LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2011

LOANS AND ALLOWANCE FOR LOAN LOSSES [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Major categories of loans are as follows:

(000s omitted)	June 30, 2011		December 31, 2010
Commercial	$	43,327	$	43,395
Real estate — commercial		98,290		106,784
Real estate — construction		7,538		9,597
Real estate — mortgage		20,759		19,046
Consumer		27,003		29,153
		196,917		207,975
Less allowance for loan losses		8,928		10,027
	$	187,989	$	197,948

The Corporation has originated primarily residential and commercial real estate loans, commercial, construction and installment loans. The Corporation estimates that the majority of their loan portfolio is based in Genesee, Oakland and Livingston counties within southeast Michigan with the remainder of the portfolio distributed throughout Michigan. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.

Activity in the allowance for loan losses, by loan class, for the three month period ended June 30, 2011 is as follows:

				Commercial			Residential
				Real			Real			Installment			Home
(000s omitted)	Commercial			Estate			Estate			Loans			Equity		Unallocated		Total
Balance, April 1, 2011
Allowance for loan losses	$	717		$	7,136		$	397		$	190		$	573	$	2	$	9,015
Provision for loan losses		451			(172	)		(9	)		60			41		359		730
Loans charged off		(134	)		(752	)		0			(25	)		0		0		(911	)
Loan recoveries		15			72			0			6			1		0		94
Balance June 30, 2011	$	1,049		$	6,284		$	388		$	231		$	615	$	361	$	8,928

Activity in the allowance for loan losses, by loan class, for the six month period ended June 30, 2011 is as follows:

				Commercial			Residential
				Real			Real			Installment			Home
(000s omitted)	Commercial			Estate			Estate			Loans			Equity			Unallocated		Total
Balance January 1, 2011
Allowance for loan losses	$	869		$	7,942		$	411		$	233		$	508		$	64	$	10,027
Provision for loan losses		305			691			(13	)		43			189			310		1,525
Loans charged off		(134	)		(2,570	)		(11	)		(57	)		(98	)		0		(2,870	)
Loan recoveries		21			196			1			12			16			0		246
Balance June 30, 2011	$	1,061		$	6,259		$	388		$	231		$	615		$	374	$	8,928

Activity in the allowance for loan losses, for the three and six month periods ended June 30, 2010 is as follows:

	Six			Three
(000s omitted)	Month			Month
Balance, beginning of period	$	8,589		$	9,686
Provision for loan losses		3,584			2,449
Loans charged off:
Commercial		(269	)		(165	)
Commercial real estate		(1,571	)		(1,248	)
Installment		(113	)		(89	)
Home equity		(140	)		(55	)
Residential real estate		(162	)		(84	)
Total loans charged off		(2,255	)		(1,641	)
Loan recoveries:
Commercial		76			57
Commercial real estate		553			12
Installment		58			43
Home equity		5			4
Residential real estate		0			0
Total loan recoveries		692			116
Balance, end of period	$	10,610		$	10,610

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method at:

			Commercial		Residential
(000s omitted)			Real		Real		Installment		Home
June 30, 2011	Commercial		Estate		Estate		Loans		Equity		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	374	$	5,177	$	27	$	99	$	290	$	0	$	5,967
Collectively evaluated for impairment		675		1,107		361		132		325		361		2,961
Total ending allowance balance	$	1,049	$	6,284	$	388	$	231	$	615	$	361	$	8,928
Loans:
Loans individually evaluated for impairment	$	3,092	$	21,733	$	591	$	263	$	502	$	0	$	26,181
Loans collectively evaluated for impairment		40,235		84,095		20,168		7,084		19,154		0		170,736
Total ending loans balance		43,327		105,828		20,759		7,347		19,656		0		196,917
Accrued interest receivable		133		380		63		42		61		0		679
Total recorded investment in loans	$	43,460	$	106,208	$	20,822	$	7,389	$	19,717	$	0	$	197,596

			Commercial		Residential
(000s omitted)			Real		Real		Installment		Home
December 31, 2010	Commercial		Estate		Estate		Loans		Equity		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	184	$	5,962	$	95	$	69	$	160	$	18	$	6,488
Collectively evaluated for impairment		685		1,980		316		164		348		46		3,539
Total ending allowance balance	$	869	$	7,942	$	411	$	233	$	508	$	64	$	10,027
Loans:
Loans individually evaluated for impairment	$	1,183	$	25,602	$	1,069	$	228	$	357	$	0	$	28,439
Loans collectively evaluated for impairment		42,212		90,779		17,977		7,798		20,770		0		179,536
Total ending loans balance	$	43,395	$	116,381	$	19,046	$	8,026	$	21,127	$	0	$	207,975
Accrued interest receivable		357		429		76		55		58		0		975
Total recorded investment in loans	$	43,752	$	116,810	$	19,122	$	8,081	$	21,185	$	0	$	208,950

The following table presents loans individually evaluated for impairment by class of loans as of:

					Allowance
					for Loan
	Unpaid Principal		Recorded		Losses
June 30, 2011	Balance		Investment		Allocated
With no related allowances recorded:
Commercial	$	938	$	945	$	0
Commercial Real Estate
Construction		540		530		0
Other		1,800		1,806		0
Residential real estate		252		252		0
Consumer
Installment Loans		122		122		0
Home Equity		89		90		0
With an allowance recorded:
Commercial		2,154		2,155		374
Commercial real estate:
Construction		4,923		4,924		444
Other		14,470		14,517		4,733
Residential real estate		339		339		27
Consumer
Installment loans		141		141		99
Home equity		413		414		290
Total	$	26,181	$	26,234	$	5,967

					Allowance
					for Loan
	Unpaid Principal		Recorded		Losses
December 31, 2010	Balance		Investment		Allocated
With no related allowances recorded:
Commercial	$	490	$	490	$	0
Commercial Real Estate
Construction		149		149		0
Other		4,034		4,036		0
Residential real estate		544		544		0
Consumer
Installment Loans		116		116		0
Home Equity		74		75		0
With an allowance recorded:
Commercial		693		696		184
Commercial real estate:
Construction		348		348		101
Other		21,071		21,161		5,879
Residential real estate		525		529		95
Consumer
Installment loans		112		112		69
Home equity		283		284		160
Total	$	28,439	$	28,540	$	6,488

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the recorded investment in nonaccrual, including real estate owned in redemption, and loans past due over 90 days still on accrual by class of loans at:

			Loans Past Due
June 30, 2011			Over 90 Days Still
(000s omitted)	Nonaccrual		Accruing
Commercial	$	1,810	$	0
Commercial real estate
Construction		4,841		0
Other		7,029		0
Consumer
Installment loans		117		0
Residential real estate (1)		519		0
Total	$	14,316	$	0

			Loans Past Due
December 31, 2010			Over 90 Days Still
(000s omitted)	Nonaccrual		Accruing (1)
Commercial	$	1,847	$	0
Commercial real estate
Construction		5,234		0
Other		4,799		0
Consumer
Installment loans		121		0
Residential real estate		495		135
Total	$	12,496	$	135

(1) - Includes accrued interest receivable of $2

The following table presents the aging of the recorded investment in past due loans by class of loans at:

(000s omitted)	30-59 Days		60-89 Days		Greater than 90		Total Past
June 30, 2011	Past Due		Past Due		Days Past Due		Due
Commercial	$	1,948	$	18	$	1,810	$	3,776
Commercial real estate:
Construction		9		0		5,221		5,230
Other		982		835		6,649		8,466
Consumer:
Installment loans		11		0		117		128
Home Equity		171		0		0		171
Residential real estate
Traditional		96		0		519		615
Total	$	3,217	$	853	$	14,316	$	18,386

(000s omitted)	30-59 Days		60-89 Days		Greater than 90		Total Past
December 31, 2010	Past Due		Past Due		Days Past Due		Due
Commercial	$	26	$	235	$	1,209	$	1,470
Commercial real estate:
Construction		0		141		4,748		4,889
Other		1,186		11		4,133		5,330
Consumer:
Installment loans		46		4		96		146
Home Equity		118		5		0		123
Residential real estate
Traditional		156		0		630		786
Total	$	1,532	$	396	$	10,816	$	12,744

Renegotiated loans:

Renegotiated loans totaled $4,846,000 at June 30, 2011 compared to $3,654,000 at December 31, 2010.

The Corporation allocated $308,000 and $71,000 of specific reserves to customers whose loan terms have been modified in renegotiated loans as of June 30, 2011 and December 31, 2010. Renegotiated loans are also included within impaired loans. The Corporation has no additional amounts committed to these customers.

Loans in discontinued operations:

As part of the terms of the sale of West Michigan Community Bank, certain non performing assets were transferred to a newly formed subsidiary of the Corporation. The subsidiary acquired $1,100,000 of substandard loans, $4,400,000 of non-accrual loans and $800,000 of real estate in redemption. The loans and real estate owned were recorded at book value at the date of transfer.

Additionally $2,900,000 of watch credit grade loans were transferred to The State Bank. The total of all loans transferred was $9,200,000.

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debts such as: current financial information, historical payment experience; credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Corporation uses the following definitions for classified risk ratings:

Watch. Loans classified as watch have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The Corporation does not classify loans as doubtful. Loans that approach this status are charged-off.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be prime or pass rated loans. Based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

(000s omitted)
June 30, 2011	Prime		Pass		Watch		Substandard		Total
Commercial	$	5,335	$	33,554	$	1,471	$	3,100	$	43,460
Commercial real estate:
Construction		0		773		1,175		5,873		7,821
Other		0		76,532		5,941		15,913		98,387
Total	$	5,335	$	110,859	$	8,587	$	24,887	$	149,668

(000s omitted)
December 31, 2010	Prime		Pass		Watch		Substandard		Total
Commercial	$	3,174	$	33,871	$	3,530	$	3,177	$	43,752
Commercial real estate:
Construction		0		755		1,414		6,979		9,148
Other		0		81,739		9,863		16,060		107,662
Total	$	3,174	$	116,365	$	14,807	$	26,216	$	160,562

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of:

(000s omitted)	Consumer				Residential
June 30, 2011	Home Equity		Installment		Real Estate		Total
Performing	$	19,213	$	7,127	$	20,231	$	46,571
Non-performing		504		262		591		1,357
Total	$	19,717	$	7,389	$	20,822	$	47,928

(000s omitted)	Consumer				Residential
December 31, 2010	Home Equity		Installment		Real Estate		Total
Performing	$	21,128	$	7,553	$	18,053	$	46,734
Non-performing		57		528		1,069		1,654
Total	$	21,185	$	8,081	$	19,122	$	48,388