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Loans
 6 Months Ended
Jun. 30, 2011
Loans  
Loans

NOTE 6 - LOANS

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated:

June 30, 2011 December 31, 2010
Amount Percent Amount Percent
(Dollars in thousands)
Real Estate Loans:
One-to-four family $ 85,281 48.9 $ 93,294 49.1
Multi-family 4,400 2.5 4,783 2.5
Commercial 59,005 33.8 62,998 33.1
Construction or development   2,562 1.5     3,873 2
Total real estate loans 151,248 86.7 164,948 86.8
Other loans:
Consumer loans:
Home equity 12,928 7.4 14,814 7.8
Other   2,941 1.7     3,403 1.8
Total consumer loans 15,869 9.1 18,217 9.6
Commercial Business Loans 7,273 4.2 6,882 3.6
Total other loans 23,142 13.3 25,099 13.2
Total Loans 174,390 100.0% 190,047 100.0%
Allowance for loan losses 5,917 6,850
Less: Net deferred loan fees 324   429
Total Loans, net $ 168,149 $ 182,768

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient documentation to conclude that the loan is well secured and in the process of collection. Loans will also be placed on nonaccrual status if the Bank cannot reasonably expect full and timely repayment. All nonaccrual loans are also deemed to be impaired unless they are residential loans whose status as nonaccrual loans is based solely on having reached 90 days past due, are in the process of collection, but whose status as well secured has not yet been established.


A loan is considered impaired when it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. All impaired loans are also classified as nonaccrual loans unless they are deemed to be impaired solely due to their status as a troubled debt restructure and, 1) the borrower is not past due or, 2) there is verifiable adequate cash flow to support the restructured debt service or, 3) there is an adequate collateral valuation supporting the restructured loan. An age analysis of past due loans including nonaccrual loans, segregated by class of loans, as of June 30, 2011 are as follows:

June 30, 2011
30-69 60-89
DaysPast DaysPast Loans 90 Days or Total Past Current
Due Due  MorePast Due due Loans Loans Total Loans
Commercial $ 22 $ 11 $ 1,375 $ 1,408 $ 5,865 $ 7,273
Commercial Real Estate:
Multi-family 454 - - $ 454 3,946 4,400
Commercial Real Estate - other 640 - 3,390 $ 4,030 54,975 59,005
Consumer:
Consumer - other 194 232 37 $ 463 15,202 15,665
Consumer - auto 15 - - $ 15 189 204
Residential:
Residential - prime 1,194 700 1,077 $ 2,971 65,986 68,957
Residential - subprime 343 63 - $ 406 15,918 16,324
Construction:
Construction - prime - 140 - $ 140 2,422 2,562
Construction - subprime   -   -   - $ -   -   -
Total $ 2,862 $ 1,146 $ 5,879 $ 9,887 $ 164,503 $ 174,390
December 31, 2010
30-69 60-89
DaysPast DaysPast Loans 90 Days or Total Past Current
Due Due  MorePast Due due Loans Loans Total Loans
Commercial $ 89 $ - $ 1,118 $ 1,207 $ 5,675 $ 6,882
Commercial Real Estate:
Multi-family - - 339 339 4,444 4,783
Commercial Real Estate - other 125 2,752 3,751 6,628 56,370 62,998
Consumer:
Consumer - other 239 19 192 450 17,437 17,887
Consumer - auto 7 - - 7 323 330
Residential:
Residential - prime 1,090 797 935 2,822 73,729 76,551
Residential - subprime 284 91 163 538 16,205 16,743
Construction:
Construction - prime 169 - - 169 3,704 3,873
Construction - subprime   -   -   -   -   -   -
Total $ 2,003 $ 3,659 $ 6,498 $ 12,160 $ 177,887 $ 190,047
 

 


All commercial loans will be assigned a risk rating by the Credit Analyst at inception. The risk rating system is composed of eight levels of quality and utilizes the following definitions. No changes have been made to the risk ratings in the second quarter of 2011.

Risk Rating Scores by definition:

1. Zero (0) Unclassified. Any loan which has not been assigned a classification.

2. One (1) Excellent. A well structured credit relationship to an established borrower. Loans to entities with a strong financial condition and solid earnings history, characterized by:

  • High liquidity, strong cash flow, low leverage.
  • Unquestioned ability to meet all obligations when due.
  • Experienced management, with management succession in place.
  • Debt to worth ratio of 1:1 or less.
  • Steady and above average earnings history.
  • If loan is secured, collateral is of high quality and readily marketable.
  • Readily accessible to capital markets and alternative financing.
  • Industry is mature with favorable outlook.
  • Loan structure within policy guidelines.
  • Loan is performing as agreed.
  • The probability of serious, rapid financial deterioration is extremely small.
  • Outstanding primary and secondary sources of repayment.

3. Two (2) Above Average Quality. Loans to borrowers with a sound financial condition and positive trend in earnings supplemented by:

  • Favorable liquidity and leverage and strong cash flow.
  • Ability to meet all obligations when due.
  • Management has successful track record.
  • Debt to worth ratio of 1.5:1 or less.
  • Steady and satisfactory earnings history.
  • If loan is secured, collateral is of high quality and readily marketable.
  • Access to alternative financing.
  • Excellent prospects for continued growth.
  • Industry outlook is favorable.
  • Loan structure is within policy guidelines.
  • Loan is performing to terms.
  • Probability of serious financial deterioration is unlikely.
  • Well defined primary and secondary source of repayment.
  • If supported by a guaranty, the financial strength and liquidity of the guarantor(s) are clearly evident.

4. Three (3) Acceptable. Loans to entities with a satisfactory financial condition and further characterized by:

  • Working capital adequate to support operations.
  • Cash flow sufficient to pay debts as scheduled.
  • Management experience and depth appear favorable.
  • Debt to worth ratio of 2.50:1 or less.
  • Acceptable sales and steady earning history.
  • Industry outlook is stable.
  • Loan structure within policy guidelines.
  • Loan performing according to terms.
  • If loan is secured, collateral is acceptable and loan is fully protected.

5. Four (4) Average. Loans to entities which are considered bankable risks, although some signs of weaknesses are shown:

  • Marginal liquidity and working capital.
  • Short or unstable earnings history.
  • Would include most start-up businesses.
  • Would be enrolled in Small Business Administration or Michigan Strategic Fund programs.
  • Occasional instances of trade slowness or repayment delinquency – may have been 10-30 days slow within the past 12 months.
  • Management abilities are apparent yet unproven.
  • Debt to worth ratio of 3.50 or less.
  • Weakness in primary source of repayment with adequate secondary source of repayment.
  • If secured, loan is protected but collateral is marginal.
  • Industry outlook is uncertain; may be cyclical or highly competitive.
  • Loan structure generally in accordance with policy.

6. Five (5) Special Mention. Special Mention loans have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date. Loans to entities that constitute an undue and unwarranted credit risk but not to the point of justifying or classification of substandard. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances surrounding a specific loan. The following characteristics may apply:

  • Downward trend in sales, profit levels and margins.
  • Impaired working capital positions.
  • Cash flow is strained in order to meet debt repayment.
  • Loan delinquency (30-60 days) and overdrafts may occur.
  • Management abilities are questionable.
  • Highly leveraged, debt to worth ratio over 3.50:1.
  • Industry conditions are weak.
  • Inadequate or outdated financial information.
  • Litigation pending against borrower.
  • Loan may need to be restructured to improve collateral position and/or reduce payment amount.
  • Collateral / guaranty offers limited protection.

7. Six (6) Substandard. A substandard loan is inadequately protected by the current sound worth and repayment capacity of the borrower. Loans so classified must have a well-defined weakness that jeopardizes the liquidation of the debt. There is a distinct possibility that the Bank will implement collection procedures if the loan deficiencies are not corrected. The following characteristics may apply:

  • Sustained losses have severely eroded the equity and cash flow.
  • Deteriorating liquidity.
  • Serious management problems.
  • Chronic trade slowness; may be placed on COD by vendors.
  • Likelihood of bankruptcy.
  • Inability to access other funding sources.
  • Reliance on secondary source of repayment.
  • Interest non-accrual may be warranted.
  • Collateral provided is of little or no value.
  • Repayment dependent upon the liquidation of non-current assets.
  • Repayment may require litigation.

8. Seven (7) Doubtful. A doubtful loan has all the weakness inherent in a substandard loan with the added characteristic that collection and/or liquidation is pending. Loans or portions of loans with one or more weaknesses which, on the basis of currently existing facts, conditions, and values, makes ultimate collection of all principal highly questionable. The possibility of loss is high and specific loan loss reserve allocations should be made or charge offs taken on anticipated collateral shortfalls. However, the amount or the certainty of eventual loss may not allow for a specific reserve or charge off because of specific pending factors. Pending factors include proposed merger or acquisition, completion or liquidation in progress, injection of new capital in progress, refinancing plans in progress, etc. "Pending Factors" not resolved after six months must be disregarded. The following characteristics may apply:

  • Normal operations are severely diminished or have ceased.
  • Seriously impaired cash flow.
  • Secondary source of repayment is inadequate.
  • Survivability as a "going concern" is impossible.
  • Placement on interest non-accrual
  • Collection process has begun.
  • Bankruptcy petition has been filed.
  • Judgments have been filed.
  • Portion of the loan balance has been charged-off.

9. Eight (8) Loss. Loans classified loss are considered uncollectible and of such little value that their continuance as bankable asset is not warranted. This classification is for charged-off loans but does not mean that the asset has absolutely no recovery or salvage value. Further characterized by:

  • Liquidation or reorganization under bankruptcy, with poor prospects of collection.
  • Fraudulently overstated assets and/or earnings.
  • Collateral has marginal or no value.
  • Debtor cannot be located.

The following table represents the risk category of loans by class based on the most recent analysis performed as of June 30, 2011 and December 31, 2010 (in thousands):

 
June 30, 2011
Commercial Real Estate Commercial Real Estate
Commercial Multi-family Other
Credit Rating
2011 2011 2011
0-2 - 35 2,984
3 11 209 3,384
4 3,505 128 25,704
5 1,814 3,574 8,467
6 737 454 16,387
7   1,206   -   2,079
Total $ 7,273 $ 4,400 $ 59,005
December 31, 2010
Commercial Real Estate Commercial Real Estate
Commercial Multi-family Other
2010 2010 2010
0-2 - 37 3,509
3 14 209 4,993
4 3,698 131 17,537
5 1,533 3,603 18,849
6 427 464 13,741
7   1,210   339   4,369
Total $ 6,882 $ 4,783 $ 62,998

 

For consumer residential real estate, and other, the Company also evaluates credit quality based on the aging status of the loan which was previously stated, and by payment activity. The following tables present the recorded investment in those classes based on payment activity and assigned grades as of June 30, 2011.

 
June 30, 2011
Residential - Prime Residential - Subprime
2011
Grade
Pass 67,720 16,221
Substandard   1,237   103
Total $ 68,957 $ 16,324
Consumer - Other Consumer - Auto
2011
Performing 15,358 204
Nonperforming   307   -
Total $ 15,665 $ 204
Construction - Prime
2011
Performing 2,562
Nonperforming   -
Total $ 2,562
December 31, 2010
Residential - Prime Residential - Subprime
2010
Grade
Pass 75,616 16,580
Substandard   935   163
Total $ 76,551 $ 16,743
Consumer - Other Consumer - Auto
2010
Performing 17,695 330
Nonperforming   192   -
Total $ 17,887 $ 330
Construction - Prime
Performing 3,873
Nonperforming   -
Total $ 3,873

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010 (in thousands).


June 30, 2011
Unpaid Average
Recorded Principal Related Recorded Interest
  Investment   Balance   Allowance   Investment   Income
With no related allowance recorded:
Commercial $ 1,766 $ 1,873 $ - $ 1,879 $ -
Commercial Real Estate:
Commercial Real Estate - Mulit-family 454 467 - 454 23
Commercial Real Estate - other 14,205 20,299 - 20,188 387
Consumer:
Consumer - other 364 364 - 364 22
Consumer - auto - - - - -
Residential:
Residential - prime 2,846 3,445 - 3,524 145
Residential - subprime 5,005 5,005 - 4,982 348
With an allowance recorded:
Commercial 64 64 20 65 -
Commercial Real Estate:
Commercial Real Estate - Multi-family - - - - -
Commercial Real Estate - other 572 607 202 610 -
Consumer:
Consumer - other - - - - -
Consumer - auto - - - - -
Residential:
Residential - prime 476 625 292 631 -
Residential - subprime   -   -   -   -   -
Total
Commercial $ 17,061 $ 23,310 $ 222 $ 23,196 $ 410
Consumer $ 364 $ 364 $ - $ 364 $ 22
Residental $ 8,327 $ 9,075 $ 292 $ 9,137 $ 493
December 31, 2010
Unpaid Average
Recorded Principal Related Recorded Interest
  Investment   Balance   Allowance   Investment   Income
With no related allowance recorded:
Commercial $ 1,463 $ 1,492 $ - $ 1,486 $ -
Commercial Real Estate:
Commercial Real Estate - Mulit-family - - - - -
Commercial Real Estate - other 15,862 22,183 - 15,689 403
Consumer:
Consumer - other 346 346 - 350 15
Consumer - auto - - - - -
Residential:
Residential - prime 3,367 3,965 - 3,665 139
Residential - subprime 4,993 4,993 - 4,586 358
With an allowance recorded:
Commercial 162 165 109 173 -
Commercial Real Estate:
Commercial Real Estate - Multi-family 803 808 366 765 -
Commercial Real Estate - other 341 354 147 357 -
Consumer:
Consumer - other - - - - -
Consumer - auto - - - - -
Residential:
Residential - prime 502 643 236 575 -
Residential - subprime   -   -   -   -   -
Total
Commercial $ 18,631 $ 25,002 $ 622 $ 18,470 $ 403
Consumer $ 346 $ 346 $ - $ 350 $ 15
Residental $ 8,862 $ 9,601 $ 236 $ 8,826 $ 497

 

The following presents by class, the recorded investment in loans and leases on non-accrual status as of June 30, 2011 and December 31, 2010.

Financing Receivables on Nonaccrual Status
  June 30, 2011
Commercial $ 1,830
Commercial real estate:
Commercial Real Estate - mulit-family -
Commercial Real Estate - other 6,850
Consumer:
Consumer - other 186
Consumer - auto -
Residential:
Residential - prime 1,933
Residential - subprime 63
Construction
Construction - prime 322
Construction - subprime   -
Total $ 11,184
Financing Receivables on Nonaccrual Status
  December 31, 2010
Commercial $ 1,625
Commercial real estate:
Commercial Real Estate - mulit-family 803
Commercial Real Estate - other 7,949
Consumer:
Consumer - other 89
Consumer - auto -
Residential:
Residential - prime 3,007
Residential - subprime 263
Construction
Construction - prime 339
Construction - subprime   -
Total $ 14,075