UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



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



|For the quarterly period ended September 30, 2016 | 
|------------------------------------------------- | 



or



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



|For the transition period from |  | to | 
|------------------------------ |  | -- | 



|Commission File Number: | 000-51166
|----------------------- | ---------



|Community Shores Bank Corporation                       
|--------------------------------------------------------
|(Exact name of registration as specified in its charter)



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



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



|(231) 780-1800                                      
|----------------------------------------------------
|(Registrant’s telephone number, including area code)



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



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

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

x Yes
 ̈ No



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

 ̈ Yes
x No



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



|Large accelerated filer   ̈  Accelerated filer   ̈     Non-accelerated filer   ̈                        Smaller reporting company x
|--------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                



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 November 14, 2016, 4,101,664 shares of
common stock were outstanding.











Community Shores Bank Corporation Index



|         |                       |                                                                                       | Page No.
|-------- | --------------------- | ------------------------------------------------------------------------------------- | --------
|PART I.  | Financial Information |                                                                                      
|         |                       |                                                                                       |         
|         | Item 1.               | Financial Statements                                                                  | 1       
|         |                       |                                                                                       |         
|         | Item 2.               | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 48      
|         |                       |                                                                                       |         
|         | Item 3.               | Quantitative and Qualitative Disclosures about Market Risk                            | 64      
|         |                       |                                                                                       |         
|         | Item 4.               | Controls and Procedures                                                               | 64      
|         |                       |                                                                                       |         
|PART II. | Other Information     |                                                                                      
|         |                       |                                                                                       |         
|         | Item 1.               | Legal Proceedings                                                                     | 64      
|         |                       |                                                                                       |         
|         | Item 1A.              | Risk Factors                                                                          | 64      
|         |                       |                                                                                       |         
|         | Item 2.               | Unregistered Sales of Equity Securities and Use of Proceeds                           | 64      
|         |                       |                                                                                       |         
|         | Item 3.               | Defaults upon Senior Securities                                                       | 65      
|         |                       |                                                                                       |         
|         | Item 4.               | Mine Safety Disclosures                                                               | 65      
|         |                       |                                                                                       |         
|         | Item 5.               | Other Information                                                                     | 65      
|         |                       |                                                                                       |         
|         | Item 6.               | Exhibits                                                                              | 65      
|         |                       |                                                                                       |         
|         | Signatures            | 66                                                                                   











PART I – FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------



COMMUNITY
SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                          |  | September 30, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------ | -
|                                                                                                                                                                          |  | 2016          |             |   | 2015         |  
|                                                                                                                                                                          |  | (unaudited)   |             |   | (audited)    |  
|ASSETS                                                                                                                                                                    |  |               |             |   |              |  
|Cash and due from financial institutions                                                                                                                                  |  | $             | 3,037,331   |   |              | $
|Interest-bearing deposits in other financial institutions                                                                                                                 |  |               | 13,996,521  |   |              |  
|Total cash and cash equivalents                                                                                                                                           |  |               | 17,033,852  |   |              |  
|Term deposit                                                                                                                                                              |  |               | 100,000     |   |              |  
|Securities available for sale (at fair value)                                                                                                                             |  |               | 19,108,072  |   |              |  
|Loans held for sale                                                                                                                                                       |  |               | 0           |   |              |  
|Loans                                                                                                                                                                     |  |               | 131,496,371 |   |              |  
|Less: Allowance for loan losses                                                                                                                                           |  |               | 1,624,718   |   |              |  
|Net loans                                                                                                                                                                 |  |               | 129,871,653 |   |              |  
|Federal Home Loan Bank stock (at cost)                                                                                                                                    |  |               | 300,500     |   |              |  
|Premises and equipment, net                                                                                                                                               |  |               | 8,567,278   |   |              |  
|Accrued interest receivable                                                                                                                                               |  |               | 355,479     |   |              |  
|Foreclosed assets                                                                                                                                                         |  |               | 1,699,027   |   |              |  
|Net deferred tax assets                                                                                                                                                   |  |               | 4,008,707   |   |              |  
|Other assets                                                                                                                                                              |  |               | 573,515     |   |              |  
|Total assets                                                                                                                                                              |  | $             | 181,618,083 |   |              | $
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                      |  |               |             |   |              |  
|Deposits                                                                                                                                                                  |  |               |             |   |              |  
|Non-interest-bearing                                                                                                                                                      |  | $             | 43,523,397  |   |              | $
|Interest-bearing                                                                                                                                                          |  |               | 114,180,321 |   |              |  
|Total deposits                                                                                                                                                            |  |               | 157,703,718 |   |              |  
|Repurchase agreements                                                                                                                                                     |  |               | 4,853,589   |   |              |  
|Subordinated debentures                                                                                                                                                   |  |               | 4,500,000   |   |              |  
|Notes payable                                                                                                                                                             |  |               | 0           |   |              |  
|Derivative liability                                                                                                                                                      |  |               | 0           |   |              |  
|Accrued expenses and other liabilities                                                                                                                                    |  |               | 453,283     |   |              |  
|Total liabilities                                                                                                                                                         |  |               | 167,510,590 |   |              |  
|Shareholders’ equity                                                                                                                                                      |  |               |             |   |              |  
|Preferred Stock, no par value: 1,000,000 shares authorized and none issued                                                                                                |  |               | 0           |   |              |  
|Common Stock, no par value: 9,000,000 shares authorized; 4,101,664 issued and outstanding at September 30, 2016 and 1,468,800 issued and outstanding at December 31, 2015 |  |               | 19,625,689  |   |              |  
|Retained deficit                                                                                                                                                          |  |               | (5,606,459  | ) |              |  
|Accumulated other comprehensive income (loss)                                                                                                                             |  |               | 88,263      |   |              |  
|Total shareholders’ equity                                                                                                                                                |  |               | 14,107,493  |   |              |  
|Total liabilities and shareholders’ equity                                                                                                                                |  | $             | 181,618,083 |   |              | $



See accompanying notes to consolidated financial
statements.



- 1 -







COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                    |  | Three Months  |           |  | Three Months  |   |           | Nine Months   |  |   | Nine Months   | 
|--------------------------------------------------- |  | ------------- | --------- |  | ------------- | - | --------- | ------------- |  | - | ------------- | 
|                                                    |  | Ended         |           |  | Ended         |   |           | Ended         |  |   | Ended         | 
|                                                    |  | September 30, |           |  | September 30, |   |           | September 30, |  |   | September 30, | 
|                                                    |  | 2016          |           |  | 2015          |   |           | 2016          |  |   | 2015          | 
|Interest and dividend income                        |  |               |           |  |               |   |           |               |  |   |               | 
|Loans, including fees                               |  | $             | 1,553,794 |  |               | $ | 1,549,915 |               |  | $ | 4,649,603     | 
|Securities (including FHLB dividends)               |  |               | 67,038    |  |               |   | 89,928    |               |  |   | 226,370       | 
|Federal funds sold and other income                 |  |               | 27,108    |  |               |   | 13,796    |               |  |   | 69,240        | 
|Total interest and dividend income                  |  |               | 1,647,940 |  |               |   | 1,653,639 |               |  |   | 4,945,213     | 
|Interest expense                                    |  |               |           |  |               |   |           |               |  |   |               | 
|Deposits                                            |  |               | 155,127   |  |               |   | 176,666   |               |  |   | 473,976       | 
|Repurchase agreements and other short-term debt     |  |               | 4,221     |  |               |   | 5,019     |               |  |   | 12,520        | 
|Federal Home Loan Bank advances and notes payable   |  |               | 32,037    |  |               |   | 57,359    |               |  |   | 123,931       | 
|Derivative valuation adjustment                     |  |               | 0         |  |               |   | 0         |               |  |   | 0             | 
|Total interest expense                              |  |               | 191,385   |  |               |   | 239,044   |               |  |   | 610,427       | 
|Net Interest Income                                 |  |               | 1,456,555 |  |               |   | 1,414,595 |               |  |   | 4,334,786     | 
|Provision for loan losses                           |  |               | 0         |  |               |   | 0         |               |  |   | 0             | 
|Net Interest Income After Provision for Loan Losses |  |               | 1,456,555 |  |               |   | 1,414,595 |               |  |   | 4,334,786     | 
|Non-interest income                                 |  |               |           |  |               |   |           |               |  |   |               | 
|Service charges on deposit accounts                 |  |               | 105,626   |  |               |   | 145,500   |               |  |   | 335,005       | 
|Gain on sale of loans                               |  |               | 50,703    |  |               |   | 22,993    |               |  |   | 121,422       | 
|Gain on sale of foreclosed assets                   |  |               | 20,822    |  |               |   | 38,020    |               |  |   | 167,835       | 
|Gain on sale of premises and equipment              |  |               | 0         |  |               |   | 0         |               |  |   | 0             | 
|Other                                               |  |               | 196,625   |  |               |   | 219,133   |               |  |   | 604,676       | 
|Total non-interest income                           |  |               | 373,776   |  |               |   | 425,646   |               |  |   | 1,228,938     | 
|Non-interest expense                                |  |               |           |  |               |   |           |               |  |   |               | 
|Salaries and employee benefits                      |  |               | 978,099   |  |               |   | 984,606   |               |  |   | 2,971,133     | 
|Occupancy                                           |  |               | 156,446   |  |               |   | 153,750   |               |  |   | 459,075       | 
|Furniture and equipment                             |  |               | 89,191    |  |               |   | 90,021    |               |  |   | 278,687       | 
|Advertising                                         |  |               | 3,309     |  |               |   | 6,042     |               |  |   | 9,512         | 
|Data processing                                     |  |               | 131,283   |  |               |   | 133,955   |               |  |   | 370,289       | 
|Professional services                               |  |               | 85,146    |  |               |   | 408,886   |               |  |   | 306,923       | 
|Foreclosed asset impairment                         |  |               | 49,119    |  |               |   | 14,596    |               |  |   | 134,533       | 
|FDIC insurance                                      |  |               | 45,145    |  |               |   | 70,777    |               |  |   | 172,731       | 
|Other                                               |  |               | 225,282   |  |               |   | 283,535   |               |  |   | 715,743       | 
|Total non-interest expense                          |  |               | 1,763,020 |  |               |   | 2,146,168 |               |  |   | 5,418,626     | 
|Income (Loss) Before Federal Income Taxes           |  |               | 67,311    |  |               |   | (305,927  | )             |  |   | 145,098       | 
|Federal income tax expense (benefit)                |  |               | 22,886    |  |               |   | (104,015  | )             |  |   | 46,088        | 
|Net Income (Loss)                                   |  | $             | 44,425    |  |               | $ | (201,912  | )             |  | $ | 99,010        | 
|Basic average shares outstanding                    |  |               | 4,101,664 |  |               |   | 1,468,800 |               |  |   | 3,265,682     | 
|Diluted average shares outstanding                  |  |               | 4,101,664 |  |               |   | 1,468,800 |               |  |   | 3,265,682     | 
|Basic (loss) earnings per share                     |  | $             | 0.01      |  |               | $ | (0.14     | )             |  | $ | 0.03          | 
|Diluted (loss) earnings per share                   |  | $             | 0.01      |  |               | $ | (0.14     | )             |  | $ | 0.03          | 



See accompanying notes to consolidated financial
statements.



- 2 -







COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(UNAUDITED)



|                                                                                  |  | Three Months       |         |   | Three Months       |   |          | Nine Months        |  |   | Nine Months        |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | -------- | ------------------ |  | - | ------------------ | -
|                                                                                  |  | Ended              |         |   | Ended              |   |          | Ended              |  |   | Ended              |  
|                                                                                  |  | September 30, 2016 |         |   | September 30, 2015 |   |          | September 30, 2016 |  |   | September 30, 2015 |  
|                                                                                  |  |                    |         |   |                    |   |          |                    |  |   |                    |  
|Net income (loss)                                                                 |  | $                  | 44,425  |   |                    | $ | (201,912 | )                  |  | $ | 99,010             |  
|                                                                                  |  |                    |         |   |                    |   |          |                    |  |   |                    |  
|Other comprehensive income (loss):                                                |  |                    |         |   |                    |   |          |                    |  |   |                    |  
|Unrealized holding gains (losses) on available for sale securities                |  |                    | (31,472 | ) |                    |   | 37,071   |                    |  |   | 177,361            |  
|Less reclassification adjustments for unrealized gains later recognized in income |  |                    | 0       |   |                    |   | 0        |                    |  |   | 0                  |  
|                                                                                  |  |                    | (31,472 | ) |                    |   | 37,071   |                    |  |   | 177,361            |  
|Tax effect                                                                        |  |                    | 10,701  |   |                    |   | (12,604  | )                  |  |   | (60,303            | )
|Other comprehensive income (loss), net of tax                                     |  |                    | (20,771 | ) |                    |   | 24,467   |                    |  |   | 117,058            |  
|                                                                                  |  |                    |         |   |                    |   |          |                    |  |   |                    |  
|Comprehensive income (loss)                                                       |  | $                  | 23,654  |   |                    | $ | (177,445 | )                  |  | $ | 216,068            |  



See accompanying notes to consolidated financial
statements.



- 3 -







COMMUNITY SHORES BANK CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)



|                                                                      |  |        |           |  |        |   |            |          |  |   | Accumulated   |   |  |               |         
|--------------------------------------------------------------------- |  | ------ | --------- |  | ------ | - | ---------- | -------- |  | - | ------------- | - |  | ------------- | --------
|                                                                      |  |        |           |  |        |   |            |          |  |   | Other         |   |  | Total         |         
|                                                                      |  |        |           |  | Common |   |            | Retained |  |   | Comprehensive |   |  | Shareholders’ |         
|                                                                      |  | Shares |           |  | Stock  |   |            | Deficit  |  |   | Income (Loss) |   |  | Equity        |         
|                                                                      |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at January 1, 2015                                            |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (4,944,867    | ) |  | $             | (270,887
|                                                                      |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Net loss                                                              |  |        |           |  |        |   |            |          |  |   | (401,961      | ) |  |               |         
|Other comprehensive income                                            |  |        |           |  |        |   |            |          |  |   |               |   |  |               | 25,743  
|                                                                      |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at September 30, 2015                                         |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (5,346,828    | ) |  | $             | (245,144
|                                                                      |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at January 1, 2016                                            |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (5,705,469    | ) |  | $             | (28,795 
|                                                                      |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Proceeds from rights offering, net of issuance costs                  |  |        | 1,383,299 |  |        |   | 3,289,905  |          |  |   |               |   |  |               |         
|Proceeds from private placement                                       |  |        | 579,412   |  |        |   | 1,477,501  |          |  |   |               |   |  |               |         
|Note payable conversion, including derivative liability, net of taxes |  |        | 670,153   |  |        |   | 1,561,592  |          |  |   |               |   |  |               |         
|Net income                                                            |  |        |           |  |        |   |            |          |  |   | 99,010        |   |  |               |         
|Other comprehensive income                                            |  |        |           |  |        |   |            |          |  |   |               |   |  |               | 117,058 
|                                                                      |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at September 30, 2016                                         |  |        | 4,101,664 |  |        | $ | 19,625,689 |          |  | $ | (5,606,459    | ) |  | $             | 88,263  



See accompanying notes to consolidated financial
statements.



- 4 -







COMMUNITY SHORES BANK CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)



|                                                                                  |  | Nine Months Ended  |            |   | Nine Months Ended  |  
|--------------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | -
|                                                                                  |  | September 30, 2016 |            |   | September 30, 2015 |  
|Cash flows from operating activities                                              |  |                    |            |   |                    |  
|Net income (loss)                                                                 |  | $                  | 99,010     |   |                    | $
|Adjustments to reconcile net income (loss) to net cash from operating activities: |  |                    |            |   |                    |  
|Depreciation and amortization                                                     |  |                    | 274,821    |   |                    |  
|Net amortization of securities                                                    |  |                    | 160,543    |   |                    |  
|Net realized gain on sale of loans                                                |  |                    | (121,422   | ) |                    |  
|Net realized gain on sale of foreclosed assets                                    |  |                    | (167,835   | ) |                    |  
|Net realized gain on sale of premises and equipment                               |  |                    | 0          |   |                    |  
|Foreclosed asset impairment                                                       |  |                    | 134,533    |   |                    |  
|Originations of loans for sale                                                    |  |                    | (4,929,350 | ) |                    |  
|Proceeds from loan sales                                                          |  |                    | 4,951,772  |   |                    |  
|Deferred federal income tax expense (benefit)                                     |  |                    | 46,088     |   |                    |  
|Valuation adjustment on derivative                                                |  |                    | 0          |   |                    |  
|Net change in:                                                                    |  |                    |            |   |                    |  
|Accrued interest receivable and other assets                                      |  |                    | 319,815    |   |                    |  
|Accrued interest payable and other liabilities                                    |  |                    | (696,261   | ) |                    |  
|Net cash from operating activities                                                |  |                    | 71,714     |   |                    |  
|Cash flows from investing activities                                              |  |                    |            |   |                    |  
|Maturities, prepayments and calls of available for sale securities                |  |                    | 6,118,479  |   |                    |  
|Purchase of a term deposit                                                        |  |                    | (100,000   | ) |                    |  
|Loan originations and payments, net                                               |  |                    | (8,791,360 | ) |                    |  
|Redemption of Federal Home Loan Bank stock                                        |  |                    | 0          |   |                    |  
|Proceeds from the disposal of equipment                                           |  |                    | 0          |   |                    |  
|Additions to premises and equipment, net                                          |  |                    | (21,597    | ) |                    |  
|Proceeds from the sale of foreclosed assets                                       |  |                    | 634,621    |   |                    |  
|Net cash from (used by) investing activities                                      |  |                    | (2,159,857 | ) |                    |  
|Cash flows from financing activities                                              |  |                    |            |   |                    |  
|Net change in deposits                                                            |  |                    | (3,477,921 | ) |                    |  
|Repayment of note payable                                                         |  |                    | (8         | ) |                    |  
|Net change in repurchase agreements                                               |  |                    | (67,434    | ) |                    |  
|Proceeds from rights offering, net of issuance cost                               |  |                    | 3,289,905  |   |                    |  
|Proceeds from private placement                                                   |  |                    | 1,477,501  |   |                    |  
|Net cash from financing activities                                                |  |                    | 1,222,043  |   |                    |  
|Net change in cash and cash equivalents                                           |  |                    | (866,100   | ) |                    |  
|Beginning cash and cash equivalents                                               |  |                    | 17,899,952 |   |                    |  
|Ending cash and cash equivalents                                                  |  | $                  | 17,033,852 |   |                    | $
|Supplemental cash flows information:                                              |  |                    |            |   |                    |  
|Cash paid during the period for interest                                          |  | $                  | 1,241,700  |   |                    | $
|Cash paid during the period for federal income tax                                |  |                    | 0          |   |                    |  
|Non-cash financing activities:                                                    |  |                    |            |   |                    |  
|Transfers from loans to foreclosed assets                                         |  |                    | 89,019     |   |                    |  
|Transfers from loans held for sale to loans held for investment                   |  |                    | 99,000     |   |                    |  
|Transfers from foreclosed assets to SBA receivable                                |  |                    | 0          |   |                    |  
|Note payable conversion to common stock, including derivative and net of taxes    |  |                    | 1,561,592  |   |                    |  



See accompanying notes to consolidated financial
statements.



- 5 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS
| | -- | ----------------------------------------------------------



BASIS OF PRESENTATION: The
unaudited, consolidated financial statements as of and for the three months and nine months ended September 30, 2016 include the
consolidated results of operations of Community Shores Bank Corporation (“Company”) and its wholly-owned subsidiaries,
Community Shores Financial Services (“CS Financial Services”), and Community Shores Bank (the “Bank”),
and the Bank’s wholly-owned subsidiary, Community Shores Mortgage Company (the “Mortgage Company”) and the Mortgage
Company’s wholly-owned subsidiary, Berryfield Development, LLC (“Berryfield”). Community Shores Capital Trust
I (“the Trust”) is not consolidated and exists solely to issue capital securities. These consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X and do not include all disclosures
required by generally accepted accounting principles for a complete presentation of the Company’s financial condition and
results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring
adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the
results of operations for such periods.  The results for the period ended September 30, 2016 should not be considered as indicative
of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in the
Company’s annual report on Form 10-K for the period ended December 31, 2015. Some items in the prior year financial statements
may be reclassified to conform to the current presentation.



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



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



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



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



- 6 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)
| | -- | ----------------------------------------------------------------------



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



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



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



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



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



The historical loss experience is determined by portfolio
segment and is based on the actual loss history experienced by the Bank over the most recent 12 quarters. The historical loss experience
is recalculated at the end of each quarter. This actual loss experience is supplemented with current economic factors based on
the risks present for each portfolio segment. These current economic factors are also reassessed at the end of each quarter and
include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs
and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other
changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant
staff; quality of loan review system; degree of oversight by the Board of Directors; national and local economic trends and conditions;
industry conditions; competition and legal and regulatory requirements; and effects of changes in credit concentrations. There
were no significant changes to this methodology in the first three quarters of 2016.



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



- 7 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)
| | -- | ----------------------------------------------------------------------



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



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



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



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



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



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



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



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



- 8 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)
| | -- | ----------------------------------------------------------------------



There was no material change in these operating doctrines
during the nine months ended September 30, 2016.



ADOPTION OF NEW ACCOUNTING STANDARDS:



In June 2015, FASB issued ASU 2015-10, Technical
Corrections and Improvements. This ASU contains amendments that will clarify and affect a variety of Topics in the FASB Accounting
Standards Codification. The amendments in this Update require transition guidance and are effective for all entities for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. All other
amendments will be effective upon the issuance of this guidance. The adoption of this guidance is being evaluated but is not expected
to have a material effect on the Company’s financial position or results of operations.



In November 2015, FASB issued ASU 2015-17, Income
Taxes; Balance Sheet Classification of Deferred Taxes. The amendments in this Update are intended to simplify the presentation
of deferred income taxes and requires that deferred tax assets and liabilities be classified as non-current in a classified statement
of financial position. The amendment is effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2016. The adoption of this guidance is being evaluated but is not expected to have a material effect on the
Company’s financial position or results of operations.



In March 2016, FASB issued ASU 2016-09, Compensation-Stock
Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU is part of the Simplification Initiative and involves
several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or a liability, and classification on the statement of cash flows. The amendments in this Update are effective
for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of this guidance
is being evaluated but is not expected to have a material effect on the Company’s financial position or results of operations.



NEWLY ISSUED NOT YET EFFECTIVE ACCOUNTING STANDARDS:



In May 2014, FASB issued ASU 2014-09, Revenue from
Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under
U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software
industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision
of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue
recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five
basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue
when (or as) the entity satisfies a performance obligation. The guidance in this ASU is effective for annual and interim periods
beginning after December 15, 2016, with three transition methods available – full retrospective, retrospective and cumulative
effect approach.  At the July 9, 2015 FASB meeting, the FASB voted to delay the effective date by one year. The 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.



- 9 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 1. | BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)
| | -- | ----------------------------------------------------------------------



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



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



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.



- 10 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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.  The adoption of this guidance
is not expected to have a material effect on the Company’s financial position or results of operations.



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



RECENT DEVELOPMENTS



In the first quarter of 2016, the Company successfully
completed a Rights Offering which commenced in the fourth quarter of 2015 and a concurrent private placement (See Note 13). On
March 28, 2016, after receiving FRB approval to repay the interest due on the Company’s subordinated debentures and to increase
the ownership percentages of certain investors in relation to the guidelines of the FRB Change in Bank Control Act, the Company
received gross proceeds of approximately $5.0 million from two transactions. On the same date, the Company’s note payable
with 1030 Norton LLC converted to 670,153 common shares, relieving the Company of any future interest payments. Two days later,
on March 30, 2016, the Company repaid $722,000 of interest on its subordinated debentures and brought its interest obligations
on this debt current through March 31, 2016. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into
the Bank, enhancing its regulatory capital position.



On
April 27, 2016, the Company’s Board of Directors voted to again defer interest payments on its subordinated debentures in
order to preserve its cash for general operations and potential capital support for the Bank as it grows. 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 September 30, 2016, the accrued
and unpaid interest owed on the subordinated debentures was $64,144.



| | 2. | SECURITIES AVAILABLE FOR SALE
| | -- | -----------------------------



The following tables represent the securities held in the Company’s
portfolio at September 30, 2016 and at December 31, 2015:



|                                                                     |  |           |            |  | Gross      |   |         | Gross      |  |   |        |  
|-------------------------------------------------------------------- |  | --------- | ---------- |  | ---------- | - | ------- | ---------- |  | - | ------ | -
|                                                                     |  | Amortized |            |  | Unrealized |   |         | Unrealized |  |   | Fair   |  
|September 30, 2016                                                   |  | Cost      |            |  | Gains      |   |         | Losses     |  |   | Value  |  
|                                                                     |  |           |            |  |            |   |         |            |  |   |        |  
|US Treasury                                                          |  | $         | 1,503,778  |  |            | $ | 4,582   |            |  | $ | 0      |  
|US Government and federal agency                                     |  |           | 7,980,037  |  |            |   | 24,090  |            |  |   | 0      |  
|Mortgage-backed and collateralized mortgage obligations– residential |  |           | 9,490,524  |  |            |   | 109,035 |            |  |   | (3,974 | )
|                                                                     |  | $         | 18,974,339 |  |            | $ | 137,707 |            |  | $ | (3,974 | )



- 11 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 2. | SECURITIES AVAILABLE FOR SALE (Continued)
| | -- | -----------------------------------------



|                                                                     |  |           |            |  | Gross      |   |        | Gross      |  |   |          |  
|-------------------------------------------------------------------- |  | --------- | ---------- |  | ---------- | - | ------ | ---------- |  | - | -------- | -
|                                                                     |  | Amortized |            |  | Unrealized |   |        | Unrealized |  |   | Fair     |  
|December 31, 2015                                                    |  | Cost      |            |  | Gains      |   |        | Losses     |  |   | Value    |  
|                                                                     |  |           |            |  |            |   |        |            |  |   |          |  
|US Treasury                                                          |  | $         | 1,505,941  |  |            | $ | 5,387  |            |  | $ | 0        |  
|US Government and federal agency                                     |  |           | 11,545,640 |  |            |   | 13,215 |            |  |   | (14,235  | )
|Municipals                                                           |  |           | 710,000    |  |            |   | 966    |            |  |   | 0        |  
|Mortgage-backed and collateralized mortgage obligations– residential |  |           | 11,491,781 |  |            |   | 64,103 |            |  |   | (113,065 | )
|                                                                     |  | $         | 25,253,362 |  |            | $ | 83,671 |            |  | $ | (127,300 | )



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, 2016:



|                                                                      |  | Amortized |            |  | Fair  |  
|--------------------------------------------------------------------- |  | --------- | ---------- |  | ----- | -
|                                                                      |  | Cost      |            |  | Value |  
|Due in one year or less                                               |  | $         | 6,475,872  |  |       | $
|Due from one to five years                                            |  |           | 3,007,943  |  |       |  
|Due from five to ten years                                            |  |           | 0          |  |       |  
|Due in more than ten years                                            |  |           | 0          |  |       |  
|Mortgage-backed and collateralized mortgage obligations – residential |  |           | 9,490,524  |  |       |  
|                                                                      |  | $         | 18,974,339 |  |       | $



- 12 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 2. | SECURITIES AVAILABLE FOR SALE (Continued)
| | -- | -----------------------------------------



Below is the table of securities with unrealized
losses, aggregated by investment category and length of time such securities were in an unrealized loss position at September 30,
2016 and December 31, 2015:



|                                                                      |  | Less than 12 Months |         |  | 12 Months or Longer |   |        | Total | 
|--------------------------------------------------------------------- |  | ------------------- | ------- |  | ------------------- | - | ------ | ----- | 
|                                                                      |  | Fair                |         |  | Unrealized          |   |        | Fair  | 
|September 30, 2016                                                    |  | Value               |         |  | Losses              |   |        | Value | 
|Mortgage-backed and collateralized mortgage obligations - residential |  | $                   | 218,097 |  |                     | $ | (1,318 | )     | 
|                                                                      |  | $                   | 218,097 |  |                     | $ | (1,318 | )     | 



|                                                                      |  | Less than 12 Months |            |  | 12 Months or Longer |   |         | Total | 
|--------------------------------------------------------------------- |  | ------------------- | ---------- |  | ------------------- | - | ------- | ----- | 
|                                                                      |  | Fair                |            |  | Unrealized          |   |         | Fair  | 
|December 31, 2015                                                     |  | Value               |            |  | Losses              |   |         | Value | 
|US Government and federal agency                                      |  | $                   | 5,453,848  |  |                     | $ | (14,235 | )     | 
|Mortgage-backed and collateralized mortgage obligations - residential |  |                     | 4,842,868  |  |                     |   | (38,336 | )     | 
|                                                                      |  | $                   | 10,296,716 |  |                     | $ | (52,571 | )     | 



The Bank was holding one municipal security at December 31,
2015. The security had a maturity of May 2018. The security was called in January of 2016.



No securities were sold in the three or nine months ended September
30, 2016 or September 30, 2015.



- 13 -











COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 2. | SECURITIES AVAILABLE FOR SALE (Continued)
| | -- | -----------------------------------------



Other-Than-Temporary-Impairment



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



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



At September 30, 2016 and December 31, 2015, all of the
mortgage-backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government-sponsored
entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment
to support. At September 30, 2016, four debt securities had unrealized losses with aggregate depreciation of 0.33% from the amortized
cost basis; three of the four had unrealized losses greater than 12 months.



Three of the four securities, which had an unrealized
loss at September 30, 2016, are issued by government agencies and one is issued by a government-sponsored entity. It is likely
that these debt securities will be retained given the fact that they are pledged to various public funds. The reported decline
in value is not material and is deemed to be market driven. Because the decline in fair value is attributable to changes in interest
rates and not credit quality and, because the Company does not have the intent to sell these securities and it is likely that it
will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to
be other-than-temporarily impaired at September 30, 2016.



At September 30, 2016 and December 31, 2015, there were
no holdings of securities of any one issuer, other than U.S. Government and federal agencies, in an amount greater than 10% of
common stock and surplus.



- 14 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 2. | SECURITIES AVAILABLE FOR SALE (Continued)
| | -- | -----------------------------------------



Securities pledged at September 30, 2016 had a carrying
amount of $14,778,836 and were pledged to secure public fund customers and customer repurchase agreements. Pledged securities at
December 31, 2015 had a carrying amount of $20,201,813.



| | 3. | LOANS
| | -- | -----



Outstanding loan balances by portfolio
segment and class at September 30, 2016 and December 31, 2015 were as follows:



|                                |  | September 30, 2016 |             |   | December 31, 2015 |  
|------------------------------- |  | ------------------ | ----------- | - | ----------------- | -
|Commercial                      |  | $                  | 48,824,798  |   |                   | $
|Commercial Real Estate:         |  |                    |             |   |                   |  
|General                         |  |                    | 50,702,719  |   |                   |  
|Construction                    |  |                    | 6,892,119   |   |                   |  
|Consumer:                       |  |                    |             |   |                   |  
|Lines of credit                 |  |                    | 5,312,221   |   |                   |  
|Other                           |  |                    | 1,206,031   |   |                   |  
|Credit card                     |  |                    | 464,378     |   |                   |  
|Residential                     |  |                    | 18,176,771  |   |                   |  
|Net deferred loan fees          |  |                    | (82,666     | ) |                   |  
|                                |  |                    | 131,496,371 |   |                   |  
|Less: Allowance for loan losses |  |                    | (1,624,718  | ) |                   |  
|Loans, net                      |  | $                  | 129,871,653 |   |                   | $



- 15 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 4. | ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS
| | -- | --------------------------------------------



The following tables present the activity in the allowance
for loan losses for the three and nine month periods ended September 30, 2016 and 2015 by portfolio segment:



|Three Months Ended September 30, 2016 |  | Commercial |         |   | Commercial Real Estate |   |         | Consumer |  |   | Residential |   |  | Unallocated |         |   | Total |  
|------------------------------------- |  | ---------- | ------- | - | ---------------------- | - | ------- | -------- |  | - | ----------- | - |  | ----------- | ------- | - | ----- | -
|Allowance for loan losses:            |  |            |         |   |                        |   |         |          |  |   |             |   |  |             |         |   |       |  
|Beginning balance                     |  | $          | 582,411 |   |                        | $ | 460,602 |          |  | $ | 263,890     |   |  | $           | 211,914 |   |       | $
|Charge-offs                           |  |            | 0       |   |                        |   | 0       |          |  |   | (21,831     | ) |  |             | 0       |   |       |  
|Recoveries                            |  |            | 5,700   |   |                        |   | 0       |          |  |   | 2,268       |   |  |             | 0       |   |       |  
|Provision for loan losses             |  |            | (27,547 | ) |                        |   | 50,168  |          |  |   | 3,717       |   |  |             | (10,977 | ) |       |  
|Ending balance                        |  | $          | 560,564 |   |                        | $ | 510,770 |          |  | $ | 248,044     |   |  | $           | 200,937 |   |       | $



|Three Months Ended September 30, 2015 |  | Commercial |         |   | Commercial Real Estate |   |         | Consumer |  |   | Residential |   |  | Unallocated |         |  | Total |  
|------------------------------------- |  | ---------- | ------- | - | ---------------------- | - | ------- | -------- |  | - | ----------- | - |  | ----------- | ------- |  | ----- | -
|Allowance for loan losses:            |  |            |         |   |                        |   |         |          |  |   |             |   |  |             |         |  |       |  
|Beginning balance                     |  | $          | 529,851 |   |                        | $ | 426,628 |          |  | $ | 276,099     |   |  | $           | 196,789 |  |       | $
|Charge-offs                           |  |            | 0       |   |                        |   | 0       |          |  |   | (138        | ) |  |             | 0       |  |       |  
|Recoveries                            |  |            | 11,600  |   |                        |   | 33      |          |  |   | 131,044     |   |  |             | 0       |  |       |  
|Provision for loan losses             |  |            | (68,267 | ) |                        |   | (344    | )        |  |   | (107,264    | ) |  |             | 26,577  |  |       |  
|Ending balance                        |  | $          | 473,184 |   |                        | $ | 426,317 |          |  | $ | 299,741     |   |  | $           | 223,366 |  |       | $



- 16 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



|Nine Months Ended September 30, 2016 |  | Commercial |         |   | Commercial Real Estate |   |         | Consumer |  |   | Residential |   |  | Unallocated |         |   | Total |  
|------------------------------------ |  | ---------- | ------- | - | ---------------------- | - | ------- | -------- |  | - | ----------- | - |  | ----------- | ------- | - | ----- | -
|Allowance for loan losses:           |  |            |         |   |                        |   |         |          |  |   |             |   |  |             |         |   |       |  
|Beginning balance                    |  | $          | 522,558 |   |                        | $ | 432,145 |          |  | $ | 322,185     |   |  | $           | 210,653 |   |       | $
|Charge-offs                          |  |            | (69,664 | ) |                        |   | (21,871 | )        |  |   | (61,124     | ) |  |             | 0       |   |       |  
|Recoveries                           |  |            | 45,253  |   |                        |   | 25,710  |          |  |   | 34,998      |   |  |             | 0       |   |       |  
|Provision for loan losses            |  |            | 62,417  |   |                        |   | 74,786  |          |  |   | (48,015     | ) |  |             | (9,716  | ) |       |  
|Ending balance                       |  | $          | 560,564 |   |                        | $ | 510,770 |          |  | $ | 248,044     |   |  | $           | 200,937 |   |       | $



|Nine Months Ended September 30, 2015 |  | Commercial |         |   | Commercial Real Estate |   |          | Consumer |  |   | Residential |   |  | Unallocated |         |  | Total |  
|------------------------------------ |  | ---------- | ------- | - | ---------------------- | - | -------- | -------- |  | - | ----------- | - |  | ----------- | ------- |  | ----- | -
|Allowance for loan losses:           |  |            |         |   |                        |   |          |          |  |   |             |   |  |             |         |  |       |  
|Beginning balance                    |  | $          | 500,776 |   |                        | $ | 848,589  |          |  | $ | 294,039     |   |  | $           | 204,485 |  |       | $
|Charge-offs                          |  |            | 0       |   |                        |   | (429,212 | )        |  |   | (14,225     | ) |  |             | 0       |  |       |  
|Recoveries                           |  |            | 38,500  |   |                        |   | 33       |          |  |   | 142,644     |   |  |             | 0       |  |       |  
|Provision for loan losses            |  |            | (66,092 | ) |                        |   | 6,907    |          |  |   | (122,717    | ) |  |             | 18,881  |  |       |  
|Ending balance                       |  | $          | 473,184 |   |                        | $ | 426,317  |          |  | $ | 299,741     |   |  | $           | 223,366 |  |       | $



- 17 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present the balance in the allowance
for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2016 and
December 31, 2015:



|September 30, 2016                              |  | Commercial |            |  | Commercial Real Estate |   |            | Consumer |  |   | Residential |  |  | Unallocated |            |  | Total |  
|----------------------------------------------- |  | ---------- | ---------- |  | ---------------------- | - | ---------- | -------- |  | - | ----------- |  |  | ----------- | ---------- |  | ----- | -
|Allowance for loan losses:                      |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Ending allowance balance attributable to loans: |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 286,825    |  |                        | $ | 0          |          |  | $ | 80,200      |  |  | $           | 67,871     |  |       | $
|Collectively evaluated for impairment           |  |            | 273,739    |  |                        |   | 510,770    |          |  |   | 167,844     |  |  |             | 133,066    |  |       |  
|Unallocated                                     |  |            | 0          |  |                        |   | 0          |          |  |   | 0           |  |  |             | 0          |  |       |  
|Total ending allowance balance                  |  | $          | 560,564    |  |                        | $ | 510,770    |          |  | $ | 248,044     |  |  | $           | 200,937    |  |       | $
|                                                |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Loans:                                          |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 2,326,779  |  |                        | $ | 5,091,554  |          |  | $ | 166,880     |  |  | $           | 530,409    |  |       | $
|Collectively evaluated for impairment           |  |            | 46,552,624 |  |                        |   | 52,582,041 |          |  |   | 6,837,875   |  |  |             | 17,689,958 |  |       |  
|Total ending loans balance                      |  | $          | 48,879,403 |  |                        | $ | 57,673,595 |          |  | $ | 7,004,755   |  |  | $           | 18,220,367 |  |       | $



|December 31, 2015                               |  | Commercial |            |  | Commercial Real Estate |   |            | Consumer |  |   | Residential |  |  | Unallocated |            |  | Total |  
|----------------------------------------------- |  | ---------- | ---------- |  | ---------------------- | - | ---------- | -------- |  | - | ----------- |  |  | ----------- | ---------- |  | ----- | -
|Allowance for loan losses:                      |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Ending allowance balance attributable to loans: |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 198,222    |  |                        | $ | 49,855     |          |  | $ | 145,955     |  |  | $           | 71,460     |  |       | $
|Collectively evaluated for impairment           |  |            | 324,336    |  |                        |   | 382,290    |          |  |   | 176,230     |  |  |             | 139,193    |  |       |  
|Unallocated                                     |  |            | 0          |  |                        |   | 0          |          |  |   | 0           |  |  |             | 0          |  |       |  
|Total ending allowance balance                  |  | $          | 522,558    |  |                        | $ | 432,145    |          |  | $ | 322,185     |  |  | $           | 210,653    |  |       | $
|                                                |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Loans:                                          |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 2,327,065  |  |                        | $ | 5,332,786  |          |  | $ | 309,323     |  |  | $           | 729,178    |  |       | $
|Collectively evaluated for impairment           |  |            | 46,048,707 |  |                        |   | 45,261,236 |          |  |   | 6,650,819   |  |  |             | 16,368,778 |  |       |  
|Total ending loans balance                      |  | $          | 48,375,772 |  |                        | $ | 50,594,022 |          |  | $ | 6,960,142   |  |  | $           | 17,097,956 |  |       | $



- 18 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present loans individually evaluated
for impairment by class of loans as of September 30, 2016 and December 31, 2015. The recorded investment includes unpaid principal
balance net of interest payments applied to principal (non-accrual loans only) as well as accrued interest receivable, deferred
fees and costs. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.



|September 30, 2016                  |  | Recorded 
Investment |           |  | Unpaid Principal
Balance |   |           | Related 
Allowance | 
|----------------------------------- |  | -------------------- | --------- |  | ------------------------ | - | --------- | ------------------ | 
|With no related allowance recorded: |  |                      |           |  |                          |   |           |                    | 
|Commercial                          |  | $                    | 1,347,890 |  |                          | $ | 1,407,648 |                    | 
|Commercial Real Estate:             |  |                      |           |  |                          |   |           |                    | 
|General                             |  |                      | 5,091,554 |  |                          |   | 6,069,152 |                    | 
|Consumer:                           |  |                      |           |  |                          |   |           |                    | 
|Lines of credit                     |  |                      | 36,201    |  |                          |   | 36,139    |                    | 
|Other                               |  |                      | 0         |  |                          |   | 0         |                    | 
|Residential                         |  |                      | 220,771   |  |                          |   | 253,352   |                    | 
|Subtotal                            |  | $                    | 6,696,416 |  |                          | $ | 7,766,291 |                    | 
|                                    |  |                      |           |  |                          |   |           |                    | 
|With a related allowance recorded:  |  |                      |           |  |                          |   |           |                    | 
|Commercial                          |  | $                    | 978,889   |  |                          | $ | 992,531   |                    | 
|Commercial Real Estate:             |  |                      |           |  |                          |   |           |                    | 
|General                             |  |                      | 0         |  |                          |   | 0         |                    | 
|Consumer:                           |  |                      |           |  |                          |   |           |                    | 
|Lines of credit                     |  |                      | 109,549   |  |                          |   | 109,050   |                    | 
|Other                               |  |                      | 21,130    |  |                          |   | 21,016    |                    | 
|Residential                         |  |                      | 309,638   |  |                          |   | 317,941   |                    | 
|Subtotal                            |  | $                    | 1,419,206 |  |                          | $ | 1,440,538 |                    | 
|Total                               |  | $                    | 8,115,622 |  |                          | $ | 9,206,829 |                    | 



- 19 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



|                                    |  | Recorded   |           |  | Unpaid Principal |   |           | Related   | 
|----------------------------------- |  | ---------- | --------- |  | ---------------- | - | --------- | --------- | 
|December 31, 2015                   |  | Investment |           |  | Balance          |   |           | Allowance | 
|With no related allowance recorded: |  |            |           |  |                  |   |           |           | 
|Commercial                          |  | $          | 1,376,371 |  |                  | $ | 1,435,861 |           | 
|Commercial Real Estate:             |  |            |           |  |                  |   |           |           | 
|General                             |  |            | 5,220,711 |  |                  |   | 6,381,061 |           | 
|Consumer:                           |  |            |           |  |                  |   |           |           | 
|Lines of credit                     |  |            | 15,740    |  |                  |   | 15,740    |           | 
|Other                               |  |            | 0         |  |                  |   | 0         |           | 
|Residential                         |  |            | 414,528   |  |                  |   | 446,950   |           | 
|Subtotal                            |  | $          | 7,027,350 |  |                  | $ | 8,279,612 |           | 
|With a related allowance recorded:  |  |            |           |  |                  |   |           |           | 
|Commercial                          |  | $          | 950,694   |  |                  | $ | 957,412   |           | 
|Commercial Real Estate:             |  |            |           |  |                  |   |           |           | 
|General                             |  |            | 112,075   |  |                  |   | 148,165   |           | 
|Consumer:                           |  |            |           |  |                  |   |           |           | 
|Lines of credit                     |  |            | 277,230   |  |                  |   | 276,275   |           | 
|Other                               |  |            | 16,353    |  |                  |   | 16,338    |           | 
|Residential                         |  |            | 314,650   |  |                  |   | 321,821   |           | 
|Subtotal                            |  | $          | 1,671,002 |  |                  | $ | 1,720,011 |           | 
|Total                               |  | $          | 8,698,352 |  |                  | $ | 9,999,623 |           | 



- 20 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present the average recorded investment
of loans individually evaluated for impairment by class of loans as of September 30, 2016 and 2015 and the associated interest
income. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.



|                                    |  | Three Months     |           |  | Three Months    |   |         | Three Months        | 
|----------------------------------- |  | ---------------- | --------- |  | --------------- | - | ------- | ------------------- | 
|                                    |  | Average Recorded |           |  | Interest Income |   |         | Cash Basis          | 
|September 30, 2016                  |  | Investment       |           |  | Recognized      |   |         | Interest Recognized | 
|With no related allowance recorded: |  |                  |           |  |                 |   |         |                     | 
|Commercial                          |  | $                | 1,352,250 |  |                 | $ | 21,801  |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |         |                     | 
|General                             |  |                  | 5,052,992 |  |                 |   | 124,372 |                     | 
|Consumer:                           |  |                  |           |  |                 |   |         |                     | 
|Lines of credit                     |  |                  | 65,622    |  |                 |   | 806     |                     | 
|Other                               |  |                  | 0         |  |                 |   | 0       |                     | 
|Residential                         |  |                  | 178,928   |  |                 |   | 593     |                     | 
|Subtotal                            |  | $                | 6,649,792 |  |                 | $ | 147,572 |                     | 
|                                    |  |                  |           |  |                 |   |         |                     | 
|With a related allowance recorded:  |  |                  |           |  |                 |   |         |                     | 
|Commercial                          |  | $                | 980,259   |  |                 | $ | 5,793   |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |         |                     | 
|General                             |  |                  | 19,333    |  |                 |   | 0       |                     | 
|Consumer:                           |  |                  |           |  |                 |   |         |                     | 
|Lines of credit                     |  |                  | 132,489   |  |                 |   | 2,201   |                     | 
|Other                               |  |                  | 22,245    |  |                 |   | 404     |                     | 
|Residential                         |  |                  | 309,966   |  |                 |   | 3,217   |                     | 
|Subtotal                            |  | $                | 1,464,292 |  |                 | $ | 11,615  |                     | 
|Total                               |  | $                | 8,114,084 |  |                 | $ | 159,187 |                     | 



- 21 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



|                                    |  | Three Months     |           |  | Three Months    |   |        | Three Months        | 
|----------------------------------- |  | ---------------- | --------- |  | --------------- | - | ------ | ------------------- | 
|                                    |  | Average Recorded |           |  | Interest Income |   |        | Cash Basis          | 
|September 30, 2015                  |  | Investment       |           |  | Recognized      |   |        | Interest Recognized | 
|With no related allowance recorded: |  |                  |           |  |                 |   |        |                     | 
|Commercial                          |  | $                | 1,332,829 |  |                 | $ | 12,534 |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |        |                     | 
|General                             |  |                  | 5,525,724 |  |                 |   | 54,728 |                     | 
|Consumer:                           |  |                  |           |  |                 |   |        |                     | 
|Lines of credit                     |  |                  | 15,905    |  |                 |   | 0      |                     | 
|Other                               |  |                  | 0         |  |                 |   | 0      |                     | 
|Residential                         |  |                  | 422,240   |  |                 |   | 401    |                     | 
|Subtotal                            |  | $                | 7,296,698 |  |                 | $ | 67,663 |                     | 
|                                    |  |                  |           |  |                 |   |        |                     | 
|With a related allowance recorded:  |  |                  |           |  |                 |   |        |                     | 
|Commercial                          |  | $                | 430,920   |  |                 | $ | 5,626  |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |        |                     | 
|General                             |  |                  | 37,470    |  |                 |   | 0      |                     | 
|Consumer:                           |  |                  |           |  |                 |   |        |                     | 
|Lines of credit                     |  |                  | 254,100   |  |                 |   | 3,640  |                     | 
|Other                               |  |                  | 11,208    |  |                 |   | 0      |                     | 
|Residential                         |  |                  | 316,262   |  |                 |   | 2,299  |                     | 
|Subtotal                            |  | $                | 1,049,960 |  |                 | $ | 11,565 |                     | 
|Total                               |  | $                | 8,346,658 |  |                 | $ | 79,228 |                     | 



- 22 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



|                                    |  | Nine Months      |           |  | Nine Months     |   |         | Nine Months         | 
|----------------------------------- |  | ---------------- | --------- |  | --------------- | - | ------- | ------------------- | 
|                                    |  | Average Recorded |           |  | Interest Income |   |         | Cash Basis          | 
|September 30, 2016                  |  | Investment       |           |  | Recognized      |   |         | Interest Recognized | 
|With no related allowance recorded: |  |                  |           |  |                 |   |         |                     | 
|Commercial                          |  | $                | 1,360,761 |  |                 | $ | 45,597  |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |         |                     | 
|General                             |  |                  | 5,053,479 |  |                 |   | 219,861 |                     | 
|Consumer:                           |  |                  |           |  |                 |   |         |                     | 
|Lines of credit                     |  |                  | 83,212    |  |                 |   | 4,753   |                     | 
|Other                               |  |                  | 0         |  |                 |   | 0       |                     | 
|Residential                         |  |                  | 327,585   |  |                 |   | 1,383   |                     | 
|Subtotal                            |  | $                | 6,825,037 |  |                 | $ | 271,594 |                     | 
|                                    |  |                  |           |  |                 |   |         |                     | 
|With a related allowance recorded:  |  |                  |           |  |                 |   |         |                     | 
|Commercial                          |  | $                | 1,004,450 |  |                 | $ | 26,179  |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |         |                     | 
|General                             |  |                  | 62,721    |  |                 |   | 0       |                     | 
|Consumer:                           |  |                  |           |  |                 |   |         |                     | 
|Lines of credit                     |  |                  | 167,765   |  |                 |   | 6,207   |                     | 
|Other                               |  |                  | 16,893    |  |                 |   | 1,078   |                     | 
|Residential                         |  |                  | 312,930   |  |                 |   | 9,662   |                     | 
|Subtotal                            |  | $                | 1,564,759 |  |                 | $ | 43,126  |                     | 
|Total                               |  | $                | 8,389,796 |  |                 | $ | 314,720 |                     | 



- 23 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



|                                    |  | Nine Months      |           |  | Nine Months     |   |         | Nine Months         | 
|----------------------------------- |  | ---------------- | --------- |  | --------------- | - | ------- | ------------------- | 
|                                    |  | Average Recorded |           |  | Interest Income |   |         | Cash Basis          | 
|September 30, 2015                  |  | Investment       |           |  | Recognized      |   |         | Interest Recognized | 
|With no related allowance recorded: |  |                  |           |  |                 |   |         |                     | 
|Commercial                          |  | $                | 1,413,541 |  |                 | $ | 38,499  |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |         |                     | 
|General                             |  |                  | 5,471,768 |  |                 |   | 156,773 |                     | 
|Consumer:                           |  |                  |           |  |                 |   |         |                     | 
|Lines of credit                     |  |                  | 44,369    |  |                 |   | 0       |                     | 
|Other                               |  |                  | 0         |  |                 |   | 0       |                     | 
|Residential                         |  |                  | 275,598   |  |                 |   | 1,322   |                     | 
|Subtotal                            |  | $                | 7,205,276 |  |                 | $ | 196,594 |                     | 
|                                    |  |                  |           |  |                 |   |         |                     | 
|With a related allowance recorded:  |  |                  |           |  |                 |   |         |                     | 
|Commercial                          |  | $                | 428,710   |  |                 | $ | 16,910  |                     | 
|Commercial Real Estate:             |  |                  |           |  |                 |   |         |                     | 
|General                             |  |                  | 364,337   |  |                 |   | 0       |                     | 
|Consumer:                           |  |                  |           |  |                 |   |         |                     | 
|Lines of credit                     |  |                  | 275,605   |  |                 |   | 12,319  |                     | 
|Other                               |  |                  | 11,166    |  |                 |   | 0       |                     | 
|Residential                         |  |                  | 358,373   |  |                 |   | 9,784   |                     | 
|Subtotal                            |  | $                | 1,438,191 |  |                 | $ | 39,013  |                     | 
|Total                               |  | $                | 8,643,467 |  |                 | $ | 235,607 |                     | 



- 24 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present the aging of the recorded
investment in past due and non-accrual loans by class of loans as of September 30, 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              |  | $               | 156,830 |  |                 | $ | 0 |                 |  | $ | 0              |  |  | $              | 156,830 |  |                | $
|Commercial Real Estate: |  |                 |         |  |                 |   |   |                 |  |   |                |  |  |                |         |  |                |  
|General                 |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Construction            |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Consumer:               |  |                 |         |  |                 |   |   |                 |  |   |                |  |  |                |         |  |                |  
|Lines of credit         |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Other                   |  |                 | 18,731  |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 18,731  |  |                |  
|Credit card             |  |                 | 4,150   |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 4,150   |  |                |  
|Residential             |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Total                   |  | $               | 179,711 |  |                 | $ | 0 |                 |  | $ | 0              |  |  | $              | 179,711 |  |                | $



|                        |  |                 |   |  |                 |   |   | 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 |                 |  | $ | 17,771         |  |  | $           | 17,771 |  |                   | $
|Commercial Real Estate: |  |                 |   |  |                 |   |   |                 |  |   |                |  |  |             |        |  |                   |  
|General                 |  |                 | 0 |  |                 |   | 0 |                 |  |   | 0              |  |  |             | 0      |  |                   |  
|Construction            |  |                 | 0 |  |                 |   | 0 |                 |  |   | 0              |  |  |             | 0      |  |                   |  
|Consumer:               |  |                 |   |  |                 |   |   |                 |  |   |                |  |  |             |        |  |                   |  
|Lines of credit         |  |                 | 0 |  |                 |   | 0 |                 |  |   | 0              |  |  |             | 0      |  |                   |  
|Other                   |  |                 | 0 |  |                 |   | 0 |                 |  |   | 0              |  |  |             | 0      |  |                   |  
|Credit card             |  |                 | 0 |  |                 |   | 0 |                 |  |   | 0              |  |  |             | 0      |  |                   |  
|Residential             |  |                 | 0 |  |                 |   | 0 |                 |  |   | 48,858         |  |  |             | 48,858 |  |                   |  
|Total                   |  | $               | 0 |  |                 | $ | 0 |                 |  | $ | 66,629         |  |  | $           | 66,629 |  |                   | $



- 25 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present the aging of the recorded
investment in past due and non-accrual loans by class of loans as of December 31, 2015:



|                        |  |                 |         |  |                 |   |         | Greater Than 90 |  |   | Total Accruing |  |  |                |         |  | Total Recorded |  
|----------------------- |  | --------------- | ------- |  | --------------- | - | ------- | --------------- |  | - | -------------- |  |  | -------------- | ------- |  | -------------- | -
|                        |  | 30-59 Days Past |         |  | 60-89 Days Past |   |         | Days Past       |  |   | Past Due       |  |  | Current        |         |  | Investment of  |  
|Accruing Loans          |  | Due             |         |  | Due             |   |         | Due             |  |   | Loans          |  |  | Accruing Loans |         |  | Accruing Loans |  
|Commercial              |  | $               | 2,755   |  |                 | $ | 0       |                 |  | $ | 0              |  |  | $              | 2,755   |  |                | $
|Commercial Real Estate: |  |                 |         |  |                 |   |         |                 |  |   |                |  |  |                |         |  |                |  
|General                 |  |                 | 184,598 |  |                 |   | 93,311  |                 |  |   | 0              |  |  |                | 277,909 |  |                |  
|Construction            |  |                 | 0       |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Consumer:               |  |                 |         |  |                 |   |         |                 |  |   |                |  |  |                |         |  |                |  
|Lines of credit         |  |                 | 0       |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Other                   |  |                 | 0       |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Credit card             |  |                 | 0       |  |                 |   | 12,481  |                 |  |   | 0              |  |  |                | 12,481  |  |                |  
|Residential             |  |                 | 263,553 |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 263,553 |  |                |  
|Total                   |  | $               | 450,906 |  |                 | $ | 105,792 |                 |  | $ | 0              |  |  | $              | 556,698 |  |                | $



|                        |  |                 |        |  |                 |   |        | 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       |  |                   | $
|Commercial Real Estate: |  |                 |        |  |                 |   |        |                 |  |   |                |  |  |             |         |  |                   |  
|General                 |  |                 | 0      |  |                 |   | 0      |                 |  |   | 113,290        |  |  |             | 113,290 |  |                   |  
|Construction            |  |                 | 0      |  |                 |   | 0      |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Consumer:               |  |                 |        |  |                 |   |        |                 |  |   |                |  |  |             |         |  |                   |  
|Lines of credit         |  |                 | 0      |  |                 |   | 0      |                 |  |   | 41,336         |  |  |             | 41,336  |  |                   |  
|Other                   |  |                 | 0      |  |                 |   | 0      |                 |  |   | 5,822          |  |  |             | 5,822   |  |                   |  
|Credit card             |  |                 | 0      |  |                 |   | 0      |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Residential             |  |                 | 50,702 |  |                 |   | 75,482 |                 |  |   | 0              |  |  |             | 126,184 |  |                   |  
|Total                   |  | $               | 50,702 |  |                 | $ | 75,482 |                 |  | $ | 160,448        |  |  | $           | 286,632 |  |                   | $



- 26 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The recorded investment of non-accrual loans decreased
$1,043,078 in the first nine months of 2016. One note with a recorded investment of $921,532 at December 31, 2015 returned to accruing
status in September 2016. During the third quarter management re-evaluated this credit. Since its last evaluation several things
had occurred; the value of the property had increased (per a recent professional appraisal), a new tenant was secured (increasing
the occupancy rate and cashflow coverage) as well as a consistent repayment history while it was on non-accrual. The loan is graded
a 6 and is carefully watched by the Bank’s credit administration staff.



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 $415,351 of specific
reserves on $7,802,979 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt
restructurings as of September 30, 2016 and $401,072 on $7,965,816 of unpaid principal balance of loans as of December 31,
2015. As of September 30, 2016, there was $234,668 committed to three customers. As of December 31, 2015, there was $75,776
committed to two customers.



- 27 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present loans by class modified
as troubled debt restructurings that occurred during the three and nine month periods ended September 30, 2016:



|                                      |  |                 |   |  | Pre-Modification     |   |        | Post-Modification    | 
|------------------------------------- |  | --------------- | - |  | -------------------- | - | ------ | -------------------- | 
|                                      |  |                 |   |  | Outstanding Recorded |   |        | Outstanding Recorded | 
|Three Months Ended September 30, 2016 |  | Number of Loans |   |  | Investment           |   |        | Investment           | 
|Troubled Debt Restructurings:         |  |                 |   |  |                      |   |        |                      | 
|Residential                           |  |                 | 1 |  |                      | $ | 83,310 |                      | 
|Total                                 |  |                 | 1 |  |                      | $ | 83,310 |                      | 



|                                     |  |                 |   |  | Pre-Modification     |   |         | Post-Modification    | 
|------------------------------------ |  | --------------- | - |  | -------------------- | - | ------- | -------------------- | 
|                                     |  |                 |   |  | Outstanding Recorded |   |         | Outstanding Recorded | 
|Nine Months Ended September 30, 2016 |  | Number of Loans |   |  | Investment           |   |         | Investment           | 
|Troubled Debt Restructurings:        |  |                 |   |  |                      |   |         |                      | 
|Commercial                           |  |                 | 1 |  |                      | $ | 15,107  |                      | 
|Commercial Real Estate:              |  |                 |   |  |                      |   |         |                      | 
|General                              |  |                 | 1 |  |                      |   | 58,194  |                      | 
|Consumer:                            |  |                 |   |  |                      |   |         |                      | 
|Other                                |  |                 | 1 |  |                      |   | 11,566  |                      | 
|Residential                          |  |                 | 1 |  |                      |   | 83,310  |                      | 
|Total                                |  |                 | 4 |  |                      | $ | 168,177 |                      | 



For the three month period ending September 30, 2016,
one loan was modified. The borrower received a reduced payment for six months and following that time will have an interest rate
below the current market rate. This modification will provide payment relief while the borrower markets the home for sale.



In addition to the above modification, there were three
others which occurred in the first six months of the year. Two modifications involved a stated interest rate below the current
market rate for a period of 7 and 21 years and one other involved a reduced payment for nine months or less.



For the nine month period ended September 30, 2016, there
were no charge-offs related to troubled debt restructurings. As of September 30, 2016, an additional $50,569 of specific reserves
were established on these troubled debt restructurings.



- 28 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present loans by class modified
as troubled debt restructurings that occurred during the three and nine month periods ended September 30, 2015:



|                                      |  |                 |   |  | Pre-Modification     |   |         | Post-Modification    | 
|------------------------------------- |  | --------------- | - |  | -------------------- | - | ------- | -------------------- | 
|                                      |  |                 |   |  | Outstanding Recorded |   |         | Outstanding Recorded | 
|Three Months Ended September 30, 2015 |  | Number of Loans |   |  | Investment           |   |         | Investment           | 
|Troubled Debt Restructurings:         |  |                 |   |  |                      |   |         |                      | 
|Commercial                            |  |                 | 1 |  |                      | $ | 20,017  |                      | 
|Total                                 |  |                 | 1 |  |                      | $ | 20,017  |                      | 
|                                      |  |                 |   |  |                      |   |         |                      | 
|                                      |  |                 |   |  | Pre-Modification     |   |         | Post-Modification    | 
|                                      |  |                 |   |  | Outstanding Recorded |   |         | Outstanding Recorded | 
|Nine Months Ended September 30, 2015  |  | Number of Loans |   |  | Investment           |   |         | Investment           | 
|Troubled Debt Restructurings:         |  |                 |   |  |                      |   |         |                      | 
|Commercial                            |  |                 | 1 |  |                      | $ | 20,017  |                      | 
|Residential                           |  |                 | 1 |  |                      |   | 272,800 |                      | 
|Total                                 |  |                 | 2 |  |                      | $ | 292,817 |                      | 



In both the three and nine month periods ending September
30, 2015, the modifications involved financing concessions ranging from 22 months to 19 years, however, there were no charge-offs
related to the troubled debt restructurings.



In the nine month period ending September 30, 2015, an
additional $20,000 of specific reserves were established on loans modified as troubled debt restructurings.



For the three and nine month periods ending September
30, 2016 there was one troubled debt restructuring that experienced a payment default within 12 months following the modification.
For the three and nine month periods ending September 30, 2015 there were no troubled debt restructurings that experienced a payment
default. Below is a table which presents information for the loans that defaulted in 2016:



|                             |  |                 |   |  | Recorded Investment |  
|---------------------------- |  | --------------- | - |  | ------------------- | -
|                             |  | Number of Loans |   |  | at time of default  |  
|Troubled Debt Restructurings |  |                 |   |  |                     |  
|That Subsequently Defaulted: |  |                 |   |  |                     |  
|Commercial                   |  |                 | 1 |  |                     | $
|Total                        |  |                 | 1 |  |                     | $



- 29 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



Credit Quality Indicators:



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



|1.  |  | Exceptional. Loans with an exceptional credit rating.                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.  |  | Quality. Loans with excellent sources of repayment that conform, in all respects, to Bank policy and regulatory requirements. These are loans for which little repayment risk has been identified.                
|3.  |  | Above Average. Loans with above average sources of repayment and minimal identified credit or collateral exceptions and minimal repayment risk.                                                                   
|4.  |  | Average. Loans with average sources of repayment that materially conform to Bank policy and regulatory requirements. Repayment risk is considered average.                                                        
|5.  |  | Acceptable. Loans with acceptable sources of repayment and risk.                                                                                                                                                  
|5M. |  | Monitor. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.
|6.  |  | Special Mention. Loans that have potential weaknesses and deserve close attention. If uncorrected, further deterioration is likely. Risk of non payment is above average.                                         
|7.  |  | Substandard. Loans that are inadequately protected by the borrower’s capacity to pay or the collateral pledged. Risk of non payment is high.                                                                      
|8.  |  | Doubtful. Loans in this grade have identified weaknesses that make full repayment highly questionable and improbable.                                                                                             



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



- 30 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



As of September 30, 2016 and December 31, 2015, and based
on the most recent analysis performed, the recorded investment by risk category and class of loans is as follows:



|      |  |               |            |  | Commercial Real Estate |   |            | Commercial Real Estate | 
|----- |  | ------------- | ---------- |  | ---------------------- | - | ---------- | ---------------------- | 
|      |  | Commercial    |            |  | General                |   |            | Construction           | 
|      |  | September 30, |            |  | December 31,           |   |            | September 30,          | 
|      |  | 2016          |            |  | 2015                   |   |            | 2016                   | 
|1     |  | $             | 2,147,936  |  |                        | $ | 871,535    |                        | 
|2     |  |               | 0          |  |                        |   | 0          |                        | 
|3     |  |               | 11,286,481 |  |                        |   | 12,001,827 |                        | 
|4     |  |               | 14,371,113 |  |                        |   | 12,742,910 |                        | 
|5     |  |               | 15,692,661 |  |                        |   | 18,581,320 |                        | 
|5M    |  |               | 2,759,947  |  |                        |   | 1,426,772  |                        | 
|6     |  |               | 687,310    |  |                        |   | 798,475    |                        | 
|7     |  |               | 1,922,286  |  |                        |   | 1,939,064  |                        | 
|8     |  |               | 11,669     |  |                        |   | 13,869     |                        | 
|Total |  | $             | 48,879,403 |  |                        | $ | 48,375,772 |                        | 



In the first quarter of 2016, there was a $1.4 million
commercial real estate loan secured by Class A medical office space that was downgraded to a 6 because of weak cashflow and deficient
collateral coverage. At December 31, 2015, this commercial real estate loan was in the 5M risk category. During the third quarter,
this loan was downgraded further to a risk category 7 because of the extent of delinquent property taxes. Since the beginning of
the year, management has increased its oversight of this credit and will continue to work with the borrower to ensure that the
current leases are renewed and well-managed and that excess cash from the leases is used to repay the outstanding property tax
balance.



In the third quarter of 2016, a commercial real estate
loan that was in risk category 8 at December 31, 2015 was upgraded to a 6. Previous to the upgrade the loan was on non-accrual.
Management noted several developments since its last risk rating; in addition to years of consistent payments while on non-accrual,
the value of the property had increased (per a recent professional appraisal) and a new tenant was secured (increasing the occupancy
rate and cashflow coverage). In spite of these improved factors, the loan is being carefully watched by the Bank’s credit
administration staff.



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 September 30, 2016 and December 31, 2015:



|           |  | Residential   |           
|---------- |  | ------------- | ----------
|           |  | September 30, |           
|           |  | 2016          |           
|Performing |  | $             | 17,689,958
|Impaired   |  |               | 530,409   
|Total      |  | $             | 18,220,367



- 31 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



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



|           |  | Consumer – Lines of credit |           |  | Consumer – Other |   |           | Consumer – Credit card | 
|---------- |  | -------------------------- | --------- |  | ---------------- | - | --------- | ---------------------- | 
|           |  | September 30,              |           |  | December 31,     |   |           | September 30,          | 
|           |  | 2016                       |           |  | 2015             |   |           | 2016                   | 
|Performing |  | $                          | 5,184,143 |  |                  | $ | 5,021,480 |                        | 
|Impaired   |  |                            | 145,750   |  |                  |   | 292,970   |                        | 
|Total      |  | $                          | 5,329,893 |  |                  | $ | 5,314,450 |                        | 



| | 5. | FORECLOSED ASSETS
| | -- | -----------------



Foreclosed asset activity:



|                           |  | September 30, |           |   | December 31, |  
|-------------------------- |  | ------------- | --------- | - | ------------ | -
|                           |  | 2016          |           |   | 2015         |  
|Beginning of year          |  | $             | 2,211,327 |   |              | $
|Additions                  |  |               | 89,019    |   |              |  
|Reductions from sales      |  |               | (466,786  | ) |              |  
|Direct write-downs         |  |               | (134,533  | ) |              |  
|Transfer to SBA receivable |  |               | 0         |   |              |  
|End of period              |  | $             | 1,699,027 |   |              | $



Foreclosed
asset expenses, net of rental income were $68,312 for the first nine months of 2016 and $136,812 for the similar period in 2015.



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.



| | 6. | PREMISES AND EQUIPMENT
| | -- | ----------------------



Period end premises and equipment were as follows at
September 30, 2016 and December 31, 2015:



|                                  |  | September 30, |            |  | December 31, |  
|--------------------------------- |  | ------------- | ---------- |  | ------------ | -
|                                  |  | 2016          |            |  | 2015         |  
|Land & land improvements          |  | $             | 4,703,312  |  |              | $
|Buildings & building improvements |  |               | 6,332,060  |  |              |  
|Furniture, fixtures and equipment |  |               | 3,226,403  |  |              |  
|                                  |  |               | 14,261,775 |  |              |  
|Less: accumulated depreciation    |  |               | 5,694,497  |  |              |  
|                                  |  | $             | 8,567,278  |  |              | $



Depreciation expenses were $274,821 and $277,171 for
the nine months ended September 30, 2016 and 2015, respectively.



- 32 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 7. | DEPOSITS
| | -- | --------



The components of
the outstanding deposit balances at September 30, 2016 and December 31, 2015 were as follows:



|                         |  | September 30, |             |  | December 31, |  
|------------------------ |  | ------------- | ----------- |  | ------------ | -
|                         |  | 2016          |             |  | 2015         |  
|Non-interest-bearing DDA |  | $             | 43,523,397  |  |              | $
|Interest-bearing DDA     |  |               | 37,224,894  |  |              |  
|Money market             |  |               | 22,616,941  |  |              |  
|Savings                  |  |               | 24,814,240  |  |              |  
|Time, under $100,000     |  |               | 19,562,155  |  |              |  
|Time, over $100,000      |  |               | 9,962,091   |  |              |  
|Total Deposits           |  | $             | 157,703,718 |  |              | $



Time deposits of $250,000 or more were $1,384,860 at
September 30, 2016 and $1,377,420 at December 31, 2015. There were no brokered deposits at either September 30, 2016 or December
31, 2015.



| | 8. | SHORT-TERM BORROWINGS
| | -- | ---------------------



The Company’s short-term borrowings outstanding
consisted entirely of repurchase agreements at September 30, 2016 and December 31, 2015. The Company utilized its line of credit
with the Federal Home Loan Bank (“FHLB”) of Indianapolis for overnight liquidity support during 2015 and used its overnight
line once in 2016 for contingency plan testing purposes. Information regarding repurchase agreements and borrowings from the FHLB
is summarized below:



|                                        |  | Repurchase |           |   | Borrowings |  
|--------------------------------------- |  | ---------- | --------- | - | ---------- | -
|                                        |  | Agreements |           |   | from FHLB  |  
|                                        |  |            |           |   |            |  
|Outstanding at September 30, 2016       |  | $          | 4,853,589 |   |            | $
|Average interest rate at period end     |  |            | 0.41      | % |            |  
|Average balance during period           |  |            | 4,068,171 |   |            |  
|Average interest rate during period     |  |            | 0.41      | % |            |  
|Maximum month end balance during period |  |            | 4,853,589 |   |            |  
|                                        |  |            |           |   |            |  
|Outstanding at December 31, 2015        |  | $          | 4,921,023 |   |            | $
|Average interest rate at year-end       |  |            | 0.42      | % |            |  
|Average balance during year             |  |            | 5,411,588 |   |            |  
|Average interest rate during year       |  |            | 0.44      | % |            |  
|Maximum month end balance during year   |  |            | 8,829,269 |   |            |  



- 33 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 8. | SHORT-TERM BORROWINGS (Continued)
| | -- | ---------------------------------



The Bank had securities of $3,724,027 pledged to repurchase
agreements at September 30, 2016 and $5,341,286 pledged at December 31, 2015. The Company had approximately $2.5 million of residential
mortgage loans pledged to support its line of credit with the FHLB at September 30, 2016.



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:



|Securities Pledged to Repurchase Agreements |  | September 30, 2016 |           |  | December 31, 2015 |  
|------------------------------------------- |  | ------------------ | --------- |  | ----------------- | -
|U.S. Treasury and agency securities         |  | $                  | 501,073   |  |                   | $
|Asset-backed securities                     |  |                    | 2,507,118 |  |                   |  
|Other                                       |  |                    | 715,836   |  |                   |  
|Total                                       |  | $                  | 3,724,027 |  |                   | $



Another
source of short-term borrowings is available through the Federal Reserve Discount Window (“Discount Window”). At September
30, 2016, collateral pledged for Discount Window borrowings consisted of $1,379,915 in home equity loans while at December 31,
2015 the collateral pledged consisted of $332,768 in home equity loans, one security valued at $661,271 and one USDA loan valued
at $3,408,161. The borrowing capacity decreased in the first quarter of 2016 due to the USDA loan no longer fulfilling the pledge
requirements of the FRB and the security that was pledged was called. Also occurring in the first quarter of 2016, the Bank was
upgraded from the secondary to the primary credit program. The primary credit program awards more value for pledged collateral
and also borrowings are fully directed by the Bank and do not require regulator approval.



| | 9. | FEDERAL HOME LOAN BANK BORROWINGS
| | -- | ---------------------------------



The
Bank is a member of the FHLB of Indianapolis. Based on its current FHLB stock holdings and collateral, the Bank has the capacity
to borrow $2,389,516 at September 30, 2016. Each borrowing requires a direct pledge of securities and/or loans. To support potential
borrowings with the FHLB, the Bank had loans with a carrying value of $5,582,125 pledged at September 30, 2016 and $7,511,449 pledged
at year-end 2015. The Bank uses a portion of the loans pledged to the FHLB as collateral for a $2,000,000 overdraft line of credit.
The remaining pledged loans are available to collateralize longer term FHLB borrowings. The Bank had no balance outstanding on
the line of credit or other borrowings with the FHLB at either September 30, 2016 or December 31, 2015.



| | 10. | SUBORDINATED DEBENTURES
| | --- | -----------------------



The
Trust, as discussed in Note 1, sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000
per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Trust to
purchase an equivalent amount of subordinated debentures from the Company. The trust preferred securities and subordinated debentures
carry a floating rate of 2.05% over the 3-month LIBOR and was 2.89% at September 30, 2016 and 2.65% at December 31, 2015. The stated
maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are,
in effect, guaranteed by the Company. Interest on the subordinated debentures is payable quarterly on March 30th, June
30th, September 30th and December 30th. 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.





- 34 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 10. | SUBORDINATED DEBENTURES (Continued)
| | --- | -----------------------------------



The
terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued, give the
Company the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified
events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in
the deferral of distributions on the trust preferred securities. In May 2010, the Company exercised its option to defer regularly
scheduled quarterly interest payments beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010.
The Company exercised its option to defer each regularly scheduled interest payment from June 2010 through March 2015. The Company’s
deferral of interest during that period did not constitute an event of default.



The
last allowable deferral period was March 30, 2015. All accrued and unpaid interest was due and payable and a corresponding amount
of distributions was payable on the trust preferred securities on June 30, 2015. The Company did not have the liquidity to pay
the interest owed at that time. On March 30, 2016, the Company remitted an interest payment of approximately $722,000 (which consisted
of $673,000 of accrued interest and $49,000 of interest on the deferred interest) curing the interest payment default utilizing
proceeds from its Rights Offering and concurrent private placement discussed in Note 13.



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 September 30, 2016, the accrued and unpaid interest owed
on the subordinated debentures was $64,144.



| | 11. | NOTES PAYABLE
| | --- | -------------



On March 20, 2013, the Company, with approval from the
FRB, borrowed $1,280,000 from 1030 Norton LLC, a Michigan limited liability company owned by nine individuals; three directors
of the Company, Gary F. Bogner, Robert L. Chandonnet and Bruce J. Essex, one former director and five local businessmen. The proceeds
of the senior debt were used to settle a defaulted note with another financial institution, to fund general operations and to
make interest payments until the repayment or maturity of the note. The note bore interest at a fixed rate of 8.00% per annum
until paid in full. While the note was outstanding, interest was paid quarterly, in arrears. The note was secured by a pledge
of all of the issued and outstanding shares of the Bank as evidenced by a pledge agreement between the Company and 1030 Norton
LLC. The note maturity was extended for another two year period in the first quarter of 2015. As a result, the note’s maturity
became March 31, 2017.



- 35 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 11. | NOTES PAYABLE (Continued)
| | --- | -------------------------



The Company’s note payable with 1030 Norton LLC
included a beneficial conversion feature allowing repayment of the outstanding principal with common stock instead of cash at a
discount of 25% below the general offering price should an offering of stock be carried out by the Company. On October 2, 2015,
the Company entered into a Debt Conversion Agreement with 1030 Norton LLC. The Debt Conversion Agreement provided that 1030 Norton
LLC would convert the principal balance of its note into shares of common stock of the Company at a conversion price of $1.91 per
share, which

equaled
75% of the per share purchase price established by the Board of Directors of the Company in connection with its Rights Offering.



The note payable conversion to equity was completed on
March 28, 2016 simultaneously with the closing of the Rights Offering. The balance of the note payable was settled in exchange
for 670,153 shares of stock issued to the members of 1030 Norton LLC and a check for $7.77 due to fractional shares. Upon consummation
of the conversion, the Company made a final interest payment of $24,747 and 1030 Norton LLC released the Company’s pledge
of 100% of the shares of Community Shores Bank.



| | 12. | DERIVATIVE LIABILITY
| | --- | --------------------



The beneficial conversion feature embedded in the Company’s
note payable to 1030 Norton LLC was recorded as a liability through interest expense for the Company during 2015. At June 30, 2015,
the conditions for the conversion were met and the liability was recorded. The value of the liability was established at $426,667,
which represented a 25% per share discount on the stock to be issued in exchange for the outstanding note payable from the price
per share of the Company’s stock established in the Rights Offering.



Similar to the related note payable discussed in Note
11, the derivative liability, net of related deferred tax, was reclassified to shareholder’s equity at conversion on March
28, 2016.



| | 13. | SHAREHOLDER’S EQUITY
| | --- | --------------------



Sale of Common Stock



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



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



- 36 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 14. | COMMITMENTS AND OFF-BALANCE SHEET RISK
| | --- | --------------------------------------



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



A summary of the notional and contractual amounts of
outstanding financing instruments with off-balance-sheet risk as of September 30, 2016 and December 31, 2015 follows:



|                                 |  | September 30, 2016 |            |  | December 31, 2015 |  
|-------------------------------- |  | ------------------ | ---------- |  | ----------------- | -
|                                 |  |                    |            |  |                   |  
|Unused lines of credit           |  | $                  | 29,802,655 |  |                   | $
|Unused standby letters of credit |  |                    | 318,000    |  |                   |  
|Commitments to make loans        |  |                    | 457,425    |  |                   |  



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



| | 15. | FAIR VALUE MEASUREMENTS
| | --- | -----------------------



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



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



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



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



- 37 -







COMMUNITY
SHORES BANK CORPORATION

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | FAIR VALUE MEASUREMENTS (Continued)
| | --- | -----------------------------------



The Company used the following methods and significant
assumptions to estimate fair value:



Securities: The fair values of securities are obtained
from a third party who utilizes quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing
(Level 2 inputs), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively
on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted
securities.



Servicing Assets: The fair value of SBA servicing rights
is obtained from a third party using assumptions provided by the Company. The individual servicing rights are valued individually
taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. The valuation
methodology utilized for the servicing rights begins with projecting future cash flows for each servicing asset, based on its unique
characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated
utilizing a market-based discount rate assumption. These inputs are generally observable in the marketplace resulting in a Level
2 classification.



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



Non-real estate collateral may be valued using appraisals,
independent valuation tools 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.



- 38 -











COMMUNITY SHORES
BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | FAIR VALUE MEASUREMENTS
                                         (Continued)
| | --- | ----------------------------------------------------------------------------



Assets measured at fair value on a recurring basis
are summarized below as of September 30, 2016 and December 31, 2015:



|                                                                         |  |       |            |  | Fair Value Measurements Using |  
|------------------------------------------------------------------------ |  | ----- | ---------- |  | ----------------------------- | -
|                                                                         |  |       |            |  | Quoted Prices                 |  
|                                                                         |  |       |            |  | in Active                     |  
|                                                                         |  |       |            |  | Markets for                   |  
|                                                                         |  |       |            |  | Identical Assets              |  
|                                                                         |  | Total |            |  | (Level 1)                     |  
|September 30, 2016                                                       |  |       |            |  |                               |  
|Available for sale securities:                                           |  |       |            |  |                               |  
|US Treasury                                                              |  | $     | 1,508,360  |  |                               | $
|US Government and federal agency                                         |  |       | 8,004,127  |  |                               |  
|Municipals                                                               |  |       | 0          |  |                               |  
|Mortgage-backed and collateralized
    mortgage obligations– residential |  |       | 9,595,585  |  |                               |  
|Total                                                                    |  | $     | 19,108,072 |  |                               | $
|                                                                         |  |       |            |  |                               |  
|Servicing assets                                                         |  | $     | 1,895      |  |                               | $



|                                                                         |  |       |            |  | Fair Value Measurements Using |  
|------------------------------------------------------------------------ |  | ----- | ---------- |  | ----------------------------- | -
|                                                                         |  |       |            |  | Quoted Prices                 |  
|                                                                         |  |       |            |  | in Active                     |  
|                                                                         |  |       |            |  | Markets for                   |  
|                                                                         |  |       |            |  | Identical Assets              |  
|                                                                         |  | Total |            |  | (Level 1)                     |  
|December 31, 2015                                                        |  |       |            |  |                               |  
|Available for sale securities:                                           |  |       |            |  |                               |  
|US Treasury                                                              |  | $     | 1,511,328  |  |                               | $
|US Government and federal agency                                         |  |       | 11,544,620 |  |                               |  
|Municipals                                                               |  |       | 710,966    |  |                               |  
|Mortgage-backed and collateralized
    mortgage obligations– residential |  |       | 11,442,819 |  |                               |  
|Total                                                                    |  | $     | 25,209,733 |  |                               | $
|                                                                         |  |       |            |  |                               |  
|Servicing assets                                                         |  | $     | 5,151      |  |                               | $



There were no transfers between levels during the
first three quarters of 2016 or 2015.



- 39 -







COMMUNITY SHORES
BANK CORPORATIONNOTES 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 September 30, 2016 and December 31, 2015:



|                   |  |       |           |  | Quoted Prices in   |   |   | Significant      |  |   |                     | 
|------------------ |  | ----- | --------- |  | ------------------ | - | - | ---------------- |  | - | ------------------- | 
|                   |  |       |           |  | Active Markets for |   |   | Other Observable |  |   | Significant         | 
|                   |  |       |           |  | Identical Assets   |   |   | Inputs           |  |   | Unobservable Inputs | 
|                   |  | Total |           |  | (Level 1)          |   |   | (Level 2)        |  |   | (Level 3)           | 
|September 30, 2016 |  |       |           |  |                    |   |   |                  |  |   |                     | 
|Impaired loans1:   |  | $     | 1,784,804 |  |                    | $ | 0 |                  |  | $ | 0                   | 
|Foreclosed assets: |  |       | 1,699,027 |  |                    |   | 0 |                  |  |   | 0                   | 
|Total              |  | $     | 3,483,831 |  |                    | $ | 0 |                  |  | $ | 0                   | 



|                   |  |       |           |  | Quoted Prices in   |   |   | Significant      |  |   |                     | 
|------------------ |  | ----- | --------- |  | ------------------ | - | - | ---------------- |  | - | ------------------- | 
|                   |  |       |           |  | Active Markets for |   |   | Other Observable |  |   | Significant         | 
|                   |  |       |           |  | Identical Assets   |   |   | Inputs           |  |   | Unobservable Inputs | 
|                   |  | Total |           |  | (Level 1)          |   |   | (Level 2)        |  |   | (Level 3)           | 
|December 31, 2015  |  |       |           |  |                    |   |   |                  |  |   |                     | 
|Impaired loans1:   |  | $     | 1,728,358 |  |                    | $ | 0 |                  |  | $ | 0                   | 
|Foreclosed assets: |  |       | 2,211,327 |  |                    |   | 0 |                  |  |   | 0                   | 
|Total              |  | $     | 3,939,685 |  |                    | $ | 0 |                  |  | $ | 0                   | 








1 Collateral dependent



- 40 -







COMMUNITY SHORES
BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | FAIR VALUE MEASUREMENTS
                                         (Continued)
| | --- | ----------------------------------------------------------------------------



The following tables present information as of September
30, 2016 and December 31, 2015 about significant unobservable inputs related to the Bank’s individually material Level 3
financial assets, by class, measured on a non-recurring basis:



|                   |  | Valuation                 |  | Significant Unobservable                             |  | Range     |        
|------------------ |  | ------------------------- |  | ---------------------------------------------------- |  | --------- | -------
|September 30, 2016 |  | Technique                 |  | Inputs                                               |  | of Inputs |        
|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 |  |           | (17)-14



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



- 41 -







COMMUNITY SHORES
BANK CORPORATIONNOTES 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 September 30, 2016   |  
|                                |  | Carrying       |         |  |                         |  
|                                |  | Amount         |         |  | Level 1                 |  
|                                |  | (in thousands) |        
|Financial assets                |  |                |         |  |                         |  
|Cash and cash equivalents       |  | $              | 17,034  |  |                         | $
|Term deposit                    |  |                | 100     |  |                         |  
|Loans held for sale             |  |                | 0       |  |                         |  
|Loans, net (including impaired) |  |                | 129,872 |  |                         |  
|FHLB stock                      |  |                | 301     |  |                         |  
|Accrued interest receivable     |  |                | 355     |  |                         |  
|                                |  |                |         |  |                         |  
|Financial liabilities           |  |                |         |  |                         |  
|Deposits                        |  |                | 157,704 |  |                         |  
|Repurchase agreements           |  |                | 4,854   |  |                         |  
|Subordinated debentures         |  |                | 4,500   |  |                         |  
|Notes payable                   |  |                | 0       |  |                         |  
|Accrued interest payable        |  |                | 82      |  |                         |  



|                                |  |                |         |  | Fair Value Measurements |  
|------------------------------- |  | -------------- | ------- |  | ----------------------- | -
|                                |  |                |         |  | at December 31, 2015    |  
|                                |  | Carrying       |         |  |                         |  
|                                |  | Amount         |         |  | Level 1                 |  
|                                |  | (in thousands) |        
|Financial assets                |  |                |         |  |                         |  
|Cash and cash equivalents       |  | $              | 17,900  |  |                         | $
|Loans held for sale             |  |                | 0       |  |                         |  
|Loans, net (including impaired) |  |                | 121,070 |  |                         |  
|FHLB stock                      |  |                | 301     |  |                         |  
|Accrued interest receivable     |  |                | 369     |  |                         |  
|                                |  |                |         |  |                         |  
|Financial liabilities           |  |                |         |  |                         |  
|Deposits                        |  |                | 161,182 |  |                         |  
|Repurchase agreements           |  |                | 4,921   |  |                         |  
|Subordinated debentures         |  |                | 4,500   |  |                         |  
|Notes payable                   |  |                | 1,280   |  |                         |  
|Accrued interest payable        |  |                | 734     |  |                         |  



- 42 -







COMMUNITY SHORES
BANK CORPORATIONNOTES 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) Term Deposits



Fair values for term deposits are estimated using
a discounted cash flows calculation that applies the interest rates currently being offered over the term of the deposit resulting
in a Level 2 classification.



(c) 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.



(d)  FHLB stock



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



(e) 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.



(f) 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.



(g) Subordinated debentures
and Notes payable



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



- 43 -







COMMUNITY SHORES
BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | FAIR VALUE MEASUREMENTS
                                         (Continued)
| | --- | ----------------------------------------------------------------------------



(h) 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.



(i) Off-balance sheet instruments



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



| | 16. | INCOME TAXES
| | --- | ------------



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



Although the Company’s income is marginal,
the outlook for future earnings is positive. Considering the reduction in debt expense and significant operational expenses such
as data processing and various insurances as well as a strong loan pipeline and capital to support growth, management concluded
that no valuation allowance on the Company’s net deferred tax asset was necessary at September 30, 2016. Net operating losses
will begin expiring in 2030 and continue through 2035.



There were no unrecognized tax benefits at September
30, 2016 or December 31, 2015, and the Company does not expect the total amount of unrecognized tax benefits to significantly
increase or decrease in the next 12 months. The Company is subject to examination by the Internal Revenue Service for years after
2012.



| | 17. | REGULATORY MATTERS
| | --- | ------------------



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



- 44 -







COMMUNITY SHORES
BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 17. | REGULATORY MATTERS
                                         (Continued)
| | --- | -----------------------------------------------------------------------



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 Basel III capital rules that became effective on January 1, 2015, there was a requirement for a capital conservation buffer
of 2.5% of risk-weighted assets to be phased in over four years at an incremental rate of 0.625% each year beginning in 2016.
When fully phased in, this will result in a minimum CET1 ratio of 7%, a minimum total capital to risk-weighted asset ratio of
10.5%, and a minimum Tier 1 capital to risk-weighted asset ratio of 8.5%. 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. As of September 30,
2016, the capital conservation buffer was 3.67%.



On March 31, 2016, following a $3.35 million contribution
of capital from the Company, the Bank’s capital ratios were elevated to a level of well-capitalized, according to prompt
corrective action regulations. On that date, the Bank’s total risk-based capital ratio was 11.90% and its Tier 1 to average
assets ratio was 8.06%; both above the minimum required to be well-capitalized.



The
Bank was considered adequately capitalized at year-end 2015. At December 31, 2015, the Bank’s total risk-based capital ratio
was 9.46% and its Tier 1 to average assets ratio was 6.12%; both well above the minimum required for capital adequacy.



- 45 -







COMMUNITY SHORES
BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 17. | REGULATORY
                                         MATTERS (Continued)
| | --- | -----------------------------------------------------------------------



Following a capital contribution of $125,000 from
the Company on September 30, 2016, the actual capital amounts and ratios for the Bank and, required capital amounts and ratios
for the Bank to be well capitalized at September 30, 2016 and December 31, 2015 were:



|                                                                          |  |        |            |  |                   |  |       |                   |  |   |                   |  |  | Minimum Required |     
|------------------------------------------------------------------------- |  | ------ | ---------- |  | ----------------- |  | ----- | ----------------- |  | - | ----------------- |  |  | ---------------- | ----
|                                                                          |  |        |            |  |                   |  |       |                   |  |   |                   |  |  | to Be Well       |     
|                                                                          |  |        |            |  |                   |  |       | Minimum Required  |  |   | Capitalized Under | 
|                                                                          |  |        |            |  |                   |  |       | For Capital       |  |   | Prompt Corrective | 
|                                                                          |  | Actual |            |  | Adequacy Purposes |  |       | Action Provisions | 
|September 30, 2016                                                        |  | Amount |            |  | Ratio             |  |       | Amount            |  |   | Ratio             |  |  | Amount           |     
|Common Equity Tier 1 (CET1) to risk-weighted
    assets of the Bank       |  | $      | 14,772,290 |  |                   |  | 10.52 | %                 |  | $ | 6,320,427         |  |  |                  | 4.50
|Total Capital (Tier 1 and Tier 2) to risk-weighted
    assets of the Bank |  |        | 16,397,008 |  |                   |  | 11.67 |                   |  |   | 11,236,314        |  |  |                  | 8.00
|Tier 1 (Core) Capital to risk-weighted assets of the
    Bank             |  |        | 14,772,290 |  |                   |  | 10.52 |                   |  |   | 8,427,236         |  |  |                  | 6.00
|Tier 1 (Core) Capital to average assets of the Bank                       |  |        | 14,772,290 |  |                   |  | 8.03  |                   |  |   | 7,362,130         |  |  |                  | 4.00



- 46 -







COMMUNITY SHORES
BANK CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 17. | REGULATORY MATTERS
                                         (Continued)
| | --- | -----------------------------------------------------------------------



|                                                                      |  |        |            |  |                   |  |      |                   |  |   |                   |  |  | Minimum Required |     
|--------------------------------------------------------------------- |  | ------ | ---------- |  | ----------------- |  | ---- | ----------------- |  | - | ----------------- |  |  | ---------------- | ----
|                                                                      |  |        |            |  |                   |  |      |                   |  |   |                   |  |  | to Be Well       |     
|                                                                      |  |        |            |  |                   |  |      | Minimum Required  |  |   | Capitalized Under | 
|                                                                      |  |        |            |  |                   |  |      | For Capital       |  |   | Prompt Corrective | 
|                                                                      |  | Actual |            |  | Adequacy Purposes |  |      | Action Provisions | 
|December 31, 2015                                                     |  | Amount |            |  | Ratio             |  |      | Amount            |  |   | Ratio             |  |  | Amount           |     
|Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank       |  | $      | 11,112,069 |  |                   |  | 8.22 | %                 |  | $ | 6,082,087         |  |  |                  | 4.50
|Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank |  |        | 12,783,486 |  |                   |  | 9.46 |                   |  |   | 10,812,599        |  |  |                  | 8.00
|Tier 1 (Core) Capital to risk-weighted assets of the Bank             |  |        | 11,112,069 |  |                   |  | 8.22 |                   |  |   | 8,109,449         |  |  |                  | 6.00
|Tier 1 (Core) Capital to average assets of the Bank                   |  |        | 11,112,069 |  |                   |  | 6.12 |                   |  |   | 7,257,858         |  |  |                  | 4.00



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 both September 30, 2016 and December 31, 2015, the entire allowance for loan loss was counted as Tier 2 capital; nothing was
disallowed. The allowance for loan losses was $1,624,718 at September 30, 2016 and $1,671,416 at December 31, 2015.



- 47 -









COMMUNITY SHORES
BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The discussion below details the financial
results of the Company and its wholly owned subsidiaries, the Bank and Community Shores Financial Services, and the Bank’s
subsidiary, the Mortgage Company, and Berryfield, the Mortgage Company’s subsidiary, through September 30, 2016 and is separated
into two parts which are labeled Financial Condition and Results of Operations. The part labeled Financial Condition compares
the financial condition at September 30, 2016 to that at December 31, 2015. The part labeled Results of Operations discusses the
three and nine month periods ending September 30, 2016 as compared to the same periods of 2015. Both parts should be read in conjunction
with the interim consolidated financial statements and footnotes included in Item 1 of Part I of this Form 10-Q.



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



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



In the first quarter of 2016, the Company
successfully completed a Rights Offering which commenced in the fourth quarter of 2015 and a concurrent private placement (See
Note 13). On March 28, 2016, after receiving FRB approval to repay the interest due on the Company’s subordinated debentures
and to increase the ownership percentages of certain investors in relation to the guidelines of the FRB Change in Bank Control
Act, the Company received gross proceeds of approximately $5.0 million from these two transactions. On the same date, the Company’s
note payable with 1030 Norton LLC converted to 670,153 common shares, relieving the Company of any future interest payments. Two
days later, on March 30, 2016, the  Company repaid $722,000 of interest on its subordinated debentures and brought its obligations
current. Finally, on March 31, 2016, the Company contributed $3.35 million of new capital into the Bank, enhancing its regulatory
capital position.



- 48 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The recent capital raise allowed the Company to improve its
financial condition and to strengthen the capital position of the Bank. However, the Written Agreement between the Company and
the FRB, which became effective on December 16, 2010, remains in effect. The Written Agreement provides that: (i) the Company
must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank;
(ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital
from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities
without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of
its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash
for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall
take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company
comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in
all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change
the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position,
without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date
of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner
of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent
company only financial statements.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES:



There have been no material changes to the application of critical
accounting estimates and policies that were discussed in the Company’s Annual Report on Form 10-K for the year ended December
31, 2015. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements
and our Annual Report on 10-K for the fiscal year ended December 31, 2015.



FINANCIAL CONDITION



Total assets were $181.6 million at September 30, 2016 compared
to $181.0 million at December 31, 2015. Total assets increased by $597,000 in the first nine months of the year. Proceeds from
the Rights Offering and investment maturities were used to fund loans and maturing non-local time deposits.



Cash and cash equivalents decreased by $866,000 to $17.0 million
at September 30, 2016 from $17.9 million at December 31, 2015. The Bank’s FRB balance which was $15.1 million at year-end
2015 and was $14.0 million on September 30, 2016. 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. The excess
liquidity at the FRB is expected to be reduced in the last quarter of the year due to the deposit activities of the Bank’s
public fund customers as well as upcoming loan originations.



- 49 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The Bank’s security portfolio was $19.1
million at September 30, 2016 and $25.2 million at December 31, 2015. Investment activity in the first nine months of the year
consisted of maturities, prepayments and calls in addition to net amortization totaling $6.3 million offset by an increase in
fair value of $177,000.



Although the investment portfolio is declining, the Bank seeks
to diligently manage unencumbered securities to ensure there are enough available to meet parameters required by several of the
Bank’s operating policies. Unencumbered securities are those that are not pledged to any other entity. As such, they serve
as a key source of collateral or potential liquidity for the Bank. The level of unpledged securities is formally assessed monthly.
Maintaining an adequate level of pledgeable assets is one of the driving forces behind investment activity. Typically the Bank
aims to leave between 10% and 20% of its investment portfolio unpledged.



At September 30, 2016, 23% of the investment portfolio was
unencumbered. This outcome is higher than required and also higher than the 20% unpledged position that existed on December 31,
2015. The increase in unencumbered investments was due to the release of approximately $4 million of pledged investments. The
Bank had originally pledged several of its investments to two of its public fund deposit customers when the Bank was under a regulatory
Consent Order. The securities were released in the second quarter of 2016 after the public fund customers were notified of the
Consent Order’s termination. Because of the depth of the Bank’s loan pipeline, management expects the size of the
investment portfolio will continue to be reduced as investments mature with the proceeds likely being used to fund loans.



As a result of the release of the pledged securities above
and decreases in customer repurchase agreement balances, the amortized cost of securities pledged to public fund customers, the
FRB discount window and customer repurchase agreements, decreased to $14.8 million from $20.2 million at year-end 2015.



In the financial services industry, investment
portfolio quality typically receives scrutiny when instruments within the portfolio are higher risk. The Bank monitors the quality
of the Company’s portfolio actively however the instruments held by the Company are deemed to be traditional and conservative
from a risk standpoint; nonetheless, the fair value of even those investments can be impacted by national and global economic
news. During the first nine months of the year, the portfolio’s fair value increased. At year-end there were net unrealized
losses on the entire portfolio of $44,000 and at September 30, 2016 the portfolio had net unrealized gains of $133,000. 
Essentially during the first nine months of 2016, the investment portfolio’s fair value improved by a net figure of $177,000.
Although the investment portfolio has a net unrealized gain at September 30, 2016, there were four securities with an amortized
cost of $1.2 million having an unrealized loss of $4,000. See Note 2 for information regarding this change as well as 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 September 30, 2016.



Loans held for sale activity during the first
nine months of 2016 included $4.9 million of loan originations and $5.0 million of sales. The associated gain on the loan sales
was $121,000. There were no loans held for sale at September 30, 2016 or December 31, 2015. During the third quarter of 2016,
a $99,000 loan that was held for sale on June 30, 2016 was moved to the loans held for investment.



- 50 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Total loans (held for investment) increased
$8.8 million and were $131.5 million at September 30, 2016 up from $122.7 million at December 31, 2015. Since 2015 the Bank has
experienced growth in all categories of loans except credit cards which had a small decrease. Although the local market is very
competitive, management believes the Bank’s lending area is positioned to continue growing its loan portfolio in 2016 and
will do so in a manner that assesses multiple risk factors in conjunction with expected rate of return and related capital allocation.



Management will continue to pay careful attention
to the credit quality of the current portfolio while seeking to increase loan growth. The lending staff regularly monitors the
loan portfolio and adheres to a well-designed credit risk assessment process. In spite of these efforts, the Bank is still exposed
to credit risk.



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



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



The analysis of the allowance for loan losses is comprised
of general credit allocations and specific credit allocations. General credit allocations are made to various categories of loans
based on loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The specific credit
allocation includes a detailed review of a borrower and its entire relationship resulting in an allocation being made to the allowance
for that particular borrower’s situation.  A loan becomes specifically identified when, based on current information
and events related to that particular borrower, it is probable that the Company will be unable to collect the scheduled payments
of principal and interest according to the contractual terms of the loan agreement. Specifically identified loans are individually
evaluated for impairment.



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



At September 30, 2016, the allowance for loan losses totaled
$1.6 million; nearly the same as at year-end 2015. The allowance for loan loss decreased by $47,000 and is the result of charge-offs
of $153,000 and recoveries of $106,000 for the first nine months of 2016. At September 30, 2016, the ratio of allowance to gross
loans outstanding was 1.24% compared to 1.36% at year-end 2015. The decrease was attributable to an increase in loan balances
and a decrease in net charge-offs in the first nine months of 2016, which resulted in lower historical loss factors.



- 51 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The allocation of the allowance at September 30, 2016 and December
31, 2015 was as follows:



|                         |  | September 30, 2016 |           |  | December 31, 2015 | 
|------------------------ |  | ------------------ | --------- |  | ----------------- | 
|                         |  |                    |           |  | Percent of        | 
|                         |  |                    |           |  | Loans in Each     | 
|                         |  |                    |           |  | Category to       | 
|                         |  | Amount             |           |  | Total Loans       | 
|Balance at End of Period |  |                    |           |  |                   | 
|Applicable to:           |  |                    |           |  |                   | 
|Commercial               |  | $                  | 560,564   |  |                   | 
|Commercial Real Estate   |  |                    | 510,770   |  |                   | 
|Consumer                 |  |                    | 248,044   |  |                   | 
|Residential              |  |                    | 200,937   |  |                   | 
|Unallocated              |  |                    | 104,403   |  |                   | 
|Total                    |  | $                  | 1,624,718 |  |                   | 



The general component of the allowance for loan losses as a
percentage of non-specifically identified loans was 0.88% at September 30, 2016, a decrease of one basis point from year-end 2015.
 At September 30, 2016, there was approximately $104,000 of unallocated reserves in the allowance for loan losses while unallocated
reserves were approximately $184,000 at December 31, 2015. In the second quarter of 2016, a portion of the unallocated reserves
were used to increase the specific allocation of an individually identified loan.



At September 30, 2016, the allowance contained $435,000 in
specific allocations for impaired loans whereas at December 31, 2015 there was $465,000 specifically allocated. In total, there
was $8.1 million of recorded investment on impaired loans at September 30, 2016 compared to $8.7 million at year-end 2015. In
the first three quarters of 2016, several specifically identified loans were charged off; one of the loans carried a specific
allocation of $50,000 at year-end 2015.



Not all specifically identified loans require an allocation
of reserves. After a loan is specifically identified and an evaluation of the collateral or expected repayment is completed, typically
a charge-off is made so that the remaining principal is the current value of the assigned collateral or expected repayment, therefore
no further reserve is required. There were 15 impaired loans requiring no reserve at September 30, 2016. At September 30, 2016,
the recorded investment on impaired loans requiring no reserves was $6.7 million, or 83% of the recorded investment of specifically
identified loans. This outcome is similar to $7.0 million requiring no reserves at year-end 2015 or 81% of the recorded investment
of specifically identified loans.



Specifically identified loans requiring reserves had a recorded
investment of $1.4 million September 30, 2016 and $1.7 million at year-end 2015. The decrease is partially a result of the charge-offs
on specifically identified loans occurring since year-end 2015.



Another factor considered in the assessment
of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. Overall from year-end 2015 to
September 30, 2016, the recorded investment in accruing past due and non-accrual loans changed significantly. The recorded investment
in past due loans still accruing interest decreased by $377,000 and the recorded investment in non-accrual loans decreased by
$1.0 million.



- 52 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The recorded investment of accruing loans
past due 30-59 days was $180,000 at September 30, 2016; a $271,000 decrease since December 31, 2015. There were five loans past
due 30-59 days at September 30, 2016. Substantially all of the amount was associated with one loan with a recorded investment
of $157,000 which matured and the renewal was not completed until after September 30.



There were no loans past due 60-89 days still accruing interest
at September 30, 2016 compared to a recorded investment of $106,000 at December 31, 2015.



There were no loans still accruing interest with a recorded
investment past due 90 days and greater at either September 30, 2016 or December 31, 2015.



Although the Bank’s loan payment delinquency is low in
both recorded investment and number of loans, the credit review process will continue to be stringent. Of course, it is possible
that past due loan payments could fluctuate in future periods despite these efforts.



The recorded investment of non-accrual loans totaled $144,000
at September 30, 2016; down $1.0 million from year-end 2015. The reduction was primarily concentrated in three loans. Two loans
were remediated and returned to an accruing status and two loans were charged off and the real estate collateral was moved to
foreclosed assets. There are four non-accrual notes remaining at September 30, 2016 and none are secured by undeveloped real estate.
At September 30, 2016, there were specific allocations of $72,000 in the allowance for any estimated collateral deficiency on
non-accrual loans.



There were net charge-offs of $47,000 for the first nine months
of 2016 and the ratio of annualized net charge-offs was 0.05% to average loans. For the first nine months of 2015, there were
net loan charge-offs of $262,000 and a ratio of annualized net charge-offs to average loans of 0.27%.



There were net charge-offs of $14,000 for the third quarter
of 2016 and a ratio of annualized net charge-offs to average loans of 0.04%. For the third quarter of 2015, there were net recoveries
of $143,000.



A majority of the recorded charge-offs made in both years were
related to specific allocations on previously impaired loans. In this case, increases to the ratios between the like periods are
not necessarily indicative of deteriorating credit quality.



- 53 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



The loan maturities and rate sensitivity of the loan portfolio
at September 30, 2016 are set forth below:



|                        |  | Within       |            |  | Three to      |   |            | One to     |  |   | After      |  |  |       |           
|----------------------- |  | ------------ | ---------- |  | ------------- | - | ---------- | ---------- |  | - | ---------- |  |  | ----- | ----------
|                        |  | Three Months |            |  | Twelve Months |   |            | Five Years |  |   | Five Years |  |  | Total |           
|Commercial              |  | $            | 6,889,409  |  |               | $ | 12,284,806 |            |  | $ | 18,658,364 |  |  | $     | 10,909,553
|Commercial Real Estate: |  |              |            |  |               |   |            |            |  |   |            |  |  |       |           
|General                 |  |              | 2,611,127  |  |               |   | 9,374,596  |            |  |   | 32,079,459 |  |  |       | 6,637,537 
|Construction            |  |              | 1,678,701  |  |               |   | 1,012,893  |            |  |   | 3,048,905  |  |  |       | 1,151,620 
|Consumer:               |  |              |            |  |               |   |            |            |  |   |            |  |  |       |           
|Lines of credit         |  |              | 83,276     |  |               |   | 173,123    |            |  |   | 2,284,180  |  |  |       | 2,771,642 
|Other                   |  |              | 42,333     |  |               |   | 70,780     |            |  |   | 839,415    |  |  |       | 253,503   
|Credit card             |  |              | 52,783     |  |               |   | 163,060    |            |  |   | 248,535    |  |  |       | 0         
|Residential             |  |              | 1,818,554  |  |               |   | 993,468    |            |  |   | 2,334      |  |  |       | 15,362,415
|                        |  | $            | 13,176,183 |  |               | $ | 24,072,726 |            |  | $ | 57,161,192 |  |  | $     | 37,086,270
|Loans at fixed rates    |  | $            | 5,251,754  |  |               | $ | 8,968,845  |            |  | $ | 45,191,135 |  |  | $     | 25,100,039
|Loans at variable rates |  |              | 7,924,429  |  |               |   | 15,103,881 |            |  |   | 11,970,057 |  |  |       | 11,986,231
|                        |  | $            | 13,176,183 |  |               | $ | 24,072,726 |            |  | $ | 57,161,192 |  |  | $     | 37,086,270



At September 30, 2016, 64% of the Bank’s loan balances
carried a fixed rate and 36% carried a floating rate. Since 2008, the Bank’s concentration of fixed rate loans has been
increasing. Some of the shift is a factor of the types of loans that have been paid off or have been added to the portfolio and
some of the change is related to customer preference at the time of renewal. As a result of the current mix of the loan portfolio,
management will be challenged to improve loan income in a rising rate environment.



The maturity distribution of the loan portfolio has lengthened
over the last several years but still remains at a level which is within the parameters determined to be acceptable by management.
At September 30, 2016, approximately 28% of the entire loan portfolio had a contractual maturity longer than five years; the same
as year-end 2015. To control extension risk, management tries to ensure that loans with a longer contractual maturity are either
floating rate or have a repricing or balloon date that is much shorter than the amortization period. Over 40% of the loans in
the greater than five year contractual maturity category are residential mortgage loans. Statistically, loans of this type do
not normally remain on the books until maturity as a result of customer repricing opportunities or changes in circumstance. Additionally,
the mortgage staff remains focused on originating loans saleable into the secondary market, thus minimizing the number that is
booked into the held for investment portfolio. Another 33% of the total of loans with a contractual maturity of five years or
more are guaranteed by government sponsored agencies; Small Business Administration (“SBA”) and United States Department
of Agriculture (“USDA”). Of these loans, 97% are either variable rate or have a scheduled rate reset within five years,
minimizing the extension risk.








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



- 54 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Foreclosed assets were $1.7 million at September 30, 2016;
down over $512,000 since December 31, 2015. Foreclosed assets consist of relinquished properties through the collection process
which were previously customer collateral supporting various borrowings. There were four property and six lot sales during the
first nine months of 2016. The net gain realized on these sales was $168,000. Two properties were added in the first three quarters
of 2016. At September 30, 2016, foreclosed assets consisted of 19 real estate holdings, two fewer than at December 31, 2015.



Deposit balances were $157.7 million at September 30, 2016
down from $161.2 million at December 31, 2015. The decline in deposit balances was due to a $9.3 million decrease in time deposits
since year-end 2015; essentially all of which were internet time deposits. The time deposit portfolio was deliberately contracted
in an effort to reduce excess liquidity at the FRB. All other deposit categories increased from year-end 2015 to September 30,
2016; the largest being demand deposits which rose $4.3 million. The increase is in all categories is primarily from existing
customers increasing their account balance since year-end 2015.



Repurchase agreement balances were $4.9 million at both September
30, 2016 and December 31, 2015.



The Company’s $1,280,000 note payable to 1030 Norton
LLC, a Michigan limited liability company owned by nine individuals; three directors of the Company, Gary F. Bogner, Robert L.
Chandonnet and Bruce J. Essex, one former director and five local businessmen was extinguished on March 28, 2016 simultaneous
to the closing of the Company’s Rights Offering. The balance of the note payable was settled in exchange for 670,153 and
shares of stock issued to the members of 1030 Norton LLC and a check for $7.77 due to fractional shares. Upon consummation of
the conversion, the Company made a final interest payment of $24,747 and 1030 Norton LLC released the Company’s pledge of
100% of the shares of Community Shores Bank.



In 2015, the Company recorded a derivative liability stemming
from the conversion right embedded in the Company’s note payable to 1030 Norton LLC once the Company initiated a plan to
raise capital via a sale of common stock. The value of the liability was established at $426,667, which represented a 25% per
share discount on the stock to be issued in exchange for the outstanding note payable from the price per share of the Company
established in the Rights Offering. Similar to the related note payable, the derivative liability, net of related deferred tax,
was reclassified to shareholder’s equity at conversion on March 28, 2016.



Accrued interest expenses and other liabilities decreased $696,000
since year-end 2015. The decrease is mainly attributable to the Company’s repayment of deferred and overdue interest on
its subordinated debentures. On March 30, 2016, utilizing proceeds from the Rights Offering, the Company remitted an interest
payment of approximately $722,000; $673,000 of accrued interest and $49,000 of interest on the deferred interest curing the interest
payment default.



On April 27, 2016, the Company’s Board
of Directors voted to again defer interest payments on its subordinated debentures in order to preserve its cash for general operations
and potential capital support for the Bank as it grows. As such, it is expected that the accrued interest balance will increase
during the deferral period. The deferral of interest does not constitute an event of default. The accrued and unpaid interest
was $64,000 at September 30, 2016.



Shareholders’ equity was approximately
$14.1 million on September 30, 2016. On December 31, 2015, the balance was $7.6 million. The net increase of $6.5 million was
made up of $6.3 million of new capital from common stock transactions, earnings of $99,000 and accumulated other comprehensive
income (security market value adjustments) of $117,000.



- 55 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The $6.3 million of additional capital stemmed from a series
of transactions related to a Rights Offering launched by the Company in October 2015. The purpose of the Rights Offering was to
increase the Company’s liquidity to allow repayment of the deferred and overdue interest on the Company’s subordinated
debentures as well as allow a contribution of capital to the Bank so that it would achieve a well-capitalized regulatory capital
level.



The Company sold a total of 1,383,299 shares of the Company’s
Common Stock in the Rights Offering. The Company closed the Rights Offering on March 28, 2016 and garnered net proceeds of approximately
$3,300,000.



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



Additionally, the Rights Offering permitted
the conversion feature of the Company’s note payable to activate. At the close of the Rights Offering, the note payable
and the derivative liability, net of taxes, were settled in exchange for 670,153 shares of stock. This transaction added $1,561,000
to equity.



Total shares outstanding at September 30,
2016 were 4,101,664 compared to 1,468,800 at December 31, 2015. The book value per share was $3.44 at September 30, 2016 compared
to $5.15 at December 31, 2015.



The largest portion of the Rights Offering
proceeds was used to contribute capital to the Bank. On March 31, 2016, the Company contributed $3.35 million of capital to the
Bank. As a result, the Bank’s regulatory capital ratio rose to a level of well capitalized according to prompt corrective
action guidance.  Although the Bank continues to be well capitalized, the Company made an additional capital contribution
of $125,000 in the third quarter to support current and anticipated asset growth. At September 30, 2016, the Bank’s total
risk-based capital ratio was 11.67% and its Tier 1 to average assets ratio was 8.03% compared to 9.46% and 6.12%, respectively,
at December 31, 2015.



RESULTS OF OPERATIONS



There was net income of $99,000 recorded for the first three
quarters of 2016. The corresponding basic and diluted income per share for the first nine months of 2016 were $0.03. Conversely
in the first three quarters of 2015, there was a net loss of $402,000 stemming from a derivative valuation recognition of $427,000
recorded in the second quarter (see Note 12) and a professional services expense of $409,000 recorded in the third quarter which
included a fee paid to a third party for assistance in renegotiating the Bank’s data processing contract. The third party’s
fee for performing this service was based on the Bank’s imputed savings over the new contract. The basic and diluted loss
per share for the first nine months of 2015 were $(0.27).



The Company had net income of $44,000 and basic and diluted
earnings per share of $0.01 in the third quarter of 2016. Because of the above noted fee paid to a third party for negotiating
the Bank’s data processing contract, the Company’s net loss recorded for the third quarter of 2015 was $202,000. The
corresponding basic and diluted loss per share for the second quarter of 2015 were $(0.14).



- 56 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



For the first nine months
of 2016, the annualized return on the Company’s average total assets was 0.07% compared to (0.29)% for the first nine months
of 2015. For the third quarter of 2016, the annualized return on the Company’s average assets was 0.09%. For the third quarter
of 2015, the annualized return on the Company’s average total assets was (0.42)%.



The annualized return on the Company’s average equity
was positive for the first nine months and third quarter of 2016 at levels of 1.10% and 1.26%, respectively. For the first nine
months of 2015, the annualized return on the Company’s average equity was (6.65)% and was (10.22)% for the third quarter
of 2015.



A primary component of
the Company’s revenue is its net interest income. The Company’s net interest income was more for the first nine months
of 2016 compared to the similar period in 2015 and the net interest margin was higher. 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.



|                                                                        |  | Nine Months ended September 30, |            
|----------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                        |  | 2016                            |            
|                                                                        |  | Average                         |            
|                                                                        |  | Balance                         |            
|Assets                                                                  |  |                                 |            
|Federal funds sold and interest-bearing deposits with banks             |  | $                               | 18,469,639 
|Securities                                                              |  |                                 | 22,668,137 
|Loans (including held for sale and non accrual)                         |  |                                 | 125,715,308
|Total interest earning assets                                           |  |                                 | 166,853,084
|Other assets                                                            |  |                                 | 16,975,843 
|                                                                        |  | $                               | 183,828,927
|Liabilities and Shareholders’ Equity                                    |  |                                 |            
|Interest-bearing deposits                                               |  | $                               | 123,884,523
|Repurchase agreements                                                   |  |                                 | 4,068,536  
|Subordinated debentures and note payable                                |  |                                 | 4,906,424  
|Total interest bearing liabilities                                      |  |                                 | 132,859,483
|Non-interest-bearing deposits                                           |  |                                 | 38,147,565 
|Other liabilities                                                       |  |                                 | 788,523    
|Shareholders’ Equity                                                    |  |                                 | 12,033,356 
|                                                                        |  | $                               | 183,828,927
|Net interest income (tax equivalent basis)                              |  |                                 |            
|Net interest spread on earning assets (tax equivalent basis)            |  |                                 |            
|Net interest margin on earning assets (tax equivalent basis)            |  |                                 |            
|Average interest-earning assets to average interest-bearing liabilities |  |                                 |            
|Tax equivalent adjustment                                               |  |                                 |            
|Net interest income                                                     |  |                                 |            



- 57 -















COMMUNITY SHORES BANK CORPORATION

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



The net interest spread on average earning assets increased
34 basis points to 3.34% in the past twelve months. The net interest margin increased by 29 basis points and was 3.46% for the
first nine months of 2016 compared to 3.17% for the first nine months of 2015. The net interest income for the first nine months
of 2015 was $4.0 million compared to a figure of $4.3 million for the same nine months in 2016. The derivative valuation adjustment
lowered 2015’s results by $427,000. Without the recognition, the net interest income would have been $105,000 more than the
net interest figure for the first nine months of 2016. The reduction in net interest income is mostly due to fewer earning assets
and a less profitable mix. For the first three quarters of 2016, average earning assets were $2.1 million less than the first three
quarters of 2015 and the loan and investment portfolios were $8.7 million less while interest bearing deposits with other financial
institutions, mainly the FRB, was $6.6 million more.



The average rate earned on interest earning assets was 3.95%
for the nine month period ending September 30, 2016; an 11 basis point erosion compared to 4.06% for the same period in 2015. The
decrease was primarily due to detrimental changes to the earning asset composition. Specifically, average investments were reduced
by 23% and loans were reduced by 2%. Changes to the loan portfolio impacts net interest income more than anything else since it
is the Company’s largest earning asset category. The $2.0 million reduction in the loan portfolio stemmed from customer repayments.
In addition to a smaller loan portfolio, there was also a reduction in the yield. As the credit markets recover, financial institutions
are more actively soliciting new business making the rate environment more competitive. In order to retain current relationships
and attract new ones, sometimes the Bank has to offer rates that are lower than the average portfolio rate. The average rate earned
on the loan portfolio was 4.93% in the first three quarters of 2016, a reduction of nine basis points compared to the first three
quarters of 2015. Lower rates are not being automatically offered on renewals or new business. To maintain the quality of the loan
portfolio, each rate decision takes into consideration the strength of the loan from an underwriting standpoint. Lower rates are
used selectively based on the risk characteristics of the credit.



Without the additional $427,000 of interest expense on the note
payable, the Company’s cost of funds for the first nine months of 2016 would have improved by five basis points when compared
to the first nine months of 2015.



Driving the reduction, was the elimination of the Company’s
note payable in the first quarter of 2016 (see Note 11). The note payable carried an interest rate of 8%. The Company continues
to decrease the rate paid on interest bearing deposits by focusing on a reduction in the concentration of internet time deposits.
In the first nine months of the year, internet time deposits decreased by $9.3 million. The average rate on these maturities was
0.84%.



- 58 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The quarter-to-quarter comparison of consolidated average interest
earning assets and interest bearing liabilities and average yield on assets and average cost of liabilities for the third quarter
ended September 30, 2016 and 2015 is in the table below.



|                                                                        |  | Three Months ended September 30, |            
|----------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                        |  | 2016                             |            
|                                                                        |  | Average                          |            
|                                                                        |  | Balance                          |            
|Assets                                                                  |  |                                  |            
|Federal funds sold and interest- bearing deposits with banks            |  | $                                | 21,556,681 
|Securities                                                              |  |                                  | 20,867,610 
|Loans (including held for sale                                          |  |                                  |            
|and non accrual)                                                        |  |                                  | 127,856,117
|Total interest earning assets                                           |  |                                  | 170,280,408
|Other assets                                                            |  |                                  | 16,922,812 
|                                                                        |  | $                                | 187,203,220
|Liabilities and Shareholders’ Equity                                    |  |                                  |            
|Interest-bearing deposits                                               |  | $                                | 121,770,387
|Repurchase agreements                                                   |  |                                  | 4,161,666  
|Subordinated debentures and note payable                                |  |                                  | 4,500,000  
|Total interest bearing liabilities                                      |  |                                  | 130,432,053
|Non-interest-bearing deposits                                           |  |                                  | 42,173,645 
|Other liabilities                                                       |  |                                  | 491,035    
|Shareholders’ Equity                                                    |  |                                  | 14,106,487 
|                                                                        |  | $                                | 187,203,220
|Net interest income (tax equivalent basis)                              |  |                                  |            
|Net interest spread on earning assets (tax equivalent basis)            |  |                                  |            
|Net interest margin on earning assets (tax equivalent basis)            |  |                                  |            
|Average interest-earning assets to average interest-bearing liabilities |  |                                  |            
|Tax equivalent adjustment                                               |  |                                  |            
|Net interest income                                                     |  |                                  |            



Net interest income increased $42,000 in the third quarter of
2016 over the similar period in 2015. Similarly, both the net interest spread and net interest margin increased. The net interest
spread was 3.28% for the third quarter of 2016; increasing 13 basis points compared to the third quarter in 2015. The net interest
margin for the third quarter of 2016 was 3.42% compared to 3.26% for the third quarter of 2015.



The yield on earning assets rose six basis points between the
third quarter of 2016 and the third quarter in 2015. The rate on interest bearing deposits at other financial institutions doubled;
increasing from 25 basis points a year ago to 50 basis points for all quarters of 2016. In December 2015, the Federal Open Market
Committee (FOMC) of the Federal Reserve System raised the Federal Funds Rate 25 basis points. Another factor in the improvement
is an increase in the concentration of loans relative to total earning assets. Loans are the highest earning asset category. In
the third quarter of 2016 loans represented 75% of earning assets while in the third quarter of 2015 the amount was 72%. The gain
came mostly from a reduction in the investment portfolio.



- 59 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The average rate paid on interest bearing liabilities improved
seven basis points between the two quarters. The average rate paid on interest bearing liabilities was 66 basis points for the
third quarter of 2015 but was 59 basis points for the third quarter of 2016. The third quarter cost of funds benefited from the
elimination of the 8% note payable in the first quarter of 2016. The blended rate paid on subordinated debentures and note payable
was 112 basis points lower in the third quarter of 2016.



Management expects the Company’s net interest margin to
increase in the last quarter of 2016. Extra liquidity in interest bearing deposits with other financial institutions will decline
as the Bank funds loans and repays maturing internet time deposits. If implemented as planned, these tactics should provide a favorable
movement in the concentration of earning assets as well as lower the Company’s cost of funds.



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



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



- 60 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Details of the repricing gap at September 30, 2016 were:



|                                                          |  | Interest Rate Sensitivity Period |            
|--------------------------------------------------------- |  | -------------------------------- | -----------
|                                                          |  | Within                           |            
|                                                          |  | Three                            |            
|                                                          |  | Months                           |            
|Earning assets                                            |  |                                  |            
|Interest-bearing deposits in other financial institutions |  | $                                | 14,096,520 
|Securities (including FHLB stock)                         |  |                                  | 3,768,898  
|Loans held for sale                                       |  |                                  | 0          
|Loans                                                     |  |                                  | 49,730,794 
|                                                          |  |                                  | 67,596,212 
|Interest-bearing liabilities                              |  |                                  |            
|Savings and checking                                      |  |                                  | 84,656,075 
|Time deposits <$100,000                                   |  |                                  | 5,802,971  
|Time deposits >$100,000                                   |  |                                  | 1,223,692  
|Repurchase agreements and Federal funds purchased         |  |                                  | 4,853,589  
|Notes payable and other borrowings                        |  |                                  | 4,500,000  
|                                                          |  |                                  | 101,036,327
|Net asset (liability) repricing gap                       |  | $                                | (33,440,115
|Cumulative net asset (liability) repricing gap            |  | $                                | (33,440,115



Currently, the Company has a negative twelve month repricing
gap which indicates that the Company is liability sensitive in the next twelve month period. This position implies that more rate
bearing products have an opportunity to reprice during this period. Recent interpretation of the information from the FOMC of the
Federal Reserve System has leaned towards raising rates; because the Company’s gap position is negative, there will likely
be a negative effect on net interest income. The interest rate sensitivity table above simply illustrates what the Company is contractually
able to change in certain time frames. The local market rates often play a large part in the movement of rates on liabilities.



There was no provision for loan losses for the first nine months
of 2016 or 2015. The provision expense is associated with changes in historical loss calculations, economic conditions (local and
national) as well as delinquency, net charge offs or recoveries and changes to credit quality grades; up and down. A methodical
assessment of these factors generates the reserves required for the risk in the Bank’s loan portfolio and the required provision
expense. Management will continue to review the allowance with the intent of maintaining it at an appropriate level for the portfolio’s
credit quality and perceived risk factors. The provision for loan losses is an estimate and may be increased or decreased in the
future.



- 61 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Non-interest income recorded in the first nine months of 2016
was essentially $1.2 million for both periods with just a $41,000 net difference between the two period ends. The category changing
the most for the first three quarters of 2016 as compared to 2015 was revenue from service charge on deposit accounts. Service
charge income was $89,000 less for the first nine months of 2016. Fees from overdrafts were $78,000 less in the first three quarters
of 2016 compared to the same three quarters in 2015. Overdraft revenue has been declining since 2015. There are many reasons surrounding
the reduction, including a stronger local economy. Management is currently reviewing other deposit account fees to see if anything
can be changed to help replace the declining revenue from overdrafts.



Conversely, gains from the sale of residential mortgage loans
and foreclosed properties were more in the first three quarters of 2016 compared to the first three quarters of 2015. The Bank
hired an additional mortgage lender in the first quarter of 2016. As a result of this increase in resources, the Bank’s gain
on the sale of mortgage loans was $121,000 for the first nine months of 2016; $26,000 more than the gains of $95,000 recorded for
the same period in 2015. Likewise, gains on the sale of foreclosed properties were $168,000 for the first three quarters of 2016
compared to $147,000 for the similar period in 2015. Although the benefit from this revenue is helpful, foreclosed asset gains
are not predictable and will likely decline as the Bank’s inventory of foreclosed properties diminishes.



Non-interest income for the third quarter of 2016 was $374,000
compared to $426,000 of non-interest income in the third quarter of 2015. Service charges on deposit accounts experienced a decrease
of $35,000 in overdraft fees. Additionally, gains on foreclosed properties were $17,000 less. Other non-interest income was $23,000
less due to a reduction in brokerage income. In 2015, there were several new account sales that netted large commissions.



Non-interest expenses for the first three quarters of 2016 were
$5.4 million; $460,000 less than the total for the first three quarters of 2015. Data processing expenses were $370,000 for the
first three quarters of 2016. These expenses were $471,000 in the first three quarters of 2015. Late in the second quarter of 2015,
the Bank renegotiated its core data processing contract. The lower fee schedule began in the third quarter of 2015 and will be
in effect for 72 months. The first three quarters of 2016 reflected a $98,000 savings over the same period in 2015 due to the new
fee schedule. Management anticipates that the savings over the life of the contract will be over $1.8 million at the Bank’s
current size and mix of electronic products. These savings could be offset by growth in the customer base as well as the addition
of new technology.



Professional services expenses for the first nine months of
2016 were $307,000 compared to $590,000 for the first nine months of 2015. In the third quarter of 2015, the Bank paid a $319,000
fee to a third party to negotiate its data processing contract. The fee for performing this service was based on the imputed savings
over the life of the contract; estimated to be over $1.8 million over 72 months. In 2016, the Bank’s audit expense increased
compared to prior years a portion of which was related to additional audit work required to restate its 2014 audited financial
statements.



Foreclosed asset impairments were $135,000 for the first three
quarters of 2016. Foreclosed asset impairments were $78,000 for the first three quarters of 2015. The $57,000 increase in this
category was mostly associated with a $58,000 reduction on a single property. The decline was based on a value arrived at through
a professional appraisal. The other impairments making up the total expense for the first nine months of the year are smaller and
spread over a variety of properties.



- 62 -







COMMUNITY SHORES BANK CORPORATIONMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FDIC
insurance expenses were $173,000 for the first three quarters of 2016 and $274,000 for the first three quarters of 2015. The $101,000
reduction in the Bank’s FDIC premium accruals was due to a strengthened regulatory capital position and improved risk profile
as well as a change in theFDIC’s assessment process.



The FDIC assessment calculation changed on June 30, 2016 because
the Deposit Insurance Fund Reserve Ratio rose to a target level triggering the FDIC to make three major changes to deposit insurance
assessments. The changes involved creating three tiers of assessment rates; one for newly established banks; one for banks over
$10 billion in consolidated assets and one for banks up to $10 billion in consolidated assets. The revised rates for small banks
equated to lower premium assessments beginning in the third quarter of 2016. It is anticipated that the Bank would save roughly
$18,000 per quarter based on its size at September 30, 2016.



Non-interest expenses for the third quarter of 2016 were $1.8
million and were $2.1 million for the third quarter of 2015. The largest item contributing to the $383,000 reduction occurred in
the professional services category. In 2015, when professional services totaled $409,000 for the quarter, there was a third party
vendor fee of $319,000 paid. As described above, the fee was related to the renegotiation of the Bank’s data processing contract.



Similar to the differences noted above in the discussion of
the nine month results of 2016 compared to that of 2015, there were third quarter increases in foreclosed asset impairments and
decreases in FDIC insurance expenses. Foreclosed asset impairments were $35,000 more for the third quarter of 2016 compared to
the third quarter of 2015 and FDIC insurance expenses were $26,000 less when comparing the same periods.



Other non-interest expenses were $225,000 for the third quarter
of 2016; $58,000 less than the third quarter of 2015 when other non-interest expenses were $283,000. More than 50% of the reduction
in this category was associated with a decline in expenses incurred to administrate non-performing loans. These expenses decreased
$30,000 when comparing the two quarters. As the Bank’s credit quality improves and the number of properties decline, this
trend would be expected.



- 63 -







COMMUNITY SHORES BANK CORPORATION



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 September 30, 2016. 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 September 30, 2016.



Changes in Internal Control



There were no changes to our internal control over financial
reporting during the fiscal quarter ended September 30, 2016 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



PART II – OTHER INFORMATION



ITEM 1.          
LEGAL PROCEEDINGS



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



ITEM 1A.       
RISK FACTORS



Not applicable for smaller reporting companies.



ITEM 2.          
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.



- 64 -







COMMUNITY SHORES BANK CORPORATION



ITEM 3.          
DEFAULTS UPON SENIOR SECURITIES



Not applicable.



ITEM 4.          
MINE SAFETY DISCLOSURES



Not applicable.



ITEM 5.          
OTHER INFORMATION



None.



ITEM 6.          
EXHIBITS



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



- 65 -







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    
|----------------- | -------------------------------------
|                  |                                      
|November 14, 2016 | By:                                  
|Date              | Heather D. Brolick                   
|                  | President and Chief Executive Officer
|                  | (principal executive officer)        



|November 14, 2016 | By:                                                                     | /s/ Tracey A. Welsh
|----------------- | ----------------------------------------------------------------------- | -------------------
|Date              | Tracey A. Welsh                                                        
|                  | Senior Vice President, Chief Financial Officer, Secretary and Treasurer
|                  | (principal financial and accounting officer)                           



- 66 -







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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