10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

or

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

For the transition period from       to   ____________________________________________

Commission File Number: 000-51166

Community Shores Bank Corporation

(Exact name of registration as specified in its charter)

Michigan	38-3423227
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1030 W. Norton Avenue, Muskegon, MI	49441
(Address of principal executive offices)	(Zip Code)

(231) 780-1800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No   X  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   No   X  

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer ___                                                                              Accelerated filer ___

Non-accelerated filer ___                                                                                Smaller reporting company _X_

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

The aggregate value of the common equity held by non-affiliates (persons other than directors and executive officers) of the registrant, computed by reference to the closing price of the common stock, and number of shares held, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $750,000.

As of March 18, 2012, there were issued and outstanding 1,468,800 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Parts I and II Portions of the 2011 annual report to shareholders.

PART I

ITEM 1.  BUSINESS

General

Community Shores Bank Corporation (“the Company"), organized in 1998, is a Michigan corporation and a bank holding company. The Company owns all of the common stock of Community Shores Bank (the "Bank").  The Bank was organized and commenced operations in January, 1999 as a Michigan chartered bank with depository accounts insured by the FDIC to the extent permitted by law.  The Bank provides a full range of commercial and consumer banking services primarily in the communities of Muskegon County and Northern Ottawa County.  The Bank's services include checking and savings accounts, certificates of deposit, electronic banking services, safe deposit boxes, courier service, and loans for commercial and consumer purposes.

Community Shores Mortgage Company (the “Mortgage Company”) was incorporated on December 13, 2001. The Mortgage Company, a wholly owned subsidiary of the Bank, can originate both commercial and residential real estate loans. Most fixed rate residential real estate loans originated by the Mortgage Company are sold to a third party. Commercial and residential real estate loans that are held in the Mortgage Company’s portfolio are serviced by the Bank pursuant to a servicing agreement.

In October of 2010, the Mortgage Company created a wholly-owned subsidiary named Berryfield Development, LLC (“Berryfield”). The entity’s sole purpose is to oversee the development and sale of vacant lots that have been foreclosed on by the Mortgage Company.

On September 27, 2002, pursuant to Title I of the Gramm-Leach-Bliley Act, the Company received regulatory approval to become a financial holding company. After becoming a financial holding company the Company created Community Shores Financial Services, Inc. (“CS Financial Services”). Currently the only source of revenue that CS Financial Services receives is referral fee income from a local insurance agency, Lakeshore Employee Benefits, formerly Lead Financial. Lakeshore Employee Benefits offers, among other things, employer sponsored benefit plans. CS Financial Services has the opportunity to earn a referral fee for each sale of employer sponsored benefits that is transacted by Lakeshore Employee Benefits as a result of a referral made by CS Financial Services. On April 16, 2009, the Company withdrew its election to be a financial holding company. The election was acknowledged by the Federal Reserve Bank of Chicago (“FRB”). The passive income derived from CS Financial Services affiliation with Lakeshore Employee Benefits is unaffected by this change.

In December of 2004, the Company formed Community Shores Capital Trust I, a Delaware business trust (“the Trust”). The Trust is administered by a Delaware trust company, and two individual administrative trustees who are employees and officers of the Company. The Trust was established for the purpose of issuing and selling its preferred securities and common securities and used the proceeds from the sales of those securities to acquire subordinated debentures issued by the Company. A majority of the net proceeds received by the Company was used to pay down the outstanding balance on the Company’s line of credit. The remaining proceeds were used to contribute capital to the Bank as well as support the general operating expenses of the Company including the debt service on the Company’s subordinated debentures.

The Company's main office is located at 1030 W. Norton Avenue, Muskegon, Michigan, 49441 and its telephone number is (231) 780-1800.

2

Recent Developments

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 has been deemed undercapitalized since December 31, 2010 according to regulatory capital standards. At that time, the Bank had a total risk-based capital ratio of 7.06%. The loss recorded by the Bank in 2011 reduced the total risk-based capital ratio to 6.40% at December 31, 2011. The Bank remains undercapitalized 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 these requirements within the required 90-day period and remains out of compliance with the Consent Order as of December 31, 2011.

The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has negative equity and 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 December 31, 2011, was approximately $34,000. Once the Company is out of cash, it is anticipated that it will no longer have the ability to fulfill its public document filing requirements since doing so requires the assistance of a third party vendor.

3

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 six contractual quarterly interest payments. The total interest due to Fifth Third at year-end 2010 was $153,000. The Company continues to accrue interest on the term loan and at December 31, 2011, the total interest due Fifth Third was $458,000. 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.

On August 17, 2011, the Bank was issued a Supervisory Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category at December 31, 2010, its failure to submit a capital restoration plan that satisfies the requirements stipulated in the FDIC Rules and Regulations, and the continued deterioration of the Bank. The Directive stipulated that the Bank be restored to an “adequately capitalized” capital category within 60 days of the issuance of the Directive. During the 60 days, the board made efforts to secure funding and comply with the Directive but was not successful. As such, the Bank was not in compliance with the Directive at the end of 60 days and remains out of compliance. The board informed the FDIC in a letter dated October 14, 2011 that it was unable to comply with the Directive. There has been no further communications with the FDIC regarding the Directive. The board’s efforts to garner capital for the Bank are continuing.

Failure to comply with the provisions of the Consent Order, the Written Agreement or the Directive may subject the Bank to further regulatory enforcement action.

The Company’s net losses, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Directive and the Consent Order, and the provisions of the Written Agreement raise substantial doubt about the Company’s ability to continue as a going concern. As a result of this substantial doubt, our auditors added an explanatory paragraph to their opinion on the Company’s December 31, 2011 and 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.

Products and Services

The Bank offers a broad range of deposit services, including checking accounts, savings accounts and time deposits of various types.  Transaction accounts and time certificates are tailored to the principal market area at rates competitive with those offered in the area.  Electronic banking services such as ACH and online bill pay are offered to both personal and business customers. All qualified deposit accounts are insured by the FDIC up to the maximum amount permitted by law.  The Bank solicits these accounts from individuals, businesses, schools, associations, churches, nonprofit organizations, financial institutions and government authorities.  The Bank also uses alternative funding sources as needed, including advances from the Federal Home Loan Bank and obtaining deposits through an internet deposit listing service. Additionally, the Bank makes available mutual funds and annuities, which are not FDIC insured, through an alliance with Sorrento Pacific. Discount brokerage services are made available to our customers through Sorrento as well. The Bank receives referral fees for customers that open a brokerage account and conduct trades.

Real Estate Loans.  The Bank originates residential mortgage loans, which are generally long-term with either fixed or variable interest rates.  The general operating policy, which is subject to review by management due to changing market and economic conditions and other factors, is to sell a majority of the fixed rate residential real estate loans originated.  Generally loan sales are on a servicing released basis in the secondary market, regardless of term or product.  The Bank, based on its lending guidelines, may periodically elect to underwrite and retain certain mortgages in its portfolio. The Bank also offers fixed rate home equity loans and variable rate home equity lines of credit, which are usually retained in its portfolio.

4

The retention of variable rate loans in the Bank's loan portfolio helps to reduce the Bank's exposure to fluctuations in interest rates.  However, such loans generally pose credit risks different from the risks inherent in fixed rate loans, primarily because as interest rates rise, the underlying payments from the borrowers rise, thereby increasing the potential for default.

Personal Loans and Lines of Credit.  The Bank makes personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles,home improvements and personal investments.  The Bank's current policy is to retain substantially all of these loans in its portfolio.

Commercial and Commercial Real Estate Loans.  Commercial loans are made primarily to small and mid-sized businesses.  These loans are and will be both secured and unsecured and are made available for general operating purposes, acquisition of fixed assets including real estate, purchases of equipment and machinery, financing of inventory and accounts receivable,as well as any other purposes considered appropriate. From March 2002 through December 2007, substantially all Commercial Real Estate Loan originations were executed by the Mortgage Company; however both the Bank and the Mortgage Company have a portfolio of Commercial Real Estate loans. Both entities generally look to a borrower's business operations as the principal source of repayment, but will also receive, when appropriate, liens on real estate, security interests in inventory, accounts receivable and other personal property or personal guarantees.

The Bank has established relationships with correspondent banks and other independent financial institutions to provide other services requested by the Bank’s customers, and loan participations where the requested loan amounts exceed the Bank's policies or legal lending limits.

Competition

The Company’s primary market area is Muskegon County and Northern Ottawa County.  Northern Ottawa County primarily consists of the cities of Grand Haven, Ferrysburg, Spring Lake and the townships surrounding these areas.  There are a number of banks, thrifts and credit union offices located in the Company’s market area.  Most are branches of larger financial institutions with the exception of some credit unions.  Competition with the Company also comes from other areas such as finance companies, insurance companies, mortgage companies, brokerage firms and other providers of financial services.  Most of the Company’s competitors have been in business a number of years longer than the Company and, for the most part, have established customer bases.  The Company competes with these older institutions, through its ability to provide quality customer service, along with competitive products and services.

Effect of Government Monetary Policies

The earnings of the Company are affected by domestic economic conditions and the monetary and fiscal policies of the United States government, its agencies, and the Federal Reserve Board.  The Federal Reserve Board’s monetary policies have had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to, among other things, curb inflation, maintain employment, and mitigate economic recession.  The policies of the Federal Reserve Board have a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

5

Regulation and Supervision

As a bank holding company under the Bank Holding Company Act, the Company is required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require.  The Company is also subject to examination by the Federal Reserve Board.

The Bank Holding Company Act limits the activities of bank holding companies that have not qualified as financial holding companies to banking and the management of banking organizations, and to certain non-banking activities.  These non-banking activities include those activities that the Federal Reserve Board found, by order or regulation as of the day prior to enactment of the Gramm-Leach-Bliley Act, to be so closely related to banking as to be a proper incident to banking.  These non-banking activities include, among other things: operating a mortgage company, finance company, factoring company; performing certain data processing operations; providing certain investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, nonoperating basis; and providing discount securities brokerage services for customers.  With the exception of the activities of the Mortgage Company and the third party arrangements with Lakeshore Employee Benefits and Sorrento Pacific discussed above, neither the Company nor any of its subsidiaries engages in any of the non-banking activities listed above.

In September, 2002, the Company's election to become a financial holding company, as permitted by the Bank Holding Company Act, as amended by Title I of the Gramm-Leach-Bliley Act, was accepted by the Federal Reserve Board.  In order to continue as a financial holding company, the Company and the Bank must satisfy statutory requirements regarding capitalization, management, and compliance with the Community Reinvestment Act.  As a financial holding company, the Company is permitted to engage in a broader range of activities than are permitted to bank holding companies which have not qualified as financial holding companies. Those expanded activities include any activity which the Federal Reserve Board (in certain instances in consultation with the Department of the Treasury) determines, by order or regulation, to be financial in nature or incidental to such financial activity, or to be complementary to a financial activity and not to pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  Such expanded activities include, among others: insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability or death, or issuing annuities, and acting as principal, agent, or broker for such purposes; providing financial, investment, or economic advisory services, including advising a mutual fund; and underwriting, dealing in, or making a market in securities.  On April 16, 2009, the Company withdrew its election to be a financial holding company. The election was acknowledged by the Federal Reserve Bank. The passive income derived from the above activities is unaffected by this change.

The Bank is subject to restrictions imposed by federal law and regulation.  Among other things, these restrictions apply to any extension of credit to the Company or its other subsidiaries, to investments in stock or other securities issued by the Company, to the taking of such stock or securities as collateral for loans to any borrower, and to acquisitions of assets or services from, and sales of certain types of assets to, the Company or its other subsidiaries.  Federal law restricts the ability of the Company or its other subsidiaries to borrow from the Bank by limiting the aggregate amount that may be borrowed and by requiring that all the loans be secured in designated amounts by specified forms of collateral.

6

With respect to the acquisition of banking organizations, the Company is generally required to obtain the prior approval of the Federal Reserve Board before it can acquire all or substantially all of the assets of any bank, or acquire ownership or control of any voting shares of any bank or bank holding company, if, after the acquisition, the Company would own or control more than 5% of the voting shares of the bank or bank holding company.  Acquisitions of banking organizations across state lines are subject to certain restrictions imposed by Federal and state law and regulations.

Loan Policy

The Bank makes loans primarily to individuals and businesses located within the Bank's market area.  The loan policy of the Bank states that the function of the lending operation is to provide a means for the investment of funds at a profitable rate of return with an acceptable degree of risk, and to meet the credit needs of qualified businesses and individuals who become customers of the Bank.  The Board of Directors of the Bank recognizes that, in the normal business of lending, some losses on loans will be inevitable.  These losses will be carefully monitored and evaluated and are recognized as a normal cost of conducting business. The Bank's loan policy anticipates that priorities in extending loans will change from time to time as interest rates, market conditions and competitive factors change.  The policy is designed to assist the Bank in managing the business risk involved in extending credit.  It sets forth guidelines on a nondiscriminatory basis for lending in accordance with applicable laws and regulations.  The policy describes criteria for evaluating a borrower's ability to support debt, including character of the borrower, evidence of financial responsibility, knowledge of collateral type, value and loan to value ratio, terms of repayment, source of repayment, payment history, and economic conditions.

The Bank provides oversight and monitoring of lending practices and loan portfolio quality through the use of an Officers Loan Committee (the "Loan Committee").  The Loan Committee members include all commercial lenders, the Commercial Loan Department Head, the Credit Administrator, the President, and other designated credit personnel.  The Loan Committee is presently permitted to approve requests for loans in an amount not exceeding $1,500,000.  The Loan Committee may recommend that requests exceeding this amount be approved by the Executive Loan Committee which consists of senior management and at least three Board members. The Executive Loan Committee has a lending authority of $2,750,000.  Loan requests in excess of the Executive Loan Committee limit require the approval of the Board of Directors.

The Board of Directors has the maximum lending authority permitted by law.  However, generally, the loan policy establishes an "in house" limit slightly lower than the actual legal lending limit.  The Bank's “in house” limit, as of December 31, 2011, was approximately $4,000,000, subject to a higher legal lending limit of approximately $5,321,000 in specific cases with approval by two-thirds of the Bank's Board of Directors.  Under Michigan banking law, these amounts would change if the Bank's capital and surplus changed.

In addition to the lending authority described above, the Bank's Board of Directors delegates significant authority to officers of the Bank. The Board believes this empowerment enables the Bank to be more responsive to its customers.  The President of the Bank and the Commercial Loan Department Head each have been delegated individual authority, where they deem it appropriate, to approve loans up to $1,000,000.  Together, their delegated authority, where they deem it appropriate, is $2,000,000; increasing to $2,750,000 with the addition of the Credit Administrator’s authorization. Other officers have been delegated individual authority to approve loans of lesser amounts, where they deem it appropriate, without approval by the Loan Committee.

The loan policy outlines the amount of funds that may be loaned against specific types of collateral.  The loan to value ratios for first mortgages on residences are expected to comply with the guidelines of secondary market investors.  First mortgages held within the Bank's portfolio are expected to mirror secondary market requirements.  In those instances where loan to value ratio exceeds 80%, it is intended that private mortgage insurance will be obtained to minimize the Bank's risk. For certain loans secured by real estate, an appraisal of the property offered as collateral, by a state licensed or certified independent appraiser, will be required.

7

The loan policy also provides general guidelines as to collateral, provides for environmental policy review, contains specific limitations with respect to loans to employees, executive officers and directors, provides for problem loan identification, establishes a policy for the maintenance of a loan loss reserve, provides for loan reviews and sets forth policies for mortgage lending and other matters relating to the Bank's lending practices.

Lending Activity

Commercial Loans.  The Bank's commercial lending group originates commercial loans primarily in the Western Michigan Counties of Muskegon and Northern Ottawa. Commercial loans are originated by experienced lenders under the leadership of the Commercial Loan Department Head. Loans are originated for general business purposes, including working capital, accounts receivable financing, machinery and equipment acquisition and commercial real estate financing, including new construction and land development.

Working capital loans that are structured as a line of credit are reviewed periodically in connection with the borrower's year end financial reporting.  These loans generally are secured by assets of the borrower and have an interest rate tied to the prime rate.  Loans for machinery and equipment purposes typically have a maturity of five to seven years and are fully amortizing.  Commercial real estate loans may have an interest rate that is fixed to maturity or floats with a spread to the prime rate or a U.S. Treasury Index.

The Bank evaluates many aspects of a commercial loan transaction in order to minimize credit and interest rate risk.  Underwriting commercial loans requires an assessment of management, products, markets, cash flow, capital, income and collateral.  The analysis includes a review of historical and projected financial results.  On certain transactions, where real estate is the primary collateral, and in some cases where equipment is the primary collateral, appraisals are obtained from licensed or certified appraisers.  In certain situations, for creditworthy customers, the Bank may accept title reports instead of requiring lenders' policies of title insurance.

Commercial real estate lending involves more risk than residential lending, because loan balances are greater and repayment is dependent upon the borrower's operations.  The Bank attempts to minimize risk associated with these transactions by generally limiting its exposure to non-owner operated properties of well known customers or new customers with an established profitable history.  In certain cases, risk may be further reduced by (i) limiting the amount of credit to any one borrower to an amount less than the Bank's legal lending limit, and (ii) avoiding certain types of commercial real estate financing.

Single Family Residential Real Estate Loans. The Bank originates first mortgage residential real estate loans in its market area according to secondary market underwriting standards.  These loans are likely to provide borrowers with a fixed or adjustable interest rate with terms up to 30 years.  A majority of the single family residential real estate loans are expected to be sold on a servicing released basis in the secondary market with all interest rate risk and credit risk passed to the purchaser.  The Bank may periodically elect to underwrite certain residential real estate loans to be held in its own loan portfolio.

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Consumer Loans.  The Bank originates consumer loans for a variety of personal financial needs.  Consumer loans are likely to include fixed home equity and equity lines of credit, new and used automobile loans, boat loans, personal unsecured lines of credit, credit cards (through third-party providers to minimize risk) and overdraft protection for checking account customers. Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and, except for home equity lines of credit, usually will involve greater credit risk due to the type and nature of the collateral securing the debt.  Strong emphasis is placed on the amount of the down payment, credit quality, employment stability, monthly income and appropriate insurance coverage.

Consumer loans are generally repaid on a monthly basis with the source of repayment tied to the borrower's periodic income.  It is recognized that consumer loan delinquency and losses are dependent on the borrower's continuing financial stability.  Job loss, illness and personal bankruptcy may adversely affect repayment.  In many cases, repossessed collateral (on a secured consumer loan) may not be sufficient to satisfy the outstanding loan balance.  This is a common occurrence due to depreciation of the underlying collateral. The Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk associated with such loans.  Consumer loans are expected to be an important componentin the Bank's efforts to meet the credit needs of the communities and customers that it serves.

Loan Portfolio Quality

The Bank hires an independent firm to help management monitor and validate their ongoing assessment of the credit quality of the Bank’s loan portfolio. The independent firm accomplishes this through a sampling of the loan portfolios for both commercial and retail loans.  The independent firm also evaluates the loan underwriting, loan approval, loan monitoring, loan documentation, and problem loan administration practices of the Bank.  Loan reviews are performed twice a year. In 2011, they occurred in July and October. The Bank is scheduled to undergo its next review in June of 2012.

The Bank has a comprehensive loan grading system for commercial and commercial real estate loans.  Administered as part of the loan review program, all commercial and commercial real estate loans are graded on a nine grade rating system utilizing a standardized grade paradigm that analyzes several critical factors, such as cash flow, management and collateral coverage. The loans are graded at inception, renewal and at various other intervals.  All commercial and commercial real estate loan relationships exceeding $500,000 are formally reviewed at least annually.  Watch list credits exceeding $100,000 are formally reviewed quarterly.

Investments

Bank Holding Company Investments.  The principal investments of the Company are the investments in the common stock of the Bank and the common securities of the Trust.  Other funds of the Company may be invested from time to time in various debt instruments.

As a bank holding company, the Company is also permitted to make portfolio investments in equity securities and to make equity investments in subsidiaries engaged in a variety of non-banking activities.  Among the permitted non-banking activities are real estate-related activities such as community development, real estate appraisals, arranging equity financing for commercial real estate, and owning and operating real estate used substantially by the Bank or acquired for its future use.  The Company has no plans at this time to make directly any of these equity investments at the bank holding company level.  The Company's Board of Directors may, however, alter the investment policy at any time without shareholder approval.

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The Bank’s Investments.  The Bank may invest its funds in a wide variety of debt instruments and may participate in the federal funds market with other depository institutions.  Subject to certain exceptions, the Bank is prohibited from investing in equity securities.  Among the equity investments permitted for the Bank under various conditions and subject in some instances to amount limitations, are shares of a subsidiary insurance agency, mortgage company (such as the Mortgage Company), real estate company, or Michigan business and industrial development company.  Under another such exception, in certain circumstances and with prior notice to or approval of the FDIC, the Bank could invest up to 10% of its total assets in the equity securities of a subsidiary corporation engaged in the acquisition and development of real property for sale, or the improvement of real property by construction or rehabilitation of residential or commercial units for sale or lease.  Real estate acquired by the Bank in satisfaction of or foreclosure upon loans may be held by the Bank for specified periods.  The Bank is also permitted to invest in such real estate as is necessary for the convenient transaction of its business.  The Bank’s Board of Directors may alter the Bank’s investment policy without shareholder approval at any time.

Environmental Matters

The Company does not believe that existing environmental regulations will have any material effect upon the capital expenditures, earnings and competitive position of the Company.

Employees

As of December 31, 2011, the Bank had 55 full-time and 23 part-time employees. No area of the Bank is represented by collective bargaining agents.

Selected Statistical Data and Return on Equity and Assets

Selected statistical data for the Company is shown for 2011, 2010 and 2009.

Consolidated Results of Operations:
	2011			2010			2009
Interest Income		10,833,160			11,984,054			13,284,651
Interest Expense		3,336,766			5,032,743			6,498,815
Net Interest Income		7,496,394			6,951,311			6,785,836
Provision for loan losses		2,483,640			6,024,775			2,607,643
Non interest income		1,921,431			1,568,780			1,971,444
Non interest expense		9,505,263			11,388,661			10,993,190
Loss before income tax expense		(2,571,078	)		(8,893,345	)		(4,843,553	)
Income tax (benefit) expense		(103,669	)		(10,618	)		118,826
Net loss		(2,467,409	)		(8,882,727	)		(4,962,379	)

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Consolidated Balance Sheet Data:
Total assets	$	208,651,301		$	237,945,497	$	231,430,059
Cash and cash equivalents		8,919,568			23,639,873		2,824,088
Securities		34,572,103			36,503,903		27,491,447
Loans held for sale		5,534,983			1,263,263		1,070,692
Gross loans		149,658,931			165,243,881		183,247,827
Allowance for loan losses		5,299,454			4,791,907		3,782,132
Other assets		15,265,170			16,086,484		20,578,138
Deposits		191,545,236			219,263,177		198,576,609
Federal funds purchased  and repurchase agreements		7,814,745			7,460,795		7,000,327
Federal Home Loan Bank advances		0			0		6,000,000
Notes payable		5,000,000			5,000,000		5,000,000
Subordinated debentures		4,500,000			4,500,000		4,500,000
Other		1,211,702			875,738		613,132
Shareholders’ equity		(1,420,382	)		845,787		9,739,991

Consolidated Financial Ratios:
Return on average assets		(1.07	) %		(3.57	) %		(1.97	) %
Return on average shareholders’ equity		(6992.01	)		(109.72	)		(36.35	)
Average equity to average assets		0.02			3.25			5.42
Dividend payout ratio		N/A			N/A			N/A
Non performing loans to total loans and leases		4.50			4.99			4.69
Tier 1 leverage capital ratio		3.79			4.25			7.79
Tier 1 leverage risk-based capital ratio		5.12			5.79			9.15
Total risk-based capital ratio		6.40			7.06			10.41
Per Share Data:
Net Loss:
Basic	$	(1.68	)	$	(6.05	)	$	(3.38	)
Diluted		(1.68	)		(6.05	)		(3.38	)
Book value at end of period		(0.97	)		0.58			6.63
Dividends declared		N/A			N/A			N/A
Weighted average shares outstanding		1,468,800			1,468,800			1,468,800
Diluted average shares outstanding		1,468,800			1,468,800			1,468,800

11

Net Interest Earnings

Years Ended December 31:	2011							2010							2009
	Average		Interest		Average			Average		Interest		Average			Average		Interest		Average
	Balance				Yield/Rate			Balance				Yield/Rate			Balance				Yield/Rate
Assets
Federal funds sold and interest-bearing deposits with banks	$	19,459,188	$	47,240		0.24	%	$	20,301,004	$	49,882		0.25	%	$	8,883,563	$	34,022		0.38	%
Securities1,2		35,734,951		849,725		2.38			31,926,359		927,582		2.91			28,101,164		1,095,665		3.90
Loans3		161,885,478		9,985,906		6.17			177,551,516		11,075,774		6.24			193,354,546		12,297,691		6.36
		217,079,617		10,882,871		5.01			229,778,879		12,053,238		5.25			230,339,273		13,427,378		5.83
Other assets		13,175,286							19,185,648							21,829,189
	$	230,254,903						$	248,964,527						$	252,168,462
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	173,966,362	$	2,845,254		1.64	%	$	194,013,849	$	4,304,290		2.22	%	$	193,243,953	$	5,749,296		2.98	%
Federal funds purchased and repurchase agreements		9,626,384		73,269		0.76			8,913,430		75,837		0.85			7,640,761		59,065		0.77
Subordinated debentures, notes Payable and FHLB Advances		9,500,000		418,243		4.40			12,142,466		652,616		5.37			15,228,219		690,454		4.53
		193,092,746		3,336,766		1.73			215,069,745		5,032,743		2.34			216,112,933		6,498,815		3.01
Noninterest-bearing deposits		36,100,143							25,027,916							21,694,511
Other liabilities		1,026,725							770,814							703,732
Shareholders’ Equity		35,289							8,096,052							13,657,286
	$	230,254,903						$	248,964,527						$	252,168,462
Net interest income (tax equivalent basis)				7,546,105							7,020,495							6,928,563
Net interest spread on earning assets (tax equivalent basis)						3.28	%						2.91	%						2.82	%
Net interest margin on earning assets (tax equivalent basis)						3.48	%						3.06	%						3.01	%
Average interest-earning assets to average interest-bearing liabilities						112.42	%						106.84	%						106.58	%
Tax equivalent adjustment				49,711							69,184							142,727
Net Interest Income			$	7,496,394						$	6,951,311						$	6,785,836

1 Includes Federal Home Loan Bank Stock.

2 Adjusted to a fully tax equivalent basis.

3 Includes loans held for sale and non-accrual loans.

12

Rate Volume Analysis

	Year ended December 31, 2011 over 2010									Year ended December 31, 2010 over 2009
	Total			Volume			Rate			Total			Volume			Rate
Increase (decrease) in interest income
Federal funds sold and interest-       bearing deposits with banks		(2,642	)		(2,049	)		(593	)		15,860			31,472			(15,612	)
Securities1,2		(77,857	)		102,689			(180,546	)		(168,083	)		135,911			(303,994	)
Loans3		(1,089,868	)		(967,582	)		(122,286	)		(1,221,917	)		(989,474	)		(232,443	)
Net change in interest income		(1,170,367	)		(866,942	)		(303,425	)		(1,374,140	)		(822,091	)		(552,049	)
Increase (decrease) in interest expense
Interest-bearing deposits		(1,459,036	)		(299,251	)		(1,159,785	)		(1,445,006	)		(98,756	)		(1,346,250	)
Federal funds purchased and       repurchase agreements		(2,568	)		5,790			(8,358	)		16,772			10,455			6,317
Subordinated debentures, notes       payable and FHLB advances		(234,373	)		(127,995	)		(106,378	)		(37,838	)		(153,455	)		115,617
Net change in interest expense		(1,695,977	)		(421,456	)		(1,274,521	)		(1,466,072	)		(241,756	)		(1,224,316	)
Net change in net interest income		525,610			(445,486	)		971,096			91,932			(580,335	)		672,267

Investment Portfolio

	Balance at		Balance at		Balance at
	December 31, 2011		December 31, 2010		December 31, 2009
US Treasury	$	4,067,656	$	1,011,094	$	0
U.S. Government and federal agency		15,572,588		16,908,716		14,495,407
Municipals		2,891,420		3,238,294		7,018,707
Mortgage-backed and collateralized mortgage obligations– residential		12,040,439		15,345,799		5,977,333
	$	34,572,103	$	36,503,903	$	27,491,447

The composition of the investment portfolio is detailed in the table below.

1 Includes Federal Home Loan Bank Stock.

2 Adjusted to a fully tax equivalent basis.

3 Includes loans held for sale and non-accrual loans.

13

Investment Portfolio (continued)

The maturity schedule of the Company’s investment portfolio as well as the weighted average yield for each timeframe is included in the table below.

2011	One Yr or Less			1 - 5 Years			Over 5 Years			Total
US Treasury	$	2,013,515		$	2,054,141		$	0		$	4,067,656
U.S. Government and federal agency		2,048,589			13,523,999			0			15,572,588
Municipals		503,455			533,595			1,854,370			2,891,420
Mortgage-backed and collateralized mortgage obligations– residential		0			253,089			11,787,350			12,040,439
	$	4,565,559		$	16,364,824		$	13,641,720		$	34,572,103
Weighted Average Yield		1.46	%		1.69	%		2.91	%		2.13	%

Yields on tax exempt obligations have not been computed on a tax equivalent basis.

The table below lists the security issuers in which the aggregate holding exceeds 10% of the Bank’s stockholders’ equity as of December 31, 2011.

Issuer	Book Value	Market Value
FNMA	2,974,649	3,175,175
FHLMC	1,903,165	1,974,056
FHLB	5,102,541	5,191,162
FFCB	5,583,519	5,658,397
GNMA	7,379,334	7,457,992
FAMCA	3,581,628	3,596,303
US Treasury Note	4,041,881	4,067,656

14

Loan Portfolio

The composition of the loan portfolio for each period is detailed in the following table.

	December 31, 2011				December 31, 2010				December 31, 2009				December 31, 2008				December 31, 2007
	Balance		%		Balance		%		Balance		%		Balance		%		Balance		%
Commercial	$	53,168,129		35.5	$	58,829,236		35.7	$	69,862,430		38.1	$	76,623,763		37.4	$	86,543,187		37.6
Real estate – Commercial		63,272,641		42.3		67,317,571		40.7		70,504,399		38.5		81,257,794		39.6		92,048,614		40.0
Real estate – Residential		16,942,989		11.3		18,213,954		11.0		18,625,574		10.2		16,275,219		7.9		15,842,205		6.9
Real estate – Construction		0		0.0		1,320,750		0.8		1,518,378		0.8		3,850,176		1.9		6,264,591		2.7
Consumer		16,275,172		10.9		19,562,370		11.8		22,737,046		12.4		27,146,251		13.2		29,520,823		12.8
		149,658,931		100.0		165,243,881		100.0		183,247,827		100.0		205,153,203		100.0		230,219,420		100.0
Less allowance for loan losses		5,299,454				4,791,907				3,782,132				4,350,903				3,602,948
	$	144,359,477			$	160,451,974			$	179,465,695			$	200,802,300			$	226,616,472

The non-accrual, past due and restructured loans as of the end of each period are reported below.

December 31,	2011			2010			2009			2008		2007
Loans on nonaccrual status	$	3,245,000		$	7,573,000		$	7,649,000		$	5,780,000	$	4,532,000
Loans 90 days or more past due and accruing interest		26,000			2,000			982,000			80,000		1,485,000
Troubled debt restructuring		9,037,000	1		5,371,000	2		2,658,000	3		0		0
	$	12,308,000		$	12,946,000		$	11,289,000		$	5,860,000	$	6,017,000

1 Includes $3,464,000 of loans that are on nonaccrual status at December 31, 2011.

2 Includes $672,000 of loans that are on nonaccrual status at December 31, 2010.

3 Includes $469,000 of loans that are on nonaccrual status at December 31, 2009.

15

Loan Portfolio (continued)

Included below is the 2011 interest information on impaired loans.

	2011
Average of impaired loans during the year	$	14,478,463
Interest income recognized during impairment		299,173
Cash-basis interest income recognized		248,814

Below are two tables that summarize the activity in and the allocation of the Allowance for Loan Losses.

Activity in the Allowance for Loan Losses:

	12/31/2011			12/31/2010			12/31/2009			12/31/2008			12/31/2007
Beginning Balance	$	4,791,907		$	3,782,132		$	4,350,903		$	3,602,948		$	2,549,016
Charge-offs
Commercial		(541,494	)		(1,126,177	)		(2,392,214	)		(530,211	)		(647,238	)
Real Estate - Commercial		(1,294,273	)		(3,028,701	)		(449,975	)		(277,663	)		(85,039	)
Real Estate - Residential		(77,060	)		(166,213	)		0			(52,453	)		0
Real Estate - Construction		0			0			0			0			0
Consumer		(248,953	)		(769,047	)		(386,378	)		(400,524	)		(188,707	)
		(2,161,780	)		(5,090,138	)		(3,228,567	)		(1,260,851	)		(920,984	)
Recoveries
Commercial		91,000			31,868			29,378			30,293			8,862
Real Estate - Commercial		49,486			317			150			0			0
Real Estate - Residential		0			0			0			0			0
Real Estate - Construction		0			0			0			0			0
Consumer		45,201			42,953			22,625			34,537			34,091
		185,687			75,138			52,153			64,830			42,953
Net Charge-offs		(1,976,093	)		(5,015,000	)		(3,176,414	)		(1,196,021	)		(878,031	)
Provision charged against operating expense		2,483,640			6,024,775			2,607,643			1,943,976			1,931,963
Ending Balance	$	5,299,454		$	4,791,907		$	3,782,132		$	4,350,903		$	3,602,948

16

Loan Portfolio (continued)

Allocation of the Allowance for Loan Losses:

	2011					2010					2009					2008					2007
	Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans			Amount		% of Loans in Each Category to Total Loans
Balance at End of Period
Applicable To:
Commercial	$	2,197,755		35.5	%	$	1,218,865		35.7	%	$	1,529,470		38.1	%	$	2,640,269		37.4	%	$	1,687,805		37.6	%
Real estate – Commercial		2,498,310		42.3			2,896,177		40.7			1,828,022		38.5			1,237,913		39.6			1,331,132		40.0
Real estate – Residential		193,388		11.3			123,391		11.0			91,532		10.2			104,033		7.9			129,906		6.9
Real estate – Construction		0		0.0			6,872		0.8			17,461		0.8			49,667		1.9			89,672		2.7
Consumer		410,001		10.9			546,602		11.8			315,647		12.4			319,021		13.2			364,433		12.8
Unallocated		0		0.0			0		0.0			0		0.0			0		0.0			0		0.0
Total	$	5,299,454		100.0	%	$	4,791,907		100.0	%	$	3,782,132		100.0	%	$	4,350,903		100.0	%	$	3,602,948		100.0	%

As of all period ends, all loans in the portfolio were domestic; there were no foreign outstandings. For further discussion of the risk elements of the portfolio and the factors considered in determining the amount of the allowance for loan losses and for a table summarizing the scheduled maturities and interest rate sensitivity of the Company’s loan portfolio see the table and information in Management’s Discussionand Analysis on pages 15 through 26 of the 2011 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report, which are incorporated here by reference.

17

Deposits

The table below represents the average balance of deposits by category as well as the average rate.

Deposits in Domestic Bank Offices:

	Average Balance 2011		Average Rate 2011			Average Balance 2010		Average Rate 2010			Average Balance 2009		Average Rate 2009
Non Interest Bearing Demand	$	36,100,143		N/A		$	25,027,916		N/A		$	21,694,511		N/A
Interest Bearing Demand		39,751,169		0.42	%		52,187,867		0.39	%		47,097,872		1.49	%
Savings		9,895,229		0.32			8,819,475		0.31			9,964,155		1.51
Time Deposits		124,319,964		2.13			133,006,507		3.06			136,181,926		4.63
Total	$	210,066,505		1.64	%	$	219,041,765		2.22	%	$	214,938,464		3.83	%

The Company had no foreign banking offices at December 31, 2011.

The table below represents the maturity distribution of time deposits of $100,000 or more at December 31, 2011.

	Within Three Months		Over Three Through Six Months		Over Six Through Twelve Months		Over Twelve Months		Total
Time Deposits > $100,000	$	5,238,252	$	6,209,801	$	3,392,981	$	1,832,185	$	16,673,219

18

Short-term Borrowings

On December 31, 2011, 2010, and 2009 the consolidated short-term borrowings of the Company consisted of repurchase agreements, but no federal funds purchased. Federal funds purchased are overnight borrowings from various correspondent banks. Repurchase agreements are advances by customers that are not covered by federal deposit insurance. This liability is secured by Bank owned securities, which are pledged on behalf of the repurchase account holders.

Details of the Company’s holdings at the specified year-ends are as follows:

	Repurchase Agreements			Borrowings from FRB			Borrowings from FHLB
Outstanding at December 31, 2011	$	7,814,745		$	0		$	0
Average interest rate at year end		0.71	%		0.00	%		0.00	%
Average balance during year		9,626,125			0			260
Average interest rate during year		0.76	%		0.00	%		0.45	%
Maximum month end balance during year		11,986,254			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
Outstanding at December 31, 2009	$	7,000,327		$	0		$	0
Average interest rate at year end		0.66	%		0.00	%		0.00	%
Average balance during year		7,489,802			150,959			0
Average interest rate during year		0.78	%		0.50	%		0.00	%
Maximum month end balance during year		10,393,960			2,120,000			0

Interest  Rate Sensitivity

The interest sensitivity of the Company’s consolidated balance sheet at December 31, 2011 and discussion of interest rate sensitivity are incorporated here by reference to Management’s Discussion and Analysis at pages 22 through 32 of the 2011 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report.

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not required for smaller reporting companies.

19

ITEM 2.  PROPERTIES

The Company’s and Bank’s main office is located at 1030 W. Norton Avenue, Roosevelt Park, Michigan, a suburb of Muskegon. The building is approximately 11,500 square feet with a three lane drive-up, including a night depository and ATM.

The Bank’s second location is at 1120 S. Beacon Boulevard, Grand Haven, Michigan. In August of 2007, the Bank relocated its banking facility from leased space at 15190 Newington Drive, Grand Haven, Michigan to a newly constructed building. The Grand Haven branch has 4,374 square feet of office space. The facility has a three lane drive-up, including a night depository and an ATM.

The third banking location is at 180 Causeway Road in the City of North Muskegon and is slightly more than 4,000 square feet. The facility has a three lane drive-up, including a night depository and an ATM.

In November of 2006, the Bank completed construction of its fourth banking location at Harvey and Mt. Garfield Road, in Norton Shores. The two-story facility is a little less than 20,000 square feet with a three-lane drive-up, including a night depository and an ATM.

In October 2006, the Bank finalized the purchase of vacant land located on Apple Avenue at Quarterline in the City of Muskegon. The purchase price of the property was $721,000. The land is anticipated to be sold in the first half of 2012.

The Company owns each of its offices.

ITEM 3.  LEGAL PROCEEDINGS

From time to time, the Company and the Bank may be involved in various legal proceedings that are incidental to their business, such as loan workouts and foreclosures. In the opinion of management, neither the Company nor the Bank is a party to any current legal proceedings that are material to the financial condition of the Company or the Bank, either individually or in aggregate.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

20

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The information listed under the caption “Stock Information” on page 86 of the 2011 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report is incorporated here by reference.

There were no sales of unregistered securities or repurchases of Company stock that are required to be reported here.

ITEM 6.  SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The information shown under the caption “Management’s Discussion and Analysis” beginning on page 6 of the 2011 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report is incorporated here by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information presented under the captions “Consolidated Balance Sheets,” “Consolidated Statements of Income,” “Consolidated Statements of Changes in Shareholders’ Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements,” as well as the Report of Independent Registered Public Accounting Firm, Crowe Horwath LLP, dated March 28, 2012, in the 2011 Annual Report furnished to the Securities and Exchange Commission as Exhibit 13 to this Report is incorporated here by reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

21

ITEM 9A.  CONTROLS AND PROCEDURES

As of December 31, 2011, an evaluation was performed under the supervision of and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures.  Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2011.

The management of Community Shores Bank Corporation is responsible for establishing and maintaining an effective system of internal control over financial reporting. The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  There are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and circumvention or overriding of controls.  Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.  Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management of Community Shores Bank Corporation assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our assessment we believe that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in the annual report.

There have been no significant changes in the internal controls over financial reporting during the quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Dated: March 28, 2012

/s/ Heather D. Brolick

Heather D. Brolick

President and Chief Executive Officer

/s/ Tracey A. Welsh

Tracey A. Welsh

Senior Vice President, Chief Financial Officer and

Treasurer

22

ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information About Directors, Nominees and Executive Officers

Information about our directors, nominees as a director, and executive officers is set forth below. Each continuing member of our Board of Directors is also a director of the Bank. There are no family relationships among any of our directors and executive officers.

Name, Age, and Position with  the Company and the Bank	Has Served As Director Since	Year When Term As a Director Expires
Class I Directors
Gary F. Bogner, 69, Director, Non-officer Chairman of the Boards of the Company and the Bank	1998	2014
Robert L. Chandonnet, 67, Director, Non-officer Vice Chairman of the Boards of  the Company and the Bank	1998	2014
Class II Directors
Steven P. Moreland, 55, Director	2006	2012
Julie K. Greene, 53, Director	2011	2012
Class III Directors
Heather D. Brolick, 52, Director, President and Chief Executive Officer of  the Company and the Bank	2006	2013
Bruce J. Essex, 62, Director	1998	2013
Executive Officers (Who Are Not Also Directors)
Tracey A. Welsh, 46, Senior Vice President, Chief Financial Officer and Treasurer of  the Company and the Bank
John M. Clark, 50, Senior Vice President and Secretary of the Company, Senior Vice President, Commercial Loan Department Head and Secretary of the Bank

Our executive officers are generally elected each year at the annual meeting of our Board of Directors that follows the annual meeting of our shareholders. Their terms of office are at the discretion of our Board of Directors.

The factual information below for each director and for each executive officer has been provided by that person. The particular experience, qualifications, attributes or skills that led our Board of Directors to conclude that each should serve on our Board, in light of our business and structure, was determined by our Board or its Governance Committee.

23

Gary F. Bogner (Director and Non-Officer Chairman of the Boards of the Company and the Bank) is a lifelong resident of Muskegon County. Mr. Bogner has been engaged in the business of real estate development since 1973, and during the past 26 years has also engaged in a number of commercial enterprises and served them in various director and officer positions. During 2001 and 2002, Mr. Bogner also served as President and a director of Safari Club International and Safari Club International Foundation, which are hunting and wildlife organizations. In addition, during the period from 1967 to 1983, Mr. Bogner was an airline captain with Northwest Airlines, and from 1978 to 1982 was an executive officer of the Airlines Pilot Association. We determined that Mr. Bogner should be a member of our Board based on a number of factors. Mr. Bogner has many years of experience in real estate development, and has been involved in setting up and operating many other businesses. He has demonstrated valuable leadership skills as Chairman of our Board.

Heather D. Brolick (President, Chief Executive Officer and a Director of the Company and the Bank) has over 31 years of commercial banking experience. Ms. Brolick has served as President and Chief Executive Officer of the Company and the Bank since 2006. From 1998 until 2006, Ms. Brolick served as Senior Vice President of the Company, and served as Secretary of the Company from 2000 through April of 2007. From 2003 until 2006, Ms. Brolick served as President and Chief Operating Officer of the Bank, and from 1999 until 2003, served as Senior Vice President Retail Lending and Operations of the Bank. Ms. Brolick served as Secretary of the Bank from 2000 through April of 2007. Ms. Brolick joined the Board of Directors of the Bank in 2003 and the Board of Directors of the Company in 2006. Ms. Brolick is the past Board President and current Resource Committee Member of Harbor Hospice and is Board Chairman and Ambassador Emeritus of The Chamber of Commerce Grand Haven, Spring Lake and Ferrysburg.  Ms Brolick is also a member of Mercy Health Partners’ Women for Health. Ms. Brolick’s broad range of experience in substantially all aspects of community banking, together with her well developed leadership skills and service as our President and Chief Executive Officer, led us to conclude that she should serve on our Board.

Robert L. Chandonnet (Director and Non-officer Vice Chairman of the Boards of the Company and the Bank) is the owner and President of The Nugent Sand Company, Inc. (“Nugent Sand”), which provides foundry sand to many foundries in the Great Lakes Region. Mr. Chandonnet has worked in the foundry industry since 1966. He began working at Nugent Sand as Sales Manager in 1980, and progressed to President of Nugent Sand in 1989. Mr. Chandonnet purchased Nugent Sand from the prior owners in 1989. He is a member of the National Industrial Sand Association, American Foundry Society, and Muskegon Country Club. Mr. Chandonnet’s many years of experience leading a foundry sand business, and his involvement in many charitable and non-profit organizations in the local community led us to conclude that he should be a member of our Board.

Bruce J. Essex (Director) is Chairman of Port City Die Cast. From 1982 until 2001, Mr. Essex owned and operated the Port City Group, a group of companies including Port City Die Cast, Port City Metal Products, Muskegon Castings Corp., and Mirror Image Tool. Mr. Essex has over 40 years experience in the die casting industry. He is a principal in Port City Custom Plastics and Port City Castings Corporation, and serves as a Director on the Boards of Reid Tool, and Supreme Machines. He is also a principal in Buck Snort Products, a rustic hardware and furnishings retail store, and Snow Protect, a manufacturer of snow retention products. We determined that Mr. Essex should be a member of our Board based on his many years of experience leading and operating successful die casting businesses, and his relationships in the business community.

24

Julie K. Greene (Director) is Chief Executive Officer of Muskegon SC, LLC, doing business as Muskegon Surgery Center, and has served in that position since 2009. Muskegon Surgery Center is a free standing surgical facility jointly owned by several Muskegon area physicians and Mercy Health Partners. From 2004 until 2009, she served as the Executive Director of Grand Valley Health Management, Inc. and Grand Valley Surgical center, LLC. Ms. Greene serves as the President of St. Thomas Educational Foundation, is past President and a member of Michigan Ambulatory Surgery Association, a member of Ambulatory Surgery Center Association, member of the National Medical Group Management Association and Michigan Medical Group Management Association. Ms. Greene’s considerable experience in the health care field and an extensive familiarity with regulations, audit requirements and compliance, as well as her professional management and leadership skills were major factors in our determination that she should be a member of our Board.

Steven P. Moreland (Director) is President and Chief Executive Officer of Automatic Spring Products Corporation (“ASPC”) in Grand Haven, and has served in that position since 1996. From 1987 to 1996, he served as Vice President of Engineering for ASPC. ASPC is a technology focused high volume manufacturer of custom designed compression, extension, and torsion springs, wire forms, flat springs, stampings, spring and shim washers, and assemblies. Mr. Moreland has served on the Board of Directors of ASPC since 1985, and as President of its Board since 1997. He currently serves as Site Committee Chairman of the Spring Manufacturer’s Institute, and as both a Board member and Executive Committee member for First Priority of the Lakeshore, Lakeside Spring Company, and Spring Manufacturer’s Institute. He also serves on the Grand Haven Township IFT Sub-Committee, Northwest Ottawa County Manufacturer’s Council Steering Committee, and Johnson Controls Inc. Supplier Council. Mr. Moreland is active in the Grand Haven community and has been involved in AYSO Kids Soccer Teams, TCKL Kids Baseball Teams, and YBL Kids Basketball Teams. We determined that Mr. Moreland should be a member of our Board based on a number of factors. Mr. Moreland has many years of experience leading a custom spring manufacturing business. His involvement in a number of organizations in the Grand Haven community is also valuable to us.

Tracey A. Welsh (Senior Vice President, Chief Financial Officer and Treasurer of the Company and the Bank) is a certified public accountant and has 22 years of bank accounting experience. Ms. Welsh joined the Company in 1998, before its initial public offering. She served as Controller of the Bank from early 1999, when the Bank commenced operations, until January of 2002. From 2002 through November of 2003, Ms. Welsh served as Vice President, Chief Financial Officer and Treasurer of the Company and Vice President and Chief Financial Officer of the Bank; and since November of 2003 has served as Senior Vice President, Chief Financial Officer and Treasurer of the Company and Senior Vice President and Chief Financial Officer of the Bank. Ms. Welsh has also served as Treasurer of the Bank since 2007. She is a member of the AICPA and serves on the Michigan Bankers Association’s Funds Management Committee. Ms. Welsh is the Treasurer and a Board member of the Humane Society of West Michigan, the Treasurer and a Board member of the Timberland Charter Academy in Muskegon, and a member of the Advisory Committee of Mercy Health Partners Life Counseling of Muskegon.

John M. Clark (Senior Vice President and Secretary of the Company and Senior Vice President, Commercial Loan Department Head, and Secretary of the Bank) has over 12 years of commercial banking experience. Mr. Clark joined the Bank in 2006 as a Vice President in the Commercial Loan Department. He served as a commercial lender for the Bank until 2008 when he assumed the additional role of Commercial Loan Department Head for the Bank. In 2009, Mr. Clark was promoted to his present positions of Senior Vice President, Commercial Loan Department Head and Secretary of the Bank, and Senior Vice President and Secretary of the Company. From 1991 to 2006, prior to joining the Bank, Mr. Clark served as President of Barrett-Clark, Incorporated, a remanufacturer of automotive parts and a producer of wood products. Mr. Clark is a Board member of the Tri-Cities Youth Soccer Organization and Harbor Hospice.

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The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.  The members of the Audit Committee consist of Bruce J. Essex, Julie K. Greene, and Steven P. Moreland.  The Board of Directors has determined that it does not have a member of the Audit Committee that is qualified as an audit committee financial expert, as that term is defined in the rules of the Securities and Exchange Commission.  The Board of Directors of the Company believes that the financial sophistication of the Audit Committee is sufficient to meet the needs of the Company and its shareholders.

The Company has adopted a Code of Ethics that applies to all of the directors, officers and employees, including the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.  The Code of Ethics is filed as Exhibit 14 to this Report.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more that 10% of our common stock, to file reports of ownership and changes in ownership with the SEC.  Based on a review of filings, we believe that all reports required to be filed under Section 16(a) for 2011 were timely filed.

ITEM 11.  EXECUTIVE COMPENSATION

Executive Compensation Table

The following table provides information regarding the compensation earned by the named executive officers for the year ended December 31, 2011.

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	Option Awards ($)	Non Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensation Earnings ($)	All Other Compensation ($) (1)	Total ($)
Heather D. Brolick	2011	195,300	0	0	0	0	0	942	196,242
President and, Chief Executive Officer of the Company and the Bank	2010	195,300	0	0	0	0	0	944	196,244
John M. Clark	2011	115,000	0	0	0	0	0	499	115,499
Vice President and Secretary of the Company, Senior Vice President and, Commercial  Loan Department Head of the Bank	2010	106,554						304	106,858
Tracey A. Welsh	2011	129,300	0	0	0	0	0	377	129,677
Senior Vice President, Chief Financial Officer and Treasurer of the Company, Senior Vice President and Chief Financial Officer of the Bank	2010	129,300	0	0	0	0	0	252	129,552

_________

(1)   Consists of the matching contribution made by the Bank to the named executive officer’s 401(k) plan account, group term life insurance premiums paid by the Bank on behalf of the named executive officers and nominal product sales referral incentive.

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Base Salary and Bonus

Consistent with our objective of attracting and retaining highly qualified and experienced employees, we establish base salary ranges for our executive officers that are intended to be slightly above the market for comparable positions.  Base salary data for comparable industry positions are reviewed annually from survey data obtained from the Michigan Bankers Association and Crowe Horwath’s Financial Institutions Compensation Surveys.  The SNL Executive Compensation Review is used biannually for comparative evaluation to like-sized companies located in surrounding Midwestern states and Michigan.

Employment Agreements

We do not have employment agreements or change in control agreements with any of our executive officers or other employees.

401(k) Plan

Our executive officers and most of our employees are eligible to participate in our 401(k) plan.  For 2009, through May 31, we provided for each eligible participant a matching contribution to the plan.  The matching contribution was equal to 100% of the first 3%, and 50% of the next 3%, of the amount of compensation that the participant contributed to the plan.  All matching contributions are 100% vested when contributed to the plan.  We may also make additional discretionary matching contributions or a discretionary profit-sharing contribution to the plan.  To help reduce our compensation expenses, we suspended our matching contribution effective June 1, 2009. We have not made any matching or profit-sharing contribution to the plan since 2009.

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Outstanding Equity Awards at 2011 Fiscal Year-End

The following table provides information as of December 31, 2011 regarding equity awards, including unexercised stock options, for each of the named executive officers.

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable (1)		Number of Securities Underlying Unexercised Options (#) Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration   Date	Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Heather D. Brolick		10,000		0		0		10.00	7/30/12		0		0		0		0
Tracey A. Welsh		7,500		0		0		10.00	9/24/12		0		0		0		0
John M. Clark		0		0		0		0	N/A		0		0		0		0

___________

(1) The options for 10,000 shares granted to Ms. Brolick vested in four installments over a three year period at the rate of 2,500 shares per year, commencing on the July 31, 2002 grant date. The option for 7,500 shares granted to Ms. Welsh vested in four installments over a three year period at the rate of 1,875 shares per year, commencing on the July 31, 2002 grant date.

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Director Compensation for 2011

The following table provides information about the compensation of our directors for the year ended December 31, 2011.

Name (1)	Fees Earned or Paid in Cash ($)		Stock Awards ($)		Option Awards (2) ($)		Non-Equity Incentive Plan Compensation ($)		Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)
Gary F. Bogner		0		0		0		0		0		0		0
Robert L. Chandonnet		0		0		0		0		0		0		0
Bruce J. Essex		0		0		0		0		0		0		0
Steven P. Moreland		0		0		0		0		0		0		0
Julie K. Greene		0		0		0		0		0		0		0

(1) Our President and Chief Executive Officer, Ms. Brolick, who is also a director, has been omitted from this table because she received no special compensation for serving on our Board of Directors. Her compensation is included in the Summary Compensation Table.

(2) No option awards were made to our directors during 2011. As of December 31, 2011, our current directors held the following option awards to acquire our common stock: Messrs. Bogner, Chandonnet, and Essex two option awards each, covering for each an aggregate of 4,000 shares; Mr. Moreland and Ms. Greene did not hold any option awards as of December 31, 2011.

Compensation Arrangements for Non-Employee Directors

Each of our current directors is also a director of the Bank, which is a wholly owned subsidiary of the Company. Our Directors received no compensation in 2011 and are expected to receive no compensation in 2012. The Compensation Committee of our Board of Directors reviews director compensation at least annually, and recommends to our Board of Directors for approval any changes that the Compensation Committee deems appropriate.

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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Stock Ownership of Certain Beneficial Owners and Management

The following table presents information regarding the beneficial ownership of our common stock by each person known to us to own beneficially more than 5% of our outstanding shares of common stock as of February 13, 2012.

Name and Address of Beneficial Owner	Amount Beneficially Owned		Percent of Class Beneficially Owned
Gordon H. Girod Trust and its trustees, Norma J. Girod, Stephen J. Girod and Gerald J. Girod 3677 Lakeshore Drive North Holland, Michigan 49424 (1)		100,000		6.8	%
Bruce J. Essex 1985 E. Laketon Avenue Muskegon, Michigan 49442 (2)		81,362		5.5	%
Steven R. Bolhuis, Sr. 1241 Keating Avenue Muskegon, Michigan 49443 (3)		75,000		5.1	%

___________

(1) This information is based on a Schedule 13G filed by the Gordon H. Girod Trust and its trustees, Norma J. Girod, Stephen J. Girod and Gerald J. Girod, and subsequently confirmed by one of the trustees. The Schedule 13G discloses that the trust has sole voting and dispositive power for these 100,000 shares, and that each of the trustees has shared voting and dispositive power for these 100,000 shares. The Schedule 13G discloses the address set forth in the table for the trust and Mr. Gerald Girod, for Mrs. Norma Girod, 2207 Lanco Drive N.W., Grand Rapids, Michigan 49504, and for Mr. Stephen Girod, 673 Lakeside Drive, Macatawa, Michigan 49434.

(2) This information is based on a Schedule 13G filed by Bruce J. Essex, who is a member of our Board of Directors, on February 16, 2010, and subsequently confirmed with Mr. Essex. The Schedule 13G discloses that Mr. Essex has sole voting and dispositive power for 23,595 of these shares, and shared voting and dispositive power for 57,767 of these shares.

(3) This information is based upon information provided by Mr. Bolhuis. Mr. Bolhuis has advised that he has sole voting and dispositive power for these shares.

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The following table presents information regarding the beneficial ownership of our common stock, as of February 13, 2012, by each of our directors and our executive officers named in the Summary Compensation Table, and all of our directors and executive officers as a group.

Name of Beneficial Owner	Amount Beneficially Owned (1)			Percent of Class Beneficially Owned (6)
Gary F. Bogner•		64,130			4.4	%
Heather D. Brolick•		21,910	(2)		1.5	%
Robert L. Chandonnet•		67,630			4.6	%
Bruce J. Essex•		81,362	(3)		5.5	%
Julie K. Greene•		0			*
Steven P. Moreland•		0			*
John M. Clark		0			*
Tracey A. Welsh		13,421	(4)		*
All directors and executive officers as a group		248,453	(5)		16.6	%
(8 persons)

___________

• Member of our Board of Directors.

* Less than one percent.

(1) The number of shares beneficially owned includes any shares over which the person has sole or shared voting power or investment power and also any shares that the person can acquire within 60 days of February 13, 2012 through the exercise of any stock options or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares such power with his or her spouse) over the shares set forth in the table. For each person, the number of shares included in the table because the person has options to acquire the shares is set forth below.

Name	Shares		Name	Shares		Name	Shares
Mr. Bogner		4,000	Mr. Clark		0	Mr. Moreland		0
Ms. Brolick		10,000	Mr. Essex		4,000	Ms. Welsh		7,500
Mr. Chandonnet		4,000	Ms. Greene		0

(2)  Includes 9,410 shares that Ms. Brolick owns under the Bank’s 401(k) plan.

(3) Includes 6,250 shares owned by Port City Die Cast, a corporation solely owned by Mr. Essex, and 767 shares owned by Mr. Essex’s spouse.

(4) Includes 5,811 shares that Ms. Welsh owns under the Bank’s 401(k) plan.

(5) Includes 29,500 shares that such persons have the right to acquire within 60 days of February 13, 2012 pursuant to our 1998 Employee Stock Option Plan or Director Stock Option Plans, and 15,221 shares that such persons own under the Bank’s 401(k) plan.

(6) The percentages shown are based on the 1,468,800 shares of our common stock outstanding as of February 13, 2012, plus the number of shares that the named person or group has the right to acquire within 60 days of February 13, 2012. For purposes of computing the percentage of outstanding shares of common stock held by each person or group, any shares that the person or group has the right to acquire within 60 days after February 13, 2012 are deemed to be outstanding with respect to such person or group but are not deemed to be outstanding for the purpose of computing the percentage of ownership of any other person or group.

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Equity Plan Compensation Information

The following table summarizes information, as of December 31, 2011, relating to the Company's compensation plans under which equity securities are authorized for issuance.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		42,800	$	10.69		115,000(2)
Equity compensation plans not approved by security holders		-		-		-
Total		42,800	$	10.69		115,000(2)

___________

(1)   The plans referred to are the Company's Employee Stock Option Plans of 1998 and 2005 and the Director Stock Option Plans of 2003 and 2005.

(2)   Includes 60,000 shares of restricted stock available for issuance pursuant to the Company’s Executive Incentive Plan.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR INDEPENDENCE

Director Independence

A majority of our Board of Directors is independent, as that term is defined in the rules of The Nasdaq Stock Market (“Nasdaq”). In March of 2012, our Board of Directors reviewed the independence of our directors and determined that each of our directors is independent as defined by applicable Nasdaq rules, with the exception of Ms. Brolick. In making this determination, our Board of Directors has concluded that none of the independent directors has a relationship that in the opinion of our Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Ms. Brolick is not considered independent because she is one of our executive officers.

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Transactions with Related Persons

The Bank has had, and expects in the future to have, loan transactions in the ordinary course of business with our directors, executive officers, or their immediate family, or companies they have a material interest in, on substantially the same terms as those prevailing for comparable transactions with others. All such transactions (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Bank, and (iii) did not involve more than the normal risk of collectability or present other unfavorable features.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table shows the fees for professional services of Crowe Horwath LLP for audit and other services they provided to the Company for 2011 and 2010.

	2011		2010
Audit Fees (1)	$	75,500	$	73,000
Audit-Related Fees (2)		400		9,060
Tax Fees (3)		400		2,900
All Other Fees (4)		195		785

___________

(1)   Includes the aggregate fees billed for professional services rendered by Crowe Horwath LLP for 2011 and 2010 for the audit of the Company’s annual financial statements and review of financial statements included in the quarterly reports on Form 10-Q.

(2)   Includes additional fees billed for consultation regarding other real estate owned for 2011 and review of impaired loans, allowance for loan losses, other real estate owned and regulatory matters for 2010.

(3)   Principally tax compliance services for 2011 and 2010.

(4)   Compensation survey for 2011 and principally deferred tax asset valuation review services for 2010.

The Audit Committee’s policy is to pre-approve all audit services and non-audit services that are to be performed for the Company by its independent auditors. This duty has not been delegated to any one or more designated members of the Audit Committee. All of the services described in the table above were pre-approved by the Audit Committee.

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1) Financial Statements.  The following financial statements and report of independent registered public accounting firm of the Company and its subsidiaries are filed as part of this report:

Report of Independent Registered Public Accounting Firm dated March 28, 2012 – Crowe Horwath LLP

Consolidated Balance Sheets – December 31, 2011 and 2010

Consolidated Statements of Income – Years ended December 31, 2011 and 2010

Consolidated Statements of Changes in Shareholders’ Equity – December 31, 2011 and 2010

Consolidated Statements of Cash Flows – Years ended December 31, 2011 and 2010

Notes to Consolidated Financial Statements

     (2) Financial Statement Schedules

Not applicable

(b) 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 no. 333-63769).
3.2	Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s 8-K filed July 5, 2006 (SEC file no. 000-51166).
4.1	Second Amendment to Loan Agreement between the Company and Fifth Third Bank dated December 18, 2009, and Promissory Note dated December 18, 2009 payable to Fifth Third Bank are included as exhibit 10.19 to this report.
10.1	1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company’s Registration Statement on Form SB-2 (SEC file no. 333-63769), which became effective on December 17, 1998.*
10.2	First Amendment to 1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company’s Registration Statement on Form SB-2 (SEC file no. 333-63769), which became effective on December 17, 1998.*

_________________________

* Management contract or compensatory plan or arrangement.

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10.3	Director Stock Option Plan is incorporated by reference to exhibit 10.53 of the Company’s December 31, 2003 Form 10-KSB (SEC file no. 333-63769).*
10.4	Agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.4 of the Company’s Registration Statement on Form SB-2 (SEC file no. 333-63769) which became effective on December 17, 1998.
10.5	Junior Subordinated Indenture between Community Shores Bank Corporation and Deutsche Bank Trust Company Americas, as Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.20 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.6	Amended and Restated Trust Agreement among Community Shores Bank Corporation, as Depositor, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and The Administrative Trustees Named Herein as Administrative Trustees dated as of December 17, 2004 is incorporated by reference to exhibit 10.21 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.7	Guarantee Agreement between Community Shores Bank Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.22 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.8	Placement Agreement among Community Shores Bank Corporation, Community Shores Capital Trust I and Suntrust Capital Markets, Inc. dated as of December 17, 2004 is incorporated by reference to exhibit 10.23 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.9	2005 Employee Stock Option Plan is incorporated by reference to Appendix A of the Company’s proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).*
10.10	2005 Director Stock Option Plan is incorporated by reference to Appendix B of the Company’s proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).*
10.11	Form of stock option agreement for options granted under the 2005 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company’s Form 8-K filed May 17, 2005 (SEC file no. 000-51166).*

_________________________

* Management contract or compensatory plan or arrangement.

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10.12	Form of stock option agreement for options granted to directors under the 2005 Director Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed December 13, 2005 (SEC file no. 000-51166).*
10.13	Extension to the agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed July 7, 2006 (SEC file no. 000-51166).
10.14	Community Shores Bank Corporation Executive Incentive Plan is incorporated by reference to Appendix A of the Company’s proxy statement for its May 10, 2007 annual meeting of shareholders that was filed April 5, 2007 (SEC file no. 000-51166)*.
10.15	Summary of Director Compensation Arrangement.*
10.16	Loan Agreement between Community Shores Bank Corporation and Fifth Third Bank dated September 7, 2007 is incorporated by reference to exhibit 10.1 of the Company’s September 30, 2007 Form 10-QSB (SEC file no. 000-51166).
10.17	Amendment to Loan Agreement, Revolving Credit Note and Pledge Agreement between Community Shores Bank Corporation and Fifth Third Bank dated September 16, 2008 are incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed September 23, 2008 (SEC file number 000-51166).
10.18	Extension notice from Fifth Third Bank dated September 22, 2009 relating to line of credit is incorporated by reference to exhibit 10.1 of the Company's September 30, 2009 Form 10-Q (SEC file no. 000-51166).
10.19	Second Amendment to Loan Agreement between the Company and Fifth Third Bank dated December 18, 2009, and Promissory Note dated December 18, 2009 payable to Fifth Third Bank are incorporated by reference to exhibit 4.1 of the Company's Form 8-K filed December 22, 2009 (SEC file no. 000-51166).
10.20	Consent Order issued and effective September 2, 2010 is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed September 9, 2010 (SEC file number 000-51166).
10.21	Stipulation to the Issuance of a Consent Order is incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed September 9, 2010 (SEC file number 000-51166).

_________________________

* Management contract or compensatory plan or arrangement.

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10.22	Written Agreement dated December 16, 2010, effective December 16, 2010, by and between Community Shores Bank Corporation and the Federal Reserve Bank of Chicago is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed December 21, 2010 (SEC file no. 000-51166).
10.23	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).
13	2011 Annual Report to Shareholders of the Company.  Except for the portions of the 2011 Annual Report that are expressly incorporated by reference in this Annual Report on Form 10-K, the 2011 Annual Report of the Company shall not be deemed filed as a part of this Annual Report on Form 10-K.
14	Code of Ethics is incorporated by reference to exhibit 14 of the Company's Form 8-K filed January 22, 2010 (SEC file no. 000-51166).
21	Subsidiaries of the registrant.
23	Consent of Independent Registered Public Accounting Firm.
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 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.
101	The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, 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.

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 2012.

COMMUNITY SHORES BANK CORPORATION

/s/ Heather D. Brolick

Heather D. Brolick

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2012.

/s/ Gary F. Bogner	/s/ Julie K. Greene
Gary F. Bogner, Chairman of the Board (non-officer)	Julie K. Greene, Director
/s/ Heather D. Brolick	/s/ Steven P. Moreland
Heather D. Brolick, President, Chief Executive Officer and Director (principal executive officer)	Steven P. Moreland, Director
/s/ Robert L. Chandonnet	/s/ Tracey A. Welsh
Robert L. Chandonnet, Vice Chairman of the Board (non-officer)	Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer)
/s/ Bruce J. Essex
Bruce J. Essex , Director

38

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 no. 333-63769).
3.2	Bylaws of the Company are incorporated by reference to exhibit 3(ii) of the Company’s 8-K filed July 5, 2006 (SEC file no. 000-5166).
4.1	Second Amendment to Loan Agreement between the Company and Fifth Third Bank dated December 18, 2009, and Promissory Note dated December 18, 2009 payable to Fifth Third Bank are included as exhibit 10.19 to this report.
10.1	1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company’s Registration Statement on Form SB-2 (SEC file no. 333-63769), which became effective on December 17, 1998.*
10.2	First Amendment to 1998 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company’s Registration Statement on Form SB-2 (SEC file no. 333-63769), which became effective on December 17, 1998.*
10.3	Director Stock Option Plan is incorporated by reference to exhibit 10.53 of the Company’s December 31, 2003 Form 10-KSB (SEC file no. 333-63769).*
10.4	Agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.4 of the Company’s Registration Statement on Form SB-2 (SEC file no. 333-63769) which became effective on December 17, 1998.
10.5	Junior Subordinated Indenture between Community Shores Bank Corporation and Deutsche Bank Trust Company Americas, as Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.20 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.6	Amended and Restated Trust Agreement among Community Shores Bank Corporation, as Depositor, Deutsche Bank Trust Company Americas, as Property Trustee, Deutsche Bank Trust Company Delaware, as Delaware Trustee, and The Administrative Trustees Named Herein as Administrative Trustees dated as of December 17, 2004 is incorporated by reference to exhibit 10.21 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).

_________________________

* Management contract or compensatory plan or arrangement.

39

10.7	Guarantee Agreement between Community Shores Bank Corporation, as Guarantor, and Deutsche Bank Trust Company Americas, as Guarantee Trustee dated as of December 17, 2004 is incorporated by reference to exhibit 10.22 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.8	Placement Agreement among Community Shores Bank Corporation, Community Shores Capital Trust I and Suntrust Capital Markets, Inc. dated as of December 17, 2004 is incorporated by reference to exhibit 10.23 of the Company’s December 31, 2004 Form 10-KSB (SEC file no. 000-51166).
10.9	2005 Employee Stock Option Plan is incorporated by reference to Appendix A of the Company’s proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).*
10.10	2005 Director Stock Option Plan is incorporated by reference to Appendix B of the Company’s proxy statement for its May 12, 2005 annual meeting of shareholders (SEC file no. 000-51166).*
10.11	Form of stock option agreement for options granted under the 2005 Employee Stock Option Plan is incorporated by reference to exhibit 10.3 of the Company’s Form 8-K filed May 17, 2005 (SEC file no. 000-51166).*
10.12	Form of stock option agreement for options granted to directors under the 2005 Director Stock Option Plan is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed December 13, 2005 (SEC file no. 000-51166).*
10.13	Extension to the agreement between Fiserv Solutions, Inc. and Community Shores Bank is incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed July 7, 2006 (SEC file no. 000-51166).
10.14	Community Shores Bank Corporation Executive Incentive Plan is incorporated by reference to Appendix A of the Company’s proxy statement for its May 10, 2007 annual meeting of shareholders that was filed April 5, 2007 (SEC file no. 000-51166)*.
10.15	Summary of Director Compensation Arrangement.*
10.16	Loan Agreement between Community Shores Bank Corporation and Fifth Third Bank dated September 7, 2007 is incorporated by reference to exhibit 10.1 of the Company’s September 30, 2007 Form 10-QSB (SEC file no. 000-51166).

_________________________

* Management contract or compensatory plan or arrangement.

40

10.17	Amendment to Loan Agreement, Revolving Credit Note and Pledge Agreement between Community Shores Bank Corporation and Fifth Third Bank dated September 16, 2008 are incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed September 23, 2008 (SEC file number 000-51166).
10.18	Extension notice from Fifth Third Bank dated September 22, 2009 relating to line of credit is incorporated by reference to exhibit 10.1 of the Company's September 30, 2009 Form 10-Q (SEC file no. 000-51166).
10.19	Second Amendment to Loan Agreement between the Company and Fifth Third Bank dated December 18, 2009, and Promissory Note dated December 18, 2009 payable to Fifth Third Bank are incorporated by reference to exhibit 4.1 of the Company's Form 8-K filed December 22, 2009 (SEC file no. 000-51166).
10.20	Consent Order issued and effective September 2, 2010 is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed September 9, 2010 (SEC file number 000-51166).
10.21	Stipulation to the Issuance of a Consent Order is incorporated by reference to exhibit 10.2 of the Company’s Form 8-K filed September 9, 2010 (SEC file number 000-51166).
10.22	Written Agreement dated December 16, 2010, effective December 16, 2010, by and between Community Shores Bank Corporation and the Federal Reserve Bank of Chicago is incorporated by reference to exhibit 10.1 of the Company’s Form 8-K filed December 21, 2010 (SEC file no. 000-51166).
10.23	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).
13	2011 Annual Report to Shareholders of the Company.  Except for the portions of the 2011 Annual Report that are expressly incorporated by reference in this Annual Report on Form 10-K, the 2011 Annual Report of the Company shall not be deemed filed as a part of this Annual Report on Form 10-K.
14	Code of Ethics is incorporated by reference to exhibit 14 of the Company's Form 8-K filed January 22, 2010 (SEC file no. 000-51166).
21	Subsidiaries of the registrant.
23	Consent of Independent Registered Public Accounting Firm.

41

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 Certification of the Chief Executive Officer.
32.2	Section 1350 Certification of the Chief Financial Officer.
101	The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, 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.

 42

EX-10.15

EXHIBIT 10.15

SUMMARY OF DIRECTOR COMPENSATION ARRANGEMENT

Our directors received no fees for their service in 2011, and none are currently being paid for 2012.

EX-13

EXHIBIT 13

COMMUNITY SHORES

BANK

CORPORATION

2011 ANNUAL REPORT

DECEMBER 31, 2011

1

Selected Financial Information
At or For the Year-Ended December 31,	2011			2010			2009
(dollars in thousands, except per share data)
Results of Operations:
Net interest income	$	7,496		$	6,951		$	6,786
Provision for loan losses		2,484			6,025			2,608
Non-interest income		1,922			1,569			1,972
Non-interest expense		9,505			11,389			10,993
Loss before income tax		(2,571	)		(8,894	)		(4,843	)
Income tax expense (benefit)		(104	)		(11	)		119
Net loss		(2,467	)		(8,883	)		(4,962	)
Financial Condition:
Total assets		208,651			237,945			231,430
Loans held for sale		5,535			1,263			1,071
Loans		149,659			165,244			183,248
Allowance for loan losses		5,299			4,792			3,782
Securities		34,572			36,504			27,491
Deposits		191,545			219,263			198,577
Federal funds purchased and repurchase agreements		7,815			7,461			7,000
Notes payable and other borrowings		9,500			9,500			15,500
Shareholders' equity		(1,420	)		846			9,740
Performance Ratios:
Return on average assets		(1.07	) %		(3.57	) %		(1.97	) %
Return on average shareholders' equity		(6,992.01	)		(109.72	)		(36.34	)
Net interest margin (tax equivalent)		3.48			3.06			3.01
Efficiency ratio		100.93			133.67			125.53
Per Share Data:
Earnings per share - basic	$	(1.68	)	$	(6.05	)	$	(3.38	)
Earnings per share - diluted		(1.68	)		(6.05	)		(3.38	)
Book value per share		(0.97	)		0.58			6.63
Capital Ratios of Bank:
Tier 1 risk-based capital		5.12	%		5.79	%		9.15	%
Total risk-based capital		6.40			7.06			10.41

2

Dear Fellow Community Shores Shareholder,

The long awaited recovery is beginning to show signs of materializing in West Michigan and in Community Shores Bank.  At last year’s annual meeting, we indicated that a return to profitability was unlikely to occur until 2012, but that we anticipated a significant reduction in our net losses.  We performed as projected and have established a positive trend toward profitability.  Importantly, we see this trend continuing as our local market’s unemployment rates are now at or below the national average.

Benchmarking

Declining real property valuations, in conjunction with the overall economy, were a substantial contributor to the significant losses experienced over the past three years.  Fortunately, in the latter half of 2011 we began to experience value stabilization in both residential and commercial properties.  This will translate into fewer losses as foreclosed assets are liquidated.  We are ahead of plan on the sale of our residential development assets and see increased sales activity on all property types continuing throughout 2012 as the market improves.

A tried and true barometer of loan portfolio health can still be found in a bank’s past due percentages.  Community Shores’ delinquency rates trended downward perceptibly in the fourth quarter of 2010.  I am pleased to report that we were able to maintain those lower levels throughout 2011.  Of important note, borrowers in our early delinquency category, those 30 to 59 days past due, declined 55% compared to year-end 2010.  This is consistent with improving economic factors and will ultimately result in a reduction in credit administration expenses.

Other positive indicators are found in the reduction of our non-accrual loans by $1.4 million compared to year-end 2010 and our substandard and doubtful commercial credits showed improvement, declining by $1 million compared to the prior year end.  Importantly, further improvement was noted in our residential and consumer loan portfolios, which industry analysts and regulatory agencies believe to be an area of future concern for the industry.  Community Shores’ impaired residential and consumer loans decreased $777,000 at year-end 2011 compared to the same period in 2010.

Capital

Management and your Board of Directors continue to work diligently on curing the Company’s capital deficiency.  Through a combination of reducing assets and working to regain profitability, our key tier 1 leverage and total risk based capital ratios remained relatively stable since the second quarter of 2011.  Although we have made considerable improvements in internal operations, increased net interest margin and continued overhead expense reductions, we have not met the requirements of the regulatory Consent Order.

Candidly, the best strategic and competitive course of action to improve our capital position will be to supplement future earnings with outside investment.  This will undoubtedly result in dilution to you, our existing shareholder.  The Board and Management fully believe that continued investment in Muskegon’s only true community bank has significant economic value.  Our business model, mission, business principles and future ability to continue vital support of Muskegon and Northern Ottawa’s economic engines are compelling reasons for continued investment.  We have weathered this recession and with appropriate investment, can expand upon our existing client base to leverage a distinct competitive opportunity.

3

Annual Meeting

In considering this year’s Annual Meeting of the Shareholders of Community Shores Bank Corporation, the Board of Directors noted that there were no proposals or actions requiring shareholder approval.  Due to the cost of producing and mailing a proxy statement, as well as the costs associated with voting, tabulation and conducting a physical meeting, the Board of Directors determined that it was fiscally prudent to postpone the 2012 Annual Meeting.  The Class II Directors, Julie K. Greene and Steven P. Moreland, will continue to serve until such time as an annual meeting of shareholders is held, and their successors are elected and qualified.

While we will not be holding our customary May meeting, we have completed our financial reporting and have filed a 10K and Annual Report.  These materials are available electronically on the internet.  We encourage you to access and review all of the important information they contain.  The 10K and Annual Report are available at:

www.communityshores.com

To view the materials, simply click on the Investor Relations tab in the upper right hand corner of your screen.  On the next screen click on the document you choose to view.

Alternatively, you may request to obtain a copy of the 10K and Annual Report by email or in paper format.  There is no charge to you for requesting a copy.  Please make your request for a copy as follows:

In writing to:  Ms. Pat Siembida, 1030 W. Norton Ave., Muskegon, MI  49441

By telephone to:  231-780-1800

By email to: ir@communityshores.com

Optimism

Last year I wrote that 2011 would be a “transitional year.” We transitioned from negative trends and indicators and achieved positive directionality.  We met our goals of reducing classified assets and maintaining delinquency levels.  We improved our net interest margin 42 basis points and found further reductions in operating expenses.  While we have not met our regulatory capital requirements, we achieved stabilization.

In approaching 2012, we are encouraged by our 2011 performance and believe that we will be able, yet again, to attain positive incremental improvements.  This will be a pivotal year for the financial service industry and Community Shores Bank, not only from the perspective of economic recovery, but in how we implement and manage the various requirements of the Dodd Frank legislation.  The Board of Directors and all of the dedicated and talented staff members of Community Shores Bank are committed to a return to profitability.  We value your investment and patronage and look forward to exemplifying the meaning of “community” in our business and personal endeavors in 2012 and beyond.

Sincerely,

Heather D. Brolick

President and Chief Executive Officer

4

COMMUNITY SHORES BANK CORPORATION

Muskegon, Michigan

2011 ANNUAL REPORT

CONTENTS

MANAGEMENT’S DISCUSSION AND ANALYSIS	6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	35
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS	36
CONSOLIDATED STATEMENTS OF INCOME	37
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY	38
CONSOLIDATED STATEMENTS OF CASH FLOWS	39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	40
SHAREHOLDER INFORMATION	86
DIRECTORS AND OFFICERS	89

5

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

Community Shores Bank Corporation (“the Company”) is a Michigan corporation and is the holding company for Community Shores Bank (“the Bank”).  The Bank owns all of the outstanding capital stock of Community Shores Mortgage Company (“the Mortgage Company”). The Mortgage Company has one wholly-owned subsidiary, Berryfield Development, LLC (“Berryfield”). On September 27, 2002, the Company created Community Shores Financial Services (“CS Financial Services”). In December 2004, a business trust subsidiary was formed called Community Shores Capital Trust I (“the Trust”).

The Bank commenced operations on January 18, 1999.  The Bank is a Michigan chartered bank with depository accounts insured by the Federal Deposit Insurance Corporation.  The Bank currently has four locations and provides a full range of commercial and consumer banking services in Muskegon County and Northern Ottawa County, Michigan.

The Mortgage Company, a wholly-owned subsidiary of the Bank, was formed on March 1, 2002 by transferring a majority of the Bank’s commercial and residential real estate loans at that date in exchange for 100% of the equity capital of the Mortgage Company. On the day of formation, the Mortgage Company commenced operations and became legally able to originate residential mortgage loans. The Bank services all of the portfolio loans held by the Mortgage Company pursuant to a servicing agreement. Management chose to form the Mortgage Company to provide better customer service and to increase the profitability of the mortgage function as well as the consolidated Company.

Berryfield, a wholly-owned subsidiary of the Mortgage Company, is a limited liability company that was created in October 2010. The entity’s sole purpose is to oversee the development and sale of vacant lots that have been foreclosed on by the Mortgage Company.

The Company filed an election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and on September 27, 2002 received regulatory approval. At that time the Company formed CS Financial Services. Currently the only source of revenue that CS Financial Services receives is referral fee income from a local insurance agency, Lakeshore Employee Benefits, formerly Lead Financial. Lakeshore Employee Benefits offers amongst other things employer-sponsored benefit plans. CS Financial Services has the opportunity to earn a referral fee for each sale of employer-sponsored benefits that is transacted by Lakeshore Employee Benefits as a result of a referral made by CS Financial Services. On April 16, 2009, the Company withdrew its election to be a financial holding company. The election was acknowledged by the Federal Reserve Bank of Chicago. The passive income derived from CS Financial Services’ affiliation with Lakeshore Employee Benefits is unaffected by this change.

In December of 2004, the Company formed Community Shores Capital Trust I, a Delaware business trust. The Trust is administered by a Delaware trust company, and two individual administrative trustees who are employees and officers of the Company. The Trust was established for the purpose of issuing and selling its preferred securities and common securities and used the proceeds from the sales of those securities to acquire subordinated debentures issued by the Company. A majority of the net proceeds received by the Company was used to pay down the outstanding balance on the Company’s line of credit. The remaining proceeds were used to contribute capital to the Bank as well as support the general operating expenses of the Company, including the debt service on the Company’s subordinated debentures.

6

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 has been deemed undercapitalized since December 31, 2010 according to regulatory capital standards. At that time, the Bank had a total risk-based capital ratio of 7.06%. The loss recorded by the Bank in 2011 reduced the total risk-based capital ratio to 6.40% at December 31, 2011. The Bank remains undercapitalized 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 these requirements within the required 90-day period and remains out of compliance with the Consent Order as of December 31, 2011.

The lack of financial soundness of the Bank and the Company’s inability to serve as a source of strength for the Bank resulted in the board of directors entering into a Written Agreement with the Federal Reserve Bank of Chicago (the “FRB”), the Company’s primary regulator. The Written Agreement became effective on December 16, 2010, when it was executed by the FRB. The Written Agreement provides that: (i) the Company must take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank; (ii) the Company may not declare or pay any dividends or take dividends or any other payment representing a reduction in capital from the Bank or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior FRB approval; (iii) the Company may not incur, increase or guarantee any debt or purchase or redeem any shares of its stock without prior FRB approval; (iv) the Company must submit a written statement of its planned sources and uses of cash for debt service, operating expenses and other purposes to the FRB within 30 days of the Written Agreement; (v) the Company shall take all necessary actions to ensure that the Bank, the Company and all nonbank subsidiaries of both the Bank and the Company comply with sections 23A and 23B of the Federal Reserve Act and Regulation W of the Board of Governors (12 C.F.R. Part 223) in all transactions between affiliates; (vi) the Company may not appoint any new director or senior executive officer, or change the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position, without prior regulatory approval; and finally (vii) within 30 days after the end of each calendar quarter following the date of the Written Agreement, the board of directors shall submit to the FRB written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement as well as current copies of the parent company only financial statements. The Company has not yet been able to meet the obligation detailed in part (i) above; as the Company currently has negative equity and 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 December 31, 2011, was approximately $34,000. Once the Company is out of cash, it is anticipated that it will no longer have the ability to fulfill its public document filing requirements since doing so requires the assistance of a third party vendor.

7

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 six contractual quarterly interest payments. The total interest due to Fifth Third at year-end 2010 was $153,000. The Company continues to accrue interest on the term loan and at December 31, 2011, the total interest due Fifth Third was $458,000. 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.

On August 17, 2011, the Bank was issued a Supervisory Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category at December 31, 2010, its failure to submit a capital restoration plan that satisfies the requirements stipulated in the FDIC Rules and Regulations, and the continued deterioration of the Bank. The Directive stipulated that the Bank be restored to an “adequately capitalized” capital category within 60 days of the issuance of the Directive. During the 60 days, the board made efforts to secure funding and comply with the Directive but was not successful. As such, the Bank was not in compliance with the Directive at the end of 60 days and remains out of compliance. The board informed the FDIC in a letter dated October 14, 2011 that it was unable to comply with the Directive. There has been no further communications with the FDIC regarding the Directive. The board’s efforts to garner capital for the Bank are expected to continue.

Failure to comply with the provisions of the Consent Order, the Written Agreement or the Directive may subject the Bank to further regulatory enforcement action.

The Company’s net losses, failure to repay its term loan at maturity, non-compliance with the higher capital ratios of the Directive and the Consent Order, and the provisions of the Written Agreement raise substantial doubt about the Company’s ability to continue as a going concern. As a result of this substantial doubt, our auditors added an explanatory paragraph to their opinion on the Company’s December 31, 2011 and 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. Discussion regarding the Company’s plans for continuing operations and consideration of the Company as a going concern are discussed further in Note 20. Management’s progress towards compliance with the Consent Order and the Written Agreement is further discussed in Note 15.

8

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

As of December 31, 2011, the Bank had 55 full-time employees and 23 part time employees, a decrease of 3.5 full-time equivalent positions since December 31, 2010. Management does not anticipate increasing staff in 2012.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The purpose of this section of the Annual Report is to provide a narrative discussion about the Company’s financial condition and results of operations during 2011.  The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as disclosures found elsewhere in the Annual Report are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. One material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.  Actual results could differ from the estimate.

Allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans and loan groupings, assessments of the impact of current and anticipated economic conditions on the portfolio and historical loss experience. See the Financial Condition section of Management’s Discussion and Analysis and Notes 1 and 3 to the Company’s consolidated financial statements for additional information.

Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and anticipated economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Company’s assets reported on the balance sheet as well as its net income. Management has discussed the development of this critical accounting estimate with the Board of Directors and the Audit Committee.

Income Taxes. Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

9

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Net deferred tax assets are recorded to the extent it is believed that they will more likely than not be realized. In making such a determination, all available positive and negative evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.  In the event it is determined that deferred income tax assets are in excess of their realizable amount, an adjustment to the valuation allowance would be made which would increase the provision for income taxes.

In determining the possible realization of deferred tax assets, future taxable income from operations exclusive of reversing temporary differences and tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire is considered.

Interest and penalties related to unrecognized tax benefits are recognized within the federal income tax expense (benefit) line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

Foreclosed Assets. Foreclosed assets are acquired through or instead of loan foreclosure and are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. During the time that foreclosed assets are waiting to be sold, there will be occasions that the Bank will need to re-evaluate the individual market values of each asset. 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 estimated fair value of the asset at the end of the reporting period. On a quarterly basis, the Bank’s Credit Department analyzes foreclosed asset values to determine the level at which they should be held on our books.

FORWARD-LOOKING STATEMENTS

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.

10

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

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, Written Agreement or Directive 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.

2011 OVERVIEW

The Company’s total assets decreased by 12.3% to $208.6 million at December 31, 2011 and there was a net loss recorded of $2,467,000. For 2011, diluted losses per share of the Company were $1.68. Although there was a recorded loss in 2011, there was a sizable reduction compared to the losses of the past two years. Essentially in 2011, real estate values showed signs of stabilization which translated into a lower loan loss provision, fewer foreclosed asset valuation adjustments and reduced expenses associated with administering non-performing assets. In addition to these reductions, the Company’s net interest margin increased 42 basis points because of a reduction in the cost of funds. Non-interest income rose as a result of net gains on the disposal of foreclosed assets. Finally, in spite of FDIC premiums increasing, operating expenses decreased year over year from a reduction in staff, lower legal expenses and the above mentioned reduction in expenses attributable to non-performing assets.

FINANCIAL CONDITION

Total assets decreased by $29.3 million to $208.6 million at December 31, 2011 from $237.9 million at December 31, 2010. The year over year decrease in assets was evidenced by a decrease in cash, investments and loans which were used to cover the decrease in interest-bearing deposits, primarily brokered time deposits.

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COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash and cash equivalents decreased by $14.7 million to $8.9 million at December 31, 2011 from $23.6 million at December 31, 2010. The decrease was essentially from lower balances on deposit at the FRB on the last business day of 2011 compared to the last business day of 2010. As a result of the seasonal fluctuations of several of its key business and public fund customers, the Bank typically experiences a liquidity reduction in the last quarter of the year if measures are not taken to replace outgoing funds. Although excess liquidity is a conservative posture, it is detrimental to earnings. When determining the Bank’s desired liquidity position, many factors are taken into consideration. Given the liquidity activities that were scheduled to occur in the first quarter of 2012, coupled with the fact that the Bank has no brokered deposits scheduled to mature until the second quarter of 2012, management decided to allow the FRB balance to decline at year-end 2011. Management strives to maintain a balance at the FRB of between $7 and $10 million.

Securities decreased by $1.9 million during 2011. The portfolio activity included purchases of $12.6 million, maturities, prepayments and calls of $13.8 million and sales of $820,000. In the third quarter of 2011, one security was sold for a gain of $3,000. In 2010, in addition to the regular portfolio activity, several municipal securities were transferred into the available for sale portfolio and liquidated. 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. In 2010, the carrying amount of the securities transferred was $5.8 million. Of that total, $3.5 million were sold. The remaining $2.3 million had an unrealized gain of $28,000 that was recorded through other comprehensive income upon transfer. In 2011, all of the purchases were classified as available for sale. At both December 31, 2010 and 2011, there are no securities classified as held to maturity.

The securities portfolio is a key source of liquidity for the Bank. Given the Bank’s troubled condition there are very few opportunities to secure off-balance-sheet borrowing facilities. Maintaining the unencumbered portion of the Bank’s security portfolio at a level that exceeds its general internal policy is critical and is one of the driving forces behind investment activity. Prior to the Consent Order, the Bank strived to have between 10% and 20% of its investment portfolio unpledged. At December 31, 2011, 33% of the investment portfolio was unencumbered. This outcome is up from the 20% unpledged position on December 31, 2010. The increase between the two years stemmed from securities that were previously pledged to the Federal Home Loan Bank (“FHLB”). On December 22, 2011, the FHLB chose not to renew the Bank’s $5 million overdraft line of credit which was 100% collateralized by securities within the investment portfolio. The securities are now unencumbered.

At year-end 2011, $23.1 million of securities were pledged to public fund customers, the Federal Reserve Discount Window (“Discount Window”) and customer repurchase agreements.

The quality of the investment portfolio has received much scrutiny over the past several years. The plight of the U.S. bond market and U.S. economy in general as well as the European debt crisis have all either directly or indirectly affected security market values. Regardless, the investment portfolio remains strong with an unrealized net gain of $688,000. Included in this total are unrealized losses of only approximately $18,000. At December 31, 2011, there were seven securities with an amortized cost of $4.1 million having an unrealized loss. Two of the seven had unrealized losses longer than 12 months. At year-end 2011, the Bank conducted its standard review for other-than-temporary impairment (“OTTI”). The unrealized losses referenced above were not determined to be other-than-temporary given the fact that the decline in value is less than 1%, that they are all fully guaranteed by the U.S. government, and the fact that the Bank has the ability and intent to hold them until they either recover or mature. The portfolio will continue to be reviewed for impairment in accordance with the Bank’s Investment Policy.

12

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

To reduce exposure to future loss (both realized and unrealized) the Bank intends to adhere to the diversification principles outlined in the investment policy and limit issuer concentrations. Besides fully guaranteed U.S. Government and federal agency securities, there were no holdings of securities of any one issuer in an amount greater than 10% of the Bank’s common stock and surplus at December 31, 2011.

Loans, including held for sale and portfolio loans, decreased 7% since year-end 2010. This is lower than the 10% decline in the previous twelve month period. Loans held for sale were $5.5 million at December 31, 2011; up from $1.3 million at December 31, 2010. Loans held for sale reflect residential mortgages, Small Business Administration (“SBA”) loans and U.S. Department of Agriculture (“USDA”) loans that have been originated and are in the process of being sold to an investor. The increase in loans held for sale was more than offset by the decrease in portfolio loan balances. At December 31, 2011, portfolio loan balances were $149.7 million; down from $165.2 million at December 31, 2010.

Loans held for sale activity for 2011 included $18.2 million of loan originations and $14.2 million of loan sales. The associated gain on the loan sales was $296,000. A majority of the loan sales were residential mortgage loans however, in the first quarter of 2011, the guaranteed portions of three 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. The increase in held for sale loans is primarily the result of one construction loan. The loan is guaranteed by the USDA. There were no SBA loan sales in 2010, loan sale activity consisted solely of residential mortgage loans.

A majority of the portfolio loan decreases were to the commercial and commercial real estate portfolios.  The downward movement in those two categories comprised 62% of the total decline but there were decreases to every category of loans except credit cards. Although the reduction in total loans outstanding was significant, the commercial oriented concentration of the portfolio did not materially change. At December 31, 2011, the concentration of commercial and commercial real estate loans was 78% of the Bank’s total loan portfolio, two percentage points more than year-end 2010. The wholesale focus of the Bank has remained since opening in 1999. Unfortunately, the sustained economic weakness both nationally and locally has affected many borrowers in the Company’s two largest portfolio segments causing a significant increase in the Bank’s overall risk profile.

13

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 financial statements. At each period end, the balance in the allowance for loan losses is based on management’s estimation of probable incurred credit losses. The estimation is the result of loan portfolio analysis completed utilizing a detailed methodology prescribed in the Bank’s credit procedures. The loan portfolio is reviewed and analyzed on a regular basis for the purpose of estimating probable incurred credit losses. The analysis of the allowance for loan losses is comprised of two portions: general credit 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 December 31, 2011, the allowance for loan losses totaled $5.3 million; an increase of $508,000 over the year-end 2010 balance. The ratio of allowance to gross loans outstanding increased to a level of 3.54% at December 31, 2011 compared to 2.90% at year-end 2010. The increase is comprised of specific allocations increasing by $871,000 and general allocations decreasing by $364,000 in the twelve month period of 2011.

At December 31, 2011, the allowance contained $2,991,000 in specific allocations for impaired loans whereas at December 31, 2010 there was $2,120,000 specifically allocated. At year-end 2011, there was $15.8 million of unpaid principal on specifically identified loans compared to $14.3 million at year-end 2010. At year-end 2011, there was $7.5 million of unpaid principal on specifically identified loans requiring no reserves, a decrease of $540,000 compared to year-end 2010, and $8.3 million of unpaid principal requiring specific allocations, an increase of $2.0 million compared to the previous year-end. Although there were many changes to the specifically identified loan pool during 2011, the overall increase in specific allocations was primarily related to one borrower. The outstanding principal balance of the new loan added to the pool of specifically identified loans in December was $3.1 million. The collateral analysis performed on the credit resulted in an allocation in the allowance for loan losses of $888,000.

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COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

The general component of the allowance for loan losses as a percentage of non-specifically identified loans was 1.76% at December 31, 2010. Although there is continued uncertainty in the economy, the impact on the Bank’s customer base appears to have stabilized. This is reflected in lower delinquency, fewer charge-offs and most importantly, a $6.7 million decrease in substandard (grade 6 or higher) commercial and commercial real estate loans and impaired residential and consumer credits from year-end 2010 to year-end 2011. As a result of these trends, the general component of the allowance for loan losses was decreased to 1.72% of total non-specifically identified loans at December 31, 2011.

The total of all allocations included in the allowance by loan segment at December 31, 2011 and 2010 was as follows:

	2011					2010
Applicable to:	Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans
Commercial	$	2,197,755		35.5	%	$	1,218,865		35.3	%
Commercial Real Estate		2,498,310		42.3			2,896,176		41.0
Consumer		410,001		10.9			546,603		11.9
Residential		193,388		11.3			130,263		11.8
	$	5,299,454		100.0	%	$	4,791,907		100.0	%

The methodology used to determine the adequacy of the allowance for loan losses is consistent with the prior year. In 2011, minor enhancements to the process employed to calculate historical loss migration and to evaluate collateral in the case of specifically identified credits continued to be made.  In addition, a certain category of riskier home equity loans were delineated and assigned a higher allocation in the allowance for loan losses.  The referenced category of home equity loans are those where the Bank is a junior lien holder behind other lending institutions and where the borrower has some form of financial difficulty. In 2010, the Bank began segregating the historical losses on land development loans due to the extraordinary impact that the economic downturn had on vacant land. Management recognized that losses within the land development class were not necessarily indicative of those that are likely to occur in the entire commercial and commercial real estate segments. The Bank followed this practice in 2011 as well. Management intends to monitor the allocation and make necessary adjustments based on portfolio concentration levels, actual loss experience, the financial condition of the borrowers and the economy. For more detailed information related to the calculation of the allowance for loan losses, see Note 1 to the financial statements.

15

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due and non accrual standpoint. Year over year, the Bank observed a decrease in overall past due and non-accrual loans of $1,310,000; a $1,381,000 decrease in total non-accrual loans was slightly offset by a small increase of $71,000 in total past due loans.

The recorded investment1 in loans past due 30-59 days was $875,000 at December 31, 2011, a decrease of $95,000 since year-end 2010. Bank staff is working diligently with customers to keep the level of past due loans down. This level of communication often assists lenders in proactively identifying troubled credits early which helps to minimize the magnitude of loss in some cases. In addition to our lenders, the Bank has two full-time employees dedicated to overseeing past due customer relationships. As a result of this diligence, the average number of days past due of the loans in the 30-59 day category was 40 in 2011. There were only ten notes in this past due category at December 31, 2011 compared to 22 on the same day in 2010.

The 60-89 day past due category consisted of three loans at December 31, 2011. The recorded investment was $394,000 at December 31, 2011. This past due category increased by $141,000 when compared to the year-end 2010 balance of $253,000. All of the loans 60-89 days past due at year-end 2011 were to one borrower. Two of the loans are commercial notes and one is a home equity loan. The commercial notes are for a restaurant. The Bank completed a troubled debt restructure on the home equity loan in early February. The two commercial notes are expected to be paid down by approximately $150,000 when the Bank liquidates a portion of the collateral. After the paydown, the remaining balance is expected to be rolled into one note and given terms that are manageable with the cashflow of the business.

The recorded investment in notes 90 days and greater past due was $27,000 at December 31, 2011; an increase of $25,000 since December 31, 2010.

Non-accrual loans totaled $6.6 million at December 31, 2011. This was an overall decrease of $1.4 million compared to 2010 year-end totals. The majority of the non-accrual notes are secured by developed real estate, only 7% of the total is secured by undeveloped real estate. At December 31, 2011, there were specific allocations of $1.7 million in the allowance for any estimated collateral deficiency on non-accrual loans. There are eleven non-accrual notes totaling approximately $1.5 million for which the Bank is in the process of foreclosing on the associated collateral. Once the foreclosure period ends, the collateral will be moved to the foreclosed assets category of the Bank’s balance sheet and the land will be marketed for sale by the Bank.

In addition to the specifically identified impaired loans quantified in Note 3, the Bank also monitors industry concentrations. When a particular industry is facing circumstances that could translate into higher risk for the Bank, management will segment the loans even if they are performing in order to subject them to a higher level of scrutiny. The classification of these loans, however, does not necessarily imply that management expects losses but that the nature of the borrower’s projects in the current economic environment deserves closer monitoring.  One particular loan segment that received much scrutiny over the last few years is land development. Land development related charge-offs were $18,000 in 2011; down substantially from recorded charge-offs in 2010 of $1.5 million. At year-end 2011, the Bank’s remaining balance of land development loans was $2.2 million. Management will continue to examine the remaining credits in this segment periodically as specified by our loan policy.

_________________________ 

1 Includes unpaid principal, accrued interest and net deferred, unearned fees.

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COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

As a result of the stabilization of the quality of the loan portfolio, the ratio of net charge-offs to average loans fell to 1.22% in 2011 from 2.82% in 2010. Net charge-offs decreased $3,039,000. The net principal balance of these charge-offs in 2011 aggregated $2.0 million, which is down from $5.0 million charged-off in 2010. During 2011, 38 loans were charged-off compared to 96 loans in 2010. Many considerations are made prior to charging off a loan. The Bank’s loan policies have very specific guidelines. The Bank’s declining past due levels would normally indicate that there are likely to be fewer charge-offs going forward, however declining collateral values on specifically identified loans also contribute to the charge-off totals. Given the uncertain direction of real estate values, the level of charged-off loans anticipated going forward is difficult to predict.

Given the unstable economy and the effect on borrowers, a solid credit process is essential. Management has an experienced officer leading the Bank’s credit area. All lenders are focused on working with current customers to improve the quality of the Bank’s loan portfolio. Bi-weekly meetings occur among loan personnel to discuss identified weak credits. In addition to frequent internal loan review sessions, the Bank’s third party credit review engagement was enhanced. In addition to more coverage, the review is now split into two sessions to assist in capturing the effect of a rapid change in the credit environment. Management continues to look for ways to enhance the credit process.

Foreclosed assets decreased $106,000 since December 31, 2010 and were $3.3 million at December 31, 2011. 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. In 2011, nine properties were added increasing the total of foreclosed assets by $1.5 million. Additionally, ten properties and nine lots were sold for $795,000 during the same year. There were net gains on these sales of $192,000. The inventory of held properties was written down by $1.0 million during the year. At December 31, 2011, there were 31 real estate holdings compared to 32 at December 31, 2010. Each quarter foreclosed assets are written down to fair value based on a professional appraisal or other common means of valuation. As real estate values stabilize, it is possible that the valuation adjustments will decrease. Although the valuations of the properties held are justifiable, there may be cases where the Bank agrees to accept a sales price that is less than the current valuation and a loss is recorded.

Deposit balances were $191.5 million at December 31, 2011, down from $219.3 million at December 31, 2010. The $27.8 million decline in total deposits occurred in the interest-bearing deposit category. Although non-interest-bearing balances were flat at $33.3 million, there was a lot of movement. Essentially existing customers decreased their balances by over $7 million but the decrease was offset by new customers and customers that transferred in to a non-interest-bearing transaction account from an interest-bearing account to take advantage of the unlimited FDIC insurance coverage. On December 31, 2010, the FDIC ended its program which had previously offered insurance coverage on certain qualifying low interest-bearing checking accounts. When the program ended several customers moved their money to protect their deposits. The FDIC program that offers unlimited insurance coverage for non-interest-bearing transaction accounts is scheduled to sunset on December 31, 2012. If the government does not extend this program it is possible that the Bank will see a decrease in balances.

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COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Interest-bearing demand accounts, consisting of both checking and money market, decreased 10.7% during the year. The combined balances were $37.9 million at December 31, 2011 and $42.4 million at year-end 2010. Substantially all of the $4.5 million decrease was in the interest-bearing checking category. At year-end 2010, the FDIC no longer offered unlimited deposit insurance coverage on interest-bearing checking accounts encouraging customers to transfer their balances into non-interest transaction accounts.

Savings accounts were up $1.1 million between the two year-end periods of 2011 and 2010. The balance at December 31, 2011 was $8.5 million. Existing customers had more on deposit at year-end 2011 compared to year-end 2010 and there were three new business customers added.

Time deposits fell by $24.2 million. The net decline in time deposits consisted of a $33.8 million decline in brokered time deposits, a $7.0 million decline in local time deposits over $100,000 somewhat offset by an increase in time deposits under $100,000. A majority of the growth consisted of time deposits garnered from the internet. In December of 2009, the Bank began utilizing an internet time deposit listing service. In 2011, the Bank solicited and obtained time deposits totaling $29.1 million using this service. These deposits had an average maturity of over 31 months and an average rate of 1.013%. The weighted average rate on the maturing brokered deposits was 3.64%.

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 receipt of new brokered deposits. The Bank has not issued any brokered deposits since January of 2010. At December 31, 2011, the concentration of brokered deposits to total deposits was 2%; a decrease of 15% since December 31, 2010 when the concentration was 17%. As of December 31, 2011, the Bank has only one remaining brokered deposit for $3,462,000, maturing in April 2012. The Bank expects to continue its strategy of maintaining liquidity through the use of deposits solicited from the internet. The Bank’s strategy of lowering its cost of funds and extending the duration of its time deposit portfolio is more successfully achieved using the internet deposit listing service. Rates in the Bank’s own local market for longer term maturities are significantly higher.

Non-deposit funding sources for the Bank, at December 31, 2011, included customer repurchase agreements, FHLB advances and FRB Discount Window borrowings. Typically unexpected fluctuations in the Bank’s daily liquidity position beyond the amount available in the Bank’s FRB account drive borrowings from these resources. The only source with an outstanding balance at year-end 2010 or 2011 was customer repurchase agreements.

At year-end 2011, repurchase agreement balances were $7.8 million, an increase of $354,000 since the same period end in 2010. 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 typically collateralized by high quality government securities held in a subaccount within the Bank’s security portfolio. The balance increase was due to the addition of one large new customer being partially offset by several customers decreasing their carrying balances between the two year-end periods.

18

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

There were no outstanding borrowings from either the FHLB or the Discount Window. Similar to repurchase agreements, the Bank is required to pledge assets to collateralize potential borrowings with the FHLB or the Discount Window. At December 31, 2011, the Bank had residential mortgage loans with a book value of $4.4 million pledged to the FHLB providing the ability to borrow approximately $3.0 million. The Bank has access to unencumbered securities in its investment portfolio that could be pledged to increase the borrowing capacity.

As a result of the Consent Order, the Bank is only eligible for secondary credit at the Discount Window. Secondary credit basically mandates that the Bank must fully utilize its other resources before it requests to borrow. The request would then need to be authorized by the FDIC. At year-end 2011, the Bank had a roughly $2.9 million borrowing capacity at the Discount Window. To secure potential Discount Window borrowings, the Bank has pledged municipal securities and eligible home equity loans.

The utilization of either the FHLB or the Discount Window for funding is not likely. The Bank’s FRB liquidity would have to be completely exhausted before resorting to the utilization of either of these borrowing facilities. In 2011, the Bank’s balance at the FRB averaged $19 million. In 2012, the Bank’s FRB average balance may be lower. As discussed earlier, management is striving to maintain an FRB balance that ranges from $7 million to $10 million in order to assist in improving the Company’s net interest margin. Even with a lower target balance, management anticipates that there is sufficient liquidity to support unforeseen funding needs based on the past history of the Bank’s cash management program.

Subordinated debentures outstanding at December 31, 2010 and 2011 remained at $4.5 million. On December 17, 2004, the Trust, a business trust subsidiary of the Company, using the proceeds from the sale of 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security, purchased an equivalent amount ($4.5 million) of subordinated debentures from the Company. Similar to the rate on the trust preferred securities, the subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and was initially set at 4.55125%. The current rate of interest is 2.63%. The stated maturity is December 30, 2034. Interest payments on the subordinated debentures are payable quarterly on March 30th, June 30th, September 30th and December 30th.

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 of 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.

19

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 December 31, 2011, the accrued interest payable on the subordinated debentures was $200,951.

Under applicable Federal Reserve Board guidelines, the trust preferred securities constitute a restricted core capital element.  The guidelines provide that the aggregate amount of restricted core elements that may be included in tier one capital must not exceed 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Any remaining amount is treated as tier two capital for risk-based capital purposes. Additionally, tier two capital cannot exceed tier one capital. At December 31, 2011, none of the $4.5 million qualified for either tier one or tier two capital at the Company. At December 31, 2010, $227,000 qualified as tier one capital and $4.3 million was disallowed. The decline in the portion of the trust preferred securities qualifying as capital is directly related to the erosion of core capital experienced as a result of the losses recorded since 2007.

The Company has a $5.0 million term loan with Fifth Third Bank (“Fifth Third”) secured by the common stock of the Bank that is in default. The total principal balance outstanding at both December 31, 2011 and December 31, 2010 was $5,000,000.  On January 3, 2011, the Company was not able to repay the 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 six contractual quarterly interest payments. The outstanding principal bears interest at a rate of 275 basis points above Fifth Third’s prime rate.  The current interest rate on the outstanding principal balance is 6.00% per annum.  The total interest due to Fifth Third at year-end 2010 was $153,000. The Company continues to accrue interest on the term loan and at December 31, 2011, the total interest due Fifth Third was $458,000. Management communicated with Fifth Third on several occasions in 2011 to discuss the past maturity loan. Although no formal forbearance was received, Fifth Third indicated that it is interested in having the term loan be part of a comprehensive recapitalization plan but that it then had no intention, in the short term, to foreclose on the stock of the Bank.

Accrued expenses and other liabilities increased $336,000 since December 31, 2010 and were $1.2 million at December 31, 2011. The increase is mostly from the accumulating interest payable on the Company’s subordinated debentures and term loan with Fifth Third.

As a result of losses recorded in 2011, the Company’s shareholders’ equity was negative at year-end. At December 31, 2011, shareholders’ equity was $(1,420,000). The decrease since December 31, 2010, was $2.3 million. The $2.5 million consolidated loss of the Company was slightly offset by a $201,000 increase in accumulated comprehensive income from an increase in the market value of the investment portfolio.

20

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

According to prompt corrective action regulations, the Bank was considered undercapitalized at both year-end 2010 and 2011. At December 31, 2011, the Bank’s total risk-based capital ratio was 6.40% and its tier one to average assets ratio was 3.79%.  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.

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 year-end 2010 or 2011 capital reporting periods. In order to attain the level of capital required by the Consent Order, the Bank would have needed additional capital of $10,320,000 on December 31, 2011 based on its asset mix and size. This is an increase of $70,000 compared to the $10,250,000 that would have been needed on December 31, 2010. The Directive, issued by the FDIC to the Bank on August 17, 2011, stipulated that the Bank be restored to an “adequately capitalized” capital category by October 17, 2011. To reach a level of adequately capitalized, according to FDIC prompt corrective action guidance; the Bank would have needed a capital contribution of roughly $2,600,000 based on its asset mix and size on December 31, 2011. Although the board made efforts to secure funding and comply with the Directive, they were not successful. As such, the Bank was not in compliance with the Directive by the required date and remains out of compliance. The board informed the FDIC in a letter dated October 14, 2011 that it was unable to comply with the Directive. There has been no further communications with the FDIC regarding the Directive. The board’s efforts to garner capital for the Bank is continuing.

RESULTS OF OPERATIONS

The Company recorded a net loss for 2011 of $2,467,000 which was $6,416,000 less than the net loss of $8,883,000 recorded a year earlier.  On a per share basis there was an improvement of $4.37. The Company’s diluted earnings per share was $(1.68) in 2011. This result was an improvement over diluted earnings per share of $(6.05) in 2010. The Company had a retained deficit of $15.1 million at December 31, 2011 compared to a retained deficit of $12.6 million at December 31, 2010.   The losses in both years translated into poor operating ratios. The table below illustrates three key performance measures for the years ended December 31, 2011 and 2010:

	2011			2010
Return on average assets		(1.07	) %		(3.57	) %
Return on average shareholders’ equity		(6,992.01	)		(109.72	)
Average equity to average assets		0.02			3.25

21

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

The main contributing factors to the losses in 2010 were deteriorating credit quality, declining property values and increased credit administration expenses which appeared to abate in 2011, comparatively. Regardless of the degree, the Company’s earnings continue to be affected by the economy and its impact on the Bank’s customers. In an attempt to offset some of these less controllable economic events, the Company continued its cost cutting measures and focused largely on increasing liquidity and improving the Bank’s deposit mix. The benefit of lowering the Bank’s cost of funds was somewhat offset by increased liquidity however, there was still an overall improvement in the Company’s net interest margin.

For 2011, net interest income was $7.5 million compared to $7.0 million for 2010.  The change represents an 8% increase compared to 2010’s results. Interest income generated during the year was derived from the loan portfolio, the securities portfolio and interest-bearing correspondent accounts. The loan portfolio makes up roughly 75% of the Company’s earning assets and its income provided 78% of the Company’s annual revenue in 2011, thus making its composition critically important from an interest rate risk standpoint.

The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. Two of the methods used are to balance the rate sensitivity of the portfolio and to avoid extension risk. At December 31, 2011, there were 71% of the loan balances carrying a fixed rate and 29% a floating rate. Since December 31, 2010, the proportion of fixed rate loans in the portfolio decreased two percent. Shifts in the rate sensitivity of the loan portfolio are typically the result of the types of loans that paid off during the year and shifts in customer preference at the time a loan is renewed. In 2007 and 2008, while rates were declining, there was a noticeable shift in the rate sensitivity of the portfolio as customer preference leaned more towards fixed rate products. Since 2007, the interest rate sensitivity of the portfolio has gone from nearly balanced to the mix described above. If the Bank does not have a more balanced loan portfolio when rates begin to rise it may be detrimental to earnings. A more equitable balance between fixed and floating rate loans is desired and is useful for protecting net interest income during upward or downward movements in rates. Management strives to optimize the repricing mix in an effort to protect the earnings of the Company but the duration of this low rate environment has had a notable impact on these internal goals. Based on the most recent communications from the Federal Open Market Committee, rates are forecasted to remain low until late 2014.

Avoidance of extension risk is the other important means to mitigate interest rate risk. In periods of low interest rates it is generally not advantageous for a financial institution to book long-term, fixed rate notes like 15 or 30 year residential mortgage loans. Since the Bank enhanced its mortgage line of business in 2007 the intention has been to sell 75-90% of all long-term residential mortgages originated. In 2011, residential loan sales were 85% of the total originated. An increase of two percent over the 83% experienced in 2010. Any increase in the residential mortgage loan portfolio resulting from the loans originated and not sold is not expected to markedly change the maturity distribution of the Bank’s total loan portfolio. At December 31, 2011, the maturity distribution of the Bank’s loan portfolio was relatively balanced between short-term (less than one year) and long-term (greater than one year) maturities. Less than 20% of the loan portfolio has a maturity greater than five years.

22

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

The contractual loan maturities and rate sensitivity of the loan portfolio at December 31, 2011 are  included below:

	Within Three Months		Three to Twelve Months		One to Five Years		After Five Years		Total
Commercial	$	4,581,116	$	24,300,602	$	21,526,279	$	2,760,132	$	53,168,129
Commercial Real Estate:
General		7,002,769		7,519,763		40,299,553		2,025,515		56,847,600
Construction		2,507,095		1,657,469		2,215,447		45,030		6,425,041
Consumer:
Lines of credit		494,454		1,816,937		5,190,299		5,874,999		13,376,689
Other		157,113		314,941		1,183,088		715,483		2,370,625
Credit card		59,557		184,716		283,585		0		527,858
Residential		0		0		8,274		16,934,715		16,942,989
	$	14,802,104	$	35,794,428	$	70,706,525	$	28,355,874	$	149,658,931
Loans at fixed rates	$	12,701,373	$	16,454,685	$	59,857,784	$	17,777,257	$	106,791,099
Loans at variable rates		2,100,731		19,339,743		10,848,741		10,578,617		42,867,832
	$	14,802,104	$	35,794,428	$	70,706,525	$	28,355,874	$	149,658,931

For 2011, average earning assets decreased $12.7 million; however the distribution of the categories remained roughly the same. The concentration of interest-bearing deposits at other financial institutions as a percentage of earning assets was nine percent in both 2010 and 2011. The rate earned on these deposits is essentially 25 basis points. Management recognizes the detrimental impact to the Company’s net interest margin as a result of maintaining excess liquidity and intends on reducing the concentration in 2012.

The Bank increased its investment portfolio during 2011. The average of this earning asset group increased $3.8 million over 2010 increasing its percentage of earning assets by three basis points. In spite of increased holdings, the average rate earned declined 53 basis points, decreasing interest income generated from this category in 2011 by $78,000 when compared to 2010. The key reasons that the Bank chose to increase the investment portfolio were to increase on balance sheet liquidity and to provide more collateral for pledging to non deposit funding resources. Purchases were also made to replace bonds that were called by the issuer prior to maturity. In any event, the bonds purchased throughout 2011 were at rates that were consistently below those that were called or matured. The weighted average rate of the bonds that were called or matured in 2011 was 2.113%. The weighted average rate of the purchases in 2011 was 1.245%. Given the forecast for a continued low rate environment it is likely that investment purchases during the next year will be made at rates below the current portfolio average.

23

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Average loans outstanding decreased $15.7 million during 2011. In addition to fewer loans on the books, the average rate earned on the loan portfolio declined 7 basis points. The internal prime lending rate remained the same for both 2010 and 2011. Fewer loans outstanding produced $1.1 million less interest income. Also included in the loan interest outcome is the reversal of $54,000 of interest income for loans that were either charged-off or put on non-accrual status in the year. The interest reversal had a 3 basis point effect on the average rate earned on loans. Currently, the Bank’s internal prime lending rate is 5%; 175 basis points higher than the Wall Street Journal prime rate. Management believes that it is not prudent to reduce the internal prime lending rate given the escalated credit risk in the marketplace and the high cost of funds in the Bank’s local market; however, there is increasing competitive pressure to lend at rates that are below the Bank’s internal prime. Since the Bank is prohibited through the Consent Order from growing assets the Bank intends to retain as many loans as possible and may selectively use lower rates to retain qualifying, existing customers. This may result in a lower yield on loans in the future.

Interest-bearing liabilities are made up of deposits, Discount Window borrowings, repurchase agreements, FHLB advances, notes payable and subordinated debentures. Together these interest-bearing liabilities, on average, decreased $22.0 million during 2011. In spite of the decrease, the composition of interest-bearing liabilities did not change. The largest rate bearing funding category is deposits. Deposits made up 90% of interest-bearing liabilities in both 2010 and 2011. Because of the heavy concentration of deposits, an improvement in the average rate paid on this liability category has a significant influence on the cost of funds. The average rate paid on overall funding costs decreased 61 basis points year over year. The reduction in the blended rate paid on deposits was 58 basis points year over year. A majority of the progress achieved was on time deposits, the largest deposit category and typically the most expensive. In 2011, $73 million in time deposits with an average rate of 2.88% matured and were repriced. The time deposit portfolio weighted average rate was reduced by 95 basis points. There are similar repricing opportunities for 2012. Over the next twelve months, nearly $59 million in time deposits (31% of total deposits) will reprice to current market rates which are currently over 50 basis points lower.

Decreases in the average balance and average rate paid on notes payable, subordinated debentures and FHLB advances between 2010 and 2011 occurred because the Bank had FHLB advances outstanding for a period of time in 2010 but no FHLB advances were outstanding during 2011.

Some of the factors affecting both net interest spread and net interest margin were mentioned above, including the mix of interest-earning assets and the interest rate sensitivity of the various categories.  To illustrate the Company’s condition, 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 period indicated.  Such yields and costs are derived by dividing income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented:

24

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

	Years Ended December 31:
	2011							2010
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Assets
Federal funds sold and interest-bearing deposits with banks	$	19,459,188	$	47,240		0.24	%	$	20,301,004	$	49,882		0.25	%
Securities 1,2		35,734,951		849,725		2.38			31,926,359		927,582		2.91
Loans 3		161,885,478		9,985,906		6.17			177,551,516		11,075,774		6.24
		217,079,617		10,882,871		5.01			229,778,879		12,053,238		5.25
Other assets		13,175,286							19,185,648
	$	230,254,903						$	248,964,527
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	173,966,362	$	2,845,254		1.64		$	194,013,849	$	4,304,290		2.22
FRB Borrowings and repurchase agreements		9,626,384		73,269		0.76			8,913,430		75,837		0.85
Subordinated debentures,  notes payable and FHLB advances		9,500,000		418,243		4.40			12,142,466		652,616		5.37
		193,092,746		3,336,766		1.73			215,069,745		5,032,743		2.34
Noninterest-bearing deposits		36,100,143							25,027,916
Other liabilities		1,026,725							770,814
Shareholders’ Equity		35,289							8,096,052
	$	230,254,903						$	248,964,527
Net interest income (tax equivalent basis)				7,546,105							7,020,495
Net interest spread on earning assets (tax equivalent basis)						3.28	%						2.91	%
Net interest margin on earning assets (tax equivalent basis)						3.48							3.06
Average interest-earning assets to average interest-bearing liabilities						112.42							106.84
Tax equivalent adjustment				49,711							69,184
Net interest income			$	7,496,394						$	6,951,311

As displayed in the preceding table, in 2011 the Company’s net interest spread (tax equivalent) improved by 37 basis points, from 2.91% in 2010 to 3.28% in 2011, and the Company’s net interest margin (tax equivalent) on earning assets increased by 42 basis points. The margin was 3.48% for the twelve months ended December 31, 2011 and 3.06% for the twelve months ended December 31, 2010.

_________________________ 

1 Includes Federal Home Loan Bank Stock.

2 Adjusted to a fully tax equivalent basis.

3 Includes loans held for sale and non-accrual loans.

25

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

As a further demonstration of the effect of rates and volume on this outcome, below is a table displaying the change in interest income and interest expense on interest-earning assets and interest-bearing liabilities segregated between change due to volume and change due to rate:

	Year-ended December 31, 2011 over 2010
	Total			Volume			Rate
Increase (decrease) in interest income
Federal funds sold and interest-bearing deposits with banks	$	(2,642	)	$	(2,049	)	$	(593	)
Securities 1		(77,857	)		102,689			(180,546	)
Loans		(1,089,868	)		(967,582	)		(122,286	)
Net change in interest income		(1,170,367	)		(866,942	)		(303,425	)
Increase (decrease) in interest expense
Interest-bearing deposits		(1,459,036	)		(299,251	)		(1,159,785	)
Federal funds purchased, repurchase agreements and FRB discount window		(2,568	)		5,790			(8,358	)
Subordinated debentures, notes payable and FHLB advances		(234,373	)		(127,995	)		(106,378	)
Net change in interest expense		(1,695,977	)		(421,456	)		(1,274,521	)
Net change in net interest income	$	525,610		$	(445,486	)	$	971,096

As shown above the decreases to interest income resulted mainly from fewer loans on the books while reductions in interest expense were derived primarily from decreases to the average rate paid on deposits. The Bank’s internal prime lending rate is not likely to decline from the current level of 5% in 2012 and as mentioned above there is a fair amount of repricing opportunity in the time deposit portfolio over the next twelve months. As such, net interest margin improvement is anticipated in 2012.

The provision for loan losses was $2.5 million for 2011 and $6.0 million for 2010. In 2010, the expense was significantly impacted by credit quality, increased charge-off activity and deteriorating collateral values on impaired loans. Although the economy is still weak, it appears that during 2011, credit quality, charge-off activity and collateral values have stabilized. Management continues to utilize the same process for monitoring credit quality, delinquency and impaired loans with the intent of maintaining the allowance for loan losses at an appropriate level which reflects the risk in the loan portfolio. The provision for loan losses is an estimate and may be increased or decreased in the future as management continues to monitor the loan portfolio, actual loan loss experience and economic conditions. At December 31, 2011, management believes that the allowance level was adequate and justifiable based on the factors discussed earlier (see Financial Condition).

_________________________ 

1 Adjusted to a fully tax equivalent basis.

26

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-interest income recorded in 2011 was $1.9 million, which reflects a $353,000 increase since 2010.   Service charge income on deposit accounts decreased 6% in the twelve months of 2011 compared to the same period in 2010. The $46,000 decrease in this category was essentially from fewer overdraft fees between the two years. Overdraft fees decreased $56,000 in 2011.

Recorded gains on loan sales were $296,000 in 2011 compared to $317,000 in 2010. The Bank actively sells both residential mortgages and the guaranteed portion of its SBA loans. In 2010, all of the recorded gains were from the sale of residential mortgage loans. In 2011, $124,000 of the total gains were from the sale of the guaranteed portion of SBA loans and $172,000 was from the sale of residential mortgage loans. Residential mortgage gains were down year over year. Although the rate environment is very favorable for consumers, the decline in property values and the rigid underwriting criteria particularly related to appraisals makes it difficult for borrowers to qualify for a loan. To offset some of this decreased revenue the Bank chose to participate with various investors on a referral basis. The Bank earned $51,000 in referral fees in 2011.

Net gains on securities sales were $3,000 in 2011 compared to $80,000 in 2010. In the first quarter of 2010, the Company sold a large portion of its municipal securities portfolio to reduce perceived risk. In that transaction ten securities were sold. In the third quarter of 2011, one security was sold because it no longer was in compliance with the Bank’s investment policy.

Management remains focused on reducing the number of foreclosed properties held. There were ten foreclosed properties and nine lots sold in 2011 compared to 28 foreclosed properties and ten lots sold in 2010. Although there were fewer sales between the two years, there was a $386,000 difference in the outcome of the transactions. In 2011, there was a net gain of $192,000 on the sale of foreclosed property. In 2010, there was a net loss of $194,000. Currently the Bank is holding 31 foreclosed properties. Management continues to evaluate the fair value of properties each quarter but it is difficult to predict if there will be gains or losses on future foreclosed asset sales.

There was a $59,000 increase in other non-interest income between 2010 and 2011.  The two main contributing factors were an increase in debit card income and additional rental income. The Bank’s debit card reward program was rolled out in May of 2010. Throughout 2011, the Bank’s employee incentive programs were focused on increasing the number of customers enrolled in the program.  Currently over 20% of the eligible customers are enrolled which has resulted in an increase in the number of qualifying transactions improving this income by $20,000 over 2010’s results. The other increase was derived from the Bank securing a second tenant at its Harvey location. The 63 month lease was signed in late 2010 but occupancy did not begin until February of 2011. The collected rents from the second tenant in 2011 were $24,000. In the second quarter of 2012, the Bank expects to complete the sale of land that was originally acquired to build a fifth branch of the Bank. There is an expected gain of roughly $250,000.

27

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-interest expenses decreased $1.9 million for the twelve month period ended December 31, 2011 compared to the similar period in 2010. Total non-interest expenses were $9.5 million for 2011 and $11.4 million in 2010. Over 80% of the decline in total non-interest expenses was the result of fewer impairment charges on foreclosed assets. In addition to that favorable outcome, several other categories had notable decreases between the twelve month period of 2010 and 2011 demonstrating management’s ongoing efforts to reduce operating expenses.

Salaries and benefit expenses totaled $4.1 million for 2011; a reduction of $72,000. Since year-end 2010, full time equivalent employees have been reduced by 3.5 and there have been no Company-wide salary increases. The staff reductions noted above occurred late in 2011, thus the impact on earnings is not fully reflected in the year over year reduction in salaries and benefits expense. The Bank has not had a 401(k) matching expense since the first half of 2009. Management continues to look for cost saving opportunities within the health and life insurance plans annually at contract renewal. At this time, management has no plans to increase staff or salaries or resume matching on the 401(k) plan in 2012.

Occupancy expenses totaled $669,000 for 2011 which was an increase of 4% compared to 2010 expenses which were $643,000. There were increases in utilities expenses as well as general repairs and maintenance.

Furniture and equipment expenses were $531,000 in 2011; down $47,000 compared to 2010. Depreciation expense on capital assets declined by $57,000 between 2010 and 2011. As the Bank’s equipment ages, the assets become fully depreciated and no longer require a monthly expense. The benefit of lower depreciation was somewhat offset by higher maintenance contract expenses.

Advertising expenses were $50,000 in 2011 compared to $58,000 in 2010. The $8,000 decrease between the years is mostly due to the fact that the Bank was intentionally trying to reduce its overhead expenses.

Data processing expenses were $506,000 in 2011 compared to $532,000 in 2010. The five percent decrease between the two twelve month periods was possible because management negotiated with its third party provider a temporary deviation from the standard billing structure.  In 2012, data processing expenses are likely to return to 2010 levels.

Professional expenses were $359,000 in 2011 and $514,000 in 2010; a decrease of $155,000 between the two period ends. Legal expenses are included in the Company’s total professional expense. In 2010, the Bank consulted with several lawyers as the details of the Consent Order were being finalized. Consolidated legal expenses were $139,000 less between the two years.

Foreclosed asset impairment charges were $1.0 million in 2011 compared to $2.6 million in 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 values 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. Given that valuations are indirectly tied to the general economic environment, it is uncertain if impairment charges will continue to decline. At December 31, 2011, there were 31 foreclosed assets totaling $3.3 million.

28

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

FDIC premiums increased 25% to $926,000 in 2011 from $739,000 in 2010. In 2011, the Bank was moved to the FDIC’s highest risk category due to its deteriorating capital position and its Consent Order. This change in risk category was largely responsible for the rise in premiums paid between 2011 and 2010. In the second quarter of 2011, there was a reduction in deposit insurance premiums assessed on smaller banks as a result of regulatory changes made to the calculation. This reduction is applicable to all smaller banks, regardless of risk category. It is possible that the Bank’s FDIC insurance premiums could be slightly less in 2012 when the calculation changes have been applicable for a full year.

Other expenses were $1.3 million in 2011 compared to $1.6 million in 2010. The $260,000 decrease between the years was primarily related to a reduction in credit administration expenses. Credit administration expenses declined $295,000 in 2011. They aggregated $466,000 in 2011 compared to $761,000 in 2010. A large portion of the expense is property tax due on foreclosed real property. Often when the Bank receives legal title to a property, the taxes are seriously delinquent. The Bank is required to get the taxes caught up to a certain point to preserve its legal position as the temporary property holder. The decline in property tax obligations is directly proportional to the number and type of foreclosed properties being held by the Bank.

Partially offsetting the decline in credit administration expenses was a $115,000 increase in the cost of the Bank’s liability insurance for its directors and officers as well as lender liability and employment practices. In February 2011 when the policy expired, the Consent Order and the Written Agreement were heavily considered in determining the level of risk for ongoing coverage. The Bank was forced to switch carriers and absorb an increased fee of 410%. It is assumed that the insurance cost will remain inflated as long as the Bank is still subject to the Consent Order and the Written Agreement. Management, with the help of staff, was successful at finding a variety of other small cost reductions that decreased the other expense category roughly $80,000 since 2010.

The Company had a federal tax benefit of $104,000 in 2011 compared to a federal tax benefit of $11,000 in 2010. An income tax benefit associated with continuing operations in the amount of $103,669 was recorded for the year ending December 31, 2011. The benefit recorded considers the results of current period adjustments to other comprehensive income. Generally, the calculation for income tax expense (benefit) does not consider the tax effects of changes in other comprehensive income or loss, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances when there is a pre-tax loss from continuing operations and income from other categories such as other comprehensive income. In such case, pre-tax income from other categories is included in the tax expense (benefit) calculation for the current period.

LIQUIDITY AND INTEREST RATE SENSITIVITY

The Company’s Asset Liability Committee (“ALCO”), which includes Senior Management, the Bank’s Controller, and Assistant Controller, monitors and manages liquidity and interest rate risk. ALCO reports to the Board of Directors and operates within Board approved policy limits. Liquidity management involves the ability to meet the cash flow requirements of the Bank’s customers.  These customers may be either borrowers with credit needs or depositors wanting to withdraw funds.

29

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

In addition to normal loan funding and deposit flow, the Bank needs to maintain liquidity to meet the demands of certain unfunded loan commitments and standby letters of credit.  At December 31, 2011, the Bank had a total of $21.3 million in unfunded loan commitments and $1.3 million in unfunded standby letters of credit.  Of the total unfunded loan commitments, nearly all were commitments available as lines of creditto be drawn at any time as customers’ cash needs vary. The Bank monitors fluctuations in credit line balances and commitment levels, and includes such data in a liquidity snapshot that is distributed monthly to members of ALCO.

Many correspondent banks have actively reduced their credit exposure to other banks by either reducing or cancelling unsecured federal funds lines of credit. At both year-end 2010 and 2011, the Bank had no established over night federal funds purchase lines through correspondent banks. The Bank’s main sources of liquidity in times of unexpected customer activity are its excess liquidity at the FRB, the FHLB, its unencumbered securities, the Discount Window secondary credit borrowing program and the internet time deposit listing service.

The Bank plans to maintain excess liquidity in its FRB account and hold an elevated level of unencumbered securities. Although the FRB balance at December 31, 2011 was only $6.4 million; the average balance held at the FRB for 2011 was $19.0 million. This compares to an average balance of $19.9 million for 2010. The entire FRB balance less reserve and clearing requirements is available for liquidity purposes. In 2012, management will be focused on maximizing the Company’s net interest margin and has decided to reduce the excess liquidity held at the FRB. During 2012, the FRB balance is expected to average between $7 million and $10 million. Although this is lower than the past two years, this range is expected to be sufficient to cover the upcoming obligations of the Bank’s customers and also provide an excess amount for unknown needs.

The Bank had unencumbered securities of $11.5 million on December 31, 2011. This was an increase in securities available to be sold for liquidity purposes of $4.2 million compared to the prior year-end. The process of liquidating securities typically takes a few days. First the Bank needs to find a buyer for the offerings and then the transaction needs a day to settle. In most cases, a security sale can occur in 2-3 days but sometimes it will take longer. The downside of security sales is the potential realization in earnings of market value and book value differences. At year-end there were $179,000 of unrealized gains and one unrealized loss of $300 on securities available to be sold for liquidity purposes.

30

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Based on Board approval, the Bank has the authority to borrow up to $20 million from the FHLB. At December 31, 2011, the Bank had the capacity to borrow $3 million from the FHLB based on a pledge of residential mortgage loans with a book value of $4.4 million and a fair market value of $3.8 million. In order to maximize this opportunity, the Bank would need to pledge more collateral. To do this, management could consider utilizing some of its unencumbered securities or pledging qualifying loans within the Bank’s commercial real estate portfolio. FHLB guidelines related to pledging this type of loan are very strict thus the Bank has not chosen to actively pursue this possibility. In 2010, the Bank also had a $5 million overdraft line of credit collateralized by securities in its portfolio. On December 22, 2011, the Federal Home Loan Bank declined to renew the line of credit so the pledge of the securities was released. As a result of the Consent Order, the Bank is only eligible for secondary credit at the Discount Window. Secondary credit basically mandates that the Bank must fully utilize its other resources before it requests to borrow. The request would then need to be authorized by the FDIC. The borrowing capacity at the Discount Window was $2.9 million at December 31, 2011. This is a reduction from the $10.3 million borrowing capacity at December 31, 2010. To secure potential Discount Window borrowings, the Bank has pledged municipal securities and eligible home equity loans. At year-end 2011, the Bank had $2.6 million of municipal securities and $4.8 million of qualifying home equity loans pledged to support this credit facility. Since year-end 2010, the Bank’s pledged home equity loans have decreased $2.7 million. As the pledged home equity loans paydown, the Bank has not replaced the collateral. Another reduction in the borrowing capacity occurred in the second half of 2011. After the Bank was elevated to the FDIC highest risk category, the FRB notified the Bank that it needed to use $4.5 million of its pledged assets to collateralize the clearing activity in its FRB correspondent bank account. These two occurrences substantiate the difference in the borrowing capacity from year-end 2010 to year-end 2011. The Bank did not utilize the Discount Window at all in 2011. Borrowing from the Discount Window is not reliable and will be maintained for emergency purposes only.

It will always be the mission of the Bank to gather local deposits however, these deposits usually are slower to accumulate and are often more costly. When liquidity is needed, internet deposits are considered a viable resource. The Bank has been a member of an internet subscription service since December 2009. The internet subscription service allows the Bank to post rates for various terms within a closed network of pre-screened investors across the country. Deposits gathered this way are generally between $50,000 and $99,000 each; up to a maximum of $250,000. These deposits are not considered brokered. In 2011, the Bank gathered $29.1 million to maintain the liquidity of the Bank. The average term for these deposits was over 31 months and the average rate paid was 1.01%. This source of deposits has been instrumental as an ALCO tool because the Bank is able to add longer term funding at rates that are significantly below the local market. ALCO strives to maximize earnings and will make decisions about targeted deposit gathering using these external sources based on many factors including comparative rate data.

Another important responsibility of the ALCO is to monitor interest rate risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. The Company employs a variety of measurement techniques to identify and manage this risk. A sophisticated simulation model is used to analyze net interest income sensitivity. The model incorporates both actual cash flows and contractual repricing behavior as well as economic and market-based assumptions provided by Senior Management. ALCO strives to maintain a balance between interest-earning assets and interest-bearing liabilities. Overnight investments, on which rates change daily, and loans tied to the prime rate, differ considerably from long-term investment securities and fixed rate loans.  Time deposits over $100,000 and money market accounts are more interest rate sensitive than regular savings accounts.  Comparison of the repricing intervals of interest-earning assets to interest-bearing liabilities is a measure of interest sensitivity gap.

31

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Details of the Company’s repricing gap at December 31, 2011 were:

	Interest Rate Sensitivity Period
	Within Three Months			Three to Twelve Months			One to Five Years			After Five Years		Total
Earning assets
Interest-bearing deposits in other financial institutions	$	6,493,426		$	0		$	0		$	0	$	6,493,426
Securities (includes FHLB stock)		2,891,812			8,204,452			19,776,932			4,149,707		35,022,903
Loans		65,657,988			14,933,005			53,045,656			21,557,265		155,193,914
		75,043,226			23,137,457			72,822,588			25,706,972		196,710,243
Interest-bearing liabilities
Savings and checking		46,379,051			0			0			0		46,379,051
Time deposits <$100,000		10,584,807			33,287,574			51,339,387			0		95,211,768
Time deposits >$100,000		5,238,302			9,602,757			1,832,160			0		16,673,219
Repurchase agreements and Federal funds purchased		7,814,745			0			0			0		7,814,745
Notes payable and other borrowings		9,500,000			0			0			0		9,500,000
		79,516,905			42,890,331			53,171,547			0		175,578,783
Net asset (liability) repricing gap	$	(4,473,679	)	$	(19,752,874	)	$	19,651,041		$	25,706,972	$	21,131,460
Cumulative net asset (liability) repricing gap	$	(4,473,679	)	$	(24,226,553	)	$	(4,575,512	)	$	21,131,460

The interest rate sensitivity table simply illustrates what the Company is contractually able to change in certain time frames. 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 decreases to the national federal funds rate would have more of an impact on interest expense than on interest income during this period if there were a parallel shift in rates. For instance, if the Company’s internal prime rate went down by 25 basis points and every interest-earning asset and interest-bearing liability on the Company’s December 31, 2011 balance sheet, repricing in the next twelve months, adjusted simultaneously by the same 25 basis points, more liabilities would be affected than assets.

The short-term repricing opportunities of time deposit liabilities should be helpful to the net interest margin and net interest income. In 2012, nearly $59 million in time deposits are scheduled to reprice to rates that are currently 50 basis points lower. Since management intends to keep the Bank’s internal prime lending rate at a level of 5% or more in 2012 regardless of any changes to the national prime rate, the reduction in the cost of funding will help improve the net interest margin. Balancing the repricing and maturity gaps and managing interest rate sensitivity is a continual challenge that has been magnified by this economy and the restrictions placed on the Bank under the Consent Order.

32

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

CAPITAL RESOURCES

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. 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. In general, capital amounts and classifications are subject to qualitative judgments by regulators about components, risk-weighting, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.

Prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a bank is not well-capitalized, regulatory approval is required to accept brokered deposits.  Subject to limited exceptions, a bank may not make a capital distribution if, after making the distribution, it would be undercapitalized.  If a bank is undercapitalized, it is subject to being closely monitored by its principal federal regulator, its asset growth and expansion are restricted, and plans for capital restoration are required. In addition, further specific types of restrictions may be imposed on the bank at the discretion of the federal regulator.

The Company was critically undercapitalized at year-end 2010, with a total risk-based capital ratio of 1.02%. Critically undercapitalized is the lowest classification according to regulatory risk-based capital guidelines. The core capital of the Company continued to erode and the Company had negative tier one capital at year-end 2011. As a result, of negative tier one capital; there was a complete disallowance of supplemental capital of approximately $6.6 million. Trust preferred securities and allowance for loan losses are the main supplemental capital components of the Company. At year-end 2010, $4.3 million of trust preferred securities and $1.3 million of qualifying allowance for loan losses were disallowed as tier two capital—supplemental capital.

The total risk-based capital ratio of the Bank at December 31, 2011 was 6.40%, or undercapitalized. Year over year there was a $15.4 million reduction of the Bank’s risk-weighted assets however that was not enough to offset the Bank’s recorded net loss for the year. For more details about prompt corrective action regulations see Note 15 to the Company’s Financial Statements.

During 2011, the Company did not have excess liquidity to contribute capital into the Bank. The Company’s only capital resource is its cash balance of approximately $34,000. This is also the main liquidity resource for paying the Company’s expenses. Financial Services will be issuing a dividend to the Company in the first quarter of 2012. The cash on hand at the Company as of year-end 2011 coupled with the dividend to be received from Financial Services is anticipated to cover the basic overhead expenses for the first half of the 2012 operating year. Once the Company is out of cash, it is anticipated that it will no longer have the ability to fulfill its public document filing requirements since doing so requires the assistance of a third party vendor.

33

COMMUNITY SHORES BANK CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Limited cash at the Company concerns the Board.  Pursuing capital for liquidity purposes at the Company and contributing capital to the Bank is a priority; however the ability to fully comply with all of the requirements of the Consent Order and the Directive, including maintaining specified capital levels, is not entirely within the control of the directors or management, and is not assured. Failure to comply with provisions of either the Consent Order or the Directive may result in further regulatory action that could have a material adverse effect on the Company and its shareholders, as well as the Bank.  For now, the Board of Directors along with management intend to continue seeking capital raising possibilities, reducing problem assets and implementing cost saving tactics to make progress towards reducing controllable overhead expenses.

RECENT ACCOUNTING DEVELOPMENTS

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  For public companies, the amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the impact of this amendment to be material to the consolidated financial statements.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements.  For public companies, the amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted.  The adoption of this amendment will change the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholders’ equity.

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

34

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Community Shores Bank Corporation

Muskegon, Michigan

We have audited the accompanying consolidated balance sheets of Community Shores Bank Corporation as of December 31, 2011 and 2010 and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Shores Bank Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 20 to the consolidated financial statements, the Company has incurred significant recurring operating losses, is in default of its notes payable collateralized by the stock of its wholly-owned bank subsidiary, and the subsidiary bank is undercapitalized and is not in compliance with revised minimum regulatory capital requirements under a formal regulatory agreement which has imposed limitations on certain operations. These events raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 20. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Crowe Horwath LLP

Grand Rapids, Michigan

March 28, 2012

35

COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2011 and 2010

	2011			2010
ASSETS
Cash and due from financial institutions	$	2,426,142		$	2,074,301
Interest-bearing deposits in other financial institutions		6,493,426			21,565,572
Cash and cash equivalents		8,919,568			23,639,873
Securities available for sale (at fair value)		34,572,103			36,503,903
Loans held for sale		5,534,983			1,263,263
Loans		149,658,931			165,243,881
Less: Allowance for loan losses		5,299,454			4,791,907
Net loans		144,359,477			160,451,974
Federal Home Loan Bank stock		450,800			479,800
Premises and equipment, net		10,404,865			10,874,176
Accrued interest receivable		746,143			781,334
Foreclosed assets		3,276,838			3,382,594
Other assets		386,524			568,580
Total assets	$	208,651,301		$	237,945,497
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing	$	33,281,198		$	33,326,683
Interest-bearing		158,264,038			185,936,494
Total deposits		191,545,236			219,263,177
Federal funds purchased and repurchase agreements		7,814,745			7,460,795
Notes payable		5,000,000			5,000,000
Subordinated debentures		4,500,000			4,500,000
Accrued expenses and other liabilities		1,211,702			875,738
Total liabilities		210,071,683			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		(15,084,431	)		(12,617,022	)
Accumulated other comprehensive income		367,358			166,118
Total shareholders’ equity		(1,420,382	)		845,787
Total liabilities and shareholders’ equity	$	208,651,301		$	237,945,497

See accompanying notes to consolidated financial statements.

36

COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2011 and 2010

	2011			2010
Interest and dividend income
Loans, including fees	$	9,985,906		$	11,075,774
Securities, taxable		698,749			724,834
Securities, tax exempt		89,063			124,868
Federal funds sold, FHLB dividends and other income		59,442			58,578
Total interest and dividend income		10,833,160			11,984,054
Interest expense
Deposits		2,845,254			4,304,290
Repurchase agreements, federal funds purchased, and other debt		73,269			75,837
Federal Home Loan Bank advances and notes payable		418,243			652,616
Total interest expense		3,336,766			5,032,743
Net Interest Income		7,496,394			6,951,311
Provision for loan losses		2,483,640			6,024,775
Net Interest Income After Provision for Loan Losses		5,012,754			926,536
Non-interest income
Service charges on deposit accounts		741,990			787,980
Mortgage loan referral fees		50,877			0
Gain on sale of loans		295,961			316,525
Gain on sale of securities		3,288			79,814
Gain (loss) on the sale of foreclosed assets		192,176			(193,559	)
Other		637,139			578,020
Total non-interest income		1,921,431			1,568,780
Non-interest expense
Salaries and employee benefits		4,074,170			4,146,318
Occupancy		668,502			643,159
Furniture and equipment		530,948			578,156
Advertising		49,636			58,411
Data processing		505,981			532,103
Professional services		358,685			513,458
Foreclosed asset impairment		1,047,644			2,575,129
FDIC Insurance		926,464			738,940
Other		1,343,233			1,602,987
Total non-interest expense		9,505,263			11,388,661
Loss Before Federal Income Taxes		(2,571,078	)		(8,893,345	)
Federal income tax expense (benefit)		(103,669	)		(10,618	)
Net Loss	$	(2,467,409	)	$	(8,882,727	)
Weighted average shares outstanding		1,468,800			1,468,800
Diluted average shares outstanding		1,468,800			1,468,800
Basic loss per share	$	(1.68	)	$	(6.05	)
Diluted loss per share	$	(1.68	)	$	(6.05	)

See accompanying notes to consolidated financial statements.

37

COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

December 31, 2011 and 2010

	Shares		Common Stock		Retained Deficit			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
Balance at January 1, 2010		1,468,800	$	13,296,691	$	(3,734,295	)	$	177,595		$	9,739,991
Comprehensive income (loss):
Net loss						(8,882,727	)					(8,882,727	)
Unrealized loss on securities available for sale, net									(11,477	)		(11,477	)
Total comprehensive income (loss)												(8,894,204	)
Balance at December 31, 2010		1,468,800		13,296,691		(12,617,022	)		166,118			845,787
Comprehensive income (loss):
Net loss						(2,467,409	)					(2,467,409	)
Unrealized gain on securities available for sale, net									201,240			201,240
Total comprehensive income (loss)												(2,266,169	)
Balance at December 31, 2011		1,468,800	$	13,296,691	$	(15,084,431	)	$	367,358		$	(1,420,382	)

See accompanying notes to consolidated financial statements.

38

COMMUNITY SHORES BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2011 and 2010

	2011			2010
Cash flows from operating activities
Net loss	$	(2,467,409	)	$	(8,882,727	)
Adjustments to reconcile net loss to net cash from operating activities:
Provision for loan losses		2,483,640			6,024,775
Depreciation		522,212			579,553
Net amortization of securities		258,365			199,959
Net realized gain on sale of securities		(3,288	)		(79,814	)
Net realized gain on sale of loans		(295,961	)		(316,525	)
Net realized (gain) loss on sale of foreclosed assets		(192,176	)		193,559
Foreclosed asset impairment		1,047,644			2,575,129
Originations of loans for sale		(18,157,446	)		(19,707,901	)
Proceeds from loan sales		14,181,687			19,831,855
Deferred federal income tax benefit		(103,669	)		0
Net change in:
Accrued interest receivable and other assets		217,247			1,090,040
Accrued interest payable and other liabilities		335,964			262,606
Net cash (used in) from operating activities		(2,173,190	)		1,770,509
Cash flows from investing activities
Activity in available for sale securities:
Sales		820,285			3,751,027
Maturities, prepayments and calls		13,800,337			11,445,595
Purchases		(12,638,990	)		(24,340,702	)
Loan originations and payments, net		12,491,304			10,798,221
Redemption (purchase) of Federal Home Loan Bank stock		29,000			(75,700	)
Additions to premises and equipment, net		(52,901	)		(160,560	)
Proceeds from the sale of foreclosed assets		367,841			2,480,359
Net cash from investing activities		14,816,876			3,898,240
Cash flows from financing activities
Net change in deposits		(27,717,941	)		20,686,568
Net change in federal funds purchased and repurchase agreements		353,950			460,468
Repayment of FHLB advances		0			(6,000,000	)
Net cash (used in) from financing activities		(27,363,991	)		15,147,036
Net change in cash and cash equivalents		(14,720,305	)		20,815,785
Beginning cash and cash equivalents		23,639,873			2,824,088
Ending cash and cash equivalents	$	8,919,568		$	23,639,873
Supplemental cash flow information:
Cash paid during the period for interest	$	2,960,854		$	4,834,163
Transfers from loans to foreclosed assets		1,544,993			3,073,725
Transfers from securities held to maturity to available for sale		0			5,839,614
Foreclosed asset sales financed by the Bank		427,440			883,000

See accompanying notes to consolidated financial statements.

39

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:  The consolidated financial statements include the accounts of Community Shores Bank Corporation (the “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”), after elimination of significant intercompany transactions and accounts.

NATURE OF OPERATIONS:  The Company was incorporated on July 23, 1998 under Michigan law and is a bank holding company owning all of the common stock of the Bank.  The Bank is a Michigan banking corporation with depository accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”).  The Bank provides a range of commercial and consumer banking services in West Michigan, primarily in Muskegon County, which includes the cities of Muskegon and North Muskegon, and Northern Ottawa County, which includes the city of Grand Haven.  Those services reflect the Bank’s strategy of serving small to medium-sized businesses, and individual customers in its market area.  Services for businesses include traditional business accounts and both commercial and commercial real estate loans. At year-end 2011, the loan portfolio was 35% commercial and 42% commercial real estate. There were 3% of total commercial real estate loans classified as land development. There are no significant concentrations of loans to any one industry or customer; however, the borrowers’ ability to repay their loans is affected by the real estate market and general market conditions in the Bank’s market area. Management focuses the Bank’s retail banking strategy on providing traditional banking products and services, including consumer and residential loans, automated teller machines, computer banking, telephone banking and automated bill-paying services to individuals and businesses in the Bank’s market area.  The Bank began operations on January 18, 1999.

The Mortgage Company, a wholly-owned subsidiary of the Bank, was formed on March 1, 2002 by transferring a majority of the Bank’s commercial and residential real estate loans at that date in exchange for 100% of the equity capital of the Mortgage Company. On the day of formation, the Mortgage Company commenced operations and became legally able to originate residential mortgage loans. The Bank services the entire portfolio of loans held by the Mortgage Company pursuant to a servicing agreement.

Berryfield, a wholly-owned subsidiary of the Mortgage Company, is a limited liability company that was created in October 2010. The entity’s sole purpose is to oversee the development and sale of vacant lots that have been foreclosed on by the Mortgage Company.

40

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company filed an election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and on September 27, 2002 received regulatory approval. At that time the Company formed CS Financial Services. Currently the only source of revenue that CS Financial Services receives is referral fee income from a local insurance agency, Lakeshore Employee Benefits. Lakeshore Employee Benefits offers, among other things, employer-sponsored benefit plans. CS Financial Services has the opportunity to earn a referral fee for each sale of employer-sponsored benefits that is transacted by Lakeshore Employee Benefits as a result of a referral made by CS Financial Services. On April 16, 2009, the Company withdrew its election to be a financial holding company. The election was acknowledged by the Federal Reserve Bank of Chicago. The passive income derived from CS Financial Services affiliation with Lakeshore Employee Benefits is unaffected by this change.

Community Shores Capital Trust I, (“the Trust”) was formed in December 2004. The Company owns all of the common securities of this special purpose trust. The Trust is not consolidated and exists solely to issue capital securities.

USE OF ESTIMATES: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The primary estimates incorporated into the Company’s consolidated financial statements, which are susceptible to change in the near term, include the allowance for loan losses; the fair value of financial instruments, the carrying value of foreclosed assets and a valuation allowance on deferred tax assets.

CASH FLOW REPORTING: Cash and cash equivalents includes cash, demand deposits with other financial institutions, short-term investments (securities with daily put provisions) and federal funds sold.  Cash flows are reported net for customer loan and deposit transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less.

INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS: Interest-bearing deposits in other financial institutions are carried at cost.

SECURITIES:  Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.  Securities are classified as available for sale when they might be sold before maturity.  Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.  Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are expected. Gains and losses on sales are based on the amortized cost of the security sold.

41

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when the economic conditions warrant such evaluation. Declines in the fair value of securities below their cost that are other-than-temporary are reflected in realized losses. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and whether the Company has the intent to sell or is likely to be required to sell the security before its anticipated recovery.

LOANS:  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.  Loans held for sale consist of both residential mortgage loans as well as Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) guaranteed loans. Loans held for sale are reported at the lower of cost or market, on an aggregated basis. Residential mortgage loans are sold to outside investors servicing released, however the Bank retains servicing on SBA loans which are sold. There were loans held for sale totaling $5,534,983 at December 31, 2011 compared to $1,263,263 at December 31, 2010.

The loan portfolio consists of the following segments:

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

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

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

42

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent 12 quarters.  The historical loss experience is recalculated at the end of each quarter. This actual loss experience is supplemented with current economic factors based on the risks present for each portfolio segment.  These current economic factors are also revisited at the end of each quarter and include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; quality of loan review system; degree of oversight by the Board of Directors; national and local economic trends and conditions; industry conditions; competition and legal and regulatory requirements; and effects of changes in credit concentrations. There were no significant changes to this methodology in 2011, only minor enhancements.

43

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

For the commercial and commercial real estate portfolio segments, the historical loss is tracked by original loan grade. The Bank utilizes a numeric grading system for commercial and commercial real estate loans. Grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation and the estimated collateral values. The description of the loan grade criteria is included in Note 3. The most significant risks to the commercial and commercial real estate segments are the level of development and sales and the collateral values.  Over the past few years, development and sales activity were sluggish. As a result, collateral values fell. The declining values prompted more frequent collateral analysis of impaired loans and typically translated into charge-offs of the specific allocations (collateral shortfall). Increases in charge-offs raised the historical loss factor assigned to the general allocation.

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

For the consumer segment, historical loss experience is based on the actual loss history of the following four classes; general consumer loans, personal lines of credit, home equity lines of credit and credit cards. The level of delinquencies and charge-off experience directly impacts the general allocations to the consumer classes. Both delinquencies and charge-offs have gone down in the last year allowing a reduction of the general allocations in the allowance for loan losses.

The residential segment loss experience is not segregated by grades or classes. The level of delinquencies, charge-off experience, and direction of real estate values directly impacts the general allocations to the residential real estate segment. Declining real estate values have resulted in increased general allocations in the allowance for loan losses.

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

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

44

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

There was no material change in the allowance for loan loss methodology during 2011.

SERVICING RIGHTS: Servicing rights are recognized separately when they are acquired through the sales of loans where servicing is retained by the institution. At this time SBA guaranteed loans are the only loans that are sold where servicing is retained. When loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Under the fair value measurement method used by the Company, earnings are adjusted for the change in fair value in the period in which the change occurs, and the amount is included with other non-interest income on the income statement. The Company uses a third party valuation at each quarter end to adjust servicing assets to their fair value as of the end of the reporting period. The fair value of servicing rights is subject to fluctuation as a result of changes in the underlying assumptions used by the third party to conduct its valuation. Servicing rights were $76,276 at December 31, 2011 and $38,858 at December 31, 2010.

Servicing fee income is recorded for fees earned for servicing loans and is reported on the income statement as other non-interest income. The fees are based on a contractual percentage of the outstanding principal of the guaranteed portion. Servicing fees totaled $89,163 for the year ended December 31, 2011 and $40,339 for the year ended December 31, 2010.

45

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated selling cost when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a direct write-down is recorded through non-interest expense. Operating costs after acquisition are expensed.

PREMISES AND EQUIPMENT:  Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.

FEDERAL HOME LOAN BANK (FHLB) STOCK:  The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

LONG-TERM ASSETS:  Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.

REPURCHASE AGREEMENTS:  Substantially all repurchase agreement liabilities represent amounts advanced by various customers.  These balances are not deposits and are not covered by federal deposit insurance. Securities are pledged to cover these liabilities.

STOCK COMPENSATION: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

46

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

INCOME TAXES:  Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company is only subject to examinations of federal taxing authorities for years after 2007. The Company and its subsidiaries are subject to U.S. federal income tax. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at either December 31, 2011 or December 31, 2010.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded. Standby letters of credit are considered guarantees and are recorded at fair value.

EARNINGS PER COMMON SHARE:  Basic earnings per common share is net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.  In 2011, stock options for 42,800 shares of common stock were not considered in computing diluted earnings per share because they were anti-dilutive. In 2010, 47,300 shares of common stock were not considered for the same reason.

COMPREHENSIVE INCOME (LOSS): Comprehensive income consists of net income (loss) and other comprehensive income (loss).  Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity.

LOSS CONTINGENCIES:  Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Currently, management does not believe there now are such matters that will have a material effect on the financial statements.

47

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RESTRICTIONS ON CASH:  The Bank was required to have $1,118,000 of cash on hand, or on deposit, with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at year-end 2011. The requirement at year-end 2010 was $1,211,000.

DIVIDEND RESTRICTIONS: Holders of the Company's common stock are entitled to receive dividends that the Board of Directors may declare from time to time.  The Company may only pay dividends out of funds that are legally available for that purpose.  The Company's ability to pay dividends to its shareholders depends primarily on the Bank’s ability to pay dividends to the Company.  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.

On December 16, 2010, the Company entered into a Written Agreement with the FRB. The Written Agreement contained several provisions related to dividends and distributions. Essentially the Company shall not declare or pay any dividends without the prior written approval of the FRB, and the Company shall not accept dividends or any other form of payment from the Bank without the prior written approval of the FRB. Similarly the Bank is prohibited from paying dividends. The Bank entered into a Consent Order with the FDIC and the OFIR, its primary banking regulators, which became effective on September 2, 2010. The Consent Order, among other things, explicitly prohibits the Bank from declaring or paying a dividend without the prior written consent of the regulators.

Prior to the regulatory dividend restrictions, there were several other restrictions in place as a result of various debt covenants. For instance, under the terms of the subordinated debentures, the Company is precluded from paying dividends on its common stock because the Company exercised its right to defer payments of interest on the subordinated debentures in June of 2010. No dividends may be issued until the deferral ends. Additionally, the Company’s dividends are limited by its lender imposed debt covenant if the source of the cash was from loan proceeds.

FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of financial instruments is estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.

48

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ADOPTION OF NEW ACCOUNTING STANDARDS:

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 gives 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 was effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment of those receivables, the amendments were applied prospectively for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this ASU had no material impact on our consolidated financial statements.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  For public companies, the amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements.  For public companies, the amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted.  The adoption of this amendment will change the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholders’ equity.

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

49

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

OPERATING SEGMENTS: While Management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered to be aggregated in one reportable segment, banking.

RECLASSIFICATION:  Some items in the prior year financial statements were reclassified to conform to the current presentation.

NOTE 2 – SECURITIES AVAILABLE FOR SALE

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2011
US Treasury	$	4,041,881	$	25,775	$	0		$	4,067,656
US Government and federal agency		15,341,362		239,037		(7,811	)		15,572,588
Municipals		2,767,463		123,957		0			2,891,420
Mortgage-backed and collateralized mortgage obligations– residential		11,733,141		317,565		(10,267	)		12,040,439
	$	33,883,847	$	706,334	$	(18,078	)	$	34,572,103
2010
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

Periodically the Company will implement a strategy to realize market value gains within its securities portfolio to supplement earnings and capital. Proceeds from sales of securities in 2011 totaled $820,285 resulting in a realized gain of $3,288 and no realized loss. Proceeds from security sales in 2010 totaled $3,751,027 resulting in a realized gain of $80,079 and realized loss of $265.

50

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

In 2010, several of the securities sold were transferred out of the held to maturity portfolio. As a result, the Company needed to transfer all of its remaining held to maturity securities into the available for sale portfolio in order to comply with accounting guidance. The carrying amount of the securities transferred during 2010 was $5,839,614. Of that total, $3,551,506 was sold. The remaining $2,288,108 had an unrealized gain of $28,192 that was recorded through other comprehensive income upon transfer.

The fair value of debt securities and carrying amount, if different, at year-end 2011 by contractual maturity were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately:

2011	Amortized Cost		Fair Value
Due in one year or less	$	4,529,357	$	4,565,559
Due from one to five years		15,866,876		16,111,735
Due from five to ten years		1,754,473		1,854,370
Due in more than ten years		0		0
Mortgage-backed and collateralized mortgage obligations – residential		11,733,141		12,040,439
	$	33,883,847	$	34,572,103

Securities with unrealized losses not recognized in income at year-end 2011 and 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or Longer					Total
2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
US Government and federal agency	$	2,060,693	$	(7,811	)	$	0	$	0		$	2,060,693	$	(7,811	)
Mortgage-backed and collateralized mortgage obligations - residential		817,615		(4,240	)		1,215,921		(6,027	)		2,033,536		(10,267	)
	$	2,878,308	$	(12,051	)	$	1,215,921	$	(6,027	)	$	4,094,229	$	(18,078	)

51

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

	Less than 12 Months					12 Months or Longer				Total
2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized 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	)

Other-Than-Temporary-Impairment

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

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

52

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 – SECURITIES AVAILABLE FOR SALE (Continued)

At both year-end 2011 and 2010, approximately 100% of the mortgage-backed securities and collateralized mortgage obligations 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. At December 31, 2011, seven debt securities had unrealized losses with aggregate depreciation of 0.44% from the amortized cost basis. All seven securities are issued by a government agency. It is likely that these debt securities will be retained given the fact that they are pledged to various public funds. The reported decline in value is not material and is deemed to be market driven. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2011.

At year-end 2011 and 2010, there were no holdings of securities of any one issuer, other than U.S. Government and federal agencies, in an amount greater than 10% of common stock and surplus.

Securities pledged at year-end 2011 had a carrying amount of $23,093,022 and were pledged to secure public fund customers, the Federal Reserve Discount Window and customer repurchase agreements.  Pledged securities at year-end 2010 had a carrying amount of $29,206,793.

NOTE 3 - LOANS

Outstanding loan balances by portfolio segment and class at year-end were as follows:

	2011			2010
Commercial	$	53,200,412		$	58,416,643
Commercial Real Estate:
General		56,847,600			58,996,411
Construction		6,425,041			8,782,762
Consumer:
Lines of credit		13,376,689			15,954,866
Other		2,370,625			3,087,409
Credit card		527,858			520,095
Residential		16,942,989			19,534,704
		149,691,214			165,292,890
Less:  Allowance for loan losses		(5,299,454	)		(4,791,907	)
Net deferred loan fees		(32,283	)		(49,009	)
Loans, net	$	144,359,477		$	160,451,974

53

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - LOANS (Continued)

The following table presents the activity in the allowance for loan losses for the year ending December 31, 2011 by portfolio segment:

Year Ending December 31, 2011	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,218,865		$	2,896,176		$	546,603		$	130,263		$	4,791,907
Charge-offs		(541,494	)		(1,294,273	)		(248,953	)		(77,060	)		(2,161,780	)
Recoveries		91,000			49,486			45,201			0			185,687
Provision for loan losses		1,429,384			846,921			67,150			140,185			2,483,640
Ending balance	$	2,197,755		$	2,498,310		$	410,001		$	193,388		$	5,299,454

Activity in the allowance for loan losses for 2010 was as follows:

	2010
Beginning balance	$	3,782,132
Charge-offs		(5,090,138	)
Recoveries		75,138
Provision for loan losses		6,024,775
Ending balance	$	4,791,907

54

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of year-end:

2011	Commercial		Commercial  Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,354,124	$	1,424,273	$	109,309	$	103,393	$	2,991,099
Collectively evaluated for impairment		843,631		1,074,037		300,692		89,995		2,308,355
Total ending allowance balance	$	2,197,755	$	2,498,310	$	410,001	$	193,388	$	5,299,454
Loans:
Individually evaluated for impairment	$	7,098,022	$	7,895,704	$	274,700	$	595,598	$	15,864,024
Collectively evaluated for impairment		46,310,131		55,826,466		16,025,489		16,429,725		134,591,811
Total ending loans balance	$	53,408,153	$	63,722,170	$	16,300,189	$	17,025,323	$	150,455,835

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

55

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

The following table presents loans individually evaluated for impairment by class of loans as of year-end. For purposes of this disclosure, the Company reports unpaid principal balance net of partial charge-offs.

2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Commercial	$	2,591,467	$	2,589,356	$	0	$	3,511,753	$	55,237	$	55,237
Commercial Real Estate:
General		4,388,271		4,377,406		0		3,265,902		123,083		107,620
Construction		227,842		227,842		0		511,659		0		0
Consumer:
Lines of credit		91,397		91,327		0		72,432		616		616
Other		0		0		0		6,012		0		0
Credit card		0		0		0		0		0		0
Residential		186,207		186,723		0		314,265		0		0
Subtotal	$	7,485,184	$	7,472,654	$	0	$	7,682,023	$	178,936	$	163,473
With an allowance recorded:
Commercial	$	4,506,555	$	4,476,078	$	1,354,124	$	1,223,325	$	48,745	$	29,623
Commercial Real Estate:
General		1,003,929		997,686		136,723		2,601,890		33,073		30,049
Construction		2,275,662		2,275,337		1,287,550		2,069,800		2,373		2,202
Consumer:
Lines of credit		63,854		63,675		16,128		145,132		11,143		3,682
Other		119,449		119,275		93,181		74,854		1,955		1,650
Credit card		0		0		0		1,006		0		0
Residential		409,391		408,244		103,393		699,853		22,948		18,135
Subtotal	$	8,378,840	$	8,340,295	$	2,991,099	$	6,815,860	$	120,237	$	85,341
Total	$	15,864,024	$	15,812,949	$	2,991,099	$	14,497,883	$	299,173	$	248,814

56

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

2010	Recorded Investment		Unpaid Principal Balance		Related 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
Credit card		0		0		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

	2010
Average of impaired loans during the year	$	14,323,860
Interest income recognized during impairment		238,647
Cash-basis interest income recognized		214,270

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.  However, non-accrual loans and loans past due 90 days still on accrual are all individually classified impaired loans.

57

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

The following tables present the aging of the recorded investment in past due and non accrual loans as of year-end 2011 by class of loans:

Accruing Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Accruing Past Due Loans		Current Accruing Loans		Total Recorded Investment of Accruing Loans
Commercial	$	774,224	$	48,273	$	0	$	822,497	$	51,248,854	$	52,071,351
Commercial Real Estate:
General		0		243,075		0		243,075		54,452,985		54,696,060
Construction		0		0		0		0		4,063,776		4,063,776
Consumer:
Lines of credit		11,052		102,760		21,002		134,814		13,194,317		13,329,131
Other		8,817		0		0		8,817		2,306,281		2,315,098
Credit card		0		0		5,899		5,899		521,959		527,858
Residential		80,952		0		0		80,952		16,772,293		16,853,245
Total	$	875,045	$	394,108	$	26,901	$	1,296,054	$	142,560,465	$	143,856,519

Non Accrual Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Non Accrual Past Due Loans		Current Non Accrual Loans		Total Non Accrual Recorded Investment
Commercial	$	0	$	2,478	$	1,172,890	$	1,175,368	$	161,434	$	1,336,802
Commercial Real Estate:
General		0		0		869,398		869,398		1,673,895		2,543,293
Construction		0		0		406,090		406,090		2,012,951		2,419,041
Consumer:
Lines of credit		4,826		66,587		48,230		119,643		0		119,643
Other		0		0		8,459		8,459		0		8,459
Credit card		0		0		0		0		0		0
Residential		0		0		0		0		172,078		172,078
Total	$	4,826	$	69,065	$	2,505,067	$	2,578,958	$	4,020,358	$	6,599,316

58

NOTE 3 – LOANS (Continued)

The following tables present the aging of the recorded investment in past due and non accrual loans as of year-end 2010 by class of loans:

Accruing Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Accruing Past Due Loans		Current Accruing Loans		Total Recorded Investment of Accruing Loans
Commercial	$	627,034	$	0	$	0	$	627,034	$	56,661,353	$	57,288,387
Commercial Real Estate:
General		157,637		217,803		0		375,440		55,866,348		56,241,788
Construction		0		0		0		0		6,184,355		6,184,355
Consumer:
Lines of credit		79,191		35,460		0		114,651		15,620,301		15,734,952
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		0		94,404		19,005,843		19,100,247
Total	$	970,320	$	253,263	$	1,776	$	1,225,359	$	156,779,875	$	158,005,234

Non Accrual Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Non Accrual Past Due Loans		Current Non Accrual Loans		Total Non Accrual Recorded Investment
Commercial	$	0	$	0	$	1,310,602	$	1,310,602	$	3,992	$	1,314,594
Commercial Real Estate:
General		107,164		654,703		1,527,536		2,289,403		790,456		3,079,859
Construction		0		0		2,623,827		2,623,827		0		2,623,827
Consumer:
Lines of credit		0		0		166,973		166,973		46,218		213,191
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		0		0		713,396		713,396		34,769		748,165
Total	$	107,164	$	654,703	$	6,342,334	$	7,104,201	$	875,435	$	7,979,636

59

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

Troubled Debt Restructurings:

The Company has allocated $1,499,705 of specific reserves on $9,036,794 of loans to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and $447,947 on $5,370,581 as of December 31, 2010. At December 31, 2011, the Company had an additional $222,700 in performing loans outstanding to one of those customers. As of December 31, 2010, there was $1,146,342 committed to two customers.  These customers are paying as agreed on those loans.

During the twelve month period ended December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a stated rate of interest lower than the current market rate for new debt with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not fully cover the interest; or a permanent reduction of the recorded investment in the loan.

Modifications involving a stated interest rate of the loan below the current market rate were for periods ranging from 6 months to 1 year. Modifications involving a reduced payment amount were for periods ranging from 5 months to 3 years.  One modification involved an interest only payment on an amortizing note for 15 months and another modification involved an interest rate/amortization concession for 3 months.  Lastly, one modification involved a permanent reduction of the recorded investment in the loan.

The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve month period ended December 31, 2011:

2011	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		8	$	391,400	$	391,440
Commercial Real Estate:
General		8		1,836,316		1,781,418
Construction		2		2,186,620		2,186,620
Consumer:
Lines of credit		2		53,696		53,696
Residential		2		311,909		311,909
Total		22	$	4,779,941	$	4,725,083

60

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

In the twelve month period ended December 31, 2011, troubled debt restructurings incurred charge-offs of $383,000. As of December 31, 2011, an additional $1,308,000 of specific reserves were established on these troubled debt restructurings.

Generally, a modified loan is considered to be in payment default when the borrower is not performing according to the renegotiated terms and stops communicating and working with the Bank.

For the twelve month period ended December 31, 2011, there were four trouble debt restructurings that experienced a payment default within twelve months of the modification. Below is a table which presents those loans by class:

2011	Number of Loans		Recorded Investment at time of default
Troubled Debt Restructurings
That Subsequently Defaulted:
Commercial		3	$	224,933
Commercial Real Estate:
General		1		319,915
Total		4	$	544,848

In the twelve month period ended December 31, 2011, troubled debt restructurings that subsequently defaulted resulted in charge-offs of $326,000.  As of December 31, 2011, there are no specific reserves on the remaining balance of these troubled debt restructurings.

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

61

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

Credit Quality Indicators:

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

1.   Exceptional. Loans with an exceptional credit rating.

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

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

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

5.   Acceptable. Loans with acceptable sources of repayment and risk.

                  5W. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.

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

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

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

62

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LOANS (Continued)

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

	Commercial				Commercial Real Estate General				Commercial Real Estate Construction
	2011		2010		2011		2010		2011		2010
1	$	0	$	0	$	0	$	0	$	0	$	0
2		253,956		583,364		0		0		0		0
3		4,947,905		1,722,896		3,141,880		3,443,220		0		30,927
4		13,552,704		21,109,601		19,274,469		17,362,231		271,335		2,727,615
5		21,119,918		19,659,157		21,250,749		24,656,543		2,347,947		1,702,025
5W		3,910,143		1,687,613		5,452,332		4,399,618		1,360,030		1,484,710
6		5,005,950		9,349,408		4,394,702		4,777,202		0		190,333
7		3,567,564		3,292,002		2,293,571		2,328,376		39,330		39,849
8		1,050,013		1,198,940		1,431,650		2,354,457		2,464,175		2,632,723
Total	$	53,408,153	$	58,602,981	$	57,239,353	$	59,321,647	$	6,482,817	$	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 and by payment activity.  The following tables present the recorded investment in residential and consumer loans based on payment activity as of December 31, 2011 and 2010:

	Residential
	2011		2010
Performing	$	16,429,725	$	18,508,671
Impaired		595,598		1,339,741
Total	$	17,025,323	$	19,848,412

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	2011		2010		2011		2010		2011		2010
Performing	$	13,293,523	$	15,708,354	$	2,204,108	$	2,870,681	$	527,858	$	517,306
Impaired		155,251		239,789		119,449		64,729		0		2,789
Total	$	13,448,774	$	15,948,143	$	2,323,557	$	2,935,410	$	527,858	$	520,095

63

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 – FORECLOSED ASSETS

Foreclosed asset activity:

	2011			2010
Beginning of year	$	3,382,594		$	6,440,916
Additions		1,544,993			3,073,725
Reductions from sales		(603,105	)		(3,556,918	)
Direct write-downs		(1,047,644	)		(2,575,129	)
End of year	$	3,276,838		$	3,382,594
Expenses related to foreclosed assets include:
		2011			2010
Operating expenses, net of rental income	$	138,199		$	445,682

NOTE 5 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

	2011		2010
Land & land improvements	$	5,466,281	$	5,464,946
Buildings & building improvements		6,132,163		6,132,163
Furniture, fixtures and equipment		3,679,037		3,652,390
		15,277,481		15,249,499
Less:  accumulated depreciation		4,872,616		4,375,323
	$	10,404,865	$	10,874,176

Land with a carrying value of $767,244 is held for sale at December 31, 2011. The Company is expecting to complete the sale by June 30, 2012, which based on the sales contract is expected to result in a gain on the sale.

Depreciation expense was $522,212 for 2011 and $579,553 for 2010.

64

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - DEPOSITS

Deposits at year-end are summarized as follows:

	2011		2010
Non-interest-bearing DDA	$	33,281,198	$	33,326,683
Interest-bearing DDA		19,432,618		23,944,608
Money market		18,468,540		18,493,059
Savings		8,477,893		7,388,395
Certificate of deposit		111,884,987		136,110,432
	$	191,545,236	$	219,263,177

Time deposits of $100,000 or more were $16,673,219 at year-end 2011 and $57,217,208 at year-end 2010. 1

Scheduled maturities of time deposits, as of year-end 2011, were as follows:

2012	$	58,713,415
2013		32,585,784
2014		17,028,479
2015		1,576,799
2016		1,980,510
	$	111,884,987

Brokered time deposits were $3,462,000 at year-end 2011 and $37,307,000 at year-end 2010.Since the Bank was not categorized as “well-capitalized” at December 31, 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 2010. All of the brokered deposits held at December 31, 2011 mature in April 2012.

___________________________

1 Includes brokered deposits.

NOTE 7 – SHORT-TERM BORROWINGS

Short-term borrowings are generally comprised of repurchase agreements and less frequently borrowings from the FRB Discount Window. There were no borrowings from the FRB Discount Window since January 2010. Repurchase agreements are advances by customers that are not covered by federal deposit insurance. This obligation of the Bank is secured by bank-owned securities held by a third-party safekeeping agent. Discount Window borrowings are collateralized by securities and home equity loans. The Bank can borrow overnight from the Discount Window under the secondary credit program for up to 60 days in any 120-day period at a current rate of 1.25%, which is 75 basis points over the Federal Open Market Committee’s target federal funds rate which is currently 0.50%.

65

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – SHORT-TERM BORROWINGS (Continued)

The balances at year-end are shown below:

	Repurchase Agreements			Discount Window
Outstanding at December 31, 2011	$	7,814,745		$	0
Average interest rate at year end		0.71	%		0.00	%
Average balance during year		9,626,125			0
Average interest rate during year		0.76	%		0.00	%
Maximum month end balance during year		11,986,254			0

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

The Bank had securities of $9,628,031 pledged to repurchase agreements at December 31, 2011 and $9,684,310 pledged at December 31, 2010.

Collateral pledged to the Discount Window at December 31, 2011 consisted of $2,557,550 in securities and $4,793,892 in home equity loans, of which $4.5 million is being held as collateral for the FRB payment system risk. At December 31, 2010, collateral consisted of $2,821,946 in securities and $7,442,413 in home equity loans.

NOTE 8 – 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 $2,974,574. Each borrowing requires a direct pledge of securities and or loans. To support potential borrowings with the Federal Home Loan Bank, the Bank had residential loans with a fair market value of $3,760,249 pledged at year-end 2011 and $4,806,678 pledged at year-end 2010. The Bank had no outstanding borrowings with the Federal Home Loan Bank at either December 31, 2010 or 2011.

66

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS (Continued)

At December 31, 2010, the Bank had securities with a fair market value of $5,513,014 pledged to the Federal Home Loan Bank to collateralize a $5,000,000 overdraft line of credit. At December 31, 2010, there was no balance outstanding on the line of credit. On December 22, 2011, the Federal Home Loan Bank declined to renew the Bank’s $5,000,000 line of credit so the pledge on the securities was released.

NOTE 9 – 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 2.63% at December 31, 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.

67

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – SUBORDINATED DEBENTURES (Continued)

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. The accrued interest payable on the subordinated debentures was $200,951 and $86,951 at December 31, 2011 and 2010.

NOTE 10 – 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 December 31, 2011, there was $458,000 of unpaid interest compared to $153,000 at December 31, 2010.

NOTE 11 - BENEFIT PLANS

The Company’s 401(k) benefit plan allows employee contributions up to the dollar limit set by law which was $16,500 in both 2010 and 2011. The Company had a Safe Harbor 401(k) Plan in both 2010 and 2011. The Company may, at its discretion, make a matching contribution.  The matching formula is 100% of the first 3% of compensation contributed and 50% of the next 3%. The Company did not make any matching contributions in 2010 or 2011.

NOTE 12- INCOME TAXES

The consolidated provision for federal income tax expense (benefit) was as follows:

	2011			2010
Current payable (receivable)	$	0		$	(10,618	)
Deferred liability (benefit)		(103,669	)		0
Valuation allowance establishment		0			0
	$	(103,669	)	$	(10,618	)

68

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12- INCOME TAXES (Continued)

The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities as of December 31, 2011 and 2010:

	2011			2010
Deferred tax asset
Allowance for loan losses	$	1,401,490		$	1,195,446
Non-accrual loans		359,526			276,715
Deferred loan costs, net		10,976			9,975
Accrued expenses		0			7,115
Foreclosed assets		1,401,133			1,276,595
Other		24,233			25,432
Net operating loss carryforward		3,086,212			2,587,922
		6,283,570			5,379,200
Deferred tax liabilities
Depreciation	$	(240,472	)	$	(240,455	)
Accretion on securities		(273	)		(191	)
Unrealized gain on securities available for sale		(217,229	)		(217,229	)
Prepaid expenses		(37,166	)		(32,942	)
Other		(11,646	)		(12,394	)
		(506,786	)		(503,211	)
	$	5,776,784		$	4,875,989
Valuation allowance		(5,776,784	)		(4,875,989	)
Net deferred tax asset	$	0		$	0

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.

69

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12- INCOME TAXES (Continued)

A reconciliation of the difference between federal income tax expense (benefit) and the amount computed by applying the statutory rate of 34% in 2011 and 2010 is as follows:

	2011			2010
Tax at statutory rate	$	(874,167	)	$	(3,023,737	)
Tax-exempt interest income		(30,281	)		(42,438	)
Other		(100,016	)		12,396
Valuation allowance		900,795			3,043,161
Federal income tax expense (benefit)	$	(103,669	)	$	(10,618	)

An income tax benefit associated with continuing operations in the amount of $103,669 was recorded for the year ending December 31, 2011. The benefit recorded considers the results of current period adjustments to other comprehensive income. Generally, the calculation for income tax expense (benefit) does not consider the tax effects of changes in other comprehensive income or loss, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances when there is a pre-tax loss from continuing operations and income from other categories such as other comprehensive income. In such case, pre-tax income from other categories is included in the tax expense (benefit) calculation for the current period.

There were no unrecognized tax benefits at December 31, 2011, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

As of December 31, 2011, the Company has a net operating loss carryover of $9,077,094 to be utilized to offset future taxable income that will begin expiring in 2029.

NOTE 13 – RELATED PARTY TRANSACTIONS

Loans and commitments to principal officers, directors and their affiliates in 2011 were as follows:

Beginning balance	$	3,390,161
New loans and line advances		1,136,625
Repayments		(869,204	)
Ending balance	$	3,657,582

Deposits from principal officers, directors and their affiliates were $2,684,204 at year-end 2011 and $3,143,260 at year-end 2010.

70

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 – STOCK OPTIONS

The Company has three share-based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $0 for both 2010 and 2011. Consequently, there was no income tax benefit recorded for either 2010 or 2011.

Stock Option Plans

Options to buy stock were granted to officers under the 1998 Employee Stock Option Plan, which provided for issue of options for up to 150,000 shares of stock of the Company.  Exercise price is not less than the market price at date of grant. The maximum option term is ten years, and presently outstanding options vested over three years.

Options to buy stock were granted to nonemployee directors of the Company under the Director Stock Option Plans of 2003 and 2005. Both plans provided for the issuance of options for up to 20,000 shares of stock of the Company. The exercise price for options issued under these plans was not less than the market price per share as of the date of grant. The maximum option term is ten years for both plans. Outstanding options under the plans were exercisable in full as of the date the options were granted.

A summary of the activity in the plans for 2011 is as follows:

	Number of Shares Subject to Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual  Term		Aggregate Intrinsic Value*
Outstanding at beginning of year		47,300		$	11.01
Granted		0			0
Exercised		0			0
Forfeited or expired		(4,500	)		(14.04	)
Outstanding at end of year		42,800		$	10.69		1.3	$	0
Exercisable at end of year		42,800		$	10.69		1.3	$	0

*The stock price at December 31, 2011 did not exceed the weighted average option exercise price.

All outstanding options are fully vested, therefore there is no unrecognized compensation cost related to options.

As of December 31, 2011, there were 2,000 shares available for grant in the Director Stock Option Plan of 2005 and 53,000 shares available to grant in the Employee Stock Option Plan of 2005.

71

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

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 December 31, 2010 and 2011.

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 required 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.

72

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)

There were several directives related to loans contained in the Consent Order. 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.

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 either December 31, 2011 or December 31, 2010. Management continues to explore options to raise the capital required for full compliance. At December 31, 2011, a capital contribution of $10,320,000 would have been needed to meet the capital ratios specified in the Consent Order.

Included in the table are the actual capital amounts and ratios for the Bank and the required capital amounts and ratios for the Bank at December 31.

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required Under Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2011
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank	$	10,350,300		6.40	%	$	12,944,731		8.00	%	$	17,799,005		11.00	%
Tier 1 (Core) Capitalto risk-weighted assets of the Bank		8,287,231		5.12			6,472,366		4.00			N/A		N/A
Tier 1 (Core) Capital to average assets of the Bank		8,287,231		3.79			8,756,307		4.00			18,607,152		8.50

73

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required Under Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
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 two capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At December 31, 2011, only $2,063,069 was counted as tier two capital and $3,236,385 was disallowed.  At December 31, 2010, $2,246,366 was counted as tier two capital and $2,545,541 was disallowed.

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

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.  As a condition of the Consent Order, the Bank is unable to accept brokered deposits.

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. Management does not believe the restriction on issuing brokered deposits imposes a significant liquidity problem for the Bank. Brokered deposit balances were $3,462,000 at December 31, 2011 and all mature during 2012.

74

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)

On August 17, 2011, the Bank was issued a Supervisory Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category at December 31, 2010, its failure to submit a capital restoration plan that satisfies the requirements spelled out in the FDIC Rules and Regulations, and the continued deterioration of the Bank. The Directive stipulated that the Bank be restored to an “adequately capitalized” capital category within 60 days of the issuance of the Directive. Since the issuance of the Consent, the board has made many efforts to secure funding and comply with both the Consent and the Directive but has not been successful. As such, the Bank was not in compliance with the Directive at the end of 60 days and remains out of compliance. The board informed the FDIC in a letter dated October 14, 2011 that it was unable to comply with the Directive. There has been no further communications with the FDIC regarding the Directive. The board’s efforts to garner capital for the Bank is continuing.

NOTE 16 – OFF-BALANCE SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs.  These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.  Commitments may expire without being used.  Risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated.  The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance sheet risk was as follows at year-end:

	2011				2010
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	0	$	21,349,655	$	1,427,195	$	23,425,296
Unused standby letters of credit		0		1,262,000		0		1,266,735
Commitments to make loans		0		0		95,470		0

Commitments to make loans are generally made for periods of 60 days or less.

75

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Following are condensed parent company only financial statements:

CONDENSED BALANCE SHEETS

December 31,

	2011			2010
ASSETS
Cash and cash equivalents	$	33,933		$	125,459
Investment in subsidiaries		8,686,686			10,471,075
Other assets		21,953			23,139
Total assets	$	8,742,572		$	10,619,673
LIABILITIES AND EQUITY
Accrued expenses and other liabilities	$	662,954		$	273,886
Notes payable		5,000,000			5,000,000
Subordinated debentures		4,500,000			4,500,000
Shareholders’ equity		(1,420,382	)		845,787
Total liabilities and shareholders’ equity	$	8,742,572		$	10,619,673

CONDENSED STATEMENTS OF INCOME

Years Ended December 31,

	2011			2010
Other income	$	354		$	4,023
Interest expense		(418,243	)		(416,455	)
Other expense		(90,452	)		(249,421	)
Loss before income tax benefit and undistributed subsidiary income		(508,341	)		(661,853	)
Equity in undistributed subsidiary income (loss)		(1,959,068	)		(8,231,492	)
Federal income tax benefit		0			(10,618	)
Net loss	$	(2,467,409	)	$	(8,882,727	)

76

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

Years Ended December 31,

	2011			2010
Cash flows from operating activities
Net loss	$	(2,467,409	)	$	(8,882,727	)
Equity in undistributed subsidiary income (loss)		1,959,068			8,231,492
Net change in:
Other assets		1,186			(14,298	)
Other liabilities		389,068			(243,718	)
Net cash used in operating activities		(118,087	)		(909,251	)
Cash flows from investing activities
Capital investment into subsidiaries		26,561			(2,606	)
Net cash from (used in) investing activities		26,561			(2,606	)
Cash flows from financing activities
Draws on notes payable and line of credit		0			0
Paydown on notes payable		0			0
Net cash from financing activities		0			0
Net change in cash and cash equivalents		(91,526	)		(911,857	)
Beginning cash and cash equivalents		125,459			1,037,316
Ending cash and cash equivalents	$	33,933		$	125,459

77

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 – OTHER COMPREHENSIVE INCOME (LOSS)

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

	2011			2010
Unrealized holding gains on held to maturity securities transferred to available for sale	$	0		$	28,192
Unrealized holding gains on available for sale securities		308,197			40,145
Less reclassification adjustments for gains later recognized in income		(3,288	)		(79,814	)
Net unrealized gain (loss)		304,909			(11,477	)
Tax effect		103,669			0
Other comprehensive income (loss)	$	201,240		$	(11,477	)

NOTE 19 - 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.

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.

78

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - FAIR VALUE MEASUREMENTS (Continued)

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. The 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.

79

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a recurring basis are summarized below for the years ending December 31, 2011 and 2010:

			Fair Value Measurements Using
December 31, 2011	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
US Treasury	$	4,067,656	$	4,067,656	$	0	$	0
US Government and federal agency		15,572,588		0		15,572,588		0
Municipals		2,891,420		0		2,891,420		0
Mortgage-backed and collateralized mortgage obligations– residential		12,040,439		0		12,040,439		0
Total	$	34,572,103	$	4,067,656	$	30,504,447	$	0
Servicing assets	$	76,276	$	0	$	76,276	$	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
Municipals		3,238,294		0		3,238,294		0
Mortgage-backed and collateralized mortgage obligations– residential		15,345,799		0		15,345,799		0
Total	$	36,503,903	$	2,011,094	$	34,492,809	$	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 last three quarters of 2011 or during all of 2010.

80

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - FAIR VALUE MEASUREMENTS (Continued)

Assets measured at fair value on a non-recurring basis are summarized below for the years ending December 31, 2011 and 2010:

	Total		Significant Unobservable Inputs (Level 3)
December 31, 2011
Impaired loans:
Commercial	$	2,390,984	$	2,390,984
Commercial Real Estate:
General		867,206		867,206
Construction		988,112		988,112
Consumer:
Lines of credit		47,726		47,726
Other		26,268		26,268
Residential		305,998		305,998
Total	$	4,626,294	$	4,626,294
Foreclosed assets:
Commercial Real Estate:
General	$	1,601,041	$	1,601,041
Construction		1,379,158		1,379,158
Residential		281,472		281,472
Total	$	3,261,671	$	3,261,671

81

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - FAIR VALUE MEASUREMENTS (Continued)

	Total		Significant Unobservable Inputs (Level 3)
December 31, 2010
Impaired loans:
Commercial	$	360,718	$	360,718
Commercial Real Estate:
General		2,513,079		2,513,079
Construction		753,096		753,096
Consumer:
Lines of credit		88,716		88,716
Other		6,184		6,184
Residential		441,613		441,613
Total	$	4,163,406	$	4,163,406
Foreclosed assets:
Commercial Real Estate:
General	$	1,061,170	$	1,061,170
Construction		2,005,831		2,005,831
Residential		163,786		163,786
Total	$	3,230,787	$	3,230,787

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

The valuation of impaired loans depends on the anticipated source of repayment.  Most of the Bank’s impaired loans are collateral dependent; only two impairments are measured using the cash flow method.  Collateral dependent impaired loans are measured using the fair value of the collateral. At December 31, 2011, such impaired loans had a recorded investment of $7,528,841, with a valuation allowance of $2,902,547 compared to impaired loans with a recorded investment of $6,226,817 and a valuation allowance of $2,063,411 at December 31, 2010. The fair value of the collateral on the collateral dependent loans were determined 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 $871,000 for the year ending December 31, 2011 and $1,565,000 for the year ending December 31, 2010.

At December 31, 2011 and December 31, 2010, foreclosed assets carried a fair value of $3,261,671 and $3,230,787 respectively. During the year ending December 31, 2011, thirty properties included in this total were written down by $1,047,644. There were also nine properties totaling $1,544,993 (at fair value) added to other real estate owned during the year ending December 31, 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.

82

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 - FAIR VALUE MEASUREMENTS (Continued)

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

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
			(in thousands)
Financial assets
Cash and cash equivalents	$	8,920	$	8,920	$	23,640	$	23,640
Loans held for sale		5,535		5,940		1,263		1,273
Loans, net (including impaired)		144,359		139,176		160,452		154,484
FHLB stock		451		N/A		480		N/A
Accrued interest receivable		746		746		781		781
Financial liabilities
Deposits		191,545		193,775		219,263		220,711
Federal funds purchased and repurchase agreements		7,815		7,815		7,461		7,461
Subordinated debentures		4,500		2,945		4,500		3,172
Notes payable		5,000		2,500		5,000		2,500
Accrued interest payable		738		738		362		362

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.

83

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - GOING CONCERN CONSIDERATION AND MANAGEMENT’S PLANS

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and discharges of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects of recoverability and classification of assets, or the amounts and classifications of liabilities, that may result should the Company be unable to continue as a going concern.

The Company recorded a net loss of $2,467,409 for year-end 2011 which is a favorable comparison to the net losses of $8,882,727 and $4,962,379 for year-end 2010 and 2009, respectively.  In prior years, the losses were primarily the result of increases in the provision for loan losses, higher FDIC insurance premiums, and higher administrative costs associated with managing nonperforming assets. In 2011, the Company experienced fewer foreclosed asset writedowns, a lower provision for loan loss and reduced costs associated with managing nonperforming assets. Conversely, FDIC premiums increased in 2011. In spite of the reduction in the Company’s recorded losses and net risk weighted assets, the Bank remained undercapitalized throughout 2011; the same capital classification it had at December 31, 2010 and the Company has negative equity at December 31, 2011. For further discussion of the Bank’s capital requirements, refer to the discussion in Note 15.

As a result of its poor financial condition, the Bank does not have the ability to pay dividends to the holding company without regulatory approval.  Although the Bank’s regulatory capital classification remained the same since December 31, 2010, the weak capital position puts the Bank at significant risk of further regulatory enforcement action.  The Consent Agreement, referenced in Note 15, imposes adjusted regulatory minimum capital requirements and prohibits the Bank from paying dividends without regulatory approval.

The Company would be dependent on dividends from the Bank to cure the default of its $5,000,000 term note with Fifth Third, which is collateralized by the Bank’s stock. However, the Bank is not permitted to pay dividends at this time. As a remedy of default, Fifth Third may, if it so chooses, foreclose on the Bank’s stock. Since the Company had negative equity at December 31, 2011 and insufficient cash to service its debt, the Company was insolvent as of that date.

84

COMMUNITY SHORES BANK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 - GOING CONCERN CONSIDERATION AND MANAGEMENT’S PLANS (Continued)

Management is using alternative liquidity sources to fund brokered deposits as they mature and has not encountered any difficulties funding over $49.5 million in maturities since 2010.  Additionally, management has implemented strategies to reduce overhead expenses and risk-weighted assets since its first year of losses in 2007. A few of these improvements since 2007 were:

·   The work force has been reduced by 27% with 20 positions eliminated. Most staff salaries have been frozen for four years and the 401(k) matching contributions were suspended in 2009. Benefits expenses have been reapportioned with the employees bearing more of the cost. As a result, salary and benefit expenses decreased 18% or over $900,000 which more than offset the $743,000 increase in FDIC premiums since 2007.

·   Renegotiated vendor contracts as well as the reduction and elimination of a variety of overhead expenses allowed the Bank to absorb over 90% of the nearly $350,000 increase in administration expenses on impaired loans since 2007.

·   The Bank’s balance sheet management successfully reduced net risk-weighted assets by over $88 million since year-end 2007. A majority of the decrease was in loans.

Management plans to continue exploring opportunities to reduce expenses, manage the balance sheet and raise capital to achieve compliance with the Consent Order and the Directive.

Management will continue its efforts to improve asset quality in 2012. In 2011, the Bank reduced non-performing assets by $1.5 million. In 2011, ten properties and nine vacant lots were sold and past due and non-accrual notes were reduced by nearly $1.4 million.

Due to the conditions and events discussed in this annual report, substantial doubt exists as to the Company’s ability to continue as a going concern. The Company has determined that significant additional capital is required to continue operations and avoid additional regulatory action. The Board and management continue to seek opportunities to raise capital.

These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.

85

SHAREHOLDER INFORMATION

SEC Form 10-K

Copies of the Company’s annual report on Form 10-K, as filed with the Securities and Exchange Commission, are available to shareholders without charge, upon written request.  Please mail your request to Tracey A. Welsh, Senior Vice President and Chief Financial Officer, at Community Shores Bank Corporation, 1030 W. Norton Avenue, Muskegon, Michigan 49441.

Stock Information

The Company’s common stock was traded on the Nasdaq Capital Market under the ticker symbol "CSHB" through December 15, 2010.  Beginning December 16, 2010, the Company’s common stock has been quoted on the OTC Bulletin Board, under the same symbol, and the Company has voluntarily delisted its common stock from the Nasdaq Capital Market.  At March 21, 2012, there were approximately 181 record holders of the Company’s common stock.  The Company has paid no dividends since its formation in 1998.

The following table shows the high and low sales prices for the common stock of the Company by quarter during 2011 and 2010, as reported by the OTC Bulletin Board and Nasdaq Capital Market.  The Company’s bid prices cannot be calculated due to limited market activity and only having one market maker quoting the common stock.

Sales Prices

	High		Low
Calendar Year 2011
First Quarter	$	1.01	$	0.57
Second Quarter		0.75		0.32
Third Quarter		0.60		0.33
Fourth Quarter		0.45		0.05
Calendar Year 2010
First Quarter	$	1.75	$	0.60
Second Quarter		2.24		1.02
Third Quarter		1.55		0.77
Fourth Quarter		1.79		0.36

86

Market Makers

At March 9, 2012 the following firm was registered with OTC Bulletin Board as market maker in common stock of the Company:

Rodman & Renshaw, LLC

1251 Avenue of the Americas

20th Floor

New York, NY 10020

Stock Registrar and Transfer Agent

Registrar and Transfer Company

10 Commerce Drive

Cranford, New Jersey 07016-3572

1-800-368-5948, via e-mail at

info@rtco.com or online at their

website, www.rtco.com

Legal Counsel

Dickinson Wright PLLC

2600 West Big Beaver Road, Suite 300

Troy, Michigan 48084

                     and

200 Ottawa Avenue, N.W., Suite 1000

Grand Rapids, Michigan 49503

www.dickinsonwright.com

Independent Auditors

Crowe Horwath LLP

55 Campau Avenue N.W., Suite 300

Grand Rapids, Michigan 49503

Additional Information

News media representatives and those seeking additional information about the Company should contact Heather D. Brolick, President and Chief Executive Officer of the Company, at (231) 780-1800, or by writing her at 1030 W. Norton Avenue, Muskegon, Michigan 49441.

87

Annual Meeting

The Board of Directors voted at its meeting on March 28, 2012, to forego holding an Annual Meeting in order to preserve the limited cash that is currently available to the Company. While we will not be holding our customary May meeting, we have completed our financial reporting and have filed a 10K and Annual Report.  These materials are available electronically on the internet.  We encourage you to access and review all of the important information they contain.  The 10K and Annual Report are available at:

www.communityshores.com

To view the materials, simply click on the Investor Relations tab in the upper right hand corner of your screen.  On the next screen click on the document you choose to view.

Alternatively, you may request to obtain a copy of the 10K and Annual Report by email or in paper format.  There is no charge to you for requesting a copy.  Please make your request for a copy as follows:

In writing to:  Ms. Pat Siembida, 1030 W. Norton Ave., Muskegon, MI  49441

By telephone to:  231-780-1800

By email to: ir@communityshores.com

88

DIRECTORS AND OFFICERS
Community Shores Bank Corporation Board of Directors
Gary F. Bogner	Real Estate Developer
(Chairman, non-officer)
Heather D. Brolick	President and Chief Executive Officer
Robert L. Chandonnet	Owner and President, The Nugent Sand Company, Inc.
(Vice Chairman, non-officer)
Bruce J. Essex	Chairman, Port City Die Cast
Julie K. Greene	Chief Executive Officer, Muskegon Surgery Center
Steven P. Moreland	President and Chief Executive Officer, Automatic Spring Products Corporation
Executive Officers
Heather D. Brolick	President and Chief Executive Officer
John M. Clark	Senior Vice President and Secretary
Tracey A. Welsh	Senior Vice President, Chief Financial Officer and Treasurer

89

DIRECTORS AND OFFICERS
Community Shores Bank Board of Directors
Gary F. Bogner	Real Estate Developer
(Chairman, non-officer)
Heather D. Brolick	President and Chief Executive Officer
Robert L. Chandonnet	Owner and President, The Nugent Sand Company, Inc.
(Vice Chairman, non-officer)
Bruce J. Essex	Chairman, Port City Die Cast
Julie K. Greene	Chief Executive Officer, Muskegon Surgery Center
Steven P. Moreland	President and Chief Executive Officer, Automatic Spring Products Corporation
Management Team
Heather D. Brolick	President and Chief Executive Officer
John M. Clark	Senior Vice President/Commercial Loan Department Head and Secretary
Amy L. Schultz	Senior Vice President and Technology/Operations Manager
Cerise A. Semrinec	Vice President and Credit Administrator
Lori E. Versalle	Senior Vice President and Branch Administrator
Tracey A. Welsh	Senior Vice President, Chief Financial Officer and Treasurer

90

DIRECTORS AND OFFICERS
Faith A. Biros	Deposit Processing Manager
Monica J. Bixeman	Retail Banking Officer
Sherri S. Campbell	Vice President / Deposit Operations Manager
Kelly M. Christian	Assistant Vice President / Controller
Jennifer L. Egeler	Assistant Controller
Sharon L. Gary	Human Resources Manager
Jon M. Huizenga	Assistant Vice President / Commercial Lending Officer
Robert J. Jacobs	Senior Vice President / Business Development Officer
Susan M. Kane	Vice President / Mortgage Loan Operations Manager
Alan W. Kowalski	Assistant Vice President / Loan Adjustment - Collections Manager
Kimberli A. LaVallee	Assistant Vice President / Grand Haven Branch Manager
Ronald Maciejewski	Vice President / Commercial Lending Officer
Renee L. Nyblade	Vice President / Mortgage Loan Officer
Benjamin D. Robbins	Vice President / Commercial Lending Officer
Jamie J. Sheffer	North Muskegon Branch Manager
Clinton A. Todd	Vice President / Retail Lending
Laurie J. White	Vice President / Retail Deposit Sales Manager

 91

EX-21

EXHIBIT 21

SUBSIDIARIES OF COMMUNITY SHORES BANK CORPORATION

Community Shores Bank, a Michigan banking corporation

Wholly-owned bank subsidiary of Community Shores Bank Corporation

Community Shores Capital Trust I

A Delaware business trust subsidiary of Community Shores Bank Corporation

Community Shores Financial Services, Inc., a Michigan business corporation

Wholly-owned subsidiary of Community Shores Bank Corporation

Community Shores Mortgage Company

Wholly-owned subsidiary of Community Shores Bank

Berryfield Development LLC

Wholly-owned subsidiary of Community Shores Mortgage Company

All five of the subsidiaries named above with the exception of Community Shores Capital Trust I were organized under the laws of the State of Michigan. Community Shores Capital Trust I was organized under the laws of the State of Delaware.

EX-23

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-89655 and 333-107675 on Form S-8 of Community Shores Bank Corporation 401(k) Plan and the 1998 Employee Stock Option Plan of our report dated March 28, 2012 relating to the consolidated financial statements of Community Shores Bank Corporation, appearing in this Annual Report on Form 10-K.

Crowe Horwath LLP

Grand Rapids, Michigan

March 28, 2012

EX-31.1

Exhibit 31.1

RULE 13a-14(a) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Heather D. Brolick, President, Chief Executive Officer and Secretary of Community Shores Bank Corporation, certify that:

1. I have reviewed this report on Form 10-K of Community Shores Bank Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

1

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 28, 2012	/s/Heather D. Brolick
	Heather D. Brolick President and Chief Executive Officer

 2

EX-31.2

Exhibit 31.2

RULE 13a-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of Community Shores Bank Corporation, certify that:

1. I have reviewed this report on Form 10-K of Community Shores Bank Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

1

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 28, 2012	/s/Tracey A. Welsh
	Tracey A. Welsh Senior Vice President, Chief Financial Officer and Treasurer

 2

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the annual report on Form 10-K for the year ended December 31, 2011 (the "Form 10-K") of Community Shores Bank Corporation (the "Issuer").

I, Heather D. Brolick, President and Chief Executive Officer of the Issuer, certify that:

(i) the Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(ii) to my knowledge, the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer as of and for the period covered by the report.

Dated: March 28, 2012

/s/Heather D. Brolick

Heather D. Brolick

President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, and accompanies the annual report on Form 10-K for the year ended December 31, 2011 (the "Form 10-K") of Community Shores Bank Corporation (the "Issuer").

I, Tracey A. Welsh, Senior Vice President, Chief Financial Officer and Treasurer of the Issuer, certify that:

(i) the Form 10-K fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(ii) to my knowledge, the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer as of and for the period covered by the report.

Dated: March 28, 2012

/s/Tracey A. Welsh

Tracey A. Welsh

Senior Vice President, Chief Financial Officer and Treasurer

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Note 19 - Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value, Measurement Inputs, Disclosure [Table Text Block]

NOTE 19 - 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.

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. The 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.

Assets measured at fair value on a recurring basis are summarized below for the years ending December 31, 2011 and 2010:

			Fair Value Measurements Using
December 31, 2011	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities:
US Treasury	$	4,067,656	$	4,067,656	$	0	$	0
US Government and federal agency		15,572,588		0		15,572,588		0
Municipals		2,891,420		0		2,891,420		0
Mortgage-backed and collateralized mortgage obligations– residential		12,040,439		0		12,040,439		0
Total	$	34,572,103	$	4,067,656	$	30,504,447	$	0
Servicing assets	$	76,276	$	0	$	76,276	$	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
Municipals		3,238,294		0		3,238,294		0
Mortgage-backed and collateralized mortgage obligations– residential		15,345,799		0		15,345,799		0
Total	$	36,503,903	$	2,011,094	$	34,492,809	$	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 last three quarters of 2011 or during all of 2010.

Assets measured at fair value on a non-recurring basis are summarized below for the years ending December 31, 2011 and 2010:

	Total		Significant Unobservable Inputs (Level 3)
December 31, 2011
Impaired loans:
Commercial	$	2,390,984	$	2,390,984
Commercial Real Estate:
General		867,206		867,206
Construction		988,112		988,112
Consumer:
Lines of credit		47,726		47,726
Other		26,268		26,268
Residential		305,998		305,998
Total	$	4,626,294	$	4,626,294
Foreclosed assets:
Commercial Real Estate:
General	$	1,601,041	$	1,601,041
Construction		1,379,158		1,379,158
Residential		281,472		281,472
Total	$	3,261,671	$	3,261,671

	Total		Significant Unobservable Inputs (Level 3)
December 31, 2010
Impaired loans:
Commercial	$	360,718	$	360,718
Commercial Real Estate:
General		2,513,079		2,513,079
Construction		753,096		753,096
Consumer:
Lines of credit		88,716		88,716
Other		6,184		6,184
Residential		441,613		441,613
Total	$	4,163,406	$	4,163,406
Foreclosed assets:
Commercial Real Estate:
General	$	1,061,170	$	1,061,170
Construction		2,005,831		2,005,831
Residential		163,786		163,786
Total	$	3,230,787	$	3,230,787

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

The valuation of impaired loans depends on the anticipated source of repayment.  Most of the Bank’s impaired loans are collateral dependent; only two impairments are measured using the cash flow method.  Collateral dependent impaired loans are measured using the fair value of the collateral. At December 31, 2011, such impaired loans had a recorded investment of $7,528,841, with a valuation allowance of $2,902,547 compared to impaired loans with a recorded investment of $6,226,817 and a valuation allowance of $2,063,411 at December 31, 2010. The fair value of the collateral on the collateral dependent loans were determined 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 $871,000 for the year ending December 31, 2011 and $1,565,000 for the year ending December 31, 2010.

At December 31, 2011 and December 31, 2010, foreclosed assets carried a fair value of $3,261,671 and $3,230,787 respectively. During the year ending December 31, 2011, thirty properties included in this total were written down by $1,047,644. There were also nine properties totaling $1,544,993 (at fair value) added to other real estate owned during the year ending December 31, 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 at year-end:

	2011				2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
			(in thousands)
Financial assets
Cash and cash equivalents	$	8,920	$	8,920	$	23,640	$	23,640
Loans held for sale		5,535		5,940		1,263		1,273
Loans, net (including impaired)		144,359		139,176		160,452		154,484
FHLB stock		451		N/A		480		N/A
Accrued interest receivable		746		746		781		781
Financial liabilities
Deposits		191,545		193,775		219,263		220,711
Federal funds purchased and repurchase agreements		7,815		7,815		7,461		7,461
Subordinated debentures		4,500		2,945		4,500		3,172
Notes payable		5,000		2,500		5,000		2,500
Accrued interest payable		738		738		362		362

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.

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Note 3 - Loans

12 Months Ended

Dec. 31, 2011

Allowance for Credit Losses on Financing Receivables [Table Text Block]

NOTE 3 - LOANS

Outstanding loan balances by portfolio segment and class at year-end were as follows:

	2011			2010
Commercial	$	53,200,412		$	58,416,643
Commercial Real Estate:
General		56,847,600			58,996,411
Construction		6,425,041			8,782,762
Consumer:
Lines of credit		13,376,689			15,954,866
Other		2,370,625			3,087,409
Credit card		527,858			520,095
Residential		16,942,989			19,534,704
		149,691,214			165,292,890
Less:  Allowance for loan losses		(5,299,454	)		(4,791,907	)
Net deferred loan fees		(32,283	)		(49,009	)
Loans, net	$	144,359,477		$	160,451,974

The following table presents the activity in the allowance for loan losses for the year ending December 31, 2011 by portfolio segment:

Year Ending December 31, 2011	Commercial			Commercial Real Estate			Consumer			Residential			Total
Allowance for loan losses:
Beginning balance	$	1,218,865		$	2,896,176		$	546,603		$	130,263		$	4,791,907
Charge-offs		(541,494	)		(1,294,273	)		(248,953	)		(77,060	)		(2,161,780	)
Recoveries		91,000			49,486			45,201			0			185,687
Provision for loan losses		1,429,384			846,921			67,150			140,185			2,483,640
Ending balance	$	2,197,755		$	2,498,310		$	410,001		$	193,388		$	5,299,454

Activity in the allowance for loan losses for 2010 was as follows:

	2010
Beginning balance	$	3,782,132
Charge-offs		(5,090,138	)
Recoveries		75,138
Provision for loan losses		6,024,775
Ending balance	$	4,791,907

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of year-end:

2011	Commercial		Commercial  Real Estate		Consumer		Residential		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,354,124	$	1,424,273	$	109,309	$	103,393	$	2,991,099
Collectively evaluated for impairment		843,631		1,074,037		300,692		89,995		2,308,355
Total ending allowance balance	$	2,197,755	$	2,498,310	$	410,001	$	193,388	$	5,299,454
Loans:
Individually evaluated for impairment	$	7,098,022	$	7,895,704	$	274,700	$	595,598	$	15,864,024
Collectively evaluated for impairment		46,310,131		55,826,466		16,025,489		16,429,725		134,591,811
Total ending loans balance	$	53,408,153	$	63,722,170	$	16,300,189	$	17,025,323	$	150,455,835

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

The following table presents loans individually evaluated for impairment by class of loans as of year-end. For purposes of this disclosure, the Company reports unpaid principal balance net of partial charge-offs.

2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
With no related allowance recorded:
Commercial	$	2,591,467	$	2,589,356	$	0	$	3,511,753	$	55,237	$	55,237
Commercial Real Estate:
General		4,388,271		4,377,406		0		3,265,902		123,083		107,620
Construction		227,842		227,842		0		511,659		0		0
Consumer:
Lines of credit		91,397		91,327		0		72,432		616		616
Other		0		0		0		6,012		0		0
Credit card		0		0		0		0		0		0
Residential		186,207		186,723		0		314,265		0		0
Subtotal	$	7,485,184	$	7,472,654	$	0	$	7,682,023	$	178,936	$	163,473
With an allowance recorded:
Commercial	$	4,506,555	$	4,476,078	$	1,354,124	$	1,223,325	$	48,745	$	29,623
Commercial Real Estate:
General		1,003,929		997,686		136,723		2,601,890		33,073		30,049
Construction		2,275,662		2,275,337		1,287,550		2,069,800		2,373		2,202
Consumer:
Lines of credit		63,854		63,675		16,128		145,132		11,143		3,682
Other		119,449		119,275		93,181		74,854		1,955		1,650
Credit card		0		0		0		1,006		0		0
Residential		409,391		408,244		103,393		699,853		22,948		18,135
Subtotal	$	8,378,840	$	8,340,295	$	2,991,099	$	6,815,860	$	120,237	$	85,341
Total	$	15,864,024	$	15,812,949	$	2,991,099	$	14,497,883	$	299,173	$	248,814

2010	Recorded Investment		Unpaid Principal Balance		Related 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
Credit card		0		0		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

	2010
Average of impaired loans during the year	$	14,323,860
Interest income recognized during impairment		238,647
Cash-basis interest income recognized		214,270

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.  However, non-accrual loans and loans past due 90 days still on accrual are all individually classified impaired loans.

The following tables present the aging of the recorded investment in past due and non accrual loans as of year-end 2011 by class of loans:

Accruing Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Accruing Past Due Loans		Current Accruing Loans		Total Recorded Investment of Accruing Loans
Commercial	$	774,224	$	48,273	$	0	$	822,497	$	51,248,854	$	52,071,351
Commercial Real Estate:
General		0		243,075		0		243,075		54,452,985		54,696,060
Construction		0		0		0		0		4,063,776		4,063,776
Consumer:
Lines of credit		11,052		102,760		21,002		134,814		13,194,317		13,329,131
Other		8,817		0		0		8,817		2,306,281		2,315,098
Credit card		0		0		5,899		5,899		521,959		527,858
Residential		80,952		0		0		80,952		16,772,293		16,853,245
Total	$	875,045	$	394,108	$	26,901	$	1,296,054	$	142,560,465	$	143,856,519

Non Accrual Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Non Accrual Past Due Loans		Current Non Accrual Loans		Total Non Accrual Recorded Investment
Commercial	$	0	$	2,478	$	1,172,890	$	1,175,368	$	161,434	$	1,336,802
Commercial Real Estate:
General		0		0		869,398		869,398		1,673,895		2,543,293
Construction		0		0		406,090		406,090		2,012,951		2,419,041
Consumer:
Lines of credit		4,826		66,587		48,230		119,643		0		119,643
Other		0		0		8,459		8,459		0		8,459
Credit card		0		0		0		0		0		0
Residential		0		0		0		0		172,078		172,078
Total	$	4,826	$	69,065	$	2,505,067	$	2,578,958	$	4,020,358	$	6,599,316

The following tables present the aging of the recorded investment in past due and non accrual loans as of year-end 2010 by class of loans:

Accruing Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Accruing Past Due Loans		Current Accruing Loans		Total Recorded Investment of Accruing Loans
Commercial	$	627,034	$	0	$	0	$	627,034	$	56,661,353	$	57,288,387
Commercial Real Estate:
General		157,637		217,803		0		375,440		55,866,348		56,241,788
Construction		0		0		0		0		6,184,355		6,184,355
Consumer:
Lines of credit		79,191		35,460		0		114,651		15,620,301		15,734,952
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		0		94,404		19,005,843		19,100,247
Total	$	970,320	$	253,263	$	1,776	$	1,225,359	$	156,779,875	$	158,005,234

Non Accrual Loans	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Non Accrual Past Due Loans		Current Non Accrual Loans		Total Non Accrual Recorded Investment
Commercial	$	0	$	0	$	1,310,602	$	1,310,602	$	3,992	$	1,314,594
Commercial Real Estate:
General		107,164		654,703		1,527,536		2,289,403		790,456		3,079,859
Construction		0		0		2,623,827		2,623,827		0		2,623,827
Consumer:
Lines of credit		0		0		166,973		166,973		46,218		213,191
Other		0		0		0		0		0		0
Credit card		0		0		0		0		0		0
Residential		0		0		713,396		713,396		34,769		748,165
Total	$	107,164	$	654,703	$	6,342,334	$	7,104,201	$	875,435	$	7,979,636

Troubled Debt Restructurings:

The Company has allocated $1,499,705 of specific reserves on $9,036,794 of loans to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and $447,947 on $5,370,581 as of December 31, 2010. At December 31, 2011, the Company had an additional $222,700 in performing loans outstanding to one of those customers. As of December 31, 2010, there was $1,146,342 committed to two customers.  These customers are paying as agreed on those loans.

During the twelve month period ended December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a stated rate of interest lower than the current market rate for new debt with similar risk; interest only payments on an amortizing note; a reduced payment amount which does not fully cover the interest; or a permanent reduction of the recorded investment in the loan.

Modifications involving a stated interest rate of the loan below the current market rate were for periods ranging from 6 months to 1 year. Modifications involving a reduced payment amount were for periods ranging from 5 months to 3 years.  One modification involved an interest only payment on an amortizing note for 15 months and another modification involved an interest rate/amortization concession for 3 months.  Lastly, one modification involved a permanent reduction of the recorded investment in the loan.

The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve month period ended December 31, 2011:

2011	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		8	$	391,400	$	391,440
Commercial Real Estate:
General		8		1,836,316		1,781,418
Construction		2		2,186,620		2,186,620
Consumer:
Lines of credit		2		53,696		53,696
Residential		2		311,909		311,909
Total		22	$	4,779,941	$	4,725,083

In the twelve month period ended December 31, 2011, troubled debt restructurings incurred charge-offs of $383,000. As of December 31, 2011, an additional $1,308,000 of specific reserves were established on these troubled debt restructurings.

Generally, a modified loan is considered to be in payment default when the borrower is not performing according to the renegotiated terms and stops communicating and working with the Bank.

For the twelve month period ended December 31, 2011, there were four trouble debt restructurings that experienced a payment default within twelve months of the modification. Below is a table which presents those loans by class:

2011	Number of Loans		Recorded Investment at time of default
Troubled Debt Restructurings
That Subsequently Defaulted:
Commercial		3	$	224,933
Commercial Real Estate:
General		1		319,915
Total		4	$	544,848

In the twelve month period ended December 31, 2011, troubled debt restructurings that subsequently defaulted resulted in charge-offs of $326,000.  As of December 31, 2011, there are no specific reserves on the remaining balance of these troubled debt restructurings.

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

Credit Quality Indicators:

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

1.   Exceptional. Loans with an exceptional credit rating.

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

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

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

5.   Acceptable. Loans with acceptable sources of repayment and risk.

                  5W. Loans considered to be below average quality. The loans are often fundamentally sound but require more frequent management review because of an adverse financial event. Risk of non payment is elevated.

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

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

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

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

	Commercial				Commercial Real Estate General				Commercial Real Estate Construction
	2011		2010		2011		2010		2011		2010
1	$	0	$	0	$	0	$	0	$	0	$	0
2		253,956		583,364		0		0		0		0
3		4,947,905		1,722,896		3,141,880		3,443,220		0		30,927
4		13,552,704		21,109,601		19,274,469		17,362,231		271,335		2,727,615
5		21,119,918		19,659,157		21,250,749		24,656,543		2,347,947		1,702,025
5W		3,910,143		1,687,613		5,452,332		4,399,618		1,360,030		1,484,710
6		5,005,950		9,349,408		4,394,702		4,777,202		0		190,333
7		3,567,564		3,292,002		2,293,571		2,328,376		39,330		39,849
8		1,050,013		1,198,940		1,431,650		2,354,457		2,464,175		2,632,723
Total	$	53,408,153	$	58,602,981	$	57,239,353	$	59,321,647	$	6,482,817	$	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 and by payment activity.  The following tables present the recorded investment in residential and consumer loans based on payment activity as of December 31, 2011 and 2010:

	Residential
	2011		2010
Performing	$	16,429,725	$	18,508,671
Impaired		595,598		1,339,741
Total	$	17,025,323	$	19,848,412

	Consumer – Lines of credit				Consumer – Other				Consumer – Credit card
	2011		2010		2011		2010		2011		2010
Performing	$	13,293,523	$	15,708,354	$	2,204,108	$	2,870,681	$	527,858	$	517,306
Impaired		155,251		239,789		119,449		64,729		0		2,789
Total	$	13,448,774	$	15,948,143	$	2,323,557	$	2,935,410	$	527,858	$	520,095

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Note 2 - Securities

12 Months Ended

Dec. 31, 2011

Marketable Securities [Text Block]

NOTE 2 – SECURITIES AVAILABLE FOR SALE

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2011
US Treasury	$	4,041,881	$	25,775	$	0		$	4,067,656
US Government and federal agency		15,341,362		239,037		(7,811	)		15,572,588
Municipals		2,767,463		123,957		0			2,891,420
Mortgage-backed and collateralized mortgage obligations– residential		11,733,141		317,565		(10,267	)		12,040,439
	$	33,883,847	$	706,334	$	(18,078	)	$	34,572,103
2010
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

Periodically the Company will implement a strategy to realize market value gains within its securities portfolio to supplement earnings and capital. Proceeds from sales of securities in 2011 totaled $820,285 resulting in a realized gain of $3,288 and no realized loss. Proceeds from security sales in 2010 totaled $3,751,027 resulting in a realized gain of $80,079 and realized loss of $265.

In 2010, several of the securities sold were transferred out of the held to maturity portfolio. As a result, the Company needed to transfer all of its remaining held to maturity securities into the available for sale portfolio in order to comply with accounting guidance. The carrying amount of the securities transferred during 2010 was $5,839,614. Of that total, $3,551,506 was sold. The remaining $2,288,108 had an unrealized gain of $28,192 that was recorded through other comprehensive income upon transfer.

The fair value of debt securities and carrying amount, if different, at year-end 2011 by contractual maturity were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately:

2011	Amortized Cost		Fair Value
Due in one year or less	$	4,529,357	$	4,565,559
Due from one to five years		15,866,876		16,111,735
Due from five to ten years		1,754,473		1,854,370
Due in more than ten years		0		0
Mortgage-backed and collateralized mortgage obligations – residential		11,733,141		12,040,439
	$	33,883,847	$	34,572,103

Securities with unrealized losses not recognized in income at year-end 2011 and 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	Less than 12 Months					12 Months or Longer					Total
2011	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
US Government and federal agency	$	2,060,693	$	(7,811	)	$	0	$	0		$	2,060,693	$	(7,811	)
Mortgage-backed and collateralized mortgage obligations - residential		817,615		(4,240	)		1,215,921		(6,027	)		2,033,536		(10,267	)
	$	2,878,308	$	(12,051	)	$	1,215,921	$	(6,027	)	$	4,094,229	$	(18,078	)

	Less than 12 Months					12 Months or Longer				Total
2010	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized 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	)

Other-Than-Temporary-Impairment

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

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

At both year-end 2011 and 2010, approximately 100% of the mortgage-backed securities and collateralized mortgage obligations 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. At December 31, 2011, seven debt securities had unrealized losses with aggregate depreciation of 0.44% from the amortized cost basis. All seven securities are issued by a government agency. It is likely that these debt securities will be retained given the fact that they are pledged to various public funds. The reported decline in value is not material and is deemed to be market driven. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2011.

At year-end 2011 and 2010, there were no holdings of securities of any one issuer, other than U.S. Government and federal agencies, in an amount greater than 10% of common stock and surplus.

Securities pledged at year-end 2011 had a carrying amount of $23,093,022 and were pledged to secure public fund customers, the Federal Reserve Discount Window and customer repurchase agreements.  Pledged securities at year-end 2010 had a carrying amount of $29,206,793.

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Consolidated Balance Sheets (USD $)	Dec. 31, 2011	Dec. 31, 2010
ASSETS
Cash and due from financial institutions	$ 2,426,142	$ 2,074,301
Interest-bearing deposits in other financial institutions	6,493,426	21,565,572
Cash and cash equivalents	8,919,568	23,639,873
Securities available for sale (at fair value)	34,572,103	36,503,903
Loans held for sale	5,534,983	1,263,263
Loans	149,658,931	165,243,881
Less: Allowance for loan losses	5,299,454	4,791,907
Net loans	144,359,477	160,451,974
Federal Home Loan Bank stock	450,800	479,800
Premises and equipment, net	10,404,865	10,874,176
Accrued interest receivable	746,143	781,334
Foreclosed assets	3,276,838	3,382,594
Other assets	386,524	568,580
Total assets	208,651,301	237,945,497
Deposits
Non-interest-bearing	33,281,198	33,326,683
Interest-bearing	158,264,038	185,936,494
Total deposits	191,545,236	219,263,177
Federal funds purchased and repurchase agreements	7,814,745	7,460,795
Notes payable	5,000,000	5,000,000
Subordinated debentures	4,500,000	4,500,000
Accrued expenses and other liabilities	1,211,702	875,738
Total liabilities	210,071,683	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	(15,084,431)	(12,617,022)
Accumulated other comprehensive income	367,358	166,118
Total shareholders’ equity	(1,420,382)	845,787
Total liabilities and shareholders’ equity	$ 208,651,301	$ 237,945,497

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Consolidated Statements Of Cash Flows (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Cash flows from operating activities
Net loss	$ (2,467,409)	$ (8,882,727)
Adjustments to reconcile net loss to net cash from operating activities:
Provision for loan losses	2,483,640	6,024,775
Depreciation	522,212	579,553
Net amortization of securities	258,365	199,959
Net realized gain on sale of securities	(3,288)	(79,814)
Net realized gain on sale of loans	(295,961)	(316,525)
Net realized (gain) loss on sale of foreclosed assets	(192,176)	193,559
Foreclosed asset impairment	1,047,644	2,575,129
Originations of loans for sale	(18,157,446)	(19,707,901)
Proceeds from loan sales	14,181,687	19,831,855
Deferred federal income tax benefit	(103,669)	0
Net change in:
Accrued interest receivable and other assets	217,247	1,090,040
Accrued interest payable and other liabilities	335,964	262,606
Net cash (used in) from operating activities	(2,173,190)	1,770,509
Activity in available for sale securities:
Sales	820,285	3,751,027
Maturities, prepayments and calls	13,800,337	11,445,595
Purchases	(12,638,990)	(24,340,702)
Loan originations and payments, net	12,491,304	10,798,221
Redemption (purchase) of Federal Home Loan Bank stock	29,000	(75,700)
Additions to premises and equipment, net	(52,901)	(160,560)
Proceeds from the sale of foreclosed assets	367,841	2,480,359
Net cash from investing activities	14,816,876	3,898,240
Cash flows from financing activities
Net change in deposits	(27,717,941)	20,686,568
Net change in federal funds purchased and repurchase agreements	353,950	460,468
Repayment of FHLB advances	0	(6,000,000)
Net cash (used in) from financing activities	(27,363,991)	15,147,036
Net change in cash and cash equivalents	(14,720,305)	20,815,785
Beginning cash and cash equivalents	23,639,873	2,824,088
Ending cash and cash equivalents	8,919,568	23,639,873
Supplemental cash flow information:
Cash paid during the period for interest	2,960,854	4,834,163
Transfers from loans to foreclosed assets	1,544,993	3,073,725
Transfers from securities held to maturity to available for sale	0	5,839,614
Foreclosed asset sales financed by the Bank	$ 427,440	$ 883,000

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Note 16 - Off-Balance Sheet Activities

12 Months Ended

Dec. 31, 2011

Commitments And Off Balance Sheet Risk [Text Block]

NOTE 16 – OFF-BALANCE SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs.  These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.  Commitments may expire without being used.  Risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated.  The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance sheet risk was as follows at year-end:

	2011				2010
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	0	$	21,349,655	$	1,427,195	$	23,425,296
Unused standby letters of credit		0		1,262,000		0		1,266,735
Commitments to make loans		0		0		95,470		0

Commitments to make loans are generally made for periods of 60 days or less.

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Note 18 - Other Comprehensive Income (Loss)

12 Months Ended

Dec. 31, 2011

Other Comprehensive Income [Text Block]

NOTE 18 – OTHER COMPREHENSIVE INCOME (LOSS)

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

	2011			2010
Unrealized holding gains on held to maturity securities transferred to available for sale	$	0		$	28,192
Unrealized holding gains on available for sale securities		308,197			40,145
Less reclassification adjustments for gains later recognized in income		(3,288	)		(79,814	)
Net unrealized gain (loss)		304,909			(11,477	)
Tax effect		103,669			0
Other comprehensive income (loss)	$	201,240		$	(11,477	)

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Note 1 - Summary Of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Significant Accounting Policies [Text Block]

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION:  The consolidated financial statements include the accounts of Community Shores Bank Corporation (the “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”), after elimination of significant intercompany transactions and accounts.

NATURE OF OPERATIONS:  The Company was incorporated on July 23, 1998 under Michigan law and is a bank holding company owning all of the common stock of the Bank.  The Bank is a Michigan banking corporation with depository accounts insured by the Federal Deposit Insurance Corporation (the “FDIC”).  The Bank provides a range of commercial and consumer banking services in West Michigan, primarily in Muskegon County, which includes the cities of Muskegon and North Muskegon, and Northern Ottawa County, which includes the city of Grand Haven.  Those services reflect the Bank’s strategy of serving small to medium-sized businesses, and individual customers in its market area.  Services for businesses include traditional business accounts and both commercial and commercial real estate loans. At year-end 2011, the loan portfolio was 35% commercial and 42% commercial real estate. There were 3% of total commercial real estate loans classified as land development. There are no significant concentrations of loans to any one industry or customer; however, the borrowers’ ability to repay their loans is affected by the real estate market and general market conditions in the Bank’s market area. Management focuses the Bank’s retail banking strategy on providing traditional banking products and services, including consumer and residential loans, automated teller machines, computer banking, telephone banking and automated bill-paying services to individuals and businesses in the Bank’s market area.  The Bank began operations on January 18, 1999.

The Mortgage Company, a wholly-owned subsidiary of the Bank, was formed on March 1, 2002 by transferring a majority of the Bank’s commercial and residential real estate loans at that date in exchange for 100% of the equity capital of the Mortgage Company. On the day of formation, the Mortgage Company commenced operations and became legally able to originate residential mortgage loans. The Bank services the entire portfolio of loans held by the Mortgage Company pursuant to a servicing agreement.

Berryfield, a wholly-owned subsidiary of the Mortgage Company, is a limited liability company that was created in October 2010. The entity’s sole purpose is to oversee the development and sale of vacant lots that have been foreclosed on by the Mortgage Company.

The Company filed an election to become a financial holding company pursuant to Title I of the Gramm-Leach-Bliley Act and on September 27, 2002 received regulatory approval. At that time the Company formed CS Financial Services. Currently the only source of revenue that CS Financial Services receives is referral fee income from a local insurance agency, Lakeshore Employee Benefits. Lakeshore Employee Benefits offers, among other things, employer-sponsored benefit plans. CS Financial Services has the opportunity to earn a referral fee for each sale of employer-sponsored benefits that is transacted by Lakeshore Employee Benefits as a result of a referral made by CS Financial Services. On April 16, 2009, the Company withdrew its election to be a financial holding company. The election was acknowledged by the Federal Reserve Bank of Chicago. The passive income derived from CS Financial Services affiliation with Lakeshore Employee Benefits is unaffected by this change.

Community Shores Capital Trust I, (“the Trust”) was formed in December 2004. The Company owns all of the common securities of this special purpose trust. The Trust is not consolidated and exists solely to issue capital securities.

USE OF ESTIMATES: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The primary estimates incorporated into the Company’s consolidated financial statements, which are susceptible to change in the near term, include the allowance for loan losses; the fair value of financial instruments, the carrying value of foreclosed assets and a valuation allowance on deferred tax assets.

CASH FLOW REPORTING: Cash and cash equivalents includes cash, demand deposits with other financial institutions, short-term investments (securities with daily put provisions) and federal funds sold.  Cash flows are reported net for customer loan and deposit transactions, interest-bearing time deposits with other financial institutions and short-term borrowings with maturities of 90 days or less.

INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS: Interest-bearing deposits in other financial institutions are carried at cost.

SECURITIES:  Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.  Securities are classified as available for sale when they might be sold before maturity.  Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.  Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are amortized on the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are expected. Gains and losses on sales are based on the amortized cost of the security sold.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when the economic conditions warrant such evaluation. Declines in the fair value of securities below their cost that are other-than-temporary are reflected in realized losses. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and whether the Company has the intent to sell or is likely to be required to sell the security before its anticipated recovery.

LOANS:  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs and an allowance for loan losses.  Loans held for sale consist of both residential mortgage loans as well as Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) guaranteed loans. Loans held for sale are reported at the lower of cost or market, on an aggregated basis. Residential mortgage loans are sold to outside investors servicing released, however the Bank retains servicing on SBA loans which are sold. There were loans held for sale totaling $5,534,983 at December 31, 2011 compared to $1,263,263 at December 31, 2010.

The loan portfolio consists of the following segments:

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

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

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

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

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

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

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

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

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the most recent 12 quarters.  The historical loss experience is recalculated at the end of each quarter. This actual loss experience is supplemented with current economic factors based on the risks present for each portfolio segment.  These current economic factors are also revisited at the end of each quarter and include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; quality of loan review system; degree of oversight by the Board of Directors; national and local economic trends and conditions; industry conditions; competition and legal and regulatory requirements; and effects of changes in credit concentrations. There were no significant changes to this methodology in 2011, only minor enhancements.

For the commercial and commercial real estate portfolio segments, the historical loss is tracked by original loan grade. The Bank utilizes a numeric grading system for commercial and commercial real estate loans. Grades are assigned to each commercial and commercial real estate loan by assessing information about the specific borrower’s situation and the estimated collateral values. The description of the loan grade criteria is included in Note 3. The most significant risks to the commercial and commercial real estate segments are the level of development and sales and the collateral values.  Over the past few years, development and sales activity were sluggish. As a result, collateral values fell. The declining values prompted more frequent collateral analysis of impaired loans and typically translated into charge-offs of the specific allocations (collateral shortfall). Increases in charge-offs raised the historical loss factor assigned to the general allocation.

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

For the consumer segment, historical loss experience is based on the actual loss history of the following four classes; general consumer loans, personal lines of credit, home equity lines of credit and credit cards. The level of delinquencies and charge-off experience directly impacts the general allocations to the consumer classes. Both delinquencies and charge-offs have gone down in the last year allowing a reduction of the general allocations in the allowance for loan losses.

The residential segment loss experience is not segregated by grades or classes. The level of delinquencies, charge-off experience, and direction of real estate values directly impacts the general allocations to the residential real estate segment. Declining real estate values have resulted in increased general allocations in the allowance for loan losses.

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

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

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

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

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

There was no material change in the allowance for loan loss methodology during 2011.

SERVICING RIGHTS: Servicing rights are recognized separately when they are acquired through the sales of loans where servicing is retained by the institution. At this time SBA guaranteed loans are the only loans that are sold where servicing is retained. When loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Under the fair value measurement method used by the Company, earnings are adjusted for the change in fair value in the period in which the change occurs, and the amount is included with other non-interest income on the income statement. The Company uses a third party valuation at each quarter end to adjust servicing assets to their fair value as of the end of the reporting period. The fair value of servicing rights is subject to fluctuation as a result of changes in the underlying assumptions used by the third party to conduct its valuation. Servicing rights were $76,276 at December 31, 2011 and $38,858 at December 31, 2010.

Servicing fee income is recorded for fees earned for servicing loans and is reported on the income statement as other non-interest income. The fees are based on a contractual percentage of the outstanding principal of the guaranteed portion. Servicing fees totaled $89,163 for the year ended December 31, 2011 and $40,339 for the year ended December 31, 2010.

TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated selling cost when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a direct write-down is recorded through non-interest expense. Operating costs after acquisition are expensed.

PREMISES AND EQUIPMENT:  Land is carried at cost.  Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.

FEDERAL HOME LOAN BANK (FHLB) STOCK:  The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

LONG-TERM ASSETS:  Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fair value.

REPURCHASE AGREEMENTS:  Substantially all repurchase agreement liabilities represent amounts advanced by various customers.  These balances are not deposits and are not covered by federal deposit insurance. Securities are pledged to cover these liabilities.

STOCK COMPENSATION: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

INCOME TAXES:  Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company is only subject to examinations of federal taxing authorities for years after 2007. The Company and its subsidiaries are subject to U.S. federal income tax. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at either December 31, 2011 or December 31, 2010.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded. Standby letters of credit are considered guarantees and are recorded at fair value.

EARNINGS PER COMMON SHARE:  Basic earnings per common share is net income (loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.  In 2011, stock options for 42,800 shares of common stock were not considered in computing diluted earnings per share because they were anti-dilutive. In 2010, 47,300 shares of common stock were not considered for the same reason.

COMPREHENSIVE INCOME (LOSS): Comprehensive income consists of net income (loss) and other comprehensive income (loss).  Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity.

LOSS CONTINGENCIES:  Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Currently, management does not believe there now are such matters that will have a material effect on the financial statements.

RESTRICTIONS ON CASH:  The Bank was required to have $1,118,000 of cash on hand, or on deposit, with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at year-end 2011. The requirement at year-end 2010 was $1,211,000.

DIVIDEND RESTRICTIONS: Holders of the Company's common stock are entitled to receive dividends that the Board of Directors may declare from time to time.  The Company may only pay dividends out of funds that are legally available for that purpose.  The Company's ability to pay dividends to its shareholders depends primarily on the Bank’s ability to pay dividends to the Company.  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.

On December 16, 2010, the Company entered into a Written Agreement with the FRB. The Written Agreement contained several provisions related to dividends and distributions. Essentially the Company shall not declare or pay any dividends without the prior written approval of the FRB, and the Company shall not accept dividends or any other form of payment from the Bank without the prior written approval of the FRB. Similarly the Bank is prohibited from paying dividends. The Bank entered into a Consent Order with the FDIC and the OFIR, its primary banking regulators, which became effective on September 2, 2010. The Consent Order, among other things, explicitly prohibits the Bank from declaring or paying a dividend without the prior written consent of the regulators.

Prior to the regulatory dividend restrictions, there were several other restrictions in place as a result of various debt covenants. For instance, under the terms of the subordinated debentures, the Company is precluded from paying dividends on its common stock because the Company exercised its right to defer payments of interest on the subordinated debentures in June of 2010. No dividends may be issued until the deferral ends. Additionally, the Company’s dividends are limited by its lender imposed debt covenant if the source of the cash was from loan proceeds.

FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair value of financial instruments is estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.

ADOPTION OF NEW ACCOUNTING STANDARDS:

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 gives 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 was effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment of those receivables, the amendments were applied prospectively for the first interim or annual period beginning on or after June 15, 2011.  The adoption of this ASU had no material impact on our consolidated financial statements.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  For public companies, the amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements.  For public companies, the amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted.  The adoption of this amendment will change the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholders’ equity.

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

OPERATING SEGMENTS: While Management monitors the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered to be aggregated in one reportable segment, banking.

RECLASSIFICATION:  Some items in the prior year financial statements were reclassified to conform to the current presentation.

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Consolidated Balance Sheets (Parentheticals) (USD $)	Dec. 31, 2011	Dec. 31, 2010
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Preferred Stock, par value (in Dollars per share)	$ 0	$ 0
Common stock, shares authorized	9,000,000	9,000,000
Common stock, shares issued	1,468,800	1,468,800
Common stock, shares outstanding	1,468,800	1,468,800
Common Stock, par value (in Dollars per share)	$ 0	$ 0

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Note 11 - Benefit Plans

12 Months Ended

Dec. 31, 2011

Pension and Other Postretirement Benefits Disclosure [Text Block]

NOTE 11 - BENEFIT PLANS

The Company’s 401(k) benefit plan allows employee contributions up to the dollar limit set by law which was $16,500 in both 2010 and 2011. The Company had a Safe Harbor 401(k) Plan in both 2010 and 2011. The Company may, at its discretion, make a matching contribution.  The matching formula is 100% of the first 3% of compensation contributed and 50% of the next 3%. The Company did not make any matching contributions in 2010 or 2011.

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Document And Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Mar. 18, 2012	Jun. 30, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	COMMUNITY SHORES BANK CORP
Document Type	10-K
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		1,468,800
Entity Public Float			$ 750,000
Amendment Flag	false
Entity Central Index Key	0001070523
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY

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Note 12 - Income Taxes

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

NOTE 12- INCOME TAXES

The consolidated provision for federal income tax expense (benefit) was as follows:

	2011			2010
Current payable (receivable)	$	0		$	(10,618	)
Deferred liability (benefit)		(103,669	)		0
Valuation allowance establishment		0			0
	$	(103,669	)	$	(10,618	)

The net deferred tax asset recorded includes the following amounts of deferred tax assets and liabilities as of December 31, 2011 and 2010:

	2011			2010
Deferred tax asset
Allowance for loan losses	$	1,401,490		$	1,195,446
Non-accrual loans		359,526			276,715
Deferred loan costs, net		10,976			9,975
Accrued expenses		0			7,115
Foreclosed assets		1,401,133			1,276,595
Other		24,233			25,432
Net operating loss carryforward		3,086,212			2,587,922
		6,283,570			5,379,200
Deferred tax liabilities
Depreciation	$	(240,472	)	$	(240,455	)
Accretion on securities		(273	)		(191	)
Unrealized gain on securities available for sale		(217,229	)		(217,229	)
Prepaid expenses		(37,166	)		(32,942	)
Other		(11,646	)		(12,394	)
		(506,786	)		(503,211	)
	$	5,776,784		$	4,875,989
Valuation allowance		(5,776,784	)		(4,875,989	)
Net deferred tax asset	$	0		$	0

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.

A reconciliation of the difference between federal income tax expense (benefit) and the amount computed by applying the statutory rate of 34% in 2011 and 2010 is as follows:

	2011			2010
Tax at statutory rate	$	(874,167	)	$	(3,023,737	)
Tax-exempt interest income		(30,281	)		(42,438	)
Other		(100,016	)		12,396
Valuation allowance		900,795			3,043,161
Federal income tax expense (benefit)	$	(103,669	)	$	(10,618	)

An income tax benefit associated with continuing operations in the amount of $103,669 was recorded for the year ending December 31, 2011. The benefit recorded considers the results of current period adjustments to other comprehensive income. Generally, the calculation for income tax expense (benefit) does not consider the tax effects of changes in other comprehensive income or loss, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances when there is a pre-tax loss from continuing operations and income from other categories such as other comprehensive income. In such case, pre-tax income from other categories is included in the tax expense (benefit) calculation for the current period.

There were no unrecognized tax benefits at December 31, 2011, and the Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

As of December 31, 2011, the Company has a net operating loss carryover of $9,077,094 to be utilized to offset future taxable income that will begin expiring in 2029.

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Condensed Consolidated Statements Of Income (USD $)	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010
Interest and dividend income
Loans, including fees	$ 9,985,906	$ 11,075,774
Securities, taxable	698,749	724,834
Securities, tax exempt	89,063	124,868
Federal funds sold, FHLB dividends and other income	59,442	58,578
Total interest and dividend income	10,833,160	11,984,054
Interest expense
Deposits	2,845,254	4,304,290
Repurchase agreements, federal funds purchased, and other debt	73,269	75,837
Federal Home Loan Bank advances and notes payable	418,243	652,616
Total interest expense	3,336,766	5,032,743
Net Interest Income	7,496,394	6,951,311
Provision for loan losses	2,483,640	6,024,775
Net Interest Income After Provision for Loan Losses	5,012,754	926,536
Non-interest income
Service charges on deposit accounts	741,990	787,980
Mortgage loan referral fees	50,877	0
Gain on sale of loans	295,961	316,525
Gain on sale of securities	3,288	79,814
Gain (loss) on the sale of foreclosed assets	192,176	(193,559)
Other	637,139	578,020
Total non-interest income	1,921,431	1,568,780
Non-interest expense
Salaries and employee benefits	4,074,170	4,146,318
Occupancy	668,502	643,159
Furniture and equipment	530,948	578,156
Advertising	49,636	58,411
Data processing	505,981	532,103
Professional services	358,685	513,458
Foreclosed asset impairment	1,047,644	2,575,129
FDIC Insurance	926,464	738,940
Other	1,343,233	1,602,987
Total non-interest expense	9,505,263	11,388,661
Loss Before Federal Income Taxes	(2,571,078)	(8,893,345)
Federal income tax expense (benefit)	(103,669)	(10,618)
Net Loss	$ (2,467,409)	$ (8,882,727)
Weighted average shares outstanding (in Shares)	1,468,800	1,468,800
Diluted average shares outstanding (in Shares)	1,468,800	1,468,800
Basic loss per share (in Dollars per share)	$ (1.68)	$ (6.05)
Diluted loss per share (in Dollars per share)	$ (1.68)	$ (6.05)

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Note 6 - Deposits

12 Months Ended

Dec. 31, 2011

Deposit Liabilities Disclosures [Text Block]

NOTE 6 - DEPOSITS

Deposits at year-end are summarized as follows:

	2011		2010
Non-interest-bearing DDA	$	33,281,198	$	33,326,683
Interest-bearing DDA		19,432,618		23,944,608
Money market		18,468,540		18,493,059
Savings		8,477,893		7,388,395
Certificate of deposit		111,884,987		136,110,432
	$	191,545,236	$	219,263,177

Time deposits of $100,000 or more were $16,673,219 at year-end 2011 and $57,217,208 at year-end 2010. 1

Scheduled maturities of time deposits, as of year-end 2011, were as follows:

2012	$	58,713,415
2013		32,585,784
2014		17,028,479
2015		1,576,799
2016		1,980,510
	$	111,884,987

Brokered time deposits were $3,462,000 at year-end 2011 and $37,307,000 at year-end 2010.Since the Bank was not categorized as “well-capitalized” at December 31, 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 2010. All of the brokered deposits held at December 31, 2011 mature in April 2012.

___________________________

1 Includes brokered deposits.

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Note 5 - Premises And Equipment

12 Months Ended

Dec. 31, 2011

Property, Plant and Equipment Disclosure [Text Block]

NOTE 5 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

	2011		2010
Land & land improvements	$	5,466,281	$	5,464,946
Buildings & building improvements		6,132,163		6,132,163
Furniture, fixtures and equipment		3,679,037		3,652,390
		15,277,481		15,249,499
Less:  accumulated depreciation		4,872,616		4,375,323
	$	10,404,865	$	10,874,176

Land with a carrying value of $767,244 is held for sale at December 31, 2011. The Company is expecting to complete the sale by June 30, 2012, which based on the sales contract is expected to result in a gain on the sale.

Depreciation expense was $522,212 for 2011 and $579,553 for 2010.

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Note 17 - Parent Company Only Condensed Financial Information

12 Months Ended

Dec. 31, 2011

Condensed Financial Information of Parent Company Only Disclosure [Text Block]

NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Following are condensed parent company only financial statements:

CONDENSED BALANCE SHEETS

December 31,

	2011			2010
ASSETS
Cash and cash equivalents	$	33,933		$	125,459
Investment in subsidiaries		8,686,686			10,471,075
Other assets		21,953			23,139
Total assets	$	8,742,572		$	10,619,673
LIABILITIES AND EQUITY
Accrued expenses and other liabilities	$	662,954		$	273,886
Notes payable		5,000,000			5,000,000
Subordinated debentures		4,500,000			4,500,000
Shareholders’ equity		(1,420,382	)		845,787
Total liabilities and shareholders’ equity	$	8,742,572		$	10,619,673

CONDENSED STATEMENTS OF INCOME

Years Ended December 31,

	2011			2010
Other income	$	354		$	4,023
Interest expense		(418,243	)		(416,455	)
Other expense		(90,452	)		(249,421	)
Loss before income tax benefit and undistributed subsidiary income		(508,341	)		(661,853	)
Equity in undistributed subsidiary income (loss)		(1,959,068	)		(8,231,492	)
Federal income tax benefit		0			(10,618	)
Net loss	$	(2,467,409	)	$	(8,882,727	)

CONDENSED STATEMENTS OF CASH FLOWS

Years Ended December 31,

	2011			2010
Cash flows from operating activities
Net loss	$	(2,467,409	)	$	(8,882,727	)
Equity in undistributed subsidiary income (loss)		1,959,068			8,231,492
Net change in:
Other assets		1,186			(14,298	)
Other liabilities		389,068			(243,718	)
Net cash used in operating activities		(118,087	)		(909,251	)
Cash flows from investing activities
Capital investment into subsidiaries		26,561			(2,606	)
Net cash from (used in) investing activities		26,561			(2,606	)
Cash flows from financing activities
Draws on notes payable and line of credit		0			0
Paydown on notes payable		0			0
Net cash from financing activities		0			0
Net change in cash and cash equivalents		(91,526	)		(911,857	)
Beginning cash and cash equivalents		125,459			1,037,316
Ending cash and cash equivalents	$	33,933		$	125,459

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Note 13 - Related Party Transactions

12 Months Ended

Dec. 31, 2011

Related Party Transactions Disclosure [Text Block]

NOTE 13 – RELATED PARTY TRANSACTIONS

Loans and commitments to principal officers, directors and their affiliates in 2011 were as follows:

Beginning balance	$	3,390,161
New loans and line advances		1,136,625
Repayments		(869,204	)
Ending balance	$	3,657,582

Deposits from principal officers, directors and their affiliates were $2,684,204 at year-end 2011 and $3,143,260 at year-end 2010.

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Note 9 - Subordinated Debentures

12 Months Ended

Dec. 31, 2011

Subordinated Borrowings Disclosure [Text Block]

NOTE 9 – 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 2.63% at December 31, 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. The accrued interest payable on the subordinated debentures was $200,951 and $86,951 at December 31, 2011 and 2010.

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Note 7 - Short-Term Borrowings

12 Months Ended

Dec. 31, 2011

Short-term Debt [Text Block]

NOTE 7 – SHORT-TERM BORROWINGS

Short-term borrowings are generally comprised of repurchase agreements and less frequently borrowings from the FRB Discount Window. There were no borrowings from the FRB Discount Window since January 2010. Repurchase agreements are advances by customers that are not covered by federal deposit insurance. This obligation of the Bank is secured by bank-owned securities held by a third-party safekeeping agent. Discount Window borrowings are collateralized by securities and home equity loans. The Bank can borrow overnight from the Discount Window under the secondary credit program for up to 60 days in any 120-day period at a current rate of 1.25%, which is 75 basis points over the Federal Open Market Committee’s target federal funds rate which is currently 0.50%.

The balances at year-end are shown below:

	Repurchase Agreements			Discount Window
Outstanding at December 31, 2011	$	7,814,745		$	0
Average interest rate at year end		0.71	%		0.00	%
Average balance during year		9,626,125			0
Average interest rate during year		0.76	%		0.00	%
Maximum month end balance during year		11,986,254			0

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

The Bank had securities of $9,628,031 pledged to repurchase agreements at December 31, 2011 and $9,684,310 pledged at December 31, 2010.

Collateral pledged to the Discount Window at December 31, 2011 consisted of $2,557,550 in securities and $4,793,892 in home equity loans, of which $4.5 million is being held as collateral for the FRB payment system risk. At December 31, 2010, collateral consisted of $2,821,946 in securities and $7,442,413 in home equity loans.

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Note 8 - Federal Home Loan bank Borrowings

12 Months Ended

Dec. 31, 2011

Federal Home Loan Bank Advances, Disclosure [Text Block]

NOTE 8 – 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 $2,974,574. Each borrowing requires a direct pledge of securities and or loans. To support potential borrowings with the Federal Home Loan Bank, the Bank had residential loans with a fair market value of $3,760,249 pledged at year-end 2011 and $4,806,678 pledged at year-end 2010. The Bank had no outstanding borrowings with the Federal Home Loan Bank at either December 31, 2010 or 2011.

At December 31, 2010, the Bank had securities with a fair market value of $5,513,014 pledged to the Federal Home Loan Bank to collateralize a $5,000,000 overdraft line of credit. At December 31, 2010, there was no balance outstanding on the line of credit. On December 22, 2011, the Federal Home Loan Bank declined to renew the Bank’s $5,000,000 line of credit so the pledge on the securities was released.

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Note 10 - Notes Payable

12 Months Ended

Dec. 31, 2011

Notes Payable [Text Block]

NOTE 10 – 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 December 31, 2011, there was $458,000 of unpaid interest compared to $153,000 at December 31, 2010.

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Note 15 - Capital Requirements And Restrictions On Retained Earnings

12 Months Ended

Dec. 31, 2011

Regulatory Capital Requirements under Banking Regulations [Text Block]

NOTE 15 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

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 December 31, 2010 and 2011.

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 required 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.

There were several directives related to loans contained in the Consent Order. 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.

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 either December 31, 2011 or December 31, 2010. Management continues to explore options to raise the capital required for full compliance. At December 31, 2011, a capital contribution of $10,320,000 would have been needed to meet the capital ratios specified in the Consent Order.

Included in the table are the actual capital amounts and ratios for the Bank and the required capital amounts and ratios for the Bank at December 31.

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required Under Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2011
Total Capital (Tier 1 and Tier 2) to risk-weighted assets of the Bank	$	10,350,300		6.40	%	$	12,944,731		8.00	%	$	17,799,005		11.00	%
Tier 1 (Core) Capitalto risk-weighted assets of the Bank		8,287,231		5.12			6,472,366		4.00			N/A		N/A
Tier 1 (Core) Capital to average assets of the Bank		8,287,231		3.79			8,756,307		4.00			18,607,152		8.50

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum Required Under Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
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 two capital. In general only 1.25% of net risk-weighted assets are allowed to be included. At December 31, 2011, only $2,063,069 was counted as tier two capital and $3,236,385 was disallowed.  At December 31, 2010, $2,246,366 was counted as tier two capital and $2,545,541 was disallowed.

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

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.  As a condition of the Consent Order, the Bank is unable to accept brokered deposits.

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. Management does not believe the restriction on issuing brokered deposits imposes a significant liquidity problem for the Bank. Brokered deposit balances were $3,462,000 at December 31, 2011 and all mature during 2012.

On August 17, 2011, the Bank was issued a Supervisory Prompt Corrective Action Directive (the “Directive”) because of its undercapitalized capital category at December 31, 2010, its failure to submit a capital restoration plan that satisfies the requirements spelled out in the FDIC Rules and Regulations, and the continued deterioration of the Bank. The Directive stipulated that the Bank be restored to an “adequately capitalized” capital category within 60 days of the issuance of the Directive. Since the issuance of the Consent, the board has made many efforts to secure funding and comply with both the Consent and the Directive but has not been successful. As such, the Bank was not in compliance with the Directive at the end of 60 days and remains out of compliance. The board informed the FDIC in a letter dated October 14, 2011 that it was unable to comply with the Directive. There has been no further communications with the FDIC regarding the Directive. The board’s efforts to garner capital for the Bank is continuing.

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Note 20 - Going Concern Consideration Management's Plans

12 Months Ended

Dec. 31, 2011

Going Concern Note

NOTE 20 - GOING CONCERN CONSIDERATION AND MANAGEMENT’S PLANS

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and discharges of liabilities in the normal course of business for the foreseeable future, and do not include any adjustments to reflect the possible future effects of recoverability and classification of assets, or the amounts and classifications of liabilities, that may result should the Company be unable to continue as a going concern.

The Company recorded a net loss of $2,467,409 for year-end 2011 which is a favorable comparison to the net losses of $8,882,727 and $4,962,379 for year-end 2010 and 2009, respectively.  In prior years, the losses were primarily the result of increases in the provision for loan losses, higher FDIC insurance premiums, and higher administrative costs associated with managing nonperforming assets. In 2011, the Company experienced fewer foreclosed asset writedowns, a lower provision for loan loss and reduced costs associated with managing nonperforming assets. Conversely, FDIC premiums increased in 2011. In spite of the reduction in the Company’s recorded losses and net risk weighted assets, the Bank remained undercapitalized throughout 2011; the same capital classification it had at December 31, 2010 and the Company has negative equity at December 31, 2011. For further discussion of the Bank’s capital requirements, refer to the discussion in Note 15.

As a result of its poor financial condition, the Bank does not have the ability to pay dividends to the holding company without regulatory approval.  Although the Bank’s regulatory capital classification remained the same since December 31, 2010, the weak capital position puts the Bank at significant risk of further regulatory enforcement action.  The Consent Agreement, referenced in Note 15, imposes adjusted regulatory minimum capital requirements and prohibits the Bank from paying dividends without regulatory approval.

The Company would be dependent on dividends from the Bank to cure the default of its $5,000,000 term note with Fifth Third, which is collateralized by the Bank’s stock. However, the Bank is not permitted to pay dividends at this time. As a remedy of default, Fifth Third may, if it so chooses, foreclose on the Bank’s stock. Since the Company had negative equity at December 31, 2011 and insufficient cash to service its debt, the Company was insolvent as of that date.

Management is using alternative liquidity sources to fund brokered deposits as they mature and has not encountered any difficulties funding over $49.5 million in maturities since 2010.  Additionally, management has implemented strategies to reduce overhead expenses and risk-weighted assets since its first year of losses in 2007. A few of these improvements since 2007 were:

·   The work force has been reduced by 27% with 20 positions eliminated. Most staff salaries have been frozen for four years and the 401(k) matching contributions were suspended in 2009. Benefits expenses have been reapportioned with the employees bearing more of the cost. As a result, salary and benefit expenses decreased 18% or over $900,000 which more than offset the $743,000 increase in FDIC premiums since 2007.

·   Renegotiated vendor contracts as well as the reduction and elimination of a variety of overhead expenses allowed the Bank to absorb over 90% of the nearly $350,000 increase in administration expenses on impaired loans since 2007.

·   The Bank’s balance sheet management successfully reduced net risk-weighted assets by over $88 million since year-end 2007. A majority of the decrease was in loans.

Management plans to continue exploring opportunities to reduce expenses, manage the balance sheet and raise capital to achieve compliance with the Consent Order and the Directive.

Management will continue its efforts to improve asset quality in 2012. In 2011, the Bank reduced non-performing assets by $1.5 million. In 2011, ten properties and nine vacant lots were sold and past due and non-accrual notes were reduced by nearly $1.4 million.

Due to the conditions and events discussed in this annual report, substantial doubt exists as to the Company’s ability to continue as a going concern. The Company has determined that significant additional capital is required to continue operations and avoid additional regulatory action. The Board and management continue to seek opportunities to raise capital.

These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.

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Consolidated Statements Of Changes Of Shareholders’ Equity (USD $)	Common Stock [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance at at Dec. 31, 2009	$ 13,296,691	$ (3,734,295)	$ 177,595	$ 9,739,991
Balance at (in Shares) at Dec. 31, 2009	1,468,800
Net loss		(8,882,727)		(8,882,727)
Unrealized gain (loss) on securities available for sale, net			(11,477)	(11,477)
Total comprehensive income (loss)				(8,894,204)
Balance at at Dec. 31, 2010	13,296,691	(12,617,022)	166,118	845,787
Balance at (in Shares) at Dec. 31, 2010	1,468,800			1,468,800
Net loss		(2,467,409)		(2,467,409)
Unrealized gain (loss) on securities available for sale, net			201,240	201,240
Total comprehensive income (loss)				(2,266,169)
Balance at at Dec. 31, 2011	$ 13,296,691	$ (15,084,431)	$ 367,358	$ (1,420,382)
Balance at (in Shares) at Dec. 31, 2011	1,468,800			1,468,800

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Note 4 - Foreclosed Assets

12 Months Ended

Dec. 31, 2011

Real Estate Owned [Text Block]

NOTE 4 – FORECLOSED ASSETS

Foreclosed asset activity:

	2011			2010
Beginning of year	$	3,382,594		$	6,440,916
Additions		1,544,993			3,073,725
Reductions from sales		(603,105	)		(3,556,918	)
Direct write-downs		(1,047,644	)		(2,575,129	)
End of year	$	3,276,838		$	3,382,594
Expenses related to foreclosed assets include:
		2011			2010
Operating expenses, net of rental income	$	138,199		$	445,682

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Note 14 - Stock Options

12 Months Ended

Dec. 31, 2011

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 14 – STOCK OPTIONS

The Company has three share-based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $0 for both 2010 and 2011. Consequently, there was no income tax benefit recorded for either 2010 or 2011.

Stock Option Plans

Options to buy stock were granted to officers under the 1998 Employee Stock Option Plan, which provided for issue of options for up to 150,000 shares of stock of the Company.  Exercise price is not less than the market price at date of grant. The maximum option term is ten years, and presently outstanding options vested over three years.

Options to buy stock were granted to nonemployee directors of the Company under the Director Stock Option Plans of 2003 and 2005. Both plans provided for the issuance of options for up to 20,000 shares of stock of the Company. The exercise price for options issued under these plans was not less than the market price per share as of the date of grant. The maximum option term is ten years for both plans. Outstanding options under the plans were exercisable in full as of the date the options were granted.

A summary of the activity in the plans for 2011 is as follows:

	Number of Shares Subject to Options			Weighted Average Exercise Price			Weighted Average Remaining Contractual  Term		Aggregate Intrinsic Value*
Outstanding at beginning of year		47,300		$	11.01
Granted		0			0
Exercised		0			0
Forfeited or expired		(4,500	)		(14.04	)
Outstanding at end of year		42,800		$	10.69		1.3	$	0
Exercisable at end of year		42,800		$	10.69		1.3	$	0

*The stock price at December 31, 2011 did not exceed the weighted average option exercise price.

All outstanding options are fully vested, therefore there is no unrecognized compensation cost related to options.

As of December 31, 2011, there were 2,000 shares available for grant in the Director Stock Option Plan of 2005 and 53,000 shares available to grant in the Employee Stock Option Plan of 2005.