Loans

9 Months Ended

Sep. 30, 2011

Loans [Abstract]

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:

		September 30, 2011		December 31, 2010
		Amount	Percent	Amount	Percent
		(Dollars in thousands)
Real Estate Loans:
	One-to-four family	$                    82,126	51.2	$                93,294	49.1
	Multi-family	767	0.5	4,783	2.5
	Commercial	55,812	34.8	62,998	33.1
	Construction or development	1,835	1.1	3,873	2.0
	Total real estate loans	140,540	87.6	164,948	86.8
Other loans:
	Consumer loans:
	Home equity	11,657	7.3	14,814	7.8
	Other	2,674	1.7	3,403	1.8
	Total consumer loans	14,331	9.0	18,217	9.6
	Commercial Business Loans	5,502	3.4	6,882	3.6
	Total other loans	19,833	12.4	25,099	13.2
	Total Loans	160,373	100.0%	190,047	100.0%
	Allowance for loan losses	5,158		6,850
Less:	Net deferred loan fees	297		429
	Total Loans, net	$                  154,918		$              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 September 30, 2011 and December 31, 2010 are as follows:

			September 30, 2011
		30-69 DaysPast Due	60-89 DaysPast Due	Loans 90 Days or More Past Due	Total Past due Loans	Current Loans	Total Loans
Commercial		$         98	$             -	$                      1,334	$    1,432	$     4,070	$          5,502
Commercial Real Estate:
	Multi-family	454	-	-	$       454	313	767
	Commercial Real Estate - other	1,465	152	3,015	$    4,632	51,180	55,812
Consumer:
	Consumer - other	58	110	169	$       337	13,832	14,169
	Consumer - auto	-	-	-	$            -	162	162
Residential:
	Residential - prime	906	272	742	$    1,920	64,215	66,135
	Residential - subprime	388	354	153	$       895	15,096	15,991
Construction:
	Construction - prime	18	-	-	$         18	1,817	1,835
	Construction - subprime	-	-	-	$            -	-	-
	Total	$    3,387	$        888	$                      5,413	$    9,688	$ 150,685	$      160,373
			December 31, 2010
		30-69 DaysPast Due	60-89 DaysPast Due	Loans 90 Days or More Past Due	Total Past due Loans	Current 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. The risk rating system was last updated in June 2010. No changes have been made to the risk ratings in the third 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 September 30, 2011 and December 31, 2010 (in thousands): 

 

			September 30, 2011
Credit Rating		Commercial	Commercial Real Estate Multi-family	Commercial Real Estate Other
		2011	2011	2011
0-2		-	35	2,954
3		103	154	2,162
4		3,267	18	30,700
5		323	106	2,306
6		523	454	15,946
7		1,286	-	1,744
	Total	$           5,502	$                                   767	$                                  55,812
			December 31, 2010
		Commercial	Commercial Real Estate Multi-family	Commercial Real Estate 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 September 30, 2011 and December 31, 2010.

			September 30, 2011
			Residential - Prime	Residential - Subprime
			2011
Grade
	Pass		65,314	15,463
	Substandard		821	528
		Total	$                              66,135	$                                  15,991
			Consumer - Other	Consumer - Auto
			2011
	Performing		13,925	162
	Nonperforming		244	-
		Total	$                              14,169	$                                       162
				Construction - Prime
				2011
		Performing		1,835
		Nonperforming		-
			Total	$                                    1,835
			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 September 30, 2011 and December 31, 2010 (in thousands).

			September 30, 2011
			Recorded Investment	Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest Income
With no related allowance recorded:
	Commercial		$           1,797	$      1,920	$              -	$         1,881	$              -
	Commercial Real Estate:
		Commercial Real Estate - Mulit-family	454	467	-	454	32
		Commercial Real Estate - other	13,727	20,099	-	19,576	398
	Consumer:
		Consumer - other	357	357	-	357	21
		Consumer - auto	-	-	-	-	-
	Residential:
		Residential - prime	2,087	2,907	-	3,009	124
		Residential - subprime	4,950	4,950	-	4,950	335
With an allowance recorded:
	Commercial		-	-	-	-	-
	Commercial Real Estate:
		Commercial Real Estate - Multi-family	-	-	-	-	-
		Commercial Real Estate - other	563	603	246	608	-
	Consumer:
		Consumer - other	-	-	-	-	-
		Consumer - auto	-	-	-	-	-
	Residential:
		Residential - prime	495	648	306	655	-
		Residential - subprime	-	-	-	-	-
Total
	Commercial		$         16,541	$    23,089	$         246	$       22,519	$         430
	Consumer		$              357	$         357	$              -	$            357	$           21
	Residental		$           7,532	$      8,505	$         306	$         8,614	$         459
			December 31, 2010
			Recorded Investment	Unpaid Principal Balance	Related Allowance	Average Recorded Investment	Interest 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

Payments received on loans in nonaccrual status are typically applied to reduce the recorded investment in the asset.  While an loan  is in nonaccrual status, some or all of the cash interest payments received may be treated as interest income on a cash basis as long as the remaining recorded investment in the asset (i.e., after charge-off of identified losses, if any) is deemed to be fully collectible.  As of September 30, 2011 and December 31, 2010 the Company had not recognized any interest income on a cash basis.  The following presents by class, the recorded investment in loans and leases on non-accrual status as of September 30, 2011 and December 31, 2010.

Financing Receivables on Nonaccrual Status
			September 30, 2011
Commercial			$                            1,797
Commercial real estate:
	Commercial Real Estate - mulit-family		-
	Commercial Real Estate - other		6,406
Consumer:
	Consumer - other		170
	Consumer - auto		-
Residential:
	Residential - prime		1,502
	Residential - subprime		496
Construction
	Construction - prime		-
	Construction - subprime		-
		Total	$                          10,371
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

Loans in which the Bank elects to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and are formally restructured due to the weakening credit status of a borrower are reported as trouble debt restructure ( TDR).  All other modifications in which the new terms are at current market conditions and are granted to clients due to competitive pressures and because of the customer's favorable past and current performance and credit risk do not constitute a TDR loan and are not monitored.

In order to maximize the collection of loan balances, we evaluate troubled loans on a case-by-case basis to determine if a loan modification would be appropriate. We pursue loan modifications when there is a reasonable chance that an appropriate modification would allow our client to continue servicing the debt. For loans secured by either commercial or residential real estate, if the client demonstrates a loss of income such that the client cannot reasonably support even a modified loan, we may pursue foreclosure, short sales and/or deed-in-lieu arrangements.  For all troubled loans, we review a number of factors, including cash flows, loan structures, collateral values, and guarantees.   Based on our review of these factors and our assessment of overall risk, we evaluate the benefits of renegotiating the terms of the loans so that they have a higher likelihood of continuing to perform. To date, we have restructured loans in a variety of ways to help our clients service their debt and to mitigate the potential for additional losses. The primary restructuring methods being offered to our clients are reductions in interest rates and extensions in terms.  Loans that, after being restructured, remain in compliance with their modified terms and whose modified interest rate yielded a market rate at the time the loan was restructured, are reviewed annually and may be reclassified as non-TDR, provided they conform with the prevailing regulatory criteria.   As of September 30, 2011 there have been no loans in which the TDR designation has been removed.

The following table represents the level of TDRs as of September 30, 2011.

					Modifications
					As of September 30
					2011
				Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
	Commercial			4	1,379	1,337
	Commercial real estate:
		Commercial Real Estate - mulit-family		1	425	454
		Commercial Real Estate - other		14	17,000	12,299
	Consumer:
		Consumer - other		22	467	428
		Consumer - auto		-	-	-
	Residential:
		Residential - prime		36	3,955	2,701
		Residential - subprime		82	5,139	5,037
	Construction
		Construction - prime		-	-	-
		Construction - subprime		-	-	-
			Total	159	$                         28,365	$                       22,256
				Number of Contracts	Recorded Investment
Troubled Debt Restructurings That Subsequently Defaulted
That Subsequently Defaulted
	Commercial			5	1,197
	Commercial real estate:
		Commercial Real Estate - mulit-family		1	187
		Commercial Real Estate - other		14	5,559
	Consumer:
		Consumer - other		3	134
		Consumer - auto		1	3
	Residential:
		Residential - prime		12	1,264
		Residential - subprime		4	352
	Construction
		Construction - prime		-	-
		Construction - subprime		-	-
				40	$                           8,696

All TDR loans are considered impaired.  When individually evaluating loans for impairment, we may measure impairment using (1) the present value of expected future cash flows discounted at the loan's effective interest rate (i.e., the contractual interest rate adjusted for any net deferred loan fees or costs, premium, or discount existing at the origination or acquisition of the loan), (2) the loan's observable market price, or (3) the fair value of the collateral.   If the present value of expected future cash flows discounted at the loan's effective interest rate is used as the means of measuring impairment the change in the present value attributable to the passage time is recognized as bad-debt expense.  As previously mentioned 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.Nonaccruing TDR loans that demonstrate a history of repayment performance in accordance with their modified terms are reclassified to accruing restructured status, typically after six months of repayment performance and are supported by a current credit evaluation of the borrower's financial condition and expectations for repayment under the revised terms.   Included in the troubled debt restructured balances above were $14.2 million of accruing TDRs at September 30, 2011 and $15.8 million at December 31, 2010.  Also included in the troubled debt restructured balances above $14.9 million are paying in accordance with modified terms at September 30, 2011 and $15.4 million at December 31, 2010.