PINX:CSHB Community Shores Bank Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012                                                                           

or

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

For the transition period from                                                                                                           to ____________________________________

Commission File Number: 000-51166 
 
Community Shores Bank Corporation 
(Exact name of registration as specified in its charter)
   
Michigan
38-3423227
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1030 W. Norton Avenue, Muskegon, MI
49441
(Address of principal executive offices)
(Zip Code)
   
(231) 780-1800
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x  Yes oNo

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).
o  Yes  x  No

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

Large accelerated filer o     Accelerated filer o      Non-accelerated filer o       Smaller reporting company x
                                                                                  (Do not check if a smaller reporting company)

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

At August 1, 2012, 1,468,800 shares of common stock were outstanding.
 
 
 

 
Community Shores Bank Corporation Index


 
 
 
 

 
PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

   
June 30,
   
December 31,
 
   
2012
 
2011
 
   
(unaudited)
       
ASSETS
           
Cash and due from financial institutions
  $ 3,200,935     $ 2,426,142  
Interest-bearing deposits in other financial institutions
    15,242,760       6,493,426  
    Total cash and cash equivalents
    18,443,695       8,919,568  
Securities available for sale (at fair value)
    36,881,714       34,572,103  
Loans held for sale
    6,070,473       5,534,983  
Loans
    132,373,910       149,658,931  
Less: Allowance for loan losses
    4,321,297       5,299,454  
    Net loans
    128,052,613       144,359,477  
Federal Home Loan Bank stock (at cost)
    450,800       450,800  
Premises and equipment, net
    9,448,046       10,404,865  
Accrued interest receivable
    648,722       746,143  
Foreclosed assets
    3,356,404       3,276,838  
Other assets
    994,996       386,524  
            Total assets
  $ 204,347,463     $ 208,651,301  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits
               
    Non-interest-bearing
  $ 35,565,711     $ 33,281,198  
    Interest-bearing
    148,052,497       158,264,038  
            Total deposits
    183,618,208       191,545,236  
Federal funds purchased and repurchase agreements
    10,993,728       7,814,745  
Subordinated debentures
    4,500,000       4,500,000  
Notes payable
    5,000,000       5,000,000  
Accrued expenses and other liabilities
    1,425,761       1,211,702  
            Total liabilities
    205,537,697       210,071,683  
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
    (14,826,896 )     (15,084,431 )
    Accumulated other comprehensive income
    339,971       367,358  
    Total shareholders’ equity
    (1,190,234 )     (1,420,382 )
    Total liabilities and shareholders’ equity
  $ 204,347,463     $ 208,651,301  

See accompanying notes to consolidated financial statements.

 
-1-

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
   
Three Months
   
Three Months
   
Six Months
   
Six Months
 
   
Ended
   
Ended
   
Ended
   
Ended
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
   
June 30, 2011
 
Interest and dividend income
                       
    Loans, including fees
  $ 2,100,364     $ 2,534,972     $ 4,253,369     $ 5,100,053  
    Securities (including FHLB dividends)
    174,501       206,808       349,695       424,722  
    Federal funds sold and other income
    11,880       12,736       23,615       26,430  
      Total interest income
    2,286,745       2,754,516       4,626,679       5,551,205  
Interest expense
                               
    Deposits
    356,395       764,822       760,668       1,576,417  
    Repurchase agreements, federal funds purchased, and other debt
    21,629       20,115       39,019       31,617  
    Federal Home Loan Bank advances and notes payable
    106,865       104,161       214,844       207,051  
      Total interest expense
    484,889       889,098       1,014,531       1,815,085  
Net Interest Income
    1,801,856       1,865,418       3,612,148       3,736,120  
Provision for loan losses
    0       497,921       75,035       1,202,426  
Net Interest Income After Provision for Loan Losses
    1,801,856       1,367,497       3,537,113       2,533,694  
Non-interest income
                               
    Service charges on deposit accounts
    174,598       197,834       338,808       374,647  
    Mortgage loan referral fees
    11,162       7,841       14,441       12,105  
    Gain on sale of loans
    64,843       13,622       102,932       171,182  
    Gain on sale of securities
    0       0       2,856       0  
    Gain (loss) on sale of foreclosed assets
    6,364       (4,269 )     (42,433 )     (5,068 )
    Gain on sale of premises and equipment
    208,389       0       208,389       0  
    Other
    109,444       145,157       251,453       326,829  
      Total non-interest income
    574,800       360,185       876,446       879,695  
Non-interest expense
                               
    Salaries and employee benefits
    918,958       1,027,091       1,888,722       2,052,431  
    Occupancy
    158,642       155,485       321,485       336,846  
    Furniture and equipment
    102,814       136,515       203,985       269,001  
    Advertising
    13,472       11,590       27,352       20,935  
    Data processing
    148,942       118,207       282,461       250,613  
    Professional services
    72,456       85,099       148,108       179,937  
    Foreclosed asset impairment
    93,878       225,062       185,020       392,928  
    Other
    545,858       490,952       1,098,891       1,167,236  
      Total non-interest expense
    2,055,020       2,250,001       4,156,024       4,669,927  
Income (Loss) Before Federal Income Taxes
    321,636       (522,319 )     257,535       (1,256,538 )
Federal income tax expense (benefit)
    0       0       0       0  
Net Income (Loss)
  $ 321,636     $ (522,319 )   $ 257,535     $ (1,256,538 )
Weighted average shares outstanding
    1,468,800       1,468,800       1,468,800       1,468,800  
Diluted average shares outstanding
    1,468,800       1,468,800       1,468,800       1,468,800  
Basic earnings (loss) per share
  $ 0.22     $ (0.36 )   $ 0.18     $ (0.86 )
Diluted earnings (loss) per share
  $ 0.22     $ (0.36 )   $ 0.18     $ (0.86 )
 
See accompanying notes to consolidated financial statements.
 
 
-2-

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
   
Three Months
   
Three Months
   
Six Months
   
Six Months
 
   
Ended
   
Ended
   
Ended
   
Ended
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
   
June 30, 2011
 
                         
Net income (loss)
  $ 321,636     $ (522,319 )   $ 257,535     $ (1,256,538 )
                                 
Other comprehensive income (loss):
                               
    Unrealized holding gains and (losses) on
                               
      available for sale securities
    14,906       194,750       (24,531 )     224,936  
    Less reclassification adjustments for gains later
                               
      recognized in income
    0       0       (2,856 )     0  
    Net unrealized gain (loss)
    14,906       194,750       (27,387 )     224,936  
    Tax effect
    0       0       0       0  
    Total other comprehensive income (loss)
    14,906       194,750       (27,387 )     224,936  
                                 
Comprehensive income (loss)
  $ 336,542     $ (327,569 )   $ 230,148     $ (1,031,602 )
 
See accompanying notes to consolidated financial statements.
 
 
-3-

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
                     
Accumulated
       
                     
Other
   
Total
 
         
Common
   
Retained
   
Comprehensive
   
Shareholders’
 
   
Shares
   
Stock
   
Deficit
   
Income
   
Equity
 
                               
Balance at January 1, 2011
    1,468,800     $ 13,296,691     $ (12,617,022 )   $ 166,118     $ 845,787  
                                         
    Net loss
                    (1,256,538 )             (1,256,538 )
    Other comprehensive income
                            224,936       224,936  
                                         
Balance at June 30, 2011
    1,468,800     $ 13,296,691     $ (13,873,560 )   $ 391,054     $ (185,815 )
                                         
Balance at January 1, 2012
    1,468,800     $ 13,296,691     $ (15,084,431 )   $ 367,358     $ (1,420,382 )
                                         
    Net income
                    257,535               257,535  
    Other comprehensive loss
                            (27,387 )     (27,387 )
                                         
Balance at June 30, 2012
    1,468,800     $ 13,296,691     $ (14,826,896 )   $ 339,971     $ (1,190,234 )
 
See accompanying notes to consolidated financial statements.

 
-4-

 
COMMUNITY SHORES BANK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
 
   
Six Months Ended
   
Six Months Ended
 
   
June 30, 2012
 
June 30, 2011
 
Cash flows from operating activities
           
    Net income (loss)
  $ 257,535     $ (1,256,538 )
    Adjustments to reconcile net income (loss) to net cash
               
      from operating activities:
               
            Provision for loan losses
    75,035       1,202,426  
            Depreciation and amortization
    202,173       267,155  
            Net amortization of securities
    148,636       118,575  
            Net realized gain on sale of securities
    (2,856 )     0  
            Net realized gain on sale of loans
    (102,932 )     (171,182 )
            Net realized gain on sale of premises and equipment
    (208,389 )     0  
            Net realized loss on sale of foreclosed assets
    42,433       5,068  
            Foreclosed asset impairment
    185,020       392,928  
            Originations of loans for sale
    (6,385,590 )     (8,104,666 )
            Proceeds from loan sales
    5,953,032       6,474,553  
            Net change in:
               
                Accrued interest receivable and other assets
    (623,857 )     170,728  
                Accrued interest payable and other liabilities
    214,059       248,947  
                    Net cash used in operating activities
    (245,701 )     (652,006 )
Cash flows from investing activities
               
    Activity in available for sale securities:
               
            Sales
    257,997       0  
            Maturities, prepayments and calls
    4,548,446       8,576,627  
            Purchases
    (7,289,221 )     (7,191,746 )
    Loan originations and payments, net
    15,365,675       4,208,981  
    Redemption of Federal Home Loan Bank stock
    0       29,000  
    Proceeds from the sale of capital assets
    998,524       0  
    Additions to premises and equipment, net
    (35,489 )     (45,123 )
    Proceeds from the sale of foreclosed assets
    671,941       138,968  
                Net cash from investing activities
    14,517,873       5,716,707  
Cash flows from financing activities
               
    Net change in deposits
    (7,927,028 )     (16,628,815 )
    Net change in federal funds purchased and
               
      repurchase agreements
    3,178,983       3,248,171  
            Net cash used in financing activities
    (4,748,045 )     (13,380,644 )
Net change in cash and cash equivalents
    9,524,127       (8,315,943 )
Beginning cash and cash equivalents
    8,919,568       23,639,873  
Ending cash and cash equivalents
  $ 18,443,695     $ 15,323,930  
Supplemental cash flow information:
               
    Cash paid during the period for interest
  $ 806,838     $ 1,633,959  
    Transfers from loans to foreclosed assets
    1,051,028       706,617  
    Foreclosed asset sales financed by the Company
    72,068       245,419  
 
See accompanying notes to consolidated financial statements.
 
 
-5-

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. 
BASIS OF PRESENTATION AND RECENT DEVELOPMENTS:
 
The unaudited, consolidated financial statements as of and for the three and six month periods ended June 30, 2012 include the consolidated results of operations of Community Shores Bank Corporation (“Company”) and its wholly-owned subsidiaries, Community Shores Financial Services (“CS Financial Services”), and Community Shores Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Community Shores Mortgage Company (the “Mortgage Company”) and the Mortgage Company’s wholly-owned subsidiary, Berryfield Development, LLC (“Berryfield”). Community Shores Capital Trust I (“the Trust”) is not consolidated and exists solely to issue capital securities. These consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X and do not include all disclosures required by generally accepted accounting principles for a complete presentation of the Company’s financial condition and results of operations.  In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary in order to make the financial statements not misleading and for a fair representation of the results of operations for such periods.  The results for the period ended June 30, 2012 should not be considered as indicative of results for a full year.  For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the period ended December 31, 2011. Some items in the prior year financial statements may be reclassified to conform to the current presentation.

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 effect of adopting this new guidance was disclosure-related only and had no impact on the Company’s results of operations.

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. The Company adopted this amendment by adding a consolidated statement of comprehensive income immediately following the consolidated statements of income.
 
 
-6-

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

Since 2008, the Company has experienced consolidated losses stemming from deterioration in credit quality and real estate values requiring the need for large loan loss provisions and impairments of foreclosed real estate. As a result primarily of the sustained losses, the Bank’s capital ratios declined. The Bank 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%. In 2012, after two quarters of profitability and a reduction of higher risk-weighted assets, the Bank’s total risk- based capital ratio increased to 7.40%. In spite of the improving total risk-based capital ratio, the Bank remains undercapitalized as of June 30, 2012.

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 June 30, 2012.

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.
 
 
-7-

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

The Company’s main liquidity resource is its cash account balance which, as of June 30, 2012, was approximately $37,000. At this time, the Company has chosen to postpone the decision to take advantage of the Jumpstart Our Business Startups Act (the “JOBS Act”) and deregister as a public company. Management and the Board of Directors are considering many options for obtaining funding for the Company and do not believe it would be in the best interest of the Company to limit its options by deregistering. It is projected that the level of cash held at June 30, 2012 is adequate to support the Company’s overhead expenses through year-end 2012.
 
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 nine contractual quarterly interest payments. The total interest due to Fifth Third at year-end 2011 was $458,000. The Company continues to accrue interest on the term loan and at June 30, 2012, the total interest due Fifth Third was $609,000. 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.
 
 
-8-

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

The following tables represent the securities held in the Company’s portfolio at June 30, 2012 and at December 31, 2011:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
June 30, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
                         
    US Treasury
  $ 5,557,094     $ 47,004     $ (583 )   $ 5,603,515  
    US Government and federal agency
    18,538,401       245,308       (2,195 )     18,781,514  
    Municipals
    2,263,868       100,039       0       2,363,907  
    Mortgage-backed and collateralized
                               
      mortgage obligations– residential
    9,861,482       283,183       (11,887 )     10,132,778  
    $ 36,220,845     $ 675,534     $ (14,665 )   $ 36,881,714  

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
                         
    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  

The amortized cost and fair value of the securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment fees.  Below is the schedule of contractual maturities for securities held at June 30, 2012:

   
Amortized
   
Fair
 
   
Cost
   
Value
 
Due in one year or less
  $ 5,512,042     $ 5,539,503  
Due from one to five years
    18,715,152       18,990,062  
Due from five to ten years
    2,132,169       2,219,371  
Due in more than ten years
    0       0  
Mortgage-backed and collateralized
               
    mortgage obligations – residential
    9,861,482       10,132,778  
    $ 36,220,845     $ 36,881,714  

 
-9-

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

Below is the table of securities with unrealized losses, aggregated by investment category and length of time such securities were in an unrealized loss position at June 30, 2012 and December 31, 2011:

   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
June 30, 2012
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
US Treasury
  $ 512,266     $ (583 )   $ 0     $ 0     $ 512,266     $ (583 )
US Government and federal agency
    1,614,517       (2,195 )     0       0       1,614,517       (2,195 )
Mortgage-backed and collateralized
                                               
    mortgage obligations - residential
    781,442       (4,580 )     315,604       (7,307 )     1,097,046       (11,887 )
    $ 2,908,225     $ (7,358 )   $ 315,604     $ (7,307 )   $ 3,223,829     $ (14,665 )

   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
December 31, 2011
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
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 )

No securities were sold in the three months ended June 30, 2012.  There was one security sold in the first six months of 2012.  Management chose to remove the security from the portfolio because it no longer complied with the Bank’s internal investment policy.  Proceeds from the sale were $257,997 resulting in a realized gain of $2,856.  There were no sales of securities for the six months ended June 30, 2011.
 
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
 
 
-10-

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

amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

At June 30, 2012, seven debt securities had unrealized losses with aggregate depreciation of 0.45% 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 June 30, 2012.

Mortgage-backed and Collateralized Mortgage Obligation Securities

At June 30, 2012, 100% of the mortgage-backed and collateralized mortgage obligation securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and Ginnie Mae, institutions which the government has affirmed its commitment to support. The unrealized loss associated with these securities was 1.07% of amortized cost at June 30, 2012. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2012.

3.
LOANS

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

   
June 30, 2012
 
December 31, 2011
 
Commercial
  $ 42,594,280     $ 50,062,289  
Commercial Real Estate:
               
    General
    52,470,622       59,985,723  
    Construction
    5,895,146       6,425,041  
Consumer:
               
    Lines of credit
    12,225,130       13,376,689  
    Other
    2,137,599       2,370,625  
    Credit card
    523,224       527,858  
Residential
    16,570,158       16,942,989  
      132,416,159       149,691,214  
Less:  Allowance for loan losses
    (4,321,297 )     (5,299,454 )
      Net deferred loan fees
    (42,249 )     (32,283 )
Loans, net
  $ 128,052,613     $ 144,359,477  

 
-11-

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

The following tables present the activity in the allowance for loan losses for the three month periods ending June 30, 2012 and 2011 by portfolio segment:

         
Commercial
                         
Three Months Ended June 30, 2012
 
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Unallocated
   
Total
 
Allowance for loan losses:
                                   
    Beginning balance
  $ 1,138,063     $ 2,486,708     $ 513,260     $ 206,001     $ 90,071     $ 4,434,103  
      Charge-offs
    (24,277 )     (94,505 )     (16,693 )     (11,392 )     0       (146,867 )
      Recoveries
    18,439       13,523       2,099       0       0       34,061  
      Provision for loan losses
    224,678       (153,745 )     (56,199 )     (903 )     (13,831 )     0  
    Ending balance
  $ 1,356,903     $ 2,251,981     $ 442,467     $ 193,706     $ 76,240     $ 4,321,297  

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

 
-12-

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables present the activity in the allowance for loan losses for the six month periods ending June 30, 2012 and 2011 by portfolio segment:

         
Commercial
                         
Six Months Ended June 30, 2012
 
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Unallocated
   
Total
 
Allowance for loan losses:
                                   
    Beginning balance
  $ 1,309,632     $ 3,386,433     $ 410,001     $ 193,388     $ 0     $ 5,299,454  
      Charge-offs
    (213,069 )     (857,205 )     (31,481 )     (11,392 )     0       (1,113,147 )
      Recoveries
    26,548       13,523       19,884       0       0       59,955  
      Provision for loan losses
    233,792       (290,770 )     44,063       11,710       76,240       75,035  
    Ending balance
  $ 1,356,903     $ 2,251,981     $ 442,467     $ 193,706     $ 76,240     $ 4,321,297  

         
Commercial
                   
Six Months Ended June 30, 2011
 
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,218,865     $ 2,896,176     $ 546,603     $ 130,263     $ 4,791,907  
      Charge-offs
    (359,807 )     (674,324 )     (72,819 )     (32,663 )     (1,139,613 )
      Recoveries
    35,780       6,999       27,993       10,142       80,914  
      Provision for loan losses
    592,524       486,959       (8,800 )     131,743       1,202,426  
    Ending balance
  $ 1,487,362     $ 2,715,810     $ 492,977     $ 239,485     $ 4,935,634  
 
 
-13-

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

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2012 and December 31, 2011:

         
Commercial
                         
June 30, 2012
 
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Unallocated
   
Total
 
Allowance for loan losses:
                                   
    Ending allowance balance attributable to loans:
                                   
      Individually evaluated for impairment
  $ 793,384     $ 1,418,184     $ 182,739     $ 121,649     $ 0     $ 2,515,956  
      Collectively evaluated for impairment
    563,519       833,797       259,728       72,057       0       1,729,101  
      Unallocated
    0       0       0       0       76,240       76,240  
            Total ending allowance balance
  $ 1,356,903     $ 2,251,981     $ 442,467     $ 193,706     $ 76,240     $ 4,321,297  
                                                 
Loans:
                                               
      Individually evaluated for impairment
  $ 4,218,406     $ 8,444,494     $ 364,276     $ 848,223     $ 0     $ 13,875,399  
      Collectively evaluated for impairment
    38,494,387       50,322,450       14,538,937       15,725,088       0       119,080,862  
            Total ending loans balance
  $ 42,712,793     $ 58,766,944     $ 14,903,213     $ 16,573,311     $ 0     $ 132,956,261  

         
Commercial
                   
December 31, 2011
 
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Total
 
Allowance for loan losses:
                             
    Ending allowance balance attributable to loans:
                             
      Individually evaluated for impairment
  $ 466,001     $ 2,312,396     $ 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
  $ 1,309,632     $ 3,386,433     $ 410,001     $ 193,388     $ 5,299,454  
                                         
Loans:
                                       
      Individually evaluated for impairment
  $ 3,930,572     $ 11,063,154     $ 274,700     $ 595,598     $ 15,864,024  
      Collectively evaluated for impairment
    46,310,136       55,826,461       16,025,489       16,429,725       134,591,811  
            Total ending loans balance
  $ 50,240,708     $ 66,889,615     $ 16,300,189     $ 17,025,323     $ 150,455,835  
 
 
-14-

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2012 and December 31, 2011.  For purposes of this disclosure, the Company reports unpaid principal balance net of partial charge-offs.

                     
Three Months
   
Three Months
   
Three Months
   
Six Months
   
Six Months
   
Six Months
 
         
Unpaid
         
Average
   
Interest
   
Cash Basis
   
Average
   
Interest
   
Cash Basis
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
   
Interest
   
Recorded
   
Income
   
Interest
 
June 30, 2012
 
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
   
Recognized
   
Investment
   
Recognized
   
Recognized
 
With no related allowance recorded:
                                                     
Commercial
  $ 2,233,517     $ 2,231,960     $ 0     $ 2,395,169     $ 13,599     $ 13,599     $ 2,556,893     $ 27,313     $ 27,198  
Commercial Real Estate:
                                                                       
    General
    3,563,035       3,563,478       0       2,438,933       10,489       10,486       2,333,487       12,921       12,912  
    Construction
    0       0       0       214,764       0       0       303,937       0       0  
Consumer:
                                                                       
    Lines of credit
    41,733       41,670       0       41,773       301       301       50,178       790       602  
    Other
    20,333       20,333       0       20,374       0       0       20,415       0       0  
    Credit card
    0       0       0       0       0       0       0       0       0  
Residential
    377,427       377,905       0       313,229       497       497       249,108       995       995  
            Subtotal
  $ 6,236,045     $ 6,235,346     $ 0     $ 5,424,242     $ 24,886     $ 24,883     $ 5,514,018     $ 42,019     $ 41,707  
                                                                         
With an allowance recorded:
                                                                       
Commercial
  $ 1,984,889     $ 1,984,404     $ 793,384     $ 1,826,765     $ 9,250     $ 8,610     $ 1,800,707     $ 18,773     $ 16,716  
Commercial Real Estate:
                                                                       
    General
    2,826,858       2,822,823       298,752       3,282,185       36,109       36,109       3,712,164       78,747       47,763  
    Construction
    2,054,601       2,054,601       1,119,432       2,045,270       0       0       2,002,868       0       0  
Consumer:
                                                                       
    Lines of credit
    190,911       190,703       95,879       222,020       1,317       1,204       200,654       2,854       2,848  
    Other
    111,299       111,035       86,860       109,821       518       483       110,092       1,001       966  
    Credit card
    0       0       0       0       0       0       352       0       0  
Residential
    470,796       469,468       121,649       539,980       3,846       3,646       529,993       7,477       7,196  
            Subtotal
  $ 7,639,354     $ 7,633,034     $ 2,515,956     $ 8,026,041     $ 51,040     $ 50,052     $ 8,356,830     $ 108,852     $ 75,489  
Total
  $ 13,875,399     $ 13,868,380     $ 2,515,956     $ 13,450,283     $ 75,926     $ 74,935     $ 13,870,848     $ 150,871     $ 117,196  

 
-15-

 
COMMUNITY SHORES BANK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                     
Twelve Months
   
Twelve Months
   
Twelve Months
 
         
Unpaid
         
Average
   
Interest
   
Cash Basis
 
   
Recorded
   
Principal
   
Related
   
Recorded
   
Income
   
Interest
 
December 31, 2011
 
Investment
   
Balance
   
Allowance
   
Investment
   
Recognized
   
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
  $ 1,339,105     $ 1,337,955     $ 466,001     $ 959,371     $ 30,124     $ 29,623  
Commercial Real Estate:
                                               
    General
    4,171,379       4,135,809       1,024,846