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

OR

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

Commission file number 000-23550

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.)

175 N Leroy, P.O. Box 725, Fenton, Michigan 48430
(Address of Principal Executive Offices)

(810) 629-2263
(Registrant’s telephone number)

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.) þ 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: July 25, 2011

Class — Common Stock		Shares Outstanding — 2,349,051

 

 

Fentura Financial, Inc.
Index to Form 10-Q

		Page
Part I — Financial Information			3
Item 1 — Consolidated Financial Statements (Unaudited)			3-34
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			34-46
Item 3 — Quantitative and Qualitative Disclosures about Market Risk			46-47
Item 4 — Controls and Procedures			48
Part II — Other Information			49
Item 1 — Legal Proceedings			49
Item 1A — Risk Factors			49
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 3 — Defaults Upon Senior Securities			49
Item 4 —Reserved			49
Item 5 — Other Information			49
Item 6 — Exhibits			49
Signatures			50
Exhibit Index			51
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
FENTURA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(000s omitted except share data)

		June 30,				Dec 31,
		2011				2010
ASSETS
Cash and due from banks		$	22,481			$	11,592
Federal funds sold			5,000				21,900
Total cash and cash equivalents			27,481				33,492
Securities available for sale			53,535				41,875
Securities held to maturity			3,648				4,350
Total securities			57,183				46,225
Loans held for sale			869				850
Loans:
Commercial			43,327				43,395
Real estate loans — commercial			105,828				116,381
Real estate loans — residential			20,759				19,046
Consumer loans			27,003				29,153
Total loans			196,917				207,975
Less: Allowance for loan losses			(8,928	)			(10,027	)
Net loans			187,989				197,948
Bank owned life insurance			5,869				5,800
Bank premises and equipment			10,226				10,335
Federal Home Loan Bank stock			661				740
Accrued interest receivable			1,025				1,050
Other real estate owned			1,854				2,742
Assets of discontinued operations			9,011				122,968
Other assets			1,165				2,078
Total assets		$	303,333			$	424,228
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing		$	63,817			$	55,044
Interest bearing			204,295				220,933
Total deposits			268,112				275,977
Short term borrowings			627				879
Federal Home Loan Bank advances			923				954
Subordinated debentures			14,000				14,000
Liabilities of discontinued operations			76				113,321
Accrued taxes, interest and other liabilities			3,184				3,042
Total liabilities			286,922				408,173
Shareholders’ equity
Common stock — no par value, 5,000,000 shares authorized, 2,349,051 shares outstanding at June 30, 2011 (2,308,765 at December 31, 2010)			43,099				43,036
Accumulated deficit			(26,977	)			(27,042	)
Accumulated other comprehensive income			289				61
Total shareholders’ equity			16,411				16,055
Total liabilities and shareholders’ equity		$	303,333			$	424,228

See accompanying notes to consolidated financial statements.

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Interest income
Loans, including fees		$	2,843			$	3,538			$	5,860			$	7,130
Interest and dividends on securities:
Taxable			339				219				618				444
Tax-exempt			39				92				84				204
Interest on federal funds sold			13				7				22				10
Total interest income			3,234				3,856				6,584				7,788
Interest expense
Deposits			654				1,057				1,376				2,191
Borrowings			126				127				252				253
Total interest expense			780				1,184				1,628				2,444
Net interest income			2,454				2,672				4,956				5,344
Provision for loan losses			730				2,449				1,525				3,584
Net interest income after provision for loan losses			1,724				223				3,431				1,760
Non-interest income
Service charges on deposit accounts			290				359				586				784
Trust and investment services income			230				194				518				463
Gain on sale of mortgage loans			31				123				99				204
Gain on sale of securities			0				71				5				71
Other income and fees			403				589				900				929
Total non-interest income			954				1,336				2,108				2,451
Non-interest expense
Salaries and employee benefits			1,623				1,595				3,296				3,214
Occupancy			276				311				560				632
Furniture and equipment			278				322				570				628
Loan and collection			85				272				195				645
Advertising and promotional			44				41				63				67
Other operating expenses			664				836				1,507				1,469
Total non-interest expense			2,970				3,377				6,191				6,655
Loss from continuing operations before income tax			(292	)			(1,818	)			(652	)			(2,444	)
Federal income tax (benefit) expense			(156	)			421				(368	)			107
Net loss from continuing operations		$	(136	)		$	(2,239	)		$	(284	)		$	(2,551	)
Discontinued operations, net of tax
Loss from discontinued operations			(109	)			(541	)			(120	)			(712	)
Gain from sale of discontinued operations			0				0				469				0
Net (loss) income from discontinued operations			(109	)			(541	)			349				(712	)
Net (loss) income		$	(245	)		$	(2,780	)		$	65			$	(3,263	)
Net loss per share from continuing operations
Basic and diluted		$	(0.06	)		$	(0.99	)		$	(0.12	)		$	(1.13	)
Net (loss) income per share from discontinued operations
Basic and diluted		$	(0.05	)		$	(0.23	)		$	0.15			$	(0.31	)
Net (loss) income per share
Basic and diluted		$	(0.11	)		$	(1.22	)		$	0.03			$	(1.44	)
Cash dividends declared		$	0.00			$	0.00			$	0.00			$	0.00

See accompanying notes to consolidated financial statements.

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

		Six Months Ended
		June 30,
(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 (40,286 and 27,888 shares)			63				61
Balance, end of period			43,099				42,974
Accumulated Deficit
Balance, beginning of period			(27,042	)			(21,657	)
Net income (loss)			65				(3,263	)
Balance, end of period			(26,977	)			(24,920	)
Accumulated Other Comprehensive Income (Loss)
Balance, beginning of period			61				(724	)
Change in unrealized gain on securities, net of tax			228				565
Balance, end of period			289				(159	)
Total shareholders’ equity		$	16,411			$	17,895

See accompanying notes to consolidated financial statements.

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

		Six Months Ended
		June 30,
(000s omitted)		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	65			$	(3,263	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion			214				346
Provision for loan losses			1,525				3,584
Loans originated for sale			(6,377	)			(12,999	)
Proceeds from the sale of loans			6,457				12,046
Gain on sales of loans			(99	)			(204	)
(Gain) loss on other real estate owned			(4	)			148
Write downs on other real estate owned			68				124
Gain on sale of securities			(5	)			(71	)
Earnings from bank owned life insurance			(69	)			(77	)
Net decrease in interest receivable & other assets			417				599
Net increase in interest payable & other liabilities			218				1,138
Net change in discontinued operations operating activities			10,638				4,952
Net cash provided by operating activities			13,048				6,323
CASH FLOWS FROM INVESTING ACTIVITES:
Proceeds from maturities of securities — HTM			701				0
Proceeds from maturities of securities — AFS			2,930				8,054
Proceeds from calls of securities — HTM			0				751
Proceeds from calls of securities — AFS			2,000				1,500
Proceeds from sales of securities — AFS			2,024				6,760
Purchases of securities — AFS			(17,714	)			(9,314	)
Proceeds from sale of bank subsidiary			711				0
Net decrease in loans			7,774				11,604
Repurchase of FHLB Stock			79				0
Sales of other real estate owned			1,480				1,724
Acquisition of premises and equipment, net			(246	)			(61	)
Net change in discontinued operations investing activities			93,229				35,615
Net cash provided by investing activities			92,968				56,633
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits			(7,865	)			(22,612	)
Net decrease in short term borrowings			(252	)			(154	)
Repayments of Federal Home Loan Bank advances			(31	)			(27	)
Net proceeds from stock issuance			63				61
Net change in discontinued operations financing activities			(103,942	)			(36,845	)
Net cash used in financing activities			(112,027	)			(59,577	)
Net change in cash and cash equivalents			(6,011	)			3,379
Cash and cash equivalents — Beginning			33,492				31,640
Cash and cash equivalents — Ending			27,180				44,493
Less cash and cash equivalents of discontinued operations			301				9,474
Cash and cash equivalents of continuing operations		$	27,481			$	35,019
Cash paid for:
Interest		$	1,216			$	619
Income taxes		$	0			$	0
Non-cash Disclosures:
Transfers from loans to other real estate		$	660			$	1,922

FENTURA FINANICIAL, INC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(000s omitted)		2011				2010				2011				2010
Net (loss) income		$	(245	)		$	(2,780	)		$	65			$	(3,263	)
Other comprehensive income, net of tax:
Reclassification adjustment for gains included in income			0				0				5				82
Unrealized holding (losses) gains related to available-for-sale securities arising during period			626				669				340				774
Tax effect			(213	)			(266	)			(117	)			(291	)
Other comprehensive income			413				403				228				565
Comprehensive income (loss)		$	168			$	(2,377	)		$	293			$	(2,698	)

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 subsidiary The State Bank in Fenton, Michigan; and reported as discontinued operations, Fentura Holdings LLC (“FHLLC”), 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, operations statement and statement of cash flows. The presentations have been updated for June 30, 2011, December 31, 2010 and June 30, 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 and six month periods ended June 30, 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.

NOTE 1 — BASIS OF PRESENTATION (continued)

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- 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 it is 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

NOTE 1 — BASIS OF PRESENTATION (continued)

changes in credit concentrations. The following portfolio segments have been identified: commercial, commercial real estate, residential mortgage, installment loans and home equity loans.

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 loan’s 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 were 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 its subsidiary Bank.

Stock Option and Restricted Stock 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.

NOTE 1 — BASIS OF PRESENTATION (continued)

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.

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 June 30, 2011			16,634			$	30.47

For the three month period ended June 30, 2011, there were no shares of stock forfeited.

On February 24, 2011, the Corporation’s board of directors granted 25,000 Stock Appreciation Rights (“SARs”) to five executives. The terms of the Stock Appreciation Rights Agreements (the “SAR Agreements”) provide that the SARs 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, no longer being subject to terms, conditions and restrictions of the consent order dated December 31, 2009 (the “Consent Order”) and the Corporation no longer being subject to terms, conditions and restrictions of the agreement between the Corporation and the Federal Reserve Board, which was effective November 4, 2010 (the “FRB Agreement”). The first payment date under the agreement is the latest of February 24, 2014, the date on which the State Bank is no longer subject to the terms, conditions and restrictions of the Consent Order, and the date on which the Corporation is no longer subject to the terms, conditions and restrictions of the FRB Agreement. 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 the Corporation’s common stock over $2.00. If the first SAR payment date does not occur prior to February 24, 2016, then the SARs shall be cancelled without any payment to the participant. If the first SAR payment date occurs prior to February 24, 2016, then the second SAR payment date shall be February 24, 2016. 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 the Corporation’s common stock on the second SAR payment date over the value of one share of the Corporation’s common stock on the first SAR payment date. If the fair market value of one share of the Corporation’s common stock on the second SAR payment date does not exceed the fair market of one share of the Corporation’s common stock on the first SAR payment date, then no payment shall be made to the participant on the second SAR payment date. 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 June 30, 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.

NOTE 1 — BASIS OF PRESENTATION (continued)

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

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 companies when determining whether a loan modification is a troubled debt restructuring. The ASU also provides additional disclosure requirements. It is effective for public corporations 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.

In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing. This ASU provides guidance to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The standard addresses the necessity and usefulness of the collateral maintenance guidance for the transferor’s ability criterion when determining whether a repo should be accounted for as a sale or as a secured borrowing. It is effective the first interim or annual period beginning on or after December 15, 2011. The Corporation believes the adoption of this standard will not have an impact on our financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement. This is an amendment to ASU 2010-06, Improving Disclosure about Fair Value Measurement. This standard requires informational disclosures on transfers between Level 1 and Level 2 instruments of the fair value hierarchy. The standard also requires informational disclosures about the sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs. In addition the amended standard requires the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed. It is effective the first interim or annual period beginning on or after December 15, 2011. Adoption of this standard will not have a significant impact on our financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income. This standard requires that all non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate consecutive statements. It is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of this standard will not have a significant impact on the display of our financial statements.

NOTE 3 — SECURITIES

Securities are as follows:

						Gross				Gross
(000s omitted)						Unrealized				Unrealized
Available for Sale		Amortized Cost				Gains				Losses				Fair Value
June 30, 2011
U.S. Government and federal agency		$	5,991			$	25			$	0			$	6,016
Mortgage-backed residential			8,899				192				0				9,091
Collateralized mortgage obligations-agencies			32,114				636				(4	)			32,746
Collateralized mortgage obligations-private label			3,935				0				(425	)			3,510
Equity securities			2,155				84				(67	)			2,172
		$	53,094			$	937			$	(496	)		$	53,535
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

						Gross				Gross
(000s omitted)						Unrealized				Unrealized
Held to Maturity		Amortized Cost				Gains				Losses				Fair Value
June 30, 2011
State and municipal		$	3,648			$	78			$	0			$	3,726
		$	3,648			$	78			$	0			$	3,726
December 31, 2010
State and municipal		$	4,350			$	41			$	(8	)		$	4,383
		$	4,350			$	41			$	(8	)		$	4,383

NOTE 3 — SECURITIES (continued)

Contractual maturities of securities at June 30, 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 from one to five years		$	2,000			$	1,999
Due from five to ten years			3,991				4,017
Mortgage-backed residential			8,899				9,091
Collateralized mortgage obligations-agencies			32,114				32,746
Collateralized mortgage obligations-private label			3,935				3,510
Equity securities			2,155				2,172
		$	53,094			$	53,535

		Held to Maturity
		Amortized				Fair
(000s omitted)		Cost				Value
Due in one year or less		$	715			$	720
Due from one to five years			1,737				1,770
Due from five to ten years			1,196				1,236
Due after ten years			0				0
		$	3,648			$	3,726

At June 30, 2011, there were 2 private label CMO securities, with aggregate holdings totaling $3,510,000 which exceeded 10% of shareholders’ equity. At June 30, 2010, there were holdings totaling $4,175,000 of private label CMO securities which exceeded 10% of shareholders equity.

Sales of available for sale securities were as follows:

(000s omitted)		Six months ended				Six months ended
		June 30, 2011				June 30, 2010
Proceeds		$	2,024			$	6,067
Gross gains			5				82
Gross losses			0				0

There was a sale of $2,024,000 of available for sale securities during the six months ended June 30, 2011. This is compared to sales totaling $6,067,000 of available for sale securities for the six months ended June 30, 2010.

The cost 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 is as follows:

		Less than 12 months								12 months or more								Total
June 30, 2011		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(000s omitted)		Value				Loss				Value				Loss				Value				Loss
Collateralized mortgage obligations-agencies		$	1,902			$	(4	)		$	0			$	0			$	1,902			$	(4	)
Collateralized mortgage obligations-private label			0				0				3,510				(425	)			3,510				(425	)
Equity securities			384				(63	)			1				(4	)			385				(67	)
Total temporarily impaired		$	2,286			$	(67	)		$	3,511			$	(429	)		$	5,797			$	(496	)

		Less than 12 months								12 months or more								Total
December 31, 2010		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(000s omitted)		Value				Loss				Value				Loss				Value				Loss
US Government and federal agency		$	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	)

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 June 30, 2011, the Corporation’s security portfolio consisted of 83 securities, 4 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 June 30, 2011, the two private label securities having an amortized cost of $3,935,000 have an unrealized loss of $425,000.

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

NOTE 3 – SECURITIES (continued)

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 are adjusted when appropriate after considering characteristics of the underlying loans collateralizing the private label CMO security.

The Corporation has one agency collateralized mortgage obligation with an unrealized loss of $4,000. 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 second 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)		June 30, 2011				December 31, 2010
Commercial		$	43,327			$	43,395
Real estate — commercial			98,290				106,784
Real estate — construction			7,538				9,597
Real estate — mortgage			20,759				19,046
Consumer			27,003				29,153
			196,917				207,975
Less allowance for loan losses			8,928				10,027
		$	187,989			$	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.

Activity in the allowance for loan losses, by loan class, for the three month period ended June 30, 2011 is as follows:

						Commercial				Residential
						Real				Real				Installment				Home
(000s omitted)		Commercial				Estate				Estate				Loans				Equity				Unallocated				Total
Balance, April 1, 2011
Allowance for loan losses		$	717			$	7,136			$	397			$	190			$	573			$	2			$	9,015
Provision for loan losses			451				(172	)			(9	)			60				41				359				730
Loans charged off			(134	)			(752	)			0				(25	)			0				0				(911	)
Loan recoveries			15				72				0				6				1				0				94
Balance June 30, 2011		$	1,049			$	6,284			$	388			$	231			$	615			$	361			$	8,928

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

Activity in the allowance for loan losses, by loan class, for the six month period ended June 30, 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			305				691				(13	)			43				189				310				1,525
Loans charged off			(134	)			(2,570	)			(11	)			(57	)			(98	)			0				(2,870	)
Loan recoveries			21				196				1				12				16				0				246
Balance June 30, 2011		$	1,061			$	6,259			$	388			$	231			$	615			$	374			$	8,928

Activity in the allowance for loan losses, for the three and six month periods ended June 30, 2010 is as follows:

		Six				Three
(000s omitted)		Month				Month
Balance, beginning of period		$	8,589			$	9,686
Provision for loan losses			3,584				2,449
Loans charged off:
Commercial			(269	)			(165	)
Commercial real estate			(1,571	)			(1,248	)
Installment			(113	)			(89	)
Home equity			(140	)			(55	)
Residential real estate			(162	)			(84	)
Total loans charged off			(2,255	)			(1,641	)
Loan recoveries:
Commercial			76				57
Commercial real estate			553				12
Installment			58				43
Home equity			5				4
Residential real estate			0				0
Total loan recoveries			692				116
Balance, end of period		$	10,610			$	10,610

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
June 30, 2011		Commercial				Estate				Estate				Loans				Equity				Unallocated				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	374			$	5,177			$	27			$	99			$	290			$	0			$	5,967
Collectively evaluated for impairment			675				1,107				361				132				325				361				2,961
Total ending allowance balance		$	1,049			$	6,284			$	388			$	231			$	615			$	361			$	8,928
Loans:
Loans individually evaluated for impairment		$	3,092			$	21,733			$	591			$	263			$	502			$	0			$	26,181
Loans collectively evaluated for impairment			40,235				84,095				20,168				7,084				19,154				0				170,736
Total ending loans balance			43,327				105,828				20,759				7,347				19,656				0				196,917
Accrued interest receivable			133				380				63				42				61				0				679
Total recorded investment in loans		$	43,460			$	106,208			$	20,822			$	7,389			$	19,717			$	0			$	197,596

						Commercial				Residential
(000s omitted)						Real				Real				Installment				Home
December 31, 2010		Commercial				Estate				Estate				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:

										Allowance
										for Loan
		Unpaid Principal				Recorded				Losses
June 30, 2011		Balance				Investment				Allocated
With no related allowances recorded:
Commercial		$	938			$	945			$	0
Commercial Real Estate
Construction			540				530				0
Other			1,800				1,806				0
Residential real estate			252				252				0
Consumer
Installment Loans			122				122				0
Home Equity			89				90				0
With an allowance recorded:
Commercial			2,154				2,155				374
Commercial real estate:
Construction			4,923				4,924				444
Other			14,470				14,517				4,733
Residential real estate			339				339				27
Consumer
Installment loans			141				141				99
Home equity			413				414				290
Total		$	26,181			$	26,234			$	5,967

										Allowance
										for Loan
		Unpaid Principal				Recorded				Losses
December 31, 2010		Balance				Investment				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