UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from                      to                     

Fentura Financial, Inc.

(Exact name of registrant as specified in its charter)

Michigan		38-2806518
(State or other jurisdiction of incorporation or organization)		(IRS Employee Identification No.)

(Address of Principal Executive Offices)

(810) 629-2263

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: May 2, 2011

Class — Common Stock           Shares Outstanding — 2,320,607

 

 

Fentura Financial, Inc.
Index to Form 10-Q

		Page
Part I — Financial Information			3
Item 1 — Consolidated Financial Statements (Unaudited)			3-32
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			32-42
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			43-45
Item 4 — Controls and Procedures			45
Part II — Other Information			46
Item 1 — Legal Proceedings			46
Item 1A — Risk Factors			46
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3 — Defaults Upon Senior Securities			46
Item 4 —Reserved			46
Item 5 — Other Information			46
Item 6 — Exhibits			46
Signatures			47
Exhibit Index			48
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

(000s omitted except share data)

		March 31,				Dec 31,
		2011				2010
		(unaudited)
ASSETS
Cash and due from banks		$	28,422			$	11,592
Federal funds sold			16,000				21,900
Total cash and cash equivalents			44,422				33,492
Securities available for sale			44,870				41,875
Securities held to maturity			4,349				4,350
Total securities			49,219				46,225
Loans held for sale			486				850
Loans:
Commercial			41,384				43,395
Real estate loans — commercial			99,350				106,784
Real estate loans — construction			8,380				9,597
Real estate loans — residential			19,219				19,046
Consumer loans			27,543				29,153
Total loans			195,876				207,975
Less: Allowance for loan losses			(9,015	)			(10,027	)
Net loans			186,861				197,948
Bank owned life insurance			5,835				5,800
Bank premises and equipment			10,302				10,335
Federal Home Loan Bank stock			740				740
Accrued interest receivable			1,060				1,050
Other real estate owned			2,362				2,742
Assets of discontinued operations			11,387				122,968
Other assets			1,791				2,078
Total assets		$	314,465			$	424,228
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	59,017			$	55,044
Interest bearing			220,153				220,933
Total deposits			279,170				275,977
Short term borrowings			662				879
Federal Home Loan Bank advances			954				954
Subordinated debentures			14,000				14,000
Liabilities of discontinued operations			0				113,321
Accrued taxes, interest and other liabilities			3,473				3,042
Total liabilities			298,259				408,173
Shareholders’ equity
Common stock — no par value, 5,000,000 shares authorized and outstanding 2,320,607 at March 31, 2011 (2,308,765 at December 31, 2010)			43,062				43,036
Retained deficit			(26,732	)			(27,042	)
Accumulated other comprehensive (loss) income			(124	)			61
Total shareholders’ equity			16,206				16,055
Total liabilities and shareholders’ equity		$	314,465			$	424,228

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(000s omitted except share data)

		Three Months Ended
		March 31
		2011				2010
Interest income
Loans, including fees		$	3,017			$	3,592
Interest and dividends on securities:
Taxable			279				225
Tax-exempt			45				112
Interest on federal funds sold			9				3
Total interest income			3,350				3,932
Interest expense
Deposits			722				1,134
Borrowings			126				126
Total interest expense			848				1,260
Net interest income			2,502				2,672
Provision for loan losses			795				1,135
Net interest income after provision for loan losses			1,707				1,537
Non-interest income
Service charges on deposit accounts			296				425
Trust and investment services income			288				269
Gain on sale of mortgage loans			68				81
Gain on sale of securities			5				0
Other income and fees			497				340
Total non-interest income			1,154				1,115
Non-interest expense
Salaries and employee benefits			1,673				1,619
Occupancy			284				321
Furniture and equipment			292				306
Loan and collection			110				373
Advertising and promotional			19				26
Other operating expenses			843				633
Total non-interest expense			3,221				3,278
Loss from continuing operations before income tax			(360	)			(626	)
Federal income tax (benefit)			(212	)			(314	)
Net loss from continuing operations		$	(148	)		$	(312	)
Discontinued operations, net of tax
Net loss from discontinued operations			(11	)			(171	)
Gain from sale of discontinued operations			469				0
Net income (loss) from discontinued operations			458				(171	)
Net income (loss)		$	310			$	(483	)
Net loss per share from continuing operations
Basic and diluted		$	(0.06	)		$	(0.14	)
Net income (loss) per share from discontinued operations
Basic and diluted		$	0.19			$	(0.07	)
Net income (loss) per share
Basic and diluted		$	0.13			$	(0.21	)
Cash Dividends declared		$	0.00			$	0.00

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)

		Three Months Ended
		March 31,
(000s omitted except share data)		2011				2010
Common Stock
Balance, beginning of period		$	43,036			$	42,913
Issuance of shares under
Director stock purchase plan and dividend reinvestment program (11,842 and 18,582 shares)			26				32
Balance, end of period			43,062				42,945
Retained Deficit
Balance, beginning of period			(27,042	)			(21,657	)
Net income (loss)			310				(483	)
Balance, end of period			(26,732	)			(22,140	)
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period			61				(724	)
Change in unrealized (loss) gain on securities, net of tax			(185	)			162
Balance, end of period			(124	)			(562	)
Total shareholders’ equity		$	16,206			$	20,243

See accompanying notes to consolidated financial statements.

FENTURA FINANCIAL, INC
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

		Three Months Ended
		March 31,
(000s omitted)		2011				2010
OPERATING ACTIVITIES:
Net income (loss)		$	310			$	(483	)
Adjustments to reconcile net income (loss) to cash Provided by Operating Activities:
Depreciation, amortization and accretion			110				160
Provision for loan losses			795				1,135
Loans originated for sale			(4,357	)			(5,570	)
Proceeds from the sale of loans			5,422				4,834
Gain on sales of loans			(701	)			(81	)
(Gain) loss on other real estate owned			(7	)			10
Write downs on other real estate owned			34				79
Gain on sale of securities			(5	)			0
Earnings from bank owned life insurance			(35	)			(38	)
Net (increase) decrease in interest receivable & other assets			(183	)			38
Net increase (decrease) in interest payable & other liabilities			431				(189	)
Net change in discontinued operations operating activities			6,224				(3,267	)
Total Adjustments			7,728				(2,889	)
Net cash provided by (used in) operating activities			8,038				(3,372	)
CASH FLOWS FROM INVESTING ACTIVITES:
Proceeds from maturities of securities — AFS			1,451				2,246
Proceeds from calls of securities — AFS			2,000				0
Proceeds from sales of securities — AFS			2,024				0
Purchases of securities — AFS			(8,116	)			0
Proceeds from sale of bank subsidiary			711				0
Net decrease in loans			10,115				6,472
Sales of other real estate owned			530				153
Acquisition of premises and equipment, net			(150	)			(26	)
Net change in discontinued operations investing activities			95,290				4,017
Net cash provided by investing activities			103,855				12,862
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			3,193				(12,343	)
Net decrease in short term borrowings			(217	)			(97	)
Net proceeds from stock issuance and purchase			26				32
Net change in discontinued operations financing activities			(103,965	)			(187	)
Net cash used in financing activities			(100,963	)			(12,595	)
Net change in cash and cash equivalents		$	10,930			$	(3,105	)
Cash and cash equivalents — Beginning		$	33,492			$	31,640
Cash and cash equivalents — Ending		$	44,422			$	28,535
Less cash and cash equivalents of discontinued operations			0				12,633
Cash and cash equivalents of continuing operations		$	44,422			$	15,902
Cash paid for:
Interest		$	732			$	1,159
Income taxes		$	167			$	249
Non-cash Disclosures:
Transfers from loans to other real estate		$	177			$	937

FENTURA FINANICIAL, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

		Three Months Ended
		March 31,
(000s omitted)		2011				2010
Net income (loss)		$	310			$	(483	)
Other comprehensive income (loss), net of tax:
Reclassification adjustment for gains included in income			5				0
Unrealized holding (losses) gains related to available-for-sale securities arising during period			(285	)			245
Tax effect			95				(83	)
Other comprehensive (loss) income			(185	)			162
Comprehensive income (loss)		$	125			$	(321	)

FENTURA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The consolidated financial statements include Fentura Financial, Inc. (the Corporation) and its wholly owned subsidiaries Fentura Holdings LLC (“FHLLC”) and The State Bank in Fenton, Michigan; and reported as discontinued operations, Davison State Bank in Davison, Michigan and West Michigan Community Bank in Hudsonville, Michigan and the other subsidiaries of the Banks. Intercompany transactions and balances are eliminated in consolidation.

In 2009, the Corporation entered into an agreement to sell one of its bank subsidiaries, Davison State Bank, to a private, nonaffiliated investor group. This sale closed on April 30, 2010. Additionally, the Corporation entered into an agreement to sell West Michigan Community Bank to a third-party investor group. This sale closed on January 31, 2011. Both subsidiaries are reported as discontinued operations. See Note 9 for further discussion.

Financial statements are presented with discontinued operations sequestered on the balance sheet, income statement and statement of cash flows. The presentations have been updated for March 31, 2011, December 31, 2010 and March 31, 2010 to reflect the discontinued operations results.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the year ended December 31, 2010.

Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-

NOTE 1 — BASIS OF PRESENTATION (continued)

backed securities, where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

In determining OTTI management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Consumer loans are typically charged off no later than 120 days past due.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segments and is based on the actual loss history experienced by the Corporation over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial, commercial real estate, residential mortgage, installment loans and home equity loans.

NOTE 1 — BASIS OF PRESENTATION (continued)

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral.

Other Real Estate Owned and Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense. There was no such interest or penalties in 2011 or 2010.

Dividend Restrictions: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Banks to the Corporation or by the Corporation to shareholders. The State Bank has been restricted from dividend payments due to the signing of a Consent Order with the Federal Deposit Insurance Corporation (FDIC). The Holding Company has been placed under restrictions by the Federal Reserve regarding the declaration or payment of any dividends and the receipt of dividends from subsidiary Banks.

Stock Option Plans Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

The Nonemployee Director Stock Option Plan provides for granting options to nonemployee directors to purchase the Corporation’s common stock. The purchase price of the shares is the fair market value at the date of the grant, and there is a three-year vesting period before options may be exercised. Options to acquire no more than 8,131 shares of stock may be granted under the Plan in any calendar year and options to acquire not more than 73,967 shares in the aggregate may be outstanding at any one time. No options were granted in 2011 or 2010.

NOTE 1 — BASIS OF PRESENTATION (continued)

The Employee Stock Option Plan grants options to eligible employees to purchase the Corporation’s common stock at or above, the fair market value of the stock at the date of the grant. Awards granted under this plan are limited to an aggregate of 86,936 shares. The administrator of the plan is a committee of directors. The administrator has the power to determine the number of options to be granted, the exercise price of the options and other terms of the options, subject to consistency with the terms of the Plan.

The following table summarizes stock option activity:

		Number of				Weighted
		Options				Average Price
Options outstanding and exercisable at January 1, 2011			18,872			$	29.32
Options forfeited in 2011			(2,238	)		$	20.77
Options outstanding and exercisable at March 31, 2011			16,634			$	30.47

On February 24, 2011, the Corporation’s board of directors granted 25,000 Stock Appreciation Rights (“SAR’s”) to five executives. The terms of the Stock Appreciation Rights Agreements (a “SAR Agreement”) provide that the SAR’s will be paid in cash on one or two fixed dates, which are determined as certain performance conditions are met. The conditions include the Corporation’s wholly owned subsidiary, The State Bank, is no longer subject to terms, conditions and restrictions of the consent order dated December 31, 2009 and the Corporation is no longer subject to terms, conditions and restrictions of the agreement between the Corporation and the Federal Reserve Board, which was effective November 4, 2010. The first payment date under the agreement is the later of February 24, 2014, the date on which the restrictions of the consent order of the State Bank is under are met, and the date on which the Corporation is no longer subject to the restrictions of the consent order for the holding company. On the first SAR payment date a participant shall receive an amount equal to the product of the number of stock appreciation rights granted and the excess of the fair market value of one share of common stock over $2. On the second payment date a participant shall receive an amount equal to the number of stock appreciation rights granted and the excess of the fair market value of one share of common stock over the value at the first payment date. The second SAR payment date only occurs if the first payment occurs and if the first payment occurs, the second payment date is February 24, 2016. Generally accepted accounting principles require plans settled in cash to be accounted for as liabilities only when the liability is probable and reasonably estimable and to be re-measured at each reporting period. Management has determined that as of March 31, 2011, it is not probable that the performance criteria will be met and as such no liability for the compensatory element of the awards has been recorded in the interim consolidated financial statements.

Operating Segments While the Corporation’s chief decision-makers monitor the revenue streams of the various Corporation products and services, operations are managed and financial performance is evaluated on a Corporate-wide basis. Accordingly, all of the Corporation’s financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

NOTE 2 — ADOPTION OF NEW ACCOUNTING STANDARDS

New Accounting Pronouncements:

In July 2010, FASB issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU amends FASB Accounting Standards Codification™ Topic 310, Receivables, to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010 and have been added to Note 4. The disclosures about activity that

NOTE 2 — ADOPTION OF NEW ACCOUNTING STANDARDS (continued)

occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010 and have been added to Note 4.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosure about Fair Value Measurements. This standard requires new disclosures on the amount and reason for transfers in and out of Level 1 and Level 2 recurring fair value measurements. The standard also requires disclosure of activities (i.e., on a gross basis), including purchases, sales, issuances, and settlements, in the reconciliation of Level 3 fair value recurring measurements. The standard clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosures regarding Level 1 and Level 2 fair value measurements and clarification of existing disclosures were effective for periods beginning after December 15, 2009. The disclosures about the reconciliation of information in Level 3 recurring fair value measurements are required for periods beginning after December 15, 2010. Adoption of this standard did not have a significant impact on our quarterly disclosures.

Newly Issued But Not Yet Effective Accounting Guidance

In April 2011, the FASB has issued ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU provides guidance for Corporations when determining whether a loan modification is a troubled debt restructuring. The ASU also provides additional disclosure requirements. It is effective for public companies for interim and annual periods beginning on or after June 15, 2011. The guidance is to be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Corporation is in the process of determining the impact of adoption.

NOTE 3 — SECURITIES

Securities are as follows:

(000s omitted)		Amortized				Gross				Gross Unrealized
Available for Sale		Cost				Unrealized Gains				Losses				Fair Value
March 31, 2011
U.S. Government and federal agency		$	3,990			$	0			$	(19	)		$	3,971
Mortgage-backed residential			6,877				126				(39	)			6,964
Collateralized mortgage obligations-agencies			27,946				197				(92	)			28,051
Collateralized mortgage obligations-private label			4,077				0				(366	)			3,711
Equity securities			2,155				39				(21	)			2,173
		$	45,045			$	362			$	(537	)		$	44,870
December 31, 2010
U.S. Government and federal agency		$	4,005			$	6			$	(11	)		$	4,000
Mortgage-backed residential			7,342				126				(36	)			7,432
Collateralized mortgage obligations-agencies			24,758				258				(114	)			24,902
Collateralized mortgage obligations-private label			4,215				0				(344	)			3,871
Equity securities			1,655				49				(34	)			1,670
		$	41,975			$	439			$	(539	)		$	41,875

NOTE 3 — SECURITIES (continued)

(000s omitted)						Gross Unrealized				Gross Unrealized
Held to Maturity		Amortized Cost				Gains				Losses				Fair Value
March 31, 2011
State and municipal		$	4,349			$	59			$	(1	)		$	4,407
		$	4,349			$	59			$	(1	)		$	4,407
December 31, 2010
State and municipal		$	4,350			$	41			$	(8	)		$	4,383
		$	4,350			$	41			$	(8	)		$	4,383

Contractual maturities of securities at March 31, 2011 were as follows. Securities not due at a single maturity date, mortgage-backed, collateralized mortgage obligations and equity securities are shown separately.

		Available for Sale
		Amortized				Fair
(000s omitted)		Cost				Value
U.S. Government and federal agency
Due in one year or less		$	3,990			$	3,971
Mortgage-backed residential			6,877				6,964
Collateralized mortgage obligations-agencies			27,946				28,051
Collateralized mortgage obligations-private label			4,077				3,711
Equity securities			2,155				2,173
		$	45,045			$	44,870

		Held to Maturity
		Amortized				Fair
(000s omitted)		Cost				Value
Due in one year or less		$	1,145			$	1,151
Due from one to five years			1,957				1,987
Due from five to ten years			879				897
Due after ten years			368				372
		$	4,349			$	4,407

At March 31, 2011, there were 2 private label CMO securities, with aggregate holdings totaling $3,711,000, which exceeded 10% of shareholders’ equity. At March 31, 2010, there were holdings totaling $2,183,000 of private label CMO securities issued by Wells Fargo which exceeded 10% of shareholders equity.

Sales of available for sale securities were as follows:

		Three months ended
(000s omitted)		March 31, 2011
Proceeds		$	2,024
Gross gains			5
Gross losses			0

There were no sales of available for sale securities for the three months ended March 31, 2010.

The costs basis used to determine the unrealized gains or losses of securities sold was the amortized cost of the individual investment security as of the trade date.

NOTE 3 — SECURITIES (continued)

Securities with unrealized losses are aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

March 31, 2011		Less than 12 months								12 months or more								Total
(000s omitted)		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Loss				Value				Loss				Value				Loss
US Government and federal agencies		$	1,981			$	(19	)		$	0			$	0			$	1,981			$	(19	)
State and municipal			0				0				169				(1	)			169				(1	)
Mortgage-backed residential			3,454				(39	)			0				0				3,454				(39	)
Collateralized mortgage obligations-agencies			5,674				(92	)			0				0				5,674				(92	)
Collateralized mortgage obligations-private label			0				0				3,711				(366	)			3,711				(366	)
Equity securities			186				(14	)			453				(7	)			639				(21	)
Total temporarily impaired		$	11,295			$	(164	)		$	4,333			$	(374	)		$	15,628			$	(538	)

December 31, 2010		Less than 12 months								12 months or more								Total
(000s omitted)		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Loss				Value				Loss				Value				Loss
US Government and federal agencies		$	1,989			$	(11	)		$	0			$	0			$	1,989			$	(11	)
State and municipal			365				(3	)			245				(5	)			610				(8	)
Mortgage-backed residential			2,062				(36	)			0				0				2,062				(36	)
Collateralized mortgage obligations-agencies			6,085				(114	)			0				0				6,085				(114	)
Collateralized mortgage obligations-private label			0				0				3,871				(344	)			3,871				(344	)
Equity securities			186				(14	)			439				(20	)			625				(34	)
Total temporarily impaired		$	10,687			$	(178	)		$	4,555			$	(369	)		$	15,242			$	(547	)

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In evaluating OTTI, management considers the factors presented in Note 1.

As of March 31, 2011, the Corporation’s security portfolio consisted of 84 securities, 10 of which were in an unrealized loss position. The majority of unrealized losses are related to the Corporation’s collateralized mortgage obligations (CMOs) and equity securities, as discussed below.

Collateralized Mortgage Obligations

The decline in fair value of the Corporation’s private label collateralized mortgage obligations is primarily attributable to the lack of liquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. The ratings held on the private label securities are AA and A-. The underlying collateral of these CMOs is comprised largely of 1-4 family residences. In each of these securities, the Corporation holds the senior tranche and receives payments before other tranches. For private label securities, management completes an analysis to review the recent performance of the mortgage pools underlying the instruments. At March 31, 2011, the two private label securities having an amortized cost of $4,077,000 have an unrealized loss of $366,000.

NOTE 3 — SECURITIES (continued)

The Corporation has also been closely monitoring the performance of the CMO and MBS portfolios. Management monitors items such as payment streams and underlying default rates, and did not determine a severe change in these items. On a quarterly basis, management uses multiple assumptions to project the expected future cash flows of the private label CMOs with prepayment speeds, projected default rates and loss severity rates. The cash flows are then discounted using the effective rate on the securities determined at acquisition. Recent historical experience is the base for determining the cash flow assumptions and is adjusted when appropriate after considering characteristics of the underlying loans collateralizing the private label CMO security.

The Corporation has four agency collateralized mortgage obligations with an unrealized loss of $92,000. The decline in value is primarily due to changes in interest rates and other market conditions.

Equity securities

The Corporation’s equity investments with unrealized losses are investments in three non-public bank holding companies in Michigan. These securities receive a multi-faceted review utilizing call report data. Management reviews such performance indicators as earnings, ROE, ROA, non-performing assets, brokered deposits and capital ratios. Management draws conclusions from this information, as well as any published information or trading activity received from the individual institutions, to assist in determining if any unrealized loss is other than temporary impairment.

Additionally management considers the length of time the investments have been at an unrealized loss. At the end of the first quarter, management performed its review and determined that no additional other-than-temporary impairment was necessary on the equity securities in the portfolio.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Major categories of loans are as follows:

(000s omitted)		March 31, 2011				December 31, 2010
Commercial		$	41,384			$	43,395
Real estate — commercial			99,350				106,784
Real estate — construction			8,380				9,597
Real estate — mortgage			19,219				19,046
Consumer			27,543				29,153
			195,876				207,975
Less allowance for loan losses			9,015				10,027
		$	186,861			$	197,948

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.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Activity in the allowance for loan losses, by classification, for the three month period ended March 31, 2011 is as follows:

						Commercial				Residential
						Real				Real				Installment				Home
(000s omitted)		Commercial				Estate				Estate				Loans				Equity				Unallocated				Total
Balance January 1, 2011
Allowance for loan losses		$	869			$	7,942			$	411			$	233			$	508			$	64			$	10,027
Provision for loan losses			(158	)			888				(4	)			(17	)			148				(62	)			795
Loans charged off			0				(1,818	)			(11	)			(32	)			(98	)			0				(1,959	)
Loan recoveries			6				124				1				6				15				0				152
Balance March 31, 2011		$	717			$	7,136			$	397			$	190			$	573			$	2			$	9,015

Activity in the allowance for loan losses, for the three month period ended March 31, 2010 is as follows:

(000s omitted)
Balance, January 1, 2010		$	8,589
Provision for loan losses			1,135
Loans charged off:
Commercial			(104	)
Commercial real estate			(323	)
Installment			(53	)
Home equity			(56	)
Residential real estate			(78	)
Total loans charged off			(614	)
Loan recoveries:
Commercial			19
Commercial real estate			539
Installment			18
Home equity			0
Residential real estate			0
Total loan recoveries			576
Balance, March 31, 2010		$	9,686

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

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:

						Commercial				Residential
(000s omitted)						Real				Real				Installment				Home
March 31, 2011		Commercial				Estate				Estate				Loans				Equity				Unallocated				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	279			$	4,083			$	56			$	112			$	180			$	0			$	4,710
Collectively evaluated for impairment			438				3,053				341				78				393				2				4,305
Total ending allowance balance		$	717			$	7,136			$	397			$	190			$	573			$	2			$	9,015
Loans:
Loans individually evaluated for impairment		$	2,964			$	23,438			$	1,019			$	393			$	275			$	0			$	28,089
Loans collectively evaluated for impairment			38,420				84,292				18,200				7,423				19,452				0				167,787
Total ending loans balance			41,384				107,730				19,219				7,816				19,727				0				195,876
Accrued interest receivable			124				390				73				49				58				0				694
Total recorded investment in loans		$	41,508			$	108,120			$	19,292			$	7,865			$	19,785			$	0			$	196,570

						Commercial				Residential
(000s omitted)						Real				Real								Home
December 31, 2010		Commercial				Estate				Estate				Installment Loans				Equity				Unallocated				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	184			$	5,962			$	95			$	69			$	160			$	18			$	6,488
Collectively evaluated for impairment			685				1,980				316				164				348				46				3,539
Total ending allowance balance		$	869			$	7,942			$	411			$	233			$	508			$	64			$	10,027
Loans:
Loans individually evaluated for impairment		$	1,183			$	25,602			$	1,069			$	228			$	357			$	0			$	28,439
Loans collectively evaluated for impairment			42,212				90,779				17,977				7,798				20,770				0				179,536
Total ending loans balance		$	43,395			$	116,381			$	19,046			$	8,026			$	21,127			$	0			$	207,975
Accrued interest receivable			357				429				76				55				58				0				975
Total recorded investment in loans		$	43,752			$	116,810			$	19,122			$	8,081			$	21,185			$	0			$	208,950

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

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

		Unpaid Principal								Allowance for Loan
March 31, 2011		Balance				Recorded Investment				Losses Allocated
With no related allowances recorded:
Commercial		$	2,237			$	2,239			$	0
Commercial Real Estate
Construction			428				428				0
Other			4,789				4,802				0
Residential real estate			567				567				0
Consumer
Installment Loans			238				239				0
With an allowance recorded:
Commercial			727				728				279
Commercial real estate:
Construction			4,972				4,973				389
Other			13,249				13,285				3,694
Residential real estate			452				509				56
Consumer
Installment loans			155				157				112
Home equity			275				276				180
Total		$	28,089			$	28,203			$	4,710

		Unpaid Principal								Allowance for Loan
December 31, 2010		Balance				Recorded Investment				Losses Allocated
With no related allowances recorded:
Commercial		$	490			$	490			$	0
Commercial Real Estate
Construction			149				149				0
Other			4,034				4,036				0
Residential real estate			544				544				0
Consumer
Installment Loans			116				116				0
Home Equity			74				75				0
With an allowance recorded:
Commercial			693				696				184
Commercial real estate:
Construction			348				348				101
Other			21,071				21,161				5,879
Residential real estate			525				529				95
Consumer
Installment loans			112				112				69
Home equity			283				284				160
Total		$	28,439			$	28,540			$	6,488

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

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, 2011						Loans Past Due Over 90
(000s omitted)		Nonaccrual (1)				Days Still Accruing (2)
Commercial		$	1,746			$	0
Commercial real estate
Construction			5,256				0
Other			7,610				418
Consumer
Home Equity			0				154
Installment loans			115				5
Residential real estate (1)			522				0
Total		$	15,249			$	577

December 31, 2010						Loans Past Due Over 90
(000s omitted)		Nonaccrual				Days Still Accruing (1)
Commercial		$	1,847			$	0
Commercial real estate
Construction			5,234				0
Other			4,799				0
Consumer
Installment loans			121				0
Residential real estate			495				135
Total		$	12,496			$	135

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

(000s omitted)		30-59 Days								Greater than 90
March 31, 2011		Past Due				60-89 Days Past Due				Days Past Due				Total Past Due
Commercial		$	173			$	327			$	1,658			$	2,158
Commercial real estate:
Construction			867				0				4,447				5,314
Other			1,368				1,939				7,225				10,532
Consumer:
Installment loans			11				11				97				119
Home Equity			87				0				153				240
Residential real estate
Traditional			0				0				522				522
Total		$	2,506			$	2,277			$	14,102			$	18,885

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

(000s omitted)		30-59 Days								Greater than 90
December 31, 2010		Past Due				60-89 Days Past Due				Days Past Due (1)				Total Past Due
Commercial		$	26			$	235			$	1,209			$	1,470
Commercial real estate:
Construction			0				141				4,748				4,889
Other			1,186				11				4,133				5,330
Consumer:
Installment loans			46				4				96				146
Home Equity			118				5				0				123
Residential real estate
Traditional			156				0				630				786
Total		$	1,532			$	396			$	10,816			$	12,744

Renegotiated loans:

Renegotiated loans totaled $4,976,000 at March 31, 2011 compared to $3,654,000 at December 31, 2010.

The Corporation allocated $2,585,000 and $71,000 of specific reserves to customers whose loan terms have been modified in renegotiated loans as of March 31, 2011 and December 31, 2010. Renegotiated loans are also included with impaired loans. The Corporation has no additional amounts committed to these customers.

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 at the date of transfer.

Additionally $2,900,000 of watch credit grade loans were transferred to The State Bank. The total of all loans transferred was $9,200,000.

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:

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.

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be prime or pass rated loans. 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, 2011		Prime				Pass				Watch				Substandard				Total
Commercial		$	4,362			$	32,430			$	1,752			$	2,964			$	41,508
Commercial real estate:
Construction			0				815				1,201				4,501				6,517
Other			0				72,199				10,414				18,990				101,603
Total		$	4,362			$	105,444			$	13,367			$	26,455			$	149,628