COMMUNITY SHORES BANK CORP - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - COMMUNITY SHORES BANK CORP	tv478982_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - COMMUNITY SHORES BANK CORP	tv478982_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - COMMUNITY SHORES BANK CORP	tv478982_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - COMMUNITY SHORES BANK CORP	tv478982_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 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 November 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	61

	Item 4.	Controls and Procedures	61

PART II.	Other Information

	Item 1.	Legal Proceedings	62

	Item 1A.	Risk Factors	62

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

	Item 3.	Defaults upon Senior Securities	62

	Item 4.	Mine Safety Disclosures	62

	Item 5.	Other Information	62

	Item 6.	Exhibits	62

	Signatures		63

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2017			2016
	(unaudited)			(audited)
ASSETS
Cash and due from financial institutions	$	3,813,833		$	3,339,650
Interest-bearing deposits in other financial institutions		7,455,403			17,642,525
Total cash and cash equivalents		11,269,236			20,982,175
Term deposit		100,000			100,000
Securities available for sale (at fair value)		17,556,086			15,765,764
Loans held for sale		0			128,000
Loans		149,712,815			140,824,584
Less: Allowance for loan losses		1,844,362			1,611,820
Net loans		147,868,453			139,212,764
Federal Home Loan Bank stock (at cost)		300,500			300,500
Premises and equipment, net		8,321,307			8,486,355
Accrued interest receivable		421,662			393,444
Foreclosed assets		1,261,160			1,460,394
Net deferred tax assets		3,847,352			4,032,675
Other assets		637,760			547,638
Total assets	$	191,583,516		$	191,409,709
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing	$	42,263,384		$	46,893,163
Interest-bearing		127,935,856			120,830,147
Total deposits		170,199,240			167,723,310
Repurchase agreements		1,692,535			4,639,766
Subordinated debentures		4,500,000			4,500,000
Accrued expenses and other liabilities		763,698			485,153
Total liabilities		177,155,473			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 September 30, 2017 and December 31, 2016		19,634,530			19,626,201
Accumulated deficit		(5,176,532	)		(5,542,341	)
Accumulated other comprehensive loss		(29,955	)		(22,380	)
Total shareholders’ equity		14,428,043			14,061,480
Total liabilities and shareholders’ equity	$	191,583,516		$	191,409,709

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2017		2016		2017		2016
Interest and dividend income
Loans, including fees	$	1,763,512	$	1,553,794	$	5,133,812	$	4,649,603
Securities (including FHLB dividends)		71,066		67,038		199,933		226,370
Federal funds sold and other income		47,753		27,108		167,112		69,240
Total interest and dividend income		1,882,331		1,647,940		5,500,857		4,945,213
Interest expense
Deposits		165,595		155,127		500,462		473,976
Repurchase agreements and other short-term debt		5,233		4,221		14,587		12,520
Federal Home Loan Bank advances and notes payable		41,168		32,037		115,989		123,931
Total interest expense		211,996		191,385		631,038		610,427
Net Interest Income		1,670,335		1,456,555		4,869,819		4,334,786
Provision for loan losses		50,942		0		224,661		0
Net Interest Income After Provision for Loan Losses		1,619,393		1,456,555		4,645,158		4,334,786
Non-interest income
Service charges on deposit accounts		108,477		105,626		322,716		335,005
Gain on sale of loans		62,499		50,703		216,568		121,422
Gain on sale of foreclosed assets		9,094		20,822		60,145		167,835
Other		205,332		196,625		600,395		604,676
Total non-interest income		385,402		373,776		1,199,824		1,228,938
Non-interest expense
Salaries and employee benefits		967,625		978,099		2,994,744		2,971,133
Occupancy		152,655		156,446		445,427		459,075
Furniture and equipment		82,133		89,191		256,512		278,687
Advertising		1,923		3,309		7,891		9,512
Data processing		129,328		131,283		380,672		370,289
Professional services		85,131		85,146		274,943		306,923
Foreclosed asset impairment		0		49,119		97,483		134,533
FDIC insurance		43,779		45,145		117,625		172,731
Other		232,121		225,282		714,651		715,743
Total non-interest expense		1,694,695		1,763,020		5,289,948		5,418,626
Income Before Federal Income Taxes		310,100		67,311		555,034		145,098
Federal income tax expense		105,948		22,886		189,225		46,088
Net Income	$	204,152	$	44,425	$	365,809	$	99,010
Basic average shares outstanding		4,101,664		4,101,664		4,101,664		3,265,682
Diluted average shares outstanding		4,126,664		4,101,664		4,128,990		3,265,682
Basic income earnings per share	$	0.05	$	0.01	$	0.09	$	0.03
Diluted income earnings per share	$	0.05	$	0.01	$	0.09	$	0.03

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016

Net income	$	204,152		$	44,425		$	365,809		$	99,010

Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities		(4,140	)		(31,472	)		(11,477	)		177,361
Less reclassification adjustments for unrealized gains later recognized in income		0			0			0			0
		(4,140	)		(31,472	)		(11,477	)		177,361
Tax effect		1,408			10,701			3,902			(60,303	)
Other comprehensive income (loss), net of tax		(2,732	)		(20,771	)		(7,575	)		117,058

Comprehensive income	$	201,420		$	23,654		$	358,234		$	216,068

See accompanying notes to consolidated financial statements.

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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		3,289,905								3,289,905
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						99,010						99,010
Other comprehensive income									117,058			117,058

Balance at September 30, 2016		4,101,664	$	19,625,689	$	(5,606,459	)	$	88,263		$	14,107,493

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				8,329								8,329
Net income						365,809						365,809
Other comprehensive loss									(7,575	)		(7,575	)

Balance at September 30, 2017		4,101,664	$	19,634,530	$	(5,176,532	)	$	(29,955	)	$	14,428,043

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended			Nine Months Ended
	September 30, 2017			September 30, 2016
Cash flows from operating activities
Net income	$	365,809		$	99,010
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		224,661			0
Depreciation and amortization		256,263			274,821
Net amortization of securities		95,086			160,543
Net realized gain on sale of loans		(216,568	)		(121,422	)
Net realized gain on sale of foreclosed assets		(60,145	)		(167,835	)
Foreclosed asset impairment		97,483			134,533
Originations of loans for sale		(6,198,030	)		(4,929,350	)
Proceeds from loan sales		6,542,598			4,951,772
Deferred federal income tax expense		189,225			46,088
Share based compensation		8,329			0
Net change in:
Accrued interest receivable and other assets		(118,338	)		319,815
Accrued interest payable and other liabilities		278,545			(696,261	)
Net cash from operating activities		1,464,918			71,714
Cash flows from investing activities
Activity in available for sale securities:
Maturities, prepayments and calls		5,618,664			6,118,479
Purchases		(7,515,551	)		0
Purchase of a term deposit		0			(100,000	)
Loan originations and payments, net		(9,324,425	)		(8,791,360	)
Proceeds from the sale of the credit card portfolio		491,075			0
Additions to premises and equipment, net		(91,215	)		(21,597	)
Proceeds from the sale of foreclosed assets		114,896			634,621
Net cash used in investing activities		(10,706,556	)		(2,159,857	)
Cash flows from financing activities
Net change in deposits		2,475,930			(3,477,921	)
Repayment of note payable		0			(8	)
Net change in repurchase agreements		(2,947,231	)		(67,434	)
Capital-raising activities
Proceeds from rights offering, net of issuance costs		0			3,289,905
Proceeds from private placement, net of issuance cost		0			1,477,501
Net cash from (used in) financing activities		(471,301	)		1,222,043
Net change in cash and cash equivalents		(9,712,939	)		(866,100	)
Beginning cash and cash equivalents		20,982,175			17,899,952
Ending cash and cash equivalents	$	11,269,236		$	17,033,852
Supplemental cash flows information:
Cash paid during the period for interest	$	109,942		$	1,241,700
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
Foreclosed asset sales financed by the Bank		47,000			99,000

See accompanying notes to consolidated financial statements.

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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 nine months ended September 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 September 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.

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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 nine months 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.

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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.

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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 nine months ended September 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.

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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

None

- 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 September 30, 2017 and at December 31, 2016:

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

US Treasury	$	3,499,182	$	0	$	(8,401	)	$	3,490,781
US Government and federal agency		6,010,998		490		(5,543	)		6,005,945
Mortgage-backed and collateralized mortgage obligations– residential		8,091,293		36,547		(68,480	)		8,059,360
	$	17,601,473	$	37,037	$	(82,424	)	$	17,556,086

			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 September 30, 2017:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	3,502,766	$	3,501,503
Due from one to five years		6,007,414		5,995,223
Due from five to ten years		0		0
Due in more than ten years		0		0
Mortgage-backed and collateralized mortgage obligations – residential		8,091,293		8,059,360
	$	17,601,473	$	17,556,086

- 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 September 30, 2017 and December 31, 2016:

	Less than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2017	Value		Losses			Value		Losses			Value		Losses
US Treasuries	$	3,490,781	$	(8,401	)	$	0	$	0		$	3,490,781	$	(8,401	)
US Government and federal agency		5,003,866		(5,543	)		0		0			5,003,866		(5,543	)
Mortgage-backed and collateralized mortgage obligations - residential		3,091,902		(11,024	)		2,550,146		(57,456	)		5,642,048		(68,480	)
	$	11,586,549	$	(24,968	)	$	2,550,146	$	(57,456	)	$	14,136,695	$	(82,424	)

	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 nine months ended September 30, 2017 or September 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 September 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. At September 30, 2017, 32 debt securities had unrealized losses with aggregate depreciation of 0.58% from the amortized cost basis; seven of the 32 had unrealized losses greater than 12 months.

Eight of the 32 securities, which had an unrealized loss at September 30, 2017, are issued by government agencies and 24 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 September 30, 2017.

At September 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 September 30, 2017 had a carrying amount of $11,776,923 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 September 30, 2017 and December 31, 2016 were as follows:

	September 30, 2017			December 31, 2016
Commercial	$	54,046,712		$	50,869,327
Commercial Real Estate:
General		65,687,460			55,412,701
Construction		4,049,315			8,383,035
Consumer:
Lines of credit		6,214,979			5,965,344
Other		1,138,473			1,169,365
Credit card		0			450,920
Residential		18,643,653			18,654,044
Net deferred loan fees		(67,777	)		(80,152	)
		149,712,815			140,824,584
Less: Allowance for loan losses		(1,844,362	)		(1,611,820	)
Loans, net	$	147,868,453		$	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 nine month periods ended September 30, 2017 and 2016 by portfolio segment:

Three Months Ended September 30, 2017	Commercial		Commercial Real Estate		Consumer			Residential			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	560,840	$	818,050	$	219,334		$	180,091		$	0	$	1,778,315
Charge-offs		0		0		(6,560	)		0			0		(6,560	)
Recoveries		4,233		1,270		16,162			0			0		21,665
Provision for loan losses		17,531		70,040		(16,557	)		(29,789	)		9,717		50,942
Ending balance	$	582,604	$	889,360	$	212,379		$	150,302		$	9,717	$	1,844,362

Three Months Ended September 30, 2016	Commercial			Commercial Real Estate		Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	582,411		$	460,602	$	263,890		$	211,914		$	119,764		$	1,638,581
Charge-offs		0			0		(21,831	)		0			0			(21,831	)
Recoveries		5,700			0		2,268			0			0			7,968
Provision for loan losses		(27,547	)		50,168		3,717			(10,977	)		(15,361	)		0
Ending balance	$	560,564		$	510,770	$	248,044		$	200,937		$	104,403		$	1,624,718

- 16 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

Nine Months Ended September 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		(7,355	)		0			0			(29,225	)
Recoveries		15,323			2,575		19,208			0			0			37,106
Provision for loan losses		(27,851	)		426,980		(58,668	)		(53,010	)		(62,790	)		224,661
Ending balance	$	582,604		$	889,360	$	212,379		$	150,302		$	9,717		$	1,844,362

Nine Months Ended September 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	)		(61,124	)		0			0			(152,659	)
Recoveries		45,253			25,710			34,998			0			0			105,961
Provision for loan losses		62,417			74,786			(48,015	)		(9,716	)		(79,472	)		0
Ending balance	$	560,564		$	510,770		$	248,044		$	200,937		$	104,403		$	1,624,718

- 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 September 30, 2017 and December 31, 2016:

September 30, 2017	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	183,050	$	348,234	$	70,904	$	9,848	$	0	$	612,036
Collectively evaluated for impairment		399,554		541,126		141,475		140,454		0		1,222,609
Unallocated		0		0		0		0		9,717		9,717
Total ending allowance balance	$	582,604	$	889,360	$	212,379	$	150,302	$	9,717	$	1,844,362

Loans:
Individually evaluated for impairment	$	1,069,023	$	8,147,249	$	124,968	$	511,228	$	0	$	9,852,468
Collectively evaluated for impairment		53,090,500		61,700,944		7,250,768		18,182,495		0		140,224,707
Total ending loans balance	$	54,159,523	$	69,848,193	$	7,375,736	$	18,693,723	$	0	$	150,077,175

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 September 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.

September 30, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	514,310	$	511,644	$	0
Commercial Real Estate:
General		6,005,897		5,986,209		0
Consumer:
Lines of credit		8,948		8,939		0
Other		0		0		0
Residential		461,327		459,946		0
Subtotal	$	6,990,482	$	6,966,738	$	0

With a related allowance recorded:
Commercial	$	554,713	$	554,854	$	183,050
Commercial Real Estate:
General		2,141,352		2,134,295		348,234
Consumer:
Lines of credit		97,575		97,175		52,553
Other		18,445		18,351		18,351
Residential		49,901		50,335		9,848
Subtotal	$	2,861,986	$	2,855,010	$	612,036
Total	$	9,852,468	$	9,821,748	$	612,036

- 19 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

December 31, 2016	Recorded Investment		Unpaid Principal Balance		Related 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 September 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
September 30, 2017	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	514,613	$	5,151	$	5,353
Commercial Real Estate:
General		5,930,647		76,679		74,525
Consumer:
Lines of credit		9,014		156		156
Other		0		0		0
Residential		464,157		4,185		1,118
Subtotal	$	6,918,431	$	86,171	$	81,152

With a related allowance recorded:
Commercial	$	665,746	$	0	$	0
Commercial Real Estate:
General		2,126,062		0		0
Consumer:
Lines of credit		97,755		1,516		1,516
Other		18,673		324		324
Residential		49,940		0		0
Subtotal	$	2,958,176	$	1,840	$	1,840
Total	$	9,876,607	$	88,011	$	82,992

- 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
September 30, 2016	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	1,352,250	$	21,801	$	13,593
Commercial Real Estate:
General		5,052,992		124,372		47,673
Consumer:
Lines of credit		65,622		806		850
Other		0		0		0
Residential		178,928		593		352
Subtotal	$	6,649,792	$	147,572	$	62,468

With a related allowance recorded:
Commercial	$	980,259	$	5,793	$	5,793
Commercial Real Estate:
General		19,333		0		0
Consumer:
Lines of credit		132,489		2,201		1,972
Other		22,245		404		306
Residential		309,966		3,217		3,217
Subtotal	$	1,464,292	$	11,615	$	11,288
Total	$	8,114,084	$	159,187	$	73,756

- 22 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

	Nine Months		Nine Months		Nine Months
	Average Recorded		Interest Income		Cash Basis
September 30, 2017	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	585,438	$	15,513	$	13,014
Commercial Real Estate:
General		6,006,497		208,427		196,261
Consumer:
Lines of credit		15,100		485		485
Other		0		0		0
Residential		435,333		12,599		9,532
Subtotal	$	7,042,368	$	237,024	$	219,292

With a related allowance recorded:
Commercial	$	854,681	$	0	$	0
Commercial Real Estate:
General		1,504,978		17,644		15,011
Consumer:
Lines of credit		100,364		4,563		4,563
Other		19,327		1,036		1,036
Residential		115,050		0		0
Subtotal	$	2,594,400	$	23,243	$	20,610
Total	$	9,636,768	$	260,267	$	239,902

- 23 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

	Nine Months		Nine Months		Nine Months
	Average Recorded		Interest Income		Cash Basis
September 30, 2016	Investment		Recognized		Interest Recognized
With no related allowance recorded:
Commercial	$	1,360,761	$	45,597	$	37,254
Commercial Real Estate:
General		5,053,479		219,861		143,162
Consumer:
Lines of credit		83,212		4,753		4,753
Other		0		0		0
Residential		327,585		1,383		1,142
Subtotal	$	6,825,037	$	271,594	$	186,311

With a related allowance recorded:
Commercial	$	1,004,450	$	26,179	$	26,179
Commercial Real Estate:
General		62,721		0		0
Consumer:
Lines of credit		167,765		6,207		5,898
Other		16,893		1,078		949
Residential		312,930		9,662		9,662
Subtotal	$	1,564,759	$	43,126	$	42,688
Total	$	8,389,796	$	314,720	$	228,999

- 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 September 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	$	1,057	$	0	$	0	$	1,057	$	53,580,271	$	53,581,328
Commercial Real Estate:
General		1,411,988		0		0		1,411,988		62,869,448		64,281,436
Construction		0		0		0		0		4,053,187		4,053,187
Consumer:
Lines of credit		0		0		0		0		6,232,804		6,232,804
Other		19,265		0		0		19,265		1,123,667		1,142,932
Credit card		0		0		0		0		0		0
Residential		0		0		0		0		18,595,092		18,595,092
Total	$	1,432,310	$	0	$	0	$	1,432,310	$	146,454,469	$	147,886,779

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	$	529,795	$	578,195
Commercial Real Estate:
General		0		0		1,513,570		1,513,570		0		1,513,570
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		0		0		98,631		98,631
Total	$	0	$	0	$	1,561,970	$	1,561,970	$	628,426	$	2,190,396

- 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 $603,372 of specific reserves on $9,633,867 of unpaid principal balance of loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2017 and $413,252 on $9,102,558 of unpaid principal balance of loans as of December 31, 2016. As of September 30, 2017, there was $175,269 in loan commitments to two customers whose loan terms were modified in a troubled debt restructuring.

There were no loans modified as troubled debt restructurings during the three month period ended September 30, 2017.

The following table presents loans by class modified as troubled debt restructurings occurring during the nine month period ended September 30, 2017:

Nine Months Ended September 30, 2017	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Balance
Troubled Debt Restructurings:
Commercial	1	$	125,604	$	125,604	$	124,105
Commercial Real Estate:
General	2		549,725		550,068		599,247
Total	3	$	675,329	$	675,672	$	723,352

There were no charge-offs related to the three troubled debt restructurings occurring in the first nine months of 2017; however, there was an additional $66,371 of specific reserves were established on these balances. Moreover, all three modifications received 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)

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

Three Months Ended September 30, 2016	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Balance
Troubled Debt Restructurings:
Residential	1	$	83,310	$	83,882	$	83,831
Total	1	$	83,310	$	83,882	$	83,831

Nine Months Ended September 30, 2016	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Current Balance
Troubled Debt Restructurings:
Commercial	1	$	15,107	$	15,107	$	14,941
Commercial Real Estate:
General	1		58,194		58,194		58,041
Consumer:
Other	1		11,566		11,566		9,687
Residential	1		83,310		83,882		83,831
Total	4	$	168,177	$	168,749	$	166,500

For the three month period ending September 30, 2016, one loan was modified. The borrower received a reduced payment for six months and following that time will have an interest rate below the current market rate. This modification will provide payment relief while the borrower markets the home for sale.

In addition to the above modification, there were three others which occurred in the first six months of the year. Two modifications involved a stated interest rate below the current market rate for a period of 7 and 21 years and one other involved a reduced payment for nine months or less.

For the nine month period ended September 30, 2016, there were no charge-offs related to troubled debt restructurings. As of September 30, 2016, an additional $50,569 of specific reserves were established on these troubled debt restructurings.

- 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:

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

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

- 29 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS (Continued)

As of September 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
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2017		2016		2017		2016		2017		2016
1	$	0	$	7,391	$	0	$	0	$	0	$	0
2		927,019		1,281,578		1,484,276		1,577,808		0		0
3		9,697,542		10,420,192		5,960,141		5,738,500		242,329		800,501
4		22,835,382		16,356,758		28,619,995		17,176,904		276,407		4,310,495
5		17,276,873		17,186,851		20,613,681		18,089,577		1,962,060		1,782,945
5M		1,289,868		2,606,184		1,975,888		3,087,363		0		0
6		872,020		1,200,346		3,889,011		8,159,197		166,940		1,490,563
7		1,202,576		1,890,779		1,780,101		1,674,939		1,405,451		0
8		58,243		11,303		1,471,913		519		0		0
Total	$	54,159,523	$	50,961,382	$	65,795,006	$	55,504,807	$	4,053,187	$	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 September 30, 2017 and December 31, 2016:

	Residential
	September 30,		December 31,
	2017		2016
Performing	$	18,182,495	$	18,176,652
Impaired		511,228		526,736
Total	$	18,693,723	$	18,703,388

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2017		2016		2017		2016		2017		2016
Performing	$	6,126,281	$	5,843,821	$	1,124,487	$	1,153,453	$	0	$	450,920
Impaired		106,523		144,693		18,445		20,481		0		0
Total	$	6,232,804	$	5,988,514	$	1,142,932	$	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:

	September 30,			December 31,
	2017			2016
Beginning of year	$	1,460,394		$	2,211,327
Additions		0			89,019
Reductions from sales		(101,751	)		(649,574	)
Direct write-downs		(97,483	)		(190,378	)
End of period	$	1,261,160		$	1,460,394

Expenses related to foreclosed assets include:
Operating expenses, net of rental income	$	70,693		$	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 September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017		2016
Land & land improvements	$	4,763,024	$	4,704,624
Buildings & building improvements		6,341,548		6,334,070
Furniture, fixtures and equipment		3,018,585		3,231,264
		14,123,157		14,269,958
Less: accumulated depreciation		5,801,850		5,783,603
	$	8,321,307	$	8,486,355

Depreciation and amortization expenses were $256,263 and $274,821 for the nine months ended September 30, 2017 and 2016, respectively.

- 31 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DEPOSITS

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

	September 30,		December 31,
	2017		2016
Non-interest-bearing DDA	$	42,263,384	$	46,893,163
Interest-bearing DDA		41,712,892		40,848,573
Money market		21,283,014		21,637,723
Savings		43,041,459		32,724,497
Time, under $100,000		13,299,426		15,663,347
Time, over $100,000		8,599,065		9,956,007
Total Deposits	$	170,199,240	$	167,723,310

Time deposits of $250,000 or more were $1,395,685 at September 30, 2017 and $1,387,575 at December 31, 2016. There were no brokered deposits at either September 30, 2017 or December 31, 2016.

SHORT-TERM BORROWINGS

The Company’s short-term borrowings outstanding consisted entirely of repurchase agreements at September 30, 2017 and December 31, 2016. The Company utilized its line of credit with the FHLB once in both 2016 and in 2017.

Information regarding repurchase agreements and borrowings from the FHLB is summarized below:

	Repurchase			Borrowings
	Agreements			from FHLB

Outstanding at September 30, 2017	$	1,692,535		$	0
Average interest rate at period end		0.50	%		0	%
Average balance during period		4,729,300			366
Average interest rate during period		0.41	%		0.70	%
Maximum month end balance during period		5,768,630			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 $1,544,780 pledged to repurchase agreements at September 30, 2017 and $4,000,396 pledged at December 31, 2016. The Company had approximately $2.6 million of residential mortgage loans pledged to support its line of credit with the FHLB at September 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	September 30, 2017		December 31, 2016
U.S. Treasury and agency securities	$	0	$	454,400
Mortgage-backed securities		1,272,389		2,895,264
Collateralized mortgage obligations		272,391		650,732
Total	$	1,544,780	$	4,000,396

Another source of short-term borrowings is available through the Federal Reserve Discount Window (“Discount Window”). At September 30, 2017, collateral pledged for Discount Window borrowings consisted of $1,883,059 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 $3,413,754 at September 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 $6,914,651 pledged at September 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 September 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 3.39% at September 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 September 30, 2017, the accrued and unpaid interest owed on the subordinated debentures was $214,882. 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 September 30, 2017 and December 31, 2016 follows:

	September 30, 2017		December 31, 2016

Unused lines of credit	$	29,060,450	$	27,175,383
Unused standby letters of credit		528,342		450,000
Commitments to make loans		26,000		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 September 30, 2017 and December 31, 2016:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2017	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	3,490,781	$	3,490,781	$	0	$	0
US Government and federal agency		6,005,945		0		6,005,945		0
Mortgage-backed and collateralized mortgage obligations– residential		8,059,360		0		8,059,360		0
Total	$	17,556,086	$	3,490,781	$	14,065,305	$	0

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable 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 nine months 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 September 30, 2017 and December 31, 2016:

			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
September 30, 2017
Impaired loans¹:	$	4,406,291	$	0	$	0	$	4,406,291
Foreclosed assets:		1,261,160		0		0		1,261,160
Total	$	5,667,451	$	0	$	0	$	5,667,451

			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant 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 September 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
September 30, 2017
		Adjustments for differences between
Impaired loans	Sales comparison approach	comparable sales	(23)-35	%
	Income approach	Capitalization rate	9-12.5	%

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

	Valuation	Significant Unobservable	Range
	Technique	Inputs	of Inputs
December 31, 2016
		Adjustments for differences between
Impaired loans	Sales comparison approach	comparable sales	(25)-19	%
	Income approach	Capitalization rate	9-12.5	%

		Adjustments for differences between
Foreclosed assets	Sales comparison approach	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
			at September 30, 2017 Using
	Carrying
	Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	11,369	$	11,269	$	100	$	0	$	11,369
Loans held for sale		0		0		0		0		0
Loans, net (including impaired)		147,868		0		0		144,644		144,644
FHLB stock		301		N/A		N/A		N/A		N/A
Accrued interest receivable		422		10		47		365		422

Financial liabilities
Deposits		170,199		0		148,272		0		148,272
Repurchase agreements		1,693		0		1,693		0		1,693
Subordinated debentures		4,500		0		0		4,694		4,694
Accrued interest payable		236		0		21		215		236

			Fair Value Measurements
			at December 31, 2016 Using
	Carrying
	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 September 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 $2,860 for the three month period ended September 30, 2017 and $8,329 for the nine month period ended September 30, 2017. There was no compensation expense charged against income for either the third quarter or the first nine months 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 that 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 September 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 nine months 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 September 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 September 30, 2017, the Bank’s was considered well-capitalized according to prompt corrective action guidance with a total risk-based capital ratio of 11.66% and a Tier 1 to average assets ratio of 8.24%. 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 of which exceeded 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 September 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
September 30, 2017
Common Equity Tier 1 (CET1) to risk-weighted assets of the Bank	$	15,882,135		10.45	%	$	6,839,043		4.50	%	$	9,878,617		6.50	%
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank		17,726,497		11.66			12,158,298		8.00			15,197,873		10.00
Tier 1 (Core) Capital to risk-weighted assets of the Bank		15,882,135		10.45			9,118,724		6.00			12,158,298		8.00
Tier 1 (Core) Capital to average assets of the Bank		15,882,135		8.24			7,710,508		4.00			9,638,135		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 September 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 $1,844,362 at September 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 September 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 September 30, 2017 to that at December 31, 2016. The part labeled Results of Operations discusses the three and nine month periods ending September 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.

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.

OTHER EVENTS

As announced on Form 8-K filed October 2, 2017, the Company intends to de-register its common stock by filing a Form 15 (Certification and Notice of Termination of Registration under Section 12(g) of the Securities Exchange Act of 1934 or Suspension of Duty to File Reports Under Sections 13 and 15(d) of the Securities Exchange Act of 1934) within the first two weeks of fiscal year 2018. The Company is eligible to de-register its common stock because it has fewer than 1,200 shareholders of record. Upon filing of the Form 15, the Company’s obligations to file certain reports and forms with the Securities Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, will immediately be suspended. The Company’s common stock is traded on the OTC Pink Market, operated by OTC Markets Group, a centralized electronic quotation service for over-the-counter securities. The Company expects that its Common Stock will continue to be traded on the OTC Pink Market, so long as market makers demonstrate an interest in trading in the Company’s common stock. After public reporting requirements conclude, the Company will continue to file financial reports with its federal regulator and intends to provide interim, unaudited financial information on its website (www.communityshores.com).

FINANCIAL CONDITION

Total assets were $191.6 million at September 30, 2017 compared to $191.4 million at December 31, 2016. Although total assets outstanding reflected little growth in the first nine months of 2017, the structure of the balance sheet was strengthened as cash on deposit at the FRB was used for investment purchases and loan originations.

Due to the increase in loans and investments, cash and cash equivalents decreased by $9.7 million to $11.3 million at September 30, 2017 from $21.0 million at December 31, 2016. The Bank’s FRB balance decreased $9.2 million since year-end 2016 and was $7.4 million on September 30, 2017.

The Bank’s security portfolio was $17.6 million at September 30, 2017 and $15.8 million at December 31, 2016. Investment activity in the first nine months of the year consisted of purchases of $7.5 million and maturities, prepayments, calls of $5.6 million and net amortization of $95,000.

- 47 -

COMMUNITY SHORES BANK CORPORATION

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

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 nine months 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. At September 30, 2017, 33% of the investment portfolio was unencumbered. At December 31, 2016, the Bank had a 10% unpledged position. In early September (2017), a customer balance was moved from repurchase agreements into a corporate checking which does not require a pledge of securities. This transfer reduced the total of pledged securities by approximately $2 million.

At September 30, 2017, securities with an amortized cost of $11.8 million were pledged to public fund customers and customer repurchase agreements, down from $14.3 million at year-end 2016.

The market value of the investment portfolio is impacted by national and global economic news. During the first nine months of 2017, the investment portfolio had net unrealized losses of $8,000. Including the decrease in value during the first nine months, net unrealized losses on the investment portfolio increased to $45,000. At September 30, 2017, there were 32 securities with an amortized cost of $14.2 million having an unrealized loss of $82,000. 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 September 30, 2017.

Loans held for sale activity during the first nine months of 2017 included $6.2 million of loan originations and $6.5 million of sales. The associated gain on the loan sales was $171,000. There were no loans held for sale at September 30, 2017 but $128,000 at December 31, 2016.

Total loans (held for investment) increased $8.9 million and were $149.7 million at September 30, 2017; up from $140.8 million at December 31, 2016. There were sizable net increases in the commercial and commercial real estate loan segments mostly due to growth but some due to reclassifications between those segments since year-end 2016. The reclassifications 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. There was $1.5 million of organic growth that also occurred.

There were also transfers within the commercial real estate segments. Since year-end 2016, $4.3 million of construction loans converted to term notes which moved the balance out of the construction segment of commercial real estate loans into the general commercial real estate loan segment. In addition to this, the general commercial real estate loan segment grew approximately $7.0 million in the first nine months of the year. Two of the largest originations had been in the works since the prior year. Other loan activity included sale of the Bank’s credit card portfolio to TCM Bank in February. 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. Based on the Bank’s current loan funding pipeline, originations are expected to slow in the fourth quarter of 2017; however, the prospect list for new deals continues to grow.

- 48 -

COMMUNITY SHORES BANK CORPORATION

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

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.

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 September 30, 2017, the allowance for loan losses totaled $1.8 million. A loan loss provision of $225,000 was made in the first nine months of 2017, increasing the allowance for loan losses balance from $1.6 million at year-end 2016. In addition to the loan loss provision, there were net recoveries for the first nine months of $8,000. As a result of the loan loss provision increasing the allowance for loan losses at September 30, 2017, the ratio of allowance to gross loans outstanding rose to 1.23%, compared to 1.14% at year-end 2016.

- 49 -

COMMUNITY SHORES BANK CORPORATION

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

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

	September 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	$	582,604		36.1	%	$	617,002		36.1	%
Commercial Real Estate		889,360		46.6			459,805		45.3
Consumer		212,379		4.9			259,194		5.4
Residential		150,302		12.4			203,312		13.2
Unallocated		9,717		N/A			72,507		N/A
Total	$	1,844,362		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 0.87% at September 30, 2017 and 0.84% at year-end 2016. At September 30, 2017, there were unallocated reserves of $10,000 in the allowance for loan losses while there were unallocated reserves of $73,000 at December 31, 2016.

At September 30, 2017, the allowance contained $612,000 in specific allocations for impaired loans whereas at December 31, 2016 there was $432,000 specifically allocated for that purpose. The $180,000 increase during the first nine 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 which remains at September 30, 2017. The second loan was identified as impaired at December 31, 2016 but required no reserve allocation at that time. Subsequently, and as a result of activities related to the collateral and the borrower, an allocation of $206,000 was assigned in the second quarter of 2017. The specific allocation of $206,000 for this credit remains at September 30, 2017.

There was a $91,000 decrease in specific allocations for other impaired loans resulting from principal payments as well as updated collateral evaluations. In total, there was $9.9 million of recorded investment on impaired loans at September 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 16 impaired loans requiring no reserve at September 30, 2017. The recorded investment of these loans on that date was $7.0 million. The recorded investment of loans requiring no reserve comprised 71% of total specifically identified loans at September 30, 2017. This outcome is down from $7.8 million requiring no reserves at year-end 2016, or 84% of the recorded investment of specifically identified loans, due to the decrease in impaired loans requiring specific allocations since year-end 2016, detailed above.

Specifically identified loans requiring reserves had a recorded investment of $2.9 million at September 30, 2017 and $1.5 million at year-end 2016. The two loans mentioned above are largely responsible for the increase.

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COMMUNITY SHORES BANK CORPORATION

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

Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. From year-end 2016 to September 30, 2017, the recorded investment in accruing past due and non-accrual loans increased by $2.3 million. This was evidenced by a $224,000 increase in the recorded investment in past due loans and a $2.1 million increase in the recorded investment in non-accrual loans in the first nine months of 2017.

The recorded investment of accruing loans past due 30-59 days was $1.4 million at September 30, 2017; a $960,000 increase since year-end 2016. There were four loans past due 30-59 days at September 30; only one was also past due at December 31, 2016. One loan comprises 99% of the balance. The loan responsible for a majority of the balance was brought current in October.

There were no loans accruing interest past due 60-89 days at September 30, 2017 whereas there were three loans with a recorded investment of $737,000 at December 31, 2016.

There were no loans still accruing interest with a recorded investment past due 90 days and greater at either September 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 $2.2 million at September 30, 2017; up $2.1 million from year-end 2016. There were seven non-accrual notes at September 30, 2017. The two notes added since year-end are responsible for the increase. One of the two is a note for $1.5 million secured by medical office space. The Bank has hired a Receiver to manage the property securing the note. The Receiver collects the rents due from the building tenants and uses the proceeds to pay the building’s operating costs. If there is any money left, the receiver sends it to the Bank for principal reductions. The Receiver is working to lease the remaining space in the building. The Bank is in the process of restructuring the borrower’s payments to help strengthen the cashflow related to this property in the meantime. The second note which became non-accrual in July (2017), is an SBA loan. When the note became 60-89 days past due, it was placed on non-accrual. A large portion of the balance outstanding is guaranteed by the Small Business Administration (“SBA”). At September 30, 2017, there were specific allocations of $399,000 in the allowance for any estimated collateral deficiency on the seven notes on non-accrual at September 30, 2017.

There were net recoveries of $15,000 for the third quarter of 2017 and net recoveries of $8,000 for the first nine 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 $14,000 for the third quarter of 2016 and net charge-offs of $47,000 for the first nine months of 2016. The ratio of annualized net charge-offs to average loans was 0.04% for the third quarter and 0.05% for the first nine 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.

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

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

	Within		Three to		One to		After
	Three Months		Twelve Months		Five Years		Five Years		Total
Commercial	$	6,495,452	$	11,380,304	$	21,192,071	$	14,911,108	$	53,978,935
Commercial Real Estate:
General		8,699,865		5,233,183		41,751,413		10,002,999		65,687,460
Construction		345,375		0		2,338,940		1,365,000		4,049,315
Consumer:
Lines of credit		124,866		283,015		2,002,555		3,804,543		6,214,979
Other		23,107		53,952		724,763		336,651		1,138,473
Residential		850,368		1,112,426		31,060		16,649,799		18,643,653
	$	16,539,033	$	18,062,880	$	68,040,802	$	47,070,100	$	149,712,815
Loans at fixed rates	$	8,058,303	$	6,631,107	$	56,483,156	$	33,847,681	$	105,020,247
Loans at variable rates		8,480,730		11,431,773		11,557,646		13,222,419		44,692,568
	$	16,539,033	$	18,062,880	$	68,040,802	$	47,070,100	$	149,712,815

At September 30, 2017, 70% of the Bank’s loan balances carried a fixed rate and 30% carried a floating rate. Since year-end 2016, there has been a 6% 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.

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 September 30, 2017 and December 31, 2016. At September 30, 2017, short-term maturities comprised 23% of the loan portfolio and long term maturities comprised approximately 31%. At December 31, 2016, short term maturities were 31% and long term maturities were 27% of the portfolio. The reduction in short-term maturities is directly related to the decrease in the construction portion of the commercial real estate loan segment. Construction loans typically carry a term of less than a year. As the projects were completed and the term financing occurred, the balances were transferred to a maturity category greater than one year. Additionally, $5.3 million of SBA loans were originated in the third quarter. The loans carry maturities that are beyond five years which increased the long term maturity category of the Bank’s loan portfolio since year-end 2016.

Foreclosed assets were $1.3 million at September 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 five properties sold during the first nine months of 2017. The net gains realized on these sales were $60,000. No properties were added in the first nine months of 2017. At September 30, 2017, foreclosed assets consisted of nine real estate holdings, five less than at December 31, 2016.

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COMMUNITY SHORES BANK CORPORATION

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

Deposit balances were $170.2 million at September 30, 2017, up from $167.7 million at December 31, 2016. The $2.5 million increase in deposits since year-end is mostly driven by a repurchase agreement customer transferring $1.8 million into an interest bearing demand deposit account in the third quarter of 2017.

Repurchase agreement balances were $1.7 million at September 30, 2017 and $4.6 million at December 31, 2016, a decrease of $2.9 million. In addition to the transfer mentioned above, another customer reduced their balance by $1.1 million since year-end 2016. The Bank is phasing out this product and intends to transfer the remaining balances to other deposit products by year-end 2017.

Shareholders’ equity was $14.4 million on September 30, 2017. On December 31, 2016, the balance was $14.1 million. The net increase was primarily made up of net income of $366,000 and share based compensation of $8,000 which were negated by a net comprehensive loss from security market value change of $8,000.

Total shares outstanding at both September 30, 2017 and December 31, 2016 were 4,101,664. The book value per share was $3.52 at September 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 September 30, 2017, the Bank’s total risk-based capital ratio was 11.66% and its Tier 1 to average assets ratio was 8.24% compared to 11.12% and 8.30%, respectively, at December 31, 2016.

RESULTS OF OPERATIONS

There was net income of $366,000 for the first nine months of 2017 which compares favorably to $99,000 recorded for the first nine months of 2016. The corresponding basic and diluted income per share for the first nine months of 2017 was $0.09 compared to $0.03 for the first nine months in 2016.

The Company’s net income for the third quarter of 2017 was $204,000 and the basic and diluted income per share were $0.05 while for the third quarter of 2016, net income was $44,000 and basic and diluted earnings per share were $0.01. For the first nine months of 2017, the annualized return on the Company’s average total assets was 0.25% compared to 0.07% for the first nine months of 2016. For the third quarter of 2017, the annualized return on the Company’s average assets was 0.42%. For the third quarter of 2016, the annualized return on the Company’s average total assets was 0.09%.

The annualized return on the Company’s average equity for the first nine months and third quarter of 2017 was 3.41% and 5.67%, respectively. For the first nine months of 2016, the annualized return on the Company’s average equity was 1.10% and was 1.26% for the third quarter of 2016.

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COMMUNITY SHORES BANK CORPORATION

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

A primary component of the Company’s revenue is its net interest income. The Company’s net interest income was more for the first nine months 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.

	Nine Months ended September 30,
	2017							2016
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Federal funds sold and interest- bearing deposits with banks	$	21,956,326	$	167,112		1.01	%	$	18,469,639	$	69,240		0.50	%
Securities		17,971,005		199,933		1.48			22,668,137		227,102		1.34
Loans (including held for sale and non accrual)		141,612,846		5,133,812		4.83			125,715,308		4,649,603		4.93
Total interest earning assets		181,540,177		5,500,857		4.04			166,853,084		4,945,945		3.95
Other assets		16,634,030							16,975,843
	$	198,174,207						$	183,828,927
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	129,519,905	$	500,462		0.52		$	123,884,523	$	473,976		0.51	%
Repurchase agreements		4,729,666		14,587		0.41			4,068,536		12,520		0.41
Subordinated debentures and note payable		4,500,000		115,989		3.44			4,906,424		123,931		3.37
Total interest bearing liabilities		138,749,571		631,038		0.61			132,859,483		610,427		0.61
Non-interest-bearing deposits		44,580,199							38,147,565
Other liabilities		521,660							788,523
Shareholders’ Equity		14,322,777							12,033,356
	$	198,174,207						$	183,828,927
Net interest income (tax equivalent basis)			$	4,869,819						$	4,335,518
Net interest spread on earning assets (tax equivalent basis)						3.43	%						3.34	%
Net interest margin on earning assets (tax equivalent basis)						3.58	%						3.46	%
Average interest-earning assets to average interest-bearing liabilities						130.84	%						125.59	%
Tax equivalent adjustment				0							732
Net interest income			$	4,869,819						$	4,334,786

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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 nine months of 2017 was $4.9 million compared to a figure of $4.3 million for the same nine months in 2016. Similarly, the net interest spread on average earning assets and the net interest margin were also higher between the two nine month periods. The net interest spread increased nine basis points to 3.43% and the net interest margin increased by 12 basis points and was 3.58% for the first nine months of 2017 compared to the similar ratios in 2016. The additional $14.7 million interest earning assets yielded $535,000 more in net interest income. A majority of the interest earning asset growth was to the highest yielding category; loans. For the first nine months of 2017, loans comprised 78% of interest earning assets but for the first nine months of 2016, loans were 75% of total interest earning assets. Conversely, the average rate earned on the loan portfolio was 4.83% in the first nine months of 2017 but was 4.93% for the first nine months of 2016. Regardless of the ten basis point difference, the favorable change in the mix of earning assets boosted the average rate earned on earning assets by nine basis points. The average rate earned on interest earning assets was 4.04% for the nine month period ending September 30, 2017 compared to 3.95% for the same period in 2016.

The decreasing average rate earned by the loan portfolio is directionally contradictory to the increase in the national lending rates over the past twelve months. Manage believes some of the decrease in the average rate earned by the loan portfolio is explained by increasing market competition for loans and some is due to improvement in the creditworthiness of borrowers. In either case, 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 nine months of 2017, the Company’s cost of funds was 0.61%, exactly what it was for the first nine months 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 its deposits; the largest interest bearing category.

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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 third quarter ended September 30, 2017 and 2016 is in the table below.

	Three Months ended September 30,
	2017							2016
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Federal funds sold and interest- bearing deposits with banks	$	14,999,041	$	47,753		1.27	%	$	21,556,681	$	27,108		0.50	%
Securities		18,846,095		71,066		1.51			20,867,610		67,038		1.29
Loans (including held for sale and non accrual)		145,608,118		1,763,512		4.84			127,856,117		1,553,794		4.86
Total interest earning assets		179,453,254		1,882,331		4.20			170,280,408		1,647,940		3.87
Other assets		16,378,841							16,922,812
	$	195,832,095						$	187,203,220
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	126,805,745	$	165,595		0.52		$	121,770,387	$	155,127		0.51	%
Repurchase agreements		4,997,733		5,233		0.42			4,161,666		4,221		0.41
Subordinated debentures and note payable		4,500,000		41,168		3.66			4,500,000		32,037		2.85
Total interest bearing liabilities		136,303,478		211,996		0.62			130,432,053		191,385		0.59
Non-interest-bearing deposits		44,536,771							42,173,645
Other liabilities		594,403							491,035
Shareholders’ Equity		14,397,443							14,106,487
	$	195,832,095						$	187,203,220
Net interest income (tax equivalent basis)			$	1,670,335						$	1,456,555
Net interest spread on earning assets (tax equivalent basis)						3.58	%						3.28	%
Net interest margin on earning assets (tax equivalent basis)						3.72	%						3.42	%
Average interest-earning assets to average interest-bearing liabilities						131.66	%						130.55	%
Tax equivalent adjustment				0							0
Net interest income			$	1,670,335						$	1,456,555

Net interest income was $214,000 more in the third quarter of 2017 compared to the similar period in 2016. Likewise, both the net interest spread and net interest margin were also higher in 2017’s third quarter compared to 2016’s third quarter. The net interest spread for the three month period ending September 30, 2017 was 3.58% compared to 3.28% in the third quarter of 2016. The net interest margin was 30 basis points higher for the third quarter of 2017 at 3.72% than for the third quarter of 2016.

The yield on interest earning assets rose 33 basis points between the third quarter of 2016 and the third quarter in 2017. Similar to the year-to-date results, the increased concentration of loans within interest earning assets drove the net interest spread and margin higher. Loans comprised 81% of interest earning assets during the third quarter of 2017 but only 75% for the third quarter of 2016. The loan portfolio is the highest yielding asset 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 0.62% for the third quarter of 2017 rising three basis points compared to the third quarter of 2016. The rate paid on interest bearing deposits and repurchase agreements both increased one basis point. The larger rate increases were experienced on the Company’s subordinated debentures. The average rate paid for the third quarter of 2017 was 81 basis points more than the third quarter in 2016.

Management expects the Company’s net interest margin to increase in the remaining quarter of 2017. The Company’s liquidity has decreased to a manageable level and newly originated loans will continue to increase the concentration of loans within interest earning assets. Further, management does not anticipate much movement in the rates paid on interest bearing deposit liabilities.

Continued improvement in the mix of earning assets is needed in order to grow net interest income in this low rate environment. Thus, asset liability management remains an important tool for assessing interest rate sensitivity; it also provides a tool for monitoring liquidity. Liquidity management involves the ability to meet the cash flow requirements of the Company’s customers. These customers may be either borrowers with credit needs or depositors wanting to withdraw funds. Management of interest rate sensitivity attempts to avoid widely varying net interest margins and achieve consistent net interest income through periods of changing interest rates.

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

- 57 -

COMMUNITY SHORES BANK CORPORATION

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

Details of the repricing gap at September 30, 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	$	7,555,403		$	0		$	0	$	0	$	7,555,403
Securities (including FHLB stock)		3,113,854			3,449,347			11,293,385		0		17,856,586
Loans held for sale		0			0			0		0		0
Loans		48,481,089			12,538,972			63,337,467		25,355,287		149,712,815
		59,150,346			15,988,319			74,630,852		25,355,287		175,124,804
Interest-bearing liabilities
Savings and checking		106,037,365			0			0		0		106,037,365
Time deposits <$100,000		4,244,054			4,392,475			4,633,657		29,240		13,299,426
Time deposits >$100,000		2,259,535			3,610,675			2,728,855		0		8,599,065
Repurchase agreements and Federal funds purchased		1,692,535			0			0		0		1,692,535
Notes payable and other borrowings		4,500,000			0			0		0		4,500,000
		118,733,489			8,003,150			7,362,512		29,240		134,128,391
Net asset (liability) repricing gap	$	(59,583,143	)	$	7,985,169		$	67,268,340	$	25,326,047	$	40,996,413
Cumulative net asset (liability) repricing gap	$	(59,583,143	)	$	(51,597,974	)	$	15,670,366	$	40,996,413

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. Over the last eighteen months, increases to national prime lending rates have not had much effect on the rates paid on liabilities. Eventually, management believes, the local market rates paid on deposits is expected to increase since there are further rate increases expected to national lending rates. If the Company still has a negative repricing gap, there may be a detrimental impact to net interest income. 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 $51,000 recorded in the third quarter of 2017 and $174,000 recorded in the second quarter making the provision expense for the first nine months of the 2017, $225,000. There was none for the first nine months of 2016. Calculated provision expense is associated with growth as well as changes in historical loss calculations, economic conditions (local and national), 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 third quarter of 2017 was due to both growth and loan grade changes. The largest grade change occurred when a $1.4 million loan was downgraded to a seven. The loan was graded a six at year-end 2016. The higher the loan grade within the pool, the more loan loss allocation is required.

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COMMUNITY SHORES BANK CORPORATION

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

In the second quarter, the loan loss provision of $174,000 was related to changes in the credit quality of two loans identified as impaired during the second quarter. One loan required a $66,000 allocation; 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. 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.

Non-interest income recorded in the first nine months of 2017 was $1.2 million; the same as the first nine months of 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 $60,000 for the first three quarters of 2017 compared to $168,000 for the first three quarters of 2016. In the prior year, the Bank benefitted from foreclosed asset sales which had no carrying value. There were fewer foreclosed assets of this kind available in 2017 and as of May 2017 all of the assets which had no carrying value were liquidated. Lower revenue stemming from foreclosed asset transactions is expected going forward.

For the first nine months of 2017, recorded gains on loan sales were $216,000 compared to $121,000 for the first nine months of 2016. Strengthened revenue stemming from loan sales helped lessen the $108,000 difference related to foreclosed asset transactions. A portion of the increase in recorded gains on loan sales 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 $171,000 for the first nine months of 2017. This outcome was $49,000 more than gains recorded on the sale of mortgage loans in the first nine months of 2016. The Bank is benefitting from a more seasoned staff and a more active real estate market. Also, there continues to be decreases in service charges on deposit accounts; mainly overdraft fee income. Overdraft income was $13,000 less between the first nine months 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 third quarter of 2017 was $385,000 compared to $374,000 of non-interest income in the third quarter of 2016. Similar to year-to-date, a majority of the differences in the third 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 third quarter of 2017, gains of foreclosed asset sales were $9,000 compared to $21,000 for the third quarter of 2016. Conversely, gains on loan sales were $12,000 more in the third quarter of 2017. Gains on the sale of mortgage loans were $62,000 for the third quarter of 2017.

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COMMUNITY SHORES BANK CORPORATION

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

Non-interest expenses for the first three quarters of 2017 were $5.3 million; $129,000 less than the total for the first three quarters of 2016. Similarly, non-interest expenses of $1.7 million for the third quarter of 2017 were $68,000 lower compared to the third quarter of the previous year.

Professional services totaled $275,000 for the first nine months of 2017. This outcome was $32,000 less than the first nine months of 2016 when professional services expenses were $307,000. There were additional audit expenses paid in 2016 related to the finalization of the Company’s 2015 Annual Report. Additionally, there were legal expenses incurred in relation to the development of the Company’s 2016 Stock Compensation Plan.

Foreclosed asset impairments varied between 2017 and 2016 affecting both the nine month and three month results. Foreclosed asset impairments were $97,000 for the first nine months of 2017 but were $134,000 for the first nine months of 2016. The reduction in impairment charges stems from a bolstered real estate market as well as the fact that there are fewer properties in the foreclosed portfolio that are subject to evaluations.

There were no foreclosed asset impairments for the third quarter of 2017 but $49,000 for the third quarter of 2016.

FDIC insurance expenses were $118,000 for the first nine months of 2017 and $173,000 for the first nine months of 2016. The $55,000 reduction in the Bank’s FDIC premium accruals were due to a strengthened regulatory capital position and improved risk profile.

FDIC insurance expenses were $44,000 for the third quarter of 2017 compared to $45,000 for the third quarter of 2016.

The Company recorded a federal income tax expense of $189,000 for the first nine months of 2017 compared to $46,000 for the first nine months of 2016. For the third quarter of 2017, federal income tax expense was $106,000 compared to $23,000 for the similar period in 2016. Federal tax expense differences essentially result 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 September 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 September 30, 2017.

Changes in Internal Control

There were no changes to our internal control over financial reporting during the first nine months of the year ended September 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



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



November 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 September 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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