

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________________________to __________________________________

Commission File Number:

000-51166

Community Shores Bank Corporation

(Exact name of registration as specified in its charter)

Michigan	38-3423227
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1030 W. Norton Avenue, Muskegon, MI	49441
(Address of principal executive offices)	(Zip Code)

(231) 780-1800

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the

Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
Emerging growth company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

At May 15, 2017, 4,101,664 shares of common stock were outstanding.

Community Shores Bank Corporation Index

			Page No.

PART I.	Financial Information

	Item 1.	Financial Statements	1

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

	Item 4.	Controls and Procedures	51

PART II.	Other Information

	Item 1.	Legal Proceedings	52

	Item 1A.	Risk Factors	52

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

	Item 3.	Defaults upon Senior Securities	52

	Item 4.	Mine Safety Disclosures	52

	Item 5.	Other Information	52

	Item 6.	Exhibits	52

	Signatures		53

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2017			December 31, 2016
	(unaudited)			(audited)
ASSETS
Cash and due from financial institutions	$	2,450,158		$	3,339,650
Interest-bearing deposits in other financial institutions		29,064,606			17,642,525
Cash and cash equivalents		31,514,764			20,982,175
Term deposit		100,000			100,000
Securities available for sale (at fair value)		18,182,447			15,765,764
Loans held for sale		0			128,000
Loans		139,596,491			140,824,584
Less: Allowance for loan losses		1,618,398			1,611,820
Net loans		137,978,093			139,212,764
Federal Home Loan Bank stock (at cost)		300,500			300,500
Premises and equipment, net		8,401,125			8,486,355
Accrued interest receivable		397,639			393,444
Foreclosed assets		1,426,123			1,460,394
Net deferred tax asset		3,963,794			4,032,675
Other assets		623,936			547,638
Total assets	$	202,888,421		$	191,409,709

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing	$	40,742,613		$	46,893,163
Interest-bearing		138,201,411			120,830,147
Total deposits		178,944,024			167,723,310
Repurchase agreements		4,743,173			4,639,766
Subordinated debentures		4,500,000			4,500,000
Accrued expenses and other liabilities		502,185			485,153
Total liabilities		188,689,382			177,348,229
Shareholders’ equity
Preferred Stock, no par value: 1,000,000 shares authorized and none issued		0			0
Common Stock, no par value: 9,000,000 shares authorized; 4,101,664 issued and outstanding at both March 31, 2017 and December 31, 2016		19,630,049			19,626,201
Accumulated deficit		(5,406,146	)		(5,542,341	)
Accumulated other comprehensive loss		(24,864	)		(22,380	)
Total shareholders’ equity		14,199,039			14,061,480
Total liabilities and shareholders’ equity	$	202,888,421		$	191,409,709

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended		Three Months Ended
	March 31, 2017		March 31, 2016
Interest and dividend income
Loans, including fees	$	1,663,094	$	1,520,753
Securities (including FHLB dividends)		63,197		84,707
Federal funds sold and other income		47,185		19,876
Total interest and dividend income		1,773,476		1,625,336
Interest expense
Deposits		166,547		161,538
Repurchase agreements and other short-term debt		4,263		4,399
Federal Home Loan Bank advances and notes payable		36,146		60,477
Total interest expense		206,956		226,414
Net Interest Income		1,566,520		1,398,922
Provision for loan losses		0		0
Net Interest Income After Provision for Loan Losses		1,566,520		1,398,922
Non-interest income
Service charges on deposit accounts		111,362		121,890
Gain on sale of loans		88,340		33,701
Gain on sale of foreclosed assets		26,029		34,881
Other		191,516		191,840
Total non-interest income		417,247		382,312
Non-interest expense
Salaries and employee benefits		1,031,023		1,010,864
Occupancy		150,936		155,736
Furniture and equipment		88,767		87,997
Advertising		4,543		3,803
Data processing		123,418		118,521
Professional services		87,325		98,589
Foreclosed asset impairment		29,421		0
FDIC Insurance		38,333		67,113
Other		223,645		275,105
Total non-interest expense		1,777,411		1,817,728
Income (Loss) Before Federal Income Tax		206,356		(36,494	)
Federal income tax expense (benefit)		70,161		(12,408	)
Net Income (Loss)	$	136,195	$	(24,086	)
Basic average shares outstanding		4,101,664		1,584,530
Diluted average shares outstanding		4,104,608		1,584,530
Basic earnings (loss) per share	$	0.03	$	(0.02	)
Diluted earnings (loss) per share	$	0.03	$	(0.02	)

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended			Three Months Ended
	March 31, 2017			March 31, 2016

Net income (loss)	$	136,195		$	(24,086	)
Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities		(3,764	)		161,178
Less reclassification adjustments for unrealized gains later recognized in income		0			0
		(3,764	)		161,178
Tax effect		1,280			(54,801	)
Other comprehensive income (loss), net of tax		(2,484	)		106,377
Comprehensive income	$	133,711		$	82,291

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

								Accumulated
								Other			Total
			Common		Accumulated			Comprehensive			Shareholders’
	Shares		Stock		Deficit			Income (Loss)			Equity

Balance at January 1, 2016		1,468,800	$	13,296,691	$	(5,705,469	)	$	(28,795	)	$	7,562,427

Proceeds from rights offering, net of issuance costs		1,383,299		3,292,183								3,292,183
Proceeds from private placement		579,412		1,477,501								1,477,501
Note payable conversion to common stock, including derivative liability, net of taxes		670,153		1,561,592								1,561,592
Net loss						(24,086	)					(24,086	)
Other comprehensive income									106,377			106,377

Balance at March 31, 2016		4,101,664		19,627,967		(5,729,555	)		77,582			13,975,994

Balance at January 1, 2017		4,101,664		19,626,201		(5,542,341	)		(22,380	)		14,061,480
Expense related to share-based compensation				3,848								3,848
Net income						136,195						136,195
Other comprehensive loss									(2,484	)		(2,484	)

Balance at March 31, 2017		4,101,664	$	19,630,049	$	(5,406,146	)	$	(24,864	)	$	14,199,039

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended			Three Months Ended
	March 31, 2017			March 31, 2016
Cash flows from operating activities
Net income (loss)	$	136,195		$	(24,086	)
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities:
Depreciation and amortization		88,851			92,981
Net amortization of securities		35,247			56,441
Net realized gain on sale of loans		(88,340	)		(33,701	)
Net realized gain on sale of foreclosed assets		(26,029	)		(34,881	)
Foreclosed asset impairment		29,421			0
Originations of loans for sale		(1,464,600	)		(1,549,050	)
Proceeds from loan sales		1,635,082			1,399,151
Deferred income tax expense (benefit)		70,161			(12,408	)
Share based compensation		3,848			0
Net change in:
Accrued interest receivable and other assets		(80,492	)		130,173
Accrued expenses and other liabilities		17,032			(698,654	)
Net cash from (used in) operating activities		356,376			(674,034	)
Cash flows from investing activities
Activity in available for sale securities:
Maturities, prepayments and calls		1,045,595			2,298,914
Purchases		(3,501,289	)		0
Loan activity:
Loan originations and payments, net		789,453			(279,042	)
Proceeds from the sale of the credit card portfolio		491,075			0
Additions to premises and equipment		(3,621	)		(15,368	)
Proceeds from the sale of foreclosed assets		30,879			246,438
Net cash from (used in) investing activities		(1,147,908	)		2,250,942
Cash flows from financing activities
Net change in deposits		11,220,714			7,591,956
Repayment of note payable		0			(8	)
Net change in repurchase agreements		103,407			(796,093	)
Capital-raising activities
Proceeds from rights offering, net of issuance costs		0			3,292,183
Proceeds from private placement		0			1,477,501
Net cash from financing activities		11,324,121			11,565,539
Net change in cash and cash equivalents		10,532,589			13,142,447
Beginning cash and cash equivalents		20,982,175			17,899,952
Ending cash and cash equivalents	$	31,514,764		$	31,042,399
Supplemental cash flows information:
Cash paid during the period for interest	$	189,754		$	916,582
including derivative liability and net of taxes		0			1,561,592

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS

BASIS OF PRESENTATION: The unaudited, consolidated financial statements as of and for the three months ended March 31, 2017 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, 2017 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the period ended December 31, 2016. Some items in the prior year financial statements may be reclassified to conform to the current presentation.

LOAN POLICY: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses. The loan portfolio consists of the following segments:

Commercial- Loans to businesses that are sole proprietorships, partnerships, limited liability companies and corporations. These loans are for commercial, industrial, or professional purposes. The risk characteristics of these loans vary based on the borrowers business and industry as repayment is typically dependent on cash flows generated from the underlying business.

Commercial Real Estate- Loans to individuals or businesses that are secured by improved and unimproved vacant land, farmland, commercial real property, 1-4 family and multifamily residential properties, and all other conforming, nonresidential properties. Proceeds may be used for land acquisition, development or construction. These loans typically fall into two general categories: property that is owner occupied and, income or investment property. Owner occupied commercial real estate loans typically involve the same risks as commercial and industrial loans, however, the underlying collateral is the real estate which is subject to changes in market value after the loan’s origination. Adverse economic events and changes in real estate market valuations generally describe the risks that accompany commercial real estate loans involving income or investment property. The ability of the borrower to repay tends to depend on the success of the underlying project or the ability of the borrower to sell or lease the property at certain anticipated values.

Consumer- Term loans or lines of credit for the purchase of consumer goods, vehicles or home improvement. The risk characteristics of the loans in this segment vary depending on the type of collateral, however, repayment is expected from an individual continuing to generate a cash flow that supports the calculated payment obligation. Secondary support could involve liquidation of collateral.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

Residential- Loans to purchase or refinance single family residences. The risks associated with this segment are similar to the risks for consumer loans as far as individual payment obligations, however, the underlying collateral is the real estate. Real estate is subject to changes in market valuation and can be unstable for a variety of reasons.

For all loan segments, interest income is accrued on the unpaid principal using the interest method assigned to the loan product and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt. A loan is moved to non-accrual status when it is past due over 90 days unless the loan is well secured and in the process of collection. If a loan is not past due but deemed to be impaired it may also be moved to non-accrual status. These rules apply to loans in all segments. However, certain classes of loans in the consumer segment may simply get charged-off as opposed to moving to non-accrual status.

All interest accrued but not received for a loan placed on non-accrual is reversed against interest income at the time the loan is assigned non-accrual status. Payments received on such loans are applied to principal when there is doubt about recovering the full principal outstanding. Loans are eligible to return to accrual status after six months of timely payment and future payments are reasonably assured.

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and from recoveries of previously charged-off loans and decreased by charge-offs.

The allowance for loan loss analysis is performed monthly. Management’s methodology consists of specific and general components. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent 12 quarters. The historical loss experience is recalculated at the end of each quarter. This actual loss experience is supplemented with current economic factors based on the risks present for each portfolio segment. These current economic factors are also reassessed at the end of each quarter and include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; quality of loan review system; degree of oversight by the Board of Directors; national and local economic trends and conditions; industry conditions; competition and legal and regulatory requirements; and effects of changes in credit concentrations. There were no significant changes to this methodology in the first quarter of 2017.

For the commercial and commercial real estate portfolio segments, the historical loss is tracked by original loan grade. The Bank utilizes a numeric grading system for commercial and commercial real estate loans. Grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation and the estimated collateral values. The description of the loan grade criteria is included in Note 4. In recent periods, with charge-off activity lessening, the calculated historical loss factor assigned to general allocations was considerably reduced.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

Within the commercial and industrial, and commercial real estate portfolios, there are classes of loans with like risk characteristics that are periodically segregated because management has determined that the historical losses or current factors are unique and ought to be considered separately from the entire segment.

For the consumer segment, historical loss experience is based on the actual loss history of the following four classes; general consumer loans, personal and home equity lines of credit. The level of delinquencies and charge-off experienced directly impacts the general allocations to the consumer classes. Similar to the commercial segment, charge-off activity in the consumer segment has been lessening, thus reducing the calculated historical loss factor assigned to the general allocations.

For the residential segment, loss experience is not segregated by grades or classes. The level of delinquencies, charge-off experience, and direction of real estate values directly impacts the general allocations to the residential real estate segment. Similar to the commercial, charge-off activity in the residential segment has been lessening, thus reducing the calculated historical loss factor assigned to the general allocations.

The specific component of the allowance for loan losses relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired.

Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Any loan within a segment can be considered for individual impairment if it meets the above criteria. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported net, at the fair value of the collateral less costs to sell.

Allocations of the allowance may be made for specific loans and groups, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan balances are generally charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Statutorily, the Bank must charge-off bad debt that reaches delinquency of 360 days. In the case of an impaired loan, management typically charges off any portion of the debt that is unsecured based on an internal analysis of future cash flows and or collateral.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

There was no material change in these operating doctrines as of March 31, 2017.

ADOPTION OF NEW ACCOUNTING STANDARDS:

None

NEWLY ISSUED NOT YET EFFECTIVE ACCOUNTING STANDARDS:

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v)recognize revenue when (or as) the entity satisfies a performance obligation. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2016, with three transition methods available – full retrospective, retrospective and cumulative effect approach. At the July 9, 2015 FASB meeting, the FASB voted to delay the effective date by one year to January 1, 2018. The adoption of this guidance will not have a material impact because the core revenue of the Company, net interest income on financial assets and liabilities, is explicitly excluded from the scope of ASU 2014-09. The Company is currently reviewing the impact on non-interest income, but does not expect a significant effect on the Company’s results of operations.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. One such amendment requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option. The presentation addresses financial statement users’ feedback that presenting the total change in fair value of a liability in net income reduced the decision usefulness of an entity’s net income when it had deterioration in its credit worthiness. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The new guidance must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The only financial instruments measured at fair value are the Company’s securities which have always been addressed separately in other comprehensive income so this guidance is not expected to have any material effect on the Company’s financial position or results of operations.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

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

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

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

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Previously, entities were allowed to amortize to contractual maturity or to call date. This ASU is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company does not currently own any callable debt securities so the adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

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

RECENT DEVELOPMENTS

The Company was subject to a Written Agreement with the Federal Reserve Bank of Chicago (“FRB”) beginning in December 2010 but in light of improvements to the Company’s financial condition and the strengthened capital position of the Bank as a result of the capital raise, the FRB terminated the Written Agreement on March 16, 2017.

Going forward, the FRB has requested that the Company obtain written approval at least 30 days prior to declaring or paying a dividend on any class of its stock; increasing its debt, including the issuance of trust preferred securities; or redeeming any Company stock.

SECURITIES AVAILABLE FOR SALE

The following tables represent the securities held in the Company’s portfolio at March 31, 2017 and at December 31, 2016:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
March 31, 2017	Cost		Gains		Losses			Value

US Treasury	$	4,002,279	$	806	$	(1,757	)	$	4,001,328
US Government and federal agency		5,960,823		3,985		(616	)		5,964,192
Municipals		0		0		0			0
Mortgage-backed and collateralized mortgage obligations– residential		8,257,018		39,859		(79,950	)		8,216,927
	$	18,220,120	$	44,650	$	(82,323	)	$	18,182,447

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2016	Cost		Gains		Losses			Value

US Treasury	$	503,045	$	1,721	$	0		$	504,766
US Government and federal agency		6,469,467		10,657		(147	)		6,479,977
Municipals		0		0		0			0
Mortgage-backed and collateralized mortgage obligations– residential		8,827,160		43,455		(89,594	)		8,781,021
	$	15,799,672	$	55,833	$	(89,741	)	$	15,765,764

- 11 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2017:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	5,963,075	$	5,966,964
Due from one to five years		4,000,027		3,998,556
Due from five to ten years		0		0
Due in more than ten years		0		0
Mortgage-backed and collateralized mortgage obligations – residential		8,257,018		8,216,927
	$	18,220,120	$	18,182,447

- 12 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE (Continued)

Below is the table of securities with unrealized losses, aggregated by investment category and length of time such securities were in an unrealized loss position at March 31, 2017 and December 31, 2016:

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2017	Value		Losses			Value		Losses			Value		Losses
US Treasuries	$	3,004,297	$	(1,757	)	$	0	$	0		$	3,004,297	$	(1,757	)
US Government and federal agency		951,950		(616	)		0		0			951,950		(616	)
Mortgage-backed and collateralized mortgage obligations - residential		5,221,577		(58,747	)		1,014,047		(21,203	)		6,235,624		(79,950	)
	$	9,177,824	$	(61,120	)	$	1,014,047	$	(21,203	)	$	10,191,871	$	(82,323	)

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2016	Value		Losses			Value		Losses			Value		Losses
US Government and federal agency	$	499,633	$	(147	)	$	0	$	0		$	499,633	$	(147	)
Mortgage-backed and collateralized mortgage obligations - residential		5,406,053		(69,170	)		881,617		(20,424	)		6,287,670		(89,594	)
	$	5,905,686	$	(69,317	)	$	881,617	$	(20,424	)	$	6,787,303	$	(89,741	)

No securities were sold in the three months ended March 31, 2017 or March 31, 2016.

- 13 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE (Continued)

Other-Than-Temporary-Impairment

Management evaluates securities for other than temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

At March 31, 2017 and December 31, 2016, all of the mortgage-backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae has the full faith and credit of the US government. Fannie Mae and Freddie Mac are highly rated by the rating agencies and although their debt is not guaranteed by the US government, the US government in 2008, acknowledged its commitment to support their financial health. At March 31, 2017, 25 debt securities had unrealized losses with aggregate depreciation of 0.80% from the amortized cost basis; four of the 25 had unrealized losses greater than 12 months.

Six of the 25 securities, which had an unrealized loss at March 31, 2017, are issued by government agencies and 19 are issued by government-sponsored entities. It is likely that these debt securities will be retained given the fact that they are pledged to various public funds. The reported decline in value is not material and is deemed to be market driven. Because the decline in fair value is attributable to changes in interest rates and not credit quality and, because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2017.

At March 31, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than U.S. Government and federal agencies, in an amount greater than 10% of common stock and surplus.

- 14 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE (Continued)

Securities pledged at March 31, 2017 had a carrying amount of $14,686,955 and were pledged to secure public fund customers and customer repurchase agreements. Pledged securities at December 31, 2016 had a carrying amount of $14,266,378.

LOANS

Outstanding loan balances by portfolio segment and class at March 31, 2017 and December 31, 2016 were as follows:

	March 31, 2017			December 31, 2016

Commercial	$	48,387,087		$	50,869,327
Commercial Real Estate:
General		60,893,535			55,412,701
Construction		4,345,936			8,383,035
Consumer:
Lines of credit		6,267,246			5,965,344
Other		1,137,623			1,169,365
Credit card		0			450,920
Residential		18,635,164			18,654,044
Net deferred loan fees		(70,100	)		(80,152	)
		139,596,491			140,824,584
Less: Allowance for loan losses		(1,618,398	)		(1,611,820	)
Loans, net	$	137,978,093		$	139,212,764

- 15 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The following tables present the activity in the allowance for loan losses for the three-month periods ended March 31, 2017 and 2016 by portfolio segment:

			Commercial
Three Months Ended March 31, 2017	Commercial		Real Estate		Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	617,002	$	459,805	$	259,194		$	203,312		$	72,507		$	1,611,820
Charge-offs		0		0		(76	)		0			0			(76	)
Recoveries		5,400		0		1,254			0			0			6,654
Provision for loan losses		5,067		65,672		(41,364	)^1,2,3		(16,794	)⁴		(12,581	)		0
Ending balance	$	627,469	$	525,477	$	219,008		$	186,518		$	59,926		$	1,618,398

Three Months Ended March 31, 2016	Commercial		Commercial Real Estate		Consumer			Residential		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	522,558	$	432,145	$	322,185		$	210,653	$	183,875		$	1,671,416
Charge-offs		0		0		(5,545	)⁵		0		0			(5,545	)
Recoveries		10,403		0		28,770	⁵		0		0			39,173
Provision for loan losses		23,313		21,093		(30,839	)⁵		4,456		(18,023	)		0
Ending balance	$	556,274	$	453,238	$	314,571		$	215,109	$	165,852		$	1,705,044

The sale of the credit card portfolio released loan loss reserves of $11,363.

The Bank annually updates its balances on watch list home equity loans. Since year-end 2016, the balances of these credits decline significantly which reduced the specific allocations by $23,038.

The loan loss reserves related to impaired consumer loans declined $9,727 since year-end 2016.

⁴

An updated appraisal was received on a specifically identified mortgage loan, which allowed the impaired loan to have zero allocation; releasing loan loss reserves of $18,289.

⁵

A negative loan loss provision was made in the first quarter due to net recoveries and a reduction in outstanding balances.

- 16 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2017 and December 31, 2016:

March 31, 2017	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment¹	$	287,564	$	62,334	$	70,776	$	40,815	$	0	$	461,489
Collectively evaluated for impairment		339,905		463,143		148,232		145,703		0		1,096,983
Unallocated		0		0		0		0		59,926		59,926
Total ending allowance balance	$	627,469	$	525,477	$	219,008	$	186,518	$	59,926	$	1,618,398

Loans:
Individually evaluated for impairment¹	$	1,367,131	$	7,215,291	$	127,875	$	522,315	$	0	$	9,232,612
Collectively evaluated for impairment		47,109,057		58,124,755		7,300,829		18,162,488		0		130,697,129
Total ending loans balance	$	48,476,188	$	65,340,046	$	7,428,704	$	18,684,803	$	0	$	139,929,741

December 31, 2016	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment¹	$	268,274	$	20,595	$	80,503	$	62,962	$	0	$	432,334
Collectively evaluated for impairment		348,728		439,210		178,691		140,350		0		1,106,979
Unallocated		0		0		0		0		72,507		72,507
Total ending allowance balance	$	617,002	$	459,805	$	259,194	$	203,312	$	72,507	$	1,611,820

Loans:
Individually evaluated for impairment¹	$	2,294,672	$	6,328,334	$	165,174	$	526,736	$	0	$	9,314,916
Collectively evaluated for impairment		48,666,710		57,560,977		7,448,194		18,176,652		0		131,852,533
Total ending loans balance	$	50,961,382	$	63,889,311	$	7,613,368	$	18,703,388	$	0	$	141,167,449

Loans that are specifically identified.

- 17 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2017 and December 31, 2016. The recorded investment includes unpaid principal balance net of interest payments applied to principal (non-accrual loans only) as well as accrued interest receivable, deferred fees and costs. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

			Unpaid				Average		Interest		Cash Basis
	Recorded		Principal		Related		Recorded		Income		Interest
March 31, 2017	Investment		Balance		Allowance		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	402,522	$	401,250	$	0	$	735,835	$	3,809	$	2,570
Commercial Real Estate:
General		5,766,667		6,912,511		0		6,380,593		67,320		65,093
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		9,349		9,336		0		27,072		167		167
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		472,178		503,374		0		372,759		5,014		4,224
Subtotal	$	6,650,716	$	7,826,471	$	0	$	7,516,259	$	76,310	$	72,054
With an allowance recorded:
Commercial	$	964,609	$	969,924	$	287,564	$	963,409	$	11,225	$	5,857
Commercial Real Estate:
General		1,448,624		1,447,891		62,334		521,116		20,205		20,165
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		98,714		98,219		51,076		105,179		1,521		1,521
Other		19,812		19,700		19,700		19,966		367		367
Credit card		0		0		0		0		0		0
Residential		50,137		59,583		40,815		245,154		0		0
Subtotal	$	2,581,896	$	2,595,317	$	461,489	$	1,854,824	$	33,318	$	27,910
Total	$	9,232,612	$	10,421,788	$	461,489	$	9,371,083	$	109,628	$	99,964

- 18 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the average recorded investment of loans individually evaluated for impairment by class of loans as of March 31, 2017 and December 31, 2016 and the associated interest income. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

			Unpaid				Average		Interest		Cash Basis
	Recorded		Principal		Related		Recorded		Income		Interest
December 31, 2016	Investment		Balance		Allowance		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,334,036	$	1,394,625	$	0	$	1,355,309	$	60,397	$	49,175
Commercial Real Estate:
General		6,270,915		7,349,245		0		5,148,859		191,666		186,453
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		35,868		35,791		0		71,397		5,010		5,010
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		181,557		214,031		0		297,361		981		490
Subtotal	$	7,822,376	$	8,993,692	$	0	$	6,872,926	$	258,054	$	241,128
With an allowance recorded:
Commercial	$	960,636	$	970,799	$	268,274	$	996,153	$	43,517	$	43,146
Commercial Real Estate:
General		57,419		57,323		20,595		51,826		2,556		2,556
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		108,825		108,217		60,132		153,010		7,904		7,512
Other		20,481		20,372		20,371		17,827		1,437		1,348
Credit card		0		0		0		0		0		0
Residential		345,179		353,232		62,962		314,968		14,314		14,314
Subtotal	$	1,492,540	$	1,509,943	$	432,334	$	1,533,784	$	69,728	$	68,876
Total	$	9,314,916	$	10,503,635	$	432,334	$	8,406,710	$	327,782	$	310,004

- 19 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the aging of the recorded investment in past due and non-accrual loans by class of loans as of March 31, 2017:

					Greater Than 90		Total Accruing				Total Recorded
	30-59 Days Past		60-89 Days Past		Days Past		Past Due		Current		Investment of
Accruing Loans	Due		Due		Due		Loans		Accruing Loans		Accruing Loans
Commercial	$	118,947	$	71,403	$	0	$	190,350	$	48,274,949	$	48,465,299
Commercial Real Estate:
General		130,188		42,181		0		172,369		60,812,525		60,984,894
Construction		0		43,872		0		43,872		4,311,280		4,355,152
Consumer:
Lines of credit		0		0		0		0		6,286,557		6,286,557
Other		1,692		998		0		2,690		1,139,457		1,142,147
Credit card		0		0		0		0		0		0
Residential		0		0		0		0		18,576,528		18,576,528
Total	$	250,827	$	158,454	$	0	$	409,281	$	139,401,296	$	139,810,577

					Greater Than 90		Total		Current		Total Non Accrual
	30-59 Days Past		60-89 Days Past		Days Past		Non Accrual		Non Accrual		Recorded
Non Accrual Loans	Due		Due		Due		Past Due Loans		Loans		Investment
Commercial	$	0	$	0	$	0	$	0	$	10,889	$	10,889
Commercial Real Estate:
General		0		0		0		0		0		0
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		0		0		0		0		0		0
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		0		0		62,050		62,050		46,225		108,275
Total	$	0	$	0	$	62,050	$	62,050	$	57,114	$	119,164

- 20 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the aging of the recorded investment in past due and non-accrual loans by class of loans as of December 31, 2016:

					Greater Than 90		Total Accruing				Total Recorded
	30-59 Days Past		60-89 Days Past		Days Past		Past Due		Current		Investment of
Accruing Loans	Due		Due		Due		Loans		Accruing Loans		Accruing Loans
Commercial	$	298,912	$	592,498	$	0	$	891,410	$	50,058,531	$	50,949,941
Commercial Real Estate:
General		100,058		0		0		100,058		55,404,749		55,504,807
Construction		0		0		0		0		8,384,504		8,384,504
Consumer:
Lines of credit		36,652		0		0		36,652		5,951,862		5,988,514
Other		0		0		0		0		1,173,934		1,173,934
Credit card		0		0		0		0		450,920		450,920
Residential		36,621		144,039		0		180,660		18,410,821		18,591,481
Total	$	472,243	$	736,537	$	0	$	1,208,780	$	139,835,321	$	141,044,101

					Greater Than 90		Total		Current		Total Non Accrual
	30-59 Days Past		60-89 Days Past		Days Past		Non Accrual		Non Accrual		Recorded
Non Accrual Loans	Due		Due		Due		Past Due Loans		Loans		Investment
Commercial	$	0	$	0	$	0	$	0	$	11,441	$	11,441
Commercial Real Estate:
General		0		0		0		0		0		0
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		0		0		0		0		0		0
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		63,049		0		48,858		111,907		0		111,907
Total	$	63,049	$	0	$	48,858	$	111,907	$	11,441	$	123,348

- 21 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

Troubled Debt Restructurings:

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

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

The Company has allocated $452,235 of specific reserves on $9,082,181 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2017. As of March 31, 2017, there were no troubled debt restructurings that experienced a payment default within 12 months following the modification and there were no charge-offs related to troubled debt restructurings occurring during the first three months of 2017.

At December 31, 2016, the Company had $413,252 in specific reserves on $9,102,558 of unpaid principal balance of loans whose loan terms had been modified in troubled debt restructurings.

During the three-month period ended March 31, 2017, there was one commercial loan modified as a troubled debt restructuring. The recorded investment was $125,604 before the modification and remained the same after the modification. It is also the current balance at March 31, 2017. The modification consisted of the borrower receiving a modified payment structure for 15 years. As of March 31, 2017, no additional specific reserves were established on this troubled debt restructuring.

There were no troubled debt restructurings that occurred during the three-month period ended March 31, 2016; however, there was one commercial troubled debt restructuring that experienced a payment default within 12 months following the modification. The recorded investment at the time of default was $18,301.

- 22 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

Credit Quality Indicators:

The Bank utilizes a numeric grading system for commercial and commercial real estate loans to indicate the strength of the credit. At origination, grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation including cash flow analysis and the estimated collateral values. The loan grade is reassessed at each renewal or amendment but any credit may receive a review based on lender identification of changes in the situation or behavior of the borrower. All commercial and commercial real estate loans exceeding $500,000 are formally reviewed at least annually. Once a loan is graded a 5M or greater number, and is over $100,000, the loan grade will be analyzed once a quarter. In addition to these methods for assigning loan grades, changes may occur through the external loan review or regulatory exam process. The loan grades are as follows:

Exceptional. Loans with an exceptional credit rating.

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.

Above Average. Loans with above average sources of repayment and minimal identified credit or collateral exceptions and minimal repayment risk.

Average. Loans with average sources of repayment that materially conform to Bank policy and regulatory requirements. Repayment risk is considered average.

Acceptable. Loans with acceptable sources of repayment and risk.

5M.

Monitor. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.

Special Mention. Loans that have potential weaknesses and deserve close attention. If uncorrected, further deterioration is likely. Risk of non payment is above average.

Substandard. Loans that are inadequately protected by the borrower’s capacity to pay or the collateral pledged. Risk of non payment is high.

Doubtful. Loans in this grade have identified weaknesses that make full repayment highly questionable and improbable.

When a loan is downgraded to a nine, it is considered a loss and is charged-off.

- 23 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

As of March 31, 2017 and December 31, 2016, and based on the most recent analysis performed, the recorded investment by risk category and class of loans is as follows:

					Commercial Real Estate				Commercial Real Estate
	Commercial				General				Construction
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2017		2016		2017		2016		2017		2016
1	$	1,274,730	$	1,288,969	$	0	$	0	$	0	$	0
2		0		0		1,546,820		1,577,808		0		0
3		9,735,201		10,420,192		5,304,065		5,738,500		238,660		800,501
4		16,810,286		16,356,758		20,469,959		17,176,904		2,294,695		4,310,495
5		16,372,352		17,186,851		19,994,461		18,089,577		331,173		1,782,945
5M		2,423,490		2,606,184		2,966,588		3,087,363		0		0
6		885,685		1,200,346		8,041,999		8,159,197		1,490,624		1,490,563
7		963,692		1,890,779		2,660,483		1,674,939		0		0
8		10,752		11,303		519		519		0		0
Total	$	48,476,188	$	50,961,382	$	60,984,894	$	55,504,807	$	4,355,152	$	8,384,504

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of March 31, 2017 and December 31, 2016:

	Residential
	March 31,		December 31,
	2017		2016
Performing	$	18,162,488	$	18,176,652
Impaired		522,315		526,736
Total	$	18,684,803	$	18,703,388

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2017		2016		2017		2016		2017		2016
Performing	$	6,178,494	$	5,843,821	$	1,122,335	$	1,153,453	$	0	$	450,920
Impaired		108,063		144,693		19,812		20,481		0		0
Total	$	6,286,557	$	5,988,514	$	1,142,147	$	1,173,934	$	0	$	450,920

- 24 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FORECLOSED ASSETS

Foreclosed asset activity for the period ended:

	March 31,			December 31,
	2017			2016
Beginning of year	$	1,460,394		$	2,211,327
Additions		0			89,019
Reductions from sales		(4,850	)		(649,574	)
Direct write-downs		(29,421	)		(190,378	)
End of period	$	1,426,123		$	1,460,394

Expenses related to foreclosed assets include:
Operating expenses, net of rental income	$	40,473		$	80,782

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

PREMISES AND EQUIPMENT

Period end premises and equipment were as follows at March 31, 2017 and December 31, 2016:

	March 31,		December 31,
	2017		2016
Land & land improvements	$	4,704,624	$	4,704,624
Buildings & building improvements		6,334,781		6,334,070
Furniture, fixtures and equipment		3,234,174		3,231,264
		14,273,579		14,269,958
Less: accumulated depreciation		5,872,454		5,783,603
	$	8,401,125	$	8,486,355

Depreciation expenses were $88,851 and $92,981 for the three months ended March 31, 2017 and 2016, respectively.

- 25 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEPOSITS

The components of the outstanding deposit balances at March 31, 2017 and December 31, 2016 were as follows:

	March 31,		December 31,
	2017		2016
Non-interest-bearing DDA	$	40,742,613	$	46,893,163
Interest-bearing DDA		44,314,394		40,848,573
Money market		31,114,870		21,637,723
Savings		38,026,536		32,724,497
Time, under $100,000		15,033,862		15,663,347
Time, over $100,000		9,711,749		9,956,007
Total Deposits	$	178,944,024	$	167,723,310

Time deposits of $250,000 or more were $1,390,232 at March 31, 2017 and $1,387,575 at December 31, 2016. There were no brokered deposits at either March 31, 2017 or December 31, 2016.

SHORT-TERM BORROWINGS

The Company’s short-term borrowings outstanding consisted entirely of repurchase agreements at March 31, 2017 and December 31, 2016. The Company utilized its line of credit with the FHLB for overnight liquidity support only during 2016. Information regarding repurchase agreements and borrowings from the FHLB is summarized below:

	Repurchase			Borrowings
	Agreements			from FHLB
Outstanding at March 31, 2017	$	4,743,173		$	0
Average interest rate at period end		0.42	%		0	%
Average balance during period		4,300,928			0
Average interest rate during period		0.40	%		0	%
Maximum month end balance during period		4,743,173			0

Outstanding at December 31, 2016	$	4,639,766		$	0
Average interest rate at year-end		0.40	%		0	%
Average balance during year		4,283,900			273
Average interest rate during year		0.41	%		0.34	%
Maximum month end balance during year		5,382,709			0

The Bank had securities of $4,429,063 pledged to repurchase agreements at March 31, 2017 and $4,000,396 pledged at December 31, 2016. The Company had approximately $2.6 million of residential mortgage loans pledged to support its line of credit with the FHLB at March 31, 2017.

- 26 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SHORT-TERM BORROWINGS (Continued)

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

Fair Market Value of Securities Pledged to Repurchase Agreements	March 31, 2017		December 31, 2016
U.S. Treasury and agency securities	$	1,449,961	$	454,400
Mortgage-backed securities		2,374,920		2,895,264
Collateralized mortgage obligations		604,182		650,732
Total	$	4,429,063	$	4,000,396

Another source of short-term borrowings is available through the Federal Reserve Discount Window (“Discount Window”). At March 31, 2017, collateral pledged for Discount Window borrowings consisted of $1,700,716 in home equity loans while at December 31, 2016 the collateral pledged consisted of $1,781,289 in home equity loans.

FEDERAL HOME LOAN BANK BORROWINGS

The Bank is a member of the FHLB of Indianapolis. Based on its current FHLB stock holdings and collateral, the Bank has the capacity to borrow $3,922,078 at March 31, 2017. Each borrowing requires a direct pledge of securities and/or loans. To support potential borrowings with the FHLB, the Bank had loans with a carrying value of $7,641,427 pledged at March 31, 2017 and $7,216,020 pledged at year-end 2016. The Bank uses a portion of the loans pledged to the FHLB as collateral for the Bank’s $2,000,000 overdraft line of credit. The remaining pledged loans are available to collateralize longer term FHLB borrowings. The Bank had no balance outstanding on the line of credit and the Bank had no other borrowings with the FHLB at either March 31, 2017 or December 31, 2016.

10.

SUBORDINATED DEBENTURES

The Trust, as discussed in Note 1, sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase an equivalent amount of subordinated debentures from the Company. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and was 3.20% at March 31, 2017 and 3.05% at December 31, 2016. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by the Company. Interest on the subordinated debentures is payable quarterly on March 30^th, June 30^th, September 30^th and December 30^th. The Company is not considered the primary beneficiary of the Trust (under the variable interest entity rules), therefore the Trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability, and the interest expense is recorded on the Company’s consolidated statement of income.

- 27 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.

SUBORDINATED DEBENTURES (Continued)

The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued, give the Company the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities.

On April 27, 2016, the Company’s Board of Directors voted to again defer interest payments in order to preserve its cash for general operations and potential capital support for the Bank as it grows. The deferral of interest does not constitute an event of default. The Company exercised its option to defer regularly scheduled quarterly interest payments beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2016. As of March 31, 2017, the accrued and unpaid interest owed on the subordinated debentures was $135,039. Accrued and unpaid interest owed on the subordinated debentures at December 31, 2016 was $98,892.

11.

SHAREHOLDER’S EQUITY

Sale of Common Stock

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

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

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

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.

- 28 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk as of March 31, 2017 and December 31, 2016 follows:

	March 31, 2017		December 31, 2016

Unused lines of credit	$	22,575,518	$	27,175,383
Unused standby letters of credit		365,000		450,000
Commitments to make loans		381,186		1,199,010

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

13.

FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s placement in the hierarchy is based on the lowest level of input that is significant to the fair value estimate. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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.

- 29 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

Impaired Loans: The method used to determine the valuation of impaired loans depends on the anticipated source of repayment. Collateral dependent impaired loans with specific allocations of the allowance for loan losses are measured using the fair value of the collateral which is generally based on recent real estate appraisals or internal evaluations. Management may add discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Such adjustments can be significant and result in a Level 3 classification of the inputs for determining fair value.

Non-real estate collateral may be valued using appraisals, independent valuation tools, or aging reports. To determine the fair value, these values are adjusted or discounted based on several factors, including but not limited to: the Bank’s historical losses within that particular asset category; knowledge of the collateral, including age and condition; and changes in market conditions from the time of the valuation, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

- 30 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a recurring basis are summarized below as of March 31, 2017 and December 31, 2016:

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
March 31, 2017	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	4,001,328	$	4,001,328	$	0	$	0
US Government and federal agency		5,964,192		0		5,964,192		0
Mortgage-backed and collateralized mortgage obligations– residential		8,216,927		0		8,216,927		0
Total	$	18,182,447	$	4,001,328	$	14,181,119	$	0

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2016	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	504,766	$	504,766	$	0	$	0
US Government and federal agency		6,479,977		0		6,479,977		0
Mortgage-backed and collateralized mortgage obligations– residential		8,781,021		0		8,781,021		0
Total	$	15,765,764	$	504,766	$	15,260,998	$	0

There were no transfers between levels during the first quarter of 2017 or 2016.

- 31 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a non-recurring basis are summarized below for the periods ended March 31, 2017 and December 31, 2016:

			Quoted Prices in		Significant
			Active Markets for		Other Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
March 31, 2017
Impaired loans¹:	$	3,138,907	$	0	$	0	$	3,138,907
Foreclosed assets:		1,426,123		0		0		1,426,123
Total	$	4,565,030	$	0	$	0	$	4,565,030

	Total		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Impaired loans¹:	$	3,210,340	$	0	$	0	$	3,210,340
Foreclosed assets:		1,460,394		0		0		1,460,394
Total	$	4,670,734	$	0	$	0	$	4,670,734

¹ Collateral dependent

- 32 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

The following tables present information as of March 31, 2017 and December 31, 2016 about significant unobservable inputs related to the Bank’s individually material Level 3 financial assets, by class, measured on a non-recurring basis:

	Valuation	Significant Unobservable	Range
	Technique	Inputs	of Inputs
March 31, 2017
Impaired loans	Sales comparison approach	Adjustments for differences between comparable sales		(23)-16	%
	Income approach	Capitalization rate		9-12.5 %

Foreclosed assets	Sales comparison approach	Adjustments for differences between comparable sales		(48.5)-(33)	%

	Valuation	Significant Unobservable	Range
	Technique	Inputs	of Inputs
December 31, 2016
Impaired loans	Sales comparison approach	Adjustments for differences between comparable sales		(25)-19	%
	Income approach	Capitalization rate		9-12.5 %

Foreclosed assets	Sales comparison approach	Adjustments for differences between comparable sales		(22)-14	%

- 33 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

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

			Fair Value Measurements
			at March 31, 2017 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	31,615	$	31,515	$	100	$	0	$	31,615
Loans, net (including impaired)		137,978		0		0		136,239		136,239
FHLB stock		301		N/A		N/A		N/A		N/A
Accrued interest receivable		398		12		53		333		398

Financial liabilities
Deposits		178,944		0		155,647		0		155,647
Repurchase agreements		4,743		0		4,743		0		4,743
Subordinated debentures		4,500		0		0		4,684		4,684
Accrued interest payable		156		0		21		135		156

			Fair Value Measurements
			at December 31, 2016 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	21,082	$	20,982	$	100	$	0	$	21,082
Loans held for sale		128		0		131		0		131
Loans, net (including impaired)		139,213		0		0		136,902		136,902
FHLB stock		301		N/A		N/A		N/A		N/A
Accrued interest receivable		393		5		45		343		393

Financial liabilities
Deposits		167,723		0		155,546		0		155,546
Repurchase agreements		4,640		0		4,640		0		4,640
Subordinated debentures		4,500		0		0		4,686		4,686
Accrued interest payable		119		0		20		99		119

- 34 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

The methods and assumptions, not previously presented above, used to estimate fair values are described as follows:

(a) Cash and cash equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans

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

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

(c) FHLB stock

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

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Repurchase agreements and other short-term borrowings

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

(f) Subordinated debentures

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

(g) Accrued interest receivable/payable

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

- 35 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.

FAIR VALUE MEASUREMENTS (Continued)

(h) Off-balance sheet instruments

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

16.

INCOME TAXES

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

There were no unrecognized tax benefits at March 31, 2017 or December 31, 2016, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months. The Company is only subject to examination by the Internal Revenue Service for years after 2012.

17.

SHARE-BASED COMPENSATION

The Company has one share-based compensation plan as described below. Total compensation cost that has been charged against income for that plan was $3,848 for the first three months of 2017. There was no compensation cost charged against income for the first three months of 2016.

Stock Incentive Plan of 2016

Under the Stock Incentive Plan of 2016, incentive awards may include, but are not limited to stock options, restricted stock, restricted stock unit, stock appreciation rights and other stock-related awards. Incentive awards that are stock options or stock appreciation rights are granted with an exercise price not less than the closing price of our common stock on the date of grant. Price, vesting and expiration date parameters are determined by the Board or a committee of the Board on a grant by grant basis. There were 500,000 shares available for incentive awards upon adoption of the plan. Shares may be granted to Company or Bank Directors and any employee of the Bank.

On December 20, 2016, the Board granted 30,000 shares of restricted stock. The restricted stock will vest over five years. At both March 31, 2017 and year-end 2016, there were 470,000 shares available for future rewards.

- 36 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.

SHARE-BASED COMPENSATION (Continued)

A summary of the restricted stock activity in the plan for the first quarter of 2017 is as follows:

			Weighted Average
	Number of		Grant Date
	Shares		Fair Value
Non-vested at beginning of period		30,000	$	2.27
Granted		0		0
Exercised		0		0
Forfeited		0		0
Non-vested at end of period		30,000	$	2.27

18.

REGULATORY MATTERS

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

The five prompt corrective action classifications are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. For instance, if a bank is not well capitalized, regulatory approval is required to accept brokered deposits. And generally, a bank may not make a capital distribution if, after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, acquisitions, new activities, new branches, payment of dividends or management fees are prohibited and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the Bank at the discretion of the federal regulator.

Under final capital rules that became effective on January 1, 2015, there was a requirement for a capital buffer to be phased in over three years beginning in 2016. Banks that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.

Since March 31, 2016, the Bank’s capital ratios were above the level of well-capitalized according to prompt corrective action regulations. On March 31, 2017, the Company contributed $385,000 of additional capital to the Bank so that it would continue to be above the well-capitalized level. The Bank’s total risk-based capital ratio was 11.90% and its Tier 1 to average assets ratio was 8.01% at March 31, 2017.

- 37 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.

REGULATORY MATTERS (Continued)

At December 31, 2016, the Bank’s total risk-based capital ratio was 11.12% and its Tier 1 to average assets ratio was 8.30%; both above the minimum required for a well-capitalized regulatory status.

Actual capital amounts and ratios for the Bank and, required capital amounts and ratios for the Bank to be well capitalized at March 31, 2017 and December 31, 2016 were:

											Minimum Required
											to Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2017
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank	$	15,565,332		10.78	%	$	6,499,828		4.50	%	$	9,388,641		6.50	%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank		17,183,730		11.90			11,555,250		8.00			14,444,063		10.00
Tier 1 (Core) Capital to risk-weighted assets of the Bank		15,565,332		10.78			8,666,438		6.00			11,555,250		8.00
Tier 1 (Core) Capital to average assets of the Bank		15,565,332		8.01			7,771,093		4.00			9,713,866		5.00

- 38 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.

REGULATORY MATTERS (Continued)

											Minimum Required
											to Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2016
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank	$	14,917,302		10.03	%	$	6,689,791		4.50	%	$	9,663,031		6.50	%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank		16,529,122		11.12			11,892,961		8.00			14,866,201		10.00
Tier 1 (Core) Capital to risk-weighted assets of the Bank		14,917,302		10.03			8,919,721		6.00			11,892,961		8.00
Tier 1 (Core) Capital to average assets of the Bank		14,917,302		8.30			7,184,813		4.00			8,981,016		5.00

Federal Reserve guidelines limit the amount of allowance for loan losses that can be included in Tier 2 capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At March 31, 2017, $1,618,398 was counted as Tier 2 capital and none was disallowed. At December 31, 2016, the full allowance for loan loss balance of $1,611,820 was counted as Tier 2 capital and nothing was disallowed.

- 39 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2017 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, 2017 to that at December 31, 2016. The part labeled Results of Operations discusses the three-month period ending March 31, 2017 as compared to the same period of 2016. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of Part I of this Form 10-Q.

This discussion and analysis of financial condition and results of operations, and other sections of the Form 10-Q contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company, Berryfield and CS Financial Services. Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future factors include, among others, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economy; the Company’s ability to generate future taxable income; the ability of the Company to borrow money or raise additional capital to maintain or increase its or the Bank’s capital position or when desired to support future growth; 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to the application of critical accounting estimates and policies that were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements and our Annual Report on 10-K for the fiscal year ended December 31, 2016.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REGULATORY UPDATE

The Company was subject to a Written Agreement with the FRB beginning in December 2010 but in light of improvements to the Company’s financial condition and the strengthened capital position of the Bank as a result of the capital raise, the FRB terminated the Written Agreement on March 16, 2017.

FINANCIAL CONDITION

Total assets were $202.9 million at March 31, 2017 compared to $191.4 million at December 31, 2016. Asset growth occurring in the first three months of 2017 stemmed primarily from increases to customer deposit accounts which drove up the Company’s balance on deposit at the FRB.

Cash and cash equivalents increased by $10.5 million to $31.5 million at March 31, 2017 from $21.0 million at December 31, 2016. The Bank’s FRB balance increased $12.4 million since year-end 2016 and was $29.0 million on March 31, 2017. The increase in balance was driven largely by an increase in customer deposit balances but also included proceeds from loan repayments and the Company’s capital contribution to the Bank. Although excess liquidity is a conservative posture, it is detrimental to earnings. Typically, a balance at the FRB of between $7 and $10 million is enough to cover the liquidity needs of the Bank’s operations as well as provide a comfortable cushion for unexpected events. Approximately half of the excess liquidity noted above was used to in April when the Company’s public fund customers reduced their balances. The withdrawals were in line with the expected seasonality of these customers. Management intends to use the remaining excess funds for loan originations.

The Bank’s security portfolio was $18.2 million at March 31, 2017 and $15.8 million at December 31, 2016. Investment activity in the first three months of the year consisted of purchases of $3.5 million and maturities, prepayments, calls and net market value changes of $1.1 million.

Maintaining an adequate level of pledgeable assets is one of the driving forces behind most of the Bank’s investment activity. The security purchases in the first quarter of 2017 were specifically intended to increase the Bank’s level of unencumbered securities. Unencumbered securities are those that are not pledged to any other entity. The Bank diligently seeks to manage unencumbered securities to ensure there are enough available to meet parameters required by several of the Bank’s operating policies. Regardless of whether securities are encumbered, they serve as a key source of collateral or potential liquidity for the Bank. The level of unpledged securities is formally assessed monthly. Typically the Bank aims to leave between 10% and 20% of its investment portfolio unpledged. At March 31, 2017, 19% of the investment portfolio was unencumbered. This outcome nearly doubled that at December 31, 2016 when the Bank had a 10% unpledged position.

At March 31, 2017, securities with an amortized cost of $14.7 million were pledged to public fund customers and customer repurchase agreements, up from $14.3 million at year-end 2016.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The market value of the investment portfolio is impacted by national and global economic news. During the first three months of 2017, the investment portfolio had net unrealized losses of $4,000. Including the decrease in value during the first quarter, net unrealized losses on the investment portfolio climbed to $38,000. At March 31, 2017, there were 25 securities with an amortized cost of $10.3 million having an unrealized loss of $82,000. See Note 2 for information regarding the Company’s assessment of other than temporary impairment on these investments.

To reduce exposure to future loss, both realized and unrealized, the Bank intends to adhere to the diversification principles outlined in the investment policy and limit issuer concentrations. Besides fully-guaranteed U.S. government and federal agency securities, there were no holdings of securities of any one issuer in an amount greater than 10% of the Bank’s common stock and surplus at March 31, 2017.

Loans held for sale activity during the first three months of 2017 included $1.5 million of loan originations and $1.6 million of sales. The associated gain on the loan sales was $42,000. There were no loans held for sale at March 31, 2017 and $128,000 at December 31, 2016.

Total loans (held for investment) decreased $1.2 million and were $139.6 million at March 31, 2017 down from $140.8 million at December 31, 2016. There were net decreases in a variety of loan segments and there were reclassifications that occurred between the commercial and commercial real estate segments in the first quarter of 2017. The most significant transactions in the first quarter of 2017 occurred in January and February. In January, one commercial real estate customer sold his business and repaid loans totaling $1.7 million. Additionally, the Bank sold its credit card portfolio in February to TCM Bank. The credit card balance at the time of sale was $445,000. The gain on the sale of these balances was $46,000. Prior to the transaction, management evaluated the risks associated with this type lending as well its potential for future interest and interchange income as well as its regulatory capital allocation. Going forward, the Bank will get a small portion of the interchange income on the transactions of the customers sold as well as a referral fee for new customers. The reclassifications mentioned above consisted of $1.7 million of loans in the commercial segment at year-end 2016 that were reclassified to the commercial real estate segment due to an internal collateral analysis that occurred in the first quarter of 2017. In spite of the net decline in the loan portfolio total since year-end 2016, management believes the Bank’s lending area is positioned to grow the portfolio in 2017 in a manner that assesses multiple risk factors in conjunction with expected rate of return and related capital allocation.

Diligent attention to the credit quality of the current portfolio and future new customers will continue. The lending staff regularly monitors the loan portfolio and adheres to a well-designed credit risk assessment process. In spite of these efforts, the Bank is still exposed to credit risk.

Credit risk is typically the risk of borrower nonpayment on loans although it can be applicable to the investment portfolio as well. In both cases, avoiding portfolio concentrations in any one type of credit or in a specific industry helps to decrease risk; however, the risk of nonpayment for any reason exists with respect to all loans and investments. The Bank recognizes that credit losses will be experienced and will vary with, among other things, general economic conditions; the creditworthiness of the borrower over the term of the debt; and in the case of a collateralized loan, the quality of the collateral.

The Bank has developed a detailed process to estimate credit risk. The process is discussed at length in Note 1 to the Company’s annual financial statements. At each period end, the balance in the allowance for loan losses is based on management’s estimation of probable incurred credit losses. The estimation is the result of loan portfolio analysis completed utilizing a detailed methodology prescribed in the Bank’s credit procedures.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The analysis of the allowance for loan losses is comprised of general credit allocations and specific credit allocations. General credit allocations are made to various categories of loans based on loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The specific credit allocation includes a detailed review of a borrower and its entire relationship resulting in an allocation being made to the allowance for that particular borrower’s situation. A loan becomes specifically identified when, based on current information and events related to that particular borrower, it

is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Specifically identified loans are individually evaluated for impairment.

The allowance for loan losses is adjusted accordingly to maintain an adequate level based on the conclusion of the general and specific analysis. There are occasions when a specifically identified loan requires no allocated allowance for loan losses. To have no allocated allowance for loan loss, a specifically identified loan must be well secured and have either a collateral analysis or a present value of cash flow analysis that supports a loan loss reserve allocation of zero.

At March 31, 2017, the allowance for loan losses totaled $1.6 million; approximately, the same as at year-end 2016. The allowance for loan loss increased by $7,000 and is largely the result of recoveries for the first three months of 2017. At March 31, 2017, the ratio of allowance to gross loans outstanding was 1.16%, compared to 1.14% at year-end 2016.

The allocation of the allowance at March 31, 2017 and December 31, 2016 was as follows:

	March 31, 2017					December 31, 2016
			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	$	627,469		34.6	%	$	617,002		36.1	%
Commercial Real Estate		525,477		46.7			459,805		45.3
Consumer		219,008		5.3			259,194		5.4
Residential		186,518		13.4			203,312		13.2
Unallocated		59,926		N/A			72,507		N/A
Total	$	1,618,398		100.0	%	$	1,611,820		100.0	%

The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 0.84% at both year-end 2016 and March 31, 2017. At March 31, 2017, there was $60,000 of unallocated reserves in the allowance for loan losses while unallocated reserves were $73,000 at December 31, 2016.

At March 31, 2017, the allowance contained $461,000 in specific allocations for impaired loans whereas at December 31, 2016 there was $432,000 specifically allocated for that purpose. The $29,000 increase during the first three months of the year was due to one impaired loan that had no reserve allocation at year-end 2016 but required a $40,000 allocation at March 31, 2017 due to unpaid property tax liabilities. A portion of this new allocation was offset by small changes to the reserve allocations of several other specifically identified loans. In total, there was $9.2 million of recorded investment on impaired loans at March 31, 2017 compared to $9.3 million at year-end 2016.

- 43 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Not all specifically identified loans require an allocation of reserves. After a loan is specifically identified and an evaluation of the collateral or expected repayment is completed, typically a charge-off is made so that the remaining principal is the current value of the assigned collateral or expected repayment, therefore no further reserve is required. There were 15 impaired loans requiring no reserve at March 31, 2017. The recorded investment of these loans on that date was $6.7 million. The recorded investment of loans requiring no reserve comprised 72% of total specifically identified loans at March 31, 2017. This outcome is down from $7.8 million requiring no reserves at year-end 2016; 84% of the recorded investment of specifically identified loans. The decrease is due to the impaired loan mentioned above requiring a specific allocation in the first quarter of 2017 due to unpaid property tax liabilities.

Specifically identified loans requiring reserves had a recorded investment of $2.6 million at March 31, 2017 and $1.5 million at year-end 2016. The increase is due to the specifically identified loan noted above.

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 2016 to March 31, 2017, the recorded investment in accruing past due and non-accrual loans decreased by $804,000. This was evidenced by a $800,000 decrease in the recorded investment in past due loans and a $4,000 decrease in the recorded investment in non-accrual loans in the first three months of 2017.

The recorded investment of accruing loans past due 30-59 days was $251,000 at March 31, 2017; a $221,000 decrease since December 31, 2016. There were five loans past due 30-59 days at March 31, 2017. Only one of the five loans was also past due 30-59 days at December 31, 2016. By April 30, 2017, all but one of these were paid current and were no longer past due.

The recorded investment of accruing loans past due 60-89 days at March 31, 2017 was $158,000 compared to a recorded investment of $737,000 at December 31, 2016. There were four loans past due at March 31, 2017. None of the four were past due at year-end 2016.

There were no loans still accruing interest with a recorded investment past due 90 days and greater at either March 31, 2017 or December 31, 2016.

The oversight of payment delinquency continues to be stringent as the Bank recognizes that this behavior is often the first indication of deterioration in credit quality.

The recorded investment of non-accrual loans totaled $119,000 at March 31, 2017; down $4,000 from year-end 2016. There were three non-accrual notes at March 31, 2017 and none were secured by undeveloped real estate. At March 31, 2017, there were specific allocations of $52,000 in the allowance for any estimated collateral deficiency on these notes.

There were net recoveries of $7,000 for the first quarter of 2017 and the ratio of annualized net recoveries to average loans was (0.02)%. Similarly, there were net recoveries of $34,000 for the first quarter of 2016. The ratio of annualized net recoveries to average loans was (0.11)% for the first three months of 2016.

- 44 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Another risk identified by the Company is interest rate risk. The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. In addition to product diversification, two other methods used are to balance the rate sensitivity of the portfolio and avoid extension risk¹.

The loan maturities and rate sensitivity of the loan portfolio at March 31, 2017 are set forth below:

	Within		Three to		One to		After
	Three		Twelve		Five		Five
	Months		Months		Years		Years		Total

Commercial	$	9,208,580	$	10,503,299	$	20,096,224	$	8,508,884	$	48,316,987
Commercial Real Estate:
General		7,483,359		9,827,302		34,160,095		9,422,779		60,893,535
Construction		2,160,231		1,700,419		485,286		0		4,345,936
Consumer:
Lines of credit		30,529		677,227		2,101,892		3,457,598		6,267,246
Other		71,440		100,849		683,587		281,747		1,137,623
Credit card		0		0		0		0		0
Residential		456,305		1,326,831		34,309		16,817,719		18,635,164
	$	19,410,444	$	24,135,927	$	57,561,393	$	38,488,727	$	139,596,491
Loans at fixed rates	$	6,477,769	$	10,742,502	$	45,658,311	$	27,498,748	$	90,377,330
Loans at variable rates		12,932,675		13,393,425		11,903,082		10,989,979		49,219,161
	$	19,410,444	$	24,135,927	$	57,561,393	$	38,488,727	$	139,596,491

At March 31, 2017, 65% of the Bank’s loan balances carried a fixed rate and 35% carried a floating rate. Since 2015, there has been a 7% reduction in the concentration of loans carrying a fixed rate, which includes a 1% reduction since year-end 2016. Some of the shift is a factor of the types of loans that have been paid off or have been added to the portfolio and some of the change is related to customer preference at the time of renewal. Since the rate environment is leaning toward further rate increases, management believes it is beneficial for the Bank to continue increasing its concentration of floating rate loans.

Avoidance of extension risk is another important means to mitigate interest rate risk. The maturity distribution of the Bank’s loan portfolio remained relatively balanced between short-term (less than one year) and long-term (greater than five years) maturities at both March 31, 2017 and December 31, 2016. At March 31, 2017, short-term maturities comprised 31% of the loan portfolio and long term maturities comprised approximately 28%. These results are similar to year-end 2016. At December 31, 2016, short term maturities were the same at 31% however, 27% of the portfolio carried a maturity greater than five years.

Foreclosed assets were $1.4 million at March 31, 2017, down slightly since December 31, 2016. Foreclosed assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. There was one property sold during the first three months of 2017 and one lot sold from a development. The development will remain in the number of foreclosed properties until the last lot is sold. The net gains realized on these sales were $26,000. No properties were added in the first quarter of 2017. At March 31, 2017, foreclosed assets consisted of 13 real estate holdings, one less than at December 31, 2016.

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

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deposit balances were $178.9 million at March 31, 2017, up from $167.7 million at December 31, 2016. The $11.2 million increase in deposits since year-end is mostly driven by the seasonal fluctuation in the deposit accounts of the Bank’s largest public fund customers. The seasonal fluctuation typically occurs in the first quarter of each year. Public fund deposit accounts rose $10.9 million since year-end 2016. In addition to this increase, there was also growth occurring from individual and business customers. The public fund customers typically reduce their deposits significantly in April of each year. In April of 2017, public fund balances were reduced by approximately $7.8 million. The withdrawals are in line with the expected seasonality of these customers.

Repurchase agreement balances were $4.7 million at March 31, 2017 and $4.6 million at December 31, 2016, an increase of $103,000. The growth between the two period ends was primarily the result of existing customers increasing their balances.

Shareholders’ equity was approximately $14.2 million on March 31, 2017. On December 31, 2016, the balance was $14.1 million. The net increase of $138,000 was made up of net income of $136,000, share based compensation of $4,000 net of a comprehensive loss from security market value change of $2,000.

Total shares outstanding at both March 31, 2017 and December 31, 2016 were 4,101,664. The book value per share was $3.46 at March 31, 2017 compared to $3.43 at December 31, 2016.

In March 2017, the Company contributed $385,000 of capital to the Bank to supplement its regulatory capital ratios. The Bank has had regulatory capital ratios which are at a level considered to be well capitalized according to prompt corrective action guidance since March 2016. The Bank continues to be well capitalized. At March 31, 2017, the Bank’s total risk-based capital ratio was 11.90% and its Tier 1 to average assets ratio was 8.01% compared to 11.12% and 8.30%, respectively, at December 31, 2016.

RESULTS OF OPERATIONS

For the first three months of 2017, the Company earned net income of $136,000 which was $160,000 more than the net loss of $24,000 recorded for the first three months of 2016. Earnings are up due to more net interest income principally from loan growth over the past twelve months. Non-interest expenses are also lower. The basic and diluted earnings per share for the first three months of 2017 were $0.03 compared to a basic and diluted loss per share for the first three months of 2016 of $(0.02).

For the first three months of 2017, the annualized return on the Company’s average total assets was 0.28%, compared to (0.05)% for the first three months of 2016. The annualized return on average equity was 3.83% for the first quarter of 2017, up from an annualized return on average equity of (1.21%) for the same period in 2016.

Earnings growth stemmed largely from a rise in net interest income driven by loan growth over the last twelve months. For the first three months of 2017 compared to the similar period in 2016, average earning assets grew $16.3 million; 96% of which was due to loan growth.

- 46 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:
	2017							2016
	Average				Average			Average				Average
	Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate
Assets
Federal funds sold and interest- bearing deposits with banks	$	23,328,643	$	47,185		0.81	%	$	16,003,536	$	19,876		0.50	%
Securities		17,885,466		63,197		1.41			24,556,120		85,439		1.39
Loans ¹		139,626,551		1,663,094		4.76			123,996,419		1,520,753		4.91
Total interest earning assets		180,840,660		1,773,476		3.92			164,556,075		1,626,068		3.95
Other assets		16,479,112							17,289,821
	$	197,319,772						$	181,845,896
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	131,433,360	$	166,547		0.51	%	$	126,312,340	$	161,538		0.51	%
Repurchase agreements		4,300,928		4,263		0.40			4,205,557		4,399		0.42
Subordinated debentures, notes payable and FHLB advances		4,500,000		36,146		3.21			5,723,736		60,477		4.23
Total interest bearing liabilities		140,234,288		206,956		0.59			136,241,633		226,414		0.66
Noninterest-bearing deposits		42,453,985							36,251,636
Other liabilities		410,184							1,391,922
Shareholders’ Equity		14,221,315							7,960,705
	$	197,319,772						$	181,845,896
Net interest income (tax equivalent basis)				1,566,520							1,399,654
Net interest spread on earning assets (tax equivalent basis)						3.33	%						3.29	%
Net interest margin on earning assets (tax equivalent basis)						3.46							3.40
Average interest-earning assets to average interest-bearing liabilities						128.96							120.78
Tax equivalent adjustment				0							732
Net interest income			$	1,566,520						$	1,398,922

For the first quarter of 2017, the net interest spread on average earning assets was 3.33%, increasing four basis points in the past 12 months. The net interest margin on a fully tax equivalent basis increased by six basis points over the same period. For the first three months of 2017, the Company’s net interest margin was 3.46% compared to 3.40% for the first three months of 2016. Net interest income for the first three months of 2017 was $1.6 million, compared to a figure of $1.4 million for the same three months in 2016.

¹ Includes loans held for sale and non-accrual loans.

- 47 -

COMMUNITY SHORES BANK CORPORATION

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

The average rate earned on interest earning assets was 3.92% for the three-month period ending March 31, 2017 compared to 3.95% for the same period in 2016. Essentially, there was more interest income generated from earning assets, but the rate earned fell slightly. The interest-earning balances held at other banks were $7.3 million more in the first quarter of 2017 compared to the same period in 2016. A majority of the increase was due to a higher balance at the FRB due to an increase in customer deposits; a large portion being additional public funds. In addition to more deposits at the FRB, the rate earned on those deposits increased 31 basis points.

Conversely, investments averaged $6.7 million less in the first quarter of 2017 compared to the same period in 2016. For most of 2016, the Bank focused on reducing its pledging obligations and allowing the proceeds from maturities to be used to repay internet deposits as well as to fund loan originations. Although the portfolio was smaller, the rate earned was two basis points higher. The average rate earned on investments was 1.41% for the first quarter of 2017.

The largest variation since the first quarter of 2016 is the increase in average loans. Average loans are $15.6 million higher in the first quarter of 2017 compared to the first quarter of 2016. In the second half of 2016, the Bank achieved significant loan growth. The larger volume produced $142,000 more interest income for the first quarter of 2017. The volume stemmed from both current and new customers. The additional interest income stemmed from increased volume, since the average rate earned on the loan portfolio actually decreased 15 basis points. The decline in the average rate earned is due to competition as well as lower rates merited at the time of renewal. Improvement in credit worthiness typically drives the decision to offer a lower rate. In addition to lower renewal rates, another difficulty facing further improvement in interest income is the fact that over 60% of the loan portfolio carries a fixed rate. Fixed rate loans in a rising rate environment limit future interest income benefit as increases to prime lending rates occur. In the short term, management will continue to focus on further growth to the loan portfolio to help boost loan interest income and earnings.

The Company’s cost of funds on interest-bearing liabilities was 0.59% in the first quarter of 2017; seven basis points less than the first quarter of 2016. The improvement occurred mainly because of the reduction in the Company’s debt as the rate paid on interest-bearing deposits remained unchanged at 0.51% when comparing the first quarter of 2017 to that of 2016. Although national prime lending rates have risen over the past twelve months, the Bank has not made many changes to the rates paid on deposits.

There was a 102 basis point decrease to the average rate on subordinated debentures and notes payable since March 31, 2016. Driving the reduction, was the elimination of the Company’s note payable in the first quarter of 2016. The note payable carried an interest rate of 8%. The Company’s debt now consists only of its subordinated debentures. The subordinated debentures bear a floating rate, which has increased over the past twelve months. Increasing rates are likely to continue given the current economic climate.

Throughout the next three quarters of 2017, management will focus on reducing the Bank’s interest earning balance at the FRB by funding loans.

To plan for net interest margin improvement and to understand potential outcomes when rates increase or decrease in future periods, asset liability management continues to be an important tool for assessing opportunities for improvement and interest rate sensitivity; it also provides a tool for monitoring liquidity. Liquidity management involves the ability to meet the cash flow requirements of the Company’s customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and achieve consistent net interest income through periods of changing interest rates.

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COMMUNITY SHORES BANK CORPORATION

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

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, 2017 were:

	Interest Rate Sensitivity Period
	Within			Three to			One to		After
	Three			Twelve			Five		Five
	Months			Months			Years		Years		Total
Earning assets
Interest-bearing deposits in other financial institutions	$	29,164,606		$	0		$	0	$	0	$	29,164,606
Securities (includes FHLB stock)		2,909,144			5,793,572			9,542,739		237,492		18,482,947
Loans (includes held for sale)		52,983,795			14,863,494			52,228,187		19,521,015		139,596,491
		85,057,545			20,657,066			61,770,926		19,758,507		187,244,044
Interest-bearing liabilities
Savings and checking		113,455,800			0			0		0		113,455,800
Time deposits <$100,000		1,695,362			8,735,926			4,573,466		29,108		15,033,862
Time deposits >$100,000		1,487,794			5,205,215			3,018,740		0		9,711,749
Repurchase agreements and Federal funds purchased		4,743,173			0			0		0		4,743,173
Notes payable and other borrowings		4,500,000			0			0		0		4,500,000
		125,882,129			13,941,141			7,592,206		29,108		147,444,584
Net asset (liability) repricing gap	$	(40,824,584	)	$	6,715,925		$	54,178,720	$	19,729,399	$	39,799,460
Cumulative net asset (liability) repricing gap	$	(40,824,584	)	$	(34,108,659	)	$	20,070,061	$	39,799,460

Currently, the Company has a negative 12 month repricing gap which indicates that the Company is liability sensitive in the next 12 month period. This position implies that more rate bearing liability products have an opportunity to reprice during this period. The local market rates often play a large part in the movement of rates on liabilities. Given current trends, management anticipates that competitive factors may eventually require the Bank to consider increasing the rates paid on its deposit and repurchase agreement products. This could negatively impact the Bank’s cost of funds and overall interest expense; however it is unknown whether the reduction will be successfully offset by loan growth. The interest rate sensitivity table above simply illustrates what the Company is contractually able to change in certain time frames and not a concrete depiction of what will change. Management believes that deposit rates are likely to increase but at a slow pace.

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COMMUNITY SHORES BANK CORPORATION

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

There was no provision for loan losses for the first three months of 2017 or 2016. The provision expense is associated with changes in historical loss calculations, economic conditions (local and national) as well as delinquency, net charge offs or recoveries and changes to credit quality grades. A methodical assessment of these factors generates the reserves required for the risk in the Bank’s loan portfolio and the required provision expense. Management will continue to review the allowance with the intent of maintaining it at an appropriate level for the portfolio’s credit quality and perceived risk factors. Since the provision for loan losses is an estimate, it may be increased in the future should any of the assessed factors trend negatively.

Non-interest income recorded in the first three months of 2017 was $417,000, compared to $382,000 recorded for the similar period in 2016. Gains recorded on loan sales provided the largest difference when comparing the two quarters. In the first quarter of 2017, the Bank finalized the sale of its credit card portfolio. On February 17, 2017, the Bank sold credit card receivables of $445,000. The gain on the transaction was $46,000. Gains from selling mortgage loans were $42,000 for the first quarter of 2017. This outcome was $8,000 more than gains recorded on the sale of mortgage loans in the first quarter of 2016. The Bank added a mortgage lender in 2016 and continues to see increases to this revenue. Partially offsetting the revenue from loan sales, was a decrease in service charges on deposit accounts. The decrease stemmed from lower overdraft fee income. Overdraft income was $12,000 less between the first quarter of 2017 and that of 2016. The Bank attributes a portion of the difference to the improving economy. Management is analyzing other fee opportunities on deposits to boost service fee revenue going forward. Lastly, net gains on foreclosed asset sales were $26,000 in the first quarter of 2017; $9,000 less than 2016’s first quarter. The Bank’s inventory of foreclosed assets had been reduced to 13 properties; as a result, the number of transactions has slowed. The remaining properties are unlikely to generate significant gains.

Non-interest expenses for the first three-month period of 2017 were $1.8 million; $40,000 less than the first three months of 2016; decreases to FDIC Insurance premiums and loan administration expenses more than offset increases to staffing costs as well as foreclosed asset impairment costs.

Salaries and benefit expenses were $1.0 million for the first quarter of 2017; $20,000 more than the first quarter of 2016. The improving economy has translated into increased wages to ensure low turnover and the retention of seasoned professionals. The Bank does not anticipate staff additions in the near term but instead and intends to manage further balance sheet growth with existing staff.

Foreclosed asset impairments were $29,000 for the first quarter of 2017. There were no foreclosed asset impairments recorded in the first quarter of 2016. Any adjustments to the value of foreclosed assets are arrived at through a professional appraisal, an internal evaluation or based on a sales agreement. The Bank is motivated to continue reducing its inventory of foreclosed assets and may continue to have recorded impairments in 2017.

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COMMUNITY SHORES BANK CORPORATION

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

FDIC insurance expenses were $38,000 for the first quarter of 2017 and $67,000 for the first quarter of 2016. The $29,000 reduction in the Bank’s FDIC premium accruals were due to a strengthened regulatory capital position and improved risk profile.

Other non-interest expenses were $224,000 for the first quarter of 2017; $51,000 less than the first quarter of 2016 when other non-interest expenses were $275,000. Approximately 65% of the reduction in this category was associated with a decline in expenses incurred to administrate non-performing loans. These expenses decreased $33,000 when comparing the two quarters. This outcome is due to an improvement in the Bank’s credit quality as well as a reduction in the number of foreclosed properties.

The Company recorded a federal income tax expense of $70,000 for the first three months of 2017. Conversely, as a result of the Company’s net loss for the first three months of 2016, there was a tax benefit of $12,000 recorded.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2017. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2017.

Changes in Internal Control

There were no changes to our internal control over financial reporting during the first fiscal quarter ended March 31, 2017 what materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In the opinion of management, the Company and its subsidiaries are not a party to any current legal proceedings that are expected to have a material adverse effect on their financial condition, either individually or in the aggregate.

ITEM 1A.

RISK FACTORS

Not applicable for smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

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

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SIGNATURES

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

	COMMUNITY SHORES BANK CORPORATION

May 15, 2017	By:	/s/ Heather D. Brolick
Date	Heather D. Brolick
	President and Chief Executive Officer
	(principal executive officer)

May 15, 2017	By:	/s/ Tracey A. Welsh
Date	Tracey A. Welsh
	Senior Vice President, Chief Financial Officer, Secretary and Treasurer
	(principal financial and accounting officer)

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EXHIBIT INDEX

EXHIBIT NO.		EXHIBIT DESCRIPTION

3.1		Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company’s June 30, 2004 Form 10-QSB (SEC file number 333-63769).
3.2		Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s Form 8-K filed July 5, 2006 (SEC file number 000-51166).
31.1		Rule 13a-14(a) Certification of the principal executive officer.
31.2		Rule 13a-14(a) Certification of the principal financial officer.
32.1		Section 1350 Chief Executive Officer Certification.
32.2		Section 1350 Chief Financial Officer Certification.

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