##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 or
 o
    
    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
 
 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
 
 
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
  o þ




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##### 



Page No.PART I. Financial InformationItem 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. Other InformationItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



ITEM 1.
    
    FINANCIAL STATEMENTS (UNAUDITED)
 
 September 30,
    
    
    December 31,2009
    
    
    2008(unaudited)ASSETSCash and due from financial institutions
    
    $
    3,013,420
    
    
    $
    3,192,789Interest-bearing deposits in other financial institutions
    
    
    2,316,738
    
    
    
    2,479,012Total cash and cash equivalents
    
    
    5,330,158
    
    
    
    5,671,801SecuritiesAvailable for sale (at fair value)
    
    
    22,833,676
    
    
    
    18,769,970Held to maturity (fair value of $6,302,636 at September
30, 2009 and
$6,706,991 at December 31, 2008)
    
    
    6,094,131
    
    
    
    6,609,620Total securities
    
    
    28,927,807
    
    
    
    25,379,590Loans held for sale
    
    
    1,439,564
    
    
    
    2,354,956Loans
    
    
    187,885,202
    
    
    
    205,153,203Less: Allowance for loan losses
    
    
    2,790,416
    
    
    
    4,350,903Net loans
    
    
    185,094,786
    
    
    
    200,802,300Federal Home Loan Bank stock
    
    
    404,100
    
    
    
    404,100Premises and equipment, net
    
    
    11,384,618
    
    
    
    11,869,741Accrued interest receivable
    
    
    950,944
    
    
    
    1,004,552Foreclosed assets
    
    
    6,524,040
    
    
    
    5,884,093Other assets
    
    
    1,171,626
    
    
    
    2,240,831Total assets
    
    $
    241,227,643
    
    
    $
    255,611,964LIABILITIES AND SHAREHOLDERS EQUITYDepositsNon-interest bearing
    
    $
    21,567,499
    
    
    $
    19,135,831Interest bearing
    
    
    181,814,969
    
    
    
    200,429,709Total deposits
    
    
    203,382,468
    
    
    
    219,565,540Federal funds purchased and repurchase agreements
    
    
    9,150,085
    
    
    
    5,813,605Federal Home Loan Bank advances
    
    
    6,000,000
    
    
    
    6,000,000Subordinated debentures
    
    
    4,500,000
    
    
    
    4,500,000Notes Payable
    
    
    5,000,000
    
    
    
    4,200,000Accrued expenses and other liabilities
    
    
    563,831
    
    
    
    586,365Total liabilities
    
    
    228,596,384
    
    
    
    240,665,510Shareholders equityPreferred Stock, no par value: 1,000,000 shares
authorized and none issued
    
    
    0
    
    
    
    0Common Stock, no par value: 9,000,000 shares authorized;
1,468,800 at September 30, 2009 and December 31, 2008
    
    
    13,296,691
    
    
    
    13,296,691Retained earnings (deficit)
    
    
    (945,421
    )
    
    
    1,228,084Accumulated other comprehensive income
    
    
    279,989
    
    
    
    421,679Total shareholders equity
    
    
    12,631,259
    
    
    
    14,946,454Total liabilities and shareholders equity
    
    $
    241,227,643
    
    
    $
    255,611,964
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##### Table of Contents



Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30, 2009
    
    
    September 30, 2008
    
    
    September 30, 2009
    
    
    September 30, 2008Interest and dividend incomeLoans, including fees
    
    $
    3,104,682
    
    
    $
    3,632,211
    
    
    $
    9,376,110
    
    
    $
    11,446,961Securities
    
    
    230,606
    
    
    
    207,745
    
    
    
    731,150
    
    
    
    636,313Federal funds sold, FHLB dividends and other income
    
    
    8,728
    
    
    
    37,986
    
    
    
    32,240
    
    
    
    189,341Total interest income
    
    
    3,344,016
    
    
    
    3,877,942
    
    
    
    10,139,500
    
    
    
    12,272,615Interest expenseDeposits
    
    
    1,357,813
    
    
    
    1,917,529
    
    
    
    4,565,492
    
    
    
    6,331,688Repurchase agreements and federal funds purchased
    
    
    16,653
    
    
    
    17,154
    
    
    
    36,292
    
    
    
    53,718Federal Home Loan Bank advances and notes payable
    
    
    171,614
    
    
    
    193,532
    
    
    
    515,007
    
    
    
    598,379Total interest expense
    
    
    1,546,080
    
    
    
    2,128,215
    
    
    
    5,116,791
    
    
    
    6,983,785Net interest income
    
    
    1,797,936
    
    
    
    1,749,727
    
    
    
    5,022,709
    
    
    
    5,288,830Provision for loan losses
    
    
    444,900
    
    
    
    94,515
    
    
    
    923,300
    
    
    
    478,599Net interest income after provision for loan losses
    
    
    1,353,036
    
    
    
    1,655,212
    
    
    
    4,099,409
    
    
    
    4,810,231Noninterest incomeService charges on deposit accounts
    
    
    236,544
    
    
    
    259,411
    
    
    
    682,928
    
    
    
    742,464Mortgage loan referral fees
    
    
    1,694
    
    
    
    0
    
    
    
    17,114
    
    
    
    0Gain on sale of loans
    
    
    64,312
    
    
    
    64,235
    
    
    
    271,054
    
    
    
    319,734Gain on sale of securities
    
    
    0
    
    
    
    0
    
    
    
    273,010
    
    
    
    0Gain (loss) on disposal of other real estate
    
    
    (11,046
    )
    
    
    0
    
    
    
    (22,087
    )
    
    
    142,324Other
    
    
    113,517
    
    
    
    114,923
    
    
    
    399,354
    
    
    
    480,876Total noninterest income
    
    
    405,021
    
    
    
    438,569
    
    
    
    1,621,373
    
    
    
    1,685,398Noninterest expenseSalaries and employee benefits
    
    
    1,016,636
    
    
    
    1,094,695
    
    
    
    3,221,516
    
    
    
    3,513,621Occupancy
    
    
    155,044
    
    
    
    162,155
    
    
    
    485,508
    
    
    
    489,586Furniture and equipment
    
    
    165,540
    
    
    
    174,885
    
    
    
    503,397
    
    
    
    517,529Advertising
    
    
    28,028
    
    
    
    33,968
    
    
    
    60,245
    
    
    
    89,395Data processing
    
    
    118,442
    
    
    
    120,755
    
    
    
    370,897
    
    
    
    356,918Professional services
    
    
    142,906
    
    
    
    115,082
    
    
    
    371,753
    
    
    
    395,227Foreclosed asset impairment
    
    
    178,320
    
    
    
    0
    
    
    
    298,062
    
    
    
    0Other
    
    
    519,548
    
    
    
    397,115
    
    
    
    1,596,948
    
    
    
    1,125,273Total noninterest expense
    
    
    2,324,464
    
    
    
    2,098,655
    
    
    
    6,908,326
    
    
    
    6,487,549Income (loss) before income taxes
    
    
    (566,407
    )
    
    
    (4,874
    )
    
    
    (1,187,544
    )
    
    
    8,080Federal income tax expense (benefit)
    
    
    0
    
    
    
    (17,350
    )
    
    
    985,961
    
    
    
    (47,172
    )Net Income (loss)
    
    $
    (566,407
    )
    
    $
    12,476
    
    
    $
    (2,173,505
    )
    
    $
    55,252Comprehensive income (loss)
    
    $
    (344,279
    )
    
    $
    56,018
    
    
    $
    (2,315,195
    )
    
    $
    54,329Weighted average shares outstanding
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800Diluted average shares outstanding
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800Basic EPS
    
    $
    (0.39
    )
    
    $
    0.01
    
    
    $
    (1.48
    )
    
    $
    0.04Diluted EPS
    
    $
    (0.39
    )
    
    $
    0.01
    
    
    $
    (1.48
    )
    
    $
    0.04
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##### Table of Contents



AccumulatedOther
    
    
    TotalCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Stock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    EquityBalance at January 1, 2008
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    2,255,543
    
    
    $
    62,091
    
    
    $
    15,614,325Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    55,252
    
    
    
    
    
    
    
    55,252Unrealized loss on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (923
    )
    
    
    (923
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,329Balance at September 30, 2008
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    2,310,795
    
    
    $
    61,168
    
    
    $
    15,668,654Balance at January 1, 2009
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    1,228,084
    
    
    $
    421,679
    
    
    $
    14,946,454Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    (2,173,505
    )
    
    
    
    
    
    
    (2,173,505
    )Unrealized loss on securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,690
    )
    
    
    (141,690
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,315,195
    )Balance at September 30, 2009
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    (945,421
    )
    
    $
    279,989
    
    
    $
    12,631,259
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##### Table of Contents



Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2009
    
    
    September 30, 2008Cash flows from operating activitiesNet Income (loss)
    
    $
    (2,173,505
    )
    
    $
    55,252Adjustments to reconcile net income (loss) to net cash
from operating activitiesProvision for loan losses
    
    
    923,300
    
    
    
    478,599Depreciation and amortization
    
    
    511,161
    
    
    
    527,665Net amortization of securities
    
    
    78,468
    
    
    
    7,433Gain on sale of securities
    
    
    (273,010
    )
    
    
    0Gain on sale of loans
    
    
    (271,054
    )
    
    
    (319,734
    )(Gain) Loss on disposal of other real estate owned
    
    
    22,087
    
    
    
    (142,324
    )Foreclosed asset impairment
    
    
    298,062
    
    
    
    0Loans originated for sale
    
    
    (22,323,669
    )
    
    
    (20,701,493
    )Proceeds from loan sales
    
    
    23,510,115
    
    
    
    21,813,803Establish deferred tax asset valuation
    
    
    1,203,189
    
    
    
    0Net change in:Accrued interest receivable and other assets
    
    
    (80,376
    )
    
    
    475,471Accrued interest payable and other liabilities
    
    
    (22,534
    )
    
    
    34,374Net cash from (used in) operating activities
    
    
    1,402,234
    
    
    
    2,229,046Cash flows from investing activitiesActivity in available for sale securities:Sales
    
    
    5,184,686
    
    
    
    0Maturities, prepayments and calls
    
    
    3,646,343
    
    
    
    1,387,811Purchases
    
    
    (12,831,394
    )
    
    
    (534,500
    )Activity in held to maturity securities:Maturities, prepayments and calls
    
    
    505,000
    
    
    
    0Loan originations and payments, net
    
    
    13,703,745
    
    
    
    9,466,105Additions to premises and equipment, net
    
    
    (26,038
    )
    
    
    (74,669
    )Proceeds from the sale of other real estate owned
    
    
    120,373
    
    
    
    588,419Net cash from (used in) investing activities
    
    
    10,302,715
    
    
    
    10,833,166Cash flow from financing activitiesNet change in deposits
    
    
    (16,183,072
    )
    
    
    (16,664,396
    )Net change in federal funds purchased and
repurchase agreements
    
    
    3,336,480
    
    
    
    14,333Other borrowing activity:Draws on note payable and line of credit
    
    
    800,000
    
    
    
    0Paydown on note payable
    
    
    0
    
    
    
    (6,043
    )Net cash (used in) from financing activities
    
    
    (12,046,592
    )
    
    
    (16,656,106
    )Net change in cash and cash equivalents
    
    
    (341,643
    )
    
    
    (3,736,218
    )Beginning cash and cash equivalents
    
    
    5,671,801
    
    
    
    7,876,916Ending cash and cash equivalents
    
    $
    5,330,158
    
    
    $
    4,140,698Supplemental cash flow information:Cash paid during the period for interest
    
    $
    4,491,184
    
    
    $
    7,010,832Cash paid during the period for federal income tax
    
    
    0
    
    
    
    0Transfers from loans to foreclosed assets
    
    
    1,080,469
    
    
    
    2,267,737
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##### Table of Contents



1.
    
    BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS:The unaudited, consolidated financial statements as of and for the three months and nine
months ended September 30, 2009 include the consolidated results of operations of Community
Shores Bank Corporation (Company) and its wholly-owned subsidiaries, Community Shores Bank
(Bank) and Community Shores Financial Services, and a wholly-owned subsidiary of the Bank,
Community Shores Mortgage Company (Mortgage Company). Community Shores Capital Trust I
(the Trust) is not consolidated and exists solely to issue capital securities. These
consolidated financial statements have been prepared in accordance with the instructions for
Form 10-Q and Article 8 of Regulation S-X and do not include all disclosures required by
generally accepted accounting principles for a complete presentation of the Companys
financial condition and results of operations. In the opinion of management, the
information reflects all adjustments (consisting only of normal recurring adjustments) which
are necessary in order to make the financial statements not misleading and for a fair
representation of the results of operations for such periods. The results for the period
ended September 30, 2009 should not be considered as indicative of results for a full year.
For further information, refer to the consolidated financial statements and footnotes
included in the Companys annual report on Form 10-K for the period ended December 31, 2008.
Some items in the prior year financial statements may be reclassified to conform to the
current presentation.In March 2008, the FASB issued ASC Topic 815, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of SFAS No. 133. ASC 815 amends and expands the disclosure
requirements for derivative instruments and hedging activities. It requires qualitative
disclosure about objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains and losses on
such instruments, as well as disclosures about credit-risk features in derivative
agreements. FAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The adoption of this standard had no
effect on the Companys results of operations or financial position.In June 2008, the FASB issued ASC Topic 260, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This Topic addresses
whether these types of instruments are participating prior to vesting and, therefore need to
be included in the earning allocation in computing earnings per share under the two class
method described in FASB Statement No. 128, Earnings Per Share. This Topic is effective
for fiscal years beginning after December 15, 2008, and interim periods within those
years. All prior-period earnings per share data presented shall be adjusted
retrospectively. The adoption of this FSP on January 1, 2009 had no effect on the Companys
results of operations or financial position.In April 2009, the FASB issued ASC Topic 320, Investments- Debt and Equity Investments which
amends existing guidance for determining whether impairment is other-than-temporary for debt
securities. The Topic requires an entity to assess whether it intends to sell, or it is
more likely than not that it will be required to sell a
 
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##### Table of Contents



1.
    
    BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS (Continued):security in an unrealized loss position before recovery of its amortized cost basis. If
either of these criteria is met, the entire difference between amortized cost and fair value
is recognized in earnings. For securities that do not meet the above criteria, the amount
of impairment recognized in earnings is limited to the amount related to credit losses,
while impairment related to other factors is recognized in other comprehensive income.
Additionally, the Topic expands and increases the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities. This Topic is effective
for interim and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The adoption of this Topic on June 30,
2009 had no effect on the Companys results of operations or financial position.In May, 2009, the FASB issued ASC Topic 855. This Topic adopts part of the auditing
literature regarding subsequent event transactions into the accounting standards. Though
the criteria used to measure subsequent events did not change, the relevant terms of Type 1
and Type 2 subsequent events were changed to recognized subsequent events and
nonrecognized subsequent events respectively. This standard also requires public
companies to disclose the date upon which subsequent events were measured, which is the date
the financial statements are filed with the Securities and Exchange Commission (SEC). The
Company evaluated subsequent events as of and through the date November 13, 2009 which is
the date the financial statements were issued.In July 2009, FASB issued Statement of Financial Accounting Standards (SFAS) No. 168, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162. The objective of this statement is to
replace SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles, and to
establish the FASB Accounting Standards Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with Generally Accepted Accounting
Principles (GAAP). Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. This Statement is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. References
to GAAP in these Notes to the Consolidated Financial Statements are provided under the
Codification structure where applicable.In April 2009, the FASB issued ASC Topic 820 Fair Value Measurements and Disclosures.
This Topic emphasizes that even if there has been a significant decrease in the volume and
level of activity, the objective of a fair value measurement remains the same. Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed
 
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##### Table of Contents



1.
    
    BASIS OF PRESENTATION AND RECENT ACCOUNTING DEVELOPMENTS (Continued):sale) between market participants. The Topic provides a number of factors to consider when
evaluating whether there has been a significant decrease in the volume and level
of activity for an asset or liability in relation to normal market activity. In addition,
when transactions or quoted prices are not considered orderly, adjustments to those prices
based on the weight of available information may be needed to determine the appropriate fair
value. The Topic also requires increased disclosures. This Topic is effective for interim
and annual reporting periods ending after June 15, 2009, and shall be applied prospectively.
The adoption of this Topic had no effect on the Companys results of operations or
financial position.In April 2009, the FASB issued ASC Topic 825 Financial Instruments. This Topic amends
prior guidance to require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies that were previously only required in annual
financial statements. This Topic is effective for interim reporting periods ending after
June 15, 2009. The adoption of this Topic had no effect on the Companys results of
operations or financial position.
 2.
    
    SECURITIESThe following tables represent the securities held in the Companys portfolio at September
30, 2009 and at December 31, 2008:
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairSeptember 30, 2009
    
    Cost
    
    Gains
    
    Losses
    
    ValueAvailable for sale:US Government and federal agency
    
    $
    14,890,048
    
    
    $
    194,673
    
    
    $
    (889
    )
    
    $
    15,083,832Municipal securities
    
    
    1,145,512
    
    
    
    38,395
    
    
    
    0
    
    
    
    1,183,907Mortgage-backed securities-residential
    
    
    6,300,898
    
    
    
    266,761
    
    
    
    (1,722
    )
    
    
    6,565,937$
    22,336,458
    
    
    $
    499,829
    
    
    $
    (2,611
    )
    
    $
    22,833,676Held to maturity:Municipal securities
    
    $
    6,094,131
    
    
    $
    208,505
    
    
    $
    0
    
    
    $
    6,302,636Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2008
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable for sale:US Government and federal agency
    
    $
    6,609,324
    
    
    $
    297,146
    
    
    $
    0
    
    
    $
    6,906,470Municipal securities
    
    
    869,663
    
    
    
    20,879
    
    
    
    0
    
    
    
    890,542Mortgage-backed securities-residential
    
    
    10,652,075
    
    
    
    326,285
    
    
    
    (5,402
    )
    
    
    10,972,958$
    18,131,062
    
    
    $
    644,310
    
    
    $
    (5,402
    )
    
    $
    18,769,970Held to maturity:Municipal securities
    
    $
    6,609,620
    
    
    $
    105,373
    
    
    $
    (8,002
    )
    
    $
    6,706,991
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##### Table of Contents



2.
    
    SECURITIES (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 September 30, 2009:
 Available for Sale
    
    Held to MaturityAmortized
    
    Fair
    
    Amortized
    
    FairCost
    
    Value
    
    Cost
    
    ValueDue in one year or less
    
    $
    507,337
    
    
    $
    511,575
    
    
    $
    0
    
    
    $
    0Due from one to five years
    
    
    14,987,172
    
    
    
    15,204,880
    
    
    
    1,392,170
    
    
    
    1,447,699Due from five to ten years
    
    
    541,051
    
    
    
    551,284
    
    
    
    4,701,961
    
    
    
    4,854,937Due in more than ten years
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Mortgage-backed-residential
    
    
    6,300,898
    
    
    
    6,565,937
    
    
    
    0
    
    
    
    0$
    22,336,458
    
    
    $
    22,833,676
    
    
    $
    6,094,131
    
    
    $
    6,302,636
 Below is the table of securities with unrealized losses, aggregated by investment
category and length of time such securities were in an unrealized loss position at September
30, 2009 and December 31, 2008:
 Less than 12 Months
    
    12 Months or Longer
    
    TotalSeptember 30, 2009
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedAvailable for Sale
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesUS Government and federal agency
    
    $
    499,111
    
    
    $
    (889
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    499,111
    
    
    $
    (889
    )Mortgage-backed
securities-residential
    
    
    386,135
    
    
    
    (1,722
    )
    
    
    0
    
    
    
    0
    
    
    
    386,135
    
    
    
    (1,722
    )$
    885,246
    
    
    $
    (2,611
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    885,246
    
    
    $
    (2,611
    )
 Less than 12 Months
    
    12 Months or Longer
    
    TotalDecember 31, 2008
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedAvailable for Sale
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMortgage-backed
securities-residential
    
    $
    604,457
    
    
    $
    (5,402
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    604,457
    
    
    $
    (5,402
    )$
    604,457
    
    
    $
    (5,402
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    604,457
    
    
    $
    (5,402
    )
 Less than 12 Months
    
    12 Months or Longer
    
    TotalDecember 31, 2008
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedHeld to Maturity
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMunicipal securities
    
    $
    701,998
    
    
    $
    (8,002
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    701,998
    
    
    $
    (8,002
    )
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##### Table of Contents



2.
    
    SECURITIES (Continued)Proceeds from sales and calls of securities available for sale were $6,189,686 for the nine
months ended September 30, 2009 and there were no proceeds for the nine months ended
September 30, 2008. Gross gains of $273,010 were realized on these sales during 2009, and no
gains were realized for 2008. There were no gross losses realized on these sales during 2009
or 2008.Proceeds from sales and calls of securities available for sale were $500,000 for the three
months ended September 30, 2009 and there were no proceeds for the three months ended
September 30, 2008. There were no gross gains or losses realized on these calls or sales
during 2009 or 2008.Other-Than-Temporary-ImpairmentManagement evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an
evaluation. The investment securities portfolio is evaluated for OTTI under ASC Topic 320,
Investments-Debt and Equity Instruments.In determining OTTI under the ASC 320 model, management considers many factors, including:
(1) the length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, (3) whether the market
decline was affected by macroeconomic conditions, and (4) whether the entity has the intent
to sell the debt security or more likely than not will be required to sell the debt security
before its anticipated recovery. The assessment of whether an other-than-temporary decline
exists involves a high degree of subjectivity and judgment and is based on the information
available to management at a point in time.When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the
security before recovery of its amortized cost basis, less any current-period credit loss.
If an entity intends to sell or it is more likely than not it will be required to sell the
security before recovery of its amortized cost basis, less any current-period credit loss,
the OTTI will be recognized in earnings equal to the entire difference between the
investments amortized cost basis and its fair value at the balance sheet date. If an entity
does not intend to sell the security and it is not more likely than not that the entity will
be required to sell the security before recovery of its amortized cost basis less any
current-period loss, the OTTI will be separated into the amount representing the credit loss
and the amount related to all other factors. The amount of the total OTTI related to the
credit loss is determined based on the present value of cash flows expected to be collected
and is recognized in earnings. The amount of the total OTTI related to other factors is
recognized in other comprehensive income, net of applicable taxes. The previous amortized
cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the
investment.
 
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##### Table of Contents



2.
    
    SECURITIES (Continued)At September 30, 2009, four debt securities had unrealized losses with aggregate
depreciation of 0.29% from the Companys amortized cost basis. All of the securities are
issued by government agencies. During the first half of the year the Company implemented a
strategy to realize market value gains within its securities portfolio to supplement
earnings and capital. Going forward it is not the Companys intent to continue this
practice. 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, is
deemed to be market driven and the depreciation in value is not considered to be
other-than-temporary.Mortgage-backed SecuritiesAt September 30, 2009, approximately 100% of the mortgage-backed securities held by the
Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae
and Freddie Mac, institutions which the government has affirmed its commitment to support.
The unrealized loss associated with these securities was 0.45% at September 30, 2009.
Because the decline in fair value is attributable to changes in interest rates and
illiquidity, and not credit quality, and because the Company does not have the intent to
sell these mortgage-backed securities and it is likely that it will not be required to sell
the securities before their anticipated recovery, the Company does not consider these
securities to be other-than-temporarily impaired at September 30, 2009.
 3.
    
    LOANSThe components of the outstanding loan balances:
 September 30, 2009
    
    December 31, 2008Commercial
    
    $
    72,134,969
    
    
    $
    76,710,342Real Estate:Commercial
    
    
    72,641,815
    
    
    
    81,257,794Residential
    
    
    17,867,439
    
    
    
    16,275,219Construction
    
    
    2,014,761
    
    
    
    3,850,176Consumer
    
    
    23,296,985
    
    
    
    27,146,251Subtotal:
    
    
    187,955,969
    
    
    
    205,239,782Allowance for loan losses
    
    
    (2,790,416
    )
    
    
    (4,350,903
    )Net deferred loan fees
    
    
    (70,767
    )
    
    
    (86,579
    )Loans, Net
    
    $
    185,094,786
    
    
    $
    200,802,300
 Loans held for sale totaled $1,439,564 at September 30, 2009 and $2,354,956 at December
31, 2008.
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##### Table of Contents



4.
    
    ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANSThe following is a summary of activity in the allowance for loan losses account for the
three and nine month periods ended September 30, 2009 and 2008:
 Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended9/30/09
    
    9/30/08
    
    9/30/09
    
    9/30/08Beginning Balance
    
    
    2,558,541
    
    
    
    3,397,169
    
    
    
    4,350,903
    
    
    
    3,602,948Charge-offsCommercial
    
    
    (152,939
    )
    
    
    (201,708
    )
    
    
    (2,286,752
    )
    
    
    (399,682
    )Real Estate-Commercial
    
    
    (1,837
    )
    
    
    (13,896
    )
    
    
    (40,439
    )
    
    
    (257,721
    )Real Estate-Residential
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (38,601
    )Consumer
    
    
    (77,688
    )
    
    
    (3,906
    )
    
    
    (202,773
    )
    
    
    (159,793
    )Total Charge-offs
    
    
    (232,464
    )
    
    
    (219,510
    )
    
    
    (2,529,964
    )
    
    
    (855,797
    )RecoveriesCommercial
    
    
    15,078
    
    
    
    6,122
    
    
    
    25,906
    
    
    
    27,942Real Estate-Commercial
    
    
    0
    
    
    
    0
    
    
    
    150
    
    
    
    0Consumer
    
    
    4,361
    
    
    
    6,372
    
    
    
    20,121
    
    
    
    30,976Total Recoveries
    
    
    19,439
    
    
    
    12,494
    
    
    
    46,177
    
    
    
    58,918Net Charge-Offs
    
    
    (213,025
    )
    
    
    (207,016
    )
    
    
    (2,483,787
    )
    
    
    (796,879
    )Provision for loan losses
    
    
    444,900
    
    
    
    94,515
    
    
    
    923,300
    
    
    
    478,599Ending Balance
    
    $
    2,790,416
    
    
    $
    3,284,668
    
    
    $
    2,790,416
    
    
    $
    3,284,668
  09/30/09
    
    
    12/31/08End of period loans with no allocated allowance for loan losses
    
    $
    7,151,371
    
    
    $
    2,684,532End of period loans with allocated allowance for loan losses
    
    $
    5,571,538
    
    
    
    9,092,437Total
    
    $
    12,722,909
    
    
    $
    11,776,969Amount of the allowance for loan losses allocated
    
    $
    740,467
    
    
    $
    2,465,185
 Three Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended9/30/09
    
    9/30/08
    
    9/30/09
    
    9/30/08Average of impaired loans during the period:
    
    $
    11,879,712
    
    
    $
    17,744,049
    
    
    $
    11,201,141
    
    
    $
    14,841,584Interest income recognized during impairment:
    
    
    77,123
    
    
    
    235,817
    
    
    
    231,393
    
    
    
    578,567Cash-basis interest income recognized:
    
    
    57,360
    
    
    
    194,110
    
    
    
    200,683
    
    
    
    547,478
 Non-performing loans were as follows:
 9/30/09
    
    12/31/08Loans past due over 90 days still on accrual:
    
    $
    1,620,696
    
    
    $
    79,828Non-accrual loans:
    
    $
    6,724,683
    
    
    $
    5,779,835
 Non-performing loans and impaired loans are defined differently. Some loans may be
included in both categories, whereas other loans may only be included in one category.
 - 11 -




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5.
    
    FORECLOSED ASSETSOther real estate owned activity:
 September 30,
    
    
    September 30,2009
    
    
    2008Beginning of year
    
    $
    5,884,093
    
    
    $
    567,000Additions
    
    
    1,080,469
    
    
    
    2,267,737Proceeds from sales
    
    
    (120,373
    )
    
    
    (446,095
    )Losses from sales
    
    
    (22,087
    )
    
    
    0Direct write-downs
    
    
    (298,062
    )
    
    
    0End of period
    
    $
    6,524,040
    
    
    $
    2,388,642Expenses related to foreclosed assets include:September 30,
    
    September 30,2009
    
    2008Operating expenses, net of rental income
    
    $
    156,201
    
    
    $
    38,304
 6.
    
    PREMISES AND EQUIPMENTPeriod end premises and equipment were as follows:
 September 30,
    
    
    December 31,2009
    
    
    2008Land & land improvements
    
    $
    5,447,328
    
    
    $
    5,447,328Buildings & building improvements
    
    
    5,959,371
    
    
    
    5,959,371Furniture, fixtures and equipment
    
    
    3,619,361
    
    
    
    3,587,487Construction in Process
    
    
    17,618
    
    
    
    23,45415,043,678
    
    
    
    15,017,640Less: accumulated depreciation
    
    
    3,659,060
    
    
    
    3,147,899$
    11,384,618
    
    
    $
    11,869,741
 7.
    
    DEPOSITSThe components of the outstanding deposit balances at September 30, 2009 and December 31,
2008 were as follows:
 September 30, 2009
    
    December 31, 2008Non-interest bearingDemand
    
    $
    21,567,499
    
    
    $
    19,135,831Interest bearingChecking
    
    
    29,673,492
    
    
    
    16,327,722Money Market
    
    
    19,578,787
    
    
    
    18,784,620Savings
    
    
    8,695,984
    
    
    
    10,891,294Time, under $100,000
    
    
    36,002,493
    
    
    
    40,384,321Time, over $100,000
    
    
    87,864,213
    
    
    
    114,041,752Total Deposits
    
    $
    203,382,468
    
    
    $
    219,565,540
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##### Table of Contents



8.
    
    SHORT-TERM BORROWINGSThe Companys short-term borrowings typically consist of repurchase agreements, borrowings
from the Federal Reserve Bank and federal funds purchased. The September 30, 2009 and
December 31, 2008 information was as follows:
 Repurchase
    
    
    Federal Funds
    
    
    BorrowingsAgreements
    
    
    Purchased
    
    
    From FRBOutstanding at September 30, 2009
    
    $
    9,150,085
    
    
    $
    0
    
    
    $
    0Average interest rate at period end
    
    
    0.69
    %
    
    
    0.00
    %
    
    
    0.00
    %Average balance during period
    
    
    6,857,450
    
    
    
    0
    
    
    
    88,755Average interest rate during period
    
    
    0.70
    %
    
    
    0.00
    %
    
    
    0.50
    %Maximum month end balance during period
    
    
    9,150,085
    
    
    
    0
    
    
    
    2,120,000Outstanding at December 31, 2008
    
    $
    5,813,605
    
    
    $
    0
    
    
    $
    0Average interest rate at year end
    
    
    0.50
    %
    
    
    0.00
    %
    
    
    0.00
    %Average balance during year
    
    
    4,604,290
    
    
    
    55,497
    
    
    
    128,937Average interest rate during year
    
    
    1.38
    %
    
    
    2.14
    %
    
    
    2.22
    %Maximum month end balance during year
    
    
    5,856,382
    
    
    
    0
    
    
    
    0
 9.
    
    FEDERAL HOME LOAN BANK BORROWINGSThe Bank is a member of the Federal Home Loan Bank of
Indianapolis. Based on its current Federal Home Loan Bank Stock
holdings and collateral, the Bank has the capacity to borrow an
additional $213,547. Each borrowing requires a direct pledge of
securities or loans. At September 30, 2009, the Bank had both
loans and securities with a market value of $7,576,607 pledged to
the Federal Home Loan Bank to support current borrowings. All
three advances are at fixed interest rates with the FHLB having
the option to convert to a floating rate index. Details of the
Banks outstanding borrowings are:
 Current
    
    
    September 30,
    
    
    December 31,Maturity Date
    
    Interest Rate
    
    
    2009
    
    
    2008March 24, 2010
    
    
    5.99
    
    
    
    1,500,000
    
    
    
    1,500,000November 3, 2010
    
    
    5.95
    
    
    
    2,000,000
    
    
    
    2,000,000December 13, 2010
    
    
    5.10
    
    
    
    2,500,000
    
    
    
    2,500,000$
    6,000,000
    
    
    $
    6,000,000
 10.
    
    SUBORDINATED DEBENTURESCommunity Shores Capital Trust I (the Trust), a business trust formed by the Company, sold
4,500 Cumulative Preferred Securities (trust preferred securities) at $1,000 per security
in a December 2004 offering. The proceeds from the sale of the trust preferred securities
were used by the Trust to purchase an equivalent amount of subordinated debentures from the
Company. The trust preferred securities and subordinated debentures carry a floating rate of
2.05% over the 3-month LIBOR and was 2.33% at September 30, 2009. The stated maturity is
December 30, 2034. The securities are redeemable at par after five years and are, in effect,
guaranteed by the Company. Interest on the subordinated debentures are payable quarterly on
March 30th,
 - 13 -




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##### Table of Contents



10.
    
    SUBORDINATED DEBENTURES (Continued)June 30th, September 30th and December 30th. Under certain
circumstances, interest payments may be deferred up to 20 calendar quarters. However, during
any such deferrals, interest accrues on any unpaid distributions. The subordinated
debentures are carried on the Companys consolidated balance sheet as a liability and the
interest expense is recorded on the Companys consolidated statement of income.
 11.
    
    NOTES PAYABLEThe Company has a $5 million revolving line of credit with Fifth Third Bank (Fifth Third).
The total balance outstanding at September 30, 2009 was $5,000,000 and $4,200,000 at
December 31, 2008. The outstanding principal bears interest at a rate of 100 basis points
above Fifth Thirds prime rate. The current interest rate on the outstanding principal
balance is 4.25%. Interest is owed quarterly in arrears on the first business day of
February, May, August, and November until the principal of this note is paid. The Company
has enough liquidity to pay the interest due at maturity. The borrowings may be prepaid in
whole or in part without any prepayment fee. The note matured on September 1, 2009 and was
extended to December 1, 2009. As of September 1, 2009, the Company was not in compliance
with the non performing asset ratios required in the debt covenants of the original note.
The Company is currently working with Fifth Third to renegotiate the terms of the debt.
Since the line is fully advanced it is likely that the debt will begin to amortize.
Additionally, Fifth Third may require a different collateral structure to support the
outstanding balance. Currently the collateral consists of all of the outstanding stock of
the Bank.
 12.
    
    COMMITMENTS AND OFF-BALANCE SHEET RISKSome financial instruments are used to meet financing needs and to reduce exposure to
interest rate changes. These financial instruments include commitments to extend credit and
standby letters of credit. These involve, to varying degrees, credit and interest-rate risk
in excess of the amount reported in the financial statements. Commitments to extend credit
are agreements to lend to a customer as long as there is no violation of any condition
established in the commitment, and generally have fixed expiration dates. Standby letters
of credit are conditional commitments to guarantee a customers performance to another
party. Exposure to credit loss, if the customer does not perform, is represented by the
contractual amount for commitments to extend credit and standby letters of credit.
Collateral or other security is normally obtained for these
financial instruments prior to their use, and many of the commitments are expected to expire
without being used.A summary of the notional and contractual amounts of outstanding financing instruments with
off-balance-sheet risk as of September 30, 2009 and December 31, 2008 follows:
 - 14 -




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September 30,
    
    December 31,2009
    
    2008Unused lines of credit and letters of credit
    
    $
    27,364,638
    
    
    $
    30,622,425Commitments to make loans
    
    
    105,193
    
    
    
    80,758
 Commitments to make loans generally terminate one year or less from the date of commitment
and may require a fee. Since many of the above commitments on lines of credit and letters
of credits expire without being used, the above amounts related to those categories do not
necessarily represent future cash commitments.
 13.
    
    FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTSASC Topic 820 defines fair value as 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. ASC 820 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The statement describes 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 or matrix pricing, 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.
 - 15 -




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##### Table of Contents



13.
    
    FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued)Servicing rights: The fair value of SBA servicing rights is obtained from a third party. The
individual servicing rights are valued individually taking into consideration the original
term to maturity, the current age of the loan and the remaining term to maturity. Their
valuation methodology utilized for the servicing rights begins with generating future cash
flows for each servicing asset, based on its unique characteristics and market-based
assumptions for prepayment speeds. The present value of the future cash flows are then
calculated utilizing the vendors market-based discount rate assumption.Assets and liabilities measured at fair value on a recurring basis are summarized below
for the periods ended September 30, 2009 and December 31, 2008:
 Fair Value Measurements at September 30, 2009 UsingQuoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableSeptember 30,
    
    Assets
    
    Inputs
    
    Inputs2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Available for sale securities:US Government and federal agency
    
    $
    15,083,832
    
    
    $
    0
    
    
    $
    15,083,832
    
    
    $
    0Municipal securities
    
    
    1,183,907
    
    
    
    0
    
    
    
    1,183,907
    
    
    
    0Mortgage-backed securities  residential
    
    
    6,565,937
    
    
    
    0
    
    
    
    6,565,937
    
    
    
    0Servicing assets
    
    
    46,337
    
    
    
    0
    
    
    
    46,337
    
    
    
    0Fair Value Measurements at December 31, 2008 UsingQuoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableDecember 31,
    
    Assets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Available for sale securities:US Government and federal agency
    
    $
    6,906,470
    
    
    $
    533,000
    
    
    $
    6,373,470
    
    
    $
    0Municipal securities
    
    
    890,542
    
    
    
    0
    
    
    
    890,542
    
    
    
    0Mortgage-backed securities  residential
    
    
    10,972,958
    
    
    
    0
    
    
    
    10,972,958
    
    
    
    0Servicing assets
    
    
    42,365
    
    
    
    0
    
    
    
    42,365
    
    
    
    0Assets and liabilities measured at fair value on a non-recurring basis are summarized
below for the periods ended September 30, 2009 and December 31, 2008:Fair Value Measurements at September 30, 2009 UsingSignificantQuoted Prices in
    
    Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableSeptember 30,
    
    Identical Assets
    
    Inputs
    
    Inputs2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Impaired loans
    
    $
    4,831,071
    
    
    $
    0
    
    
    $
    0
    
    
    $
    4,831,071Other Real Estate Owned
    
    
    3,502,951
    
    
    
    0
    
    
    
    0
    
    
    
    3,502,951
 - 16 -




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13.
    
    FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued)
 Fair Value Measurements at December 31, 2008 UsingSignificantQuoted Prices in
    
    Other
    
    SignificantActive Markets for
    
    Observable
    
    UnobservableDecember 31,
    
    Identical Assets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Impaired loans
    
    $
    6,627,252
    
    
    $
    0
    
    
    $
    0
    
    
    $
    6,627,252Other Real Estate Owned
    
    
    5,862,092
    
    
    
    0
    
    
    
    0
    
    
    
    5,862,092
 The following represents impairment charges recognized during the third quarter of
2009:Collateral dependent impaired loans are measured using the fair value of the collateral. At
September 30, 2009, such impaired loans had a carrying amount of $5,571,538, with a
valuation allowance of $740,467 compared to impaired loans with a carrying value of
$9,092,437 and a valuation allowance of $2,465,185 at December 31, 2008. The fair values of
the collateral on these loans were determined primarily using
independent appraisals and broker market opinions which were adjusted for anticipated disposition costs.At September 30, 2009 and December 31, 2008, other real estate owned carried a fair value of
$3,502,951 and $5,862,092 respectively. During the nine month period ended September 30,
2009, twenty one properties included in this total were written down by $298,000. During the
twelve month period ended December 31, 2008 four properties were written down by $83,000.
There were also twelve properties totaling $1,080,000 (at fair value) added to other real
estate owned during the first nine months of 2009, while during the twelve month period
ended December 31, 2008 there were twenty six properties totaling $5,762,000 added. The fair
value of other real estate owned was determined primarily using independent appraisals and
broker market opinions which were adjusted for anticipated disposition costs.
  September 30,
    
    
    December 31,2009
    
    
    2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(in thousands)Financial assetsCash and cash equivalents
    
    $
    5,330
    
    
    $
    5,330
    
    
    $
    5,672
    
    
    $
    5,672Securities available for sale
    
    
    22,834
    
    
    
    22,834
    
    
    
    18,770
    
    
    
    18,770Securities held to maturity
    
    
    6,094
    
    
    
    6,303
    
    
    
    6,610
    
    
    
    6,707Loans held for sale
    
    
    1,440
    
    
    
    1,440
    
    
    
    2,355
    
    
    
    2,355Loans, net
    
    
    185,095
    
    
    
    185,685
    
    
    
    200,802
    
    
    
    200,617FHLB stock
    
    
    404
    
    
    
    N/A
    
    
    
    404
    
    
    
    N/AAccrued interest receivable
    
    
    951
    
    
    
    951
    
    
    
    1,005
    
    
    
    1,005Financial liabilitiesDeposits
    
    
    203,382
    
    
    
    207,398
    
    
    
    219,566
    
    
    
    223,275Federal funds purchased and repurchase agreements
    
    
    9,150
    
    
    
    9,150
    
    
    
    5,814
    
    
    
    5,814FHLB advances
    
    
    6,000
    
    
    
    6,001
    
    
    
    6,000
    
    
    
    5,999Subordinated debentures
    
    
    4,500
    
    
    
    4,366
    
    
    
    4,500
    
    
    
    4,362Notes payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    4,200
    
    
    
    4,200Accrued interest payable
    
    
    200
    
    
    
    200
    
    
    
    326
    
    
    
    326
 - 17 -




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##### Table of Contents



13.
    
    FAIR VALUE OPTION AND FAIR VALUE MEASUREMENTS (Continued)The methods and assumptions used to estimate fair value are described as follows:Carrying amount is the estimated fair value for cash and cash equivalents, short-term
borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and
variable rate loans or deposits that reprice frequently and fully. Security fair values are
based on the information previously presented. For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent repricing or repricing limits, fair value is
based on discounted cash flows using current market rates applied to the estimated life and
credit risk including consideration for widening credit spreads. Fair values for impaired
loans are estimated using discounted cash flow analysis or underlying collateral values.
Fair value of loans held for sale is based on market quotes. Fair value of debt is based on
current rates for similar financing. It was not practical to determine the fair value of
FHLB stock due to restrictions placed on its transferability. Estimated fair value for other
financial instruments and off-balance sheet loan commitments are considered to approximate
carrying value.
 14.
    
    INCOME TAXESA valuation allowance related to deferred tax assets is required when it is considered more
likely than not that all or part of the benefit related to such assets will not be realized.
At the end of 2009s second quarter, management reviewed the deferred tax position for the
Company. At that time, the deferred tax position had been impacted by operating losses
primarily driven by higher provisions for loan losses over the past few years. The
cumulative loss position was reviewed utilizing applicable accounting guidance. On June 30
2009, management concluded that it is not more likely than not that we will be able to
realize our deferred tax assets and accordingly have established a full valuation allowance
against our deferred tax asset. As a result, our net deferred tax asset of $986,000 at
December 31, 2008 was decreased to $0 at June 30, 2009. The valuation allowance was analyzed
at September 30, 2009 and management concluded that the full valuation allowance was still
necessary. An analysis will be performed quarterly for changes affecting the deferred tax
assets, and as financial conditions improve and we return to consistent profitability, it
may be reduced or eliminated.
 15.
    
    REGULATORY MATTERSBanks are subject to regulatory capital requirements administered by the federal banking
agencies. 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.
 - 18 -




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15.
    
    REGULATORY MATTERS (Continued)Prompt corrective action regulations provide five classifications, including well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent overall
financial condition. If a bank is not well capitalized, regulatory approval is required to
accept brokered deposits. Subject to limited exceptions, a bank may not make a capital distribution if, after making the distribution, it 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, and plans for capital restoration
are required. In addition, further specific types of restrictions may be imposed on the bank
at the discretion of the federal regulator. The Bank was in the well-capitalized category
under the regulatory framework for prompt corrective action at both September 30, 2009 and
December 31, 2008.Actual and required capital amounts and ratios at September 30, 2009 and December 31, 2008
for the Bank were:
 Minimum Required toBe Well CapitalizedMinimum Required
    
    
    Under PromptFor Capital
    
    
    Corrective ActionActual
    
    
    Adequacy Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioSeptember 30, 2009Total Capital (Tier
1 and Tier 2) to
risk weighted
assets
of the Bank
    
    $
    23,712,938
    
    
    
    11.40
    %
    
    $
    16,635,243
    
    
    
    8.00
    %
    
    $
    20,794,054
    
    
    
    10.00
    %Tier 1 (Core)
Capital
to risk-weighted
assets of the Bank
    
    
    21,111,321
    
    
    
    10.15
    
    
    
    8,317,621
    
    
    
    4.00
    
    
    
    12,476,432
    
    
    
    6.00Tier 1 (Core)
Capital
to average assets
of the Bank
    
    
    21,111,321
    
    
    
    8.29
    
    
    
    10,190,868
    
    
    
    4.00
    
    
    
    12,738,585
    
    
    
    5.00December 31, 2008Total Capital (Tier
1 and Tier 2) to
risk weighted
assets
of the Bank
    
    $
    24,445,615
    
    
    
    10.96
    %
    
    $
    17,840,749
    
    
    
    8.00
    %
    
    $
    22,300,936
    
    
    
    10.00
    %Tier 1 (Core)
Capital
to risk-weighted
assets of the Bank
    
    
    21,638,698
    
    
    
    9.70
    
    
    
    8,920,375
    
    
    
    4.00
    
    
    
    13,380,562
    
    
    
    6.00Tier 1 (Core)
Capital to
 average assets
of the Bank
    
    
    21,638,698
    
    
    
    8.30
    
    
    
    10,423,367
    
    
    
    4.00
    
    
    
    13,029,208
    
    
    
    5.00
  - 19 -




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16.
    
    OTHER COMPREHENSIVE INCOMEOther comprehensive income (loss) components and related tax effects were as follows:
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSept 30, 2009
    
    
    Sept 30, 2008
    
    
    Sept 30, 2009
    
    
    Sept 30, 2008Unrealized holding gains
(losses) on available-for-sale
securities
    
    $
    222,128
    
    
    $
    28,738
    
    
    $
    131,320
    
    
    $
    (609
    )Less reclassification
adjustments for (gains) and
losses later
recognized in income
    
    
    0
    
    
    
    0
    
    
    
    (273,010
    )
    
    
    0Net unrealized gain (loss)
    
    
    222,128
    
    
    
    28,738
    
    
    
    (141,690
    )
    
    
    (609
    )Tax effect
    
    
    0
    
    
    
    14,804
    
    
    
    0
    
    
    
    (314
    )Other comprehensive income (loss)
    
    $
    222,128
    
    
    $
    43,542
    
    
    $
    (141,690
    )
    
    $
    (923
    )
 - 20 -




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     - 21 -




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FINANCIAL CONDITION
      - 22 -




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1
 Within
    
    
    Three to
    
    
    One to
    
    
    AfterThree
    
    
    Twelve
    
    
    Five
    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalCommercial, financial and other
    
    $
    17,610,661
    
    
    $
    28,152,648
    
    
    $
    24,184,206
    
    
    $
    2,109,217
    
    
    $
    72,056,732Real estate:commercial
    
    
    16,454,665
    
    
    
    10,437,364
    
    
    
    44,002,376
    
    
    
    1,747,410
    
    
    
    72,641,815construction
    
    
    898,086
    
    
    
    228,106
    
    
    
    0
    
    
    
    888,569
    
    
    
    2,014,761mortgages
    
    
    156,993
    
    
    
    406,067
    
    
    
    2,502,690
    
    
    
    14,801,689
    
    
    
    17,867,439Consumer
    
    
    1,593,482
    
    
    
    2,730,854
    
    
    
    15,195,181
    
    
    
    3,784,938
    
    
    
    23,304,455$
    36,713,887
    
    
    $
    41,955,039
    
    
    $
    85,884,453
    
    
    $
    23,331,823
    
    
    $
    187,885,202Loans at fixed rates
    
    
    13,936,670
    
    
    
    19,669,200
    
    
    
    78,543,156
    
    
    
    22,594,235
    
    
    
    134,743,261Loans at variable rates
    
    
    22,777,217
    
    
    
    22,285,839
    
    
    
    7,341,297
    
    
    
    737,588
    
    
    
    53,141,941$
    36,713,887
    
    
    $
    41,955,039
    
    
    $
    85,884,453
    
    
    $
    23,331,823
    
    
    $
    187,885,202
   
 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. - 23 -




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##### Table of Contents



September 30, 2009
    
    
    December 31, 2008Percent of
    
    
    
    
    
    
    Percent ofAllowance
    
    
    
    
    
    
    AllowanceRelated to
    
    
    
    
    
    
    Related toAmount
    
    
    Loan Category
    
    
    Amount
    
    
    Loan CategoryBalance at End of Period Applicable to:Commercial
    
    $
    1,216,093
    
    
    
    1.7
    %
    
    $
    2,640,269
    
    
    
    3.4
    %Real estate:Commercial
    
    
    1,148,363
    
    
    
    1.6
    
    
    
    1,237,913
    
    
    
    1.5Residential
    
    
    96,829
    
    
    
    .05
    
    
    
    104,033
    
    
    
    0.6Construction
    
    
    24,177
    
    
    
    1.2
    
    
    
    49,667
    
    
    
    1.3Consumer
    
    
    304,954
    
    
    
    1.3
    
    
    
    319,021
    
    
    
    1.2Total
    
    $
    2,790,416
    
    
    
    1.5
    %
    
    $
    4,350,903
    
    
    
    2.1
    %
  - 24 -




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##### Table of Contents



IncreaseLoans Past Due:
    
    
    September 30, 2009
    
    December 31, 2008
    
    (Decrease)30-59 days
    
    
    $
    1,093,027
    
    
    $
    3,182,098
    
    
    $
    (2,089,071
    )60-89 days
    
    
    
    1,906,607
    
    
    
    1,257,315
    
    
    
    649,29290 days and greater
    
    
    
    1,620,696
    
    
    
    79,828
    
    
    
    1,540,868Non accrual loans
    
    
    
    6,724,683
    
    
    
    5,779,835
    
    
    
    944,848
      - 25 -




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- 26 -




---



##### Table of Contents



RESULTS OF OPERATIONS
   - 27 -




---



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- 28 -




---



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Nine months ended September 30,2009
    
    
    2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsFederal funds sold and interest-
bearing deposits with other financial
institutions
    
    $
    10,894,308
    
    
    $
    32,240
    
    
    
    0.39
    %
    
    $
    10,785,241
    
    
    $
    189,341
    
    
    
    2.34
    %Securities
    
    
    27,874,514
    
    
    
    839,728
    
    
    
    4.02
    
    
    
    19,960,690
    
    
    
    749,702
    
    
    
    5.01Loans (including held for sale and non
accrual)
    
    
    195,807,625
    
    
    
    9,376,110
    
    
    
    6.38
    
    
    
    223,616,549
    
    
    
    11,446,961
    
    
    
    6.83234,576,447
    
    
    
    10,248,078
    
    
    
    5.83
    
    
    
    254,362,480
    
    
    
    12,386,004
    
    
    
    6.49Other assets
    
    
    22,676,799
    
    
    
    
    
    
    
    
    
    
    
    16,851,670$
    257,253,246
    
    
    
    
    
    
    
    
    
    
    $
    271,214,150Liabilities and Shareholders EquityInterest-bearing deposits
    
    $
    199,483,793
    
    
    $
    4,565,492
    
    
    
    3.05
    
    
    $
    217,399,485
    
    
    $
    6,331,688
    
    
    
    3.88Federal funds purchased, repurchase agreements and Federal
Reserve Bank borrowings
    
    
    6,946,205
    
    
    
    36,292
    
    
    
    0.70
    
    
    
    4,523,032
    
    
    
    53,718
    
    
    
    1.58Subordinated Debentures, Note Payable
and Federal Home Loan Bank Advances
    
    
    15,136,630
    
    
    
    515,007
    
    
    
    4.54
    
    
    
    14,700,684
    
    
    
    598,379
    
    
    
    5.43221,566,628
    
    
    
    5,116,791
    
    
    
    3.08
    
    
    
    236,623,201
    
    
    
    6,983,785
    
    
    
    3.94Non-interest bearing deposits
    
    
    20,838,793
    
    
    
    
    
    
    
    
    
    
    
    18,200,482Other liabilities
    
    
    747,402
    
    
    
    
    
    
    
    
    
    
    
    736,816Shareholders Equity
    
    
    14,100,423
    
    
    
    
    
    
    
    
    
    
    
    15,653,651$
    257,253,246
    
    
    
    
    
    
    
    
    
    
    $
    271,214,150Net interest income (tax equivalent basis)
    
    
    
    
    
    
    5,131,287
    
    
    
    
    
    
    
    
    
    
    
    5,402,219Net interest spread on earning assets
(tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    2.75
    %
    
    
    
    
    
    
    
    
    
    
    2.56
    %Net interest margin on earning assets
(tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    
    
    
    2.83
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    105.87
    %
    
    
    
    
    
    
    
    
    
    
    107.50
    %Tax equivalent adjustment
    
    
    
    
    
    
    108,578
    
    
    
    
    
    
    
    
    
    
    
    113,389Net interest income
    
    
    
    
    
    $
    5,022,709
    
    
    
    
    
    
    
    
    
    
    $
    5,288,830
   - 29 -




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##### Table of Contents



Three months ended September 30,2009
    
    
    2008Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateAssetsFederal funds sold and interest-
bearing deposits with other financial
institutions
    
    $
    13,783,078
    
    
    $
    8,728
    
    
    
    0.25
    %
    
    $
    7,928,877
    
    
    $
    37,986
    
    
    
    1.92
    %Securities
    
    
    28,901,004
    
    
    
    264,881
    
    
    
    3.67
    
    
    
    19,473,787
    
    
    
    246,039
    
    
    
    5.05Loans (including held for sale and
non accrual)
    
    
    190,813,478
    
    
    
    3,104,682
    
    
    
    6.51
    
    
    
    219,298,741
    
    
    
    3,632,211
    
    
    
    6.63233,497,560
    
    
    
    3,378,291
    
    
    
    5.79
    
    
    
    246,701,405
    
    
    
    3,916,236
    
    
    
    6.35Other assets
    
    
    21,052,027
    
    
    
    
    
    
    
    
    
    
    
    16,874,447$
    254,549,587
    
    
    
    
    
    
    
    
    
    
    $
    263,575,852Liabilities and Shareholders EquityInterest-bearing deposits
    
    $
    194,817,963
    
    
    $
    1,357,813
    
    
    
    2.79
    
    
    $
    209,182,609
    
    
    $
    1,917,529
    
    
    
    3.67Federal funds purchased, repurchase agreements and Federal
Reserve Bank borrowings
    
    
    8,572,005
    
    
    
    16,653
    
    
    
    0.78
    
    
    
    4,799,518
    
    
    
    17,154
    
    
    
    1.43Subordinated Debentures, Note Payable
and Federal Home
Loan Bank Advances
    
    
    15,500,000
    
    
    
    171,614
    
    
    
    4.43
    
    
    
    14,700,000
    
    
    
    193,532
    
    
    
    5.27218,889,968
    
    
    
    1,546,080
    
    
    
    2.83
    
    
    
    228,682,127
    
    
    
    2,128,215
    
    
    
    3.72Non-interest bearing deposits
    
    
    21,673,174
    
    
    
    
    
    
    
    
    
    
    
    18,379,643Other liabilities
    
    
    921,126
    
    
    
    
    
    
    
    
    
    
    
    850,064Shareholders Equity
    
    
    13,065,319
    
    
    
    
    
    
    
    
    
    
    
    15,664,018$
    254,549,587
    
    
    
    
    
    
    
    
    
    
    $
    263,575,852Net interest income (tax equivalent basis)
    
    
    
    
    
    
    1,832,211
    
    
    
    
    
    
    
    
    
    
    
    1,788,021Net interest spread on earning assets
(tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    2.63
    %Net interest margin on earning assets
(tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    3.14
    %
    
    
    
    
    
    
    
    
    
    
    2.90
    %Average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.67
    %
    
    
    
    
    
    
    
    
    
    
    107.88
    %Tax equivalent adjustment
    
    
    
    
    
    
    34,275
    
    
    
    
    
    
    
    
    
    
    
    38,294Net interest income
    
    
    
    
    
    $
    1,797,936
    
    
    
    
    
    
    
    
    
    
    $
    1,749,727
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##### Table of Contents



Interest Rate Sensitivity PeriodWithin
    
    
    Three to
    
    
    One to
    
    
    AfterThree
    
    
    Twelve
    
    
    Five
    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalEarning assetsInterest-bearing deposits
in other financial institutions
    
    $
    2,316,738
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    2,316,738Federal Funds Sold
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Securities (including FHLB stock)
    
    
    1,344,156
    
    
    
    7,035,799
    
    
    
    16,257,365
    
    
    
    4,694,587
    
    
    
    29,331,907Loans Held for Sale
    
    
    17,930
    
    
    
    61,831
    
    
    
    372,238
    
    
    
    987,565
    
    
    
    1,439,564Loans1
    
    
    79,931,764
    
    
    
    17,480,610
    
    
    
    73,570,070
    
    
    
    16,902,758
    
    
    
    187,885,20283,610,588
    
    
    
    24,578,240
    
    
    
    90,199,673
    
    
    
    22,584,910
    
    
    
    220,973,411Interest-bearing liabilitiesSavings and checking
    
    
    57,948,263
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    57,948,263Time deposits <$100,000
    
    
    4,617,925
    
    
    
    17,953,830
    
    
    
    13,430,738
    
    
    
    0
    
    
    
    36,002,493Time deposits >$100,000
    
    
    17,399,007
    
    
    
    18,077,390
    
    
    
    52,304,099
    
    
    
    83,717
    
    
    
    87,864,213Repurchase agreements and
Federal funds purchased
    
    
    9,150,085
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,150,085Subordinated Debt and Federal
Home Loan Bank Advances
    
    
    15,500,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    15,500,000104,615,280
    
    
    
    36,031,220
    
    
    
    65,734,837
    
    
    
    83,717
    
    
    
    206,465,054Net asset (liability) repricing gap
    
    $
    (21,004,692
    )
    
    $
    (11,452,980
    )
    
    $
    24,464,836
    
    
    $
    22,501,193
    
    
    $
    14,508,357Cumulative net asset (liability)
Repricing gap
    
    $
    (21,004,692
    )
    
    $
    (32,457,672
    )
    
    $
    (7,992,836
    )
    
    $
    14,508,357
   
 1
    
    Includes non accrual loans. - 32 -




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EXHIBIT NO.
    
    EXHIBIT DESCRIPTION3.1
    
    Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Companys June 30, 2004 Form 10-QSB (SEC
file number 333-63769).3.2
    
    Bylaws of the Company are incorporated by reference to exhibit
3(ii) of the Companys Form 8-K filed July 5, 2006 (SEC file
number 000-51166).10.1
    
    Extension notice from Fifth Third
Bank dated September 22, 2009 relating to line of credit.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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##### Table of Contents



COMMUNITY SHORES BANK CORPORATIONNovember 13, 2009
    
    By:
    
    /s/ Heather D. BrolickDate
    
    Heather D. BrolickPresident and Chief Executive Officer(principal executive officer)November 13, 2009
    
    By:
    
    /s/ Tracey A. WelshDate
    
    Tracey A. WelshSenior Vice President, Chief Financial Officer andTreasurer (principal financial and accounting officer)
 - 37 -




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##### Table of Contents



EXHIBIT INDEX
 EXHIBIT NO.
    
    EXHIBIT DESCRIPTION3.1
    
    Articles of Incorporation are incorporated by reference to
exhibit 3.1 of the Companys June 30, 2004 Form 10-QSB (SEC
file number 333-63769).3.2
    
    Bylaws of the Company are incorporated by reference to exhibit
3(ii) of the Companys Form 8-K filed July 5, 2006 (SEC file
number 000-51166).10.1
    
    Extension notice from Fifth Third
Bank dated September 22, 2009 relating to line of credit.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.
 - 38 -