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 June 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.

S
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 August 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



|                                                                                              |  | June 30,    |             |   | December 31, |  
|--------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ------------ | -
|                                                                                              |  | 2013        |             |   | 2012         |  
|                                                                                              |  | (unaudited) |             |   | (audited)    |  
|ASSETS                                                                                        |  |             |             |   |              |  
|Cash and due from financial institutions                                                      |  | $           | 3,189,631   |   |              | $
|Interest-bearing deposits in other financial institutions                                     |  |             | 10,418,177  |   |              |  
|Total cash and cash equivalents                                                               |  |             | 13,607,808  |   |              |  
|Securities available for sale (at fair value)                                                 |  |             | 35,837,124  |   |              |  
|Loans held for sale                                                                           |  |             | 4,997,603   |   |              |  
|Loans                                                                                         |  |             | 124,546,972 |   |              |  
|Less: Allowance for loan losses                                                               |  |             | 3,287,274   |   |              |  
|Net loans                                                                                     |  |             | 121,259,698 |   |              |  
|Federal Home Loan Bank stock (at cost)                                                        |  |             | 450,800     |   |              |  
|Premises and equipment, net                                                                   |  |             | 9,269,499   |   |              |  
|Accrued interest receivable                                                                   |  |             | 528,240     |   |              |  
|Foreclosed assets                                                                             |  |             | 2,830,775   |   |              |  
|Other assets                                                                                  |  |             | 862,197     |   |              |  
|Total assets                                                                                  |  | $           | 189,643,744 |   |              | $
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                          |  |             |             |   |              |  
|Deposits                                                                                      |  |             |             |   |              |  
|Non-interest-bearing                                                                          |  | $           | 30,486,661  |   |              | $
|Interest-bearing                                                                              |  |             | 138,648,820 |   |              |  
|Total deposits                                                                                |  |             | 169,135,481 |   |              |  
|Federal funds purchased and repurchase agreements                                             |  |             | 10,180,238  |   |              |  
|Subordinated debentures                                                                       |  |             | 4,500,000   |   |              |  
|Notes payable                                                                                 |  |             | 1,280,000   |   |              |  
|Accrued expenses and other liabilities                                                        |  |             | 952,384     |   |              |  
|Total liabilities                                                                             |  |             | 186,048,103 |   |              |  
|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                                                                              |  |             | (9,436,795  | ) |              |  
|Accumulated other comprehensive
    (loss) income                                             |  |             | (264,255    | ) |              |  
|Total shareholders’ equity                                                                    |  |             | 3,595,641   |   |              |  
|Total liabilities and shareholders’
    equity                                                |  | $           | 189,643,744 |   |              | $



See accompanying notes to consolidated
financial statements.



- 1 -







COMMUNITY SHORES
BANK CORPORATION

CONDENSED CONSOLIDATED
STATEMENTS OF INCOME

(UNAUDITED)



|                                                                   |  | Three Months |           |  | Three Months |   |           | Six Months |  |   | Six Months | 
|------------------------------------------------------------------ |  | ------------ | --------- |  | ------------ | - | --------- | ---------- |  | - | ---------- | 
|                                                                   |  | Ended        |           |  | Ended        |   |           | Ended      |  |   | Ended      | 
|                                                                   |  | June 30,     |           |  | June 30,     |   |           | June 30,   |  |   | June 30,   | 
|                                                                   |  | 2013         |           |  | 2012         |   |           | 2013       |  |   | 2012       | 
|Interest and dividend income                                       |  |              |           |  |              |   |           |            |  |   |            | 
|Loans, including fees                                              |  | $            | 1,714,892 |  |              | $ | 2,100,364 |            |  | $ | 3,591,366  | 
|Securities                                                         |  |              | 137,710   |  |              |   | 174,501   |            |  |   | 294,599    | 
|Federal funds sold and other income                                |  |              | 7,984     |  |              |   | 11,880    |            |  |   | 18,313     | 
|Total interest income                                              |  |              | 1,860,586 |  |              |   | 2,286,745 |            |  |   | 3,904,278  | 
|Interest expense                                                   |  |              |           |  |              |   |           |            |  |   |            | 
|Deposits                                                           |  |              | 252,138   |  |              |   | 356,395   |            |  |   | 531,050    | 
|Repurchase agreements, federal funds purchased, and
    other debt |  |              | 14,512    |  |              |   | 21,629    |            |  |   | 29,726     | 
|Federal Home Loan Bank advances and notes payable                  |  |              | 55,321    |  |              |   | 106,865   |            |  |   | 88,038     | 
|Total interest expense                                             |  |              | 321,971   |  |              |   | 484,889   |            |  |   | 648,814    | 
|Net Interest Income                                                |  |              | 1,538,615 |  |              |   | 1,801,856 |            |  |   | 3,255,464  | 
|Provision for loan losses                                          |  |              | 0         |  |              |   | 0         |            |  |   | 0          | 
|Net Interest Income After Provision for Loan Losses                |  |              | 1,538,615 |  |              |   | 1,801,856 |            |  |   | 3,255,464  | 
|Non-interest income                                                |  |              |           |  |              |   |           |            |  |   |            | 
|Service charges on deposit accounts                                |  |              | 161,852   |  |              |   | 174,598   |            |  |   | 311,303    | 
|Mortgage loan referral fees                                        |  |              | 0         |  |              |   | 11,162    |            |  |   | 0          | 
|Gain on sale of loans                                              |  |              | 59,921    |  |              |   | 64,843    |            |  |   | 127,164    | 
|Gain on sale of securities                                         |  |              | 0         |  |              |   | 0         |            |  |   | 0          | 
|Gain (loss) on sale of foreclosed assets                           |  |              | 44,377    |  |              |   | 6,364     |            |  |   | 44,377     | 
|Gain on sale of premises and equipment                             |  |              | 0         |  |              |   | 208,389   |            |  |   | 1,000      | 
|Gain on the extinguishment of debt                                 |  |              | 0         |  |              |   | 0         |            |  |   | 5,262,653  | 
|Other                                                              |  |              | 160,449   |  |              |   | 109,444   |            |  |   | 316,725    | 
|Total non-interest income                                          |  |              | 426,599   |  |              |   | 574,800   |            |  |   | 6,063,222  | 
|Non-interest expense                                               |  |              |           |  |              |   |           |            |  |   |            | 
|Salaries and employee benefits                                     |  |              | 912,135   |  |              |   | 918,958   |            |  |   | 1,827,045  | 
|Occupancy                                                          |  |              | 149,239   |  |              |   | 158,642   |            |  |   | 316,269    | 
|Furniture and equipment                                            |  |              | 92,156    |  |              |   | 102,814   |            |  |   | 198,199    | 
|Advertising                                                        |  |              | 9,100     |  |              |   | 13,472    |            |  |   | 24,111     | 
|Data processing                                                    |  |              | 154,055   |  |              |   | 148,942   |            |  |   | 300,739    | 
|Professional services                                              |  |              | 114,164   |  |              |   | 72,456    |            |  |   | 204,812    | 
|Foreclosed asset impairment                                        |  |              | 101,141   |  |              |   | 93,878    |            |  |   | 108,740    | 
|FDIC insurance                                                     |  |              | 51,227    |  |              |   | 178,373   |            |  |   | 224,068    | 
|Other                                                              |  |              | 306,732   |  |              |   | 367,485   |            |  |   | 629,905    | 
|Total non-interest expense                                         |  |              | 1,889,949 |  |              |   | 2,055,020 |            |  |   | 3,833,888  | 
|Income Before Federal Income Taxes                                 |  |              | 75,265    |  |              |   | 321,636   |            |  |   | 5,484,798  | 
|Federal income tax expense                                         |  |              | 0         |  |              |   | 0         |            |  |   | 105,000    | 
|Net Income                                                         |  | $            | 75,265    |  |              | $ | 321,636   |            |  | $ | 5,379,798  | 
|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                                           |  | $            | 0.05      |  |              | $ | 0.22      |            |  | $ | 3.66       | 
|Diluted earnings per share                                         |  | $            | 0.05      |  |              | $ | 0.22      |            |  | $ | 3.66       | 



See accompanying notes to consolidated
financial statements.



- 2 -







COMMUNITY
SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(UNAUDITED)



|                                                                           |  | Three Months  |          |   | Three Months  |   |         | Six Months    |  |   | Six Months    |  
|-------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------- | - | ------- | ------------- |  | - | ------------- | -
|                                                                           |  | Ended         |          |   | Ended         |   |         | Ended         |  |   | Ended         |  
|                                                                           |  | June 30, 2013 |          |   | June 30, 2012 |   |         | June 30, 2013 |  |   | June 30, 2012 |  
|                                                                           |  |               |          |   |               |   |         |               |  |   |               |  
|Net income                                                                 |  | $             | 75,265   |   |               | $ | 321,636 |               |  | $ | 5,379,798     |  
|                                                                           |  |               |          |   |               |   |         |               |  |   |               |  
|Other comprehensive income (loss):                                         |  |               |          |   |               |   |         |               |  |   |               |  
|Unrealized holding gains and (losses) on available
    for sale securities |  |               | (468,823 | ) |               |   | 14,906  |               |  |   | (545,061      | )
|Less reclassification adjustments for gains later
    recognized in income |  |               | 0        |   |               |   | 0       |               |  |   | 0             |  
|Net unrealized gain (loss)                                                 |  |               | (468,823 | ) |               |   | 14,906  |               |  |   | (545,061      | )
|Tax effect                                                                 |  |               | 0        |   |               |   | 0       |               |  |   | 0             |  
|Total other comprehensive income
    (loss)                                |  |               | (468,823 | ) |               |   | 14,906  |               |  |   | (545,061      | )
|                                                                           |  |               |          |   |               |   |         |               |  |   |               |  
|Comprehensive income (loss)                                                |  | $             | (393,558 | ) |               | $ | 336,542 |               |  | $ | 4,834,737     |  



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                 |  |        |           |  |        |   |            |          |  |   | 257,535       |   |  |               |         
|Other comprehensive loss   |  |        |           |  |        |   |            |          |  |   |               |   |  |               | (27,387 
|                           |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at June 30, 2012   |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (14,826,896   | ) |  | $             | 339,971 
|                           |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at January 1, 2013 |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (14,816,593   | ) |  | $             | 280,806 
|                           |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Net income                 |  |        |           |  |        |   |            |          |  |   | 5,379,798     |   |  |               |         
|Other comprehensive loss   |  |        |           |  |        |   |            |          |  |   |               |   |  |               | (545,061
|                           |  |        |           |  |        |   |            |          |  |   |               |   |  |               |         
|Balance at June 30, 2013   |  |        | 1,468,800 |  |        | $ | 13,296,691 |          |  | $ | (9,436,795    | ) |  | $             | (264,255



See accompanying notes to consolidated
financial statements.



- 4 -







COMMUNITY
SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(UNAUDITED)



|                                                                               |  | Six Months Ended |             |   | Six Months Ended |  
|------------------------------------------------------------------------------ |  | ---------------- | ----------- | - | ---------------- | -
|                                                                               |  | June 30, 2013    |             |   | June 30, 2012    |  
|Cash flows from operating activities                                           |  |                  |             |   |                  |  
|Net income                                                                     |  | $                | 5,379,798   |   |                  | $
|Adjustments to reconcile net income to net cash from
    operating activities: |  |                  |             |   |                  |  
|Provision for loan losses                                                      |  |                  | 0           |   |                  |  
|Depreciation and amortization                                                  |  |                  | 202,781     |   |                  |  
|Net amortization of securities                                                 |  |                  | 196,288     |   |                  |  
|Net realized gain on sale of securities                                        |  |                  | 0           |   |                  |  
|Net realized gain on sale of loans                                             |  |                  | (127,164    | ) |                  |  
|Net realized (gain) loss on sale of foreclosed assets                          |  |                  | (44,377     | ) |                  |  
|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                                                    |  |                  | 108,740     |   |                  |  
|Originations of loans for sale                                                 |  |                  | (5,536,206  | ) |                  |  
|Proceeds from loan sales                                                       |  |                  | 5,712,239   |   |                  |  
|Net change in:                                                                 |  |                  |             |   |                  |  
|Accrued interest receivable and other assets                                   |  |                  | (83,194     | ) |                  |  
|Accrued interest payable and
    other liabilities                             |  |                  | 111,130     |   |                  |  
|Net cash from (used in) operating activities                                   |  |                  | 656,382     |   |                  |  
|Cash flows from investing activities                                           |  |                  |             |   |                  |  
|Activity in available for sale securities:                                     |  |                  |             |   |                  |  
|Sales                                                                          |  |                  | 0           |   |                  |  
|Maturities, prepayments and calls                                              |  |                  | 4,881,923   |   |                  |  
|Purchases                                                                      |  |                  | 0           |   |                  |  
|Loan originations and payments, net                                            |  |                  | 1,599,948   |   |                  |  
|Additions to premises and equipment, net                                       |  |                  | (50,394     | ) |                  |  
|Proceeds from the sale of premises and equipment                               |  |                  | 0           |   |                  |  
|Proceeds from the sale of foreclosed assets                                    |  |                  | 493,667     |   |                  |  
|Net cash from investing activities                                             |  |                  | 6,925,144   |   |                  |  
|Cash flows from financing activities                                           |  |                  |             |   |                  |  
|Net change in deposits                                                         |  |                  | (15,041,012 | ) |                  |  
|Net change in federal funds purchased and repurchase
    agreements            |  |                  | (9,821      | ) |                  |  
|Other borrowing activity:                                                      |  |                  |             |   |                  |  
|Repayment of note payable                                                      |  |                  | (500,000    | ) |                  |  
|Issuance of senior debt                                                        |  |                  | 1,280,000   |   |                  |  
|Net cash used in financing activities                                          |  |                  | (14,270,833 | ) |                  |  
|Net change in cash and cash equivalents                                        |  |                  | (6,689,307  | ) |                  |  
|Beginning cash and cash equivalents                                            |  |                  | 20,297,115  |   |                  |  
|Ending cash and cash equivalents                                               |  | $                | 13,607,808  |   |                  | $
|Supplemental cash flow information:                                            |  |                  |             |   |                  |  
|Cash paid during the period for interest                                       |  | $                | 592,519     |   |                  | $
|Transfers from loans to foreclosed assets                                      |  |                  | 582,024     |   |                  |  
|Transfers from loans held for sale to portfolio                                |  |                  | 994,397     |   |                  |  
|Foreclosed asset sales financed by the Company                                 |  |                  | 0           |   |                  |  



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 six months ended June 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 six month periods ended June 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 half 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 two quarters of 2013.
As a result of a $5.3 million gain on extinguishment of debt recorded late in the first quarter, the Company’s consolidated
earnings rose to $5.4 million. 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 June 30, 2013, there was approximately $350,000 of unallocated reserves stemming from
improvement in macro-economic factors as well as 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 quarter, the Bank’s
total risk-based capital ratio rose to 8.27% at June 30.



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 June 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. The Company’s main liquidity resource is its cash account balance which, as of June 30, 2013,
was approximately $688,000.



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 proceeding
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, at the end of
April.



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 June 30, 2013 and at December 31, 2012:



|                                                                         |  |           |            |  | Gross      |   |         | Gross      |  |   |          |  
|------------------------------------------------------------------------ |  | --------- | ---------- |  | ---------- | - | ------- | ---------- |  | - | -------- | -
|                                                                         |  | Amortized |            |  | Unrealized |   |         | Unrealized |  |   | Fair     |  
|June 30, 2013                                                            |  | Cost      |            |  | Gains      |   |         | Losses     |  |   | Value    |  
|                                                                         |  |           |            |  |            |   |         |            |  |   |          |  
|US Treasury                                                              |  | $         | 3,034,793  |  |            | $ | 17,551  |            |  | $ | 0        |  
|US Government and federal agency                                         |  |           | 18,413,856 |  |            |   | 125,304 |            |  |   | (73,534  | )
|Municipals                                                               |  |           | 1,566,755  |  |            |   | 41,832  |            |  |   | 0        |  
|Mortgage-backed and collateralized
    mortgage obligations– residential |  |           | 12,765,077 |  |            |   | 163,908 |            |  |   | (218,418 | )
|                                                                         |  | $         | 35,780,481 |  |            | $ | 348,595 |            |  | $ | (291,952 | )



- 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 June 30, 2013:



|                                                                          |  | Amortized |            |  | Fair  |  
|------------------------------------------------------------------------- |  | --------- | ---------- |  | ----- | -
|                                                                          |  | Cost      |            |  | Value |  
|Due in one year or less                                                   |  | $         | 6,026,911  |  |       | $
|Due from one to five years                                                |  |           | 16,636,377 |  |       |  
|Due from five to ten years                                                |  |           | 352,116    |  |       |  
|Due in more than ten years                                                |  |           | 0          |  |       |  
|Mortgage-backed and collateralized
    mortgage obligations – residential |  |           | 12,765,077 |  |       |  
|                                                                          |  | $         | 35,780,481 |  |       | $



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 June 30, 2013 and December 31, 2012:



|                                                                          |  | Less than 12 Months |            |  | 12 Months or Longer |   |          | Total | 
|------------------------------------------------------------------------- |  | ------------------- | ---------- |  | ------------------- | - | -------- | ----- | 
|                                                                          |  | Fair                |            |  | Unrealized          |   |          | Fair  | 
|June 30, 2013                                                             |  | Value               |            |  | Losses              |   |          | Value | 
|US Government and federal agency                                          |  | $                   | 6,568,089  |  |                     | $ | (73,534  | )     | 
|Mortgage-backed and collateralized
    mortgage obligations - residential |  |                     | 6,845,892  |  |                     |   | (217,267 | )     | 
|                                                                          |  | $                   | 13,413,981 |  |                     | $ | (290,801 | )     | 



|                                                                          |  | 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 six months ended June 30, 2013. One security was sold in the first quarter of 2012 and none in 2012’s second quarter.
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 six 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 June 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 June 30,
2013, 21 debt securities had unrealized losses with aggregate depreciation of 2.09% from the amortized cost basis. Five of the
21 securities are issued by government agencies and 16 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 is not material
however, the reported decline in value of $545,000 since year-end 2012 is significant. Nonetheless, 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 likely that it will not be required to sell the securities before their anticipated recovery,
the Company does not consider these securities to be other-than-temporarily impaired at June 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:



|                                 |  | June 30, 2013 |             |   | December 31, 2012 |  
|-------------------------------- |  | ------------- | ----------- | - | ----------------- | -
|Commercial                       |  | $             | 43,922,455  |   |                   | $
|Commercial Real Estate:          |  |               |             |   |                   |  
|General                          |  |               | 51,433,667  |   |                   |  
|Construction                     |  |               | 2,224,785   |   |                   |  
|Consumer:                        |  |               |             |   |                   |  
|Lines of credit                  |  |               | 8,773,538   |   |                   |  
|Other                            |  |               | 1,648,264   |   |                   |  
|Credit card                      |  |               | 473,688     |   |                   |  
|Residential                      |  |               | 16,128,503  |   |                   |  
|Net deferred loan fees           |  |               | (57,928     | ) |                   |  
|                                 |  |               | 124,546,972 |   |                   |  
|Less:  Allowance for loan losses |  |               | (3,287,274  | ) |                   |  
|Loans, net                       |  | $             | 121,259,698 |   |                   | $



- 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 June 30, 2013 and 2012 by portfolio segment:



|Three Months Ended June 30, 2013 |  | Commercial |          |   | Commercial Real Estate |   |           | Consumer |  |   | Residential |   |  | Unallocated |         |   | Total |  
|-------------------------------- |  | ---------- | -------- | - | ---------------------- | - | --------- | -------- |  | - | ----------- | - |  | ----------- | ------- | - | ----- | -
|Allowance for loan losses:       |  |            |          |   |                        |   |           |          |  |   |             |   |  |             |         |   |       |  
|Beginning balance                |  | $          | 524,383  |   |                        | $ | 2,072,756 |          |  | $ | 330,028     |   |  | $           | 169,549 |   |       | $
|Charge-offs                      |  |            | 0        |   |                        |   | (15,314   | )        |  |   | (20,306     | ) |  |             | 0       |   |       |  
|Recoveries                       |  |            | 16,616   |   |                        |   | 0         |          |  |   | 3,981       |   |  |             | 0       |   |       |  
|Provision for loan losses        |  |            | (101,006 | ) |                        |   | (136,855  | )        |  |   | 105,808     |   |  |             | (12,143 | ) |       |  
|Ending balance                   |  | $          | 439,993  |   |                        | $ | 1,920,587 |          |  | $ | 419,511     |   |  | $           | 157,406 |   |       | $



|Three Months Ended June 30, 2012 |  | Commercial |           |   | Commercial Real Estate |   |           | Consumer |  |   | Residential |   |  | Unallocated |         |   | Total |  
|-------------------------------- |  | ---------- | --------- | - | ---------------------- | - | --------- | -------- |  | - | ----------- | - |  | ----------- | ------- | - | ----- | -
|Allowance for loan losses:       |  |            |           |   |                        |   |           |          |  |   |             |   |  |             |         |   |       |  
|Beginning balance                |  | $          | 1,138,063 |   |                        | $ | 2,486,708 |          |  | $ | 513,260     |   |  | $           | 206,001 |   |       | $
|Charge-offs                      |  |            | (24,277   | ) |                        |   | (94,505   | )        |  |   | (16,693     | ) |  |             | (11,392 | ) |       |  
|Recoveries                       |  |            | 18,439    |   |                        |   | 13,523    |          |  |   | 2,099       |   |  |             | 0       |   |       |  
|Provision for loan losses        |  |            | 224,678   |   |                        |   | (153,745  | )        |  |   | (56,199     | ) |  |             | (903    | ) |       |  
|Ending balance                   |  | $          | 1,356,903 |   |                        | $ | 2,251,981 |          |  | $ | 442,467     |   |  | $           | 193,706 |   |       | $



- 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 six month periods ended June 30, 2013 and 2012 by portfolio segment:



|Six Months Ended June 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                    |  |            | (40,253  | ) |                        |   | (25,025   | )        |  |   | (38,597     | ) |  |             | (54,599 | ) |       |  
|Recoveries                     |  |            | 56,200   |   |                        |   | 0         |          |  |   | 6,571       |   |  |             | 0       |   |       |  
|Provision for loan losses      |  |            | (158,152 | ) |                        |   | (320,690  | )        |  |   | 120,078     |   |  |             | 8,987   |   |       |  
|Ending balance                 |  | $          | 439,993  |   |                        | $ | 1,920,587 |          |  | $ | 419,511     |   |  | $           | 157,406 |   |       | $



|Six Months Ended June 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                    |  |            | (213,069  | ) |                        |   | (857,205  | )        |  |   | (31,481     | ) |  |             | (11,392 | ) |       |  
|Recoveries                     |  |            | 26,548    |   |                        |   | 13,523    |          |  |   | 19,884      |   |  |             | 0       |   |       |  
|Provision for loan losses      |  |            | 233,792   |   |                        |   | (290,770  | )        |  |   | 44,063      |   |  |             | 11,710  |   |       |  
|Ending balance                 |  | $          | 1,356,903 |   |                        | $ | 2,251,981 |          |  | $ | 442,467     |   |  | $           | 193,706 |   |       | $

- 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 June 30, 2013 and December 31, 2012:



|June 30, 2013                                   |  | Commercial |            |  | Commercial Real Estate |   |            | Consumer |  |   | Residential |  |  | Unallocated |            |  | Total |  
|----------------------------------------------- |  | ---------- | ---------- |  | ---------------------- | - | ---------- | -------- |  | - | ----------- |  |  | ----------- | ---------- |  | ----- | -
|Allowance for loan losses:                      |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Ending allowance balance attributable to loans: |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 30,532     |  |                        | $ | 1,347,556  |          |  | $ | 223,450     |  |  | $           | 92,295     |  |       | $
|Collectively evaluated for impairment           |  |            | 409,461    |  |                        |   | 573,031    |          |  |   | 196,061     |  |  |             | 65,111     |  |       |  
|Unallocated                                     |  |            | 0          |  |                        |   | 0          |          |  |   | 0           |  |  |             | 0          |  |       |  
|Total ending allowance
    balance              |  | $          | 439,993    |  |                        | $ | 1,920,587  |          |  | $ | 419,511     |  |  | $           | 157,406    |  |       | $
|                                                |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Loans:                                          |  |            |            |  |                        |   |            |          |  |   |             |  |  |             |            |  |       |  
|Individually evaluated for impairment           |  | $          | 1,310,908  |  |                        | $ | 6,761,174  |          |  | $ | 408,363     |  |  | $           | 657,692    |  |       | $
|Collectively evaluated
    for impairment       |  |            | 42,715,693 |  |                        |   | 47,014,394 |          |  |   | 10,525,882  |  |  |             | 15,521,595 |  |       |  
|Total ending loans balance                      |  | $          | 44,026,601 |  |                        | $ | 53,775,568 |          |  | $ | 10,934,245  |  |  | $           | 16,179,287 |  |       | $



|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 June 30, 2013 and December 31, 2012. For purposes of this disclosure, the unpaid
principal balance is not reduced for partial charge-offs.



|                                        |  | As of June 30, 2013 |           |  | For the periods ended June 30, 2013 |  
|--------------------------------------- |  | ------------------- | --------- |  | ----------------------------------- | -
|                                        |  |                     |           |  |                                     |  
|                                        |  |                     |           |  | Unpaid                              |  
|                                        |  | Recorded            |           |  | Principal                           |  
|                                        |  | Investment          |           |  | Balance                             |  
|With
    no related allowance recorded: |  |                     |           |  |                                     |  
|Commercial                              |  | $                   | 1,185,733 |  |                                     | $
|Commercial Real Estate:                 |  |                     |           |  |                                     |  
|General                                 |  |                     | 2,113,470 |  |                                     |  
|Construction                            |  |                     | 0         |  |                                     |  
|Consumer:                               |  |                     |           |  |                                     |  
|Lines of credit                         |  |                     | 37,141    |  |                                     |  
|Other                                   |  |                     | 7,305     |  |                                     |  
|Credit card                             |  |                     | 0         |  |                                     |  
|Residential                             |  |                     | 123,181   |  |                                     |  
|Subtotal                                |  | $                   | 3,466,830 |  |                                     | $
|                                        |  |                     |           |  |                                     |  
|With
    an allowance recorded:         |  |                     |           |  |                                     |  
|Commercial                              |  | $                   | 125,175   |  |                                     | $
|Commercial Real Estate:                 |  |                     |           |  |                                     |  
|General                                 |  |                     | 4,647,704 |  |                                     |  
|Construction                            |  |                     | 0         |  |                                     |  
|Consumer:                               |  |                     |           |  |                                     |  
|Lines of credit                         |  |                     | 254,524   |  |                                     |  
|Other                                   |  |                     | 109,393   |  |                                     |  
|Credit card                             |  |                     | 0         |  |                                     |  
|Residential                             |  |                     | 534,511   |  |                                     |  
|Subtotal                                |  | $                   | 5,671,307 |  |                                     | $
|Total                                   |  | $                   | 9,138,137 |  |                                     | $





- 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 June 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 June 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         |  |                 | 106,102 |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 106,102 |  |                |  
|Other                   |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Credit card             |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Residential             |  |                 | 0       |  |                 |   | 0 |                 |  |   | 0              |  |  |                | 0       |  |                |  
|Total                   |  | $               | 106,102 |  |                 | $ | 0 |                 |  | $ | 0              |  |  | $              | 106,102 |  |                | $



|                        |  |                 |        |  |                 |   |        | 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      |                 |  | $ | 114,936        |  |  | $           | 114,936 |  |                   | $
|Commercial Real Estate: |  |                 |        |  |                 |   |        |                 |  |   |                |  |  |             |         |  |                   |  
|General                 |  |                 | 0      |  |                 |   | 0      |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Construction            |  |                 | 0      |  |                 |   | 0      |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Consumer:               |  |                 |        |  |                 |   |        |                 |  |   |                |  |  |             |         |  |                   |  
|Lines of credit         |  |                 | 20,549 |  |                 |   | 0      |                 |  |   | 60,029         |  |  |             | 80,578  |  |                   |  
|Other                   |  |                 | 0      |  |                 |   | 2,802  |                 |  |   | 0              |  |  |             | 2,802   |  |                   |  
|Credit card             |  |                 | 0      |  |                 |   | 0      |                 |  |   | 0              |  |  |             | 0       |  |                   |  
|Residential             |  |                 | 0      |  |                 |   | 77,162 |                 |  |   | 0              |  |  |             | 77,162  |  |                   |  
|Total                   |  | $               | 20,549 |  |                 | $ | 79,964 |                 |  | $ | 174,965        |  |  | $           | 275,478 |  |                   | $



- 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 $1,586,671 of specific
reserves on $8,493,195 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings
as of June 30, 2013 and $1,699,851 on $10,441,218 of unpaid principal balance of loans as of December 31, 2012. At June 30, 2013,
the Company had an additional $182,455 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 six month periods ending June
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 six month period ended June 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 six month period ended June 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.



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



|                                 |  |                 |   |  | Pre-Modification     |   |         | Post-Modification    | 
|-------------------------------- |  | --------------- | - |  | -------------------- | - | ------- | -------------------- | 
|                                 |  |                 |   |  | Outstanding Recorded |   |         | Outstanding Recorded | 
|Three Months Ended June 30, 2013 |  | Number of Loans |   |  | Investment           |   |         | Investment           | 
|Troubled Debt Restructurings:    |  |                 |   |  |                      |   |         |                      | 
|Consumer:                        |  |                 |   |  |                      |   |         |                      | 
|Lines of credit                  |  |                 | 2 |  |                      | $ | 137,893 |                      | 
|Total                            |  |                 | 2 |  |                      | $ | 137,893 |                      | 



In the three month period ended June 30, 2013, there
were no charge-offs as part of a troubled debt restructuring arrangement however an additional $39,519 of specific reserves were
established on one of the troubled debt restructurings.



- 22 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



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



|                               |  |                 |   |  | Pre-Modification     |   |         | Post-Modification    | 
|------------------------------ |  | --------------- | - |  | -------------------- | - | ------- | -------------------- | 
|                               |  |                 |   |  | Outstanding Recorded |   |         | Outstanding Recorded | 
|Six Months Ended June 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 six month period ended June 30, 2013, there
were $9,711 of charge-offs as part of a troubled debt restructuring arrangement and an additional $39,519 of specific reserves
were established on these troubled debt restructurings.



The following table presents loans by class modified
as troubled debt restructurings that occurred during the three month period ended June 30, 2012:



|                                 |  |                 |   |  | Pre-Modification     |   |        | Post-Modification    | 
|-------------------------------- |  | --------------- | - |  | -------------------- | - | ------ | -------------------- | 
|                                 |  |                 |   |  | Outstanding Recorded |   |        | Outstanding Recorded | 
|Three Months Ended June 30, 2012 |  | Number of Loans |   |  | Investment           |   |        | Investment           | 
|Troubled Debt Restructurings:    |  |                 |   |  |                      |   |        |                      | 
|Consumer:                        |  |                 |   |  |                      |   |        |                      | 
|Lines of credit                  |  |                 | 1 |  |                      | $ | 22,416 |                      | 
|Total                            |  |                 | 1 |  |                      | $ | 22,416 |                      | 



In the three month period ended June 30, 2012, there
were no charge-offs as part of a troubled debt restructuring arrangement however an additional $22,000 of specific reserves were
established on this troubled debt restructuring.



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



|                               |  |                 |   |  | Pre-Modification     |   |           | Post-Modification    | 
|------------------------------ |  | --------------- | - |  | -------------------- | - | --------- | -------------------- | 
|                               |  |                 |   |  | Outstanding Recorded |   |           | Outstanding Recorded | 
|Six Months Ended June 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 |                      | 



- 23 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



In the six month period ended June 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 six month periods ended June 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.



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



- 24 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



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



As of June 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           | 
|      |  | June 30,   |            |  | December 31,           |   |            | June 30,               | 
|      |  | 2013       |            |  | 2012                   |   |            | 2013                   | 
|1     |  | $          | 0          |  |                        | $ | 0          |                        | 
|2     |  |            | 326,329    |  |                        |   | 298,200    |                        | 
|3     |  |            | 7,896,158  |  |                        |   | 2,004,476  |                        | 
|4     |  |            | 12,208,441 |  |                        |   | 14,017,221 |                        | 
|5     |  |            | 16,381,147 |  |                        |   | 16,373,423 |                        | 
|5M    |  |            | 4,854,101  |  |                        |   | 3,318,016  |                        | 
|6     |  |            | 1,056,835  |  |                        |   | 2,180,119  |                        | 
|7     |  |            | 1,166,790  |  |                        |   | 1,369,803  |                        | 
|8     |  |            | 136,800    |  |                        |   | 466,305    |                        | 
|Total |  | $          | 44,026,601 |  |                        | $ | 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 June 30, 2013 and December 31, 2012:



|           |  | Residential |           
|---------- |  | ----------- | ----------
|           |  | June 30,    |           
|           |  | 2013        |           
|Performing |  | $           | 15,521,595
|Impaired   |  |             | 657,692   
|Total      |  | $           | 16,179,287



|           |  | Consumer – Lines of credit |           |  | Consumer – Other |   |           | Consumer – Credit card | 
|---------- |  | -------------------------- | --------- |  | ---------------- | - | --------- | ---------------------- | 
|           |  | June 30,                   |           |  | December 31,     |   |           | June 30,               | 
|           |  | 2013                       |           |  | 2012             |   |           | 2013                   | 
|Performing |  | $                          | 8,513,058 |  |                  | $ | 8,944,652 |                        | 
|Impaired   |  |                            | 291,665   |  |                  |   | 190,770   |                        | 
|Total      |  | $                          | 8,804,723 |  |                  | $ | 9,135,422 |                        | 



- 25 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Foreclosed asset activity:



|                                               |  | June 30, |           |   | June 30, |  
|---------------------------------------------- |  | -------- | --------- | - | -------- | -
|                                               |  | 2013     |           |   | 2012     |  
|Beginning of year                              |  | $        | 2,806,781 |   |          | $
|Additions                                      |  |          | 582,024   |   |          |  
|Reductions from sales                          |  |          | (449,290  | ) |          |  
|Direct write-downs                             |  |          | (108,740  | ) |          |  
|End of period                                  |  | $        | 2,830,775 |   |          | $
|                                               |  |          |           |   |          |  
|Expenses related to foreclosed assets include: |  |          |           |   |          |  
|Operating expenses, net of rental income       |  | $        | 106,572   |   |          | $



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



Period end premises and equipment were as follows:



|                                  |  | June 30, |            |  | December 31, |  
|--------------------------------- |  | -------- | ---------- |  | ------------ | -
|                                  |  | 2013     |            |  | 2012         |  
|Land & land improvements          |  | $        | 4,700,464  |  |              | $
|Buildings & building improvements |  |          | 6,144,749  |  |              |  
|Furniture, fixtures and equipment |  |          | 3,839,269  |  |              |  
|                                  |  |          | 14,684,482 |  |              |  
|Less:  accumulated depreciation   |  |          | 5,414,983  |  |              |  
|                                  |  | $        | 9,269,499  |  |              | $



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 June 30, 2013 and December 31, 2012 were as follows:



|                         |  | June 30, |             |  | December 31, |  
|------------------------ |  | -------- | ----------- |  | ------------ | -
|                         |  | 2013     |             |  | 2012         |  
|Non-interest-bearing DDA |  | $        | 30,486,661  |  |              | $
|Interest-bearing DDA     |  |          | 23,764,110  |  |              |  
|Money market             |  |          | 21,340,151  |  |              |  
|Savings                  |  |          | 8,763,824   |  |              |  
|Time, under $100,000     |  |          | 75,112,213  |  |              |  
|Time, over $100,000      |  |          | 9,668,522   |  |              |  
|Total Deposits           |  | $        | 169,135,481 |  |              | $



There were no brokered deposits at June 30, 2013
and December 31, 2012. Since the Bank was not categorized as “well capitalized” at June 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 June 30, 2013 and December 31, 2012 short-term borrowing information was as follows:



|                                        |  | Repurchase |           
|--------------------------------------- |  | ---------- | ----------
|                                        |  | Agreements |           
|                                        |  |            |           
|Outstanding at June 30, 2013            |  | $          | 10,180,238
|Average interest rate at period end     |  |            | 0.57      
|Average balance during period           |  |            | 10,043,572
|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 $3,131,295. 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 $3,914,119 pledged at
June 30, 2013. The Bank had no outstanding borrowings with the FHLB at either June 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 2.32% at June 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 June 30, 2013, the accruedinterest payable on the subordinated debentures was $384,651.



- 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 June 30, 2013 was approximately $26,000. The entire interest balance due
was paid on July 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 June 30, 2013 and December 31, 2012 follows:



|                                             |  | June 30, 2013 |            |  | December 31, 2012 |  
|-------------------------------------------- |  | ------------- | ---------- |  | ----------------- | -
|                                             |  |               |            |  |                   |  
|Unused lines of credit and letters of credit |  | $             | 22,704,244 |  |                   | $
|Commitments to make loans                    |  |               | 31,700     |  |                   |  



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 loser
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 June 30, 2013 and December 31, 2012:



|                                                                     |  |       |            |  | Fair Value Measurements Using |  
|-------------------------------------------------------------------- |  | ----- | ---------- |  | ----------------------------- | -
|                                                                     |  |       |            |  | Quoted Prices                 |  
|                                                                     |  |       |            |  | in Active                     |  
|                                                                     |  |       |            |  | Markets for                   |  
|                                                                     |  |       |            |  | Identical Assets              |  
|                                                                     |  | Total |            |  | (Level 1)                     |  
|June 30, 2013                                                        |  |       |            |  |                               |  
|Available for sale securities:                                       |  |       |            |  |                               |  
|US Treasury                                                          |  | $     | 3,052,344  |  |                               | $
|US Government and federal agency                                     |  |       | 18,465,626 |  |                               |  
|Municipals                                                           |  |       | 1,608,587  |  |                               |  
|Mortgage-backed and collateralized mortgage obligations– residential |  |       | 12,710,567 |  |                               |  
|Total                                                                |  | $     | 35,837,124 |  |                               | $
|                                                                     |  |       |            |  |                               |  
|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 six 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 June 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)           |  
|June 30, 2013           |  |       |           |  |                     |  
|Impaired loans:         |  |       |           |  |                     |  
|Commercial              |  | $     | 27,559    |  |                     | $
|Commercial Real Estate: |  |       |           |  |                     |  
|General                 |  |       | 189,934   |  |                     |  
|Consumer:               |  |       |           |  |                     |  
|Lines of credit         |  |       | 69,247    |  |                     |  
|Other                   |  |       | 19,350    |  |                     |  
|Residential             |  |       | 161,575   |  |                     |  
|Total                   |  | $     | 467,665   |  |                     | $
|Foreclosed assets:      |  |       |           |  |                     |  
|Commercial Real Estate: |  |       |           |  |                     |  
|General                 |  | $     | 1,154,365 |  |                     | $
|Construction            |  |       | 159,283   |  |                     |  
|Total                   |  | $     | 1,313,648 |  |                     | $
|                        |  |       |           |  |                     |  
|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   |  |                     | $



- 33 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The following describes the impairment charges recognized
during the period:



At June 30, 2013, impaired loans carried at fair
value had a recorded investment of $638,032 and a valuation allowance of $170,367, resulting in additional provision of $137,127.
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 June 30,
2013 were $1,313,648 compared to $521,738 at December 31, 2012. During 2013, six properties included in this total were written
down by $92,771. During 2012, three properties included in this total were written down by $128,139.



- 34 -







COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The following tables present information as of
June 30, 2013 and December 31, 2012 about significant unobservable inputs related to the Bank’s individually material 1Level
3 financial assets, by class, measured on a non-recurring basis:



|                            |  |            |         |  | Valuation     |                           | Significant Unobservable |                                                                      | Range     |  |                                                                                                                    | Weighted | 
|--------------------------- |  | ---------- | ------- |  | ------------- | ------------------------- | ------------------------ | -------------------------------------------------------------------- | --------- |  | ------------------------------------------------------------------------------------------------------------------ | -------- | 
|                            |  | Fair Value |         |  | Technique (s) |                           | Inputs                   |                                                                      | of Inputs |  |                                                                                                                    | Average  | 
|June 30, 2013               |  |            |         |  |               |                           |                          |                                                                      |           |  |                                                                                                                    |          | 
|                            |  |            |         |  |               |                           |                          |                                                                      |           |  |                                                                                                                    |          | 
|Foreclosed assets:          |  |            |         |  |               |                           |                          |                                                                      |           |  |                                                                                                                    |          | 
|Commercial
    Real Estate: |  |            |         |  |               | Sales comparison approach |                          | Adjustments for differences between
    the comparable sales         |           |  | (45.0)
                                                                                           - 9.3            | %        | 
|General                     |  | $          | 684,000 |  |               | Income approach           |                          | Capitalization rate                                                  |           |  | 10.0                                                                                                               | %        | 
|                            |  |            |         |  |               | Income approach           |                          | Adjustments for differences
    in net operating income expectations |           |  | (40.0)
                                                                                                     - (4.4 | )%       | 
|Total                       |  | $          | 684,000 |  |               |                           |                          |                                                                      |           |  |                                                                                                                    |          | 



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



- 35 -







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 |  
|------------------------------------------------- |  | -------------- | ------- |  | ----------------------- | -
|                                                  |  | Carrying       |         |  | at June 30, 2013 Using  |  
|                                                  |  | Amount         |         |  | Level 1                 |  
|                                                  |  | (in thousands) |        
|Financial assets                                  |  |                |         |  |                         |  
|Cash and cash equivalents                         |  | $              | 13,608  |  |                         | $
|Loans held for sale                               |  |                | 4,998   |  |                         |  
|Loans, net (including impaired)                   |  |                | 121,260 |  |                         |  
|FHLB stock                                        |  |                | 451     |  |                         |  
|Accrued interest receivable                       |  |                | 528     |  |                         |  
|                                                  |  |                |         |  |                         |  
|Financial liabilities                             |  |                |         |  |                         |  
|Deposits                                          |  |                | 169,135 |  |                         |  
|Federal funds purchased and repurchase agreements |  |                | 10,180  |  |                         |  
|Subordinated debentures                           |  |                | 4,500   |  |                         |  
|Notes payable                                     |  |                | 1,280   |  |                         |  
|Accrued interest payable                          |  |                | 450     |  |                         |  



|                                                  |  |                |         |  | Fair Value Measurements    |  
|------------------------------------------------- |  | -------------- | ------- |  | -------------------------- | -
|                                                  |  | Carrying       |         |  | at December 31, 2012 Using |  
|                                                  |  | 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   |  |                            |  



- 36 -







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.



- 37 -







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
two 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.



- 38 -







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 June 30, 2013, the total risk-based capital ratio of the Bank had risen to
8.27% and 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 June 30, 2013 and December 31, 2012 were:



|                                                                              |  |        |            |  |                   |  |      | Minimum Required |  |   | Minimum Required | 
|----------------------------------------------------------------------------- |  | ------ | ---------- |  | ----------------- |  | ---- | ---------------- |  | - | ---------------- | 
|                                                                              |  |        |            |  |                   |  |      | For Capital      |  |   | Under            | 
|                                                                              |  | Actual |            |  | Adequacy Purposes |  |      | Consent Order    | 
|                                                                              |  | Amount |            |  | Ratio             |  |      | Amount           |  |   | Ratio            | 
|                                                                              |  |        |            |  |                   |  |      |                  |  |   |                  | 
|June 30, 2013                                                                 |  |        |            |  |                   |  |      |                  |  |   |                  | 
|Total Capital (Tier 1
    and Tier 2) to
    risk-weighted assets of the Bank |  | $      | 11,137,921 |  |                   |  | 8.27 | %                |  | $ | 10,779,401       | 
|Tier 1 (Core) Capital
    to risk-weighted assets of the Bank                 |  |        | 9,433,849  |  |                   |  | 7.00 |                  |  |   | 5,389,701        | 
|Tier 1 (Core) Capital
    to average assets of the Bank                       |  |        | 9,433,849  |  |                   |  | 4.84 |                  |  |   | 7,803,635        | 



|                                                                          |  |        |            |  |                   |  |      | 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        | 



- 39 -







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 June 30, 2013, only $1,704,072 was counted as Tier 2 capital and $1,583,202 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 have been submitted to the FDIC. Management continues to update the action plans and is
working diligently to reduce the risk position as outlined in each action plan.



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 June 30, 2013 or either December 31, 2010, 2011 or 2012. Management continues to explore
options to raise the capital required for full compliance. At June 30, 2013, a capital contribution of $7,149,000 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.



- 40 -







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 June 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.



- 41 -







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 June 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 June 30, 2013 to that at December 31, 2012. The part labeled Results of Operations discusses the three and
six month periods ending June 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.



- 42 -







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 June 30, 2013, unemployment was 9.2% for Muskegon County and 7.2% 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 June 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. The Company’s main liquidity resource is its cash account balance which, as of June 30, 2013,
was approximately $688,000 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.



- 43 -







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 proceeding 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.



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.



- 44 -







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.



- 45 -







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 $189.6 million at June 30, 2013
compared to $204.2 million at December 31, 2012. The $14.6 million decrease in assets stemmed mainly from the seasonal fluctuation
in the deposit balances of several of the Bank’s large public fund customers and the maturity of securities.



Cash and cash equivalents decreased by $6.7 million
in the first half of 2013 and were $13.6 million at June 30, 2013. Cash and cash equivalents were $20.3 million at year-end 2012.
The Bank’s FRB balance decreased $6.9 million since year-end 2012 and was $10.4 million on June 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 June 30, 2013 was within 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 Bank’s security portfolio
was $35.8 million at June 30, 2013 and $41.5 million at December 31, 2012. Investment activity in the first six months of the year
consisted of maturities, prepayments and calls totaling $4.9 million and market value adjustments of $545,000. There were no sales
or purchases of portfolio securities in the first six months of 2013.



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 monthly. 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 June 30, 2013, 19% 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 (“TAG”).



- 46 -







COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS



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 six months
of 2013.



At June 30, 2013, $29.0 million of securities were
pledged to public fund customers, FRB Automated Clearing House (“ACH”) debit activity and customer repurchase agreements.



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 $545,000 since year-end 2012 and was
$57,000 at June 30, 2013. Included in this total are 21 securities with an amortized cost of $13.9 million having an unrealized
loss of $292,000. One of the 21 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 June 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 June 30, 2013.



Loans held for sale activity during
the first six months of 2013 included $5.5 million of loan originations, $994,000 of loans transferred to the held for investment
portfolio and $5.7 million of loan sales. The associated gain on the loan sales was $127,000. The loans that were transferred to
the held for investment portfolio were Small Business Administration (“SBA”) loans. The transfer was based on management’s
re-evaluation of the Bank’s intent to sell these loans in the short-term.



Total loans (held for investment)
decreased $1.3 million and were $124.5 million at June 30, 2013 down from $125.8 million at December 31, 2012. There were decreases
in nearly every loan category that more than offset an increase to the commercial loan portfolio. With the increase in commercial
loans outstanding, the concentration changed slightly. At June 30, 2013, the concentration of commercial and commercial real estate
loans was 78%; 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 affected the Bank’s earnings and capital.



- 47 -







COMMUNITY SHORES BANK CORPORATION

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

OPERATIONS



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 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.



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 June 30, 2013, the allowance for loan losses totaled $3.3
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 $96,000 recorded in the first half of 2013. The ratio of allowance to gross loans outstanding decreased to a level
of 2.64% at June 30, 2013 compared to 2.69% at year-end 2012. Fifty-four percent of the loan charge-offs occurring in the first
half of 2013 held specific allocations at year-end 2012.



- 48 -











COMMUNITY SHORES BANK CORPORATION

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



The allocation of the allowance at June 30, 2013 and December
31, 2012 was as follows:



|                         |  | June 30, 2013 |           |  | December 31, 2012 | 
|------------------------ |  | ------------- | --------- |  | ----------------- | 
|                         |  |               |           |  | Percent of        | 
|                         |  |               |           |  | Loans in Each     | 
|Balance at End of Period |  |               |           |  | Category to       | 
|Applicable to:           |  | Amount        |           |  | Total Loans       | 
|Commercial               |  | $             | 439,993   |  |                   | 
|Commercial Real Estate   |  |               | 1,920,587 |  |                   | 
|Consumer                 |  |               | 419,511   |  |                   | 
|Residential              |  |               | 157,406   |  |                   | 
|Unallocated              |  |               | 349,777   |  |                   | 
|Total                    |  | $             | 3,287,274 |  |                   | 



The general component of the allowance for loan losses as a
percentage of non-specifically identified loans was 1.07% at June 30, 2013, a decrease of 30 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 $350,000 of unallocated reserves in the allowance for loan losses stemming from improvement in macro-economic factors as well
as 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 similar to year-end 2012 at a level of 1.38%. 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 June 30, 2013, the allowance contained $1,694,000 in specific
allocations for impaired loans whereas at December 31, 2012 there was $1,810,000 specifically allocated. There was $9.1 million
of recorded investment on impaired loans at June 30, 2013, compared to $11.7 million at year-end 2012. At June 30, 2013, the recorded
investment on impaired loans requiring no reserves was $3.5 million, a decrease of $1.6 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, $582,000 of impaired loans were moved to foreclosed assets in the first half
of 2013. There were specific allocations on these loans of $58,000 at year-end 2012. At June 30, 2013, 38% of specifically identified
loans required no reserves. In many cases, management had approved further charge-offs since the time of their initial impairment,
which reduced principal to the current value of assigned collateral or expected repayment, therefore no further specific reserve
is required on these loans. At year-end 2012, approximately 44% of specifically identified loans required no reserves.



Recorded investment on specifically identified loans requiring
reserves was $5.7 million at June 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 June 30,
2013, the recorded investment in accruing past due and non-accrual loans decreased by $961,000. This was evidenced by a $155,000
decrease in the recorded investment in past due loans and a $806,000 decrease in the recorded investment in non-accrual loans in
the first six months of 2013.



- 49 -







COMMUNITY SHORES BANK CORPORATION

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



The recorded investment of accruing loans
past due 30-59 days was $106,000 at June 30, 2013; a decrease of $25,000 since December 31, 2012. There were three loans past due
30-59 days at June 30, 2013.



There were no accruing loans with a recorded investment past
due 60-89 days at June 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 June 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 $3.1 million
at June 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 2% of the total is secured by undeveloped real
estate. At June 30, 2013, there were specific allocations of $1.3 million in the allowance for any estimated collateral deficiency
on non-accrual loans.



Loan charge-off activity has been minimal in 2013 which follows
the trend of stabilized economic conditions and improving credit quality. Overall net charge-offs for the second quarter of 2013
were $15,000 and were $96,000 for the first half of 2013. The corresponding ratio of net charge-offs to average loans for the second
quarter of 2013 was 0.05% while the ratio of net charge-offs to average loans was 0.15% for the first half of 2013.



The net charge-offs for the second quarter of 2012 were $113,000
and $1.1 million for the first half of 2012. The resulting ratio of net charge-offs to average loans for the second quarter of
2012 was 0.32% and 1.47% for the first half of the same year.



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, two other methods used are to balance the rate sensitivity of the portfolio and avoid extension risk1.



|
|




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



- 50 -







COMMUNITY SHORES BANK CORPORATION

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



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



|                        |  | Within       |           |  | Three to      |   |            | One to     |  |   | After      |  |  |       |           
|----------------------- |  | ------------ | --------- |  | ------------- | - | ---------- | ---------- |  | - | ---------- |  |  | ----- | ----------
|                        |  | Three Months |           |  | Twelve Months |   |            | Five Years |  |   | Five Years |  |  | Total |           
|Commercial              |  | $            | 4,221,078 |  |               | $ | 16,090,257 |            |  | $ | 16,647,449 |  |  | $     | 6,905,743 
|Commercial Real Estate: |  |              |           |  |               |   |            |            |  |   |            |  |  |       |           
|General                 |  |              | 3,010,173 |  |               |   | 7,265,375  |            |  |   | 39,101,213 |  |  |       | 2,056,906 
|Construction            |  |              | 236,686   |  |               |   | 1,454,481  |            |  |   | 533,618    |  |  |       | 0         
|Consumer:               |  |              |           |  |               |   |            |            |  |   |            |  |  |       |           
|Lines of credit         |  |              | 659,359   |  |               |   | 734,158    |            |  |   | 2,786,316  |  |  |       | 4,593,705 
|Other                   |  |              | 83,143    |  |               |   | 156,157    |            |  |   | 870,835    |  |  |       | 538,129   
|Credit card             |  |              | 54,390    |  |               |   | 167,112    |            |  |   | 252,186    |  |  |       | 0         
|Residential             |  |              | 0         |  |               |   | 364,595    |            |  |   | 0          |  |  |       | 15,763,908
|                        |  | $            | 8,264,829 |  |               | $ | 26,232,135 |            |  | $ | 60,191,617 |  |  | $     | 29,858,391
|Loans at fixed rates    |  | $            | 5,484,565 |  |               | $ | 13,425,209 |            |  | $ | 44,799,636 |  |  | $     | 20,317,100
|Loans at variable rates |  |              | 2,780,264 |  |               |   | 12,806,926 |            |  |   | 15,391,981 |  |  |       | 9,541,291 
|                        |  | $            | 8,264,829 |  |               | $ | 26,232,135 |            |  | $ | 60,191,617 |  |  | $     | 29,858,391



At June 30, 2013, there were 67% of the loan balances carrying
a fixed rate and 33% a floating rate. This concentration of fixed rate loans is down from a level of 78% at June 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 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.



The maturity distribution of the loan portfolio has lengthened
over the last several years but still remains at a level which is within the parameters determined to be acceptable by management.
Contributing to the change in distribution is the increase in the mortgage loan portfolio. Typically management strives to retain
only 10-15% of residential mortgages originated because of the longer contractual terms generally associated with mortgage products.
At June 30, 2013, approximately 24% 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 $2.8 million at June 30, 2013 which was
an increase of $24,000 since December 31, 2012. These assets consist of relinquished properties through the collection process
which were previously customer collateral supporting various borrowings. At June 30, 2013 there were 25 real estate holdings and
at December 31, 2012 there were 24 real estate holdings. Foreclosed activity in the first half of 2013 consisted of seven lot and
five property sales and six additions.



- 51 -







COMMUNITY SHORES BANK CORPORATION

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



Deposit balances were $169.1 million at June 30, 2013 down from
$184.2 million at December 31, 2012. The net decrease of $15.1 million stemmed from non-interest bearing balances declining $9.8
million and interest bearing balances decreasing $5.3 million in the first half of 2013. A portion of the non-interest bearing
activity entailed customers moving their balances into interest bearing accounts after the conclusion of TAG. One non-interest
bearing customer wired $2.2 million to another financial institution in January to diversify their deposits after the conclusion
of TAG. Non-interest bearing balances were $40.3 million on December 31, 2012 and $30.5 million on June 30, 2013.



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 $138.6 million on June
30, 2013 down from $143.9 million on December 31, 2012. The $5.3 million decrease in the first half of the year was the result
of interest bearing demand deposits and money market accounts together rising $3.6 million and the time deposit portfolio declining
$8.6 million. Savings accounts declined $255,000 in the first half of 2013.



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 the Bank’s common stock. The extinguishment
of debt resulted in a gain of $5.3 million.



Shareholders’ equity was $3.6 million
on June 30, 2013. On December 31, 2012, the balance was $(1.2) million. The net increase of $4.8 million was made up of net income
recorded in the first six months of 2013 offset partially by decreases in accumulated other comprehensive income (security market
value adjustments). The book value per share was $2.45 at June 30, 2013.



The Bank’s capital ratios have risen
since year-end 2012. At June 30, 2013, the Bank’s total risk-based capital ratio was 8.27% and its tier one to average assets
ratio was 4.84%. 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 two 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 June 30, 2013. In order to attain the level
of capital required by the Consent Order, the Bank would have needed additional capital of $7,149,000 on June 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.



- 52 -







COMMUNITY SHORES BANK CORPORATION

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



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.



RESULTS OF OPERATIONS



Net income recorded for the first six months of 2013 was $5.4
million. Net income recorded for the similar period in 2012 was $258,000. The improvement of $5.1 million between the first six
months of 2013 and the first six months of 2012 stemmed mainly from a $5.3 million gain on debt extinguishment. The corresponding
basic and diluted earnings per share for the first six months of 2013 was $3.66. The basic and diluted earnings per share for the
first half of 2012 was $0.18.



The net income for the second quarter of 2013 was $75,000, which
was $246,000 less than net income of $322,000 recorded for the second quarter of 2012. The corresponding basic and diluted earnings
per share for the second quarter of 2013 was $0.05. The basic and diluted earnings per share for the second quarter of 2012 was
$0.22. The income recorded in the second quarter of 2012 was largely the result of completing the sale of land the Bank had purchased
in the fourth quarter of 2006 for expansion of its branching system. The property was located on Apple Avenue in Muskegon County.
The book value of the land sold was $788,000. There was a gain recorded of $208,000.



For the first six months
of 2013, the annualized return on the Company’s average total assets was 5.41% compared to 0.24% for the first six months
of 2012. For the second quarter of 2013, the annualized return on the Company’s average total assets was 0.15% compared to
0.62% for the similar period in 2012.



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 six months of 2013, the annualized return on shareholders’ equity was 624.5%. The Company’s
average shareholders’ equity for the second three month period of 2013 was 7.74%. 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 half 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.



|                                                                            |  | Six Months
    ended June 30, |            
|--------------------------------------------------------------------------- |  | ----------------------------- | -----------
|                                                                            |  | 2013                          |            
|                                                                            |  | Average                       |            
|                                                                            |  | Balance                       |            
|Assets                                                                      |  |                               |            
|Federal
    funds sold and interest- bearing deposits with banks            |  | $                             | 15,403,645 
|Securities                                                                  |  |                               | 39,130,885 
|Loans
    (including held for sale and non accrual)                         |  |                               | 131,449,876
|                                                                            |  |                               | 185,984,406
|Other
    assets                                                            |  |                               | 12,937,183 
|                                                                            |  | $                             | 198,921,589
|Liabilities and Shareholders’
    Equity                                    |  |                               |            
|Interest-bearing deposits                                                   |  | $                             | 143,665,307
|Repurchase agreements                                                       |  |                               | 10,043,572 
|Subordinated
    debentures and notes payable                               |  |                               | 5,228,398  
|                                                                            |  |                               | 158,937,277
|Non-interest-bearing deposits                                               |  |                               | 35,032,523 
|Other liabilities                                                           |  |                               | 3,229,250  
|Shareholders’
    Equity                                                    |  |                               | 1,722,539  
|                                                                            |  | $                             | 198,921,589
|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
11 basis points to 3.38% in the past twelve months. The net interest margin decreased by 13 basis points from 3.63% for the first
six months of 2012 to 3.50% for the first six months of 2013. Net interest income for the first six months of 2013 was $3.3 million
compared to $3.6 million for the same six months in 2012. During the twelve month period from June 30, 2012 to June 30, 2013, average
earning assets decreased by $13.2 million. The deterioration stemmed largely from a decrease in the yield earned on earning 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 4.20%
for the six month period ending June 30, 2013 compared to 4.65% for the same period in 2012. The main contributing factor was a
reduction in both the rate and volume of the loan portfolio, the Company’s largest earning asset category. As the economy
improves, businesses become healthier which strengthens their financial condition and allows them more banking options. As economic
activity returns, many businesses are using excess liquidity to repay loans while others are pursuing lower rate financing at other
financial institutions.



The Company’s average loan portfolio is $12.2 million
smaller than it was for the first six month period of 2012. Management will match competitor pricing to retain a customer when
the rates adequately reflect borrower risk. 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.



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 matured,
the replacement securities purchased yielded lower rates as a result of differences in the rate 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 $366,000 and the average rate paid improved by 34 basis points when comparing the first
six months of 2013 to that of the similar period in 2012.



The yield paid on interest bearing deposits declined 24 basis
points primarily due to a 24 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 will be an ongoing goal of management.



The Bank’s customer repurchase agreement balance remained
essentially the same in both six month periods; however, the average rate paid declined by 18 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 two six 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 115 basis points between the first half of 2013 and
the first half 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 $4.3 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 2.35% in the first half of 2013 which is roughly 22 basis points lower than an average rate of 2.57% 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 second quarter ended June 30, 2013 and 2012 is in the table below.



|                                                                            |  | Three Months
    ended June 30, |            
|--------------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                            |  | 2013                            |            
|                                                                            |  | Average                         |            
|                                                                            |  | Balance                         |            
|Assets                                                                      |  |                                 |            
|Federal funds
    sold and interest-bearing deposits with banks             |  | $                               | 13,462,955 
|Securities                                                                  |  |                                 | 37,581,116 
|Loans
    (including held for sale and non accrual)                         |  |                                 | 130,752,458
|                                                                            |  |                                 | 181,796,529
|Other
    assets                                                            |  |                                 | 13,167,479 
|                                                                            |  | $                               | 194,964,008
|Liabilities and Shareholders’
    Equity                                    |  |                                 |            
|Interest-bearing deposits                                                   |  | $                               | 140,808,852
|Repurchase agreements                                                       |  |                                 | 9,970,945  
|Subordinated
    debentures and notes payable                               |  |                                 | 5,780,000  
|                                                                            |  |                                 | 156,559,797
|Non-interest-bearing deposits                                               |  |                                 | 33,573,462 
|Other liabilities                                                           |  |                                 | 955,554    
|Shareholders’
    Equity                                                    |  |                                 | 3,875,195  
|                                                                            |  | $                               | 194,964,008
|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
27 basis points to 3.27% in the past twelve months. The net interest margin decreased by 28 basis points from 3.67% for the second
quarter of 2012 to 3.39% for the second quarter of 2013. The net interest income for the second quarter of 2013 was $1.5 million;
compared to a figure of $1.8 million for the same three months in 2012. Additionally, there was a decrease in average earning assets
of $14.4 million when comparing the second quarter of 2013 to the second quarter of 2012.



The average rate earned on interest earning assets was 4.09%
for the three month period ending June 30, 2013, compared to 4.66% for the same period in 2012. One of the reasons for the decrease
stems from the yield on the securities portfolio declining by 42 basis points between the second quarter of 2012 and that of 2013.
As described earlier, throughout the last year, as securities matured or were called, the replacement securities purchased yielded
lower rates as a result of differences in the rate environment.



- 56 -







COMMUNITY SHORES BANK CORPORATION

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



The primary reason for the decrease in the average rate earned
on earning assets was the reduction in the yield on the loan portfolio, the Company’s largest earning asset category. The
average rate earned on the loan portfolio was 5.25% in the second quarter of 2013, a reduction of 78 basis points compared to the
second quarter of 2012. A majority of the yield decrease was due to an $8.7 million contraction in the loan portfolio over the
last twelve months. Several of the loan payoffs were on higher rate credits thus changing the rate distribution of the loan portfolio.
The Bank has an internal prime rate that is 175 basis points above the national prime rate, which can make it difficult to compete
with other local banks when loans come up for renewal. Finally, there was one interest adjustment that was responsible for 25 basis
points of the overall reduction. The interest adjustment was associated with a note that was previously on non-accrual. The Company
expects to recoup the reversed interest over time.



Decreases to the overall yield on interest earning assets were
not completely offset by rate reductions on the funding side. Since the second quarter of 2012, the cost of funds improved 30 basis
points. The main contributing factor was a 21 basis point improvement in the rate paid on interest bearing deposits when comparing
the second quarter of 2013 to that of the similar period of 2012; a majority of the improvement was a 24 basis point reduction
in the average rate paid on the time deposit portfolio over the last twelve months.



Additionally, there were
improvements in the average rate paid on repurchase agreements, subordinated debentures and notes payable between the second quarter
of 2013 and the second quarter of 2012. The average rate paid on repurchase agreements was 19 basis points less. The average rate
paid on subordinated debentures and notes payable was 3.83% for the second quarter of 2013; a 67 basis point decrease stemming
from the new blended rate of the Company’s debt.



For both the six month and three month periods ending June 30,
2013, improvements to the Company’s cost of funds were not able to offset the decline in the yield on average earning assets.
This trend is expected to continue and the Company’s net interest income and net interest margin will likely be detrimentally
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 June 30, 2013 were:



|                                                          |  | Interest Rate Sensitivity Period |            
|--------------------------------------------------------- |  | -------------------------------- | -----------
|                                                          |  | Within                           |            
|                                                          |  | Three                            |            
|                                                          |  | Months                           |            
|Earning assets                                            |  |                                  |            
|Interest-bearing deposits in other financial institutions |  | $                                | 10,418,177 
|Securities (including FHLB stock)                         |  |                                  | 4,125,599  
|Loans held for sale                                       |  |                                  | 4,997,603  
|Loans                                                     |  |                                  | 51,287,575 
|                                                          |  |                                  | 70,828,954 
|Interest-bearing liabilities                              |  |                                  |            
|Savings and checking                                      |  |                                  | 53,868,085 
|Time deposits <$100,000                                   |  |                                  | 11,009,551 
|Time deposits >$100,000                                   |  |                                  | 1,896,928  
|Repurchase agreements and Federal funds purchased         |  |                                  | 10,180,238 
|Notes payable and other borrowings                        |  |                                  | 4,500,000  
|                                                          |  |                                  | 81,454,802 
|Net asset (liability) repricing gap                       |  | $                                | (10,625,848
|Cumulative net asset (liability) repricing gap            |  | $                                | (10,625,848



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 six months
of 2013 and just $75,000 for the first half of 2012. Neither the second quarter of 2013 nor the second 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.





Non-interest income recorded in the first six months of 2013
was $6.1 million compared to $876,000 recorded for the similar period in 2012. The first half 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.







- 58 -







COMMUNITY SHORES BANK CORPORATION

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



Non-interest income for the second quarter
of 2013 was $427,000 compared to $575,000 of non-interest income in the second quarter of 2012. The second quarter of 2012 included
a $208,000 gain on the sale of land that was purchased by the Bank in 2006 for a future branch. There was a $38,000 difference
between gains on foreclosed asset transactions when comparing the second quarter of 2013 to the similar period in 2012 and other
income for the second quarter of 2013 included $29,000 more service fee income on SBA loans than what was recorded in the second
quarter of 2012.



Non-interest expenses for the first six months of 2013 were
$3.8 million. Non-interest expenses for the first six months of 2012 were $4.2 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 second quarter
of 2013 compared to $2.1 million for the similar period in 2012. The decline of $165,000 was attributable to reductions in FDIC
insurance and collection expenses.



There were foreclosed asset impairment charges of $109,000 in
the first half of 2013, compared to $185,000 in the first half 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, the total
decreased in the first two quarters of 2013 compared to the first two quarters of 2012. The decrease is caused by two things, the
Bank’s portfolio of foreclosed real property is declining and the values of the properties within the portfolio appear to
be stabilizing. At June 30, 2013, the Bank held 25 foreclosed assets valued at a total of $2.8 million.



Beginning with the March 31, 2013 regulatory capital reporting
period, the Bank achieved an adequately capitalized regulatory capital status. Although management knew that the improvement in
regulatory capital ratio would translate into an FDIC premium reduction of 30% or more per quarter, it was unclear when the savings
would begin. To be conservative, the Bank did not assume a reduction in FDIC insurance premiums in the quarter that it achieved
the adequately capitalized regulatory capital status. In mid-June when the FDIC sent the insurance billing for the first quarter
of 2013, the Bank confirmed that it was charged the rates of an adequately capitalized financial institution. An accrual reversal
of $58,000 was recorded in June along with a reduction in second quarter premiums. For the entire year of 2012, the Bank was considered
under-capitalized. FDIC insurance expenses were $224,000 for the first half of 2013 compared to $362,000 for the first half of
2012; a reduction of $138,000. The second quarter of 2013 included the $58,000 accrual adjustment resulting in a recorded expense
of $51,000. FDIC premiums were $178,000 in the second quarter of 2012.



Other non-interest expenses were $630,000 for the first two
quarters of 2013 and $737,000 for the like period in 2012; a reduction of $107,000. The main contributing factor is a $120,000
reduction in expenses to administer impaired assets. In the first half of 2013, these expenses totaled $196,000. Similarly, these
expenses totaled $316,000 in the first half of 2012. Fewer expenses related to administering impaired assets supports management’s
assessment of improved credit quality over the past several quarters. Similarly, the decline of $61,000 in other non-interest expense
between the second quarter of 2013 and the second quarter of 2012 was primarily the result of a $56,000 reduction in expenses to
administer impaired assets between the two quarterly periods.



- 59 -







COMMUNITY SHORES BANK CORPORATION

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



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
| | ------- | -----------------------



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 June 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, to the best of their
knowledge, effective as of June 30, 2013.



There have been no changes in the internal control over financial
reporting during the quarter ended June 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 June 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
|--------------- | ---------------------------------
|                |                                  
|August 13, 2013 | By:                              
|Date            |                                  
|                |                                  
|                |                                  
|                |                                  
|August 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 -