Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES

The Corporation originates primarily residential and commercial real estate loans, commercial, and installment loans. The Corporation estimates that the majority of their loan portfolio is based in Genesee, Oakland and Livingston counties within southeast 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 portfolio segment, for the year ended December 31, 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	$	871		$	9,155		$	411		$	233		$	508		$	46	$	11,224
Provision for loan losses		152			2,379			81			169			66			295		3,142
Loans charged off		(212	)		(6,044	)		(19	)		(220	)		(118	)		0		(6,613	)
Loan recoveries		80			269			3			33			26			0		411
Balance December 31, 2011	$	891		$	5,759		$	476		$	215		$	482		$	341	$	8,164

Activity in the allowance for loan losses, for the year ended December 31, 2010 is as follows:

(000s omitted)	2010
Balance, beginning of year,	$	8,786
Provision for loan losses		8,107
Loans charged off:
Commercial		(438	)
Commercial real estate		(5,276	)
Installment		(212	)
Home equity		(331	)
Residential real estate		(333	)
Total loans charged off		(6,590	)
Loan recoveries:
Commercial		180
Commercial real estate		633
Installment		59
Home equity		8
Residential real estate		41
Total loan recoveries		921
Balance, end of year	$	11,224

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

(000s omitted) December 31, 2011	Commercial		Commercial Real Estate		Residential Real Estate		Installment Loans		Home Equity		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	714	$	2,907	$	201	$	60	$	275	$	0	$	4,157
Collectively evaluated for impairment		177		2,852		275		155		207		341		4,007
Total ending allowance balance	$	891	$	5,759	$	476	$	215	$	482	$	341	$	8,164
Loans:
Loans individually evaluated for impairment	$	3,823	$	24,797	$	844	$	133	$	494	$	0	$	30,091
Loans collectively evaluated for impairment		30,133		94,187		25,985		6,270		19,101		0		175,676
Total ending loans balance	$	33,956	$	118,984	$	26,829	$	6,403	$	19,595	$	0	$	205,767
Accrued interest receivable		143		341		75		47		61		0		667
Total recorded investment in loans	$	34,099	$	119,325	$	26,904	$	6,450	$	19,656	$	0	$	206,434

(000s omitted) December 31, 2010	Commercial		Commercial Real Estate		Residential Real Estate		Installment Loans		Home Equity		Unallocated		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	184	$	6,939	$	95	$	69	$	160	$	0	$	7,447
Collectively evaluated for impairment		687		2,216		316		164		348		46		3,777
Total ending allowance balance	$	871	$	9,155	$	411	$	233	$	508	$	46	$	11,224
Loans:
Loans individually evaluated for impairment	$	1,790	$	31,766	$	1,272	$	228	$	357	$	0	$	35,413
Loans collectively evaluated for impairment		42,267		93,906		17,977		7,798		20,770		0		182,718
Total ending loans balance	$	44,057	$	125,672	$	19,249	$	8,026	$	21,127	$	0	$	218,131
Accrued interest receivable		358		429		76		55		58		0		976
Total recorded investment in loans	$	44,415	$	126,101	$	19,325	$	8,081	$	21,185	$	0	$	219,107

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

(000s omitted) December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowances recorded:
Commercial	$	2,280	$	2,116	$	0	$	2,407	$	59
Commercial real estate		16,275		11,302		0		11,785		250
Residential real estate		279		168		0		170		7
Consumer
Installment Loans		13		13		0		0		0
Home Equity		119		119		0		0		0
With an allowance recorded:
Commercial		1,903		1,715		714		1,874		120
Commercial real estate		15,814		13,532		2,907		13,733		788
Residential real estate		894		675		201		710		38
Consumer
Installment loans		121		121		60		71		5
Home equity		377		379		275		444		22
Total	$	38,705	$	30,140	$	4,157	$	31,194	$	1,289

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

(000s omitted) December 31, 2010	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowances recorded:
Commercial	$	1,112	$	1,098	$	0
Commercial real estate		13,520		10,318		0
Residential real estate		835		786		0
Consumer
Installment Loans		206		116		0
Home Equity		74		75		0
With an allowance recorded:
Commercial		898		695		184
Commercial real estate		25,192		21,588		6,939
Residential real estate		733		529		95
Consumer
Installment loans		114		112		69
Home equity		283		284		160
Total	$	42,967	$	35,601	$	7,447

(000s omitted)	2010
Average of individually impaired loans during the year	$	27,612
Cash basis interest income recognized during the year		1,262

Non-accrual 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:

(000s omitted) December 31, 2011	Nonaccrual		Loans Past Due Over 90 Days Still Accruing  (1)
Commercial	$	2,298	$	449
Commercial real estate		13,918		0
Home equity		88		39
Installment loans		13		0
Residential real estate		241		0
Total	$	17,097	$	488

(1)-Includes accrued interest receivable of $6

(000s omitted) December 31, 2010	Nonaccrual		Loans Past Due Over 90 Days Still Accruing  (1)
Commercial	$	2,448	$	0
Commercial real estate		16,936		0
Installment loans		121		0
Residential real estate		627		135
Total	$	20,132	$	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) December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due  (1)		Total Past Due
Commercial	$	431	$	14	$	2,741	$	3,186
Commercial real estate:		2,796		0		10,750		13,546
Installment loans		3		1		51		55
Home equity		73		0		85		158
Residential real estate		0		0		198		198
Total	$	3,303	$	15	$	13,825	$	17,143

(1)-Includes accrued interest receivable of $15

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

(1)-Includes accrued interest receivable of $2

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 $6,448,000, with a specific valuation allowance of $1,357,000, as of December 31, 2011. This specific valuation is an allocated portion of the total allowance for loan losses.

Modified loans totaled $15,005,000 at December 31, 2011 compared to $6,246,000 at December 31, 2010. The sizeable increase was partially the result of reclassification of loans modified that were not previously reported as modified.

The Corporation allocated $2,289,000 and $1,413,000 of specific reserves to customers whose loan terms have been modified in TDRs as of December 31, 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 year ended December 31, 2011.

	Loans Modified as TDR for the Year Ended December 31, 2011
(000s omitted)	Number of Loans		Pre-Modification Recorded  Investment		Post-Modification Recorded  Investment
Commercial		12	$	3,220	$	3,220
Commercial real estate		9		2,987		2,987
Residential real estate		1		201		201
Installment loans		1		6		6
Home equity		1		34		34
Total		24	$	6,448	$	6,448

The following presents information on TDRs for which there was a payment default, (i.e. 30 days or more past due following a modification) during 2011 that had been modified during the 12-month period prior to the default.

(000s omitted)	Loans with payment defaults during 2011:
	Number of Contracts		Recorded Investment (as of period end) (1)
Commercial		3	$	789
Commercial real estate		2		1,113
Installment loans		1		6
Total		6	$	1,908

(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 portfolio loan class, the type of modification made in a TDR from January 1, 2011 through December 31, 2011:

	Loans modified through reduction of interest rate
(000s omitted)	Number of Loans		Recorded Investment (as of period end) (1)
Commercial		1	$	545
Commercial real estate		1		174
Residential real estate		1		201
Installment loans		1		6
Home equity		1		34
Total		5	$	960

(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
(000s omitted)	Number of Loans		Recorded Investment (as of period end) (1)
Commercial		11	$	2,675
Commercial real estate		8		2,813
Total		19	$	5,488

(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 nor 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 portfolio class of loans is as follows:

(000s omitted) December 31, 2011	Prime		Pass		Watch		Substandard		Total
Commercial	$	3,411	$	25,006	$	1,850	$	3,832	$	34,099
Commercial real estate		0		79,909		14,583		24,833		119,325
Total	$	3,411	$	104,915	$	16,433	$	28,665	$	153,424

(000s omitted) December 31, 2010	Prime		Pass		Watch		Substandard		Total
Commercial	$	3,174	$	33,871	$	3,585	$	3,785	$	44,415
Commercial real estate		0		82,266		14,404		29,431		126,101
Total	$	3,174	$	116,137	$	17,989	$	33,216	$	170,516

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) December 31, 2011					Residential
	Home Equity		Installment		Real estate		Total
Performing	$	19,162	$	6,317	$	26,060	$	51,539
Non-performing		494		133		844		1,471
Total	$	19,656	$	6,450	$	26,904	$	53,010

(000s omitted) December 31, 2010					Residential
	Home Equity		Installment		Real estate		Total
Performing	$	21,128	$	7,553	$	18,014	$	46,695
Non-performing		57		528		1,311		1,896
Total	$	21,185	$	8,081	$	19,325	$	48,591

Related party transactions:

Certain directors and executive officers of the Corporation, including their affiliates are loan customers of the Bank. These amounts are reflective of directors and executive officers of continuing operations only.

(000s omitted)	2011			2010
Beginning balance, January 1,	$	3,098		$	4,223
New loans		1,134			247
Repayments		(1,150	)		(339	)
Change in related parties		(42	)		(1,033	)
Ending balance, December 31,	$	3,040		$	3,098