COMMUNITY SHORES BANK CORP - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORP	v472980_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORP	v472980_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORP	v472980_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORP	v472980_ex31-1.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

June 30, 2017

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

For the transition period from

Commission File Number:

000-51166

Community Shores Bank Corporation

(Exact name of registration as specified in its charter)

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

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

(231) 780-1800

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

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

¨ Yes x No

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

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
Emerging Growth Company ¨		(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

¨ Yes x No

At August 14, 2017, 4,101,664 shares of common stock were outstanding.

Community Shores Bank Corporation Index

			Page No.

PART I.	Financial Information

	Item 1.	Financial Statements	1

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

	Item 4.	Controls and Procedures	60

PART II.	Other Information

	Item 1.	Legal Proceedings	61

	Item 1A.	Risk Factors	61

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

	Item 3.	Defaults upon Senior Securities	61

	Item 4.	Mine Safety Disclosures	61

	Item 5.	Other Information	61

	Item 6.	Exhibits	61

		Signatures	62

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2017			2016
	(unaudited)			(audited)
ASSETS
Cash and due from financial institutions	$	3,726,821		$	3,339,650
Interest-bearing deposits in other financial institutions		20,629,648			17,642,525
Total cash and cash equivalents		24,356,469			20,982,175
Term deposit		100,000			100,000
Securities available for sale (at fair value)		17,104,789			15,765,764
Loans held for sale		44,000			128,000
Loans		138,708,122			140,824,584
Less: Allowance for loan losses		1,778,315			1,611,820
Net loans		136,929,807			139,212,764
Federal Home Loan Bank stock (at cost)		300,500			300,500
Premises and equipment, net		8,337,437			8,486,355
Accrued interest receivable		396,717			393,444
Foreclosed assets		1,355,560			1,460,394
Net deferred tax assets		3,951,891			4,032,675
Other assets		602,445			547,638
Total assets	$	193,479,615		$	191,409,709
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing	$	43,340,389		$	46,893,163
Interest-bearing		125,621,468			120,830,147
Total deposits		168,961,857			167,723,310
Repurchase agreements		5,255,475			4,639,766
Subordinated debentures		4,500,000			4,500,000
Accrued expenses and other liabilities		538,519			485,153
Total liabilities		179,255,851			177,348,229
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; 4,101,664 issued and outstanding at both June 30, 2017 and December 31, 2016		19,631,670			19,626,201
Accumulated deficit		(5,380,684	)		(5,542,341	)
Accumulated other comprehensive loss		(27,222	)		(22,380	)
Total shareholders’ equity		14,223,764			14,061,480
Total liabilities and shareholders’ equity	$	193,479,615		$	191,409,709

See accompanying notes to consolidated financial statements.

-1-

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2017		2016		2017		2016
Interest and dividend income
Loans, including fees	$	1,707,206	$	1,575,056	$	3,370,300	$	3,095,809
Securities (including FHLB dividends)		65,670		74,625		128,867		159,332
Federal funds sold and other income		72,174		22,256		119,359		42,132
Total interest and dividend income		1,845,050		1,671,937		3,618,526		3,297,273
Interest expense
Deposits		168,320		157,311		334,867		318,849
Repurchase agreements and other short-term debt		5,091		3,900		9,354		8,299
Federal Home Loan Bank advances and notes payable		38,675		31,417		74,821		91,894
Total interest expense		212,086		192,628		419,042		419,042
Net Interest Income		1,632,964		1,479,309		3,199,484		2,878,231
Provision for loan losses		173,719		0		173,719		0
Net Interest Income After Provision for Loan Losses		1,459,245		1,479,309		3,025,765		2,878,231
Non-interest income
Service charges on deposit accounts		102,877		107,489		214,239		229,379
Gain on sale of loans		65,729		37,018		154,069		70,719
Gain on sale of foreclosed assets		25,022		112,132		51,051		147,013
Other		203,547		216,211		395,063		408,051
Total non-interest income		397,175		472,850		814,422		855,162
Non-interest expense
Salaries and employee benefits		996,096		982,170		2,027,119		1,993,034
Occupancy		141,836		146,893		292,772		302,629
Furniture and equipment		85,612		101,499		174,379		189,496
Advertising		1,425		2,400		5,968		6,203
Data processing		127,926		120,485		251,344		239,006
Professional services		102,487		123,188		189,812		221,777
Foreclosed asset impairment		68,062		85,414		97,483		85,414
FDIC insurance		35,513		60,473		73,846		127,586
Other		258,885		215,356		482,530		490,461
Total non-interest expense		1,817,842		1,837,878		3,595,253		3,655,606
Income Before Federal Income Taxes		38,578		114,281		244,934		77,787
Federal income tax expense		13,116		35,610		83,277		23,202
Net Income	$	25,462	$	78,671	$	161,657	$	54,585
Basic average shares outstanding		4,101,664		4,101,664		4,101,664		2,843,097
Diluted average shares outstanding		4,128,697		4,101,664		4,130,172		2,843,097
Basic income earnings per share	$	0.01	$	0.02	$	0.04	$	0.02
Diluted income earnings per share	$	0.01	$	0.02	$	0.04	$	0.02

See accompanying notes to consolidated financial statements.

-2-

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016

Net income	$	25,462		$	78,671		$	161,657		$	54,585

Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities		(3,573	)		47,655			(7,337	)		208,833
Less reclassification adjustments for unrealized gains later recognized in income		0			0			0			0
		(3,573	)		47,655			(7,337	)		208,833
Tax effect		1,215			(16,203	)		2,495			(71,004	)
Other comprehensive income (loss), net of tax		(2,358	)		31,452			(4,842	)		137,829

Comprehensive income	$	23,104		$	110,123		$	156,815		$	192,414

See accompanying notes to consolidated financial statements.

-3-

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

								Accumulated
								Other			Total
			Common		Accumulated			Comprehensive			Shareholders’
	Shares		Stock		Deficit			Income (Loss)			Equity

Balance at January 1, 2016		1,468,800	$	13,296,691	$	(5,705,469	)	$	(28,795	)	$	7,562,427

Proceeds from rights offering, net of issuance costs		1,383,299		3,290,183								3,290,183
Proceeds from private placement		579,412		1,477,501								1,477,501
Note payable conversion, including derivative liability, net of taxes		670,153		1,561,592								1,561,592
Net income						54,585						54,585
Other comprehensive income									137,829			137,829

Balance at June 30, 2016		4,101,664	$	19,625,967	$	(5,650,884	)	$	109,034		$	14,084,117

Balance at January 1, 2017		4,101,664	$	19,626,201	$	(5,542,341	)	$	(22,380	)	$	14,061,480

Expense related to share-based compensation				5,469								5,469
Net income						161,657						161,657
Other comprehensive loss									(4,842	)		(4,842	)

Balance at June 30, 2017		4,101,664	$	19,631,670	$	(5,380,684	)	$	(27,222	)	$	14,223,764

See accompanying notes to consolidated financial statements.

-4-

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended			Six Months Ended
	June 30, 2017			June 30, 2016
Cash flows from operating activities
Net income	$	161,657		$	54,585
Adjustments to reconcile net income to net cash from (used in) operating activities:
Provision for loan losses		173,719			0
Depreciation and amortization		173,466			184,893
Net amortization of securities		67,340			110,551
Net realized gain on sale of loans		(154,069	)		(70,719	)
Net realized gain on sale of foreclosed assets		(51,051	)		(147,013	)
Foreclosed asset impairment		97,483			85,414
Originations of loans for sale		(4,449,580	)		(2,820,750	)
Proceeds from loan sales		4,641,791			2,792,469
Deferred federal income tax expense		83,277			23,202
Share based compensation		5,469			0
Net change in:
Accrued interest receivable and other assets		(58,076	)		367,013
Accrued interest payable and other liabilities		53,366			(719,193	)
Net cash from (used in) operating activities		744,792			(139,548	)
Cash flows from investing activities
Activity in available for sale securities:
Maturities, prepayments and calls		3,091,138			3,953,641
Purchases		(4,504,841	)		0
Loan originations and payments, net		1,664,020			(4,467,416	)
Proceeds from the sale of the credit card portfolio		491,075			0
Additions to premises and equipment, net		(24,548	)		(18,736	)
Proceeds from the sale of foreclosed assets		58,402			556,570
Net cash from investing activities		775,246			24,059
Cash flows from financing activities
Net change in deposits		1,238,547			(5,235,502	)
Repayment of note payable		0			(8	)
Net change in repurchase agreements		615,709			(923,948	)
Capital-raising activities
Proceeds from rights offering, net of issuance costs		0			3,290,183
Proceeds from private placement, net of issuance cost		0			1,477,501
Net cash from (used in) financing activities		1,854,256			(1,391,774	)
Net change in cash and cash equivalents		3,374,294			(1,507,263	)
Beginning cash and cash equivalents		20,982,175			17,899,952
Ending cash and cash equivalents	$	24,356,469		$	16,392,689
Supplemental cash flows information:
Cash paid during the period for interest	$	152,087		$	1,080,845
Cash paid during the period for federal income tax		0			0
Non-cash financing activities:
Transfers from loans to foreclosed assets		0			89,019
Note payable conversion to common stock, including derivative and net of taxes		0			1,561,592

See accompanying notes to consolidated financial statements.

-5-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS

BASIS OF PRESENTATION: The unaudited, consolidated financial statements as of and for the three months and six months ended June 30, 2017 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 June 30, 2017 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the period ended December 31, 2016. Some items in the prior year financial statements may be reclassified to conform to the current presentation.

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

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

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

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

-6-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

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

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

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

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

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

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent 12 quarters. The historical loss experience is recalculated at the end of each quarter. This actual loss experience is supplemented with current economic factors based on the risks present for each portfolio segment. These current economic factors are also reassessed at the end of each quarter and include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; quality of loan review system; degree of oversight by the Board of Directors; national and local economic trends and conditions; industry conditions; competition and legal and regulatory requirements; and effects of changes in credit concentrations. There were no significant changes to this methodology in the first half of 2017.

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

-7-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

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

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

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

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

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

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

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

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

-8-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

There was no material change in these operating doctrines during the six months ended June 30, 2017.

ADOPTION OF NEW ACCOUNTING STANDARDS:

None

NEWLY ISSUED NOT YET EFFECTIVE ACCOUNTING STANDARDS:

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2016, with three transition methods available – full retrospective, retrospective and cumulative effect approach. At the July 9, 2015 FASB meeting, the FASB voted to delay the effective date by one year to January 1, 2018. The adoption of this guidance will not have a material impact because the core revenue of the Company, net interest income on financial assets and liabilities, is explicitly excluded from the scope of ASU 2014-09. The Company is currently reviewing the impact on non-interest income, but does not expect this guidance to have a material effect on the Company’s results of operations.

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

-9-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

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

In June 2016, the FASB issued ASU 2016-13 "Financial Instruments-Credit Losses" which introduces the current expected credit losses methodology (CECL) for estimating allowances for credit losses. The new accounting standard allows a financial institution to leverage its current internal credit risk systems as a framework for estimating expected credit losses. For public business entities (PBE) that are U.S. SEC filers, the new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is in process of evaluating this new ASU to determine the potential impact on the Company’s financial position or results of operations.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). This ASU addresses concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In particular, this ASU addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments are effective for annual periods beginning after December 15, 2017, and for interim periods within those annual periods. Out of the eight specific cash flow issues addressed by this guidance many are not relevant to the Company’s current operations. As such, the adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

-10-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION, LOAN POLICY AND RECENT DEVELOPMENTS (Continued)

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU requires the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. Previously, entities were allowed to amortize to contractual maturity or to call date. This ASU is effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company does not currently own any callable debt securities so the adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

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

RECENT DEVELOPMENTS

The Company was subject to a Written Agreement with the Federal Reserve Bank of Chicago (“FRB”) beginning in December 2010 but in light of improvements to the Company’s financial condition and the strengthened capital position of the Bank as a result of the capital raise, the FRB terminated the Written Agreement on March 16, 2017.

Going forward, the FRB has requested that the Company obtain written approval at least 30 days prior to declaring or paying a dividend on any class of its stock; increasing its debt, including the issuance of trust preferred securities; or redeeming any Company stock.

-11-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE

The following tables represent the securities held in the Company’s portfolio at June 30, 2017 and at December 31, 2016:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2017	Cost		Gains		Losses			Value

US Treasury	$	4,000,294	$	36	$	(6,502	)	$	3,993,828
US Government and federal agency		4,453,835		1,151		(1,642	)		4,453,344
Mortgage-backed and collateralized mortgage obligations– residential		8,691,905		34,125		(68,413	)		8,657,617
	$	17,146,034	$	35,312	$	(76,557	)	$	17,104,789

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2016	Cost		Gains		Losses			Value

US Treasury	$	503,045	$	1,721	$	0		$	504,766
US Government and federal agency		6,469,467		10,657		(147	)		6,479,977
Mortgage-backed and collateralized mortgage obligations – residential		8,827,160		43,455		(89,594	)		8,781,021
	$	15,799,672	$	55,833	$	(89,741	)	$	15,765,764

The amortized cost and fair value of the securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment fees. Below is the schedule of contractual maturities for securities held at June 30, 2017:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	4,954,268	$	4,953,812
Due from one to five years		3,499,861		3,493,360
Due from five to ten years		0		0
Due in more than ten years		0		0
Mortgage-backed and collateralized mortgage obligations – residential		8,691,905		8,657,617
	$	17,146,034	$	17,104,789

-12-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE (Continued)

Below is the table of securities with unrealized losses, aggregated by investment category and length of time such securities were in an unrealized loss position at June 30, 2017 and December 31, 2016:

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2017	Value		Losses			Value		Losses			Value		Losses
US Treasuries	$	3,493,360	$	(6,502	)	$	0	$	0		$	3,493,360	$	(6,502	)
US Government and federal agency		2,948,349		(1,642	)		0		0			2,948,349		(1,642	)
Mortgage-backed and collateralized mortgage obligations – residential		5,892,612		(48,618	)		947,909		(19,795	)		6,840,521		(68,413	)
	$	12,334,321	$	(56,762	)	$	947,909	$	(19,795	)	$	13,282,230	$	(76,557	)

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2016	Value		Losses			Value		Losses			Value		Losses
US Treasuries	$	0	$	0		$	0	$	0		$	0	$	0
US Government and federal agency		499,633		(147	)		0		0			499,633		(147	)
Mortgage-backed and collateralized mortgage obligations – residential		5,406,053		(69,170	)		881,617		(20,424	)		6,287,670		(89,594	)
	$	5,905,686	$	(69,317	)	$	881,617	$	(20,424	)	$	6,787,303	$	(89,741	)

No securities were sold in the three or six months ended June 30, 2017 or June 30, 2016.

-13-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE (Continued)

Other-Than-Temporary-Impairment

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

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

At June 30, 2017 and December 31, 2016, all of the mortgage-backed securities and collateralized mortgage obligations held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Ginnie Mae, Fannie Mae and Freddie Mac. Ginnie Mae has the full faith and credit of the US government. Fannie Mae and Freddie Mac are highly rated by the rating agencies and although their debt is not guaranteed by the US government, the US government in 2008, acknowledged its commitment to support their financial health. At June 30, 2017, 32 debt securities had unrealized losses with aggregate depreciation of 0.57% from the amortized cost basis; four of the 32 had unrealized losses greater than 12 months.

Nine of the 32 securities, which had an unrealized loss at June 30, 2017, are issued by government agencies and 23 are issued by government-sponsored entities. It is likely that these debt securities will be retained given the fact that they are pledged to various public funds. The reported decline in value is not material and is deemed to be market driven. Because the decline in fair value is attributable to changes in interest rates and not credit quality and, because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2017.

At June 30, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than U.S. Government and federal agencies, in an amount greater than 10% of common stock and surplus.

-14-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES AVAILABLE FOR SALE (Continued)

Securities pledged at June 30, 2017 had a carrying amount of $15,569,658 and were pledged to secure public fund customers and customer repurchase agreements. Pledged securities at December 31, 2016 had a carrying amount of $14,266,378.

LOANS

Outstanding loan balances by portfolio segment and class at June 30, 2017 and December 31, 2016 were as follows:

	June 30, 2017			December 31, 2016
Commercial	$	46,071,803		$	50,869,327
Commercial Real Estate:
General		62,075,432			55,412,701
Construction		5,498,002			8,383,035
Consumer:
Lines of credit		6,390,778			5,965,344
Other		1,126,005			1,169,365
Credit card		0			450,920
Residential		17,611,873			18,654,044
Net deferred loan fees		(65,771	)		(80,152	)
		138,708,122			140,824,584
Less: Allowance for loan losses		(1,778,315	)		(1,611,820	)
Loans, net	$	136,929,807		$	139,212,764

-15-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The following tables present the activity in the allowance for loan losses for the three and six month periods ended June 30, 2017 and 2016 by portfolio segment:

Three Months Ended June 30, 2017	Commercial			Commercial Real Estate		Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	627,469		$	525,477	$	219,008		$	186,518		$	59,926		$	1,618,398
Charge-offs		(21,870	)		0		(719	)		0			0			(22,589	)
Recoveries		5,690			1,305		1,792			0			0			8,787
Provision for loan losses		(50,449	)		291,268		(747	)		(6,427	)		(59,926	)		173,719
Ending balance	$	560,840		$	818,050	$	219,334		$	180,091		$	0		$	1,778,315

Three Months Ended June 30, 2016	Commercial			Commercial Real Estate			Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	556,274		$	453,238		$	314,571		$	215,109		$	165,852		$	1,705,044
Charge-offs		(69,664	)		(21,871	)		(33,748	)		0			0			(125,283	)
Recoveries		29,150			25,710			3,960			0			0			58,820
Provision for loan losses		66,651			3,525			(20,893	)		(3,195	)		(46,088	)		0
Ending balance	$	582,411		$	460,602		$	263,890		$	211,914		$	119,764		$	1,638,581

-16-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

Six Months Ended June 30, 2017	Commercial			Commercial Real Estate		Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	617,002		$	459,805	$	259,194		$	203,312		$	72,507		$	1,611,820
Charge-offs		(21,870	)		0		(795	)		0			0			(22,665	)
Recoveries		11,090			1,305		3,046			0			0			15,441
Provision for loan losses		(45,382	)		356,940		(42,111	)		(23,221	)		(72,507	)		173,719
Ending balance	$	560,840		$	818,050	$	219,334		$	180,091		$	0		$	1,778,315

Six Months Ended June 30, 2016	Commercial			Commercial Real Estate			Consumer			Residential		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	522,558		$	432,145		$	322,185		$	210,653	$	183,875		$	1,671,416
Charge-offs		(69,664	)		(21,871	)		(39,293	)		0		0			(130,828	)
Recoveries		39,553			25,710			32,730			0		0			97,993
Provision for loan losses		89,964			24,618			(51,732	)		1,261		(64,111	)		0
Ending balance	$	582,411		$	460,602		$	263,890		$	211,914	$	119,764		$	1,638,581

-17-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2017 and December 31, 2016:

June 30, 2017	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	240,290	$	349,209	$	70,767	$	42,415	$	0	$	702,681
Collectively evaluated for impairment		320,550		468,841		148,567		137,676		0		1,075,634
Unallocated		0		0		0		0		0		0
Total ending allowance balance	$	560,840	$	818,050	$	219,334	$	180,091	$	0	$	1,778,315

Loans:
Individually evaluated for impairment	$	1,401,269	$	7,840,947	$	126,435	$	517,404	$	0	$	9,886,055
Collectively evaluated for impairment		44,766,083		59,839,522		7,415,262		17,140,547		0		129,161,414
Total ending loans balance	$	46,167,352	$	67,680,469	$	7,541,697	$	17,657,951	$	0	$	139,047,469

December 31, 2016	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	268,274	$	20,595	$	80,503	$	62,962	$	0	$	432,334
Collectively evaluated for impairment		348,728		439,210		178,691		140,350		0		1,106,979
Unallocated		0		0		0		0		72,507		72,507
Total ending allowance balance	$	617,002	$	459,805	$	259,194	$	203,312	$	72,507	$	1,611,820

Loans:
Individually evaluated for impairment	$	2,294,672	$	6,328,334	$	165,174	$	526,736	$	0	$	9,314,916
Collectively evaluated for impairment		48,666,710		57,560,977		7,448,194		18,176,652		0		131,852,533
Total ending loans balance	$	50,961,382	$	63,889,311	$	7,613,368	$	18,703,388	$	0	$	141,167,449

-18-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2017 and December 31, 2016. The recorded investment includes unpaid principal balance net of interest payments applied to principal (non-accrual loans only) as well as accrued interest receivable, deferred fees and costs. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

	Recorded		Unpaid Principal		Related
June 30, 2017	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	515,288	$	597,124	$	0
Commercial Real Estate:
General		5,778,273		6,855,992		0
Consumer:
Lines of credit		9,150		9,139		0
Other		0		0		0
Residential		467,387		498,858		0
Subtotal	$	6,770,098	$	7,961,113	$	0

With a related allowance recorded:
Commercial	$	885,981	$	884,614	$	240,290
Commercial Real Estate:
General		2,062,674		2,048,270		349,209
Consumer:
Lines of credit		98,150		97,670		51,734
Other		19,135		19,033		19,033
Residential		50,017		59,465		42,415
Subtotal	$	3,115,957	$	3,109,052	$	702,681
Total	$	9,886,055	$	11,070,165	$	702,681

-19-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

	Recorded		Unpaid Principal		Related
December 31, 2016	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	1,334,036	$	1,394,625	$	0
Commercial Real Estate:
General		6,270,915		7,349,245		0
Consumer:
Lines of credit		35,868		35,791		0
Other		0		0		0
Residential		181,557		214,031		0
Subtotal	$	7,822,376	$	8,993,692	$	0
With a related allowance recorded:
Commercial	$	960,636	$	970,799	$	268,274
Commercial Real Estate:
General		57,419		57,323		20,595
Consumer:
Lines of credit		108,825		108,217		60,132
Other		20,481		20,372		20,371
Residential		345,179		353,232		62,962
Subtotal	$	1,492,540	$	1,509,943	$	432,334
Total	$	9,314,916	$	10,503,635	$	432,334

-20-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the average recorded investment of loans individually evaluated for impairment by class of loans as of June 30, 2017 and 2016 and the associated interest income. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.

	Three Months		Three Months		Three Months
	Average Recorded		Interest Income		Cash Basis
June 30, 2017	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	505,866	$	6,553	$	5,091
Commercial Real Estate:
General		5,708,252		64,428		56,643
Consumer:
Lines of credit		9,214		162		162
Other		0		0		0
Residential		469,083		3,400		4,190
Subtotal	$	6,692,415	$	74,543	$	66,086

With a related allowance recorded:
Commercial	$	934,887	$	9,845	$	2,271
Commercial Real Estate:
General		1,704,785		27,031		14,037
Consumer:
Lines of credit		98,159		1,526		1,526
Other		19,343		345		345
Residential		50,057		0		0
Subtotal	$	2,807,231	$	38,747	$	18,179
Total	$	9,499,646	$	113,290	$	84,265

-21-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

	Three Months		Three Months		Three Months
	Average Recorded		Interest Income		Cash Basis
June 30, 2016	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	1,364,290	$	11,865	$	11,730
Commercial Real Estate:
General		4,981,629		46,671		50,113
Consumer:
Lines of credit		109,978		2,232		2,259
Other		0		0		0
Residential		404,421		379		379
Subtotal	$	6,860,318	$	61,147	$	64,481

With a related allowance recorded:
Commercial	$	1,003,161	$	9,900	$	15,296
Commercial Real Estate:
General		56,756		363		363
Consumer:
Lines of credit		154,895		1,711		1,760
Other		14,010		353		424
Residential		313,648		3,210		4,269
Subtotal	$	1,542,470	$	15,537	$	22,112
Total	$	8,402,788	$	76,684	$	86,593

-22-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

	Six Months		Six Months		Six Months
	Average Recorded		Interest Income		Cash Basis
June 30, 2017	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	620,851	$	10,362	$	7,661
Commercial Real Estate:
General		6,044,422		131,748		121,736
Consumer:
Lines of credit		18,143		329		329
Other		0		0		0
Residential		420,921		8,414		8,414
Subtotal	$	7,104,337	$	150,853	$	138,140

With a related allowance recorded:
Commercial	$	949,148	$	21,070	$	8,128
Commercial Real Estate:
General		1,194,435		47,236		34,202
Consumer:
Lines of credit		101,669		3,047		3,047
Other		19,655		712		712
Residential		147,605		0		0
Subtotal	$	2,412,512	$	72,065	$	46,089
Total	$	9,516,849	$	222,918	$	184,229

-23-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

	Six Months		Six Months		Six Months
	Average Recorded		Interest Income		Cash Basis
June 30, 2016	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	1,365,016	$	23,796	$	23,661
Commercial Real Estate:
General		5,053,723		95,489		95,489
Consumer:
Lines of credit		92,006		3,947		3,903
Other		0		0		0
Residential		408,334		790		790
Subtotal	$	6,919,079	$	124,022	$	123,843

With a related allowance recorded:
Commercial	$	1,016,545	$	20,386	$	20,386
Commercial Real Estate:
General		84,415		363		363
Consumer:
Lines of credit		185,403		4,006		3,926
Other		14,217		674		643
Residential		314,413		6,445		6,445
Subtotal	$	1,614,993	$	31,874	$	31,763
Total	$	8,534,072	$	155,896	$	155,606

-24-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the aging of the recorded investment in past due and non-accrual loans by class of loans as of June 30, 2017:

Accruing Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Accruing Past Due Loans		Current Accruing Loans		Total Recorded Investment of Accruing Loans
Commercial	$	15,185	$	566,752	$	0	$	581,937	$	45,526,490	$	46,108,427
Commercial Real Estate:
General		1,397,931		0		0		1,397,931		60,731,071		62,129,002
Construction		0		0		0		0		5,509,754		5,509,754
Consumer:
Lines of credit		0		0		0		0		6,411,596		6,411,596
Other		0		0		0		0		1,130,101		1,130,101
Credit card		0		0		0		0		0		0
Residential		0		0		0		0		17,553,203		17,553,203
Total	$	1,413,116	$	566,752	$	0	$	1,979,868	$	136,862,215	$	138,842,083

Non-Accrual Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Non-Accrual Past Due Loans		Current Non-Accrual Loans		Total Non-Accrual Recorded Investment
Commercial	$	0	$	0	$	48,400	$	48,400	$	10,525	$	58,925
Commercial Real Estate:
General		0		0		41,713		41,713		0		41,713
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		0		0		0		0		0		0
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		0		0		59,050		59,050		45,698		104,748
Total	$	0	$	0	$	149,163	$	149,163	$	56,223	$	205,386

-25-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

The following tables present the aging of the recorded investment in past due and non-accrual loans by class of loans as of December 31, 2016:

Accruing Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Accruing Past Due Loans		Current Accruing Loans		Total Recorded Investment of Accruing Loans
Commercial	$	298,912	$	592,498	$	0	$	891,410	$	50,058,531	$	50,949,941
Commercial Real Estate:
General		100,058		0		0		100,058		55,404,749		55,504,807
Construction		0		0		0		0		8,384,504		8,384,504
Consumer:
Lines of credit		36,652		0		0		36,652		5,951,862		5,988,514
Other		0		0		0		0		1,173,934		1,173,934
Credit card		0		0		0		0		450,920		450,920
Residential		36,621		144,039		0		180,660		18,410,821		18,591,481
Total	$	472,243	$	736,537	$	0	$	1,208,780	$	139,835,321	$	141,044,101

Non-Accrual Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Non-Accrual Past Due Loans		Current Non-Accrual Loans		Total Non-Accrual Recorded Investment
Commercial	$	0	$	0	$	0	$	0	$	11,441	$	11,441
Commercial Real Estate:
General		0		0		0		0		0		0
Construction		0		0		0		0		0		0
Consumer:
Lines of credit		0		0		0		0		0		0
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		63,049		0		48,858		111,907		0		111,907
Total	$	63,049	$	0	$	48,858	$	111,907	$	11,441	$	123,348

-26-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

Troubled Debt Restructurings:

A loan is considered to be a Troubled Debt Restructure (“TDR”) when the Bank grants a concession to the borrower that it would not normally consider because the borrower is experiencing financial difficulty. The concession is typically a modification of one or more of the terms such as a rate reduction below the current market rate for new debt with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not cover the interest; financing concessions; or a permanent reduction of the recorded investment of the loan.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed utilizing the Company’s internal underwriting policy.

The Company has allocated $693,716 of specific reserves on $9,620,258 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2017 and $413,252 on $9,102,558 of unpaid principal balance of loans as of December 31, 2016. As of June 30, 2017, there were no loan commitments to any customer whose loan terms were modified in a troubled debt restructuring.

The following tables present loans by class modified as troubled debt restructurings that occurred during the three and six month periods ended June 30, 2017:

			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded		Current
Three Months Ended June 30, 2017	Number of Loans		Investment		Investment		Balance
Troubled Debt Restructurings:
Commercial Real Estate:
General		2	$	549,725	$	550,068	$	599,247
Total		2	$	549,725	$	550,068	$	599,247

			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded		Current
Six Months Ended June 30, 2017	Number of Loans		Investment		Investment		Balance
Troubled Debt Restructurings:
Commercial		1	$	125,604	$	125,604	$	125,604
Commercial Real Estate:
General		2		549,725		550,068		599,247
Total		3	$	675,329	$	675,672	$	724,851

For the three and six month periods ending June 30, 2017, all three modifications consisted of the borrowers receiving a modified payment structure for a range of 5 to 15 years.

-27-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

For the six month period ended June 30, 2017, there were no charge-offs related to troubled debt restructurings. As of June 30, 2017, an additional $66,371 of specific reserves were established on these troubled debt restructurings.

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

			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded		Current
Three Months Ended June 30, 2016	Number of Loans		Investment		Investment		Balance
Troubled Debt Restructurings:
Commercial		1	$	15,107	$	15,107	$	15,107
Commercial Real Estate:
General		1		58,194		58,194		58,194
Consumer:
Other		1		11,566		11,566		11,566
Total		3	$	84,867	$	84,867	$	84,867

			Pre-Modification		Post-Modification
			Outstanding Recorded		Outstanding Recorded		Current
Six Months Ended June 30, 2016	Number of Loans		Investment		Investment		Balance
Troubled Debt Restructurings:
Commercial		1	$	15,107	$	15,107	$	15,107
Commercial Real Estate:
General		1		58,194		58,194		58,194
Consumer:
Other		1		11,566		11,566		11,566
Total		3	$	84,867	$	84,867	$	84,867

For the three and six month periods ending June 30, 2016, one modification involved a stated interest rate below the current market rate for a period of 7 years. Two modifications involved a reduced payment amount for a period ranging from 4 months to 9 months.

For the six month period ended June 30, 2016, there were no charge-offs related to troubled debt restructurings. As of June 30, 2016, an additional $50,937 of specific reserves were established on these troubled debt restructurings.

For the three and six month periods ending June 30, 2017 there were no troubled debt restructuring that experienced a payment default. However, there was one commercial troubled debt restructuring that experienced a payment default within 12 months following the modification within the three and six month periods ending June 30, 2016. The recorded investment at the time of default was $18,301.

-28-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

Credit Quality Indicators:

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

Exceptional. Loans with an exceptional credit rating.

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.

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

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

Acceptable. Loans with acceptable sources of repayment and risk.

5M.

Monitor. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.

Special Mention. Loans that have potential weaknesses and deserve close attention. If uncorrected, further deterioration is likely. Risk of non payment is above average.

Substandard. Loans that are inadequately protected by the borrower’s capacity to pay or the collateral pledged. Risk of non payment is high.

Doubtful. Loans in this grade have identified weaknesses that make full repayment highly questionable and improbable.

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

-29-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

As of June 30, 2017 and December 31, 2016, and based on the most recent analysis performed, the recorded investment by risk category and class of loans is as follows:

					Commercial Real Estate				Commercial Real Estate
	Commercial				General				Construction
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2017		2016		2017		2016		2017		2016
1	$	0	$	7,391	$	0	$	0	$	0	$	0
2		1,246,575		1,281,578		1,515,695		1,577,808		0		0
3		9,820,697		10,420,192		5,770,271		5,738,500		89,573		800,501
4		15,694,200		16,356,758		25,528,419		17,176,904		2,126,616		4,310,495
5		15,224,547		17,186,851		19,963,538		18,089,577		1,671,139		1,782,945
5M		1,938,281		2,606,184		2,763,772		3,087,363		0		0
6		1,150,624		1,200,346		3,480,895		8,159,197		1,622,426		1,490,563
7		1,033,640		1,890,779		3,147,606		1,674,939		0		0
8		58,788		11,303		519		519		0		0
Total	$	46,167,352	$	50,961,382	$	62,170,715	$	55,504,807	$	5,509,754	$	8,384,504

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of June 30, 2017 and December 31, 2016:

	Residential
	June 30,		December 31,
	2017		2016
Performing	$	17,140,547	$	18,176,652
Impaired		517,404		526,736
Total	$	17,657,951	$	18,703,388

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2017		2016		2017		2016		2017		2016
Performing	$	6,304,296	$	5,843,821	$	1,110,966	$	1,153,453	$	0	$	450,920
Impaired		107,300		144,693		19,135		20,481		0		0
Total	$	6,411,596	$	5,988,514	$	1,130,101	$	1,173,934	$	0	$	450,920

-30-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FORECLOSED ASSETS

Foreclosed asset activity for the period ended:

	June 30,			December 31,
	2017			2016
Beginning of year	$	1,460,394		$	2,211,327
Additions		0			89,019
Reductions from sales		(7,351	)		(649,574	)
Direct write-downs		(97,483	)		(190,378	)
End of period	$	1,355,560		$	1,460,394

Expenses related to foreclosed assets include:
Operating expenses, net of rental income	$	46,924		$	80,782

A significant portion of the operating expenses is related to property taxes paid on the foreclosed assets. These amounts can vary from year-to-year depending on the number and types of foreclosed properties as well as the timing of the payments.

PREMISES AND EQUIPMENT

Period end premises and equipment were as follows at June 30, 2017 and December 31, 2016:

	June 30,		December 31,
	2017		2016
Land & land improvements	$	4,704,624	$	4,704,624
Buildings & building improvements		6,334,781		6,334,070
Furniture, fixtures and equipment		3,017,085		3,231,264
		14,056,490		14,269,958
Less: accumulated depreciation		5,719,053		5,783,603
	$	8,337,437	$	8,486,355

Depreciation and amortization expenses were $173,466 and $184,893 for the six months ended June 30, 2017 and 2016, respectively.

-31-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEPOSITS

The components of the outstanding deposit balances at June 30, 2017 and December 31, 2016 were as follows:

	June 30,		December 31,
	2017		2016
Non-interest-bearing DDA	$	43,340,389	$	46,893,163
Interest-bearing DDA		45,723,186		40,848,573
Money market		22,435,302		21,637,723
Savings		33,678,408		32,724,497
Time, under $100,000		14,553,646		15,663,347
Time, over $100,000		9,230,926		9,956,007
Total Deposits	$	168,961,857	$	167,723,310

Time deposits of $250,000 or more were $1,392,955 at June 30, 2017 and $1,387,575 at December 31, 2016. There were no brokered deposits at either June 30, 2017 or December 31, 2016.

SHORT-TERM BORROWINGS

The Company’s short-term borrowings outstanding consisted entirely of repurchase agreements at June 30, 2017 and December 31, 2016. The Company has not utilized its line of credit with the FHLB in 2017, and only utilized it once during 2016. Information regarding repurchase agreements and borrowings from the FHLB is summarized below:

	Repurchase			Borrowings
	Agreements			from FHLB

Outstanding at June 30, 2017	$	5,255,475		$	0
Average interest rate at period end		0.41	%		0	%
Average balance during period		4,593,411			0
Average interest rate during period		0.41	%		0	%
Maximum month end balance during period		5,320,693			0

Outstanding at December 31, 2016	$	4,639,766		$	0
Average interest rate at year-end		0.40	%		0	%
Average balance during year		4,283,900			273
Average interest rate during year		0.41	%		0.34	%
Maximum month end balance during year		5,382,709			0

The Bank had securities of $5,184,056 pledged to repurchase agreements at June 30, 2017 and $4,000,396 pledged at December 31, 2016. The Company had approximately $3.5 million of residential mortgage loans pledged to support its line of credit with the FHLB at June 30, 2017.

-32-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SHORT-TERM BORROWINGS (Continued)

The potential risk associated with the Repurchase Agreements and related pledge collateral, including obligations arising from a decline in fair value of the pledged collateral, are minimal due to the fact that the Repurchase Agreements pertain to overnight borrowings and therefore not subject to fluctuations in fair market value. The following table represents the type of securities pledged to the Repurchase Agreements:

Fair Market Value of Securities Pledged to Repurchase Agreements	June 30, 2017		December 31, 2016
U.S. Treasury and agency securities	$	2,937,708	$	454,400
Mortgage-backed securities		1,692,069		2,895,264
Collateralized mortgage obligations		554,279		650,732
Total	$	5,184,056	$	4,000,396

Another source of short-term borrowings is available through the Federal Reserve Discount Window (“Discount Window”). At June 30, 2017, collateral pledged for Discount Window borrowings consisted of $1,829,366 in home equity loans while at December 31, 2016 the collateral pledged consisted of $1,781,289 in home equity loans.

FEDERAL HOME LOAN BANK BORROWINGS

The Bank is a member of the FHLB of Indianapolis. Based on its current FHLB stock holdings and collateral, the Bank has the capacity to borrow $2,167,279 at June 30, 2017. Each borrowing requires a direct pledge of securities and/or loans. To support potential borrowings with the FHLB, the Bank had loans with a carrying value of $7,266,803 pledged at June 30, 2017 and $7,216,020 pledged at year-end 2016. The Bank uses a portion of the loans pledged to the FHLB as collateral for the Bank’s $2,000,000 overdraft line of credit. The remaining pledged loans are available to collateralize longer term FHLB borrowings. The Bank had no balance outstanding on the line of credit and the Bank had no other borrowings with the FHLB at either June 30, 2017 or December 31, 2016.

10.

SUBORDINATED DEBENTURES

The Trust, as discussed in Note 1, sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase an equivalent amount of subordinated debentures from the Company. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and was 3.35% at June 30, 2017 and 3.05% at December 31, 2016. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by the Company. Interest on the subordinated debentures is payable quarterly on March 30^th, June 30^th, September 30^th and December 30^th. The Company is not considered the primary beneficiary of the Trust (under the variable interest entity rules), therefore the Trust is not consolidated in the Company’s financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded on the Company’s consolidated statement of income.

-33-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.

SUBORDINATED DEBENTURES (Continued)

The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued, give the Company the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities.

On April 27, 2016, the Company’s Board of Directors voted to again defer interest payments in order to preserve its cash for general operations and potential capital support for the Bank as it grows. The deferral of interest does not constitute an event of default. The Company exercised its option to defer regularly scheduled quarterly interest payments beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2016. As of June 30, 2017, the accrued and unpaid interest owed on the subordinated debentures was $173,714. Accrued and unpaid interest owed on the subordinated debentures at December 31, 2016 was $98,892.

11.

SHAREHOLDER’S EQUITY

Sale of Common Stock

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

The Rights Offering consisted of a distribution of nontransferable subscription rights to its shareholders of record as of October 12, 2015. Each shareholder of record received 1.7488 rights for each share of the Company’s common stock they owned as of the record date. Each right enabled its holder to purchase one share of the Company’s common stock at a price of $2.55 per share. Additionally, rights holders were given an oversubscription privilege to subscribe for a portion of the Rights Offering shares that were not purchased by other rights holders. The shares of the Company’s Common Stock sold in the Rights Offering totaled 1,383,299. The Rights Offering was closed on March 28, 2016 and garnered proceeds of approximately $3,300,000 (gross proceeds of $3,527,000 net of offering costs of $237,000).

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

12.

COMMITMENTS AND OFF-BALANCE SHEET RISK

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

-34-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.

COMMITMENTS AND OFF-BALANCE SHEET RISK (Continued)

A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk as of June 30, 2017 and December 31, 2016 follows:

	June 30, 2017		December 31, 2016

Unused lines of credit	$	25,097,329	$	27,175,383
Unused standby letters of credit		721,600		450,000
Commitments to make loans		28,500		1,199,010

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

13.

FAIR VALUE MEASUREMENTS

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

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

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

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

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.

-35-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

FAIR VALUE MEASUREMENTS (Continued)

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

Non-real estate collateral may be valued using appraisals, independent valuation tools, or aging reports. To determine the fair value, these values are adjusted or discounted based on several factors, including but not limited to: the Bank’s historical losses within that particular asset category; knowledge of the collateral, including age and condition; and changes in market conditions from the time of the valuation, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Foreclosed Assets: Commercial and residential real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. Fair values are generally based on recent real estate appraisals or internal evaluations. Management may add discounts to third party appraisals. The appraisals are generally obtained annually and are performed by qualified licensed appraisers approved by the Board of Directors. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area. This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return. This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments of the carrying amount utilizing this process result in a Level 3 classification.

-36-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a recurring basis are summarized below as of June 30, 2017 and December 31, 2016:

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2017	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	3,993,828	$	3,993,828	$	0	$	0
US Government and federal agency		4,453,344		0		4,453,344		0
Mortgage-backed and collateralized mortgage obligations – residential		8,657,617		0		8,657,617		0
Total	$	17,104,789	$	3,993,828	$	13,110,961	$	0

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
December 31, 2016	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	504,766	$	504,766	$	0	$	0
US Government and federal agency		6,479,977		0		6,479,977		0
Mortgage-backed and collateralized mortgage obligations – residential		8,781,021		0		8,781,021		0
Total	$	15,765,764	$	504,766	$	15,260,998	$	0

There were no transfers between levels during the first half of 2017 or 2016.

-37-

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 June 30, 2017 and December 31, 2016:

			Quoted Prices in		Significant
			Active Markets for		Other Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
June 30, 2017
Impaired loans¹:	$	4,431,126	$	0	$	0	$	4,431,126
Foreclosed assets:		1,355,560		0		0		1,355,560
Total	$	5,786,686	$	0	$	0	$	5,786,686

			Quoted Prices in		Significant
			Active Markets for		Other Observable		Significant
			Identical Assets		Inputs		Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
December 31, 2016
Impaired loans¹:	$	3,210,340	$	0	$	0	$	3,210,340
Foreclosed assets:		1,460,394		0		0		1,460,394
Total	$	4,670,734	$	0	$	0	$	4,670,734

¹Collateral dependent

-38-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

FAIR VALUE MEASUREMENTS (Continued)

The following tables present information as of June 30, 2017 and December 31, 2016 about significant unobservable inputs related to the Bank’s individually material Level 3 financial assets, by class, measured on a non-recurring basis:

	Valuation	Significant Unobservable	Range
	Technique	Inputs	of Inputs
June 30, 2017

Impaired loans	Sales comparison approach	Adjustments for differences between comparable sales		(23)-35	%
	Income approach	Capitalization rate		9-12.5	%

Foreclosed assets	Sales comparison approach	Adjustments for differences between comparable sales		(48.5)-(33)	%

	Valuation	Significant Unobservable	Range
	Technique	Inputs	of Inputs
December 31, 2016

Impaired loans	Sales comparison approach	Adjustments for differences between comparable sales		(25)-19	%
	Income approach	Capitalization rate		9-12.5	%

Foreclosed assets	Sales comparison approach	Adjustments for differences between comparable sales		(22)-14	%

-39-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

FAIR VALUE MEASUREMENTS (Continued)

The carrying amounts and estimated fair values of financial instruments not previously presented above are as follows:

			Fair Value Measurements
	Carrying		at June 30, 2017 Using
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	24,456	$	24,356	$	100	$	0	$	24,456
Loans held for sale		44		0		45		0		45
Loans, net (including impaired)		136,930		0		0		136,681		136,681
FHLB stock		301		N/A		N/A		N/A		N/A
Accrued interest receivable		397		14		43		340		397

Financial liabilities
Deposits		168,962		0		147,718		0		147,718
Repurchase agreements		5,255		0		5,255		0		5,255
Subordinated debentures		4,500		0		0		4,692		4,692
Accrued interest payable		194		0		20		174		194

			Fair Value Measurements
	Carrying		at December 31, 2016 Using
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	21,082	$	20,982	$	100	$	0	$	21,082
Loans held for sale		128		0		131		0		131
Loans, net (including impaired)		139,213		0		0		136,902		136,902
FHLB stock		301		N/A		N/A		N/A		N/A
Accrued interest receivable		393		5		45		343		393

Financial liabilities
Deposits		167,723		0		155,546		0		155,546
Repurchase agreements		4,640		0		4,640		0		4,640
Subordinated debentures		4,500		0		0		4,686		4,686
Accrued interest payable		119		0		20		99		119

-40-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

FAIR VALUE MEASUREMENTS (Continued)

The methods and assumptions, not previously presented above, used to estimate fair values are described as follows:

(a) Cash and cash equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

(b) Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(c) FHLB stock

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

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Repurchase agreements and other short-term borrowings

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

(f) Subordinated debentures

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

(g) Accrued interest receivable/payable

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

-41-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

FAIR VALUE MEASUREMENTS (Continued)

(h) Off-balance sheet instruments

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

14.

INCOME TAXES

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

There were no unrecognized tax benefits at June 30, 2017 or December 31, 2016, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months. The Company is only subject to examination by the Internal Revenue Service for years after 2012.

16.

SHARE-BASED COMPENSATION

The Company has one share-based compensation plan as described below. Total compensation expense that has been charged against income for that plan was $5,469 for the first half of 2017. There was no compensation expense charged against income for the first half of 2016.

Stock Incentive Plan of 2016

Under the Stock Incentive Plan of 2016, incentive awards may include, but are not limited to stock options, restricted stock, restricted stock unit, stock appreciation rights and other stock-related awards. Incentive awards that are stock options or stock appreciation rights are granted with an exercise price not less than the closing price of our common stock on the date of grant. Price, vesting and expiration date parameters are determined by the Board or a committee of the Board on a grant by grant basis. There were 500,000 shares available for incentive awards upon adoption of the plan. Shares may be granted to Company or Bank Directors and any employee of the Bank.

On December 20, 2016, the Board granted 30,000 shares of restricted stock. The restricted stock will vest over five years. On May 8, 2017, 5,000 shares of restricted stock what were granted on December 20, 2016, were forfeited due to the voluntary termination of one of the recipients. None of the shares had vested. At June 30, 2017, there were 475,000 shares available for future stock rewards whereas at year-end 2016, there were 470,000 shares available for the same purpose.

-42-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.

SHARE-BASED COMPENSATION (Continued)

A summary of the restricted stock activity in the plan for the first half of 2017 is as follows:

				Weighted Average
	Number of			Grant Date
	Shares			Fair Value
Non-vested at beginning of period		30,000		$	2.27
Granted		0			0
Exercised		0			0
Forfeited		(5,000	)		(2.27	)
Non-vested at end of period		25,000		$	2.27

17.

REGULATORY MATTERS

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

The five prompt corrective action classifications are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. For instance, if a bank is not well capitalized, regulatory approval is required to accept brokered deposits. And generally, a bank may not make a capital distribution if, after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, acquisitions, new activities, new branches, payment of dividends or management fees are prohibited and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the Bank at the discretion of the federal regulator.

Under final capital rules that became effective on January 1, 2015, there was a requirement for a capital buffer to be phased in over three years beginning in 2016. Banks that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement effectively raises the minimum Common Equity Tier One ratio to 7.0%, Tier One Capital (to risk weighted assets) ratio to 8.5% and Total Risk Based Capital Ratio to 10.5% . Management believes that as of June 30, 2017, the Bank would meet the capital buffer requirements under the BASEL III capital rules on a fully phased-in basis as if all such requirements were currently in effect.

Since March 31, 2016, the Bank’s capital ratios were above the level of well-capitalized according to prompt corrective action regulations. On March 31, 2017, the Company contributed $385,000 of additional capital to the Bank so that it would continue to be above the well-capitalized level. At June 30, 2017, the Bank’s was still considered well-capitalized according to prompt corrective action guidance with a total risk-based capital ratio of 12.10% and a Tier 1 to average assets ratio of 7.90%. At December 31, 2016, the Bank’s total risk-based capital ratio was 11.12% and its Tier 1 to average assets ratio was 8.30%; both above the minimum required for a well-capitalized regulatory status.

-43-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.

REGULATORY MATTERS (Continued)

Actual capital amounts and ratios for the Bank and, required capital amounts and ratios for the Bank to be well capitalized at June 30, 2017 and December 31, 2016 were:

											Minimum Required
											to Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2017
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank	$	15,663,356		10.87	%	$	6,484,919		4.50	%	$	9,367,105		6.50	%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank		17,441,671		12.10			11,528,745		8.00			14,410,931		10.00
Tier 1 (Core) Capital to risk-weighted assets of the Bank		15,663,356		10.87			8,646,559		6.00			11,528,745		8.00
Tier 1 (Core) Capital to average assets of the Bank		15,663,356		7.90			7,934,052		4.00			9,917,565		5.00

-44-

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.

REGULATORY MATTERS (Continued)

											Minimum Required
											to Be Well
						Minimum Required					Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2016
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank	$	14,917,302		10.03	%	$	6,689,791		4.50	%	$	9,663,031		6.50	%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank		16,529,122		11.12			11,892,961		8.00			14,866,201		10.00
Tier 1 (Core) Capital to risk-weighted assets of the Bank		14,917,302		10.03			8,919,721		6.00			11,892,961		8.00
Tier 1 (Core) Capital to average assets of the Bank		14,917,302		8.30			7,184,813		4.00			8,981,016		5.00

Federal Reserve guidelines limit the amount of allowance for loan losses that can be included in Tier 2 capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At both December 31, 2016 and June 30, 2017, the full recorded balance of the Bank’s allowance for loan losses was counted as Tier 2 capital and nothing was disallowed. The balance of the allowance for loan losses was $1,778,315 at June 30, 2017 and $1,611,820 at December 31, 2016.

-45-

COMMUNITY SHORES BANK CORPORATION

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

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

The discussion below details the financial results of the Company and its wholly owned subsidiaries, the Bank and Community Shores Financial Services, and the Bank’s subsidiary, the Mortgage Company, and Berryfield, the Mortgage Company’s subsidiary, through June 30, 2017 and is separated into two parts which are labeled Financial Condition and Results of Operations. The part labeled Financial Condition compares the financial condition at June 30, 2017 to that at December 31, 2016. The part labeled Results of Operations discusses the three and six month periods ending June 30, 2017 as compared to the same periods of 2016. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of Part I of this Form 10-Q.

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

There have been no material changes to the application of critical accounting estimates and policies that were discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. For a complete summary of our significant accounting policies, see the notes to the consolidated financial statements and our Annual Report on 10-K for the fiscal year ended December 31, 2016.

-46-

COMMUNITY SHORES BANK CORPORATION

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

REGULATORY UPDATE

The Company was subject to a Written Agreement with the FRB beginning in December 2010 but in light of improvements to the Company’s financial condition and the strengthened capital position of the Bank as a result of the capital raise, the FRB terminated the Written Agreement on March 16, 2017.

FINANCIAL CONDITION

Total assets were $193.5 million at June 30, 2017 compared to $191.4 million at December 31, 2016. Asset growth occurring in the first half of 2017 stemmed primarily from increases to customer deposit and repurchase agreement accounts which drove up the Company’s balance on deposit at the FRB.

Cash and cash equivalents increased by $3.4 million to $24.4 million at June 30, 2017 from $21.0 million at December 31, 2016. The Bank’s FRB balance increased $4.0 million since year-end 2016 and was $20.6 million on June 30, 2017. The increase in balance was driven largely by an increase in customer deposit balances but also included proceeds from loan repayments and the Company’s capital contribution to the Bank. Although excess liquidity is a conservative posture, it is detrimental to earnings. Typically, a balance at the FRB of between $7 million and $10 million is enough to cover the liquidity needs of the Bank’s operations as well as provide a comfortable cushion for unexpected events. Management intends to use excess funds for loan originations and securities purchased for pledging obligations.

The Bank’s security portfolio was $17.1 million at June 30, 2017 and $15.8 million at December 31, 2016. Investment activity in the first six months of the year consisted of purchases of $4.5 million and maturities, prepayments, calls of $3.1 million and net amortization of $67,000.

Maintaining an adequate level of pledgeable assets is one of the driving forces behind most of the Bank’s investment activity. The security purchases in the first half of 2017 were specifically intended to increase the Bank’s level of unencumbered securities. Unencumbered securities are those that are not pledged to any other entity. The Bank diligently seeks to manage unencumbered securities to ensure there are enough available to meet parameters required by several of the Bank’s operating policies. Regardless of whether securities are encumbered, they serve as a key source of collateral or potential liquidity for the Bank. The level of unpledged securities is formally assessed monthly. Typically the Bank aims to leave between 10% and 20% of its investment portfolio unpledged but at June 30, 2017, only 9% of the investment portfolio was unencumbered. The shortfall occurred due to an unexpected increase in the balances of the Bank’s repurchase agreements coupled with expected maturities. In early July (2017), $3 million of securities were purchased to restore the Bank’s level of unencumbered securities to one which is within the level specified above. At December 31, 2016, the Bank had a 10% unpledged position.

At June 30, 2017, securities with an amortized cost of $15.6 million were pledged to public fund customers and customer repurchase agreements, up from $14.3 million at year-end 2016.

-47-

COMMUNITY SHORES BANK CORPORATION

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

The market value of the investment portfolio is impacted by national and global economic news. During the first six months of 2017, the investment portfolio had net unrealized losses of $7,000. Including the decrease in value during the first half, net unrealized losses on the investment portfolio climbed to $41,000. At June 30, 2017, there were 32 securities with an amortized cost of $13.3 million having an unrealized loss of $77,000. See Note 2 for information regarding the Company’s assessment of other than temporary impairment on these investments.

To reduce exposure to future loss, both realized and unrealized, the Bank intends to adhere to the diversification principles outlined in the investment policy and limit issuer concentrations. Besides fully-guaranteed U.S. government and federal agency securities, there were no holdings of securities of any one issuer in an amount greater than 10% of the Bank’s common stock and surplus at June 30, 2017.

Loans held for sale activity during the first six months of 2017 included $4.5 million of loan originations and $4.6 million of sales. The associated gain on the loan sales was $108,000. Loans held for sale at June 30, 2017 were $44,000 and $128,000 at December 31, 2016.

Total loans (held for investment) decreased $2.1 million and were $138.7 million at June 30, 2017 down from $140.8 million at December 31, 2016. There were net decreases in a variety of loan segments and there were reclassifications that occurred between the commercial and commercial real estate segments in the first half of 2017. The most significant transactions in the first quarter of 2017 occurred in January and February. In January, one commercial real estate customer sold his business and repaid loans totaling $1.7 million. Additionally, the Bank sold its credit card portfolio in February to TCM Bank. The credit card balance at the time of sale was $445,000. The gain on the sale of these balances was $46,000. Prior to the transaction, management evaluated the risks associated with this type of lending as well its potential for future interest and interchange income and its regulatory capital allocation. Going forward, the Bank will get a small portion of the interchange income on the transactions of the customers sold as well as a referral fee for new customers. The reclassifications mentioned above consisted of $1.7 million of loans in the commercial segment at year-end 2016 that were reclassified to the commercial real estate segment due to an internal collateral analysis that occurred in the first quarter of 2017. Six construction loans secured end financing in the first half of 2017 and were refinanced with term debt. All six of the loans were in the commercial real estate general category at June 30, 2017. In spite of the net decline in the loan portfolio total since year-end 2016, in July (2017), the Bank originated $7.4 million in loans supporting management’s belief that the Bank’s loan portfolio will experience net growth in 2017 and do so in a manner that assesses multiple risk factors in conjunction with expected rate of return and related capital allocation.

Diligent attention to the credit quality of the current portfolio and future new customers will continue. The lending staff regularly monitors the loan portfolio and adheres to a well-designed credit risk assessment process. In spite of these efforts, the Bank is still exposed to credit risk.

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

-48-

COMMUNITY SHORES BANK CORPORATION

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

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

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

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

At June 30, 2017, the allowance for loan losses totaled $1.8 million. There was a loan loss provision that was made in June of $174,000 which increased the allowance for loan losses balance from $1.6 million at year-end 2016. In addition to the loan loss provision, there were net charge-offs for the first six months of $7,000. As a result of the loan loss provision increasing the allowance for loan losses at June 30, 2017, the ratio of allowance to gross loans outstanding rose to 1.28%, compared to 1.14% at year-end 2016.

The allocation of the allowance at June 30, 2017 and December 31, 2016 was as follows:

	June 30, 2017					December 31, 2016
			Percent of					Percent of
			Loans in Each					Loans in Each
Balance at End of Period			Category to					Category to
Applicable to:	Amount		Total Loans			Amount		Total Loans
Commercial	$	560,840		33.2	%	$	617,002		36.1	%
Commercial Real Estate		818,050		48.7			459,805		45.3
Consumer		219,334		5.4			259,194		5.4
Residential		180,091		12.7			203,312		13.2
Unallocated		0		N/A			72,507		N/A
Total	$	1,778,315		100.0	%	$	1,611,820		100.0	%

The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 0.83% at June 30, 2017 and 0.84% at year-end 2016. At June 30, 2017, there were no unallocated reserves in the allowance for loan losses while there were unallocated reserves of $73,000 at December 31, 2016.

-49-

COMMUNITY SHORES BANK CORPORATION

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

At June 30, 2017, the allowance contained $703,000 in specific allocations for impaired loans whereas at December 31, 2016 there was $432,000 specifically allocated for that purpose. The $271,000 increase during the first six months of the year was due to two impaired loans. One loan was identified as impaired in the second quarter of 2017 and required a $66,000 allocation at June 30, 2017; an amount higher than that required when it was in the general pool. The second loan was identified as impaired at December 31, 2016 but had no reserve allocation. As a result of activities related to the collateral and the borrower an allocation of $206,000 was required at June 30, 2017. There were other changes to the reserve allocations of several other specifically identified loans but they had little net impact on the overall balance. In total, there was $9.9 million of recorded investment on impaired loans at June 30, 2017 compared to $9.3 million at year-end 2016.

Not all specifically identified loans require an allocation of reserves. After a loan is specifically identified and an evaluation of the collateral or expected repayment is completed, typically a charge-off is made so that the remaining principal is the current value of the assigned collateral or expected repayment, therefore no further reserve is required. There were 18 impaired loans requiring no reserve at June 30, 2017. The recorded investment of these loans on that date was $6.8 million. The recorded investment of loans requiring no reserve comprised 68% of total specifically identified loans at June 30, 2017. This outcome is down from $7.8 million requiring no reserves at year-end 2016; 84% of the recorded investment of specifically identified loans. The decrease is due to the impaired loans mentioned above requiring specific allocations since year-end 2016.

Specifically identified loans requiring reserves had a recorded investment of $3.1 million at June 30, 2017 and $1.5 million at year-end 2016. The two loans mentioned above are largely responsible for the increase.

Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. From year-end 2016 to June 30, 2017, the recorded investment in accruing past due and non-accrual loans increased by $853,000. This was evidenced by a $771,000 increase in the recorded investment in past due loans and a $82,000 increase in the recorded investment in non-accrual loans in the first half of 2017.

The recorded investment of accruing loans past due 30-59 days was $1.4 million at June 30, 2017; a $941,000 increase since year-end 2016. There are only two loans past due 30-59 days at June 30; neither were past due at December 31, 2016. One loan comprises 99% of the balance. The loan responsible for a majority of the balance is impaired and was the loan that required a large specific allocation in the second quarter. The loan had slipped to 60-89 days past due at July 31, 2017. The Bank has taken the real estate property into Receivership and is working with the Receiver in obtaining payment. The Bank is considering a payment restructure to accommodate a change in cashflow for the borrower related to this property.

The recorded investment of accruing loans past due 60-89 days at June 30, 2017 was $567,000 compared to a recorded investment of $737,000 at December 31, 2016. A single loan comprises the entire balance 60-89 days past due at June 30, 2017. This same loan was 60-89 days past due at year-end 2016. A large portion of the balance outstanding is guaranteed by the Small Business Administration (“SBA”). As a result of the delinquency and the borrower’s failure to comply with the terms of its troubled debt restructure, the Bank put the loan on non-accrual in July. The Bank intends to work closely with the SBA and has issued a demand letter to the borrower.

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COMMUNITY SHORES BANK CORPORATION

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

There were no loans still accruing interest with a recorded investment past due 90 days and greater at either June 30, 2017 or December 31, 2016.

The oversight of payment delinquency continues to be stringent as the Bank recognizes that this behavior is often the first indication of deterioration in credit quality.

The recorded investment of non-accrual loans totaled $205,000 at June 30, 2017; up $82,000 from year-end 2016. There were five non-accrual notes at June 30, 2017 and none were secured by undeveloped real estate. At June 30, 2017, there were specific allocations of $53,000 in the allowance for any estimated collateral deficiency on these notes.

There were net charge-offs of $14,000 for the second quarter of 2017 and net charge-offs of $7,000 for the first six months of 2017 and the corresponding ratio of annualized net recoveries to average loans was 0.04% and 0.01%. Similarly, there were net charge-offs of $66,000 for the second quarter of 2016 and net charge-offs of $33,000 for the first six months of 2016. The ratio of annualized net charge-offs to average loans was 0.21% for the second quarter and 0.05% for the first six months of 2016.

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

The loan maturities and rate sensitivity of the loan portfolio at June 30, 2017 are set forth below:

	Within Three Months		Three to Twelve Months		One to Five Years		After Five Years		Total
Commercial	$	7,385,319	$	10,330,227	$	20,152,903	$	8,137,583	$	46,006,032
Commercial Real Estate:
General		6,142,828		11,873,957		36,442,378		7,616,269		62,075,432
Construction		2,179,141		0		1,911,033		1,407,828		5,498,002
Consumer:
Lines of credit		453,176		362,638		1,996,211		3,578,753		6,390,778
Other		38,569		72,834		689,453		325,149		1,126,005
Residential		234,071		951,829		32,693		16,393,280		17,611,873
	$	16,433,104	$	23,591,485	$	61,224,671	$	37,458,862	$	138,708,122
Loans at fixed rates	$	4,180,445	$	12,743,445	$	48,074,070	$	26,624,806	$	91,622,766
Loans at variable rates		12,252,659		10,848,040		13,150,601		10,834,056		47,085,356
	$	16,433,104	$	23,591,485	$	61,224,671	$	37,458,862	$	138,708,122

At June 30, 2017, 66% of the Bank’s loan balances carried a fixed rate and 34% carried a floating rate. Since year-end 2016, there has been a 2% increase in the concentration of loans carrying a fixed rate. Some of the shift is a factor of the types of loans that have been paid off or have been added to the portfolio and some of the change is related to customer preference at the time of renewal. Since the rate environment is leaning toward further rate increases, management will be challenged to increase the Bank’s concentration of floating rate loans and limit originating loans with a fixed rate.

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.

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COMMUNITY SHORES BANK CORPORATION

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

Avoidance of extension risk is another important means to mitigate interest rate risk. The maturity distribution of the Bank’s loan portfolio remained relatively balanced between short-term (less than one year) and long-term (greater than five years) maturities at both June 30, 2017 and December 31, 2016. At June 30, 2017, short-term maturities comprised 29% of the loan portfolio and long term maturities comprised approximately 27%. These results are similar to year-end 2016. At December 31, 2016, short term maturities were 31% and long term maturities were the same at 27% of the portfolio.

Foreclosed assets were $1.4 million at June 30, 2017, down slightly since December 31, 2016. Foreclosed assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. There were three properties sold during the first half of 2017. Vacant land held in foreclosed assets for future development, will remain in the number of foreclosed properties until the last lot is sold. The net gains realized on these sales were $51,000. No properties were added in the first half of 2017. At June 30, 2017, foreclosed assets consisted of 11 real estate holdings, three less than at December 31, 2016.

Deposit balances were $169.0 million at June 30, 2017, up from $167.7 million at December 31, 2016. The $1.3 million increase in deposits since year-end is mostly driven by existing customers increasing their balances since year-end 2016.

Repurchase agreement balances were $5.3 million at June 30, 2017 and $4.6 million at December 31, 2016, an increase of $616,000. Similar to deposits, growth between the two period ends was the result of existing customers increasing their balances.

Shareholders’ equity was approximately $14.2 million on June 30, 2017. On December 31, 2016, the balance was $14.1 million. The net increase was primarily made up of net income of $162,000. Share based compensation of $5,000 was negated by a net comprehensive loss from security market value change of $5,000.

Total shares outstanding at both June 30, 2017 and December 31, 2016 were 4,101,664. The book value per share was $3.47 at June 30, 2017 compared to $3.43 at December 31, 2016.

In March 2017, the Company contributed $385,000 of capital to the Bank to supplement its regulatory capital ratios. The Bank has had regulatory capital ratios which are at a level considered to be well capitalized according to prompt corrective action guidance since its capital raise was completed in March 2016. The Bank continues to be well capitalized. At June 30, 2017, the Bank’s total risk-based capital ratio was 12.10% and its Tier 1 to average assets ratio was 7.90% compared to 11.12% and 8.30%, respectively, at December 31, 2016.

RESULTS OF OPERATIONS

There was net income of $162,000 for the first half of 2017 which compares favorably to $55,000 recorded for the first half of 2016. The corresponding basic and diluted income per share for the first six months of 2017 were $0.04 and $0.02 for the same period in 2016.

The Company’s net income for the second quarter of 2017 was $25,000 and the basic and diluted income per share was $0.01 while for the second quarter of 2016, net income was $79,000 and basic and diluted earnings per share was $0.02.

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COMMUNITY SHORES BANK CORPORATION

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

For the first six months of 2017, the annualized return on the Company’s average total assets was 0.16% compared to 0.06% for the first six months of 2016. For the second quarter of 2017, the annualized return on the Company’s average assets was 0.05%. For the second quarter of 2016, the annualized return on the Company’s average total assets was 0.17%.

The annualized return on the Company’s average equity for the first half and second quarter of 2017 was 2.26% and 0.71%, respectively. For the first half of 2016, the annualized return on the Company’s average equity was 0.99% and was 2.25% for the second quarter of 2016.

A primary component of the Company’s revenue is its net interest income. The Company’s net interest income was more for the first half of 2017 compared to the similar period in 2016 and the net interest margin was higher. The following table sets forth certain information relating to the Company’s consolidated average interest earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented.

	Six Months ended June 30,
	2017							2016
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Federal funds sold and interest-bearing deposits with banks	$	25,492,625	$	119,359		0.94	%	$	16,909,157	$	42,132		0.50	%
Securities		17,971,005		128,867		1.43			23,578,293		160,064		1.36
Loans (including held for sale and non accrual)		139,582,100		3,370,300		4.83			124,633,141		3,095,809		4.97
Total interest earning assets		183,045,730		3,618,526		3.95			165,120,591		3,298,005		3.99
Other assets		16,318,943							17,004,349
	$	199,364,673						$	182,124,940
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	130,899,722	$	334,867		0.51	%	$	124,949,733	$	318,849		0.51	%
Repurchase agreements		4,593,411		9,354		0.41			4,021,460		8,299		0.41
Subordinated debentures and note payable		4,500,000		74,821		3.33			5,111,868		91,894		3.60
Total interest bearing liabilities		139,993,133		419,042		0.60			134,083,061		419,042		0.63
Non-interest-bearing deposits		44,602,275							36,112,403
Other liabilities		484,686							944,123
Shareholders’ Equity		14,284,579							10,985,353
	$	199,364,673						$	182,124,940
Net interest income (tax equivalent basis)				3,199,484							2,878,963
Net interest spread on earning assets
(tax equivalent basis)						3.35	%						3.36	%
Net interest margin on earning assets
(tax equivalent basis)						3.50	%						3.49	%
Average interest-earning assets to average interest-bearing liabilities						130.75	%						123.15	%
Tax equivalent adjustment				0							732
Net interest income			$	3,199,484						$	2,878,231

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COMMUNITY SHORES BANK CORPORATION

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

The net interest income for the first six months of 2016 was $2.9 million compared to a figure of $3.2 million for the same six months in 2017. Conversely, the net interest spread on average earning assets decreased 1 basis point to 3.35% in the past twelve months; however, the net interest margin increased by 1 basis point and was 3.50% for the first six months of 2017. The lack of net interest margin impact resulting from an additional $17.9 million more interest earning assets and $321,000 more in net interest income was due to the fact that the mix of earning assets was less profitable. The concentration of interest earning balances on deposit with other banks, mainly the FRB, comprised 4% more of earning assets than in the first half of 2016 while investments were 4% less. The loan portfolio remained essentially the same between the two periods.

The average rate earned on interest earning assets was 3.95% for the six month period ending June 30, 2017; a four basis point decrease compared to 3.99% for the same period in 2016. As mentioned above a portion of the decrease was due to detrimental changes to the earning asset composition but a large portion stemmed from a reduction in the rate earned on the loan portfolio, the Company’s largest earning asset category. The average rate earned on the loan portfolio was 4.83% in the first half of 2017, a reduction of 14 basis points compared to the first half of 2016. As the economy strengthens and the creditworthiness of borrowers improves, financial institutions are more actively soliciting new business making the rate environment more competitive. In order to retain current relationships and attract new ones, sometimes the Bank has to offer rates that are lower than the average portfolio rate. Lower rates are not being automatically offered on renewals or new business. To maintain the quality of the loan portfolio, each rate decision takes into consideration the strength of the loan from an underwriting standpoint. Lower rates are used selectively based on the risk characteristics of the credit.

In the first half of 2017, the Company’s cost of funds was 0.60%, an improvement of three basis points when compared to the first half of 2016. The improvement occurred mainly because of the reduction in the Company’s debt as the rate paid on interest-bearing deposits and repurchase agreements remained unchanged at 0.51% and 0.41% respectively when comparing the first half of 2017 to that of 2016. Although national prime lending rates have risen over the past twelve months, the Bank has not made many changes to the rates paid on deposits.

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COMMUNITY SHORES BANK CORPORATION

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

The quarter-to-quarter comparison of consolidated average interest earning assets and interest bearing liabilities and average yield on assets and average cost of liabilities for the second quarter ended June 30, 2017 and 2016 is in the table below.

	Three Months ended June 30,
	2017							2016
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Federal funds sold and interest- bearing deposits with banks	$	27,632,828	$	72,174		1.04	%	$	17,814,778	$	22,256		0.50	%
Securities		18,055,605		65,670		1.45			22,600,465		74,625		1.32
Loans (including held for sale and non accrual)		139,538,137		1,707,206		4.89			125,269,863		1,575,056		5.03
Total interest earning assets		185,226,570		1,845,050		3.98			165,685,106		1,671,937		4.04
Other assets		16,160,535							16,724,652
	$	201,387,105						$	182,409,758
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	130,371,950	$	168,320		0.52	%	$	123,583,503	$	157,311		0.51	%
Repurchase agreements		4,882,680		5,091		0.42			3,837,362		3,900		0.41
Subordinated debentures and note payable		4,500,000		38,675		3.44			4,500,000		31,417		2.79
Total interest bearing liabilities		139,754,630		212,086		0.61			131,920,865		192,628		0.58
Non-interest-bearing deposits		46,726,957							35,973,170
Other liabilities		558,369							506,337
Shareholders’ Equity		14,347,149							14,009,386
	$	201,387,105						$	182,409,758
Net interest income (tax equivalent basis)				1,632,964							1,479,309
Net interest spread on earning assets (tax equivalent basis)						3.37	%						3.46	%
Net interest margin on earning assets (tax equivalent basis)						3.53	%						3.57	%
Average interest-earning assets to average interest-bearing liabilities						132.54	%						125.59	%
Tax equivalent adjustment				0							0
Net interest income			$	1,632,964						$	1,479,309

Net interest income increased $154,000 in the second quarter of 2017 over the similar period in 2016; however, both the net interest spread and net interest margin were lower. The net interest spread for the three month period ending June 30, 2017 was 3.37% compared to 3.46% in the second quarter of 2016 and the net interest margin was four basis points lower. The net interest margin for the second quarter of 2017 was 3.53% compared to 3.57% for the second quarter of 2016.

The yield on earning assets fell six basis points between the second quarter of 2016 and the second quarter in 2017. Again, an increase in the concentration of interest bearing deposits with other banks in relation to interest earning assets was responsible. This earning asset category increased from 11% of average earning assets in the second quarter of 2016 to 15% of total average earning assets in 2017. Interest bearing deposits with other financial institutions is the lowest yielding category.

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COMMUNITY SHORES BANK CORPORATION

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

The Company’s cost of funds was 0.61% for the second quarter of 2017 rising three basis points compared to the second quarter of 2016. All of the interest-bearing liabilities experienced minimal yield increases when compared to the second quarter of 2016. A portion of the increase is also due to the tiered pricing which exists on many interest bearing products. As interest bearing liabilities grow, they may move into a higher tier within the product. The higher tiers are typically subject to a slightly higher rate. Average interest bearing liabilities increased $7.8 million when comparing the outstanding balances of the second quarter of 2017 to those of the second quarter of 2016.

Management expects the Company’s net interest margin to increase in the remaining quarters of 2017. Extra liquidity in interest bearing deposits with other banks will be used to fund loans. If the loan portfolio increases and the interest earning balances at other banks decreases, there should be a favorable movement in the composition of earning assets and an increase in net interest income and its ratios.

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

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

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COMMUNITY SHORES BANK CORPORATION

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

Details of the repricing gap at June 30, 2017 were:

	Interest Rate Sensitivity Period
	Within			Three to			One to		After
	Three			Twelve			Five		Five
	Months			Months			Years		Years		Total
Earning assets
Interest-bearing deposits in other financial institutions	$	20,729,648		$	0		$	0	$	0	$	20,729,648
Securities (including FHLB stock)		3,098,881			4,971,914			9,292,021		42,473		17,405,289
Loans held for sale		0			0			0		44,000		44,000
Loans		47,991,353			17,823,247			54,248,351		18,645,171		138,708,122
		71,819,882			22,795,161			63,540,372		18,731,644		176,887,059
Interest-bearing liabilities
Savings and checking		101,836,896			0			0		0		101,836,896
Time deposits <$100,000		2,574,505			7,306,213			4,643,754		29,174		14,553,646
Time deposits >$100,000		1,165,918			4,644,732			3,420,276		0		9,230,926
Repurchase agreements and
Federal funds purchased		5,255,475			0			0		0		5,255,475
Notes payable and other borrowings		4,500,000			0			0		0		4,500,000
		115,332,794			11,950,945			8,064,030		29,174		135,376,943
Net asset (liability) repricing gap	$	(43,512,912	)	$	10,844,216		$	55,476,342	$	18,702,470	$	41,510,116
Cumulative net asset (liability) repricing gap	$	(43,512,912	)	$	(32,668,696	)	$	22,807,646	$	41,510,116

Currently, the Company has a negative twelve month repricing gap which indicates that the Company is liability sensitive in the next twelve month period. This position implies that more rate bearing products have an opportunity to reprice during this period. Recent interpretation of the information from the Federal Open Market Committee of the Federal Reserve System has leaned towards further rate increases; because the Company’s gap position is negative, there may be a negative effect on market rates for interest bearing liabilities. The interest rate sensitivity table above simply illustrates what the Company is contractually able to change in certain time frames.

There was a provision for loan losses of $174,000 recorded in the second quarter of 2017 and none in the first quarter making the provision expense for the first six months of the 2017, $174,000. There was none for the first six months of 2016. Calculated provision expense is associated with changes in historical loss calculations, economic conditions (local and national) as well as delinquency, net charge-offs or recoveries and changes to credit quality grades; up and down. A methodical assessment of these factors generates the reserves required for the risk in the Bank’s loan portfolio and the required provision expense. The provision expense recorded in the second quarter of 2017 was due to changes in the credit quality of two loans identified as impaired. One loan was identified as impaired in the second quarter of 2017 requiring a $66,000 allocation at June 30, 2017; an amount higher than that required when it was in the general pool. The second loan was identified as impaired at December 31, 2016 but had no reserve allocation. As a result of activities related to the collateral and the borrower an allocation of $206,000 was required at June 30, 2017. These allocations were partially funded by unallocated reserves. Management will continue to review the allowance with the intent of maintaining it at an appropriate level for the portfolio’s credit quality and perceived risk factors. The provision for loan losses is an estimate and may be increased or decreased in the future.

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COMMUNITY SHORES BANK CORPORATION

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

Non-interest income recorded in the first six months of 2017 was $814,000 compared to $855,000 recorded for the similar period in 2016. Although the year-to-date results for non-interest income were similar in total, there were differences in the components. Gains on foreclosed asset sales were $51,000 for the first half of 2017 compared to $147,000 for the first half of 2016. In the prior year, the Bank benefitted from foreclosed asset sales carrying no book value. There were fewer lots available in 2017 and as of May 2017 all of the lots were liquidated. Lower revenue stemming from foreclosed asset transactions is expected going forward.

Strengthened revenue stemming from loan sales helped lessen the $96,000 difference related to foreclosed asset transactions. For the first half of 2017, recorded gains on loan sales were $154,000 compared to $71,000 for the first half of 2016. A portion of the increase stemmed from a single, specific transaction. In the first quarter of 2017, the Bank finalized the sale of its credit card portfolio. On February 17, 2017, the Bank sold credit card receivables of $445,000. The gain on the transaction was $46,000. Complementing this income was strengthened gains from selling mortgage loans. Gains on the sale of mortgage loans were $108,000 for the first six months of 2017. This outcome was $37,000 more than gains recorded on the sale of mortgage loans in the first six months of 2016. The Bank added a mortgage lender in early 2016 and increases to this revenue have started to materialize. Also, there continues to be decreases in service charges on deposit accounts; mainly overdraft fee income. Overdraft income was $14,000 less between the first half of 2017 and that of 2016. The Bank attributes a portion of the difference to the improving economy. Management is analyzing other fee opportunities on deposits to boost service fee revenue going forward.

Non-interest income for the second quarter of 2017 was $397,000 compared to $473,000 of non-interest income in the second quarter of 2016. Similar to year-to-date, a majority of the differences in the second quarter outcomes of 2017 and 2016 were due to the same areas; lower gains on foreclosed asset sales partially offset by higher gains on loan sales. For the second quarter of 2017, gains of foreclosed asset sales were $25,000 compared to $112,000 for the second quarter of 2016. Conversely, gains on loan sales were $29,000 more. Gains on the sale of mortgage loans were $66,000 for the second quarter of 2017.

Non-interest expenses for the first half of 2017 were $3.6 million; $60,000 less than the total for the first half of 2016. Similarly, non-interest expenses of $1.8 million for the second quarter of 2017 were $20,000 lower compared to the second quarter of the previous year.

FDIC insurance expenses were $74,000 for the first half of 2017 and $128,000 for the first half of 2016. The $54,000 reduction in the Bank’s FDIC premium accruals were due to a strengthened regulatory capital position and improved risk

profile. Continuing with the trend of reduction, FDIC insurance expenses were $35,000 for the second quarter of 2017 compared to $60,000 for the second quarter of 2016.

Also affecting the second quarter of 2017, were differences in other non-interest expenses. Other non-interest expenses were $259,000 for the second quarter of 2017; $44,000 more than the second quarter of 2016 when other non-interest expenses were $215,000. In the second quarter of 2017, there were additional expenses incurred to administrate the commercial loan that was impaired during the quarter. Prior to this quarter, the trend of expenses incurred to administrate problem credits had been declining due to fewer problem credits and a reduction in the number of foreclosed properties.

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COMMUNITY SHORES BANK CORPORATION

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

The Company recorded a federal income tax expense of $83,000 for the first six months of 2017 compared to $23,000 for the first six months of 2016. For the second quarter of 2017, federal income tax expense was $13,000 compared to $36,000 for the similar period in 2016. Federal tax expense differences originate from differences in pre-tax income between the periods being compared.

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COMMUNITY SHORES BANK CORPORATION

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4.

CONTROLS AND PROCEDURES

We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2017. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017.

Changes in Internal Control

There were no changes to our internal control over financial reporting during the first half of the year ended June 30, 2017 what materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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COMMUNITY SHORES BANK CORPORATION

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 1A.

RISK FACTORS

Not applicable for smaller reporting companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMUNITY SHORES BANK CORPORATION

August 14, 2017	By:	/s/ Heather D. Brolick
Date	Heather D. Brolick
	President and Chief Executive Officer
	(principal executive officer)

August 14, 2017	By:	/s/ Tracey A. Welsh
Date	Tracey A. Welsh
	Senior Vice President, Chief Financial Officer, Secretary and Treasurer
	(principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit No.		EXHIBIT DESCRIPTION

3.1		Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company’s June 30, 2004 Form 10-QSB (SEC file number 333-63769).
3.2		Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s Form 8-K filed July 5, 2006 (SEC file number 000-51166).
31.1		Rule 13a-14(a) Certification of the principal executive officer.
31.2		Rule 13a-14(a) Certification of the principal financial officer.
32.1		Section 1350 Chief Executive Officer Certification.
32.2		Section 1350 Chief Financial Officer Certification.

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