10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

OR

☐ 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 incorporation or organization)	(I.R.S. Employer 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 ☒  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	☒
(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 ☒

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 August 7, 2014
(Title of Class)	2,884,049 shares

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

INDEX

			PAGE
PART I – FINANCIAL INFORMATION
ITEM 1 - UNAUDITED FINANCIAL STATEMENT			3
	Consolidated Balance Sheet at June 30, 2014 and December 31, 2013		3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and June 30, 2013		4
	Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014		5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and June 30, 2013		6
	Notes to Unaudited Consolidated Financial Statements		7
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3 – QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK			29
ITEM 4 - CONTROLS AND PROCEDURES			29
Part II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS			30
ITEM 1A - RISK FACTORS			30
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			30
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES			30
ITEM 4 - MINE SAFTEY DISCLOSURES			30
ITEM 5 - OTHER INFORMATION			30
ITEM 6 - EXHIBITS			30
	Section 302 Certifications
	Section 906 Certifications
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	101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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.

2

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheet

	June 30, 2014			December 31, 2013
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks	$	3,235,034		$	2,760,010
Overnight deposits with FHLB		2,066			5,823
Total cash and cash equivalents		3,237,100			2,765,833
Securities AFS		61,466,330			50,358,175
Securities HTM		2,215,000			2,255,000
Loans held for sale		380,405			175,400
Loans receivable, net of allowance for loan losses of $1,486,809 and $1,471,622 as of June 30, 2014 and December 31, 2013, respectively		135,068,805			136,314,964
Foreclosed real estate and other repossessed assets		1,723,024			1,780,058
Federal Home Loan Bank stock, at cost		3,266,100			3,266,100
Premises and equipment		5,122,666			5,203,301
Accrued interest receivable		714,126			744,730
Intangible assets		—			39,732
Deferred tax asset		574,768			798,163
Originated mortgage servicing rights		773,413			860,024
Bank owned life insurance		4,667,787			4,610,070
Other assets		580,782			485,234
Total assets	$	219,790,306		$	209,656,784
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	168,999,329		$	160,029,115
Advances from borrowers for taxes and insurance		383,311			151,254
Federal Home Loan Bank Advances		25,157,152			24,813,409
Accrued expenses and other liabilities		1,091,910			1,138,324
Total liabilities		195,631,702			186,132,102
Stockholders’ equity:
Common stock ($0.01 par value 20,000,000 shares authorized 3,191,799 shares issued and outstanding) at June 30, 2014 and December 31, 2013		31,918			31,918
Additional paid-in capital		23,853,891			23,853,891
Retained earnings		2,963,515			2,763,242
Treasury stock at cost (307,750 shares) at June 30, 2014 and December 31, 2013		(2,963,918	)		(2,963,918	)
Accumulated other comprehensive income (loss)		273,198			(160,451	)
Total stockholders’ equity		24,158,604			23,524,682
Total liabilities and stockholders’ equity	$	219,790,306		$	209,656,784

See accompanying notes to consolidated financial statements.

3

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Operations and Comprehensive Income

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
	(Unaudited)						(Unaudited)
Interest income:
Interest and fees on loans	$	1,690,977		$	1,826,649		$	3,401,391		$	3,643,262
Interest and dividends on investments
Taxable		149,521			123,991			300,197			239,320
Tax-exempt		41,028			37,348			82,484			75,043
Interest on mortgage-backed securities		143,269			106,795			285,563			222,166
Total interest income		2,024,795			2,094,783			4,069,635			4,179,791
Interest expense:
Interest on deposits		191,720			208,638			378,248			430,540
Interest on borrowings		66,890			76,022			129,656			175,463
Total interest expense		258,610			284,660			507,904			606,003
Net interest income		1,766,185			1,810,123			3,561,731			3,573,788
Provision for loan losses		—			195,753			15,765			339,827
Net interest income after provision for loan losses		1,766,185			1,614,370			3,545,966			3,233,961
Non-interest income:
Service charges and other fees		188,126			222,279			369,218			414,719
Mortgage banking activities		128,244			161,691			224,082			332,123
Net gain (loss) on sale of premises and equipment, real estate owned and other repossessed assets		(21,251	)		(5,729	)		(26,064	)		750
Other		49,232			86,371			113,350			157,363
Total non-interest income		344,351			464,612			680,586			904,955
Non-interest expense:
Compensation and employee benefits		1,109,608			1,134,644			2,218,651			2,293,901
FDIC Insurance Premiums		45,330			48,978			90,874			94,677
Advertising		43,989			28,797			71,624			67,716
Occupancy		219,570			218,209			455,945			451,655
Amortization of intangible assets		10,086			29,646			39,732			59,292
Service bureau charges		83,790			77,089			146,176			154,583
Professional services		164,885			163,833			294,143			236,696
Collection activity		11,291			21,591			29,496			63,764
Real estate owned & other repossessed assets		11,732			88,153			28,681			121,419
Other		316,092			271,557			535,595			531,084
Total non-interest expense		2,016,373			2,082,497			3,910,917			4,074,787
Income (loss) before income tax benefit		94,163			(3,515	)		315,635			64,129
Income tax benefit		—			—			—			—
Net income (loss)	$	94,163		$	(3,515	)	$	315,635		$	64,129
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investment securities - net of tax		160,996			(457,978	)	$	433,649		$	(557,775	)
Comprehensive income (loss)	$	255,159		$	(461,493	)	$	749,284		$	(493,646	)
Per share data:
Net income (loss) per share
Basic	$	0.03		$	(0.00	)	$	0.11		$	0.02
Diluted	$	0.03		$	(0.00	)	$	0.11		$	0.02
Weighted average number of shares outstanding
Basic		2,884,049			2,884,049			2,884,049			2,884,049
Including dilutive stock options		2,884,049			2,884,049			2,884,049			2,884,049

See accompanying notes to consolidated financial statements.

4

First Federal of Northern Michigan Bancorp Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

											Accumulated
						Additional					Other
	Common		Treasury			Paid-in		Retained			Comprehensive
	Stock		Stock			Capital		Earnings			Income (Loss)			Total
Balance at December 31, 2013		31,918		(2,963,918	)		23,853,891		2,763,242			(160,451	)		23,524,682
Net income		—		—			—		315,635			—			315,635
Change in unrealized gain on available-for-sale securities (net of tax of $223,395)		—		—			—		—			433,649			433,649
Dividends declared		—		—			—		(115,362	)		—			(115,362	)
Balance at June 30, 2014		31,918		(2,963,918	)		23,853,891		2,963,515			273,198			24,158,604

See accompanying notes to the consolidated financial statements.

5

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

	For Six Months Ended
	June 30,
	2014			2013
	(Unaudited)
Cash Flows from Operating Activities:
Net income	$	315,635		$	64,129
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		184,337			200,654
Provision for loan loss		15,765			339,827
Amortization and accretion on securities		204,416			303,600
Gain on sale of loans held for sale		(89,149	)		(138,002	)
Originations of loans held for sale		(5,522,508	)		(7,931,234	)
Proceeds from sale of loans held for sale		5,406,652			7,724,458
(Gain) loss on sale of fixed assets		20,564			(8,084	)
Loss on sale of real estate owned and other repossessed assets		5,500			7,334
Net change in:
Accrued interest receivable		30,604			71,287
Other assets		(8,937	)		70,530
Prepaid FDIC insurance premiums		—			582,945
Bank owned life insurance		(57,717	)		(66,652	)
Accrued expenses and other liabilities		(46,414	)		25,283
Net cash provided by operating activities		458,748			1,246,075
Cash Flows from Investing Activities:
Net decrease (increase) in loans (loans originated, net of principal payments)		965,394			(961,058	)
Proceeds from maturity and sale of available-for-sale securities		5,570,151			10,715,273
Proceeds from sale of property and equipment		1,725			55,164
Proceeds from sale of real estate owned and other repossed assets		316,534			555,330
Purchase of securities		(16,185,678	)		(9,453,079	)
Purchase of premises and equipment		(86,259	)		(6,585	)
Net cash provided by (used for) investing activities		(9,418,133	)		905,045
Cash Flows from Financing Activities:
Dividend paid on common stock		(115,362	)		—
Net increase in deposits		8,970,214			2,997,019
Net increase (decrease) in Repo Sweep accounts		—			390,318
Net increase in advances from borrowers		232,057			280,359
Advances from Federal Home Loan Bank		12,055,000			27,625,000
Repayments of Federal Home Loan Bank advances		(11,711,257	)		(29,870,898	)
Net cash provided by financing activities		9,430,652			1,421,798
Net increase in cash and cash equivalents		471,267			3,572,918
Cash and cash equivalents at beginning of period		2,765,833			2,751,810
Cash and cash equivalents at end of period	$	3,237,100		$	6,324,728
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest	$	508,572		$	622,719
Transfers of loans to foreclosed real estate and repossessed assets	$	265,000		$	273,000

See accompanying notes to the consolidated financial statements.

6

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, 2013.

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 and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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 was 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). The collection of this stream of income expired in April of 2014. 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:

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
	(in thousands)
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	12,835	$	41	$	(71	)	$	12,805
Municipal obligations		15,144		270		(130	)		15,284
Corporate bonds & other obligations		1,060		17		—			1,077
Mortgage-backed securities		32,011		398		(118	)		32,291
Equity securities		2		7		—			9
Total	$	61,052	$	733	$	(319	)	$	61,466
Securities Held to Maturity
Municipal obligations	$	2,215	$	117	$	—		$	2,332

7

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Market Value
	(in thousands)
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	7,111	$	36	$	(105	)		7,042
Municipal obligations		13,694		216		(301	)		13,609
Corporate bonds & other obligations		1,085		12		—			1,097
Mortgage-backed securities		28,708		279		(384	)		28,603
Equity securities		3		4		—			7
Total	$	50,601	$	547	$	(790	)	$	50,358
Securities Held to Maturity
Municipal obligations	$	2,255	$	145	$	—		$	2,400

The amortized cost and estimated market value of securities at June 30, 2014, 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.

	June 30, 2014
	Amortized Cost		Market Value
	(in thousands)
Available For Sale:
Due in one year or less	$	3,332	$	3,354
Due after one year through five years		18,095		18,130
Due in five year through ten years		6,409		6,396
Due after ten years		1,203		1,286
Subtotal		29,039		29,166
Equity securities		2		9
Mortgage-backed securities		32,011		32,291
Total	$	61,052	$	61,466
Held To Maturity:
Due in one year or less	$	95	$	97
Due after one year through five years		500		519
Due in five year through ten years		715		765
Due after ten years		905		951
Total	$	2,215	$	2,332

At June 30, 2014 and December 31, 2013, securities with a carrying value and fair value of $39,000,000 and $36,000,000, respectively, were pledged to secure certain deposit accounts, FHLB advances and our line of credit at the Federal Reserve.

For the six months ended June 30, 2014 and 2013 there were no sales of securities from the investment portfolio.

The following is a summary of securities that had unrealized losses at June 30, 2014 and December 31, 2013. The information is presented for securities that have been in an unrealized loss position for less than 12 months and for more than 12 months. At June 30, 2014 there were 30 securities with unrealized losses totaling $319,000 and at December 31, 2013, the Company held 39 securities with unrealized losses totaling $790,000.

8

	June 30, 2014
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		< 12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	3,233	$	(17	)	$	945	$	(54	)
Corporate bonds & other obligations		—		—			—		—
Municipal obligations		1,711		(2	)		6,321		(128	)
Mortgage-backed securities		2,309		(11	)		5,186		(107	)
Equity securities		—		—			—		—
Total	$	7,253	$	(30	)	$	12,452	$	(289	)
Held to Maturity:
Municipal obligations	$	—	$	—		$	—	$	—

	December 31, 2013
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		< 12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	—		$	894	$	(105	)
Municipal obligations		7,902		(243	)		1,668		(58	)
Mortgage-backed securities		14,471		(334	)		2,052		(50	)
Equity securities		—		—			—		—
Total	$	22,373	$	(577	)	$	4,614	$	(213	)
Held to Maturity:
Municipal obligations	$	—	$	—		$	—	$	—

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

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

9

	At June 30,			At December 31,
	2014			2013
	(in thousands)
Real estate loans:
Residential mortgage	$	64,498		$	63,839
Commercial loans:
Construction - real estate		173			173
Secured by real estate		50,197			51,726
Other		12,477			12,451
Total commercial loans		62,847			64,350
Consumer loans:
Secured by real estate		8,282			8,730
Other		1,193			1,165
Total consumer loans		9,475			9,895
Total gross loans	$	136,820		$	138,084
Less:
Net deferred loan fees		(264	)		(297	)
Allowance for loan losses		(1,487	)		(1,472	)
Total loans, net	$	135,069		$	136,315

The following table illustrates the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2014 and December 31, 2013:

As of June 30, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
	(dollars in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		11		—		1,441		1,452		48,745		50,197		—
Commercial - non real estate		35		—		—		35		12,442		12,477		—
Consumer:
Consumer - Real Estate		50		11		12		73		8,209		8,282		—
Consumer - Other		—		—		—		—		1,193		1,193		—
Residential:
Residential		1,174		346		383		1,903		62,595		64,498		22
Total	$	1,270	$	357	$	2,009	$	3,636	$	133,184	$	136,820	$	22

As of December 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(dollars in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		—		521		1,441		1,962		49,764		51,726		—
Commercial - non real estate		33		20		—		53		12,398		12,451		—
Consumer:
Consumer - Real Estate		54		55		—		109		8,621		8,730		—
Consumer - Other		—		4		2		6		1,159		1,165		2
Residential:
Residential		1,973		393		353		2,719		61,120		63,839		24
Total	$	2,060	$	993	$	1,969	$	5,022	$	133,062	$	138,084	$	26

10

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. In any tables presented subsequently, Risk Grade 4.5 credits are included with Risk Grade 4 credits.

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.

11

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 June 30, 2014 and December 31, 2013:

As of June 30, 2014
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	—	$	—	$	25
3		—		15,389		5,750
4		—		22,511		5,867
4.5		—		4,915		660
5		—		4,508		16
6		173		2,874		159
7		—		—		—
8		—		—		—
Total	$	173	$	50,197	$	12,477

As of December 31, 2013
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	—	$	—	$	—
3		—		16,187		5,602
4		—		24,327		6,528
4.5		—		3,462		171
5		—		4,835		45
6		173		2,915		105
7		—		—		—
8		—		—		—
Total	$	173	$	51,726	$	12,451

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 June 30, 2014 and December 31, 2013:

As of June 30, 2014
	(dollars in thousands)
	Residential
Loan Grade:
Pass	$	63,940
Special Mention		—
Substandard		558
Total	$	64,498

	Consumer - Real Estate		Consumer - Other
	(dollars in thousands)
Performing	$	8,266	$	1,193
Nonperforming		16		—
Total	$	8,282	$	1,193

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As of December 31, 2013
	(dollars in thousands)
	Residential
Loan Grade:
Pass	$	63,164
Special Mention		—
Substandard		675
Total	$	63,839

	Consumer -  Real Estate		Consumer - Other
Performing	$	8,723	$	1,163
Nonperforming		7		2
Total	$	8,730	$	1,165

The following table presents the recorded investment in non-accrual loans by class as of June 30, 2014 and December 31, 2013:

	As of
	June 30, 2014		December 31, 2013
	(in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	173	$	173
Commercial Real Estate - other		1,452		1,454
Commercial		—		—
Consumer:
Consumer - real estate		16		7
Consumer - other		—		—
Residential:
Residential		536		651
Total	$	2,177	$	2,285

The key features of the Company’s loan modifications are determined on a loan-by-loan basis. Generally, our restructurings have related to interest rate reductions and loan term extensions. In the past the Company has granted reductions in interest rates, payment extensions and short-term payment forbearances as a means to maximize collectability of troubled credits. The Company has not forgiven principal to date, although this would be considered if necessary to ensure the long-term collectability of the loan. The Company’s loan modifications are typically short-term in nature, although the Company would consider a long-term modification to ensure the long-term collectability of the credit. In general, a borrower must make at least six consecutive timely payments before the Company would consider a return of a restructured loan to accruing status in accordance with Federal Deposit Insurance Corporation guidelines regarding restoration of credits to accrual status.

The Bank has classified approximately $2,080,000 of its impaired loans as troubled debt restructurings as of June 30, 2014. There were no commitments to extend credit to borrowers with loans classified as troubled debt restructurings as of June 30, 2014 and December 31, 2013.

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.

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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 delinquency, 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-offs may be realized as further unsecured positions are recognized.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013:

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of June 30, 2014							2014				2014
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)										(dollars in thousands)
With no specific allowance recorded:
Commercial	$	—	$	-—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—		—		—
Commercial Real Estate - Other		1,451		1,450		—		1,460		21		1,527		42
Consumer - Real Estate		17		16		—		16		—		16		—
Consumer - Other		—		—		—		—		—		—		—
Residential		659		543		—		553		3		554		4
With a specific allowance recorded:
Commercial		—		—		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—		173		—
Commercial Real Estate - Other		2,423		1,834		136		1,837		4		1,838		9
Consumer - Real Estate		—		—		—		—		—		—		—
Consumer - Other		—		—		—		—		—		—		—
Residential		90		90		25		90		1		90		1
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	3,874	$	3,284	$	136	$	3,297	$	25	$	3,365	$	51
Consumer - Real Estate	$	17	$	16	$	—	$	16	$	—	$	16	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential	$	749	$	633	$	25	$	643	$	4	$	644	$	5

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of December 31, 2013							2013				2013
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)										(dollars in thousands)
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		173		—		173		—
Commercial Real Estate - Other		1,789		1,788		—		3,172		33		3,195		60
Consumer - Real Estate		8		7		—		9		—		10		—
Consumer - Other		—		—		—		—		—		—		—
Residential		954		722		—		1,793		1		1,797		2
With a specific allowance recorded:
Commercial		—		—		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		—		—		—		—
Commercial Real Estate - Other		3,980		3,391		182		3,602		20		3,607		39
Consumer - Real Estate		—		—		—		—		—		—		—
Consumer - Other		—		—		—		—		—		—		—
Residential		53		30		5		—		—		—		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	6,774	$	53	$	6,802	$	99
Consumer - Real Estate	$	8	$	7	$	—	$	9	$	—	$	10	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	1,793	$	1	$	1,797	$	2

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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 three and six months ended June 30, 2014 and June 30, 2013, respectively:

Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Three Months Ended June 30, 2014
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	48	$	392	$	61	$	49		$	16		$	792		$	100	$	1,458
Charge-offs		—		—		—		—			(1	)		(10	)		—		(11	)
Recoveries		—		12		—		14			—			14			—		40
Provision		—		22		11		(25	)		1			(13	)		4		—
Ending Balance	$	48	$	426	$	72	$	38		$	16		$	783		$	104	$	1,487

For the Six Months Ended June 30, 2014
	Commercial		Commercial					Consumer
	Construction		Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	48	$	444		$	63	$	62		$	21		$	784		$	50	$	1,472
Charge-offs		—		(16	)		—		(13	)		(6	)		(45	)		—		(80	)
Recoveries		—		32			—		23			—			24			—		79
Provision		—		(34	)		9		(34	)		1			20			54		16
Ending Balance	$	48	$	426		$	72	$	38		$	16		$	783		$	104	$	1,487

Loan Balances Individually Evaluated for Impairment
As of June 30, 2014
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses as of June 30, 2014
Ending balance: individually evaluated for impairment	$	48	$	136	$	—	$	—	$	—	$	25	$	—	$	209
Ending balance: loans collectively evaluated for impairment	$	—	$	290	$	72	$	38	$	16	$	758	$	104	$	1,278
Loans as of June 30, 2014
Loans:
Ending Balance	$	173	$	50,197	$	12,477	$	8,282	$	1,193	$	64,498	$	—	$	136,820
Ending balance: individually evaluated for impairment	$	173	$	3,284	$	—	$	16	$	—	$	633	$	—	$	4,106
Ending balance: loans collectively evaluated for impairment	$	—	$	46,913	$	12,477	$	8,266	$	1,193	$	63,865	$	—	$	132,714

15

For the Three Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate		Commercial			Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	89		$	509	$	87		$	87		$	26		$	877		$	—	$	1,675
Charge-offs		—			—		—			—			(6	)		(205	)		—		(211	)
Recoveries		—			1		—			18			—			12			—		31
Provision		(89	)		163		(8	)		(30	)		5			155			—		196
Ending Balance	$	—		$	673	$	79		$	75		$	25		$	839		$	—	$	1,691

For the Six Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69	$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(85	)		—		(7	)		(12	)		(367	)		—		(471	)
Recoveries		—			11			—		33			5			24			—		73
Provision		(64	)		168			10		(50	)		(1	)		276			—		339
Ending Balance	$	—		$	673		$	79	$	75		$	25		$	839		$	—	$	1,691

Loan Balances Individually Evaluated for Impairment
As of June 30, 2013
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses as of June 30, 2013
Ending balance: individually evaluated for impairment	$	—	$	322	$	—	$	—	$	—	$	—	$	—	$	322
Ending balance: loans collectively evaluated for impairment	$	—	$	351	$	79	$	75	$	25	$	839	$	—	$	1,369
Loans as of June 30, 2013
Loans:
Ending Balance	$	173	$	53,284	$	12,052	$	9,371	$	1,152	$	65,225	$	—	$	141,257
Ending balance: individually evaluated for impairment	$	173	$	6,745	$	8	$	—	$	—	$	1,676	$	—	$	8,602
Ending balance: loans collectively evaluated for impairment	$	—	$	46,539	$	12,044	$	9,371	$	1,152	$	63,549	$	—	$	132,655

Note 5—DIVIDENDS

We are dependent primarily upon the Bank for our earnings and funds to pay dividends on our common stock. The payment of dividends also is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Bank’s earnings, capital requirements, financial condition and other factors considered by our Board of Directors.

Note 6—STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted FASB ASC 718-10 “Shareholder Based Payments”, which requires that the grant-date fair value of awarded stock options be expensed over the requisite service period. The Company’s 1996 Stock Option Plan (the “1996 Plan”), which was approved by shareholders, permits the grant of share options to its employees for up to 127,491 shares of common stock (adjusted for the exchange ratio applied in the Company’s 2005 stock offering and related second-step conversion). The Company’s 2006 Stock-Based Incentive Plan (the “2006 Plan”), which was approved by the shareholders on May 17, 2006, permits the award of up to 242,740 shares of common stock of which the maximum number to be granted as Stock Options is 173,386 and the maximum that can be granted as Restricted Stock Awards is 69,354. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on five years of continual service and have ten year contractual terms. Certain options provide for accelerated vesting if there is a change in control (as defined in the Plans).

During the three and six months ended June 30, 2014 no shares were awarded under either the 1996 Plan or the 2006 Plan. Shares issued under the plans and exercised pursuant to the exercise of the stock options awarded under the plans may be either authorized but unissued shares or reacquired shares held by the Company as treasury stock.

16

Stock Options - A summary of option activity under the Plans during the six months ended June 30, 2014 is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2014		150,030		$	9.52		2.4	$	—
Granted		—			N/A
Exercised		—			N/A
Forfeited or expired		(12,500	)	$	9.26
Outstanding at June 30, 2014		137,530		$	9.54		2.0	$	—
Options Exercisable at June 30, 2014		137,530		$	9.54		2.0	$	—

The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value (i.e. the difference between the Company’s closing stock price of $6.12 on June 30, 2014 and the exercise price times the number of shares) that would have been received by the option holder had all option holders exercised their options on June 30, 2014. This amount changes based on the fair market value of the stock.

As of June 30, 2014 the Company had no unrecognized compensation cost related to nonvested options under the Plan. There were no shares which vested during the quarter ended June 30, 2014. In addition, there were no non-vested options as of June 30, 2014.

Restricted Stock Awards – As of June 30, 2014 all restricted stock awards have vested; therefore the Company had no unrecognized compensation costs under the 2006 Plan. There were 5,304 shares available for future stock award grants as of June 30, 2014.

Note 7—COMMITMENTS TO EXTEND CREDIT

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, stand-by letters of credit, and commercial lines of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The Company’s exposure to credit loss is represented by the contracted amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At June 30, 2014, the Company had outstanding commitments to originate loans of $24.6 million. These commitments included the following:

	As of
	June 30, 2014
Commitments to grant loans	$	11,380
Unfunded commitments under lines of credit		13,125
Commercial and standby letters of credit		59

Note 8—FAIR VALUE MEASUREMENTS

The fair value of financial assets and liabilities recorded at fair value is categorized in three levels. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. These levels are as follows:

17

Level 1 — Valuations based on quoted prices in active markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

Level 3 — Assets and liabilities with valuations that include methodologies and assumptions that may not be readily observable, including option pricing models, discounted cash flow models, yield curves and similar techniques. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities, but in all cases are corroborated by external data, which may include third-party pricing services.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and the valuation techniques used by the Company to determine those fair values.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs  (Level 3)		Balance at June 30, 2012
Assets
Investment securities- available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	12,805	$	—	$	12,805
Municipal obligations		—		15,284		—		15,284
Corporate bonds & other obligations				1,077				1,077
Mortgage-backed securities		—		32,291		—		32,291
Equity securities		—		9		—		9
Total investment securities - available-for-sale	$	—	$	61,466	$	—	$	61,466

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value as of December 31, 2013
	(dollars in thousands)
Assets
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal obligations		—		13,609		—		13,609
Corporate bonds & other obligations		—		1,097		—		1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		—		7		—		7
Total investment securities - available-for-sale	$	—	$	50,358	$	—	$	50,358

Fair value measurements of U.S. Government agencies and mortgage backed securities use pricing models that vary and may consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.

There were no transfers between Levels 1 and 2 of the fair value hierarchy from December 31, 2013 to June 30, 2014. For the available for sale securities, the Company obtains fair value measurements from an independent third-party service.

18

The Company has assets that, under certain conditions, are subject to measurement at fair value on a nonrecurring basis. At June 30, 2014 and December 31, 2013, such assets consist primarily of impaired loans and other real estate owned. The Company has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2014
	Balance at June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Impaired loans accounted for under FASB ASC 310-10	$	3,457	$	—	$	—	$	3,457
Other real estate owned -residential mortgages	$	365	$	—	$	—	$	365
Other Real estate owned - commercial	$	442	$	—	$	—	$	442
Other repossessed assets	$	916	$	—	$	—	$	916
Total assets at fair value on a non-recurring basis							$	5,180

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Impaired loans accounted for under FASB ASC 310-10	$	5,352	$	—	$	—	$	5,352
Other real estate owned -residential mortgages		285		—		—		285
Other real estate owned - commercial		472		—		—		472
Other repossessed assets		1,023		—		—		1,023
Total assets at fair value on a non-recurring basis							$	7,132

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents - The carrying amounts of cash and short-term instruments approximate fair values.

Investment Securities - Fair value for the Bank’s investment securities was determined using the market value in active markets, where available. When not available, fair values are estimated using the fair value hierarchy. In the fair value hierarchy, Level 2 fair values are determined using observable inputs other than Level 1 market prices, such as quoted prices for similar assets. Level 3 values are determined using unobservable inputs, such as discounted cash flow projections.

Loans Receivable - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one- to four-family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial, and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

19

Loans Held For Sale - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Federal Home Loan Bank Stock - The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank Advances - The estimated fair value of the fixed and variable rate Federal Home Loan Bank advances are estimated by discounting the related cash flows using the rates currently available for similarly structured borrowings with similar maturities.

Accrued Interest - The carrying amounts of accrued interest approximate fair value.

The estimated fair values and related carrying or notional amounts of the Company’s financial instruments are as follows:

June 30, 2014	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	3,237	$	3,237	$	—	$	—	$	3,237
Securities available for sale		61,466		—		61,466		—		61,466
Securities held to maturity		2,215		—		2,332		—		2,332
Loans held for sale		380		—		—		380		380
Loans receivable - net		135,069		—		—		134,336		134,336
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		714		—		—		714		714
Financial liabilities:
Customer deposits		168,999		—		169,436		—		169,436
Federal Home Loan Bank advances		25,157		—		24,958		—		24,958
Accrued interest payable		88		—		—		88		88

December 31, 2013	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	2,766	$	2,766	$	—	$	—	$	2,766
Securities available for sale		50,358		—		50,358		—		50,358
Securities held to maturity		2,255		—		2,400		—		2,400
Loans held for sale		175		—		—		178		178
Loans receivable - net		136,315		—		—		135,172		135,172
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		745		—		—		745		745
Financial liabilities:
Customer deposits		160,029		—		160,784		—		160,784
Federal Home Loan Bank advances		24,813		—		24,458		—		24,458
Accrued interest payable		89		—		—		89		89

Note 9—SUBSEQUENT EVENTS

On January 23, 2014, the Company announced that it had entered into a merger agreement with Alpena Banking Corporation, the parent company of Bank of Alpena. The Company has received all required conditional regulatory approvals to consummate the merger, and, subject to customary closing conditions, it is expected that merger will be consummated in August 2014.

20

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

AND SUBSIDIARIES

PART Ι - FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF

 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion compares the consolidated financial condition of the Company at June 30, 2014 and December 31, 2013, and the results of operations for the three- and six-month periods ended June 30, 2014 and 2013. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

The Company operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its eight 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.

For the quarter ended June 30, 2014, the Company reported net income of $94,000, or $0.03 per basic and diluted share, compared to a net loss of $4,000, or less than $0.01 per basic and diluted share, for the quarter ended June 30 2013, an increase of $98,000. Net income was $316,000, or $0.11 per basic and diluted share, for the six months ended June 30, 2014 as compared to $64,000, or $0.02 per share, for the same period ended June 30, 2013.

Total assets increased $10.1 million, or 4.8%, to $219.8 million as of June 30, 2014 from $209.7 million as of December 31, 2013. Cash and cash equivalents increased by $471,000 and investment securities available for sale increased by $11.1 million while net loans receivable decreased $1.2 million during this time period. Total deposits increased $9.0 million from December 31, 2013 to June 30, 2014 and Federal Home Loan Bank advances increased $344,000.

CRITICAL ACCOUNTING POLICIES

As of June 30, 2014, 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, 2013. The Company’s critical accounting policies are described in the Management’s Discussion and Analysis and financial sections of its 2013 Annual Report. Management believes its critical accounting policies relate to the Company’s allowance for loan losses, real estate owned, mortgage servicing rights, valuation of deferred tax assets and impairment of intangible assets.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2014 AND DECEMBER 31, 2013

ASSETS: Total assets increased $10.1 million, or 4.8%, to $219.8 million at June 30, 2014 from $209.7 million at December 31, 2013. Investment securities available for sale increased $11.1 million, or 22.1%, as a result of purchases year to date totaling $16.2 million. Net loans receivable decreased $1.2 million, or 0.9%, to $135.1 million at June 30, 2014 from $136.3 million at December 31, 2013. The decrease in net loans was attributable primarily to prepayments and normal monthly amortization for the six-month period ended June 30, 2014.

LIABILITIES: Deposits increased $9.0 million to $169.0 million at June 30, 2014 from $160.0 million at December 31, 2013. We experienced increases of $4.1 million in statement savings accounts, $3.4 million in non-interest bearing accounts, $594,000 in money market accounts and $1.0 million in NOW demand deposit accounts during the six-month period. Partially offsetting these increases was a decrease of $225,000 in our traditional certificates of deposit and $1.3 million in our liquid certificates of deposit (from which customers can take a penalty–free withdrawal with seven days advance written notice). Total FHLB advances increased $344,000 to $25.2 million at June 30, 2014 from $24.8 million at December 31, 2013.

21

EQUITY: Stockholders’ equity increased $634,000 to $24.2 million at June 30, 2014 from $23.5 million at December 31, 2013. The increase was due primarily to an increase of $434,000, net of tax in the unrealized gain on available-for-sale securities in addition to net income for the six-month period of $316,000.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

General: Net income increased $98,000 to $94,000 for the three months ended June 30, 2014 from a loss of $4,000 for the same period ended June 30, 2013.

Interest Income: Interest income decreased to $2.0 million for the three months ended June 30, 2014 from $2.1 million for the year earlier period, due mainly to a decrease of 26 basis points in the average yield on interest-earning assets period over period. The yield on our mortgage loans declined to 4.68% for the three months ended June 30, 2014 from 5.26% for same period in 2013. In addition, the yield on non-mortgage loans decreased to 5.19% for the three months ended June 30, 2014 compared to 5.23% for the three-month period ended June 30, 2013. These declines are a result of continued low interest rates on loan products period over period.

Interest Expense: Interest expense decreased to $259,000 for the three months ended June 30, 2014 from $285,000 for the three months ended June 30, 2013. The decrease in interest expense was due primarily to a decrease in our cost of funds related to certificates of deposit and FHLB advances. The average cost of our certificates of deposit decreased to 0.98% for the three months ended June 30, 2014 from 1.02% for the three months ended June 30, 2013 as higher costing deposits matured and either left the Bank as we were not a market leader in rates or were re-priced at a lower rate. In addition, the cost of our FHLB advances decreased 14 basis points to 1.09% for the three months ended June 30, 2014 from 1.23% for the three months ended June 30, 2013 due to decreases in market interest rates.

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

	Quarter ended June 30, 2014
	Compared to
	Quarter ended June 30, 2013
	Increase (Decrease) Due to:
	Volume			Rate			Total
	(in thousands)
Interest-earning assets:
Loans receivable	$	(36	)	$	(100	)	$	(136	)
Investment securities		37			33		$	70
Other investments		5			(9	)	$	(4	)
Total interest-earning assets		6			(76	)		(70	)
Interest-bearing liabilities:
Savings Deposits		—			—			—
Money Market/NOW accounts		4			—			4
Certificates of Deposit		(13	)		(8	)		(21	)
Deposits		(9	)		(8	)		(17	)
Borrowed funds		—			(9	)		(9	)
Total interest-bearing liabilities		(9	)		(17	)		(26	)
Change in net interest income	$	15		$	(59	)	$	(44	)

Net Interest Income: Net interest income remained relatively unchanged at $1.8 million for the three-months ended June 30, 2014 and June 30, 2013. The yield on average interest-earning assets decreased to 4.02% for the quarter ended June 30, 2014 from 4.28% for the prior year quarter and the cost of average interest-bearing liabilities decreased to 0.62% from 0.69% for the three-month periods ended June 30, 2014 and 2013, respectively. The net interest margin decreased to 3.50% for the three months ended June 30, 2014 from 3.70% for same period in 2013.

22

Provision for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability 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 provision for loan losses for the three months ended June 30, 2014 was $0 compared to $196,000 for the prior year period. During the quarter ended June 30, 2014, we had net recoveries of $29,000 compared to $180,000 of net charge-offs during the quarter ended June 30, 2013 in large part due to the decrease in the number of loans in foreclosure. The direct effect of the decrease in net charge-offs quarter over quarter and reduced general reserve factors resulted in no provision expense for the period ended June 30, 2014. The provision was based on management’s review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors.

Non Interest Income: Non interest income decreased $120,000 to $344,000 for the three months ended June 30, 2014 from $465,000 for the three months ended June 30, 2013. In 2014 we experienced decreases of $34,000 in service charge income, $33,000 in mortgage banking activities and $37,000 in other income related to reduce insurance and brokerage commission.

Non Interest Expense: Non interest expense decreased $66,000 to $2.0 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Most notably, real estate owned expenses decreased $76,000 during the three months ended June 30, 2014. In addition, salaries and benefits decreased $25,000 as we reduced staffing and self insured a portion of our health insurance premiums and amortization of intangible assets decreased $20,000 as our current intangibles fully amortized in the beginning of the quarter. Partially offsetting these decreases was an increase to other expenses of $44,535 as we incurred increased commercial loan expenses related primarily to a large troubled credit during the three months ended June 30, 2014.

Income Taxes: The Company did not record federal income tax expense for the three months ended June 30, 2014 and 2013 due to the net operating loss carry forward that offsets any current tax liability.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

General: Net income increased $252,000 to $316,000 for the six months ended June 30, 2014 from $64,000 for the same period ended June 30, 2013.

Interest Income: Interest income decreased $110,000 to $4.1 million for the six-month period ended June 30, 2014 from $4.2 million for the same period in 2013. This decrease was primarily attributable to an 18 basis point decrease in the yield on interest-earning assets to 4.10% for the six-month period ended June 30, 2014 from 4.28% for the same period in 2013, due mainly to lower market interest rates period over period. The decrease in rates was partially offset by a $5.7 million increase in average balances of our available-for-sale investment portfolio during the six months ended June 30, 2014.

Interest Expense: Interest expense for the six months ended June 30, 2014 decreased to $508,000 from $606,000 for the six months ended June 30, 2013. The decrease in interest expense for the 2014 period was due primarily to a decrease in the cost of our certificates of deposit and FHLB advances. The cost of our certificates of deposit decreased 9 basis points to 0.97% for the six months ended June 30, 2014 from 1.06% for the six months ended June 30, 2013, as higher costing deposits matured and either left the Bank or were re-priced at lower rates. In addition, the cost of our FHLB advances decreased 28 basis points to 1.08% for the six months ended June 30, 2014 from 1.36% for the six months ended June 30, 2013 due primarily to lower market interest rates period over period.

23

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

	Six Months ended June 30, 2014
	Compared to
	Six Months ended June 30, 2013
	Increase (Decrease) Due to:
	Volume			Rate			Total
	(in thousands)
Interest-earning assets:
Loans receivable	$	(87	)	$	(155	)	$	(242	)
Investment securities		63			57			120
Other investments		9			3			12
Total interest-earning assets		(15	)		(95	)		(110	)
Interest-bearing liabilities:
Savings Deposits		1			—			1
Money Market/NOW accounts		7			(1	)		6
Certificates of Deposit		59			(118	)		(59	)
Deposits		67			(119	)		(52	)
Borrowed funds		(2,101	)		2,055			(46	)
Total interest-bearing liabilities		(2,034	)		1,936			(98	)
Change in net interest income	$	2,019		$	(2,031	)	$	(12	)

Net Interest Income: Net interest income remained unchanged at $3.6 million for the six-month period ended June 30, 2014 compared to the same period in 2013. For the six months ended June 30, 2014, average interest-earning assets increased $3.2 million, or 1.6%, when compared to the same period in 2013. Average interest-bearing liabilities decreased $1.1 million, or 0.7%, to $166.5 million for the six months ended June 30, 2014 from $167.6 million for the six months ended June 30, 2013. The yield on average interest-earning assets decreased to 4.10% for the six month period ended June 30, 2014 from 4.28% for the same period in 2013 while the cost of average interest-bearing liabilities decreased to 0.62% from 0.73% for the six-month periods ended June 30, 2014 and 2013, respectively. The net interest margin decreased to 3.59% for the six-month period ended June 30, 2014 from 3.66% for same period in 2013.

Delinquent Loans and Nonperforming Assets. Nonperforming assets decreased $169,000 to $3.9 million at June 30, 2014 from $4.1 million at December 31, 2013 due in large part to a net reduction of $108,000 in loans placed in non-accrual status during the six-month period ended June 30, 2014.

The ratio of nonperforming loans to total loans was 1.61% and 1.67% at June 30, 2014 and December 31, 2013, respectively. As a percentage of total assets, nonperforming assets decreased to 1.78% at June 30, 2014 from 1.95% at December 31, 2013. The Company experienced a decline in the classified asset ratio to 22.51% as of June 30, 2014 from 23.53% as of December 31, 2013; the decline is attributed to securing a guarantee from the Small Business Administration (SBA) for a classified credit, which resulted in an improved collateral position for the Company and a decrease in the classified balance of the credit.

24

	June 30,			December 31,
	2014			2013
	(in thousands)
Total non-accrual loans	$	2,177		$	2,285
Accrual loans delinquent 90 days or more:
One- to four-family residential		22			24
Other real estate loans		—			—
Construction		—			—
Purchased Out-of-State		—			—
Commerical		—			—
Consumer & other		—			2
Total accrual loans delinquent 90 days or more	$	22		$	26
Total nonperforming loans (1)		2,199			2,311
Total real estate owned-residential mortgages (2)		365			285
Total real estate owned-Commercial (2)		442			472
Total real estate owned-Consumer & other repossessed assets (2)		916			1,023
Total nonperforming assets	$	3,922		$	4,091
Total nonperforming loans to loans receivable		1.61	%		1.67	%
Total nonperforming assets to total assets		1.78	%		1.95	%

(1)	All of the Bank’s loans delinquent more than 90 days are classified as nonperforming.
(2)	Represents the net book value of property acquired by the Bank through foreclosure or deed in lieu of foreclosure. Upon acquisition, this property is recorded at the lower of its fair market value or the principal balance of the related loan.

Provision for Loan Losses: For the six-month period ended June 30, 2014, the provision for loan losses was $16,000 as compared to $340,000 for the same period ended June 30, 2013. Our provision for loan losses is based on a twelve-quarter rolling average of actual net charge-offs adjusted for various environmental factors for each pool of loans in our portfolio. During the six-month period ended June 30, 2014, net charge offs declined $397,000, primarily related to mortgage loan charge offs. As a result of the decline in net-charge offs period over period the general reserve factors applied to each loan pool in our portfolio decreased. The provision was based on management’s review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors.

25

The following table sets forth the details of our loan portfolio at the dates indicated:

				Delinquent
	Portfolio			Loans		Non-Accrual
	Balance			Over 90 Days		Loans
	(in thousands)
At June 30, 2014
Real estate loans:
Construction	$	1,445		$	—	$	173
One - to four - family		63,226			22		536
Commercial Mortgages		50,197			—		1,452
Home equity lines of credit/ Junior liens		8,282			—		16
Commercial loans		12,477			—		—
Consumer loans		1,193			—		—
Total gross loans	$	136,820		$	22	$	2,177
Less:
Net deferred loan fees		(264	)		—		(6	)
Allowance for loan losses		(1,487	)		—		(200	)
Total loans, net	$	135,069		$	22	$	1,971
At December 31, 2013
Real estate loans:
Construction	$	1,756		$	—	$	173
One - to four - family		62,256			24		651
Commercial Mortgages		51,726			—		1,454
Home equity lines of credit/Junior liens		8,730			—		7
Commercial loans		12,451			—		—
Consumer loans		1,165			2		—
Total gross loans	$	138,084		$	26	$	2,285
Less:
Net deferred loan fees		(297	)		—		(1	)
Allowance for loan losses		(1,472	)		—		(200	)
Total loans, net	$	136,315		$	26	$	2,084

Non Interest Income: Non interest income decreased to $681,000 for the six months ended June 30, 2014 from $905,000 for the six months ended June 30, 2013, mainly due to a decrease in mortgage banking activities income of $108,000 period over period. In addition, we experienced decreases of $46,000 in service charge income and $44,000 in other income related to insurance and brokerage activities.

Non Interest Expense. Non interest expense decreased to $3.9 million for the six months ended June 30, 2014 from $4.1 million for the six months ended June 30, 2013. The decrease was primarily due to decreases of $93,000 in real estate owned expenses, $75,000 in salaries and benefits, as we reduced staffing and self insured a portion of our health insurance premiums, and $20,000 in amortization of intangible assets due to current intangibles fully amortizing in the beginning of the quarter. These decreases were partially offset by an increase of $57,000 in professional services related to merger costs incurred during the six months ended June 30, 2014.

Income Taxes: The Company did not record federal income tax expense for the six months ended June 30, 2014 and 2013 due to the net operating loss carry forward that offsets any current tax liability. A valuation allowance of $3.1 million remains on our current deferred tax asset as of June 30, 2014.

The Company will continue to evaluate the future benefits from these carryforwards and at such time as it becomes “more likely than not” that they would be utilized prior to expiration, the Company will recognize the additional benefits as an adjustment to the valuation allowance. The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not utilized, will fully expire in the year 2033.

26

LIQUIDITY

The Company’s current liquidity position is more than adequate to fund expected asset growth. The Company’s primary sources of funds are deposits, FHLB advances, proceeds from principal and interest payments, prepayments on loans and mortgage-backed and investment securities and sale of long-term fixed-rate mortgages into the secondary market. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit flows, mortgage prepayments and sale of mortgage loans into the secondary market are greatly influenced by general interest rates, economic conditions and competition.

Liquidity represents the amount of an institution’s assets that can be quickly and easily converted into cash without significant loss. The most liquid assets are cash, short-term U.S. Government securities, U.S. Government agency securities and certificates of deposit. The Company is required to maintain sufficient levels of liquidity as defined by OCC regulations. This requirement may be varied at the direction of the OCC. Regulations currently in effect require that the Bank must maintain sufficient liquidity to ensure its safe and sound operation. The Company’s objective for liquidity is to be above 20%. Liquidity as of June 30, 2014 was $68.4 million, or 51.0%, compared to $53.4 million, or 42.4%, at December 31, 2013. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. The liquidity calculated by the Company includes additional borrowing capacity available with the FHLB. This borrowing capacity is based on pledged collateral.

The Company retains for its portfolio certain originated residential mortgage loans (primarily adjustable rate and shorter term fixed rate mortgage loans) and generally sells the remainder. The Bank will from time to time participate in or originate commercial real estate loans, including real estate development loans. During the six month period ended June 30, 2014, the Company originated $9.5 million in residential mortgage loans, of which $4.0 million were retained in portfolio while the remainder were sold or are being held for sale. This compares to $13.6 million in originations during the first six months of 2013 of which $5.6 million were retained in portfolio. The Company also originated $8.0 million of commercial loans and $1.3 million of consumer loans in the first six months of 2014 compared to $13.8 million of commercial loans and $788,000 of consumer loans for the same period in 2013. Of total loans receivable, excluding loans held for sale, mortgage loans comprised 47.7% and 46.1%, commercial loans 46.5% and 46.4% and consumer loans 7.0% and 7.5% at June 30, 2014 and June 30, 2013, respectively.

Deposits are a primary source of ;funds for use in lending and for other general business purposes. At June 30, 2014 deposits funded 76.9% of the Company’s total assets compared to 76.3% at December 31, 2013. Certificates of deposit scheduled to mature in less than one year at June 30, 2014 totaled $30.0 million.Management believes that a significant portion of such deposits will remain with the Bank. The Bank monitors the deposit rates offered by competition in the area and sets rates that take into account the prevailing market conditions along with the Bank’s liquidity position. Moreover, management believes that growth in assets is not expected to require significant in-flows of liquidity. As such, the Bank does not expect to be a market leader in rates paid for liabilities, although we may from time to time offer higher rates than our competitors, as liquidity needs dictate.

Borrowings may be used to compensate for seasonal or other reductions in normal sources of funds or for deposit outflows at more than projected levels. Borrowings may also be used on a longer-term basis to support increased lending or investment activities. At June 30, 2014 the Company had $25.2 million in FHLB advances and had sufficient available collateral to obtain an additional $32.5 million. FHLB borrowings as a percentage of total assets were 11.4% at June 30, 2014 as compared to 11.8% at December 31, 2013.

CAPITAL RESOURCES

Stockholders’ equity at June 30, 2014 was $24.2 million, or 11.0% of total assets, compared to $23.5 million, or 11.2% of total assets, at December 31, 2013 (See “Consolidated Statement of Changes in Stockholders’ Equity”). The Bank is subject to certain capital-to-assets levels in accordance with federal regulations. The Bank was considered “well capitalized” under all capital requirements set forth by the OCC as of June 30, 2014. The following table summarizes the Bank’s actual capital with the regulatory capital requirements and with requirements to be “Well Capitalized” under prompt corrective action provisions, as of June 30, 2014:

27

						Regulatory					Minimum to be
	Actual					Minimum					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	Dollars in Thousands
Tier 1 (Core) capital (to adjusted assets)	$	22,966		10.48	%	$	8,767		4.00	%	$	10,959		5.00	%
Total risk-based capital (to risk- weighted assets)	$	24,453		18.24	%	$	10,723		8.00	%	$	13,404		10.00	%
Tier 1 risk-based capital (to risk weighted assets)	$	22,966		17.13	%	$	5,362		4.00	%	$	8,043		6.00	%
Tangible Capital (to tangible assets)	$	22,966		10.48	%	$	3,288		1.50	%	$	4,384		2.00	%

ITEM 3 - QUALITATIVE AND QUANTITIATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4 - CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including the Company’s Chief Executive Officer and VP – Director of Financial Reporting & Accounting, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d–15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and VP - Director of Financial Reporting & Accounting concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in the Company’s internal control over the financial reporting during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

28

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

PART II – OTHER INFORMATION

Item 1 - Legal Proceedings:

At June 30, 2014 there were no material legal proceedings to which the Company is a party or of which any of its property is subject. From time to time the Company is a party to various legal proceedings incident to its business.

Item 1A - Risk Factors:

Not applicable to smaller reporting companies

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds:

(a)	Not applicable
(b)	Not applicable
(c)	Not applicable

Item 3 - Defaults upon Senior Securities:

Not applicable.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information:

Not applicable

Item 6 - Exhibits:

Exhibit 31.1 Certification by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification by VP - Director of Financial Reporting & Accounting pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 Statement of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 Statement of VP - Director of Financial Reporting & Accounting furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Taxonomy Instance Document
101.SCH	XBRL Taxonomy Extension Schema Linkbase
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

29

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
By:	/s/Michael W. Mahler
	Michael W. Mahler
	Chief Executive Officer
	Date:August 7, 2014
By:	/s/Eileen M. Budnick
	Eileen M. Budnick
	VP-Director of Financial Reporting and Accounting
	(Principal Financial and Accounting Officer)
	Date: August 7, 2014

30

EX-31.1

First Federal Of Northern Michigan Bancorp, Inc. 10-Q

Exhibit 31.1

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael W. Mahler, certify that:

(1)	I have reviewed this quarterly report on Form 10-Q of First Federal of Northern Michigan Bancorp, Inc.;
(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)	Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report;
(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 7, 2014	/s/ Michael W. Mahler
	Michael W. Mahler
	Chief Executive Officer

EX-31.2

First Federal Of Northern Michigan Bancorp, Inc. 10-Q

Exhibit 31.2 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

 FORM 10-Q

 Quarter Ended June 30, 2014

Certification of VP – Director of Financial Reporting & Accounting

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Eileen M. Budnick, certify that:

(1)	I have reviewed this quarterly report on Form 10-Q of First Federal of Northern Michigan Bancorp, Inc.;
(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3)	Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this report;
(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 7, 2014	/s/ Eileen M. Budnick
	Eileen M. Budnick
	VP – Director of Financial Reporting & Accounting

EX-32.1

First Federal Of Northern Michigan Bancorp, Inc. 10-Q

EXHIBIT 32.1

STATEMENT FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,

The undersigned, Michael W. Mahler, is the Chief Executive Officer of First Federal of Northern Michigan Bancorp, Inc. (the “Company”).

This statement is being furnished in connection with the filing by the Company of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “Report”).

By execution of this statement, I certify that to the best of my knowledge:

A)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
B)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.

A signed original of this written statement required by Section 906 has been provided to First Federal of Northern Bancorp, Inc. and will be retained by First Federal of Northern Michigan Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

August 7, 2014	/s/ Michael W. Mahler
Dated	Michael W. Mahler

EX-32.2

First Federal Of Northern Michigan Bancorp, Inc. 10-Q

EXHIBIT 32.2

STATEMENT FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO

 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002,

The undersigned, Eileen M. Budnick, is the VP – Director of Financial Reporting & Accounting of First Federal of Northern Michigan Bancorp, Inc. (the “Company”).

This statement is being furnished in connection with the filing by the Company of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “Report”).

By execution of this statement, I certify that to the best of my knowledge:

A)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ; and
B)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report.

A signed original of this written statement required by Section 906 has been provided to First Federal of Northern Bancorp, Inc. and will be retained by First Federal of Northern Michigan Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

August 7, 2014	/s/Eileen M. Budnick
Dated	Eileen M. Budnick

XML

FAIR VALUE MEASUREMENTS (Details 1) (Nonrecurring [Member], USD $)	Jun. 30, 2014	Dec. 31, 2013
Fair Value [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans	$ 3,457,000	$ 5,352,000
Other real estate owned - residential mortgages	365,000	285,000
Other real estate owned - commercial	442,000	472,000
Other repossessed assets	916,000	1,023,000
Significant Unobservable Inputs (Level 3) [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans	3,457,111	5,352,000
Other real estate owned - residential mortgages	365,000	285,000
Other real estate owned - commercial	442,000	472,000
Other repossessed assets	916,000	1,023,000
Total assets measured at fair value on a non-recurring basis	$ 5,180,000	$ 7,132,000

XML

LOANS (Details 6) (USD $)	3 Months Ended		6 Months Ended			3 Months Ended	6 Months Ended				3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended			3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013	Jun. 30, 2013 Commercial Real Estate Construction [Member]	Jun. 30, 2013 Commercial Real Estate Construction [Member]	Jun. 30, 2014 Commercial Real Estate Construction [Member]	Mar. 31, 2014 Commercial Real Estate Construction [Member]	Dec. 31, 2013 Commercial Real Estate Construction [Member]	Jun. 30, 2014 Commercial Secured by Real Estate [Member]	Jun. 30, 2013 Commercial Secured by Real Estate [Member]	Jun. 30, 2014 Commercial Secured by Real Estate [Member]	Jun. 30, 2013 Commercial Secured by Real Estate [Member]	Dec. 31, 2013 Commercial Secured by Real Estate [Member]	Jun. 30, 2014 Commercial Real Estate Other [Member]	Jun. 30, 2013 Commercial Real Estate Other [Member]	Jun. 30, 2014 Commercial Real Estate Other [Member]	Jun. 30, 2013 Commercial Real Estate Other [Member]	Dec. 31, 2013 Commercial Real Estate Other [Member]	Jun. 30, 2014 Consumer Real Estate [Member]	Jun. 30, 2013 Consumer Real Estate [Member]	Jun. 30, 2014 Consumer Real Estate [Member]	Jun. 30, 2013 Consumer Real Estate [Member]	Dec. 31, 2013 Consumer Real Estate [Member]	Jun. 30, 2014 Consumer Other [Member]	Jun. 30, 2013 Consumer Other [Member]	Jun. 30, 2014 Consumer Other [Member]	Jun. 30, 2013 Consumer Other [Member]	Dec. 31, 2013 Consumer Other [Member]	Jun. 30, 2014 Residential Mortgage [Member]	Jun. 30, 2013 Residential Mortgage [Member]	Jun. 30, 2014 Residential Mortgage [Member]	Jun. 30, 2013 Residential Mortgage [Member]	Dec. 31, 2013 Residential Mortgage [Member]	Jun. 30, 2014 Unallocated [Member]	Jun. 30, 2014 Unallocated [Member]
Allowance for loan losses:
Beginning Balance	$ 1,458,000	$ 1,675,000	$ 1,471,622	$ 1,750,000		$ 89,000	$ 64,000	$ 48,000	$ 48,000	$ 48,000	$ 392,000	$ 509,000	$ 444,000	$ 579,000		$ 61,000	$ 87,000	$ 63,000	$ 69,000		$ 49,000	$ 87,000	$ 62,000	$ 99,000		$ 16,000	$ 26,000	$ 21,000	$ 33,000		$ 792,000	$ 877,000	$ 784,000	$ 906,000		$ 100,000	$ 50,000
Charge offs	(11,000)	(211,000)	(80,000)	(471,000)									(16,000)	(85,000)									(13,000)	(7,000)		(1,000)	(6,000)	(6,000)	(12,000)		(10,000)	(205,000)	(45,000)	(367,000)
Recoveries	40,000	31,000	79,000	73,000							12,000	1,000	32,000	11,000							14,000	18,000	23,000	33,000					5,000		14,000	12,000	24,000	24,000
Provision		195,753	15,765	339,827		(89,000)	(64,000)				22,000	163,000	(34,000)	168,000		11,000	(8,000)	9,000	10,000		(25,000)	(30,000)	(34,000)	(50,000)		1,000	5,000	1,000	(1,000)		(13,000)	155,000	20,000	276,000		4,000	54,000
Ending balance	1,486,809	1,691,000	1,486,809	1,691,000				48,000	48,000	48,000	426,000	673,000	426,000	673,000		72,000	79,000	72,000	79,000		38,000	75,000	38,000	75,000		16,000	25,000	16,000	25,000		783,000	839,000	783,000	839,000		104,000	104,000
Individually evaluated for impairment	209,000	322,000	209,000	322,000				48,000			136,000	322,000	136,000	322,000																	25,000		25,000
Collectively evaluated for impairment	1,278,000	1,369,000	1,278,000	1,369,000							290,000	351,000	290,000	351,000		72,000	79,000	72,000	79,000		38,000	75,000	38,000	75,000		16,000	25,000	16,000	25,000		758,000	839,000	758,000	839,000		104,000	104,000
Loans receivable (gross):
Gross loans	136,820,000	141,257,000	136,820,000	141,257,000	138,084,000	173,000	173,000	173,000		173,000	50,197,000	53,284,000	50,197,000	53,284,000	51,726,000	12,477,000	12,052,000	12,477,000	12,052,000	12,451,000	8,282,000	9,371,000	8,282,000	9,371,000	8,730,000	1,193,000	1,152,000	1,193,000	1,152,000	1,165,000	64,498,000	65,225,000	64,498,000	65,225,000	63,839,000
Individually evaluated for impairment	4,106,000	8,602,000	4,106,000	8,602,000		173,000	173,000	173,000			3,284,000	6,745,000	3,284,000	6,745,000			8,000		8,000		16,000		16,000								633,000	1,676,000	633,000	1,676,000
Collectively evaluated for impairment	$ 132,714,000	$ 132,655,000	$ 132,714,000	$ 132,655,000							$ 46,913,000	$ 46,539,000	$ 46,913,000	$ 46,539,000		$ 12,477,000	$ 12,044,000	$ 12,477,000	$ 12,044,000		$ 8,266,000	$ 9,371,000	$ 8,266,000	$ 9,371,000		$ 1,193,000	$ 1,152,000	$ 1,193,000	$ 1,152,000		$ 63,865,000	$ 63,549,000	$ 63,865,000	$ 63,549,000

XML

SECURITIES (Details 2) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Securities available for sale
Fair Value Less Than 12 Months	$ 7,253,000	$ 22,373,000
Unrealized Loss Less Than 12 Months	(30,000)	(577,000)
Fair Value Less Than 12 Months or Longer	12,452,000	4,614,000
Unrealized Loss Less Than 12 Months or Longer	(289,000)	(213,000)
US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale
Fair Value Less Than 12 Months	3,233,000
Unrealized Loss Less Than 12 Months	(17,000)
Fair Value Less Than 12 Months or Longer	945,000	894,000
Unrealized Loss Less Than 12 Months or Longer	(54,000)	(105,000)
Municipal Obligations [Member]
Securities available for sale
Fair Value Less Than 12 Months	1,711,000	7,902,000
Unrealized Loss Less Than 12 Months	(2,000)	(243,000)
Fair Value Less Than 12 Months or Longer	6,321,000	1,668,000
Unrealized Loss Less Than 12 Months or Longer	(128,000)	(58,000)
Mortgage Backed Securities [Member]
Securities available for sale
Fair Value Less Than 12 Months	2,309,000	14,471,000
Unrealized Loss Less Than 12 Months	(11,000)	(334,000)
Fair Value Less Than 12 Months or Longer	5,186,000	2,052,000
Unrealized Loss Less Than 12 Months or Longer	$ (107,000)	$ (50,000)

XML

COMMITMENTS TO EXTEND CREDIT (Details) (USD $)	Jun. 30, 2014
Obligations to extend credit for loan commitments	$ 24,600,000
Commitments to grant loans [Member]
Obligations to extend credit for loan commitments	11,380,000
Unfunded commitments under lines of credit [Member]
Obligations to extend credit for loan commitments	13,125,000
Commercial and standby letters of credit [Member]
Obligations to extend credit for loan commitments	$ 59,000

XML

PRINCIPLES OF CONSOLIDATION

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

PRINCIPLES OF CONSOLIDATION

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 was 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). The collection of this stream of income expired in April of 2014. All significant intercompany balances and transactions have been eliminated in the consolidation.

XML

LOANS (Details 2) (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Gross loans	$ 136,820,000	$ 138,084,000	$ 141,257,000
Commercial Real Estate Construction [Member]
Gross loans	173,000	173,000	173,000
Commercial Real Estate Construction [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	173,000	173,000
Commercial Secured by Real Estate [Member]
Gross loans	50,197,000	51,726,000	53,284,000
Commercial Secured by Real Estate [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans	15,389,000	16,187,000
Commercial Secured by Real Estate [Member] | Risk Grade 4.5 (Monitored) [Member]
Gross loans	4,915,000	3,462,000
Commercial Secured by Real Estate [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	22,511,000	24,327,000
Commercial Secured by Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	4,508,000	4,835,000
Commercial Secured by Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	2,874,000	2,915,000
Commercial Real Estate Other [Member]
Gross loans	12,477,000	12,451,000	12,052,000
Commercial Real Estate Other [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans	25,000
Commercial Real Estate Other [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans	5,750,000	5,602,000
Commercial Real Estate Other [Member] | Risk Grade 4.5 (Monitored) [Member]
Gross loans	660,000	171,000
Commercial Real Estate Other [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	5,867,000	6,528,000
Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	16,000	45,000
Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	$ 159,000	$ 105,000

XML

LOANS (Details 1) (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
30-59 Days past due	$ 1,270,000	$ 2,060,000
60-89 Days past due	357,000	993,000
Greater than 90 days past due	2,009,000	1,969,000
Total past due	3,636,000	5,022,000
Current	133,184,000	133,062,000
Gross loans	136,820,000	138,084,000	141,257,000
Recorded investment > 90 days and accruing	22,000	26,000
Commercial Real Estate Construction [Member]
Greater than 90 days past due	173,000	173,000
Total past due	173,000	173,000
Gross loans	173,000	173,000	173,000
Commercial Secured by Real Estate [Member]
30-59 Days past due	11,000
60-89 Days past due		521,000
Greater than 90 days past due	1,441,000	1,441,000
Total past due	1,452,000	1,962,000
Current	48,745,000	49,764,000
Gross loans	50,197,000	51,726,000	53,284,000
Commercial Real Estate Other [Member]
30-59 Days past due	35,000	33,000
60-89 Days past due		20,000
Total past due	35,000	53,000
Current	12,442,000	12,398,000
Gross loans	12,477,000	12,451,000	12,052,000
Consumer Real Estate [Member]
30-59 Days past due	50,000	54,000
60-89 Days past due	11,000	55,000
Greater than 90 days past due	12,000
Total past due	73,000	109,000
Current	8,209,000	8,621,000
Gross loans	8,282,000	8,730,000	9,371,000
Consumer Other [Member]
60-89 Days past due		4,000
Greater than 90 days past due		2,000
Total past due		6,000
Current	1,193,000	1,159,000
Gross loans	1,193,000	1,165,000	1,152,000
Recorded investment > 90 days and accruing		2,000
Residential Mortgage [Member]
30-59 Days past due	1,174,000	1,973,000
60-89 Days past due	346,000	393,000
Greater than 90 days past due	383,000	353,000
Total past due	1,903,000	2,719,000
Current	62,595,000	61,120,000
Gross loans	64,498,000	63,839,000	65,225,000
Recorded investment > 90 days and accruing	$ 22,000	$ 24,000

XML

LOANS (Details 3) (USD $)	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2013
Gross loans	$ 136,820,000	$ 138,084,000	$ 141,257,000
Residential Mortgage [Member]
Gross loans	64,498,000	63,839,000	65,225,000
Residential Mortgage [Member] | Pass [Member]
Gross loans	63,940,000	63,164,000
Residential Mortgage [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	558,000	675,000
Consumer Real Estate [Member]
Gross loans	8,282,000	8,730,000	9,371,000
Consumer Real Estate [Member] | Performing [Member]
Gross loans	8,266,000	8,723,000
Consumer Real Estate [Member] | Nonperforming [Member]
Gross loans	16,000	7,000
Consumer Other [Member]
Gross loans	1,193,000	1,165,000	1,152,000
Consumer Other [Member] | Performing [Member]
Gross loans	1,193,000	1,163,000
Consumer Other [Member] | Nonperforming [Member]
Gross loans		$ 2,000

XML

LOANS (Details 4) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Recorded investment in non-accrual loans	$ 2,177,000	$ 2,285,000
Commercial Real Estate Construction [Member]
Recorded investment in non-accrual loans	173,000	173,000
Commercial Secured by Real Estate [Member]
Recorded investment in non-accrual loans	1,452,000	1,454,000
Consumer Real Estate [Member]
Recorded investment in non-accrual loans	16,000	7,000
Residential Mortgage [Member]
Recorded investment in non-accrual loans	$ 536,000	$ 651,000

XML

BASIS OF FINANCIAL STATEMENT PRESENTATION

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BASIS OF FINANCIAL STATEMENT PRESENTATION

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, 2013.

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 and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

XML

LOANS (Details 5) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Commercial Real Estate Construction [Member]
With no related allowance recorded:
Average Recorded Investment		$ 173,000
With an allowance recorded:
Unpaid Principal	1,589,000		1,589,000		1,589,000
Recorded Investment	173,000		173,000		173,000
Related allowance	48,000		48,000		48,000
Average Recorded Investment	173,000		173,000
Total
Unpaid Principal	1,589,000		1,589,000		1,589,000
Recorded Investment	173,000		173,000		173,000
Average Recorded Investment	173,000	173,000	173,000	173,000
Commercial Secured by Real Estate [Member]
With no related allowance recorded:
Unpaid Principal	1,451,000		1,451,000		1,789,000
Recorded Investment	1,450,000		1,450,000		1,788,000
Average Recorded Investment	1,460,000	3,172,000	1,527,000	1,527,000
Interest income recognized	21,000	33,000	42,000	42,000
With an allowance recorded:
Unpaid Principal	2,423,000		2,423,000		3,980,000
Recorded Investment	1,834,000		1,834,000		3,391,000
Related allowance	136,000		136,000		182,000
Average Recorded Investment	1,837,000	3,602,000	1,838,000	3,607,000
Interest income recognized	4,000	20,000	9,000	39,000
Total
Unpaid Principal	3,874,000		3,874,000		5,769,000
Recorded Investment	3,284,000		3,284,000		5,179,000
Average Recorded Investment	3,297,000	6,774,000	3,365,000	6,802,000
Interest income recognized	25,000	53,000	51,000	99,000
Consumer Real Estate [Member]
With no related allowance recorded:
Unpaid Principal	17,000		17,000		8,000
Recorded Investment	16,000		16,000		7,000
Average Recorded Investment	16,000	9,000	16,000	16,000
Total
Unpaid Principal	17,000		17,000		8,000
Recorded Investment	16,000		16,000		7,000
Average Recorded Investment	16,000	9,000	16,000	10,000
Residential Mortgage [Member]
With no related allowance recorded:
Unpaid Principal	659,000		659,000		954,000
Recorded Investment	543,000		543,000		722,000
Average Recorded Investment	553,000	1,793,000	554,000	554,000
Interest income recognized		1,000	4,000	4,000
With an allowance recorded:
Unpaid Principal	90,000		90,000		53,000
Recorded Investment	90,000		90,000		30,000
Related allowance	25,000		25,000		5,000
Average Recorded Investment	90,000		90,000
Interest income recognized	1,000		1,000
Total
Unpaid Principal	749,000		749,000		1,007,000
Recorded Investment	633,000		633,000		752,000
Average Recorded Investment	643,000	1,793,000	644,000	1,797,000
Interest income recognized	$ 4,000	$ 1,000	$ 5,000	$ 2,000

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FAIR VALUE MEASUREMENTS (Details 2) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Financial assets:
Securities available for sale	$ 61,466,330	$ 50,358,175
Securities held to maturity	2,332,000	2,400,000
Carrying Value [Member]
Financial assets:
Cash and cash equivalents	3,237,000	2,766,000
Securities available for sale	61,466,000	50,358,000
Securities held to maturity	2,215,000	2,255,000
Loans held for sale	380,000	175,000
Loans receivable - net	135,069,000	136,315,000
Federal Home Loan Bank stock	3,266,000	3,266,000
Accrued interest receivable	714,000	745,000
Financial liabilities:
Customer deposits	168,999,000	160,029,000
Federal Home Loan Bank advances	25,157,000	24,813,000
Accrued interest payable	88,000	89,000
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Financial assets:
Cash and cash equivalents	3,237,000	2,766,000
Significant Other Observable Inputs (Level 2) [Member]
Financial assets:
Securities available for sale	61,466,000	50,358,000
Securities held to maturity	2,332,000	2,400,000
Federal Home Loan Bank stock	3,266,000	3,266,000
Financial liabilities:
Customer deposits	169,436,000	160,784,000
Federal Home Loan Bank advances	24,958,000	24,458,000
Significant Unobservable Inputs (Level 3) [Member]
Financial assets:
Loans held for sale	380,000	178,000
Loans receivable - net	134,336,000	135,172,000
Accrued interest receivable	714,000	745,000
Financial liabilities:
Accrued interest payable	88,000	89,000
Fair Value [Member]
Financial assets:
Cash and cash equivalents	3,237,000	2,766,000
Securities available for sale	61,466,000	50,358,000
Securities held to maturity	2,332,000	2,400,000
Loans held for sale	380,000	178,000
Loans receivable - net	134,336,000	135,712,000
Federal Home Loan Bank stock	3,266,000	3,266,000
Accrued interest receivable	714,000	745,000
Financial liabilities:
Customer deposits	169,436,000	160,784,000
Federal Home Loan Bank advances	24,958,000	24,458,000
Accrued interest payable	$ 88,000	$ 89,000

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Consolidated Balance Sheet (Unaudited) (USD $)	Jun. 30, 2014	Dec. 31, 2013
ASSETS
Cash on hand and due from banks	$ 3,235,034	$ 2,760,010
Overnight deposits with FHLB	2,066	5,823
Total cash and cash equivalents	3,237,100	2,765,833
Securities available for sale	61,466,330	50,358,175
Securities held to maturity	2,215,000	2,255,000
Loans held for sale	380,405	175,400
Loans receivable, net of allowance for loan losses of $1,486,809 and $1,471,622 as of June 30, 2014 and December 31, 2013, respectively	135,068,805	136,314,964
Foreclosed real estate and other repossessed assets	1,723,024	1,780,058
Federal Home Loan Bank stock, at cost	3,266,100	3,266,100
Premises and equipment	5,122,666	5,203,301
Accrued interest receivable	714,126	744,730
Intangible assets		39,732
Deferred tax asset	574,768	798,163
Originated mortgage servicing rights	773,413	860,024
Bank owned life insurance	4,667,787	4,610,070
Other assets	580,782	485,234
Total assets	219,790,306	209,656,784
Liabilities:
Deposits	168,999,329	160,029,115
Advances from borrowers for taxes and insurance	383,311	151,254
Advances from Federal Home Loan Bank	25,157,152	24,813,409
Accrued expenses and other liabilities	1,091,910	1,138,324
Total liabilities	195,631,702	186,132,102
Stockholders' equity:
Common stock ($0.01 par value 20,000,000 shares authorized 3,191,799 shares issued and outstanding) at June 30, 2014 and December 31, 2013	31,918	31,918
Additional paid-in capital	23,853,891	23,853,891
Retained earnings	2,963,515	2,763,242
Treasury stock at cost (307,750 shares) at June 30, 2014 and December 31, 2013	(2,963,918)	(2,963,918)
Accumulated other comprehensive income (loss)	273,198	(160,451)
Total stockholders' equity	24,158,604	23,524,682
Total liabilities and stockholders' equity	$ 219,790,306	$ 209,656,784

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Consolidated Statement of Changes in Stockholders' Equity (Unaudited) (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2014
Statement of Stockholders' Equity [Abstract]
Tax on change in unrealized gain on available-for-sale securities	$ 223,395

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STOCK-BASED COMPENSATION (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Number of Options
Outstanding, Beginning balance	150,030
Forfeited or expired	(12,500)
Outstanding, Ending balance	137,530	150,030
Options Exercisable	137,530
Weighted Average Exercise Price
Outstanding, Beginning Balance	$ 9.52
Forfeited or expired	$ 9.26
Outstanding, Ending Balance	$ 9.54	$ 9.52
Options Exercisable	$ 9.54
Weighted Average Remaining Contractual Term
Outstanding, ending	2 years	2 years 4 months 24 days
Options exercisable	2 years

XML

SECURITIES (Details Narrative) (USD $)	Jun. 30, 2014 Securities	Dec. 31, 2013 Securities
Investments, Debt and Equity Securities [Abstract]
Securities pledged as collateral	$ 39,000,000	$ 36,000,000
Number of securities with an unrealized loss	30	39

XML

COMMITMENTS TO EXTEND CREDIT (Details Narrative) (USD $)	Jun. 30, 2014
Commitments and Contingencies Disclosure [Abstract]
Obligations to extend credit for loan commitments	$ 24,600,000

XML

SECURITIES (Details 1) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Amortized cost:
Total	$ 61,052,000
Market Value:
Total	61,466,000
Amortized Cost:
Due in one year or less	95,000
Due after one year through five years	500,000
Due after five years through ten years	715,000
Due after ten years	905,000
Total	2,215,000
Market Value:
Due in one year or less	97,000
Due after one year through five years	519,000
Due after five years through ten years	765,000
Due after ten years	951,000
Total	2,332,000	2,400,000
Available-for-sale Securities [Member]
Amortized cost:
Due in one year or less	3,332,000
Due after one year through five years	18,095,000
Due after five years through ten years	6,409,000
Due after ten years	1,203,000
Total	29,039,000
Market Value:
Due in one year or less	3,354,000
Due after one year through five years	18,130,000
Due after five years through ten years	6,396,000
Due after ten years	1,286,000
Total	29,166,000
Equity Securities [Member]
Amortized cost:
Total	2,000
Market Value:
Total	9,000
Mortgage Backed Securities [Member]
Amortized cost:
Total	32,011,000
Market Value:
Total	$ 32,291,000

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Consolidated Statement of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash Flows from Operating Activities:
Net income	$ 315,635	$ 64,129
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	184,337	200,654
Provision for loan loss	15,765	339,827
Amortization and accretion on securities	204,416	303,600
Gain on sale of loans held for sale	(89,149)	(138,002)
Originations of loans held for sale	(5,522,508)	(7,931,234)
Proceeds from sale of loans held for sale	5,406,652	7,724,458
(Gain) loss on sale of fixed assets	20,564	(8,084)
Loss on sale of real estate owned and other repossessed assets	5,500	7,334
Net change in:
Accrued interest receivable	30,604	71,287
Other assets	(8,937)	70,530
Prepaid FDIC insurance premiums		582,945
Bank owned life insurance	(57,717)	(66,652)
Accrued expenses and other liabilities	(46,414)	25,283
Net cash provided by operating activities	458,748	1,246,075
Cash Flows from Investing Activities:
Net decrease (increase) in loans (loans originated, net of principal payments)	965,394	(961,058)
Proceeds from maturities and calls of available-for-sale securities	5,570,151	10,715,273
Proceeds from sale of property and equipment	1,725	55,164
Proceeds from sale of real estate owned and other repossessed assets	316,534	555,330
Purchase of securities	(16,185,678)	(9,453,079)
Purchase of premises and equipment	(86,259)	(6,585)
Net cash provided by (used for) investing activities	(9,418,133)	905,045
Cash Flows from Financing Activities:
Dividends paid on common stock	(115,362)
Net increase in deposits	8,970,214	2,997,019
Net increase (decrease) in Repo Sweep accounts		390,318
Net increase in advances from borrowers	232,057	280,359
Advances from Federal Home Loan Bank	12,055,000	27,625,000
Repayments of Federal Home Loan Bank advances	(11,711,257)	(29,870,898)
Net cash provided by financing activities	9,430,652	1,421,798
Net increase in cash and cash equivalents	471,267	3,572,918
Cash and cash equivalents at beginning of period	2,765,833	2,751,810
Cash and cash equivalents at end of period	3,237,100	6,324,728
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	508,572	622,719
Transfers of loans to foreclosed real estate and repossessed assets	$ 265,000	$ 273,000

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Consolidated Balance Sheet (Unaudited) (Parenthetical) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Allowance for loan losses	$ 1,486,809	$ 1,471,622
Common stock, par value per share	$ 0.01	$ 0.01
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	3,191,799	3,191,799
Treasury stock, shares	307,750	307,750

XML

SECURITIES (Tables)

6 Months Ended

Jun. 30, 2014

Investments, Debt and Equity Securities [Abstract]

Schedule of carrying value and estimated fair value of securities

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

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
	(in thousands)
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	12,835	$	41	$	(71	)	$	12,805
Municipal obligations		15,144		270		(130	)		15,284
Corporate bonds & other obligations		1,060		17		—			1,077
Mortgage-backed securities		32,011		398		(118	)		32,291
Equity securities		2		7		—			9
Total	$	61,052	$	733	$	(319	)	$	61,466
Securities Held to Maturity
Municipal obligations	$	2,215	$	117	$	—		$	2,332

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Market Value
	(in thousands)
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	7,111	$	36	$	(105	)		7,042
Municipal obligations		13,694		216		(301	)		13,609
Corporate bonds & other obligations		1,085		12		—			1,097
Mortgage-backed securities		28,708		279		(384	)		28,603
Equity securities		3		4		—			7
Total	$	50,601	$	547	$	(790	)	$	50,358
Securities Held to Maturity
Municipal obligations	$	2,255	$	145	$	—		$	2,400

Schedule of amortized cost and market value of securities by maturity

The amortized cost and estimated market value of securities at June 30, 2014, 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.

	June 30, 2014
	Amortized Cost		Market Value
	(in thousands)
Available For Sale:
Due in one year or less	$	3,332	$	3,354
Due after one year through five years		18,095		18,130
Due in five year through ten years		6,409		6,396
Due after ten years		1,203		1,286
Subtotal		29,039		29,166
Equity securities		2		9
Mortgage-backed securities		32,011		32,291
Total	$	61,052	$	61,466
Held To Maturity:
Due in one year or less	$	95	$	97
Due after one year through five years		500		519
Due in five year through ten years		715		765
Due after ten years		905		951
Total	$	2,215	$	2,332

Summary schedule of temporily impaired investments

The following is a summary of securities that had unrealized losses at June 30, 2014 and December 31, 2013.

	June 30, 2014
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		< 12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	3,233	$	(17	)	$	945	$	(54	)
Corporate bonds & other obligations		—		—			—		—
Municipal obligations		1,711		(2	)		6,321		(128	)
Mortgage-backed securities		2,309		(11	)		5,186		(107	)
Equity securities		—		—			—		—
Total	$	7,253	$	(30	)	$	12,452	$	(289	)
Held to Maturity:
Municipal obligations	$	—	$	—		$	—	$	—

	December 31, 2013
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		< 12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	—		$	894	$	(105	)
Municipal obligations		7,902		(243	)		1,668		(58	)
Mortgage-backed securities		14,471		(334	)		2,052		(50	)
Equity securities		—		—			—		—
Total	$	22,373	$	(577	)	$	4,614	$	(213	)
Held to Maturity:
Municipal obligations	$	—	$	—		$	—	$	—

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 07, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	First Federal of Northern Michigan Bancorp, Inc.
Entity Central Index Key	0001128227
Entity Filer Category	Smaller Reporting Company
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014
Trading Symbol	FFNM
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		2,884,049

XML

LOANS (Tables)

6 Months Ended

Jun. 30, 2014

Receivables [Abstract]

Schedule of composition of loans categorized by the type of loan

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

	At June 30,			At December 31,
	2014			2013
	(in thousands)
Real estate loans:
Residential mortgage	$	64,498		$	63,839
Commercial loans:
Construction - real estate		173			173
Secured by real estate		50,197			51,726
Other		12,477			12,451
Total commercial loans		62,847			64,350
Consumer loans:
Secured by real estate		8,282			8,730
Other		1,193			1,165
Total consumer loans		9,475			9,895
Total gross loans	$	136,820		$	138,084
Less:
Net deferred loan fees		(264	)		(297	)
Allowance for loan losses		(1,487	)		(1,472	)
Total loans, net	$	135,069		$	136,315

Schedule of past due loans

The following table illustrates the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2014 and December 31, 2013:

As of June 30, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
	(dollars in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		11		—		1,441		1,452		48,745		50,197		—
Commercial - non real estate		35		—		—		35		12,442		12,477		—
Consumer:
Consumer - Real Estate		50		11		12		73		8,209		8,282		—
Consumer - Other		—		—		—		—		1,193		1,193		—
Residential:
Residential		1,174		346		383		1,903		62,595		64,498		22
Total	$	1,270	$	357	$	2,009	$	3,636	$	133,184	$	136,820	$	22

As of December 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(dollars in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		—		521		1,441		1,962		49,764		51,726		—
Commercial - non real estate		33		20		—		53		12,398		12,451		—
Consumer:
Consumer - Real Estate		54		55		—		109		8,621		8,730		—
Consumer - Other		—		4		2		6		1,159		1,165		2
Residential:
Residential		1,973		393		353		2,719		61,120		63,839		24
Total	$	2,060	$	993	$	1,969	$	5,022	$	133,062	$	138,084	$	26

Schedule of loans by risk category

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 June 30, 2014 and December 31, 2013:

As of June 30, 2014
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	—	$	—	$	25
3		—		15,389		5,750
4		—		22,511		5,867
4.5		—		4,915		660
5		—		4,508		16
6		173		2,874		159
7		—		—		—
8		—		—		—
Total	$	173	$	50,197	$	12,477

As of December 31, 2013
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	—	$	—	$	—
3		—		16,187		5,602
4		—		24,327		6,528
4.5		—		3,462		171
5		—		4,835		45
6		173		2,915		105
7		—		—		—
8		—		—		—
Total	$	173	$	51,726	$	12,451

The following tables present the risk category of loans by class based on the most recent analysis performed as of June 30, 2014 and December 31, 2013:

As of June 30, 2014
	(dollars in thousands)
	Residential
Loan Grade:
Pass	$	63,940
Special Mention		—
Substandard		558
Total	$	64,498

	Consumer - Real Estate		Consumer - Other
	(dollars in thousands)
Performing	$	8,266	$	1,193
Nonperforming		16		—
Total	$	8,282	$	1,193

As of December 31, 2013
	(dollars in thousands)
	Residential
Loan Grade:
Pass	$	63,164
Special Mention		—
Substandard		675
Total	$	63,839

	Consumer -  Real Estate		Consumer - Other
Performing	$	8,723	$	1,163
Nonperforming		7		2
Total	$	8,730	$	1,165

Schedule of recorded investment in non-accrual loans by class

The following table presents the recorded investment in non-accrual loans by class as of June 30, 2014 and December 31, 2013:

	As of
	June 30, 2014		December 31, 2013
	(in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	173	$	173
Commercial Real Estate - other		1,452		1,454
Commercial		—		—
Consumer:
Consumer - real estate		16		7
Consumer - other		—		—
Residential:
Residential		536		651
Total	$	2,177	$	2,285

Schedule of loans individually evaluated for impairment

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013:

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of June 30, 2014							2014				2014
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)										(dollars in thousands)
With no specific allowance recorded:
Commercial	$	—	$	-—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—		—		—
Commercial Real Estate - Other		1,451		1,450		—		1,460		21		1,527		42
Consumer - Real Estate		17		16		—		16		—		16		—
Consumer - Other		—		—		—		—		—		—		—
Residential		659		543		—		553		3		554		4
With a specific allowance recorded:
Commercial		—		—		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—		173		—
Commercial Real Estate - Other		2,423		1,834		136		1,837		4		1,838		9
Consumer - Real Estate		—		—		—		—		—		—		—
Consumer - Other		—		—		—		—		—		—		—
Residential		90		90		25		90		1		90		1
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	3,874	$	3,284	$	136	$	3,297	$	25	$	3,365	$	51
Consumer - Real Estate	$	17	$	16	$	—	$	16	$	—	$	16	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential	$	749	$	633	$	25	$	643	$	4	$	644	$	5

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of December 31, 2013							2013				2013
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)										(dollars in thousands)
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		173		—		173		—
Commercial Real Estate - Other		1,789		1,788		—		3,172		33		3,195		60
Consumer - Real Estate		8		7		—		9		—		10		—
Consumer - Other		—		—		—		—		—		—		—
Residential		954		722		—		1,793		1		1,797		2
With a specific allowance recorded:
Commercial		—		—		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		—		—		—		—
Commercial Real Estate - Other		3,980		3,391		182		3,602		20		3,607		39
Consumer - Real Estate		—		—		—		—		—		—		—
Consumer - Other		—		—		—		—		—		—		—
Residential		53		30		5		—		—		—		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	6,774	$	53	$	6,802	$	99
Consumer - Real Estate	$	8	$	7	$	—	$	9	$	—	$	10	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	1,793	$	1	$	1,797	$	2

Schedule of activity in the allowance for loan losses

Activity in the allowance for loan and lease losses was as follows for the three and six months ended June 30, 2014 and June 30, 2013, respectively:

Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Three Months Ended June 30, 2014
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	48	$	392	$	61	$	49		$	16		$	792		$	100	$	1,458
Charge-offs		—		—		—		—			(1	)		(10	)		—		(11	)
Recoveries		—		12		—		14			—			14			—		40
Provision		—		22		11		(25	)		1			(13	)		4		—
Ending Balance	$	48	$	426	$	72	$	38		$	16		$	783		$	104	$	1,487

For the Six Months Ended June 30, 2014
	Commercial		Commercial					Consumer
	Construction		Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	48	$	444		$	63	$	62		$	21		$	784		$	50	$	1,472
Charge-offs		—		(16	)		—		(13	)		(6	)		(45	)		—		(80	)
Recoveries		—		32			—		23			—			24			—		79
Provision		—		(34	)		9		(34	)		1			20			54		16
Ending Balance	$	48	$	426		$	72	$	38		$	16		$	783		$	104	$	1,487

Loan Balances Individually Evaluated for Impairment
As of June 30, 2014
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses as of June 30, 2014
Ending balance: individually evaluated for impairment	$	48	$	136	$	—	$	—	$	—	$	25	$	—	$	209
Ending balance: loans collectively evaluated for impairment	$	—	$	290	$	72	$	38	$	16	$	758	$	104	$	1,278
Loans as of June 30, 2014
Loans:
Ending Balance	$	173	$	50,197	$	12,477	$	8,282	$	1,193	$	64,498	$	—	$	136,820
Ending balance: individually evaluated for impairment	$	173	$	3,284	$	—	$	16	$	—	$	633	$	—	$	4,106
Ending balance: loans collectively evaluated for impairment	$	—	$	46,913	$	12,477	$	8,266	$	1,193	$	63,865	$	—	$	132,714

For the Three Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate		Commercial			Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	89		$	509	$	87		$	87		$	26		$	877		$	—	$	1,675
Charge-offs		—			—		—			—			(6	)		(205	)		—		(211	)
Recoveries		—			1		—			18			—			12			—		31
Provision		(89	)		163		(8	)		(30	)		5			155			—		196
Ending Balance	$	—		$	673	$	79		$	75		$	25		$	839		$	—	$	1,691

For the Six Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69	$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(85	)		—		(7	)		(12	)		(367	)		—		(471	)
Recoveries		—			11			—		33			5			24			—		73
Provision		(64	)		168			10		(50	)		(1	)		276			—		339
Ending Balance	$	—		$	673		$	79	$	75		$	25		$	839		$	—	$	1,691

Loan Balances Individually Evaluated for Impairment
As of June 30, 2013
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses as of June 30, 2013
Ending balance: individually evaluated for impairment	$	—	$	322	$	—	$	—	$	—	$	—	$	—	$	322
Ending balance: loans collectively evaluated for impairment	$	—	$	351	$	79	$	75	$	25	$	839	$	—	$	1,369
Loans as of June 30, 2013
Loans:
Ending Balance	$	173	$	53,284	$	12,052	$	9,371	$	1,152	$	65,225	$	—	$	141,257
Ending balance: individually evaluated for impairment	$	173	$	6,745	$	8	$	—	$	—	$	1,676	$	—	$	8,602
Ending balance: loans collectively evaluated for impairment	$	—	$	46,539	$	12,044	$	9,371	$	1,152	$	63,549	$	—	$	132,655

XML

Consolidated Statement of Operations and Comprehensive Income (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Interest income:
Interest and fees on loans	$ 1,690,977	$ 1,826,649	$ 3,401,391	$ 3,643,262
Interest and dividends on investments
Taxable	149,521	123,991	300,197	239,320
Tax-exempt	41,028	37,348	82,484	75,043
Interest on mortgage-backed securities	143,269	106,795	285,563	222,166
Total interest income	2,024,795	2,094,783	4,069,635	4,179,791
Interest expense:
Interest on deposits	191,720	208,638	378,248	430,540
Interest on borrowings	66,890	76,022	129,656	175,463
Total interest expense	258,610	284,660	507,904	606,003
Net Interest Income	1,766,185	1,810,123	3,561,731	3,573,788
Provision for loan losses		195,753	15,765	339,827
Net Interest Income after provision for loan losses	1,766,185	1,614,370	3,545,966	3,233,961
Non-interest income:
Service charges and other fees	188,126	222,279	369,218	414,719
Mortgage banking activities	128,244	161,691	224,082	332,123
Net gain (loss) on sale of premises and equipment, real estate owned and other repossessed assets	(21,251)	(5,729)	(26,064)	750
Other	49,232	86,371	113,350	157,363
Total other income	344,351	464,613	680,586	904,955
Operating Expenses
Compensation and employee benefits	1,109,608	1,134,644	2,218,651	2,293,901
FDIC Insurance Premiums	45,330	48,978	90,874	94,677
Advertising	43,989	28,797	71,624	67,716
Occupancy	219,570	218,209	455,945	451,655
Amortization of intangible assets	10,086	29,646	39,732	59,292
Service bureau charges	83,790	77,089	146,176	154,583
Professional services	164,885	163,833	294,143	236,696
Collection activity	11,291	21,591	29,496	63,764
Real estate owned & other repossessed assets	11,732	88,153	28,681	121,419
Other	316,092	271,557	535,595	531,084
Total operating expenses	2,016,373	2,082,497	3,910,917	4,074,787
Income (loss) before income tax expense	94,163	(3,515)	315,635	64,129
Net income (loss)	94,163	(3,515)	315,635	64,129
Other comprehensive Income (loss):
Unrealized gain (loss) on available-for-sale investment securities - net of tax	160,996	(457,978)	433,649	(557,775)
Comprehensive income (loss)	$ 255,159	$ (461,493)	$ 749,284	$ (493,646)
Net Income (loss) per share
Basic	$ 0.03	$ 0.00	$ 0.11	$ 0.03
Diluted	$ 0.03	$ 0.00	$ 0.11	$ 0.03
Weighted average number of shares outstanding
Basic	2,884,049	2,884,049	2,884,049	2,884,049
Including dilutive stock options	2,884,049	2,884,049	2,884,049	2,884,049

XML

DIVIDENDS

6 Months Ended

Jun. 30, 2014

Stockholders' Equity Note [Abstract]

DIVIDENDS

Note 5—DIVIDENDS

We are dependent primarily upon the Bank for our earnings and funds to pay dividends on our common stock. The payment of dividends also is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Bank’s earnings, capital requirements, financial condition and other factors considered by our Board of Directors.

XML

LOANS

6 Months Ended

Jun. 30, 2014

Receivables [Abstract]

LOANS

Note 4—LOANS

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

	At June 30,			At December 31,
	2014			2013
	(in thousands)
Real estate loans:
Residential mortgage	$	64,498		$	63,839
Commercial loans:
Construction - real estate		173			173
Secured by real estate		50,197			51,726
Other		12,477			12,451
Total commercial loans		62,847			64,350
Consumer loans:
Secured by real estate		8,282			8,730
Other		1,193			1,165
Total consumer loans		9,475			9,895
Total gross loans	$	136,820		$	138,084
Less:
Net deferred loan fees		(264	)		(297	)
Allowance for loan losses		(1,487	)		(1,472	)
Total loans, net	$	135,069		$	136,315

The following table illustrates the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2014 and December 31, 2013:

As of June 30, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
	(dollars in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		11		—		1,441		1,452		48,745		50,197		—
Commercial - non real estate		35		—		—		35		12,442		12,477		—
Consumer:
Consumer - Real Estate		50		11		12		73		8,209		8,282		—
Consumer - Other		—		—		—		—		1,193		1,193		—
Residential:
Residential		1,174		346		383		1,903		62,595		64,498		22
Total	$	1,270	$	357	$	2,009	$	3,636	$	133,184	$	136,820	$	22

As of December 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
	(dollars in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	173	$	173	$	—	$	173	$	—
Commercial Real Estate - other		—		521		1,441		1,962		49,764		51,726		—
Commercial - non real estate		33		20		—		53		12,398		12,451		—
Consumer:
Consumer - Real Estate		54		55		—		109		8,621		8,730		—
Consumer - Other		—		4		2		6		1,159		1,165		2
Residential:
Residential		1,973		393		353		2,719		61,120		63,839		24
Total	$	2,060	$	993	$	1,969	$	5,022	$	133,062	$	138,084	$	26

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. In any tables presented subsequently, Risk Grade 4.5 credits are included with Risk Grade 4 credits.

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 June 30, 2014 and December 31, 2013:

As of June 30, 2014
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	—	$	—	$	25
3		—		15,389		5,750
4		—		22,511		5,867
4.5		—		4,915		660
5		—		4,508		16
6		173		2,874		159
7		—		—		—
8		—		—		—
Total	$	173	$	50,197	$	12,477

As of December 31, 2013
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	—	$	—	$	—
3		—		16,187		5,602
4		—		24,327		6,528
4.5		—		3,462		171
5		—		4,835		45
6		173		2,915		105
7		—		—		—
8		—		—		—
Total	$	173	$	51,726	$	12,451

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 June 30, 2014 and December 31, 2013:

As of June 30, 2014
	(dollars in thousands)
	Residential
Loan Grade:
Pass	$	63,940
Special Mention		—
Substandard		558
Total	$	64,498

	Consumer - Real Estate		Consumer - Other
	(dollars in thousands)
Performing	$	8,266	$	1,193
Nonperforming		16		—
Total	$	8,282	$	1,193

As of December 31, 2013
	(dollars in thousands)
	Residential
Loan Grade:
Pass	$	63,164
Special Mention		—
Substandard		675
Total	$	63,839

	Consumer -  Real Estate		Consumer - Other
Performing	$	8,723	$	1,163
Nonperforming		7		2
Total	$	8,730	$	1,165

The following table presents the recorded investment in non-accrual loans by class as of June 30, 2014 and December 31, 2013:

	As of
	June 30, 2014		December 31, 2013
	(in thousands)
Commercial Real Estate:
Commercial Real Estate - construction	$	173	$	173
Commercial Real Estate - other		1,452		1,454
Commercial		—		—
Consumer:
Consumer - real estate		16		7
Consumer - other		—		—
Residential:
Residential		536		651
Total	$	2,177	$	2,285

The key features of the Company’s loan modifications are determined on a loan-by-loan basis. Generally, our restructurings have related to interest rate reductions and loan term extensions. In the past the Company has granted reductions in interest rates, payment extensions and short-term payment forbearances as a means to maximize collectability of troubled credits. The Company has not forgiven principal to date, although this would be considered if necessary to ensure the long-term collectability of the loan. The Company’s loan modifications are typically short-term in nature, although the Company would consider a long-term modification to ensure the long-term collectability of the credit. In general, a borrower must make at least six consecutive timely payments before the Company would consider a return of a restructured loan to accruing status in accordance with Federal Deposit Insurance Corporation guidelines regarding restoration of credits to accrual status.

The Bank has classified approximately $2,080,000 of its impaired loans as troubled debt restructurings as of June 30, 2014. There were no commitments to extend credit to borrowers with loans classified as troubled debt restructurings as of June 30, 2014 and December 31, 2013.

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 delinquency, 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-offs may be realized as further unsecured positions are recognized.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013:

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of June 30, 2014							2014				2014
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)										(dollars in thousands)
With no specific allowance recorded:
Commercial	$	—	$	-—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—		—		—
Commercial Real Estate - Other		1,451		1,450		—		1,460		21		1,527		42
Consumer - Real Estate		17		16		—		16		—		16		—
Consumer - Other		—		—		—		—		—		—		—
Residential		659		543		—		553		3		554		4
With a specific allowance recorded:
Commercial		—		—		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—		173		—
Commercial Real Estate - Other		2,423		1,834		136		1,837		4		1,838		9
Consumer - Real Estate		—		—		—		—		—		—		—
Consumer - Other		—		—		—		—		—		—		—
Residential		90		90		25		90		1		90		1
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	3,874	$	3,284	$	136	$	3,297	$	25	$	3,365	$	51
Consumer - Real Estate	$	17	$	16	$	—	$	16	$	—	$	16	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential	$	749	$	633	$	25	$	643	$	4	$	644	$	5

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of December 31, 2013							2013				2013
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)										(dollars in thousands)
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		173		—		173		—
Commercial Real Estate - Other		1,789		1,788		—		3,172		33		3,195		60
Consumer - Real Estate		8		7		—		9		—		10		—
Consumer - Other		—		—		—		—		—		—		—
Residential		954		722		—		1,793		1		1,797		2
With a specific allowance recorded:
Commercial		—		—		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		—		—		—		—
Commercial Real Estate - Other		3,980		3,391		182		3,602		20		3,607		39
Consumer - Real Estate		—		—		—		—		—		—		—
Consumer - Other		—		—		—		—		—		—		—
Residential		53		30		5		—		—		—		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	6,774	$	53	$	6,802	$	99
Consumer - Real Estate	$	8	$	7	$	—	$	9	$	—	$	10	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	1,793	$	1	$	1,797	$	2

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 three and six months ended June 30, 2014 and June 30, 2013, respectively:

Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Three Months Ended June 30, 2014
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	48	$	392	$	61	$	49		$	16		$	792		$	100	$	1,458
Charge-offs		—		—		—		—			(1	)		(10	)		—		(11	)
Recoveries		—		12		—		14			—			14			—		40
Provision		—		22		11		(25	)		1			(13	)		4		—
Ending Balance	$	48	$	426	$	72	$	38		$	16		$	783		$	104	$	1,487

For the Six Months Ended June 30, 2014
	Commercial		Commercial					Consumer
	Construction		Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	48	$	444		$	63	$	62		$	21		$	784		$	50	$	1,472
Charge-offs		—		(16	)		—		(13	)		(6	)		(45	)		—		(80	)
Recoveries		—		32			—		23			—			24			—		79
Provision		—		(34	)		9		(34	)		1			20			54		16
Ending Balance	$	48	$	426		$	72	$	38		$	16		$	783		$	104	$	1,487

Loan Balances Individually Evaluated for Impairment
As of June 30, 2014
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses as of June 30, 2014
Ending balance: individually evaluated for impairment	$	48	$	136	$	—	$	—	$	—	$	25	$	—	$	209
Ending balance: loans collectively evaluated for impairment	$	—	$	290	$	72	$	38	$	16	$	758	$	104	$	1,278
Loans as of June 30, 2014
Loans:
Ending Balance	$	173	$	50,197	$	12,477	$	8,282	$	1,193	$	64,498	$	—	$	136,820
Ending balance: individually evaluated for impairment	$	173	$	3,284	$	—	$	16	$	—	$	633	$	—	$	4,106
Ending balance: loans collectively evaluated for impairment	$	—	$	46,913	$	12,477	$	8,266	$	1,193	$	63,865	$	—	$	132,714

For the Three Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate		Commercial			Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	89		$	509	$	87		$	87		$	26		$	877		$	—	$	1,675
Charge-offs		—			—		—			—			(6	)		(205	)		—		(211	)
Recoveries		—			1		—			18			—			12			—		31
Provision		(89	)		163		(8	)		(30	)		5			155			—		196
Ending Balance	$	—		$	673	$	79		$	75		$	25		$	839		$	—	$	1,691

For the Six Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69	$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(85	)		—		(7	)		(12	)		(367	)		—		(471	)
Recoveries		—			11			—		33			5			24			—		73
Provision		(64	)		168			10		(50	)		(1	)		276			—		339
Ending Balance	$	—		$	673		$	79	$	75		$	25		$	839		$	—	$	1,691

Loan Balances Individually Evaluated for Impairment
As of June 30, 2013
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Allowance for loan losses as of June 30, 2013
Ending balance: individually evaluated for impairment	$	—	$	322	$	—	$	—	$	—	$	—	$	—	$	322
Ending balance: loans collectively evaluated for impairment	$	—	$	351	$	79	$	75	$	25	$	839	$	—	$	1,369
Loans as of June 30, 2013
Loans:
Ending Balance	$	173	$	53,284	$	12,052	$	9,371	$	1,152	$	65,225	$	—	$	141,257
Ending balance: individually evaluated for impairment	$	173	$	6,745	$	8	$	—	$	—	$	1,676	$	—	$	8,602
Ending balance: loans collectively evaluated for impairment	$	—	$	46,539	$	12,044	$	9,371	$	1,152	$	63,549	$	—	$	132,655

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SECURITIES (Details) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Available for Sale
Available for Sale, Amortized Cost	$ 61,052,000	$ 50,601,000
Available for Sale, Gross Unrealized Gains	733,000	547,000
Available for Sale, Gross Unrealized Losses	(319,000)	(790,000)
Available for Sale, Market Value	61,466,330	50,358,175
Held to Maturity
Held to Maturity, Amortized Cost	2,215,000	2,255,000
Held to Maturity Securities, Gross Unrealized Gains	117,000	145,000
Held to Maturity, Market Value	2,332,000	2,400,000
US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Available for Sale
Available for Sale, Amortized Cost	12,835,000	7,111,000
Available for Sale, Gross Unrealized Gains	41,000	36,000
Available for Sale, Gross Unrealized Losses	(71,000)	(105,000)
Available for Sale, Market Value	12,805,000	7,042,000
Municipal Obligations [Member]
Available for Sale
Available for Sale, Amortized Cost	15,144,000	13,694,000
Available for Sale, Gross Unrealized Gains	270,000	216,000
Available for Sale, Gross Unrealized Losses	(130,000)	(301,000)
Available for Sale, Market Value	15,284,000	13,609,000
Held to Maturity
Held to Maturity, Amortized Cost	2,215,000	2,255,000
Held to Maturity Securities, Gross Unrealized Gains	117,000	145,000
Held to Maturity, Market Value	2,332,000	2,400,000
Corporate Bonds and Other Obligations [Member]
Available for Sale
Available for Sale, Amortized Cost	1,060,000	1,085,000
Available for Sale, Gross Unrealized Gains	17,000	12,000
Available for Sale, Market Value	1,077,000	1,097,000
Mortgage Backed Securities [Member]
Available for Sale
Available for Sale, Amortized Cost	32,011,000	28,708,000
Available for Sale, Gross Unrealized Gains	398,000	279,000
Available for Sale, Gross Unrealized Losses	(118,000)	(384,000)
Available for Sale, Market Value	32,291,000	28,603,000
Equity Securities [Member]
Available for Sale
Available for Sale, Amortized Cost	2,000	3,000
Available for Sale, Gross Unrealized Gains	7,000	4,000
Available for Sale, Market Value	$ 9,000	$ 7,000

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STOCK-BASED COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of option activity

A summary of option activity under the Plans during the six months ended June 30, 2014 is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2014		150,030		$	9.52		2.4	$	—
Granted		—			N/A
Exercised		—			N/A
Forfeited or expired		(12,500	)	$	9.26
Outstanding at June 30, 2014		137,530		$	9.54		2.0	$	—
Options Exercisable at June 30, 2014		137,530		$	9.54		2.0	$	—

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

Note 8—FAIR VALUE MEASUREMENTS

The fair value of financial assets and liabilities recorded at fair value is categorized in three levels. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. These levels are as follows:

Level 1 — Valuations based on quoted prices in active markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 — Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.

Level 3 — Assets and liabilities with valuations that include methodologies and assumptions that may not be readily observable, including option pricing models, discounted cash flow models, yield curves and similar techniques. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities, but in all cases are corroborated by external data, which may include third-party pricing services.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and the valuation techniques used by the Company to determine those fair values.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs  (Level 3)		Balance at June 30, 2012
Assets
Investment securities- available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	12,805	$	—	$	12,805
Municipal obligations		—		15,284		—		15,284
Corporate bonds & other obligations				1,077				1,077
Mortgage-backed securities		—		32,291		—		32,291
Equity securities		—		9		—		9
Total investment securities - available-for-sale	$	—	$	61,466	$	—	$	61,466

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value as of December 31, 2013
	(dollars in thousands)
Assets
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal obligations		—		13,609		—		13,609
Corporate bonds & other obligations		—		1,097		—		1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		—		7		—		7
Total investment securities - available-for-sale	$	—	$	50,358	$	—	$	50,358

Fair value measurements of U.S. Government agencies and mortgage backed securities use pricing models that vary and may consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.

There were no transfers between Levels 1 and 2 of the fair value hierarchy from December 31, 2013 to June 30, 2014. For the available for sale securities, the Company obtains fair value measurements from an independent third-party service.

The Company has assets that, under certain conditions, are subject to measurement at fair value on a nonrecurring basis. At June 30, 2014 and December 31, 2013, such assets consist primarily of impaired loans and other real estate owned. The Company has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2014
	Balance at June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Impaired loans accounted for under FASB ASC 310-10	$	3,457	$	—	$	—	$	3,457
Other real estate owned -residential mortgages	$	365	$	—	$	—	$	365
Other Real estate owned - commercial	$	442	$	—	$	—	$	442
Other repossessed assets	$	916	$	—	$	—	$	916
Total assets at fair value on a non-recurring basis							$	5,180

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Impaired loans accounted for under FASB ASC 310-10	$	5,352	$	—	$	—	$	5,352
Other real estate owned -residential mortgages		285		—		—		285
Other real estate owned - commercial		472		—		—		472
Other repossessed assets		1,023		—		—		1,023
Total assets at fair value on a non-recurring basis							$	7,132

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash and Cash Equivalents - The carrying amounts of cash and short-term instruments approximate fair values.

Investment Securities - Fair value for the Bank’s investment securities was determined using the market value in active markets, where available. When not available, fair values are estimated using the fair value hierarchy. In the fair value hierarchy, Level 2 fair values are determined using observable inputs other than Level 1 market prices, such as quoted prices for similar assets. Level 3 values are determined using unobservable inputs, such as discounted cash flow projections.

Loans Receivable - For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one- to four-family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial, and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans Held For Sale - Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

Federal Home Loan Bank Stock - The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Federal Home Loan Bank Advances - The estimated fair value of the fixed and variable rate Federal Home Loan Bank advances are estimated by discounting the related cash flows using the rates currently available for similarly structured borrowings with similar maturities.

Accrued Interest - The carrying amounts of accrued interest approximate fair value.

The estimated fair values and related carrying or notional amounts of the Company’s financial instruments are as follows:

June 30, 2014	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	3,237	$	3,237	$	—	$	—	$	3,237
Securities available for sale		61,466		—		61,466		—		61,466
Securities held to maturity		2,215		—		2,332		—		2,332
Loans held for sale		380		—		—		380		380
Loans receivable - net		135,069		—		—		134,336		134,336
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		714		—		—		714		714
Financial liabilities:
Customer deposits		168,999		—		169,436		—		169,436
Federal Home Loan Bank advances		25,157		—		24,958		—		24,958
Accrued interest payable		88		—		—		88		88

December 31, 2013	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	2,766	$	2,766	$	—	$	—	$	2,766
Securities available for sale		50,358		—		50,358		—		50,358
Securities held to maturity		2,255		—		2,400		—		2,400
Loans held for sale		175		—		—		178		178
Loans receivable - net		136,315		—		—		135,172		135,172
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		745		—		—		745		745
Financial liabilities:
Customer deposits		160,029		—		160,784		—		160,784
Federal Home Loan Bank advances		24,813		—		24,458		—		24,458
Accrued interest payable		89		—		—		89		89

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STOCK-BASED COMPENSATION

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

Note 6—STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted FASB ASC 718-10 “Shareholder Based Payments”, which requires that the grant-date fair value of awarded stock options be expensed over the requisite service period. The Company’s 1996 Stock Option Plan (the “1996 Plan”), which was approved by shareholders, permits the grant of share options to its employees for up to 127,491 shares of common stock (adjusted for the exchange ratio applied in the Company’s 2005 stock offering and related second-step conversion). The Company’s 2006 Stock-Based Incentive Plan (the “2006 Plan”), which was approved by the shareholders on May 17, 2006, permits the award of up to 242,740 shares of common stock of which the maximum number to be granted as Stock Options is 173,386 and the maximum that can be granted as Restricted Stock Awards is 69,354. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on five years of continual service and have ten year contractual terms. Certain options provide for accelerated vesting if there is a change in control (as defined in the Plans).

During the three and six months ended June 30, 2014 no shares were awarded under either the 1996 Plan or the 2006 Plan. Shares issued under the plans and exercised pursuant to the exercise of the stock options awarded under the plans may be either authorized but unissued shares or reacquired shares held by the Company as treasury stock.

Stock Options - A summary of option activity under the Plans during the six months ended June 30, 2014 is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2014		150,030		$	9.52		2.4	$	—
Granted		—			N/A
Exercised		—			N/A
Forfeited or expired		(12,500	)	$	9.26
Outstanding at June 30, 2014		137,530		$	9.54		2.0	$	—
Options Exercisable at June 30, 2014		137,530		$	9.54		2.0	$	—

The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value (i.e. the difference between the Company’s closing stock price of $6.12 on June 30, 2014 and the exercise price times the number of shares) that would have been received by the option holder had all option holders exercised their options on June 30, 2014. This amount changes based on the fair market value of the stock.

As of June 30, 2014 the Company had no unrecognized compensation cost related to nonvested options under the Plan. There were no shares which vested during the quarter ended June 30, 2014. In addition, there were no non-vested options as of June 30, 2014.

Restricted Stock Awards – As of June 30, 2014 all restricted stock awards have vested; therefore the Company had no unrecognized compensation costs under the 2006 Plan. There were 5,304 shares available for future stock award grants as of June 30, 2014.

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COMMITMENTS TO EXTEND CREDIT

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS TO EXTEND CREDIT

Note 7—COMMITMENTS TO EXTEND CREDIT

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, stand-by letters of credit, and commercial lines of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheet. The Company’s exposure to credit loss is represented by the contracted amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At June 30, 2014, the Company had outstanding commitments to originate loans of $24.6 million. These commitments included the following:

	As of
	June 30, 2014
Commitments to grant loans	$	11,380
Unfunded commitments under lines of credit		13,125
Commercial and standby letters of credit		59

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SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

Note 9—SUBSEQUENT EVENTS

On January 23, 2014, the Company announced that it had entered into a merger agreement with Alpena Banking Corporation, the parent company of Bank of Alpena. The Company has received all required conditional regulatory approvals to consummate the merger, and, subject to customary closing conditions, it is expected that merger will be consummated in August 2014.

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STOCK-BASED COMPENSATION (Details Narrative) (USD $)	6 Months Ended
	Jun. 30, 2014
Share Price	$ 6.12
Stock Options [Member]
Vesting term	5 years
Contractual term	10 years
Restricted Stock [Member]
Shares available for grant	5,304
1996 Stock-Based Incentive Plan [Member] | Stock Options [Member]
Number of awards authorized	127,491
2006 Stock-Based Incentive Plan [Member]
Number of awards authorized	242,740
2006 Stock-Based Incentive Plan [Member] | Stock Options [Member]
Number of awards authorized	173,386
2006 Stock-Based Incentive Plan [Member] | Restricted Stock [Member]
Number of awards authorized	69,354

XML

FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [Abstract]

Schedule of assets and liabilities measured at fair value on a recurring basis

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, and the valuation techniques used by the Company to determine those fair values.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs  (Level 3)		Balance at June 30, 2012
Assets
Investment securities- available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	12,805	$	—	$	12,805
Municipal obligations		—		15,284		—		15,284
Corporate bonds & other obligations				1,077				1,077
Mortgage-backed securities		—		32,291		—		32,291
Equity securities		—		9		—		9
Total investment securities - available-for-sale	$	—	$	61,466	$	—	$	61,466

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2013
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value as of December 31, 2013
	(dollars in thousands)
Assets
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal obligations		—		13,609		—		13,609
Corporate bonds & other obligations		—		1,097		—		1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		—		7		—		7
Total investment securities - available-for-sale	$	—	$	50,358	$	—	$	50,358

Schedule of assets measured at fair value on a nonrecurring basis

he Company has assets that, under certain conditions, are subject to measurement at fair value on a nonrecurring basis.

Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2014
	Balance at June 30, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Impaired loans accounted for under FASB ASC 310-10	$	3,457	$	—	$	—	$	3,457
Other real estate owned -residential mortgages	$	365	$	—	$	—	$	365
Other Real estate owned - commercial	$	442	$	—	$	—	$	442
Other repossessed assets	$	916	$	—	$	—	$	916
Total assets at fair value on a non-recurring basis							$	5,180

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2013
	Balance at December 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Impaired loans accounted for under FASB ASC 310-10	$	5,352	$	—	$	—	$	5,352
Other real estate owned -residential mortgages		285		—		—		285
Other real estate owned - commercial		472		—		—		472
Other repossessed assets		1,023		—		—		1,023
Total assets at fair value on a non-recurring basis							$	7,132

Schedule of carrying value and estimated fair values of Financial Instruments

The estimated fair values and related carrying or notional amounts of the Company’s financial instruments are as follows:

June 30, 2014	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	3,237	$	3,237	$	—	$	—	$	3,237
Securities available for sale		61,466		—		61,466		—		61,466
Securities held to maturity		2,215		—		2,332		—		2,332
Loans held for sale		380		—		—		380		380
Loans receivable - net		135,069		—		—		134,336		134,336
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		714		—		—		714		714
Financial liabilities:
Customer deposits		168,999		—		169,436		—		169,436
Federal Home Loan Bank advances		25,157		—		24,958		—		24,958
Accrued interest payable		88		—		—		88		88

December 31, 2013	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	2,766	$	2,766	$	—	$	—	$	2,766
Securities available for sale		50,358		—		50,358		—		50,358
Securities held to maturity		2,255		—		2,400		—		2,400
Loans held for sale		175		—		—		178		178
Loans receivable - net		136,315		—		—		135,172		135,172
Federal Home Loan Bank stock		3,266		—		3,266		—		3,266
Accrued interest receivable		745		—		—		745		745
Financial liabilities:
Customer deposits		160,029		—		160,784		—		160,784
Federal Home Loan Bank advances		24,813		—		24,458		—		24,458
Accrued interest payable		89		—		—		89		89

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LOANS (Details Narrative) (USD $)	Jun. 30, 2014
Receivables [Abstract]
Impaired loans - TDRs	$ 2,080,000

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Consolidated Statement of Changes in Stockholders' Equity (Unaudited) (USD $)	Common Stock	Treasury Stock	Additional Paid-in Capital	Retained Earnings	Accumulated Other Comprehensive Income	Total
Balance, beginning at Dec. 31, 2013	$ 31,918	$ (2,963,918)	$ 23,853,891	$ 2,763,242	$ (160,451)	$ 23,524,682
Net income				315,635		315,635
Change in unrealized gain on available-for-sale securities (net of tax of $223,395)					433,649	433,649
Dividends declared				(115,362)		(115,362)
Balance, ending at Jun. 30, 2014	$ 31,918	$ (2,963,918)	$ 23,853,891	$ 2,963,515	$ 273,198	$ 24,158,604

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SECURITIES

6 Months Ended

Jun. 30, 2014

Investments, Debt and Equity Securities [Abstract]

SECURITIES

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:

	June 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
	(in thousands)
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	12,835	$	41	$	(71	)	$	12,805
Municipal obligations		15,144		270		(130	)		15,284
Corporate bonds & other obligations		1,060		17		—			1,077
Mortgage-backed securities		32,011		398		(118	)		32,291
Equity securities		2		7		—			9
Total	$	61,052	$	733	$	(319	)	$	61,466
Securities Held to Maturity
Municipal obligations	$	2,215	$	117	$	—		$	2,332

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Market Value
	(in thousands)
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	7,111	$	36	$	(105	)		7,042
Municipal obligations		13,694		216		(301	)		13,609
Corporate bonds & other obligations		1,085		12		—			1,097
Mortgage-backed securities		28,708		279		(384	)		28,603
Equity securities		3		4		—			7
Total	$	50,601	$	547	$	(790	)	$	50,358
Securities Held to Maturity
Municipal obligations	$	2,255	$	145	$	—		$	2,400

The amortized cost and estimated market value of securities at June 30, 2014, 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.

	June 30, 2014
	Amortized Cost		Market Value
	(in thousands)
Available For Sale:
Due in one year or less	$	3,332	$	3,354
Due after one year through five years		18,095		18,130
Due in five year through ten years		6,409		6,396
Due after ten years		1,203		1,286
Subtotal		29,039		29,166
Equity securities		2		9
Mortgage-backed securities		32,011		32,291
Total	$	61,052	$	61,466
Held To Maturity:
Due in one year or less	$	95	$	97
Due after one year through five years		500		519
Due in five year through ten years		715		765
Due after ten years		905		951
Total	$	2,215	$	2,332

At June 30, 2014 and December 31, 2013, securities with a carrying value and fair value of $39,000,000 and $36,000,000, respectively, were pledged to secure certain deposit accounts, FHLB advances and our line of credit at the Federal Reserve.

For the six months ended June 30, 2014 and 2013 there were no sales of securities from the investment portfolio.

The following is a summary of securities that had unrealized losses at June 30, 2014 and December 31, 2013. The information is presented for securities that have been in an unrealized loss position for less than 12 months and for more than 12 months. At June 30, 2014 there were 30 securities with unrealized losses totaling $319,000 and at December 31, 2013, the Company held 39 securities with unrealized losses totaling $790,000.

	June 30, 2014
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		< 12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	3,233	$	(17	)	$	945	$	(54	)
Corporate bonds & other obligations		—		—			—		—
Municipal obligations		1,711		(2	)		6,321		(128	)
Mortgage-backed securities		2,309		(11	)		5,186		(107	)
Equity securities		—		—			—		—
Total	$	7,253	$	(30	)	$	12,452	$	(289	)
Held to Maturity:
Municipal obligations	$	—	$	—		$	—	$	—

	December 31, 2013
			Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		< 12 months			Fair Value		> 12 months
	(in thousands)
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	—		$	894	$	(105	)
Municipal obligations		7,902		(243	)		1,668		(58	)
Mortgage-backed securities		14,471		(334	)		2,052		(50	)
Equity securities		—		—			—		—
Total	$	22,373	$	(577	)	$	4,614	$	(213	)
Held to Maturity:
Municipal obligations	$	—	$	—		$	—	$	—

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.

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LOANS (Details) (USD $)	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012
Gross loans	$ 136,820,000		$ 138,084,000	$ 141,257,000
Net deferred loan fees	(264,000)		(297,000)
Allowance for loan losses	(1,486,809)	(1,458,000)	(1,471,622)	(1,691,000)	(1,675,000)	(1,750,000)
Loans receivable, net	135,068,805		136,314,964
Residential Mortgage [Member]
Gross loans	64,498,000		63,839,000	65,225,000
Allowance for loan losses	(783,000)	(792,000)	(784,000)	(839,000)	(877,000)	(906,000)
Commercial Real Estate Construction [Member]
Gross loans	173,000		173,000	173,000
Allowance for loan losses	(48,000)	(48,000)	(48,000)		(89,000)	(64,000)
Commercial Secured by Real Estate [Member]
Gross loans	50,197,000		51,726,000	53,284,000
Allowance for loan losses	(426,000)	(392,000)	(444,000)	(673,000)	(509,000)	(579,000)
Commercial Real Estate Other [Member]
Gross loans	12,477,000		12,451,000	12,052,000
Allowance for loan losses	(72,000)	(61,000)	(63,000)	(79,000)	(87,000)	(69,000)
Total Commercial Loans [Member]
Gross loans	62,847,000		64,350,000
Consumer Real Estate [Member]
Gross loans	8,282,000		8,730,000	9,371,000
Allowance for loan losses	(38,000)	(49,000)	(62,000)	(75,000)	(87,000)	(99,000)
Consumer Other [Member]
Gross loans	1,193,000		1,165,000	1,152,000
Allowance for loan losses	(16,000)	(16,000)	(21,000)	(25,000)	(26,000)	(33,000)
Total Consumer Loans [Member]
Gross loans	$ 9,475,000		$ 9,895,000

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FAIR VALUE MEASUREMENTS (Details) (USD $)	Jun. 30, 2014	Dec. 31, 2013
Securities available for sale	$ 61,466,330	$ 50,358,175
Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	61,466,000	50,358,000
Fair Value [Member]
Securities available for sale	61,466,000	50,358,000
US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale	12,805,000	7,042,000
Municipal Obligations [Member]
Securities available for sale	15,284,000	13,609,000
Corporate Bonds and Other Obligations [Member]
Securities available for sale	1,077,000	1,097,000
Mortgage Backed Securities [Member]
Securities available for sale	32,291,000	28,603,000
Equity Securities [Member]
Securities available for sale	9,000	7,000
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	61,466,000	50,358,000
Recurring [Member] | Fair Value [Member]
Securities available for sale	61,466,000	50,358,000
Recurring [Member] | US Treasury Securities and Obligations of US Government Corporations and Agencies [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	12,805,000	7,042,000
Recurring [Member] | US Treasury Securities and Obligations of US Government Corporations and Agencies [Member] | Fair Value [Member]
Securities available for sale	12,805,000	7,042,000
Recurring [Member] | Municipal Obligations [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	15,284,000	13,609,000
Recurring [Member] | Municipal Obligations [Member] | Fair Value [Member]
Securities available for sale	15,284,000	13,609,000
Recurring [Member] | Corporate Bonds and Other Obligations [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	1,077,000	1,097,000
Recurring [Member] | Corporate Bonds and Other Obligations [Member] | Fair Value [Member]
Securities available for sale	1,077,000	1,097,000
Recurring [Member] | Mortgage Backed Securities [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	32,291,000	28,603,000
Recurring [Member] | Mortgage Backed Securities [Member] | Fair Value [Member]
Securities available for sale	32,291,000	28,603,000
Recurring [Member] | Equity Securities [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	9,000	7,000
Recurring [Member] | Equity Securities [Member] | Fair Value [Member]
Securities available for sale	$ 9,000	$ 7,000

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COMMITMENTS TO EXTEND CREDIT (Tables)

6 Months Ended

Jun. 30, 2014

Commitments and Contingencies Disclosure [Abstract]

Schedule of outstanding commitments

At June 30, 2014, the Company had outstanding commitments to originate loans of $24.6 million. These commitments included the following:

	As of
	June 30, 2014
Commitments to grant loans	$	11,380
Unfunded commitments under lines of credit		13,125
Commercial and standby letters of credit		59