Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

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)	March 31, 2012			December 31, 2011
Commercial	$	33,207		$	33,956
Commercial real estate		113,238			118,984
Residential real estate		26,845			26,829
Consumer		25,397			25,998
Total loans		198,687			205,767
Less allowance for loan losses		(7,675	)		(8,164	)
Net loans	$	191,012		$	197,603

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 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 periods ended March 31, 2012 and 2011 are as follows:

(000s omitted)	Commercial			Commercial Real Estate			Residential Real Estate			Installment Loans			Home Equity			Unallocated			Total
Allowance for loan losses
Balance January 1, 2012	$	891		$	5,759		$	476		$	215		$	482		$	341		$	8,164
Provision for loan losses		181			1,068			74			(36	)		(87	)		(337	)		863
Loans charged off		(551	)		(680	)		(60	)		(10	)		(104	)		0			(1,405	)
Loan recoveries		13			29			1			6			4			0			53
Balance March 31, 2012	$	534		$	6,176		$	491		$	175		$	295		$	4		$	7,675

(000s omitted)	Commercial			Commercial Real Estate			Residential Real Estate			Installment Loans			Home Equity			Unallocated			Total
Allowance for loan losses
Balance January 1, 2011	$	871			9,155		$	411		$	233		$	508		$	46		$	11,224
Provision for loan losses		(158	)		888			(4	)		(17	)		148			(62	)		795
Loans charged off		(2	)		(3,031	)		(11	)		(32	)		(98	)		0			(3,174	)
Loan recoveries		6			124			1			6			15			18			170
Balance March 31, 2011	$	717		$	7,136		$	397		$	190		$	573		$	2		$	9,015

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) March 31, 2012	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	$	191	$	3,011	$	296	$	54	$	97	$	0	$	3,649
Collectively evaluated for impairment		343		3,165		195		121		198		4		4,026
Total ending allowance balance	$	534	$	6,176	$	491	$	175	$	295	$	4	$	7,675
Loans:
Loans individually evaluated for impairment	$	2,842		24,007	$	1,109	$	101	$	470	$	0	$	28,529
Loans collectively evaluated for impairment		30,365		89,231		25,736		5,866		18,960		0		170,158
Total ending loans balance		33,207		113,238		26,845		5,967		19,430		0		198,687
Accrued interest receivable		273		167		85		38		53		0		616
Total recorded investment in loans	$	33,480	$	113,405	$	26,930	$	6,005	$	19,483	$	0	$	199,303

(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

The following tables present loans individually evaluated for impairment by class of loans as of:

(000s omitted) March 31, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowances recorded:
Commercial	$	2,849	$	1,612	$	0
Commercial real estate		12,714		9,203		0
Residential real estate		289		253		0
Consumer
Installment Loans		13		10		0
Home Equity		326		279		0
With an allowance recorded:
Commercial		717		705		191
Commercial real estate		17,966		15,467		3,011
Residential real estate		1,077		856		296
Consumer
Installment loans		91		91		54
Home equity		191		191		97
Total	$	36,233	$	28,667	$	3,649

(000s omitted) December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowances recorded:
Commercial	$	2,280	$	2,116	$	0
Commercial real estate		16,275		11,302		0
Residential real estate		279		168		0
Consumer
Installment Loans		13		13		0
Home Equity		119		119		0
With an allowance recorded:
Commercial		1,903		1,715		714
Commercial real estate		15,814		13,532		2,907
Residential real estate		894		675		201
Consumer
Installment loans		121		121		60
Home equity		377		379		275
Total	$	38,705	$	30,140	$	4,157

The following table presents the average recorded investment and interest income recognized on loans individually evaluated for impairment by class of loans for the period ended:

	March 31, 2012				March 31, 2011
(000s omitted)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowances recorded:
Commercial	$	1,864	$	7	$	971	$	11
Commercial real estate		10,253		40		9,003		39
Residential real estate		211		4		226		0
Consumer
Installment Loans		12		0		127		1
Home Equity		199		2		242		2
With an allowance recorded:
Commercial		1,210		11		446		9
Commercial real estate		14,500		50		19,697		123
Residential real estate		766		12		699		6
Consumer
Installment loans		106		1		104		2
Home equity		285		2		460		3
Total	$	29,406	$	129	$	31,975	$	196

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:

March 31, 2012 (000s omitted)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Commercial	$	2,186	$	0
Commercial real estate		11,174		0
Residential real estate		237		0
Home Equity		168		0
Installment loans		6		0
Total	$	13,771	$	0

December 31, 2011 (000s omitted)	Nonaccrual		Loans Past Due Over 90 Days Still Accruing (1)
Commercial	$	2,837	$	449
Commercial real estate		13,918		0
Residential real estate		241		0
Home Equity		88		39
Installment loans		13		0
Total	$	17,097	$	488

(1)-Includes accrued interest receivable of $6

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

(000s omitted) March 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due
Commercial	$	1,049	$	0	$	2,249	$	3,298
Commercial real estate		453		0		8,360		8,813
Residential real estate		99		95		196		390
Installment loans		0		230		6		236
Home Equity		7		0		6		13
Total	$	1,608	$	325	$	10,817	$	12,750

(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
Residential real estate		0		0		198		198
Installment loans		3		1		51		55
Home Equity		73		0		85		158
Total	$	3,303	$	15	$	13,825	$	17,143

(1) Includes interest receivable of $15.

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.

The Corporation has 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 Corporation’s recorded investment in TDRs at March 31, 2012 is $16,182,000, with a specific valuation allowance of $2,376,000. This is compared to $15,005,000, with a specific valuation allowance of $2,289,000, at December 31, 2011. This specific valuation allowance is an allocated portion of the total allowance for loan losses. 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 period ended March 31, 2012.

(000s omitted)	Number of Loans		Pre-Modification Recorded  Investment		Post-Modification Recorded  Investment
Commercial real estate		5	$	2,565	$	2,565
Residential real estate		2		191		191
Home equity		1		38		38
Total		8	$	2,794	$	2,794

The following presents information on TDRs for which there was a payment default during the period ended March 31, 2012 (i.e. 30 days or more past due following a modification) that had been modified during the 12-month period prior to the default.

(000s omitted)	Loans with payment defaults
	Number of Contracts		Recorded Investment (as of period end) (1)
Commercial		4	$	1,295
Commercial real estate		7		1,554
Installment loans		1		6
Total		12	$	2,855

(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, 2012 through March 31, 2012:

	Loans modified through reduction of interest rate
(000s omitted)	Number of Loans		Recorded Investment (as of period end) (1)
Commercial real estate		3	$	2,264
Residential real estate		1		104
Home equity		1		38
Total		5	$	2,406

(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 real estate		2	$	301
Residential real estate		1		87
Total		3	$	388

(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) March 31, 2012	Prime		Pass		Watch		Substandard		Total
Commercial	$	5,160	$	24,057	$	1,948	$	2,315	$	33,480
Commercial real estate		396		80,856		8,499		23,654		113,405
Total	$	5,556	$	104,913	$	10,447	$	25,969	$	146,885
(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

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) March 31, 2012	Home Equity		Installment		Residential Real Estate		Total
Performing	$	19,098	$	5,819	$	25,821	$	50,738
Non-performing		385		186		1,109		1,680
Total	$	19,483	$	6,005	$	26,930	$	52,418
(000s omitted) December 31, 2011	Home Equity		Installment		Residential 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