Edgar Filing: First Federal of Northern Michigan Bancorp, Inc.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________________________to_________________________

Commission File Number 000-31957

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	32-0135202
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

100 S. Second Avenue, Alpena, Michigan	49707
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (989) 356-9041

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. Yes x 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). Yes ¨ No ¨

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

	Large accelerated filer ¨		Accelerated filer ¨
	Non-accelerated filer ¨		Smaller reporting company x
	(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 ¨ No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock, Par Value $0.01	Outstanding at May 2, 2011
(Title of Class)	2,884,049 shares

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended March 31, 2011

INDEX

	PAGE
PART I – FINANCIAL INFORMATION
ITEM 1 - UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet at March 31, 2011 and December 31, 2010		3
Consolidated Statements of Income for the Three Months Ended March 31, 2011 and March 31, 2010		4
Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2011		5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and March 31, 2010		6
Notes to Unaudited Consolidated Financial Statements		7

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		23

ITEM 3 - QUALITITATIVE AND QUANITIATIVE DISCLOSURES ABOUT MARKET RISK		30

ITEM 4 - CONTROLS AND PROCEDURES		30

Part II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS		31
ITEM 1A - RISK FACTORS		31
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		31
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES		31
ITEM 4 - [REMOVED AND RESERVED]		31
ITEM 5 - OTHER INFORMATION		31
ITEM 6 - EXHIBITS		31
Section 302 Certifications
Section 906 Certifications

When used in this Form 10-Q or future filings by First Federal of Northern Michigan Bancorp, Inc. (the “Company”) with the Securities and Exchange Commission ("SEC"), in the Company's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheet

	March 31, 2011			December 31, 2010
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks	$	3,541,896		$	1,889,999
Overnight deposits with FHLB		313,959			72,658
Total cash and cash equivalents		3,855,856			1,962,657
Securities AFS		38,809,481			35,301,238
Securities HTM		2,520,000			2,520,000
Loans held for sale		152,237			-
Loans receivable, net of allowance for loan losses of $2,631,993 and $2,831,332 as of March 31, 2011 and December 31, 2010, respectively		151,255,315			157,143,918
Foreclosed real estate and other repossessed assets		3,186,668			2,818,343
Federal Home Loan Bank stock, at cost		3,775,400			3,775,400
Premises and equipment		5,982,768			6,026,793
Accrued interest receivable		1,146,752			1,230,938
Intangible assets		554,193			627,306
Prepaid FDIC Premiums		900,140			967,143
Deferred Tax Asset		603,082			659,194
Other assets		2,702,714			2,700,034
Total assets	$	215,444,605		$	215,732,964

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits	$	156,231,755		$	155,465,896
Advances from borrowers for taxes and insurance		316,969			130,030
Federal Home Loan Bank Advances		28,000,000			29,000,000
REPO Sweep Accounts		5,753,871			6,172,362
Accrued expenses and other liabilities		1,646,240			1,728,735

Total liabilities		191,948,835			192,497,023

Stockholders' equity:
Common stock ($0.01 par value 20,000,000 shares authorized 3,191,799 shares issued)		31,918			31,918
Additional paid-in capital		23,838,758			23,822,152
Retained earnings		2,398,765			2,238,064
Treasury stock at cost (307,750 shares)		(2,963,918	)		(2,963,918	)
Unearned compensation		(15,043	)		(38,382	)
Accumulated other comprehensive income		205,290			146,107
Total stockholders' equity		23,495,770			23,235,941

Total liabilities and stockholders' equity	$	215,444,605		$	215,732,964

See accompanying notes to consolidated financial statements.

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Income

	For the Three Months
	Ended March 31,
	2011			2010
	(Unaudited)
Interest income:
Interest and fees on loans	$	2,273,320		$	2,540,413
Interest and dividends on investments
Taxable		94,815			132,563
Tax-exempt		40,328			52,812
Interest on mortgage-backed securities		183,366			156,533
Total interest income		2,591,829			2,882,321

Interest expense:
Interest on deposits		437,253			637,824
Interest on borrowings		168,074			318,582
Total interest expense		605,327			956,406

Net interest income		1,986,502			1,925,915
Provision for loan losses		67,358			11,088
Net interest income after provision for loan losses		1,919,144			1,914,827

Non-interest income:
Service charges and other fees		164,491			204,174
Mortgage banking activities		235,983			248,092
Gain on sale of available-for-sale investments		-			49,430
Net gain (loss) on sale of premises and equipment, real estate owned and other repossessed assets		(8,675	)		11,176
Other		57,553			65,613
Total non-interest income		449,352			578,485

Non-interest expense:
Compensation and employee benefits		1,168,936			1,170,942
FDIC Insurance Premiums		71,217			94,200
Advertising		23,021			19,889
Occupancy		270,042			312,576
Amortization of intangible assets		73,113			73,113
Service bureau charges		76,206			79,582
Professional services		87,577			103,111
Other		437,683			335,683
Total non-interest expense		2,207,795			2,189,096

Income before income tax expense		160,701			304,216
Income tax expense		-			101,913

Net Income	$	160,701		$	202,303

Per share data:
Net Income per share
Basic	$	0.06		$	0.07
Diluted	$	0.06		$	0.07

Weighted average number of shares outstanding
Basic		2,884,049			2,884,249
Including dilutive stock options		2,884,049			2,884,249
Dividends per common share	$	-		$	-

See accompanying notes to consolidated financial statements.

First Federal of Northern Michigan Bancorp Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity (Unaudited)

													Accumulated
						Additional							Other
	Common		Treasury			Paid-in		Unearned			Retained		Comprehensive
	Stock		Stock			Capital		Compensation			Earnings		Income		Total

Balance at December 31, 2010	$	31,918	$	(2,963,918	)	$	23,822,152	$	(38,382	)	$	2,238,064	$	146,107	$	23,235,941

Stock Options/MRP shares expensed		-		-			16,606		23,339			-		-		39,945

Stock Options/MRP shares forteited		-		-			-		-			-		-		-

Net income for the period		-		-			-		-			160,701		-		160,701

Change in unrealized gain:
on available-for-sale securities(net of tax of 30,488)		-		-			-		-			-		59,183		59,183

Total comprehensive income		-		-			-		-			-		-		219,884

Balance at March 31, 2011	$	31,918	$	(2,963,918	)	$	23,838,758	$	(15,043	)	$	2,398,765	$	205,290	$	23,495,770

See accompanying notes to the consolidated financial statements.

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

	For Three Months Ended
	March 31,
	2011			2010
	(Unaudited)
Cash Flows from Operating Activities:
Net income	$	160,701		$	202,303
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		181,356			207,170
Provision for loan loss		67,358			11,088
Amortization and accretion on securities		70,989			31,596
Gain on sale of investment securities		-			(49,430	)
Stock awards/options		39,945			52,804
Gain on sale of loans held for sale		(94,940	)		(93,199	)
Originations of loans held for sale		(6,846,031	)		(6,947,064	)
Proceeds from sale of loans held for sale		6,788,734			7,013,633
Gain on sale of fixed assets		(990	)		-
Loss/(gain) on sale of repossessed assets		8,932			(11,176	)
Net change in:
Accrued interest receivable		84,186			(201	)
Other assets		(410,427	)		(70,889	)
Prepaid FDIC insurance premiums		67,003			89,760
Deferred income tax benefit		56,112			100,704
Accrued expenses and other liabilities		(82,493	)		(226,169	)
Net cash provided by operating activities		90,435			310,930

Cash Flows from Investing Activities:
Net decrease in loans		5,821,245			2,760,929
Proceeds from maturity and sale of available-for-sale securities		2,414,843			5,249,241
Proceeds from sale of property and equipment		1,480			-
Purchase of securities		(5,904,403	)		(4,597,624	)
Purchase of premises and equipment		(64,708	)		(6,086	)
Net cash provided by investing activities		2,268,457			3,406,460

Cash Flows from Financing Activities:
Net increase (decrease) in deposits		765,859			(1,487,622	)
Net (decrease) increase in Repo Sweep accounts		(418,491	)		189,000
Net increase in advances from borrowers		186,939			171,100
Additions to advances from Federal Home Loan Bank and notes payable		3,350,000			10,025,000
Repayments of Federal Home Loan Bank advances and notes payable		(4,350,000	)		(12,855,927	)
Net cash used for financing activities		(465,693	)		(3,958,449	)

Net increase (decrease) in cash and cash equivalents		1,893,199			(241,059	)
Cash and cash equivalents at beginning of period		1,962,657			3,099,058
Cash and cash equivalents at end of period	$	3,855,856		$	2,857,999

Supplemental disclosure of cash flow information:
Cash refunded during the period for income taxes	$	(41,000	)	$	-
Cash paid during the period for interest	$	608,921		$	1,006,607

See accompanying notes to the consolidated financial statements.

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The interim financial statements should be read in conjunction with the financial statements of First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

All adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash flows, have been made. The results of operations 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.

Note 2— PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of First Federal of Northern Michigan Bancorp, Inc., First Federal of Northern Michigan, and the Bank’s wholly owned subsidiaries, Financial Services & Mortgage Corporation (“FSMC”) and FFNM Agency, Inc. FSMC invests in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The main activity of FFNM Agency is to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override to the Grotenhuis Group (as discussed further below). All significant intercompany balances and transactions have been eliminated in the consolidation.

Note 3—SECURITIES

Investment securities have been classified according to management’s intent. The carrying value and estimated fair value of securities are as follows:

	March 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Market Value
	(in thousands)
Securities Available for Sale

U.S. Government and agency obligations	$	8,108	$	42	$	-			8,150
Municipal obligations		4,888		174		-			5,062
Mortgage-backed securities		25,500		137		(41	)		25,596
Equity investments		2		-		(1	)		1

Total	$	38,498	$	353	$	(42	)	$	38,809

Securities Held to Maturity
Municipal notes	$	2,520	$	130	$	(2	)	$	2,648

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Market Value
	(in thousands)
Securities Available for Sale
U.S. Government and agency obligations	$	4,518	$	44	$	-			4,562
Municipal obligations		4,875		171		-			5,046
Mortgage-backed securities		25,684		83		(75	)		25,692
Equity investments		3		-		(2	)		1

Total	$	35,080	$	298	$	(77	)	$	35,301

Securities Held to Maturity
Municipal notes	$	2,520	$	90	$	(15	)	$	2,595

The amortized cost and estimated market value of securities at March 31, 2011, by contract maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities with no specified maturity date are separately stated.

	March 31, 2011
	Amortized Cost		Market Value
	(in thousands)
Available For Sale:
Due in one year or less	$	1,552	$	1,564
Due after one year through five years		6,887		6,983
Due in five year through ten years		4,116		4,169
Due after ten years		441		496

Subtotal		12,996		13,212

Equity securities		2		1
Mortgage-backed securities		25,500		25,596

Total	$	38,498	$	38,809

Held To Maturity:
Due in one year or less	$	85	$	86
Due after one year through five years		390		414
Due in five year through ten years		630		670
Due after ten years		1,415		1,478

Total	$	2,520	$	2,648

At March 31, 2011 and December 31, 2010, securities with a fair value of $30,576,905 and $31,378,639, respectively, were pledged to secure our REPO sweep accounts, FHLB advances and our line of credit at the Federal Reserve.

Gross proceeds from the sale of securities for the three months ended March 31, 2011 and 2010 were $0 and $1,100,000, respectively, resulting in gross gains of $0 and $49,000, respectively and gross losses of $0 and $0, respectively.

The following is a summary of temporarily impaired investments that have been impaired for less than and more than twelve months as of March 31, 2011 and December 31, 2010:

	March 31, 2011
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		<12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Government and agency obligations	$	-	$	-		$	-	$	-
Municipal obligations		-		-			-		-
Mortgage-backed securities		12,513		(41	)		-		-
Equity securities		2		(1	)		-		-

Total	$	12,515	$	(42	)	$	-	$	-

Held to Maturity:
Municipal notes	$	-	$	-		$	28	$	(2	)

	December 31, 2010
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		<12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Government and agency obligations	$	-	$	-		$	-	$	-
Municipal obligations		-		-			-		-
Mortgage-backed securities		12,626		(75	)		-		-
Equity securities		3		(2	)		-		-

Total	$	12,626	$	(77	)	$	-	$	-

Held to Maturity:
Municipal notes	$	382	$	(13	)	$	28	$	(2	)

The unrealized losses on the securities held in the portfolio are not considered other than temporary and have not been recognized into income. This decision is based on the Company’s ability and intent to hold any potentially impaired security until maturity. The performance of the security is based on the contractual terms of the agreement, the extent of the impairment and the financial condition and credit quality of the issuer. The decline in market value is considered temporary and a result of changes in interest rates and other market variables.

Note 4—LOANS AND ALLOWANCE FOR LOAN LOSSES

The following table sets forth the composition of our loan portfolio by loan type at the dates indicated.

	At March 31,			At December 31,
	2011			2010
	(in thousands)
Real estate loans:
Residential mortgage	$	68,603		$	71,697
Commercial loans:
Secured by real estate		59,165			61,010
Other		8,658			8,848
Total commercial loans		67,823			69,858

Consumer loans:
Secured by real estate		15,739			16,547
Other		1,981			2,118

Total consumer loans		17,720			18,665
Total gross loans	$	154,146		$	160,220
Less:
Net deferred loan fees		(259	)		(245	)
Allowance for loan losses		(2,632	)		(2,831	)

Total loans, net	$	151,255		$	157,144

The following table illustrates the contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2011 and December 31, 2010:

As of March 31, 2011
													Recorded
													Investment > 90
	30 - 59 Days		60 - 89 Days		Greater than 90		Total				Total Financing		Days and
	Past Due		Past Due		Days		Past Due		Current		Receivables		Accruing

Commercial Real Estate:
Commercial Real Estate - construction	$	-	$	-	$	1,772	$	1,772	$	70	$	1,842	$	-
Commercial Real Estate - other		1,127		600		376		2,103		55,220		57,323		-
Commercial - non real estate		-		-		-		-		8,658		8,658		-

Consumer:
Consumer - Real Estate		599		14		173		786		14,953		15,739		-
Consumer - Other		11		16		13		40		1,941		1,981		39

Residential:
Residential		5,473		-		2,378		7,851		60,752		68,603		774
Total	$	7,210	$	630	$	4,712	$	12,552	$	141,594	$	154,146	$	813

As of December 31, 2010
													Recorded
													Investment > 90
	30 - 59 Days		60 - 89 Days		Greater than 90		Total				Total Financing		Days and
	Past Due		Past Due		Days		Past Due		Current		Receivables		Accruing

Commercial Real Estate:
Commercial Real Estate - construction	$	-	$	-	$	1,772	$	1,772	$	1,498	$	3,270	$	-
Commercial Real Estate - other		891		488		784		2,163		55,577		57,740		82
Commercial - non real estate		-		6		-		6		8,842		8,848		-

Consumer:
Consumer - Real Estate		650		108		205		963		15,584		16,547		-
Consumer - Other		27		14		2		43		2,075		2,118		2

Residential:
Residential		3,919		2,056		2,434		8,409		63,288		71,697		282
Total	$	5,487	$	2,672	$	5,197	$	13,356	$	146,864	$	160,220	$	366

The Bank uses an eight tier risk rating system to grade its commercial loans. The grade of a loan may change during the life of the loans. The risk ratings are described as follows:

Risk Grade 1 (Excellent) - Prime loans based on liquid collateral, with adequate margin or supported by strong financial statements. Probability of serious financial deterioration is unlikely. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. This classification also includes all loans secured by certificates of deposit or cash equivalents.

Risk Grade 2 (Good) - Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Probability of serious financial deterioration is unlikely. These loans possess a sound repayment source (and/or a secondary source). These loans represent less than the normal degree of risk associated with the type of financing contemplated.

Risk Grade 3 (Satisfactory) - Satisfactory loans of average risk – may have some minor deficiency or vulnerability to changing economic conditions, but still fully collectible. There may be some minor weakness but with offsetting features or other support readily available. These loans present a normal degree of risk associated with the type of financing. Actual and projected indicators and market conditions provide satisfactory assurance that the credit shall perform in accordance with agreed terms.

Risk Grade 4 (Acceptable) - Loans considered satisfactory, but which are of slightly “below average” credit risk due to financial weaknesses or uncertainty. The loans warrant a somewhat higher than average level of monitoring to insure that weaknesses do not advance. The level of risk is considered acceptable and within normal underwriting guidelines, so long as the loan is given the proper level of management supervision.

Risk Grade 4.5 (Monitored) - Loans are considered “below average” and monitored more closely due to some credit deficiency that poses additional risk but is not considered adverse to the point of being a “classified” credit. Possible reasons for additional monitoring may include characteristics such as temporary negative debt service coverage due to weak economic conditions, borrower may have experienced recent losses from operations, declining equity and/or increasing leverage, or marginal liquidity that may affect long-term sustainability. Loans of this grade have a higher degree of risk and warrant close monitoring to insure against further deterioration.

Risk Grade 5 (Other Assets Especially Mentioned) (OAEM) - Loans which possess some credit deficiency or potential weakness, which deserve close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future.

Risk Grade 6 (Substandard) - Loans are “substandard” whose full, final collectability does not appear to be a matter of serious doubt, but which nevertheless portray some form of well defined weakness that requires close supervision by Bank management. The noted weaknesses involve more than normal banking risk. One or more of the following characteristics may be exhibited in loans classified Substandard: (1) Loans possess a defined credit weakness and the likelihood that the loan shall be paid from the primary source of repayment is uncertain; (2) Loans are not adequately protected by the current net worth and/or paying capacity of the obligor; (3) primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility that the Bank shall sustain some loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) the borrower is not generating enough cash flow to repay loan principal, however, continues to make interest payments; (7) the Bank is forced into a subordinated or unsecured position due to flaws in documentation; (8) loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

Grade 7 (Doubtful) - Loans have all the weaknesses of those classified Substandard. Additionally, however, these weaknesses make collection or liquidation in full, based on existing conditions, improbable. Loans in this category are typically not performing in conformance with established terms and conditions. Full repayment is considered “Doubtful”, but extent of loss is not currently determinable.

Risk Grade 8 (Loss) - Loans are considered uncollectible and of such little value, that continuing to carry them as an asset on the Bank’s financial statements is not feasible.

The following table presents the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of March 31, 2011 and December 31, 2010:

As of March 31, 2011
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial

1-2	$	-	$	-	$	4
3		70		13,099		2,388
4		-		32,411		6,093
5		-		3,223		173
6		1,772		8,590		-
7		-		-		-
8		-		-		-
Total	$	1,842	$	57,323	$	8,658

As of December 31, 2010

	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial

1-2	$	-	$	-	$	5
3		70		12,411		2,958
4		1,428		33,754		5,631
5		-		3,245		248
6		1,772		8,330		6
7		-		-		-
8		-		-		-
Total	$	3,270	$	57,740	$	8,848

For residential real estate and other consumer credit the Company also evaluates credit quality based on the aging status of the loan and by payment activity. Loans 60 or more days past due are monitored by the collection committee.

The following tables present the risk category of loans by class based on the most recent analysis performed as of March 31, 2011 and December 31, 2010:

As of March 31, 2011			As of December 31, 2010

	Residential			Residential

Grade			Grade

Pass	$	64,997	Pass	$	68,301
Special Mention		-	Special Mention		-
Substandard		3,606	Substandard		3,396
Total	$	68,603	Total	$	71,697

As of March 31, 2011

	Consumer -
	Real Estate		Consumer - Other

Performing	$	15,546	$	1,961
Nonperforming		193		20
Total	$	15,739	$	1,981

As of December 31, 2010

	Consumer -
	Real Estate		Consumer - Other

Performing	$	16,341	$	2,116
Nonperforming		206		2
Total	$	16,547	$	2,118

The following table presents the recorded investment in non-accrual loans by class as of March 31, 2011 and December 31, 2010:

	As of
	March 31, 2011

Commercial Real Estate:
Commercial Real Estate - construction	$	1,772
Commercial Real Estate - other		1,261
Commercial		-

Consumer:
Consumer - real estate		158
Consumer - other		15

Residential:
Residential		2,832

Total	$	6,038

	As of
	December 31, 2010

Commercial Real Estate:
Commercial Real Estate - construction	$	1,772
Commercial Real Estate - other		1,148
Commercial		-

Consumer:
Consumer - real estate		206
Consumer - other		-

Residential:
Residential		3,114

Total	$	6,240

The Bank has classified approximately $1,368,000 of its impaired loans as troubled debt restructurings as of March 31, 2011.

For the majority of the Bank’s impaired loans, the Bank will apply the observable market price methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine observable market price, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated evaluations are received, the Bank may discount the collateral value used.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial credits are charged down at 90 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010:

As of March 31, 2011
							Average		Interest
	Unpaid Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction		-		-		-		-		-
Commercial Real Estate - Other		584		465		-		478		-
Consumer - Real Estate		61		59		-		60		-
Consumer - Other		15		15		-		16		-
Residential		1,449		1,377		-		1,269		-

With a specific allowance recorded:
Commercial		-		-		-		-		-
Commercial Real Estate - Construction		3,449		1,772		305		3,449		-
Commercial Real Estate - Other		836		796		108		812		-
Consumer - Real Estate		99		99		9		99		-
Consumer - Other		-		-		-		-		-
Residential		1,551		1,455		221		1,456		-

Totals:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction	$	3,449	$	1,772	$	305	$	1,772	$	-
Commercial Real Estate - Other	$	1,420	$	1,261	$	108	$	1,290	$	-
Consumer - Real Estate	$	160	$	158	$	9	$	159	$	-
Consumer - Other	$	15	$	15	$	-	$	16	$	-
Residential	$	3,000	$	2,832	$	221	$	2,725	$	-

As of December 31, 2010
							Average		Interest
	Unpaid Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized

With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction		-		-		-		-		-
Commercial Real Estate - Other		822		674		-		-		-
Consumer - Real Estate		124		123		-		193		-
Consumer - Other		-		-		-		-		-
Residential		1,842		1,770		-		1,803		-

With a specific allowance recorded:
Commercial		-		-		-		-		-
Commercial Real Estate - Construction		3,449		1,772		305		1,805		-
Commercial Real Estate - Other		586		474		89		1,132		-
Consumer - Real Estate		83		83		25		14		-
Consumer - Other		-		-		-		-		-
Residential		1,416		1,344		165		1,330		-

Totals:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction	$	3,449	$	1,772	$	305	$	1,805	$	-
Commercial Real Estate - Other	$	1,408	$	1,148	$	89	$	1,132	$	-
Consumer - Real Estate	$	207	$	206	$	25	$	207	$	-
Consumer - Other	$	-	$	-	$	-	$	-	$	-
Residential	$	3,258	$	3,114	$	165	$	3,133	$	-

The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense.

Activity in the allowance for loan and lease losses was as follows for the quarter and year ended March 31, 2011 and December 31, 2010, respectively:

Allowance for Credit Losses and Recorded Investment in Financing Receivables

For the Three Months Ended March 31, 2011

Commercial

Consumer

Construction

Real Estate

Commercial