Attached files

file filename
EX-31 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORPexh_311.htm
EX-31 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORPexh_312.htm
EX-32 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORPexh_321.htm
EX-32 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORPexh_322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

or

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

For the transition period from ____________________________________ to ____________________________________

Commission File Number: 000-51166 

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

Michigan
38-3423227 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1030 W. Norton Avenue, Muskegon, MI
49441
(Address of principal executive offices)
(Zip Code)
 
(231) 780-1800
(Registrant’s telephone number, including area code)
 
________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [  ] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]
    (Do not check if a smaller reporting company)  
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No [X]

At May 12, 2011, 1,468,800 shares of common stock were outstanding.
 
 
 

 
Community Shores Bank Corporation Index
 

 

 
 

 
PART I – FINANCIAL INFORMATION

FINANCIAL STATEMENTS (UNAUDITED)

COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
ASSETS
           
Cash and due from financial institutions
  $ 2,266,480     $ 2,074,301  
Interest-bearing deposits in other financial institutions
    28,193,508       21,565,572  
Total cash and cash equivalents
    30,459,988       23,639,873  
Securities available for sale (at fair value)
    35,583,067       36,503,903  
Loans held for sale
    3,012,189       1,263,263  
Loans
    162,117,482       165,243,881  
Less: Allowance for loan losses
    5,255,868       4,791,907  
Net loans
    156,861,614       160,451,974  
Federal Home Loan Bank stock
    479,800       479,800  
Premises and equipment, net
    10,740,220       10,874,176  
Accrued interest receivable
    708,703       781,334  
Foreclosed assets
    3,872,996       3,382,594  
Other assets
    677,399       568,580  
Total assets
  $ 242,395,976     $ 237,945,497  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
Non-interest-bearing
  $ 42,093,347     $ 33,326,683  
Interest-bearing
    181,341,093       185,936,494  
Total deposits
    223,434,440       219,263,177  
Federal funds purchased and repurchase agreements
    8,407,631       7,460,795  
Federal Home Loan Bank advances
    0       0  
Notes payable
    5,000,000       5,000,000  
Accrued expenses and other liabilities
    912,151       875,738  
Total liabilities
    242,254,222       237,099,710  
Shareholders’ equity
               
Preferred Stock, no par value: 1,000,000 shares
               
authorized and none issued
    0       0  
Common Stock, no par value: 9,000,000 shares authorized;
               
1,468,800 issued and outstanding
    13,296,691       13,296,691  
Retained deficit
    (13,351,241 )     (12,617,022 )
Accumulated other comprehensive income
    196,304       166,118  
Total shareholders’ equity
    141,754       845,787  
Total liabilities and shareholders’ equity
  $ 242,395,976     $ 237,945,497  
                 
 
See accompanying notes to consolidated financial statements.
 
- 1 -

 
COMMUNITY SHORES BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
March 31, 2011
   
March 31, 2010
 
Interest and dividend income
           
Loans, including fees
  $ 2,565,081     $ 2,805,607  
Securities
    214,163       211,435  
Federal funds sold, FHLB dividends and other income
    17,445       7,459  
Total interest income
    2,796,689       3,024,501  
Interest expense
               
Deposits
    811,595       1,107,977  
Repurchase agreements, federal funds purchased, and other debt
    11,502       20,571  
Federal Home Loan Bank advances and notes payable
    102,890       184,532  
Total interest expense
    925,987       1,313,080  
                 
Net Interest Income
    1,870,702       1,711,421  
Provision for loan losses
    704,505       529,081  
                 
Net Interest Income After Provision for Loan Losses
    1,166,197       1,182,340  
Non-interest income
               
Service charges on deposit accounts
    176,813       174,533  
Gain on sale of loans
    157,560       45,906  
Gain on sale of securities
    0       79,814  
Loss on sale of foreclosed assets
    (799 )     (8,689 )
Other
    185,936       193,271  
Total non-interest income
    519,510       484,835  
                 
Non-interest expense
               
Salaries and employee benefits
    1,025,340       1,032,156  
Occupancy
    181,361       165,616  
Furniture and equipment
    132,486       159,128  
Advertising
    9,345       18,165  
Data processing
    132,406       122,779  
Professional services
    94,838       124,650  
Foreclosed asset impairment
    167,866       24,655  
Other
    676,284       460,431  
Total non-interest expense
    2,419,926       2,107,580  
                 
Loss Before Federal Income Taxes
    (734,219 )     (440,405 )
Federal income tax expense (benefit)
    0       0  
Net Loss
  $ (734,219 )   $ (440,405 )
                 
Comprehensive Loss
  $ (704,033 )   $ (430,812 )
                 
Weighted average shares outstanding
    1,468,800       1,468,800  
Diluted average shares outstanding
    1,468,800       1,468,800  
Basic loss per share
  $ (0.50 )   $ (0.30 )
Diluted loss per share
  $ (0.50 )   $ (0.30 )
 
See accompanying notes to consolidated financial statements.
 
- 2 -

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENT OF CHANGES OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
                     
Accumulated
       
                     
Other
   
Total
 
         
Common
   
Retained
   
Comprehensive
   
Shareholders’
 
   
Shares
   
Stock
   
Deficit
   
Income
   
Equity
 
                               
Balance at January 1, 2010
    1,468,800     $ 13,296,691     $ (3,734,295 )   $ 177,595     $ 9,739,991  
                                         
Comprehensive loss:
                                       
Net loss
                    (440,405 )             (440,405 )
Unrealized gain on securities
                                       
available for sale
                            9,593       9,593  
Total comprehensive loss
                                    (430,812 )
                                         
Balance at March 31, 2010
    1,468,800     $ 13,296,691     $ (4,174,700 )   $ 187,188     $ 9,309,179  
                                         
                                         
Balance at January 1, 2011
    1,468,800     $ 13,296,691     $ (12,617,022 )   $ 166,118     $ 845,787  
                                         
Comprehensive loss:
                                       
Net loss
                    (734,219 )             (734,219 )
Unrealized gain on securities
                                       
available for sale
                            30,186       30,186  
Total comprehensive loss
                                    (704,033 )
                                         
Balance at March 31, 2011
    1,468,800     $ 13,296,691     $ (13,351,241 )   $ 196,304     $ 875,973  

See accompanying notes to consolidated financial statements.

 
- 3 -

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
 
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
March 31, 2011
   
March 31, 2010
 
Cash flows from operating activities
           
Net loss
  $ (734,219 )   $ (440,405 )
Adjustments to reconcile net loss to net cash
               
from operating activities:
               
Provision for loan losses
    704,505       529,081  
Depreciation and amortization
    133,711       161,505  
Net amortization of securities
    63,444       36,330  
Net realized gain on sale of securities
    0       (79,814 )
Net realized gain on sale of loans
    (157,560 )     (45,906 )
Net realized loss on sale of foreclosed assets
    799       8,689  
Foreclosed asset impairment
    167,866       24,655  
Originations of loans for sale
    (7,327,907 )     (2,776,126 )
Proceeds from loan sales
    5,736,541       3,281,621  
Net change in:
               
Accrued interest receivable and other assets
    (36,188 )     115,664  
Accrued interest payable and other liabilities
    36,413       46,370  
Net cash from (used in) operating activities
    (1,412,595 )     861,664  
Cash flows from investing activities
               
Activity in available for sale securities:
               
Sales
    0       3,751,027  
Maturities, prepayments and calls
    3,920,664       3,469,445  
Purchases
    (3,033,086 )     (9,654,156 )
Loan originations and payments, net
    2,219,028       1,172,721  
Additions to premises and equipment, net
    245       (84,396 )
Proceeds from the sale of foreclosed assets
    7,760       53,104  
Net cash from (used in) investing activities
    3,114,611       (1,292,255 )
Cash flows from financing activities
               
Net change in deposits
    4,171,263       21,936,871  
Net change in federal funds purchased and
               
repurchase agreements
    946,836       1,873,248  
Repayment of FHLB advance
    0       (1,500,000 )
Net cash from (used in) financing activities
    5,118,099       22,310,119  
Net change in cash and cash equivalents
    6,820,115       21,879,528  
Beginning cash and cash equivalents
    23,639,873       2,824,088  
Ending cash and cash equivalents
  $ 30,459,988     $ 24,703,616  
Supplemental cash flow information:
               
Cash paid during the period for interest
  $ 444,124     $ 1,298,830  
Transfers from loans to foreclosed assets
    687,717       544,364  
Transfers from securities held to maturity to available for sale
    0       5,839,614  
Foreclosed asset sales financed by the Company
    20,890       71,019  
 
See accompanying notes to consolidated financial statements.
 
- 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 ended March 31, 2011 include the consolidated results of operations of Community Shores Bank Corporation (“Company”) and its wholly-owned subsidiaries, Community Shores Financial Services (“CS Financial Services”), and Community Shores Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Community Shores Mortgage Company (the “Mortgage Company”) and the Mortgage Company’s wholly-owned subsidiary, Berryfield Development, LLC (“Berryfield”). Community Shores Capital Trust I (“the Trust”) is not consolidated and exists solely to issue capital securities. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company’s financial condition and results of operations.  In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods.  The results for the period ended March 31, 2011 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, 2010. Some items in the prior year financial statements may be reclassified to conform to the current presentation.

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 and the aging of past due financing receivables at the end of the reporting period by class of financing receivables. For public entities, the disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010 and have been added to Note 3. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The effect of adopting this new guidance is disclosure-related only and had no impact on the Company’s results of operations.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring”, an amendment to the topic “Receivables”.  Given the recent economic downturn, the volume of debt restructured (modified) by creditors has increased. This ASU is expected to give additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  This ASU is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
 
 
- 5 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued):

Since 2008, the Company has experienced consolidated losses stemming from deterioration in credit quality and real estate values requiring the need for large loan loss provisions and impairments of foreclosed real estate. As a result primarily of the sustained losses, the Bank’s capital ratios declined. The Bank was deemed under capitalized at December 31, 2010 according to regulatory capital standards, with a total risk based capital ratio of 7.06%. The Bank’s first quarter loss reduced the total risk based capital ratio to 6.84% at March 31, 2011.

As a result of deteriorating asset quality, poor earnings and falling capital ratios, the Bank endured additional regulatory scrutiny and entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the State of Michigan’s Office of Financial and Insurance Regulation (“OFIR”), its primary regulators, on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The
Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR. Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet this requirement within the required 90-day period and remains out of compliance with the Consent Order as of March 31, 2011.
 
The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has limited resources with which to support the capital needs of the Bank. The Company’s main liquidity resource is its cash account balance of approximately $132,000.
 
 
- 6 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued):

On January 3, 2011, the Company was not able to repay its $5 million term loan when it came due. 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 last three contractual quarterly interest payments. The total interest due to Fifth Third at year-end 2010 was $153,410. The Company continues to accrue interest on the term loan and at March 31, 2011, the total interest due Fifth Third was $228,487. Since the Company presently does not have sufficient funds to pay off the term loan’s principal and accrued interest, Fifth Third has a right to foreclose on the Bank’s stock which collateralizes the term loan.

The Company’s net losses, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Consent Order, and the provisions of the Written Agreement creates an uncertainty about the Company’s ability to
continue as a going concern. As a result of such uncertainty, our auditors added an explanatory paragraph to their opinion on the Company’s December 31, 2010 consolidated financial statements expressing substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

2.
SECURITIES AVAILABLE FOR SALE:

The following tables represent the securities held in the Company’s portfolio at March 31, 2011 and at December 31, 2010:
 
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
                         
US Treasury
  $ 4,034,734     $ 5,727     $ (930 )   $ 4,039,531  
US Government and federal agency
    13,668,240       174,396       (15,523 )     13,827,113  
Municipals
    3,177,917       68,004       (1,726 )     3,244,195  
Mortgage-backed and collateralized
                               
mortgage obligations– residential
    14,288,643       223,199       (39,614 )     14,472,228  
    $ 35,169,534     $ 471,326     $ (57,793 )   $ 35,583,067  


         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
                         
US Treasury
  $ 1,004,240     $ 6,854     $ 0     $ 1,011,094  
US Government and federal agency
    16,696,952       222,261       (10,497 )     16,908,716  
Municipals
    3,179,898       62,864       (4,468 )     3,238,294  
Mortgage-backed and collateralized
                         
mortgage obligations– residential
    15,239,466       236,840       (130,507 )     15,345,799  
    $ 36,120,556     $ 528,819     $ (145,472 )   $ 36,503,903  
 
 
- 7 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.
SECURITIES AVAILABLE FOR SALE (Continued):

The amortized cost and fair value of the securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment fees.  Below is the schedule of contractual maturities for securities held at March 31, 2011:

       
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Due in one year or less
  $ 2,412,416     $ 2,425,631  
Due from one to five years
    16,712,784       16,890,802  
Due from five to ten years
    1,755,691       1,794,406  
Due in more than ten years
    0       0  
Mortgage-backed and collateralized
               
mortgage obligations – residential
    14,288,643       14,472,228  
    $ 35,169,534     $ 35,583,067  

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 March 31, 2011 and December 31, 2010:

   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
March 31, 2011
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
US Treasuries
  $ 3,030,391     $ (930 )   $ 0     $ 0     $ 3,030,391     $ (930 )
US Government and federal agency
    3,984,477       (15,523 )     0       0       3,984,477       (15,523 )
Municipals
    352,985       (1,726 )     0       0       352,985       (1,726 )
Mortgage-backed and
                                               
collateralized mortgage
                                               
obligations - residential
    8,044,852       (39,614 )     0       0       8,044,852       (39,614 )
    $ 15,412,705     $ (57,793 )   $ 0     $ 0     $ 15,412,705     $ (57,793 )
                                                 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
December 31, 2010
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
US Government and federal agency
  $ 2,489,266     $ (10,497 )   $ 0     $ 0     $ 2,489,266     $ (10,497 )
Municipals
    350,532       (4,468 )     0       0       350,532       (4,468 )
Mortgage-backed and
                                               
collateralized mortgage
                                               
obligations - residential
    7,887,368       (130,507 )     0       0       7,887,368       (130,507 )
    $ 10,727,166     $ (145,472 )   $ 0     $ 0     $ 10,727,166     $ (145,472 )

 
Periodically the Company will implement a strategy to realize market value gains within its securities portfolio to supplement earnings and capital. In 2011’s first quarter, the Company had no security sales. In the first quarter of 2010 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.
 
 
- 8 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.
SECURITIES AVAILABLE FOR SALE (Continued):
 
Other-Than-Temporary-Impairment
 
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. 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 March 31, 2011, twenty-five debt securities had unrealized losses with aggregate depreciation of 0.37% from the Company’s amortized cost basis, all of which had been in a continuous loss for less than twelve months. Most of the securities are issued by government or government sponsored agencies and to a lesser extent municipal securities.

Mortgage-backed and Collateralized Mortgage Obligation Securities

At March 31, 2011, 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 0.49% at March 31, 2011. 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 March 31, 2011.
 
 
- 9 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.
LOANS

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

   
March 31,
   
December 31,
 
   
2011
   
2010
 
             
Commercial
  $ 58,547,470     $ 58,416,643  
Commercial Real Estate:
               
General
    56,603,106       58,996,411  
Construction
    9,359,374       8,782,762  
Consumer:
               
Lines of credit
    15,587,977       15,954,866  
Other
    2,818,811       3,087,409  
Credit card
    510,220       520,095  
Residential
    18,726,265       19,534,704  
      162,153,223       165,292,890  
Less:  Allowance for loan losses
    (5,255,868 )     (4,791,907 )
Net deferred loan fees
    (35,741 )     (49,009 )
Loans, net
  $ 156,861,614     $ 160,451,974  

Loans held for sale totaled $3,012,189 at March 31, 2011 and $1,263,263 at December 31, 2010.
 
 
- 10 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The following is a summary of activity in the allowance for loan losses account for the three month periods ended March 31, 2011 and 2010:

   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
Allowance for loan losses:
           
Beginning balance
  $ 4,791,907     $ 3,782,132  
Charge-offs
    (283,397 )     (1,014,632 )
Recoveries
    42,853       20,985  
Provision for loan losses
    704,505       529,081  
Ending balance
  $ 5,255,868     $ 3,317,566  

The following table presents the activity in the allowance for loan losses for the first quarter of 2011 by portfolio segment and the recorded investment in loans by portfolio segment based on impairment method at March 31, 2011 and December 31, 2010:

March 31, 2011
 
Commercial
   
Commercial
Real Estate
   
Consumer
   
Residential
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,218,865     $ 2,896,176     $ 546,603     $ 130,263     $ 4,791,907  
      Charge-offs
    (134,701 )     (88,238 )     (60,458 )     0       (283,397 )
      Recoveries
    27,648       3,498       11,707       0       42,853  
      Provision for loan losses
    49,094       393,603       133,464       128,344       704,505  
    Ending balance
  $ 1,160,906     $ 3,205,039     $ 631,316     $ 258,607     $ 5,255,868  
                                         
    Ending allowance balance attributable to loans:
                                       
      Individually evaluated for impairment
  $ 139,094     $ 2,176,621     $ 177,287     $ 143,186     $ 2,636,188  
      Collectively evaluated for impairment
    1,021,812       1,028,418       454,029       115,421       2,619,680  
            Total ending allowance balance
  $ 1,160,906     $ 3,205,039     $ 631,316     $ 258,607     $ 5,255,868  
                                         
Loans:
                                       
      Individually evaluated for impairment
  $ 4,712,309     $ 8,861,899     $ 337,975     $ 883,555     $ 14,795,738  
      Collectively evaluated for impairment
    54,044,661       57,415,496       18,629,486       17,892,830       147,982,473  
            Total ending loans balance
  $ 58,756,970     $ 66,277,395     $ 18,967,461     $ 18,776,385     $ 162,778,211  
 
 
 
- 11 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

December 31, 2010
 
Commercial
   
Commercial
Real Estate
   
Consumer
   
Residential
   
Total
 
Allowance for loan losses:
                             
Ending allowance balance attributable to loans:
                             
Individually evaluated for impairment
  $ 195,684     $ 1,789,936     $ 85,233     $ 49,145     $ 2,119,998  
Collectively evaluated for impairment
    1,023,181       1,106,240       461,370       81,118       2,671,909  
Total ending allowance balance
  $ 1,218,865     $ 2,896,176     $ 546,603     $ 130,263     $ 4,791,907  
                                         
Loans:
                                       
Individually evaluated for impairment
  $ 4,276,850     $ 8,405,141     $ 307,307     $ 1,339,741     $ 14,329,039  
Collectively evaluated for impairment
    54,326,131       59,724,688       19,096,341       18,508,671       151,655,831  
Total ending loans balance
  $ 58,602,981     $ 68,129,829     $ 19,403,648     $ 19,848,412     $ 165,984,870  
 
 
- 12 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents loans individually evaluated for impairment by class of loans at March 31, 2011 and December 31, 2010:

         
Unpaid
         
Average
   
Interest
   
Interest Income
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
   
Cash Basis
 
March 31, 2011
 
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Recognized
 
With no related allowance recorded:
                                   
Commercial
  $ 4,196,360     $ 4,194,212     $ 0     $ 3,955,325     $ 21,231     $ 20,373  
Commercial Real Estate:
                                               
General
    1,897,094       1,897,272       0       2,099,458       1,858       1,748  
Construction
    458,001       458,001       0       482,221       0       0  
Consumer:
                                               
Lines of credit
    80,506       80,506       0       82,200       298       0  
Other
    18,900       18,900       0       18,900       0       0  
Residential
    193,851       194,367       0       348,433       1,895       1,895  
Subtotal
  $ 6,844,712     $ 6,843,258     $ 0     $ 6,986,537     $ 25,282     $ 24,016  
                                                 
With an allowance recorded:
                                               
Commercial
  $ 515,949     $ 513,733     $ 139,094     $ 595,863     $ 7,164     $ 6,854  
Commercial Real Estate:
                                               
General
    4,320,184       4,305,083       964,492       3,722,050       38,128       27,697  
Construction
    2,186,620       2,186,620       1,212,129       2,160,400       0       0  
Consumer:
                                               
Lines of credit
    188,005       187,643       133,623       203,284       1,086       1,060  
Other
    45,648       45,524       38,748       46,081       367       367  
Credit card
    4,916       4,916       4,916       3,630       0       0  
Residential
    689,704       700,076       143,186       550,782       1,037       1,037  
Subtotal
  $ 7,951,026     $ 7,943,595     $ 2,636,188     $ 7,282,090     $ 47,782     $ 37,015  
Total
  $ 14,795,738     $ 14,786,853     $ 2,636,188     $ 14,268,627     $ 73,064     $ 61,031  
 
 
- 13 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

         
Unpaid
       
   
Recorded
   
Principal
   
Related
 
December 31, 2010
 
Investment
   
Balance
   
Allowance
 
With no related allowance recorded:
                 
Commercial
  $ 3,692,148     $ 3,689,868     $ 0  
Commercial Real Estate:
                       
General
    2,684,164       2,681,391       0  
Construction
    664,866       664,866       0  
Consumer:
                       
Lines of credit
    108,274       108,274       0  
Other
    18,900       18,900       0  
Residential
    848,983       849,457       0  
Subtotal
  $ 8,017,335     $ 8,012,756     $ 0  
                         
With an allowance recorded:
                       
Commercial
  $ 584,702     $ 582,331     $ 195,684  
Commercial Real Estate:
                       
General
    3,088,254       3,078,481       575,175  
Construction
    1,967,857       1,967,857       1,214,761  
Consumer:
                       
Lines of credit
    131,515       131,149       42,799  
Other
    45,829       45,696       39,645  
Credit card
    2,789       2,789       2,789  
Residential
    490,758       490,385       49,145  
Subtotal
  $ 6,311,704     $ 6,298,688     $ 2,119,998  
Total
  $ 14,329,039     $ 14,311,444     $ 2,119,998  
 
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.
 
 
- 14 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans at March 31, 2011 and December 31, 2010:

   
March 31, 2011
   
December 31, 2010
 
         
Recorded
         
Recorded
 
         
Investment >
         
Investment >
 
         
90 Days and
         
90 Days and
 
   
Non Accrual
   
Accruing
   
Non Accrual
   
Accruing
 
Commercial
  $ 1,708,032     $ 0     $ 1,316,168     $ 0  
Commercial Real Estate:
                               
General
    2,755,448       0       3,143,819       0  
Construction
    2,644,621       0       2,632,723       0  
Consumer:
                               
Lines of credit
    213,453       0       214,489       0  
Other
    437       0       0       1,776  
Credit card
    0       0       0       0  
Residential
    614,461       0       748,166       0  
Total
  $ 7,936,452     $ 0     $ 8,055,365     $ 1,776  
 
 
- 15 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

The following table presents the aging of the recorded investment in past due loans by class of loans at March 31, 2011 and December 31, 2010:

               
Greater Than 90
                   
   
30-59 Days Past
   
60-89 Days Past
   
Days and Non
               
Total Recorded
 
March 31, 2011
 
Due
   
Due
   
Accrual
   
Total Past Due
   
Current
   
Investment
 
Commercial
  $ 297,113     $ 121,284     $ 1,708,032     $ 2,126,429     $ 56,630,541     $ 58,756,970  
Commercial Real Estate:
                                               
General
    661,882       326,585       2,755,448       3,743,915       53,149,339       56,893,254  
Construction
    0       0       2,644,621       2,644,621       6,739,520       9,384,141  
Consumer:
                                               
Lines of credit
    21,831       0       213,453       235,284       15,428,074       15,663,358  
Other
    893       0       437       1,330       2,792,553       2,793,883  
Credit card
    0       1,630       0       1,630       508,590       510,220  
Residential
    451,729       0       614,461       1,066,190       17,710,195       18,776,385  
Total
  $ 1,433,448     $ 449,499     $ 7,936,452     $ 9,819,399     $ 152,958,812     $ 162,778,211  
                                                 
                                                 
                   
Greater Than 90
                         
   
30-59 Days Past
   
60-89 Days Past
   
Days and Non
                   
Total Recorded
 
December 31, 2010
 
Due
   
Due
   
Accrual
   
Total Past Due
   
Current
   
Investment
 
Commercial
  $ 627,034     $ 0     $ 1,316,168     $ 1,943,202     $ 56,659,779     $ 58,602,981  
Commercial Real Estate:
                                               
General
    157,637       217,803       3,143,819       3,519,259       55,802,388       59,321,647  
Construction
    0       0       2,632,723       2,632,723       6,175,459       8,808,182  
Consumer:
                                               
Lines of credit
    79,191       35,460       214,489       329,140       15,619,003       15,948,143  
Other
    12,054       0       1,776       13,830       2,921,580       2,935,410  
Credit card
    0       0       0       0       520,095       520,095  
Residential
    94,404       0       748,166       842,570       19,005,842       19,848,412  
Total
  $ 970,320     $ 253,263     $ 8,057,141     $ 9,280,724     $ 156,704,146     $ 165,984,870  
 
 
- 16 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4.
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

Troubled Debt Restructurings:

The Company has allocated $1,953,316 of specific reserves on $7,910,305 of  loans to customers whose terms have been modified in troubled debt restructurings as of March 31, 2011 and $447,947 on $5,370,581 as of December 31, 2010. The Company has also committed $1,136,781 to two customers whose loans are classified as a troubled debt restructuring as of March 31, 2011. As of December 31, 2010, there was $1,146,342 committed to those customers. These customers are paying as agreed on those loans.

Credit Quality Indicators:

The Bank utilizes a numeric grading system for commercial and commercial real estate loans to indicate the strength of the credit. At origination, grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation including cash flow analysis and the estimated collateral values. The loan grade is reassessed at each renewal or amendment but any credit may receive a review based on lender identification of changes in the situation or behavior of the borrower. Once a loan becomes a 5W or higher the loan grade will be reanalyzed once a quarter to assess the borrowers compliance with Bank’s documented action plan. In addition to these methods for assigning loan grades, changes may occur through the external loan review or regulatory exam process. The loan grades are as follows:

1.  
Exceptional. Loans with an exceptional credit rating.
2.  
Quality. Loans with excellent sources of repayment that conform, in all respects, to Bank policy and regulatory requirements. These are loans for which little repayment risk has been identified
3.  
Above Average. Loans with above average sources of repayment and minimal identified credit or collateral exceptions and minimal repayment risk.
4.  
Average. Loans with average sources of repayment that materially conform to Bank policy and regulatory requirements. Repayment risk is considered average.
5.  
Acceptable. Loans with acceptable sources of repayment and risk.
5W.  
Watch. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.
6.  
Special Mention. Loans that have potential weaknesses and deserve close attention. If uncorrected, further deterioration is likely. Risk of non payment is above average.
7.  
Substandard. Loans that are inadequately protected by the borrower’s capacity to pay or the collateral pledged. Risk of non payment is high.
8.  
Doubtful. Loans in this grade have identified weaknesses that make full repayment highly questionable and improbable.
 
 
- 17 -

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4. 
ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued):

As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

         
Commercial Real Estate
   
Commercial Real Estate
 
   
Commercial
   
General
   
Construction
 
   
March 31,
   
December 31,
   
March 31,
   
December 31,
   
March 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
   
2011
   
2010
 
1   $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
2     582,361       583,364       0       0       0       0  
3     1,714,115       1,722,896       3,398,840       3,443,220       30,289       30,927  
4     20,363,874       21,109,601       17,297,781       17,362,231       3,110,369       2,727,615  
5     23,033,370       19,659,157       21,158,122       24,656,543       3,558,961       1,702,025  
5W     1,003,591       1,687,613       5,025,745       4,399,618       0       1,484,710  
6     6,679,840       9,349,408       5,423,268       4,777,202       0       190,333  
7     3,923,874       3,292,002       2,930,112       2,328,376       39,901       39,849  
8     1,455,945       1,198,940       1,659,386       2,354,457       2,644,621       2,632,723  
Total
  $ 58,756,970     $ 58,602,981     $ 56,893,254     $ 59,321,647     $ 9,384,141     $ 8,808,182  

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses.  For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented on page 16 of this document, and