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, 2013
|------------------------------ | ------------------



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
|------------------------- | ------------------- | --------------------------------------------- | ---------------------------
|                          |                     | (Do not check if a smaller reporting company)



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



 ̈ Yes x No



At November 1, 2013,
1,468,800 shares of common stock were outstanding.











Community Shores Bank Corporation Index



|         |                       | Page No.                                                                                 
|-------- | --------------------- | -----------------------------------------------------------------------------------------
|PART I.  | Financial Information |                                                                                          
|         |                       |                                                                                          
|         | Item 1.               | Financial Statements                                                                     
|         |                       |                                                                                          
|         | Item 2.               | Management’s Discussion and Analysis
    of Financial Condition and Results of Operations
|         |                       |                                                                                          
|         | Item 3.               | Quantitative and Qualitative Disclosures
    about Market Risk                           
|         |                       |                                                                                          
|         | Item 4.               | Controls and Procedures                                                                  
|         |                       |                                                                                          
|PART II. | Other Information     |                                                                                          
|         |                       |                                                                                          
|         | Item 1.               | Legal Proceedings                                                                        
|         |                       |                                                                                          
|         | Item 1A.              | Risk Factors                                                                             
|         |                       |                                                                                          
|         | Item 2.               | Unregistered Sales of Equity Securities
    and Use of Proceeds                          
|         |                       |                                                                                          
|         | Item 3.               | Defaults upon Senior Securities                                                          
|         |                       |                                                                                          
|         | Item 4.               | Mine Safety Disclosures                                                                  
|         |                       |                                                                                          
|         | Item 5.               | Other Information                                                                        
|         |                       |                                                                                          
|         | Item 6.               | Exhibits                                                                                 
|         |                       |                                                                                          
|         | Signatures            | 63                                                                                       











PART I – FINANCIAL INFORMATION



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



COMMUNITY
SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                              |  | September 30, |             |   | December 31, |  
|--------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------------ | -
|                                                                                              |  | 2013          |             |   | 2012         |  
|                                                                                              |  | (unaudited)   |             |   | (audited)    |  
|ASSETS                                                                                        |  |               |             |   |              |  
|Cash and due from financial institutions                                                      |  | $             | 3,245,012   |   |              | $
|Interest-bearing deposits in other
    financial institutions                                 |  |               | 6,895,413   |   |              |  
|Total cash and cash equivalents                                                               |  |               | 10,140,425  |   |              |  
|Securities available for sale (at fair value)                                                 |  |               | 33,500,614  |   |              |  
|Loans held for sale                                                                           |  |               | 0           |   |              |  
|Loans                                                                                         |  |               | 128,547,253 |   |              |  
|Less: Allowance for loan losses                                                               |  |               | 2,870,036   |   |              |  
|Net loans                                                                                     |  |               | 125,677,217 |   |              |  
|Federal Home Loan Bank stock (at cost)                                                        |  |               | 450,800     |   |              |  
|Premises and equipment, net                                                                   |  |               | 9,168,352   |   |              |  
|Accrued interest receivable                                                                   |  |               | 485,441     |   |              |  
|Foreclosed assets                                                                             |  |               | 2,686,237   |   |              |  
|Other assets                                                                                  |  |               | 855,210     |   |              |  
|Total assets                                                                                  |  | $             | 182,964,296 |   |              | $
|LIABILITIES AND SHAREHOLDERS’
    EQUITY                                                      |  |               |             |   |              |  
|Deposits                                                                                      |  |               |             |   |              |  
|Non-interest-bearing                                                                          |  | $             | 31,700,054  |   |              | $
|Interest-bearing                                                                              |  |               | 131,868,405 |   |              |  
|Total deposits                                                                                |  |               | 163,568,459 |   |              |  
|Federal funds purchased and repurchase agreements                                             |  |               | 8,972,374   |   |              |  
|Subordinated debentures                                                                       |  |               | 4,500,000   |   |              |  
|Notes payable                                                                                 |  |               | 1,280,000   |   |              |  
|Accrued expenses and other liabilities                                                        |  |               | 873,104     |   |              |  
|Total liabilities                                                                             |  |               | 179,193,937 |   |              |  
|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;
    1,468,800 issued and outstanding |  |               | 13,296,691  |   |              |  
|Retained deficit                                                                              |  |               | (9,312,447  | ) |              |  
|Accumulated other comprehensive
    (loss) income                                             |  |               | (213,885    | ) |              |  
|Total shareholders’ equity                                                                    |  |               | 3,770,359   |   |              |  
|Total liabilities and shareholders’
    equity                                                |  | $             | 182,964,296 |   |              | $



See accompanying notes to consolidated
financial statements.



- 1 -







COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



|                                                               |  | Three Months  |           |  | Three Months  |   |           | Nine Months   |  |   | Nine Months   | 
|-------------------------------------------------------------- |  | ------------- | --------- |  | ------------- | - | --------- | ------------- |  | - | ------------- | 
|                                                               |  | Ended         |           |  | Ended         |   |           | Ended         |  |   | Ended         | 
|                                                               |  | September 30, |           |  | September 30, |   |           | September 30, |  |   | September 30, | 
|                                                               |  | 2013          |           |  | 2012          |   |           | 2013          |  |   | 2012          | 
|Interest and dividend income                                   |  |               |           |  |               |   |           |               |  |   |               | 
|Loans, including fees                                          |  | $             | 1,701,576 |  |               | $ | 1,946,158 |               |  | $ | 5,292,942     | 
|Securities                                                     |  |               | 127,222   |  |               |   | 162,014   |               |  |   | 421,821       | 
|Federal funds sold and other income                            |  |               | 8,283     |  |               |   | 15,841    |               |  |   | 26,596        | 
|Total interest income                                          |  |               | 1,837,081 |  |               |   | 2,124,013 |               |  |   | 5,741,359     | 
|Interest expense                                               |  |               |           |  |               |   |           |               |  |   |               | 
|Deposits                                                       |  |               | 226,945   |  |               |   | 333,829   |               |  |   | 757,995       | 
|Repurchase agreements, federal funds purchased, and other debt |  |               | 14,193    |  |               |   | 15,574    |               |  |   | 43,919        | 
|Federal Home Loan Bank advances and notes payable              |  |               | 55,947    |  |               |   | 108,093   |               |  |   | 143,985       | 
|Total interest expense                                         |  |               | 297,085   |  |               |   | 457,496   |               |  |   | 945,899       | 
|Net Interest Income                                            |  |               | 1,539,996 |  |               |   | 1,666,517 |               |  |   | 4,795,460     | 
|Provision for loan losses                                      |  |               | 0         |  |               |   | 0         |               |  |   | 0             | 
|Net Interest Income After Provision for Loan Losses            |  |               | 1,539,996 |  |               |   | 1,666,517 |               |  |   | 4,795,460     | 
|Non-interest income                                            |  |               |           |  |               |   |           |               |  |   |               | 
|Service charges on deposit accounts                            |  |               | 152,341   |  |               |   | 166,975   |               |  |   | 463,644       | 
|Mortgage loan referral fees                                    |  |               | 0         |  |               |   | 0         |               |  |   | 0             | 
|Gain on sale of loans                                          |  |               | 39,602    |  |               |   | 105,455   |               |  |   | 166,766       | 
|Gain on sale of securities                                     |  |               | 0         |  |               |   | 0         |               |  |   | 0             | 
|Gain (loss) on sale of foreclosed assets                       |  |               | 136,786   |  |               |   | 2,375     |               |  |   | 181,163       | 
|Gain on sale of premises and equipment                         |  |               | 0         |  |               |   | 0         |               |  |   | 1,000         | 
|Gain on the extinguishment of debt                             |  |               | 0         |  |               |   | 0         |               |  |   | 5,262,653     | 
|Other                                                          |  |               | 162,479   |  |               |   | 144,153   |               |  |   | 479,204       | 
|Total non-interest income                                      |  |               | 491,208   |  |               |   | 418,958   |               |  |   | 6,554,430     | 
|Non-interest expense                                           |  |               |           |  |               |   |           |               |  |   |               | 
|Salaries and employee benefits                                 |  |               | 952,400   |  |               |   | 939,795   |               |  |   | 2,779,445     | 
|Occupancy                                                      |  |               | 168,241   |  |               |   | 163,266   |               |  |   | 484,510       | 
|Furniture and equipment                                        |  |               | 96,796    |  |               |   | 101,243   |               |  |   | 294,995       | 
|Advertising                                                    |  |               | 11,427    |  |               |   | 14,198    |               |  |   | 35,538        | 
|Data processing                                                |  |               | 156,105   |  |               |   | 142,929   |               |  |   | 456,844       | 
|Professional services                                          |  |               | 63,357    |  |               |   | 70,695    |               |  |   | 268,169       | 
|Foreclosed asset impairment                                    |  |               | 32,791    |  |               |   | 92,428    |               |  |   | 141,531       | 
|FDIC insurance                                                 |  |               | 107,123   |  |               |   | 178,529   |               |  |   | 331,191       | 
|Other                                                          |  |               | 318,616   |  |               |   | 380,445   |               |  |   | 948,521       | 
|Total non-interest expense                                     |  |               | 1,906,856 |  |               |   | 2,083,528 |               |  |   | 5,740,744     | 
|Income Before Federal Income Taxes                             |  |               | 124,348   |  |               |   | 1,947     |               |  |   | 5,609,146     | 
|Federal income tax expense                                     |  |               | 0         |  |               |   | 0         |               |  |   | 105,000       | 
|Net Income                                                     |  | $             | 124,348   |  |               | $ | 1,947     |               |  | $ | 5,504,146     | 
|Weighted average shares outstanding                            |  |               | 1,468,800 |  |               |   | 1,468,800 |               |  |   | 1,468,800     | 
|Diluted average shares outstanding                             |  |               | 1,468,800 |  |               |   | 1,468,800 |               |  |   | 1,468,800     | 
|Basic earnings per share                                       |  | $             | 0.08      |  |               | $ | 0.00      |               |  | $ | 3.75          | 
|Diluted earnings per share                                     |  | $             | 0.08      |  |               | $ | 0.00      |               |  | $ | 3.75          | 



See accompanying notes to consolidated
financial statements.



- 2 -







COMMUNITY
SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

(UNAUDITED)



|                                                                           |  | Three Months       |         |  | Three Months       |   |        | Nine Months        |  |   | Nine Months        |  
|-------------------------------------------------------------------------- |  | ------------------ | ------- |  | ------------------ | - | ------ | ------------------ |  | - | ------------------ | -
|                                                                           |  | Ended              |         |  | Ended              |   |        | Ended              |  |   | Ended              |  
|                                                                           |  | September 30, 2013 |         |  | September 30, 2012 |   |        | September 30, 2013 |  |   | September 30, 2012 |  
|                                                                           |  |                    |         |  |                    |   |        |                    |  |   |                    |  
|Net income                                                                 |  | $                  | 124,348 |  |                    | $ | 1,947  |                    |  | $ | 5,504,146          |  
|                                                                           |  |                    |         |  |                    |   |        |                    |  |   |                    |  
|Other comprehensive income (loss):                                         |  |                    |         |  |                    |   |        |                    |  |   |                    |  
|Unrealized holding gains and (losses) on available
    for sale securities |  |                    | 50,370  |  |                    |   | 38,745 |                    |  |   | (494,691           | )
|Less reclassification
    adjustments for gains later recognized in income |  |                    | 0       |  |                    |   | 0      |                    |  |   | 0                  |  
|Net unrealized gain (loss)                                                 |  |                    | 50,370  |  |                    |   | 38,745 |                    |  |   | (494,691           | )
|Tax effect                                                                 |  |                    | 0       |  |                    |   | 0      |                    |  |   | 0                  |  
|Total other comprehensive income
    (loss)                                |  |                    | 50,370  |  |                    |   | 38,745 |                    |  |   | (494,691           | )
|                                                                           |  |                    |         |  |                    |   |        |                    |  |   |                    |  
|Comprehensive income                                                       |  | $                  | 174,718 |  |                    | $ | 40,692 |                    |  | $ | 5,009,455          |  



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, 2012    |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (15,084,431   | ) |  | $             | 367,358 
|                              |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Net income                    |  |        |           |  |        |   |            |          |  |   | 259,482       |   |  |               |         
|Other comprehensive income    |  |        |           |  |        |   |            |          |  |   |               |   |  |               | 11,358  
|                              |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at September 30, 2012 |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (14,824,949   | ) |  | $             | 378,716 
|                              |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at January 1, 2013    |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (14,816,593   | ) |  | $             | 280,806 
|                              |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Net income                    |  |        |           |  |        |   |            |          |  |   | 5,504,146     |   |  |               |         
|Other comprehensive loss      |  |        |           |  |        |   |            |          |  |   |               |   |  |               | (494,691
|                              |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at September 30, 2013 |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (9,312,447    | ) |  | $             | (213,885



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, 2013 |             |   | September 30, 2012 |  
|Cash flows from operating activities                  |  |                    |             |   |                    |  
|Net income                                            |  | $                  | 5,504,146   |   |                    | $
|Adjustments to reconcile net income to net cash       |  |                    |             |   |                    |  
|from operating activities:                            |  |                    |             |   |                    |  
|Provision for loan losses                             |  |                    | 0           |   |                    |  
|Depreciation and amortization                         |  |                    | 308,010     |   |                    |  
|Net amortization of securities                        |  |                    | 287,298     |   |                    |  
|Net realized gain on sale of securities               |  |                    | 0           |   |                    |  
|Net realized gain on sale of loans                    |  |                    | (166,766    | ) |                    |  
|Net realized (gain) loss on sale of foreclosed assets |  |                    | (181,163    | ) |                    |  
|Net realized gain on sale of premises and equipment   |  |                    | (1,000      | ) |                    |  
|Net realized gain on the extinguishment of debt       |  |                    | (5,262,653  | ) |                    |  
|Foreclosed asset impairment                           |  |                    | 141,531     |   |                    |  
|Originations of loans for sale                        |  |                    | (7,291,857  | ) |                    |  
|Proceeds from loan sales                              |  |                    | 7,617,841   |   |                    |  
|Net change in:                                        |  |                    |             |   |                    |  
|Accrued interest receivable and other assets          |  |                    | (33,408     | ) |                    |  
|Accrued interest payable and other liabilities        |  |                    | 31,850      |   |                    |  
|Net cash from operating activities                    |  |                    | 953,829     |   |                    |  
|Cash flows from investing activities                  |  |                    |             |   |                    |  
|Activity in available for sale securities:            |  |                    |             |   |                    |  
|Sales                                                 |  |                    | 0           |   |                    |  
|Maturities, prepayments and calls                     |  |                    | 7,177,793   |   |                    |  
|Purchases                                             |  |                    | 0           |   |                    |  
|Loan originations and payments, net                   |  |                    | 2,051,555   |   |                    |  
|Additions to premises and equipment, net              |  |                    | (55,476     | ) |                    |  
|Proceeds from the sale of premises and equipment      |  |                    | 1,000       |   |                    |  
|Proceeds from the sale of foreclosed assets           |  |                    | 760,328     |   |                    |  
|Net cash from investing activities                    |  |                    | 9,935,200   |   |                    |  
|Cash flows from financing activities                  |  |                    |             |   |                    |  
|Net change in deposits                                |  |                    | (20,608,034 | ) |                    |  
|Net change in federal funds purchased and             |  |                    |             |   |                    |  
|repurchase agreements                                 |  |                    | (1,217,685  | ) |                    |  
|Other borrowing activity:                             |  |                    |             |   |                    |  
|Repayment of note payable                             |  |                    | (500,000    | ) |                    |  
|Issuance of senior debt                               |  |                    | 1,280,000   |   |                    |  
|Net cash used in financing activities                 |  |                    | (21,045,719 | ) |                    |  
|Net change in cash and cash equivalents               |  |                    | (10,156,690 | ) |                    |  
|Beginning cash and cash equivalents                   |  |                    | 20,297,115  |   |                    |  
|Ending cash and cash equivalents                      |  | $                  | 10,140,425  |   |                    | $
|Supplemental cash flow information:                   |  |                    |             |   |                    |  
|Cash paid during the period for interest              |  | $                  | 864,706     |   |                    | $
|Transfers from loans to foreclosed assets             |  |                    | 614,485     |   |                    |  
|Transfers from loans held for sale to portfolio       |  |                    | 5,881,651   |   |                    |  
|Foreclosed asset sales financed by the Company        |  |                    | 14,333      |   |                    |  



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 and nine months ended September 30, 2013 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 three and nine month periods ended September 30, 2013 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, 2012. 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, 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 but for the most part 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 revisited 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.



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. The most significant risks to the commercial and commercial real estate segments are the level of development
and sales of real estate and the collateral values.  Locally and nationally, real estate development and sales activity is
slowly picking up but has not yet returned to pre-recession levels. There are widespread pockets of value stabilization but in
some cases real estate values can be erratic for properties such as golf courses and non-owner occupied office space. Even so,
impaired loan charge-off activity directly related to falling collateral values has been less frequent. In 2012 and 2013, with
charge-off activity lessening, the calculated historical loss factor assigned to general allocations was 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 experience directly impacts the general allocations
to the consumer classes. Both delinquencies and charge-offs have gone down in the last year allowing a reduction of the general
allocations in the allowance for loan losses.



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 allocations to the residential real estate segment. Stabilizing real estate values have resulted in reduced specific allocations
in the allowance for loan losses.



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, collateral value, 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.



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 any 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)
| | -- | ----------------------------------------------------------------------



Various regulatory agencies periodically review
our allowance for loan losses. These agencies may require the Company to take additional provisions based on their judgments about
information available to them at the time of their examination.



There was no material change in the allowance for
loan loss methodology in the first three quarters of 2013.



RECENT DEVELOPMENTS: In February 2013, the
FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which is intended
to improve the reporting of reclassifications out of accumulated other comprehensive income.  The ASU requires an entity
to report, either on the face of the income statement or in the notes to the financial statements, the effect of significant reclassifications
out of accumulated other comprehensive income on the respective line items in the income statement.  This ASU was adopted
by the Company prospectively in the first quarter of 2013.



In 2012, the Company recorded
consolidated net income for the first time since 2006. The trend of profitability continued in the first three quarters of 2013.
A large portion of the earnings reported for 2013 is attributable to a $5.3 million gain on extinguishment of debt recorded late
in the first quarter. Operating profits recorded in the second and third quarters have added to the Company’s consolidated
earnings, which were $5.5 million through September 30, 2013. The return to core earning profitability stems mainly from stabilized
credit quality and real estate valuations and the associated effect on the calculated reserve for loan losses. There has been
no provision for loan losses made since the first quarter of 2012, and at September 30, 2013, there was approximately $46,000
of unallocated reserves stemming from decreases to the Bank’s 36-month historical loss calculation. The unallocated reserves
are not specific to any particular portfolio segment.



In spite of the improved financial
outcome for the last several quarters, the Company’s significant consolidated losses from 2007 through 2011 eroded capital
and reduced regulatory capital ratios. As a result, the Bank was deemed undercapitalized according to regulatory capital standards
beginning December 31, 2010. At that time, the Bank had a total risk-based capital ratio of 7.06%. Earnings recorded by the Bank
along with a significant reduction in risk-weighted assets during 2012 improved the total risk-based capital ratio to 7.88% at
December 31, 2012. At March 31, 2013, the Bank’s total risk-based capital ratio advanced to 8.04% as a result of the Bank’s
first quarter earnings and a $25,000 capital contribution from the Company. At that time, the Bank was considered adequately capitalized
according to regulatory capital standards. As a result of earnings recorded during 2013’s second and third quarters, the
Bank’s total risk-based capital ratio rose to 8.46% at September 30, 2013.



From 2007 through 2011 when the Company recorded
significant losses primarily as a result of deteriorating asset quality, the Bank endured additional regulatory scrutiny and entered
into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the State of Michigan’s Department
of Insurance and Financial Services (“DIFS”) previously the Office of Financial and Insurance Regulation (“OFIR”),
its primary regulators, on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any
charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines
or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended,
or set aside by the FDIC and DIFS.



- 9 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Under the Consent Order, the Bank was required,
within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at
a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The
Bank was not able to meet these requirements within the required 90-day period and remained out of compliance with the Consent
Order as of September 30, 2013.



The lack of financial
soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of
directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s
primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement
provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as
a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment
representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated
debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any
debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement
of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the
Written Agreement; (v) the Company shall take all necessary actions to ensure thatthe Bank, the Company and all nonbank
subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of
the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director
or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a
different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end
of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress
reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as
well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation
detailed in part (i) above; as the Company currently has limited resources with which to assist the Bank in achieving the capital
level required by the Consent Order. The Company’s main liquidity resource is its cash account balance which, as of September
30, 2013, was approximately $656,000.



On January 3, 2011, the Company was not able to
repay its $5 million term loan owed to Fifth Third Bank (“Fifth Third”); nor was the Company able to make the preceding
ten quarterly interest payments. The term loan was in default for 25 months. At December 31, 2012, the total amount owed Fifth
Third was $5,763,000. 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, and settled its debt with Fifth Third for $500,000. Settling
the Fifth Third debt resulted in a gain of approximately $5.3 million in the first quarter of 2013. As a result of this transaction,
the Company was able to achieve positive shareholders’ equity of approximately $4 million at March 31, 2013.



In addition to the payment to Fifth Third, the proceeds
of the new senior debt will be used for interest carry, general operations and potential capital support for the Bank. The note
bears interest at 8% per annum until paid in full. Interest is payable quarterly in arrears. The note matures on March 31, 2015
and is secured by all of the issued and outstanding shares of the Bank as evidenced by a pledge agreement between the Company
and 1030 Norton LLC dated March 20, 2013. The reduced amount of borrowings is expected to decrease interest expense by approximately
$200,000 annually. Refer to Note 11 for further discussion.



- 10 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



On August 17, 2011, the Bank was issued a
Supervisory Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category
at December 31, 2010, its failure to submit a capital restoration plan that satisfies the requirements stipulated in the FDIC
Rules and Regulations, and the continued deterioration of the Bank. The Directive stipulated that the Bank be restored to an
“adequately capitalized” capital category within 60 days of the issuance of the Directive. During the 60 days,
the board made efforts to secure funding and comply with the Directive but was not successful. Through several quarters of
earnings and a $25,000 capital contribution from the Company, the Bank reached an adequately capitalized regulatory capital
category at March 31, 2013—see Note 15 to the consolidated financial statements. Management formally communicated
achievement of the capital level stipulated in the Directive to the FDIC through the submission of the quarterly Call Report
and the required quarterly written communication to the regulatory agencies at the end of April. Recent feedback received by
management indicated that formal public release of the Directive is anticipated to occur upon achievement of four consecutive
quarters of adequate capitalization, which is expected to occur by way of submitting 2013’s fourth quarter Call Report
to the FDIC on or about January 30, 2014, assuming that the capital ratios of the Bank remain stable for the remaining
quarter of 2013.



Regardless of meeting the stipulations in the Directive,
failure to comply with the provisions of the Consent Order or the Written Agreement may subject the Bank to further regulatory
enforcement action.



As of December 31, 2012, the Company’s
extended period of net losses, failure to repay its term loan at maturity (subsequently settled as noted above), timely compliance
with the higher capital ratios of the Directive and the Consent Order, and the provisions of the Written Agreement raised substantial
doubt about the Company’s ability to continue as a going concern and as a result of this doubt, our auditors added an explanatory
paragraph to their opinion on the Company’s December 31, 2012 consolidated financial statements expressing such doubt. These
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.



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



The following tables represent the securities held
in the Company’s portfolio at September 30, 2013 and at December 31, 2012:



|                                                                     |  |           |            |  | Gross      |   |         | Gross      |  |   |          |  
|-------------------------------------------------------------------- |  | --------- | ---------- |  | ---------- | - | ------- | ---------- |  | - | -------- | -
|                                                                     |  | Amortized |            |  | Unrealized |   |         | Unrealized |  |   | Fair     |  
|September 30, 2013                                                   |  | Cost      |            |  | Gains      |   |         | Losses     |  |   | Value    |  
|                                                                     |  |           |            |  |            |   |         |            |  |   |          |  
|US Treasury                                                          |  | $         | 3,029,943  |  |            | $ | 22,166  |            |  | $ | 0        |  
|US Government and federal agency                                     |  |           | 16,867,009 |  |            |   | 119,983 |            |  |   | (43,990  | )
|Municipals                                                           |  |           | 1,565,075  |  |            |   | 33,077  |            |  |   | 0        |  
|Mortgage-backed and collateralized mortgage obligations– residential |  |           | 11,931,575 |  |            |   | 150,175 |            |  |   | (174,399 | )
|                                                                     |  | $         | 33,393,602 |  |            | $ | 325,401 |            |  | $ | (218,389 | )



- 11 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                                   |  |           |            |  | Gross      |   |         | Gross      |  |   |         |  
|---------------------------------- |  | --------- | ---------- |  | ---------- | - | ------- | ---------- |  | - | ------- | -
|                                   |  | Amortized |            |  | Unrealized |   |         | Unrealized |  |   | Fair    |  
|December 31, 2012                  |  | Cost      |            |  | Gains      |   |         | Losses     |  |   | Value   |  
|                                   |  |           |            |  |            |   |         |            |  |   |         |  
|US Treasury                        |  | $         | 4,044,909  |  |            | $ | 49,623  |            |  | $ | 0       |  
|US Government and federal agency   |  |           | 20,013,843 |  |            |   | 250,523 |            |  |   | (4,623  | )
|Municipals                         |  |           | 2,260,272  |  |            |   | 73,469  |            |  |   | 0       |  
|Mortgage-backed and collateralized |  |           |            |  |            |   |         |            |  |   |         |  
|mortgage obligations– residential  |  |           | 14,539,668 |  |            |   | 264,090 |            |  |   | (31,378 | )
|                                   |  | $         | 40,858,692 |  |            | $ | 637,705 |            |  | $ | (36,001 | )



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, 2013:



|                                                                      |  | Amortized |            |  | Fair  |  
|--------------------------------------------------------------------- |  | --------- | ---------- |  | ----- | -
|                                                                      |  | Cost      |            |  | Value |  
|Due in one year or less                                               |  | $         | 5,024,323  |  |       | $
|Due from one to five years                                            |  |           | 16,085,877 |  |       |  
|Due from five to ten years                                            |  |           | 351,827    |  |       |  
|Due in more than ten years                                            |  |           | 0          |  |       |  
|Mortgage-backed and collateralized mortgage obligations – residential |  |           | 11,931,575 |  |       |  
|                                                                      |  | $         | 33,393,602 |  |       | $



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, 2013 and December 31, 2012:



|                                                                      |  | Less than 12 Months |           |  | 12 Months or Longer |   |          | Total | 
|--------------------------------------------------------------------- |  | ------------------- | --------- |  | ------------------- | - | -------- | ----- | 
|                                                                      |  | Fair                |           |  | Unrealized          |   |          | Fair  | 
|September 30, 2013                                                    |  | Value               |           |  | Losses              |   |          | Value | 
|US Government and federal agency                                      |  | $                   | 3,999,792 |  |                     | $ | (43,990  | )     | 
|Mortgage-backed and collateralized mortgage obligations - residential |  |                     | 5,702,888 |  |                     |   | (141,394 | )     | 
|                                                                      |  | $                   | 9,702,680 |  |                     | $ | (185,384 | )     | 



|                                                                      |  | Less than 12 Months |           |  | 12 Months or Longer |   |         | Total | 
|--------------------------------------------------------------------- |  | ------------------- | --------- |  | ------------------- | - | ------- | ----- | 
|                                                                      |  | Fair                |           |  | Unrealized          |   |         | Fair  | 
|December 31, 2012                                                     |  | Value               |           |  | Losses              |   |         | Value | 
|US Government and federal agency                                      |  | $                   | 3,050,187 |  |                     | $ | (4,623  | )     | 
|Mortgage-backed and collateralized mortgage obligations - residential |  |                     | 3,882,818 |  |                     |   | (21,580 | )     | 
|                                                                      |  | $                   | 6,933,005 |  |                     | $ | (26,203 | )     | 



- 12 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



No securities were sold in the
three or nine months ended September 30, 2013. One security was sold in the first quarter of 2012 and none in 2012’s second
or third quarters. The sale decision was made by management because the security no longer complied with the Bank’s internal
investment policy. Proceeds from the sale were $257,997 resulting in a realized gain of $2,856. In the first nine months of 2013,
there were no transfers out of accumulated other comprehensive income for security sales.



Other-Than-Temporary-Impairment



Management evaluates securities for 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, 2013, 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, 2013, 16 debt securities had unrealized losses with aggregate depreciation of 1.99% from the amortized cost basis;
fourteen of the 16 securities had unrealized losses less than twelve months and two had unrealized losses longer than twelve months.
Furthermore, five of the 16 securities are issued by government agencies and 11 are 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 aggregate
depreciation of 1.99% of amortized cost is not material however; there has been a marked decline in value since year-end 2012.
The decrease was $495,000. Even so, the change appears to be market driven and 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 not likely that it will 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, 2013.



- 13 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



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



|                                 |  | September 30, 2013 |             |   | December 31, 2012 |  
|-------------------------------- |  | ------------------ | ----------- | - | ----------------- | -
|Commercial                       |  | $                  | 43,596,519  |   |                   | $
|Commercial Real Estate:          |  |                    |             |   |                   |  
|General                          |  |                    | 56,402,659  |   |                   |  
|Construction                     |  |                    | 2,094,988   |   |                   |  
|Consumer:                        |  |                    |             |   |                   |  
|Lines of credit                  |  |                    | 8,291,775   |   |                   |  
|Other                            |  |                    | 1,669,427   |   |                   |  
|Credit card                      |  |                    | 470,836     |   |                   |  
|Residential                      |  |                    | 16,078,808  |   |                   |  
|Net deferred loan fees           |  |                    | (57,759     | ) |                   |  
|                                 |  |                    | 128,547,253 |   |                   |  
|Less:  Allowance for loan losses |  |                    | (2,870,036  | ) |                   |  
|Loans, net                       |  | $                  | 125,677,217 |   |                   | $



- 14 -







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 month periods ended September 30, 2013 and 2012 by portfolio segment:



|Three Months Ended September 30, 2013 |  | Commercial |         |   | Commercial Real Estate |   |           | Consumer |  |   | Residential |   |  | Unallocated |          |   | Total |  
|------------------------------------- |  | ---------- | ------- | - | ---------------------- | - | --------- | -------- |  | - | ----------- | - |  | ----------- | -------- | - | ----- | -
|Allowance for loan losses:            |  |            |         |   |                        |   |           |          |  |   |             |   |  |             |          |   |       |  
|Beginning balance                     |  | $          | 439,993 |   |                        | $ | 1,920,587 |          |  | $ | 419,511     |   |  | $           | 157,406  |   |       | $
|Charge-offs                           |  |            | (25,794 | ) |                        |   | 0         |          |  |   | (225,308    | ) |  |             | (193,596 | ) |       |  
|Recoveries                            |  |            | 19,656  |   |                        |   | 0         |          |  |   | 7,804       |   |  |             | 0        |   |       |  
|Provision for loan losses             |  |            | (51,133 | ) |                        |   | (105,707  | )        |  |   | 209,672     |   |  |             | 250,712  |   |       |  
|Ending balance                        |  | $          | 382,722 |   |                        | $ | 1,814,880 |          |  | $ | 411,679     |   |  | $           | 214,522  |   |       | $



|Three Months Ended September 30, 2012 |  | Commercial |           |   | Commercial
    Real Estate |   |           | Consumer |  |   | Residential |   |  | Unallocated |         |   | Total |  
|------------------------------------- |  | ---------- | --------- | - | -------------------------- | - | --------- | -------- |  | - | ----------- | - |  | ----------- | ------- | - | ----- | -
|Allowance for loan losses:            |  |            |           |   |                            |   |           |          |  |   |             |   |  |             |         |   |       |  
|Beginning balance                     |  | $          | 1,356,903 |   |                            | $ | 2,251,981 |          |  | $ | 442,467     |   |  | $           | 193,706 |   |       | $
|Charge-offs                           |  |            | (656,201  | ) |                            |   | (2,299    | )        |  |   | (79,767     | ) |  |             | 0       |   |       |  
|Recoveries                            |  |            | 10,296    |   |                            |   | 8,204     |          |  |   | 1,877       |   |  |             | 0       |   |       |  
|Provision for loan losses             |  |            | (98,273   | ) |                            |   | (100,367  | )        |  |   | 2,191       |   |  |             | (39,529 | ) |       |  
|Ending balance                        |  | $          | 612,725   |   |                            | $ | 2,157,519 |          |  | $ | 366,768     |   |  | $           | 154,177 |   |       | $



- 15 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present the activity in the
allowance for loan losses for the nine month periods ended September 30, 2013 and 2012 by portfolio segment:



|Nine Months Ended September 30, 2013 |  | Commercial |          |   | Commercial
    Real Estate |   |           | Consumer |  |   | Residential |   |  | Unallocated |          |   | Total |  
|------------------------------------ |  | ---------- | -------- | - | -------------------------- | - | --------- | -------- |  | - | ----------- | - |  | ----------- | -------- | - | ----- | -
|Allowance for loan losses:           |  |            |          |   |                            |   |           |          |  |   |             |   |  |             |          |   |       |  
|Beginning balance                    |  | $          | 582,198  |   |                            | $ | 2,266,302 |          |  | $ | 331,459     |   |  | $           | 203,018  |   |       | $
|Charge-offs                          |  |            | (66,047  | ) |                            |   | (25,025   | )        |  |   | (263,905    | ) |  |             | (248,195 | ) |       |  
|Recoveries                           |  |            | 75,856   |   |                            |   | 0         |          |  |   | 14,375      |   |  |             | 0        |   |       |  
|Provision for loan losses            |  |            | (209,285 | ) |                            |   | (426,397  | )        |  |   | 329,750     |   |  |             | 259,699  |   |       |  
|Ending balance                       |  | $          | 382,722  |   |                            | $ | 1,814,880 |          |  | $ | 411,679     |   |  | $           | 214,522  |   |       | $



|Nine Months Ended September 30, 2012 |  | Commercial |           |   | Commercial 
    Real Estate |   |           | Consumer |  |   | Residential |   |  | Unallocated |         |   | Total |  
|------------------------------------ |  | ---------- | --------- | - | --------------------------- | - | --------- | -------- |  | - | ----------- | - |  | ----------- | ------- | - | ----- | -
|Allowance for loan losses:           |  |            |           |   |                             |   |           |          |  |   |             |   |  |             |         |   |       |  
|Beginning balance                    |  | $          | 1,309,632 |   |                             | $ | 3,386,433 |          |  | $ | 410,001     |   |  | $           | 193,388 |   |       | $
|Charge-offs                          |  |            | (869,270  | ) |                             |   | (859,504  | )        |  |   | (111,248    | ) |  |             | (11,392 | ) |       |  
|Recoveries                           |  |            | 36,844    |   |                             |   | 21,727    |          |  |   | 21,761      |   |  |             | 0       |   |       |  
|Provision for loan losses            |  |            | 135,519   |   |                             |   | (391,137  | )        |  |   | 46,254      |   |  |             | (27,819 | ) |       |  
|Ending balance                       |  | $          | 612,725   |   |                             | $ | 2,157,519 |          |  | $ | 366,768     |   |  | $           | 154,177 |   |       | $



- 16 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The remaining loan footnote tables on the following
pages present loans at the recorded investment which includes unpaid principal, accrued interest receivable and net deferred,
unearned fees. 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, 2013 and December 31, 2012:



|September 30, 2013                              |  | Commercial |            |  | Commercial Real Estate |   |            | Consumer |  |   | Residential |  |  | Unallocated |            |  | Total |  
|----------------------------------------------- |  | ---------- | ---------- |  | ---------------------- | - | ---------- | -------- |  | - | ----------- |  |  | ----------- | ---------- |  | ----- | -
|Allowance for loan losses:                      |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Ending allowance balance attributable to loans: |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 31,938     |  |                        | $ | 1,319,242  |          |  | $ | 147,892     |  |  | $           | 75,361     |  |       | $
|Collectively evaluated for impairment           |  |            | 350,784    |  |                        |   | 495,638    |          |  |   | 263,787     |  |  |             | 139,161    |  |       |  
|Unallocated                                     |  |            | 0          |  |                        |   | 0          |          |  |   | 0           |  |  |             | 0          |  |       |  
|Total ending allowance balance                  |  | $          | 382,722    |  |                        | $ | 1,814,880  |          |  | $ | 411,679     |  |  | $           | 214,522    |  |       | $
|                                                |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Loans:                                          |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 1,226,231  |  |                        | $ | 6,911,363  |          |  | $ | 306,026     |  |  | $           | 861,509    |  |       | $
|Collectively evaluated for impairment           |  |            | 42,469,937 |  |                        |   | 51,680,583 |          |  |   | 10,164,702  |  |  |             | 15,260,815 |  |       |  
|Total ending loans balance                      |  | $          | 43,696,168 |  |                        | $ | 58,591,946 |          |  | $ | 10,470,728  |  |  | $           | 16,122,324 |  |       | $



|December 31, 2012                               |  | Commercial |            |  | Commercial Real Estate |   |            | Consumer |  |   | Residential |  |  | Unallocated |            |  | Total |  
|----------------------------------------------- |  | ---------- | ---------- |  | ---------------------- | - | ---------- | -------- |  | - | ----------- |  |  | ----------- | ---------- |  | ----- | -
|Allowance for loan losses:                      |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Ending allowance balance attributable to loans: |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 104,727    |  |                        | $ | 1,489,569  |          |  | $ | 89,050      |  |  | $           | 127,030    |  |       | $
|Collectively evaluated for impairment           |  |            | 477,471    |  |                        |   | 776,733    |          |  |   | 242,409     |  |  |             | 75,988     |  |       |  
|Unallocated                                     |  |            | 0          |  |                        |   | 0          |          |  |   | 0           |  |  |             | 0          |  |       |  
|Total ending allowance balance                  |  | $          | 582,198    |  |                        | $ | 2,266,302  |          |  | $ | 331,459     |  |  | $           | 203,018    |  |       | $
|                                                |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Loans:                                          |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 3,288,294  |  |                        | $ | 7,322,850  |          |  | $ | 321,820     |  |  | $           | 782,732    |  |       | $
|Collectively evaluated for impairment           |  |            | 36,739,269 |  |                        |   | 49,391,498 |          |  |   | 11,329,495  |  |  |             | 17,063,417 |  |       |  
|Total ending loans balance                      |  | $          | 40,027,563 |  |                        | $ | 56,714,348 |          |  | $ | 11,651,315  |  |  | $           | 17,846,149 |  |       | $



- 17 -







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, 2013 and December 31, 2012. For purposes of this disclosure, the
unpaid principal balance is not reduced for partial charge-offs.



|                                        |  | As of September 30, 2013 |           |  | For the periods ended September 30, 2013 |  
|--------------------------------------- |  | ------------------------ | --------- |  | ---------------------------------------- | -
|                                        |  |                          |           |  |                                          |  
|                                        |  |                          |           |  | Unpaid                                   |  
|                                        |  | Recorded                 |           |  | Principal                                |  
|                                        |  | Investment               |           |  | Balance                                  |  
|With
    no related allowance recorded: |  |                          |           |  |                                          |  
|Commercial                              |  | $                        | 1,122,429 |  |                                          | $
|Commercial Real Estate:                 |  |                          |           |  |                                          |  
|General                                 |  |                          | 2,472,673 |  |                                          |  
|Construction                            |  |                          | 0         |  |                                          |  
|Consumer:                               |  |                          |           |  |                                          |  
|Lines of credit                         |  |                          | 9,800     |  |                                          |  
|Other                                   |  |                          | 58,369    |  |                                          |  
|Credit card                             |  |                          | 0         |  |                                          |  
|Residential                             |  |                          | 461,646   |  |                                          |  
|Subtotal                                |  | $                        | 4,124,917 |  |                                          | $
|                                        |  |                          |           |  |                                          |  
|With
    an allowance recorded:         |  |                          |           |  |                                          |  
|Commercial                              |  | $                        | 103,802   |  |                                          | $
|Commercial Real Estate:                 |  |                          |           |  |                                          |  
|General                                 |  |                          | 4,438,690 |  |                                          |  
|Construction                            |  |                          | 0         |  |                                          |  
|Consumer:                               |  |                          |           |  |                                          |  
|Lines of credit                         |  |                          | 197,628   |  |                                          |  
|Other                                   |  |                          | 40,229    |  |                                          |  
|Credit card                             |  |                          | 0         |  |                                          |  
|Residential                             |  |                          | 399,863   |  |                                          |  
|Subtotal                                |  | $                        | 5,180,212 |  |                                          | $
|Total                                   |  | $                        | 9,305,129 |  |                                          | $



- 18 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                                        |  | As of December 31, 2012 |            |  | For the periods ended September 30, 2012 |  
|--------------------------------------- |  | ----------------------- | ---------- |  | ---------------------------------------- | -
|                                        |  |                         |            |  |                                          |  
|                                        |  |                         |            |  | Unpaid                                   |  
|                                        |  | Recorded                |            |  | Principal                                |  
|                                        |  | Investment              |            |  | Balance                                  |  
|With
    no related allowance recorded: |  |                         |            |  |                                          |  
|Commercial                              |  | $                       | 2,147,075  |  |                                          | $
|Commercial Real Estate:                 |  |                         |            |  |                                          |  
|General                                 |  |                         | 2,662,984  |  |                                          |  
|Construction                            |  |                         | 0          |  |                                          |  
|Consumer:                               |  |                         |            |  |                                          |  
|Lines of credit                         |  |                         | 55,659     |  |                                          |  
|Other                                   |  |                         | 26,221     |  |                                          |  
|Credit card                             |  |                         | 0          |  |                                          |  
|Residential                             |  |                         | 208,178    |  |                                          |  
|Subtotal                                |  | $                       | 5,100,117  |  |                                          | $
|With
    an allowance recorded:         |  |                         |            |  |                                          |  
|Commercial                              |  | $                       | 1,141,219  |  |                                          | $
|Commercial Real Estate:                 |  |                         |            |  |                                          |  
|General                                 |  |                         | 4,659,866  |  |                                          |  
|Construction                            |  |                         | 0          |  |                                          |  
|Consumer:                               |  |                         |            |  |                                          |  
|Lines of credit                         |  |                         | 135,111    |  |                                          |  
|Other                                   |  |                         | 104,829    |  |                                          |  
|Credit card                             |  |                         | 0          |  |                                          |  
|Residential                             |  |                         | 574,554    |  |                                          |  
|Subtotal                                |  | $                       | 6,615,579  |  |                                          | $
|Total                                   |  | $                       | 11,715,696 |  |                                          | $



Non-performing loans and impaired loans are defined differently.
Some loans may be included in both categories, whereas other loans may only be included in one category. However, non-accrual
loans and loans past due 90 days still on accrual are all individually classified impaired loans.



- 19 -







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, 2013:



|                        |  |                 |        |  |                  |   |       | 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              |  | $               | 0      |  |                  | $ | 0     |                 |  | $ | 0              |  |  | $              | 0       |  |                | $
|Commercial Real Estate: |  |                 |        |  |                  |   |       |                 |  |   |                |  |  |                |         |  |                |  
|General                 |  |                 | 0      |  |                  |   | 0     |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Construction            |  |                 | 0      |  |                  |   | 0     |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Consumer:               |  |                 |        |  |                  |   |       |                 |  |   |                |  |  |                |         |  |                |  
|Lines of credit         |  |                 | 97,593 |  |                  |   | 0     |                 |  |   | 0              |  |  |                | 97,593  |  |                |  
|Other                   |  |                 | 0      |  |                  |   | 4,949 |                 |  |   | 0              |  |  |                | 4,949   |  |                |  
|Credit card             |  |                 | 506    |  |                  |   | 0     |                 |  |   | 0              |  |  |                | 506     |  |                |  
|Residential             |  |                 | 0      |  |                  |   | 0     |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Total                   |  | $               | 98,099 |  |                  | $ | 4,949 |                 |  | $ | 0              |  |  | $              | 103,048 |  |                | $



|                        |  |                 |         |  |                 |   |       | 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     |                 |  | $ | 40,316         |  |  | $           | 40,316  |  |                   | $
|Commercial Real Estate: |  |                 |         |  |                 |   |       |                 |  |   |                |  |  |             |         |  |                   |  
|General                 |  |                 | 204,541 |  |                 |   | 0     |                 |  |   | 0              |  |  |             | 204,541 |  |                   |  
|Construction            |  |                 | 0       |  |                 |   | 0     |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Consumer:               |  |                 |         |  |                 |   |       |                 |  |   |                |  |  |             |         |  |                   |  
|Lines of credit         |  |                 | 9,800   |  |                 |   | 0     |                 |  |   | 44,528         |  |  |             | 54,328  |  |                   |  
|Other                   |  |                 | 0       |  |                 |   | 2,141 |                 |  |   | 0              |  |  |             | 2,141   |  |                   |  
|Credit card             |  |                 | 0       |  |                 |   | 0     |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Residential             |  |                 | 0       |  |                 |   | 0     |                 |  |   | 285,528        |  |  |             | 285,528 |  |                   |  
|Total                   |  | $               | 214,341 |  |                 | $ | 2,141 |                 |  | $ | 370,372        |  |  | $           | 586,854 |  |                   | $



- 20 -







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, 2012:



|                        |  |                 |         |  |                 |   |         | 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              |  | $               | 1,956   |  |                 | $ | 0       |                 |  | $ | 0              |  |  | $              | 1,956   |  |                | $
|Commercial Real Estate: |  |                 |         |  |                 |   |         |                 |  |   |                |  |  |                |         |  |                |  
|General                 |  |                 | 97,605  |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 97,605  |  |                |  
|Construction            |  |                 | 0       |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Consumer:               |  |                 |         |  |                 |   |         |                 |  |   |                |  |  |                |         |  |                |  
|Lines of credit         |  |                 | 26,037  |  |                 |   | 44,866  |                 |  |   | 0              |  |  |                | 70,903  |  |                |  
|Other                   |  |                 | 3,707   |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 3,707   |  |                |  
|Credit card             |  |                 | 2,010   |  |                 |   | 0       |                 |  |   | 0              |  |  |                | 2,010   |  |                |  
|Residential             |  |                 | 0       |  |                 |   | 85,242  |                 |  |   | 0              |  |  |                | 85,242  |  |                |  
|Total                   |  | $               | 131,315 |  |                 | $ | 130,108 |                 |  | $ | 0              |  |  | $              | 261,423 |  |                | $



|                        |  |                 |        |  |                 |   |         | 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              |  | $               | 8,958  |  |                 | $ | 20,469  |                 |  | $ | 320,592        |  |  | $           | 350,019   |  |                   | $
|Commercial Real Estate: |  |                 |        |  |                 |   |         |                 |  |   |                |  |  |             |           |  |                   |  
|General                 |  |                 | 8,414  |  |                 |   | 280,399 |                 |  |   | 406,792        |  |  |             | 695,605   |  |                   |  
|Construction            |  |                 | 0      |  |                 |   | 0       |                 |  |   | 0              |  |  |             | 0         |  |                   |  
|Consumer:               |  |                 |        |  |                 |   |         |                 |  |   |                |  |  |             |           |  |                   |  
|Lines of credit         |  |                 | 0      |  |                 |   | 21,583  |                 |  |   | 0              |  |  |             | 21,583    |  |                   |  
|Other                   |  |                 | 0      |  |                 |   | 0       |                 |  |   | 6,050          |  |  |             | 6,050     |  |                   |  
|Credit card             |  |                 | 0      |  |                 |   | 0       |                 |  |   | 0              |  |  |             | 0         |  |                   |  
|Residential             |  |                 | 0      |  |                 |   | 0       |                 |  |   | 195,649        |  |  |             | 195,649   |  |                   |  
|Total                   |  | $               | 17,372 |  |                 | $ | 322,451 |                 |  | $ | 929,083        |  |  | $           | 1,268,906 |  |                   | $



- 21 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Troubled Debt Restructurings:



The Company has allocated $1,537,738 of specific reserves on
$8,361,469 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings
as of September 30, 2013 and $1,699,851 on $10,441,218 of unpaid principal balance of loans as of December 31, 2012. At September
30, 2013, the Company had an additional $181,503 in performing loans outstanding to one of those customers. As of December 31,
2012, there was $184,364 committed to one customer.



During the three and nine month periods ending September 30,
2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such
loans included one or a combination of the following: a stated rate of interest lower than the current market rate for new debt
with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not fully cover the interest;
financing concessions; or a permanent reduction of the recorded investment in the loan.



In the nine month period ended September 30, 2013, one modification
involved a stated interest rate below the current market rate for a period of 7 years, while another modification for 2.5 years
involved interest-only payments on an amortizing note. One A-B note modification involved a permanent reduction of the recorded
investment in the loan.



In the nine month period ended September 30, 2012, modifications
involving a stated interest rate of the loan below the current market rate were for periods ranging from 11 months to 5 years.
Modifications involving a reduced payment amount were for periods ranging from 5 months to 4 years. Two modifications involved
a permanent reduction of the recorded investment in the loan.



In the three month period ended September 30, 2013, there were
no loans modified as troubled debt restructurings and no charge-offs as part of a troubled debt restructuring.



The following table presents loans by class modified as troubled
debt restructurings that occurred during the nine month period ended September 30, 2013:



|                                     |  |                 |  | Pre-Modification     |         |  | Post-Modification    |  
|------------------------------------ |  | --------------- |  | -------------------- | ------- |  | -------------------- | -
|                                     |  |                 |  | Outstanding Recorded |         |  | Outstanding Recorded |  
|Nine Months Ended September 30, 2013 |  | Number of Loans |  | Investment           |         |  | Investment           |  
|Troubled Debt Restructurings:        |  |                 |  |                      |         |  |                      |  
|Commercial                           |  | 1               |  | $                    | 143,136 |  |                      | $
|Consumer:                            |  |                 |  |                      |         |  |                      |  
|Lines of credit                      |  | 2               |  |                      | 137,893 |  |                      |  
|Total                                |  | 3               |  | $                    | 281,029 |  |                      | $



In the nine month period ended September 30, 2013, there were
$9,711 of charge-offs as part of a troubled debt restructuring arrangement and an additional $38,913 of specific reserves were
established on these troubled debt restructurings.



- 22 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



In the three month period ended September 30, 2012, there were
no loans modified as troubled debt restructurings and no charge-offs as part of a troubled debt restructuring.



The following table presents loans by class modified as troubled
debt restructurings that occurred during the nine month period ending September 30, 2012:



|                                     |  |                 |  | Pre-Modification     |           |  | Post-Modification    |  
|------------------------------------ |  | --------------- |  | -------------------- | --------- |  | -------------------- | -
|                                     |  |                 |  | Outstanding Recorded |           |  | Outstanding Recorded |  
|Nine Months Ended September 30, 2012 |  | Number of Loans |  | Investment           |           |  | Investment           |  
|Troubled Debt Restructurings:        |  |                 |  |                      |           |  |                      |  
|Commercial                           |  | 1               |  | $                    | 11,880    |  |                      | $
|Commercial Real Estate:              |  |                 |  |                      |           |  |                      |  
|General                              |  | 5               |  |                      | 3,446,269 |  |                      |  
|Consumer:                            |  |                 |  |                      |           |  |                      |  
|Lines of credit                      |  | 2               |  |                      | 126,860   |  |                      |  
|Residential                          |  | 1               |  |                      | 62,085    |  |                      |  
|Total                                |  | 9               |  | $                    | 3,647,094 |  |                      | $



In the nine month period ended September 30, 2012, there were
$638,000 of charge-offs as part of a troubled debt restructuring arrangement and an additional $50,000 of specific reserves were
established on these troubled debt restructurings.



Generally, a modified loan is considered to be in payment default
when the borrower is not performing according to the renegotiated terms.



For the three and nine month periods ended September 30, 2013
and 2012, there were no troubled debt restructurings that experienced a payment default within 12 months following the modification.



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.



- 23 -







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



| | 1. | Exceptional. Loans with an exceptional credit rating.
| | -- | -----------------------------------------------------

| | 2. | Quality. Loans with excellent sources of repayment that conform,
                                                            in all respects, to Bank policy and regulatory requirements. These
                                                            are loans for which little repayment risk has been identified.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Above Average. Loans with above average sources of repayment and
                                                            minimal identified credit or collateral exceptions and minimal repayment
                                                            risk.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Average. Loans with average sources of repayment that materially
                                                            conform to Bank policy and regulatory requirements. Repayment risk
                                                            is considered average.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Acceptable. Loans with acceptable sources of repayment and risk.
| | -- | ----------------------------------------------------------------

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.



- 24 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



As of September 30, 2013 and December 31, 2012,
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,          | 
|      |  | 2013          |            |  | 2012                   |   |            | 2013                   | 
|1     |  | $             | 0          |  |                        | $ | 0          |                        | 
|2     |  |               | 261,437    |  |                        |   | 298,200    |                        | 
|3     |  |               | 7,791,976  |  |                        |   | 2,004,476  |                        | 
|4     |  |               | 13,313,325 |  |                        |   | 14,017,221 |                        | 
|5     |  |               | 15,217,224 |  |                        |   | 16,373,423 |                        | 
|5M    |  |               | 4,275,905  |  |                        |   | 3,318,016  |                        | 
|6     |  |               | 1,705,945  |  |                        |   | 2,180,119  |                        | 
|7     |  |               | 1,072,584  |  |                        |   | 1,369,803  |                        | 
|8     |  |               | 57,772     |  |                        |   | 466,305    |                        | 
|Total |  | $             | 43,696,168 |  |                        | $ | 40,027,563 |                        | 



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, 2013 and December 31, 2012:



|           |  | Residential   |           
|---------- |  | ------------- | ----------
|           |  | September 30, |           
|           |  | 2013          |           
|Performing |  | $             | 15,260,815
|Impaired   |  |               | 861,509   
|Total      |  | $             | 16,122,324



|           |  | Consumer – Lines of credit |           |  | Consumer – Other |   |           | Consumer – Credit card | 
|---------- |  | -------------------------- | --------- |  | ---------------- | - | --------- | ---------------------- | 
|           |  | September 30,              |           |  | December 31,     |   |           | September 30,          | 
|           |  | 2013                       |           |  | 2012             |   |           | 2013                   | 
|Performing |  | $                          | 8,115,446 |  |                  | $ | 8,944,652 |                        | 
|Impaired   |  |                            | 207,428   |  |                  |   | 190,770   |                        | 
|Total      |  | $                          | 8,322,874 |  |                  | $ | 9,135,422 |                        | 



- 25 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Foreclosed asset activity:



|                                               |  | September 30, |           |   | September 30, |  
|---------------------------------------------- |  | ------------- | --------- | - | ------------- | -
|                                               |  | 2013          |           |   | 2012          |  
|Beginning of year                              |  | $             | 2,806,781 |   |               | $
|Additions                                      |  |               | 614,485   |   |               |  
|Reductions from sales                          |  |               | (593,498  | ) |               |  
|Direct write-downs                             |  |               | (141,531  | ) |               |  
|End of period                                  |  | $             | 2,686,237 |   |               | $
|                                               |  |               |           |   |               |  
|Expenses related to foreclosed assets include: |  |               |           |   |               |  
|Operating expenses, net of rental income       |  | $             | 189,268   |   |               | $



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



Period end premises and equipment were as follows:



|                                  |  | September 30, |            |  | December 31, |  
|--------------------------------- |  | ------------- | ---------- |  | ------------ | -
|                                  |  | 2013          |            |  | 2012         |  
|Land & land improvements          |  | $             | 4,700,464  |  |              | $
|Buildings & building improvements |  |               | 6,148,829  |  |              |  
|Furniture, fixtures and equipment |  |               | 3,839,270  |  |              |  
|                                  |  |               | 14,688,563 |  |              |  
|Less:  accumulated depreciation   |  |               | 5,520,211  |  |              |  
|                                  |  | $             | 9,168,352  |  |              | $



During the second quarter of 2012, the Company sold land with
a carrying value of $790,135 resulting in a gain on sale of $208,389.



- 26 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The components
of the outstanding deposit balances at September 30, 2013 and December 31, 2012 were as follows:



|                         |  | September 30, |             |  | December 31, |  
|------------------------ |  | ------------- | ----------- |  | ------------ | -
|                         |  | 2013          |             |  | 2012         |  
|Non-interest-bearing DDA |  | $             | 31,700,054  |  |              | $
|Interest-bearing DDA     |  |               | 25,738,324  |  |              |  
|Money market             |  |               | 21,524,818  |  |              |  
|Savings                  |  |               | 8,157,419   |  |              |  
|Time, under $100,000     |  |               | 66,976,766  |  |              |  
|Time, over $100,000      |  |               | 9,471,078   |  |              |  
|Total Deposits           |  | $             | 163,568,459 |  |              | $



There were no brokered deposits at September 30,
2013 and December 31, 2012. Since the Bank was not categorized as “well capitalized” at September 30, 2013 and is
under a Consent Order, a regulatory waiver is required to accept, renew or rollover brokered deposits. The Bank has not issued
brokered deposits since January of 2010.



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



The Company’s short-term borrowings consist
of repurchase agreements and less frequently borrowings from the FRB Discount Window. There have been no borrowings from the FRB
Discount Window since January 2010. The September 30, 2013 and December 31, 2012 short-term borrowing information was as follows:



|                                        |  | Repurchase |           
|--------------------------------------- |  | ---------- | ----------
|                                        |  | Agreements |           
|                                        |  |            |           
|Outstanding at September 30, 2013       |  | $          | 8,972,374 
|Average interest rate at period end     |  |            | 0.56      
|Average balance during period           |  |            | 9,996,881 
|Average interest rate during period     |  |            | 0.59      
|Maximum month end balance during period |  |            | 10,878,256
|                                        |  |            |           
|Outstanding at December 31, 2012        |  | $          | 10,190,059
|Average interest rate at year-end       |  |            | 0.59      
|Average balance during year             |  |            | 9,241,260 
|Average interest rate during year       |  |            | 0.75      
|Maximum month end balance during year   |  |            | 12,037,087



- 27 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The
Bank is a member of the Federal Home Loan Bank (“FHLB”) of Indianapolis. Based on its current FHLB stock holdings
and collateral, the Bank has the capacity to borrow $2,839,659. Each borrowing requires a direct pledge of securities and or loans.
To support potential borrowings with the FHLB, the Bank had residential loans with a fair market value of $3,549,574 pledged at
September 30, 2013. The Bank had no outstanding borrowings with the FHLB at either September 30, 2013 or December 31, 2012.



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



The
Trust, as defined 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 2.30% at September 30, 2013 and 2.36% at December 31, 2012. 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.



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



During the deferral period, interest will continue
to accrue on the subordinated debentures. Also, the deferred interest will accrue interest. At the expiration of the deferral
period, all accrued and unpaid interest will become immediately due and payable.



The
indenture under which the subordinated debentures were issued prohibits certain actions by the Company during the deferral period.
Among other things, during the deferral period and subject to certain exceptions, the Company is prohibited from declaring or
paying any dividends or distributions on, or redeeming, purchasing, acquiring or making any liquidation payment with respect to,
any shares of its capital stock. Although the Company has not determined the duration of the deferral period, as of December 16,
2010, under the FRB Written Agreement, the Company is prohibited from making any distributions of interest,
principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval. At September 30,
2013, the accruedinterest payable on the subordinated debentures was $414,429.



- 28 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



On January 3, 2011, the Company’s $5,000,000
term loan with Fifth Third Bank (“Fifth Third”) matured. The Company did not have the resources to pay the amount
due. The loan was in default at year-end 2012. In addition to the outstanding principal due, there was accrued interest of $763,000
at December 31, 2012. The outstanding principal had an interest rate of 6.00% per annum; 275 basis points above Fifth Third’s
prime rate.



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, and settled
its debt in full with Fifth Third for $500,000. In addition to the payment to Fifth Third, the proceeds of the new senior debt
will be used for interest carry, general operations and potential capital support for the Bank. The note bears interest at a fixed
rate of 8.00% per annum until paid in full. Interest is payable quarterly, in arrears. The note matures on March 31, 2015. The
note is 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 accrued interest at September 30, 2013 was approximately $26,000. The entire interest balance
due was paid on October 1, 2013.



Settling the Fifth Third debt resulted in a gain
of approximately $5.3 million in the first quarter of 2013. As a result of this transaction, the Company was able to achieve positive
shareholders’ equity of approximately $4 million at March 31, 2013.



| | 12. | COMMITMENTS AND OFF-BALANCE SHEET RISK
| | --- | --------------------------------------



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



A summary of the notional and
contractual amounts of outstanding financing instruments with off-balance-sheet risk as of September 30, 2013 and December 31,
2012 follows:



|                                             |  | September 30, 2013 |            |  | December 31, 2012 |  
|-------------------------------------------- |  | ------------------ | ---------- |  | ----------------- | -
|                                             |  |                    |            |  |                   |  
|Unused lines of credit and letters of credit |  | $                  | 25,064,561 |  |                   | $
|Commitments to make loans                    |  |                    | 453,935    |  |                   |  



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.



- 29 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | FAIR VALUE MEASUREMENTS
| | --- | -----------------------



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



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



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



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



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.



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.



- 30 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | FAIR VALUE MEASUREMENTS (Continued)
| | --- | -----------------------------------



Non-real estate collateral may be valued using appraisals,
independent valuation tools, net book value per the borrower’s financial statements, 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 at the time of foreclosure, establishing
a new cost basis. Subsequently, foreclosed assets continue to be measured at the lower of cost or fair value. 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.



- 31 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | FAIR VALUE MEASUREMENTS (Continued)
| | --- | -----------------------------------



Assets measured at fair value on a recurring basis
are summarized below as of the periods ended September 30, 2013 and December 31, 2012:



|                                                                         |  |       |            |  | Fair Value Measurements Using |  
|------------------------------------------------------------------------ |  | ----- | ---------- |  | ----------------------------- | -
|                                                                         |  |       |            |  | Quoted Prices                 |  
|                                                                         |  |       |            |  | in Active                     |  
|                                                                         |  |       |            |  | Markets for                   |  
|                                                                         |  |       |            |  | Identical Assets              |  
|September 30, 2013                                                       |  | Total |            |  | (Level 1)                     |  
|Available for sale securities:                                           |  |       |            |  |                               |  
|US Treasury                                                              |  | $     | 3,052,109  |  |                               | $
|US Government and federal agency                                         |  |       | 16,943,002 |  |                               |  
|Municipals                                                               |  |       | 1,598,152  |  |                               |  
|Mortgage-backed and collateralized mortgage obligations– residential     |  |       | 11,907,351 |  |                               |  
|Total                                                                    |  | $     | 33,500,614 |  |                               | $
|                                                                         |  |       |            |  |                               |  
|December 31, 2012                                                        |  |       |            |  |                               |  
|Available for sale securities:                                           |  |       |            |  |                               |  
|US Treasury                                                              |  | $     | 4,094,532  |  |                               | $
|US Government and federal agency                                         |  |       | 20,259,743 |  |                               |  
|Municipals                                                               |  |       | 2,333,741  |  |                               |  
|Mortgage-backed and
    collateralized mortgage obligations– residential |  |       | 14,772,380 |  |                               |  
|Total                                                                    |  | $     | 41,460,396 |  |                               | $



There were no transfers between levels during the first nine
months of 2013 or 2012.



- 32 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | FAIR VALUE MEASUREMENTS (Continued)
| | --- | -----------------------------------



Assets measured at fair value on a non-recurring
basis are summarized below as of the periods ended September 30, 2013 and December 31, 2012. Impaired loans and foreclosed assets
are included if the fair value of such assets was revised during the quarterly period then ended.



|                        |  |       |           |  | Significant         |  
|----------------------- |  | ----- | --------- |  | ------------------- | -
|                        |  |       |           |  | Unobservable Inputs |  
|                        |  | Total |           |  | (Level 3)           |  
|September 30, 2013      |  |       |           |  |                     |  
|Impaired loans:         |  |       |           |  |                     |  
|Consumer:               |  |       |           |  |                     |  
|Other                   |  | $     | 52,612    |  |                     | $
|Residential             |  |       | 61,722    |  |                     |  
|Total                   |  | $     | 114,334   |  |                     | $
|Foreclosed assets:      |  |       |           |  |                     |  
|Commercial Real Estate: |  |       |           |  |                     |  
|General                 |  | $     | 267,390   |  |                     | $
|Residential             |  |       | 55,794    |  |                     |  
|Total                   |  | $     | 323,184   |  |                     | $
|                        |  |       |           |  |                     |  
|December 31, 2012       |  |       |           |  |                     |  
|Impaired loans:         |  |       |           |  |                     |  
|Commercial              |  | $     | 84,755    |  |                     | $
|Commercial Real Estate: |  |       |           |  |                     |  
|General                 |  |       | 786,282   |  |                     |  
|Residential             |  |       | 140,269   |  |                     |  
|Total                   |  | $     | 1,011,306 |  |                     | $
|Foreclosed assets:      |  |       |           |  |                     |  
|Commercial Real Estate: |  |       |           |  |                     |  
|General                 |  | $     | 141,596   |  |                     | $
|Construction            |  |       | 380,142   |  |                     |  
|Total                   |  | $     | 521,738   |  |                     | $



The following describes the impairment charges recognized during
the period:



At September 30, 2013, impaired loans carried at fair value
had a recorded investment of $114,334 with no valuation allowance, resulting in additional provision of $15,818. At December 31,
2012, impaired loans carried at fair value had a recorded investment of $2,394,211 and a valuation allowance of $1,382,905, resulting
in additional provision of $13,000.



Foreclosed assets carried at fair value at September 30, 2013
were $323,184 compared to $521,738 at December 31, 2012. During 2013, four properties included in this total were written down
by $40,240. During 2012, three properties included in this total were written down by $128,139.



- 33 -











COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | FAIR VALUE MEASUREMENTS (Continued)
| | --- | -----------------------------------



As of September 30, 2013, there were no individually
material Level 3 financial assets, by class, measured on a non-recurring basis.



The following table presents information as of December
31, 2012 about significant unobservable inputs related to the Bank’s individually material1 Level 3 financial
assets, by class, measured on a non-recurring basis:



|                        |  |            |         |  | Valuation     |                           | Significant Unobservable |                                     | Range     |  |            | Weighted | 
|----------------------- |  | ---------- | ------- |  | ------------- | ------------------------- | ------------------------ | ----------------------------------- | --------- |  | ---------- | -------- | 
|                        |  | Fair Value |         |  | Technique (s) |                           | Inputs                   |                                     | of Inputs |  |            | Average  | 
|December 31, 2012       |  |            |         |  |               |                           |                          |                                     |           |  |            |          | 
|                        |  |            |         |  |               |                           |                          |                                     |           |  |            |          | 
|Impaired loans:         |  |            |         |  |               |                           |                          | Adjustments for differences between |           |  |            |          | 
|Commercial Real Estate: |  |            |         |  |               | Sales comparison approach |                          | the comparable sales                |           |  | 0          | %        | 
|General                 |  | $          | 698,475 |  |               | Income approach           |                          | Capitalization rate                 |           |  | 10.0       | %        | 
|Total                   |  | $          | 698,475 |  |               |                           |                          |                                     |           |  |            |          | 
|Foreclosed assets:      |  |            |         |  |               |                           |                          |                                     |           |  |            |          | 
|Commercial Real Estate: |  |            |         |  |               |                           |                          | Adjustments for differences between |           |  |            |          | 
|Construction            |  | $          | 269,100 |  |               | Sales comparison approach |                          | the comparable sales                |           |  | (45.0)
- 0 | %        | 
|Total                   |  | $          | 269,100 |  |               |                           |                          |                                     |           |  |            |          | 








| | 1 | For
purposes of this disclosure, only material Level 3 assets are disclosed. These assets are included in the total non-recurring
Level 3 financial assets reported in the preceding tables.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 34 -









COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | 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, 2013 Using |  
|                                                  |  | Carrying       |         |  |                             |  
|                                                  |  | Amount         |         |  | Level 1                     |  
|                                                  |  | (in thousands) |        
|Financial assets                                  |  |                |         |  |                             |  
|Cash and cash equivalents                         |  | $              | 10,140  |  |                             | $
|Loans held for sale                               |  |                | 0       |  |                             |  
|Loans, net (including impaired)                   |  |                | 125,677 |  |                             |  
|FHLB stock                                        |  |                | 451     |  |                             |  
|Accrued interest receivable                       |  |                | 485     |  |                             |  
|                                                  |  |                |         |  |                             |  
|Financial liabilities                             |  |                |         |  |                             |  
|Deposits                                          |  |                | 163,568 |  |                             |  
|Federal funds purchased and repurchase agreements |  |                | 8,972   |  |                             |  
|Subordinated debentures                           |  |                | 4,500   |  |                             |  
|Notes payable                                     |  |                | 1,280   |  |                             |  
|Accrued interest payable                          |  |                | 475     |  |                             |  



|                                                  |  |                |         |  | Fair Value Measurements    |  
|------------------------------------------------- |  | -------------- | ------- |  | -------------------------- | -
|                                                  |  |                |         |  | at December 31, 2012 Using |  
|                                                  |  | Carrying       |         |  |                            |  
|                                                  |  | Amount         |         |  | Level 1                    |  
|                                                  |  | (in thousands) |        
|Financial assets                                  |  |                |         |  |                            |  
|Cash and cash equivalents                         |  | $              | 20,297  |  |                            | $
|Loans held for sale                               |  |                | 6,041   |  |                            |  
|Loans, net (including impaired)                   |  |                | 122,447 |  |                            |  
|FHLB stock                                        |  |                | 451     |  |                            |  
|Accrued interest receivable                       |  |                | 592     |  |                            |  
|                                                  |  |                |         |  |                            |  
|Financial liabilities                             |  |                |         |  |                            |  
|Deposits                                          |  |                | 184,176 |  |                            |  
|Federal funds purchased and repurchase agreements |  |                | 10,190  |  |                            |  
|Subordinated debentures                           |  |                | 4,500   |  |                            |  
|Notes payable                                     |  |                | 5,000   |  |                            |  
|Accrued interest payable                          |  |                | 1,156   |  |                            |  



- 35 -









COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | 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) FHLB stock



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



(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) 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 1 classification. Fair values for fixed
rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.



(e) Federal funds purchased and repurchase agreements



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



(f) Subordinated debentures 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.



(g) Accrued interest receivable/payable



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



- 36 -









COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 13. | FAIR VALUE MEASUREMENTS (Continued)
| | --- | -----------------------------------



(h) Off-balance sheet instruments



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



14.	INCOME
TAXES



Accounting guidance related to income taxes requires
that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration
of all available evidence using a “more likely than not” standard.  In making such judgments, we consider both
positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future
operating results. Significant weight is given to evidence that can be objectively verified.  The previous losses dating back
to 2007 significantly restricted our ability under the accounting rules to rely on projections of future taxable income to support
the recovery of our deferred tax assets. Consequently, we determined it necessary to carry a valuation allowance against our entire
net deferred tax asset.



Although the Company recognized a profit in 2012
and the first three quarters of 2013, there must be a consistent trend of profitability in order to support the realization of
our deferred tax assets. The valuation allowance against our deferred tax assets may be reversed to income in future periods to
the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required.
 We will continue to monitor our deferred tax assets quarterly for changes affecting their realizability.



As a result of the large gain on the extinguishment
of debt, the Company recorded income tax expense from operations in the amount of $105,000. This amount represents projected taxable
earnings subject to alternative minimum taxation which may fluctuate throughout the year with changes in operating results. Additionally,
the gain on the extinguishment of debt may result in a reduction of net operating loss carry-forward tax attributes by an estimated
$5.3 million.  Even so, the Company’s estimated net operating loss carry-forward remaining would be over $6 million.



| | 15. | REGULATORY MATTERS
| | --- | ------------------



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



- 37 -









COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | REGULATORY MATTERS (Continued)
| | --- | ------------------------------



Prompt corrective action regulations provide five
classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If a bank is not well capitalized,
regulatory approval is required to accept brokered deposits. Subject to limited exceptions, a bank may not make a capital distribution
if, after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is subject to being closely
monitored by its principal federal regulator, its asset growth and expansion are restricted, acquisitions, new activities, new
branches, payment of dividends or management fees are prohibited and plans for capital restoration are required. In addition, further
specific types of restrictions may be imposed on the Bank at the discretion of the federal regulator. The Bank was in the undercapitalized
category at December 31, 2012. At March 31, 2013, through earnings and a $25,000 capital contribution from the Company, the Bank
achieved a total risk-based capital ratio of 8.04%; four basis points above the required level to be in the adequately capitalized
regulatory category. At September 30, 2013, the total risk-based capital ratio of the Bank had risen to 8.46% and the Bank continues
to be adequately capitalized.



Actual capital amounts and ratios for the Bank and
required capital amounts and ratios for the Bank to be adequately capitalized and to be at the level mandated by the Consent Order
at September 30, 2013 and December 31, 2012 were:



|                                                          |  |        |            |  |                   |  |      | Minimum Required |  |   | Minimum Required | 
|--------------------------------------------------------- |  | ------ | ---------- |  | ----------------- |  | ---- | ---------------- |  | - | ---------------- | 
|                                                          |  |        |            |  |                   |  |      | For Capital      |  |   | Under            | 
|                                                          |  | Actual |            |  | Adequacy Purposes |  |      | Consent Order    | 
|                                                          |  | Amount |            |  | Ratio             |  |      | Amount           |  |   | Ratio            | 
|                                                          |  |        |            |  |                   |  |      |                  |  |   |                  | 
|September 30, 2013                                        |  |        |            |  |                   |  |      |                  |  |   |                  | 
|Total Capital (Tier 1 and                                 |  |        |            |  |                   |  |      |                  |  |   |                  | 
|Tier 2) to risk-weighted assets of the Bank               |  | $      | 11,305,260 |  |                   |  | 8.46 | %                |  | $ | 10,688,585       | 
|Tier 1 (Core) Capital to risk-weighted assets of the Bank |  |        | 9,620,354  |  |                   |  | 7.20 |                  |  |   | 5,344,293        | 
|Tier 1 (Core) Capital to average assets of the Bank       |  |        | 9,620,354  |  |                   |  | 5.06 |                  |  |   | 7,602,012        | 



|                                                                      |  |        |            |  |                   |  |      | Minimum Required |  |   | Minimum Required | 
|--------------------------------------------------------------------- |  | ------ | ---------- |  | ----------------- |  | ---- | ---------------- |  | - | ---------------- | 
|                                                                      |  |        |            |  |                   |  |      | For Capital      |  |   | Under            | 
|                                                                      |  | Actual |            |  | Adequacy Purposes |  |      | Consent Order    | 
|                                                                      |  | Amount |            |  | Ratio             |  |      | Amount           |  |   | Ratio            | 
|                                                                      |  |        |            |  |                   |  |      |                  |  |   |                  | 
|December 31, 2012                                                     |  |        |            |  |                   |  |      |                  |  |   |                  | 
|Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank |  | $      | 10,760,348 |  |                   |  | 7.88 | %                |  | $ | 10,928,836       | 
|Tier 1 (Core) Capital to risk-weighted assets of the Bank             |  |        | 9,032,034  |  |                   |  | 6.61 |                  |  |   | 5,464,418        | 
|Tier 1 (Core) Capital to average assets of the Bank                   |  |        | 9,032,034  |  |                   |  | 4.53 |                  |  |   | 7,976,194        | 



- 38 -









COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | REGULATORY MATTERS (Continued)
| | --- | ------------------------------



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 September 30, 2013, only $1,684,905 was counted as Tier 2 capital and $1,185,131 was disallowed.
At December 31, 2012, $1,728,314 was counted as Tier 2 capital and $1,654,663 was disallowed.



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



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



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



There were several directives related to
loans contained in the Consent Order. All action plans  were submitted to the FDIC as required. As of September 11, 2013,
action plan submission is no longer required; however management continues to update plans as needed and works diligently to
mitigate and reduce associated credit risk.



Under the Consent Order, the Bank was required, within
90 days of September 2, 2010, to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum
of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was
not in compliance with this requirement at September 30, 2013 or either December 31, 2010, 2011 or 2012. Management continues to
explore options to raise the capital required for full compliance. At September 30, 2013, a capital contribution of $6,534,000
would have been needed to meet the capital ratios specified in the Consent Order.



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



- 39 -









COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



| | 15. | REGULATORY MATTERS (Continued)
| | --- | ------------------------------



As required by the Consent Order, the Bank adopted
a detailed liquidity plan on November 17, 2010 which provided for intended liquidity sources to meet the Bank’s assessed
liquidity needs over the time horizons of 6, 12 and 18 months. The liquidity plan was meant to address the stipulation in the Consent
Order that prohibited the Bank from accepting brokered deposits. To meet this restriction, the Bank’s liquidity plan entailed
replacing maturing brokered deposits with a combination of local deposits and internet based time deposits. Since the beginning
of 2010, the Bank has successfully used this strategy. There were no brokered deposits outstanding at September 30, 2013. The Bank
has been able to maintain sufficient liquidity for its required payments despite the restriction on issuing brokered deposits.



On
August 17, 2011, the Bank was issued a Supervisory Prompt Corrective Action Directive (the “Directive”) because of
its undercapitalized capital category at December 31, 2010, its failure to submit a capital restoration plan that satisfies the
requirements stipulated in the FDIC Rules and Regulations, and the continued deterioration of the Bank. The Directive stipulated
that the Bank be restored to an “adequately capitalized” capital category within 60 days of the issuance of the Directive.
During the 60 days, the board made efforts to secure funding and comply with the Directive but was not successful. Through several
quarters of earnings and a $25,000 capital contribution from the Company, the Bank reached an adequately capitalized regulatory
capital category at March 31, 2013. Management formally communicated achievement of the capital level stipulated in the Directive
to the FDIC through the submission of the quarterly Call Report and the required quarterly written communication, at the end of
April. Recent feedback received by management indicated that formal public release of the Directive is anticipated to occur upon
achievement of four consecutive quarters of adequate capitalization which is expected to occur by way of submitting 2013’s
fourth quarter Call Report to the FDIC on or about January 30, 2014, assuming that the capital ratios of the Bank remain stable
for the remaining quarter of 2013.



- 40 -







COMMUNITY SHORES BANK CORPORATION

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



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



The discussion below details the
financial results of the Company and its wholly owned subsidiaries, the Bank and Community Shores Financial Services, and the Bank’s
subsidiary, the Mortgage Company, and Berryfield, the Mortgage Company’s subsidiary, through September 30, 2013 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, 2013 to that at December 31, 2012. The part labeled Results of Operations discusses the three
and nine month periods ending September 30, 2013 as compared to the same periods of 2012. 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 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 Consent Order, Written Agreement
or Directive may result in further regulatory action that could have a material adverse effect on us and our shareholders, as well
as the Bank; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities
and Exchange Commission. These are representative of the Future Factors that could cause a difference between an ultimate actual
outcome and a preceding forward-looking statement. These risks and uncertainties should be considered when evaluating forward-looking
statements. Undue reliance should not be placed on such statements.



- 41 -







COMMUNITY SHORES BANK CORPORATION

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



The overall economic environment
remains challenging particularly from an interest rate standpoint, but other economic indicators appear to be stabilizing, both
nationally and locally. Unemployment in both Muskegon and Ottawa counties is stable but nonetheless remains at an elevated level.
At August 31, 2013, unemployment was 8.5% for Muskegon County and 6.5% for Ottawa County. Additionally, property values, although
low, are holding. Stable property values are likely to lead to more real estate sales and construction activity. However, in spite
of the improvements in the economic climate, the effects of the extended downturn had an adverse effect on the financial health
of the Bank. Poor earnings stemming primarily from deteriorating asset quality eroded the Bank’s capital and corresponding
regulatory capital ratios subjecting it to additional regulatory scrutiny.



On September 2, 2010, the Bank
entered into a Consent Order with the FDIC and the State of Michigan’s DIFS, its primary regulators. The Bank agreed to the
terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital,
asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect
and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and DIFS. Under
the Consent Order, the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital,
as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted
assets, at a minimum of 11%. The Bank was not able to meet these requirements within the required 90-day period and remained out
of compliance with the Consent Order as of September 30, 2013.



The lack of financial
soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of
directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s
primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement
provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as
a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment
representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated
debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any
debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement
of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the
Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries
of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors
(12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive
officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive
officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following
the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and
manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the
parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above;
as the Company currently has limited resources with which to assist the Bank in achieving the capital level required by
the Consent Order. For additional information regarding the capital levels see Note 15 to the Consolidated Financial Statements.
The Company’s main liquidity resource is its cash account balance which, as of September 30, 2013, was approximately $656,000
compared to $8,000 at year-end 2012. The increase in cash resulted from the issuance of senior debt during the first quarter of
2013.



- 42 -







COMMUNITY SHORES BANK CORPORATION

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



On January 3, 2011, the Company was not
able to repay its $5 million term loan owed to Fifth Third Bank; nor was the Company able to make the preceding ten quarterly
interest payments. The term loan was in default for 25 months. At December 31, 2012, the total amount owed Fifth Third was $5,763,000.
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, and settled its debt with Fifth Third for $500,000. In addition to the payment to
Fifth Third, the proceeds of the new senior debt will be used for interest carry, general operations and potential capital support
for the Bank. The note bears interest at 8.00% per annum until paid in full. Interest is payable quarterly in arrears. The note
matures on March 31, 2015. The note is secured by all of the issued and outstanding shares of the Bank as evidenced by a pledge
agreement between the Company and 1030 Norton LLC dated March 20, 2013. The reduced amount of borrowings is expected to decrease
interest expense by approximately $200,000 annually.



Settling the Fifth Third debt resulted in a gain
of approximately $5.3 million in the first quarter of 2013. As a result of this transaction, the Company was able to achieve positive
shareholders’ equity of approximately $4 million at March 31, 2013.



On August 17, 2011, the Bank was issued a Supervisory
Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category at December
31, 2010, its failure to submit a capital restoration plan that satisfies the requirements stipulated in the FDIC Rules and Regulations,
and the continued deterioration of the Bank. The Directive stipulated that the Bank be restored to an “adequately capitalized”
capital category within 60 days of the issuance of the Directive. During the 60 days, the board made efforts to secure funding
and comply with the Directive but was not successful. Through several quarters of earnings and a $25,000 capital contribution
from the Company, the Bank reached an adequately capitalized regulatory capital category at March 31, 2013. Management formally
communicated achievement of the capital level stipulated in the Directive to the FDIC through the submission of the quarterly
Call Report and the required quarterly written communication, at the end of April. Recent feedback received by management indicated
that formal public release of the Directive is anticipated to occur upon achievement of four consecutive quarters of adequate
capitalization which is expected to occur by way of submitting 2013’s fourth quarter Call Report to the FDIC on or about
January 30, 2014, assuming that the capital ratios of the Bank remain stable for the remaining quarter of 2013.



Regardless of meeting
the stipulations in the Directive, failure to comply with the provisions of the Consent Order or the Written Agreement may subject
the Bank to further regulatory enforcement action.



As of December 31, 2012, the Company’s extended
period of net losses, failure to repay its term loan at maturity (subsequently settled as noted above), timely compliance with
the higher capital ratios of the Directive and the Consent Order, and the provisions of the Written Agreement raised substantial
doubt about the Company’s ability to continue as a going concern and as a result of this doubt, our auditors added an explanatory
paragraph to their opinion on the Company’s December 31, 2012 consolidated financial statements expressing such doubt. These
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.



- 43 -







COMMUNITY SHORES BANK CORPORATION

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



CRITICAL ACCOUNTING POLICIES AND ESTIMATES: The
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as disclosures
found elsewhere in Form 10-Q are based upon the Company’s consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The allowance for loan losses, income taxes and foreclosed assets are deemed critical due to the required level of management
judgment and the use of estimates that are particularly susceptible to significant change in the near term.



Allowance for loan losses.The allowance for
loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated
loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans
and loan groupings, assessments of the impact of current and anticipated economic conditions on the portfolio and historical loss
experience. See the Financial Condition section of Management’s Discussion and Analysis and Notes 1 and 4 to the Company’s
consolidated financial statements for additional information.



Management believes the accounting estimate related
to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible
to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and anticipated
economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s
assets reported on the balance sheet as well as its net income. Management has discussed the development of this critical accounting
estimate with the Board of Directors and the Audit Committee.



Income Taxes.Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this
method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis
of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the
enactment date.



A tax position
is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax
benefit is recorded.



Net deferred
tax assets are recorded to the extent it is believed that they will more likely than not be realized. In making such a determination,
all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent financial operations. In the event it is determined that deferred income
tax assets are in excess of their realizable amount, an adjustment to the valuation allowance would be made which would increase
the provision for income taxes.



- 44 -







COMMUNITY SHORES BANK CORPORATION

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



In determining
the possible realization of deferred tax assets, future taxable income from operations exclusive of reversing temporary differences
and tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating
losses might otherwise expire is considered.



Interest and
penalties related to unrecognized tax benefits are recognized within the federal income tax expense (benefit) line in the accompanying
consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated
balance sheets.



Foreclosed Assets.Foreclosed assets are acquired
through loan foreclosure or other proceedings and are initially recorded at fair value less estimated selling costs when acquired,
establishing a new cost basis. During the time that foreclosed assets are waiting to be sold, there will be occasions that the
Bank will need to re-evaluate the individual market values of each asset. If there is evidence that the fair value has declined
since the last evaluation, the Bank will incur an impairment charge in order to properly reflect the estimated fair value of the
asset at the end of the reporting period. On a quarterly basis, the Bank’s Credit Department analyzes foreclosed asset values
to determine the level at which they should be held on our books.



FINANCIAL CONDITION



Total assets were $183.0 million at September 30,
2013 compared to $204.2 million at December 31, 2012. The $21.2 million decrease in assets stemmed mainly from the seasonal fluctuation
in the deposit balances of several of the Bank’s large public fund customers, the maturity of securities and a reduction
in the outstanding senior debt of the Company.



Cash and cash equivalents decreased by $10.2 million
in the first three quarters of 2013 and were $10.1 million at September 30, 2013. Cash and cash equivalents were $20.3 million
at year-end 2012. The Bank’s FRB balance decreased $10.5 million since year-end 2012 and was $6.8 million on September 30,
2013. The decrease in balance is driven largely by the seasonal deposit activities of several of the Bank’s public fund customers
and a reduction in time deposits. The FRB balance at September 30, 2013 was near management’s desired range of $7 to $10
million. The range indicated is enough to cover the typical liquidity needs of the Bank’s operations as well as provide a
surplus for unexpected events.



The balance held at the FRB on December 31, 2012
was purposely elevated because management had implemented its contingency funding plan to be prepared for customer deposit withdrawals
after the conclusion of the FDIC Transaction Account Guarantee Program (“TAG”) on December 31, 2012. In the months
following the TAG sunset, the Bank was able to reduce its additional FRB liquidity as there was very little deposit loss and the
additional liquidity negatively impacted the earnings of the Company.



The Bank’s security portfolio
was $33.5 million at September 30, 2013 and $41.5 million at December 31, 2012. Investment activity in the first nine months of
the year consisted of maturities, prepayments and calls totaling $7.2 million and market value adjustments of $(495,000). There
were no sales or purchases of portfolio securities in the first nine months of 2013.



- 45 -







COMMUNITY SHORES BANK CORPORATION

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



The securities portfolio is a key source of liquidity
for the Bank. Given the Bank’s weakened condition, off-balance-sheet borrowing facilities are significantly limited, forcing
the Bank to resort to on-balance-sheet sources. Consequently, it remains critical to maintain the unencumbered portion of the Bank’s
security portfolio at a level equal to or perhaps above its general internal policy, depending on assessed liquidity needs. The
level of unpledged securities is regularly monitored and needs are formally assessed on a monthly basis. Maintaining an adequate
level of pledgeable assets is one of the driving forces behind investment activity. Prior to the Consent Order, the Bank strived
to have between 10% and 20% of its investment portfolio unpledged. At September 30, 2013, 16% of the investment portfolio was unencumbered.
This outcome is down from the 35% unpledged position that existed on December 31, 2012 when the portfolio was intentionally inflated
to allow for additional customer pledging needs after the conclusion of the FDIC Transaction Account Guarantee Program.



The Bank believes that customer needs related to
the conclusion of TAG have been addressed and has chosen not to replace any of the securities that matured in the first nine months
of 2013.



At September 30, 2013, securities with a market value
of $28.1 million were pledged to public fund customers, FRB Automated Clearing House (“ACH”) debit activity and customer
repurchase agreements. On October 18, 2013, the FRB formally communicated the removal of pledging required for ACH debit activity.
Both loans and securities were pledged. Management anticipates release of the securities will increase the percent of unencumbered
securities by nearly 4%.



Investment portfolio quality has
received much scrutiny over the past several years. Recently, as a result of signs that global central banks may wind down monetary
stimulus, the U.S. 10-year Treasury yield rose drastically having a significant impact on the market value of the Bank’s
investment portfolio. The investment portfolio’s net unrealized gain was reduced by $495,000 since year-end 2012 decreasing
the unrealized gains on the entire portfolio to $107,000 at September 30, 2013. Included in this total are 16 securities with an
amortized cost of $11.0 million having an unrealized loss of $218,000. Two of the 16 had an unrealized loss longer than 12 months.



Although there has been a significant
change in the market value of the portfolio overall, none of the unrealized losses are expected to impact earnings. At September
30, 2013, the Bank conducted its standard review for other-than-temporary impairment (“OTTI”). The unrealized losses
referenced above were not determined to be other-than-temporary given the fact that they are all fully guaranteed by the U.S. government
and the Bank 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 portfolio will continue to be reviewed for impairment in accordance with the Bank’s
investment policy.



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, 2013.



Loans held for sale activity during
the first nine months of 2013 included $7.3 million of loan originations, $5.9 million of loans transferred to the held for investment
portfolio and $7.6 million of loan sales. The associated gain on the loan sales was $167,000. The loans that were transferred to
the held for investment portfolio consisted of Small Business Administration (“SBA”) and United States Department of
Agriculture (“USDA”) loans. The transfer was based on management’s re-evaluation of the Bank’s intent to
sell these loans in the short-term.



- 46 -







COMMUNITY SHORES BANK CORPORATION

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



Total loans (held for investment)
were $128.5 million at September 30, 2013 and $125.8 million at December 31, 2012. The $2.7 million increase since year-end 2012
was brought about mainly by the $5.9 million transferred from the held for sale portfolio offset by net customer repayments and
transfers to foreclosed assets.



Details of the activity since year-end
2012 was an increase of $3.7 million to the commercial loan portfolio; an increase of $1.9 million to the commercial real estate
portfolio and a decrease of $2.9 million to the consumer and residential portfolios. With the increase in commercial loans outstanding,
the concentration changed slightly. At September 30, 2013, the concentration of commercial and commercial real estate loans was
79%; up from a level of 77% at year-end 2012. The wholesale focus of the Bank has remained since opening in 1999. Unfortunately,
the sustained economic weakness both nationally and locally from 2008 through 2011 affected many borrowers but particularly the
borrowers in these two segments. During that time, the credit deterioration of customers in those segments, primarily commercial
real estate, increased the overall risk profile of the Bank. As a result, the Bank incurred significant expenses to address the
assessed risk which negatively impacted the Bank’s earnings and capital.



Management believes that the economy in the local
market has stabilized substantially over the past several quarters. Loan credit quality has improved. Even so, the Bank remains
diligent about monitoring its loan portfolio and will continue its efforts to develop and educate lenders and credit staff, and
to invest time into the design and overall strengthening of the Company’s credit risk assessment processes.



Simply put, credit risk is the risk of borrower nonpayment
typically on loans although it can be applicable to the investment portfolio as well. In both cases, avoiding portfolio concentrations
in any one type of credit or in a specific industry helps to decrease risk; however, the risk of nonpayment for any reason exists
with respect to all loans and investments. The Bank 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 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.
Management reviews and analyzes the loan portfolio on a regular basis for the purpose of estimating probable incurred credit losses.



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



- 47 -







COMMUNITY SHORES BANK CORPORATION

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



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



At September 30, 2013, the allowance for loan
losses totaled $2.9 million. At year-end 2012, the allowance for loan losses was $3.4 million. The reduction in the allowance
is the result of net charge-offs of $513,000 recorded in the first nine months of 2013. The ratio of allowance to gross loans
outstanding decreased to a level of 2.23% at September 30, 2013 compared to 2.69% at year-end 2012. Twenty percent of the
loan charge-offs occurring in the first three quarters of 2013 held specific allocations at year-end 2012.



The allocation at each period end was as follows:



|                         |  | September 30, 2013 |           |  | December 31, 2012 | 
|------------------------ |  | ------------------ | --------- |  | ----------------- | 
|                         |  |                    |           |  | Percent of        | 
|                         |  |                    |           |  | Loans in Each     | 
|Balance at End of Period |  |                    |           |  | Category to       | 
|Applicable to:           |  | Amount             |           |  | Total Loans       | 
|Commercial               |  | $                  | 382,722   |  |                   | 
|Commercial Real Estate   |  |                    | 1,814,880 |  |                   | 
|Consumer                 |  |                    | 411,679   |  |                   | 
|Residential              |  |                    | 214,522   |  |                   | 
|Unallocated              |  |                    | 46,233    |  |                   | 
|Total                    |  | $                  | 2,870,036 |  |                   | 



The general component of the allowance for loan losses
as a percentage of non-specifically identified loans was 1.04% at September 30, 2013, a decrease of 33 basis points from year-end
2012. At year-end 2012, the general component of the allowance for loan losses was 1.37% of total non-specifically identified loans.
There are $46,000 of unallocated reserves in the allowance for loan losses stemming mostly from decreases to the Bank’s 36-month
historical loss calculation. If the unallocated reserves were added to the general component of the allowance for loan losses,
the ratio would be 1.08%. Management believes that the trend of the general component of the allowance for loan losses and the
increase in the unallocated reserves is in line with stabilization and strengthening of the local economy, local unemployment and
the overall improvement in the credit quality of the loan portfolio.



At September 30, 2013, the allowance contained $1,574,000
in specific allocations for impaired loans whereas at December 31, 2012 there was $1,810,000 specifically allocated. There was
$9.3 million of recorded investment on impaired loans at September 30, 2013, compared to $11.7 million at year-end 2012. At September
30, 2013, the recorded investment on impaired loans requiring no reserves was $4.1 million, a decrease of $1.0 million since year-end
2012. In the first quarter of 2013, there was a $1.4 million relationship that was removed from TDR status. The specific allocation
associated with the loan was $34,000 at year-end 2012. Furthermore, $614,000 of impaired loans were moved to foreclosed assets
in the first nine months of 2013. There were specific allocations on these loans of $58,000 at year-end 2012.



- 48 -







COMMUNITY SHORES BANK CORPORATION

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



At September 30, 2013, 44% of specifically identified
loans required no reserves; the same percentage at year-end 2012. In many cases, management approves further charge-offs after
the time of initial impairment. The charge-offs reduce principal to the current value of assigned collateral or expected repayment,
therefore no specific reserve is required on these loans.



Recorded investment on specifically identified loans
requiring reserves was $5.2 million at September 30, 2013 compared to $6.6 million at year-end 2012.



Another factor considered in the
assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. From year-end 2012
to September 30, 2013, the recorded investment in accruing past due and non-accrual loans decreased by $846,000. This was evidenced
by a $158,000 decrease in the recorded investment in past due loans and a $688,000 decrease in the recorded investment in non-accrual
loans in the first nine months of 2013.



The recorded investment of accruing
loans past due 30-59 days was $98,000 at September 30, 2013; a decrease of $33,000 since December 31, 2012. There were two loans
and one credit card balance past due 30-59 days at September 30, 2013.



There was a $5,000 recorded investment in accruing
loans past due 60-89 days at September 30, 2013. At year-end 2012, the balance of these loans was $130,000.



There were no accruing loans with a recorded investment
past due 90 days and greater at either September 30, 2013 or year-end 2012.



The Bank’s delinquency has been reduced compared
to prior periods and compares favorably to typical industry averages. The credit review process will continue to be stringent;
however, it is possible that past dues could fluctuate in future periods.



The recorded investment of non-accrual loans totaled
$3.2 million at September 30, 2013 which is a reduction since year-end 2012 when the recorded investment of non-accrual loans totaled
$3.9 million. The majority of the non-accrual loans are secured by developed real estate, only 1% of the total is secured by undeveloped
real estate. At September 30, 2013, there were specific allocations of $1.2 million in the allowance for any estimated collateral
deficiency on non-accrual loans.



Loan charge-off activity in the third quarter stemmed
mainly from two customers. Overall net charge-offs for the third quarter of 2013 were $417,000 and were $513,000 for the first
nine months of 2013. The corresponding ratio of net charge-offs to average loans for the third quarter of 2013 was 1.30% while
the ratio of net charge-offs to average loans was 0.52% for the first nine months of 2013. Management does not think the recent
charge-offs are indicative of changes in the local economy but rather unfortunate circumstances particular to each relationship.



The net charge-offs for the third quarter of 2012
were $718,000 and $1.8 million for the first three quarters of 2012. The resulting ratio of net charge-offs to average loans for
the third quarter of 2012 was 2.15% and 1.68% for the first nine months of the same year.



- 49 -







COMMUNITY SHORES BANK CORPORATION

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



In the first quarter of 2012, a large commercial
real estate credit was restructured in a modification that is commonly referred to as an A-B note structure. In these types of
modifications, a detailed analysis of the borrower’s financial condition is performed and the total debt is separated into
two notes. The first note (“note A”) is underwritten to be supported by current cash flows and collateral and the second
note (“note B”) is made for the remaining debt. Note B is immediately charged-off after closing with any recoveries
occurring only after note A is completely repaid. Sixty-six percent of the charge-offs recorded in the first quarter of 2012 was
the note B of a commercial real estate restructuring. Aside from that single transaction, normal recurring charge offs would have
been less than 1% of total loans during the first three months of 2012.



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, the Company also seeks to mitigate interest rate risk by balancing the rate
sensitivity of the portfolio and avoiding extension risk1.



The loan maturities and rate sensitivity of the loan
portfolio at September 30, 2013 are set forth below:



|                        |  | Within       |           |  | Three to      |   |            | One to     |  |   | After      |  |  |       |           
|----------------------- |  | ------------ | --------- |  | ------------- | - | ---------- | ---------- |  | - | ---------- |  |  | ----- | ----------
|                        |  | Three Months |           |  | Twelve Months |   |            | Five Years |  |   | Five Years |  |  | Total |           
|Commercial              |  | $            | 3,974,684 |  |               | $ | 17,252,348 |            |  | $ | 16,235,243 |  |  | $     | 6,076,485 
|Commercial Real Estate: |  |              |           |  |               |   |            |            |  |   |            |  |  |       |           
|General                 |  |              | 2,742,903 |  |               |   | 8,528,077  |            |  |   | 38,290,520 |  |  |       | 6,841,159 
|Construction            |  |              | 1,442,164 |  |               |   | 8,910      |            |  |   | 643,914    |  |  |       | 0         
|Consumer:               |  |              |           |  |               |   |            |            |  |   |            |  |  |       |           
|Lines of credit         |  |              | 779,237   |  |               |   | 769,944    |            |  |   | 2,392,032  |  |  |       | 4,350,562 
|Other                   |  |              | 49,020    |  |               |   | 161,388    |            |  |   | 921,450    |  |  |       | 537,569   
|Credit card             |  |              | 53,348    |  |               |   | 165,085    |            |  |   | 252,403    |  |  |       | 0         
|Residential             |  |              | 144,480   |  |               |   | 535,757    |            |  |   | 0          |  |  |       | 15,398,571
|                        |  | $            | 9,185,836 |  |               | $ | 27,421,509 |            |  | $ | 58,735,562 |  |  | $     | 33,204,346
|Loans at fixed rates    |  | $            | 4,738,124 |  |               | $ | 15,086,633 |            |  | $ | 44,335,922 |  |  | $     | 23,888,946
|Loans at variable rates |  |              | 4,447,712 |  |               |   | 12,334,876 |            |  |   | 14,399,640 |  |  |       | 9,315,400 
|                        |  | $            | 9,185,836 |  |               | $ | 27,421,509 |            |  | $ | 58,735,562 |  |  | $     | 33,204,346



At September 30, 2013, there were 68% of the loan
balances carrying a fixed rate and 32% a floating rate. This concentration of fixed rate loans is down from a level of 75% at September
30, 2012. Prior to 2008, the Bank’s mix of fixed and floating rate loans had been relatively evenly divided. During the economic
downturn the loan portfolio mix became more heavily weighted with fixed rate loans. The movement in the third quarter of 2013 towards
a balanced portfolio is management’s preference. However, a majority of the composition change is not controllable. Shifts
can occur as a result of the types of loans that have been repaid and changes in customer preference at the time of renewal. Restoring
the loan portfolio to a balanced position between fixed and floating loans will be important since future rate movements are likely
to trend upward.












| | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 50 -







COMMUNITY SHORES BANK CORPORATION

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



The maturity distribution of the loan portfolio has
lengthened over the last several years but still remains at a level that is within the parameters determined to be acceptable by
management. Contributing to the change in distribution is the increase in the mortgage loan portfolio. Typically management strives
to retain only 10-15% of residential mortgages originated because of the longer contractual terms generally associated with mortgage
products. For 2013, the percent retained is averaging 19% due to a variety of conditions related to rates, regulations and investor
preferences.



At September 30, 2013, approximately 26% of the entire
loan portfolio had a contractual maturity longer than five years. 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. A majority of the loans in the greater than five year contractual maturity 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.



Foreclosed assets were $2.7 million at September
30, 2013 which was a decrease of $121,000 since December 31, 2012. These assets consist of relinquished properties through the
collection process which were previously customer collateral supporting various loans. At September 30, 2013 there were 25 real
estate holdings and at December 31, 2012 there were 24 real estate holdings. Foreclosed asset activity in the first nine months
of 2013 consisted of twelve lot and eight property sales and nine additional properties acquired through the foreclosure process.



Deposit balances were $163.6 million at September
30, 2013 down from $184.2 million at December 31, 2012. The net decrease of $20.6 million stemmed from non-interest bearing balances
declining $8.6 million and interest bearing balances decreasing $12.0 million in the first nine months of 2013.



Non-interest bearing balances were $31.7 million
on September 30, 2013 and $40.3 million on December 31, 2012. The four largest public fund customers have decreased their balances
by $5.1 million since year-end 2012. The level of deposits at September 30, 2013 is in line with the seasonality of these customers.
One non-interest bearing customer wired $2.2 million to another financial institution in January to diversify their deposits after
the conclusion of TAG.



Total interest bearing deposits are made up of interest
bearing demand deposits, money market and savings accounts and time deposits. Total interest bearing deposits were $131.9 million
on September 30, 2013 down from $143.9 million on December 31, 2012. The $12.0 million decrease in the first three quarters of
the year was the result of interest bearing demand deposits and money market accounts together rising $5.8 million and the time
deposit portfolio declining $17.0 million. Savings accounts declined $861,000 in the first nine months of 2013. The time deposit
portfolio was deliberately contracted in an effort to reduce excess liquidity at the FRB.



Repurchase agreement balances were
$9.0 million at September 30, 2013 and $10.2 million at December 31, 2012; a decrease of $1.2 million. The decrease between the
two period ends was primarily the result of one customer decreasing its balance since year-end 2012.



- 51 -







COMMUNITY SHORES BANK CORPORATION

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



A repurchase agreement is treated
like a short-term borrowing of the Bank. To secure the short-term borrowing (repurchase agreement), balances held by customers
are collateralized by high quality government securities held in a sub-account within the Bank’s security portfolio. Some
customers with investable dollars exceeding the FDIC limits are utilizing this account type because they are seeking higher interest
rates while mitigating their risk.



The Company had a $5.0 million
term loan with Fifth Third secured by the common stock of the Bank that was in default at year-end 2012. In addition to the outstanding
principal due, there was accrued interest of $763,000 at December 31, 2012. On March 20, 2013, the Company, with approval from
the FRB, borrowed $1,280,000 from a group of investors and settled its debt in full with Fifth Third for $500,000. At closing,
Fifth Third released its secured interest in the common stock of the Bank. The new senior debt bears interest at a fixed rate of
8.00% per annum and is payable quarterly, in arrears. The new note matures on March 31, 2015 and is secured by a pledge of 100%
of the common stock of the Bank owned by the Company. The extinguishment of debt resulted in a gain of $5.3 million.



Shareholders’ equity was
$3.8 million on September 30, 2013compared to $(1.2) million on December 31, 2012. The net increase of $5.0 million was made up
of net income recorded in the first three quarters of 2013, largely attributable to settlement of our term loan with Fifth Third,
and partially offset by decreases in accumulated other comprehensive income (security market value adjustments). The book value
per share was $2.57 at September 30, 2013.



The Bank’s capital ratios
have risen since year-end 2012. At September 30, 2013, the Bank’s total risk-based capital ratio was 8.46% and its tier one
to average assets ratio was 5.06%. The Bank’s total risk-based capital ratio at December 31, 2012 was 7.88%. Its tier one
to average assets ratio was 4.53% at year-end 2012. The total risk-based capital ratio improved because of the Bank’s earnings
recorded in the first three quarters of 2013 along with a capital contribution of $25,000 from the Company. Achieving a total risk-based
capital ratio above 8.00% qualifies the Bank to be considered adequately capitalized according to prompt corrective action regulation
administered by federal banking agencies. The Bank was considered under-capitalized at year-end 2012.



Under the Consent Order, the Bank
is required to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and
its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Consent Order capital
requirements were effective beginning with the December 31, 2010 capital reporting period. The Bank was not in compliance with
required capital ratios at the December 2010 capital reporting period and remains out of compliance at September 30, 2013. In order
to attain the level of capital required by the Consent Order, the Bank would have needed additional capital of $6,534,000 on September
30, 2013 based on its asset mix and size. This is less than the amount that would have been needed on December 31, 2012 which was
$7,917,000.



The Directive, issued by the
FDIC to the Bank on August 17, 2011, stipulated that the Bank be restored to an “adequately capitalized” capital
category by October 17, 2011. Although the board made efforts to secure funding and comply with the Directive, they were not
successful. As such, the Bank was not in compliance with the Directive by the required date. The Bank reached an adequately
capitalized regulatory capital category at March 31, 2013. Management formally communicated achievement of the capital level
stipulated in the Directive to the FDIC through the submission of the quarterly Call Report and the required quarterly
written communication, at the end of April. Recent feedback received by management indicated that formal public release of
the Directive is anticipated to occur upon achievement of four consecutive quarters of adequate capitalization, which is
expected to occur by way of submitting 2013’s fourth quarter



- 52 -







COMMUNITY SHORES BANK CORPORATION

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



Call Report to the FDIC on or about
January 30, 2014, assuming that the capital ratios of the Bank remain stable for the remaining quarter of 2013.



RESULTS OF OPERATIONS



Net income recorded for the first nine months of
2013 was $5.5 million. Net income recorded for the similar period in 2012 was $259,000. The improvement of $5.2 million between
the first three quarters of 2013 and the first three quarters of 2012 stemmed mainly from a $5.3 million gain on debt extinguishment.
The corresponding basic and diluted earnings per share for the first nine months of 2013 was $3.75. The basic and diluted earnings
per share for the first nine months of 2012 was $0.18.



The net income for the third quarter of 2013 was
$124,000, which was $122,000 more than net income of $2,000 recorded for the third quarter of 2012. The corresponding basic and
diluted earnings per share for the third quarter of 2013 was $0.08. The basic and diluted earnings per share for the third quarter
of 2012 was $0.00.



For the
first nine months of 2013, the annualized return on the Company’s average total assets was 3.74% compared to 0.16% for
the first nine months of 2012. For the third quarter of 2013, the annualized return on the Company’s average total
assets was 0.26%. The Company’s earnings for the third quarter of 2012 were just above breakeven so the annualized
return on average assets was 0.00%.



The Company’s
average shareholders’ equity became positive in the first quarter of 2013 after recording the $5.3 million debt extinguishment
gain on March 20, 2013. For the first nine months of 2013, the annualized return on shareholders’ equity was 296.6%. The
Company’s average shareholders’ equity for the third three month period of 2013 was 13.57%. The ratio was not meaningful
for the comparable periods in 2012 because shareholders’ equity was negative.



- 53 -







COMMUNITY SHORES BANK CORPORATION

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



A significant
component of the Company’s revenue is its net interest income. The Company’s net interest income and net interest margin
were both lower for the first nine months of 2013 compared to the similar period in 2012. 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, |            
|----------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                        |  | 2013                            |            
|                                                                        |  | Average                         |            
|                                                                        |  | Balance                         |            
|Assets                                                                  |  |                                 |            
|Federal funds sold and interest- bearing deposits with banks            |  | $                               | 14,785,764 
|Securities                                                              |  |                                 | 37,751,706 
|Loans (including held for sale and non accrual)                         |  |                                 | 130,419,135
|                                                                        |  |                                 | 182,956,605
|Other assets                                                            |  |                                 | 13,081,968 
|                                                                        |  | $                               | 196,038,573
|Liabilities and Shareholders’ Equity                                    |  |                                 |            
|Interest-bearing deposits                                               |  | $                               | 141,193,801
|Repurchase agreements                                                   |  |                                 | 9,996,881  
|Subordinated debentures and notes payable                               |  |                                 | 5,414,286  
|                                                                        |  |                                 | 156,604,968
|Non-interest-bearing deposits                                           |  |                                 | 34,499,333 
|Other liabilities                                                       |  |                                 | 2,460,712  
|Shareholders’ Equity                                                    |  |                                 | 2,473,560  
|                                                                        |  | $                               | 196,038,573
|Net interest income                                                     |  |                                 |            
|Net interest spread on earning assets                                   |  |                                 |            
|Net interest margin on earning assets                                   |  |                                 |            
|Average interest-earning assets to average interest-bearing liabilities |  |                                 |            



The net interest spread on average earning assets
decreased 3 basis points to 3.37% in the past twelve months. The net interest margin decreased by 6 basis points from 3.55% for
the first nine months of 2012 to 3.49% for the first nine months of 2013. Net interest income for the first three quarters of 2013
was $4.8 million compared to $5.3 million for the same three quarters in 2012. During the twelve month period from September 30,
2012 to September 30, 2013, average earning assets decreased by $15.2 million; 65% of the decrease occurred in the loan portfolio
which is the highest yielding earning asset. In addition to fewer earning assets, there was a decrease in the overall yield on
those assets.



- 54 -







COMMUNITY SHORES BANK CORPORATION

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



The average rate earned on interest earning assets
was 4.18% for the nine month period ending September 30, 2013 compared to 4.54% for the same period in 2012. In addition to the
average loan portfolio shrinking by $9.9 million over the last twelve months, the yield declined 48 basis points in that period.
Management attributes this to improved economic conditions. As the economy improves, businesses become healthier which strengthens
their financial condition and allows them more banking options; including using excess liquidity to repay loans or requesting lower
borrowing rates. Since the Bank’s internal prime lending rate is 175 basis points above the Wall Street Journal Prime Lending
Rate, there is substantial competitive pressure to revisit pricing on those customers that have recovered and are experiencing
an improved financial condition. The Bank carefully considers every request and when the request does not adequately reflect borrower
risk according to the Bank’s lending standards, the rate will not be lowered fully to match competition. Sometimes this results
in businesses pursuing financing at other financial institutions.



Also contributing to the decreased yield on average
earning assets is the marked decrease in the yield earned on the investment portfolio. Throughout the last year, as securities
were called or matured, they were either not replaced or replaced with securities that bear lower rates reflective of the current
environment.



A portion of the decrease to the overall yield on
interest earning assets was offset by rate reductions on the funding side. Management spends a significant amount of time managing
the continued improvement in the cost of funds, especially in light of the restrictions placed by the Consent Order. Interest expense
incurred on rate-bearing liabilities decreased by $526,000 and the average rate paid improved by 33 basis points when comparing
the first three quarters of 2013 to that of the similar period in 2012.



The yield paid on interest bearing deposits declined
23 basis points primarily due to a 20 basis point reduction in the average rate paid on the time deposit portfolio over the last
twelve months. The time deposit portfolio makes up roughly 61% of interest bearing deposits so changes to rates paid on this portfolio
have a substantial impact on the blended rate paid on interest bearing deposits. There are limited opportunities to further improve
this portfolio since the rate environment has remained low for such an extended period of time. Changing the mix of interest bearing
deposits to be less heavily weighted towards time deposits will be beneficial to earnings and is an ongoing goal of management.



The Bank’s customer repurchase agreement balance
remained essentially the same in both nine month periods; however, the average rate paid declined by 17 basis points. Rates have
remained substantially the same, however, the product has tiered pricing which means that the mix of customer balances was different
when comparing the nine month periods of 2012 and 2013, resulting in a lower overall yield.



Finally, the
Company’s average rate paid on notes payable and subordinated debentures decreased by 98 basis points between the first three
quarters of 2013 and the first three quarters of 2012. Decreases to the average rate on subordinated debentures and notes payable
is directly related to the settlement with Fifth Third that occurred late in the first quarter of 2013. As a result, there was
a reduction in interest bearing liabilities of $4.1 million. Although the new senior debt bears interest at a rate 2% higher than
the former Fifth Third note payable, the increase in the average rate paid is offset by a much smaller balance outstanding. The
Company’s subordinated debt carried an average rate of 2.34% in the first nine months of 2013 which is roughly 21 basis points
lower than an average rate of 2.55% paid for the same period in 2012.



- 55 -







COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’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, 2013 and 2012 is in the table below.



|                                                                        |  | Three Months ended September 30, |            
|----------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                        |  | 2013                             |            
|                                                                        |  | Average                          |            
|                                                                        |  | Balance                          |            
|Assets                                                                  |  |                                  |            
|Federal funds sold and interest- bearing deposits with banks            |  | $                                | 13,570,152 
|Securities                                                              |  |                                  | 35,038,321 
|Loans (including held for sale and non accrual)                         |  |                                  | 128,391,263
|                                                                        |  |                                  | 176,999,736
|Other assets                                                            |  |                                  | 13,070,572 
|                                                                        |  | $                                | 190,070,308
|Liabilities and Shareholders’ Equity                                    |  |                                  |            
|Interest-bearing deposits                                               |  | $                                | 136,331,382
|Repurchase agreements                                                   |  |                                  | 9,905,021  
|Subordinated debentures and notes payable                               |  |                                  | 5,780,000  
|                                                                        |  |                                  | 152,016,403
|Non-interest-bearing deposits                                           |  |                                  | 33,450,338 
|Other liabilities                                                       |  |                                  | 948,697    
|Shareholders’ Equity                                                    |  |                                  | 3,654,870  
|                                                                        |  | $                                | 190,070,308
|Net interest income                                                     |  |                                  |            
|Net interest spread on earning assets                                   |  |                                  |            
|Net interest margin on earning assets                                   |  |                                  |            
|Average interest-earning assets to average interest-bearing liabilities |  |                                  |            



Although net interest income was $127,000 less between
the third quarter of 2013 and the similar period in 2012, the net interest spread on average earning assets improved by 14 basis
points and was 3.37% compared to a spread of 3.23% for the third quarter of 2012. The net interest margin for the third quarter
of 2013 was 3.48% or 8 basis points higher than the 3.40% shown for the third quarter of 2012. The improvement was achieved because
the decline in yield on earning assets was more than offset by the reduction in yield paid on interest-bearing liabilities.



The average rate earned on interest earning assets
was 4.15% for the three month period ending September 30, 2013, compared to 4.33% for the same period in 2012. The two biggest
earning asset categories, securities and loans, each had a decline in yield when comparing the third quarter of 2013 to the similar
period of 2012. A decline in the interest-bearing balances held at other banks positively impacted the overall average rate earned
on earning assets. Due to the low rate earned, reductions to the concentration of this category help dilute rate declines in other
categories. The concentration of this earning asset category was 8% for the third quarter of 2013 and 13% for the third quarter
of 2012.



- 56 -







COMMUNITY SHORES BANK CORPORATION

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



The decline in the yield on the securities portfolio
was 33 basis points when comparing the outcome for the third quarter of 2013 to the third quarter of 2012. The result is directly
related to rate differences between maturing securities and replacement securities, the same situation that was described earlier.



Additionally, the average rate earned on the loan
portfolio, the Company’s largest earning asset category, was 5.30% for the third quarter of 2013. The average rate earned
on the loan portfolio was 5.82% for the third quarter of 2012. The difference between the two periods was 52 basis points. A portion
of the yield decrease was due to lower rates given to existing customers at the time of renewal. The healthier business climate
allows some customers to qualify for lower rates and the Bank is challenged to remain on par with competition or risk losing the
borrowing relationship.



Decreases to the overall yield on interest earning
assets were more than offset by rate reductions on the funding side. Since the third quarter of 2012, the cost of funds improved
32 basis points. The main contributing factor was a 23 basis point improvement in the rate paid on interest bearing deposits when
comparing the third quarter of 2013 to that of the similar period of 2012; the entire improvement was linked to a 23 basis point
reduction in the average rate paid on the time deposit portfolio between the two periods.



Additionally,
there were improvements in the average rate paid on repurchase agreements, subordinated debentures and notes payable between the
third quarter of 2013 and the third quarter of 2012. The average rate paid on repurchase agreements was 17 basis points less. The
average rate paid on subordinated debentures and notes payable was 3.87% for the third quarter of 2013; a 68 basis point decrease
stemming from the new blended rate of the Company’s debt.



While the Company experienced improvements to its
cost of funds that were able to offset the decline in the yield on average earning assets in the third quarter of 2013, management
believes it is unlikely that this trend will continue. If the trend does not continue, the Company’s net interest income
and net interest margin will likely be negatively impacted.



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.



- 57 -







COMMUNITY SHORES BANK CORPORATION

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



Details of the repricing gap at September 30, 2013
were:



|                                                          |  | Interest Rate Sensitivity Period |            
|--------------------------------------------------------- |  | -------------------------------- | -----------
|                                                          |  | Within                           |            
|                                                          |  | Three                            |            
|                                                          |  | Months                           |            
|Earning assets                                            |  |                                  |            
|Interest-bearing deposits in other financial institutions |  | $                                | 6,895,413  
|Securities (including FHLB stock)                         |  |                                  | 3,914,015  
|Loans held for sale                                       |  |                                  | 0          
|Loans                                                     |  |                                  | 52,271,942 
|                                                          |  |                                  | 63,081,370 
|Interest-bearing liabilities                              |  |                                  |            
|Savings and checking                                      |  |                                  | 55,420,561 
|Time deposits <$100,000                                   |  |                                  | 9,073,336  
|Time deposits >$100,000                                   |  |                                  | 1,146,917  
|Repurchase agreements and Federal funds purchased         |  |                                  | 8,972,374  
|Notes payable and other borrowings                        |  |                                  | 4,500,000  
|                                                          |  |                                  | 79,113,188 
|Net asset (liability) repricing gap                       |  | $                                | (16,031,818
|Cumulative net asset (liability) repricing gap            |  | $                                | (16,031,818



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 liabilities have an opportunity to reprice during this period. If the Company’s gap position remains negative
when interest rates begin to rise, 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, it does not address rate
concessions that may be granted to retain a loan outside of its scheduled maturity.



There was no provision for loan losses for the first
nine months of 2013 and just $75,000 for the first three quarters of 2012. Neither the third quarter of 2013 nor the third quarter
of 2012 had a provision for loan losses. The provision expense is associated with changes in historical loss calculations, economic
condition (local and national) as well as delinquency, charge offs 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.



- 58 -







COMMUNITY SHORES BANK CORPORATION

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



Non-interest income recorded in the first nine months
of 2013 was $6.6 million compared to $1.3 million recorded for the similar period in 2012. The first nine months of 2013 included
a gain of $5.3 million associated with the settlement of debt with Fifth Third. On March 20, 2013, the Company, with approval from
the FRB, borrowed $1,280,000 from a group of investors and settled its debt in full with Fifth Third for $500,000. At closing,
the balance owed to Fifth Third was approximately $5.8 million. Additionally, foreclosed asset sales netted the Company $181,000
in gains during the first nine months of 2013 while the foreclosed asset sales for the same period in 2012 resulted in a net loss
of $40,000. Gains on sale of capital assets were $207,000 more for the first nine months of 2012 due to a $208,000 gain recorded
when the Bank sold land that was originally acquired to build a fifth banking branch. Sales of premises and equipment were minimal
in the first nine months of 2013.



Non-interest income for the third
quarter of 2013 was $491,000 compared to $419,000 of non-interest income in the third quarter of 2012. As a result of a rise in
Treasury rates during the previous months, residential lending activity has slowed substantially. Last year, gains on residential
loan sales were $106,000 in the three month period ending September 30. For the similar period in 2013, gains on residential loan
sales were $40,000. However, there was $134,000 more gains on foreclosed asset sales when comparing the third quarter of 2013 to
the similar period in 2012. Other non-interest income increased $18,000 over 2012’s third quarter. Two areas included in
this category are rental income received on foreclosed assets and debit card fee income. Rental income received in the third quarter
of 2013 was $9,000 more than the third quarter of 2012. Debit card fee income was $10,000 more in the third quarter of 2013 compared
to the similar quarter in 2012. The Bank has promoted its debit card reward program and has encouraged customers to participate
over the past several quarters.



Non-interest expenses for the first three quarters
of 2013 were $5.7 million. Non-interest expenses for the first three quarters of 2012 were $6.2 million. Decreases to foreclosed
asset impairment, FDIC insurance and collection expenses were the main factors for the difference between the two operating periods.



Non-interest expenses were $1.9 million for the third
quarter of 2013 compared to $2.1 million for the similar period in 2012. The decline of $177,000 was attributable to the same three
expenses mentioned above-foreclosed asset impairments, FDIC insurance and collection expenses.



There were foreclosed asset impairment charges of
$142,000 in the first nine months of 2013, compared to $277,000 in the first nine months of 2012. For the third quarter of 2013,
this expense was $33,000 or $59,000 less than the third quarter of 2012. During the time that foreclosed real properties are waiting
to be sold, there will be occasions that the Bank will need to reevaluate the individual market value of each property. If there
is evidence that the fair value has declined since the last evaluation, the Bank will incur an impairment charge in order to properly
reflect the fair value of the asset at the end of the reporting period. Although impairment charges continue to occur, they are
lower for two reasons; the Bank’s portfolio of foreclosed real property is declining and the values of the properties within
the portfolio appear to be stabilizing. At September 30, 2013, the Bank held 25 foreclosed assets valued at a total of $2.7 million.



Beginning with the March 31, 2013 regulatory capital
reporting period, the Bank achieved an adequately capitalized regulatory capital status. The improvement in the Bank’s regulatory
capital ratio translated into an FDIC premium reduction of 30% or more per quarter. For the entire year of 2012, the Bank was considered
under-capitalized. FDIC insurance expenses were $331,000 for the first nine months of 2013 compared to $541,000 for the first three
quarters of 2012; a reduction of $210,000. For the third quarter of 2013, FDIC insurance expenses were $107,000. FDIC premiums
were $179,000 in the third quarter of 2012.



- 59 -







COMMUNITY SHORES BANK CORPORATION

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



Other non-interest expenses were $949,000 for the
first three quarters of 2013 and $1.1 million for the like period in 2012; a reduction of $169,000. The improvement was led by
a $180,000 decline in expenses to administer impaired assets. In the first nine months of 2013, these expenses totaled $274,000
compared to $454,000 in the first nine months of 2012. Fewer expenses related to administering impaired assets supports management’s
assessment of improved credit quality over the past several quarters. For the third quarter of 2013, there was a $62,000 decline
in other non-interest expense compared to the third quarter of 2012. Similarly, the result was due to a $60,000 reduction in expenses
to administer impaired assets between the two quarterly periods.



As a result of the large gain on the extinguishment
of debt, the Company recorded income tax expense from operations in the amount of $105,000. This amount represents projected taxable
earnings subject to alternative minimum taxation which may fluctuate throughout the year with changes in operating results. Additionally,
the gain on the extinguishment of debt may result in a reduction of net operating loss carry forward tax attributes by an estimated
$5.3 million.  Even so, the Company’s estimated net operating loss carry forward remaining would be over $6 million.



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, 2013. 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, 2013.



There have been no changes in the Company’s
internal control over financial reporting during the quarter ended September 30, 2013, that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial reporting.



- 60 -







COMMUNITY SHORES BANK CORPORATION



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



The Company made no unregistered sale of equity securities,
and did not purchase any of its equity securities, during the quarter ended September 30, 2013.



Holders of Company common stock are entitled to receive
cash dividends to the extent that they are declared from time to time by the Company's Board of Directors. To date, the Company's
Board of Directors has never declared a cash dividend. The Company may only pay cash dividends out of funds that are legally available
for that purpose. The Company is a holding company and substantially all of its assets are held by its subsidiaries. The Company's
ability to pay cash dividends to its shareholders depends primarily on the Bank's ability to pay cash dividends to the Company.
Cash dividend payments and extensions of credit to the Company from the Bank are subject to legal and regulatory limitations, generally
based on capital levels and current and retained earnings, imposed by law and regulatory agencies with authority over the Bank.
The ability of the Bank to pay cash dividends is also subject to its profitability, financial condition, capital expenditures and
other cash flow requirements. Under the Consent and Written Agreement, the Bank is precluded from paying dividends to the Company
and the Company may not receive dividends from the Bank.



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



- 61 -







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



| | 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.                                                                                           



- 62 -







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 13, 2013 | By:                              
|Date              |                                  
|                  |                                  
|                  |                                  
|                  |                                  
|November 13, 2013 | By:                              
|Date              |                                  
|                  |                                  
|                  |                                  



- 63 -







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.                                                                                           



- 64 -