MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below details the financial results of the Company and its wholly owned subsidiaries, the Bank and Community Shores Financial Services, and the Bank's subsidiary, the Mortgage Company, through June 30, 2009 and is separated into two parts which are labeled Financial Condition and Results of Operations. The part labeled Financial Condition compares the financial condition at June 30, 2009 to that at December 31, 2008. The part labeled Results of Operations discusses the three month and six month periods ended June 30, 2009 as compared to the same periods of 2008. Both parts should be read in conjunction with the interim consolidated financial statements and footnotes included in Item 1 of Part I of this Form 10-Q.
This discussion and analysis and other sections of this Form 10-Q contain forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Company, the Bank, the Mortgage Company and Community Shores Financial Services. Words such as "anticipates", "believes", "estimates", "expects", "forecasts", "intends", "is likely", "plans", "projects", variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update, amend, or clarify forward looking statements, whether as a result of new information, future events (whether anticipated or unanticipated), or otherwise. Future Factors include, among others, changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in banking regulation; 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 when desired to support future growth 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.
FINANCIAL CONDITION
Total assets decreased by $7.2 million to $248.4 million at June 30, 2009 from $255.6 million at December 31, 2008. This is a 2.8% decrease in assets during the first half of 2009. Balance sheet reduction mostly consisted of a net decrease of $11.1 million in the loan portfolio offset by increases to loans held for sale and the investment portfolio.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Securities increased $2.4 million since December 31, 2008. During the first half of the year the Company implemented a strategy to realize market value gains within its securities portfolio to supplement earnings and capital. Going forward it is not the Company's intent to continue this practice. The activity in the first six month of the year included purchases of $10.8 million, maturities of $3.1 million and sales of $5.2 million. The gain associated with the sales was $273,000. The Bank's security portfolio was nearly 100% pledged at year-end 2008. In order to provide opportunity for additional pledging, to secure access to future liquidity and to maximize the return on the Bank's deposits, securities are being strategically purchased. It is likely that the Bank will make additional security purchases throughout 2009. Total loans (held for investment) decreased $12.9 million and were $192.3 million at June 30, 2009 down from $205.2 million at December 31, 2008. The decrease is evidenced by a decline of $8.4 million in the commercial and commercial real estate portfolios and a decline of $3.8 million in the consumer loan portfolio. A portion of the decrease was attributable to charge offs of $2.3 million in the first half of 2009; the rest was various loan payoffs. The Bank's underwriting standards include pricing for risk and profitability which does not always result in the lowest market rate. Although the loss of loans is unfortunate, management feels that adhering to high underwriting standards will be the most prudent tactic, particularly in this economic environment. In spite of these decreases, the concentration of commercial and commercial real estate loans was 78% similar to a level of 77% at year-end 2008. Other lending activity during the first six months of 2009 included $18.2 million of residential mortgage loan originations and $17.4 million of residential mortgage loan sales. The associated gain on the loan sales was $207,000. These results compare to mortgage originations of $15.4 million, sales of $15.7 million and gains of $203,000 occurring in the first half of 2008. There was no Small Business Association ("SBA") lending activity in the first half of 2009. In the first half of 2008, there were SBA originations of $422,000, sales of $1.4 million and gains of $52,000. Given the economic conditions and the tightening of credit standards, SBA loan originations are anticipated to be lower in 2009.
The Company attempts to mitigate interest rate risk in its loan portfolio in many ways. In addition to product diversification, two other methods used are to balance the rate sensitivity of the portfolio and avoid extension risk1. The loan maturities and rate sensitivity of the loan portfolio at June 30, 2009 are set forth below:

1 Extension risk, as related to loans, exists when booking fixed rate loans with long final contractual maturities. When a customer is contractually allowed longer to return its borrowed principal and rates rise, the Bank is delayed from taking advantage of the opportunity to reinvest the returning principal at the higher market rate.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Within Three to One to After Three Twelve Five Five Months Months Years Years Total Commercial, financial and other $ 23,689,710 $ 25,796,159 $ 21,826,264 $ 3,112,842 $ 74,424,975 Real estate: commercial 10,824,471 18,558,381 43,917,492 1,764,730 75,065,074 construction 2,165,887 531,370 0 482,949 3,180,206 mortgages 119,616 386,639 2,385,734 13,375,306 16,267,295 Consumer 1,296,866 2,994,703 15,366,976 3,677,899 23,336,444 $ 38,096,550 $ 48,267,252 $ 83,496,466 $ 22,413,726 $ 192,273,994 Loans at fixed rates 7,528,141 24,327,872 75,870,153 22,302,860 130,029,026 Loans at variable rates 30,568,410 23,939,379 7,626,313 110,866 62,244,968 $ 38,096,551 $ 48,267,251 $ 83,496,466 $ 22,413,726 $ 192,273,994

At June 30, 2009, there were 68% of the loan balances carrying a fixed rate and 32% a floating rate and only 12% of the entire portfolio had a contractual maturity longer than five years. During 2008 there was an increase in the concentration of fixed rate loans. Some of the shift is a factor of the types of loans that were removed from the loan portfolio and some is customer preference initially or during refinancing. Having a larger concentration of fixed rate loans is helpful in this declining rate environment but both types of loans are useful to protect interest income during periods of interest rate fluctuations. The maturity distribution of the loan portfolio has lengthened with the continued activity in the mortgage business line however the focus is on sale into the secondary market. Management only expects to retain 10-15% of residential mortgages originated because of the longer contractual terms involved in mortgage products.
Another risk included as part of the Bank's risk management program is credit risk estimation. 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 policy. 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 credit resulting in an allocation being made to the allowance for that particular loan. There are occasions when an impaired 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. The allowance for loan losses is adjusted accordingly to maintain an adequate level based on the conclusion of the portfolio analysis.
At June 30, 2009 there were $4.8 million in outstanding loans deemed to be impaired but requiring no allocated allowance for loans losses. During the first half of 2009, several loans were charged down to a balance that could be completely supported by the value of the collateral. Once this occurs, the loan becomes impaired with no allocated allowance.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the first six months of 2009, $478,000 was added to the allowance through the provision expense. At June 30, 2009, the allowance totaled $2.6 million or approximately 1.31% of gross loans outstanding, compared to 2.12% at December 31, 2008. Many of the loans that were charged off in the first half of 2009 were fully allocated for or as referenced above some of the impaired loans that were charged down require no reserve allocation based on the outcome of the quarterly collateral analysis. Impaired loans with an allocated allowance decreased $3.5 million since December 31, 2008 and the impaired loans requiring no allocated allowance for loan losses increased by $2.1 million since year-end 2008.
The allocation of the allowance at June 30, 2009 was as follows:

June 30, 2009 December 31, 2008 Percent of Percent of Allowance Allowance Related to Related to Amount Loan Category Amount Loan Category Balance at End of Period Applicable to: Commercial $ 1,142,524 1.5 % $ 2,640,269 3.4 % Real estate: Commercial 1,053,536 1.4 1,237,913 1.5 Residential 71,788 0.4 104,033 0.6 Construction 34,982 1.1 49,667 1.3 Consumer 255,711 1.1 319,021 1.2 Total $ 2,558,541 1.3 % $ 4,350,903 2.1 %

Another factor considered in the assessment of the adequacy of the allowance is the quality of the loan portfolio from a past due standpoint. Below is a table, which details the past due balances at June 30, 2009 compared to those at year-end 2008 and the corresponding change related to those two periods.

Increase June 30, 2009 December 31, 2008 (Decrease) Loans Past Due: 30-59 days $ 596,761 $ 3,182,098 $ (2,585,337 ) 60-89 days 2,600,629 1,257,315 1,343,314 90 days and greater 635,884 79,828 556,056 Non accrual loans 5,858,264 5,779,835 78,429

Since year-end 2008, overall past due and non-accrual loans have decreased by $607,538.
Loans past due 30-59 days have decreased drastically since year-end 2008. The decrease of $2.6 million is comprised of the following actions: $1.3 million either paid off or became current on payments and $1.1 million became more delinquent or actually impaired.
Two loans in the 60-89 day past due total at June 30, 2009, comprised essentially all of the increase in this past due category since year-end 2008. One loan is collateralized by a mobile home park and the Bank is in the process of getting an appraisal on the land and is considering a temporary troubled debt restructure. The other delinquency is a land development loan. The Bank is working with the borrowers as they restructure other debt to provide cash flow to bring the loan current.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Loans ninety days past due and greater increased by $556,000 since year-end 2008. Three unrelated customers are largely responsible for the overall increase. One loan for $172,000 is in the foreclosure process. One relationship for $152,000 was placed on non accrual in July. The debt is well collateralized and the Bank does not anticipate any loss. The last loan for $219,000 is rental property that is not cash flowing due to loss of tenants. The debt is well collateralized and the Bank is working with the customer to provide short term payment relief while new tenants are pursued.
The Bank's non-accrual loans have remained at relatively the same level since December 31, 2008 although the activity within the category has been significant. During the first quarter of 2009, eleven notes that were on non accrual status at year-end 2008 were charged off. During the second quarter of 2009, thirteen new loans were added thus the net balance change for the activity was an increase of $78,000.
Overall net charge-offs for the second quarter and first six months of 2009 were $311,000 and $2.3 million compared to $281,000 and $590,000 for the comparable periods in 2008. The corresponding ratios of net charge-offs to average loans for the second quarter and first half of 2009 were 0.64% and 2.29% compared to 0.51% and 0.52% for the second quarter and first half of 2008. There were 38 loans charged off or down to collateral value in the first half of 2009. Given the rise in non performing assets over the past year and the continued economic deterioration, it is likely that charge off ratios may remain elevated for a period of time.
Foreclosed assets rose $857,000 since December 31, 2008. These assets consist of relinquished properties through the collection process which were previously customer collateral supporting various borrowings. During the first half of 2009 properties with a value of $1.1 million were added, one property was sold for $93,000 and other held properties were written down by $120,000. Each quarter foreclosed assets are written down to market value based on a professional appraisal or other common means of valuation. These properties are held until they can be sold. At June 30, 2009, there were thirty-four real properties compared to nine at June 30, 2008. The Bank was also holding one high end boat at both June 30, 2008 and 2009. If any relinquished asset is sold for less than it is being held further losses could result.
Deferred tax assets are included in the other asset category. There were no net deferred tax assets at June 30, 2009 which is a decrease of $986,000 since year-end 2008. Statement of Financial Accounting Standards 109 ("SFAS 109"), "Accounting for 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 accordance with SFAS 109, the Company reviewed the components of its deferred tax asset and determined that a valuation allowance should be established based on the duration of the Company's reported losses and the general market conditions within which the Company is operating. The valuation allowance can be reversed once a trend of profitability returns.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Deposit balances were $211.7 million at June 30, 2009 down from $219.6 million at December 31, 2008. Total deposits have declined $7.9 million or 4% since year-end 2008. Non interest bearing deposits grew $4.0 million or 21% since year-end 2008. In addition to Bank-wide incentive programs targeted at growing these types of deposits, the FDIC has temporarily increased its insurance program from $100,000 to $250,000 allowing a customer to keep larger insured balances on deposit.
Interest bearing checking and money market accounts grew $14.1 million. Growth is due to several of the Bank's large public fund customers increasing their holdings since year-end.
Savings accounts were $9.1 million at June 30, 2009. These account types decreased $1.8 million since year-end 2008. A majority of the decline is in the Bank's Premium Sweep Savings accounts which mostly consist of business customers.
Total time deposits decreased by a net figure of $24.2 million since December 31, 2008. Local time deposits decreased $4.0 million and brokered deposits decreased by $20.2 million. The concentration of brokered deposits to total deposits was reduced to 28% at June 30, 2009 from 36% at December 31, 2008. The Bank's current liquidity position, its short term liquidity projection and the cost relative to local deposits are all factors which are considered when increasing or decreasing brokered deposits. Additional brokered deposits are likely to mature without being replaced for the remainder of 2009. The Company has a $5 million revolving line of credit with Fifth Third Bank ("Fifth Third") that is coming due on September 1, 2009. The Company has enough liquidity to pay the interest due at maturity but not to pay off the outstanding balance, it is necessary to renegotiate the terms of the debt. Management is in the process of working on the details with Fifth Third. Given the tightening in the credit market it is a possibility that the loan will begin to amortize (principal and interest payments due), may have a rate increase and require a change in the supporting collateral.
Shareholders' equity totaled $13.0 million and $14.9 million at June 30, 2009 and December 31, 2008 respectively. The operating losses recorded in the first half were coupled with a decrease in accumulated other comprehensive income (security market value adjustments).
RESULTS OF OPERATIONS
The net loss for the first six months of 2009 was $1.6 million which was $1.6 million higher than the similar period in 2008. The corresponding basic and diluted earnings (loss) per share for the first six months of 2009 were $(1.09) compared to $0.03 for 2008. Year to date 2009 earnings were impacted by the establishment of a deferred tax valuation allowance in the second quarter of the year.
The Company recorded net loss of $1.3 million for the second quarter of 2009 while the same period in 2008 netted earnings of $11,000. The corresponding basic and diluted earnings per share were $(0.91) for the second quarter of 2009 and $.01 for the same period in 2008.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the first six months and second quarter of 2009, the annualized return on the Company's average total assets was (1.24)% and (2.06)%, respectively, which is down from 0.03% and 0.02% annualized return for the same periods in 2008. The Company's annualized return on average equity was (22.16)% and (37.04)% for the first six months and second quarter of 2009 and 0.55% and 0.28% for the first six months and second quarter of 2008. The ratio of average equity to average assets was 5.61% and 5.57% for the first six months and second quarter of 2009 and 5.69% and 5.77% for the same periods in 2008.
A large portion of revenue is net interest income. The net interest income and corresponding net interest margin were similar between the first six months of 2008 and that of 2009. The following table sets forth certain information relating to the Company's consolidated average interest earning assets and interest bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing annualized income or expenses by the average daily balance of assets or liabilities, respectively, for the periods presented.

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COMMUNITY SHORES BANK CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six months ended June 30, 2009 2008 Average Average Average Average Balance Interest Rate Balance Interest Rate Assets Federal funds sold and interest- bearing deposits with other financial institutions $ 9,425,983 $ 23,512 0.50 % $ 12,229,117 $ 151,355 2.48 % Securities 27,352,763 574,848 4.20 20,206,816 503,665 4.99 Loans (including held for sale and non accrual) 198,346,087 6,271,428 6.32 225,799,177 7,814,750 6.92 235,124,833 6,869,788 5.84 258,235,110 8,469,770 6.56 Other assets 23,502,650 16,840,158 $ 258,627,483 $ 275,075,268 Liabilities and Shareholders' Equity Interest-bearing deposits $ 201,976,379 $ 3,207,679 3.18 $ 221,553,070 $ 4,414,159 3.98 Federal funds purchased, repurchase agreements and Federal Reserve Bank borrowings 6,119,831 19,639 0.64 4,383,266 36,564 1.67 Subordinated Debentures, Note Payable and Federal Home Loan Bank Advances 14,951,934 343,393 4.59 14,701,029 404,847 5.51 223,048,144 3,570,711 3.20 240,637,365 4,855,570 4.04 Non-interest bearing deposits 20,414,688 18,109,919 Other liabilities 659,101 679,573 Shareholders' Equity 14,505,550 15,648,411 $ 258,627,483 $ 275,075,268 Net interest income (tax equivalent basis) 3,299,077 3,614,200 Net interest spread on earning assets (tax equivalent basis) 2.64 % 2.52 % Net interest margin on earning assets (tax equivalent basis) 2.81 % 2.80 % Average interest-earning assets to average interest-bearing liabilities 105.41 % 107.31 % Tax equivalent adjustment 74,304 75,097 Net interest income $ 3,224,773 $ 3,539,103

The tax equivalent net interest spread on average earning assets increased 12 basis points to 2.64% since June 30, 2008. The tax equivalent net interest . . .