Loans And Allowance For Loan Losses

9 Months Ended

Sep. 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)	September 30, 2011			December 31, 2010
Commercial	$	52,706		$	44,057
Real estate – commercial		103,394			125,672
Real estate – mortgage		22,953			19,249
Consumer		26,437			29,153
		205,490			218,131
Allowance for loan losses		(9,119	)		(11,224	)
	$	196,371		$	206,907

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 classification, for the three month period ended September 30, 2011 is as follows:

(000s omitted)	Commercial			Commercial Real Estate			Residential Real Estate			Installment Loans			Home Equity			Unallocated			Total
Balance July 1, 2011
Allowance for loan losses	$	1,049		$	6,284		$	388		$	231		$	615		$	361		$	8,928
Provision for loan losses		(176	)		1,053			206			459			(258	)		(267	)		1,017
Loans charged off		(67	)		(752	)		(8	)		(55	)		(20	)		0			(902	)
Loan recoveries		6			48			2			18			2			0			76
Balance September 30, 2011	$	812		$	6,633		$	588		$	653		$	339		$	94		$	9,119

Activity in the allowance for loan losses, by classification, for the nine month period ended September 30, 2011 is as follows:

(000s omitted)	Commercial			Commercial Real Estate			Residential Real Estate			Installment Loans			Home Equity			Unallocated		Total
Balance January 1, 2011
Allowance for loan losses	$	869		$	7,942		$	411		$	233		$	508		$	64	$	10,027
Provision for loan losses		117			1,769			193			502			(69	)		30		2,542
Loans charged off		(201	)		(3,322	)		(19	)		(112	)		(118	)		0		(3,772	)
Loan recoveries		27			244			3			30			18			0		322
Balance September 30, 2011	$	812		$	6,633		$	588		$	653		$	339		$	94	$	9,119

Activity in the allowance for loan losses, for the three and nine month periods ended September 2010 is as follows:

(000s omitted)	Three Months			Nine Months
Balance, beginning of period,	$	11,665		$	8,589
Provision for loan losses		2,796			7,435
Loans charged off:
Commercial		(102	)		(282	)
Commercial real estate		(3,699	)		(5,359	)
Installment		(8	)		(165	)
Home equity		0			(96	)
Residential real estate		(6	)		(168	)
Total loans charged off		(3,815	)		(6,070	)
Loan recoveries:
Commercial		23			99
Commercial real estate		70			623
Installment		16			74
Home equity		1			6
Residential real estate		1			1
Total loan recoveries		111			803
Balance, end of period	$	10,757		$	10,757

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:

(000s omitted)	Commercial		Commercial Real Estate		Residential Real Estate		Installment Loans		Home Equity		Unallocated		Total
September 30, 2011
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	240	$	4,293	$	209	$	154	$	355	$	0	$	5,251
Collectively evaluated for impairment		572		2,340		379		258		225		94		3,868
Total ending allowance balance	$	812	$	6,633	$	588	$	412	$	580	$	94	$	9.119
Loans:
Loans individually evaluated for impairment	$	3,521	$	25,965	$	824	$	224	$	643	$	0	$	31,177
Loans collectively evaluated for impairment		49,185		77,429		22,129		11,747		13,823		0		174,313
Total ending loans balance		52,706		103,394		22,953		11,971		14,466		0		205,490
Accrued interest receivable		62		358		78		39		57		0		594
Total recorded investment in loans	$	52,768	$	103,752	$	23,031	$	12,010	$	14,523	$	0	$	206,084

(000s omitted)	Commercial		Commercial Real Estate		Residential Real Estate		Installment Loans		Home Equity		Unallocated		Total
December 31, 2010
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	186	$	7,175	$	95	$	69	$	160	$	0	$	7,685
Collectively evaluated for impairment		685		1,980		316		164		348		46		3,539
Total ending allowance balance	$	871	$	9,155	$	411	$	233	$	508	$	46	$	11,224
Loans:
Loans individually evaluated for impairment	$	1,845	$	34,893	$	1,272	$	228	$	357	$	0	$	38,595
Loans collectively evaluated for impairment		42,212		90,779		17,977		7,798		20,770		0		179,536
Total ending loans balance	$	44,057	$	125,672	$	19,249	$	8,026	$	21,127	$	0	$	218,131
Accrued interest receivable		358		657		115		55		58		0		1,243
Total recorded investment in loans	$	44,415	$	126,329	$	19,364	$	8,081	$	21,185	$	0	$	219,374

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

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
September 30, 2011
With no related allowances recorded:
Commercial	$	2,102	$	2,103	$	0
Commercial Real Estate		9,256		9,311		0
Residential real estate		73		73		0
Consumer
Installment Loans		20		20		0
Home Equity		86		86		0
With an allowance recorded:
Commercial		1,419		1,420		240
Commercial real estate:		16,709		16,759		4,293
Residential real estate		751		751		209
Consumer
Installment loans		204		243		154
Home equity		557		614		355
Total	$	31,177	$	31,380	$	5,251

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
December 31, 2010
With no related allowances recorded:
Commercial	$	1,098	$	1,098	$	0
Commercial real estate		10,268		10,318		0
Residential real estate		747		786		0
Consumer
Installment Loans		116		116		0
Home Equity		74		75		0
With an allowance recorded:
Commercial		747		751		186
Commercial real estate		24,625		24,895		7,175
Residential real estate		525		529		95
Consumer
Installment loans		112		112		69
Home equity		283		284		160
Total	$	38,595	$	38,964	$	7,685

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 and loans past due over 90 days still on accrual by class of loans at:

September 30, 2011

(000s omitted)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Commercial	$	2,222	$	0
Commercial real estate		14,980		530
Consumer
Home Equity		85		0
Installment loans		110		0
Residential real estate		243		0
Total	$	17,640	$	530

December 31, 2010

(000s omitted)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing (1)
Commercial	$	1,847	$	0
Commercial real estate		15,116		0
Consumer
Installment loans		121		0
Residential real estate		495		135
Total	$	17,579	$	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 Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due
September 30, 2011
Commercial	$	1,098	$	32	$	614	$	1,744
Commercial real estate:		4,637		1,457		6,618		12,712
Consumer:
Installment loans		160		85		103		348
Home Equity		74		0		0		74
Residential real estate
Traditional		351		200		0		551
Total	$	6,320	$	1,774	$	7,335	$	15,429

(000s omitted)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due
December 31, 2010
Commercial	$	26	$	235	$	1,209	$	1,470
Commercial real estate:		1,740		310		10,013		12,063
Consumer:
Installment loans		46		4		96		146
Home Equity		118		5		0		123
Residential real estate
Traditional		156		0		630		786
Total	$	2,086	$	554	$	11,948	$	14,588

Modifications:

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of concessions when modifying a loan or lease, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Residential real estate loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs through a reduction of interest rate and/or extension of the maturity date. Installment loans modified in a TDR are primarily comprised of loans where the Corporation has lowered monthly payments by extending the term.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Corporation may have the financial effect of increasing the specific allowance associated with the loan.

As a result of adopting the amendments in ASU No. 2011-02, the Corporation reassessed all loan restructurings that occurred on or after January 1, 2011 for identification as troubled debt restructurings (TDRs). The Corporation identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance for loan losses methodology. Upon identifying these loans as TDRs, the Corporation classified them as impaired. The amendments in ASU No. 2011-02 require retrospective application of the impairment measurement guidance for those loans newly identified as impaired during the period. The Corporation’s recorded investment in TDRs as a result of the guidance set forth in ASU No. 2011-02 is $3,357,000, with a specific valuation allowance of $773,000, as of September 30, 2011. This specific valuation is an allocated portion of the total allowance for loan losses.

Modified loans totaled $7,682,000 at September 30, 2011 compared to $6,246,000 at December 31, 2010.

The Corporation allocated $1,310,000 and $1,413,000 of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2011 and December 31, 2010. Modified loans are also included with impaired loans. The Corporation has no additional amounts committed to these customers.

The following presents by class, information related to loans modified in a TDR during the three and nine month periods ended September 30, 2011:

	Loans Modified as a TDR for the Three Months Ended September 30, 2011						Loans Modified as TDR for the Nine Months Ended September 30, 2011
(000s omitted)	Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans		Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial		0	$	0	$	0		3	$	353	$	353
Commercial- Real Estate		2		936		936		11		2,759		2,759
Residential- Real Estate		1		204		204		1		204		204
Installment loans		1		7		7		2		41		41
Total		4	$	1,147	$	1,147		17	$	3,357	$	3,357

The following presents by class, defaults (i.e. 30 days or more past due following a modification) on any loans that were modified as troubled debt restructurings during the preceding twelve months in the three and nine month periods ended September 30, 2011:

	Loans Modified as a TDR since July 1, 2010 That Subsequently Defaulted During the Three Months Ended September 30, 2011				Loans Modified as a TDR since January 1, 2010 That Subsequently Defaulted During the Nine Months Ended September 30, 2011
(000s omitted)	Number of Contracts		Recorded Investment (as of period end) (1)		Number of Contracts		Recorded Investment (as of period end) (1)
Commercial		1	$	45		1	$	45
Commercial- Real Estate		3		224		4		463
Total		4	$	269		5	$	508

(1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date, if any. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

Based on the Corporation’s historical loss experience, losses associated with TDRs are not significantly different than other impaired loans within the same loan segment. As such, TDRs are analyzed in the same manner as other impaired loans within their respective loan segment.

The following presents by class, the type of modification made in a TDR from January 1, 2011 through September 30, 2011:

	Loans modified through reduction of interest rate as of  September 30, 2011
	Three month period				Nine month period
(000s omitted)	Number of Loans		Recorded Investment (as of period end) (1)		Number of Loans		Recorded Investment (as of period end) (1)
Residential-Real Estate		1	$	204		1	$	204
Installment loans		0		0		1		34
Total		1	$	204		2	$	238

(1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date, if any. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

	Loans modified through extension of term as of September 30, 2011
	Three month period				Nine month period
(000s omitted)	Number of Loans		Recorded Investment (as of period end) (1)		Number of Loans		Recorded Investment (as of period end) (1)
Commercial						3	$	353
Commercial-Real Estate		2	$	936		11		2,759
Residential-Real Estate
Installment loans		1		7		1		7
Total		3	$	943		15	$	3,119

(1) The period end balances are inclusive of all partial paydowns and charge-offs since the modification date, if any. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

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:

Prime. Loans classified as prime are well seasoned borrowers displaying strong financial condition, consistently superior earning performance, and access to a range of financing alternatives. The borrower’s trends and outlook, as well as those of its industry are positive.

Pass. Loans classified as pass have a moderate to average risk to established borrowers that display sound financial condition and operating results. The capacity to service debt is stable and demonstrated at a level consistent with or above the industry norms. Borrower and industry trends and outlook are considered good.

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.

Based on the most recent analysis performed, the recorded investment by risk category of loans by class of loans is as follows:

(000s omitted)	Prime		Pass		Watch		Substandard		Total
September 30, 2011
Commercial	$	6,123	$	41,498	$	1,624	$	3,523	$	52,768
Commercial real estate		0		65,777		11,865		26,110		103,752
Total	$	6,123	$	107,275	$	13,489	$	29,633	$	156,520

(000s omitted)	Prime		Pass		Watch		Substandard		Total
December 31, 2010
Commercial	$	3,174	$	33,871	$	3,585	$	3,785	$	44,415
Commercial real estate		0		82,494		14,404		29,431		126,329
Total	$	3,174	$	116,365	$	17,989	$	33,216	$	170,744

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:

	Consumer				Residential
(000s omitted)	Home Equity		Installment		Real Estate		Total
September 30, 2011
Performing	$	13,823	$	11,747	$	22,207	$	47,777
Non-performing		700		263		824		1,787
Total	$	14,523	$	12,010	$	23,031	$	49,564

	Consumer				Residential
(000s omitted)	Home Equity		Installment		Real Estate		Total
December 31, 2010
Performing	$	21,128	$	7,553	$	18,053	$	46,734
Non-performing		57		528		1,311		1,896
Total	$	21,185	$	8,081	$	19,364	$	48,630

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 were recorded at book value on the date of transfer. Additionally $2,900,000 of watch credit grade loans was transferred to The State Bank. The total of all loans transferred and originally included in discontinued operations was $9,200,000.

As of July 1, 2011, $4,498,000 of loans and $1,246,000 of real estate owned were transferred back into continuing operations. This reclassification reflects a change in management’s intent related to these accounts, to be a part of continuing operations on a going forward basis.