f10q_081511.htm

10-Q 1 f10q_081511.htm FORM 10-Q f10q_081511.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from ____________________________________ to ____________________________________

Commission File Number: 000-51166

Community Shores Bank Corporation

(Exact name of registration as specified in its charter)

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

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

(231) 780-1800

(Registrant’s telephone number, including area code)

________________________________________________________

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

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

Yes [X] No [ ]

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

Yes [X] No [ ]

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

Large accelerated filer [ ]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller reporting company [X]
		(Do not check if a smaller reporting company)

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

Yes [ ] No [X]

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

Community Shores Bank Corporation Index

PART I.	Financial Information	Page No.

	Item 1. Financial Statements	1

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	47

	Item 4. Controls and Procedures	47

PART II.	Other Information

	Item 1. Legal Proceedings	48

	Item 1A. Risk Factors	48

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48

	Item 3. Defaults upon Senior Securities	48

	Item 4. Reserved	48

	Item 5. Other Information	49

	Item 6. Exhibits	49

	Signatures	50

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30,			December 31,
	2011			2010
	(unaudited)
ASSETS
Cash and due from financial institutions	$	4,080,891		$	2,074,301
Interest-bearing deposits in other financial institutions		11,243,039			21,565,572
Total cash and cash equivalents		15,323,930			23,639,873
Securities available for sale (at fair value)		35,225,383			36,503,903
Loans held for sale		3,064,558			1,263,263
Loans		159,515,003			165,243,881
Less: Allowance for loan losses		4,935,634			4,791,907
Net loans		154,579,369			160,451,974
Federal Home Loan Bank stock		450,800			479,800
Premises and equipment, net		10,652,144			10,874,176
Accrued interest receivable		709,911			781,334
Foreclosed assets		3,306,828			3,382,594
Other assets		469,275			568,580
Total assets	$	223,782,198		$	237,945,497
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing	$	34,366,638		$	33,326,683
Interest-bearing		168,267,724			185,936,494
Total deposits		202,634,362			219,263,177
Federal funds purchased and repurchase agreements		10,708,966			7,460,795
Subordinated debentures		4,500,000			4,500,000
Notes payable		5,000,000			5,000,000
Accrued expenses and other liabilities		1,124,685			875,738
Total liabilities		223,968,013			237,099,710
Shareholders’ equity
Preferred Stock, no par value: 1,000,000 shares authorized and none issued		0			0
Common Stock, no par value: 9,000,000 shares authorized; 1,468,800 issued and outstanding		13,296,691			13,296,691
Retained deficit		(13,873,560	)		(12,617,022	)
Accumulated other comprehensive income		391,054			166,118
Total shareholders’ equity		(185,815	)		845,787
Total liabilities and shareholders’ equity	$	223,782,198		$	237,945,497

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Interest and dividend income
Loans, including fees	$	2,534,972		$	2,854,592		$	5,100,053		$	5,660,199
Securities		204,029			205,259			418,192			416,694
Federal funds sold, FHLB dividends and other income		15,515			15,664			32,960			23,123
Total interest income		2,754,516			3,075,515			5,551,205			6,100,016
Interest expense
Deposits		764,822			1,126,529			1,576,417			2,234,506
Repurchase agreements, federal funds purchased, and other debt		20,115			20,757			31,617			41,328
Federal Home Loan Bank advances and notes payable		104,161			164,030			207,051			348,562
Total interest expense		889,098			1,311,316			1,815,085			2,624,396
Net Interest Income		1,865,418			1,764,199			3,736,120			3,475,620
Provision for loan losses		497,921			832,723			1,202,426			1,361,804
Net Interest Income After Provision for Loan Losses		1,367,497			931,476			2,533,694			2,113,816
Non-interest income
Service charges on deposit accounts		197,834			199,290			374,647			373,823
Mortgage loan referral fees		7,841			0			12,105			0
Gain on sale of loans		13,622			60,931			171,182			106,837
Gain on sale of securities		0			0			0			79,814
Loss on sale of foreclosed assets		(4,269	)		(12,622	)		(5,068	)		(21,311	)
Other		145,157			117,921			326,829			311,192
Total non-interest income		360,185			365,520			879,695			850,355
Non-interest expense
Salaries and employee benefits		1,027,091			1,007,047			2,052,431			2,039,203
Occupancy		155,485			148,671			336,846			314,287
Furniture and equipment		136,515			145,457			269,001			304,585
Advertising		11,590			19,102			20,935			37,267
Data processing		118,207			137,244			250,613			260,023
Professional services		85,099			116,297			179,937			240,947
Foreclosed asset impairment		225,062			359,966			392,928			384,621
Other		490,952			552,328			1,167,236			1,012,759
Total non-interest expense		2,250,001			2,486,112			4,669,927			4,593,692
Loss Before Federal Income Taxes		(522,319	)		(1,189,116	)		(1,256,538	)		(1,629,521	)
Federal income tax expense (benefit)		0			0			0			0
Net Loss	$	(522,319	)	$	(1,189,116	)	$	(1,256,538	)	$	(1,629,521	)
Comprehensive Loss	$	(327,569	)	$	(921,846	)	$	(1,031,602	)	$	(1,352,658	)
Weighted average shares outstanding		1,468,800			1,468,800			1,468,800			1,468,800
Diluted average shares outstanding		1,468,800			1,468,800			1,468,800			1,468,800
Basic loss per share	$	(0.36	)	$	(0.81	)	$	(0.86	)	$	(1.11	)
Diluted loss per share	$	(0.36	)	$	(0.81	)	$	(0.86	)	$	(1.11	)

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED STATEMENT OF CHANGES OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

								Accumulated
								Other		Total
			Common		Retained			Comprehensive		Shareholders’
	Shares		Stock		Deficit			Income		Equity

Balance at January 1, 2010		1,468,800	$	13,296,691	$	(3,734,295	)	$	177,595	$	9,739,991

Comprehensive loss:
Net loss						(1,629,521	)				(1,629,521	)
Unrealized gain on securities available for sale									276,863		276,863
Total comprehensive loss											(1,352,658	)

Balance at June 30, 2010		1,468,800	$	13,296,691	$	(5,363,816	)	$	454,458	$	8,387,333


Balance at January 1, 2011		1,468,800	$	13,296,691	$	(12,617,022	)	$	166,118	$	845,787

Comprehensive loss:
Net loss						(1,256,538	)				(1,256,538	)
Unrealized gain on securities available for sale									224,936		224,936
Total comprehensive loss											(1,031,602	)

Balance at June 30, 2011		1,468,800	$	13,296,691	$	(13,873,560	)	$	391,054	$	(185,815	)

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

	Six Months Ended			Six Months Ended
	June 30, 2011			June 30, 2010
Cash flows from operating activities
Net loss	$	(1,256,538	)	$	(1,629,521	)
Adjustments to reconcile net loss to net cash from operating activities:
Provision for loan losses		1,202,426			1,361,804
Depreciation and amortization		267,155			307,408
Net amortization of securities		118,575			78,094
Net realized gain on sale of securities		0			(79,814	)
Net realized gain on sale of loans		(171,182	)		(106,837	)
Net realized loss on sale of foreclosed assets		5,068			21,311
Foreclosed asset impairment		392,928			384,621
Originations of loans for sale		(8,104,666	)		(6,807,963	)
Proceeds from loan sales		6,474,553			6,660,526
Net change in:
Accrued interest receivable and other assets		170,728			175,133
Accrued interest payable and other liabilities		248,947			36,961
Net cash from (used in) operating activities		(652,006	)		401,723
Cash flows from investing activities
Activity in available for sale securities:
Sales		0			3,751,027
Maturities, prepayments and calls		8,576,627			6,584,667
Purchases		(7,191,746	)		(14,800,724	)
Loan originations and payments, net		4,208,981			848,206
Redemption of Federal Home Loan Bank Stock		29,000			(109,500	)
Additions to premises and equipment, net		(45,123	)		(91,478	)
Proceeds from the sale of foreclosed assets		138,968			770,493
Net cash from (used in) investing activities		5,716,707			(3,047,309	)
Cash flows from financing activities
Net change in deposits		(16,628,815	)		30,576,752
Net change in federal funds purchased and repurchase agreements		3,248,171			2,220,358
Repayment of FHLB advance		0			(1,500,000	)
Net cash from (used in) financing activities		(13,380,644	)		31,297,110
Net change in cash and cash equivalents		(8,315,943	)		28,651,524
Beginning cash and cash equivalents		23,639,873			2,824,088
Ending cash and cash equivalents	$	15,323,930		$	31,475,612
Supplemental cash flow information:
Cash paid during the period for interest	$	1,633,959		$	2,585,188
Transfers from loans to foreclosed assets		706,617			1,572,699
Transfers from securities held to maturity to available for sale		0			5,839,614
Foreclosed asset sales financed by the Company		245,419			71,019

See accompanying notes to consolidated financial statements.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND RECENT DEVELOPMENTS:

The unaudited, consolidated financial statements as of and for the three months and six months ended June 30, 2011 include the consolidated results of operations of Community Shores Bank Corporation (“Company”) and its wholly-owned subsidiaries, Community Shores Financial Services (“CS Financial Services”), and Community Shores Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Community Shores Mortgage Company (the “Mortgage Company”) and the Mortgage Company’s wholly-owned subsidiary, Berryfield Development, LLC (“Berryfield”). Community Shores Capital Trust I (“the Trust”) is not consolidated and exists solely to issue capital securities. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company’s financial condition and results of operations. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods. The results for the period ended June 30, 2011 should not be considered as indicative of results for a full year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the period ended December 31, 2010. Some items in the prior year financial statements may be reclassified to conform to the current presentation.

In July 2010, the FASB issued an Accounting Standards Update, “Receivables: Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of this update is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. An entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The update makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables and the aging of past due financing receivables at the end of the reporting period by class of financing receivables. For public entities, the disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010 and have been added to Note 3. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The effect of adopting this new guidance is disclosure-related only and had no impact on the Company’s results of operations.

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

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued):

Since 2008, the Company has experienced consolidated losses stemming from deterioration in credit quality and real estate values requiring the need for large loan loss provisions and impairments of foreclosed real estate. As a result primarily of the sustained losses, the Bank’s capital ratios declined. The Bank was deemed under capitalized at December 31, 2010 according to regulatory capital standards, with a total risk based capital ratio of 7.06%. The losses recorded by the Bank in the first half of 2011 reduced the total risk based capital ratio to 6.66% at June 30, 2011 and the Bank remains under capitalized as of that date.

As a result of deteriorating asset quality, poor earnings and falling capital ratios, the Bank endured additional regulatory scrutiny and entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the State of Michigan’s Office of Financial and Insurance Regulation (“OFIR”), its primary regulators, on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR. Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet this requirement within the required 90-day period and remains out of compliance with the Consent Order as of June 30, 2011.

The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has limited resources with which to support the capital needs of the Bank. The Company’s main liquidity resource is its cash account balance which, as of June 30, 2011, was approximately $65,000.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND RECENT DEVELOPMENTS (Continued):

On January 3, 2011, the Company was not able to repay its $5 million term loan when it came due. The Company does not have the resources to pay the outstanding principal and does not expect to have it in the near future. The Company did not make the last four contractual quarterly interest payments. The total interest due to Fifth Third at year-end 2010 was $155,000. The Company continues to accrue interest on the term loan and at June 30, 2011, the total interest due Fifth Third was $304,000. Since the Company presently does not have sufficient funds to pay off the term loan’s principal and accrued interest, Fifth Third has a right to foreclose on the Bank’s stock which collateralizes the term loan.

The Company’s net losses, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Consent Order, and the provisions of the Written Agreement creates an uncertainty about the Company’s ability to

continue as a going concern. As a result of such uncertainty, our auditors added an explanatory paragraph to their opinion on the Company’s December 31, 2010 consolidated financial statements expressing substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

2. SECURITIES AVAILABLE FOR SALE:

The following tables represent the securities held in the Company’s portfolio at June 30, 2011 and at December 31, 2010:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2011	Cost		Gains		Losses			Value

US Treasury	$	4,029,433	$	20,801	$	0		$	4,050,234
US Government and federal agency		14,300,418		219,762		(25,082	)		14,495,098
Municipals		2,771,059		101,440		0			2,872,499
Mortgage-backed and collateralized mortgage obligations– residential		13,516,190		300,552		(9,190	)		13,807,552
	$	34,617,100	$	642,555	$	(34,272	)	$	35,225,383

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2010	Cost		Gains		Losses			Value

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

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SECURITIES AVAILABLE FOR SALE (Continued):

The amortized cost and fair value of the securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment fees. Below is the schedule of contractual maturities for securities held at June 30, 2011:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	2,508,407	$	2,520,392
Due from one to five years		16,837,218		17,072,355
Due from five to ten years		1,755,285		1,825,084
Due in more than ten years		0		0
Mortgage-backed and collateralized mortgage obligations – residential		13,516,190		13,807,552
	$	34,617,100	$	35,225,383

Below is the table of securities with unrealized losses, aggregated by investment category and length of time such securities were in an unrealized loss position at June 30, 2011 and December 31, 2010:

	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
June 30, 2011	Value		Losses			Value		Losses		Value		Losses
US Government and federal agency	$	4,120,102	$	(25,082	)	$	0	$	0	$	4,120,102	$	(25,082	)
Mortgage-backed and collateralized mortgage obligations - residential		3,177,071		(9,190	)						3,177,071		(9,190	)
	$	7,297,173	$	(34,272	)	$	0	$	0	$	7,297,173	$	(34,272	)

	Less than 12 Months					12 Months or Longer				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
December 31, 2010	Value		Losses			Value		Losses		Value		Losses
US Government and federal agency	$	2,489,266	$	(10,497	)	$	0	$	0	$	2,489,266	$	(10,497	)
Municipals		350,532		(4,468	)		0		0		350,532		(4,468	)
Mortgage-backed and collateralized mortgage obligations - residential		7,887,368		(130,507	)		0		0		7,887,368		(130,507	)
	$	10,727,166	$	(145,472	)	$	0	$	0	$	10,727,166	$	(145,472	)

Periodically the Company will implement a strategy to realize market value gains within its securities portfolio to supplement earnings and capital. In 2011’s first half, the Company had no security sales. For the six months ended June 30, 2010 the company sold securities and realized a net gain of $79,814. Proceeds from the sales were $3,751,027. There were no gross losses realized on the sale. There were no security sales for the three months ended June 30, 2010.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SECURITIES AVAILABLE FOR SALE (Continued):

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI following guidance issued by FASB.

In determining OTTI under the FASB model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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

At June 30, 2011, thirteen debt securities had unrealized losses with aggregate depreciation of 0.47% from the Company’s amortized cost basis, all of which had been in a continuous loss for less than twelve months. Most of the securities are issued by government or government sponsored agencies and to a lesser extent municipal securities.

Mortgage-backed and Collateralized Mortgage Obligation Securities

At June 30, 2011, 100% of the mortgage-backed and collateralized mortgage obligation securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The unrealized loss associated with these securities was 0.29% at June 30, 2011. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2011.

- 9 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. LOANS

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

	June 30,			December 31,
	2011			2010

Commercial	$	57,561,342		$	58,416,643
Commercial Real Estate:
General		58,394,464			58,996,411
Construction		6,558,133			8,782,762
Consumer:
Lines of credit		15,202,238			15,954,866
Other		2,443,959			3,087,409
Credit card		500,197			520,095
Residential		18,888,858			19,534,704
		159,549,191			165,292,890
Less: Allowance for loan losses		(4,935,634	)		(4,791,907	)
Net deferred loan fees		(34,188	)		(49,009	)
Loans, net	$	154,579,369		$	160,451,974

Loans held for sale totaled $3,064,558 at June 30, 2011 and $1,263,263 at December 31, 2010.

- 10 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ALLOWANCE FOR LOAN LOSSES AND IMPAIRED LOANS

The following is a summary of activity in the allowance for loan losses account for the three month and six month periods ended June 30, 2011 and 2010:

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Allowance for loan losses:
Beginning balance	$	5,255,868		$	3,317,566		$	4,791,907		$	3,782,132
Charge-offs		(856,216	)		(1,022,556	)		(1,139,613	)		(2,037,188	)
Recoveries		38,061			10,570			80,914			31,555
Provision for loan losses		497,921			832,723			1,202,426			1,361,804
Ending balance	$	4,935,634		$	3,138,303		$	4,935,634		$	3,138,303

The following table presents the activity in the allowance for loan losses for the three month and six month periods ending June 30, 2011 by portfolio segment:

Three Months Ended June 30, 2011	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,160,906		$	3,205,039		$	631,316		$	258,607		$	5,255,868
Charge-offs		(225,106	)		(586,086	)		(12,361	)		(32,663	)	$	(856,216	)
Recoveries		8,132			3,501			16,286			10,142		$	38,061
Provision for loan losses		543,430			93,356			(142,264	)		3,399		$	497,921
Ending balance	$	1,487,362		$	2,715,810		$	492,977		$	239,485		$	4,935,634

Six Months Ended June 30, 2011	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,218,865		$	2,896,176		$	546,603		$	130,263		$	4,791,907
Charge-offs		(359,807	)		(674,324	)		(72,819	)		(32,663	)		(1,139,613	)
Recoveries		35,780			6,999			27,993			10,142			80,914
Provision for loan losses		592,524			486,959			(8,800	)		131,743			1,202,426
Ending balance	$	1,487,362		$	2,715,810		$	492,977		$	239,485		$	4,935,634

- 11 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table represents the recorded investment in loans by portfolio segment based on impairment method at June 30, 2011 and December 31, 2010:

June 30, 2011	Commercial		Commercial Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	497,457	$	1,692,805	$	80,472	$	145,543	$	2,416,277
Collectively evaluated for impairment		989,905		1,023,005		412,505		93,942		2,519,357
Total ending allowance balance	$	1,487,362	$	2,715,810	$	492,977	$	239,485	$	4,935,634

Loans:
Individually evaluated for impairment	$	4,564,767	$	8,895,054	$	214,052	$	1,095,094	$	14,768,967
Collectively evaluated for impairment		53,264,855		56,401,436		17,940,287		17,862,177		145,468,755
Total ending loans balance	$	57,829,622	$	65,296,490	$	18,154,339	$	18,957,271	$	160,237,722

December 31, 2010	Commercial		Commercial Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	195,684	$	1,789,936	$	85,233	$	49,145	$	2,119,998
Collectively evaluated for impairment		1,023,181		1,106,240		461,370		81,118		2,671,909
Total ending allowance balance	$	1,218,865	$	2,896,176	$	546,603	$	130,263	$	4,791,907

Loans:
Individually evaluated for impairment	$	4,276,850	$	8,405,141	$	307,307	$	1,339,741	$	14,329,039
Collectively evaluated for impairment		54,326,131		59,724,688		19,096,341		18,508,671		151,655,831
Total ending loans balance	$	58,602,981	$	68,129,829	$	19,403,648	$	19,848,412	$	165,984,870

- 12 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents loans individually evaluated for impairment by class of loans at June 30, 2011 and December 31, 2010:

							Three Months		Three Months		Three Months		Six Months		Six Months		Six Months
			Unpaid				Average		Interest		Interest Income		Average		Interest		Interest Income
	Recorded		Principal		Related		Recorded		Income		Cash Basis		Recorded		Income		Cash Basis
June 30, 2011	Investment		Balance		Allowance		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	3,823,389	$	3,820,442	$	0	$	3,799,873	$	18,445	$	18,669	$	3,877,599	$	39,676	$	39,042
Commercial Real Estate:
General		3,897,156		3,888,934		0		2,807,518		53,698		42,181		2,453,488		55,556		43,929
Construction		555,619		555,619		0		640,982		0		0		561,602		0		0
Consumer:
Lines of credit		7,166		7,166		0		55,794		0		0		68,997		0		0
Other		0		0		0		0		0		0		9,450		0		0
Residential		191,462		191,978		0		285,054		0		0		316,744		0		0
Subtotal	$	8,474,792	$	8,464,139	$	0	$	7,589,221	$	72,143	$	60,850	$	7,287,880	$	95,232	$	82,971

With an allowance recorded:
Commercial	$	741,380	$	735,898	$	497,457	$	837,753	$	11,905	$	9,517	$	716,808	$	19,069	$	16,371
Commercial Real Estate:
General		2,481,843		2,469,408		502,877		3,397,436		0		0		3,559,743		18,563		12,573
Construction		1,960,467		1,960,467		1,189,928		1,960,467		0		0		2,060,433		0		0
Consumer:
Lines of credit		162,309		161,980		42,883		177,519		4,514		967		190,402		5,600		2,027
Other		44,577		44,453		37,589		44,951		368		368		45,516		735		735
Credit card		0		0		0		0		0		0		1,815		0		0
Residential		903,599		902,263		145,543		756,496		5,828		5,223		653,639		6,865		6,260
Subtotal	$	6,294,208	$	6,274,469	$	2,416,277	$	7,174,622	$	22,615	$	16,075	$	7,228,356	$	50,832	$	37,966
Total	$	14,768,967	$	14,738,608	$	2,416,277	$	14,763,843	$	94,758	$	76,925	$	14,516,236	$	146,064	$	120,937

- 13 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

			Unpaid
	Recorded		Principal		Related
December 31, 2010	Investment		Balance		Allowance
With no related allowance recorded:
Commercial	$	3,692,148	$	3,689,868	$	0
Commercial Real Estate:
General		2,684,164		2,681,391		0
Construction		664,866		664,866		0
Consumer:
Lines of credit		108,274		108,274		0
Other		18,900		18,900		0
Residential		848,983		849,457		0
Subtotal	$	8,017,335	$	8,012,756	$	0

With an allowance recorded:
Commercial	$	584,702	$	582,331	$	195,684
Commercial Real Estate:
General		3,088,254		3,078,481		575,175
Construction		1,967,857		1,967,857		1,214,761
Consumer:
Lines of credit		131,515		131,149		42,799
Other		45,829		45,696		39,645
Credit card		2,789		2,789		2,789
Residential		490,758		490,385		49,145
Subtotal	$	6,311,704	$	6,298,688	$	2,119,998
Total	$	14,329,039	$	14,311,444	$	2,119,998

Non-performing loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

- 14 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans at June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
			Recorded				Recorded
			Investment >				Investment >
			90 Days and				90 Days and
	Non Accrual		Accruing		Non Accrual		Accruing
Commercial	$	1,524,421	$	149,242	$	1,316,168	$	0
Commercial Real Estate:
General		3,250,968		0		3,143,819		0
Construction		2,498,610		0		2,632,723		0
Consumer:
Lines of credit		96,458		0		214,489		0
Other		0		0		0		1,776
Credit card		0		0		0		0
Residential		609,830		0		748,166		0
Total	$	7,980,287	$	149,242	$	8,055,365	$	1,776

- 15 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents the aging of the recorded investment in past due loans by class of loans at June 30, 2011 and December 31, 2010:

					Greater Than 90
	30-59 Days Past		60-89 Days Past		Days and Non						Total Recorded
June 30, 2011	Due		Due		Accrual		Total Past Due		Current		Investment
Commercial	$	97,035	$	133,302	$	1,673,663	$	1,904,000	$	55,925,622	$	57,829,622
Commercial Real Estate:
General		0		0		3,250,968		3,250,968		55,460,030		58,710,998
Construction		0		0		2,498,610		2,498,610		4,086,882		6,585,492
Consumer:
Lines of credit		115,733		0		96,458		212,191		15,061,123		15,273,314
Other		13,751		0		0		13,751		2,367,077		2,380,828
Credit card		0		0		0		0		500,197		500,197
Residential		0		0		609,830		609,830		18,347,441		18,957,271
Total	$	226,519	$	133,302	$	8,129,529	$	8,489,350	$	151,748,372	$	160,237,722


					Greater Than 90
	30-59 Days Past		60-89 Days Past		Days and Non						Total Recorded
December 31, 2010	Due		Due		Accrual		Total Past Due		Current		Investment
Commercial	$	627,034	$	0	$	1,316,168	$	1,943,202	$	56,659,779	$	58,602,981
Commercial Real Estate:
General		157,637		217,803		3,143,819		3,519,259		55,802,388		59,321,647
Construction		0		0		2,632,723		2,632,723		6,175,459		8,808,182
Consumer:
Lines of credit		79,191		35,460		214,489		329,140		15,619,003		15,948,143
Other		12,054		0		1,776		13,830		2,921,580		2,935,410
Credit card		0		0		0		0		520,095		520,095
Residential		94,404		0		748,166		842,570		19,005,842		19,848,412
Total	$	970,320	$	253,263	$	8,057,141	$	9,280,724	$	156,704,146	$	165,984,870

- 16 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Troubled Debt Restructurings:

The Company has allocated $1,892,310 of specific reserves on $10,323,260 of loans to customers whose terms have been modified in troubled debt restructurings as of June 30, 2011 and $447,947 on $5,370,581 as of December 31, 2010. The Company has also committed $432,615 to two customers whose loans are classified as a troubled debt restructuring as of June 30, 2011. As of December 31, 2010, there was $1,146,342 committed to those customers. These customers are paying as agreed on those loans.

Credit Quality Indicators:

The Bank utilizes a numeric grading system for commercial and commercial real estate loans to indicate the strength of the credit. At origination, grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation including cash flow analysis and the estimated collateral values. The loan grade is reassessed at each renewal or amendment but any credit may receive a review based on lender identification of changes in the situation or behavior of the borrower. Once a loan becomes a 5W, and is over $100,000, the loan grade will be reanalyzed once a quarter to assess the borrowers compliance with Bank’s documented action plan. The analysis is done at least annually for 5W's less than $100,000. In addition to these methods for assigning loan grades, changes may occur through the external loan review or regulatory exam process. The loan grades are as follows:

Exceptional. Loans with an exceptional credit rating.

Quality. Loans with excellent sources of repayment that conform, in all respects, to Bank policy and regulatory requirements. These are loans for which little repayment risk has been identified

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

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

Acceptable. Loans with acceptable sources of repayment and risk.

5W.

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

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

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

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

- 17 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of June 30, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

					Commercial Real Estate				Commercial Real Estate
	Commercial				General				Construction
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2011		2010		2011		2010		2011		2010
1	$	0	$	0	$	0	$	0	$	0	$	0
2		582,245		583,364		0		0		0		0
3		6,462,870		1,722,896		3,337,833		3,443,220		0		30,927
4		14,730,183		21,109,601		19,859,703		17,362,231		238,501		2,727,615
5		21,078,350		19,659,157		21,049,338		24,656,543		2,410,146		1,702,025
5W		3,248,544		1,687,613		5,007,285		4,399,618		1,359,663		1,484,710
6		6,523,315		9,349,408		5,532,344		4,777,202		0		190,333
7		3,826,434		3,292,002		2,616,883		2,328,376		61,097		39,849
8		1,377,681		1,198,940		1,307,612		2,354,457		2,516,085		2,632,723
Total	$	57,829,622	$	58,602,981	$	58,710,998	$	59,321,647	$	6,585,492	$	8,808,182

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented on page 16 of this report, and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of June 30, 2011 and December 31, 2010:

	Residential
	June 30,		December 31,
	2011		2010
Performing	$	17,862,177	$	18,508,671
Impaired		1,095,094		1,339,741
Total	$	18,957,271	$	19,848,412

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2011		2010		2011		2010		2011		2010
Performing	$	15,103,839	$	15,708,354	$	2,336,251	$	2,870,681	$	500,197	$	517,306
Impaired		169,475		239,789		44,577		64,729		0		2,789
Total	$	15,273,314	$	15,948,143	$	2,380,828	$	2,935,410	$	500,197	$	520,095

- 18 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. FORECLOSED ASSETS

Foreclosed asset activity:

	June 30,			June 30,
	2011			2010
Beginning of year	$	3,382,594		$	6,440,916
Additions		706,617			1,572,700
Proceeds from sales		(384,387	)		(770,493	)
Losses from sales		(5,068	)		(21,311	)
Direct write-downs		(392,928	)		(384,621	)
End of period	$	3,306,828		$	6,837,191

Expenses related to foreclosed assets include:
Operating expenses, net of rental income	$	48,679		$	105,663

6. PREMISES AND EQUIPMENT

Period end premises and equipment were as follows:

	June 30,		December 31,
	2011		2010
Land & land improvements	$	5,447,328	$	5,447,328
Buildings & building improvements		6,132,163		6,132,163
Furniture, fixtures and equipment		3,656,772		3,652,390
Construction in process		55,878		17,618
		15,292,141		15,249,499
Less: accumulated depreciation		4,639,997		4,375,323
	$	10,652,144	$	10,874,176

7. DEPOSITS

The components of the outstanding deposit balances at June 30, 2011 and December 31, 2010 were as follows:

	June 30,		December 31,
	2011		2010
Non-interest-bearing DDA	$	34,366,638	$	33,326,683
Interest-bearing DDA		22,487,332		23,944,608
Money market		18,861,258		18,493,059
Savings		9,382,387		7,388,395
Time, under $100,000		75,293,261		78,893,224
Time, over $100,000		42,243,486		57,217,208
Total Deposits	$	202,634,362	$	219,263,177

- 19 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. DEPOSITS (Continued):

Brokered deposits totaled $25,970,000 at June 30, 2011 and $37,307,000 at December 31, 2010. Since the Bank was not categorized as “well capitalized” at June 30, 2011 and is under a Consent Order, a regulatory waiver is required to accept, renew or rollover brokered deposits. The Bank has not issued brokered deposits since January of 2010. At June 30, 2011, maturities of brokered deposits were as follows:

	Due in 3 months or less	$13,166,000
	Due in 3-12 months	$12,804,000

8. SHORT-TERM BORROWINGS

The Company’s short-term borrowings typically consist of repurchase agreements and borrowings from the FRB Discount Window. There were no borrowings from the FRB Discount Window since January 2010. The June 30, 2011 and December 31, 2010 information was as follows:

	Repurchase			Discount			Borrowings
	Agreements			Window			from FHLB

Outstanding at June 30, 2011	$	10,708,966		$	0		$	0
Average interest rate at period end		0.84	%		0.00	%		0.00	%
Average balance during period		8,530,912			0			251
Average interest rate during period		0.74	%		0.00	%		0.49	%
Maximum month end balance during period		11,741,712			0			0

Outstanding at December 31, 2010	$	7,460,795		$	0		$	0
Average interest rate at year-end		0.72	%		0.00	%		0.00	%
Average balance during year		8,598,005			315,425			0
Average interest rate during year		0.86	%		0.50	%		0.00	%
Maximum month end balance during year		10,132,049			0			0

9. FEDERAL HOME LOAN BANK BORROWINGS:

The Bank is a member of the Federal Home Loan Bank of Indianapolis. Based on its current Federal Home Loan Bank Stock holdings and collateral, the Bank has the capacity to borrow $8,460,300 through the use of its $5 million line of credit or a standard advance. Each borrowing requires a direct pledge of securities and or loans. At June 30, 2011, the Bank had loans and securities with a market value of $9,741,393 pledged to the Federal Home Loan Bank for future borrowings. At June 30, 2011 and December 31, 2010 there was no balance outstanding on the line of credit nor were there any outstanding advances.

- 20 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SUBORDINATED DEBENTURES

The Trust, a business trust formed by the Company, sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Trust to purchase an equivalent amount of subordinated debentures from the Company. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and was 2.30% at June 30, 2011 and 2.35% at December 31, 2010. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par on any interest payment date and are, in effect, guaranteed by the Company. Interest on the subordinated debentures are payable quarterly on March 30th, June 30th, September 30th and December 30th. The Company is not considered the primary beneficiary of the Trust (variable interest entity), therefore the Trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability, and the interest expense is recorded on the Company’s consolidated statement of income.

The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued, give the Company the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities. In May 2010, the Company exercised its option to defer regularly scheduled quarterly interest payments beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010. The Company’s deferral of interest does not constitute an event of default.

During the deferral period, interest will continue to accrue on the subordinated debentures. Also, the deferred interest will accrue interest. At the expiration of the deferral period, all accrued and unpaid interest will be due and payable and a corresponding amount of distributions will be payable on the trust preferred securities.

The indenture under which the subordinated debentures were issued prohibits certain actions by the Company during the deferral period. Among other things, and subject to certain exceptions, during the deferral period, the Company is prohibited from declaring or paying any dividends or distributions on, or redeeming, purchasing, acquiring or making any liquidation payment with respect to, any shares of its capital stock. Although the Company has not determined the duration of the deferral period, as of December 16, 2010, under the FRB Written Agreement, the Company is prohibited from making any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval. At June 30, 2011, the accrued interest payable on the subordinated debentures was $143,092.

11. NOTES PAYABLE

On January 3, 2011, the Company’s $5,000,000 term loan with Fifth Third Bank (“Fifth Third”) matured. The loan is in default, and the Company does not have the resources to pay the outstanding principal and accrued interest and does not expect to have it in the near future. Under the terms of the note, Fifth Third has the right to foreclose on the Bank’s stock which collateralizes the loan. The Company continues to accrue interest at the rate of the term loan at maturity which was 6.00%, 275 basis points above Fifth Third’s prime rate. On June 30, 2011, there was $304,000 of unpaid interest compared to $155,000 at December 31, 2010.

- 21 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. COMMITMENTS AND OFF-BALANCE SHEET RISK

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

A summary of the notional and contractual amounts of outstanding financing instruments with off-balance-sheet risk as of June 30, 2011 and December 31, 2010 follows:

	June 30, 2011		December 31, 2010

Unused lines of credit and letters of credit	$	25,232,073	$	26,119,226
Commitments to make loans		0		95,470

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. 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.

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COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. FAIR VALUE MEASUREMENTS (Continued)

The Company used the following methods and significant assumptions to estimate fair value:

Securities: The fair values of securities are obtained from a third party who utilizes quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing (Level 2 inputs), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Servicing rights: The fair value of SBA servicing rights is obtained from a third party using assumptions provided by the Company. The individual servicing rights are valued individually taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. Their valuation methodology utilized for the servicing rights begins with projecting future cash flows for each servicing asset, based on its unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing a market-based discount rate assumption. These inputs are generally observable in the marketplace resulting in a Level 2 classification.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals, broker market opinions or internal evaluations. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Foreclosed Assets: Nonrecurring adjustments to certain commercial and residential real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. Fair values are generally based on recent real estate appraisals, broker market opinions or internal evaluations. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Adjustments of the carrying amount utilizing this process result in a Level 3 classification.

- 23 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a recurring basis are summarized below as of the periods ended June 30, 2011 and December 31, 2010:

			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
June 30, 2011	Total		(Level 1)		(Level 2)		(Level 3)
Available for sale securities:
US Treasury	$	4,050,234	$	4,050,234	$	0	$	0
US Government and federal agency		14,495,098		0		14,495,098		0
Municipal securities		2,872,499		0		2,872,499		0
Mortgage-backed and collateralized mortgage obligations– residential		13,807,552		0		13,807,552		0

Servicing assets		80,245		0		80,245		0


December 31, 2010
Available for sale securities:
US Treasury	$	1,011,094	$	1,011,094	$	0	$	0
US Government and federal agency		16,908,716		1,000,000		15,908,716		0
Municipal securities		3,238,294		0		3,238,294		0
Mortgage-backed and collateralized mortgage obligations– residential		15,345,799		0		15,345,799		0

Servicing assets		38,858		0		38,858		0

During the first quarter of 2011, there was a transfer of two federal agency securities with a fair value of $991,568 at March 31, 2011 from Level 1 to Level 2. There were no transfers between Level 1 and Level 2 during the second quarter of 2011.

- 24 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a non-recurring basis are summarized below as of the periods ended June 30, 2011 and December 31, 2010:


			Significant
			Unobservable
			Inputs
	Total		(Level 3)
June 30, 2011
Impaired loans:
Commercial	$	238,441	$	238,441
Commercial Real Estate:
General		1,966,531		1,966,531
Construction		770,539		770,539
Consumer:
Lines of credit		119,097		119,097
Other		6,864		6,864
Residential		756,753		756,753
Foreclosed assets:
Commercial Real Estate:
General		1,333,408		1,333,408
Construction		1,834,664		1,834,664
Residential		123,589		123,589

December 31, 2010
Impaired loans:
Commercial	$	386,647	$	386,647
Commercial Real Estate:
General		2,503,306		2,503,306
Construction		753,096		753,096
Consumer:
Lines of credit		88,350		88,350
Other		6,051		6,051
Residential		441,240		441,240
Foreclosed assets:
Commercial Real Estate:
General		1,061,170		1,061,170
Construction		2,005,831		2,005,831
Residential		163,786		163,786

- 25 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. FAIR VALUE MEASUREMENTS (Continued)

The following two paragraphs describe the impairment charges recognized during the period:

Collateral dependent impaired loans are measured using the fair value of the collateral. At June 30, 2011, such impaired loans had a balance of $6,274,469, with a valuation allowance of $2,416,277 compared to impaired loans with a balance of $6,298,688 and a valuation allowance of $2,119,998 at December 31, 2010. The fair values of the collateral on these loans were determined generally using independent appraisals, broker market opinions or internal evaluations which were adjusted for anticipated disposition costs. The impairment charges, recorded to the provision for loan losses, on collateral dependent loans were $296,000 for the first six months of 2011.

At June 30, 2011 and December 31, 2010, foreclosed assets carried a fair value of $3,291,661 and $3,230,787 respectively. During the six month period ended June 30, 2011, twenty nine properties included in this total were written down by $392,928. There were also three properties totaling $706,617 (at fair value) added to other real estate owned during the first six months of 2011. The fair value of other real estate owned was determined primarily using independent appraisals, broker market opinions or internal evaluations which were adjusted for anticipated disposition costs.

Carrying amount and estimated fair values of financial instruments not previously presented were as follows:

	June 30,				December 31,
	2011				2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(in thousands)
Financial assets
Cash and cash equivalents	$	15,324	$	15,324	$	23,640	$	23,640
Loans held for sale		3,065		3,306		1,263		1,273
Loans, net (including impaired)		154,579		154,000		160,452		154,484
FHLB stock		451		N/A		480		N/A
Accrued interest receivable		710		710		781		781

Financial liabilities
Deposits		202,634		205,213		219,263		220,711
Federal funds purchased and repurchase agreements		10,709		10,709		7,461		7,461
Subordinated debentures		4,500		2,930		4,500		3,172
Notes payable		5,000		2,500		5,000		2,500
Accrued interest payable		543		543		362		362

- 26 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. FAIR VALUE MEASUREMENTS (Continued)

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk including consideration for widening credit spreads. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. It was not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. Estimated fair value for other financial instruments and off-balance sheet loan commitments are considered to approximate carrying value.

14. INCOME TAXES

Accounting guidance related to income taxes requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, we consider both positive and negative evidence and analyze changes in near-term market conditions as well as other factors which may impact future operating results. Significant weight is given to evidence that can be objectively verified. The continuing recent losses resulting from the distressed operating environment in Michigan have significantly restricted our ability under the accounting rules to rely on projections of future taxable income to support the recovery of our deferred tax assets. Consequently, we determined it necessary to carry a valuation allowance against our entire net deferred tax asset. The valuation allowance against our deferred tax assets may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer required. We will continue to monitor our deferred tax assets quarterly for changes affecting their realizability.

15. REGULATORY MATTERS

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

Prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is not well capitalized, regulatory approval is required to accept brokered deposits. Subject to limited exceptions, a bank may not make a capital distribution if, after making the distribution, it would be undercapitalized. If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, acquisitions, new activities, new branches, payment of dividends or management fees are prohibited and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the bank at the discretion of the federal regulator. The Bank was in the undercapitalized category at both June 30, 2011 and December 31, 2010.

- 27 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. REGULATORY MATTERS (Continued)

Actual capital amounts and ratios for the Bank and required capital amounts and ratios for the Bank to be adequately capitalized and to be at the level mandated by the Consent Order at June 30, 2011 and December 31, 2010 were:

						Minimum Required					Minimum Required
						For Capital					Under
	Actual					Adequacy Purposes					Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio

June 30, 2011
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank	$	11,439,894		6.66	%	$	13,738,792		8.00	%	$	18,890,839		11.00	%
Tier 1 (Core) Capital to risk-weighted assets of the Bank		9,258,777		5.39			6,869,396		4.00			N/A		N/A
Tier 1 (Core) Capital to average assets of the Bank		9,258,777		3.98			9,314,787		4.00			19,793,923		8.50

						Minimum Required					Minimum Required
						For Capital					Under
	Actual					Adequacy Purposes					Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio

December 31, 2010


Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank	$	12,501,302		7.06	%	$	14,173,103		8.00	%	$	19,488,017		11.00	%
Tier 1 (Core) Capital to risk-weighted assets of the Bank		10,254,935		5.79			7,086,552		4.00			N/A		N/A
Tier 1 (Core) Capital to average assets of the Bank		10,254,935		4.25			9,646,274		4.00			20,498,333		8.50

Federal Reserve guidelines limit the amount of allowance for loan losses that can be included in Tier 2 capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At June 30, 2011, only $2,181,118 was counted as Tier 2 capital and $2,754,516 was disallowed. At December 31, 2010, $2,246,366 was counted as Tier 2 capital and $2,545,541 was disallowed.

- 28 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. REGULATORY MATTERS (Continued)

The Bank’s Consent Order with the FDIC and the OFIR, its primary banking regulators, became effective on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR.

The Consent Order requires the Bank to implement a written profit plan, a written contingency funding plan, a written plan to reduce the Bank's reliance on brokered deposits, a comprehensive strategic plan; and to develop an analysis and assessment of the Bank's management needs. Under the Consent Order, the Bank is required to maintain higher capital levels than requested under prompt corrective action and the Bank may not declare or pay any dividend without the prior written consent of the regulators.

Prior to the issuance of the Consent Order, the Bank's Board of Directors and management had already commenced initiatives and strategies to address a number of the requirements of the Consent Order. The Bank continues to work in cooperation with its regulators. Our ability to fully comply with all of the requirements of the Consent Order, including maintaining specified capital levels, is not entirely within our control, and is not assured. Our ability to comply with the requirements of the Consent Order may be affected by many factors, including the availability of capital and other funds, the extent of repayment of loans by borrowers, declines in the value of collateral including real estate, the Bank's ability to realize on collateral, actions that may be taken by our lender in connection with our matured $5,000,000 term loan, and actions by bank regulators. Failure to comply with provisions of the Consent Order may result in further regulatory action that could have a material adverse effect on us and our shareholders, as well as the Bank.

As of October 1, 2010, the Bank had retained a third party consultant, acceptable to the regulators, who was hired to develop a written analysis and assessment of the Bank’s management needs for the purpose of providing qualified management for the Bank. The consultant completed the analysis by the December 1, 2010 deadline. On January 6, the FDIC and OFIR acknowledged the timely filing of the report and concurred with the consultant, that the members of the present executive management team have the ability, experience and qualifications to perform their respective duties in a capable manner. No changes in the Bank’s management were recommended.

The Bank’s Board of Directors continues to participate in the governance of the Bank and has developed a program for monitoring compliance with the Consent Order. The template is updated periodically as necessary and is distributed to all Board members for discussion at the monthly board meeting.

There were several directives related to loans contained in the Consent Order. The Bank was ordered to charge off all loans classified as “loss” by the FDIC during the March 2010 examination. The charge offs were completed as directed. The Bank was prohibited from extending additional credit to any impaired borrower. The Bank is in compliance with this mandate. The Bank was asked to develop, implement and submit to the FDIC, written action plans to reduce the risk position in impaired credits. All action plans have been submitted to the FDIC. Management continues to update the action plans and is working diligently to reduce the risk position as outlined in each action plan. All recommended loan and collection policy revisions have been adopted and submitted to the FDIC.

- 29 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. REGULATORY MATTERS (Continued)

Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not in compliance with this requirement at December 31, 2010 or June 30, 2011. Management continues to explore options to raise the capital required for full compliance. At June 30, 2011, a capital contribution of $10,545,000 would have been needed to meet the capital ratios specified in the Consent Order.

Under the Consent Order the Bank is restricted from declaring or paying dividends without prior written authorization of the FDIC. The Bank was in full compliance with this restriction.

The Bank was ordered to adopt, implement and adhere to a realistic, comprehensive written profit plan and budget for 2011. The Bank adopted a written profit plan and budget for 2011 on November 17, 2010. Management intends on informing the Board on a monthly basis as to how the Bank’s performance compared to the budget.

Per the Consent Order the Board must be given the opportunity to evaluate the adequacy of the allowance for loan losses prior to the submission of any reports of condition and statements of income to the FDIC. The Board is given the opportunity each month to review the details of the allowance for loan loss calculation and the resulting provision expense and to provide feedback to management as to the sufficiency.

As required by the Consent Order, the Bank adopted a detailed liquidity plan on November 17, 2010 which provided for intended liquidity sources to meet the Bank’s assessed liquidity needs over the time horizons of 6, 12 and 18 months. A significant portion of the upcoming funding needs are related to the brokered deposit maturities discussed below.

As a condition of the Consent Order, the Bank is unable to accept brokered deposits. On October 27, 2010, the Board, as required by the Consent Order, approved a written plan to reduce the Bank’s reliance on brokered deposits. The plan to reduce brokered deposits includes details of the volume and maturities of the existing brokered deposits over the next eight quarters and includes a specific strategy to fund their maturities.

Since the beginning of 2010, the Bank has been able to replace maturing brokered deposits with local deposits, including internet based time deposits and core deposits. The plan to reduce brokered deposits mainly consists of continuing this successful strategy. Management does not believe the restriction on issuing brokered deposits imposes a significant liquidity problem for the Bank. Monthly written progress reports will be provided to the Board.

- 30 -

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. OTHER COMPREHENSIVE INCOME

Other comprehensive income (loss) components and related tax effects were as follows:

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2011		June 30, 2010		June 30, 2011		June 30, 2010

Unrealized holding gains on held to maturity securities transferred to available for sale	$	0	$	0	$	0	$	28,192
Unrealized holding gains on available for sale securities		194,750		267,270		224,936		328,485
Less reclassification adjustments for (gains) and losses later recognized in income		0		0		0		(79,814	)

Net unrealized gain (loss)		194,750		267,270		224,936		276,863
Tax effect		0		0		0		0

Other comprehensive income (loss)	$	194,750	$	267,270	$	224,936	$	276,863

- 31 -

COMMUNITY SHORES BANK CORPORATION

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

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

The discussion below details the financial results of the Company and its wholly owned subsidiaries, the Bank and Community Shores Financial Services, and the Bank’s subsidiary, the Mortgage Company, and Berryfield, the Mortgage Company’s subsidiary, through June 30, 2011 and is separated into two parts which are labeled Financial Condition and Results of Operations. The part labeled Financial Condition compares the financial condition at June 30, 2011 to that at December 31, 2010. The part labeled Results of Operations discusses the three month period ended June 30, 2011 as compared to the same period of 2010. 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 Annual Report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company, Berryfield and CS Financial Services. Words such as “anticipates”, “believes”, “estimates”, “expects”, “forecasts”, “intends”, “is likely”, “plans”, “projects”, variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Future Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise.

Future Factors include, among others, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economy; the ability of the Company to borrow money or raise additional capital to maintain or increase its or the Bank’s capital position or when desired to support future growth; action that Fifth Third may take in connection with its $5.0 million term loan to the Company, the repayment of which is now overdue; lack of adequate cash by the Company to continue its business or pay its debts; failure to comply with provisions of the Consent Order or Written Agreement may result in further regulatory action that could have a material adverse effect on us and our shareholders, as well as the Bank; and other factors, including risk factors, referred to from time to time in filings made by the Company with the Securities and Exchange Commission. These are representative of the Future Factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement. These risks and uncertainties should be considered when evaluating forward-looking statements. Undue reliance should not be placed on such statements.

The overall economic environment remains challenging but appears to be stabilizing. The state of Michigan’s financial health remains in question which tends to exacerbate the national economic weaknesses. Unemployment in Muskegon and Ottawa counties appears to have stabilized but remains at a critical level. At June 30, 2011,

- 32 -

COMMUNITY SHORES BANK CORPORATION

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

unemployment was 10.8% for Muskegon County and 9.0% for Ottawa County. In addition to high unemployment, property values are irrational because of the current supply and demand and they are often directionally unpredictable even to third party professionals. In general property values have declined but there have been pockets of stabilization. Unfortunately a large portion of the difficulty in the financial market centers on the low real estate valuations coupled with the lack of sales and construction activity. The negative effect of this downturn in real estate has adversely affected the credit markets and the ability to actively lend based on a risk-centered underwriting process. It is unlikely that these trends will be reversed quickly but it is encouraging that there have been signs of stabilization which may bolster consumer confidence and eventually translate into more real estate activity and climbing valuations.

The declining property valuations have contributed to the credit issues experienced by the Bank. As a result of these and other issues, the Bank has recorded operating losses since 2008. The deteriorating condition of the asset quality of the Bank warranted regulatory intervention. The Bank has entered into a Consent Order with the FDIC and the OFIR, its primary banking regulators, which became effective on September 2, 2010. The Bank agreed to the terms of the Consent Order without admitting or denying any charge of unsafe or unsound banking practices relating to capital, asset quality, or earnings. The Consent Order imposes no fines or penalties on the Bank. The Consent Order will remain in effect and enforceable until it is modified, terminated, suspended, or set aside by the FDIC and OFIR.

Under the Consent Order the Bank was required, within 90 days of September 2, 2010, to have and maintain its level of Tier 1 capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Bank was not able to meet this requirement within the required 90-day period and remains out of compliance with the Consent Order as of June 30, 2011.

The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company complies with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only

- 33 -

COMMUNITY SHORES BANK CORPORATION

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

financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above. The Company currently has limited resources with which to support the capital needs of the Bank. The Company’s main liquidity resource is its cash account balance which, as of June 30, 2011, was approximately $65,000.

On January 3, 2011, the Company’s $5,000,000 term loan with Fifth Third Bank (“Fifth Third”) matured. The loan is in default, and the Company does not have the resources to pay the outstanding principal and accrued interest and does not expect to have it in the near future. Under the terms of the note, Fifth Third has the right to foreclose on the Bank’s stock which collateralizes the loan. Management met with Fifth Third on February 17, 2011, to discuss the term loan. Fifth Third indicated that it is interested in having the term loan be part of a comprehensive recapitalization plan but that it has no intention, in the short term, to foreclose on the stock of the Bank. Since the initial meeting on February 17, 2011, there have been periodic meetings to discuss the term loan.

The Company’s net losses, declining cash on hand, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Consent Order, and the provisions of the Written Agreement creates an uncertainty about the Company’s ability to continue as a going concern. The financial statements in this Form 10-Q do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

FINANCIAL CONDITION

Total assets decreased by $14.1 million to $223.8 million at June 30, 2011 from $237.9 million at December 31, 2010. This is a 5.9% decrease in assets during the first six months of 2011. Balance sheet contraction consisted mainly of a decline in deposit balances funded by decreases in cash held in interest bearing bank accounts and the Bank’s loan portfolio.

Cash and cash equivalents decreased by $8.3 million to $15.3 million at June 30, 2011 from $23.6 million at December 31, 2010. This change was mostly reflective of decreases in balances held in bank accounts between the above two periods. Balances kept at the FRB decreased $10.3 million since year-end 2010 while the balances held at other correspondent banks increased by $2.0 million. The net decrease in liquidity is driven largely by the seasonal fluctuation in the balances of several of the Bank’s public fund customers as well as the maturity of two brokered time deposits. This decrease in cash was expected and in line with management’s expectations. Although the FRB balance decreased, the goal of maintaining elevated on balance sheet liquidity to accommodate brokered deposit maturities and to provide for unexpected cash needs remains in place. Over the last couple of years, the core principles of cash management have been greatly affected by the current rate and regulatory environment and the need to preserve capital. Balances held at the FRB are given a preferential risk rating when computing regulatory risk based capital ratios. The risk rating is lower than either federal funds or other correspondent bank balances. So when the FRB began paying interest on excess deposits in 2008, it became a prudent capital preservation strategy to keep excess liquidity on deposit at the FRB. Additionally, regulatory agencies have emphatically encouraged banks to proactively strengthen both on and off balance sheet funding resources in order to be perceived as operating in a safe and sound manner given the dramatic increase in bank failures. All of these factors contribute to management’s ongoing decision to maintain a high FRB balance.

Securities decreased $1.3 million since December 31, 2010. Investment activity in the first six months of the year included purchases of $7.2 million and maturities, pre-payments and calls of $8.5 million. In 2010, the Bank liquidated a portion of its municipal portfolio. Prior to the sale, several of the securities sold were transferred out

- 34 -

COMMUNITY SHORES BANK CORPORATION

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

of the held to maturity portfolio into the available for sale portfolio. As a result, the Company needed to transfer all of its remaining held to maturity securities into the available for sale portfolio in order to comply with accounting guidance. The carrying amount of the securities transferred was $5,839,614. Of that total, $3,551,506 were sold. The remaining $2,288,108 had an unrealized gain of $28,192 that was recorded through other comprehensive income upon transfer.

Maintaining the unencumbered portion of the Bank’s security portfolio at a level that complies with its internal policy is typically the driving force behind investment activity. The Bank strives to have between 10% and 20% of its investment portfolio unpledged. Although the portfolio decreased since year-end 2010, the unencumbered portion was within the range desired by management. At June 30, 2011 there were securities with a market value of $29.7 million pledged to secure public fund customers, the Federal Reserve Discount Window (“Discount Window”), Federal Home Loan Bank (“FHLB”) overdraft line of credit, and customer repurchase agreements leaving 15.6% of its portfolio unencumbered. On December 31, 2010, 20.0% of investments were unencumbered. In order to provide opportunity for additional pledging, to secure access to future liquidity and to maximize the return on the Bank’s deposits, securities are being strategically purchased. It is likely that the Bank will make additional security purchases in 2011.

The fair value of investments has received much scrutiny over the past three years. The plight of the bond market in general and the weakened position of several government sponsored entities have affected market values. At June 30, 2011, there were 13 securities with an unrealized loss; none of these unrealized losses were longer than 12 months. The securities were not deemed to have other-than-temporary impairment. At June 30, 2011, the unrealized losses totaled approximately $34,000 on securities with an amortized cost of $7.3 million. To reduce exposure to loss (both realized and unrealized) the investment policy has prudent diversification principles; one of them being issuer concentration. There were no holdings of securities of any one issuer, other than the U.S. Government and federal agencies, in an amount greater than 10% of the Bank’s shareholders’ equity. The entire investment portfolio remains strong with an overall unrealized gain of $608,000 at June 30, 2011.

Loans held for sale activity during the first six months of 2011 included $8.1 million of loan originations and $6.5 million of loan sales. The associated gain on the loan sales was $171,000. A majority of the gains were recorded in the first quarter and were related to the sale of the guaranteed portion of three Small Business Administration (“SBA”) loans. These SBA loans totaling $2.4 million were sold for a gain of $124,000. The Bank is no longer originating SBA loans with the intention of selling the guaranteed portion in the secondary market so it is not likely that these gains will occur going forward. Loan sale activity in the first half of 2010 consisted of only residential mortgage loans.

Total loans (held for investment) decreased $5.7 million and were $159.5 million at June 30, 2011 down from $165.2 million at December 31, 2010. The decrease in the commercial real estate portfolio comprised 49% of the overall decline. The overall decrease in the loan portfolio did not change the concentration. At June 30, 2011 the concentration of commercial and commercial real estate loans was 77%, and roughly the same as year-end 2010. The wholesale focus of the Bank has remained since opening in 1999. Unfortunately, the economic crisis has severely affected many borrowers in the Company’s two largest portfolio segments causing a significant increase in the Bank’s overall risk profile.

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COMMUNITY SHORES BANK CORPORATION

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

To help mitigate the credit risk stemming from the economic condition of the country in general and Michigan specifically, the Bank continues to develop and educate lenders and credit staff, and to invest time into the design and overall strengthening of the Company’s credit risk assessment processes. Simply put credit risk is the risk of borrower nonpayment typically on loans although it can be applicable to the investment portfolio as well. In both cases, avoiding portfolio concentrations in any one type of credit or in a specific industry helps to decrease risk; however, the risk of nonpayment for any reason exists with respect to all loans and investments. The Bank recognizes that credit losses will be experienced and will vary with, among other things, general economic conditions; the creditworthiness of the borrower over the term of the debt; and in the case of a collateralized loan, the quality of the collateral.

There is a very detailed process that has been developed by the Bank to estimate credit risk. The process is discussed at length in Note 1 to the Company’s December 31, 2010 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 utilizing the specified process. Basically, the analysis of the allowance for loan losses is comprised of two portions: general credit allocations and specific credit allocations. General credit allocations are made to various categories of loans based on loan ratings, delinquency trends, historical loss experience as well as current economic conditions. The specific credit allocation includes a detailed review of a borrower and its entire relationship resulting in an allocation being made to the allowance for that particular borrower. A loan becomes specifically identified when, based on current information and events related to that particular borrower, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement.

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

At June 30, 2011, the allowance for loan losses totaled $4.9 million. During the first six months of 2011, $1.2 million was added to the allowance through the provision expense. At year-end 2010, the allowance for loan losses was $4.8 million. The ratio of allowance to gross loans outstanding increased to a level of 3.09% at June 30, 2011 compared to 2.90% at year-end 2010.

The allocation of the allowance at June 30, 2011 and December 31, 2010 was as follows:

	June 30, 2011					December 31, 2010
			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	$	1,487,362		36.1	%	$	1,218,865		35.3	%
Commercial Real Estate		2,715,810		40.7			2,896,176		41.0
Consumer		491,248		11.4			546,603		11.9
Residential		241,214		11.8			130,263		11.8
Total	$	4,935,634		100	%	$	4,791,907		100	%

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COMMUNITY SHORES BANK CORPORATION

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

The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 1.73% at June 30, 2011, a slight decrease of three basis points from year-end 2010. At year-end 2010, the general component of the allowance for loan losses was 1.76% of total non-specifically identified loans.

At June 30, 2011, the allowance contained $2,416,000 in specific allocations for impaired loans whereas at December 31, 2010 there was $2,120,000 specifically allocated. There was $14.7 million of unpaid principal on impaired loans at June 30, 2011 compared to $14.3 million at year-end 2010. At June 30, 2011, there was $8.5 million of unpaid principal on impaired loans requiring no reserves, an increase of $451,000 since year-end 2010. The specific allocation on one customer relationship was adjusted because of an unfavorable court ruling in the associated lawsuit between the Bank and the customer. The Bank is appealing the decision. The increased allocation was more than 100% of the increase in specific allocations since year-end 2010. Other increases in specific allocations were widespread over many loans and were offset by chargedowns on the balances of specifically identified loans.

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 2010 to June 30, 2011, the recorded investment in past due and non-accrual loans has decreased by $791,000. This was evidenced by a $716,000 decrease in the recorded investment in past due loans and a $75,000 decrease in the recorded investment in non-accrual loans in the first six months of 2011.

The recorded investment of loans past due 30-59 days was $227,000 at June 30, 2011; a decrease of $744,000 since December 31, 2010. Over 60% of the loans past due as of June 30, 2011 had made a payment by the end of July. One customer whose loan balance represents over 30% of the total past due at June 30, 2011 continues to be past due.

The recorded investment of loans past due 60-89 days decreased $120,000 since year-end 2010 and was $133,000 at June 30, 2011. There was only one loan comprising the entire past due balance at the end of June 2011. The borrower is working to overcome some setbacks encountered in the daily operation of the business. The loan has an SBA guarantee on 85% of the outstanding principal. The credit receives ongoing monitoring by the Bank’s Loan Review Committee.

There was one loan with a recorded investment of $149,000 past due 90 days and greater at June 30, 2011. There was $2,000 past due 90 days and greater at year-end 2010. On July 29, 2011, the Bank received payment of interest owed and began negotiating a payment relief plan.

Non-accrual notes were $7.9 million at June 30, 2011 which was a decrease of $75,000 compared to non-accrual notes of $8.0 million at December 31, 2010.

Overall net charge-offs for the second quarter of 2011 were $818,000 and were $1.1 million for the first half of 2011. The corresponding ratio of net charge-offs to average loans for the second quarter of 2011 was 2.00% while the ratio of net charge-offs to average loans was 1.29% for the first half of 2011. The net charge-offs for the second quarter of 2010 were $1.0 million and $2.0 million for the first half of 2010. The resulting ratio of net charge-offs to average loans for the second quarter of 2010 was 2.22% and 2.20% for the first half of the same

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COMMUNITY SHORES BANK CORPORATION

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

year. Although the current ratios are not comparable to normal historical charge off ratios, it is encouraging that there has been a decrease compared to the quarterly and first half ratios reported in 2010. Nonetheless, it is likely that charge off ratios may remain elevated until there is a widespread improvement in the economic condition of the state of Michigan and the specific market areas in which the Bank operates--Muskegon and northern Ottawa counties.

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

The loan maturities and rate sensitivity of the loan portfolio at June 30, 2011 are set forth below:

	Within		Three to		One to		After
	Three		Twelve		Five		Five
	Months		Months		Years		Years		Total

Commercial	$	14,626,618	$	16,939,536	$	21,891,945	$	4,069,055	$	57,527,154
Commercial Real Estate:
General		2,001,367		11,629,264		41,825,232		2,938,601		58,394,464
Construction		3,001,563		2,853,586		616,973		86,011		6,558,133
Consumer:
Lines of credit		438,472		1,575,909		6,198,858		6,988,999		15,202,238
Other		135,206		342,215		1,512,245		454,293		2,443,959
Credit card		56,264		174,786		269,147		0		500,197
Residential		438,049		79,460		9,852		18,361,497		18,888,858
	$	20,697,539	$	33,594,756	$	72,324,252	$	32,898,456	$	159,515,003
Loans at fixed rates	$	11,536,379	$	18,776,130	$	59,648,592	$	22,788,553	$	112,749,654
Loans at variable rates		9,161,160		14,818,626		12,675,660		10,109,903		46,765,349
	$	20,697,539	$	33,594,756	$	72,324,252	$	32,898,456	$	159,515,003

At June 30, 2011, there were 71% of the loan balances carrying a fixed rate and 29% a floating rate. Since 2008, the Bank’s concentration of fixed rate loans has been increasing. Some of the shift is a factor of the types of loans that have paid off or have been added to the portfolio and some of the change is related to customer preference at the time of renewal. It is likely that future rate movements will be rising given the extended period of low rates that has existed over the past few years. As a result of the current mix of the loan portfolio, management will be challenged to improve loan income in a rising rate environment.

The maturity distribution of the loan portfolio has lengthened over the last several years but still remains at a level which is within the parameters determined to be acceptable by management. Contributing to the change in distribution is the increase in the mortgage loan portfolio over the past several years. Typically management

_______________

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

strives to retain only 10-15% of residential mortgages originated because of the longer contractual terms generally associated with mortgage products. At June 30, 2011, approximately 21% of the entire loan portfolio had a contractual maturity longer than five years. To control extension risk mostly associated with the mortgage business line, management remains focused on originating loans saleable into the secondary market.

Foreclosed assets were $3,307,000 at June 30, 2011 which was a decrease of $76,000 since December 31, 2010. These assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. These properties are held until they can be sold. During the first six months of 2011, three properties were added and seven properties sold. At June 30, 2011 there were 28 real estate holdings and at December 31, 2010 there were 32 real estate holdings.

Deposit balances were $202.6 million at June 30, 2011 down from $219.2 million at December 31, 2010. Since year-end 2010, total deposits have decreased $16.6 million or 8%. Non-interest bearing deposits increased $1.0 million since year-end 2010 while interest bearing accounts decreased by $17.6 million. The decrease in interest-bearing accounts stemmed from a decline in interest bearing checking accounts and time deposits offset by an increase in money market and savings accounts.

The $1.0 million increase in non-interest bearing checking balances and the $1.5 million decrease in interest bearing checking balances are somewhat correlated. Since year-end there has been a shift in the account type preferred by existing customers as a result of a change in FDIC insurance programs. On December 31, 2010, the FDIC discontinued its program which offered full insurance coverage on low interest transaction accounts. This change motivated several large customers to switch their interest bearing accounts to non-interest bearing accounts at the beginning of the year.

Money market and savings balances rose by $2.4 million in the first half of 2011 as a result of several existing business customers increasing their balances since year-end 2010.

Time deposits declined by a net figure of $18.6 million. Over three quarters of the decrease in time deposits was related to brokered deposit maturities of $11.3 million. Since the Bank has not been categorized as “well capitalized” since June 30, 2010, a regulatory waiver is required to accept, renew or rollover brokered deposits. Additionally, the Bank’s Consent Order with the FDIC prohibits the use of brokered deposits. The Bank has not issued any brokered deposits since January of 2010. At June 30, 2011, the concentration of brokered deposits to total deposits was 13%; a decrease of 4% since December 31, 2010 when the concentration was 17%. For more information related to future maturities of brokered deposits see Note 7.

Repurchase agreement balances were $7.5 million at December 31, 2010 and $10.7 million at June 30, 2011; an increase of $3.2 million. A repurchase agreement is treated like a short-term borrowing of the Bank. To secure the short-term borrowing (repurchase agreement), balances held by customers are collateralized by high quality government securities held in a sub-account within the Bank’s security portfolio. This banking product has also gotten more utilization since the FDIC program changed on December 31, 2010. Customers with investable dollars exceeding the FDIC limits are utilizing this account type because they are seeking higher interest rates while mitigating their risk. The increase in the balance between the two period ends was from existing repurchase customers keeping more money in their accounts.

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COMMUNITY SHORES BANK CORPORATION

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

Shareholders’ equity was negative on June 30, 2011. The balance was $(186,000) on that day. On December 31, 2010 the balance was $846,000. The operating losses recorded in the first six months of 2011 were partially offset by an increase in accumulated other comprehensive income (security market value adjustments).

As a result of the significant losses incurred in the last few years, the Bank’s capital ratios have declined. At June 30, 2011, the Bank’s total risk based capital ratio was 6.66% and its tier one to average assets ratio was 3.98%. The Bank’s total risk based capital ratio at December 31, 2010 was 7.06%. Its tier one to average assets ratio was 4.25% at year-end 2010. On both period ends the Bank was considered under capitalized according to prompt corrective action regulations administered by federal banking agencies.

Under the Consent Order, the Bank is required to have and maintain its level of tier one capital, as a percentage of its total assets, at a minimum of 8.5%, and its level of qualifying total capital, as a percentage of risk-weighted assets, at a minimum of 11%. The Consent Order capital requirements were effective beginning with the December 31, 2010 capital reporting period. The Bank was not in compliance with required capital ratios at either the December or June capital reporting period. In order to attain the level of capital required by the Consent Order, the Bank would have needed additional capital of $10,545,000 on June 30, 2011 based on its asset mix and size. This is an increase of $295,000 compared to the $10,250,000 that would have been needed on December 31, 2010.

RESULTS OF OPERATIONS

The net loss for the first six months of 2011 was $1.3 million which was $373,000 less than the loss recorded for the first six months of 2010. The corresponding basic and diluted loss per share for the first six months of 2011 was $(0.86). The basic and diluted loss per share for the first half of 2010 was $(1.11).

The Company recorded net loss of $522,000 for the second quarter of 2011. The corresponding basic and diluted loss per share was $(0.36) for the second quarter of 2011. The loss recorded in 2010’s second quarter was $1.2 million. The corresponding basic and diluted loss per share was $(0.81).

The losses recorded in the first six months of 2011 stem primarily from additional expenses related to administering troubled assets. The loan loss provision, foreclosed asset impairments and other collection expenses totaled $1.8 million for the first six months of 2011. For the similar period in 2010 the same expenses totaled $2.0 million. For the second quarter of 2011, loan loss provision, foreclosed asset impairments and other collection expenses totaled $785,000; a decrease of $580,000 from the second quarter of 2010. Currently, expenses related to administering troubled assets appear to have stabilized and for the most part are decreasing when comparing them to the same period a year ago.

For the first six months of 2011, the annualized return on the Company’s average total assets was (1.06)% compared to (1.32)% for the first six months of 2010. For the second quarter of 2011, the annualized return on the Company’s average total assets was (0.90)%. For the second quarter of 2010, the ratio was (1.87)%. The Company’s annualized return on average equity was (565.08)% for the first six months of 2011 and (32.57)% for the first six months of 2010. For the second quarter of 2011, the annualized return on average equity was (1894.74)% compared to (51.71)% for the second quarter of 2010. The ratio of average equity to average assets was 0.19% for the first six months of 2011 and 4.04% for the first six months of 2010. The ratio was 0.05% for the second quarter of 2011 and 3.62% for the same period in 2010. After years of recorded losses the

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COMMUNITY SHORES BANK CORPORATION

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

shareholder’s equity of the Company has eroded and is currently a negative number. Subsequently the ratios are substantially skewed in spite of smaller losses in 2011.

Another component of the Company’s revenue is its net interest income. The net interest income and corresponding net interest margin were better for the first six months of 2011 than the same period in 2010 mostly as a result of improvements made to the Company’s cost of average funds. The following table sets forth certain information relating to the Company’s consolidated average interest earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented.

	Six Months ended June 30,
	2011							2010
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Federal funds sold and interest- bearing deposits with banks	$	21,990,723	$	26,430		0.24	%	$	15,684,402	$	19,093		0.24	%
Securities		35,975,068		450,881		2.51			29,316,331		462,445		3.15
Loans (including held for sale and non accrual)		164,650,630		5,100,053		6.19			182,277,698		5,660,199		6.21
		222,616,421		5,577,364		5.01			227,278,431		6,141,737		5.40
Other assets		13,610,779							20,307,085
	$	236,227,200						$	247,585,516
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	178,615,080	$	1,576,417		1.77	%	$	190,605,661	$	2,234,506		2.34	%
Federal funds purchased, repur- chase agreements and Federal Reserve Bank borrowings		8,531,164		31,617		0.74			8,020,567		41,328		1.03
Subordinated Debentures, notes payable and FHLB advances		9,500,000		207,051		4.36			15,315,635		348,562		4.55
		196,646,244		1,815,085		1.85			213,941,863		2,624,396		2.45
Non-interest-bearing deposits		38,298,664							22,926,100
Other liabilities		837,562							711,212
Shareholders’ Equity		444,730							10,006,341
	$	236,227,200						$	247,585,516
Net interest income (tax equivalent basis)				3,762,279							3,517,341
Net interest spread on earning assets (tax equivalent basis)						3.16	%						2.95	%
Net interest margin on earning assets (tax equivalent basis)						3.38	%						3.10	%
Average interest-earning assets to average interest- bearing liabilities						113.21	%						106.23	%
Tax equivalent adjustment				26,159							41,721
Net interest income			$	3,736,120						$	3,475,620

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COMMUNITY SHORES BANK CORPORATION

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

The tax equivalent net interest spread on average earning assets increased 21 basis points to 3.16% in the past twelve months. The tax equivalent net interest margin increased by 28 basis points from 3.10% for the first six months of 2010 to 3.38% for the first six months of 2011. The tax equivalent net interest income for the first six months of 2011 was $3.8 million compared to a figure of $3.5 million for the same six months in 2010. The Company recorded $260,000 more net interest income. There were $4.7 million less average earning assets on the books in the first half of 2011 compared to the first half of 2010. In spite of having less average earning assets, the net interest margin improved. Improvement stemmed primarily from a change in the mix of funding resources and a decrease in the yield paid on interest bearing liabilities.

The average rate earned on interest earning assets was 5.01% for the six month period ending June 30, 2011 compared to 5.40% for the same period in 2010. The main contributing factor was a change in the mix of interest earning assets. Interest bearing accounts at other banks now comprises a larger percentage of interest earning assets. In an effort to increase the Company’s on balance sheet liquidity, the Bank has chosen to leave more on deposit at the FRB. This category is the lowest yielding of all interest earning assets and it comprised 10% of average earning assets for the first half of 2011. It comprised just 7% in the first half of 2010.

Also contributing to the decreased yield on average earning assets is the marked decrease in the yield earned on the investment portfolio. Throughout last year, as securities matured and several securities were sold, the replacement securities purchased yielded lower rates as a result of differences in the rate environment.

In addition to the changes in the mix of earning assets and the declining yield on the investment portfolio, there was a slight two basis point decrease in the yield on loans. There were no differences in the internal prime rate when comparing the same two six month periods of 2010 and 2011. The decrease stemmed from a change in the weighted average rate of the loan portfolio since June 2010. Several of the loan payoffs were on higher rate credits thus changing the rate distribution of the loan portfolio. All things being equal, the Bank usually stands to benefit from a pricing stand point when loans come up for renewal during the year because the Bank is given a new opportunity to evaluate the risk factors within the deal which mostly results in a higher renewal rate.

Fortunately, decreases to the overall yield on interest earning assets were more than offset by rate reductions on the funding side. Management spends a significant amount of time managing the continued improvement in the cost of funds, especially in light of the restrictions placed by the Consent Order. The first notable contributing factor is the increase in non-interest bearing funds. On average there was $15.4 million more in non-interest bearing deposits between the first half of 2011 and the first half of 2010. Additionally, interest expense incurred on rate-bearing liabilities improved by 60 basis points when comparing the first six months of 2011 to that of the similar period of 2010; a majority of the improvement was a 70 basis point reduction in the average rate paid on the time deposit portfolio over the last twelve months. As time deposits are maturing, the Bank has been successful at securing lower rates on new and renewed deposits.

The Bank lowered its rate on repurchase agreements in 2010. As a result there was a 29 basis point reduction when comparing the first six month period of 2011 to that of 2010. There was very little customer impact as the average balance actually increased by $511,000.

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COMMUNITY SHORES BANK CORPORATION

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

Finally, the Company’s average rate paid on notes payable and FHLB advances decreased by 19 basis points between the first half of 2011 and the first half of 2010. The Bank repaid its FHLB advances in 2010 so there were no FHLB advances outstanding in the first half of 2011 compared to $4.7 million outstanding in the first half of 2010 carrying a weighted average rate of 5.50%.

The quarter-to-quarter comparison of consolidated average interest earning assets and interest bearing liabilities and average yield on assets and average cost of liabilities for the second quarter ended June 30, 2011 and 2010 is in the table below.

	Three Months ended June 30,
	2011							2010
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
Assets
Federal funds sold and interest- bearing deposits with banks	$	21,068,803	$	12,736		0.24	%	$	22,200,286	$	13,671		0.25	%
Securities		35,407,386		219,236		2.48			29,982,403		221,225		2.95
Loans (including held for sale and non accrual)		163,317,006		2,534,972		6.21			182,002,676		2,854,592		6.27
		219,793,195		2,766,944		5.04			234,185,365		3,089,488		5.28
Other assets		13,100,894							19,988,151
	$	232,894,089						$	254,173,516
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	176,242,411	$	764,822		1.74	%	$	197,283,505	$	1,126,529		2.28	%
Federal funds purchased, repur- chase agreements and Federal Reserve Bank borrowings		10,012,413		20,115		0.80			8,858,465		20,757		0.94
Subordinated Debentures, notes payable and FHLB advances		9,500,000		104,161		4.39			14,000,000		164,030		4.69
		195,754,824		889,098		1.82			220,141,970		1,311,316		2.38
Non-interest-bearing deposits		35,955,251							24,110,782
Other liabilities		1,073,747							722,942
Shareholders’ Equity		110,267							9,197,822
	$	232,894,089						$	254,173,516
Net interest income (tax equivalent basis)				1,877,846							1,778,172
Net interest spread on earning assets (tax equivalent basis)						3.22	%						2.90	%
Net interest margin on earning assets (tax equivalent basis)						3.42	%						3.04	%
Average interest-earning assets to average interest- bearing liabilities						112.28	%						106.38	%
Tax equivalent adjustment				12,428							13,973
Net interest income			$	1,865,418						$	1,764,199

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COMMUNITY SHORES BANK CORPORATION

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

Similar to the comparison of the year to date net interest income results above; there was an increase in tax equivalent net interest income between the second quarter results of 2011 and that of 2010. Tax equivalent net interest income improved by $100,000. Decreases to the blended rate earned on the average earning assets fell by 24 basis points but was more than offset by the 56 basis point improvement in the Company’s average cost of funds. The tax equivalent net interest spread rose by 32 basis points between the second quarter of 2010 and the similar period in 2011. The net interest margin on earning assets was 3.42% for the second quarter of 2011; an improvement of 38 basis points compared to the second quarter of 2010. The second half of 2011 should continue to reflect improvements in the net interest margin as time deposits mature and go off the balance sheet or reprice to current market rates.

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

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

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COMMUNITY SHORES BANK CORPORATION

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

Details of the repricing gap at June 30, 2011 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	$	11,243,039		$	0		$	0		$	0	$	11,243,039
Securities (including FHLB stock)		4,716,528			4,270,391			23,109,073			3,580,191		35,676,183
Loans held for sale		116,518			22,323			89,222			2,836,495		3,064,558
Loans		64,541,589			22,754,467			54,039,796			18,179,151		159,515,003
		80,617,674			27,047,181			77,238,091			24,595,837		209,498,783
Interest-bearing liabilities
Savings and checking		50,730,976			0			0			0		50,730,976
Time deposits <$100,000		8,314,245			23,425,006			43,554,010			0		75,293,261
Time deposits >$100,000		15,028,853			24,408,410			2,806,224			0		42,243,487
Repurchase agreements and Federal funds purchased		10,708,966			0			0			0		10,708,966
Subordinated debt and Federal Home Loan Bank advances		9,500,000			0			0			0		9,500,000
		94,283,040			47,833,416			46,360,234			0		188,476,690
Net asset (liability) repricing gap	$	(13,665,366	)	$	(20,786,235	)	$	30,877,857		$	24,595,837	$	21,022,093
Cumulative net asset (liability) repricing gap	$	(13,665,366	)	$	(34,451,601	)	$	(3,573,744	)	$	21,022,093

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. If the rate environment remains flat, a negative repricing gap should be helpful for further reduction to the Company’s overall interest expense and potential increases to net interest income and margin. Conversely, if rates begin to rise, the negative repricing position implies that more rate bearing liabilities could reprice compared to earning assets which would likely decrease net interest income outcomes. The interest rate sensitivity table simply illustrates what the Company is contractually able to change in certain time frames.

The provision for loan losses for the first six months of 2011 was $1.2 million compared to $1.4 million for first half of 2010. The second quarter provision for loan losses was $498,000 for 2011 and $833,000 for 2010. The provision expenses are associated with changes in historical loss calculations, economic condition as well as loan charge offs and downgrades. A methodical assessment of these factors generates the reserves required for the risk in the Bank’s loan portfolio. Over the past few years, general allocations to the loan loss reserve were increasing as a result of the weakening economy and the level of emphasis being placed on recent loss history. Currently, general allocations are relatively stable as a result of declining charge off activity. If charge off activity continues to decline and the economy begins to improve, general allocations may begin to go down.

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COMMUNITY SHORES BANK CORPORATION

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

Specific allocations to the loan loss reserve have increased since year-end 2010 but have decreased since June 30, 2010. At June 30, 2011, the allowance for loan loss included specific allocations of $2.4 million. At December 31, 2010 specific allocations were $2.2 million and at June 30, 2010 were $3.4 million. Since specific credit allocations are based on current information and events related to each specifically identified borrower, it is probable that the total of specific allocations could increase or decrease during any period based on the outcome of the analysis done within the Bank’s Credit Administration Department.

The allowance for loan losses is an estimate. Management believes that the allowance level is adequate and justified based on the factors discussed earlier (see Financial Condition). Management will continue to review the allowance with the intent of maintaining it at an appropriate level. The provision may be increased or decreased in the future as management continues to monitor the loan portfolio, actual loan loss experience and the environmental factors related to lending and collateral.

Non-interest income recorded in the first six months of 2011 was $879,000 compared to $850,000 recorded for the similar period in 2010. There were two primary differences between the two periods. Included in 2010’s first half total were security gains of $80,000 from the sale of a majority of the Bank’s municipal portfolio. There were no recorded securities gains included in the first half of 2011. Offsetting the differences in the gains on securities sales was an increase of $64,000 in gains on the sale of loans. In the first quarter of 2011, the Company sold the guaranteed portion of three SBA loans which resulted in a gain of $124,000. Offsetting this was a $47,000 decrease in residential mortgage gains in the first six months of 2011 compared to the similar period in 2010.

Non-interest income for the second quarter of 2011 was $360,000 compared to $366,000 of non-interest income in the second quarter of 2010. Decreases in gains on the sale of residential mortgage loans between the two periods was mostly offset by rental income received from tenants leasing space at the Bank’s location on Harvey Street in Muskegon.

Non-interest expenses for the first six months of 2011 were $4.7 million. Non-interest expenses for the first six months of 2010 were $4.6 million. Increases in FDIC insurance premiums and regulatory exam fees were partially offset by decreases in the Company’s professional expenses and its collection expenses on troubled assets. The FDIC premiums and regulatory exam fees as well as collection expenses are included in the other expense category of non-interest expenses.

Professional expenses were $180,000 in the first six months of 2011. In the first half of 2010 professional expenses were $241,000; a decrease of $61,000 between the two period ends. Legal expenses are included in the Company’s total professional expense. Last year the Bank consulted with several lawyers as the details of the Consent order were being finalized. This drove legal expenses to be temporarily inflated. Legal expenses were $50,000 less in the first half of 2011 compared to the similar period in 2010.

Other non-interest expenses in the first half of 2011 were $1.2 million compared to $1.0 million in the first half of 2010. The increase of $154,000 was mostly caused by an increase in FDIC insurance premiums and regulatory examination fees and a decrease in loan collection expenses.

FDIC insurance premiums and regulatory exam fees were $567,000 in the first half of 2011 and were $334,000 for the similar period of 2010. The 70% increase in FDIC insurance premiums between the two period ends was due to the fact that the Bank was in a higher FDIC risk category due to its deteriorating capital position and its

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COMMUNITY SHORES BANK CORPORATION

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

Consent Order. Somewhat offsetting this increase was a decline in expenses related to troubled assets. The decrease is directly correlated to the reduction in the Bank’s portfolio of foreclosed assets. There was a $78,000 reduction in collection expenses between the first half of 2010 and the first half of 2011.

Non-interest expenses for the second quarter of 2011 were $2.3 million. Non-interest expenses for the second quarter of 2010 were $2.5 million. Decreases in foreclosed asset impairment charges and collection expenses on troubled assets were somewhat offset by increases in FDIC insurance premiums and regulatory exam fees. The FDIC premiums and regulatory exam fees as well as collection expenses are included in the other expense category of non-interest expenses.

There were foreclosed asset impairment charges of $225,000 in the second quarter of 2011. These results compare to $360,000 in the second quarter of 2010. During the time that foreclosed real properties are waiting to be sold, there will be occasions that the Bank will need to reevaluate the individual market value of each property. If there is evidence that the fair value has declined since the last evaluation, the Bank will incur an impairment charge in order to properly reflect the fair value of the asset at the end of the reporting period. Although impairment charges continue to occur, the total decreased when comparing the second quarter of 2010 and the similar period in 2011. The decrease is caused by two things, the Bank’s portfolio of foreclosed real property is declining and the values of the properties within the portfolio appear to be stabilizing for the time being. Given that valuations are indirectly tied to the general economic environment, it is uncertain whether impairment charges will continue to decline or begin increasing. At June 30, 2011, there were 28 foreclosed assets totaling $3.3 million.

Other non-interest expenses in the second quarter of 2011 were $491,000 compared to $552,000 in the second quarter of 2010. There was a $61,000 decrease between the two periods. There were two main differences. Expenses related to troubled assets were $110,000 less in the second quarter of 2011 compared to the same period in 2010. This decrease was offset by an increase in FDIC insurance premiums and regulatory exam fees of $45,000. The FDIC premiums and regulatory exam fees totaled $220,000 for the second quarter of 2011 and $175,000 for the second quarter of 2010.

There was no income tax expense in either the first quarter of 2011 or that of 2010.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2011. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective as of June 30, 2011. There have been no significant changes in the internal controls over financial reporting during the quarter ended June 30, 2011, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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COMMUNITY SHORES BANK CORPORATION

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

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 affect on their financial condition, either individually or in the aggregate.

ITEM 1A. RISK FACTORS

Not applicable for smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company made no unregistered sale of equity securities, and did not purchase any of its equity securities, during the quarter ended June 30, 2011.

Holders of Company common stock are entitled to receive cash dividends to the extent that they are declared from time to time by the Company's Board of Directors. To date, the Company's Board of Directors has never declared a cash dividend. The Company may only pay cash dividends out of funds that are legally available for that purpose. The Company is a holding company and substantially all of its assets are held by its subsidiaries. The Company's ability to pay cash dividends to its shareholders depends primarily on the Bank's ability to pay cash dividends to the Company. Cash dividend payments and extensions of credit to the Company from the Bank are subject to legal and regulatory limitations, generally based on capital levels and current and retained earnings, imposed by law and regulatory agencies with authority over the Bank. The ability of the Bank to pay cash dividends is also subject to its profitability, financial condition, capital expenditures and other cash flow requirements.

Under the terms of the subordinated debentures that the Company issued to the Trust, the Company is precluded from paying cash dividends on the Company's common stock if an event of default has occurred and is continuing under the subordinated debentures, or if the Company has exercised its right to defer payments of interest on the subordinated debentures, until the deferral ends. In May of 2010, the Company gave notice that it was deferring the regularly scheduled quarterly interest payments on the subordinated debentures beginning with the quarterly interest payment that was scheduled to be paid on June 30, 2010. So until the deferral ends, the terms of the subordinated debentures preclude the Company from paying any dividends on the common stock. If the Company had any preferred stock outstanding, it would similarly be precluded from paying any dividend on the preferred stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. RESERVED

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COMMUNITY SHORES BANK CORPORATION

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

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBIT NO.	EXHIBIT DESCRIPTION

3.1	Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company’s June 30, 2004 Form 10-QSB (SEC file number 333-63769).
3.2	Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s Form 8-K filed July 5, 2006 (SEC file number 000-51166).
10.1	Purchase Agreement entered into effective May 18, 2011, between Community Shores Bank, as Seller, and Velmeir Acquisition Services, LLC as Buyer, relating to vacant land in the County of Muskegon, is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed May 24, 2011 (SEC file no. 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.
100	The following financial information from Community Shores Bank Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Consolidated Statement of Changes of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flow, and (v) the Notes to Consolidated Financial Statements*

_______________

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

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

	COMMUNITY SHORES BANK CORPORATION


August 15, 2011	By:	/s/ Heather D. Brolick
Date	Heather D. Brolick
	President and Chief Executive Officer
	(principal executive officer)


August 15, 2011	By:	/s/ Tracey A. Welsh
Date	Tracey A. Welsh
	Senior Vice President, Chief Financial Officer and Treasurer
	(principal financial and accounting officer)

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EXHIBIT INDEX

EXHIBIT NO.	EXHIBIT DESCRIPTION

3.1	Articles of Incorporation are incorporated by reference to exhibit 3.1 of the Company’s June 30, 2004 Form 10-QSB (SEC file number 333-63769).
3.2	Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s Form 8-K filed July 5, 2006 (SEC file number 000-51166).
10.1	Purchase Agreement entered into effective May 18, 2011, between Community Shores Bank, as Seller, and Velmeir Acquisition Services, LLC as Buyer, relating to vacant land in the County of Muskegon, is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed May 24, 2011 (SEC file no. 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.
100	The following financial information from Community Shores Bank Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Consolidated Statement of Changes of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flow, and (v) the Notes to Consolidated Financial Statements*

_______________