10-K

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 10-K

☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2014

OR

☐ Transition Report Pursuant to 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 Number)
100 S. Second Avenue, Alpena, Michigan	49707
(Address of Principal Executive Offices)	Zip Code

(989) 356-9041

(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share	The Nasdaq Stock Market LLC
(Title of Class)	(Name of Exchange of Which Registered)

Securities Registered Pursuant to Section 12(g) of the Act: 

None

Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.     YES  ☐     NO  ☒

Indicate by check mark if the registrant in not required to file reports pursuant to Section 13 or 15(d) of the Act.     YES  ☐     NO  ☒

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past twelve 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or nay amendments to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large 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 by Rule 12b-2 of the Exchange Act).     YES  ☐     NO  ☒.

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price on June 30, 2014 ($6.05 per share) was $15.4 million.

As of March 30, 2015, there were issued and outstanding 4,034,764shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

1. Proxy Statement for the 2014 Annual Meeting of Stockholders (Parts I and III).

2. Annual Report to Shareholders for the Year Ended December 31, 2014 (Part II).

TABLE OF CONTENTS
PART I
ITEM 1	BUSINESS	3
ITEM 1A	RISK FACTORS	35
ITEM 1B	UNRESOLVED STAFF COMMENTS	35
ITEM 2	PROPERTIES	35
ITEM 3	LEGAL PROCEEDINGS	35
ITEM 4	MINE SAFETY DISCLOSURES	35
PART II
ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	35
ITEM 6	SELECTED FINANCIAL DATA	36
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	36
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	36
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	36
ITEM 9A	CONTROLS AND PROCEDURES	36
ITEM 9B	OTHER INFORMATION	37
PART III
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	37
ITEM 11	EXECUTIVE COMPENSATION	37
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BEENFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	37
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	37
ITEM 14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	37
PART IV
ITEM 15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	38
	SIGNATURES	39

2

PART I

ITEM 1. BUSINESS

Private Securities Litigation Reform Act Safe Harbor Statement

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1955, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” and words of similar meaning. These forward-looking statements include, but are not limited to:

· statements of our goals, intentions and expectations;

· statements regarding our business plans, prospects, growth and operating strategies;

· statements regarding the asset quality of our loan and investment portfolios; and

· estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-K.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

· general economic conditions, either nationally or in our market areas, that are worse than expected;

· competition among depository and other financial institutions;

· inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

· adverse changes in the securities markets;

· changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

· our ability to enter new markets successfully and capitalize on growth opportunities;

· our ability to successfully integrate acquired entities;

· changes in consumer spending, borrowing and savings habits;

· changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

· changes in our organization, compensation and benefit plans;

· changes in our financial condition or results or operations that reduce capital available to pay dividends;

· regulatory changes or actions; and

· changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

3

First Federal of Northern Michigan Bancorp, Inc.

First Federal of Northern Michigan Bancorp, Inc. is a Maryland corporation that owns all of the outstanding shares of common stock of First Federal of Northern Michigan. At December 31, 2014, we had consolidated assets of $325.8 million, deposits of $270.7 million and stockholders’ equity of $30.5 million. As of December 31, 2014, First Federal of Northern Michigan Bancorp, Inc. had 4,034,764 shares of common stock issued and outstanding. Our executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Our phone number at that address is (800) 498-0013.

The Company maintains a website at www.first-federal.com that includes important information on our Company, including a list of our products and services, branch locations and current financial information. In addition, we make available, without charge, through our website, a link to our filings with the SEC, including copies of annual reports on Form 10-K, quarterly reports in Form 10-Q, current reports in Form 8-K, and amendments to these filings, if any. Information on our website should not be considered a part of this Annual Report.

First Federal of Northern Michigan

First Federal of Northern Michigan is a full-service, community-oriented savings bank that provides financial services to individuals, families and businesses from eight full-service facilities located in Alpena, Cheboygan,Emmet,Iosco, Otsego, Montmorency andOscoda Counties, Michigan. First Federal of Northern Michigan was chartered in 1957, and reorganized into the mutual holding company structure in 1994. In 2000, First Federal of Northern Michigan became the wholly owned subsidiary of Alpena Bancshares, Inc., our predecessor company, and in April 2005 we completed our “second step” mutual-to-stock conversion and formed our current ownership structure.

In August 2014 we completed our merger with Alpena Banking Corporation and its subsidiary Bank of Alpena, a Michigan chartered bank located in Alpena, Michigan.

First Federal of Northern Michigan’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans, commercial real estate loans, commercial business loans, consumer loans and in investment securities and mortgage-backed securities.

First Federal of Northern Michigan’s executive offices are located at 100 South Second Avenue, Alpena, Michigan 49707. Its phone number at that address is (800) 498-0013.

Market Area and Competition

First Federal of Northern Michigan conducts operations through its main office in Alpena, Michigan, which is located in the northeastern lower peninsula of Michigan, and through its seven other branch offices in Michigan. According to the Michigan Senate, the population of Alpena County, from which the majority of our deposits are drawn, has decreased approximately 7.0% since 2000, and currently is approximately 30,000. The population of our primary market area, which includes Alpena County and seven surrounding counties, was estimated to be approximately 155,000 in 2013, a decrease of 1.1% from approximately 157,000 according to the 2010 census conducted by United States Census Bureau. Median household income for the counties which comprised our market area in 2013 ranged from approximately $33,200 to $50,900, which represented moderate increases from 2010 levels in most counties in our market area. Median household income for our entire market area was below the national level of $53,046 and below the Michigan level of $48,411 in all but one county in our market area, reflecting the largely rural nature of our market area and the absence of more densely populated urban and suburban areas. Household income levels are not expected to increase substantially in our market area in the near future. The unemployment rate in our primary market, Alpena County, was 6.4% for December 2014, and ranged from 6.4% to 12.0% across the rest of our primary market area, as compared to 6.7% nationally and 8.4% for Michigan (all numbers not seasonally adjusted).

Alpena is the largest city located in the northeastern lower peninsula of Michigan. This area has long been associated with agricultural, wood and concrete industries. Tourism has also been a major industry in our primary market area. All of these industries tend to be seasonal and are strongly affected by state and national economic conditions.

Major employers in our primary market area include various public schools and governmental agencies, Alpena Regional Medical Center, Besser Company (a manufacturer of concrete products equipment), Lafarge Corporation (an international limestone mining and cement producer), Panel Processing (a peg board manufacturer), Treetops Sylvan Resort (an operator of resort properties), Garland Resort (an operator of resort properties and golf courses), Otsego Memorial Hospital, Decorative Panels International (a hardboard manufacturer), OMNI Metalcraft Corp. (a diversified manufacturer), and various other small companies.

4

As of December 31, 2014, First Federal of Northern Michigan was the only thrift institution headquartered in our market area. We encounter strong competition both in attracting deposits and in originating residential and commercial real estate and other loans. Our most direct competition for deposits has historically come from commercial banks, other savings institutions, and credit unions in our market area. Competition for loans comes from such financial institutions. We expect continued strong competition in the foreseeable future, including the “super-regional” banks currently in our markets, from internet banks, and from credit unions in many of our markets. We compete for savings deposits by offering depositors a high level of personal service and a wide range of competitively priced financial products. We compete for real estate loans primarily on the basis of the interest rates and fees we charge and through advertising. Strong competition for deposits and loans may limit our ability to grow and may adversely affect our profitability in the future.

Lending Activities

General. The largest part of our loan portfolio is mortgage loans secured by one- to four-family residential real estate. In recent years, we have sold most of the fixed-rate conventional one- to four-family mortgage loans that we originate that have terms of 15 years or more. We retain the servicing on a majority of the mortgage loans that we sell. To a lesser extent, we also originate commercial loans, commercial real estate loans and consumer loans. At December 31, 2014, we had total loans of $165.3 million, of which $71.8 million, or 43.5%, were one- to four-family residential real estate mortgage loans, $63.6 million, or 38.5%, were commercial real estate loans, and $19.0 million, or 11.5%, were commercial loans. Other loans consisted primarily of home equity loans, which totaled $9.5 million, or 5.8%, of total loans, and other consumer loans which totaled $1.4 million, or 0.9% of total loans.

One- to Four-Family Residential Real Estate Lending. Our primary lending activity consists of originating one- to four-family owner-occupied residential mortgage loans, virtually all of which are collateralized by properties located in our market area. We also originate one- to four-family construction loans that pay interest only during the initial construction period (which generally does not exceed twelve months) and then pay interest and principal for the remainder of the loan term. To address interest rate risk we generally sell most of our one- to four-family fixed-rate mortgage loans with terms of 15 years or more and retain the loan servicing on a majority of these mortgage loans. Fixed-rate loans with terms of 15 years or less are either sold into the secondary market or, in some cases, retained in our portfolio. Adjustable rate mortgage loans are generally underwritten to secondary market mortgage standards, but are retained in our loan portfolio. One- to four-family residential mortgage loans are underwritten and originated according to policies and guidelines established by the secondary mortgage market agencies and approved by our Board of Directors. We utilize existing liquidity, deposits, loan repayments, and Federal Home Loan Bank advances to fund new loan originations.

We currently offer fixed rate one- to four-family residential mortgage loans with terms ranging from 15to 30 years. One- to four-family residential mortgage loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. The average length of time that our one- to four-family residential mortgage loans remain outstanding varies significantly depending upon trends in market interest rates and other factors. In recent years, the average maturity of our mortgage loans has decreased significantly because of the declining trend in market interest rates and the unprecedented volume of refinancing activity resulting from such interest rate decreases.

Originations of one- to four fixed-rate mortgage loans are regularly monitored and are affected significantly by the level of market interest rates, our interest rate gap position, and loan products offered by our competitors. Our fixed rate mortgage loans amortize on a monthly basis with principal and interest due each month.

We have in the past originated fixed-rate loans that amortize over 15 years but that have “balloon payments” that are due upon the maturity of the loan in five years. As a general rule, we no longer originate this type of mortgage loan. Upon maturity, existing balloon mortgage loans are either underwritten as fixed-rate loans and sold or rewritten as adjustable rate mortgages at current market rates. While the majority of our balloon mortgage loans amortize over 15 years, some amortize over 10 or 30 years, and a limited number amortize over five years.

Our one- to four-family residential mortgage loans customarily include due-on-sale clauses, which are provisions giving us the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on our fixed-rate mortgage loan portfolio, and we have generally exercised our rights under these clauses.

5

Regulations limit the amount that a savings institution may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. Such regulations permit a maximum loan-to-value ratio of 100% for residential property and 90% for all other real estate loans. Our lending policies limit the maximum loan-to-value ratio on fixed-rate loans without private mortgage insurance to 80% of the lesser of the appraised value or the purchase price of the property serving as collateral for the loan.

Generally, we make one- to four-family mortgage loans with loan-to-value ratios of up to 90%. However, for one- to four-family real estate loans with loan-to-value ratios of between 80% and 90%, we may require the borrower to purchase private mortgage insurance. In 2005 we began making 80/20 loans and interest-only loans subject to Board-approved dollar limits to limit risk exposure. In late 2007 these products were eliminated; however, at December 31, 2014 approximately $315,000 of these products remained in our portfolio. We require fire and casualty insurance, flood insurance when applicable, as well as title insurance, on all properties securing real estate loans made by us.

Commercial Real Estate Lending. We originate commercial real estate loans. At December 31, 2014, we had a total of 265 loans secured primarily by commercial real estate properties, unimproved vacant land and, to a limited extent, multifamily properties. Our commercial real estate loans are secured by income-producing properties such as office buildings, retail buildings, restaurants and motels. A majority of our commercial real estate loans are secured by properties located in our primary market area, although at December 31, 2014 we had $2.3 million in commercial real estate loans located outside of Michigan. We have originated commercial construction loans that are originated as permanent loans but are interest-only during the initial construction period, which generally does not exceed nine months. At December 31, 2014, our commercial real estate loans, totaled $63.6 million, or 38.5% of our total loans, and had an average principal balance of approximately $239,000. The terms of each loan typically amortize over 15 years and have a three- or five-year balloon feature. An origination fee of 0.5% to 1.0% is generally charged on commercial real estate loans. We generally make commercial real estate loans up to 75% of the appraised value of the property securing the loan.

At December 31, 2014, our largest commercial real estate relationship consisted of two loans with a total principal balance of $4.0 million, which was performing according to its repayment terms as of December 31, 2014. This loan relationship is secured by two pieces of commercial real estate. Our largest single commercial real estate loan had an outstanding balance of $3.1 million, which was performing according to its repayment terms as of December 31, 2014.

Commercial real estate loans generally carry higher interest rates and have shorter terms than those on one- to four-family residential mortgage loans. However, loans secured by commercial real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the business or the related real estate property. If the cash flow from the business operation is reduced, the borrower’s ability to repay the loan may be impaired. This may be particularly true in the early years of the business operation when the risk of failure is greatest. Some of our commercial real estate loans have been made to borrowers whose business operations are untested, which increases our risk.

Consumer and Other Loans. We originate a variety of consumer and other loans, including loans secured by savings accounts, new and used automobiles, mobile homes, boats, recreational vehicles, and other personal property. As of December 31, 2014, consumer and other loans totaled $10.9 million, or 6.6% of our total loan portfolio. At such date, $147,000, or 0.09% of our consumer loans, were unsecured. As of December 31, 2014, home equity loans totaled $9.5 million, or 5.8% of our total loan portfolio, and automobile loans totaled $630,000, or 0.4% of our total loan portfolio. We originate automobile loans directly to our customers and have no outstanding agreements with automobile dealerships to generate indirect loans.

Our procedures for underwriting consumer loans include an assessment of an applicant’s credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral security, if any, to the proposed loan amount.

6

Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles, mobile homes, boats and recreational vehicles. In addition, the repayment of consumer loans depends on the borrower’s continued financial stability, as repayment is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy than a single family mortgage loan.

Commercial Loans. At December 31, 2014, we had $19.0 million in commercial loans which amounted to 11.5% of total loans. We make commercial loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. Commercial lending products include term loans and revolving lines of credit. The maximum amount of a commercial loan is our loans-to-one-borrower limit, which was $4.8 million at December 31, 2014. Such loans are generally used for longer-term working capital purposes such as purchasing equipment or furniture. Commercial loans are made with either adjustable or fixed rates of interest. Variable rates are generally based on the prime rate, as published in The Wall Street Journal, plus a margin. Fixed rate commercial loans are set at a margin above the Federal Home Loan Bank comparable advance rate.

When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral. Commercial loans are generally secured by a variety of collateral, primarily accounts receivable, inventory and equipment, and are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial loans are typically made in amounts of up to 75% of the value of the collateral securing the loan.

Commercial loans generally have greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. If the cash flow from the business operation is reduced, the borrower’s ability to repay the loan may be impaired. This may be particularly true in the early years of the business operation when the risk of failure is greatest. Moreover, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards. At December 31, 2014, our largest commercial loan was a $2.2 million commercial term loan and was collateralized by equipment and inventory of a supermarket. At December 31, 2014, the outstanding balance was $1.5 million and the loan was performing according to its repayment terms.

Construction Loans. We originate construction loans to local home builders in our market area, generally with whom we have an established relationship, and to individuals engaged in the construction of their residences. We also originate loans for the construction of commercial buildings and, to a lesser extent, participate in construction loan projects originated by other lenders. Our construction loans totaled $2.2 million, or 1.3% of our total loan portfolio, at December 31, 2014.

Our construction loans to home builders are repaid on an interest-only basis for the term of the loan (which is generally six to 12 months), with interest calculated on the amount disbursed to the builders based upon a percentage of completion of construction. These loans typically have a maximum loan-to-value ratio of 80%, based on the appraised value. Interest rates are fixed during the construction phase of the loan. Loans to builders are made on either a pre-sold or speculative (unsold) basis. Most of our construction loans to individuals who intend to occupy the completed dwelling are originated via a “one-step closing” process, whereby the construction phase and end-financing are handled with one loan closing. Prior to funding a construction loan, we require an appraisal of the property from a qualified appraiser approved by us, and all appraisals are reviewed by us.

Construction lending exposes us to greater credit risk than permanent mortgage financing because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. If the estimate of construction costs is inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion is inaccurate, the value of the property may be insufficient to assure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the repayment of the loan depends on the builder’s ability to sell the property prior to the time that the construction loan is due. We have attempted to minimize these risks by, among other things, limiting our residential construction lending primarily to residential properties in our market area and generally requiring personal guarantees from the principals of corporate borrowers.

7

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

	At December 31,
	2014						2013						2012						2011						2010
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(dollars in thousands)
Real estate loans:
Residential Mortgages:
1-4 Family Mortgages	$	68,355			41.4	%	$	60,750			44.0	%	$	63,867			45.3	%	$	64,177			45.0	%	$	68,298			42.7	%
Purchased Mortgage In-State		1,300			0.8	%		1,506			1.2	%		1,711			1.3	%		1,924			1.3	%		3,243			2.0	%
1-4 Family Construction		2,173			1.3	%		1,583			1.1	%		962			0.7	%		498			0.3	%		156			0.1	%
Home Equity/Junior Liens		9,502			5.7	%		8,730			6.3	%		10,409			7.4	%		13,395			9.4	%		16,547			10.3	%
Nonresidential Mortgages:
Nonresidential		54,908			33.2	%		41,090			29.8	%		40,992			29.1	%		44,020			30.9	%		43,580			27.3	%
Purchased Nonresidential In-State		4,993			3.0	%		6,886			5.0	%		4,553			3.2	%		2,130			1.5	%		4,232			2.6	%
Purchased Nonresidential Out-of-State		2,262			1.4	%		3,750			2.7	%		6,882			4.9	%		7,788			5.5	%		9,928			6.2	%
Nonresidential Construction		1,443			0.9	%		—			0.0	%		1,458			1.0	%		91			0.1	%		1,498			0.9	%
Purchased Construction In-State		—			0.0	%		—			0.0	%		615			0.4	%		—			0.0	%		—			0.0	%
Purchased Construction Out-of-State		—			0.0	%		173			0.1	%		173			0.1	%		173			0.1	%		1,772			1.1	%
Non real estate loans:
Commercial Loans		17,361			10.5	%		12,164			8.8	%		7,769			5.5	%		6,621			4.6	%		7,382			4.6	%
Purchased Commercial Loans In-State		1,639			1.0	%		287			0.2	%		333			0.2	%		381			0.3	%		1,466			0.9	%
Consumer and other loans		1,403			0.8	%		1,165			0.8	%		1,258			0.9	%		1,477			1.0	%		2,118			1.3	%
Total Loans	$	165,339			100.00	%	$	138,084			100.00	%	$	140,982			100.00	%	$	142,675			100.00	%	$	160,220			100.00	%
Other items:
Deferred loan origination costs		226						179						15						14						31
Deferred loan origination fees		(489	)					(476	)					(335	)					(287	)					(276	)
Allowance for loan losses		(1,429	)					(1,472	)					(1,750	)					(1,518	)					(2,831	)
Total loans, net	$	163,647					$	136,315					$	138,912					$	140,884					$	157,144

8

Loan Portfolio Maturities and Yield. The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2014. Demand loans, loans having no stated repayment or maturity, and overdraft loans are reported as being due in one year or less.

						Purchased Mortgage				1-4 Family
		1-4 Family Mortgage				In-State				Construction
			Weighted				Weighted				Weighted
			Average				Average				Average
		Amount	Rate			Amount	Rate			Amount	Rate
		(dollars in thousands)
Due During the Years Ending December 31,
2015	$	380	8.43	%	$	—	0.00	%	$	2,112	4.12	%
2016		141	6.98	%		—	0.00	%		61	3.63	%
2017		226	6.08	%		—	0.00	%		—	0.00	%
2018 to 2019		2,483	5.79	%		—	0.00	%		—	0.00	%
2020 to 2024		5,565	5.31	%		—	0.00	%		—	0.00	%
2025 to 2029		25,750	4.44	%		22	2.85	%		—	0.00	%
2030 and beyond		33,810	4.68	%		1,278	2.56	%		—	0.00	%
Total	$	68,355	4.71	%	$	1,300	2.56	%	$	2,173	4.10	%

										Purchased Nonresidential
		Home Equity/Junior Liens				Nonresidential				In-State
			Weighted				Weighted				Weighted
			Average				Average				Average
		Amount	Rate			Amount	Rate			Amount	Rate
		(dollars in thousands)
Due During the Years Ending December 31,
2015	$	118	5.27	%	$	5,379	6.74	%	$	20	7.48	%
2016		337	6.50	%		6,313	6.01	%		785	4.66	%
2017		505	5.52	%		13,738	5.63	%		1,370	4.75	%
2018 to 2019		1,338	4.80	%		14,631	5.50	%		180	4.75	%
2020 to 2024		4,389	5.73	%		7,443	5.33	%		1,697	4.75	%
2025 to 2029		2,802	4.16	%		2,854	5.11	%		941	5.75	%
2030 and beyond		13	5.25	%		4,550	6.16	%		—	0.00	%
Total	$	9,502	5.15	%	$	54,908	5.73	%	$	4,993	4.94	%

		Purchased Nonresidential				Nonresidential
		Out-of-State				Construction				Commercial Loans
			Weighted				Weighted				Weighted
			Average				Average				Average
		Amount	Rate			Amount	Rate			Amount	Rate
		(dollars in thousands)
Due During the Years Ending December 31,
2015	$	—	0.00	%	$	1,443	5.25	%	$	6,025	5.13	%
2016		—	0.00	%		—	0.00	%		2,327	5.54	%
2017		—	0.00	%		—	0.00	%		2,013	5.53	%
2018 to 2019		—	0.00	%		—	0.00	%		4,055	5.13	%
2020 to 2024		—	0.00	%		—	0.00	%		2,941	5.18	%
2025 to 2029		—	0.00	%		—	0.00	%		—	0.00	%
2030 and beyond		2,262	5.75	%		—	0.00	%		—	0.00	%
Total	$	2,262	5.75	%	$	1,443	5.25	%	$	17,361	5.24	%

		Purchased Commercial				Consumer
		Loans In-State				& Other Loans				Total
			Weighted				Weighted				Weighted
			Average				Average				Average
		Amount	Rate			Amount	Rate			Amount	Rate
		(dollars in thousands)
Due During the Years Ending December 31,
2015	$	—	0.00	%	$	57	8.29	%	$	15,534	5.66	%
2016		1,408	3.50	%		153	8.33	%		11,525	5.56	%
2017		—	0.00	%		512	6.63	%		18,364	5.59	%
2018 to 2019		231	4.75	%		407	5.63	%		23,325	5.42	%
2020 to 2024		—	0.00	%		233	5.19	%		22,268	5.34	%
2025 to 2029		—	0.00	%		28	5.50	%		32,397	4.51	%
2030 and beyond		—	0.00	%		13	18.00	%		41,926	4.84	%
Total	$	1,639	3.68	%	$	1,403	6.44	%	$	165,339	5.13	%

9

Fixed- and Adjustable-Rate Loans. The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2014 that are contractually due after December 31, 2015.

	Due After December 31, 2015
	Fixed		Adjustable		Total
	(dollars in thousands)
Residential Mortgages:
1-4 Family Mortgages	$	38,808	$	29,229	$	68,037
Purchased Mortgage In-State		—		1,300		1,300
Home Equity/Junior Liens		3,049		6,335		9,384
Nonresidential Mortgages:
Nonresidential		33,839		15,690		49,529
Purchased Nonresidential In-State		3,246		1,726		4,972
Purchased Nonresidential Out-of-State		2,262		—		2,262
Non real estate loans:
Commercial Loans		8,770		2,566		11,336
Purchased Commerical Loans In-State		1,639		—		1,639
Consumer and other loans		1,121		225		1,346
Total Loans	$	92,734	$	57,071	$	149,805

Loan Originations, Purchases, Sales and Servicing. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in our market area. These lenders include competing banks, savings banks, credit unions, internet lenders, mortgage banking companies and life insurance companies that may also actively compete for local commercial real estate loans. Loan originations are derived from a number of sources, including real estate agent referrals, existing customers, borrowers, builders, attorneys, our directors, walk-in customers and our own sales force. Upon receiving a loan application, we obtain a credit report and employment verification to verify specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, we obtain a determination of value of the real estate intended to collateralize the proposed loan. Our residential mortgage officers have residential mortgage lending authority up to $150,000. While certain Senior Bank Officers have residential lending limits up to $400,000, the Officer Loan Committee generally approves residential loans from $150,000 to $500,000, while requests over $500,000 must be approved by the Board of Directors. Secured consumer lending limits by officer range from $25,000 to $50,000, while certain Senior Bank Officers have secured consumer lending limits up to $150,000. For secured commercial loans, the limits range from $100,000 to $400,000. Senior Loan Committee generally approves secured commercial loans from $400,000 to $500,000, while requests over $500,000 must be approved by the Board of Directors.

A commercial commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. Commitments are typically issued for 15-day periods. The borrower must provide proof of fire and casualty insurance on the property serving as collateral, which must be maintained during the full term of the loan. A title insurance policy is required on all real estate loans. At December 31, 2014, we had outstanding loan commitments of $24.2 million, including unfunded commitments under lines of credit and commercial and standby letters of credit.

Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand, while declining interest rates may stimulate increased loan demand. Accordingly, the volume of loan originations, the mix of fixed- and adjustable-rate loans, and the profitability of this activity can vary from period to period. One- to four-family residential mortgage loans are generally underwritten to investor guidelines, and closed on standard investor documents. We currently sell loans to Freddie Mac and the Federal Home Loan Bank of Indianapolis (the “FHLB”). If such loans are sold, the sales are conducted using standard investor purchase contracts and master commitments as applicable. The majority of one- to four-family mortgage loans that we have sold to investors have been sold on a non-recourse basis, whereby foreclosure losses are generally the responsibility of the purchaser and not First Federal of Northern Michigan.

We are a qualified loan servicer for both Freddie Mac and the FHLB. Our policy has historically been to retain the servicing rights for all conforming loans sold, and to continue to collect payments on the loans, maintain tax escrows and applicable fire and flood insurance coverage, and supervise foreclosure proceedings if necessary. We retain a portion of the interest paid by the borrower on the loans as consideration for our servicing activities.

10

We require appraisals of real property securing loans. Appraisals are performed by independent appraisers, who are approved by our Board of Directors annually. We require fire and extended coverage insurance in amounts adequate to protect our principal balance. Where appropriate, flood insurance is also required. Private mortgage insurance is required for most residential mortgage loans with loan-to-value ratios greater than 80%.

Loan Origination Fees and Costs. In addition to interest earned on loans, we generally receive fees in connection with loan originations. Such loan origination fees, net of costs to originate, are deferred and amortized using an interest method over the contractual life of the loan. Fees deferred are recognized into income immediately upon prepayment or subsequent sale of the related loan. At December 31, 2014, we had $263,000 of net deferred loan origination fees. Such fees vary with the volume and type of loans and commitments made and purchased, principal repayments, and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money. In addition to loan origination fees, we also generate other income through the sales and servicing of mortgage loans, late charges on loans, and fees and charges related to deposit accounts. We recognized fees and service charges of $807,000 and $857,000 for the years ended December 31, 2014 and 2013, respectively.

To the extent that originated loans are sold with servicing retained, we capitalize a mortgage servicing asset at the time of the sale in accordance with applicable accounting standards (ASC 860, “Transfers and Servicing”). The capitalized amount is amortized thereafter (over the period of estimated net servicing income) as a reduction of servicing fee income. The unamortized amount is fully charged to income when loans are prepaid. Originated mortgage servicing rights with an amortized cost of $710,000 were included on our balance sheet at December 31, 2014.

Origination, Purchase and Sale of Loans. The table below shows our loan originations, purchases, sales, and repayments of loans for the periods indicated.

	Years Ended December 31,
	2014			2013			2012
	(dollars in thousands)
Loans receivable at beginning of period	$	138,084		$	140,982		$	142,675
Loans acquired in merger		29,142			—			—
Originations:
Real estate:
Residential 1-4 family		25,250			28,776			52,387
Commercial and Multi-family		23,889			33,260			18,182
Consumer		2,306			1,639			2,040
Total originations		51,445			63,675			72,609
Loan purchases:
Commercial		2,000			2,844			6,538
Total loan purchases		2,000			2,844			6,538
Loan sales		(13,833	)		(17,776	)		(36,529	)
Transfer of loans to foreclosed assets		(1,562	)		(1,486	)		(1,823	)
Repayments		(39,937	)		(50,155	)		(42,488	)
Total loans receivable at end of period	$	165,339		$	138,084		$	140,982

Delinquent Loans, Other Real Estate Owned and Classified Assets

Collection Procedures. Our general collection procedures provide that when a commercial loan becomes 10 days past due and when a mortgage or consumer loan become 15 days past due, a computer-generated late charge notice is sent to the borrower requesting payment. If delinquency continues, a second delinquent notice is mailed when the loan continues past due for 30 days. If a loan becomes 60 days past due, the loan becomes subject to possible legal action. We will generally send a “due and payable” letter upon a loan becoming 60 days delinquent. This letter grants the borrower 30 days to bring the account paid to date prior to the start of any legal action. If not paid, foreclosure proceedings are initiated after this 30-day period. To the extent required by regulations of the Department of Housing and Urban Development (“HUD”), generally within 30 days of delinquency, a Section 160 HUD notice is given to the borrower which provides access to consumer counseling services. General collection procedures may vary with particular circumstances on a loan by loan basis. Also, collection procedures for Freddie Mac serviced loans follow the Freddie Mac guidelines which are different from our general procedures.

11

Loans Past Due and Non-Performing Assets. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful or when extraordinary efforts are required to collect the debt. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.

Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is deemed real estate owned (“REO”) until such time as it is sold. In general, we consider collateral for a loan to be “in-substance” foreclosed if: (i) the borrower has little or no equity in the collateral; (ii) proceeds for repayment of the loan can be expected to come only from the operation or sale of the collateral; and (iii) the borrower has either formally or effectively abandoned control of the collateral, or retained control of the collateral but is unlikely to be able to rebuild equity in the collateral or otherwise repay the loan in the foreseeable future. Cash flow attributable to in-substance foreclosures is used to reduce the carrying value of the collateral.

When collateral, other than real estate, securing commercial and consumer loans is acquired as a result of delinquency or other reasons, it is classified as Other Repossessed Assets (“ORA”) and recorded at the lower of cost or fair market value until it is disposed.

When collateral is acquired or otherwise deemed REO/ORA, it is recorded at the lower of the unpaid principal balance of the related loan or its estimated net realizable value. This write down is recorded against the allowance for loan losses. Periodic future valuations are performed by management, and any subsequent decline in fair value is charged to operations. At December 31, 2014, we held $2.0 million in properties that were classified REO and $860,000 in assets classified as ORA.

12

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

				At December 31,
	2014			2013			2012			2011			2010
	(dollars in thousands)
Non-Accrual Loans:
Residential Mortgage	$	750		$	651		$	1,810		$	2,420		$	3,114
Commercial Mortgage		486			13			821			356			1,148
Purchased Mortgage Out-of-State		—			1,441			2,030			—			—
Construction		—			—			—			—			—
Purchased Construction Out-of-State		—			173			173			173			1,772
Commercial		77			—			—			—			—
Consumer and other		25			7			29			152			206
Total non-accrual loans (*)	$	1,338		$	2,285		$	4,863		$	3,101		$	6,240
Accrual loans delinquent 90 days or more:
Residential Mortgage		312			24			61			238			282
Commercial Mortgage		—			—			—			—			82
Construction		—			—			—			—			—
Purchased Construction Out-of-State		—			—			—			—			—
Commercial		—			—			—			—			—
Consumer and other		3			2			6			—			2
Total accrual loans delinquent 90 days or more	$	315		$	26		$	67		$	238		$	366
Total nonperforming loans (*)(1)	$	1,653		$	2,311		$	4,930		$	3,339		$	6,606
Real Estate Owned and Other Repossessed Assets:
Residential Mortgage		356			285			957			1,086			494
Commercial Mortgage		391			472			309			1,015			2,304
Purchased Mortgage Out-of-State		1,216
Construction		—			—			—			—			—
Commercial		—			—			—			—			—
Consumer and other		860			1,023			1,121			1,307			20
Total real estate owned and other repossessed assets (2)	$	2,823		$	1,780		$	2,387		$	3,408		$	2,818
Total nonperforming assets (*)	$	4,476		$	4,091		$	7,317		$	6,747		$	9,424
Total nonperforming loans to total originated loans receivable		1.00	%		1.67	%		3.50	%		2.37	%		4.12	%
Total nonperforming assets to total assets		1.37	%		1.95	%		3.42	%		3.11	%		4.37	%

(*)	Totals include non-performing loans and assets acquired on August 8, 2014 with the merger.
(1)	All of our loans delinquent 90 days or more are classified as nonperforming.
(2)	Represents the net book value of property acquired by us 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.

Nonperforming Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated.

	Loan Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	( dollars in thousands)
At December 31, 2014
Residential Mortgages		11	$	802		9	$	847		20	$	1,649
Commercial Mortgages		3		323		6		93		9		416
Purchased Out-of-State Commercial Mortgages		—		—		—		—		—		—
Construction		—		—		—		—		—		—
Purchased Out-of-State Construction		—		—		—		—		—		—
Commercial		1		40		1		104		2		144
Consumer		1		4		4		42		5		46
Total		16	$	1,169		20	$	1,086		36		2,255

13

	Loan Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	( dollars in thousands)
At December 31, 2013
Residential Mortgages	9		$	393	5		$	353	14		$	746
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Commercial		1		20		—		—		1		20
Purchased In-State		—		—		—		—		—		—
Total		15	$	993		8	$	1,969		23		2,962
At December 31, 2012
Residential Mortgages		11	$	796		10	$	1,198		21	$	1,994
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Total		13	$	1,341		17	$	1,672		30		3,013
At December 31, 2011
Residential Mortgages		16	$	1,501		23	$	1,969		39	$	3,470
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Total		26	$	1,928		30	$	2,515		56		4,443
At December 31, 2010
Residential Mortgages		23	$	2,056		34	$	2,434		57	$	4,490
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Purchased In-State		—		—		—		—		—		—
Total		37	$	2,672		53	$	5,197		90		7,869

Interest income that would have been recorded for the year ended December 31, 2014, had non-accruing loans been current according to their original terms amounted to $159,000. Interest of $4,000 was recognized on these impaired loans prior to placing them on non-accrual status, and is included in net income for the year ended December 31, 2014.

The following table displays the unpaid principal balance and number of loans classified as troubled debt restructurings, including those acquired in the merger with Bank of Alpena, as of the dates indicated:

	Troubled Debt Restructurings
	as of December 31,				as of December 31,				as of December 31,
	2014				2013				2012
	(dollars in thousands)
	Number of		Unpaid rincipal		Number of		Unpaid rincipal		Number of		Unpaid rincipal
	Contracts		Balance		Contracts		Balance		Contracts		Balance
Commercial - Construction		—	$	—		1	$	173		1	$	173
Commercial Real Estate - Other		11	$	2,624		6	$	3,725		6	$	3,872
Commercial - non real estate		2	$	196		—	$	—		—	$	—
Residential		6	$	520		2	$	267		—	$	—
Total		19	$	3,340		9	$	4,165		7	$	4,045

14

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets such as debt and equity securities and real estate held for sale considered by the Office of the Comptroller of the Currency (OCC) to be of lesser quality as “substandard,” “doubtful,” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the savings institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated “special mention” by management. Loans designated as special mention are generally loans that, while current in required payments, have exhibited some potential weaknesses that, if not corrected, could increase the level of risk in the future.

The allowance for loan losses represents amounts that have been established to recognize losses inherent in the loan portfolio that are both probable and reasonably estimable at the date of the financial statements. When we classify problem assets as loss, we charge-off such amount. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our regulatory agencies, which can order the establishment of additional loss allowances. Management regularly reviews our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of our assets at December 31, 2014, classified assets consisted of substandard assets of $6.7 million. There was one assets classified as doubtful and no assets classified as loss at December 31, 2014.

We classify our assets pursuant to criteria similar to the classification structure provided in the OCC regulations. The following table sets forth the aggregate amount of our internally classified assets at the dates indicated.

	At December 31,
	2014		2013		2012		2011		2010
	(dollars in thousands)
Substandard assets	$	5,896	$	5,662	$	13,008	$	16,435	$	15,974
Doubtful assets		9		—		—		—		—
Loss assets		—		—		—		—		—
Total classified assets	$	5,905	$	5,662	$	13,008	$	16,435	$	15,974

Allowance for Loan Losses. We provide for loan losses based on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management’s judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with accounting principles generally accepted in the United States of America. The allowance for loan losses consists of amounts specifically allocated to non-performing loans and other criticized or classified loans (if any) as well as general allowances determined for each major loan category. Commercial loans and loans secured by commercial real estate are evaluated individually for impairment. Other smaller-balance, homogeneous loan types, including loans secured by one- to four-family residential real estate and consumer installment loans, are evaluated for impairment on a collective basis. After we establish a provision for loans that are known to be non-performing, criticized or classified, we calculate percentage loss factors to apply to the remaining categories within the loan portfolio to estimate probable losses inherent in these categories of the portfolio. When the loan portfolio increases, therefore, the percentage calculation results in a higher dollar amount of estimated probable losses than would be the case without the increase, and when the loan portfolio decreases, the percentage calculation results in a lower dollar amount of estimated probable losses than would be the case without the decrease. These percentage loss factors are determined by management based on our historical loss experience and credit concentrations for the applicable loan category, which may be adjusted to reflect our evaluation of levels of, and trends in, delinquent and non-accrual loans, trends in volume and terms of loans, and local economic trends and conditions.

15

We consider commercial and commercial real estate loans and construction loans to be riskier than the one- to four-family residential mortgage loans that we originate. Commercial and commercial real estate loans have greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy. Construction loans have greater credit risk than permanent mortgage financing because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated cost of the project. If the estimate of construction costs is inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion is inaccurate, the value of the property may be insufficient to assure full repayment. Projects also may be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the repayment of the loan depends on the builder’s ability to sell the property prior to the time that the construction loan is due. The increased risk characteristics associated with commercial real estate and land loans and construction loans are considered by management in the evaluation of the allowance for loan losses and generally result in a larger loss factor applied to these segments of the loan portfolio in developing an estimate of the required allowance for loan losses. We intend to increase our originations of commercial and commercial real estate loans, and we intend to retain these loans in our portfolio. Because these loans entail significant additional credit risks compared to one- to four-familyresidential mortgage loans, an increase in our origination (and retention in our portfolio) of these types of loans would, in the absence of other offsetting factors, require us to make additional provisions for loan losses.

The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, our regulatory agencies periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

16

Analysis of the Allowance for Loan Losses. The following table sets forth the activity on our allowance for loan losses for the periods indicated.

	For the Years Ended December 31,
	2014			2013			2012			2011			2010
	(dollars in thousands)
Allowance at beginning of period	$	1,472		$	1,750		$	1,518		$	2,831		$	3,660
(Charge-offs):
Real Estate:
Residential Mortgages		(177	)		(464	)		(840	)		(1,119	)		(258	)
Nonresidential Real Estate:
Commercial Mortgages		(16	)		(85	)		(265	)		(334	)		(198	)
Purchased In-State		—			—			—			—			—
Purchased Out-of-State		(225	)		(589	)		—			(93	)		(314	)
Construction		(12	)		—			—			—			(751	)
Purchased In-State		—			—			—			—			—
Purchased Out-of-State		—			—			—			—			(262	)
Non Real Estate Loans:
Commercial		—			—			—			(6	)		—
Consumer and other		(38	)		(53	)		(131	)		(192	)		(319	)
Total charge offs		(468	)		(1,191	)		(1,236	)		(1,744	)		(2,102	)
Recoveries:
Real Estate:
Residential Mortgages		55			120			65			25			2
Nonresidential Real Estate:
Commercial Mortgages		54			114			10			79			85
Construction		—			—			—			—			60
Non Real Estate Loans:
Commercial		2			—			—			1			—
Consumer and other		30			42			26			42			25
Total recoveries		141			276			101			147			172
Net (charge offs) recoveries		(327	)		(915	)		(1,135	)		(1,597	)		(1,930	)
Provision for loan losses		284			637			1,367			284			1,101
Balance at end of year	$	1,429		$	1,472		$	1,750		$	1,518		$	2,831
Ratios:
Net Charge-offs to average loans outstanding (annualized)		0.23	%		0.64	%		0.79	%		1.02	%		1.14	%
Allowance for loan loss to non-performing loans at end of period		86.45	%		63.70	%		35.50	%		45.46	%		87.70	%
Allowance for loan losses to total loans at end of period		1.05	%		1.07	%		1.24	%		1.06	%		1.98	%

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

17

	At December 31
	2014					2013					2012
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
	(dollars in thousands)
Residential Mortgages:
1 - 4 family residential	$	860		45.3	%	$	773		44.0	%	$	894		45.3	%
Purchased Mortgages In-State		9		1.0	%		11		1.2	%		12		1.3	%
1 - 4 family construction		—		1.3	%		—		1.1	%		—		0.7	%
Home Equity & Junior Liens		33		5.7	%		62		6.3	%		99		7.4	%
Nonresidential Mortgages:
Nonresidential		307		28.7	%		319		29.8	%		453		29.1	%
Purchased Nonresidential In-State		—		3.6	%		—		5.0	%		50		3.2	%
Purchased Nonresidential Out-of-State		—		1.7	%		125		2.7	%		76		4.9	%
Construction		8		1.1	%		—		0.0	%		57		1.0	%
Purchased Construction In-State		—		0.0	%		—		0.0	%		—		0.4	%
Purchased Construction Out-of-State		—		0.0	%		48		0.1	%		7		0.1	%
Non Real Estate Loans:
Commercial		94		9.5	%		63		8.8	%		66		5.5	%
Purchased Commercial In-State		—		1.2	%		—		0.2	%		3		0.2	%
Consumer		19		0.9	%		21		0.8	%		33		0.9	%
Unallocated		99		0.0	%		50		0.0	%		—		0.0	%
Total	$	1,429		100.0	%	$	1,472		100.0	%	$	1,750		100.0	%

	At December 31
	2011					2010
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
	(dollars in thousands)
Residential Mortgages:
One to four family residential	$	858		45.0	%	$	519		42.7	%
Purchased Mortgages In-State		12		1.3	%		17		2.0	%
1 - 4 family construction		—		0.3	%		—		0.1	%
Home Equity & Junior Liens		146		9.4	%		228		10.3	%
Nonresidential Mortgages:
Nonresidential		320		30.9	%		967		27.3	%
Purchased Nonresidential In-State		16		1.5	%		94		2.6	%
Purchased Nonresidential Out-of-State		57		5.5	%		220		6.2	%
Construction		3		0.1	%		245		0.9	%
Purchased Construction In-State		—		0.0	%		—		0.0	%
Purchased Construction Out-of-State		7		0.1	%		290		1.1	%
Non Real Estate Loans:
Commercial		50		4.6	%		192		4.6	%
Purchased Commercial In-State		3		0.3	%		—		0.9	%
Consumer		46		1.0	%		59		1.3	%
Total	$	1,518		100.0	%	$	2,831		100.0	%

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Mortgage Banking Activities

Our mortgage banking activities involve the origination and subsequent sale of one- to four-family residential mortgage loans. When loans are sold, we generally retain the rights to service those loans thereby maintaining our customer relationships. We intend to use these customer relationships to cross-sell additional products and services. Loans that we sell are originated using the same personnel and the same underwriting policies as loans that we maintain in our portfolio. The decision whether to sell a loan is dependent upon the type of loan product and the term of the loan. In recent years, we have sold most of our fixed-rate one- to four-family residential loans with maturities of 15 years or greater, and have retained servicing on most of these loans.

Mortgage servicing involves the administration and collection of home loan payments. When we acquire mortgage servicing rights through the origination of mortgage loans and the subsequent sale of those loans with servicing rights retained, we allocate a portion of the total cost of the mortgage loans to the mortgage servicing rights based on their relative fair value.As of December 31, 2014, we were servicing mortgage loans sold to third parties totaling $125.4 million, and the mortgage servicing rights associated with such loans had a book value, net of valuation reserve, at such date of $710,000. Generally, the value of mortgage servicing rights increases as interest rates rise and decreases as interest rates fall, because the estimated life and estimated income from the underlying loans increase with rising interest rates and decrease with falling interest rates.

Insurance Brokerage Activities

In March 2003, we acquired InsuranCenter of Alpena (“ICA”), a licensed insurance agency, to increase and diversify our sources of non-interest income. In April 2008, ICA sold to a non-related third party the rights to service certain health insurance contracts and collect commissions on the contracts written through the local Chambers of Commerce. This sale resulted in a nominal gain to us, but reduced health insurance revenues. The sale also reduced non-interest expenses and amortization of intangibles.

On February 27, 2009, we sold the majority of the assets of ICA. We retained the residual income stream associated with the April 2008 sale of its wholesale Blue Cross/Blue Shield override business to the third party. The final installment of the residual revenue stream associated with this sale through FFNM Agency, the successor company to ICA, was received in April of 2014. As of December 31, 2014 this subsidiary has been dissolved.

See “Subsidiary Activity” for a further discussion of ICA and FFNM Agency.

Investment Activities

Our investment securities portfolio is comprised of U.S. Government, state agency and municipal obligations, and mortgage-backed securities, of which $120.0 million, or 99.3%, was classified as available-for-sale, and $790,000, or 0.1%, of the total portfolio was classified as held-to-maturity. At December 31, 2014, we had no investments in unrated securities. At December 31, 2014, $44.2 million, or 36.6% of our investment portfolio was scheduled to mature in less than five years, and $12.5 million, or 10.4%, of our investment portfolio was scheduled to mature in over five years. At December 31, 2014, $5.1 million, or 4.3% of our investment portfolio was scheduled to mature in less than one year.

At December 31, 2014, we held U.S. Government and state agency obligations and municipal obligations classified as available-for-sale, with a fair market value of $54.4 million. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes, as collateral for borrowings, and for prepayment protection.

We invest in mortgage-backed securities in order to: generate positive interest rate spreads with minimal administrative expense; lower credit risk as a result of the guarantees provided by Ginnie Mae and, to a lesser extent, Fannie Mae and Freddie Mac; supplement local loan originations; reduce interest rate risk exposure; and increase liquidity. Our mortgage-backed securities portfolio consists of pass-through certificates. At December 31, 2014, the fair market value of mortgage-backed securities totaled $64.0 million, or 53.0% of total investments. All of our pass-through certificates are insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae. Our policy is to hold mortgage-backed securities as available-for-sale.

We have interests in pools of single-family mortgages in which the principal and interest payments are from the mortgage originators, through intermediaries (generally government-sponsored agencies) that pool and repackage loans and sell the participation interest in the form of securities, to investors. These government-sponsored agencies include Freddie Mac, Ginnie Mae, or Fannie Mae. The underlying pool of mortgages can be comprised of either fixed-rate mortgage loans or adjustable-rate mortgage loans. The interest rate risk characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable rate, are shared by the investors in that pool.

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Our investment policy also permits investment in corporate debt obligations. Although corporate bonds may offer higher yields than U.S. Treasury or agency securities of comparable duration, corporate bonds also have a higher risk of default due to possible adverse changes in the creditworthiness of the issuer.

We are required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short term securities and certain other investments. We generally have maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management’s projections as to the short term demand for funds to be used in our loan origination and other activities.

ASC 320-10 requires that, at the time of purchase, we designate a security as held to maturity, available for sale, or trading, depending on our ability and intent. Securities available for sale are reported at fair value. As of December 31, 2014, all of our investment securities were designated as available for sale except for $790,000 in municipal bond investments designated as held to maturity.

At December 31, 2014 we had no investment in a single company or entity (other than an agency of the U.S. Government or U.S. Government-sponsored enterprise) that had an aggregate book value in excess of 10% of our equity.

Investment Securities Portfolio. The following table sets forth the composition of our investment securities portfolio at the dates indicated.

	At December 31,
	2014				2013					2012
	Amortized		Fair		Amortized			Fair		Amortized		Fair
	Cost		Value		Cost			Value		Cost		Value
	(dollars in thousands)
Debt Securities:
U.S. Government and agency obligations	$	31,221	$	31,223	$	7,111		$	7,042	$	9,181	$	9,247
Municipal obligations		23,684		24,041		15,949			16,009		12,758		13,328
Corporate bonds and other obligations		1,549		1,561		1,085			1,097		1,135		1,150
Mortgage-backed securities:
Pass-through securities:
Fannie Mae		29,760		29,856		11,052			10,941		6,486		6,587
Freddie Mac		21,068		21,166		2,989			2,940		4,045		4,110
Ginnie Mae		12,820		13,025		14,667	#		14,722		18,370		18,911
Total debt securities		120,102		120,871		52,853			52,751		51,975		53,333
Marketable equity securities
Common stock		3		5		3			7		3		1
Total equity securities		3		5		3			7		3		1
Total investment securities	$	120,105	$	120,876	$	52,856		$	52,758	$	51,978	$	53,334

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2014 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State and municipal securities yields have not been adjusted to a tax-equivalent basis.

20

	At December 31, 2014
						More than One Year					More than Five Years
	One Year or Less					Through Five years					Through Ten Years					More than Ten Years					Total Securities
			Weighted					Weighted					Weighted					Weighted							Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Fair		Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Value		Yield
	(dollars in thousands)
Debt Securities:
U.S. Government and agency securities	$	2,571		1.83	%	$	25,649		1.57	%	$	3,002		2.38	%	$	—		0.00	%	$	31,222	$	31,223		1.67	%
State agency and municipal obligations		994.03		2.45	%		13,379		2.30	%		7,939		2.99	%		1,372		4.35	%		23,684		24,041		2.65	%
Corporate bonds and other obligations		1,549		6.06	%		—		0.00	%		—		0.00	%		—		0.00	%		1,549		1,561		6.06	%
Mortgage-backed securities
Fannie Mae		—		0.00	%		199		4.13	%		12,088		2.69	%		17,474		3.02	%		29,761		29,856		2.90	%
Freddie Mac		6		5.00	%		3		1.63	%		6,268		3.01	%		14,791		3.19	%		21,068		21,166		3.13	%
Ginnie Mae		2		5.00	%		26		3.13	%		934		4.00	%		11,858		3.16	%		12,820		13,025		3.22	%
Total debt securities		5,122					39,255					30,231					45,495					120,103		120,871
Marketable equity securities:
Common Stock		—		0.00	%		—		0.00	%		—		0.00	%		2		0.00	%		2		5		0.00	%
Total investment securities	$	5,122				$	39,255				$	30,231				$	45,497				$	120,105	$	120,876

	At December 31, 2013
						More than One Year					More than Five Years
	One Year or Less					Through Five years					Through Ten Years					More than Ten Years					Total Securities
			Weighted					Weighted					Weighted					Weighted							Weighted
	Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Average			Amortized		Fair		Average
	Cost		Yield			Cost		Yield			Cost		Yield			Cost		Yield			Cost		Value		Yield
	(dollars in thousands)
Debt Securities:
U.S. Government and agency securities	$	2,009		3.13	%	$	4,103		2.03	%	$	999		2.19	%	$	—		0.00	%	$	7,111	$	7,042		2.36	%
State agency and municipal obligations		2,871		4.68	%		5,782		2.54	%		5,761		2.17	%		1,535		4.32	%		15,949		16,009		2.96	%
Corporate bonds and other obligations		—		0.00	%		1,085		6.90	%		—		0.00	%		—		0.00	%		1,085		1,097		6.90	%
Mortgage-backed securities
Fannie Mae		—		0.00	%		83		4.50	%		10,969		2.49	%		—		0.00	%		11,052		10,941		2.50	%
Freddie Mac		—		0.00	%		4		1.63	%		2,234		2.73	%		751		0.00	%		2,989		2,940		2.80	%
Ginnie Mae		—		0.00	%		44		3.39	%		—		0.00	%		14,623		3.40	%		14,667		14,722		3.40	%
Total debt securities		4,880					11,102					19,963					16,909					52,853		52,751
Marketable equity securities:
Common Stock		—		0.00	%		—		0.00	%		—		0.00	%		3		0.00	%		3		7		0.00	%
Total investment securities	$	4,880				$	11,102				$	19,963				$	16,912				$	52,856	$	52,758

Sources of Funds

General. Deposits are the major source of our funds for lending and other investment purposes. We generate deposits from our eight full-service offices in Alpena, Mio, Cheboygan, Oscoda, Lewiston, Alanson and Gaylord. In addition to deposits, we derive funds from borrowings, proceeds from the settlement of loan sales, the amortization and prepayment of loans and mortgage-backed securities, the maturity of investment securities, and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings are used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes. We currently are managing liquidity levels and loan funding primarily through secondary mortgage market sales and Federal Home Loan Bank advances.

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Deposits. We generate deposits primarily from our market area by offering a broad selection of deposit instruments including NOW accounts, regular savings, money market deposits, term certificate accounts and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The rate of interest which we must pay is not established by regulatory authority. The asset/liability committee regularly evaluates our internal cost of funds, surveys rates offered by competing institutions, reviews the cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. We have sought to decrease the risk associated with changes in interest rates by offering competitive rates on some deposit accounts and by pricing certificates of deposit to provide customers with incentives to choose certificates of deposit with longer maturities. We also attract non-interest bearing commercial deposit accounts from our commercial borrowers and offer a competitive non-deposit sweep product that is not insured by the FDIC. In recent periods, we generally have not obtained funds through brokers or through a solicitation of funds outside our market area. At December 31, 2014 we had $1.2 million in brokered deposits from CDAR’s and ICS sweep program.We offer a limited amount of certificates of deposit in excess of $100,000 which may have negotiated rates. Future liquidity needs are expected to be satisfied through the both the use of Federal Home Loan Bank borrowings, as necessary, and through growth in deposits. Management does not generally plan on paying above-market rates on deposit products, although from time-to-time we may do so as liquidity needs dictate or as a means of managing our interest rate risk profile.

The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated.

	At December 31,
	2014								2013								2012
						Weighted								Weighted								Weighted
						Average								Average								Average
	Amount		Percent of Total			Interest Rate			Amount		Percent of Total			Interest Rate			Amount		Percent of Total			Interest Rate
	(dollars in thousands)
Non-interest-bearing	$	56,032		20.71	%		NA		$	21,047		13.15	%		NA		$	21,067		13.30	%		NA
NOW accounts		63,770		23.55	%		0.33	%		22,794		14.24	%		0.21	%		19,531		12.33	%		0.21	%
Passbook		29,846		11.02	%		0.05	%		22,037		13.77	%		0.05	%		19,867		12.55	%		0.05	%
Money market accounts		44,165		16.31	%		0.14	%		27,428		17.14	%		0.22	%		24,687		15.59	%		0.22	%
Time deposits that mature:
Less than 12 months		39,149		14.46	%		0.68	%		32,952		20.59	%		0.85	%		39,161		24.73	%		1.08	%
Within 12-36 months		22,853		8.44	%		1.03	%		24,273		15.17	%		1.33	%		28,701		18.13	%		1.60	%
Beyond 36 months		14,919		5.51	%		1.85	%		9,498		5.94	%		2.10	%		5,336		3.37	%		2.21	%
Jumbo		—		0.00	%		0.00	%		—		0.00	%		0.00	%		—		0.00	%		0.00	%
Total deposits	$	270,734		100.00	%		0.47	%	$	160,029		100.00	%		0.68	%	$	158,350		100.00	%		0.87	%

Time Deposit Rates. The following table sets forth time deposits classified by rates as of the dates indicated (see Note 8 to our consolidated financial statements contained within Exhibit 13 for a more detailed breakdown by rate range):

	At December 31,
Rate	2014		2013		2012
	(dollars in thousands)
0.10 percent to 0.99 percent	$	42,302	$	40,259	$	42,698
1.00 percent to 1.99 percent		27,362		17,715		15,962
2.00 percent to 2.99 percent		6,092		7,130		10,746
3.00 percent to 3.99 percent		1,050		1,486		3,398
4.00 percent to 4.99 percent		115		133		394
	$	76,921	$	66,723	$	73,198

Time Deposit Maturities. The following table sets forth the amount and maturities of time deposits at December 31, 2014.

	Less Than		1 - Less than 2		2- Less than 3		3- Less than 5		5- Less and
Rate	One Year		Years		Years		Years		Greater		Total
	(dollars in thousands)
0.10 percent to 0.99 percent	$	33,161	$	8,214	$	532	$	395	$	—	$	42,302
1.00 percent to 1.99 percent		1,419		6,884		6,398		12,394		267		27,362
2.00 percent to 2.99 percent		4,022		696		47		323		1,004		6,092
3.00 percent to 3.99 percent		502		—		12		536		—		1,050
4.00 percent to 4.99 percent		45		17		53		—		—		115
	$	39,149	$	15,811	$	7,042	$	13,648	$	1,271	$	76,921

As of December 31, 2014, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was $28.1 million. The following table sets forth the maturity of those certificates as of December 31, 2014.

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	Certificates of Deposit
Maturity Period	in excess of $100,000
	(dollars in thousands)
Three months or less	$	5,572
Three through six months		2,639
Six through twelve months		6,966
Over twelve months		12,970
Total	$	28,147

Borrowings. Our borrowings consist primarily of advances from the Federal Home Loan Bank of Indianapolis. At December 31, 2014, we had access to additional Federal Home Loan Bank advances of up to $27.2 million, based upon pledged collateral. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances and other borrowings at the dates and for the periods indicated.

	Years Ended December 31,
	2014			2013			2012
	(dollars in thousands)
Balance at end of period	$	22,885		$	24,813		$	26,358
Average balance during period		23,497			24,065			31,260
Maximum outstanding at any month end		25,236			25,313			35,600
Weighted average interest rate at end of period		1.17	%		1.00	%		1.46	%
Average interest rate during period		1.12	%		1.25	%		1.88	%

Subsidiary Activity

First Federal of Northern Michigan Bancorp, Inc.’s only direct subsidiary is First Federal of Northern Michigan.

First Federal of Northern Michigan’s wholly owned subsidiary, Financial Services & Mortgage Corporation has been consolidated in the financial statements with all inter-company balances and transactions being eliminated in consolidation.

Financial Services & Mortgage Corporation’s primary business is to lease, sell, develop and maintains real estate properties. For reporting purposes, Financial Services & Mortgage Corporation is included in our banking segment. As of December 31, 2014, First Federal of Northern Michigan’s investment in Financial Services & Mortgage Corporation was $92,000. Financial Services & Mortgage Corporation is not currently a party to any agreement that is material to First Federal of Northern Michigan Bancorp, Inc. on a consolidated basis.

FFNM Agency, Inc., collects the residual income stream associated with the April 2008 sale of the Company’s wholesale health insurance override business to a third party. FFNM Agency is the successor company to the InsuranCenter of Alpena (“ICA”). On February 27, 2009, we sold the majority of the assets of ICA. Due to the expiration of the residual income stream in April of 2014 this subsidiary was dissolved as of December 31, 2014.

Subsequent to December 31, 2014, First Federal of Northern Michigan formed another subsidiary, FFNM Financial Service, Inc. The principal business of FFNM Financial Services, Inc. is to collect commissions associated with a wealth management program that is offered by an independent investment consultant. The subsidiary formation was completed by January 31, 2015.

Personnel

As of December 31, 2014, First Federal of Northern Michigan had 83 full-time and 18 part-time employees. None of the Bank’s employees are represented by a collective bargaining group. The Bank believes its relationship with its employees to be good. First Federal of Northern Michigan Bancorp, Inc., FFNM Agency, Inc. and FSMC have no separate employees.

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SUPERVISION AND REGULATION

General

As a federal savings bank, First Federal of Northern Michigan is subject to examination and regulation by the Office of the Comptroller of the Currency (“OCC”), and is also subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). Prior to July 21, 2011, the Office of Thrift Supervision was First Federal of Northern Michigan’s primary federal regulator. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is discussed further below, eliminated the Office of Thrift Supervision and transferred the Office of Thrift Supervision’s functions relating to federal savings banks, including rulemaking authority, to the OCC, effective July 21, 2011. The federal system of regulation and supervision establishes a comprehensive framework of activities in which First Federal of Northern Michigan may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund.

First Federal of Northern Michigan also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board”, which governs the reserves to be maintained against deposits and other matters. In addition, First Federal of Northern Michigan is a member of and owns stock in the Federal Home Loan Bank of Indianapolis, which is one of the twelve regional banks in the Federal Home Loan Bank System. First Federal of Northern Michigan’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a lesser extent, state law, including in matters concerning the ownership of deposit accounts and the form and content of First Federal of Northern Michigan’s loan documents.

As a savings and loan holding company, First Federal of Northern Michigan Bancorp, Inc. is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. The Office of Thrift Supervision’s functions relating to savings and loan holding companies were transferred to the Federal Reserve Board on July 21, 2011 pursuant to the Dodd-Frank Act regulatory restructuring. First Federal of Northern Michigan Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Set forth below are certain material regulatory requirements that are applicable to First Federal of Northern Michigan and First Federal of Northern Michigan Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on First Federal of Northern Michigan and First Federal of Northern Michigan Bancorp. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on First Federal of Northern Michigan Bancorp, First Federal of Northern Michigan and their operations.

Dodd-Frank Act

The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies, as well as changes that affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as First Federal of Northern Michigan, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

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The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage originations.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, and the regulations of the OCC. Under these laws and regulations, First Federal of Northern Michigan may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other loans and assets. First Federal of Northern Michigan also may establish subsidiaries that may engage in activities not otherwise permissible for First Federal of Northern Michigan directly, including real estate investment, securities brokerage and insurance agency services.

Capital Requirements. OCC regulations require savings banks to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest CAMELS rating) and an 8% risk-based capital ratio. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.

The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OCC capital regulation based on the risks inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted assets, and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

Additionally, a savings association that retains credit risk in connection with an asset sale may be required to maintain regulatory capital because of the recourse back to the savings association. In assessing an institution’s capital adequacy, the OCC takes into consideration not only the numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.

In July 2013, the Office of the Comptroller of the Currency and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule also implements the Dodd-Frank Act’s directive to apply to savings and loan holding companies consolidated capital requirements that are not less stringent than those applicable to their subsidiary institutions. The final rule is effective January 1, 2015. The “capital conservation buffer” will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.

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At December 31, 2014, First Federal of Northern Michigan’s capital exceeded all applicable requirements. The following table sets forth the Bank’s capital position at December 31, 2014 and 2013, as compared to the minimum capital requirements.

	At December 31,
	2014					2013
			Percent					Percent
	Amount		of Assets			Amount		of Assets
	(dollars in thousands)
Equity capital	$	29,731		9.2	%	$	22,701		10.9	%
Tangible Capital Requirement:
Tangible capital level		27,662		8.5	%		22,563		10.8	%
Requirement		4,857		1.5	%		3,137		1.5	%
Excess		22,805		7.0	%		19,426		9.3	%
Core Capital Requirement:
Core capital level		27,662		8.5	%		22,563		10.8	%
Requirement		12,953		4.0	%		8,366		4.0	%
Excess		14,709		4.5	%		14,197		6.8	%
Risk-based Capital Requirement:
Risk-based capital level		29,091		16.9	%		24,033		17.9	%
Requirement		13,778		8.0	%		10,748		8.0	%
Excess		15,313		8.9	%		13,285		9.9	%

Loans to One Borrower. A federal savings bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus on an unsecured basis. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of December 31, 2014, First Federal of Northern Michigan was in compliance with the loans-to-one-borrower limitations.

Qualified Thrift Lender Test. As a federal savings bank, First Federal of Northern Michigan is subject to a qualified thrift lender, or “QTL,” test. Under the QTL test, First Federal of Northern Michigan must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period.

A savings bank that fails the QTL test must operate under specified restrictions. The Dodd-Frank Act made noncompliance with the QTL test potentially subject to agency enforcement action for a violation of law. At December 31, 2014, First Federal of Northern Michigan maintained approximately 67.4% of its portfolio assets in qualified thrift investments, and therefore satisfied the QTL test.

Capital Distributions. OCC regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the institution’s capital account. A savings bank must file an application for approval of a capital distribution if:

· the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings bank’s retained net income for the preceding two years;

· the savings bank would not be at least adequately capitalized following the distribution;

· the distribution would violate any applicable statute, regulation, agreement or Office of the Comptroller of the Currency-imposed condition; or

· the savings bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every savings bank that is a subsidiary of a savings and loan holding company, such as First Federal of Northern Michigan, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.

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A notice or application related to a capital distribution may be disapproved if: 

· the federal savings bank would be undercapitalized following the distribution;

· the proposed capital distribution raises safety and soundness concerns; or

· the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings bank also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form.

Community Reinvestment Act and Fair Lending Laws. All savings banks have a responsibility under the Community Reinvestment Act and related regulations of the OCC to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the OCC is required to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. First Federal of Northern Michigan received an “Outstanding” Community Reinvestment Act rating in its two most recent federal examinations.

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its “affiliates” is limited by Office of the Comptroller of the Currency regulations and Regulation W of the Federal Reserve Board, which implements Sections 23A and 23B of the Federal Reserve Act. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. First Federal of Northern Michigan Bancorp, Inc. and its non-savings institution subsidiaries will be affiliates of First Federal of Northern Michigan. In general, transactions with affiliates must be on terms that are as favorable to the savings bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings bank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings bank. In addition, Office of the Comptroller of the Currency regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.

First Federal of Northern Michigan’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of First Federal of Northern Michigan’s capital. In addition, extensions of credit in excess of certain limits must be approved by First Federal of Northern Michigan’s Board of Directors.

Enforcement. The OCC has primary enforcement responsibility over federal savings banks and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the savings bank, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to recommend to the Director of the Office of the Comptroller of the Currency that enforcement action be taken with respect to a particular savings bank. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.

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Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

Federal Insurance of Deposit Accounts. First Federal of Northern Michigan is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit accounts in First Federal of Northern Michigan are insured up to a maximum of $250,000 for each separately insured depositor.

The Federal Deposit Insurance Corporation imposes an assessment for deposit insurance on all depository institutions. Under the Federal Deposit Insurance Corporation’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by Federal Deposit Insurance Corporation regulations, with less risky institutions paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2 ½ to 45 basis points of each institution’s total assets less tangible capital. The Federal Deposit Insurance Corporation may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The Federal Deposit Insurance Corporation’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation is authorized to impose and collect, through the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the Financing Corporation in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017 through 2019. For the quarter ended December 31, 2014, the annualized Financing Corporation assessment was equal to 0.62 basis points of total assets less tangible capital.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The Federal Deposit Insurance Corporation must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long-term fund ratio of 2%.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of First Federal of Northern Michigan. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management of First Federal of Northern Michigan does not know of any practice, condition or violation that may lead to termination of our deposit insurance.

Prompt Corrective Action. The “prompt corrective action” provisions of the FDIA create a statutory framework that applies a system of both discretionary and mandatory supervisory actions indexed to the capital level of FDIC-insured depository institutions. These provisions impose progressively more restrictive constraints on operations, management, and capital distributions of the institution as its regulatory capital decreases, or in some cases, based on supervisory information other than the institution’s capital level. This framework and the authority it confers on the federal banking agencies supplement other existing authority vested in such agencies to initiate supervisory actions to address capital deficiencies. Moreover, other provisions of law and regulation employ regulatory capital level designations the same as or similar to those established by the prompt corrective action provisions both in imposing certain restrictions and limitations and in conferring certain economic and other benefits upon institutions. These include restrictions on brokered deposits, limits on exposure to interbank liabilities, determination of risk-based FDIC deposit insurance premium assessments, and action upon regulatory applications

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The recently proposed rules that would increase regulatory capital requirements would adjust prompt corrective categories accordingly. See “- Capital Requirements” above.

Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the savings bank or its affiliates or not obtain services of a competitor of the savings bank.

Federal Home Loan Bank System. First Federal of Northern Michigan is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Indianapolis, First Federal of Northern Michigan is required to acquire and hold shares of capital stock in the Federal Home Loan Bank in an amount equal to at least 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of December 31, 2014, First Federal of Northern Michigan was in compliance with this requirement.

Qualified Mortgages and Retention of Credit Risk. The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage“ definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

· excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);

· interest-only payments;

· negative-amortization; and

· terms longer than 30 years.

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizers of loans to retain not less than 5% of the credit risk for any asset that is not a “qualified residential mortgage.” The regulatory agencies have issued a proposed rule to implement this requirement. The Dodd-Frank Act provides that the definition of “qualified residential mortgage” can be no broader than the definition of “qualified mortgage” issued by the Consumer Financial Protection Bureau for purposes of its regulations (as described above). Although the final rule with respect to the retention of credit risk has not yet been issued, the final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans.

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Other Regulations

Interest and other charges collected or contracted for by First Federal of Northern Michigan are subject to state usury laws and federal laws concerning interest rates. First Federal of Northern Michigan’s operations are also subject to federal laws applicable to credit transactions, such as the:

· Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

· Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

· Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

· Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

· Truth in Savings Act; and

· rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of First Federal of Northern Michigan also are subject to the:

· Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

· Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

· Check Clearing for the 21^st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

· Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the American financial system to fund terrorist activities. Among other provisions, the USA PATRIOT Act and the related regulations of the OCC require savings associations operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

· The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Federal Reserve System

Federal Reserve Board regulations require savings banks to maintain non-interest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, 2014, First Federal of Northern Michigan was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of the Comptroller of the Currency.

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The USA PATRIOT Act

The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Certain provisions of the Act impose affirmative obligations on a broad range of financial institutions, including federal savings banks, like First Federal of Northern Michigan. These obligations include enhanced anti-money laundering programs, customer identification programs and regulations relating to private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States).

First Federal of Northern Michigan has established policies and procedures to ensure compliance with the USA PATRIOT Act’s provisions, and the impact of the USA PATRIOT Act on our operations has not been material.

Holding Company Regulation

Pursuant to the Dodd-Frank Act, as of July 21, 2011, the Federal Reserve Board succeeded the Office of Thrift Supervision as the regulator for savings and loan holding companies, such as First Federal of Northern Michigan Bancorp, Inc.

General. First Federal of Northern Michigan Bancorp, Inc. is a non-diversified unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, First Federal of Northern Michigan Bancorp, Inc. is registered with the Federal Reserve Board and subject to examination and supervision by the Federal Reserve Bank of Chicago. First Federal of Northern Michigan Bancorp, Inc. is subject to the Federal Reserve Board regulations (including applicable regulations of the former Office of Thrift Supervision), and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over First Federal of Northern Michigan Bancorp, Inc. and its non-insured subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Savings and loan holding companies have not historically been subjected to consolidated regulatory capital requirements. However, the Dodd-Frank Act required the Federal Reserve Board to set for all depository institution holding companies minimum consolidated capital levels that are as stringent as those required for the insured depository subsidiaries. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions will apply to savings and loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.

The Federal Reserve Board has issued a policy guidance regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Federal Reserve Board guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect our ability to pay dividends or otherwise engage in capital distributions.

The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. 

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Permissible Activities. Under present law, the business activities of First Federal of Northern Michigan Bancorp, Inc. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.

Federal law prohibits a savings and loan holding company, including First Federal of Northern Michigan Bancorp, Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Bank of Chicago. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Bank of Chicago must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

The Federal Reserve Bank of Chicago is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

the approval of interstate supervisory acquisitions by savings and loan holding companies; and

(i) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other things corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosures of corporate information. We have existing policies, procedures and systems designed to comply with these regulations, and we review and document such policies, procedures and systems to ensure continued compliance with these regulations.

Federal Securities Laws

First Federal of Northern Michigan Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. First Federal of Northern Michigan Bancorp, Inc. is subject to the information, proxy solicitation, insider trader restrictions and other requirements under the Securities Exchange of 1934.

First Federal of Northern Michigan Bancorp, Inc. common stock held by persons who are affiliates (generally officers, directors and principal stockholders) of First Federal of Northern Michigan Bancorp, Inc. may not be resold without registration or unless sold in accordance with certain resale restrictions. If First Federal of Northern Michigan Bancorp, Inc. meets specified current public information requirements, each affiliate of First Federal of Northern Michigan Bancorp, Inc. is able to sell in the public market, without registration, a limited number of shares in any three-month period.

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TAXATION

Federal Taxation

General. First Federal of Northern Michigan Bancorp, Inc. and First Federal of Northern Michigan are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to First Federal of Northern Michigan Bancorp, Inc. and First Federal of Northern Michigan.

Method of Accounting. For federal income tax purposes, First Federal of Northern Michigan currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.

Bad Debt Reserves. Prior to the Small Business Protection Act of 1996, First Federal of Northern Michigan was permitted to establish a reserve for bad debts for tax purposes and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at First Federal of Northern Michigan’s taxable income. As a result of the Small Business Protection Act, First Federal of Northern Michigan must use the specific charge-off method in computing its bad debt deduction for tax purposes.

Deferred Tax Asset Valuation. The Company records a valuation allowance against its deferred tax assets if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income. At December 31, 2014 the Company had a valuation allowance against its deferred tax assets of $3.1 million.

Taxable Distributions and Recapture. Prior to the Small Business Protection Act of 1996, bad debt reserves created prior to 1988 were subject to recapture into taxable income if First Federal of Northern Michigan failed to meet certain thrift asset and definitional tests. The Small Business Protection Act of 1996 eliminated these thrift-related recapture rules. However, under current law, pre-1988 reserves remain subject to tax recapture should First Federal of Northern Michigan make certain distributions from its tax bad debt reserve or cease to maintain a bank charter. At December 31, 2014, First Federal of Northern Michigan’s total federal pre-1988 reserve was approximately $60,000. This reserve reflects the cumulative effects of federal tax deductions by First Federal of Northern Michigan for which no federal income tax provision has been made.

Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The alternative minimum tax is payable to the extent such AMTI is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. First Federal of Northern Michigan has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover.

Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding five taxable years and forward to the succeeding 20 taxable years. At December 31, 2014, First Federal of Northern Michigan had a net operating loss of approximately $12.3 million which it may carry forward for federal income tax purposes until 2034.

Corporate Dividends. We may exclude from our income 100% of dividends received from First Federal of Northern Michigan as a member of the same affiliated group of corporations.

The federal income tax returns of First Federal of Northern Michigan Bancorp, Inc. and its predecessor, Alpena Bancshares, Inc. have not been audited by the Internal Revenue Service in the last five fiscal years.

33

State and Local Taxation

We are subject to the Michigan Business Tax (MBT). Financial Institutions are subject to a component of the MBT, the Financial Institutions Tax, which is based on capital rather than taxable earnings.

Other applicable state taxes include generally applicable sales, use and real property taxes.

As a Maryland business corporation, First Federal of Northern Michigan Bancorp, Inc. is required to file annual returns with and pay annual fees to the State of Maryland.

34

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies. 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

As of December 31, 2014, First Federal of Northern Michigan owned its main office and all of its branch offices. The following is a list of our locations:

Main Office
100 South Second Avenue
Alpena, Michigan 49707
Branch Offices
468 North Ripley Boulevard	2885 South County Road #489
Alpena, Michigan 49707	Lewiston, Michigan 49756
6232 River Street	308 North Morenci
Alanson, Michigan 49706	Mio, Michigan 48647
101 South Main Street	201 North State Street
Cheboygan, Michigan 49721	Oscoda, Michigan 48750
1000 South Wisconsin
Gaylord, Michigan 49735

ITEM 3. LEGAL PROCEEDINGS

We are periodically involved in claims and lawsuits that are incident to their business. At December 31, 2014, we are not involved in any claims or lawsuits material to their respective businesses.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)	First Federal of Northern Michigan Bancorp, Inc.’s common stock is traded on the Nasdaq Capital Market under the symbol “FFNM.”
	As of March 27, 2015 there were 4,034,764 shares of First Federal of Northern Michigan Bancorp, Inc. common stock outstanding. At December 31, 2014, First Federal of Northern Michigan Bancorp, Inc. had approximately 600 stockholders of record. The remaining information required by this item is incorporated by reference to Exhibit 13, the Company’s Annual Report to Stockholders.
	No equity securities were sold during the year ended December 31, 2014 that were not registered under the Securities Act.
(b)	Not Applicable
(c)	First Federal of Northern Michigan Bancorp, Inc. did not repurchase any of its equity securities during the quarter ended December 31, 2014.

35

ITEM 6. SELECTED FINANCIAL DATA

Not required for smaller reporting companies.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated by reference to Exhibit 13, the Company’s Annual Report to Stockholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information contained in the section captioned “Financial Statements” is incorporated by reference to Exhibit 13, the Company’s Annual Report to Shareholders.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure 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 and 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 and 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, is recorded, processed, summarized and reported, within the time periods specified by the SEC’s rules and forms and in timely alerting them to material information relating to the Company (or its consolidated subsidiaries) required to be included in its periodic SEC filings.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Management of First Federal of Northern Michigan Bancorp, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control is designed under the supervision of management, including our Chief Executive Officer and VP – Director of Financial Reporting and Accounting, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).

36

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.

As of December 31, 2014, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon its assessment, management believes that the Company’s internal control over financial reporting as of December 31, 2014 is effective using these criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission applicable to smaller reporting companies that permit the Company to provide only management’s report in this annual report.

(c) Changes in Internal Control over Financial Reporting

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

ITEM 9B. OTHER INFORMATION

None. 

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information concerning directors and executive officers is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Proposal I—Election of Directors.”

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Proposal I—Election of Directors.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain owners and management is incorporated herein by reference from the Company’s Proxy Statement, specifically the Section captioned “Proposal I – Election of Directors.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information concerning relationships and transactions is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons”.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services is incorporated herein by reference to the Company’s Proxy Statement, specifically the section captioned “Proposal II – Ratification of Appointment of Auditors.”

37

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    The exhibits filed as a part of this form 10-K are as follows:

3.1	Articles of Incorporation of First Federal of Northern Michigan Bancorp, Inc.*
3.2	Bylaws of First Federal of Northern Michigan Bancorp, Inc.*
4	Form of Common Stock Certificate of First Federal of Northern Michigan Bancorp, Inc.*
10.1	Change in Control Agreements*
10.2	1996 Stock Option Plan*
10.3	2006 Stock-Based Incentive Plan**
13	Annual Report to Shareholders
14	Code of Ethics ***
21	Subsidiaries of Registrant
23	Consent of Plante & Moran PLLC
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	INS XBRL Taxonomy Extension Schema
101	SCH XBRL Taxonomy Extension Calculation Linkbase
101	CAL XBRL Taxonomy Extension Label Linkbase
101	DEF XBRL Taxonomy Extension Definition Linkbase
101	LAB XBRL Taxonomy Extension Label Linkbase
101	PRE XBRL Taxonomy Extension Presentation Linkbase
*	Incorporated by reference to the Registration Statement on Form SB-2 of First Federal of Northern Michigan Bancorp, Inc. (Registration No. 333-121178), originally filed with the Commission on December 10, 2004.
**	Incorporate by reference to the Definitive Proxy materials filed on April 10, 2006 (No. 000-31957).
***	Incorporated by reference to the Annual Report on Form 10-K of Alpena Bancshares, Inc. filed with the Commission on March 30, 2004 (Registration No. 000-31957).

38

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: March 30, 2015

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/Michael W. Mahler	By:	/s/Eileen M. Budnick
	Michael W. Mahler, Director and		Eileen M. Budnick, VP- Director of Financial Reporting &
	Chief Executive Officer		Accounting, Treasurer & Corporate Secretary
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)
Date: March 30, 2015			Date: March 30, 2015

By:	/s/Martin A. Thomson	By:	/s/Thomas R. Townsend
	Martin A. Thomson, Chairman		Thomas R. Townsend, Director
Date: March 30, 2015			Date: March 30, 2015

By:	/s/GaryVanMassenhove	By:	/s/James E. Kraenzlein
	Gary VanMassenhove, Director		James E. Kraenzlein, Director
Date: March 30, 2015			Date: March 30, 2015

By:	/s/Timothy E. Fitzpatrick	By:	/s/Christopher B. McCoy
	Timothy E. Fitzpatrick, Director		Christopher B. McCoy, Director
Date: March 30, 2015			Date: March 30, 2015

By:	/s/Richard L. Crittenden	By:	/s/Eric G. Smith
	Richard L. Crittenden, Director		Eric G. Smith, Director
Date: March 30, 2015			Date: March 30, 2015

39

EX-13

First Federal of Northern Michigan Bancorp, Inc. 10-K

EXHIBIT 13

2014 ANNUAL REPORT TO STOCKHOLDERS

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

2014

ANNUAL REPORT

March 27, 2015

1

Selected Consolidated Financial and Other Data of the Company

Set forth below are selected financial and other data of First Federal of Northern Michigan Bancorp, Inc. (the “Company”). This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto presented elsewhere in this Annual Report. The information at and for the years ended December 31, 2014 and December 31, 2013 is derived in part from the audited consolidated financial statements of the Company that appear in this Annual Report. The information at and for the years ended December 31, 2012, 2011, and 2010 is derived in part from audited consolidated financial statements that do not appear in this Annual Report.

	At December 31,
Financial condition data:	2014		2013		2012		2011		2010
Total assets	$	325,867	$	209,657	$	213,834	$	217,045	$	215,733
Loans receivable, net		163,647		136,315		138,912		140,884		157,144
Loans held for sale		88		175		79		—		—
Investment securities		120,758		52,613		53,109		55,484		37,821
Cash and cash equivalents		11,254		2,766		2,752		2,749		1,963
Deposits		270,734		160,029		158,350		150,649		155,466
FHLB advances		22,885		24,813		26,358		34,500		29,000
Repo Sweep agreements		—		—		3,183		5,592		6,172
Stockholders' equity		30,536		23,525		24,435		24,568		23,236

	For the Years Ended December 31,
Operating data:	2014			2013			2012			2011			2010
										(In thousands)
Interest income	$	9,100		$	8,319		$	9,243		$	10,390		$	11,447
Interest expense		1,082			1,150			1,654			2,262			3,447
Net interest income		8,018			7,169			7,589			8,128			8,000
Provision for loan losses		2014			2013			2012			2011			2010
Net interest income after provision for loan losses		6,004			5,156			5,577			6,117			5,990
Other income (loss):
Service charges and fees		807			857			760			730			804
Mortgage banking activities		472			585			1,243			969			1,438
Net gain on sale of investment securities		(4	)		—			47			—			546
Gain (loss) on sale of real estate		(76	)		3			(3	)		(51	)		(43	)
Bargain purchase gain		1,982			—			—			—			—
Other non-interest income		180			194			80			126			301
Insurance & brokerage commissions		117			126			149			158			159
Total other income		3,478			1,765			2,276			1,932			3,205
Other expenses		8,963			8,242			8,712			9,034			9,866
Income (loss) before income tax expense (benefit)		519			(1,321	)		(859	)		(985	)		(671	)
Income tax expense		—			—			—			—			—
Net income (loss)	$	519		$	(1,321	)	$	(859	)	$	(985	)	$	(671	)

		For the Years Ended December 31,
Performance Ratios:		2014			2013			2012			2011			2010
Return on average assets		0.87	%		0.03	%		-0.10	%		0.34	%		0.10	%
Return on average equity		8.42	%		0.22	%		-0.85	%		3.07	%		0.99	%
Average interest rate spread		3.18	%		3.54	%		3.65	%		3.88	%		3.60	%
Dividend payout ratio		11.01	%		105.35	%		0.00	%		0.00	%		0.00	%
Dividends per share	$	0.08		$	0.02		$	0.00		$	0.00		$	0.00
Net interest margin		3.31	%		3.64	%		3.78	%		4.02	%		3.78	%
Efficiency ratio (Bank)		78.24	%		98.00	%		101.55	%		90.06	%		102.76	%
Texas ratio (Bank)		17.02	%		17.02	%		30.83	%		28.28	%		39.66	%
Non-interest expense to average total assets		3.36	%		3.78	%		3.94	%		4.14	%		4.33	%
Average interest-earning assets to average interest-bearing liabilities		128.81	%		118.10	%		115.88	%		112.59	%		111.20	%
		At December 31,
Asset Quality Ratios:		2014			2013			2012			2011			2010
Non-performing assets to total assets		1.52	%		1.95	%		3.42	%		3.11	%		4.37	%
Non-performing loans to total loans		1.30	%		1.68	%		3.50	%		2.34	%		4.13	%
Allowance for loan losses to nonperforming loans		66.82	%		63.65	%		35.50	%		45.47	%		42.85	%
Allowance for loan losses to total loans		0.86	%		1.07	%		1.24	%		1.07	%		1.77	%
Capital Ratios:
Equity to total assets at end of period		9.37	%		11.22	%		11.43	%		11.32	%		10.77	%
Average equity to average assets		10.27	%		11.43	%		11.63	%		11.06	%		10.47	%
Risk-based capital ratio (Bank only)		16.89	%		17.89	%		17.36	%		17.20	%		15.57	%
Other Data:
Number of full service offices		8			8			8			8			8

2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

First Federal of Northern Michigan (the “Bank”), the Company’s principal operating subsidiary, is a full-service, community-oriented savings bank whose primary lending activity is the origination of one- to four-family residential real estate mortgages, commercial real estate loans, commercial loans, and consumer loans. As of December 31, 2014, $71.8 million, or 43.5%, of our total loan portfolio consisted of one- to four-family residential real estate loans, $63.6 million, or 38.5%, and $19.0 million, or 11.5%, of our total loan portfolio consisted of commercial mortgage loans and commercial loans, respectively, and $10.9 million, or 6.6%, of our total loan portfolio consisted of consumer and other loans. In recent years, commercial mortgage loans and commercial loans have grown as a percentage of our loan portfolio for three reasons. First, we have increased our emphasis on originating these loans, which generally have higher interest rates compared to one- to four-family residential real estate loans. In addition, most of these loans are originated with adjustable interest rates, which assist us in managing interest rate risk. Finally, most of our one- to four-family residential mortgage loan customers prefer fixed-rate loans in the low interest rate environment that has prevailed over the last several years. In spite of the fact of selling a majority of the fixed-rate one- to four-family residential mortgage loans that we originate, one- to four-family residential real estate loans have increased as a percentage of our total loan portfolio.

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we receive on our interest-earning assets, such as loans and securities, and the interest expense we pay on our deposits and borrowings. Our results of operations are also affected by non-interest income and non-interest expense, the provision for loan losses and income tax expense. Non-interest income consists primarily of banking fees, service charges, insurance commissions, mortgage banking activities and security transactions. Our non-interest expense consists primarily of salaries and employee benefits, FDIC insurance premiums, occupancy and office expenses, advertising and promotion expense, data processing expenses and expenses related to troubled credits and repossessed properties.

Our results of operations are significantly affected by general economic and competitive conditions, and particularly changes in market interest rates, government policies and actions of regulatory authorities. Numerous factors that are beyond our control can cause market interest rates to increase or decline. In addition, we are unable to predict future changes in government policies and actions of regulatory authorities that could have a material impact on our financial performance. As a result, we believe that changes in market interest rates, government policies and actions of regulatory authorities represent the primary uncertainties in predicting our future performance.

Business Strategy

Operating as a Community Savings Bank. We are committed to meeting the financial needs of the communities in which we operate. Our branch network of eight offices enhances our ability to serve these communities. We provide a broad range of individualized consumer and business financial services. We believe that we can be more effective in servicing our customers than many of our non-local competitors because our employees and senior management are able to respond promptly to customer needs and inquiries. Our ability to provide these services is enhanced by the experience of our senior management, which has an average of 26 years experience in the financial services industry.

In August 2014, we consummated our merger with Bank of Alpena, (“Alpena”), resulting in an increase to stockholders equity of $7.0 million during 2014.

Restoring our Balance Sheet. Beginning in 2001, we began to increase our originations of commercial real estate and commercial loans, resulting in significant organic loan growth in the years from 2004 through 2006. In contrast, beginning in 2008, due to severely deteriorating economic conditions we began to see a decline in loan balances and an increase in charge-offs, which decreased our asset base. As a result of our merger with Bank of Alpena, our total assets grew to $325.6 million as of December 31, 2014. Total loans increased $27.3 million, or 19.7% to $165.3 million as of December 31, 2014 from $138.1 million as of December 31, 2013. We are seeing signs of economic recovery in our markets and have devoted staff and resources to allow for continued growth of our balance sheet in 2015 and beyond.

3

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Increasing Our Share of Lower-Cost Deposits. In past years our cost of funds has been relatively high as we accepted higher-cost long-term certificates of deposit to fund our long-term assets such as one- to four-family residential mortgage loans. As we have increased our origination of shorter-term commercial real estate and commercial loans, most of which are originated with adjustable interest rates, we have decreased our need for higher-cost long-term certificates of deposit. We intend to continue to lower our cost of funds by increasing our share of lower-cost deposit products in the form of savings, checking and money market deposits. We typically are not a market leader in deposit rates, although from time-to-time we do offer higher rates as liquidity needs dictate. We also intend to continue to market our non-interest-bearing checking accounts in conjunction with our focus on commercial business lending. We grew the average balance of core deposits, non-maturity deposit accounts, by $78.7 million in 2014. This growth is attributed to the merger and implementing a sales calling program, in which we target area businesses and municipalities to gain core deposit relationships and a reclassification of funds previously maintained in non-core deposit products.

Maintaining High Asset Quality and Capital Strength. We are committed to conservative loan underwriting standards and procedures, and we primarily originate loans secured by real estate. As a result, we have historically experienced low levels of late payments and losses on loans. However, during the economic recession of recent years, we saw delinquency trends increase despite our conservative underwriting practices due to declining economic conditions and increasing unemployment in our market area. In 2014 we saw an improvement in delinquency patterns as evidenced by improvements in our asset quality ratios: at December 31, 2014, our ratio of non-performing assets to total assets was 1.03% as compared to 1.95% at December 31, 2013. We continue to maintain a strong capital base. At December 31, 2014, our total risk-based capital ratio was 16.9%, a decrease from 17.9% at December 31, 2013 and well in excess of the regulatory requirements to be categorized as “well capitalized.”

Managing Our Interest Rate Risk Exposure by Selling Fixed-Rate Residential Real Estate Loans. Historically, most borrowers have preferred long-term, fixed-rate residential real estate loans when, as now, market interest rates are at relatively low levels. These loans expose us to interest rate risk because our liabilities, consisting primarily of deposits, have relatively short maturities. In order to better match the maturities of our loan portfolio to the maturities of our deposits in the current low interest rate environment, we sell substantially all of the fixed-rate, one- to four-family residential real estate loans with maturities of 15 years or more that we have originated since 2002. Beginning in late 2012 we began placing certain 15 year fixed residential real estate loans into our portfolio in an effort to rebuild our balance sheet and increase net interest income, however we continue to sell most loans with terms longer than 15 years into the secondary market to minimize interest rate risk.

Comparison of Financial Condition at December 31, 2014 and 2013

Total assets increased $116.0 million, or 55.3%, to $325.6 million at December 31, 2014 from $209.7 million at December 31, 2013. Net loans increased $27.3 million, or 20.1% to $163.6 million at December 31, 2014 from $136.3 million at December 31, 2013. Mortgage loan originations decreased $3.5 million to $25.3 million in 2014 from $28.8 million in 2013. During that time period, our mortgage loan portfolio increased $8.0 million to $71.8 million at December 31, 2014 from $63.8 million as of December 31, 2013, as a result of loans acquired in the merger. The commercial loan portfolio increased 28.4% to $82.6 million at December 31, 2014 from $64.4 million at December 31, 2013. Cash and cash equivalents increased $8.5 million to $11.3 million at December 31, 2014 from $2.8 million at December 31, 2013. Deposits held at other financial institutions increased $8.4 million as a result of investing in certificates of deposit with the cash acquired in the merger. Investment securities increased $68.1 million, or 129.5%, to $120.8 million at December 31, 2014 from $52.6 million at December 31, 2013.

4

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Deposits increased $110.7 million, or 69.2%, to $270.7 million at December 31, 2014 from $160.0 million at December 31, 2013. This increase was due in large part to $95.8 million in deposits acquired in the merger, of which $29.4 million was placed in our interest bearing commercial checking and $33.0 million in our non-interest-bearing commercial checking accounts. Our focus in 2014 continued to be on building deposit relationships rather than attracting higher-cost non-core certificate of deposit accounts. Borrowings, consisting primarily of FHLB advances, decreased $1.9 million, or 7.8%, to $22.9 million at December 31, 2014 from $24.8 million at December 31, 2013 as we replaced borrowings with deposits.

Stockholders’ equity increased $7.0 million, or 29.8%, to $30.5 million at December 31, 2014 from $23.5 million at December 31, 2013. The increase was mainly a result of the $7.1 million in equity acquired from Bank of Alpena in the merger, $2.2 million in net income for the year, and an increase of $591,000 in net unrealized gain on investment securities, with dividends paid of $247,000 partially offsetting these increases.

Comparison of Operating Results for the Years Ended December 31, 2014 and 2013

General. Net income increased to $2.2 million for the year ended December 31, 2014 from $55,000 for the year ended December 31, 2013. Net interest income before provision for loan losses increased $849,000 to $8.0 million in 2014 from $7.2 million in 2013, due in large part to the increase in interest earning assets for the year. The provision for loan losses was $353,000 lower in 2014 than in 2013, resulting in net interest income after provision for loan losses being $1.2 million higher in 2014 than in 2013. Non-interest income was $1.7 million higher in 2014 than in 2013, and non-interest expense was $721,000 higher in 2014 than in 2013.

Interest Income. Interest income increased $781,000, or 9.4%, to $9.1 million for the year ended December 31, 2014 from $8.2 million for the year ended December 31, 2013. The increase was primarily due to an increase in the average balance of our interest earning assets of $45.5 million, or 23.1%, year over year. The average balance of our one- to four-family residential mortgage loans increased $1.8 million, or 2.7%, to $67.1 million for the year ended December 31, 2014 from $65.3 million for the year ended December 31, 2013, while the average yield on such loans decreased to 4.67% from 5.11%. The average balance of our non-mortgage loans, principally commercial loans and consumer loans, increased $7.4 million, or 9.9%, to $82.2 million for the twelve months ended December 31, 2014 from $74.8 million for the twelve months ended December 31, 2013. The average yield on our commercial loans decreased five basis points and the average yield on our consumer loans decreased 18 basis points from 2013 to 2014. The average balance of our investment securities, excluding mortgage-backed securities, increased $15.8 million, or 70.5%, to $38.2 million for the year ended December 31, 2014 from $22.4 million for the year ended December 31, 2013, while the average yield on these investments decreased to 2.00% from 2.24%. In addition, the average balance of our mortgage-backed securities increased $11.2 million, or 38.0%, to $40.8 million for the year ended December 31, 2014 from $29.5 million for the year ended December 31, 2013, with an average yield increase of 25 basis points to 1.88% from 1.63%.

Interest Expense. Interest expense decreased to $1.1 million for the year ended December 31, 2014 from $1.2 million for the year ended December 31, 2013, due primarily to a $26.1 million, or 38.2%, increase in the average balance of lower costing core deposits accounts year over year. The average balance of interest-bearing deposits increased $26.1 million from 2014 to 2013, while the average cost of those deposits decreased nine basis points to 0.51% for 2014 from 0.60% for 2013, reflecting a continued decline in market interest rates during 2014. The average balance of FHLB borrowings decreased $646,000 from 2014 to 2013 while the cost of those borrowings decreased to 1.11% from 1.92% year over year as we were able to pay off high-cost maturing advances with deposits or replace them with lower-cost advances due to the rate environment. The average balance of REPO Sweep accounts decreased $4.0 million, or 100.0% year over year, as a result of the discontinuation of this product as of December 31, 2013.

Net Interest Income. Net interest income increased to $8.0 million for the year ended December 31, 2014 from $7.2 million for the year ended December 31, 2013. The increase was primarily due to an increase of $45.5 million in the average balance of our interest earning assets. While the average balance increased we experienced a decrease of 36 basis points in our average interest rate spread to 3.18% for the year ended December 31, 2014 from 3.54% for the year ended December 31, 2013.

5

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Provision for Loan Losses. We recorded a provision for loan losses of $284,000 for the year ended December 31, 2014 compared to $637,000 for the year ended December 31, 2013. We had net charge-offs of $362,000 and $915,000 during 2014 and 2013, respectively. Included in our net charge-offs for 2013 is a partial charge-off of $589,000, related to a single loan that became troubled at the end of 2012. Our provision is based on management’s review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors. For 2014, the provision was significantly lower than 2013 due to the following factors: 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. As our charge-off history on commercial loans improved in 2014 as compared to recent prior years, lower loss factors were applied to those pools of loans to establish an adequate reserve. In addition, asset quality metrics improved in 2014. In contrast, in 2013, the Company charged off $915,000 in loans, including $344,000 of residential mortgage loans which required a comparatively higher provision than the current year.

Non-Interest Income. Non-interest income increased to $3.5 million for the year ended December 31, 2014 from $1.8 million for the year ended December 31, 2013. The 2014 results reflect a bargain purchase gain of $2.0 million related to the acquisition that closed in August 2014. This increase was partially offset by decreases of $113,000 in mortgage banking activities and a loss on sale of real estate owned and other repossessed assets of $79,000 which was recorded in 2014. In 2014 we retained in our portfolio approximately $11.4 million of 10- and 15-year fixed residential mortgages in our portfolio, rather than selling them, which reduced mortgage banking activities income. Non-interest income is detailed in the table presented below:

	For years ended December 31,
	2014			2013		Change from 2014 to 2013
	(dollars in thousands)
Service charges and other fees	$	807		$	857		(5.83	%)
Net gain on sale of investments		(4	)		—		0.00	%
Net gain on sale of loans		206			235		(12.34	%)
Net gain/(loss) on sale of real estate owned
and other repossessed assets		(76	)		3		2,633.33	%
Loan servcing fees		266			350		(24.00	%)
Insurance and brokerage commissions		117			126		(7.14	%)
Bargain purchase gain		1,982			—		0.00	%
Other		180			194		(7.22	%)
	$	3,478		$	1,765		97.05	%

Non-Interest Expense. Non-interest expense increased to $9.0 million for the year ended December 31, 2014 from $8.2 million for the year ended December 31, 2013. The year over year increase related primarily to increases in compensation and employee benefits of $307,000, occupancy of $121,000, and merger related expenses of $183,000. These increases were partially offset by a decrease in collection loan activity expenses of $85,000 for 2014. Non-interest expense is detail in the table presented below:

6

Management’s Discussion and Analysis of Financial Condition and Results of Operations

	For years ended December 31,
	2014		2013		Change from 2014 to 2013
	(dollars in thousands)
Compensation and employee benefits	$	4,961	$	4,654		6.60	%
FDIC premiums		207		184		12.50	%
Amortization of intangible assets		145		119		21.85	%
Advertising		183		130		40.77	%
Occupancy and equipment		1,032		911		13.28	%
Data processing service bureau		345		301		14.62	%
Professional fees		393		427		(7.96	%)
Collection activity		68		153		(55.56	%)
Real estate and other repossessed assets		272		245		11.02	%
Merger related expenses		266		83		220.48	%
Other		1,091		1,035		5.41	%
	$	8,963	$	8,242		8.75	%

7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Income Taxes. The Company had no federal income expense for 2014 and 2013 as a result of the valuation allowance against the Company’s deferred tax assets. See Critical Accounting Policies section for discussion on valuation of deferred tax assets.

Average Balance Sheet. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

	As of December 31, 2014					For Years Ended December 31, 2014							Average Consolidated Statements of Condition For Years Ended December 31, 2013							Average Consolidated Statements of Condition For Years Ended December 31, 2012
										Average							Average							Average
			Yield /			Average				Yield /			Average				Yield /			Average				Yield /
	Balance		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate
								(In thousands)							(In thousands)							(In thousands
Interest-earning assets:
Mortgage loans						$	67,057	$	3,133				$	65,297	$	3,338				$	67,151	$	3,708
Non-mortgage loans							82,232		4,260					74,813		3,865					75,640		4,220
Loans		163,735		4.80	%		149,289		7,393		4.95	%		140,110		7,203		5.14	%		142,791		7,928		5.55	%
Mortgage-backed securities		63,648		2.65	%		40,760		767		1.89	%		29,540		480		1.63	%		29,002		621		2.14	%
Other Investment securities		57,110		1.60	%		39,656		766		1.93	%		22,401		502		2.24	%		24,352		566		2.32	%
Investment securities		120,758		2.16	%		80,416		1,533		1.91	%		51,941		982		1.89	%		53,354		1,187		2.22	%
Other investments		19,683		0.71	%		12,632		174		1.39	%		4,759		134		2.83	%		4,412		128		2.90	%
Total interest-earning assets		304,176		3.47	%		242,337		9,100		3.76	%		196,810		8,319		4.23	%		200,557		9,243		4.62	%
Non interest-earning assets		21,691					56,314							16,261							16,544
Total Assets	$	325,867				$	298,651						$	213,071						$	217,101
Interest-bearing liabilities:
Savings Deposits		29,846		0.05	%	$	26,279	$	13		0.06	%	$	21,630	$	11		0.06	%	$	18,784		9		0.06	%
Money market/NOW accounts		107,935		0.27	%		68,206		141		0.21	%		46,765		97		0.21	%		43,634		94		0.21	%
Certificates of deposit		76,921		1.00	%		70,228		664		0.95	%		70,217		718		1.02	%		74,966		931		1.24	%
Total interest-bearing deposits		214,702		0.50	%		164,713	$	818		0.51	%		138,612	$	826		0.61	%		137,384		1,034		0.75	%
Borrowed funds		22,885		1.17	%		23,422		264		1.11	%		28,035		324		1.14	%		35,694		620		1.74	%
Total interest-bearing liabilities		237,587		0.57	%		188,135		1,082		0.58	%		166,647		1,150		0.69	%		173,078		1,654		0.96	%
Non interest-bearing liabilities		57,744					82,204							22,043							18,729
Total liabilities		295,331					270,339							188,690							191,807
Stockholders' equity		30,536					28,312							24,381							25,294
Total liabilities & stockholders' equity	$	325,867				$	298,651						$	213,071						$	217,101
Net interest income								$	8,018						$	7,169						$	7,589
Interest rate spread				2.90	%						3.18	%						3.54	%						3.66	%
Net interest-earning assets						$	54,202						$	30,163						$	27,479
Net interest margin (1)				3.02	%						3.30	%						3.64	%						3.80	%
Average interest-earning assets to average interest-bearing liabilities											128.81	%						118.10	%						115.88	%

(1) Net interest margin represents net interest income divided by the interest-earning assets

8

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Rate/Volume Analysis

The following table sets forth certain information regarding changes in interest income and interest expense of the Company during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided in each category with respect to (i) changes attributable to changes in volume (change in volume multiplied by prior rate), (ii) changes in rates (changes in rate multiplied by prior average volume), and (iii) the net change. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Year ended December 31, 2014 Compared to Year ended December 31, 2013 Increase (Decrease) Due to:
	Volume			Rate			Total
				(In thousands)
Interest-earning assets:
Loans receivable	$	483		$	(293	)	$	190
Investment securities		542			9		$	551
Other investments		147			(107	)	$	40
Total interest-earning assets		1,172			(391	)		781
Interest-bearing liabilities:
Savings Deposits		2			—			2
Money Market/NOW accounts		44			(1	)		43
Certificates of Deposit		—			(53	)		(53	)
Deposits		46			(54	)		(8	)
Borrowed funds		(51	)		(9	)		(60	)
Total interest-bearing liabilities		(5	)		(63	)		(68	)
Change in net interest income	$	1,177		$	(328	)	$	849

	Year ended December 31, 2013 Compared to Year ended December 31, 2012 Increase (Decrease) Due to:
	Volume			Rate			Total
				(In thousands)
Interest-earning assets:
Loans receivable	$	(154	)	$	(571	)	$	(725	)
Investment securities		(33	)		(172	)	$	(205	)
Other investments		10			(4	)	$	6
Total interest-earning assets		(177	)		(747	)		(924	)
Interest-bearing liabilities:
Savings Deposits		—			2			2
Money Market/NOW accounts		6			(3	)		3
Certificates of Deposit		(66	)		(147	)		(213	)
Deposits		(60	)		(148	)		(208	)
Borrowed funds		(210	)		(86	)		(296	)
Total interest-bearing liabilities		(270	)		(234	)		(504	)
Change in net interest income	$	93		$	(513	)	$	(420	)

9

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management of Interest Rate Risk

Qualitative Analysis. Our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to reduce the exposure of our net interest income to changes in market interest rates. First Federal of Northern Michigan’s asset/liability management committee (“ALCO”), which consists of senior management and one member of the board of directors, evaluates the interest rate risk inherent in our assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit-taking strategies accordingly. The Board of Directors reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.

We actively evaluate interest rate risk in connection with our lending, investing and deposit-taking activities. Generally, our loans, which represent the significant majority of our assets, have longer-terms to maturity than our deposits, which represent the significant majority of our liabilities. As of December 31, 2014, $124.5 million, or 91.4% of our loan portfolio, consisted of loans that mature or reprice after December 31, 2015. In contrast, as of December 31, 2014, $39.1 million, or 50.9% of our time deposits as of that date, consisted of deposits that mature or reprice in less than one year.

In an effort to manage interest rate risk, we have increased our focus on the origination and retention in our portfolio of adjustable-rate residential mortgage loans. In addition, we have increased the origination and retention in our portfolio of commercial real estate and commercial loans, since most of these loans are originated with adjustable interest rates. In the current low interest rate environment, we generally have sold all of the fixed-rate, longer-term (15 years or more) residential mortgage loans that we originate on a servicing-retained basis. In 2014, we determined to retain in portfolio $11.4 million of 10- and 15-year fixed rate residential mortgage loans. Finally, we have primarily invested in short- and medium-term securities and have maintained high levels of liquid assets, such as cash and cash equivalents. Shortening the average maturity of our interest-earning assets through these strategies helps us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Maintaining high levels of liquid assets also permits us to invest in higher-yielding securities and loans when market interest rates increase. However, these strategies can be expected to adversely affect net interest income if long-term interest rates remain at low levels. As long-term interest rates rise, as we expect will happen, we will reduce our mortgage-banking operations, and will retain in our portfolio a larger percentage of the one- to four-family loans that we originate.

Quantitative Analysis. The Company uses two primary measurement techniques to identify and manage its interest rate risk:

— Net Interest Income (NII) simulation

— Economic Value of Equity (EVE)

Net Interest Income Simulation Model: The Company uses a NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Company’s financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management’s projections of the future volume and pricing of each of the product lines offered by the Company as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Company’s interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over a 24-month horizon assuming a -100bp, 100bp, 200bp, 300bp and 400bp parallel ramped decrease or increase in interest rates. The Fed Funds interest rate, targeted by the Federal Reserve at a range of 0% to 0.25% is currently set at a level that would be negative in parallel ramped decrease scenarios, therefore those scenarios were omitted from the interest rate risk analysis at December 31, 2014.

At December 31, 2014, the Company’s interest rate risk profile reflects a neutral position. The following table shows the Company’s estimated net interest income sensitivity profile and ALCO policy limits as of December 31, 2014.

10

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Dynamic Balance Sheet - RAMP
Rate Changes:		0 BP		- 100 BP			+ 100 BP			+200 BP			+300 BP			+400 BP
$ Change in NII	$	18,428	$	17,873		$	19,003		$	19,333		$	19,623		$	19,797
% Change in NII				-3.01	%		3.12	%		4.91	%		6.49	%		7.43	%
Policy Limits				+/-5	%		+/-5	%		+/-10	%		+/-15	%		+/-20	%

The 24-months net interest income at risk reported as of December 31, 2014 for all scenarios presented shows that the Company’s overall risk to changes in interest rates is low. Given that the duration of our assets is longer than that of our liabilities, the scenarios shown illustrate that a rising rate environment has a neutral to slightly positive impact on our net interest income. The impact illustrated is well within Board set limits.

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data do not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results. As a means of validation and testing of our assumptions a back test is performed annually to compare actual results to the predicted results.

Economic Value of Equity: The Company also uses EVE as a measurement tool in managing interest rate risk. Whereas the net interest income simulation model highlights exposure over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The EVE of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the earnings simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving prepayments and the expected changes in balances and pricing of transaction deposit portfolios. The following table shows the Company’s EVE sensitivity profile as of December 31, 2014.

Rate Changes:		0 BP		+ 100 BP			+200 BP			+300 BP			+400 BP
$ Change in Equity	$	51,821	$	54,565		$	56,505		$	58,027		$	59,352
% Change in Equity				5.30	%		9.04	%		11.98	%		14.53	%
Policy Limits				+/-10	%		+/-15	%		+/-20	%		+/-25	%

The EVE at risk profile shows slight to moderate asset sensitivity from market rate increases.

Cash Flows

Cash flows provided by operations were $1.7 million for 2014 compared to $2.0 million for 2013. Cash flows used for investing activities were $5.8 million in 2014 as compared to cash flows provided by investing activities of $1.1 million in 2013. The change year over year was due in large part to the purchase of available-for-sale securities as a result of increased cash on hand following the merger. Cash provided by financing activities was $12.8 million in 2014 as compared to cash used in financing activities of $3.1 million in 2013, due primarily to the increased growth of deposits, subsequent to the merger, and the continued decrease in our outstanding Federal Home Loan Bank (FHLB) advances year over year in 2014.

11

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, borrowings (Federal Home Loan Bank advances), the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments, mortgage loan sales and mortgage-backed securities sales are greatly influenced by market interest rates, economic conditions and competition.

Liquidity represents the amount of our assets that can be quickly and easily converted into cash without significant loss. Our most liquid assets are cash, short-term U.S. Government securities and U.S. Government agency or government-sponsored enterprise securities. We are required to maintain sufficient levels of liquidity as defined by the Office of the Comptroller of the Currency regulations. Current regulations require that we maintain sufficient liquidity to ensure our safe and sound operation. Our current objective is to maintain liquid assets equal to at least 20% of total deposits and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of December 31, 2014 was $146.5 million, or 62.9% of total deposits and Federal Home Loan Bank borrowings due in one year or less, compared to $53.4 million, or 42.4% of this amount at December 31, 2013. The levels of liquidity are dependent on our operating, financing, lending and investing activities during any given period. Our calculation of liquidity includes additional borrowing capacity available with the Federal Home Loan Bank. As of December 31, 2014, we had unused borrowing capacity of $33.5 million.

We currently retain in our portfolio all adjustable-rate residential mortgage loans, short-term balloon mortgage loans and fixed-rate residential mortgage loans with maturities of less than 15 years, and generally sell the remainder. We also originate for retention in our loan portfolio, commercial and commercial real estate loans, including real estate development loans. During the year ended December 31, 2014, we originated $25.3 million of one- to four-family residential mortgage loans, of which $11.4 million were retained in our portfolio and the remainder were sold. This compares to $28.8 million of one- to four-family originations during the year ended December 31, 2013, of which $11.7 million were retained in our portfolio. At December 31, 2014, we had outstanding loan commitments of $24.2 million. These commitments included $2.0 million for permanent one- to four-family residential mortgage loans, $3.7 million for non-residential loans, $2.2 million of undisbursed loan proceeds for construction of one- to four-family residences, $5.2 million of undisbursed lines of credit on home equity loans, $590,000 of unused credit card lines, $7.5 million of unused commercial lines of credit, and $1.2 million for commercial loans, unused bounce protection of $1.7 million and letters of credit of $134,000.

Deposits are a primary source of funds for use in lending and for other general business purposes. At December 31, 2014, deposits funded 83.1% of our total assets compared to 76.3% at December 31, 2013. Certificates of deposit scheduled to mature in less than one year at December 31, 2014 totaled $39.1 million. We believe that a significant portion of such deposits will remain with us. We monitor the deposit rates offered by competitors in our market area, and we set rates that take into account the prevailing market conditions along with our liquidity position.

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 also may be used on a longer-term basis to support increased lending or investment activities. At December 31, 2014, we had $22.9 million in Federal Home Loan Bank advances and no outstanding advances at the Federal Reserve Discount Window. Total borrowings as a percentage of total assets were 7.0% at December 31, 2014 compared to 11.8% at December 31, 2013.

12

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As of December 31, 2014, management was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2014, we had no material commitments for capital expenditures.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statement of Cash Flows included with our Consolidated Financial Statements.

Our total stockholders’ equity was $30.5 million at December 31, 2014 and $23.5 million at December 31, 2013, an increase of $7.0 million year over year, resulting from net income of $2.2 million and $7.1 million of acquired equity in the merger. The Company’s ratio of equity to assets decreased to 9.4% as of December 31, 2014 from 11.2% as of December 31, 2013. Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These regulatory standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be “well capitalized” if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, Leverage Capital Ratio is at least 5%, and the Bank is not subject to any written agreements or orders issued by the FDIC pursuant to Section 8 of the Federal Deposit Insurance Act.

The following table summarizes the capital ratios of the Company:

	At December 31,						Minimum to be
	2014			2013			Well Capitalized
Tier 1 Leverage Ratio		8.59	%		10.75	%		5.00	%
Tier 1 Risk-Based Capital		16.14	%		16.79	%		6.00	%
Total Risk-Based Capital		16.96	%		17.89	%		10.00	%

At December 31, 2014 and December 31, 2013, the Bank exceeded the minimum capital requirements to be considered “well capitalized.” See Note 12 to our financial statements for further information.

Critical Accounting Policies

Our accounting and reporting policies are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. We consider accounting policies that require significant judgment and assumptions by management that have, or could have a material impact on the carrying value of certain assets or on income to be critical accounting policies. Changes in underlying factors, assumptions or estimates could have a material impact on our future financial condition and results of operations. Based on the size of the item or significance of the estimate, the following accounting policies are considered critical to our financial results.

Allowance for Loan and Lease Losses (ALLL). The ALLL is calculated with the objective of maintaining an allowance sufficient to absorb estimated probable loan losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral.

We have established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish an allowance for losses on loans. The allowance for losses on loans is based on our current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision for loan losses based on our evaluation of the losses inherent in the loan portfolio, and considers all known internal and external factors that affect loan collectability as of the reporting date. Our evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, our knowledge of inherent losses in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management believes this is a critical accounting policy because this evaluation involves a high degree of complexity and requires us to make subjective judgments that often require assumptions or estimates about various matters.

13

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The analysis of the ALLL has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. The principal assumption used in deriving the ALLL is the estimate of loss content for each risk rating. To illustrate, if recent loss experience dictated that the projected loss ratios would be increased by 10% (of the estimate) across all risk ratings, the allocated allowance as of December 31, 2014 would have changed by approximately $130,000. Actual loan losses may be significantly more than the allowances we have established, which could have a material negative effect on our financial results.

Mortgage Servicing Rights. We sell to investors a portion of our originated one- to four-family residential real estate mortgage loans. When we acquire mortgage servicing rights through the origination of mortgage loans and sale of those loans with servicing rights retained, we allocate a portion of the total cost of the mortgage loans to the mortgage servicing rights based on their relative fair value.As of December 31, 2014, we were servicing mortgage loans sold to others totaling $125.4 million. We amortize capitalized mortgage servicing rights as a reduction of servicing fee income in proportion to, and over the period of, estimated net servicing income by use of a method that approximates the level-yield method. We periodically evaluate capitalized mortgage servicing rights for impairment using a model that takes into account several variables including expected prepayment speeds and prevailing interest rates. If we identify impairment, we charge the amount of the impairment to earnings by establishing a valuation allowance against the capitalized mortgage servicing rights asset. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speed. We monitor this risk and adjust the valuation allowance as necessary to adequately record any probable impairment in the portfolio. Management believes the estimation of these variables makes this a critical accounting policy. For purposes of measuring impairment, the mortgage servicing rights are stratified based on financial asset type and interest rates. In addition, we obtain an independent third-party valuation of the mortgage servicing portfolio on a quarterly basis. In general, the value of mortgage servicing rights increases as interest rates rise and decreases as interest rates fall. This is because the estimated life and estimated income from a loan increase as interest rates rise and decrease as interest rates fall. The key economic assumptions made in determining the fair value of the mortgage servicing rights at December 31, 2014 included the following:

	December 31,
	2014			2013
Annual constant prepayment speed (CPR)		11.46	%		10.27	%
Weighted average life (in months)		244			244
Discount rate		9.38	%		9.26	%

As of the December 31, 2013 valuation, we determined that the book value of our mortgage servicing rights asset associated with sold 20-year fixed-rate loans was no longer $19,200 more than the independent valuation; therefore the $19,200 valuation reserve that was established against that tranche of loans as of December 31, 2012 was reversed. As of December 31, 2014 there was no need to establish a valuation allowance against the mortgage servicing asset.

Impairment of Intangible Assets. On June 12, 2003, we acquired 100% of the stock of the InsuranCenter of Alpena (ICA). We allocated the excess of the purchase price paid over the fair value of net assets acquired to intangible assets, including goodwill. On February 27, 2009 the Company sold the majority of the assets of ICA. The remaining goodwill on our books of $600,000 related to certain assets of the Company that were not sold in the sale of ICA. We allocated the goodwill between the assets sold and the assets retained and determined a value of the assets that remained of $600,000. Since the $600,000 allocation relates to a finite life asset, we re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March 2009. The intangible asset was fully amortized in April of 2014, and as a result this subsidiary was dissolved as of December 31, 2014.

14

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Upon completion of our merger, on August 8, 2014, with Alpena, we established a core deposit intangible asset of $1.4 million, which represents the value of the depositor relationships that were acquired. The core deposit intangible is an amortizable asset that will be recognized on an accelerated basis over a 10 year period. The Company evaluates the carrying value on an annual basis for impairment.

Valuation of Deferred Tax Assets. The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

At December 31, 2014 and 2013, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2014 and 2013 a valuation allowance of $3.1 million and $3.2 million was recorded, respectively. The net deferred tax asset recorded at December 31, 2014 and 2013 was $851,000 and $799,000. See Note 10 for additional information.

Off-Balance Sheet Arrangements

In the ordinary course of business, First Federal of Northern Michigan is a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. First Federal of Northern Michigan follows the same credit policies in making off-balance sheet commitments as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by First Federal of Northern Michigan, is based on management’s credit evaluation of the customer.

Unfunded commitments under construction lines of credit for residential and commercial properties and commercial lines of credit are commitments for possible future extensions of credit to existing customers, for which funds have not been advanced by First Federal of Northern Michigan.

At December 31, 2014 and December 31, 2013, First Federal of Northern Michigan had $9.0 million and $5.9 million, respectively, of commitments to grant loans, $15.0 million and $12.9 million, respectively, of unfunded commitments under lines of credit and $134,000 and $59,000, respectively, of letters of credit. See Note 11 of the Notes to the Consolidated Financial Statements.

Safe Harbor Statement

When used in this annual report or future filings by First Federal of Northern Michigan Bancorp, Inc. with the Securities and Exchange Commission, 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.

15

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Impact of Inflation and Changing Prices

The financial statements and related notes of First Federal of Northern Michigan Bancorp, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

16

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Report of Independent Registered Public Accounting Firm

Board of Directors 

First Federal of Northern Michigan Bancorp, Inc.

We have audited the consolidated balance sheet of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2014 and 2013 and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each year in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2014 and 2013 and the consolidated results of its operations and its cash flows for each year in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC 

Auburn Hills, Michigan 

March 27, 2015

17

First federal of northern Michigan bancorp, inc. and subsidiaries 2014
Annual Report

Consolidated Balance Sheet 

(000s omitted, except per share data)

	December 31,
	2014			2013
Assets
Cash and cash equivalents	$	11,205		$	2,760
Overnight deposits with Federal Home Loan Bank		267			6
Total cash and cash equivalents		11,472			2,766
Deposits held in other financial institutions		8,429			—
Securities available for sale, at fair value (Note 3)		119,968			50,358
Securities held to maturity (Note 3)		790			2,255
Loans - net (Note 4)		163,647			136,315
Loans held for sale		88			175
Federal Home Loan Bank stock		2,591			3,266
Property and equipment (Note 5)		6,336			5,203
Assets held for sale - net		478			—
Foreclosed real estate and other repossessed assets		2,823			1,780
Accrued interest receivable		986			745
Intangible assets (Note 7)		1,286			40
Deferred tax asset (Note 10)		851			799
Originated mortgage servicing right - net (Note 6)		710			860
Bank owned life insurance		4,727			4,610
Other assets		685			485
Total assets	$	325,867		$	209,657
Liabilities and Stockholders' Equity
Liabilities
Non-interest bearing deposits	$	56,032		$	21,047
Interest-bearing deposits (Note 8)		214,702			138,982
Advances from Federal Home Loan Bank (Note 9)		22,885			24,813
Accrued expenses and other liabilities (Note 13)		1,712			1,290
Total liabilities		295,331			186,132
Stockholders' Equity (Note 12)
Common stock ($0.01 par value 20,000,000 shares authorized, 4,034,764 and 3,191,799
shares issued and outstanding) - at December 31, 2014 and 2013 , respectively		40			32
Additional paid-in capital		28,264			23,854
Retained earnings		4,765			2,763
Treasury stock at cost (307,750 shares) - at December 31, 2014 and 2013 , respectively		(2,964	)		(2,964	)
Accumulated other comprehensive income (loss)		431			(160	)
Total stockholders' equity		30,536			23,525
Total liabilities and stockholders' equity	$	325,867		$	209,657

18

First federal of northern Michigan bancorp, inc. and subsidiaries 2014
Annual Report

Consolidated Statement of Operations and Comprehensive Income 

(000s omitted, except per share data)

	Year Ended December 31,
	2014			2013
Interest Income
Loans, including fees	$	7,394		$	7,203
Investments
Taxable		781			484
Tax-exempt		158			151
Mortgage-backed securities		767			481
Total interest income		9,100			8,319
Interest Expense
Deposits (Note 8)		818			826
Borrowings		264			324
Total interest expense		1,082			1,150
Net Interest Income - Before provision for loan losses		8,018			7,169
Provision for Loan Losses (Note 4)		284			637
Net Interest Income - After provision for loan losses		7,734			6,532
Other Income
Service charges and other fees		807			857
Net loss on sale of investments		(4	)		—
Net gain on sale of loans		206			235
Net (loss) gain on sale of real estate owned and other repossessed assets		(76	)		3
Loan servicing fees		266			350
Insurance and brokerage commissions		117			126
Bargain purchase gain (Note 2)		1,982			—
Other		180			194
Total other income		3,478			1,765
Operating Expenses
Compensation and employee benefits (Note 13)		4,961			4,654
FDIC insurance premiums		207			184
Amortization of intangible assets		146			119
Advertising		183			130
Occupancy and equipment		1,032			911
Data processing service bureau		345			301
Professional fees		393			427
Collection activity		68			153
Real estate owned & other repossessed assets		272			245
Merger related expenses		266			83
Other		1,090			1,035
Total operating expenses		8,963			8,242
Income - before income tax expense		2,249			55
Income tax expense (Note 10)		—			—
Net income	$	2,249		$	55
Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities available for sale - net of tax		594			(907	)
Reclassification adjustment for losses realized in earnings - net of tax		(3	)		—
Comprehensive Income (Loss)	$	2,840		$	(852	)
Per Share Data
Net income per share
Basic	$	0.70		$	0.02
Diluted	$	0.70		$	0.02
Dividends per common share	$	0.08		$	0.02

19

First federal of northern Michigan bancorp, inc. and subsidiaries 2014
Annual Report

Consolidated Statement of Changes in Stockholders’ Equity 

(000s omitted)

	Shares		Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
Balance - January 1, 2013		3,192	$	32	$	(2,964	)	$	23,854	$	2,766		$	747		$	24,435
Net income		—		—					—		55			—			55
Other comprehensive loss		—		—					—		—			(907	)		(907	)
Common dividend declared, $0.02 per share		—		—					—		(58	)		—			(58	)
Balance - December 31, 2013		3,192		32		(2,964	)		23,854		2,763			(160	)		23,525
Net income		—		—					—		2,249			—			2,249
Exchange of Alpena Banking Corp Stock (842,965 shares issued)		843		8					4,410		—			—			4,418
Other comprehensive income		—		—					—		—			591			591
Common dividend declared, $0.08 per share		—		—					—		(247	)		—			(247	)
Balance - December 31, 2014		4,035	$	40	$	(2,964	)	$	28,264	$	4,765		$	431		$	30,536

20

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Consolidated Statement of Cash Flows 

(000s omitted, except per share data)

	Year Ended December 31
	2014			2013
Cash Flows from Operating Activities
Net income (loss)	$	2,249		$	55
Adjustments to reconcile net income (loss) to cash from operating
activities:
Depreciation and amortization		483			401
Provision for loan losses		284			637
Accretion of acquired loans		(89	)		—
Amortization and accretion on securities		578			551
Bargain purchase gain from bank acquisition		(1,982	)		—
Loss on sale of investment securities		4			—
Gain on sale of loans held for sale		(206	)		(235	)
Loss (Gain) on sale of property and equipment		23			(12	)
Loss (Gain) on sale of real estate owned and other repossessed assets		4			(3	)
Originations of loans held for sale		(13,833	)		(17,383	)
Proceeds from sale of loans held for sale		14,126			17,522
Net change in:
Accrued interest receivable		(25	)		225
Prepaid FDIC insurance premiums		—			583
Bank owned life insurance		(117	)		(135	)
Other assets		128			73
Accrued expenses and other liabilities		86			(236	)
Net cash provided by operating activities		1,713			2,043
Cash Flows from Investing Activities
Net cash received in bank acquisition		41,650			—
Net decrease in loans		3,740			474
Net increase in deposits at other institutions		(7,189	)		—
Proceeds from maturity of securities		14,843			14,441
Proceeds from sale of securities available-for-sale		730			—
Proceeds from sale of FHLB stock		831			—
Proceeds from sale of property and equipment		3			59
Proceeds from sale of of real estate owned and other repossessed assets		556			2,097
Purchase of securities available for sale		(60,636	)		(15,872	)
Purchase of premises and equipment		(306	)		(139	)
Net cash (used in) provided by investing activities		(5,778	)		1,060
Cash Flows from Financing Activities
Net increase in deposits		14,919			1,679
Dividends paid on common stock		(247	)		(58	)
Net decrease in Repo Sweep Accts		—			(3,183	)
Net increase in advances from borrowers		28			18
Advances from FHLB		17,955			47,005
Repayments of advances from FHLB		(19,884	)		(48,550	)
Net cash provided by (used in) financing activities		12,771			(3,089	)
Net Increase in Cash and Cash Equivalents		8,706			14
Cash and Cash Equivalents - Beginning of year		2,766			2,752
Cash and Cash Equivalents - End of year	$	11,472		$	2,766
Supplemental Cash Flow and Noncash Information
Net cash paid for income taxes	$	20		$	—
Cash paid for interest on deposits and borrowings		1,076			1,161
Transfer of loans to real estate owned & other repossessed assets		1,562			1,486

21

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Note 1 - Summary of Significant Accounting Policies

Nature of Operations – First Federal of Northern Michigan Bancorp, Inc. (the “Company”) and its subsidiary, First Federal of Northern Michigan (the “Bank”), conduct operations in the northeastern lower peninsula of Michigan. The Company’s primary services include accepting deposits, making commercial, consumer and mortgage loans, and engaging in mortgage banking activities.

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 subsidiary, Financial Services & Mortgage Corporation (“FSMC”). FSMC invested in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The 2014 activity of FFNM Agency, Inc. was to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to an outside party and, to a lesser extent, the collection of commissions for the sale of non-insured investment products. The final override commission payment was collected in April of 2014 and as a result, this subsidiary was dissolved as of December 31, 2014. All significant intercompany balances and transactions have been eliminated in the consolidation.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease loss (“ALLL”), the valuation of investment securities, intangible and deferred tax assets, and mortgage servicing rights.

Significant Concentrations of Credit Risk - Most of the Company’s activities are with customers located within the northeastern lower peninsula of Michigan. Note 3 discusses the types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.

Cash and Cash Equivalents - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions and federal funds sold and interest bearing deposits in other depository institutions which mature within ninety days when purchased.

Securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. When evaluating investment securities consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether another-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

22

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but the entity does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

Federal Home Loan Bank Stock – Federal Home Loan Bank (FHLB) Stock is carried at cost and is held to allow the Bank to conduct business with the entity. Federal Home Loan Bank sells and purchases its stock at par; therefore cost approximates fair market value.

Mortgage Banking Activities – The Company routinely sells to investors its originated long-term residential fixed-rate mortgage loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2014 and 2013.

The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The fair value of forward contracts was insignificant at December 31, 2014 and 2013.

Originated Loans - The Company grants mortgage, commercial, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the ALLL, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual life of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected, for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

23

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Loans Acquired in a Business Combination – Loans acquired in a business combination (acquired loans) consist of loans acquired on August 8, 2014 in the merger with Bank of Alpena. Acquired loans are recorded at fair value as of the acquisition date without a carryover of the associated allowance for loan losses related to these loans, through a fair value discount that was, in part, attributed to credit quality. The estimate of the expected credit losses was determined based on due diligence performed by executive and senior management of the Company. The fair value discount was recorded as a reduction to the acquired loans’ outstanding principal balance in the consolidated financial statements on the merger date.

24

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

The Company accounts for acquired loans, which are recorded at fair value at acquisition, in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30). Under the provisions of ASC 310-30, the Company evaluated each loan individually and determined that loans with an outstanding principal balance of $5.9 million exhibited deteriorated credit quality, and therefore, met the criteria set forth in ASC 310-30. None of the loans acquired were classified as debt securities.

In accordance with ASC 310-30 with Company elected to evaluate each loan individually for expected future cash flows. Loans will be removed from the acquired loan segment in the event of sale, foreclosure, pay off or being written off as uncollectable. The Company estimates the cash flow to be collected over the remaining life of the loan on a quarterly basis based on a set of assumptions including expectations as to default rates, prepayment rates, and expected loss rates. The Company makes numerous assumptions, interpretations and judgments using internal and third-party credit quality information when determining the probability of collecting all contractual required payments. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.

The calculation of the fair value of the acquired loans entails estimating the amount and timing of cash flows attributable to both principal and interest expected to be collected on each individual loan, and then discounting those cash flows at a market interest rate. The excess of a loan’s expected cash flow at the acquisition date over its estimated fair value is commonly referred to as “accretable yield”, which is recognized into interest income over the remaining life of the loan on a level-yield basis. The difference between an individual loan’s contractual required principal and interest as of the merger date and the expected cash flows as of the same date is commonly referred to as “nonaccretable difference”, which includes an estimate of future credit losses expected to be incurred over the remaining life of the loan and interest payments that are not expected to be collected. A decrease to the expected cash flows of a loan in subsequent periods will require the Company to record a provision for loan loss. Improvements to expected cash flows of a loan in subsequent periods will result in reversing a portion of the nonaccretable difference, which is then classified as a part of the accretable yield and subsequently recognized into interest income over the estimated remaining life of the loan. A loan will be removed from the acquired loan segment through any one of the following avenues, foreclosed, paid off or written off.

Allowance for Loan and Lease Losses (ALLL) - The ALLL is established as losses are estimated to have occurred 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 ALLL is evaluated on a regular basis by management and is based on management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

25

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. The Company does not separately identify individual consumer and residential loans for impairment disclosures until a loss is imminent.

Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is experiencing financial difficulties and (b) the Company granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.

Loan Servicing – Servicing assets are recognized as separate assets when rights are retained through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income using market based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the capitalized amount for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other-than-temporary impairment results in a permanent reduction to the carrying value of the servicing asset. Servicing income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Foreclosed Assets (Including Other Real Estate Owned) - Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. Foreclosed real estate is classified as other real estate owned. The net income from operations of foreclosed real estate held for sale is reported in non-interest income.

Property and Equipment - These assets are recorded at cost, less accumulated depreciation. The Bank uses the straight-line method of recording depreciation for financial reporting. The depreciable lives used by the Company are: land improvements 7-10 years, buildings 7-40 years and equipment 3-10 years. Maintenance and repairs are charged to expense and improvements are capitalized.

26

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Bank Owned Life Insurance - The Bank has purchased life insurance policies on certain key officers. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Intangible Assets – The Company has in the past purchased one or more branches from other financial institutions. The analysis of these branch acquisitions led the Company to conclude that in each case, we acquired a business and therefore, the purchase price generally includes the intangible value of the depositor relationships acquired, referred to as core deposit intangible assets. The expected life for core deposit intangible asset is based on the type of products acquired. The amortization periods range from 10 to 15 years and are based on the expected life of the products and relationships. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangible assets, related to branch purchases, were amortized on a straight line basis.

In conjunction with the merger with Bank of Alpena, the Company established a $1.4 million core deposit intangible asset. This intangible asset is being amortized over a 10 year period on an accelerated basis. The core deposit intangible is analyzed quarterly for impairment.

On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock of the InsuranCenter of Alpena (ICA).

On February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena.

At the time of the sale, goodwill of $600 continued to be recorded relating to certain assets of the Company that were not sold in the sale of ICA. The assets retained relate to a future stream of commissions. Management computed an estimated cash flow on this commission using a 6.0% discount rate and determined a fair value of $600. Since the $600 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009. Pursuant to the agreement, the Company received the final override commission payment in April, 2014.

Income Taxes - Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

At December 31, 2014 and 2013, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2014 and 2013 a valuation allowance of $3.1 million and $3.2 million was recorded, respectively.

The net deferred tax asset recorded at December 31, 2014 and 2013 was $851 and $799. See Note 10 for additional information.

Off Balance Sheet Instruments - In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. For letters of credit, a liability is recorded for the fair value of the obligation undertaken in issuing the guarantee.

27

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the consolidated statement of financial condition. Such items, along with net income, are components of comprehensive income.

Accumulated other comprehensive income consists solely of unrealized gains and losses on available for sale securities, reported net of tax of $222 and ($83) at December 31, 2014 and December 31, 2013, respectively.

Stock-Based Compensation – The Company’s stock based compensation plans are described in detail in Note 12 (Employee Benefit Plans). Compensation expense is recognized for stock options and unvested (restricted) stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common shares at the date of grant is used to estimate the fair value of unvested (restricted) stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the unvested period for nonvested (restricted) stock awards. Certain of theCompany’s share-based awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.

The Company granted no options in 2014 and 2013. Compensation costs related to stock options charged to earnings were $0 in 2014 and 2013, respectively.

Earnings Per Common Share – Basic earnings per common share is computed by dividing net income by the average number of common shares outstanding during the period. The Company uses the treasury stock method to compute diluted earnings per share, which assumes that proceeds from the assumed exercise of stock options would be used to purchase common stock at the average market price during the period. As of December 31, 2014, 136,030 options were not considered dilutive, due to the fact that the option price exceeded the fair value of the shares.

Earnings per common share have been computed based on the following:

	December 31,
	2014		2013
Net income	$	2,249	$	55
Average number of common shares outstanding		3,218,926		2,884,049
Effect of dilutive options		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		3,218,926		2,884,049

Recent Accounting Pronouncements - The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 does not apply to financial instruments. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2016 (therefore, for the year ending December 31, 2017 for the Company). Early implementation is not allowed for public companies. Management is currently assessing the impact to the Company’s consolidated financial statements.

28

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU is effective for public entities for reporting beginning after December 15, 2014 (therefore, for the year ending December 31, 2015 for the Company). The ASU can be adopted using either a modified retrospective transition method or a prospective transition method. Adoption of this update is not expected to have a material effect on the consolidated financial statements.

Note 2 - Business Combinations

As of August 8, 2014 (“Merger Date”), the Company completed its merger with Alpena Banking Corporation and its wholly owned subsidiary Bank of Alpena (“Alpena”). Alpena had one branch office and $102.9 million in assets as of August 8, 2014. The results of operations due to the merger have been included in the Company’s results since the Merger Date. The merger was effected by the issuance of shares of the Company’s common stock to Alpena Banking Corporation shareholders. Each share of Alpena’s common stock was converted into the right to receive 1.549 shares of the Company’s common stock, with cash paid in lieu of fractional shares. The conversion of Alpena’s shares resulted in the issuance of 842,965 shares of the Company’s common stock.

The business combination was recorded using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the Merger Date. The following table provides the purchase price calculation as of December 31, 2014 and the identifiable assets acquired and liabilities assumed at their estimated fair values. A bargain purchase gain resulted from the business combination due to the fair value of the net assets acquired exceeding the value of the stock issued as consideration in the transaction. These fair value measurements are based on third-party valuations and are subject to refinement for up to one year after the Merger Date based on additional information that may be obtained by us that existed on the Merger Date.

29

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

First Federal of Northern Michigan Bancorp, Inc. common stock issued for Alpena Banking Corporation common shares		843
Price per share, based on First Federal of Northern Michigan Bancorp, Inc. closing price on August 8, 2014	$	5.59
Total purchase price	$	4,712

Preliminary Statement of Net Assets Acquired Fair Value:

Assets
Cash and cash equivalents	$	41,650
Securities		24,008
Loans		33,051
Premises and Equipment		1,667
Core Deposit Intangible		1,392
Deferred Tax Asset		337
Other Assets		467
Total Assets	$	102,572
Liabilities
Deposits		95,787
Other Liabilities		91
Total Liabilities	$	95,878
Net Identifiable Assets Acquired			$	6,694
Bargain Purchase Gain			$	(1,982	)

The results of operations for the year ended December 31, 2014 include the operating results of the combined entities cfor the 143 days subsequent to the Merger Date. Alpena’s results of operations prior to the Merger Date are not included in the Company’s consolidated statement of comprehensive income.

We incurred merger related expenses of $266 during 2014. These expenses were for professional services such as legal, accounting and contractual arrangements for consulting services.

The following table provides the pro forma information for the results of operations for the years ended December 31, 2014 and 2013, as if the merger had occurred on January 1 of each year. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Bank of Alpena. In addition, the $266 in merger-related costs noted above are included in each period presented. Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts. These pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organizations that would have been achieved had the merger occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of the Company.

	For the Year Ended
	December 31,
	2014		2013
Net interest income	$	9,554	$	9,602
Non-interest income		3,631		2,079
Non-interest expense		10,502		11,064
Net income		2,316		190
Net income per basic and diluted share		0.72		0.07
Weighted average shares outstanding		3,219		2,884

30

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

In most instances, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the valuation of acquired loans. For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Alpena’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounting for under ASC 310-30 (“acquired impaired”), and loans that do not meet the criteria, which are accounted for under ACC 310-20 (“acquired non-impaired”). In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.

	Acquired Impaired		Acquired Non-Impaired		Acquired Total
	(in thousands)
Real estate loans:
Residential mortgages	$	397	$	6,992	$	7,389
Commercial Loans:
Construction - real estate		—		109		109
Secured by real estate		3,070		14,721		17,791
Other		1,201		4,213		5,414
Total commercial loans		4,271		19,043		23,314
Consumer loans:
Secured by real state		30		1,567		1,598
Other		—		750		750
Total consumer loans		30		2,318		2,348
Total Loans at acqusition date	$	4,698	$	28,353	$	33,051

	Acquired Impaired			Acquired Non-Impaired			Acquired Total
	(in thousands)
Loans acquired- contractual required payments	$	5,930		$	28,587		$	34,517
Non accretable difference		(1,232	)		—			(1,232	)
Expected cash flows		4,698			28,587			33,285
Accretable yield		—			(234	)		(234	)
Carrying balance at acquisition date	$	4,698		$	28,353		$	33,051

31

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

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:

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	31,221	$	58	$	(57	)	$	31,222
Municipal notes		22,894		369		(129	)		23,134
Corporate securities		1,549		12		—			1,561
Mortgage-backed securities		63,648		515		(117	)		64,046
Equity securities		3		2		—			5
Total	$	119,315	$	956	$	(303	)	$	119,968
Securities Held to Maturity
Municipal notes	$	790	$	118	$	—		$	908
		December 31, 2013
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of  U.S. government corporations and agencies	$	7,111	$	36	$	(105	)	$	7,042
Municipal notes		13,694		216		(301	)		13,609
Corporate securities		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 notes	$	2,255	$	145	$	—		$	2,400

The amortized cost and estimated market value of securities at December 31, 2014, by contractual 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.

32

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

	December 31, 2014
	Amortized Cost		Market Value
Available For Sale:
Due in one year or less	$	5,069	$	5,092
Due after one year through five years		38,827		38,843
Due in five year through ten years		10,478		10,562
Due after ten years		1,290		1,420
Subtotal		55,664		55,917
Equity securities		3		5
Mortgage-backed securities		63,648		64,046
Total	$	119,315	$	119,968
Held To Maturity
Due in one year or less	$	45	$	45
Due after one year through five years		200		218
Due in five year through ten years		315		365
Due after ten years		230		280
Total	$	790	$	908

At December 31, 2014 and 2013, securities with a fair value of $35.0 million and $36.0 million, respectively, were pledged to FHLB advances and borrowings from the Federal Reserve discount window.

Gross proceeds from the sale of available-for-sale securities for the years ended December 31, 2014 and 2013 were $730 and $0, respectively, resulting in gross gains of $1 and $0, respectively, and gross losses of $5 and $0, respectively. The tax benefit applicable to the net realized loss amounted to $2 and $0, respectively.

The following is a summary of securities that had unrealized losses at December 31, 2014 and 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 December 31, 2014, the Company held 72 securities with unrealized losses totaling $303. At December 31, 2013 there were 39 securities with unrealized losses totaling $790.

There are temporary reasons why securities may be valued at less than amortized cost. Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Company are higher and impairment is not due to credit deterioration. The Company has the intent and the ability to hold these securities until their value recovers, which may be until maturity.

	December 31, 2014										December 31, 2013
			Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		Less than 12 months			Fair Value		12 months or longer			Fair Value		Less than 12 months			Fair Value		12 months or longer
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	13,672	$	(28	)	$	971	$	(29	)	$	—	$	—		$	894	$	(105	)
Corporate and other securities
Municipal notes		9,506		(54	)		4,039		(75	)		7,902		(243	)		1,668		(58	)
Mortgage-backed securities		9,923		(31	)		4,666		(86	)		14,471		(334	)		2,052		(50	)
Equity securities		—		—			—		—			—		—			—		—
Total Securities available for sale	$	33,101	$	(113	)	$	9,676	$	(190	)	$	22,373	$	(577	)	$	4,614	$	(213	)
Held to Maturity:
Municipal notes		—		—			—		—			—		—			—		—
Total Securities held to maturity	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—

33

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

On a quarterly basis, the Company performs a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if other-than-temporary impairment (“OTTI”) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. For debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the individual security. If the Company does not expect to sell the security, the Company must evaluate the expected cash flows to be received to determine if a credit loss has occurred. If a credit loss is present, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in other comprehensive income.

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and the intent and whether management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Company will recover the entire cost basis, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

 
Management does not believe that the investment securities that were in an unrealized loss position as of December 31, 2014 represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

Note 4 – Loans

Loans at December 31, 2014 and 2013 are summarized as follows:

	December 31
	2014		2013
Real estate loans - One- to four-family residential	$	71,828	$	63,839
Commercial loans:
Secured by real estate		63,606		51,899
Other		19,000		12,451
Total commercial loans		82,606		64,350
Consumer loans:
Secured by real estate		9,502		8,730
Other		1,403		1,165
Total consumer loans		10,905		9,895
Total gross loans		165,339		138,084
Less:
Net deferred loan fees		263		297
Allowance for loan losses		1,429		1,472
Total loans - net	$	163,647	$	136,315

34

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

As of December 31, 2014 the total outstanding balance and carrying value of acquired impaired loans was $5.2 million and $4.7 million, respectively. Changes to the accretable yield for acquired impaired loans were as follows as of December 31, 2014:

	Acquired Impaired Non- Accretable			Acquired Non- Impaired Accretable			Acquired Total
Beginning of year	$	—		$	—		$	—
Net discount associated with acquired loans		(1,456	)		(234	)		(1,690	)
Accretion of discount for credit spread		—			26			26
Loans paid off through December 31, 2014		224			—			224
	$	(1,232	)	$	(208	)	$	(1,440	)

Final loan maturities and rate sensitivity of the loan portfolio are as follows:

	December 31, 2014
	Less Than One Year		One Year to Five Years		After Five Years		Total
Originated Loans:
Loans at fixed interest rates	$	3,983	$	31,560	$	50,507	$	86,050
Loans at variable interest rates		7,731		8,381		34,035		50,147
Total	$	11,714	$	39,941	$	84,542	$	136,197
	December 31, 2014
		Less Than One Year		One Year to Five Years		After Five Years		Total
Acquired Loans :
Loans at fixed interest rates	$	1,796	$	9,502	$	1,165	$	12,463
Loans at variable interest rates		2,024		3,773		10,882		16,679
Total	$	3,820	$	13,275	$	12,047	$	29,142

Certain directors and executive officers of the Company were loan customers of the Bank during 2014 and 2013. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectability. An analysis of aggregate loans outstanding to directors and executive officers for the years ended December 31, 2014 and 2013 are as follows:

	December 31,
	2014			2013
Aggregate balance - Beginning of Period	$	3,168		$	3,340
New loans		1,070			2,524
Repayments		(1,135	)		(2,491	)
Net change in directors and officers(1)		3,134			(205	)
Aggregate balance - End of Period	$	6,237		$	3,168

(1) Represents the addition or removal of new officer and directors during the year.

35

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

The following tables illustrate the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2014 and 2013:

			As of December 31, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans	Recorded Investment > 90 Days andAccruing
Originated Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	—	$	—	$	1,443	$1,443	$	—
Commercial Real Estate - other		10		195		—		205		46,103	46,308		—
Commercial - non real estate		—		—		—		—		14,544	14,544		—
Consumer:
Consumer - Real Estate		107		4		7		118		7,684	7,802		—
Consumer - Other		3		—		3		6		1,152	1,158		3
Residential:
Residential		1,484		746		386		2,616		62,326	64,942		87
Total	$	1,604	$	945	$	396	$	2,945	$	133,252	$136,197	$	90

			As of December 31, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Acquired Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - other		125		128		93		346		15,604		15,950		—
Commercial - non real estate		—		40		104		144		4,217		4,361		—
Consumer:
Consumer - Real Estate		123		—		—		123		1,609		1,732		—
Consumer - Other		—		—		—		—		213		213		—
Residential:
Residential		147		56		461		664		6,222		6,886		225
Total	$	395	$	224	$	658	$	1,277	$	27,865	$	29,142	$	225

			As of December 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
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

36

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

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

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

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

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

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

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

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

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

37

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

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

As of December 31, 2014
Originated Loans:
		Commercial Real Estate		Commercial Real Estate
Loan Grade		Construction		Other		Commercial
	1-2	$	—	$	—	$	31
	3		—		13,565		6,088
	4		1,443		21,757		7,538
	4.5		—		3,553		252
	5		—		6,040		635
	6		—		1,393		—
	7		—		—		—
	8		—		—		—
	Total	$	1,443	$	46,308	$	14,544

As of December 31, 2014
Acquired Loans:
		Commercial Real Estate		Commercial Real Estate
Loan Grade		Construction		Other		Commercial
	1-2	$	—	$	280	$	1,188
	3		—		2,696		876
	4		—		10,905		970
	4.5		—		337		21
	5		—		1,176		1,150
	6		—		547		156
	7		—		9		0
	8		—		—		0
	Total	$	—	$	15,950	$	4,361

As of December 31, 2013
		Commercial Real Estate		Commercial Real Estate
Loan Grade		Construction		Other		Commercial
	1-2	$	—	$	—	$	—
	3		—		16,187		5,602
	4		—		27,789		6,699
	5		—		4,835		45
	6		173		2,915		105
	7		—		—		—
	8		—		—		—
	Total	$	173	$	51,726	$	12,451

38

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

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 December 31, 2014 and 2013.

As of December 31, 2014
			Consumer -
	Residential		Real Estate		Consumer - Other
Originated Loans:
Loan Grade:
Pass	$	64,397	$	7,778	$	1,155
Special Mention		—		—		—
Substandard		545		24		3
Total	$	64,942	$	7,802	$	1,158
				Consumer -
		Residential		Real Estate		Consumer - Other
Acquired Loans:
Loan Grade:
Pass	$	6,335	$	1,731	$	213
Special Mention		—		—		—
Substandard		551		1		—
Total	$	6,886	$	1,732	$	213

As of December 31, 2013
			Consumer -
	Residential		Real Estate		Consumer - Other
Loan Grade:
Pass	$	63,164	$	8,723	$	1,163
Special Mention		—		7		2
Substandard		675
Total	$	63,839	$	8,730	$	1,165

39

The following tables present the recorded investment in non-accrual loans by class as of December 31, 2014 and 2013:

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

As of December 31
	2014		2013
Originated Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	173
Commercial Real Estate - other		486		1,454
Commercial		77		—
Consumer:
Consumer - real estate		25		7
Consumer - other		—		—
Residential:
Residential		750		651
Total	$	1,338	$	2,285

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2014

and 2013:

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2014							2014
	Unpaid Principal		Recorded		Related		Average		Interest
	Balance		Investment		Allowance		Recorded		Income
							Investment		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,431		1,430		—		1,482		84
Consumer - Real Estate		26		24		—		26		—
Consumer - Other		—		—		—		—		—
Residential		781		618		—		635		14
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		386		386		10		393		18
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		—		—		—		—		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Other	$	1,817	$	1,816	$	10	$	1,875	$	102
Consumer - Real Estate	$	26	$	24	$	—	$	26	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	781	$	618	$	—	$	635	$	14

40

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2013							2013
	Unpaid Principal		Recorded		Related		Average		Interest
	Balance		Investment		Allowance		Recorded		Income
							Investment		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,789		1,788		—		1,894		104
Consumer - Real Estate		8		7		—		7		—
Consumer - Other		—		—		—		—		—
Residential		954		722		—		727		6
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—
Commercial Real Estate - Other		3,980		3,391		182		3,397		94
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		53		30		5		30		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	5,291	$	198
Consumer - Real Estate	$	8	$	7	$	—	$	7	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	757	$	6

As of December 31, 2014 no additional funds are committed to be advanced in connection with impaired loans.

A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Company adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a TDR applies in a particular instance. Prior to loans being modified and classified as a TDR, specific reserves are generally assessed, as most of these loans have been specifically allocated for as part of the Company’s normal loan loss provisioning methodology. The Company allocated $10 and $230 reserves for the TDR loans at December 31, 2014 and December 31, 2013, respectively. The Company classifies all TDR loans as impaired loans in the table above.

The following table summarizes the loans that were modified as a TDR during the period ended December 31, 2014 and 2013.

	For the Twelve Months Ended
	December 31, 2014
			Pre-Modification		Post-Modification	Troubled Debt Restructurings That Subsequently Defaulted
	Number of		Outstanding Recorded		Outstanding Recorded	Number of		Recorded
	Contracts		Investments		Investment	Contracts		Investment
Commercial Real Estate - Construction	—	$	—	$	—	—	$	—
Commercial Real Estate - Other	—		—		—	—		—
Commercial - non real estate	—		—		—	—		—
Residential	—		—		—	—		—
Total	—	$	—	$	—	—	$	—

41

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

For the Twelve Months Ended
December 31, 2013
							Troubled Debt Restructurings
			Pre-Modification		Post-Modification		That Subsequently Defaulted
	Number of		Outstanding Recorded		Outstanding Recorded		Number of		Recorded
	Contracts		Investments		Investment		Contracts		Investment
Commerical Real Estate - Construction		—	$	—	$	—		—	$	—
Commercial Real Estate - Other		1		412		412		—		—
Consumer - Real Estate		—		—		—		—		—
Residential		2		337		337		—		—
Total		3	$	749	$	749		—	$	—

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.

Additional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.

Loans modified in a TDR may be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate if the loan is performing in accordance with the modified terms. Management exercises significant judgment in developing these estimates.

The regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged and the borrower has not reaffirmed the debt, regardless of the delinquency status of the loan. The filing of bankruptcy by the borrower is evidence of financial difficulty and the discharge of the obligation by the bankruptcy court is deemed to be a concession granted to the borrower.

At December 31, 2014, there were no additional commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.

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

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

42

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Activity in the ALLL was as follows for the years ended December 31, 2014 and 2013:

For the Year Ended December 31, 2014
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	48		$	444		$	63	$	62		$	21		$	784		$	50	$	1,472
Charge-offs		(12	)		(241	)		—		(14	)		(24	)		(177	)		—		(468	)
Recoveries		—			54			2		30			—			55			—		141
Provision		(28	)		50			29		(45	)		22			207			49		284
Ending Balance	$	8		$	307		$	94	$	33		$	19		$	869		$	99	$	1,429
Ending balance: individually evaluated for impairment	$	—		$	10		$	—	$	—		$	—		$	—		$	—	$	10
Ending balance: loans collectively evaluated for impairment	$	8		$	297		$	94	$	33		$	19		$	869		$	99	$	1,419
Loans:
Ending Balance	$	1,443		$	62,163		$	19,000	$	9,502		$	1,403		$	71,828		$	—	$	165,339
Ending balance: individually evaluated for impairment	$	—		$	1,816		$	—	$	24		$	—		$	618		$	—	$	2,458
Ending balance: loans collectively evaluated for impairment	$	1,443		$	44,492		$	14,544	$	7,778		$	1,158		$	64,324		$	—	$	133,739
Acquired loans not subject to loan loss reserve	$	—		$	15,855		$	4,456	$	1,700		$	245		$	6,886		$	—	$	29,142

For the Year Ended December 31, 2013
	Commercial Construction			Commercial Real Estate			Commercial			Consumer Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69		$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(674	)		—			(40	)		(13	)		(464	)		—		(1,191	)
Recoveries		—			114			—			36			6			120			—		276
Provision		(16	)		425			(6	)		(33	)		(5	)		222			50		637
Ending Balance	$	48		$	444		$	63		$	62		$	21		$	784		$	50	$	1,472
Ending balance: individually evaluated for impairment	$	48		$	182		$	—		$	—		$	—		$	5		$	—	$	235
Ending balance: loans collectively evaluated for impairment	$	—		$	262		$	63		$	62		$	21		$	779		$	50	$	1,237
Loans:
Ending Balance	$	173		$	51,726		$	12,451		$	8,730		$	1,165		$	63,839		$	—	$	138,084
Ending balance: individually evaluated for impairment	$	173		$	5,179		$	—		$	7		$	—		$	752		$	—	$	6,111
Ending balance: loans collectively evaluated for impairment	$	—		$	46,547		$	12,451		$	8,723		$	1,165		$	63,087		$	—	$	131,973

43

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Note 5 - Property and Equipment

A summary of property and equipment is as follows:

	December 31,
	2014		2013
Land	$	1,271	$	1,071
Land improvements		195		182
Buildings		7,058		6,237
Equipment		3,959		3,523
Total property and equipment		12,483		11,013
Accumulated depreciation		6,147		5,810
Net property and equipment	$	6,336	$	5,203

Depreciation expense was $337 and $283 for the periods ended December 31, 2014 and 2013, respectively.

Note 6 – Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage and other loans serviced for others were approximately $125.4 million and $131.7 million at December 31, 2014 and 2013, respectively. The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:

	December 31,
	2014			2013
Annual constant prepayment speed (CPR)		11.46	%		10.27	%
Weighted average life (in months)		244			244
Discount rate		9.38	%		9.26	%

The fair value of our mortgage servicing rights was estimated to be $1.0 million and $1.1 million at December 31, 2014 and December 31, 2013, respectively. At December 31, 2012 a valuation allowance of $19 was established against the mortgage servicing rights associated with our 20-year fixed-rate sold loans. Based on decreased prepayment speeds within the 20-year fixed rate tranche, the valuation allowance was removed in 2013.

44

The following table summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

	December 31,
	2014			2013
Balance - beginning of period:	$	860		$	1,035
Originated mortgage servicing rights capitalized		111			151
Amortization of mortgage servicing rights		(261	)		(326	)
Balance - end of period		710			860
Valuation allowances:
Balance - beginning of period		—			(19	)
Reductions		—			19
Balance - end of period (net of allowances)	$	710		$	860

Note 7 - Intangible Assets

Intangible assets of the Company are summarized as follows:

	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit (merger)		1,392		106	$	1,286
Core deposit (purchase)	$	25	$	25		—
Commission residual		600		600		—
Total	$	2,017	$	731	$	1,286
		December 31, 2013
		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit	$	25	$	24	$	1
Commission residual		600		561		39
Total	$	625	$	585	$	40

Amortization expense was $146 and $118 for the periods ended December 31, 2014 and 2013, respectively.

In accordance with the merger with Bank of Alpena in 2014, the Company recorded $1.4 million in core deposit intangible assets.

The estimated future amortization expense on core deposit intangible assets for the years ending after December 31, 2014 are as follows:

	Amortization
	Expense
2015	$	243
2016		217
2017		192
2018		167
2019		141
Thereafter		326
Total	$	1,286

45

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Note 8 - Deposits

Deposit accounts, by type and range of rates, consist of the following:

	December 31,
	2014		2013
Account Type
NOW accounts and MMDA	$	107,935	$	50,222
Regular savings accounts		29,846		22,037
Total		137,781		72,259
Certificate of Deposit Rates
0.10 percent to 0.99 percent		42,302		40,259
1.00 percent to 1.99 percent		27,362		17,715
2.00 percent to 2.99 percent		6,092		7,130
3.00 percent to 3.99 percent		1,050		1,486
4.00 percent to 4.99 percent		115		133
Total certificate of deposits		76,921		66,723
Total interest-bearing deposits	$	214,702	$	138,982

Certificates of deposit $100 or greater at December 31, 2014 and 2013 were $28.1 million and $22.9 million, respectively.

The following table sets forth the amount and maturities of certificates of deposit:

	December 31, 2014
	Amount Due
Rate	Less than 1 Year		1-2 Years		2-3 Years		3-5 Years		Greater than 5 Years		Total
0.10 percent to 0.99 percent	$	33,161	$	8,214	$	532	$	395	$	—	$	42,302
1.00 percent to 1.99 percent		1,419		6,884		6,398		12,394		267		27,362
2.00 percent to 2.99 percent		4,022		696		47		323		1,004		6,092
3.00 percent to 3.99 percent		502		—		12		536		—		1,050
4.00 percent to 4.99 percent		45		17		53		—		—		115
Total	$	39,149	$	15,811	$	7,042	$	13,648	$	1,271	$	76,921

Interest expense on deposits is summarized as follows:

	Year Ended December 31,
	2014		2013
NOW and MMDAs	$	141	$	98
Regular savings		13		11
Certificates of deposit		664		717
Total	$	818	$	826

46

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Deposits from related parties held by the Bank at December 31, 2014 and 2013 amounted to $13.3 million and $632, respectively.

Note 9 - Federal Home Loan Bank and Federal Reserve Advances

The Bank has advances from the Federal Home Loan Bank of Indianapolis. Interest rates range from 0.32% to 2.21% with a weighted average interest rate of 1.17%. These advances contain varying maturity dates through January 3, 2023 with a weighted average maturity of approximately 27 months. The advances are collateralized by approximately $48.9 million and $49.6 million of mortgage loans as of December 31, 2014 and 2013, respectively. In addition, at December 31, 2014 and 2013, securities with a carrying value of $21.2 million and $20.4 million, respectively, were pledged as collateral for Federal Home Loan Bank advances. Available borrowings with the Federal Home Loan Bank at December 31, 2014 totaled $56.4 million, of which $22.9 million was outstanding.

The advances are subject to prepayment penalties subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank. Future maturities of the advances are as follows:

December 31, 2014
Years Ending December 31		Amount		Weighted Average Interest Rate
	2015	$	4,890		.71
	2016		8,561		1.10
	2017		4,362		1.70
	2018		3,303		1.10
	2019		1,460		1.56
	Thereafter		309		1.61
	Total	$	22,885		1.17

47

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

The Bank had $0 and $1.5 million of variable rate advances outstanding as of December 31, 2014 and 2013, respectively.

In 2009, the Bank entered into a discount window loan agreement with the Federal Reserve Bank that allows for advances up to seventy-five percent of the collateral balance. As of December 31, 2014, these advances are secured by investment securities with a fair value of approximately $8.7 million and are generally due within 28 days from the date of the advance. The interest rate on the advances is based on the quoted Federal Reserve discount window rate (effective rate of 0.75 percent as of December 31, 2014). At December 31, 2014 and 2013, the Bank had no outstanding advances.

Note 10 - Federal Income Tax

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed.

The Company and the Bank file a consolidated Federal income tax return. The analysis of the consolidated provision for federal income tax is as follows:

	Year Ended December 31,
	2014			2013
Current provision	$	—		$	—
Deferred benefit		807			(57	)
Change in valuation allowance		(807	)		57
Total	$	—		$	—

A reconciliation of the federal income tax expense and the amount computed by applying the statutory federal income tax rate (34 percent) to income before federal income tax is as follows:

	Year Ended December 31,
	2014			2013
Tax expense at statutory rate	$	765		$	19
Increase (decrease) from:
Change in valuation allowance, including bargain purchase gain		(807	)		57
Tax-exempt interest		(52	)		(52	)
Other		94			(24	)
Total income tax expense	$	—		$	—

48

The net deferred tax asset was comprised of the following temporary differences:

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

	December 31,
	2014		2013
Deferred tax assets:
Acquired loans	$	565	$	—
Other real estate owned		202		92
Non-accrual loan interest		155		49
Directors’ benefit plan		251		272
Net operating loss carryforward		4,177		3,684
Investment in subsidiary		—		784
Net deferred loan origination fees		89		101
Unrealized loss on available-for-sale securities		—		83
Other		90		246
Total deferred tax assets		5,529		5,311
Less: valuation allowance		3,090		3,223
Deferred tax liabilities:
Allowance for loan losses		306		322
Mortgage servicing rights		242		292
Partnership losses		132		124
Unrealized gain on available-for-sale securities		222		—
Depreciation		115		344
Core deposit intangible		437		—
Other		134		207
Total deferred tax liabilities		1,588		1,289
Net deferred tax asset	$	851	$	799

The Company has net operating loss carryforwards of approximately $12.3 million generated from December 31, 2007 through December 31, 2014 that are available to reduce total taxable income through the years ending December 31, 2033.

For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction for tax purposes based on a percentage of taxable income or on actual experience. The Bank used the percentage of taxable income method through December 31, 1995.

A deferred tax liability has not been recognized for the tax bad debt base year reserves of the Bank. The base year reserves are the balance of reserves as of December 31, 1987. At December 31, 2014 and 2013, the amount of those reserves was approximately $60. The amount of the unrecognized deferred tax liability at December 31, 2014 and 2013 was approximately $20.

Note 11 – Off-Balance Sheet Risk Commitments and Contingencies

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, standby letters of credit, and commercial letters of credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk:

49

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

	December 31,
	2014		2013
Commitments to grant loans	$	9,020	$	5,936
Unfunded commitments under lines of credit		15,022		12,940
Commercial and standby letters of credit		134		59

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. In most cases, these lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. Fees earned on commercial and standby letters of credit are required to be deferred over the contractual life of the letter of credit. The Company determined that the fair value of guarantees on standby letters of credit has an immaterial effect on the financial results at December 31, 2014 and 2013.

To reduce credit risk related to the use of credit-related financial instruments, the Company generally holds collateral supporting those commitments if deemed necessary. The amount and nature of the collateral obtained is based on the Company’s credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and real estate.

If the counterparty does not have the right and ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it.

Various legal claims also arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s financial statements.

Note 12 - Stockholders’ Equity

Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitation on payment of dividends, the Bank’s results of operations and financialcondition, tax considerations, and general economic conditions.

The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (OCC). Failure to meet certain capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk-weightings, and other factors.

50

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

During the most recent regulatory examination, the OCC categorized the Bank as “well-capitalized” per definition of 12 CFR Section 565.4(b)(1). To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, tier 1 risk based, and tangible equity ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s categorization. Consolidated data has not been disclosed as the amounts and ratios are not significantly different.

In 2013 the federal banking agencies issued revisions to the existing capital rules to incorporate certain changes to the Basel capital framework, including Basel III and other elements. The intent is to strengthen the definition of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. Beginning January 1, 2015, banks transitioned to the new rules and will report results with the first call report of 2015. As part of the new rules there are several provisions affecting the Company, such as the implementation of a new common tier ratio, the start of a capital conservation buffer, and increased prompt corrective action capital adequacy thresholds.

	Actual					For Capital Adequacy Purposes					To be Categorized as Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
December 31, 2014
Total capital (to risk-weighted assets)	$	29,092		16.9	%	$	13,778		8.0	%	$	17,223		10.0	%
Tier 1 capital (to risk-weighted assets)	$	27,662		16.1	%	$	6,889		4.0	%	$	10,334		6.0	%
Tangible capital (to tangible assets)	$	27,662		8.5	%	$	4,858		1.5	%	$	6,477		2.0	%
December 31, 2013
Total capital (to risk-weighted assets)	$	24,033		17.9	%	$	10,748		8.0	%	$	13,436		10.0	%
Tier 1 capital (to risk-weighted assets)	$	22,563		16.8	%	$	5,374		4.0	%	$	8,061		6.0	%
Tangible capital (to tangible assets)	$	22,563		10.8	%	$	3,137		1.5	%	$	4,183		2.0	%

Note 13 - Employee Benefit Plan

Defined Benefit Pension Plan

The Bank is a participant in the multiemployer Financial Institutions Retirement Fund (FIRF or the “Plan”), which covers substantially all of its officers and employees. The defined benefit plan covers all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. Normal retirement age is 65, with reduced benefits available at age 55. The Bank’s contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank’s portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. Effective July 1, 2005 the plan was frozen as to current participants and any new employees hired after July 1, 2004 were excluded from the plan. The expense of the Plan allocated to the Bank was $103 and $72 for the years ended December 31, 2014 and 2013, respectively.

51

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all of its employees who meet certain age and service requirements. Contributions to the plan by the Bank are discretionary in nature in such amounts determined by the Board of Directors. The expense under the plan for the years ended December 31, 2014 and 2013 was $96 and $89, respectively.

Nonqualified Deferred Compensation Plan

The Bank has a nonqualified deferred compensation plan for certain ofits directors. Through 1998, each eligibledirector could voluntarily defer all or part of his or her director’s fees to participate in the program. The plan is currently unfunded and amounts deferred are unsecured and remain subject to claims of the Bank’s general creditors.

Directors are paid once they reach normal retirement age or sooner for reason of death, total disability, or termination. The Bank may terminate the plan at any time. The amount recorded under the plan totaled approximately $738 and $801 at December 31, 2014 and 2013, respectively. The expense under the plan for the years ended December 31, 2014 and 2013 was $73 and $78, respectively.

Employee Stock Ownership Plan

Effective January 1, 1994, the Bank implemented an employee stock ownership plan (ESOP). The ESOP covers substantially all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. To fund the ESOP, the Bank borrowed $480 from an outside party to purchase 48,000 shares of the Company’s common stock at $10 per share. The ESOP note was payable quarterly with interest at the prime rate and was retired in 1999. All of the 1994 shares were allocated as of December 31, 1999. Compensation expense is measured by the fair value of ESOP shares allocated to participants during a fiscal year.

Pursuant to the 2005 second-step conversion and stock offering, the shareholders of the Company approved the purchase of 8% of shares sold in the stock offering by the ESOP. The Company provided a loan to the ESOP, which was used to purchase 138,709 shares of the Company’s common stock in the stock offering at $10 per share. The loan bore interest at a rate equal to the current prime rate, adjustable on January 1 of each year and provided for repayment of principal over the 15 year term of the loan. Since the Company provided the loan to the ESOP, the note receivable was not included in the Company’s balance sheet. Accordingly, the Company did not recognize interest income on the loan.

The Company made annual contributions to the ESOP sufficient to support the debt service of the loan. The loan was secured by the shares purchased, which were held in a suspense account for allocation among the participants as the loan is paid. Dividends paid on unallocated shares were not considered dividends for financial reporting purposes and were used to pay principal and interest on the ESOP loan. Dividends on allocated shares are charged to retained earnings.

The loan was paid in full as of December 31, 2009.

Compensation expense is recognized for the ESOP equal to the average fair value of shares committed to be released for allocation to participant accounts. Any difference between the average fair value of shares committed to be released for allocation and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). During the years ended December 31, 2014 and 2013, respectively, 0 and 2,793 shares were sold into the open market and no shares were purchased from the open market. Total compensation expense was $0 for both the years ended December 31, 2014 and 2013.

As of December 31, 2014 this benefit plan was terminated and funds have been distributed to the participants or rolled over into an individual retirement accounts (IRA) or the 401(k) plan savings plan.

52

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Stock-Based Compensation Plans

The Company’s 1996 Stock Option Plan (the “1996 Plan”), which was approved by shareholders, permits the grant of stock options to its directors and employees for up to 127,491 shares of common stock (retroactively 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). Shares issued under the Plan and exercised pursuant to the exercise of the stock option plan may be either authorized but unissued shares or reacquired shares held by the Company as treasury stock.

53

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Stock Options - A summary of option activity under the Plans during the years ended December 31, 2014 and 2013 is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		167,620		$	9.53		3.38		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or Expired		(17,590	)	$	9.60
Outstanding at December 31, 2013		150,030		$	9.52		2.40		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or expired		(14,000	)	$	9.30
Oustanding at December 31, 2014		136,030		$	9.54		1.40		—
Options Exercisable at December 31, 2014		136,030		$	9.54		1.40		—

There were 63,256 shares available for future granting of options as of December 31, 2014.

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 $5.49 on December 31, 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 December 31, 2014. The amount changes based on the fair market value of the stock. This value was $0.00 at both December 31, 2014 and 2013. The exercise prices for the stock options range from $9.07 to $9.65 per share.

As of December 31, 2014, the total compensation cost of the Plans was fully recognized. The total fair value of shares vested during the year ended December 31, 2014 and 2013 was $0 and $0, respectively. Compensation expense for 2014 and 2013 related to options granted under this plan was $0 and $0, respectively.

All stock options were fully vested at December 31, 2014 and 2013, respectively.

Restricted Stock Awards – The Company did not grant any award shares during the years ended December 31, 2014 and 2013. Compensation expense for 2014 and 2013 related to awards granted under this plan was $0 and $0, respectively.

The shares vest over a five year service period. As of December 31, 2014, the total compensation cost of the Plan was fully recognized. In addition, there were no restricted stock awards under the plan that were unvested at December 31, 2014 and 2013, respectively.

There were 5,304 shares available for future grants of award shares at December 31, 2014.

54

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Note 14 - Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

The following tables present information about the Company’s assets measured at fair value on a recurring basis at December 31, 2014 and 2013 and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2014
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	31,223	$	—	$	31,223
Municipal notes		—		23,133		—		23,133
Corporate securities		—		1,561				1,561
Mortgage-backed securities		—		64,046		—		64,046
Equity securities		5		—		—		5
Total investment securities - available-for-sale	$	5	$	119,963	$	—	$	119,968

55

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

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)		Balance at December 31, 2013
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal notes		—		13,609		—		13,609
Corporate securities		—		1,097				1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		7		—		—		7
Total investment securities - available-for-sale	$	7	$	50,351	$	—	$	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 during the years ended December 31, 2014 and 2013. For the available for sale securities, the Company obtains fair value measurements from an independent third-party service.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include impaired loans (see Note 4) and other real estate owned.

The change in fair value of impaired loans is recorded through the ALLL. The Company estimates the fair value of impaired loans based on Level 3 inputs which include the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

Other real estate owned assets are reported in the following table at initial recognition of impairment and on an ongoing basis until recovery or charge-off. At the time of foreclosure or repossession, real estate owned and repossessed assets are adjusted to fair value less estimated costs to sell, establishing a new cost basis. At that time, they are reported in the Company’s fair value disclosures in the following nonrecurring tables:

56

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2014
	Balance at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Originated Assets:
Impaired loans accounted for under FASB ASC 310-10	$	1,806	$	—	$	—	$	1,806
Other real estate owned -residential mortgages		336		—		—		336
Other real estate owned - commercial		1,628		—		—		1,628
Other repossessed assets		860		—		—		860
Total assets at fair value on a non-recurring basis							$	4,630
Acquired Assets:
Impaired loans accounted for under FASB ASC 310-10	$	396	$	—	$	—	$	396
Other real estate owned -residential mortgages		—		—		—		—
		—
Other real estate owned - commercial		—		—		—		—
Other repossessed assets		—		—		—		—
Total assets at fair value on a non-recurring basis							$	396

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)
Impaired loans accounted for under FASB ASC 310-10	$	5,122	$	—	$	—	$	5,122
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							$	6,902

57

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

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.

Securities - Fair values of securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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 other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

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 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.

Other Financial Instruments - The fair value of other financial instruments, including loan commitments and unfunded letters of credit, based on discounted cash flow analyses, is not material.

58

The estimated fair values and related carrying amounts of the Company’s financial instruments as of December 31, 2014 and 2013 are as follows:

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

December 31, 2014	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	11,254	$	11,254	$	—	$	—	$	11,254
Deposits held at other financial institutions		8,429		—		8,424		—		8,424
Securities available for sale		119,968		—		119,968		—		119,968
Securities held to maturity		790		—		908		—		908
Loans held for sale		88						90		90
Loans receivable - net		163,646		—		—		163,690		163,690
Federal Home Loan Bank stock		2,591		—		2,591		—		2,591
Accrued interest receivable		986		—		—		986		986
Financial liabilities:
Customer deposits		270,734		—		271,200		—		271,200
Federal Home Loan Bank advances		22,885		—		22,696		—		22,696
Accrued interest payable		101		—		—		101		101

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 15 - Restrictions on Dividends

Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by the Office of the Comptroller of Currency (OCC). These restrictions generally limit dividends to the current and prior two years’ retained earnings. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Bank’s regulatory capital requirements and minimum regulatory guidelines. Future dividend payments by the Company will be based on future earnings and the approval of the OCC.

59

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

 
Note 16 - Parent-Only Financial Statements

The following represents the condensed financial statements of First Federal of Northern Michigan Bancorp, Inc. (“Parent”) only. The Parent-only financial information should be read in conjunction with the Company’s consolidated financial statements.

Condensed parent company financial statements, which include transactions with the subsidiary, are as follows (000s omitted):

	December 31,
	2014		2013
Assets
Cash at subsidiary bank	$	481	$	510
Investment in subsidiary		29,731		22,701
Deferred tax asset		318		318
Other assets		6		1
Total assets	$	30,536	$	23,530
Liabilities and Stockholders’ Equity
Liabilities	$	—	$	5
Stockholders’ equity		30,536		23,525
Total liabilities and stockholders’ equity	$	30,536	$	23,530

	December 31,
	2014			2013
Operating income	$	—		$	—
Dividend income		500			—
Operating expense		(271	)		(249	)
Income (Loss) before income taxes and equity in undistributed net income of subsidiary bank		229			(249	)
Income tax benefit		—			—
Income (Loss) before equity in undistributed loss of subsidiary bank		229			(249	)
Equity in undistributed net income of subsidiary bank		2,020			304
Net income	$	2,249		$	55

60

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Statements of Operations:

	December 31,
	2014			2013
Cash Flows from Operating Activities
Net income	$	2,249		$	55
Adjustments to reconcile net income to net cash from operating activities:
Dividend from subsidiary bank	$	500
Stock options/awards		—			—
Equity in undistributed net income of subsidiary bank		(2,520	)		(304	)
Net change in other liabilities		(6	)		1
Net change in other assets		(5	)		(1	)
Cash Flows from Financing Activities
Dividends paid		(247	)		(58	)
Net cash used in operating activities		(2,278	)		(362	)
Net Decrease in Cash		(29	)		(307	)
Cash - Beginning of year		510			817
Cash - End of year	$	481		$	510

61

First federal of northern Michigan bancorp, inc. and subsidiaries
Notes to consolidated financial statements – December 31, 2014 and 2013
(000’s omitted), except per share data 2014
Annual report

Note 17 - Quarterly Results of Operations (Unaudited)

The following tables summarize the Company’s quarterly results for the fiscal years ended December 31, 2014 and 2013:

	For the Three-Month Period Ending
	March 31, 2014		June 30, 2014		September 30, 2014		December 31, 2014
Interest income	$	2,045	$	2,025	$	2,387	$	2,643
Interest expense		249		259		270		304
Net interest income		1,796		1,766		2,117		2,339
Provision for loan losses		16		—		257		11
Other income		336		344		2,224		574
Other expenses		1,895		2,016		2,470		2,582
Income - before income tax expense		221		94		1,614		320
Income tax expense		—		—		—		—
Net income	$	221	$	94	$	1,614	$	320
Net income per share
Basic	$	0.08	$	0.03	$	0.48	$	0.11
Diluted	$	0.08	$	0.03	$	0.48	$	0.11
Weighted average number of shares outstanding - basic and dilutive		2,884		2,884		3,370		3,019
Cash dividends declared per common share	$	0.020	$	0.020	$	0.020	$	0.020

	For the Three-Month Period Ending
	March 31, 2013		June 30, 2013			September 30, 2013		December 31, 2013
Interest income	$	2,085	$	2,095		$	2,065	$	2,074
Interest expense		321		285			274		270
Net interest income		1,764		1,810			1,791		1,804
Provision for loan losses		144		196			32		265
Other income		440		465			459		401
Other expenses		1,992		2,082			2,036		2,132
Income (loss) - before income tax expense (benefit)		68		(3	)		182		(192	)
Income tax expense		—		—			—		—
Net income (loss)	$	68	$	(3	)	$	182	$	(192	)
Net income (loss) per share
Basic	$	0.02	$	—		$	0.06	$	(0.07	)
Diluted	$	0.02	$	—		$	0.06	$	(0.07	)
Weighted average number of shares outstanding - basic and dilutive		2,884		2,884			2,884		2,884
Cash dividends declared per common share	$	—	$	—		$	—	$	0.020

62

Stockholder information 2014
Annual
report

Annual Stockholder Meeting

The Annual Meeting of Stockholders will be held at 1:00 p.m., May 13, 2015 at the Art in the Loft, 109 N. Second Ave. Suite 300, Alpena, MI 49707.

Stock Listing

The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “FFNM”.

Price Range of Common Stock

The following sets forth the quarterly high and low closing price per share and cash dividends declared during each of the four quarters in 2014 and 2013.

				Market Price
						Cash Dividend
Quarter Ended		High		Low		Declared
	December 31, 2014	$	5.80	$	4.70	$	0.020
	September 30, 2014	$	6.20	$	5.33	$	0.020
	June 30, 2014	$	6.12	$	4.82	$	0.020
	March 31, 2014	$	5.40	$	4.88	$	0.020
	December 31, 2013	$	5.72	$	4.71	$	0.020
	September 30, 2013	$	4.47	$	4.20	$	—
	June 30, 2013	$	4.65	$	3.40	$	—
	March 31, 2013	$	4.79	$	4.24	$	—

Special Counsel

Luse Gorman, PC
5335 Wisconsin Avenue, N.W.
Suite 780
Washington, D.C. 20015

Market Maker

Raymond James & Associates, Inc.
222 South Riverside Plaza
7^th Floor
Chicago, IL 60606
312-655-3000 Independent Auditor

Plante & Moran, PLLC
2601 Cambridge Ct. Suite 500
Auburn Hills, MI 48326


Transfer Agent

Computershare Investor Services
211 Quality Circle
Suite 210
College Station, TX 77845
800-368-5948

Annual Report on Form 10-K

A copy of the Company’s Form 10-K for the year ended December 31, 2014 will be furnished without charge upon written request to: Eileen M. Budnick, VP- Director of Financial Reporting & Accounting, Treasurer and Corporate Secretary, First Federal of Northern Michigan Bancorp, Inc., 100 S. Second Avenue, Alpena, Michigan 49707.

63

directors and exectuive officer of first federal of northern
michigan bancorp, inc. and first federal of northern michigan 2014
Annual report

Directors

Martin A. Thomson has been Chairman of the Board of Directors since May 2008. He was President and Chief Executive Officer of the Company and Bank from May 2001. In January 2006, Mr. Thomson relinquished the position of President and in May 2008 relinquished the position of Chief Executive Officer and assumed the role of Chairman of the Board of Directors of the Company and Bank. Mr. Thomson previously held the position of President and Chief Executive Officer of Presque Isle Electric and Gas Co-op., Onaway, Michigan. Mr. Thomson has been a director of the Bank since 1986, and a director of the Company since its formation in November 2000.

Gary C. VanMassenhove is a Certified Public Accountant at Straley, Lamp and Kraenzlein, CPA firm. Mr. VanMassenhove has been a Certified Public Accountant for 44 years. He has been a director of the Company and the Bank since September 2001.

Thomas R. Townsend is the President of the R.A. Townsend Co., a plumbing, heating and air conditioning distributor located in Alpena, Michigan, where he has been employed for the past 37 years. Mr. Townsend has been a director of the Company and the Bank since April 2002.

James E. Kraenzlein is a partner in Straley, Lamp and Kraenzlein CPA firm. Mr. Kraenzlein has been a Certified Public account for 18 years. He has been a director of the Company since June 2013.

Timothy E. Fitzpatrick is the President of WMCR, Inc., a restaurant holding company located in Alpena, Michigan, where he has been employed for the past 35 years. Mr. Fitzpatrick has been a director of the Company since August 2014.

Christopher B. McCoy is the President of Magnaloy Coupling, a manufacturing company that produces a light weight, heavy-duty flexible drive coupling, located in Alpena Michigan, where he has been employed for the past 38 years. Mr. McCoy has been a director of the Company since August 2014.

Eric G. Smith is the President of Panel Processing, a panel fabricating plant located in Alpena Michigan, where he has been employed for the past 23 years. Mr. Smith is a Certified Public Accountant and has been a director of the Company since August 2014.

Richard L. Crittenden is the President of DeVere Construction Co., a general contractor and construction management company located in Alpena Michigan, where he has been employed for the past 35 years. Mr. Crittenden has been a director of the Company since August 2014.

Michael W. Mahler currently serves as the Chief Executive Officer of the Company and the Bank. In May 2008 he was named President and Chief Executive Officer of the Company and the Bank. Preceding that appointment, beginning in January 2006, he served as the President and Chief Operating Officer of the Company and the Bank. Prior to that designation, since November 2004, Mr. Mahler served as Executive Vice President of the Company and the Bank and had served, since November 2002, as Chief Financial Officer. From September 2000 until November 2002, Mr. Mahler was Corporate Controller at Besser Company, Alpena, Michigan, an international producer of concrete products equipment. From 1990 until 2000, Mr. Mahler was employed at LTV Steel Company, East Chicago, Indiana where he served in financial roles of increasing responsibility and served, from 1997 until 2000, as Controller for a northeast Michigan division. Mr. Mahler has been a Director of the Bank since January 2006 and of the Company since May 2008.

64

directors and exectuive officer of first federal of northern
michigan bancorp, inc. and first federal of northern michigan 2014
Annual report

Executive Officers Who Are Not Directors

Craig A. Kus was named President and Chief Operating Officer of the Company and Bank in August 2014. Prior to joining the Bank, Mr. Kus served as the President and Chief Executive Officer of the Bank of Alpena and Alpena Banking Corporation, Alpena Michigan, a position he held since the bank’s inception in 2001. Mr. Kus has been in the banking profession since 1977.

Jerome W. Tracey was named Executive Vice President, of the Company, and Chief Lending Officer of the Bank in January 2006. Mr. Tracey had served as Senior Vice President, Senior Lender of the Company and the Bank since September 2001 and served as Vice President of Commercial Services since joining the Bank in November 1999. Prior to joining the Bank, Mr. Tracey served as Vice President of Commercial Lending for National City Bank, Alpena, Michigan, a position he held since 1996. Mr. Tracey has been in the banking profession since 1981.

Eileen M. Budnick was named VP- Director of Financial Reporting & Accounting, Treasurer and Corporate Secretary of the Company and the Bank in May 2013. Mrs. Budnick had served as Controller of the Bank since April 2008 and had served, since February 2007, as Assistant Controller, and prior to that appointment served, since February 2002, as a staff accountant for the Bank. Prior to February 2002, Mrs. Budnick was employed at Alpena Alcona Area Credit Union serving in various banking positions since September 1993.

Executive Management of the Bank

Michael W. Mahler, Craig A. Kus, Jerome W. Tracey, Eileen M. Budnick, and Joseph P. Garber

Officers of the Bank

Michael W. Mahler, Craig A. Kus, Jerome W. Tracey, Eileen M. Budnick, Joseph P. Garber, Joseph W. Gentry II, Kathleen R. Brown, Linda K. Sansom, Jerome P. Schmidt, Steven T. Mousseau and Tifanie A. Tremble.

65

EX-21

First Federal of Northern Michigan Bancorp, Inc. 10-K

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

EXHIBIT 21

Subsidiaries of the Registrant

Parent Company	Subsidiary Companies	State of Incorporation
First Federal of Northern Michigan Bancorp, Inc.	First Federal of Northern Michigan	Federal
First Federal of Northern Michigan	Financial Services and Mortgage Corporation	Michigan
First Federal of Northern Michigan	FFNM Agency, Inc (1)	Michigan

(1) FFNM Subsidiary was dissolved effective December 31, 2014.

EX-23

First Federal of Northern Michigan Bancorp, Inc. 10-K

EXHIBIT 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EXHIBIT 23

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference into the Registration Statement on Form S-8 for the Company’s 1996 Stock Option Plan and 1996 Recognition and Retention Plan (Registration No. 333-83198) of our report dated March 27, 2015 relating to the consolidated financial statements of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2014 which appear in this Form 10-K of First Federal of Northern Michigan Bancorp, Inc. for the year ended December 31, 2014.

Plante & Moran, PLLC

Auburn Hills, Michigan

March 27, 2015

EX-31.1

First Federal of Northern Michigan Bancorp, Inc. 10-K

Exhibit 31.1

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-K

Year Ended December 31, 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 annual report on Form 10-K of First Federal of Northern Michigan Bancorp, Inc.;

(2) Based on my knowledge, this annual 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 annual report;

(3) Based on my knowledge, the financial statements and other financial information included in this annual 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 annual 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 fourth 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 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.

March 30, 2015	/s/ Michael W. Mahler
Date	Michael W. Mahler
	Chief Executive Officer

EX-31.2

 First Federal of Northern Michigan Bancorp, Inc. 10-K

Exhibit 31.2 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-K

Year Ended December 31, 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 annual report on Form 10-K of First Federal of Northern Michigan Bancorp, Inc.;

(2) Based on my knowledge, this annual 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 annual report;

(3) Based on my knowledge, the financial statements and other financial information included in this annual 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 annual 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 fourth 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 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.

March 30, 2015	/s/ Eileen M. Budnick
Date	Eileen M. Budnick
	VP- Director of Financial Reporting & Accounting,
	Treasurer and Corporate Secretary

EX-32.1

First Federal of Northern Michigan Bancorp, Inc. 10-K

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 Annual Report on Form 10-K for the year ended December 31, 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 (15 U.S.C. 78m(a) or 78o(d)) 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.

This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended.

March 30, 2015	/s/ Michael W. Mahler
Dated	Michael W. Mahler

EX-32.2

First Federal of Northern Michigan Bancorp, Inc. 10-K

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 Annual Report on Form 10-K for the year ended December 31, 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 (15 U.S.C. 78m(a) or 78o(d)) 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.

This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. 

March 30, 2015	/s/ Eileen M. Budnick
Dated	Eileen M. Budnick

XML

Parent-Only Financial Statements (Tables)

12 Months Ended

Dec. 31, 2014

Parent-Only Financial Statements Tables

Schedule of condensed balance sheet

Condensed parent company financial statements, which include transactions with the subsidiary, are as follows (000s omitted):

	December 31,
	2014		2013
Assets
Cash at subsidiary bank	$	481	$	510
Investment in subsidiary		29,731		22,701
Deferred tax asset		318		318
Other assets		6		1
Total assets	$	30,536	$	23,530
Liabilities and Stockholders’ Equity
Liabilities	$	—	$	5
Stockholders’ equity		30,536		23,525
Total liabilities and stockholders’ equity	$	30,536	$	23,530

Schedule of condensed income statement

	December 31,
	2014			2013
Operating income	$	—		$	—
Dividend income		500			—
Operating expense		(271	)		(249	)
Income (Loss) before income taxes and equity in undistributed net income of subsidiary bank		229			(249	)
Income tax benefit		—			—
Income (Loss) before equity in undistributed loss of subsidiary bank		229			(249	)
Equity in undistributed net income of subsidiary bank		2,020			304
Net income	$	2,249		$	55

Schedule of condensed cash flow statement

	December 31,
	2014			2013
Cash Flows from Operating Activities
Net income	$	2,249		$	55
Adjustments to reconcile net income to net cash from operating activities:
Dividend from subsidiary bank	$	500
Stock options/awards		—			—
Equity in undistributed net income of subsidiary bank		(2,520	)		(304	)
Net change in other liabilities		(6	)		1
Net change in other assets		(5	)		(1	)
Cash Flows from Financing Activities
Dividends paid		(247	)		(58	)
Net cash used in operating activities		(2,278	)		(362	)
Net Decrease in Cash		(29	)		(307	)
Cash - Beginning of year		510			817
Cash - End of year	$	481		$	510

XML

Loans (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Gross loans	$ 165,339	$ 138,084
Net deferred loan fees	263	297
Allowance for loan losses	1,429	1,472	1,750
Total loans, net	163,647	136,315
One-to-Four Family Residential Real Estate [Member]
Gross loans	71,828	63,839
Allowance for loan losses	869	784	906
Commercial Real Estate [Member]
Gross loans	63,606	51,899
Allowance for loan losses	307	444	579
Commercial Non Real Estate [Member]
Gross loans	19,000	12,451
Commercial Loans [Member]
Gross loans	82,606	64,350
Allowance for loan losses	94	63	69
Consumer Real Estate [Member]
Gross loans	9,502	8,730
Allowance for loan losses	33	62	99
Consumer Other [Member]
Gross loans	1,403	1,165
Total Consumer Loans [Member]
Gross loans	10,905	9,895
Allowance for loan losses	$ 19	$ 21	$ 33

XML

Business Combinations (Details 4) (Bank of Alpena [Member], USD $) In Thousands, unless otherwise specified	Aug. 08, 2014
Loans acquired - contractual required payments	$ 34,517
Non accretable difference	(1,232)
Expected cash flows	33,285
Accretable yield	(234)
Acquired loans	33,051
Impaired Loans [Member]
Loans acquired - contractual required payments	5,930
Non accretable difference	(1,232)
Expected cash flows	4,698
Acquired loans	4,698
Non-Impaired Loans [Member]
Loans acquired - contractual required payments	28,587
Non accretable difference
Expected cash flows	28,587
Accretable yield	(234)
Acquired loans	$ 28,353

XML

Intangible Assets (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Intangible Assets Details Narrative
Amortization expense	$ 146	$ 119

XML

Loans (Details 1) (Acquired Loans [Member], USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014
Beginning of year
Net discount associated with accretable and non-accretable loans acquired during period	(1,690)
Accretion of discount for credit spread	26
Loans paid off	224
End of year	(1,440)
Impaired Loans Non-Accretable [Member]
Beginning of year
Net discount associated with accretable and non-accretable loans acquired during period	(1,456)
Accretion of discount for credit spread
Loans paid off	224
End of year	(1,232)
Non-Impaired Loans Accretable [Member]
Beginning of year
Net discount associated with accretable and non-accretable loans acquired during period	(234)
Accretion of discount for credit spread	26
Loans paid off
End of year	$ (208)

XML

Federal Home Loan Bank and Federal Reserve Advances (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
FHLB advances maturing in the year ending December 31,
2015	$ 4,890
2016	8,561
2017	4,362
2018	3,303
2019	1,460
Thereafter	309
Total	$ 22,885	$ 24,813
Weighted average interest rate of FHLB advances maturing in the year ending December 31,
2015	0.71%
2016	1.10%
2017	1.70%
2018	1.10%
2019	1.56%
Thereafter	1.61%
Weighted average interest rate of FHLB advances	1.17%

XML

Business Combinations (Details 2) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Pro-forma results
Net interest income	$ 2,339	$ 2,117	$ 1,766	$ 1,796	$ 1,804	$ 1,791	$ 1,810	$ 1,764	$ 8,018	$ 7,169
Weighted average shares outstanding	3,019	3,370	2,884	2,884	2,884	2,884	2,884	2,884
Bank of Alpena [Member]
Pro-forma results
Net interest income									9,554	9,602
Net interest income									3,631	2,079
Non-interest expense									10,502	11,064
Net income									$ 2,316	$ 190
Net income per diluted shares									$ 0.72	$ 0.07
Weighted average shares outstanding									3,219	2,884

XML

Federal Home Loan Bank and Federal Reserve Advances (Tables)

12 Months Ended

Dec. 31, 2014

Federal Home Loan Bank And Federal Reserve Advances Tables

Schedule of the Future Maturities of Federal Home Loan Bank Advances

Future maturities of the advances are as follows:

December 31, 2014
Years Ending December 31		Amount		Weighted Average Interest Rate
	2015	$	4,890		.71
	2016		8,561		1.10
	2017		4,362		1.70
	2018		3,303		1.10
	2019		1,460		1.56
	Thereafter		309		1.61
	Total	$	22,885		1.17

XML

Federal Income Tax (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Federal Income Tax Details Narrative
Statutory tax rate	34.00%
Net operating loss carryforwards	$ 12,300
Total deferred tax reserve liabilities	60	60
Unrecognized deferred tax liabilitiy	$ 20	$ 20

XML

Deposits (Details Narrative) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Deposits Details Narrative
Certificates of deposit in denominations of $100,000 or more	$ 28,100	$ 22,900
Deposits from related parties	$ 13,300	$ 632

XML

Fair Value Measurements (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Financial assets:
Deposits held at other financial institutions	$ 8,429
Securities available for sale	119,968	50,358
Securities held to maturity	908
Carrying Value [Member]
Financial assets:
Cash and cash equivalents	11,254	2,766
Deposits held at other financial institutions	8,429
Securities available for sale	119,968	50,358
Securities held to maturity	790	2,255
Loans held for sale	88	175
Loans receivable - net	163,646	136,315
Federal Home Loan Bank stock	2,591	3,266
Accrued interest receivable	986	745
Financial liabilities:
Customer deposits	270,734	160,029
Federal Home Loan Bank advances	22,885	24,813
REPO sweep accounts	101	89
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Financial assets:
Cash and cash equivalents	11,254	2,766
Deposits held at other financial institutions
Securities available for sale
Securities held to maturity
Loans receivable - net
Federal Home Loan Bank stock
Accrued interest receivable
Financial liabilities:
Customer deposits
Federal Home Loan Bank advances
REPO sweep accounts
Significant Other Observable Inputs (Level 2) [Member]
Financial assets:
Cash and cash equivalents
Deposits held at other financial institutions	8,424
Securities available for sale	119,968	50,358
Securities held to maturity	908	2,400
Loans receivable - net
Federal Home Loan Bank stock	2,591	3,266
Accrued interest receivable
Financial liabilities:
Customer deposits	271,200	160,784
Federal Home Loan Bank advances	22,696	24,458
REPO sweep accounts
Significant Unobservable Inputs (Level 3) [Member]
Financial assets:
Cash and cash equivalents
Deposits held at other financial institutions
Securities available for sale
Securities held to maturity
Loans held for sale	90	178
Loans receivable - net	163,690	135,172
Federal Home Loan Bank stock
Accrued interest receivable	986	745
Financial liabilities:
Customer deposits
Federal Home Loan Bank advances
REPO sweep accounts	101	89
Fair Value [Member]
Financial assets:
Cash and cash equivalents	11,254	2,766
Deposits held at other financial institutions	8,424
Securities available for sale	119,968	50,358
Securities held to maturity	908	2,400
Loans held for sale	90	178
Loans receivable - net	163,690	135,172
Federal Home Loan Bank stock	2,591	3,266
Accrued interest receivable	986	745
Financial liabilities:
Customer deposits	271,200	160,784
Federal Home Loan Bank advances	22,696	24,458
REPO sweep accounts	$ 101	$ 89

XML

Loans (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014		Dec. 31, 2013
Loans receivable from executive officers and directors
Loans outstanding, beginning	$ 3,168		$ 3,340
New loans	1,070		2,524
Repayments	(1,135)		(2,491)
Net change in directors and officers	3,134	[1]	(205)	[1]
Loans outstanding, ending	$ 6,237		$ 3,168

[1] Represents the addition or removal of new officer and directors during the year.

XML

Deposits (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Interest expense on deposits:
NOW and MMDAs	$ 141	$ 98
Savings accounts	13	11
Certificates of deposit	664	717
Total	$ 818	$ 826

XML

Employee Benefit Plans (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Number of Options
Outstanding, Beginning balance	150,030	167,620
Forfeited or expired	(14,000)	(17,590)
Outstanding, Ending balance	136,030	150,030
Options Exercisable	136,030
Weighted Average Exercise Price
Outstanding, Beginning Balance	$ 9.52	$ 9.53
Forfeited or expired	$ 9.30	$ 9.60
Outstanding, Ending Balance	$ 9.54	$ 9.52
Options Exercisable	$ 9.54
Weighted Average Remaining Contractual Term
Outstanding, Begining	2 years 4 months 24 days	3 years 4 months 17 days
Outstanding, ending	1 year 4 months 24 days	2 years 4 months 24 days
Options exercisable	1 year 4 months 24 days

XML

Federal Income Tax (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Reconciliation of federal income tax expense and statutory federal tax rate:
Tax (benefit) expense at statutory rate									$ 765	$ 19
Increase (decrease) from:
Change in valuation allowance									(807)	57
Tax-exempt interest									(52)	(52)
Other									94	(24)
Income tax expense

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Securities available for sale	$ 119,968	$ 50,358
US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale	31,222	7,042
Municipal Notes [Member]
Securities available for sale	23,134	13,609
Corporate Securities [Member]
Securities available for sale	1,561	1,097
Equity Securities [Member]
Securities available for sale	5	7
Mortgage Backed Securities [Member]
Securities available for sale	64,046	28,603
Carrying Value [Member]
Securities available for sale	119,968	50,358
Fair Value [Member]
Securities available for sale	119,968	50,358
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Securities available for sale
Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	119,968	50,358
Significant Unobservable Inputs (Level 3) [Member]
Securities available for sale
Recurring [Member] | Fair Value [Member]
Securities available for sale	119,968	50,358
Recurring [Member] | Fair Value [Member] | US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale	31,223	7,042
Recurring [Member] | Fair Value [Member] | Municipal Notes [Member]
Securities available for sale	23,133	13,609
Recurring [Member] | Fair Value [Member] | Corporate Securities [Member]
Securities available for sale	1,561	1,097
Recurring [Member] | Fair Value [Member] | Equity Securities [Member]
Securities available for sale	5	7
Recurring [Member] | Fair Value [Member] | Mortgage Backed Securities [Member]
Securities available for sale	64,046	28,603
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Securities available for sale	5	7
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Municipal Notes [Member]
Securities available for sale
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Corporate Securities [Member]
Securities available for sale
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Equity Securities [Member]
Securities available for sale	5	7
Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member] | Mortgage Backed Securities [Member]
Securities available for sale
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member]
Securities available for sale	119,963	50,351
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale	31,223	7,042
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | Municipal Notes [Member]
Securities available for sale	23,133	13,609
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | Corporate Securities [Member]
Securities available for sale	1,561	1,097
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | Equity Securities [Member]
Securities available for sale
Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member] | Mortgage Backed Securities [Member]
Securities available for sale	64,046	28,603
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Securities available for sale
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Municipal Notes [Member]
Securities available for sale
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Equity Securities [Member]
Securities available for sale
Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member] | Mortgage Backed Securities [Member]
Securities available for sale

XML

Federal Home Loan Bank and Federal Reserve Advances (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Lower range of interest rate of FHLB advances	0.32%
Upper range of interest rate of FHLB advances	2.21%
Weighted average interest rate of FHLB advances	1.17%
Year last FHLB advance is due	2023
Weighted average maturity for FHLB advances	27 months
Available borrowings with FHLB	$ 56,400	$ 22,900
Variable rate FHLB advances	0	1,500
Percentage of collateral which FRB discount borrowings may not exceed	0.75%
Weighted average interest rate of Federal Reserve Bank borrowings	0.75%
Securities [Member]
Collateral for FHLB advances	21,200	20,400
Collateral for Federal Reserve Bank borrowings	8,700
Mortgage Loans [Member]
Collateral for FHLB advances	$ 48,900	$ 49,600

XML

Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Gross Carrying Amount	$ 2,017	$ 625
Accumulated Amortization	731	585
Total	1,286	40
Commission Residual [Member]
Gross Carrying Amount	600	600
Accumulated Amortization	600	561
Total		39
Core Deposits [Member]
Gross Carrying Amount		25
Accumulated Amortization		24
Total	1,286	1
Core deposit (merger) [Member]
Gross Carrying Amount	1,392
Accumulated Amortization	106
Total	1,286
Core deposit (purchase) [Member]
Gross Carrying Amount	25
Accumulated Amortization	25
Total

XML

Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2014

Summary Of Significant Accounting Policies Tables

Schedule of weighted average number of common shares outstanding

Earnings per common share have been computed based on the following:

	December 31,
	2014		2013
Net income	$	2,249	$	55
Average number of common shares outstanding		3,218,926		2,884,049
Effect of dilutive options		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		3,218,926		2,884,049

XML

Securities (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Available for Sale
Available for Sale, Amortized Cost	$ 119,315	$ 50,601
Available for Sale, Gross Unrealized Gains	956	547
Available for Sale, Gross Unrealized (Losses)	(303)	(790)
Available for Sale, Market Value	119,968	50,358
Held to Maturity
Held to Maturity, Amortized Cost	790	2,255
Held to Maturity, Market Value	908
US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Available for Sale
Available for Sale, Amortized Cost	31,221	7,111
Available for Sale, Gross Unrealized Gains	58	36
Available for Sale, Gross Unrealized (Losses)	(57)	(105)
Available for Sale, Market Value	31,222	7,042
Municipal Notes [Member]
Available for Sale
Available for Sale, Amortized Cost	22,894	13,694
Available for Sale, Gross Unrealized Gains	369	216
Available for Sale, Gross Unrealized (Losses)	(129)	(301)
Available for Sale, Market Value	23,134	13,609
Held to Maturity
Held to Maturity, Amortized Cost	790	2,255
Held to Maturity Securities, Gross Unrealized Gains	118	145
Held to Maturity Securities, Gross Unrealized (Losses)
Held to Maturity, Market Value	908	2,400
Corporate Securities [Member]
Available for Sale
Available for Sale, Amortized Cost	1,549	1,085
Available for Sale, Gross Unrealized Gains	12	12
Available for Sale, Gross Unrealized (Losses)
Available for Sale, Market Value	1,561	1,097
Mortgage Backed Securities [Member]
Available for Sale
Available for Sale, Amortized Cost	63,648	28,708
Available for Sale, Gross Unrealized Gains	515	279
Available for Sale, Gross Unrealized (Losses)	(117)	(384)
Available for Sale, Market Value	64,046	28,603
Equity Securities [Member]
Available for Sale
Available for Sale, Amortized Cost	3	3
Available for Sale, Gross Unrealized Gains	2	4
Available for Sale, Gross Unrealized (Losses)
Available for Sale, Market Value	$ 5	$ 7

XML

Summary of Significant Accounting Policies (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Earnings Per Common Share:
Net income	$ 320	$ 1,614	$ 94	$ 221	$ (192)	$ 182	$ (3)	$ 68	$ 2,249	$ 55
Average number of common shares outstanding									3,218,926	2,884,049
Effect of dilutive options
Average number of common shares outstanding used to calculate diluted earnings per common share									3,218,926	2,884,049

XML

Deposits (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Maturities of certificates of deposit:
Less than 1 Year	$ 39,149
1-2 Years	15,811
2-3 Years	7,042
3-5 Years	13,648
Greater than 5 Years	1,271
Certificates of deposit	76,921	66,723
Interest Rates 4.00 percent to 4.99 percent [Member]
Maturities of certificates of deposit:
Less than 1 Year	45
1-2 Years	17
2-3 Years	53
3-5 Years
Greater than 5 Years
Certificates of deposit	115	133
Interest Rates 3.00 percent to 3.99 percent [Member]
Maturities of certificates of deposit:
Less than 1 Year	502
1-2 Years
2-3 Years	12
3-5 Years	536
Greater than 5 Years
Certificates of deposit	1,050	1,486
Interest Rates 2.00 percent to 2.99 percent [Member]
Maturities of certificates of deposit:
Less than 1 Year	4,022
1-2 Years	696
2-3 Years	47
3-5 Years	323
Greater than 5 Years	1,004
Certificates of deposit	6,092	7,130
Interest Rates 1.00 percent to 1.99 percent [Member]
Maturities of certificates of deposit:
Less than 1 Year	1,419
1-2 Years	6,884
2-3 Years	6,398
3-5 Years	12,394
Greater than 5 Years	267
Certificates of deposit	27,362	17,715
Interest Rates 0.10 percent to 0.99 percent [Member]
Maturities of certificates of deposit:
Less than 1 Year	33,161
1-2 Years	8,214
2-3 Years	532
3-5 Years	395
Greater than 5 Years
Certificates of deposit	$ 42,302	$ 40,259
Upper Range [Member] | Interest Rates 4.00 percent to 4.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	4.99%
Upper Range [Member] | Interest Rates 3.00 percent to 3.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	3.99%
Upper Range [Member] | Interest Rates 2.00 percent to 2.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	2.99%
Upper Range [Member] | Interest Rates 1.00 percent to 1.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	1.99%
Upper Range [Member] | Interest Rates 0.10 percent to 0.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	0.99%
Lower Range [Member] | Interest Rates 4.00 percent to 4.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	4.00%
Lower Range [Member] | Interest Rates 3.00 percent to 3.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	3.00%
Lower Range [Member] | Interest Rates 2.00 percent to 2.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	2.00%
Lower Range [Member] | Interest Rates 1.00 percent to 1.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	1.00%
Lower Range [Member] | Interest Rates 0.10 percent to 0.99 percent [Member]
Maturities of certificates of deposit:
Interest Rate	0.10%

XML

Employee Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2014

Employee Benefit Plans Tables

Summary of stock option activity

A summary of option activity under the Plans during the years ended December 31, 2014 and 2013 is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		167,620		$	9.53		3.38		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or Expired		(17,590	)	$	9.60
Outstanding at December 31, 2013		150,030		$	9.52		2.40		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or expired		(14,000	)	$	9.30
Oustanding at December 31, 2014		136,030		$	9.54		1.40		—
Options Exercisable at December 31, 2014		136,030		$	9.54		1.40		—

XML

Securities (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Securities available for sale
Fair Value Less Than 12 Months	$ 33,101	$ 22,373
Unrealized Loss Less Than 12 Months	(113)	(577)
Fair Value Less Than 12 Months or Longer	9,676	4,614
Unrealized Loss Less Than 12 Months or Longer	(190)	(213)
Securities Held to Maturity
Fair Value Less Than 12 Months
Unrealized Loss Less Than 12 Months
Fair Value Less Than 12 Months or Longer
Unrealized Loss Less Than 12 Months or Longer
US Treasury Securities and Obligations of US Government Corporations and Agencies [Member]
Securities available for sale
Fair Value Less Than 12 Months	13,672
Unrealized Loss Less Than 12 Months	(28)
Fair Value Less Than 12 Months or Longer	971	894
Unrealized Loss Less Than 12 Months or Longer	(29)	(105)
Municipal Notes [Member]
Securities available for sale
Fair Value Less Than 12 Months	9,506	7,902
Unrealized Loss Less Than 12 Months	(54)	(243)
Fair Value Less Than 12 Months or Longer	4,039	1,668
Unrealized Loss Less Than 12 Months or Longer	(75)	(58)
Securities Held to Maturity
Fair Value Less Than 12 Months
Unrealized Loss Less Than 12 Months
Fair Value Less Than 12 Months or Longer
Unrealized Loss Less Than 12 Months or Longer
Mortgage Backed Securities [Member]
Securities available for sale
Fair Value Less Than 12 Months	9,923	14,471
Unrealized Loss Less Than 12 Months	(31)	(334)
Fair Value Less Than 12 Months or Longer	4,666	2,052
Unrealized Loss Less Than 12 Months or Longer	(86)	(50)
Equity Securities [Member]
Securities available for sale
Fair Value Less Than 12 Months
Unrealized Loss Less Than 12 Months
Fair Value Less Than 12 Months or Longer
Unrealized Loss Less Than 12 Months or Longer

XML

Servicing (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2014	Dec. 31, 2013
Servicing Details Narrative
Unpaid principal balances of mortgage and other loans serviced for others		$ 125,400	$ 131,700
Fair value of mortgage servicing rights		1,000	1,100
Valuation allowance of mortgage servicing rights	$ 19

XML

Loans (Details 7) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Recorded investment in non-accrual loans	$ 1,338	$ 2,285
Commercial Real Estate Construction [Member]
Recorded investment in non-accrual loans		173
Commercial Real Estate Other [Member]
Recorded investment in non-accrual loans	486	1,454
Consumer Real Estate [Member]
Recorded investment in non-accrual loans	77
Consumer Other [Member]
Recorded investment in non-accrual loans	25	7
One-to-Four Family Residential Real Estate [Member]
Recorded investment in non-accrual loans
Commercial Loans [Member]
Recorded investment in non-accrual loans	$ 750	$ 651

XML

Business Combinations (Details 3) (Bank of Alpena [Member], USD $) In Thousands, unless otherwise specified	Aug. 08, 2014
Impaired acquired loans	$ 4,698
Non-impaired acquired loans	28,353
Acquired loans	33,051
Residential Mortgage [Member]
Impaired acquired loans	397
Non-impaired acquired loans	6,992
Acquired loans	7,389
Commercial Real Estate Construction [Member]
Impaired acquired loans
Non-impaired acquired loans	109
Acquired loans	109
Commercial Secured by Real Estate [Member]
Impaired acquired loans	3,070
Non-impaired acquired loans	14,721
Acquired loans	17,791
Commercial Real Estate Other [Member]
Impaired acquired loans	1,201
Non-impaired acquired loans	4,213
Acquired loans	5,414
Commercial Loans [Member]
Impaired acquired loans	4,271
Non-impaired acquired loans	19,043
Acquired loans	23,314
Total Consumer Loans [Member]
Impaired acquired loans	30
Non-impaired acquired loans	1,567
Acquired loans	1,598
Consumer Other [Member]
Impaired acquired loans
Non-impaired acquired loans	750
Acquired loans	756
Total Consumer Loans [Member]
Impaired acquired loans	30
Non-impaired acquired loans	2,318
Acquired loans	$ 2,348

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Securities

12 Months Ended

Dec. 31, 2014

Securities

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:

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	31,221	$	58	$	(57	)	$	31,222
Municipal notes		22,894		369		(129	)		23,134
Corporate securities		1,549		12		—			1,561
Mortgage-backed securities		63,648		515		(117	)		64,046
Equity securities		3		2		—			5
Total	$	119,315	$	956	$	(303	)	$	119,968
Securities Held to Maturity
Municipal notes	$	790	$	118	$	—		$	908
		December 31, 2013
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of  U.S. government corporations and agencies	$	7,111	$	36	$	(105	)	$	7,042
Municipal notes		13,694		216		(301	)		13,609
Corporate securities		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 notes	$	2,255	$	145	$	—		$	2,400

The amortized cost and estimated market value of securities at December 31, 2014, by contractual 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.

	December 31, 2014
	Amortized Cost		Market Value
Available For Sale:
Due in one year or less	$	5,069	$	5,092
Due after one year through five years		38,827		38,843
Due in five year through ten years		10,478		10,562
Due after ten years		1,290		1,420
Subtotal		55,664		55,917
Equity securities		3		5
Mortgage-backed securities		63,648		64,046
Total	$	119,315	$	119,968
Held To Maturity
Due in one year or less	$	45	$	45
Due after one year through five years		200		218
Due in five year through ten years		315		365
Due after ten years		230		280
Total	$	790	$	908

At December 31, 2014 and 2013, securities with a fair value of $35.0 million and $36.0 million, respectively, were pledged to FHLB advances and borrowings from the Federal Reserve discount window.

Gross proceeds from the sale of available-for-sale securities for the years ended December 31, 2014 and 2013 were $730 and $0, respectively, resulting in gross gains of $1 and $0, respectively, and gross losses of $5 and $0, respectively. The tax benefit applicable to the net realized loss amounted to $2 and $0, respectively.

The following is a summary of securities that had unrealized losses at December 31, 2014 and 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 December 31, 2014, the Company held 72 securities with unrealized losses totaling $303. At December 31, 2013 there were 39 securities with unrealized losses totaling $790.

There are temporary reasons why securities may be valued at less than amortized cost. Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Company are higher and impairment is not due to credit deterioration. The Company has the intent and the ability to hold these securities until their value recovers, which may be until maturity.

	December 31, 2014										December 31, 2013
			Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		Less than 12 months			Fair Value		12 months or longer			Fair Value		Less than 12 months			Fair Value		12 months or longer
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	13,672	$	(28	)	$	971	$	(29	)	$	—	$	—		$	894	$	(105	)
Corporate and other securities
Municipal notes		9,506		(54	)		4,039		(75	)		7,902		(243	)		1,668		(58	)
Mortgage-backed securities		9,923		(31	)		4,666		(86	)		14,471		(334	)		2,052		(50	)
Equity securities		—		—			—		—			—		—			—		—
Total Securities available for sale	$	33,101	$	(113	)	$	9,676	$	(190	)	$	22,373	$	(577	)	$	4,614	$	(213	)
Held to Maturity:
Municipal notes		—		—			—		—			—		—			—		—
Total Securities held to maturity	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—

On a quarterly basis, the Company performs a comprehensive security-level impairment assessment on all securities in an unrealized loss position to determine if other-than-temporary impairment (“OTTI”) exists. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. For debt securities, an OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the individual security. If the Company does not expect to sell the security, the Company must evaluate the expected cash flows to be received to determine if a credit loss has occurred. If a credit loss is present, only the amount of impairment associated with the credit loss is recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in other comprehensive income.

The security-level assessment is performed on each security, regardless of the classification of the security as available for sale or held to maturity. The assessments are based on the nature of the securities, the financial condition of the issuer, the extent and duration of the securities, the extent and duration of the loss and the intent and whether management intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis, which may be maturity. For those securities for which the assessment shows the Company will recover the entire cost basis, management does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of the amortized cost basis, the gross unrealized losses are recognized in other comprehensive income, net of tax.

 
Management does not believe that the investment securities that were in an unrealized loss position as of December 31, 2014 represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost bases, which may be at maturity.

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Loans (Details 8) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Commercial Real Estate Construction [Member]
With an allowance recorded:
Unpaid Principal		$ 1,589
Related allowance		173
Recorded Investment		48
Average Recorded Investment		173
Interest income recognized
Total
Unpaid Principal		1,589
Recorded Investment		173
Average Recorded Investment		173
Commercial Real Estate Other [Member]
With no related allowance recorded:
Unpaid Principal	1,431	1,789
Recorded Investment	1,430	1,788
Average Recorded Investment	1,482	1,894
Interest income recognized	84	104
With an allowance recorded:
Unpaid Principal	386	3,980
Related allowance	386	3,391
Recorded Investment	10	182
Average Recorded Investment	393	3,397
Interest income recognized	18	94
Total
Unpaid Principal	1,817	5,769
Recorded Investment	1,816	5,179
Average Recorded Investment	1,875	5,291
Interest income recognized	102	198
Consumer Real Estate [Member]
With no related allowance recorded:
Unpaid Principal	26	8
Recorded Investment	24	7
Average Recorded Investment	26	7
Total
Unpaid Principal	26	8
Recorded Investment	24	7
Average Recorded Investment	26	7
One-to-Four Family Residential Real Estate [Member]
With no related allowance recorded:
Unpaid Principal	781	954
Recorded Investment	618	722
Average Recorded Investment	635	727
Interest income recognized	14	6
With an allowance recorded:
Unpaid Principal		53
Related allowance		30
Recorded Investment		5
Average Recorded Investment		30
Interest income recognized
Total
Unpaid Principal	781	1,007
Recorded Investment	618	752
Average Recorded Investment	635	757
Interest income recognized	$ 14	$ 6

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Business Combinations (Details Narrative) (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended		0 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Aug. 08, 2014
Total assets	$ 325,867	$ 209,657
Merger related expense	266	83
Bank of Alpena [Member]
Number of branch offices	1
Total assets	$ 102,900
Shares converted in merger, share ratio			$ 1.549
Shares issued for Alpena Banking corporation shares			842,965

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Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2014

Property And Equipment Tables

Schedule of property and equipment

A summary of property and equipment is as follows:

	December 31,
	2014		2013
Land	$	1,271	$	1,071
Land improvements		195		182
Buildings		7,058		6,237
Equipment		3,959		3,523
Total property and equipment		12,483		11,013
Accumulated depreciation		6,147		5,810
Net property and equipment	$	6,336	$	5,203

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Loans (Tables)

12 Months Ended

Dec. 31, 2014

Loans Tables

Schedule of composition of loans categorized by the type of loan

Loans at December 31, 2014 and 2013 are summarized as follows:

	December 31
	2014		2013
Real estate loans - One- to four-family residential	$	71,828	$	63,839
Commercial loans:
Secured by real estate		63,606		51,899
Other		19,000		12,451
Total commercial loans		82,606		64,350
Consumer loans:
Secured by real estate		9,502		8,730
Other		1,403		1,165
Total consumer loans		10,905		9,895
Total gross loans		165,339		138,084
Less:
Net deferred loan fees		263		297
Allowance for loan losses		1,429		1,472
Total loans - net	$	163,647	$	136,315

Final loan maturities and rate sensitivity of the loan portfolio are as follows:

	December 31, 2014
	Less Than One Year		One Year to Five Years		After Five Years		Total
Originated Loans:
Loans at fixed interest rates	$	3,983	$	31,560	$	50,507	$	86,050
Loans at variable interest rates		7,731		8,381		34,035		50,147
Total	$	11,714	$	39,941	$	84,542	$	136,197
	December 31, 2014
		Less Than One Year		One Year to Five Years		After Five Years		Total
Acquired Loans :
Loans at fixed interest rates	$	1,796	$	9,502	$	1,165	$	12,463
Loans at variable interest rates		2,024		3,773		10,882		16,679
Total	$	3,820	$	13,275	$	12,047	$	29,142

Schedule of the change in accretable and nonaccretable yields of acquired impaired loans

Changes to the accretable yield for acquired impaired loans were as follows as of December 31, 2014:

	Acquired Impaired Non- accretable			Acquired Non- Impaired Accretable			Acquired Total
Beginning of year	$	—		$	—		$	—
Net discount associated with acquired loans		(1,456	)		(234	)		(1,690	)
Accretion of discount for credit spread		—			26			26
Loans paid off through December 31, 2014		224			—			224
	$	(1,232	)	$	(208	)	$	(1,440	)

Schedule of loans to executives and directors

Certain directors and executive officers of the Company were loan customers of the Bank during 2014 and 2013. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectability. An analysis of aggregate loans outstanding to directors and executive officers for the years ended December 31, 2014 and 2013 are as follows:

	December 31,
	2014			2013
Aggregate balance - Beginning of Period	$	3,168		$	3,340
New loans		1,070			2,524
Repayments		(1,135	)		(2,491	)
Net change in directors and officers(1)		3,134			(205	)
Aggregate balance - End of Period	$	6,237		$	3,168

(1) Represents the addition or removal of new officer and directors during the year.

Schedule of aging of past due loans by class

The following tables illustrate the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2014 and 2013:

			As of December 31, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans	Recorded Investment > 90 Days andAccruing
Originated Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	—	$	—	$	1,443	$1,443	$	—
Commercial Real Estate - other		10		195		—		205		46,103	46,308		—
Commercial - non real estate		—		—		—		—		14,544	14,544		—
Consumer:
Consumer - Real Estate		107		4		7		118		7,684	7,802		—
Consumer - Other		3		—		3		6		1,152	1,158		3
Residential:
Residential		1,484		746		386		2,616		62,326	64,942		87
Total	$	1,604	$	945	$	396	$	2,945	$	133,252	$136,197	$	90

			As of December 31, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Acquired Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - other		125		128		93		346		15,604		15,950		—
Commercial - non real estate		—		40		104		144		4,217		4,361		—
Consumer:
Consumer - Real Estate		123		—		—		123		1,609		1,732		—
Consumer - Other		—		—		—		—		213		213		—
Residential:
Residential		147		56		461		664		6,222		6,886		225
Total	$	395	$	224	$	658	$	1,277	$	27,865	$	29,142	$	225

			As of December 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
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 tables present the risk category of loans by class based on the most recent analysis performed as of December 31, 2014 and 2013.

As of December 31, 2014
			Consumer -
	Residential		Real Estate		Consumer - Other
Originated Loans:
Loan Grade:
Pass	$	64,397	$	7,778	$	1,155
Special Mention		—		—		—
Substandard		545		24		3
Total	$	64,942	$	7,802	$	1,158
				Consumer -
		Residential		Real Estate		Consumer - Other
Acquired Loans:
Loan Grade:
Pass	$	6,335	$	1,731	$	213
Special Mention		—		—		—
Substandard		551		1		—
Total	$	6,886	$	1,732	$	213

As of December 31, 2013
			Consumer -
	Residential		Real Estate		Consumer - Other
Loan Grade:
Pass	$	63,164	$	8,723	$	1,163
Special Mention		—		7		2
Substandard		675
Total	$	63,839	$	8,730	$	1,165

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

As of December 31, 2014
			Consumer -
	Residential		Real Estate		Consumer - Other
Originated Loans:
Loan Grade:
Pass	$	64,397	$	7,778	$	1,155
Special Mention		—		—		—
Substandard		545		24		3
Total	$	64,942	$	7,802	$	1,158
				Consumer -
		Residential		Real Estate		Consumer - Other
Acquired Loans:
Loan Grade:
Pass	$	6,335	$	1,699	$	245
Special Mention		—		—		—
Substandard		551		1		—
Total	$	6,886	$	1,700	$	245

As of December 31, 2013
			Consumer -
	Residential		Real Estate		Consumer - Other
Loan Grade:
Pass	$	63,164	$	8,723	$	1,163
Special Mention		—		7		2
Substandard		675
Total	$	63,839	$	8,730	$	1,165

Schedule of recorded investment in non-accrual loans by class

The following tables present the recorded investment in non-accrual loans by class as of December 31, 2014 and 2013:

As of December 31
	2014		2013
Originated Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	173
Commercial Real Estate - other		486		1,454
Commercial		77		—
Consumer:
Consumer - real estate		25		7
Consumer - other		—		—
Residential:
Residential		750		651
Total	$	1,338	$	2,285

Schedule of loans individually evaluated for impairment

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2014

and 2013:

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2014							2014
	Unpaid Principal		Recorded		Related		Average		Interest
	Balance		Investment		Allowance		Recorded		Income
							Investment		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,431		1,430		—		1,482		84
Consumer - Real Estate		26		24		—		26		—
Consumer - Other		—		—		—		—		—
Residential		781		618		—		635		14
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		386		386		10		393		18
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		—		—		—		—		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Other	$	1,817	$	1,816	$	10	$	1,875	$	102
Consumer - Real Estate	$	26	$	24	$	—	$	26	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	781	$	618	$	—	$	635	$	14

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2013							2013
	Unpaid Principal		Recorded		Related		Average		Interest
	Balance		Investment		Allowance		Recorded		Income
							Investment		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,789		1,788		—		1,894		104
Consumer - Real Estate		8		7		—		7		—
Consumer - Other		—		—		—		—		—
Residential		954		722		—		727		6
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—
Commercial Real Estate - Other		3,980		3,391		182		3,397		94
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		53		30		5		30		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	5,291	$	198
Consumer - Real Estate	$	8	$	7	$	—	$	7	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	757	$	6

Schedule of loans modified as troubled debt restructurings

The following table summarizes the loans that were modified as a TDR during the period ended December 31, 2014 and 2013.

	For the Twelve Months Ended
	December 31, 2014
			Pre-Modification		Post-Modification	Troubled Debt Restructurings That Subsequently Defaulted
	Number of		Outstanding Recorded		Outstanding Recorded	Number of		Recorded
	Contracts		Investments		Investment	Contracts		Investment
Commercial Real Estate - Construction	—	$	—	$	—	—	$	—
Commercial Real Estate - Other	—		—		—	—		—
Commercial - non real estate	—		—		—	—		—
Residential	—		—		—	—		—
Total	—	$	—	$	—	—	$	—

For the Twelve Months Ended
December 31, 2013
							Troubled Debt Restructurings
			Pre-Modification		Post-Modification		That Subsequently Defaulted
	Number of		Outstanding Recorded		Outstanding Recorded		Number of		Recorded
	Contracts		Investments		Investment		Contracts		Investment
Commerical Real Estate - Construction		—	$	—	$	—		—	$	—
Commercial Real Estate - Other		1		412		412		—		—
Consumer - Real Estate		—		—		—		—		—
Residential		2		337		337		—		—
Total		3	$	749	$	749		—	$	—

Schedule of activity for allowance for loan losses

Activity in the ALLL was as follows for the years ended December 31, 2014 and 2013:

For the Year Ended December 31, 2014
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	48		$	444		$	63	$	62		$	21		$	784		$	50	$	1,472
Charge-offs		(12	)		(241	)		—		(14	)		(24	)		(177	)		—		(468	)
Recoveries		—			54			2		30			—			55			—		141
Provision		(28	)		50			29		(45	)		22			207			49		284
Ending Balance	$	8		$	307		$	94	$	33		$	19		$	869		$	99	$	1,429
Ending balance: individually evaluated for impairment	$	—		$	10		$	—	$	—		$	—		$	—		$	—	$	10
Ending balance: loans collectively evaluated for impairment	$	8		$	297		$	94	$	33		$	19		$	869		$	99	$	1,419
Loans:
Ending Balance	$	1,443		$	62,163		$	19,000	$	9,502		$	1,403		$	71,828		$	—	$	165,339
Ending balance: individually evaluated for impairment	$	—		$	1,816		$	—	$	24		$	—		$	618		$	—	$	2,458
Ending balance: loans collectively evaluated for impairment	$	1,443		$	44,492		$	14,544	$	7,778		$	1,158		$	64,324		$	—	$	133,739
Acquired loans not subject to loan loss reserve	$	—		$	15,855		$	4,456	$	1,700		$	245		$	6,886		$	—	$	29,142

For the Year Ended December 31, 2013
	Commercial Construction			Commercial Real Estate			Commercial			Consumer Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69		$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(674	)		—			(40	)		(13	)		(464	)		—		(1,191	)
Recoveries		—			114			—			36			6			120			—		276
Provision		(16	)		425			(6	)		(33	)		(5	)		222			50		637
Ending Balance	$	48		$	444		$	63		$	62		$	21		$	784		$	50	$	1,472
Ending balance: individually evaluated for impairment	$	48		$	182		$	—		$	—		$	—		$	5		$	—	$	235
Ending balance: loans collectively evaluated for impairment	$	—		$	262		$	63		$	62		$	21		$	779		$	50	$	1,237
Loans:
Ending Balance	$	173		$	51,726		$	12,451		$	8,730		$	1,165		$	63,839		$	—	$	138,084
Ending balance: individually evaluated for impairment	$	173		$	5,179		$	—		$	7		$	—		$	752		$	—	$	6,111
Ending balance: loans collectively evaluated for impairment	$	—		$	46,547		$	12,451		$	8,723		$	1,165		$	63,087		$	—	$	131,973

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Gross loans	$ 165,339	$ 138,084
Orginated Loans and Leases [Member]
Loans at fixed interest rates	86,050
Loans at variable interest rates	50,147
Gross loans	136,197
Orginated Loans and Leases [Member] | Maturing Within One Year [Member]
Loans at fixed interest rates	3,983
Loans at variable interest rates	7,731
Gross loans	11,714
Orginated Loans and Leases [Member] | Maturing One Year to Five Years [Member]
Loans at fixed interest rates	31,560
Loans at variable interest rates	8,381
Gross loans	39,941
Orginated Loans and Leases [Member] | Maturing Five Years to Ten Years [Member]
Loans at fixed interest rates	50,507
Loans at variable interest rates	34,035
Gross loans	84,542
Acquired Loans [Member]
Loans at fixed interest rates	12,463
Loans at variable interest rates	16,679
Gross loans	29,142
Acquired Loans [Member] | Maturing Within One Year [Member]
Loans at fixed interest rates	1,796
Loans at variable interest rates	2,024
Gross loans	3,820
Acquired Loans [Member] | Maturing One Year to Five Years [Member]
Loans at fixed interest rates	9,502
Loans at variable interest rates	3,773
Gross loans	13,275
Acquired Loans [Member] | Maturing Five Years to Ten Years [Member]
Loans at fixed interest rates	1,165
Loans at variable interest rates	10,882
Gross loans	$ 12,047

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Business Combinations (Details) (Bank of Alpena [Member], USD $) In Thousands, except Share data, unless otherwise specified	0 Months Ended
	Aug. 08, 2014
Bank of Alpena [Member]
Shares issued for Alpena Banking corporation shares	842,965
Price per share	$ 5.59
Total purchase price	$ 4,712

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Servicing (Tables)

12 Months Ended

Dec. 31, 2014

Servicing Tables

Schedule of assumptions used in determining the fair value of mortgage servicing rights

The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:

	December 31,
	2014			2013
Annual constant prepayment speed (CPR)		11.46	%		10.27	%
Weighted average life (in months)		244			244
Discount rate		9.38	%		9.26	%

Schedule of activity in mortgage servicing rights

The following table summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:

	December 31,
	2014			2013
Balance - beginning of period:	$	860		$	1,035
Originated mortgage servicing rights capitalized		111			151
Amortization of mortgage servicing rights		(261	)		(326	)
Balance - end of period		710			860
Valuation allowances:
Balance - beginning of period		—			(19	)
Reductions		—			19
Balance - end of period (net of allowances)	$	710		$	860

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Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2014

Intangible Assets Tables

Schedule of intangible assets

Intangible assets of the Company are summarized as follows:

	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit (merger)		1,392		106	$	1,286
Core deposit (purchase)	$	25	$	25		—
Commission residual		600		600		—
Total	$	2,017	$	731	$	1,286
		December 31, 2013
		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit	$	25	$	24	$	1
Commission residual		600		561		39
Total	$	625	$	585	$	40

Schedule of remaining amortization expense

The estimated future amortization expense on core deposit intangible assets for the years ending after December 31, 2014 are as follows:

	Amortization
	Expense
2015	$	243
2016		217
2017		192
2018		167
2019		141
Thereafter		326
Total	$	1,286

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Business Combinations

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Business Combinations

Note 2 - Business Combinations

As of August 8, 2014 (“Merger Date”), the Company completed its merger with Alpena Banking Corporation and its wholly owned subsidiary Bank of Alpena (“Alpena”). Alpena had one branch office and $102.9 million in assets as of August 8, 2014. The results of operations due to the merger have been included in the Company’s results since the Merger Date. The merger was effected by the issuance of shares of the Company’s common stock to Alpena Banking Corporation shareholders. Each share of Alpena’s common stock was converted into the right to receive 1.549 shares of the Company’s common stock, with cash paid in lieu of fractional shares. The conversion of Alpena’s shares resulted in the issuance of 842,965 shares of the Company’s common stock.

The business combination was recorded using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair values on the Merger Date. The following table provides the purchase price calculation as of December 31, 2014 and the identifiable assets acquired and liabilities assumed at their estimated fair values. A bargain purchase gain resulted from the business combination due to the fair value of the net assets acquired exceeding the value of the stock issued as consideration in the transaction. These fair value measurements are based on third-party valuations and are subject to refinement for up to one year after the Merger Date based on additional information that may be obtained by us that existed on the Merger Date.

First Federal of Northern Michigan Bancorp, Inc. common stock issued for Alpena Banking Corporation common shares		843
Price per share, based on First Federal of Northern Michigan Bancorp, Inc. closing price on August 8, 2014	$	5.59
Total purchase price	$	4,712

Preliminary Statement of Net Assets Acquired Fair Value:

Assets
Cash and cash equivalents	$	41,650
Securities		24,008
Loans		33,051
Premises and Equipment		1,667
Core Deposit Intangible		1,392
Deferred Tax Asset		337
Other Assets		467
Total Assets	$	102,572
Liabilities
Deposits		95,787
Other Liabilities		91
Total Liabilities	$	95,878
Net Identifiable Assets Acquired			$	6,694
Bargain Purchase Gain			$	(1,982	)

The results of operations for the year ended December 31, 2014 include the operating results of the combined entities cfor the 143 days subsequent to the Merger Date. Alpena’s results of operations prior to the Merger Date are not included in the Company’s consolidated statement of comprehensive income.

We incurred merger related expenses of $266 during 2014. These expenses were for professional services such as legal, accounting and contractual arrangements for consulting services.

The following table provides the pro forma information for the results of operations for the years ended December 31, 2014 and 2013, as if the merger had occurred on January 1 of each year. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Bank of Alpena. In addition, the $266 in merger-related costs noted above are included in each period presented. Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts. These pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organizations that would have been achieved had the merger occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of the Company.

	For the Year Ended
	December 31,
	2014		2013
Net interest income	$	9,554	$	9,602
Non-interest income		3,631		2,079
Non-interest expense		10,502		11,064
Net income		2,316		190
Net income per basic and diluted share		0.72		0.07
Weighted average shares outstanding		3,219		2,884

In most instances, determining the fair value of the acquired assets and assumed liabilities required the Company to estimate the cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the valuation of acquired loans. For such loans, the excess cash flows expected at merger over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at merger and the cash flows expected to be collected at merger reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with the applicable accounting guidance for business combinations, there was no carry-over of Alpena’s previously established allowance for loan losses.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounting for under ASC 310-30 (“acquired impaired”), and loans that do not meet the criteria, which are accounted for under ACC 310-20 (“acquired non-impaired”). In addition, the loans are further categorized into different pools based primarily on the type and purpose of the loan.

	Acquired Impaired		Acquired Non-Impaired		Acquired Total
	(in thousands)
Real estate loans:
Residential mortgages	$	397	$	6,992	$	7,389
Commercial Loans:
Construction - real estate		—		109		109
Secured by real estate		3,070		14,721		17,791
Other		1,201		4,213		5,414
Total commercial loans		4,271		19,043		23,314
Consumer loans:
Secured by real state		30		1,567		1,598
Other		—		750		750
Total consumer loans		30		2,318		2,348
Total Loans at acqusition date	$	4,698	$	28,353	$	33,051

	Acquired Impaired			Acquired Non-Impaired			Acquired Total
	(in thousands)
Loans acquired- contractual required payments	$	5,930		$	28,587		$	34,517
Non accretable difference		(1,232	)		—			(1,232	)
Expected cash flows		4,698			28,587			33,285
Accretable yield		—			(234	)		(234	)
Carrying balance at acquisition date	$	4,698		$	28,353		$	33,051

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Deposits (Tables)

12 Months Ended

Dec. 31, 2014

Deposits Tables

Schedule of deposit liabilities, by type and range

Deposit accounts, by type and range of rates, consist of the following:

	December 31,
	2014		2013
Account Type
NOW accounts and MMDA	$	107,935	$	50,222
Regular savings accounts		29,846		22,037
Total		137,781		72,259
Certificate of Deposit Rates
0.10 percent to 0.99 percent		42,302		40,259
1.00 percent to 1.99 percent		27,362		17,715
2.00 percent to 2.99 percent		6,092		7,130
3.00 percent to 3.99 percent		1,050		1,486
4.00 percent to 4.99 percent		115		133
Total certificate of deposits		76,921		66,723
Total interest-bearing deposits	$	214,702	$	138,982

Schedule of maturities of certificates of deposit

The following table sets forth the amount and maturities of certificates of deposit:

	December 31, 2014
	Amount Due
Rate	Less than 1 Year		1-2 Years		2-3 Years		3-5 Years		Greater than 5 Years		Total
0.10 percent to 0.99 percent	$	33,161	$	8,214	$	532	$	395	$	—	$	42,302
1.00 percent to 1.99 percent		1,419		6,884		6,398		12,394		267		27,362
2.00 percent to 2.99 percent		4,022		696		47		323		1,004		6,092
3.00 percent to 3.99 percent		502		—		12		536		—		1,050
4.00 percent to 4.99 percent		45		17		53		—		—		115
Total	$	39,149	$	15,811	$	7,042	$	13,648	$	1,271	$	76,921

Schedule of interest expense on deposits

Interest expense on deposits is summarized as follows:

	Year Ended December 31,
	2014		2013
NOW and MMDAs	$	141	$	98
Regular savings		13		11
Certificates of deposit		664		717
Total	$	818	$	826

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Off Balance Sheet Risk Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Commercial and standby letters of credit [Member]
Commitments	$ 134	$ 59
Unfunded commitments under lines of credit [Member]
Commitments	15,022	12,940
Commitments to grant loans [Member]
Commitments	$ 9,020	$ 5,936

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Quarterly Results of Operations (Tables)

12 Months Ended

Dec. 31, 2014

Quarterly Results Of Operations Tables

Schedule of quarterly results of operations

The following tables summarize the Company’s quarterly results for the fiscal years ended December 31, 2014 and 2013:

	For the Three-Month Period Ending
	March 31, 2014		June 30, 2014		September 30, 2014		December 31, 2014
Interest income	$	2,045	$	2,025	$	2,387	$	2,643
Interest expense		249		259		270		304
Net interest income		1,796		1,766		2,117		2,339
Provision for loan losses		16		—		257		11
Other income		336		344		2,224		574
Other expenses		1,895		2,016		2,470		2,582
Income - before income tax expense		221		94		1,614		320
Income tax expense		—		—		—		—
Net income	$	221	$	94	$	1,614	$	320
Net income per share
Basic	$	0.08	$	0.03	$	0.48	$	0.11
Diluted	$	0.08	$	0.03	$	0.48	$	0.11
Weighted average number of shares outstanding - basic and dilutive		2,884		2,884		3,370		3,019
Cash dividends declared per common share	$	0.020	$	0.020	$	0.020	$	0.020

	For the Three-Month Period Ending
	March 31, 2013		June 30, 2013			September 30, 2013		December 31, 2013
Interest income	$	2,085	$	2,095		$	2,065	$	2,074
Interest expense		321		285			274		270
Net interest income		1,764		1,810			1,791		1,804
Provision for loan losses		144		196			32		265
Other income		440		465			459		401
Other expenses		1,992		2,082			2,036		2,132
Income (loss) - before income tax expense (benefit)		68		(3	)		182		(192	)
Income tax expense		—		—			—		—
Net income (loss)	$	68	$	(3	)	$	182	$	(192	)
Net income (loss) per share
Basic	$	0.02	$	—		$	0.06	$	(0.07	)
Diluted	$	0.02	$	—		$	0.06	$	(0.07	)
Weighted average number of shares outstanding - basic and dilutive		2,884		2,884			2,884		2,884
Cash dividends declared per common share	$	—	$	—		$	—	$	0.020

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Loans (Details Narrative) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Loans Details Narrative
Valuation allowance for TDR Loans	$ 10	$ 230

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Intangible Assets (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Amortization expense for future fiscal years:
Total	$ 1,286	$ 40
Core Deposits [Member]
Amortization expense for future fiscal years:
2015	243
2016	217
2017	192
2018	167
2019	141
Thereafter	326
Total	$ 1,286	$ 1

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Consolidated Balance Sheet (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
ASSETS
Cash and cash equivalents	$ 11,205	$ 2,760
Overnight deposits with Federal Home Loan Bank	267	6
Total cash and cash equivalents	11,472	2,766
Deposits held in other financial institutions	8,429
Securities available for sale, at fair value (Note 3)	119,968	50,358
Securities held to maturity (Note 3)	790	2,255
Loans - net (Note 4)	163,647	136,315
Loans held for sale	88	175
Federal Home Loan Bank stock	2,591	3,266
Property and equipment (Note 5)	6,336	5,203
Assets held for sale - net	478
Foreclosed real estate and other repossessed assets	2,823	1,780
Accrued interest receivable	986	745
Intangible assets (Note 7)	1,286	40
Deferred tax asset (Note 10)	851	799
Originated mortgage servicing right - net (Note 6)	710	860
Bank owned life insurance	4,727	4,610
Other assets	685	485
Total assets	325,867	209,657
Liabilities:
Non-interest bearing deposits	56,032	21,047
Interest-bearing deposits (Note 8)	214,702	138,982
Advances from Federal Home Loan Bank (Note 9)	22,885	24,813
Accrued expenses and other liabilities (Note 13)	1,712	1,290
Total liabilities	295,331	186,132
Stockholders' Equity (Note 12)
Common stock ($0.01 par value 20,000,000 shares authorized, 4,034,764 and 3,191,799 shares issued and outstanding) - at December 31, 2014 and 2013 , respectively	40	32
Additional paid-in capital	28,264	23,854
Retained earnings	4,765	2,763
Treasury stock at cost (307,750 shares) - at December 31, 2014 and 2013 , respectively	(2,964)	(2,964)
Accumulated other comprehensive income (loss)	431	(160)
Total stockholders' equity	30,536	23,525
Total liabilities and stockholders' equity	$ 325,867	$ 209,657

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Business Combinations (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended	0 Months Ended
	Dec. 31, 2014	Aug. 08, 2014
Liabilities
Bargain Purchase Gain	$ (1,982)
Bank of Alpena [Member]
Assets
Cash and cash equivalents		41,650
Securities		24,008
Loans		33,051
Premises and Equipment		1,667
Core Deposit Intangible		1,392
Deferred Tax Asset		337
Other Assets		467
Total Assets		102,572
Liabilities
Deposits		95,787
Other Liabilities		91
Total Liabilities		95,878
Net Identifable Assets Acquired		6,694
Bargain Purchase Gain		$ 1,982

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Consolidated Statement of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Cash Flows from Operating Activities:
Net income (loss)	$ 2,249	$ 55
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization	483	401
Provision for loan loss	284	637
Accretion of acquired loans	(89)
Amortization and accretion on securities	578	551
Bargain purchase gain from bank acquisition	(1,982)
Loss on sale of investment securities	4
Gain on sale of loans held for sale	(206)	(235)
Loss (Gain) on sale of property and equipment	23	(12)
Loss (Gain) on sale of real estate owned and other repossessed assets	4	(3)
Originations of loans held for sale	(13,833)	(17,383)
Proceeds from sale of loans held for sale	14,126	17,522
Net change in:
Accrued interest receivable	(25)	225
Prepaid FDIC insurance premiums		583
Bank owned life insurance	(117)	(135)
Other assets	128	73
Accrued expenses and other liabilities	86	(236)
Net cash provided by operating activities	1,713	2,043
Cash Flows from Investing Activities:
Net cash received in bank acquisition	41,650
Net decrease in loans	3,740	474
Net increase in deposits at other institutions	(7,189)
Proceeds from maturity of securities	14,843	14,441
Proceeds from sale of securities available-for-sale	730
Proceeds from sale of FHLB stock	831
Proceeds from sale of property and equipment	3	59
Proceeds from sale of real estate owned and other repossessed assets	556	2,097
Purchase of securities available for sale	(60,636)	(15,872)
Purchase of premises and equipment	(306)	(139)
Net cash (used in) provided by investing activities	(5,778)	1,060
Cash Flows from Financing Activities:
Net increase in deposits	14,919	1,679
Dividends paid on common stock	(247)	(58)
Net decrease in Repo Sweep Accts		(3,183)
Net increase in advances from borrowers	28	18
Advances from FHLB	17,955	47,005
Repayments of advances from FHLB	(19,884)	(48,550)
Net cash provided by (used in) financing activities	12,771	(3,089)
Net Increase in Cash and Cash Equivalents	8,706	14
Cash and Cash Equivalents - Beginning of year	2,766	2,752
Cash and Cash Equivalents - End of year	11,472	2,766
Supplemental Cash Flow and Noncash Information
Net cash paid for income taxes	20
Cash paid for interest on deposits and borrowings	1,076	1,161
Transfer of loans to real estate owned & other repossessed assets	$ 1,562	$ 1,486

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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Gross loans	$ 165,339	$ 138,084
Commercial Real Estate Construction [Member]
Gross loans		173
Commercial Real Estate Construction [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans
Commercial Real Estate Construction [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans
Commercial Real Estate Construction [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans
Commercial Real Estate Construction [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Commercial Real Estate Construction [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans		173
Commercial Real Estate Construction [Member] | Risk Grade 7 (Doubtful) [Member]
Gross loans
Commercial Real Estate Construction [Member] | Risk Grade 8 (Loss) [Member]
Gross loans
Commercial Real Estate Other [Member]
Gross loans		51,726
Commercial Real Estate Other [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans
Commercial Real Estate Other [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans		16,187
Commercial Real Estate Other [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans		27,789
Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans		4,835
Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans		2,915
Commercial Real Estate Other [Member] | Risk Grade 7 (Doubtful) [Member]
Gross loans
Commercial Real Estate Other [Member] | Risk Grade 8 (Loss) [Member]
Gross loans
Commercial Non Real Estate [Member]
Gross loans	19,000	12,451
Commercial Non Real Estate [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans
Commercial Non Real Estate [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans		5,602
Commercial Non Real Estate [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans		6,699
Commercial Non Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans		45
Commercial Non Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans		105
Commercial Non Real Estate [Member] | Risk Grade 7 (Doubtful) [Member]
Gross loans
Commercial Non Real Estate [Member] | Risk Grade 8 (Loss) [Member]
Gross loans
Orginated Loans and Leases [Member]
Gross loans	136,197
Orginated Loans and Leases [Member] | Commercial Real Estate Construction [Member]
Gross loans	1,443
Orginated Loans and Leases [Member] | Commercial Real Estate Construction [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	1,443
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member]
Gross loans	46,308
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans	13,565
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	21,757
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 4 (Acceptable) and Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	3,553
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	6,040
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	1,393
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member]
Gross loans	14,544
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans	31
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans	6,088
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	7,538
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member] | Risk Grade 4 (Acceptable) and Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	252
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	635
Acquired Loans [Member]
Gross loans	29,142
Acquired Loans [Member] | Commercial Real Estate Construction [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 4 (Acceptable) and Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 7 (Doubtful) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 8 (Loss) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Other [Member]
Gross loans	15,950
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans	280
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans	2,696
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	10,905
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 4 (Acceptable) and Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	337
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	1,176
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	547
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 7 (Doubtful) [Member]
Gross loans	9
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 8 (Loss) [Member]
Gross loans
Acquired Loans [Member] | Commercial Non Real Estate [Member]
Gross loans	4,361
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 1 (Excellent) and Grade 2 (Good) [Member]
Gross loans	1,188
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 3 (Satisfactory) [Member]
Gross loans	876
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 4 (Acceptable) [Member]
Gross loans	970
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 4 (Acceptable) and Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	21
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	1,150
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	156
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 7 (Doubtful) [Member]
Gross loans	0
Acquired Loans [Member] | Commercial Non Real Estate [Member] | Risk Grade 8 (Loss) [Member]
Gross loans	$ 0

XML

Off Balance Sheet Risk Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2014

Off Balance Sheet Risk Commitments And Contingencies Tables

Outstanding Commitments to Originate Loans

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk:

	December 31,
	2014		2013
Commitments to grant loans	$	9,020	$	5,936
Unfunded commitments under lines of credit		15,022		12,940
Commercial and standby letters of credit		134		59

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Property and Equipment (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Property And Equipment Details Narrative
Depreciation expense	$ 337	$ 283

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Parent-Only Financial Statements

12 Months Ended

Dec. 31, 2014

Parent-Only Financial Statements

Parent-Only Financial Statements

Note 16 - Parent-Only Financial Statements

The following represents the condensed financial statements of First Federal of Northern Michigan Bancorp, Inc. (“Parent”) only. The Parent-only financial information should be read in conjunction with the Company’s consolidated financial statements.

Condensed parent company financial statements, which include transactions with the subsidiary, are as follows (000s omitted):

	December 31,
	2014		2013
Assets
Cash at subsidiary bank	$	481	$	510
Investment in subsidiary		29,731		22,701
Deferred tax asset		318		318
Other assets		6		1
Total assets	$	30,536	$	23,530
Liabilities and Stockholders’ Equity
Liabilities	$	—	$	5
Stockholders’ equity		30,536		23,525
Total liabilities and stockholders’ equity	$	30,536	$	23,530

	December 31,
	2014			2013
Operating income	$	—		$	—
Dividend income		500			—
Operating expense		(271	)		(249	)
Income (Loss) before income taxes and equity in undistributed net income of subsidiary bank		229			(249	)
Income tax benefit		—			—
Income (Loss) before equity in undistributed loss of subsidiary bank		229			(249	)
Equity in undistributed net income of subsidiary bank		2,020			304
Net income	$	2,249		$	55

Statements of Operations:

	December 31,
	2014			2013
Cash Flows from Operating Activities
Net income	$	2,249		$	55
Adjustments to reconcile net income to net cash from operating activities:
Dividend from subsidiary bank	$	500
Stock options/awards		—			—
Equity in undistributed net income of subsidiary bank		(2,520	)		(304	)
Net change in other liabilities		(6	)		1
Net change in other assets		(5	)		(1	)
Cash Flows from Financing Activities
Dividends paid		(247	)		(58	)
Net cash used in operating activities		(2,278	)		(362	)
Net Decrease in Cash		(29	)		(307	)
Cash - Beginning of year		510			817
Cash - End of year	$	481		$	510

XML

Stockholders' Equity (Tables)

12 Months Ended

Dec. 31, 2014

Stockholders Equity Tables

Schedule of regulatory compliance

As part of the new rules there are several provisions affecting the Company, such as the implementation of a new common tier ratio, the start of a capital conservation buffer, and increased prompt corrective action capital adequacy thresholds.

	Actual					For Capital Adequacy Purposes					To be Categorized as Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
December 31, 2014
Total capital (to risk-weighted assets)	$	29,092		16.9	%	$	13,778		8.0	%	$	17,223		10.0	%
Tier 1 capital (to risk-weighted assets)	$	27,662		16.1	%	$	6,889		4.0	%	$	10,334		6.0	%
Tangible capital (to tangible assets)	$	27,662		8.5	%	$	4,858		1.5	%	$	6,477		2.0	%
December 31, 2013
Total capital (to risk-weighted assets)	$	24,033		17.9	%	$	10,748		8.0	%	$	13,436		10.0	%
Tier 1 capital (to risk-weighted assets)	$	22,563		16.8	%	$	5,374		4.0	%	$	8,061		6.0	%
Tangible capital (to tangible assets)	$	22,563		10.8	%	$	3,137		1.5	%	$	4,183		2.0	%

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2014

Summary Of Significant Accounting Policies Policies

Nature Of Operation

Nature of Operations – First Federal of Northern Michigan Bancorp, Inc. (the “Company”) and its subsidiary, First Federal of Northern Michigan (the “Bank”), conduct operations in the northeastern lower peninsula of Michigan. The Company’s primary services include accepting deposits, making commercial, consumer and mortgage loans, and engaging in mortgage banking activities.

Principles of Consolidation

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 subsidiary, Financial Services & Mortgage Corporation (“FSMC”). FSMC invested in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The 2014 activity of FFNM Agency, Inc. was to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to an outside party and, to a lesser extent, the collection of commissions for the sale of non-insured investment products. The final override commission payment was collected in April of 2014 and as a result, this subsidiary was dissolved as of December 31, 2014. All significant intercompany balances and transactions have been eliminated in the consolidation.

Use of Estimates

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease loss (“ALLL”), the valuation of investment securities, intangible and deferred tax assets, and mortgage servicing rights.

Significant Group Concentrations of Credit Risk

Significant Concentrations of Credit Risk - Most of the Company’s activities are with customers located within the northeastern lower peninsula of Michigan. Note 3 discusses the types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.

Cash and Cash Equivalents

Cash and Cash Equivalents - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions and federal funds sold and interest bearing deposits in other depository institutions which mature within ninety days when purchased.

Securities

Securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. When evaluating investment securities consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether another-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but the entity does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

Federal Home Loan Bank Stock

Federal Home Loan Bank Stock – Federal Home Loan Bank (FHLB) Stock is carried at cost and is held to allow the Bank to conduct business with the entity. Federal Home Loan Bank sells and purchases its stock at par; therefore cost approximates fair market value.

Mortgage Banking Activities

Mortgage Banking Activities – The Company routinely sells to investors its originated long-term residential fixed-rate mortgage loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2014 and 2013.

The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The fair value of forward contracts was insignificant at December 31, 2014 and 2013.

Loans

Originated Loans - The Company grants mortgage, commercial, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the ALLL, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual life of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected, for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans Acquired in a Business Combination

Loans Acquired in a Business Combination – Loans acquired in a business combination (acquired loans) consist of loans acquired on August 8, 2014 in the merger with Bank of Alpena. Acquired loans are recorded at fair value as of the acquisition date without a carryover of the associated allowance for loan losses related to these loans, through a fair value discount that was, in part, attributed to credit quality. The estimate of the expected credit losses was determined based on due diligence performed by executive and senior management of the Company. The fair value discount was recorded as a reduction to the acquired loans’ outstanding principal balance in the consolidated financial statements on the merger date.

The Company accounts for acquired loans, which are recorded at fair value at acquisition, in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30). Under the provisions of ASC 310-30, the Company evaluated each loan individually and determined that loans with an outstanding principal balance of $5.9 million exhibited deteriorated credit quality, and therefore, met the criteria set forth in ASC 310-30. None of the loans acquired were classified as debt securities.

In accordance with ASC 310-30 with Company elected to evaluate each loan individually for expected future cash flows. Loans will be removed from the acquired loan segment in the event of sale, foreclosure, pay off or being written off as uncollectable. The Company estimates the cash flow to be collected over the remaining life of the loan on a quarterly basis based on a set of assumptions including expectations as to default rates, prepayment rates, and expected loss rates. The Company makes numerous assumptions, interpretations and judgments using internal and third-party credit quality information when determining the probability of collecting all contractual required payments. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.

The calculation of the fair value of the acquired loans entails estimating the amount and timing of cash flows attributable to both principal and interest expected to be collected on each individual loan, and then discounting those cash flows at a market interest rate. The excess of a loan’s expected cash flow at the acquisition date over its estimated fair value is commonly referred to as “accretable yield”, which is recognized into interest income over the remaining life of the loan on a level-yield basis. The difference between an individual loan’s contractual required principal and interest as of the merger date and the expected cash flows as of the same date is commonly referred to as “nonaccretable difference”, which includes an estimate of future credit losses expected to be incurred over the remaining life of the loan and interest payments that are not expected to be collected. A decrease to the expected cash flows of a loan in subsequent periods will require the Company to record a provision for loan loss. Improvements to expected cash flows of a loan in subsequent periods will result in reversing a portion of the nonaccretable difference, which is then classified as a part of the accretable yield and subsequently recognized into interest income over the estimated remaining life of the loan. A loan will be removed from the acquired loan segment through any one of the following avenues, foreclosed, paid off or written off.

Allowance for Loan and Lease Losses (ALLL)

Allowance for Loan and Lease Losses (ALLL) - The ALLL is established as losses are estimated to have occurred 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 ALLL is evaluated on a regular basis by management and is based on management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. The Company does not separately identify individual consumer and residential loans for impairment disclosures until a loss is imminent.

Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is experiencing financial difficulties and (b) the Company granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.

Loan Servicing

Loan Servicing – Servicing assets are recognized as separate assets when rights are retained through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income using market based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the capitalized amount for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other-than-temporary impairment results in a permanent reduction to the carrying value of the servicing asset. Servicing income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Foreclosed Assets (Including Other Real Estate Owned)

Foreclosed Assets (Including Other Real Estate Owned) - Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. Foreclosed real estate is classified as other real estate owned. The net income from operations of foreclosed real estate held for sale is reported in non-interest income.

Property and Equipment

Property and Equipment - These assets are recorded at cost, less accumulated depreciation. The Bank uses the straight-line method of recording depreciation for financial reporting. The depreciable lives used by the Company are: land improvements 7-10 years, buildings 7-40 years and equipment 3-10 years. Maintenance and repairs are charged to expense and improvements are capitalized.

Bank Owned Life Insurance

Bank Owned Life Insurance - The Bank has purchased life insurance policies on certain key officers. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Intangible Assets

Intangible Assets – The Company has in the past purchased one or more branches from other financial institutions. The analysis of these branch acquisitions led the Company to conclude that in each case, we acquired a business and therefore, the purchase price generally includes the intangible value of the depositor relationships acquired, referred to as core deposit intangible assets. The expected life for core deposit intangible asset is based on the type of products acquired. The amortization periods range from 10 to 15 years and are based on the expected life of the products and relationships. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangible assets, related to branch purchases, were amortized on a straight line basis.

In conjunction with the merger with Bank of Alpena, the Company established a $1.4 million core deposit intangible asset. This intangible asset is being amortized over a 10 year period on an accelerated basis. The core deposit intangible is analyzed quarterly for impairment.

On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock of the InsuranCenter of Alpena (ICA).

On February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena.

At the time of the sale, goodwill of $600 continued to be recorded relating to certain assets of the Company that were not sold in the sale of ICA. The assets retained relate to a future stream of commissions. Management computed an estimated cash flow on this commission using a 6.0% discount rate and determined a fair value of $600. Since the $600 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009. Pursuant to the agreement, the Company received the final override commission payment in April, 2014.

Income Taxes

Income Taxes - Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

At December 31, 2014 and 2013, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2014 and 2013 a valuation allowance of $3.1 million and $3.2 million was recorded, respectively.

The net deferred tax asset recorded at December 31, 2014 and 2013 was $851 and $799. See Note 10 for additional information.

Off Balance Sheet Instruments

Off Balance Sheet Instruments - In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. For letters of credit, a liability is recorded for the fair value of the obligation undertaken in issuing the guarantee.

Comprehensive Income

Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the consolidated statement of financial condition. Such items, along with net income, are components of comprehensive income.

Accumulated other comprehensive income consists solely of unrealized gains and losses on available for sale securities, reported net of tax of $222 and ($83) at December 31, 2014 and December 31, 2013, respectively.

Stock-Based Compensation

Stock-Based Compensation – The Company’s stock based compensation plans are described in detail in Note 12 (Employee Benefit Plans). Compensation expense is recognized for stock options and unvested (restricted) stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common shares at the date of grant is used to estimate the fair value of unvested (restricted) stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the unvested period for nonvested (restricted) stock awards. Certain of theCompany’s share-based awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.

The Company granted no options in 2014 and 2013. Compensation costs related to stock options charged to earnings were $0 in 2014 and 2013, respectively.

Earnings Per Common Share

Earnings Per Common Share – Basic earnings per common share is computed by dividing net income by the average number of common shares outstanding during the period. The Company uses the treasury stock method to compute diluted earnings per share, which assumes that proceeds from the assumed exercise of stock options would be used to purchase common stock at the average market price during the period. As of December 31, 2014, 136,030 options were not considered dilutive, due to the fact that the option price exceeded the fair value of the shares.

Earnings per common share have been computed based on the following:

	December 31,
	2014		2013
Net income	$	2,249	$	55
Average number of common shares outstanding		3,218,926		2,884,049
Effect of dilutive options		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		3,218,926		2,884,049

Recent Accounting Pronouncements

Recent Accounting Pronouncements - The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 does not apply to financial instruments. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2016 (therefore, for the year ending December 31, 2017 for the Company). Early implementation is not allowed for public companies. Management is currently assessing the impact to the Company’s consolidated financial statements.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU is effective for public entities for reporting beginning after December 15, 2014 (therefore, for the year ending December 31, 2015 for the Company). The ASU can be adopted using either a modified retrospective transition method or a prospective transition method. Adoption of this update is not expected to have a material effect on the consolidated financial statements.

XML

Servicing (Details)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Servicing Details
Annual constant prepayment speed (CPR)	11.46%	10.27%
Weighted average life	244 months	244 months
Discount rate	9.38%	9.26%

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2014

Summary Of Significant Accounting Policies

Summary of Significant Accounting Policies

Note 1 - Summary of Significant Accounting Policies

Nature of Operations – First Federal of Northern Michigan Bancorp, Inc. (the “Company”) and its subsidiary, First Federal of Northern Michigan (the “Bank”), conduct operations in the northeastern lower peninsula of Michigan. The Company’s primary services include accepting deposits, making commercial, consumer and mortgage loans, and engaging in mortgage banking activities.

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 subsidiary, Financial Services & Mortgage Corporation (“FSMC”). FSMC invested in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The 2014 activity of FFNM Agency, Inc. was to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to an outside party and, to a lesser extent, the collection of commissions for the sale of non-insured investment products. The final override commission payment was collected in April of 2014 and as a result, this subsidiary was dissolved as of December 31, 2014. All significant intercompany balances and transactions have been eliminated in the consolidation.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease loss (“ALLL”), the valuation of investment securities, intangible and deferred tax assets, and mortgage servicing rights.

Significant Concentrations of Credit Risk - Most of the Company’s activities are with customers located within the northeastern lower peninsula of Michigan. Note 3 discusses the types of securities in which the Company invests. Note 4 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.

Cash and Cash Equivalents - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions and federal funds sold and interest bearing deposits in other depository institutions which mature within ninety days when purchased.

Securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. When evaluating investment securities consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether another-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but the entity does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.

Federal Home Loan Bank Stock – Federal Home Loan Bank (FHLB) Stock is carried at cost and is held to allow the Bank to conduct business with the entity. Federal Home Loan Bank sells and purchases its stock at par; therefore cost approximates fair market value.

Mortgage Banking Activities – The Company routinely sells to investors its originated long-term residential fixed-rate mortgage loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2014 and 2013.

The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The fair value of forward contracts was insignificant at December 31, 2014 and 2013.

Originated Loans - The Company grants mortgage, commercial, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the ALLL, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual life of the loan.

The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected, for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans Acquired in a Business Combination – Loans acquired in a business combination (acquired loans) consist of loans acquired on August 8, 2014 in the merger with Bank of Alpena. Acquired loans are recorded at fair value as of the acquisition date without a carryover of the associated allowance for loan losses related to these loans, through a fair value discount that was, in part, attributed to credit quality. The estimate of the expected credit losses was determined based on due diligence performed by executive and senior management of the Company. The fair value discount was recorded as a reduction to the acquired loans’ outstanding principal balance in the consolidated financial statements on the merger date.

The Company accounts for acquired loans, which are recorded at fair value at acquisition, in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC 310-30). Under the provisions of ASC 310-30, the Company evaluated each loan individually and determined that loans with an outstanding principal balance of $5.9 million exhibited deteriorated credit quality, and therefore, met the criteria set forth in ASC 310-30. None of the loans acquired were classified as debt securities.

In accordance with ASC 310-30 with Company elected to evaluate each loan individually for expected future cash flows. Loans will be removed from the acquired loan segment in the event of sale, foreclosure, pay off or being written off as uncollectable. The Company estimates the cash flow to be collected over the remaining life of the loan on a quarterly basis based on a set of assumptions including expectations as to default rates, prepayment rates, and expected loss rates. The Company makes numerous assumptions, interpretations and judgments using internal and third-party credit quality information when determining the probability of collecting all contractual required payments. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved.

The calculation of the fair value of the acquired loans entails estimating the amount and timing of cash flows attributable to both principal and interest expected to be collected on each individual loan, and then discounting those cash flows at a market interest rate. The excess of a loan’s expected cash flow at the acquisition date over its estimated fair value is commonly referred to as “accretable yield”, which is recognized into interest income over the remaining life of the loan on a level-yield basis. The difference between an individual loan’s contractual required principal and interest as of the merger date and the expected cash flows as of the same date is commonly referred to as “nonaccretable difference”, which includes an estimate of future credit losses expected to be incurred over the remaining life of the loan and interest payments that are not expected to be collected. A decrease to the expected cash flows of a loan in subsequent periods will require the Company to record a provision for loan loss. Improvements to expected cash flows of a loan in subsequent periods will result in reversing a portion of the nonaccretable difference, which is then classified as a part of the accretable yield and subsequently recognized into interest income over the estimated remaining life of the loan. A loan will be removed from the acquired loan segment through any one of the following avenues, foreclosed, paid off or written off.

Allowance for Loan and Lease Losses (ALLL) - The ALLL is established as losses are estimated to have occurred 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 ALLL is evaluated on a regular basis by management and is based on management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. The Company does not separately identify individual consumer and residential loans for impairment disclosures until a loss is imminent.

Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as a Troubled Debt Restructure (TDR). A loan is a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying or renewing a loan that the Company would not otherwise consider. To make this determination, the Company must determine whether (a) the borrower is experiencing financial difficulties and (b) the Company granted the borrower a concession. This determination requires consideration of all of the facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties.

Loan Servicing – Servicing assets are recognized as separate assets when rights are retained through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income using market based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the capitalized amount for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other-than-temporary impairment results in a permanent reduction to the carrying value of the servicing asset. Servicing income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Foreclosed Assets (Including Other Real Estate Owned) - Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. Foreclosed real estate is classified as other real estate owned. The net income from operations of foreclosed real estate held for sale is reported in non-interest income.

Property and Equipment - These assets are recorded at cost, less accumulated depreciation. The Bank uses the straight-line method of recording depreciation for financial reporting. The depreciable lives used by the Company are: land improvements 7-10 years, buildings 7-40 years and equipment 3-10 years. Maintenance and repairs are charged to expense and improvements are capitalized.

Bank Owned Life Insurance - The Bank has purchased life insurance policies on certain key officers. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Intangible Assets – The Company has in the past purchased one or more branches from other financial institutions. The analysis of these branch acquisitions led the Company to conclude that in each case, we acquired a business and therefore, the purchase price generally includes the intangible value of the depositor relationships acquired, referred to as core deposit intangible assets. The expected life for core deposit intangible asset is based on the type of products acquired. The amortization periods range from 10 to 15 years and are based on the expected life of the products and relationships. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangible assets, related to branch purchases, were amortized on a straight line basis.

In conjunction with the merger with Bank of Alpena, the Company established a $1.4 million core deposit intangible asset. This intangible asset is being amortized over a 10 year period on an accelerated basis. The core deposit intangible is analyzed quarterly for impairment.

On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock of the InsuranCenter of Alpena (ICA).

On February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena.

At the time of the sale, goodwill of $600 continued to be recorded relating to certain assets of the Company that were not sold in the sale of ICA. The assets retained relate to a future stream of commissions. Management computed an estimated cash flow on this commission using a 6.0% discount rate and determined a fair value of $600. Since the $600 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009. Pursuant to the agreement, the Company received the final override commission payment in April, 2014.

Income Taxes - Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.

At December 31, 2014 and 2013, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2014 and 2013 a valuation allowance of $3.1 million and $3.2 million was recorded, respectively.

The net deferred tax asset recorded at December 31, 2014 and 2013 was $851 and $799. See Note 10 for additional information.

Off Balance Sheet Instruments - In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. For letters of credit, a liability is recorded for the fair value of the obligation undertaken in issuing the guarantee.

Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the consolidated statement of financial condition. Such items, along with net income, are components of comprehensive income.

Accumulated other comprehensive income consists solely of unrealized gains and losses on available for sale securities, reported net of tax of $222 and ($83) at December 31, 2014 and December 31, 2013, respectively.

Stock-Based Compensation – The Company’s stock based compensation plans are described in detail in Note 12 (Employee Benefit Plans). Compensation expense is recognized for stock options and unvested (restricted) stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common shares at the date of grant is used to estimate the fair value of unvested (restricted) stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock option awards and as the unvested period for nonvested (restricted) stock awards. Certain of theCompany’s share-based awards contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period.

The Company granted no options in 2014 and 2013. Compensation costs related to stock options charged to earnings were $0 in 2014 and 2013, respectively.

Earnings Per Common Share – Basic earnings per common share is computed by dividing net income by the average number of common shares outstanding during the period. The Company uses the treasury stock method to compute diluted earnings per share, which assumes that proceeds from the assumed exercise of stock options would be used to purchase common stock at the average market price during the period. As of December 31, 2014, 136,030 options were not considered dilutive, due to the fact that the option price exceeded the fair value of the shares.

Earnings per common share have been computed based on the following:

	December 31,
	2014		2013
Net income	$	2,249	$	55
Average number of common shares outstanding		3,218,926		2,884,049
Effect of dilutive options		—		—
Average number of common shares outstanding used to calculate diluted earnings per common share		3,218,926		2,884,049

Recent Accounting Pronouncements - The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 does not apply to financial instruments. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2016 (therefore, for the year ending December 31, 2017 for the Company). Early implementation is not allowed for public companies. Management is currently assessing the impact to the Company’s consolidated financial statements.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU is effective for public entities for reporting beginning after December 15, 2014 (therefore, for the year ending December 31, 2015 for the Company). The ASU can be adopted using either a modified retrospective transition method or a prospective transition method. Adoption of this update is not expected to have a material effect on the consolidated financial statements.

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Consolidated Balance Sheet (Parenthetical) (USD $)	Dec. 31, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Common stock, par value per share	$ 0.01	$ 0.01
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	4,034,764	3,191,799
Common stock, shares oustanding	4,034,764	3,191,799
Treasury stock, shares	307,750	307,750

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Off Balance Sheet Risk Commitments and Contingencies

12 Months Ended

Dec. 31, 2014

Off Balance Sheet Risk Commitments And Contingencies

Off Balance Sheet Risk Commitments and Contingencies

Note 11 – Off-Balance Sheet Risk Commitments and Contingencies

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, standby letters of credit, and commercial letters of credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk:

	December 31,
	2014		2013
Commitments to grant loans	$	9,020	$	5,936
Unfunded commitments under lines of credit		15,022		12,940
Commercial and standby letters of credit		134		59

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. In most cases, these lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. Fees earned on commercial and standby letters of credit are required to be deferred over the contractual life of the letter of credit. The Company determined that the fair value of guarantees on standby letters of credit has an immaterial effect on the financial results at December 31, 2014 and 2013.

To reduce credit risk related to the use of credit-related financial instruments, the Company generally holds collateral supporting those commitments if deemed necessary. The amount and nature of the collateral obtained is based on the Company’s credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and real estate.

If the counterparty does not have the right and ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it.

Various legal claims also arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s financial statements.

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Quarterly Results of Operations (Unaudited) (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Quarterly Results Of Operations Details
Total interest income	$ 2,643	$ 2,387	$ 2,025	$ 2,045	$ 2,074	$ 2,065	$ 2,095	$ 2,085	$ 9,100	$ 8,319
Total interest expense	304	270	259	249	270	274	285	321	1,082	1,150
Net Interest Income - Before provision for loan losses	2,339	2,117	1,766	1,796	1,804	1,791	1,810	1,764	8,018	7,169
Provision for Loan Losses (Note 4)	11	257		16	265	32	196	144	284	637
Total other income	574	2,224	344	336	401	459	465	440	3,478	1,765
Total operating expenses	2,582	2,470	2,016	1,895	2,132	2,036	2,082	1,992	8,963	8,242
Income (Loss) - before income tax expense	320	1,614	94	221	(192)	182	(3)	68	2,249	55
Income tax expense (Note 9)
Net income (loss)	$ 320	$ 1,614	$ 94	$ 221	$ (192)	$ 182	$ (3)	$ 68	$ 2,249	$ 55
Net Income per share - Basic	$ 0.11	$ 0.48	$ 0.03	$ 0.08	$ (0.07)	$ 0.06		$ 0.02	$ 0.7	$ 0.02
Net income per share - diluted	$ 0.11	$ 0.48	$ 0.03	$ 0.08	$ (0.07)	$ 0.06		$ 0.02	$ 0.7	$ 0.02
Weighted Average Number of Shares	3,019	3,370	2,884	2,884	2,884	2,884	2,884	2,884
Dividends per common share	$ 0.02	$ 0.02	$ 0.02	$ 0.02	$ 0.02				$ 0.08	$ 0.02

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Parent-Only Financial Statements (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Income (loss) before income taxes and equity in undistributed net income of subsidiary bank	$ 320	$ 1,614	$ 94	$ 221	$ (192)	$ 182	$ (3)	$ 68	$ 2,249	$ 55
Income tax expense
Net income	320	1,614	94	221	(192)	182	(3)	68	2,249	55
Parent Company [Member]
Operating income
Dividend income									500
Operating expense									(271)	(249)
Income (loss) before income taxes and equity in undistributed net income of subsidiary bank									229	(249)
Income tax expense
Income (loss) before equity in undistributed loss of subsidiary bank									229	(249)
Equity in undistributed net income (loss) of subsidiary bank									2,020	304
Net income									$ 2,249	$ 55

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Document and Entity Information (USD $) In Thousands, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Mar. 30, 2015	Jun. 30, 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
Entity a Well-known Seasoned Issuer	No
Entity a Voluntary Filer	No
Entity's Reporting Status Current	Yes
Document Type	10-K
Document Period End Date	Dec. 31, 2014
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2013
Trading Symbol	FFNM
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		4,034,764
Entity Public Float			$ 15,400

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Stockholders' Equity

12 Months Ended

Dec. 31, 2014

Stockholders' Equity (Note 12)

Stockholders' Equity

Note 12 - Stockholders’ Equity

Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitation on payment of dividends, the Bank’s results of operations and financialcondition, tax considerations, and general economic conditions.

The Bank is subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency (OCC). Failure to meet certain capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk-weightings, and other factors.

During the most recent regulatory examination, the OCC categorized the Bank as “well-capitalized” per definition of 12 CFR Section 565.4(b)(1). To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, tier 1 risk based, and tangible equity ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s categorization. Consolidated data has not been disclosed as the amounts and ratios are not significantly different.

In 2013 the federal banking agencies issued revisions to the existing capital rules to incorporate certain changes to the Basel capital framework, including Basel III and other elements. The intent is to strengthen the definition of regulatory capital, increase risk-based capital requirements, and make selected changes to the calculation of risk-weighted assets. Beginning January 1, 2015, banks transitioned to the new rules and will report results with the first call report of 2015. As part of the new rules there are several provisions affecting the Company, such as the implementation of a new common tier ratio, the start of a capital conservation buffer, and increased prompt corrective action capital adequacy thresholds.

	Actual					For Capital Adequacy Purposes					To be Categorized as Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
December 31, 2014
Total capital (to risk-weighted assets)	$	29,092		16.9	%	$	13,778		8.0	%	$	17,223		10.0	%
Tier 1 capital (to risk-weighted assets)	$	27,662		16.1	%	$	6,889		4.0	%	$	10,334		6.0	%
Tangible capital (to tangible assets)	$	27,662		8.5	%	$	4,858		1.5	%	$	6,477		2.0	%
December 31, 2013
Total capital (to risk-weighted assets)	$	24,033		17.9	%	$	10,748		8.0	%	$	13,436		10.0	%
Tier 1 capital (to risk-weighted assets)	$	22,563		16.8	%	$	5,374		4.0	%	$	8,061		6.0	%
Tangible capital (to tangible assets)	$	22,563		10.8	%	$	3,137		1.5	%	$	4,183		2.0	%

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Federal Income Tax (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Federal Income Tax Details
Current provision
Deferred benefit									807	(57)
Change in valuation allowance									(807)	57
Income tax expense

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Parent-Only Financial Statements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
ASSETS
Cash at subsidiary bank	$ 267	$ 6
Deferred tax asset	851	799
Other assets	685	485
Total assets	325,867	209,657
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities	295,331	186,132
Stockholders' equity	30,536	23,525	24,435
Total liabilities and stockholders' equity	325,867	209,657
Parent Company [Member]
ASSETS
Cash at subsidiary bank	481	510
Investment in subsidiary	29,731	22,701
Deferred tax asset	318	318
Other assets	6	1
Total assets	30,536	23,530
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities		5
Stockholders' equity	30,536	23,525
Total liabilities and stockholders' equity	$ 30,536	$ 23,530

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Consolidated Statement of Operations and Comprehensive Income (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Interest income:
Loans, including fees	$ 7,394	$ 7,203
Investments
Taxable	781	484
Tax-exempt	158	151
Mortgage-backed securities	767	481
Total interest income	9,100	8,319
Interest expense:
Deposits (Note 8)	818	826
Borrowings	264	324
Total interest expense	1,082	1,150
Net Interest Income - Before provision for loan losses	8,018	7,169
Provision for Loan Losses (Note 4)	284	637
Net Interest Income - After provision for loan losses	7,734	6,532
Other Income
Service charges and other fees	807	857
Net loss on sale of investments	(4)
Net gain on sale of loans	206	235
Net (loss) gain on sale of real estate owned and other repossessed assets	(76)	3
Loan servicing fees	266	350
Insurance and brokerage commissions	117	126
Bargain purchase gain (Note 2)	1,982
Other	180	194
Total other income	3,478	1,765
Operating Expenses
Compensation and employee benefits (Note 13)	4,961	4,654
FDIC Insurance Premiums	207	184
Amortization of intangible assets	146	119
Advertising	183	130
Occupancy and equipment	1,032	911
Data processing service bureau	345	301
Professional fees	393	427
Collection activity	68	153
Real estate owned & other repossessed assets	272	245
Merger related expenses	266	83
Other	1,090	1,035
Total operating expenses	8,963	8,242
Income - before income tax expense	2,249	55
Income tax expense (Note 10)
Net income	2,249	55
Other Comprehensive Income (Loss):
Unrealized gain (loss) on securities available for sale - net of tax	594	(907)
Reclassification adjustment for losses realized in earnings - net of tax	(3)
Comprehensive Income (Loss)	$ 2,840	$ (852)
Net income per share
Basic (in dollars per share)	$ 0.7	$ 0.02
Diluted (in dollars per share)	$ 0.7	$ 0.02
Dividends per common share (in dollars per share)	$ 0.08	$ 0.02

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Servicing

12 Months Ended

Dec. 31, 2014

Servicing

Servicing

Note 6 – Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage and other loans serviced for others were approximately $125.4 million and $131.7 million at December 31, 2014 and 2013, respectively. The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:

	December 31,
	2014			2013
Annual constant prepayment speed (CPR)		11.46	%		10.27	%
Weighted average life (in months)		244			244
Discount rate		9.38	%		9.26	%

The fair value of our mortgage servicing rights was estimated to be $1.0 million and $1.1 million at December 31, 2014 and December 31, 2013, respectively. At December 31, 2012 a valuation allowance of $19 was established against the mortgage servicing rights associated with our 20-year fixed-rate sold loans. Based on decreased prepayment speeds within the 20-year fixed rate tranche, the valuation allowance was removed in 2013.

The following table summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:

	December 31,
	2014			2013
Balance - beginning of period:	$	860		$	1,035
Originated mortgage servicing rights capitalized		111			151
Amortization of mortgage servicing rights		(261	)		(326	)
Balance - end of period		710			860
Valuation allowances:
Balance - beginning of period		—			(19	)
Reductions		—			19
Balance - end of period (net of allowances)	$	710		$	860

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Property and Equipment

12 Months Ended

Dec. 31, 2014

Property And Equipment

Property and Equipment

Note 5 - Property and Equipment

A summary of property and equipment is as follows:

	December 31,
	2014		2013
Land	$	1,271	$	1,071
Land improvements		195		182
Buildings		7,058		6,237
Equipment		3,959		3,523
Total property and equipment		12,483		11,013
Accumulated depreciation		6,147		5,810
Net property and equipment	$	6,336	$	5,203

Depreciation expense was $337 and $283 for the periods ended December 31, 2014 and 2013, respectively.

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Quarterly Results of Operations (Unaudited)

12 Months Ended

Dec. 31, 2014

Quarterly Results Of Operations

Quarterly Results of Operations (Unaudited)

Note 17 - Quarterly Results of Operations (Unaudited)

The following tables summarize the Company’s quarterly results for the fiscal years ended December 31, 2014 and 2013:

	For the Three-Month Period Ending
	March 31, 2014		June 30, 2014		September 30, 2014		December 31, 2014
Interest income	$	2,045	$	2,025	$	2,387	$	2,643
Interest expense		249		259		270		304
Net interest income		1,796		1,766		2,117		2,339
Provision for loan losses		16		—		257		11
Other income		336		344		2,224		574
Other expenses		1,895		2,016		2,470		2,582
Income - before income tax expense		221		94		1,614		320
Income tax expense		—		—		—		—
Net income	$	221	$	94	$	1,614	$	320
Net income per share
Basic	$	0.08	$	0.03	$	0.48	$	0.11
Diluted	$	0.08	$	0.03	$	0.48	$	0.11
Weighted average number of shares outstanding - basic and dilutive		2,884		2,884		3,370		3,019
Cash dividends declared per common share	$	0.020	$	0.020	$	0.020	$	0.020

	For the Three-Month Period Ending
	March 31, 2013		June 30, 2013			September 30, 2013		December 31, 2013
Interest income	$	2,085	$	2,095		$	2,065	$	2,074
Interest expense		321		285			274		270
Net interest income		1,764		1,810			1,791		1,804
Provision for loan losses		144		196			32		265
Other income		440		465			459		401
Other expenses		1,992		2,082			2,036		2,132
Income (loss) - before income tax expense (benefit)		68		(3	)		182		(192	)
Income tax expense		—		—			—		—
Net income (loss)	$	68	$	(3	)	$	182	$	(192	)
Net income (loss) per share
Basic	$	0.02	$	—		$	0.06	$	(0.07	)
Diluted	$	0.02	$	—		$	0.06	$	(0.07	)
Weighted average number of shares outstanding - basic and dilutive		2,884		2,884			2,884		2,884
Cash dividends declared per common share	$	—	$	—		$	—	$	0.020

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2014

Employee Benefit Plans

Employee Benefit Plans

Note 13 - Employee Benefit Plan

Defined Benefit Pension Plan

The Bank is a participant in the multiemployer Financial Institutions Retirement Fund (FIRF or the “Plan”), which covers substantially all of its officers and employees. The defined benefit plan covers all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. Normal retirement age is 65, with reduced benefits available at age 55. The Bank’s contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank’s portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. Effective July 1, 2005 the plan was frozen as to current participants and any new employees hired after July 1, 2004 were excluded from the plan. The expense of the Plan allocated to the Bank was $103 and $72 for the years ended December 31, 2014 and 2013, respectively.

401(k) Savings Plan

The Bank has a 401(k) savings plan covering substantially all of its employees who meet certain age and service requirements. Contributions to the plan by the Bank are discretionary in nature in such amounts determined by the Board of Directors. The expense under the plan for the years ended December 31, 2014 and 2013 was $96 and $89, respectively.

Nonqualified Deferred Compensation Plan

The Bank has a nonqualified deferred compensation plan for certain ofits directors. Through 1998, each eligibledirector could voluntarily defer all or part of his or her director’s fees to participate in the program. The plan is currently unfunded and amounts deferred are unsecured and remain subject to claims of the Bank’s general creditors.

Directors are paid once they reach normal retirement age or sooner for reason of death, total disability, or termination. The Bank may terminate the plan at any time. The amount recorded under the plan totaled approximately $738 and $801 at December 31, 2014 and 2013, respectively. The expense under the plan for the years ended December 31, 2014 and 2013 was $73 and $78, respectively.

Employee Stock Ownership Plan

Effective January 1, 1994, the Bank implemented an employee stock ownership plan (ESOP). The ESOP covers substantially all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. To fund the ESOP, the Bank borrowed $480 from an outside party to purchase 48,000 shares of the Company’s common stock at $10 per share. The ESOP note was payable quarterly with interest at the prime rate and was retired in 1999. All of the 1994 shares were allocated as of December 31, 1999. Compensation expense is measured by the fair value of ESOP shares allocated to participants during a fiscal year.

Pursuant to the 2005 second-step conversion and stock offering, the shareholders of the Company approved the purchase of 8% of shares sold in the stock offering by the ESOP. The Company provided a loan to the ESOP, which was used to purchase 138,709 shares of the Company’s common stock in the stock offering at $10 per share. The loan bore interest at a rate equal to the current prime rate, adjustable on January 1 of each year and provided for repayment of principal over the 15 year term of the loan. Since the Company provided the loan to the ESOP, the note receivable was not included in the Company’s balance sheet. Accordingly, the Company did not recognize interest income on the loan.

The Company made annual contributions to the ESOP sufficient to support the debt service of the loan. The loan was secured by the shares purchased, which were held in a suspense account for allocation among the participants as the loan is paid. Dividends paid on unallocated shares were not considered dividends for financial reporting purposes and were used to pay principal and interest on the ESOP loan. Dividends on allocated shares are charged to retained earnings.

The loan was paid in full as of December 31, 2009.

Compensation expense is recognized for the ESOP equal to the average fair value of shares committed to be released for allocation to participant accounts. Any difference between the average fair value of shares committed to be released for allocation and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). During the years ended December 31, 2014 and 2013, respectively, 0 and 2,793 shares were sold into the open market and no shares were purchased from the open market. Total compensation expense was $0 for both the years ended December 31, 2014 and 2013.

As of December 31, 2014 this benefit plan was terminated and funds have been distributed to the participants or rolled over into an individual retirement accounts (IRA) or the 401(k) plan savings plan.

Stock-Based Compensation Plans

The Company’s 1996 Stock Option Plan (the “1996 Plan”), which was approved by shareholders, permits the grant of stock options to its directors and employees for up to 127,491 shares of common stock (retroactively 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). Shares issued under the Plan and exercised pursuant to the exercise of the stock option plan 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 years ended December 31, 2014 and 2013 is presented below:

Options	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		167,620		$	9.53		3.38		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or Expired		(17,590	)	$	9.60
Outstanding at December 31, 2013		150,030		$	9.52		2.40		—
Granted		—		$	0.00
Exercised		—		$	0.00
Forfeited or expired		(14,000	)	$	9.30
Oustanding at December 31, 2014		136,030		$	9.54		1.40		—
Options Exercisable at December 31, 2014		136,030		$	9.54		1.40		—

There were 63,256 shares available for future granting of options as of December 31, 2014.

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 $5.49 on December 31, 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 December 31, 2014. The amount changes based on the fair market value of the stock. This value was $0.00 at both December 31, 2014 and 2013. The exercise prices for the stock options range from $9.07 to $9.65 per share.

As of December 31, 2014, the total compensation cost of the Plans was fully recognized. The total fair value of shares vested during the year ended December 31, 2014 and 2013 was $0 and $0, respectively. Compensation expense for 2014 and 2013 related to options granted under this plan was $0 and $0, respectively.

All stock options were fully vested at December 31, 2014 and 2013, respectively.

Restricted Stock Awards – The Company did not grant any award shares during the years ended December 31, 2014 and 2013. Compensation expense for 2014 and 2013 related to awards granted under this plan was $0 and $0, respectively.

The shares vest over a five year service period. As of December 31, 2014, the total compensation cost of the Plan was fully recognized. In addition, there were no restricted stock awards under the plan that were unvested at December 31, 2014 and 2013, respectively.

There were 5,304 shares available for future grants of award shares at December 31, 2014.

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Stockholders' Equity (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Total Capital
Total Capital (to risk-weighted assets)	$ 29,092	$ 24,033
Total Capital (to risk-weighted assets) ratio	16.90%	17.90%
Minimum amount of capital for adequacy purposes	13,778	10,748
Minimum amount of capital for adequacy purposes, ratio	8.00%	8.00%
Minimum capital required to be well-capitalized under prompt corrective action provisions	17,223	13,436
Minimum capital required to be well-capitalized under prompt corrective action provisions, ratio	10.00%	10.00%
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)	27,662	22,563
Tier 1 Capital (to risk-weighted assets) ratio	16.10%	16.80%
Minimum amount of Tier 1 Capital for adequacy purposes	6,889	5,374
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	4.00%	4.00%
Minimum Tier 1 Capital required to be well-capitalized under prompt corrective action provisions	10,334	8,061
Minimum Tier 1 Capital required to be well-capitalized under prompt corrective action provisions, ratio	6.00%	600.00%
Tier 1 Capital (to average assets)
Tier 1 Capital (to average assets)	27,662	22,563
Tier 1 Capital (to average assets) ratio	8.50%	10.80%
Minimum amount of Tier 1 Capital for adequacy purposes	4,858	3,137
Minimum amount of Tier 1 Capital for adequacy purposes, ratio	1.50%	1.50%
Minimum Tier 1 Capital required to be well-capitalized under prompt corrective action provisions	$ 6,477	$ 4,183
Minimum Tier 1 Capital required to be well-capitalized under prompt corrective action provisions, ratio	2.00%	2.00%

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Federal Home Loan Bank and Federal Reserve Advances

12 Months Ended

Dec. 31, 2014

Federal Home Loan Bank And Federal Reserve Advances

Federal Home Loan Bank and Federal Reserve Advances

Note 9 - Federal Home Loan Bank and Federal Reserve Advances

The Bank has advances from the Federal Home Loan Bank of Indianapolis. Interest rates range from 0.32% to 2.21% with a weighted average interest rate of 1.17%. These advances contain varying maturity dates through January 3, 2023 with a weighted average maturity of approximately 27 months. The advances are collateralized by approximately $48.9 million and $49.6 million of mortgage loans as of December 31, 2014 and 2013, respectively. In addition, at December 31, 2014 and 2013, securities with a carrying value of $21.2 million and $20.4 million, respectively, were pledged as collateral for Federal Home Loan Bank advances. Available borrowings with the Federal Home Loan Bank at December 31, 2014 totaled $56.4 million, of which $22.9 million was outstanding.

The advances are subject to prepayment penalties subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank. Future maturities of the advances are as follows:

December 31, 2014
Years Ending December 31		Amount		Weighted Average Interest Rate
	2015	$	4,890		.71
	2016		8,561		1.10
	2017		4,362		1.70
	2018		3,303		1.10
	2019		1,460		1.56
	Thereafter		309		1.61
	Total	$	22,885		1.17

The Bank had $0 and $1.5 million of variable rate advances outstanding as of December 31, 2014 and 2013, respectively.

In 2009, the Bank entered into a discount window loan agreement with the Federal Reserve Bank that allows for advances up to seventy-five percent of the collateral balance. As of December 31, 2014, these advances are secured by investment securities with a fair value of approximately $8.7 million and are generally due within 28 days from the date of the advance. The interest rate on the advances is based on the quoted Federal Reserve discount window rate (effective rate of 0.75 percent as of December 31, 2014). At December 31, 2014 and 2013, the Bank had no outstanding advances.

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Loans (Details 6) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Gross loans	$ 165,339	$ 138,084
One-to-Four Family Residential Real Estate [Member]
Gross loans	71,828	63,839
One-to-Four Family Residential Real Estate [Member] | Pass [Member]
Gross loans		63,164
One-to-Four Family Residential Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
One-to-Four Family Residential Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans		675
Consumer Real Estate [Member]
Gross loans	9,502	8,730
Consumer Real Estate [Member] | Pass [Member]
Gross loans		8,723
Consumer Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans		7
Commercial Real Estate Construction [Member]
Gross loans		173
Commercial Real Estate Construction [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Commercial Real Estate Construction [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans		173
Consumer Other [Member]
Gross loans	1,403	1,165
Commercial Real Estate Other [Member]
Gross loans		51,726
Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans		4,835
Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans		2,915
Orginated Loans and Leases [Member]
Gross loans	136,197
Orginated Loans and Leases [Member] | One-to-Four Family Residential Real Estate [Member]
Gross loans	64,942
Orginated Loans and Leases [Member] | One-to-Four Family Residential Real Estate [Member] | Pass [Member]
Gross loans	64,397
Orginated Loans and Leases [Member] | One-to-Four Family Residential Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Orginated Loans and Leases [Member] | One-to-Four Family Residential Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	545
Orginated Loans and Leases [Member] | Consumer Real Estate [Member]
Gross loans	7,802
Orginated Loans and Leases [Member] | Consumer Real Estate [Member] | Pass [Member]
Gross loans	7,778
Orginated Loans and Leases [Member] | Consumer Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Orginated Loans and Leases [Member] | Consumer Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	24
Orginated Loans and Leases [Member] | Commercial Real Estate Construction [Member]
Gross loans	1,443
Orginated Loans and Leases [Member] | Consumer Other [Member]
Gross loans	1,158
Orginated Loans and Leases [Member] | Consumer Other [Member] | Pass [Member]
Gross loans	1,155
Orginated Loans and Leases [Member] | Consumer Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Orginated Loans and Leases [Member] | Consumer Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	3
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member]
Gross loans	46,308
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	6,040
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	1,393
Acquired Loans [Member]
Gross loans	29,142
Acquired Loans [Member] | One-to-Four Family Residential Real Estate [Member]
Gross loans	6,886
Acquired Loans [Member] | One-to-Four Family Residential Real Estate [Member] | Pass [Member]
Gross loans	6,335
Acquired Loans [Member] | One-to-Four Family Residential Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Acquired Loans [Member] | One-to-Four Family Residential Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	551
Acquired Loans [Member] | Consumer Real Estate [Member]
Gross loans	1,732
Acquired Loans [Member] | Consumer Real Estate [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Acquired Loans [Member] | Consumer Real Estate [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	1
Acquired Loans [Member] | Commercial Real Estate Construction [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Pass [Member]
Gross loans	1,731
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Construction [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans
Acquired Loans [Member] | Consumer Other [Member]
Gross loans	213
Acquired Loans [Member] | Consumer Other [Member] | Pass [Member]
Gross loans	213
Acquired Loans [Member] | Consumer Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans
Acquired Loans [Member] | Consumer Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Other [Member]
Gross loans	15,950
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 5 (Other Assets Especially Mentioned) [Member]
Gross loans	1,176
Acquired Loans [Member] | Commercial Real Estate Other [Member] | Risk Grade 6 (Substandard) [Member]
Gross loans	$ 547

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Intangible Assets

12 Months Ended

Dec. 31, 2014

Intangible Assets

Intangible Assets

Note 7 - Intangible Assets

Intangible assets of the Company are summarized as follows:

	December 31, 2014
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit (merger)		1,392		106	$	1,286
Core deposit (purchase)	$	25	$	25		—
Commission residual		600		600		—
Total	$	2,017	$	731	$	1,286
		December 31, 2013
		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets:
Core deposit	$	25	$	24	$	1
Commission residual		600		561		39
Total	$	625	$	585	$	40

Amortization expense was $146 and $118 for the periods ended December 31, 2014 and 2013, respectively.

In accordance with the merger with Bank of Alpena in 2014, the Company recorded $1.4 million in core deposit intangible assets.

The estimated future amortization expense on core deposit intangible assets for the years ending after December 31, 2014 are as follows:

	Amortization
	Expense
2015	$	243
2016		217
2017		192
2018		167
2019		141
Thereafter		326
Total	$	1,286

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Deposits

12 Months Ended

Dec. 31, 2014

Deposits [Abstract]

Deposits

Note 8 - Deposits

Deposit accounts, by type and range of rates, consist of the following:

	December 31,
	2014		2013
Account Type
NOW accounts and MMDA	$	107,935	$	50,222
Regular savings accounts		29,846		22,037
Total		137,781		72,259
Certificate of Deposit Rates
0.10 percent to 0.99 percent		42,302		40,259
1.00 percent to 1.99 percent		27,362		17,715
2.00 percent to 2.99 percent		6,092		7,130
3.00 percent to 3.99 percent		1,050		1,486
4.00 percent to 4.99 percent		115		133
Total certificate of deposits		76,921		66,723
Total interest-bearing deposits	$	214,702	$	138,982

Certificates of deposit $100 or greater at December 31, 2014 and 2013 were $28.1 million and $22.9 million, respectively.

The following table sets forth the amount and maturities of certificates of deposit:

	December 31, 2014
	Amount Due
Rate	Less than 1 Year		1-2 Years		2-3 Years		3-5 Years		Greater than 5 Years		Total
0.10 percent to 0.99 percent	$	33,161	$	8,214	$	532	$	395	$	—	$	42,302
1.00 percent to 1.99 percent		1,419		6,884		6,398		12,394		267		27,362
2.00 percent to 2.99 percent		4,022		696		47		323		1,004		6,092
3.00 percent to 3.99 percent		502		—		12		536		—		1,050
4.00 percent to 4.99 percent		45		17		53		—		—		115
Total	$	39,149	$	15,811	$	7,042	$	13,648	$	1,271	$	76,921

Interest expense on deposits is summarized as follows:

	Year Ended December 31,
	2014		2013
NOW and MMDAs	$	141	$	98
Regular savings		13		11
Certificates of deposit		664		717
Total	$	818	$	826

Deposits from related parties held by the Bank at December 31, 2014 and 2013 amounted to $13.3 million and $632, respectively.

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Federal Income Tax

12 Months Ended

Dec. 31, 2014

Federal Income Tax

Federal Income Tax

Note 10 - Federal Income Tax

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed.

The Company and the Bank file a consolidated Federal income tax return. The analysis of the consolidated provision for federal income tax is as follows:

	Year Ended December 31,
	2014			2013
Current provision	$	—		$	—
Deferred benefit		807			(57	)
Change in valuation allowance		(807	)		57
Total	$	—		$	—

A reconciliation of the federal income tax expense and the amount computed by applying the statutory federal income tax rate (34 percent) to income before federal income tax is as follows:

	Year Ended December 31,
	2014			2013
Tax expense at statutory rate	$	765		$	19
Increase (decrease) from:
Change in valuation allowance, including bargain purchase gain		(807	)		57
Tax-exempt interest		(52	)		(52	)
Other		94			(24	)
Total income tax expense	$	—		$	—

The net deferred tax asset was comprised of the following temporary differences:

	December 31,
	2014		2013
Deferred tax assets:
Acquired loans	$	565	$	—
Other real estate owned		202		92
Non-accrual loan interest		155		49
Directors’ benefit plan		251		272
Net operating loss carryforward		4,177		3,684
Investment in subsidiary		—		784
Net deferred loan origination fees		89		101
Unrealized loss on available-for-sale securities		—		83
Other		90		246
Total deferred tax assets		5,529		5,311
Less: valuation allowance		3,090		3,223
Deferred tax liabilities:
Allowance for loan losses		306		322
Mortgage servicing rights		242		292
Partnership losses		132		124
Unrealized gain on available-for-sale securities		222		—
Depreciation		115		344
Core deposit intangible		437		—
Other		134		207
Total deferred tax liabilities		1,588		1,289
Net deferred tax asset	$	851	$	799

The Company has net operating loss carryforwards of approximately $12.3 million generated from December 31, 2007 through December 31, 2014 that are available to reduce total taxable income through the years ending December 31, 2033.

For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction for tax purposes based on a percentage of taxable income or on actual experience. The Bank used the percentage of taxable income method through December 31, 1995.

A deferred tax liability has not been recognized for the tax bad debt base year reserves of the Bank. The base year reserves are the balance of reserves as of December 31, 1987. At December 31, 2014 and 2013, the amount of those reserves was approximately $60. The amount of the unrecognized deferred tax liability at December 31, 2014 and 2013 was approximately $20.

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Loans (Details 10) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Allowance for loan losses:
Beginning Balance				$ 1,472				$ 1,750	$ 1,472	$ 1,750
Charge offs									(468)	(1,191)
Recoveries									141	276
Provision	11	257		16	265	32	196	144	284	637
Ending balance	1,429				1,472				1,429	1,472
Individually evaluated for impairment	10				235				10	235
Collectively evaluated for impairment	1,419				1,237				1,419	1,237
Loans receivable (gross):
Gross loans	165,339				138,084				165,339	138,084
Individually evaluated for impairment	2,458				6,111				2,458	6,111
Collectively evaluated for impairment	133,739				131,973				133,739	131,973
Acquired loans not subject to loan loss reserve	29,142								29,142
Commercial Real Estate Construction [Member]
Allowance for loan losses:
Beginning Balance				48				64	48	64
Charge offs									(12)
Recoveries
Provision									(28)	(16)
Ending balance	8				48				8	48
Individually evaluated for impairment					48					48
Collectively evaluated for impairment	8								8
Loans receivable (gross):
Gross loans	1,443				173				1,443	173
Individually evaluated for impairment					173					173
Collectively evaluated for impairment	1,443								1,443
Commercial Real Estate [Member]
Allowance for loan losses:
Beginning Balance				444				579	444	579
Charge offs									(241)	(674)
Recoveries									54	114
Provision									50	425
Ending balance	307				444				307	444
Individually evaluated for impairment	10				182				10	182
Collectively evaluated for impairment	297				262				297	262
Loans receivable (gross):
Gross loans	62,163				51,726				62,163	51,726
Individually evaluated for impairment	1,816				5,179				1,816	5,179
Collectively evaluated for impairment	44,492				46,547				44,492	46,547
Acquired loans not subject to loan loss reserve	15,855								15,855
Commercial Loans [Member]
Allowance for loan losses:
Beginning Balance				63				69	63	69
Charge offs
Recoveries									2
Provision									29	(6)
Ending balance	94				63				94	63
Individually evaluated for impairment
Collectively evaluated for impairment	94				63				94	63
Loans receivable (gross):
Gross loans	19,000				12,451				19,000	12,451
Individually evaluated for impairment
Collectively evaluated for impairment	14,544				12,451				14,544	12,451
Acquired loans not subject to loan loss reserve	4,456								4,456
Consumer Real Estate [Member]
Allowance for loan losses:
Beginning Balance				62				99	62	99
Charge offs									(14)	(40)
Recoveries									30	36
Provision									(45)	(33)
Ending balance	33				62				33	62
Individually evaluated for impairment
Collectively evaluated for impairment	33				62				33	62
Loans receivable (gross):
Gross loans	9,502				8,730				9,502	8,730
Individually evaluated for impairment	24				7				24	7
Collectively evaluated for impairment	7,778				8,723				7,778	8,723
Acquired loans not subject to loan loss reserve	1,700								1,700
Total Consumer Loans [Member]
Allowance for loan losses:
Beginning Balance				21				33	21	33
Charge offs									(24)	(13)
Recoveries										6
Provision									22	(5)
Ending balance	19				21				19	21
Individually evaluated for impairment
Collectively evaluated for impairment	19				21				19	21
Loans receivable (gross):
Gross loans	1,403				1,165				1,403	1,165
Individually evaluated for impairment
Collectively evaluated for impairment	1,158				1,165				1,158	1,165
Acquired loans not subject to loan loss reserve	245								245
One-to-Four Family Residential Real Estate [Member]
Allowance for loan losses:
Beginning Balance				784				906	784	906
Charge offs									(177)	(464)
Recoveries									55	120
Provision									207	222
Ending balance	869				784				869	784
Individually evaluated for impairment					5					5
Collectively evaluated for impairment	869				779				869	779
Loans receivable (gross):
Gross loans	71,828				63,839				71,828	63,839
Individually evaluated for impairment	618				752				618	752
Collectively evaluated for impairment	64,324				63,087				64,324	63,087
Acquired loans not subject to loan loss reserve	6,886								6,886
Unallocated Financing Receivables [Member]
Allowance for loan losses:
Beginning Balance				50					50
Charge offs
Recoveries
Provision									49	50
Ending balance	99				50				99	50
Individually evaluated for impairment
Collectively evaluated for impairment	99				50				99	50
Loans receivable (gross):
Gross loans
Individually evaluated for impairment
Collectively evaluated for impairment

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Employee Benefit Plans (Details Narrative) (USD $) In Thousands, except Share data, unless otherwise specified	1 Months Ended	12 Months Ended
	Jan. 31, 1994	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2005	Dec. 31, 2012
Expense recognized for contributions to the defined benefit pension plan		$ 103	$ 72
Expense recognized for contributions to the 401(k) plan		96	89
Nonqualified deferred compensation plan balance		738	801
Nonqualified deferred compensation plan expense		73	78
Employee Stock Ownership Plan:
Amount borrowed to fund shares held in ESOP	480
Shares purchased and funded into ESOP	48,000
Price paid per share for shares purchased to fund ESOP	$ 10			$ 10
Percentage of shares purchased and funded into ESOP				8.00%
Shares purchased by ESOP using funds loaned by the company				138,709
Loan term				15 years
Shares sold in open market under ESOP			2,793
ESOP compensation expense		0
Stock-Based Compensation Plans:
Share price		$ 5.49
Stock option exercise price		$ 9.54	$ 9.52		$ 9.53
Share-based Compensation expense			$ 0
1996 Stock Option Plan [Member]
Stock-Based Compensation Plans:
Number of awards authorized		127,491
2006 Stock-Based Incentive Plan [Member]
Stock-Based Compensation Plans:
Number of awards authorized		242,740
Stock Options [Member]
Stock-Based Compensation Plans:
Shares available for grant		63,256
Stock Options [Member] | Lower Range [Member]
Stock-Based Compensation Plans:
Stock option exercise price		$ 9.07
Stock Options [Member] | Upper Range [Member]
Stock-Based Compensation Plans:
Stock option exercise price		$ 9.65
Stock Options [Member] | 2006 Stock-Based Incentive Plan [Member]
Stock-Based Compensation Plans:
Number of awards authorized		173,386
Restricted Stock [Member]
Stock-Based Compensation Plans:
Shares available for grant		5,304
Restricted Stock [Member] | 2006 Stock-Based Incentive Plan [Member]
Stock-Based Compensation Plans:
Number of awards authorized		69,354

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Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Total property and equipment	$ 12,483	$ 11,013
Accumulated depreciation	6,147	5,810
Net property and equipment	6,336	5,203
Equipment [Member]
Total property and equipment	3,959	3,523
Land Improvements [Member]
Total property and equipment	195	182
Land [Member]
Total property and equipment	1,271	1,071
Buildings [Member]
Total property and equipment	$ 7,058	$ 6,237

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Loans (Details 9) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014 Number	Dec. 31, 2013 Number
Troubled Debt Restructuring
Number of contracts		3
Pre-modification outstanding recorded investment		$ 749
Post-modification outstanding recorded investment		749
Subsequent Default
Number of contracts subsequently defaulted
Recorded investment of contracts subsequently defaulted
Commercial Real Estate Construction [Member]
Troubled Debt Restructuring
Number of contracts
Pre-modification outstanding recorded investment
Post-modification outstanding recorded investment
Subsequent Default
Number of contracts subsequently defaulted
Recorded investment of contracts subsequently defaulted
Commercial Real Estate Other [Member]
Troubled Debt Restructuring
Number of contracts		1
Pre-modification outstanding recorded investment		412
Post-modification outstanding recorded investment		412
Subsequent Default
Number of contracts subsequently defaulted
Recorded investment of contracts subsequently defaulted
Commercial Non Real Estate [Member]
Troubled Debt Restructuring
Number of contracts
Pre-modification outstanding recorded investment
Post-modification outstanding recorded investment
Subsequent Default
Number of contracts subsequently defaulted
Recorded investment of contracts subsequently defaulted
One-to-Four Family Residential Real Estate [Member]
Troubled Debt Restructuring
Number of contracts		2
Pre-modification outstanding recorded investment		337
Post-modification outstanding recorded investment		337
Subsequent Default
Number of contracts subsequently defaulted
Recorded investment of contracts subsequently defaulted
Consumer Real Estate [Member]
Troubled Debt Restructuring
Pre-modification outstanding recorded investment
Post-modification outstanding recorded investment
Subsequent Default
Number of contracts subsequently defaulted
Recorded investment of contracts subsequently defaulted

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Parent-Only Financial Statements (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013
Cash Flows from Operating Activities:
Net Income (loss)	$ 320	$ 1,614	$ 94	$ 221	$ (192)	$ 182	$ (3)	$ 68	$ 2,249	$ 55
Adjustments to reconcile net income (loss) to cash from operating activities:
Stock options/awards										0
Net change in other assets									128	73
Cash Flows from Financing Activities:
Net cash provided by (used in) operating activities									1,713	2,043
Net (Decrease) Increase in Cash and Cash Equivalents									8,706	14
Parent Company [Member]
Cash Flows from Operating Activities:
Net Income (loss)									2,249	55
Adjustments to reconcile net income (loss) to cash from operating activities:
Dividend from subsidiary bank									500
Stock options/awards
Equity in undistributed net (income) of subsidiary bank									(2,020)	(304)
Net change in other liabilities									(6)	1
Net change in other assets									(5)	(1)
Cash Flows from Financing Activities:
Dividends paid									(247)	(58)
Net cash provided by (used in) operating activities									(2,278)	(362)
Net (Decrease) Increase in Cash and Cash Equivalents									(29)	(307)
Cash and cash equivalents at beginning of period				510				817	510	817
Cash and cash equivalents at end of period	$ 481				$ 510				$ 481	$ 510

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Federal Income Tax (Tables)

12 Months Ended

Dec. 31, 2014

Federal Income Tax Tables

Schedule of components of Federal income tax

The Company and the Bank file a consolidated Federal income tax return. The analysis of the consolidated provision for federal income tax is as follows:

	Year Ended December 31,
	2014			2013
Current provision	$	—		$	—
Deferred benefit		807			(57	)
Change in valuation allowance		(807	)		57
Total	$	—		$	—

Schedule of effective income tax rate reconciliation

A reconciliation of the federal income tax expense and the amount computed by applying the statutory federal income tax rate (34 percent) to income before federal income tax is as follows:

	Year Ended December 31,
	2014			2013
Tax expense at statutory rate	$	765		$	19
Increase (decrease) from:
Change in valuation allowance, including bargain purchase gain		(807	)		57
Tax-exempt interest		(52	)		(52	)
Other		94			(24	)
Total income tax expense	$	—		$	—

Schedule of deferred tax assets

The net deferred tax asset was comprised of the following temporary differences:

	December 31,
	2014		2013
Deferred tax assets:
Acquired loans	$	565	$	—
Other real estate owned		202		92
Non-accrual loan interest		155		49
Directors’ benefit plan		251		272
Net operating loss carryforward		4,177		3,684
Investment in subsidiary		—		784
Net deferred loan origination fees		89		101
Unrealized loss on available-for-sale securities		—		83
Other		90		246
Total deferred tax assets		5,529		5,311
Less: valuation allowance		3,090		3,223
Deferred tax liabilities:
Allowance for loan losses		306		322
Mortgage servicing rights		242		292
Partnership losses		132		124
Unrealized gain on available-for-sale securities		222		—
Depreciation		115		344
Core deposit intangible		437		—
Other		134		207
Total deferred tax liabilities		1,588		1,289
Net deferred tax asset	$	851	$	799

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Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Amortized cost:
Total	$ 119,315
Fair Value:
Total	119,968
Amortized Cost:
Due in one year or less	45
Due after one year through five years	200
Due after five years through ten years	315
Due after ten years	230
Total	790
Fair Value:
Due in one year or less	45
Due after one year through five years	218
Due after five years through ten years	365
Due after ten years	280
Total	908
Municipal Notes [Member]
Fair Value:
Total	908	2,400
Equity Securities [Member]
Amortized cost:
Total	3
Fair Value:
Total	5
Mortgage Backed Securities [Member]
Amortized cost:
Total	63,648
Fair Value:
Total	64,046
Available-for-sale Securities
Amortized cost:
Due in one year or less	5,069
Due after one year through five years	38,827
Due after five years through ten years	10,478
Due after ten years	1,290
Total	55,664
Fair Value:
Due in one year or less	5,092
Due after one year through five years	38,843
Due after five years through ten years	10,562
Due after ten years	1,420
Total	$ 55,917

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Restrictions on Dividends

12 Months Ended

Dec. 31, 2014

Restrictions On Dividends

Restrictions on Dividends

Note 15 - Restrictions on Dividends

Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by the Office of the Comptroller of Currency (OCC). These restrictions generally limit dividends to the current and prior two years’ retained earnings. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Bank’s regulatory capital requirements and minimum regulatory guidelines. Future dividend payments by the Company will be based on future earnings and the approval of the OCC.

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Business Combinations (Tables)

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Schedule of purchase price of acquisition

First Federal of Northern Michigan Bancorp, Inc. common stock issued for Alpena Banking Corporation common shares		843
Price per share, based on First Federal of Northern Michigan Bancorp, Inc. closing price on August 8, 2014	$	5.59
Total purchase price	$	4,712

Preliminary Statement of Net Assets Acquired Fair Value:

Assets
Cash and cash equivalents	$	41,650
Securities		24,008
Loans		33,051
Premises and Equipment		1,667
Core Deposit Intangible		1,392
Deferred Tax Asset		337
Other Assets		467
Total Assets	$	102,572
Liabilities
Deposits		95,787
Other Liabilities		91
Total Liabilities	$	95,878
Net Identifiable Assets Acquired			$	6,694
Bargain Purchase Gain			$	(1,982	)

Schedule of the unaudited pro forma information for the results of operations

The following table provides the pro forma information for the results of operations for the years ended December 31, 2014 and 2013, as if the merger had occurred on January 1 of each year. These adjustments reflect the impact of certain purchase accounting fair value measurements, primarily on the loan and deposit portfolios of Bank of Alpena. In addition, the $266 in merger-related costs noted above are included in each period presented. Further operating cost savings are expected along with additional business synergies as a result of the merger which are not presented in the pro forma amounts. These pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual results of operations of the combined banking organizations that would have been achieved had the merger occurred at the beginning of each period presented, nor are they intended to represent or be indicative of future results of the Company.

	For the Year Ended
	December 31,
	2014		2013
Net interest income	$	9,554	$	9,602
Non-interest income		3,631		2,079
Non-interest expense		10,502		11,064
Net income		2,316		190
Net income per basic and diluted share		0.72		0.07
Weighted average shares outstanding		3,219		2,884

Schedule of acquired loans

	Acquired Impaired		Acquired Non-Impaired		Acquired Total
	(in thousands)
Real estate loans:
Residential mortgages	$	397	$	6,992	$	7,389
Commercial Loans:
Construction - real estate		—		109		109
Secured by real estate		3,070		14,721		17,791
Other		1,201		4,213		5,414
Total commercial loans		4,271		19,043		23,314
Consumer loans:
Secured by real state		30		1,567		1,598
Other		—		750		750
Total consumer loans		30		2,318		2,348
Total Loans at acqusition date	$	4,698	$	28,353	$	33,051

	Acquired Impaired			Acquired Non-Impaired			Acquired Total
	(in thousands)
Loans acquired- contractual required payments	$	5,930		$	28,587		$	34,517
Non accretable difference		(1,232	)		—			(1,232	)
Expected cash flows		4,698			28,587			33,285
Accretable yield		—			(234	)		(234	)
Carrying balance at acquisition date	$	4,698		$	28,353		$	33,051

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Securities (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014 Number	Dec. 31, 2013 Number
Securities Details Narrative
Securities pledged as collateral	$ 35,000	$ 36,000
Gross proceeds from sale of securities	730	0
Gross gains from sale of securities	1	0
Gross losses from sale of securities	5	0
Tax effect from sale of securities	2	0
Number of securities with an unrealized loss	72	39
Fair value of securities with an unrealized loss	$ 303	$ 790

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Summary of Significant Accounting Policies (Details Narrative) (USD $) In Thousands, except Share data, unless otherwise specified	0 Months Ended	12 Months Ended
	Feb. 27, 2010	Dec. 31, 2014	Dec. 31, 2013	Feb. 27, 2009	Jun. 12, 2004
Goodwill				$ 600
Discount rate	6.00%
Deferred tax valuation allowance		3,090	3,223
Deferred tax asset, net		851	799
Stock-based compensation expense			0
Antidilutive options		136,030
Land Improvements [Member] | Upper Range [Member]
Useful lives of property and equipment		10 years
Land Improvements [Member] | Lower Range [Member]
Useful lives of property and equipment		7 years
Buildings [Member] | Upper Range [Member]
Useful lives of property and equipment		40 years
Buildings [Member] | Lower Range [Member]
Useful lives of property and equipment		7 years
Equipment [Member] | Upper Range [Member]
Useful lives of property and equipment		10 years
Equipment [Member] | Lower Range [Member]
Useful lives of property and equipment		3 years
Core Deposits [Member] | Upper Range [Member]
Useful lives of intangible assets		15 years
Core Deposits [Member] | Lower Range [Member]
Useful lives of intangible assets		10 years
Parent Company [Member]
Stock-based compensation expense
InsuranCenter of Alpena [Member]
Ownership interest					100.00%

XML

Consolidated Statement of Changes in Stockholders' Equity (USD $) In Thousands, except Share data	Common Stock [Member]	Treasury Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Total
Balance, beginning at Dec. 31, 2012	$ 32	$ (2,964)	$ 23,854	$ 2,766	$ 747	$ 24,435
Balance, beginning, shares at Dec. 31, 2012	3,192
Net income				55		55
Other comprehensive income (loss)					(907)	(907)
Common dividend declared				(58)		(58)
Balance, ending at Dec. 31, 2013	32	(2,964)	23,854	2,763	(160)	23,525
Balance, beginning, shares at Dec. 31, 2013	3,192
Net income				2,249		2,249
Exchange of Alpena Banking Corp Stock	8		4,410			4,418
Exchange of Alpena Banking Corp Stock, shares	843
Other comprehensive income (loss)					591	591
Common dividend declared				(247)		(247)
Balance, ending at Dec. 31, 2014	$ 40	$ (2,964)	$ 28,264	$ 4,765	$ 431	$ 30,536
Balance, ending, shares at Dec. 31, 2014	4,035

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Fair Value Measurements (Details 1) (Nonrecurring [Member], USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2014
Fair Value [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans	$ 5,352
Other real estate owned - residential mortgages	285
Other real estate owned - commercial	472
Other repossessed assets	1,023
Significant Unobservable Inputs (Level 3) [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans	5,352
Other real estate owned - residential mortgages	285
Other real estate owned - commercial	472
Other repossessed assets	1,023
Total assets measured at fair value on a non-recurring basis	6,902
Originated Assets [Member] | Fair Value [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans		1,806
Other real estate owned - residential mortgages		336
Other real estate owned - commercial		1,628
Other repossessed assets		860
Total assets measured at fair value on a non-recurring basis		4,630
Originated Assets [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans		1,806
Other real estate owned - residential mortgages		336
Other real estate owned - commercial		1,628
Other repossessed assets		860
Acquired Assets [Member] | Fair Value [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans		396
Other real estate owned - residential mortgages
Other real estate owned - commercial
Other repossessed assets
Acquired Assets [Member] | Significant Unobservable Inputs (Level 3) [Member]
Fair Value Assets Measured on a Nonrecurring Basis
Impaired loans		396
Other real estate owned - residential mortgages
Other real estate owned - commercial
Other repossessed assets
Total assets measured at fair value on a non-recurring basis

XML

Loans

12 Months Ended

Dec. 31, 2014

Loans

Loans

Note 4 – Loans

Loans at December 31, 2014 and 2013 are summarized as follows:

	December 31
	2014		2013
Real estate loans - One- to four-family residential	$	71,828	$	63,839
Commercial loans:
Secured by real estate		63,606		51,899
Other		19,000		12,451
Total commercial loans		82,606		64,350
Consumer loans:
Secured by real estate		9,502		8,730
Other		1,403		1,165
Total consumer loans		10,905		9,895
Total gross loans		165,339		138,084
Less:
Net deferred loan fees		263		297
Allowance for loan losses		1,429		1,472
Total loans - net	$	163,647	$	136,315

As of December 31, 2014 the total outstanding balance and carrying value of acquired impaired loans was $5.2 million and $4.7 million, respectively. Changes to the accretable yield for acquired impaired loans were as follows as of December 31, 2014:

	Acquired Impaired Non- accretable			Acquired Non- Impaired Accretable			Acquired Total
Beginning of year	$	—		$	—		$	—
Net discount associated with acquired loans		(1,456	)		(234	)		(1,690	)
Accretion of discount for credit spread		—			26			26
Loans paid off through December 31, 2014		224			—			224
	$	(1,232	)	$	(208	)	$	(1,440	)

Final loan maturities and rate sensitivity of the loan portfolio are as follows:

	December 31, 2014
	Less Than One Year		One Year to Five Years		After Five Years		Total
Originated Loans:
Loans at fixed interest rates	$	3,983	$	31,560	$	50,507	$	86,050
Loans at variable interest rates		7,731		8,381		34,035		50,147
Total	$	11,714	$	39,941	$	84,542	$	136,197
	December 31, 2014
		Less Than One Year		One Year to Five Years		After Five Years		Total
Acquired Loans :
Loans at fixed interest rates	$	1,796	$	9,502	$	1,165	$	12,463
Loans at variable interest rates		2,024		3,773		10,882		16,679
Total	$	3,820	$	13,275	$	12,047	$	29,142

Certain directors and executive officers of the Company were loan customers of the Bank during 2014 and 2013. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectability. An analysis of aggregate loans outstanding to directors and executive officers for the years ended December 31, 2014 and 2013 are as follows:

	December 31,
	2014			2013
Aggregate balance - Beginning of Period	$	3,168		$	3,340
New loans		1,070			2,524
Repayments		(1,135	)		(2,491	)
Net change in directors and officers(1)		3,134			(205	)
Aggregate balance - End of Period	$	6,237		$	3,168

(1) Represents the addition or removal of new officer and directors during the year.

The following tables illustrate the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2014 and 2013:

			As of December 31, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans	Recorded Investment > 90 Days andAccruing
Originated Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	—	$	—	$	1,443	$1,443	$	—
Commercial Real Estate - other		10		195		—		205		46,103	46,308		—
Commercial - non real estate		—		—		—		—		14,544	14,544		—
Consumer:
Consumer - Real Estate		107		4		7		118		7,684	7,802		—
Consumer - Other		3		—		3		6		1,152	1,158		3
Residential:
Residential		1,484		746		386		2,616		62,326	64,942		87
Total	$	1,604	$	945	$	396	$	2,945	$	133,252	$136,197	$	90

			As of December 31, 2014
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
Acquired Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - other		125		128		93		346		15,604		15,950		—
Commercial - non real estate		—		40		104		144		4,217		4,361		—
Consumer:
Consumer - Real Estate		123		—		—		123		1,609		1,732		—
Consumer - Other		—		—		—		—		213		213		—
Residential:
Residential		147		56		461		664		6,222		6,886		225
Total	$	395	$	224	$	658	$	1,277	$	27,865	$	29,142	$	225

			As of December 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days and Accruing
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.

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

As of December 31, 2014
Originated Loans:
		Commercial Real Estate		Commercial Real Estate
Loan Grade		Construction		Other		Commercial
	1-2	$	—	$	—	$	31
	3		—		13,565		6,088
	4		1,443		21,757		7,538
	4.5		—		3,553		252
	5		—		6,040		635
	6		—		1,393		—
	7		—		—		—
	8		—		—		—
	Total	$	1,443	$	46,308	$	14,544

As of December 31, 2014
Acquired Loans:
		Commercial Real Estate		Commercial Real Estate
Loan Grade		Construction		Other		Commercial
	1-2	$	—	$	280	$	1,188
	3		—		2,696		876
	4		—		10,905		970
	4.5		—		337		21
	5		—		1,176		1,150
	6		—		547		156
	7		—		9		0
	8		—		—		0
	Total	$	—	$	15,950	$	4,361

As of December 31, 2013
		Commercial Real Estate		Commercial Real Estate
Loan Grade		Construction		Other		Commercial
	1-2	$	—	$	—	$	—
	3		—		16,187		5,602
	4		—		27,789		6,699
	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 December 31, 2014 and 2013.

As of December 31, 2014
			Consumer -
	Residential		Real Estate		Consumer - Other
Originated Loans:
Loan Grade:
Pass	$	64,397	$	7,778	$	1,155
Special Mention		—		—		—
Substandard		545		24		3
Total	$	64,942	$	7,802	$	1,158
				Consumer -
		Residential		Real Estate		Consumer - Other
Acquired Loans:
Loan Grade:
Pass	$	6,335	$	1,731	$	213
Special Mention		—		—		—
Substandard		551		1		—
Total	$	6,886	$	1,732	$	213

As of December 31, 2013
			Consumer -
	Residential		Real Estate		Consumer - Other
Loan Grade:
Pass	$	63,164	$	8,723	$	1,163
Special Mention		—		7		2
Substandard		675
Total	$	63,839	$	8,730	$	1,165

The following tables present the recorded investment in non-accrual loans by class as of December 31, 2014 and 2013:

As of December 31
	2014		2013
Originated Loans:
Commercial Real Estate:
Commercial Real Estate - construction	$	—	$	173
Commercial Real Estate - other		486		1,454
Commercial		77		—
Consumer:
Consumer - real estate		25		7
Consumer - other		—		—
Residential:
Residential		750		651
Total	$	1,338	$	2,285

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2014

and 2013:

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2014							2014
	Unpaid Principal		Recorded		Related		Average		Interest
	Balance		Investment		Allowance		Recorded		Income
							Investment		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,431		1,430		—		1,482		84
Consumer - Real Estate		26		24		—		26		—
Consumer - Other		—		—		—		—		—
Residential		781		618		—		635		14
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		386		386		10		393		18
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		—		—		—		—		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Other	$	1,817	$	1,816	$	10	$	1,875	$	102
Consumer - Real Estate	$	26	$	24	$	—	$	26	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	781	$	618	$	—	$	635	$	14

							For the Twelve Months Ended
Impaired Loans							December 31,
As of December 31, 2013							2013
	Unpaid Principal		Recorded		Related		Average		Interest
	Balance		Investment		Allowance		Recorded		Income
							Investment		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction		—		—		—		—		—
Commercial Real Estate - Other		1,789		1,788		—		1,894		104
Consumer - Real Estate		8		7		—		7		—
Consumer - Other		—		—		—		—		—
Residential		954		722		—		727		6
With a specific allowance recorded:
Commercial		—		—		—		—		—
Commercial Real Estate - Construction		1,589		173		48		173		—
Commercial Real Estate - Other		3,980		3,391		182		3,397		94
Consumer - Real Estate		—		—		—		—		—
Consumer - Other		—		—		—		—		—
Residential		53		30		5		30		—
Totals:
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate - Construction	$	1,589	$	173	$	48	$	173	$	—
Commercial Real Estate - Other	$	5,769	$	5,179	$	182	$	5,291	$	198
Consumer - Real Estate	$	8	$	7	$	—	$	7	$	—
Consumer - Other	$	—	$	—	$	—	$	—	$	—
Residential	$	1,007	$	752	$	5	$	757	$	6

As of December 31, 2014 no additional funds are committed to be advanced in connection with impaired loans.

A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The Company adheres to ASC 310-40, Troubled Debt Restructurings by Creditors, to determine whether a TDR applies in a particular instance. Prior to loans being modified and classified as a TDR, specific reserves are generally assessed, as most of these loans have been specifically allocated for as part of the Company’s normal loan loss provisioning methodology. The Company allocated $10 and $230 reserves for the TDR loans at December 31, 2014 and December 31, 2013, respectively. The Company classifies all TDR loans as impaired loans in the table above.

The following table summarizes the loans that were modified as a TDR during the period ended December 31, 2014 and 2013.

	For the Twelve Months Ended
	December 31, 2014
			Pre-Modification		Post-Modification	Troubled Debt Restructurings That Subsequently Defaulted
	Number of		Outstanding Recorded		Outstanding Recorded	Number of		Recorded
	Contracts		Investments		Investment	Contracts		Investment
Commercial Real Estate - Construction	—	$	—	$	—	—	$	—
Commercial Real Estate - Other	—		—		—	—		—
Commercial - non real estate	—		—		—	—		—
Residential	—		—		—	—		—
Total	—	$	—	$	—	—	$	—

For the Twelve Months Ended
December 31, 2013
							Troubled Debt Restructurings
			Pre-Modification		Post-Modification		That Subsequently Defaulted
	Number of		Outstanding Recorded		Outstanding Recorded		Number of		Recorded
	Contracts		Investments		Investment		Contracts		Investment
Commerical Real Estate - Construction		—	$	—	$	—		—	$	—
Commercial Real Estate - Other		1		412		412		—		—
Consumer - Real Estate		—		—		—		—		—
Residential		2		337		337		—		—
Total		3	$	749	$	749		—	$	—

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.

Additional collateral, a co-borrower, or a guarantor may be requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.

Loans modified in a TDR may be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. The allowance for impaired loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent or on the present value of expected future cash flows discounted at the loan’s effective interest rate if the loan is performing in accordance with the modified terms. Management exercises significant judgment in developing these estimates.

The regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged and the borrower has not reaffirmed the debt, regardless of the delinquency status of the loan. The filing of bankruptcy by the borrower is evidence of financial difficulty and the discharge of the obligation by the bankruptcy court is deemed to be a concession granted to the borrower.

At December 31, 2014, there were no additional commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.

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

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

Activity in the ALLL was as follows for the years ended December 31, 2014 and 2013:

For the Year Ended December 31, 2014
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	48		$	444		$	63	$	62		$	21		$	784		$	50	$	1,472
Charge-offs		(12	)		(241	)		—		(14	)		(24	)		(177	)		—		(468	)
Recoveries		—			54			2		30			—			55			—		141
Provision		(28	)		50			29		(45	)		22			207			49		284
Ending Balance	$	8		$	307		$	94	$	33		$	19		$	869		$	99	$	1,429
Ending balance: individually evaluated for impairment	$	—		$	10		$	—	$	—		$	—		$	—		$	—	$	10
Ending balance: loans collectively evaluated for impairment	$	8		$	297		$	94	$	33		$	19		$	869		$	99	$	1,419
Loans:
Ending Balance	$	1,443		$	62,163		$	19,000	$	9,502		$	1,403		$	71,828		$	—	$	165,339
Ending balance: individually evaluated for impairment	$	—		$	1,816		$	—	$	24		$	—		$	618		$	—	$	2,458
Ending balance: loans collectively evaluated for impairment	$	1,443		$	44,492		$	14,544	$	7,778		$	1,158		$	64,324		$	—	$	133,739
Acquired loans not subject to loan loss reserve	$	—		$	15,855		$	4,456	$	1,700		$	245		$	6,886		$	—	$	29,142

For the Year Ended December 31, 2013
	Commercial Construction			Commercial Real Estate			Commercial			Consumer Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69		$	99		$	33		$	906		$	—	$	1,750
Charge-offs		—			(674	)		—			(40	)		(13	)		(464	)		—		(1,191	)
Recoveries		—			114			—			36			6			120			—		276
Provision		(16	)		425			(6	)		(33	)		(5	)		222			50		637
Ending Balance	$	48		$	444		$	63		$	62		$	21		$	784		$	50	$	1,472
Ending balance: individually evaluated for impairment	$	48		$	182		$	—		$	—		$	—		$	5		$	—	$	235
Ending balance: loans collectively evaluated for impairment	$	—		$	262		$	63		$	62		$	21		$	779		$	50	$	1,237
Loans:
Ending Balance	$	173		$	51,726		$	12,451		$	8,730		$	1,165		$	63,839		$	—	$	138,084
Ending balance: individually evaluated for impairment	$	173		$	5,179		$	—		$	7		$	—		$	752		$	—	$	6,111
Ending balance: loans collectively evaluated for impairment	$	—		$	46,547		$	12,451		$	8,723		$	1,165		$	63,087		$	—	$	131,973

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
30-59 Days past due		$ 2,060
60-89 Days past due		993
Greater than 90 days past due		1,969
Total past due		5,022
Current		133,062
Gross loans	165,339	138,084
Recorded investment > 90 days and accruing		26
Commercial Real Estate Construction [Member]
Greater than 90 days past due		173
Total past due		173
Gross loans		173
Commercial Real Estate Other [Member]
60-89 Days past due		521
Greater than 90 days past due		1,441
Total past due		1,962
Current		49,764
Gross loans		51,726
Commercial Non Real Estate [Member]
30-59 Days past due		33
60-89 Days past due		20
Total past due		53
Current		12,398
Gross loans	19,000	12,451
Consumer Real Estate [Member]
30-59 Days past due		54
60-89 Days past due		55
Total past due		109
Current		8,621
Gross loans	9,502	8,730
Consumer Other [Member]
60-89 Days past due		4
Greater than 90 days past due		2
Total past due		6
Current		1,159
Gross loans	1,403	1,165
Recorded investment > 90 days and accruing		2
One-to-Four Family Residential Real Estate [Member]
30-59 Days past due		1,973
60-89 Days past due		393
Greater than 90 days past due		353
Total past due		2,719
Current		61,120
Gross loans	71,828	63,839
Recorded investment > 90 days and accruing		24
Orginated Loans and Leases [Member]
30-59 Days past due	1,604
60-89 Days past due	945
Greater than 90 days past due	396
Total past due	2,945
Current	133,252
Gross loans	136,197
Recorded investment > 90 days and accruing	90
Orginated Loans and Leases [Member] | Commercial Real Estate Construction [Member]
Current	1,443
Gross loans	1,443
Orginated Loans and Leases [Member] | Commercial Real Estate Other [Member]
30-59 Days past due	10
60-89 Days past due	195
Greater than 90 days past due
Total past due	205
Current	46,103
Gross loans	46,308
Orginated Loans and Leases [Member] | Commercial Non Real Estate [Member]
Current	14,544
Gross loans	14,544
Orginated Loans and Leases [Member] | Consumer Real Estate [Member]
30-59 Days past due	107
60-89 Days past due	4
Greater than 90 days past due	7
Total past due	118
Current	7,684
Gross loans	7,802
Orginated Loans and Leases [Member] | Consumer Other [Member]
30-59 Days past due	3
Greater than 90 days past due	3
Total past due	6
Current	1,152
Gross loans	1,158
Recorded investment > 90 days and accruing	3
Orginated Loans and Leases [Member] | One-to-Four Family Residential Real Estate [Member]
30-59 Days past due	1,484
60-89 Days past due	746
Greater than 90 days past due	386
Total past due	2,616
Current	62,326
Gross loans	64,942
Recorded investment > 90 days and accruing	87
Acquired Loans [Member]
30-59 Days past due	395
60-89 Days past due	224
Greater than 90 days past due	658
Total past due	1,277
Current	27,865
Gross loans	29,142
Recorded investment > 90 days and accruing	225
Acquired Loans [Member] | Commercial Real Estate Construction [Member]
Gross loans
Acquired Loans [Member] | Commercial Real Estate Other [Member]
30-59 Days past due	125
60-89 Days past due	128
Greater than 90 days past due	93
Total past due	346
Current	15,604
Gross loans	15,950
Acquired Loans [Member] | Commercial Non Real Estate [Member]
60-89 Days past due	40
Greater than 90 days past due	104
Total past due	144
Current	4,217
Gross loans	4,361
Acquired Loans [Member] | Consumer Real Estate [Member]
30-59 Days past due	123
Total past due	123
Current	1,609
Gross loans	1,732
Acquired Loans [Member] | Consumer Other [Member]
Current	213
Gross loans	213
Acquired Loans [Member] | One-to-Four Family Residential Real Estate [Member]
30-59 Days past due	147
60-89 Days past due	56
Greater than 90 days past due	461
Total past due	664
Current	6,222
Gross loans	6,886
Recorded investment > 90 days and accruing	$ 225

XML

Federal Income Tax (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Deferred tax assets:
Acquired loans	$ 565
Other real estate owned	202	92
Non-accrual loan interest	155	49
Directors' benefit plan	251	272
Net operating loss carryforward	4,177	3,684
Investment in subsidiary		784
Net deferred loan origination fees	89	101
Unrealized gain on available-for-sale securities		83
Other	90	246
Total deferred tax assets	5,529	5,311
Less: valuation allowance	3,090	3,223
Deferred tax liabilities:
Allowance for loan losses	306	322
Mortgage servicing rights	242	292
Partnership losses	132	124
Unrealized gain on available-for-sale securities	222
Depreciation	115	344
Core deposit intangible	437
Other	134	207
Total deferred tax liabilities	1,588	1,289
Net deferred tax asset	$ 851	$ 799

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Servicing (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Rollforward of Mortgage Servicing Rights:
Balance - beginning of period	$ 860	$ 1,035
Originated mortgage servicing rights capitalized	111	151
Amortization of mortgage servicing rights	(261)	(326)
Balance - end of period	710	860
Valuation allowances:
Balance - beginning of period		(19)
Additions
Reductions		19
Balance - end of period	$ 710	$ 860

XML

Securities (Tables)

12 Months Ended

Dec. 31, 2014

Securities Tables

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:

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	31,221	$	58	$	(57	)	$	31,222
Municipal notes		22,894		369		(129	)		23,134
Corporate securities		1,549		12		—			1,561
Mortgage-backed securities		63,648		515		(117	)		64,046
Equity securities		3		2		—			5
Total	$	119,315	$	956	$	(303	)	$	119,968
Securities Held to Maturity
Municipal notes	$	790	$	118	$	—		$	908
		December 31, 2013
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Securities Available for Sale
U.S. Treasury securities and obligations of  U.S. government corporations and agencies	$	7,111	$	36	$	(105	)	$	7,042
Municipal notes		13,694		216		(301	)		13,609
Corporate securities		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 notes	$	2,255	$	145	$	—		$	2,400

Schedule of amortized cost and market value of securities by maturity

	December 31, 2014
	Amortized Cost		Market Value
Available For Sale:
Due in one year or less	$	5,069	$	5,092
Due after one year through five years		38,827		38,843
Due in five year through ten years		10,478		10,562
Due after ten years		1,290		1,420
Subtotal		55,664		55,917
Equity securities		3		5
Mortgage-backed securities		63,648		64,046
Total	$	119,315	$	119,968
Held To Maturity
Due in one year or less	$	45	$	45
Due after one year through five years		200		218
Due in five year through ten years		315		365
Due after ten years		230		280
Total	$	790	$	908

Summary of Temporily Impaired Investments Impaired

There are temporary reasons why securities may be valued at less than amortized cost. Temporary reasons are that the current levels of interest rates as compared to the coupons on the securities held by the Company are higher and impairment is not due to credit deterioration. The Company has the intent and the ability to hold these securities until their value recovers, which may be until maturity.

	December 31, 2014										December 31, 2013
			Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses					Gross Unrealized Losses
	Fair Value		Less than 12 months			Fair Value		12 months or longer			Fair Value		Less than 12 months			Fair Value		12 months or longer
Available For Sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	13,672	$	(28	)	$	971	$	(29	)	$	—	$	—		$	894	$	(105	)
Corporate and other securities
Municipal notes		9,506		(54	)		4,039		(75	)		7,902		(243	)		1,668		(58	)
Mortgage-backed securities		9,923		(31	)		4,666		(86	)		14,471		(334	)		2,052		(50	)
Equity securities		—		—			—		—			—		—			—		—
Total Securities available for sale	$	33,101	$	(113	)	$	9,676	$	(190	)	$	22,373	$	(577	)	$	4,614	$	(213	)
Held to Maturity:
Municipal notes		—		—			—		—			—		—			—		—
Total Securities held to maturity	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—

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Deposits (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Deposits:
NOW accounts and MMDA	$ 107,935	$ 50,222
Regular savings accounts	29,846	22,037
Total	137,781	72,259
Certificates of deposit	76,921	66,723
Total interest-bearing deposits	214,702	138,982
Interest Rates 0.10 percent to 0.99 percent [Member]
Deposits:
Certificates of deposit	42,302	40,259
Interest Rates 4.00 percent to 4.99 percent [Member]
Deposits:
Certificates of deposit	115	133
Interest Rates 3.00 percent to 3.99 percent [Member]
Deposits:
Certificates of deposit	1,050	1,486
Interest Rates 2.00 percent to 2.99 percent [Member]
Deposits:
Certificates of deposit	6,092	7,130
Interest Rates 1.00 percent to 1.99 percent [Member]
Deposits:
Certificates of deposit	$ 27,362	$ 17,715
Lower Range [Member] | Interest Rates 0.10 percent to 0.99 percent [Member]
Deposits:
Certificate of Deposit Rates	0.10%
Lower Range [Member] | Interest Rates 4.00 percent to 4.99 percent [Member]
Deposits:
Certificate of Deposit Rates	4.00%
Lower Range [Member] | Interest Rates 3.00 percent to 3.99 percent [Member]
Deposits:
Certificate of Deposit Rates	3.00%
Lower Range [Member] | Interest Rates 2.00 percent to 2.99 percent [Member]
Deposits:
Certificate of Deposit Rates	2.00%
Lower Range [Member] | Interest Rates 1.00 percent to 1.99 percent [Member]
Deposits:
Certificate of Deposit Rates	1.00%
Upper Range [Member] | Interest Rates 0.10 percent to 0.99 percent [Member]
Deposits:
Certificate of Deposit Rates	0.99%
Upper Range [Member] | Interest Rates 4.00 percent to 4.99 percent [Member]
Deposits:
Certificate of Deposit Rates	4.99%
Upper Range [Member] | Interest Rates 3.00 percent to 3.99 percent [Member]
Deposits:
Certificate of Deposit Rates	3.99%
Upper Range [Member] | Interest Rates 2.00 percent to 2.99 percent [Member]
Deposits:
Certificate of Deposit Rates	2.99%
Upper Range [Member] | Interest Rates 1.00 percent to 1.99 percent [Member]
Deposits:
Certificate of Deposit Rates	1.99%

XML

Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2014

Fair Value Measurements Tables

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

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2014
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	31,223	$	—	$	31,223
Municipal notes		—		23,133		—		23,133
Corporate securities		—		1,561				1,561
Mortgage-backed securities		—		64,046		—		64,046
Equity securities		5		—		—		5
Total investment securities - available-for-sale	$	5	$	119,963	$	—	$	119,968

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)		Balance at December 31, 2013
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal notes		—		13,609		—		13,609
Corporate securities		—		1,097				1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		7		—		—		7
Total investment securities - available-for-sale	$	7	$	50,351	$	—	$	50,358

Schedule of assets measured at fair value on a nonrecurring basis

Other real estate owned assets are reported in the following table at initial recognition of impairment and on an ongoing basis until recovery or charge-off. At the time of foreclosure or repossession, real estate owned and repossessed assets are adjusted to fair value less estimated costs to sell, establishing a new cost basis. At that time, they are reported in the Company’s fair value disclosures in the following nonrecurring tables:

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2014
	Balance at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Originated Assets:
Impaired loans accounted for under FASB ASC 310-10	$	1,806	$	—	$	—	$	1,806
Other real estate owned -residential mortgages		336		—		—		336
Other real estate owned - commercial		1,628		—		—		1,628
Other repossessed assets		860		—		—		860
Total assets at fair value on a non-recurring basis							$	4,630
Acquired Assets:
Impaired loans accounted for under FASB ASC 310-10	$	396	$	—	$	—	$	396
Other real estate owned -residential mortgages		—		—		—		—
		—
Other real estate owned - commercial		—		—		—		—
Other repossessed assets		—		—		—		—
Total assets at fair value on a non-recurring basis							$	396

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)
Impaired loans accounted for under FASB ASC 310-10	$	5,122	$	—	$	—	$	5,122
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							$	6,902

Schedule of carrying value and estimated fair values of Financial Instruments

The estimated fair values and related carrying amounts of the Company’s financial instruments as of December 31, 2014 and 2013 are as follows:

December 31, 2014	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	11,254	$	11,254	$	—	$	—	$	11,254
Deposits held at other financial institutions		8,429		—		8,424		—		8,424
Securities available for sale		119,968		—		119,968		—		119,968
Securities held to maturity		790		—		908		—		908
Loans held for sale		88						90		90
Loans receivable - net		163,646		—		—		163,690		163,690
Federal Home Loan Bank stock		2,591		—		2,591		—		2,591
Accrued interest receivable		986		—		—		986		986
Financial liabilities:
Customer deposits		270,734		—		271,200		—		271,200
Federal Home Loan Bank advances		22,885		—		22,696		—		22,696
Accrued interest payable		101		—		—		101		101

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

XML

Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Fair Value Measurements

FAIR VALUE MEASUREMENTS

Note 14 - Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

The following tables present information about the Company’s assets measured at fair value on a recurring basis at December 31, 2014 and 2013 and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2014
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2014
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	31,223	$	—	$	31,223
Municipal notes		—		23,133		—		23,133
Corporate securities		—		1,561				1,561
Mortgage-backed securities		—		64,046		—		64,046
Equity securities		5		—		—		5
Total investment securities - available-for-sale	$	5	$	119,963	$	—	$	119,968

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)		Balance at December 31, 2013
Investment securities - available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	—	$	7,042	$	—	$	7,042
Municipal notes		—		13,609		—		13,609
Corporate securities		—		1,097				1,097
Mortgage-backed securities		—		28,603		—		28,603
Equity securities		7		—		—		7
Total investment securities - available-for-sale	$	7	$	50,351	$	—	$	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 during the years ended December 31, 2014 and 2013. For the available for sale securities, the Company obtains fair value measurements from an independent third-party service.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include impaired loans (see Note 4) and other real estate owned.

The change in fair value of impaired loans is recorded through the ALLL. The Company estimates the fair value of impaired loans based on Level 3 inputs which include the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals).

Other real estate owned assets are reported in the following table at initial recognition of impairment and on an ongoing basis until recovery or charge-off. At the time of foreclosure or repossession, real estate owned and repossessed assets are adjusted to fair value less estimated costs to sell, establishing a new cost basis. At that time, they are reported in the Company’s fair value disclosures in the following nonrecurring tables:

Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2014
	Balance at December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Originated Assets:
Impaired loans accounted for under FASB ASC 310-10	$	1,806	$	—	$	—	$	1,806
Other real estate owned -residential mortgages		336		—		—		336
Other real estate owned - commercial		1,628		—		—		1,628
Other repossessed assets		860		—		—		860
Total assets at fair value on a non-recurring basis							$	4,630
Acquired Assets:
Impaired loans accounted for under FASB ASC 310-10	$	396	$	—	$	—	$	396
Other real estate owned -residential mortgages		—		—		—		—
		—
Other real estate owned - commercial		—		—		—		—
Other repossessed assets		—		—		—		—
Total assets at fair value on a non-recurring basis							$	396

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)
Impaired loans accounted for under FASB ASC 310-10	$	5,122	$	—	$	—	$	5,122
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							$	6,902

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.

Securities - Fair values of securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

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 other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of nonperforming loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable.

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 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.

Other Financial Instruments - The fair value of other financial instruments, including loan commitments and unfunded letters of credit, based on discounted cash flow analyses, is not material.

The estimated fair values and related carrying amounts of the Company’s financial instruments as of December 31, 2014 and 2013 are as follows:

December 31, 2014	Carrying Value		Level 1		Level 2		Level 3		Total Estimated Fair Value
	(dollars in thousands)
Financial assets:
Cash and cash equivalents	$	11,254	$	11,254	$	—	$	—	$	11,254
Deposits held at other financial institutions		8,429		—		8,424		—		8,424
Securities available for sale		119,968		—		119,968		—		119,968
Securities held to maturity		790		—		908		—		908
Loans held for sale		88						90		90
Loans receivable - net		163,646		—		—		163,690		163,690
Federal Home Loan Bank stock		2,591		—		2,591		—		2,591
Accrued interest receivable		986		—		—		986		986
Financial liabilities:
Customer deposits		270,734		—		271,200		—		271,200
Federal Home Loan Bank advances		22,885		—		22,696		—		22,696
Accrued interest payable		101		—		—		101		101

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