allowances and provisions, growth opportunities, interest rates, acquisition and divestiture opportunities, capital and other expenditures and synergies, efficiencies, cost savings and funding and other advantages expected to be realized from various activities. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," "project," "predict," "continue" and similar expressions are intended to identify forward-looking statements.
Forward-looking statements include statements with respect to the Company's beliefs, plans, strategies, objectives, goals, expectations, anticipations, estimates or intentions that are subject to significant risks or uncertainties or that are based on certain assumptions. Future results and the actual effect of plans and strategies are inherently uncertain, and actual results could differ materially from those anticipated in the forward-looking statements, depending upon various important factors, risks or uncertainties. Those factors, many of which are subject to change based on various other factors, including factors beyond the Company's control, and other factors, including others discussed in the Company's Annual Report to Stockholders, the Company's Form 10-K, other factors identified in the Company's other filings with the SEC, as well as other factors identified by management from time to time, could have a material adverse effect on the Company and its operations or cause its financial performance to differ materially from the plans, objectives, expectations, estimates or intentions expressed in the Company's forward-looking statements. The impact of technological changes implemented by the Company and the Bank and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers.
OVERVIEW. The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 24 full-service banking centers. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company's principal lending activity is the origination of mortgage loans for the purchase or refinancing of one-to-four family residential properties. The Company also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit and a variety of other consumer loans.
CRITICAL ACCOUNTING POLICIES. As of March 31, 2009, there have been no changes in the critical accounting policies as disclosed in the Company's Form 10-K for the year ended December 31, 2008. The Company's critical accounting policies are described in the Management's Discussion and Analysis and financial sections of its 2008 Annual Report. Management believes its critical accounting policies relate to the Company's securities, allowance for loan losses, mortgage servicing rights and core deposit intangibles.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2009 AND DECEMBER 31, 2008 Summary. Total assets decreased $43.6 million, or 2.2%, to $1.917 billion at March 31, 2009, from $1.961 billion at December 31, 2008, as a result of an decrease of $40.0 million in net loans to $1.363 billion at March 31, 2009 from $1.403 billion at December 31, 2008, Total investment securities decreased by $24.0 million or 7.4% to $300.4 million at March 31, 2009 from $324.3 million at December 31, 2008. This decrease is due primarily to the combined result of credit and non-credit related OTTI charges to the Company's non-agency CMO portfolio totaling $37.4 million, sale of a $13.4 million U.S. government agency CMO, purchase of U.S. government sponsored agency debt securities totaling $30.2 million and proceeds from maturity and principal prepayments on mortgage related securities totaling $10.5 million. OTTI charges to the Company's non-agency CMO portfolio are indicative of continued downgrades as applied by the major rating agencies since acquisition of these securities. Since acquisition of these securities and up to May 11, 2009, $18.8 million, or 7.2%, of the amortized cost, before OTTI charges realized at March 31, 2009, of the securities held to maturity portfolio, have been downgraded by the major rating agencies to levels still considered investment grade. In addition, the remaining $243.4 million, or 92.8%, of the amortized cost of the securities held to maturity portfolio have been downgraded to sub-investment grade levels. Similar security types within the available for sale securities portfolio have also experienced major rating agency downgrades. Since acquisition date and up to May 11, 2009, $13.8 million, or 21.8%, of the amortized cost of the available for sale securities portfolio have been downgraded to levels still considered investment grade, while the remaining $49.3 million, or 78.2%, has been downgraded to sub-investment grade levels. These downgrades have occurred as a result of the continued increase in delinquency levels impacting the residential real estate markets nationally and, more specifically as delinquency levels are impacting the underlying collateral of the specific securities receiving downgrades. The major rating agencies will continue to review these residential real estate collateralized investment types and could possibly apply further downgrades to these and other investments within the Company's investment portfolio. The Asset/Liability Committee will continue to review these investments and closely monitor their performance. Reference is made to Note 3 for additional information regarding the Company's analysis and review for other than temporary impairment (OTTI) relating to these securities. This OTTI analysis will continue to be performed on a quarterly basis. Considering the above described downgrades and the sensitivity of the various assumptions used in the Company's OTTI analysis model, there is an increased risk that the Company will experience additional OTTI charges in future periods related to it's non-agency collateralized mortgage obligations.
Total net loans decreased during the period by 2.9% or $40.0 million to $1.363 billion from $1.403 billion at December 31, 2008. Most areas decreased slightly, with the largest decreases coming in the commercial loans and commercial real estate loan categories.

Commercial loans decreased by 19.2% or $42.6 million to $179.3 million at March 31, 2009 from $221.9 million at December 31, 2008 while commercial real estate increased by $11.8 million to $424.1 million at March 31, 2009 from $412.3 million at December 31, 2008. The decrease in loans was a result of the Company's strategy to de-leverage it's balance sheet along with the general slowdown in the overall economy. We expect lending activity to continue at reduced levels during 2009 as a result of the current rate environment and the general economic conditions in the State of Michigan, which are the worst seen in over 25 years.
Total liabilities decreased by 1.0% or $19.2 million to $1.834 billion at March 31, 2009 from $1.853 billion at December 31, 2008. The decrease was primarily the result of a decrease in Federal Home Loan Bank advances of $122.2 million or 24.6% to $375.0 million at March 31, 2009 from $497.2 million at December 31, 2008 as the Company decreased its dependence on the FHLB. Offsetting this decrease, total deposits increased by 4.3% or $55.7 million to $1.350 billion at March 31, 2009 from $1.295 billion at December 31, 2008. At the same time, the Company increased its short term borrowings at the Federal Reserve Bank to $100.0 million at March 31, 2009 from $50.0 million at December 31, 2008.
While deposit growth has been significant during the first quarter of 2009, management expects that balances of Federal Reserve and FHLB borrowings may increase in subsequent periods, depending on future deposit growth and which borrowing opportunity makes the most economic sense after analyzing maturity and repricing data and balancing interest rate risk.
Portfolio Loans and Asset Quality. Nonperforming loans totaled $95.7 million at March 31, 2009 compared to $90.7 million at December 31, 2008, an increase of 5.5% or $5.0 million. This represents an increase to 6.87% of total loans at March 31, 2009 compared to 6.35% at December 31, 2008. As indicated by the table below, $11.4 million of the increase in total nonperforming loans resulted from an increase in nonperforming real estate loans. Other real estate increased by $1.3 million as a result of foreclosed loans. In the other real estate area, during the first quarter of 2009, management has noted increases in the number of property sales and increases in the numbers of offers on properties owned. While there can be no assurance this trend will continue, management believes this is a positive trend in the real estate markets. Of the $23.2 million in real estate and other assets owned, $5.2 million of the balance represents the sale of foreclosed properties which have been sold under terms of a special loan program generally requiring no down payment and, as a result, are being recognized under the installment method of accounting. As a result, as soon as the borrowers under this financing program repay principal in the amount of 5%, to a loan-to-value balance of 95%, these financing arrangements will be transferred into accruing loan status. Performing restructured loans increased during the quarter by $9.0 million to $14.7 million at March 31, 2009, largely as the result of the restructure of a large commercial loan to a single borrower. The loan is based upon a commercial property which recently lost its sole tenant. The borrower has sufficient indicated cash flow and the collateral has sufficient value to support the loan based upon a current appraisal. The borrower has not been late on payments but is experiencing cash flow difficulties due to global real estate conditions. The overall increase in these nonperforming categories is overwhelmingly due to a rise in foreclosures reflecting both weak economic conditions and soft residential real estate values in many parts of Michigan in which the Company lends to.
The following table sets forth information regarding nonperforming assets (in thousands):

                                                                  March 31,          December 31,
                                                                     2009                2008
Nonperforming loans:
Real estate                                                       $   79,618        $       68,193
Commercial                                                            15,471                22,016
Consumer                                                                 599                   512

Total                                                                 95,688                90,721
Real estate and other assets owned                                    23,153                21,857

Total nonperforming assets                                        $  118,841        $      112,578
Performing restructured loans                                         14,705                 5,719

Total nonperforming assets and performing restructured loans      $  133,546        $      118,297


Total nonperforming loans as a percentage of total loans                6.87 %                6.35 %
Total nonperforming assets and performing restructured loans
as a percentage of total assets                                         6.96 %                6.03 %

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The following table sets forth activity in the allowance for loan losses for the interim periods (in thousands):

                                                              Three Months
                                                             ended March 31,
                                                            2009         2008
      Balance, beginning of period                        $ 26,473     $ 21,464
      Provision for loan losses                              8,058        1,131
      Charge-offs                                           (5,111 )     (4,449 )
      Recoveries                                               263          118

      Balance, end of period                              $ 29,683     $ 18,264


      Allowance for loan losses to total loans                2.13 %       1.21 %
      Allowance for loans losses to nonperforming loans      31.02 %      20.13 %

Deposits. Deposits increased $55.7 million, or 4.3%, to $1.350 billion at March 31, 2009, from $1.295 billion at December 31, 2008. The increases in deposits came primarily in the NOW and MMDA categories which combined increased by 15% or $43.7 million at March 31, 2009 over December 31, 2008. At the same time, retail certificates of deposit increased by $8.0 million to $469.2 million at March 31, 2009. Partially offsetting these increases, non-interest DDA deposits decreased by $4.9 million at March 31, 2009 from $86.4 million at December 31, 2008. Deposit growth continues to be affected by general adverse economic conditions experienced in the State of Michigan.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2009 AND 2008
Summary. The Company experienced a net loss for the three months ended March 31, 2009 of $7.7 million compared to a net income of $1.6 million during the same period in 2008. Diluted earnings per share for the three month period ended March 31, 2009, resulted in a loss of $0.96 versus income of $0.21 for the same period in 2008. Annualized losses as a percentage of average assets during the three month period ended March 31, 2009, was 1.6% compared with a positive return of 0.33% during the same period in 2008.
Decreased market values in Michigan's real estate markets and resulting impact on credit and asset quality have further resulted in lower earnings to the Company. In response to the negative impact on asset quality and underlying collateral values, the Company increased its allowance for loan losses as a percent of portfolio loans during the first quarter of 2009, to 2.13% from 1.85% at December 31, 2008, resulting in a significant increase in the provision for loan losses for the quarter. During first quarter 2009, the Company provisioned $8.1 million for loan losses while recording $4.8 million in net charge-offs against the allowance for loan losses account. In comparison, the Company added $1.1 million to the to the allowance for loan losses during the three month period ended March 31, 2008, and recorded $4.3 million in net charge-offs during the three month period ended March 31, 2008. Relatedly, costs to repossess and maintain nonperforming loan collateral increased to $1.5 million during the first quarter of 2009, an increase of 242% over the $436,000 incurred during the same period in 2008.
In the first quarter of 2009, as noted in Note 3 to the financial statements, the Company recorded net losses on available for sale securities of $1.7 million and net losses on held to maturity securities of $2.9 million. These are the result of credit impairment losses resulting from the Company's OTTI analysis performed as of March 31, 2009. Net losses for the three months ended March 31, 2008 were zero.
Partially offsetting the negative impact to earnings during the three month period ended March 31, 2009, as a result of the factors noted above, was an increase of $638,000 in net interest income, as well as a $1.5 million increase in income from mortgage banking activities. Mortgage banking activity has increased substantially as the result of new government programs to stimulate the economy and the mortgage markets combined with a substantial decrease in mortgage interest rates. Occupancy costs, decreased by $211,000 to $2.2 million for the three month ended March 31, 2009 as compared to the same period a year earlier primarily due to decreased

depreciation expense and equipment repairs. Non-performing asset costs increased to $1.5 million for the three months ended March 31, 2009 as compared to $436,000 for the three months ended March 31, 2008 due to the increases in other real estate held, the costs to maintain the properties and write-downs on the property values.
The Company recorded a $2.7 million income tax benefit for the three months ended March 31, 2009, which was offset by an increase of the same amount in the deferred tax valuation allowance, resulting in no income tax benefit or expense recognized for the three months ended March 31, 2009.
In order to preserve capital and balance sheet strength during this difficult economic period, the Board of Directors voted on August 8, 2008, to temporarily suspend the quarterly common stock cash dividend. Temporary suspension of the $0.09 per share quarterly dividend will preserve approximately $740,000 of retained earnings quarterly. Management and the Board of Directors believes this action will provide added support in navigating through the current economic downturn, optimize shareholder value and result in better long term returns to its shareholders. The Bank's ability to pay dividends and other capital distributions to the Bancorp is generally limited by the Michigan Banking Commissioner and Federal Deposit Insurance Corporation. Additionally, the Michigan Banking Commissioner and Federal Deposit Insurance Corporation may prohibit the payment of dividends by the Bank to the Bancorp, which is otherwise permissible by regulation for safety and soundness reasons.
Net Interest Income. Net interest income, before provision for loan losses, for the three months ended March 31, 2009, totaled $13.0 million, an increase of 5.2%, as compared to $12.4 million for the same period in the prior year. During the three months ended March 31, 2009, the net interest spread increased to 2.72% compared to 2.53% for the same period in 2008. Several factors contributed to the increase. First, the Company has increased the spread it uses to price new and renewed loans in its portfolio. Secondly, rates on deposits have decreased as market rates have decreased and certificates of deposit have matured and/or been re-written into lower rate certificates of deposit. Also during the first quarter of 2009, the Bank called or had $169.2 million in FHLB borrowings mature at an average rate of 4.97% while it renewed only $47 million at rates less than 1%. At the same time it, increased borrowings at the FRB by $50.0 million at a rate of 0.25%. These factors combined to increase the net interest margin to 2.86% for the three months ended March 31, 2009 from 2.82% for the same period one year earlier.

The following table presents an analysis of net interest margin for the three months ended March 31, 2009 and 2008 (in thousands).

                                                      For the Three Months Ended March 31,
                                              2009                                             2008                                  Change in Net Interest Income
                                                             Average                                          Average
                             Average         Revenue/         Yield/          Average         Revenue/         Yield/
                             Balance           Cost            Rate           Balance           Cost            Rate           Volume           Yield/Rate          Net
Assets
Loans (1)                  $ 1,421,239       $  20,034           5.72 %     $ 1,531,515       $  24,755           6.56 %     $   (1,809 )      $     (2,912 )     $ (4,721 )
Certificates of
deposit                          1,996               7           1.42 %             319               4           5.08 %             21                 (18 )            3
Investment securities
(2)                            323,264           6,504           8.16 %         206,098           3,920           8.31 %          2,434                 151          2,585
FHLB Stock                      31,086             313           4.08 %          25,768             264           4.15 %             55                  (6 )           49
Federal funds sold              26,669               3           0.05 %          15,364             111           2.93 %             83                (191 )         (108 )
Interest earning
deposits                        38,796              22           0.23 %           1,180               5           1.59 %            150                (132 )           17

Total interest-earning
assets                       1,843,050       $  26,883           5.92 %       1,780,243       $  29,058           6.62 %     $      934        $     (3,108 )     $ (2,174 )

Noninterest-earning
assets                         119,496                                          144,896

Total assets               $ 1,962,546                                      $ 1,925,140


Liabilities
Deposits:
NOW                        $   218,461       $     320           0.59 %     $    80,537       $     101           0.51 %     $      176        $         43       $    219
Money market                    96,906             483           2.02 %         232,387           1,638           2.86 %           (969 )              (187 )       (1,155 )
Savings                        106,342             259           0.99 %         118,474             550           1.88 %            (57 )              (234 )         (291 )
Certificates of
deposit                        829,038           8,169           4.00 %         719,393           8,516           4.80 %          1,316              (1,662 )         (347 )

Total interest bearing
deposits                     1,250,747           9,231           2.99 %       1,150,791          10,804           3.81 %            952              (2,525 )       (1,573 )
Federal funds
purchased                            -               -              -             4,544              51           4.55 %            (52 )                 1            (51 )
FHLB advances                  446,044           4,538           4.13 %         500,198           5,844           4.74 %           (642 )              (664 )       (1,306 )
Federal reserve
borrowings                      64,689             117           0.73 %               -               -              -                -                 117            117

Total interest-bearing
liabilities                  1,761,480       $  13,886           3.20 %       1,655,533       $  16,699           4.09 %     $    1,083        $     (3,897 )     $ (2,813 )

Non-interest bearing
deposits                        74,685                                           88,544
Other
noninterest-bearing
liabilities                     19,488                                           10,281

Total liabilities            1,855,653                                        1,754,358
Equity                         106,893                                          170,782

Total liabilities and
equity                     $ 1,962,546                                      $ 1,925,140


Net interest-earning
assets                     $    81,570                                      $   124,710
Net interest income                          $  12,997                                        $  12,359                      $     (149 )      $        788       $    639

Interest rate spread
(3)                                                              2.72 %                                           2.53 %
Net interest margin as
a percentage of
interest-earning
assets (4)                                                       2.86 %                                           2.82 %
Ratio of
interest-earning
assets to
interest-bearing
liabilities                                                    104.63 %                                         107.53 %

(1) Balances are net of deferred loan origination fees, undisbursed proceeds of construction loans in process, and include nonperforming loans.

(2) Securities available for sale are not on a tax equivalent basis.

(3) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

Provision for Loan Losses. Based upon our detailed analysis of the allowance for loan losses performed at May 8, 2009, the Company recorded a provision for loan losses of $8.1 million for the three months ended March 31, 2009, compared to $1.1 million for the same period in the prior year. The provision for loan losses is thoroughly reviewed and is the result of management's analysis of the loan loss allowance, current and forecasted economic conditions in the regional markets where we conduct business, and historical charge off rates in the overall loan portfolio. In order to accurately depict the actual loss inherent in a loan relationship, a determination is made by reviewing a non-performing loan for collateral sufficiency. This entails utilizing any relevant appraisal values and discounting said values for market deterioration, time value of liquidation period, and liquidation costs. Standard discount factors are applied to maintain consistency and reflect current market and economic conditions. The resulting discounted values are reviewed, and adjusted if necessary, every six months. Those factors are 10% for liquidation expense (6% broker commission and 4% other) and a selling period of 2 years for builder direct (speculative) homes . . .