UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-51166
 Community Shores Bank Corporation
  Michigan
    
    38-3423227(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)1030 W. Norton Avenue, Muskegon, MI
    
    49441(Address of principal executive offices)
    
    (Zip Code)
 231) 780-1800
 
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ




---



##### 



Page No.PART I.
Financial InformationItem 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II.
Other InformationItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults upon Senior Securities
    
    
    30Item 4. Reserved
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    30Signatures
    
    
    31




---



##### 



September 30,
    
    
    December 31,2010
    
    
    2009(unaudited)ASSETSCash and due from financial institutions
    
    $
    2,759,910
    
    
    $
    2,161,388Interest-bearing deposits in other financial institutions
    
    
    23,762,066
    
    
    
    662,700Total cash and cash equivalents
    
    
    26,521,976
    
    
    
    2,824,088SecuritiesAvailable for sale (at fair value)
    
    
    34,823,196
    
    
    
    21,650,026Held to maturity (fair value of $0 at September 30, 2010 and
$5,945,437 at December 31, 2009)
    
    
    0
    
    
    
    5,841,421Total securities
    
    
    34,823,196
    
    
    
    27,491,447Loans held for sale
    
    
    1,170,141
    
    
    
    1,070,692Loans
    
    
    170,502,544
    
    
    
    183,247,827Less: Allowance for loan losses
    
    
    4,544,431
    
    
    
    3,782,132Net loans
    
    
    165,958,113
    
    
    
    179,465,695Federal Home Loan Bank stock
    
    
    513,600
    
    
    
    404,100Premises and equipment, net
    
    
    10,945,436
    
    
    
    11,293,169Accrued interest receivable
    
    
    794,495
    
    
    
    885,103Foreclosed assets
    
    
    5,673,287
    
    
    
    6,440,916Other assets
    
    
    1,337,172
    
    
    
    1,554,849Total assets
    
    $
    247,737,416
    
    
    $
    231,430,059LIABILITIES AND SHAREHOLDERS EQUITYDepositsNon-interest-bearing
    
    $
    25,417,038
    
    
    $
    24,884,625Interest-bearing
    
    
    197,427,294
    
    
    
    173,691,984Total deposits
    
    
    222,844,332
    
    
    
    198,576,609Federal funds purchased and repurchase agreements
    
    
    10,114,988
    
    
    
    7,000,327Federal Home Loan Bank advances
    
    
    0
    
    
    
    6,000,000Subordinated debentures
    
    
    4,500,000
    
    
    
    4,500,000Notes payable
    
    
    5,000,000
    
    
    
    5,000,000Accrued expenses and other liabilities
    
    
    699,409
    
    
    
    613,132Total liabilities
    
    
    243,158,729
    
    
    
    221,690,068Shareholders equityPreferred Stock, no par value: 1,000,000 shares
authorized and none issued
    
    
    0
    
    
    
    0Common Stock, no par value: 9,000,000 shares authorized;
1,468,800 issued and outstanding
    
    
    13,296,691
    
    
    
    13,296,691Retained deficit
    
    
    (9,284,699
    )
    
    
    (3,734,295
    )Accumulated other comprehensive income
    
    
    566,695
    
    
    
    177,595Total shareholders equity
    
    
    4,578,687
    
    
    
    9,739,991Total liabilities and shareholders equity
    
    $
    247,737,416
    
    
    $
    231,430,059
  - 1 -




---



##### 



Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30, 2010
    
    
    September 30, 2009
    
    
    September 30, 2010
    
    
    September 30, 2009Interest and dividend incomeLoans, including fees
    
    $
    2,768,788
    
    
    $
    3,104,682
    
    
    $
    8,428,987
    
    
    $
    9,376,110Securities
    
    
    217,413
    
    
    
    226,299
    
    
    
    634,107
    
    
    
    722,359FHLB dividends and other income
    
    
    21,280
    
    
    
    13,035
    
    
    
    44,403
    
    
    
    41,031Total interest income
    
    
    3,007,481
    
    
    
    3,344,016
    
    
    
    9,107,497
    
    
    
    10,139,500Interest expenseDeposits
    
    
    1,108,847
    
    
    
    1,357,813
    
    
    
    3,343,353
    
    
    
    4,565,492Repurchase agreements, federal funds purchased,
and other debt
    
    
    17,616
    
    
    
    16,653
    
    
    
    58,944
    
    
    
    36,292Federal Home Loan Bank advances, subordinated
debentures and notes payable
    
    
    199,215
    
    
    
    171,614
    
    
    
    547,777
    
    
    
    515,007Total interest expense
    
    
    1,325,678
    
    
    
    1,546,080
    
    
    
    3,950,074
    
    
    
    5,116,791Net Interest Income
    
    
    1,681,803
    
    
    
    1,797,936
    
    
    
    5,157,423
    
    
    
    5,022,709Provision for loan losses
    
    
    2,022,923
    
    
    
    444,900
    
    
    
    3,384,727
    
    
    
    923,300Net Interest Income after Provision for Loan
Losses
    
    
    (341,120
    )
    
    
    1,353,036
    
    
    
    1,772,696
    
    
    
    4,099,409Non-interest incomeService charges on deposit accounts
    
    
    205,832
    
    
    
    236,544
    
    
    
    579,655
    
    
    
    682,928Mortgage loan referral fees
    
    
    0
    
    
    
    1,694
    
    
    
    0
    
    
    
    17,114Gain on sale of loans
    
    
    83,947
    
    
    
    64,312
    
    
    
    190,784
    
    
    
    271,054Gain on sale of securities
    
    
    0
    
    
    
    0
    
    
    
    79,814
    
    
    
    273,010Gain (loss) on sale of foreclosed assets
    
    
    (49,814
    )
    
    
    (11,046
    )
    
    
    (71,125
    )
    
    
    (22,087
    )Other
    
    
    128,849
    
    
    
    113,517
    
    
    
    440,041
    
    
    
    399,354Total non-interest income
    
    
    368,814
    
    
    
    405,021
    
    
    
    1,219,169
    
    
    
    1,621,373Non-interest expenseSalaries and employee benefits
    
    
    1,022,220
    
    
    
    1,016,636
    
    
    
    3,061,423
    
    
    
    3,221,516Occupancy
    
    
    165,237
    
    
    
    155,044
    
    
    
    479,524
    
    
    
    485,508Furniture and equipment
    
    
    138,363
    
    
    
    165,540
    
    
    
    442,948
    
    
    
    503,397Advertising
    
    
    11,259
    
    
    
    28,028
    
    
    
    48,526
    
    
    
    60,245Data processing
    
    
    135,083
    
    
    
    118,442
    
    
    
    395,106
    
    
    
    370,897Professional services
    
    
    164,653
    
    
    
    142,906
    
    
    
    405,600
    
    
    
    371,753Foreclosed asset impairment
    
    
    1,588,168
    
    
    
    178,320
    
    
    
    1,972,789
    
    
    
    298,062Other
    
    
    723,594
    
    
    
    519,548
    
    
    
    1,736,353
    
    
    
    1,596,948Total non-interest expense
    
    
    3,948,577
    
    
    
    2,324,464
    
    
    
    8,542,269
    
    
    
    6,908,326Loss Before Federal Income Taxes
    
    
    (3,920,883
    )
    
    
    (566,407
    )
    
    
    (5,550,404
    )
    
    
    (1,187,544
    )Federal income tax expense
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    985,961Net Loss
    
    $
    (3,920,883
    )
    
    $
    (566,407
    )
    
    $
    (5,550,404
    )
    
    $
    (2,173,505
    )Comprehensive Loss
    
    $
    (3,808,646
    )
    
    $
    (344,279
    )
    
    $
    (5,161,304
    )
    
    $
    (2,315,195
    )Weighted average shares outstanding
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800Diluted average shares outstanding
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800
    
    
    
    1,468,800Basic loss per share
    
    $
    (2.67
    )
    
    $
    (0.39
    )
    
    $
    (3.78
    )
    
    $
    (1.48
    )Diluted loss per share
    
    $
    (2.67
    )
    
    $
    (0.39
    )
    
    $
    (3.78
    )
    
    $
    (1.48
    )
  - 2 -




---



##### 



AccumulatedRetained
    
    
    Other
    
    
    TotalCommon
    
    
    (Deficit)
    
    
    Comprehensive
    
    
    Shareholders'Shares
    
    
    Stock
    
    
    Earnings
    
    
    Income
    
    
    EquityBalance at January 1, 2009
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    1,228,084
    
    
    $
    421,679
    
    
    $
    14,946,454Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (2,173,505
    )
    
    
    
    
    
    
    (2,173,505
    )Unrealized loss on securities
available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141,690
    )
    
    
    (141,690
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,315,195
    )Balance at September 30, 2009
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    (945,421
    )
    
    $
    279,989
    
    
    $
    12,631,259Balance at January 1, 2010
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    (3,734,295
    )
    
    $
    177,595
    
    
    $
    9,739,991Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (5,550,404
    )
    
    
    
    
    
    
    (5,550,404
    )Unrealized gain on securities
available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389,100
    
    
    
    389,100Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,161,304
    )Balance at September 30, 2010
    
    
    1,468,800
    
    
    $
    13,296,691
    
    
    $
    (9,284,699
    )
    
    $
    566,695
    
    
    $
    4,578,687
  - 3 -




---



##### 



Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2010
    
    
    September 30, 2009Cash flows from operating activitiesNet loss
    
    $
    (5,550,404
    )
    
    $
    (2,173,505
    )Adjustments to reconcile net loss to net cash
from operating activities:Provision for loan losses
    
    
    3,384,727
    
    
    
    923,300Depreciation and amortization
    
    
    444,399
    
    
    
    511,161Net amortization of securities
    
    
    134,345
    
    
    
    78,468Net realized gain on sale of securities
    
    
    (79,814
    )
    
    
    (273,010
    )Net realized gain on sale of loans
    
    
    (190,784
    )
    
    
    (271,054
    )Net realized loss on sale of foreclosed assets
    
    
    71,125
    
    
    
    22,087Foreclosed asset impairment
    
    
    1,972,789
    
    
    
    298,062Originations of loans for sale
    
    
    (12,595,942
    )
    
    
    (22,323,669
    )Proceeds from loan sales
    
    
    12,687,277
    
    
    
    23,510,115Establish deferred tax asset valuation
    
    
    0
    
    
    
    1,203,189Net change in:Accrued interest receivable and other assets
    
    
    308,285
    
    
    
    (80,376
    )Accrued interest payable and other liabilities
    
    
    86,277
    
    
    
    (22,534
    )Net cash from (used in) operating activities
    
    
    672,280
    
    
    
    1,402,234Cash flows from investing activitiesActivity in available for sale securities:Sales
    
    
    3,751,027
    
    
    
    5,184,686Maturities, prepayments and calls
    
    
    9,578,493
    
    
    
    3,646,343Purchases
    
    
    (20,326,700
    )
    
    
    (12,831,394
    )Activity in held to maturity securities:Maturities
    
    
    0
    
    
    
    505,000Loan originations and payments, net
    
    
    7,114,261
    
    
    
    13,703,745Purchase of Federal Home Loan Bank stock
    
    
    (109,500
    )
    
    
    0Additions to premises and equipment, net
    
    
    (96,666
    )
    
    
    (26,038
    )Proceeds from the sale of foreclosed assets
    
    
    1,732,309
    
    
    
    120,373Net cash from (used in) investing activities
    
    
    1,643,224
    
    
    
    10,302,715Cash flows from financing activitiesNet change in deposits
    
    
    24,267,723
    
    
    
    (16,183,072
    )Net change in federal funds purchased and
repurchase agreements
    
    
    3,114,661
    
    
    
    3,336,480Repayment of FHLB advance
    
    
    (6,000,000
    )Draws on note payable and line of credit
    
    
    0
    
    
    
    800,000Net cash from (used in) financing activities
    
    
    21,382,384
    
    
    
    (12,046,592
    )Net change in cash and cash equivalents
    
    
    23,697,888
    
    
    
    (341,643
    )Beginning cash and cash equivalents
    
    
    2,824,088
    
    
    
    5,671,801Ending cash and cash equivalents
    
    $
    26,521,976
    
    
    $
    5,330,158Supplemental cash flow information:Cash paid during the period for interest
    
    $
    3,811,659
    
    
    $
    4,491,184Transfers from loans to foreclosed assets during the period
    
    
    3,008,594
    
    
    
    1,080,469Transfers from securities held to maturity to available for sale
    
    
    5,839,614
    
    
    
    0
  - 4 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    BASIS OF PRESENTATION AND RECENT DEVELOPMENTS:The unaudited, consolidated financial statements as of and for the three months and nine months
ended September 30, 2010 include the consolidated results of operations of Community Shores Bank
Corporation (Company) and its wholly-owned subsidiaries, Community Shores Bank (Bank) and
Community Shores Financial Services, and a wholly-owned subsidiary of the Bank, Community Shores
Mortgage Company (Mortgage Company). Community Shores Capital Trust I (the Trust) is not
consolidated and exists solely to issue capital securities. These consolidated financial statements
have been prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation
S-X and do not include all disclosures required by generally accepted accounting principles for a
complete presentation of the Companys financial condition and results of operations. In the
opinion of management, the information reflects all adjustments (consisting only of normal
recurring adjustments) which are necessary in order to make the financial statements not misleading
and for a fair representation of the results of operations for such periods. The results for the
period ended September 30, 2010 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, 2009. Some items in the
prior year financial statements may be reclassified to conform to the current presentation.In June 2009, the FASB amended previous guidance relating to transfers of financial assets,
and for consolidation of variable interest entity by replacing the quantitative-based risks
and rewards calculation for determining which enterprise, if any, has a controlling
financial interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest entity that
most significantly impact the entitys economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the entity.
Additional disclosures about an enterprises involvement in variable interest entities are also
required. This guidance is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods thereafter. This
guidance must be applied to transfers occurring on or after the effective date. The disclosure
provisions were also amended and apply to transfers that occurred both before and after the
effective date of this guidance. Early adoption is prohibited. Adoption of this new guidance by
the Company on January 1, 2010 did not have a material impact on our results of operations or
financial condition.Also in June 2009, the FASB amended previous guidance relating to transfers of financial assets and
eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of
the beginning of each reporting entitys first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period and for interim and annual
reporting periods thereafter. This guidance must be applied to transfers occurring on or after the
effective date. Additionally, on and after the effective date, the concept of a qualifying
special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly
qualifying special-purpose entities should be evaluated for consolidation by reporting entities on
and after the effective date in accordance with the applicable consolidation guidance. The
disclosure provisions were also amended and apply to transfers that occurred both before and after
the effective date of this guidance. The effect of adopting this new guidance was not material to
the Company.
 - 5 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued)In July 2010, the FASB issued an Accounting Standards Update, Receivables: Disclosure about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. The objective of this
update is for an entity to provide disclosures that facilitate financial statement users
evaluation of the nature of credit risk inherent in the entitys portfolio of financing
receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses,
and the changes and reasons for those changes in the allowance for credit losses. An entity should
provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2)
class of financing receivable. The update makes changes to existing disclosure requirements and
includes additional disclosure requirements about financing receivables, including credit quality
indicators of financing receivables at the end of the reporting period by class of financing
receivables, the aging of past due financing receivables at the end of the reporting period by
class of financing receivables, and the nature and extent of troubled debt restructurings that
occurred during the period by class of financing receivables and their effect on the allowance for
credit losses. The Company expects the adoption on December 31, 2010 to be disclosure-related only
and to have no impact on its results of operations.As of June 30, 2010, the Company was not in compliance with certain debt covenants and may not be
able to pay all future principal payments due under its note payable to Fifth Third. Effective
September 2, 2010, the Bank entered into a Consent Order with the Federal Deposit Insurance
Corporation (FDIC) and the Michigan Office of Financial and Insurance Regulation (OFIR). The
Consent Order requires, among other things, that within 90 days of September 2, 2010, the Bank must
have and maintain higher capital ratios. The Companys net losses, noncompliance with debt
covenants, and anticipated non-compliance with the higher capital ratios of the Consent Order,
creates an uncertainty about the Companys ability to continue as a going concern.Managements strategies to improve profitability, to comply with the Consent Order and to become in
compliance with the debt covenants are further discussed in Notes 11 and 15. 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
 The following tables represent the securities held in the Companys portfolio at September 30, 2010
and at December 31, 2009:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairSeptember 30, 2010
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable for sale:US Treasury
    
    $
    1,005,084
    
    
    $
    8,744
    
    
    $
    0
    
    
    $
    1,013,828US Government and federal agency
    
    
    15,732,474
    
    
    
    328,399
    
    
    
    (13
    )
    
    
    16,060,860Municipals
    
    
    3,181,879
    
    
    
    131,533
    
    
    
    0
    
    
    
    3,313,412Mortgage-backed and
collateralized mortgage
obligations residential
    
    
    14,119,835
    
    
    
    331,151
    
    
    
    (15,890
    )
    
    
    14,435,096$
    34,039,272
    
    
    $
    799,827
    
    
    $
    (15,903
    )
    
    $
    34,823,196Held to maturity:
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 - 6 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SECURITIES (Continued)
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairDecember 31, 2009
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable for sale:US Government and federal agency
    
    $
    14,357,370
    
    
    $
    138,037
    
    
    $
    0
    
    
    $
    14,495,407Municipals
    
    
    1,144,121
    
    
    
    33,165
    
    
    
    0
    
    
    
    1,177,286Mortgage-backed  residential
    
    
    5,753,711
    
    
    
    226,766
    
    
    
    (3,144
    )
    
    
    5,977,333$
    21,255,202
    
    
    $
    397,968
    
    
    $
    (3,144
    )
    
    $
    21,650,026Held to maturity:Municipals
    
    $
    5,841,421
    
    
    $
    104,016
    
    
    $
    0
    
    
    $
    5,945,437
 The amortized cost and fair value of the securities portfolio are shown by expected maturity.
Expected maturities may differ from contractual maturities if borrowers have the right to call or
prepay obligations with or without call or prepayment fees. Below is the schedule of contractual
maturities for securities held at September 30, 2010:
 Available for SaleAmortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    4,440,789
    
    
    $
    4,495,329Due from one to five years
    
    
    13,722,144
    
    
    
    14,048,600Due from five to ten years
    
    
    1,756,504
    
    
    
    1,844,171Due in more than ten years
    
    
    0
    
    
    
    0Mortgage-backed and
collateralized mortgage
obligations  residential
    
    
    14,119,835
    
    
    
    14,435,096$
    34,039,272
    
    
    $
    34,823,196
 Below is the table of securities with unrealized losses, aggregated by investment category and
length of time such securities were in an unrealized loss position at September 30, 2010 and
December 31, 2009:
 Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalSeptember 30, 2010
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedAvailable for Sale
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesUS Government
and federal agency
    
    $
    499,700
    
    
    $
    (13
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    499,700
    
    
    $
    (13
    )Mortgage-backed and
collateralized
mortgage
obligations 
residential
    
    
    2,009,465
    
    
    
    (15,890
    )
    
    
    0
    
    
    
    0
    
    
    
    2,009,465
    
    
    
    (15,890
    )$
    2,509,165
    
    
    $
    (15,903
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    2,509,165
    
    
    $
    (15,903
    )
 Less than 12 Months
    
    12 Months or Longer
    
    TotalDecember 31, 2009
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedAvailable for Sale
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMortgage-backed 
residential
    
    $
    237,655
    
    
    $
    (3,144
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    237,655
    
    
    $
    (3,144
    )$
    237,655
    
    
    $
    (3,144
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    237,655
    
    
    $
    (3,144
    )
 - 7 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SECURITIES (Continued)Periodically the Company will implement a strategy to realize market value gains within its
securities portfolio to supplement earnings and capital. In 2010s first quarter, the Company sold
securities and realized a net gain of $79,814. Proceeds from the sales were $3,751,027. There were
no gross losses realized on the sale. In 2009, the Company sold securities in both the first and
second quarters. Proceeds from those sales were $5,184,686. Net gains of $273,010 were realized.
There were no gross losses realized on the sales in 2009. There were no security sales in the third
quarter of either 2010 or 2009. The Company is considering a liquidation of several securities in
the fourth quarter of 2010 to enhance earnings and capital.In 2010, several of the securities sold were transferred out of the held to maturity portfolio. As
a result, the Company needed to transfer all of its remaining held to maturity securities into the
available for sale portfolio in order to comply with accounting guidance. The carrying amount of
the securities transferred was $5,839,614. Of that total, $3,551,506 were sold. The remaining
$2,288,108 had an unrealized gain of $28,192 that was recorded through other comprehensive income
upon transfer.Other-Than-Temporary-ImpairmentManagement evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
The investment securities portfolio is evaluated for OTTI following guidance issued by FASB.In determining OTTI under the FASB model, management considers many factors, including: (1) the
length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or
more likely than not will be required to sell the debt security before its anticipated recovery.
The assessment of whether an other-than-temporary decline exists involves a high degree of
subjectivity and judgment and is based on the information available to management at a point in
time.When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis, less any current-period credit loss. If an entity
intends to sell or it is more likely than not it will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI will be
recognized in earnings equal to the entire difference between the investments amortized cost basis
and its fair value at the balance sheet date. If an entity does not intend to sell the security and
it is not more likely than not that the entity will be required to sell the security before
recovery of its amortized cost basis less any current-period loss, the OTTI will be separated into
the amount representing the credit loss and the amount related to all other factors. The amount of
the total OTTI related to the credit loss is determined based on the present value of cash flows
expected to be collected and is recognized in earnings. The amount of the total OTTI related to
other factors is recognized in other comprehensive income, net of applicable taxes. The previous
amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of
the investment.At September 30, 2010, three debt securities had unrealized losses with aggregate depreciation of
0.63% from the Companys amortized cost basis, all of which had been in a continuous loss for less
than twelve months. All of the securities are issued by government or government sponsored
agencies.
 - 8 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 2.
    
    SECURITIES (Continued)Mortgage-backed and Collateralized Mortgage Obligation SecuritiesAt September 30, 2010, 100% of the mortgage-backed and collateralized mortgage obligation
securities 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. The unrealized loss associated with these securities was 0.79% at
September 30, 2010. Because the decline in fair value is
attributable to changes in interest rates and illiquidity, and not credit quality, and because the
Company does not have the intent to sell these securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company does not consider
these securities to be other-than-temporarily impaired at September 30, 2010.
 3.
    
    LOANSThe components of the outstanding loan balances:
 September 30,
    
    
    December 31,2010
    
    
    2009Commercial
    
    $
    59,604,094
    
    
    $
    69,926,958Real Estate:Commercial
    
    
    70,179,164
    
    
    
    70,504,399Residential
    
    
    18,483,613
    
    
    
    18,625,574Construction
    
    
    1,970,120
    
    
    
    1,518,378Consumer
    
    
    19,790,780
    
    
    
    22,140,462Credit Cards
    
    
    527,836
    
    
    
    596,584Subtotal
    
    
    170,555,607
    
    
    
    183,312,355Allowance for loan losses
    
    
    (4,544,431
    )
    
    
    (3,782,132
    )Net deferred loan fees
    
    
    (53,063
    )
    
    
    (64,528
    )Loans, Net
    
    $
    165,958,113
    
    
    $
    179,465,695
 Loans held for sale totaled $1,170,141 at September 30, 2010 and $1,070,692 at December 31, 2009.
 - 9 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 4.
    
    ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANSThe following is a summary of activity in the allowance for loan losses account for the three and
nine month periods ended September 30, 2010 and 2009:
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended09/30/10
    
    
    09/30/09
    
    
    09/30/10
    
    
    09/30/09Beginning Balance
    
    $
    3,138,303
    
    
    $
    2,558,541
    
    
    $
    3,782,132
    
    
    $
    4,350,903Charge-offsCommercial
    
    
    (73,946
    )
    
    
    (152,939
    )
    
    
    (754,660
    )
    
    
    (2,286,752
    )Real Estate-Commercial
    
    
    (363,327
    )
    
    
    (1,837
    )
    
    
    (1,324,085
    )
    
    
    (40,439
    )Real Estate-Residential
    
    
    (15,859
    )
    
    
    0
    
    
    
    (91,929
    )
    
    
    0Consumer
    
    
    (184,631
    )
    
    
    (77,688
    )
    
    
    (504,277
    )
    
    
    (202,773
    )Total Charge-offs
    
    
    (637,763
    )
    
    
    (232,464
    )
    
    
    (2,674,951
    )
    
    
    (2,529,964
    )RecoveriesCommercial
    
    
    16,603
    
    
    
    15,078
    
    
    
    22,772
    
    
    
    25,906Real Estate-Commercial
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    150Consumer
    
    
    4,365
    
    
    
    4,361
    
    
    
    29,751
    
    
    
    20,121Total Recoveries
    
    
    20,968
    
    
    
    19,439
    
    
    
    52,523
    
    
    
    46,177Net Charge-offs
    
    
    (616,795
    )
    
    
    (213,025
    )
    
    
    (2,622,428
    )
    
    
    (2,483,787
    )Provision for loan losses
    
    
    2,022,923
    
    
    
    444,900
    
    
    
    3,384,727
    
    
    
    923,300Ending Balance
    
    $
    4,544,431
    
    
    $
    2,790,416
    
    
    $
    4,544,431
    
    
    $
    2,790,416
 Impaired loans were as follows:
 9/30/10
    
    
    12/31/09End of period loans with no allocated allowance for loan losses
    
    $
    6,905,925
    
    
    $
    5,025,520End of period loans with allocated allowance for loan losses
    
    
    8,760,383
    
    
    
    9,148,730Total
    
    $
    15,666,308
    
    
    $
    14,174,250Amount of the allowance for loan losses allocated
    
    $
    2,313,316
    
    
    $
    1,726,570
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended9/30/10
    
    
    9/30/09
    
    
    9/30/10
    
    
    9/30/09Average of impaired loans during the period:
    
    $
    14,181,583
    
    
    $
    11,879,712
    
    
    $
    13,950,602
    
    
    $
    11,201,141Interest income recognized during
impairment:
    
    
    71,244
    
    
    
    77,123
    
    
    
    207,026
    
    
    
    231,393Cash-basis interest income recognized:
    
    
    62,405
    
    
    
    57,360
    
    
    
    186,878
    
    
    
    200,683
 Non-performing loans were as follows:
 9/30/10
    
    
    12/31/09Loans past due over 90 days still on accrual:
    
    $
    396,240
    
    
    $
    981,704Non-accrual loans:
    
    
    8,324,917
    
    
    
    8,117,994
 - 10 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 4.
    
    ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)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. Non-accrual loans and
loans past due 90 days still on accrual include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired loans. The Company has
allocated $463,028 of specific reserves on $5,429,073 of loans to customers whose loan terms have
been modified in troubled debt restructurings as of September 30, 2010. All loans classified as
troubled debt restructurings are included in the total end of period loans with allocated allowance
noted above. The Company has also committed $1,147,221 to customers whose loans are classified as a
troubled debt restructuring.
 5.
    
    FORECLOSED ASSETS
 Foreclosed asset activity:
 September 30,
    
    
    September 30,2010
    
    
    2009Beginning of year
    
    $
    6,440,916
    
    
    $
    5,884,093Additions
    
    
    3,008,594
    
    
    
    1,080,469Proceeds from sales
    
    
    (1,732,309
    )
    
    
    (120,373
    )Losses from sales
    
    
    (71,125
    )
    
    
    (22,087
    )Direct write-downs
    
    
    (1,972,789
    )
    
    
    (298,062
    )End of period
    
    $
    5,673,287
    
    
    $
    6,524,040Expenses related to foreclosed assets include:Operating expenses, net of rental income
    
    $
    331,990
    
    
    $
    164,001
 6.
    
    PREMISES AND EQUIPMENT
  September 30,
    
    
    December 31,2010
    
    
    2009Land & land improvements
    
    $
    5,447,328
    
    
    $
    5,447,328Buildings & building improvements
    
    
    6,070,954
    
    
    
    5,959,371Furniture, fixtures and equipment
    
    
    3,645,017
    
    
    
    3,648,675Construction in process
    
    
    22,305
    
    
    
    61,43215,185,604
    
    
    
    15,116,806Less: accumulated depreciation
    
    
    4,240,168
    
    
    
    3,823,637$
    10,945,436
    
    
    $
    11,293,169
 - 11 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7.
    
    DEPOSITS
 The components of the outstanding deposit balances at September 30, 2010 and December 31, 2009 were
as follows:
 September 30,
    
    
    December  31,2010
    
    
    2009Non-interest-bearing DDA
    
    $
    25,417,038
    
    
    $
    24,884,625Interest-bearing DDA
    
    
    34,351,590
    
    
    
    27,677,774Money market
    
    
    19,138,116
    
    
    
    19,330,781Savings
    
    
    8,926,711
    
    
    
    8,611,038Time, under $100,000
    
    
    55,796,851
    
    
    
    35,095,482Time, over $100,000
    
    
    79,214,026
    
    
    
    82,976,909Total Deposits
    
    $
    222,844,332
    
    
    $
    198,576,609
 Brokered deposits totaled $53,032,447 at September 30, 2010 and $52,683,579 at December 31, 2009.
Since the Bank was not categorized as well capitalized at September 30, 2010 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 this year. At September 30, 2010, maturities
of brokered deposits were as follows:
 Due in 3 months or less
    
    $
    15,723,000Due in 3-12 months
    
    $
    24,505,447Due in one or more years
    
    $
    12,804,000
 - 12 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    SHORT-TERM BORROWINGS
 The Companys short-term borrowings typically consist of repurchase agreements and borrowings from
the Federal Reserve Bank. The September 30, 2010 and December 31, 2009 information was as follows:
 Repurchase
    
    
    BorrowingsAgreements
    
    
    From FRBOutstanding at September 30, 2010
    
    $
    10,114,988
    
    
    $
    0Average interest rate at period end
    
    
    0.75
    %
    
    
    0.00
    %Average balance during period
    
    
    8,489,636
    
    
    
    421,722Average interest rate during period
    
    
    0.90
    
    
    
    0.50Maximum month end balance during period
    
    
    10,132,049
    
    
    
    0Outstanding at December 31, 2009
    
    $
    7,000,327
    
    
    $
    0Average interest rate at year end
    
    
    0.66
    %
    
    
    0.00
    %Average balance during year
    
    
    7,489,802
    
    
    
    150,959Average interest rate during year
    
    
    0.78
    
    
    
    0.50Maximum month end balance during year
    
    
    10,393,960
    
    
    
    2,120,000
 9.
    
    FEDERAL HOME LOAN BANK BORROWINGS
 The Bank is a member of the Federal Home Loan Bank of Indianapolis. Based on its current Federal
Home Loan Bank Stock holdings and collateral, the Bank has the capacity to borrow $5,208,575. Each
borrowing requires a direct pledge of securities and or loans. At September 30, 2010, the Bank had
securities with a market value of $5,469,004 pledged to the Federal Home Loan Bank to collateralize
a $5 million overdraft line of credit. At September 30, 2010 there was no balance outstanding on
the line of credit.
 On July 6, 2010, the Bank chose to prepay the last two of its outstanding advances. The computed
prepayment penalty of $88,336 is reflected in this quarters interest expense. Although the
prepayment penalty is significant, it is actually a savings of roughly $4,000 to the Bank when
comparing the interest payments owed to maturity with the return that would have been received had
the funds remained on deposit at the Federal Reserve Bank.
 Details of the Banks former borrowings at both period ends are:
 Current
    
    
    September 30,
    
    
    December 31,Maturity Date
    
    Interest Rate
    
    
    2010
    
    
    2009March 24, 2010
    
    
    5.99
    
    
    
    0
    
    
    
    1,500,000November 3, 2010
    
    
    5.95
    
    
    
    0
    
    
    
    2,000,000December 13, 2010
    
    
    5.10
    
    
    
    0
    
    
    
    2,500,000$
    0
    
    
    $
    6,000,000
 - 13 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10.
    
    SUBORDINATED DEBENTURESThe Trust, a business trust formed by the Company, sold 4,500 Cumulative Preferred Securities
(trust preferred securities) at $1,000 per security in a December 2004 offering. The proceeds
from the sale of the trust preferred securities were used by the Trust to purchase an equivalent
amount of subordinated debentures from the Company. The trust preferred securities and subordinated
debentures carry a floating rate of 2.05% over the 3-month LIBOR and was 2.34% at September 30,
2010. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at
par on any interest payment date and are, in effect, guaranteed by the Company. Interest on the
subordinated debentures are payable quarterly on March 30th, June 30th,
September 30th and December 30th. The Company is not considered the primary
beneficiary of the Trust (variable interest entity), 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, 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 be due and payable and a corresponding amount of distributions will be
payable on the trust preferred securities.
 The indenture under which the subordinated debentures were issued prohibits certain actions by the
Company during the deferral period. Among other things, and subject to certain exceptions, during
the deferral period, 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. The Company has not determined the duration of the
deferral period, which may continue for up to 20 consecutive quarterly periods. The current accrued
interest payable on the subordinated debentures is $58,855.11.
    
    NOTES PAYABLEThe Company has a $5.0 million term loan with Fifth Third Bank (Fifth Third) secured by the
common stock of the Bank. The total principal balance outstanding at September 30, 2010 and
December 31, 2009 was $5,000,000. The outstanding principal bears interest at a rate of 275 basis
points above Fifth Thirds prime rate. The current interest rate on the outstanding principal
balance is 6.00% per annum. The maturity date of the term loan is January 3, 2011. The loan is not
amortizing. Interest is payable quarterly in arrears on the last business day of March, June,
September, and December. The term loan may be prepaid in whole or in part without any prepayment
fee.
 - 14 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 11.
    
    NOTES PAYABLE (Continued)The term loan includes covenants such as: the Company may not use the loan proceeds to pay
dividends in excess of $500,000 annually; the Company must have cash available to service quarterly
interest; the Bank must be well capitalized and the Company must be adequately capitalized; capped
ratios of non-performing loans to total loans and non-performing assets to total assets and a Bank
return on average assets ratio. While the Company was in compliance with all applicable financial
covenants at December 31, 2009 and March 31, 2010, the Company has not been in compliance with the
capital ratios or the return on average assets ratio since June 30, 2010.The breach of the above mentioned covenants are considered events of default which allows Fifth
Third the option to demand immediately all or any part of the unpaid principal and interest
balance. The Company does not have the resources to pay the outstanding principal and does not
expect to have it in the near future. The Company did not make the interest payment of $76,667 on
September 30, 2010. Since the Company presently does not have sufficient funds to continue to pay
interest or to pay off the note should Fifth Third demand payment, the Company is at risk of Fifth
Third foreclosing on the Banks stock which collateralizes the loan. Management is currently
discussing alternatives with Fifth Third including loan modifications and waivers of debt
covenants. Management continues to work on restoring the Banks earnings and capital ratios, which
will ultimately assist in complying with the debt covenants of the note.
 12.
    
    COMMITMENTS AND OFF-BALANCE SHEET RISKSome financial instruments are used to meet financing needs and to reduce exposure to interest rate
changes. These financial instruments include commitments to extend credit and standby letters of
credit. These involve, to varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional commitments to
guarantee a customers performance to another party. Exposure to credit loss, if the customer does
not perform, is represented by the contractual amount for commitments to extend credit and standby
letters of credit. Collateral or other security is normally obtained for these financial
instruments prior to their use and many of the commitments are expected to expire without being
used.A summary of the notional and contractual amounts of outstanding financing instruments with
off-balance-sheet risk as of September 30, 2010 and December 31, 2009 follows:
 September 30,
    
    
    December 31,2010
    
    
    2009Unused lines of credit and letters of credit
    
    $
    27,792,208
    
    
    $
    28,256,337Commitments to make loans
    
    
    145,295
    
    
    
    866,340
 - 15 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12.
    
    COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)Commitments to make loans generally terminate one year or less from the date of commitment and may
require a fee. Since many of the above commitments on lines of credit and letters of credits
expire without being used, the above amounts related to those categories do not necessarily
represent future cash disbursements.
 13.
    
    FAIR VALUE MEASUREMENTSFair 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.Servicing rights: The fair value of SBA servicing rights is obtained from a third party using
assumptions provided by the Company. The individual servicing rights are valued individually taking
into consideration the original term to maturity, the current age of the loan and the remaining
term to maturity. Their valuation methodology utilized for the servicing rights begins with
generating future cash flows for each servicing asset, based on its unique characteristics and
market-based assumptions for prepayment speeds. The present value of the future cash flows are then
calculated utilizing a market-based discount rate assumption.
 - 16 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13.
    
    FAIR VALUE MEASUREMENTS (Continued)Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for
loan losses is generally based on recent real estate appraisals, broker market opinions or internal
evaluations. These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are routinely made in
the appraisal process by the third party appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are typically significant and result
in a level 3 classification of the inputs for determining fair value.Foreclosed Assets: Nonrecurring adjustments to certain commercial and residential real estate
properties classified as foreclosed assets are measured at the lower of carrying amount or fair
value, less costs to sell. Fair values are generally based on recent real estate appraisals, broker
market opinions or internal evaluations. These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income approach. Adjustments are
routinely made in the appraisal process by the third party appraisers to adjust for differences
between the comparable sales and income data available. Adjustments of the carrying amount
utilizing this process result in a Level 3 classification. In cases where the carrying amount
exceeds the fair value, less costs to sell, an impairment loss is recognized.Assets measured at fair value on a recurring basis are summarized below for the periods ended
September 30, 2010 and December 31, 2009:
 Fair Value Measurements UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsSeptember 30, 2010
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Available for sale securities:US Treasury
    
    $
    1,013,828
    
    
    $
    1,013,828
    
    
    $
    0
    
    
    $
    0US Government and
federal agency
    
    
    16,060,860
    
    
    
    1,499,700
    
    
    
    14,561,160
    
    
    
    0Municipal securities
    
    
    3,313,412
    
    
    
    0
    
    
    
    3,313,412
    
    
    
    0Mortgage-backed and
collateralized mortgage
obligations residential
    
    
    14,435,096
    
    
    
    986,733
    
    
    
    13,448,363
    
    
    
    0Servicing assets
    
    
    37,452
    
    
    
    0
    
    
    
    37,452
    
    
    
    0December 31, 2009Available for sale securities:US Government and
federal agency
    
    $
    14,495,407
    
    
    $
    500,000
    
    
    $
    13,995,407
    
    
    $
    0Municipal securities
    
    
    1,177,286
    
    
    
    0
    
    
    
    1,177,286
    
    
    
    0Mortgage-backed
 residential
    
    
    5,977,333
    
    
    
    0
    
    
    
    5,977,333
    
    
    
    0Servicing assets
    
    
    45,602
    
    
    
    0
    
    
    
    45,602
    
    
    
    0
 - 17 -




---



##### 



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 for the periods ended
September 30, 2010 and December 31, 2009:
 Fair Value Measurements UsingQuoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsSeptember 30, 2010
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Impaired loans
    
    $
    6,447,067
    
    
    $
    0
    
    
    $
    0
    
    
    $
    6,447,067Foreclosed assets
    
    
    5,498,271
    
    
    
    0
    
    
    
    0
    
    
    
    5,498,271December 31, 2009Impaired loans
    
    $
    7,422,160
    
    
    $
    0
    
    
    $
    0
    
    
    $
    7,422,160Foreclosed assets
    
    
    6,210,650
    
    
    
    0
    
    
    
    0
    
    
    
    6,210,650
 The following two paragraphs describe the impairment charges recognized during the period:Collateral dependent impaired loans are measured using the fair value of the collateral. At
September 30, 2010, such impaired loans had a principal amount of $8,760,383, with a valuation
allowance of $2,313,316 compared to impaired loans with a principal amount of $9,148,730 and a
valuation allowance of $1,726,570 at December 31, 2009. The fair values of the collateral on these
loans were determined generally using independent appraisals, broker market opinions or internal
evaluations which were adjusted for anticipated disposition costs. The impairment charges, recorded
to the provision for loan losses, on collateral dependent loans were $746,000 for the third quarter
and $789,000 for the first nine months of 2010.At September 30, 2010 and December 31, 2009, foreclosed assets carried a fair value of $5,498,271
and $6,210,650 respectively. During the nine month period ended September 30, 2010, thirty
properties included in this total were written down by $1,972,789. During the twelve month period
ended December 31, 2009, thirty properties were written down by $1,905,622. There were also
twenty-one properties totaling $3,008,594 (at fair value) added to other real estate owned during
the first nine months of 2010, while during the twelve month period ended December 31, 2009 there
were nineteen properties totaling $2,928,689 added. The fair value of other real estate owned was
determined primarily using independent appraisals, broker market opinions or internal evaluations
which were adjusted for anticipated disposition costs.
 - 18 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13.
    
    FAIR VALUE MEASUREMENTS (Continued)Carrying amount and estimated fair values of financial instruments not previously presented were as
follows:
 September 30,
    
    
    December 31,2010
    
    
    2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    Value(in thousands)Financial assetsCash and cash equivalents
    
    $
    26,522
    
    
    $
    26,522
    
    
    $
    2,824
    
    
    $
    2,824Securities held to maturity
    
    
    0
    
    
    
    0
    
    
    
    5,841
    
    
    
    5,945Loans held for sale
    
    
    1,170
    
    
    
    1,183
    
    
    
    1,071
    
    
    
    1,078Loans, net
    
    
    165,958
    
    
    
    159,715
    
    
    
    179,466
    
    
    
    176,157FHLB stock
    
    
    514
    
    
    
    N/A
    
    
    
    404
    
    
    
    N/AAccrued interest receivable
    
    
    794
    
    
    
    794
    
    
    
    885
    
    
    
    885Financial liabilitiesDeposits
    
    
    222,844
    
    
    
    224,898
    
    
    
    198,577
    
    
    
    202,151Federal funds purchased and
repurchase agreements
    
    
    10,115
    
    
    
    10,115
    
    
    
    7,000
    
    
    
    7,000FHLB advances
    
    
    0
    
    
    
    0
    
    
    
    6,000
    
    
    
    6,020Subordinated debentures
    
    
    4,500
    
    
    
    3,171
    
    
    
    4,500
    
    
    
    3,758Notes payable
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,000
    
    
    
    5,000Accrued interest payable
    
    
    302
    
    
    
    302
    
    
    
    164
    
    
    
    164
 The methods and assumptions used to estimate fair value are described as follows:Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings,
accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans
or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life and credit risk
including consideration for widening credit spreads. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral values. Fair value of loans held for
sale is based on market quotes. Fair value of debt is based on current rates for similar
financing. We believe that the note payable is currently at a rate that is appropriate for the
credit condition of the Company thus we are concluding that it has a market rate. It was not
practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on
its transferability. Estimated fair value for other financial instruments and off-balance sheet
loan commitments are considered to approximate carrying value.
 - 19 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 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 continuing recent losses resulting from the distressed
operating environment in Michigan have 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 establish a valuation allowance against our
entire net deferred tax asset. 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.
 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.Prompt corrective action regulations provide five classifications, including well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If a
bank is not well capitalized, regulatory approval is
required to accept brokered deposits. Subject to limited exceptions, a bank may not make a capital
distribution if,
after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is
subject to being closely monitored by its principal federal regulator, its asset growth and
expansion are restricted, and plans for capital restoration are required. In addition, further
specific types of restrictions may be imposed on the bank at the discretion of the federal
regulator. The Bank was in the well-capitalized category under the regulatory framework for prompt
corrective action at December 31, 2009 however the Bank was in the adequately capitalized category
at September 30, 2010. Since the Bank was not categorized as well capitalized at September 30,
2010, a regulatory waiver is required to accept, renew or rollover brokered deposits.The Bank has entered into a Consent Order with the FDIC and the OFIR, its primary banking
regulators, which 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 OFIR.
 - 20 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.
    
    REGULATORY MATTERS (Continued)The Consent Order, among other things, requires 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, 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%; 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, actions that may be taken by
our lender in connection with our outstanding $5 million term loan, 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. Since the
issuance of the Consent Order, there have only been a few requirements that have become due
currently. The two most critical elements are described below.As of October 1, 2010, the Bank had retained a third party consultant, acceptable to the
regulators, who will develop a written analysis and assessment of the Banks management needs for
the purpose of providing qualified management for the Bank. The materials requested by the third
party were delivered in October and the Bank is on track with the required December 1, 2010
deadline.The Bank is presently unable to accept brokered deposits and on October 27, 2010, the Board, as a
requirement of the Consent Order approved a written plan to reduce the Banks reliance on brokered
deposits. The plan to reduce brokered deposits includes details of the volume and maturities of the
existing brokered deposits over the next eight quarters and includes a specific strategy to fund
their maturities.There was $53,032,447 of brokered deposits outstanding as of September 30, 2010. They mature as
follows:
 Due in 3 months or less
    
    $
    15,723,000Due in 3-12 months
    
    $
    24,505,447Due in one or more years
    
    $
    12,804,000
 Since the beginning of the year the Bank has been able to replace maturing brokered deposits with
local deposits, including internet based time deposits and core deposits. The plan to reduce
brokered deposits mainly consists of continuing this successful strategy. Management does not
believe that the restriction on issuing brokered deposits imposes a significant liquidity problem
for the Bank. Monthly written progress reports will be provided to the Board.
 - 21 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15.
    
    REGULATORY MATTERS (Continued)The Consent Order capital requirements are effective for the December 31, 2010 capital reporting
period. If the higher capital requirements were effective September 30, 2010, the Bank would not
have been in compliance. The Bank would have needed approximately $8,590,000 of capital to become
in compliance based on the current asset size.Actual capital amounts and ratios for the Bank and required capital amounts and ratios for the Bank
to be adequately capitalized and well capitalized at September 30, 2010 and December 31, 2009 were:
 Minimum Required toBe AdequatelyMinimum Required
    
    
    Capitalized UnderFor Capital
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioSeptember 30, 2010Total Capital (Tier 1
and Tier 2) to
risk-weighted
assets of the Bank
    
    $
    15,859,220
    
    
    
    8.52
    %
    
    $
    14,899,233
    
    
    
    8.00
    %
    
    $
    14,899,233
    
    
    
    8.00
    %Tier 1 (Core) Capital
to risk-weighted
assets of the Bank
    
    
    13,503,852
    
    
    
    7.25
    
    
    
    7,449,617
    
    
    
    4.00
    
    
    
    7,449,617
    
    
    
    4.00Tier 1 (Core) Capital
to average assets
of the Bank
    
    
    13,503,852
    
    
    
    5.20
    
    
    
    10,394,979
    
    
    
    4.00
    
    
    
    10,394,979
    
    
    
    4.00
 Minimum Required toBe Well CapitalizedMinimum Required
    
    
    Under PromptFor Capital
    
    
    Corrective ActionActual
    
    
    Adequacy Purposes
    
    
    ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioDecember 31, 2009Total Capital (Tier 1
and Tier 2) to
risk-weighted
assets of the Bank
    
    $
    21,035,207
    
    
    
    10.41
    %
    
    $
    16,167,491
    
    
    
    8.00
    %
    
    $
    20,209,363
    
    
    
    10.00
    %Tier 1 (Core) Capital
to risk-weighted
assets of the Bank
    
    
    18,493,531
    
    
    
    9.15
    
    
    
    8,083,745
    
    
    
    4.00
    
    
    
    12,125,618
    
    
    
    6.00Tier 1 (Core) Capital
to average assets
of the Bank
    
    
    18,493,531
    
    
    
    7.79
    
    
    
    9,500,313
    
    
    
    4.00
    
    
    
    11,875,391
    
    
    
    5.00
 - 22 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 16.
    
    OTHER COMPREHENSIVE INCOMEOther comprehensive income (loss) components and related tax effects were as follows:
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Unrealized holding gains (losses) on held to maturity securities
transferred to available for sale
    
    $
    0
    
    
    $
    0
    
    
    $
    28,192
    
    
    $
    0Unrealized holding gains (losses) on available for sale
securities
    
    
    112,237
    
    
    
    222,128
    
    
    
    440,722
    
    
    
    131,320Less reclassification adjustments for (gains) and losses later
recognized in income
    
    
    0
    
    
    
    0
    
    
    
    (79,814
    )
    
    
    (273,010
    )Net unrealized gain (loss)
    
    
    112,237
    
    
    
    222,128
    
    
    
    389,100
    
    
    
    (141,690
    )Tax effect
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Other comprehensive income (loss)
    
    $
    112,237
    
    
    $
    222,128
    
    
    $
    389,100
    
    
    $
    (141,690
    )
 - 23 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
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, through September 30, 2010 and is separated into two parts which are labeled
Financial Condition and Results of Operations. The part labeled Financial Condition compares the
financial condition at September 30, 2010 to that at December 31, 2009. The part labeled Results of
Operations discusses the three month and nine month periods ended September 30, 2010 as compared to
the same periods of 2009. 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 and other sections of this 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 and Community Shores 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; action
that Fifth Third may take in connection with its $5.0 million term loan to the Company; 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 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 risks and uncertainties should be considered when
evaluating forward-looking statements. Undue reliance should not be placed on such statements.The overall economic environment is more challenging than we have ever seen and the lack of
financial health in the state of Michigan only stands to exacerbate the problems. Unemployment in
Muskegon and Ottawa counties appears to have stabilized but remains at a critical level. At
September 30, 2010, unemployment was 13.2% for Muskegon County and 11.1% for Ottawa County. In
addition to high unemployment, property values have declined. A large portion of the difficulty in
the financial market centers on the lack of activity and declining valuations in real estate. The
negative effect of this downturn in real estate has adversely affected credit markets
 - 24 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 and consumer
confidence. It is unlikely that these trends will be reversed in the short term however recent data
has indicated that stabilization may be occurring.The Bank has entered into a Consent Order with the FDIC and the OFIR, its primary banking
regulators, which 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 OFIR.The Consent Order requires 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, 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%;
and the Bank may not declare or pay any dividend without the prior written consent of the
regulators.As of June 30, 2010, the Company was not in compliance with certain debt covenants of its notes
payable to Fifth Third Bank. A breach of the covenants are considered events of default which
allows Fifth Third the option to demand immediately all or any part of the unpaid principal and
interest balance. The Company does not have the resources to pay the outstanding principal and does
not expect to have it in the near future. The Company did not make the interest payment of $76,667
on September 30, 2010. Since the Company presently does not have sufficient funds to continue to
pay interest or to pay off the note should Fifth Third demand payment, the Company is at risk of
Fifth Third foreclosing on the Banks stock which collateralizes the loan. Management is currently
discussing alternatives with Fifth Third including loan modifications and waivers of debt
covenants.The Companys net losses, noncompliance with debt covenants, and anticipated non-compliance with
the higher capital ratios of the Consent Order, creates an uncertainty about the Companys ability
to continue as a going concern.Managements strategies to improve profitability, to comply with the Consent Order and to become in
compliance with the debt covenants are further discussed in Notes 11 and 15. These financial
statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.FINANCIAL CONDITIONTotal assets increased by $16.3 million to $247.7 million at September 30, 2010 from $231.4 million
at December 31, 2009. This is a 7.0% increase in assets during the first nine months of 2010.
Balance sheet growth was funded by deposit growth and consisted mainly of increases in cash held in
interest bearing bank accounts and available for sale securities offset somewhat by a net decrease
in the Banks loan portfolio.Cash and cash equivalents increased by $23.7 million to $26.5 million at September 30, 2010 from
$2.8 million at December 31, 2009. This change was mostly reflective of increases in balances held
in bank accounts between the above two periods. Balances kept at the Federal Reserve Bank of
Chicago (FRB) increased $23.0 million since year-end 2009. The increase in liquidity is driven
largely by increases in the balances of the Banks public fund
 - 25 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 customers and an increase in time
deposits. Managements liquidity plan includes preparation for maturities of brokered deposits in
the remaining quarter of the year and mandates a strong funding base for unexpected cash needs.
Balances held at the FRB receive an interest rate which exceeds the federal funds sold rate.
Additionally,
balances held at the FRB are given a preferential risk rating when computing total risk based
capital ratios. The current rate environment and the need to preserve capital, are given great
consideration when making cash management decisions.Securities increased $7.3 million since December 31, 2009. Investment activity in the first nine
months of the year included purchases of $20.3 million, maturities pre-payments and calls of $9.6
million and sales of $3.8 million. In the first quarter of 2010, a majority of the Banks municipal
portfolio was transferred to available for sale and sold. There was a realized net gain of $80,000.
The Company will not be in a taxable position in the near term so management chose to realize
market value gains to supplement earnings and capital.A majority of the municipal securities sold were in the held to maturity category of the investment
portfolio. Accounting rules are such that transferring held to maturity investments into the
available for sale portfolio prior to maturity disallows utilization of the held to maturity
category until management can again assert that it has the intent and ability to hold such
securities until maturity. It also requires the remaining securities to be transferred into the
available for sale category causing them to be carried at fair value. All of the securities
transferred had an unrealized gain on March 31, 2010 so there was no detrimental impact to the
transfer. There were no security sales in the third quarter.Increasing the unencumbered portion of the Banks security portfolio is another driving force
behind the investment activity in the first three quarters of 2010. In order to provide opportunity
for additional pledging, to secure access to future liquidity and to maximize the return on the
Banks deposits, securities are being strategically purchased. The security portfolio was nearly
95% pledged at year-end 2009 compared to 81% pledged at September 30, 2010. It is likely that the
Bank will make additional security purchases during the last quarter of 2010 and will replace any
securities that are sold to ensure that the security portfolio remains a meaningful source of
liquidity to the Company. The entire investment portfolio remains strong with an overall unrealized
gain of $784,000 at September 30, 2010.Total loans (held for investment) decreased $12.7 million and were $170.5 million at September 30,
2010 down from $183.2 million at December 31, 2009. The decrease is evidenced by a decline of $10.3
million in the commercial portfolio and a $2.4 million decline in the consumer loan portfolio. A
portion of the overall decrease was attributable to net charge offs of $2.6 million in the first
nine months of 2010; the rest was various loan payoffs and transfers to foreclosed assets. The
overall decrease in the loan portfolio only changed the concentration of commercial and commercial
real estate loans by 1%. The concentration of commercial and commercial real estate loans was 76%
at September 30, 2010 compared to a level of 77% at year-end 2009.Loans held for sale activity during the first nine months of 2010 included $12.6 million of
residential mortgage loan originations and $12.5 million of residential mortgage loan sales. The
associated gain on the loan sales was $191,000. These results compare to mortgage originations of
$22.3 million and sales of $23.5 million (including gains of $271,000) occurring in the first three
quarters of 2009. Mortgage originations have been impacted by the struggling economy and stricter
underwriting criteria dictated by the Banks mortgage loan investors.
 - 26 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. In addition
to product diversification, two other methods used are to balance the rate sensitivity of the
portfolio and avoid extension risk1.The loan maturities and rate sensitivity of the loan portfolio at September 30, 2010 are set forth
below:
 Within
    
    
    Three to
    
    
    One to
    
    
    AfterThree
    
    
    Twelve
    
    
    Five
    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalCommercial, financial
and other
    
    $
    15,984,399
    
    
    $
    19,884,702
    
    
    $
    20,413,145
    
    
    $
    3,268,785
    
    
    $
    59,551,031Real Estate:Commercial
    
    
    13,832,637
    
    
    
    11,714,138
    
    
    
    42,262,307
    
    
    
    2,370,082
    
    
    
    70,179,164Construction
    
    
    681,248
    
    
    
    1,082,572
    
    
    
    0
    
    
    
    206,300
    
    
    
    1,970,120Residential
    
    
    0
    
    
    
    0
    
    
    
    12,169
    
    
    
    18,471,444
    
    
    
    18,483,613Consumer
    
    
    1,148,892
    
    
    
    1,649,626
    
    
    
    10,564,242
    
    
    
    6,428,020
    
    
    
    19,790,780Credit Cards
    
    
    59,641
    
    
    
    184,831
    
    
    
    283,364
    
    
    
    0
    
    
    
    527,836$
    31,706,817
    
    
    $
    34,515,869
    
    
    $
    73,535,227
    
    
    $
    30,744,631
    
    
    $
    170,502,544Loans at fixed rates
    
    
    14,684,184
    
    
    
    21,381,954
    
    
    
    65,929,221
    
    
    
    23,929,372
    
    
    
    125,924,731Loans at variable rates
    
    
    17,022,633
    
    
    
    13,133,915
    
    
    
    7,606,006
    
    
    
    6,815,259
    
    
    
    44,577,813$
    31,706,817
    
    
    $
    34,515,869
    
    
    $
    73,535,227
    
    
    $
    30,744,631
    
    
    $
    170,502,544
 At September 30, 2010, there were 74% of the loan balances carrying a fixed rate and 26% a floating
rate. Since 2008, the Banks concentration of fixed rate loans has been increasing. Some of the
shift is a factor of the types of loans that have paid off or have been added to the portfolio and
some of the change is related to customer preference at the time of renewal. Rates have remained
low for an extended period of time. It is likely that future rate movements will be rising. As a
result of the current mix of the loan portfolio, management will be challenged to improve loan
income in a rising rate environment.The maturity distribution of the loan portfolio has lengthened over the last several years but
still remains at a level which is within the parameters determined to be acceptable by management.
Contributing to the change in distribution is the increase in the mortgage loan portfolio over the
past several years. Typically management strives to retain only 10-15% of residential mortgages
originated because of the longer contractual terms generally associated with mortgage products. At
September 30, 2010, approximately 18% of the entire loan portfolio had a contractual maturity
longer than five years. To control extension risk mostly associated with the mortgage business
line, management remains focused on originating loans salable into the secondary market.Another risk included as part of the Banks risk management program is credit risk estimation. 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 policy. The loan portfolio is reviewed and
analyzed 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
 
 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. - 27 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 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. These allocations have increased since December 31, 2009 which is consistent with
changes in the Banks loan portfolio and credit trends in the industry. The specific credit
allocation includes a detailed review of a credit resulting in an allocation being made to the
allowance for that particular loan. There are occasions when an impaired 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. The allowance for loan loss is adjusted accordingly to maintain an
adequate level based on the conclusion of the portfolio analysis.At September 30, 2010, there were $6.9 million in outstanding loans deemed to be impaired but
requiring no allocated allowance for loan losses. During the first three quarters of 2010, several
loans were charged down to a balance that could be completely supported by the value of the
collateral. Once this occurs, the loan becomes impaired with no allocated allowance.During the first nine months of 2010, $3.4 million was added to the allowance through the provision
expense. At September 30, 2010, the allowance totaled $4.5 million or approximately 2.67% of gross
loans outstanding, compared to 2.06% at December 31, 2009. In the first three quarters of 2010,
$1.1 million of the charged off balances were fully allocated for in the allowance for loan losses
at year-end 2009 and $1.5 million was not. Of the 1.5 million that had no specific allocation95%
was related to loans that had a recent change in credit quality.Impaired loans with an allocated allowance decreased slightly since December 31, 2009 to $8.8
million at September 30, 2010. Impaired loans requiring no allocated allowance for loan losses
increased by $1.9 million since year-end 2009. Approximately $1.6 million of 2010s recorded loan
loss provision was related to increased specific allocations. Additionally, general allocations
increased in the first nine months of 2010 mostly related to the impact from certain modifications
to quantitative factors, and historical charge-offs, consistent with credit risk trends. The
general reserves as a percentage of non-specifically identified loans increased from 1.22% at
December 31, 2009 to 1.44% at September 30, 2010.The allocation of the allowance at September 30, 2010 and December 31, 2009 was as follows:
 September 30, 2010
    
    
    December 31, 2009Percent of
    
    
    
    
    
    
    Percent ofAllowance
    
    
    
    
    
    
    AllowanceRelated to
    
    
    
    
    
    
    Related toBalance at End of Period Applicable
    
    Amount
    
    
    Loan Category
    
    
    Amount
    
    
    Loan CategoryCommercial
    
    $
    1,230,077
    
    
    
    2.1
    %
    
    $
    1,529,470
    
    
    
    2.2
    %Real Estate:Commercial
    
    
    2,619,250
    
    
    
    3.7
    
    
    
    1,828,022
    
    
    
    2.6Residential
    
    
    62,658
    
    
    
    0.3
    
    
    
    91,532
    
    
    
    0.5Construction
    
    
    7,092
    
    
    
    0.4
    
    
    
    17,461
    
    
    
    1.1Consumer
    
    
    625,354
    
    
    
    3.1
    
    
    
    315,647
    
    
    
    1.4Total
    
    $
    4,544,431
    
    
    
    2.7
    %
    
    $
    3,782,132
    
    
    
    2.1
    %
 - 28 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Another factor considered in the assessment of the adequacy of the allowance is the quality of the
loan portfolio from a past due standpoint. Below is a table, which details the past due balances at
September 30, 2010 compared to those at year-end 2009 and the corresponding change related to those
two periods.
 IncreaseLoans Past Due:
    
    September 30, 2010
    
    
    December 31, 2009
    
    
    (Decrease)30-59 days
    
    $
    3,010,048
    
    
    $
    1,317,396
    
    
    $
    1,692,65260-89 days
    
    
    226,507
    
    
    
    881,712
    
    
    
    (655,205
    )90 days and greater
    
    
    396,240
    
    
    
    981,704
    
    
    
    (585,464
    )Non-accrual loans
    
    
    8,324,917
    
    
    
    8,117,994
    
    
    
    206,923
 From year-end 2009 to September 30, 2010, overall past due and non-accrual loans have increased by
$659,000. The largest change is the increase in 30-59 days past due. The other categories have
either decreased or only slightly increased. The 30-59 days past due category was $3,010,048 at
September 30, 2010; an increase of $1,692,652. Three loans comprise 76% of the total.Two of the three are restructured borrowings1. The first borrower has been on a reduced
payment plan since December 2009 but still struggles to make the required payments. The business
has been for sale during the TDR period but there has been no success. It is likely that the Bank
will begin foreclosing on the collateral in the next few months. A majority of the underlying
collateral is real estate.Another loan in the 30-59 day past due category is collateralized by a partially completed
condominium project in a Lake Michigan resort area. The borrower cannot carry the cost of the loan
any longer. The Bank is working with the borrower to sell the underlying property and on a
deficiency agreement if necessary.The last loan is also a TDR. The TDR period on this particular credit has ended. The Bank is in the
process of negotiating a new TDR. The lower payments were originally granted in an effort to allow
the borrower time to find enough tenants to help support the carrying cost of the loan at market
rates. The underlying collateral is a 12,000 square foot building. All three loans were already
specifically identified within the allowance for loan loss at September 30, 2010. If these loans
continue to be past due, it is possible that the Bank will need to allocate additional funds within
the allowance for loan losses to support potential collateral deficiencies in all three cases.Loans past due 60-89 days decreased $655,000 since year-end 2009 and were $227,000 at September 30,
2010. Three loans totaling $458,000 were moved to the non-accrual category and approximately
$105,000 was charged off.Loans past due 90 days and greater decreased $585,000 from year-end 2009 to September 30, 2010 and
were $396,000 at period end. One loan for $735,000 was paid off and another note for $149,000 was
charged off. Somewhat offsetting this activity was one note totaling $246,000 that moved from the
30-59 days past due category.Non-accrual notes were $8.3 million on September 30, 2010 which was an increase of $207,000.
 
 1
    
    A restructured borrowing is often called a troubled debt restructure or (TDR). - 29 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Overall net charge-offs for the third quarter and first nine months of 2010 were $617,000 and
$2.6 million. The corresponding ratios of net charge-offs to average loans for the third quarter
and first nine months of 2010 were 1.40% and 1.94%. The net charge-offs for the third quarter and
first nine months of 2009 were $213,000 and $2.5 million. The resulting ratios of net charge-offs
to average loans for the third quarter and first nine months of 2009
were 0.45% and 1.69%. The current ratios are not comparable to normal historical charge off ratios
however, due to the rise in non performing assets over the past year and the continued economic
deterioration; it is likely that charge off ratios may remain elevated for an unknown period of
time. Increased charge offs has had a marked impact on increases to the general reserves since
year-end.Since year-end the Bank purchased $109,500 more FHLB stock. The purchase was made to comply with
stock ownership requirements related to FHLB borrowing instruments. In June, the Bank applied for
and received a $5 million secured overdraft line of credit from the FHLB. The overdraft line of
credit is meant to provide the Bank with another short term liquidity resource. There has been no
borrowing activity on the overdraft line nor was there an outstanding balance at September 30,
2010.Foreclosed assets decreased $768,000 since December 31, 2009. These assets consist of relinquished
properties through the collection process which were previously customer collateral supporting
various borrowings. During the first nine months of 2010, 21 properties were added and two
properties required improvements which added $3.0 million to the total of foreclosed assets.
Additionally, 15 properties were sold for $1.7 million in the first three quarters of 2010. There
were net losses on these sales of $71,000. The inventory of held properties were written down by
$2.0 million in the first nine months of 2010. Each quarter foreclosed assets are written down to
market value based on a professional appraisal or other common means of valuation. These properties
are held until they can be sold. At September 30, 2010, there were forty real estate holdings
compared to thirty-four at December 31, 2009. If any foreclosed asset is sold for less than it is
being held further losses could result.Deposit balances were $222.8 million at September 30, 2010 up from $198.6 million at December 31,
2009. Total deposit growth since year-end was $24.2 million or 12%. Non-interest bearing deposits
increased $532,000 since year-end 2009. There have been several new customer relationships
established and existing customers have been keeping more on deposit.Interest-bearing checking and savings accounts rose $7.0 million while money market accounts
decreased by $193,000. Two of the Banks large public fund customers, in aggregate, increased their
holdings over $6 million since year-end. Additionally the Bank gained the full banking relationship
of one new public fund customer since year-end 2009. This customer had a balance of nearly $3
million at September 30, 2010 an increase of $2.8 million since year-end 2009.Time deposits grew $16.9 million since December 31, 2009. None of the net growth was brokered time
deposits. In December, the Bank began utilizing an internet time deposit listing service.
Additionally, in January, local specials were advertised in conjunction with the Banks eleven year
anniversary.Brokered time deposits increased $349,000 in the first nine months of 2010. In January, two
brokered deposits totaling $7.1 million were recorded. One had a term of 27 months and was at a
rate of 1.60%. The second had a term of 16 months and was at a rate of 0.80%. These rates were
nearly 60 basis points lower than local market rates. In the second and third quarters of 2010,
brokered deposits totaling $6.0 million matured and were not
 - 30 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 replaced. The weighted average rate on
these maturing deposits was 4.74%. Since the Bank has not been categorized as well capitalized
since June 30, 2010, a regulatory waiver is required to accept, renew or rollover brokered
deposits. Additionally the Banks Consent Order with the FDIC prohibits the use of brokered
deposits. The Bank has not issued any brokered deposits since January of 2010. At September 30,
2010, the concentration
of brokered deposits to total deposits was 24%; a decrease of 2% since December 31, 2009 when the
concentration was 26%.Repurchase agreement balances were $7.0 million at December 31, 2009 and $10.1 million at September
30, 2010; an increase of $3.1 million. A repurchase agreement is treated like a short-term
borrowing of the Bank. To secure the short-term borrowing (repurchase agreement), balances held by
customers are collateralized by high quality government securities held within the Banks security
portfolio. In addition to existing repurchase customers keeping more money in their accounts,
during the first quarter of 2010, one customer transferred a significant portion of his balance
from a non-interest bearing checking account into his repurchase account. Customers with investable
dollars exceeding the FDIC limits are utilizing this account type because they are seeking higher
interest rates and mitigated risk.The Company had no outstanding FHLB advances at September 30, 2010. There were $6.0 million
outstanding at December 31, 2009. One advance for $1.5 million matured on March 24th and was not
renewed. The two remaining advances which were scheduled to mature in the fourth quarter of 2010
were prepaid by the Bank on July 6, 2010. The computed prepayment penalty was approximately $4,000
less than what the computed interest until maturity would have been net of the interest that could
have been earned had the money remained on deposit at the Federal Reserve Bank. Management chose to
pay off the advances early to utilize a portion of the Banks liquidity. At this time, it is not
the Companys intention to borrow funds from the FHLB.Shareholders equity totaled $4.6 million at September 30, 2010 and $9.7 million on December 31,
2009. The operating losses recorded in the first nine months of 2010 were coupled with an increase
in accumulated other comprehensive income (security market value adjustments).As a result of the significant losses incurred in the first nine months and third quarter of 2010,
the Banks capital ratios have declined. At September 30, 2010, the Banks total risk based capital
ratio was 8.52% and its Tier one to average assets ratio was 5.20%. In the second quarter of 2010,
the Bank fell below the well capitalized category. Its ratios on June 30, 2010 were 9.97% and
6.77% for total risk based capital and the tier one respectively. Conversely, the Bank was in the
well capitalized category for both ratios at year-end 2009. The Banks total risk based capital
ratio at December 31, 2009 was 10.41%. Its tier one to average assets ratio was 7.79% at year-end
2009.Under the Consent Order the Bank is required, within 90 days, 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
Consent Order capital requirements are effective for the December 31, 2010 capital reporting
period. If the higher capital requirements were effective September 30, 2010, the Bank would not
have been in compliance. The Bank would have needed approximately $8,590,000 of capital to become
in compliance based on the current asset size.
 - 31 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 RESULTS OF OPERATIONSThe net loss for the first nine months of 2010 was $5.6 million which was $3.4 million more than
the loss recorded for the first three quarters of 2009. The corresponding basic and diluted loss
per share for the first nine months of 2010 was $(3.78). The basic and diluted loss per share for
the first nine months of 2009 was $(1.48).The Company recorded net loss of $3.9 million for the third quarter of 2010. The corresponding
basic and diluted loss per share was $(2.67). The loss recorded in 2009s third quarter was
$566,000. The corresponding basic and diluted loss per share was $(0.39).The losses recorded in the first nine months of 2010, have been directly tied to expenses related
to administering troubled assets. The loan loss provision recorded for the first nine months was
$3.4 million. Foreclosed asset impairments and other collection expenses totaled $2.0 million and
$300,000, respectively for the same nine month period.For the first nine months of 2010, the annualized return on the Companys average total assets was
(2.94)% compared to (1.13)% for the first nine months of 2009. For the third quarter of 2010, the
annualized return on the Companys average total assets was (6.04)%. For the third quarter of 2009,
the ratio was (0.89)%.
The Companys annualized return on average equity was (79.24)% for the first nine months of 2010
and (20.56)% for the first nine months of 2009. For the third quarter of 2010, the annualized
return on average equity was (195.41)% compared to (17.33)% for the third quarter of 2009.The ratio of average equity to average assets was 3.71% for the first nine months of 2010 and 5.48%
for the first nine months of 2009. The ratio was 3.09% for the third quarter of 2010 and 5.13% for
the same period in 2009.
 - 32 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Nine months ended September 30,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssetsFederal funds sold and interest-bearing deposits with banks
    
    $
    20,771,407
    
    
    $
    38,251
    
    
    
    0.25
    %
    
    $
    10,894,308
    
    
    $
    32,240
    
    
    
    0.39
    %Securities
    
    
    30,656,184
    
    
    
    695,711
    
    
    
    3.03
    
    
    
    27,874,514
    
    
    
    839,728
    
    
    
    4.02Loans (including held for sale and non accrual)
    
    
    180,063,597
    
    
    
    8,428,987
    
    
    
    6.24
    
    
    
    195,807,625
    
    
    
    9,376,110
    
    
    
    6.38231,491,188
    
    
    
    9,162,949
    
    
    
    5.28
    
    
    
    234,576,447
    
    
    
    10,248,078
    
    
    
    5.83Other assets
    
    
    20,096,580
    
    
    
    
    
    
    
    
    
    
    
    22,676,799$
    251,587,768
    
    
    
    
    
    
    
    
    
    
    $
    257,253,246Liabilities and Shareholders EquityInterest-bearing deposits
    
    $
    195,310,406
    
    
    $
    3,343,353
    
    
    
    2.28
    
    
    $
    199,483,793
    
    
    $
    4,565,492
    
    
    
    3.05Federal funds purchased, repur-chase agreements and Federal
Reserve Bank borrowings
    
    
    8,911,358
    
    
    
    57,367
    
    
    
    0.86
    
    
    
    6,946,205
    
    
    
    36,292
    
    
    
    0.70Subordinated Debentures, notes
payable and FHLB advances
    
    
    13,032,967
    
    
    
    549,354
    
    
    
    5.62
    
    
    
    15,136,630
    
    
    
    515,007
    
    
    
    4.54217,254,731
    
    
    
    3,950,074
    
    
    
    2.42
    
    
    
    221,566,628
    
    
    
    5,116,791
    
    
    
    3.08Non-interest-bearing deposits
    
    
    24,253,880
    
    
    
    
    
    
    
    
    
    
    
    20,838,793Other liabilities
    
    
    740,274
    
    
    
    
    
    
    
    
    
    
    
    747,402Shareholders Equity
    
    
    9,338,883
    
    
    
    
    
    
    
    
    
    
    
    14,100,423$
    251,587,768
    
    
    
    
    
    
    
    
    
    
    $
    257,253,246Net interest income (tax equivalent basis)
    
    
    
    
    
    
    5,212,875
    
    
    
    
    
    
    
    
    
    
    
    5,131,287Net interest spread on earning assets (tax
equivalent basis)
    
    
    
    
    
    
    
    
    
    
    2.86
    %
    
    
    
    
    
    
    
    
    
    
    2.75
    %Net interest margin on earning assets (tax
equivalent basis)
    
    
    
    
    
    
    
    
    
    
    3.00
    %
    
    
    
    
    
    
    
    
    
    
    2.92
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.55
    %
    
    
    
    
    
    
    
    
    
    
    105.87
    %Tax equivalent adjustment
    
    
    
    
    
    
    55,452
    
    
    
    
    
    
    
    
    
    
    
    108,578Net interest income
    
    
    
    
    
    $
    5,157,423
    
    
    
    
    
    
    
    
    
    
    $
    5,022,709
  - 33 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    - 34 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Three months ended September 30,2010
    
    
    2009Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateAssetsFederal funds sold and interest-bearing
deposits with banks
    
    $
    30,779,539
    
    
    $
    19,158
    
    
    
    0.25
    %
    
    $
    13,783,078
    
    
    $
    8,728
    
    
    
    0.25
    %Securities
    
    
    33,292,200
    
    
    
    233,266
    
    
    
    2.80
    
    
    
    28,901,004
    
    
    
    264,881
    
    
    
    3.67Loans (including held for
sale and non accrual)
    
    
    175,707,592
    
    
    
    2,768,788
    
    
    
    6.30
    
    
    
    190,813,478
    
    
    
    3,104,682
    
    
    
    6.51239,779,331
    
    
    
    3,021,212
    
    
    
    5.04
    
    
    
    233,497,560
    
    
    
    3,378,291
    
    
    
    5.79Other assets
    
    
    19,682,431
    
    
    
    
    
    
    
    
    
    
    
    21,052,027$
    259,461,762
    
    
    
    
    
    
    
    
    
    
    $
    254,549,587Liabilities and Shareholders
EquityInterest-bearing deposits
    
    $
    204,566,480
    
    
    $
    1,108,847
    
    
    
    2.17
    
    
    $
    194,817,963
    
    
    $
    1,357,813
    
    
    
    2.79Federal funds purchased,
repur-chase agreements and
Federal
Reserve Bank borrowings
    
    
    9,412,478
    
    
    
    17,616
    
    
    
    0.75
    
    
    
    8,572,005
    
    
    
    16,653
    
    
    
    0.78Subordinated Debentures, Note
Payable and Federal Home
Loan Bank Advances
    
    
    9,793,478
    
    
    
    199,215
    
    
    
    8.14
    
    
    
    15,500,000
    
    
    
    171,614
    
    
    
    4.43223,772,436
    
    
    
    1,325,678
    
    
    
    2.37
    
    
    
    218,889,968
    
    
    
    1,546,080
    
    
    
    2.83Non-interest bearing deposits
    
    
    26,866,141
    
    
    
    
    
    
    
    
    
    
    
    21,673,174Other liabilities
    
    
    797,452
    
    
    
    
    
    
    
    
    
    
    
    921,126Shareholders Equity
    
    
    8,025,733
    
    
    
    
    
    
    
    
    
    
    
    13,065,319$
    259,461,762
    
    
    
    
    
    
    
    
    
    
    $
    254,549,587Net interest income (tax
equivalent basis)
    
    
    
    
    
    
    1,695,534
    
    
    
    
    
    
    
    
    
    
    
    1,832,211Net interest spread on earning
assets (tax equivalent basis)
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    
    
    
    
    
    
    
    
    2.96
    %Net interest margin on
earning assets (tax equivalent
basis)
    
    
    
    
    
    
    
    
    
    
    2.83
    %
    
    
    
    
    
    
    
    
    
    
    3.14
    %Average interest-earning assets
to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    107.15
    %
    
    
    
    
    
    
    
    
    
    
    106.67
    %Tax equivalent adjustment
    
    
    
    
    
    
    13,731
    
    
    
    
    
    
    
    
    
    
    
    34,275Net interest income
    
    
    
    
    
    $
    1,681,803
    
    
    
    
    
    
    
    
    
    
    $
    1,797,936
  - 35 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    - 36 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Interest Rate Sensitivity PeriodWithin
    
    
    Three to
    
    
    One to
    
    
    AfterThree
    
    
    Twelve
    
    
    Five
    
    
    FiveMonths
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    TotalEarning assetsInterest-bearing deposits
in other financial institutions
    
    $
    23,762,066
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    23,762,066Securities (including FHLB stock)
    
    
    2,366,918
    
    
    
    9,088,497
    
    
    
    17,765,326
    
    
    
    6,116,055
    
    
    
    35,336,796Loans held for sale
    
    
    21,117
    
    
    
    74,682
    
    
    
    416,425
    
    
    
    657,917
    
    
    
    1,170,141Loans1
    
    
    70,246,683
    
    
    
    21,262,855
    
    
    
    61,616,680
    
    
    
    17,376,326
    
    
    
    170,502,54496,396,784
    
    
    
    30,426,034
    
    
    
    79,798,431
    
    
    
    24,150,298
    
    
    
    230,771,547Interest-bearing liabilitiesSavings and checking
    
    
    62,416,417
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    62,416,417Time deposits <$100,000
    
    
    4,421,633
    
    
    
    19,437,286
    
    
    
    31,937,932
    
    
    
    0
    
    
    
    55,796,851Time deposits >$100,000
    
    
    22,963,018
    
    
    
    34,685,941
    
    
    
    21,565,067
    
    
    
    0
    
    
    
    79,214,026Repurchase agreements and
Federal funds purchased
    
    
    10,114,988
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    10,114,988Subordinated debt and Federal
Home Loan Bank advances
    
    
    9,500,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    9,500,000109,416,056
    
    
    
    54,123,227
    
    
    
    53,502,999
    
    
    
    0
    
    
    
    217,042,282Net asset (liability) repricing gap
    
    $
    (13,019,272
    )
    
    $
    (23,697,193
    )
    
    $
    26,295,432
    
    
    $
    24,150,298
    
    
    $
    13,729,265Cumulative net asset (liability)
repricing gap
    
    $
    (13,019,272
    )
    
    $
    (36,716,465
    )
    
    $
    (10,421,033
    )
    
    $
    13,729,265
    
 1
    
    Includes non accrual loans. - 37 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
        - 38 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
     - 39 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
              - 40 -




---



##### 



COMMUNITY SHORES BANK CORPORATION
        EXHIBIT NO.
    
    EXHIBIT DESCRIPTION3.1
    
    
    Articles of Incorporation are incorporated by reference to exhibit
3.1 of the Companys June 30, 2004 Form 10-QSB (SEC file number
333-63769).3.2
    
    
    Bylaws of the Company are incorporated by reference to exhibit 3(ii)
of the Companys Form 8-K filed July 5, 2006 (SEC file number
000-51166).10.1
    
    
    Consent Order issued and effective September 2, 2010 is incorporated
by reference to exhibit 10.1 of the Companys Form 8-K filed
September 9, 2010 (SEC file number 000-51166).10.2
    
    
    Stipulation to the Issuance of a Consent Order is incorporated by
reference to exhibit 10.2 of the Companys Form 8-K filed September
9, 2010 (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.
 - 41 -




---



##### 



COMMUNITY SHORES BANK CORPORATIONDate November 15, 2010
    By:
    /s/ Heather D. BrolickHeather D. BrolickPresident and Chief Executive Officer
(principal executive officer) Date November 15, 2010
    By:
    /s/ Tracey A. WelshTracey A. WelshSenior Vice President, Chief Financial Officer and Treasurer 
(principal financial and accounting officer) - 42 -




---



##### 



EXHIBIT INDEX
 EXHIBIT NO.
    
    EXHIBIT DESCRIPTION3.1
    
    
    Articles of Incorporation are incorporated by reference to exhibit
3.1 of the Companys June 30, 2004 Form 10-QSB (SEC file number
333-63769).3.2
    
    
    Bylaws of the Company are incorporated by reference to exhibit 3(ii)
of the Companys Form 8-K filed July 5, 2006 (SEC file number
000-51166).10.1
    
    
    Consent Order issued and effective September 2, 2010 is incorporated
by reference to exhibit 10.1 of the Companys Form 8-K filed
September 9, 2010 (SEC file number 000-51166).10.2
    
    
    Stipulation to the Issuance of a Consent Order is incorporated by
reference to exhibit 10.2 of the Companys Form 8-K filed September
9, 2010 (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.
 - 43 -