10-Q 1 v377187_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2014

¨ 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 0-25752

FNBH BANCORP, INC.

(Exact name of registrant as specified in its charter)

MICHIGAN		38-2869722
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

101 East Grand River, Howell, Michigan 48843

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (517) 546-3150

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,755,115.

Shares of the Corporation’s Common Stock (no par value) were outstanding as of May 15, 2014.

TABLE OF CONTENTS

		Page
		Number

Part I Financial Information (unaudited)
Item 1. Financial Statements:
	Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	1
	Consolidated Statements of Income for the three months ended March 31, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2014 and 2013	3
	Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2014 and 2013	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	5
	Notes to Interim Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	31
Item 4.	Controls and Procedures	31

Part II. Other Information
Item 1A	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 6.	Exhibits	32

Signatures		33

Discussions and statements in this report that are not statements of historical fact, including, without limitation, statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan,” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions and other statements that are not historical facts, are forward-looking statements. Forward-looking statements include, but are not limited to, statements about the likelihood of additional regulatory enforcement action against our Bank; descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; predictions as to our Bank’s ability to maintain certain regulatory capital standards; our expectation that we will have or be able to maintain sufficient cash to meet expected obligations during 2014; and descriptions of other steps we may take to improve our capital position. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals and, by their nature, are subject to assumptions, risks, and uncertainties. Although we believe that the expectations, forecasts, and goals reflected in these forward-looking statements are reasonable, actual results could differ materially for a variety of reasons, including, among others:

our ability to comply with the various requirements imposed by the regulatory Consent Order against the Bank;

our ability to implement our recovery plan initiatives;

economic, market, operational, liquidity, credit, and interest rate risks associated with our business;

economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our Bank operates;

the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan losses;

the ability of our Bank to maintain certain regulatory capital standards;

increased competition in the financial services industry, either nationally or regionally;

our ability to achieve loan and deposit growth;

volatility and direction of market interest rates;

limitations on our ability to access and rely on wholesale funding sources;

the continued services of our management team; and

implementation of new legislation and regulatory initiatives, which may have significant effects on us and the financial services industry

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all inclusive. The risk factors disclosed in Part I – Item A of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include all known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Part I – Financial Information

Item 1. Financial Statements

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

	March 31, 2014			December 31, 2013
	(in thousands, except share amounts)
Assets
Cash and due from banks	$	46,376		$	77,827
Short term investments		198			198
Total cash and cash equivalents		46,574			78,025

Investment securities:
Investment securities available for sale, at fair value		105,357			67,680
FHLBI and FRB stock, at cost		1,241			779
Total investment securities		106,598			68,459

Loans held for investment:
Commercial		133,671			136,864
Consumer		16,107			16,231
Real estate mortgage		11,715			12,020
Total loans held for investment		161,493			165,115
Less allowance for loan losses		(9,239	)		(9,214	)
Net loans held for investment		152,254			155,901
Premises and equipment, net		7,419			7,395
Other real estate owned, held for sale		1,032			480
Accrued interest and other assets		1,953			2,030
Total assets	$	315,830		$	312,290

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Demand (non-interest bearing)	$	89,725		$	93,953
NOW		30,658			29,937
Savings and money market		89,784			82,518
Time deposits		76,433			77,782
Brokered certificates of deposit		-			1,123
Total deposits		286,600			285,313
Other borrowings		-			16
Accrued interest, taxes, and other liabilities		1,259			1,855
Total liabilities		287,859			287,184

Shareholders' Equity
Preferred stock, no par value.
Series A - Authorized 10,000 shares; no shares issued and outstanding		-			-
Series B - Authorized 20,000 shares; 17,510 shares issued and outstanding		16,520			16,520
Common stock, no par value. Authorized 11,000,000 shares at March 31, 2014 and December 31, 2013; 2,755,887 shares issued and outstanding at March 31, 2014 and 455,115 shares issued and outstanding at December 31, 2013		8,929			7,321
Retained earnings		2,527			2,478
Deferred directors' compensation		224			342
Accumulated other comprehensive loss		(229	)		(1,555	)
Total shareholders' equity		27,971			25,106
Total liabilities and shareholders' equity	$	315,830		$	312,290

See accompanying notes to interim consolidated financial statements (unaudited).

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Three Months Ended March 31, 2014 and 2013

(Unaudited)

	Three months ended March 31,
	2014		2013
	(in thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans	$	2,102	$	2,466
Interest and dividends on securities:
Taxable		368		262
Tax-exempt		12		11
Other securities		10		6
Interest on short term investments		1		1
Total interest and dividend income		2,493		2,746
Interest expense		208		235
Net interest income		2,285		2,511
Provision for loan losses		-		(2,250	)
Net interest income after provison for loan losses		2,285		4,761
Noninterest income:
Service charges and other fee income		592		655
Trust income		32		42
Other		9		63
Total noninterest income		633		760
Noninterest expense:
Salaries and employee benefits		1,502		1,476
Net occupancy expense		237		250
Equipment expense		92		80
Professional and service fees		407		395
Loan collection and foreclosed property expenses		53		83
Computer service fees		129		114
Computer software amortization expense		9		8
FDIC assessment fees		84		256
Insurance		126		131
Printing and supplies		50		43
Net loss on sale/writedown of OREO and repossessions		1		44
Other		174		193
Total noninterest expense		2,864		3,073
Income before federal income taxes		54		2,448
Federal income tax expense (benefit)		5		(42	)
Net income	$	49	$	2,490

Per share statistics:
Basic and diluted EPS	$	0.00	$	5.44

Weighted-average common shares outstanding		557,989		457,435
Weighted-average common stock equivalent preferred shares outstanding, as converted		25,014,285		-
Total basic and diluted shares		25,572,274		457,435

See accompanying notes to interim consolidated financial statements (unaudited).

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2014 and 2013

	Three months ended March 31,
	2014		2013
	(in thousands)
Net income	$	49	$	2,490
Other comprehensive income:
Net change in unrealized gains on securities available for sale		1,326		82
Comprehensive income	$	1,375	$	2,572

See accompanying notes to interim consolidated financial statements (unaudited).

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

Three Months Ended March 31, 2014 and 2013

(Unaudited)

	Preferred Stock		Common Stock		Retained Earnings (Deficit)			Deferred Directors' Compensation			Accumulated Other Comprehensive Income (Loss)			Total
	(in thousands)
Balances at January 1, 2013	$	-	$	7,202	$	(496	)	$	461		$	202		$	7,369
Issued 788 shares for deferred directors' fees		-		119		-			(119	)		-			-
Net income		-		-		2,490			-			-			2,490
Other comprehensive income		-		-		-			-			82			82
Balances at March 31, 2013	$	-	$	7,321	$	1,994		$	342		$	284		$	9,941

Balances at January 1, 2014	$	16,520	$	7,321	$	2,478		$	342		$	(1,555	)	$	25,106
Issuance of common stock		-		1,490		-			-			-			1,490
Issued 772 shares for deferred directors' fees		-		118		-			(118	)		-			-
Net income		-		-		49			-			-			49
Other comprehensive income		-		-		-			-			1,326			1,326
Balances at March 31, 2014	$	16,520	$	8,929	$	2,527		$	224		$	(229	)	$	27,971

See accompanying notes to interim consolidated financial statements (unaudited).

FNBH BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
	2014			2013
	(in thousands)
Cash flows from operating activities:
Net income	$	49		$	2,490
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			(2,250	)
Depreciation and amortization		123			102
Deferred income tax expense (benefit)		-			(42	)
Net amortization on investment securities		208			323
Net loss on sale/writedown of OREO and repossessions		1			44
Decrease in accrued interest income and other assets		72			390
Increase (decrease) in accrued interest, taxes, and other liabilities		(596	)		353
Net cash provided by (used in) operating activities		(143	)		1,410
Cash flows from investing activities
Purchases of available for sale securities		(39,985	)		(20,684	)
Proceeds from maturities and calls of available for sale securities		-			3,000
Proceeds from mortgage-backed securities paydowns - available for sale securities		3,426			5,518
Purchase of FRB stock		(462	)		-
Proceeds from sale of OREO and repossessions		-			1,001
Net decrease in loans		3,094			8,677
Capital expenditures		(142	)		(35	)
Net cash used in investing activities		(34,069	)		(2,523	)
Cash flows from financing activites:
Net increase (decrease) in deposits		1,287			(4,428	)
Common stock issued		1,490			-
(Repayment of) proceeds from other borrowings		(16	)		15
Net cash provided by (used in) financing activities		2,761			(4,413	)
Net change in cash and cash equivalents		(31,451	)		(5,526	)
Cash and cash equivalents at beginning of year		78,025			42,021
Cash and cash equivalents at end of period	$	46,574		$	36,495

Supplemental disclosures:
Interest paid	$	216		$	241
Loans transferred to other real estate owned		553			-
Loans charged off		86			75

See accompanying notes to interim consolidated financial statements (unaudited).

Notes to Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management of FNBH Bancorp, Inc. (the Corporation), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation were included. The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in the 2013 Annual Report contained in the Corporation’s report on Form 10-K filing. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

2. Regulatory Matters and Recovery Initiatives

Regulatory Actions

On October 16, 2008, the Bank entered into a formal agreement with its primary federal regulator, the Office of the Comptroller of the Currency (the "OCC"). Pursuant to the agreement, the Bank agreed to take certain actions intended to address various issues that negatively impacted the Bank's financial condition and performance.

On September 24, 2009, the Bank stipulated to the issuance of a Consent Order against the Bank by the OCC. This Consent Order, which superseded the formal agreement signed in October 2008, required the Bank to take certain actions to improve its financial condition and operations, including achieving and maintaining total capital equal to 11% of risk-weighted assets and Tier 1 capital equal to at least 8.5% of adjusted total assets. The Consent Order included a number of other requirements, including the submission of an acceptable strategic plan for the Bank's operations, the development and implementation of various written plans designed to improve the Bank's management of its loan portfolio, and certain steps to manage risks associated with commercial real estate and construction and development lending.

On October 31, 2013, the Bank stipulated to the issuance by the OCC of a new Consent Order against the Bank (the "Consent Order"). This new Consent Order replaces the Consent Order issued in 2009. The new Consent Order includes essentially all of the articles included in the 2009 Consent Order. In addition, the new Consent Order contains various new provisions intended to enhance the Bank’s risk management policies and practices; requirements to obtain OCC approval prior to deviating from the Bank's strategic business plan; requirements to ensure effective management and board composition, establish a formal compensation plan structure, and better manage third party vendor relationships; a new article requiring the Bank to establish an affiliate transaction policy; and a new article to ensure the effectiveness of the Bank's internal audit program. Importantly, the new Consent Order continues to require the Bank to achieve and maintain total capital equal to 11% of risk weighted assets and Tier 1 capital equal to at least 8.5% of adjusted total assets. The new Consent Order was filed as an exhibit to the Corporation’s Form 10-Q for the quarterly period ended September 30, 2013 and the OCC has made a copy of the new Consent Order available on their website at www.occ.gov.

On December 11, 2013, the Corporation completed a private placement transaction in which it issued 17,510 shares of its Series B Mandatorily Convertible Non-Cumulative Junior Participating Preferred Stock to investors. This private placement resulted in aggregate net proceeds of approximately $16.5 million. On December 20, 2013, the Corporation contributed $15.4 million of the net proceeds from this transaction to the capital of the Bank. As a result, as of December 31, 2013, the Bank met the minimum capital ratios required by the Consent Order. In addition, on March 27, 2014, the Corporation completed a rights offering in which it issued a total of approximately 2.3 million shares of its common stock to existing shareholders for net cash proceeds of approximately $1.5 million. On March 28, 2014, the Corporation contributed $550,000 of the net proceeds from this transaction to the capital of the Bank. These capital contributions enabled the Bank to achieve and maintain the minimum regulatory capital ratios imposed by the Consent Order as of December 31, 2013 and March 31, 2014. (See Note 8 – Shareholders’ Equity.)

As noted above, the Consent Order imposes many other requirements on the Bank in addition to the minimum capital ratios. Despite achieving the required minimum capital levels, the Bank was not in full compliance with any of the other articles of the Consent Order at March 31, 2014. Management believes it has made substantive progress on these other Consent Order requirements through various initiatives. However, additional effort and time is necessary in order for the Bank to demonstrate adherence to, and the effectiveness of, new policies and procedures implemented to remediate deficiencies identified in the Consent Order and to achieve compliance with these other provisions of the Consent Order. The Bank continues to work diligently to meet these requirements in an effort to gain full compliance with the Consent Order.

It will be imperative for the Bank to comply with these other requirements in order to avoid further regulatory enforcement action. As long as the Bank is subject to the Consent Order, the financial performance of the Corporation will be adversely impacted by higher FDIC insurance premiums paid by the Bank and other ongoing costs incurred to correct the deficiencies underlying the requirements of the Consent Order.

Despite exceeding minimum regulatory standards for well-capitalized institutions at March 31, 2014, for purposes of the regulators’ Prompt Corrective Action (“PCA”) powers, the Bank is currently considered "adequately capitalized" due to being subject to the Consent Order. As a result of this classification, for purposes of PCA, the Bank is subject to a number of additional restrictions. These include, among other things, limitations on the payment of capital distributions and management fees; prohibitions on the acceptance, renewal, or roll-over of any brokered deposit without prior written approval of the Federal Deposit Insurance Corporation (FDIC); and restrictions on interest rates paid on deposits. The Bank's capital category is determined solely for purposes of applying PCA; the capital category may not constitute an accurate representation of the Bank's overall financial condition or prospects.

In addition to the above regulatory actions and restrictions imposed on the Bank, the Federal Reserve has imposed restrictions on the Corporation to effect its support of the Bank. Specifically, the Corporation must receive approval from the Federal Reserve before the payment of dividends, issuance of debt, or redemption of stock. Additional restrictions on the Corporation by the Federal Reserve relate to changes in the composition of board members, the employment of senior executive officers or changes in the responsibilities of senior executive officers, and limitations on indemnification and severance payments.

Despite restoration of the Bank’s regulatory capital ratios to minimum levels imposed by the Consent Order, there is no assurance that the Bank will be able to maintain these capital ratios throughout 2014 or beyond. Moreover, management and the Board of Directors' execution of various initiatives designed to fully satisfy the asset quality, risk management, and other requirements of the Consent Order will take additional time and may not prove to be sufficiently effective. As such, no assurance can be provided as to whether or when the Bank will be in full compliance with the Consent Order or whether or when the Consent Order will be lifted or terminated. Even if lifted or terminated, the Bank may still be subject to a memorandum of understanding or other enforcement action by regulators that would restrict activities or that would continue to impose greater capital requirements on the Bank. The requirements and restrictions of the Consent Order are legally enforceable and the Bank’s failure to comply with such requirements and restrictions may subject the Corporation and the Bank to additional regulatory restrictions.

Recovery Plan Initiatives

As part of a recovery plan initiated in late 2008, management and the Board of Directors have been aggressively pursuing various initiatives intended to address and satisfy deficiencies identified in the Consent Order, the most important of which was a significant recapitalization necessary to restore the Bank’s capital. Other recovery plan efforts and initiatives are designed to improve the Bank’s financial health and risk management practices and policies. They include aggressively reducing credit risk exposure in the loan portfolio and improving the efficiency and effectiveness of core business processes. Certain other key elements of management’s continued recovery plan include, but are not limited to:

Continued, aggressive management of the Bank’s existing loan portfolio to reduce the level of classified loans, to minimize further credit losses and to maximize recoveries via negotiated payoffs, settlements and restructuring of existing problem loans;

Continued strengthening of risk management processes and procedures via ensuring the Bank has appropriate personnel with sufficient experience, training and authority to execute safe and sound banking practices with respect to asset quality;

Improvement of core profitability via gradual repositioning of balance sheet composition to increase earning assets while ensuring the Bank maintains an acceptable risk profile and adequate capital levels; and

Commitment to dedicate sufficient resources to address all portions of the Consent Order followed by a managed re-alignment of operating costs with a recapitalized, restructured and more efficient banking operation designed to promote balance sheet growth in an increasingly regulated and competitive business climate.

Management makes no assurances that the efforts, results, and/or future plans described above will improve the Bank’s overall financial condition, guarantee profitability in 2014, or ensure the modification or discharge of existing regulatory enforcement actions imposed on the Bank.

3. Securities

Securities available for sale consist of the following:

			Unrealized
	Amortized Cost		Gains		Losses			Fair Value
	(in thousands)
March 31, 2014
Mortgage-backed/CMO	$	83,588	$	131	$	(1,147	)	$	82,572
U.S. Agency		20,157		-		(43	)		20,114
Obligations of state and political subdivisions		1,792		12		-			1,804
Preferred stock⁽¹⁾		49		818		-			867
Total available for sale	$	105,586	$	961	$	(1,190	)	$	105,357

December 31, 2013
Mortgage-backed/CMO	$	67,392	$	84	$	(2,307	)	$	65,169
Obligations of state and political subdivisions		1,794		7		(7	)		1,794
Preferred stock⁽¹⁾		49		668		-			717
Total available for sale	$	69,235	$	759	$	(2,314	)	$	67,680

⁽¹⁾Represents preferred stocks issued by Freddie Mac and Fannie Mae

Securities are reviewed quarterly for possible other-than-temporary impairment (OTTI) based on guidance included in ASC Topic 320, Investments–Debt and Equity Instruments. This guidance requires an entity to assess whether it intends to sell, or whether it is more likely than not that it will be required to sell, a security in an unrealized loss position before the recovery of the security’s amortized cost basis. If either of these criteria is met, the entire difference between the amortized cost and fair value is recognized in earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.

Management’s review of the securities portfolio for the existence of OTTI considers various qualitative and quantitative factors regarding each investment category, including if the securities were U.S. Government issued, the credit rating on the securities, credit outlook, payment status and financial condition, the length of time the security has been in a loss position, the size of the loss position and other meaningful information.

At March 31, 2014, the Corporation had one agency mortgage-backed security and two agency CMO securities which have been impaired for more than twelve months. At December 31, 2013, there were two agency CMO securities impaired more than twelve months.

A summary of the par value, book value, carrying value (fair value) and unrealized loss for the non-agency mortgage-backed security is presented below:

	March 31, 2014					December 31, 2013
	Amount		% of Par			Amount		% of Par
	(dollars in thousands)

Par value	$	1,557		100.00	%	$	1,632		100.00	%
Book value		1,382		88.76	%		1,454		83.34	%
Carrying value		1,419		91.14	%		1,454		83.34	%
Unrealized gain (loss)		37		2.38	%		-		0.00	%

The Corporation makes a quarterly assessment of OTTI on its only non-agency mortgage-backed security primarily based on a quarterly cash flow analysis performed by an independent third-party specialist. The evaluation includes a comparison of the present value of the expected cash flows to previous estimates to determine whether adverse changes in cash flows resulted during the period. The analysis considers attributes of the security, such as its super tranche position, and specific loan level collateral underlying the security. Certain key attributes of the underlying loans supporting the security included the following:

	March 31, 2014			December 31, 2013
Weighted average remaining credit score (based on original FICO)		736			737
Primary location of underlying loans:
California		69	%		70	%
Florida		3	%		3	%
Other		28	%		27	%
Delinquency status of underlying loans:
Past due 30-59 days		3.07	%		1.44	%
Past due 60-89 days		1.05	%		3.44	%
Past due 90 days or more		7.37	%		6.01	%
In process of foreclosure		6.02	%		3.78	%
Held as other real estate owned		0.00	%		0.00	%

The specialist calculates an estimate of the fair value of the security's cash flows using an INTEX valuation model, subject to certain assumptions regarding collateral related cash flows such as expected prepayment rates, default rates, loss severity estimates, and discount rates as key valuation inputs. Certain key attributes of the underlying loans supporting the security included the following:

	March 31, 2014			December 31, 2013
Voluntary repayment rate (CRR)		15.26	%		14.27	%
Default rates:
Within next 24 months		7.33	%		6.56	%
Decreasing to (by month 37)		3.32	%		3.55	%
Decreasing to (by month 209 at March 2014 and by month 212 at December 2013)		0.00	%		0.00	%
Loss severity rates:
Initial loss upon default (Year 1)		46.13	%		45.08	%
Per annum decrease in loss rate (Years 2 - 11)		3.50	%		3.50	%
Floor (Year 12)		23.00	%		23.00	%
Discount rate ⁽¹⁾:		6.00	%		5.50	%
Remaining credit support provided by other collateral pools of underlying loans within the security:		0.00	%		0.00	%

⁽¹⁾Intended to reflect estimated uncertainty and liquidity premiums, after adjustment for estimated credit loss cash flows.

The prepayment assumptions used within the model consider borrowers’ incentive to prepay based on market interest rates and borrowers’ ability to prepay based on underlying assumptions for borrowers’ ability to qualify for a new loan based on their credit and appraised property value, by location. As such, prepayment speeds decrease as credit quality and home prices deteriorate, reflecting a diminished ability to refinance.

In addition, collateral cash flow assumptions utilize a valuation technique under a “Liquidation Scenario” whereby loans are evaluated by delinquency and are assigned probability of default and loss factors deemed appropriate in the current economic environment. The liquidation scenarios assume that all loans 60 or more days past due migrate to default, are liquidated, and losses are realized over a period of between six and twenty four months based in part upon initial loan to value ratios and estimated changes in both historical and future property values since origination as obtained from financial data sources.

At March 31, 2014, based on a present value at a prospective yield of future cash flows for the investment as provided by the specialist and after management’s evaluation of the reasonableness of the specialist's underlying assumptions regarding Level 2 and Level 3 inputs, the Corporation concluded that the security’s expected cash flows continued to support the amortized cost of the security and no additional other-than-temporary impairment had been incurred.

At March 31, 2014 the non-agency mortgage-backed security was in an unrealized gain position of approximately $37,000. At December 31, 2013, using the valuation methodology and applicable inputs and assumptions described above, there was no unrealized gain or loss on the security.

The following is a summary of the gross unrealized losses and fair value of securities by length of time that individual securities have been in a continuous loss position:

	Less than 12 months					12 months or more					Total
	Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value
	(in thousands)
March 31, 2014
Mortgage-backed/CMO	$	(1,076	)	$	59,988	$	(71	)	$	4,924	$	(1,147	)		64,912
U.S Agency		(43	)		20,114		-			-		(43	)		20,114
Total	$	(1,119	)	$	80,102	$	(71	)	$	4,924	$	(1,190	)	$	85,026

December 31, 2013
Mortgage-backed/CMO	$	(2,093	)	$	52,020	$	(214	)	$	3,537	$	(2,307	)		55,557
Obligations of state and political subdivisions		(7	)		780		-			-		(7	)		780
Total	$	(2,100	)	$	52,800	$	(214	)	$	3,537	$	(2,314	)	$	56,337

The amortized cost and fair value of securities available for sale, by contractual maturity, follow. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2014				December 31, 2013
	Amortized Cost		Approximate Fair Value		Amortized Cost		Approximate Fair Value
	(in thousands)
Maturing within one year	$	-	$	-	$	-	$	-
Maturing after one year but within five years		20,916		20,876		761		761
Maturing after five years but within ten years		505		513		505		512
Maturing after ten years		577		1,396		577		1,238
		21,998		22,785		1,843		2,511
Mortgage-backed/CMO securities		83,588		82,572		67,392		65,169
Totals	$	105,586	$	105,357	$	69,235	$	67,680

Proceeds from at-par calls of securities totaled $3.0 million for the three months ended March 31, 2013. No securities were called during the three month period ended March 31, 2014.

At March 31, 2014 and December 31, 2013, the Corporation did not own any investment securities issued by states and political subdivisions in which the amortized cost and fair value of such securities individually exceeded 10% of shareholders’ equity.

Investment securities, with an amortized cost of approximately $58.4 million at March 31, 2014 were pledged to secure public deposits and for other purposes required or permitted by law, including approximately $24.3 million of securities pledged as collateral at the Federal Home Loan Bank of Indianapolis (FHLBI) to support potential liquidity needs of the Bank. At December 31, 2013, the amortized cost of pledged investment securities totaled $60.8 million of which $25.5 million of securities was pledged as collateral at the FHLBI for contingent liquidity needs of the Bank.

The Bank owns stock in the Federal Home Loan Bank of Indianapolis (FHLBI) and the Federal Reserve Bank (FRB), both of which are recorded at cost. The Bank is required to hold stock in the FHLBI equal to 5% of the institution’s borrowing capacity with the FHLBI. The Bank’s investment in FHLBI stock amounted to $735,000 at March 31, 2014 and December 31, 2013. As a member bank of the Federal Reserve System, the Bank is required to own FRB capital stock equal to six percent of its capital and surplus. The Bank’s investment in FRB stock totaled $506,000 and $44,000 at March 31, 2014 and December 31, 2013, respectively. In March 2014, the Bank purchased additional FRB stock due to the increase in its capital position resulting from the December 2013 capital contribution from the Corporation. The FHLBI and FRB stock investments can only be resold to, or redeemed by, the issuer.

4. Loans

The recorded investment in portfolio loans consists of the following:

	March 31, 2014			December 31, 2013
	(in thousands)
Commercial	$	16,215		$	15,019
Commercial real estate:
Construction, land development, and other land		5,724			5,826
Owner occupied		47,923			49,012
Nonowner occupied		57,732			60,322
Consumer real estate:
Commercial purpose		6,230			6,886
Mortgage - Residential		12,599			12,955
Home equity and home equity lines of credit		8,987			8,991
Consumer and Other		6,242			6,273
Subtotal		161,652			165,284
Unearned income		(159	)		(169	)
Total Loans	$	161,493		$	165,115

Included in the consumer real estate loans above are residential first mortgages reported as “real estate mortgages” on the consolidated balance sheets. In addition, a portion of these consumer real estate loans include commercial purpose loans where the borrower has pledged a 1-4 family residential property as collateral. Loans also include the reclassification of demand deposit overdrafts, which amounted to $102,000 at March 31, 2014 and $114,000 at December 31, 2013, respectively.

Loans serviced for others, including commercial participations sold, are not reported as assets of the Bank and approximated $3.8 million at March 31, 2014 and $3.9 million at December 31, 2013.

5. Allowance for Loan Losses and Credit Quality of Loans

The Corporation separates its loan portfolio into segments to perform the calculation and analysis of the allowance for loan losses. The four segments analyzed are Commercial, Commercial Real Estate, Consumer Real Estate, and Consumer and Other. The Commercial segment includes loans to finance commercial and industrial businesses that are not secured by real estate. The Commercial Real Estate segment includes: i) construction real estate loans to finance construction and land development and/or loans secured by vacant land and ii) commercial real estate loans secured by non-farm, non-residential real estate which are further classified as either owner occupied or non-owner occupied based on the underlying collateral type. The Consumer Real Estate segment includes (commercial and non-commercial purpose) loans that are secured by 1 – 4 family residential real estate properties, including first mortgages on residential properties and home equity loans and lines of credit that are secured by first or second liens on residential properties. The Consumer and Other segment include all loans not included in any other segment. These are primarily loans to consumers for household, family, and other personal expenditures, such as autos, boats, and recreational vehicles.

Activity in the allowance for loan losses by portfolio segment for three months ended:

	Commercial			Commercial Real Estate			Consumer Real Estate			Consumer and Other			Total
	(in thousands)
March 31, 2014
Allowance for loan losses:
Beginning balance	$	633		$	7,180		$	1,215		$	186		$	9,214
Charge offs		(1	)		(41	)		(23	)		(21	)		(86	)
Recoveries		57			9			17			28			111
Provision		(67	)		81			(25	)		11			-
Ending balance	$	622		$	7,229		$	1,184		$	204		$	9,239

March 31, 2013
Allowance for loan losses:
Beginning balance	$	908		$	8,682		$	2,036		$	143		$	11,769
Charge offs		-			(24	)		(7	)		(44	)		(75	)
Recoveries		17			5			63			24			109
Provision		(33	)		(1,797	)		(445	)		25			(2,250	)
Ending balance	$	892		$	6,866		$	1,647		$	148		$	9,553

The following presents the balance in allowance for loan losses and loan balances by portfolio segment based on impairment method:

	Commercial		Commercial Real Estate		Consumer Real Estate		Consumer and Other		Total
	(in thousands)
March 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	-	$	1,982	$	-	$	-	$	1,982
Collectively evaluated for impairment		622		5,247		1,184		204		7,257
Total allowance for loan losses	$	622	$	7,229	$	1,184	$	204	$	9,239

Recorded investment in loans:
Individually evaluated for impairment	$	333	$	16,393	$	1,787	$	-	$	18,513
Collectively evaluated for impairment		15,882		94,986		26,029		6,242		143,139
Total recorded investment in loans	$	16,215	$	111,379	$	27,816	$	6,242	$	161,652

December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	11	$	2,298	$	135	$	-	$	2,444
Collectively evaluated for impairment		622		4,882		1,080		186		6,770
Total allowance for loan losses	$	633	$	7,180	$	1,215	$	186	$	9,214

Recorded investment in loans:
Individually evaluated for impairment	$	211	$	17,052	$	1,848	$	-	$	19,111
Collectively evaluated for impairment		14,808		98,108		26,984		6,273		146,173
Total recorded investment in loans	$	15,019	$	115,160	$	28,832	$	6,273	$	165,284

Management’s on-going monitoring of the credit quality of the portfolio relies on an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank’s customers, the payment performance of individual loans and pools of homogenous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific relationships.

Our internal loan grading system assigns a risk grade to all commercial loans. This grading system is similar to those employed by banking regulators. Grades 1 through 5 are considered “pass” credits and grade 6 are considered “watch” credits and are subject to greater scrutiny. Those loans graded 7 and higher are considered substandard and are individually evaluated for impairment if reported as nonaccrual and are greater than $100,000 or part of an aggregate relationship exceeding $100,000. All commercial loans are graded at inception and reviewed, and if appropriate, re-graded at various intervals thereafter. Additionally, our commercial loan portfolio and assigned risk grades are periodically subjected to review by external loan reviewers and banking regulators. Certain of the key factors considered in assigning loan grades include: cash flows, operating performance, financial condition, collateral, industry condition, management, and the strength, liquidity and willingness of guarantors’ support.

A description of the general characteristics of each risk grade follows:

	·	RATING 1 (Satisfactory – Minimal Risk) - Loans in this category are to persons or entities of unquestioned financial strength, a highly liquid financial position, with collateral that is liquid and well margined. These borrowers have performed without question on past obligations, and the Bank expects their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin.

	·	RATING 2 (Satisfactory – Modest Risk) – These loans to persons or entities with strong financial condition and above-average liquidity who have previously satisfactorily handled their obligations with the Bank. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally-generated cash flow covers current maturities of long-term debt more than adequately.

	·	RATING 3 (Satisfactory - Average) – These are loans with average cash flow and ratios compared to peers. Usually RMA comparisons show where companies fall in the performance spectrum. Companies have consistent performance for 3 or more years.

	·	RATING 4 (Satisfactory – Acceptable Risk) – Loans to persons or entities with an average financial condition, adequate collateral margins, adequate cash flow to service long-term debt, and net worth comprised mainly of fixed assets are included in this category. These entities are minimally profitable now, with projections indicating continued profitability into the foreseeable future. Overall, these loans are basically sound.

RATING 5 (Satisfactory - Acceptable – Monitor) - These loans are characterized by borrowers who have marginal, but adequate cash flow, marginal profitability, but currently have been meeting the obligations of their loan structure. However, adverse changes in the borrower’s circumstances and/ or current economic conditions are more likely to impair their capacity for repayment. The borrower has in the past satisfactorily handled debts with the Bank, but may be experiencing some minor delinquency in making payments, or other signs of temporary cash flow issues. Borrower may be experiencing declining margins or other negative financial trends, despite the borrower’s continued satisfactory condition and positive cash flow. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement, or declining but positive repayment capacity. This classification includes loans to new or established borrowers with satisfactory loan structure, but where near term economic or business issues appears to remain stable and the near term projections would limit the ability for an improvement in the financial trends of the borrower.

	·	RATING 6 (Special Mention - OAEM) - Loans in this class have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. These potential weaknesses may result in a deterioration of the repayment of the loan and increase the credit risk. Special mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Special mention credits may include a borrower that pays the Bank on a timely basis (occasional 30 day delinquent) and may be experiencing temporary cash flow deficiencies.

	·	RATING 7 (Substandard) – A substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans. Substandard credits may include a borrower that pays consistently past due, has significant cash flow shortages and may have a collateral shortfall that requires a specific reserve.

RATING 8 (Doubtful) - This risk rating class has all of the weaknesses inherent in the substandard rating but with the added characteristic that the weaknesses make collection in full or liquidation, on the basis of currently known existing facts, condition, and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectability in full within a reasonable period of time; in fact, there is permanent impairment in the collateral securing the Bank’s loan. These loans are in a work-out status, must be non-accrual status and have a defined work-out strategy.

This is a transitional risk rating class while collateral value and other factors are assessed. Loans will remain in this class for the assessment period, but in no event for more than 1 year. If there is no improvement in the Bank’s position during that time, a charge-off will be taken to best reflect known asset collateral value. If the loan goes into a “Deeds in Redemption” status before 1 year, any shortfall will be recognized immediately.

The assessment of compensating factors may result in a rating plus or minus one grade from those listed above. These factors include, but are not limited to collateral, guarantors, environmental conditions, history, plan/projection reasonableness, quality of information, and payment delinquency.

The internal loan grading system is applied to the residential real estate portion of our consumer loan portfolio upon certain triggering events (e.g., delinquency, bankruptcy, restructuring, etc.). However, large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment and they are not separately identified for impairment disclosures. The primary risk element for the residential real estate portion of consumer loans is the timeliness of borrowers’ scheduled payments. We rely primarily on our internal reporting system to monitor past due loans and have internal policies and procedures to pursue collection and protect our collateral interests in order to mitigate losses.

Our monitoring of credit quality is further denoted by classification of loans as nonperforming, which reflects loans where the accrual of interest has been discontinued and loans that are past due 90 days or more and still accruing interest. In addition, nonperforming loans include troubled debt restructured loans (as discussed below) that are on nonaccrual status or past due 90 days or more. Troubled debt restructured loans that are accruing interest and not past due 90 days or more are excluded from nonperforming loans.

The following presents the recorded investment in loans by risk grade and a summary of nonperforming loans, by class of loan:

	Not Rated		1		2		3		4		5		6		7		8		Total		Nonperforming
	(in thousands)
March 31, 2014
Commercial	$	102	$	446	$	16	$	3,744	$	5,297	$	5,773	$	540	$	297	$	-	$	16,215	$	237
Commercial Real Estate:
Construction, land development, and other land		-		-		-		-		1,534		1,965		162		589		1,474		5,724		1,902
Owner occupied		30		-		687		2,995		20,514		15,916		2,849		4,932		-		47,923		2,654
Nonowner occupied		-		-		379		1,332		17,812		28,062		4,660		5,487		-		57,732		3,194
Consumer real estate:
Commercial Purpose		-		-		-		119		1,191		3,422		315		1,183		-		6,230		1,053
Mortgage - Residential		5,274		-		-		-		-		4,158		-		3,167		-		12,599		2,010
Home equity and home equity lines of credit		7,213		-		-		-		-		1,233		-		541		-		8,987		352
Consumer and Other		5,790		-		-		-		-		338		-		114		-		6,242		44
Total	$	18,409	$	446	$	1,082	$	8,190	$	46,348	$	60,867	$	8,526	$	16,310	$	1,474	$	161,652	$	11,446

December 31, 2013
Commercial	$	114	$	479	$	17	$	2,680	$	5,057	$	5,901	$	607	$	164	$	-	$	15,019	$	12
Commercial Real Estate:
Construction, land development, and other land		-		-		-		-		1,840		1,745		165		602		1,474		5,826		1,849
Owner occupied		32		-		720		3,132		20,987		16,172		2,916		5,053		-		49,012		2,580
Nonowner occupied		-		-		393		1,340		19,057		28,865		4,735		5,932		-		60,322		3,623
Consumer real estate:
Commercial Purpose		-		-		-		221		1,712		3,399		760		794		-		6,886		663
Mortgage - Residential		5,490		-		-		-		-		4,349		-		3,116		-		12,955		1,853
Home equity and home equity lines of credit		4,164		3,502		-		-		-		770		-		555		-		8,991		363
Consumer and Other		5,839		-		-		-		-		307		-		127		-		6,273		124
Total	$	15,639	$	3,981	$	1,130	$	7,373	$	48,653	$	61,508	$	9,183	$	16,343	$	1,474	$	165,284	$	11,067

Loans are considered past due when contractually required principal or interest has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due.

An aging analysis of the recorded investment in past due loans, segregated by class of loans follows:

													90+ Days
	Loans Past Due												Past Due
	30-59 Days		60-89 Days		90+ Days		Total		Current		Total		and Accruing
	(in thousands)
March 31, 2014
Commercial	$	149	$	-	$	-	$	149	$	16,066	$	16,215	$	-
Commercial real estate:
Construction, land development, and other land		-		-		67		67		5,657		5,724		-
Owner occupied		-		-		160		160		47,763		47,923		-
Nonowner occupied		362		-		373		735		56,997		57,732		-
Consumer real estate:
Commercial purpose		127		-		1		128		6,102		6,230		-
Mortgage - Residential		1,105		285		392		1,782		10,817		12,599		-
Home equity and home equity lines of credit		144		2		-		146		8,841		8,987		-
Consumer and Other		32		14		-		46		6,196		6,242		-
Total	$	1,919	$	301	$	993	$	3,213	$	158,439	$	161,652	$	-

December 31, 2013
Commercial	$	-	$	-	$	-	$	-	$	15,019	$	15,019	$	-
Commercial real estate:
Construction, land development, and other land		-		-		68		68		5,758		5,826		-
Owner occupied		153		155		843		1,151		47,861		49,012		-
Nonowner occupied		627		312		241		1,180		59,142		60,322		-
Consumer real estate:
Commercial purpose		103		-		123		226		6,660		6,886		-
Mortgage - Residential		77		851		104		1,032		11,923		12,955		-
Home equity and home equity lines of credit		75		37		-		112		8,879		8,991		-
Consumer and Other		55		9		-		64		6,209		6,273		-
Total	$	1,090	$	1,364	$	1,379	$	3,833	$	161,451	$	165,284	$	-

Loans are placed on nonaccrual when, in the opinion of management, the collection of additional interest is doubtful. Loans are generally placed on nonaccrual upon becoming ninety days past due. However, loans may be placed on nonaccrual regardless of whether or not they are past due. All cash received on nonaccrual loans is applied to the principal balance. Loans are considered for return to accrual status on an individual basis when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following is a summary of the recorded investment in nonaccrual loans, by class of loan:

	March 31, 2014		December 31, 2013
	(in thousands)
Commercial	$	237	$	12
Commercial real estate:
Construction, land development, and other land		1,902		1,849
Owner occupied		2,654		2,580
Nonowner occupied		3,194		3,623
Consumer real estate:
Commercial purpose		1,053		663
Mortgage - Residential		2,010		1,853
Home equity and home equity lines of credit		352		363
Consumer and Other		44		124
Total	$	11,446	$	11,067

The following presents information pertaining to impaired loans and related valuation allowance allocations by class of loan:

	March 31, 2014						December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Valuation Allowance		Recorded Investment		Unpaid Principal Balance		Valuation Allowance
	(in thousands)
With an allowance recorded:
Commercial	$	-	$	-	$	-	$	198	$	224	$	11
Commercial real estate:
Construction, land development, and other land		2,175		4,450		1,627		2,368		4,664		1,649
Owner occupied		2,056		2,255		147		3,467		3,799		297
Nonowner occupied		4,700		4,758		208		5,107		5,470		352
Consumer real estate:
Commercial purpose		-		-		-		1,185		1,316		135
Mortgage - Residential		-		-		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-		-		-
Consumer and Other		-		-		-		-		-		-
Total		8,931		11,463		1,982		12,325		15,473		2,444

With no related allowance recorded:
Commercial		333		389		-		13		14		-
Commercial real estate:
Construction, land development, and other land		479		604		-		306		416		-
Owner occupied		3,789		4,727		-		2,556		3,517		-
Nonowner occupied		3,194		3,890		-		3,248		3,871		-
Consumer real estate:
Commercial purpose		1,787		2,533		-		663		1,261		-
Mortgage - Residential		-		-		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-		-		-
Consumer and Other		-		-		-		-		-		-
Total		9,582		12,143		-		6,786		9,079		-

Total:
Commercial		333		389		-		211		238		11
Commercial real estate:
Construction, land development, and other land		2,654		5,054		1,627		2,674		5,080		1,649
Owner occupied		5,845		6,982		147		6,023		7,316		297
Nonowner occupied		7,894		8,648		208		8,355		9,341		352
Consumer real estate:
Commercial purpose		1,787		2,533		-		1,848		2,577		135
Mortgage - Residential		-		-		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-		-		-
Consumer and Other		-		-		-		-		-		-
Total Impaired Loans	$	18,513	$	23,606	$	1,982	$	19,111	$	24,552	$	2,444

The following presents information pertaining to the recorded investment in impaired loans for the three months ended:

	March 31, 2014				March 31, 2013
	Average Outstanding Balance		Interest Income Recognized		Average Outstanding Balance		Interest Income Recognized
	(in thousands)
Commercial	$	373	$	2	$	774	$	4
Commercial real estate:
Construction, land development, and other land		2,696		10		3,625		20
Owner occupied		6,037		48		7,456		80
Nonowner occupied		8,017		59		8,169		78
Consumer real estate:
Commercial purpose		1,808		11		2,415		22
Mortgage - Residential		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-
Consumer and Other		-		-		-		-
Total	$	18,931	$	130	$	22,439	$	204

For loans where impairment is measured based on the present value of expected future cash flows, subsequent changes in present value and related allowance adjustments resulting from the passage of time are accounted within the provision for loan losses rather than interest income.

Troubled Debt Restructurings

The Corporation may agree to modify the terms of a loan to improve its ability to collect amounts due. The modified terms are intended to enable customers to mitigate the risk of foreclosure by creating a payment structure that provides for continued loan payment requirements based on their current cash flow ability. Modifications, including renewals, where concessions are made by the Bank and result from the debtor’s financial difficulties are considered troubled debt restructurings (TDRs).

Loan modifications are considered TDRs when the modification includes terms outside of normal lending practices (i.e., concessions) to a borrower who is experiencing financial difficulties.

Typical concessions granted include, but are not limited to:

Agreeing to interest rates below prevailing market rates for debt with similar risk characteristics

Extending the amortization period beyond typical lending guidelines for debt with similar risk characteristics

Forbearance of principal

Forbearance of accrued interest

To determine if a borrower is experiencing financial difficulties, the Corporation considers if:

The borrower is currently in default on any other of their debt

It is likely that the borrower would default on any of their debt if the concession was not granted

The borrower’s cash flow was sufficient to service all of their debt if the concession was not granted

The borrower has declared, or is in the process of declaring bankruptcy

The borrower is a going concern (if the entity is a business)

The following summarizes troubled debt restructurings:

	March 31, 2014						December 31, 2013
	Outstanding Recorded Investment						Outstanding Recorded Investment
	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
	(in thousands)
Commercial	$	96	$	193	$	289	$	199	$	13	$	212
Commercial real estate:
Construction, land development, and other land		820		1,653		2,473		826		1,662		2,488
Owner occupied		3,190		2,236		5,426		3,442		2,202		5,644
Nonowner occupied		4,700		2,436		7,136		4,732		2,281		7,013
Consumer real estate:
Commercial purpose		734		899		1,633		1,185		502		1,687
Mortgage - Residential		795		941		1,736		940		823		1,763
Home equity and home equity lines of credit		57		242		299		58		250		308
Consumer and Other		6		54		60		6		61		67
Total	$	10,398	$	8,654	$	19,052	$	11,388	$	7,794	$	19,182

Troubled debt restructured loans may qualify for return to accrual status if the borrower complies with the revised terms and conditions and has demonstrated sustained payment performance consistent with the modified terms for a minimum of six consecutive payment cycles after the restructuring date. In addition, the collection of future payments must be reasonably assured.

The following presents information regarding existing loans that were restructured, resulting in the loan being classified as a troubled debt restructuring:

	Loans Restructured in the Three Months						Loans Restructured in the Three Months
	Ended March 31, 2014						Ended March 31, 2013
			Pre- Modification		Post-Modification				Pre- Modification		Post-Modification
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of Loans		Investment		Investment		of Loans		Investment		Investment
	(dollars in thousands)
Commercial		-	$	-	$	-		-	$	-	$	-
Commercial real estate:
Construction, land development, and other land		-		-		-		-		-		-
Owner occupied		1		35		35		1		390		390
Nonowner occupied		1		212		212		-		-		-
Consumer real estate:
Commercial purpose		-		-		-		1		114		114
Mortgage - Residential		-		-		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-		-		-
Consumer and Other		-		-		-		-		-		-
Total		2	$	247	$	247		2	$	504	$	504

During the three months ended March 31, 2013, the Corporation had four TDR loans with a recorded investment of $1.8 million that defaulted within 12 months of restructuring. During the three months ended March 31, 2014 there were no payment defaults on TDR loans. A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms.

The following summarizes the nature of concessions granted by the Corporation to borrowers experiencing financial difficulties which resulted in troubled debt restructurings:

									Non-Market Interest Rate
					Extension of				and Extension of
	Non-Market Interest Rate				Amortization Period				Amortization Period
			Pre-Modification				Pre-Modification				Pre-Modification
	Number		Recorded		Number		Recorded		Number		Recorded
	of Loans		Investment		of Loans		Investment		of Loans		Investment
	(dollars in thousands)
Three months ended March 31, 2014
Commercial		-	$	-			$	-		-	$	-
Commercial real estate:
Construction, land development, and other land		-		-		-		-		-		-
Owner occupied		-		-		1		35		-		-
Nonowner occupied		-		-		1		212		-		-
Consumer real estate:
Commercial purpose		-		-		-		-		-		-
Mortgage - Residential		-		-		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-		-		-
Consumer and Other		-		-		-		-		-		-
Total		-	$	-		2	$	247		-	$	-
Three months ended March 31, 2013
Commercial		-	$	-		-	$	-		-	$	-
Commercial real estate:
Construction, land development, and other land		-		-		-		-		-		-
Owner occupied		-		-		-		-		1		390
Nonowner occupied		-		-		-		-		-		-
Consumer real estate:
Commercial purpose		-		-		1		114		-		-
Mortgage - Residential		-		-		-		-		-		-
Home equity and home equity lines of credit		-		-		-		-		-		-
Consumer and Other		-		-		-		-		-		-
Total		-	$	-		1	$	114		1	$	390

During the three months ended March 31, 2014 and 2013, there were no non-market interest rate restructurings of substandard performing loans that were renewed at their existing contractual rates or non-market rates. Renewals of substandard performing loans at non-market interest rates are considered troubled debt restructurings.

6. Fair Value Measurements

ASC Topic 820 defines fair value and establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurements. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price”. The three levels of inputs that may be used to measure fair value are as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of the Corporation’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring basis:

Securities available for sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, if available (Level 1). If quoted prices are not available, fair values are measured using independent pricing models such as matrix pricing models (Level 2). Matrix pricing is a mathematical technique widely used in the financial industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 securities include U.S. government and agency securities, other U.S. government and agency mortgage-backed securities, municipal bonds and preferred stock securities. Level 3 securities include private collateralized mortgage obligations. The fair value measurement of our only Level 3 security, a non-investment grade CMO, and details regarding significant inputs and assumptions used in estimating its fair value, is detailed in Note 3, Securities.

Fair value of assets measured on a recurring basis:

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
March 31, 2014
Mortgage-backed/CMO	$	82,572	$	-	$	81,153	$	1,419
U.S. Agency		20,114		-		20,114		-
Obligations of state and political subdivisions		1,804		-		1,804		-
Preferred stock		867		-		867		-
Total investment securities available for sale	$	105,357	$	-	$	103,938	$	1,419

December 31, 2013
Mortgage-backed/CMO	$	65,169	$	-	$	63,715	$	1,454
Obligations of state and political subdivisions		1,794		-		1,794		-
Preferred stock		717		-		717		-
Total investment securities available for sale	$	67,680	$	-	$	66,226	$	1,454

The reconciliation of the beginning and ending balances of the asset classified by the Corporation within Level 3 of the valuation hierarchy for the three months ended March 31, 2014 is as follows:

	Fair Value Measurement
	Using Significant
	Unobservable Inputs
	(Level 3)
Fair value of non-agency mortgage-backed security, beginning of year⁽¹⁾	$	1,454
Total gains (losses) realized/unrealized:
Included in earnings⁽²⁾		-
Included in other comprehensive income⁽²⁾		37
Purchases, issuances, and other settlements		(72	)
Transfers into Level 3		-
Fair value of non-agency mortgage-backed security, March 31, 2014	$	1,419

Total amount of losses for the year included in earnings attributable to the change in unrealized in unrealized losses relating to assets still held at March 31, 2014	$	-

⁽¹⁾

Non-agency CMO classified as available for sale is valued using internal valuation models and pricing information from third parties.

⁽²⁾

Realized gains (losses), including unrealized losses deemed other-than-temporary, are reported in noninterest income. Unrealized gains (losses) are reported in accumulated other comprehensive income (loss).

The following is a description of the Corporation’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a non-recurring basis:

Loans. The Corporation does not record loans at fair value on a recurring basis. However, from time to time, the Corporation records nonrecurring fair value adjustments to collateral dependent loans to reflect partial write-downs or specific reserves that are based on the observable market price or current appraised value of the collateral. These loans are reported in the nonrecurring table below at initial recognition of impairment and on an ongoing basis until recovery or charge off. When the fair value of the collateral is based on an observable market price or a current appraised value, the Corporation records the impaired loan as nonrecurring Level 2. When a current appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Corporation records the impaired loan as nonrecurring Level 3.

Other real estate owned. Real estate acquired through foreclosure or deed-in-lieu is adjusted to fair value less costs to sell upon transfer of the loan to other real estate owned, usually based on an appraisal of the property. Subsequently, other real estate owned is carried at the lower of carrying value or fair value, less cost to sell. A valuation based on a current appraisal or by a broker’s opinion is considered a Level 2 fair value. If management determines the fair value of the property is further impaired below the appraised value and there is no observable market price, the Corporation records the property as nonrecurring Level 3.

Fair value of assets on a non-recurring basis:

			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
March 31, 2014
Impaired loans ⁽¹⁾	$	16,531	$	-	$	-	$	16,531
Other real estate owned	$	1,032	$	-	$	-	$	1,032

December 31, 2013
Impaired loans ⁽¹⁾	$	16,667	$	-	$	-	$	16,667
Other real estate owned	$	480	$	-	$	-	$	480

⁽¹⁾

Represents carrying value and related write-downs and specific reserves pertaining to collateral dependent loans for which adjustments are based on the appraised value of the collateral or by other unobservable inputs.

7. Fair Value of Financial Instruments

Fair value disclosures require fair-value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair-value estimates cannot be substantiated by comparison to independent markets and, in many cases, cannot be realized in immediate settlement of the instrument.

Fair-value methods and assumptions for the Corporation’s financial instruments are as follows:

Cash and cash equivalents – The carrying amounts reported in the consolidated balance sheet for cash and short term investments reasonably approximate those assets’ fair values.

Investment securities – Fair values for investment securities are determined as discussed above.

FHLBI and FRB stock – The carrying amounts reported in the consolidated balance sheet for FHLBI and FRB stock reasonably approximate those assets’ fair values.

Loans – For variable-rate loans that reprice frequently, fair values are generally based on carrying values, adjusted for credit risk. The fair value of fixed-rate loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Accrued interest income – The carrying amount of accrued interest income is a reasonable estimate of fair value.

Deposit liabilities – The fair value of deposits with no stated maturity, such as demand deposit, NOW, savings, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is estimated using rates currently offered for wholesale funds with similar remaining maturities.

Other borrowings – The carrying amount of other borrowings is a reasonable estimate of fair value.

Accrued interest payable – The carrying amount of accrued interest payable is a reasonable estimate of fair value.

Off-balance-sheet instruments – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments to extend credit, including letters of credit, is estimated to approximate their aggregate book balance and is not considered material and therefore not included in the following table.

		March 31, 2014				December 31, 2013
	Level in Fair Value Hierarchy	Carrying Value		Fair Value		Carrying Value		Fair Value
		(in thousands)
Financial assets:
Cash and cash equivalents	Level 1	$	46,376	$	46,376	$	77,827	$	77,827
Short term investments	Level 2		198		198		198		198
Investment and mortgage-backed securities	Level 2		103,938		103,938		66,226		66,226
Non-agency mortgage-backed security	Level 3		1,419		1,419		1,454		1,454
FHLBI and FRB stock	Level 2		1,241		1,241		779		779
Loans, net	Level 3		152,254		152,909		155,901		156,793
Accrued interest income	Level 2		692		692		573		573

Financial liabilities:
Deposits	Level 2		286,600		281,548		285,313		280,549
Other borrowings	Level 2		-		-		16		16
Accrued interest expense	Level 2		75		75		83		83

Limitations

Fair-value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discounts that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation’s financial instruments, fair-value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

8. Shareholders’ Equity

In a private placement transaction which closed on December 11, 2013, the Corporation issued 17,510 shares of its Mandatorily Convertible Non-Cumulative Junior Participating Preferred Stock, Series B (the "Series B Preferred Shares"), to investors who qualified as accredited investors under federal securities laws. The transaction resulted in gross proceeds to the Corporation of approximately $17.5 million and provided additional equity of approximately $16.5 million after related offering costs. Shares of preferred stock were offered in the private placement instead of common stock because the Corporation did not have a sufficient number of authorized shares of common stock to raise the desired amount of capital needed from the private placement. The Series B Preferred Shares are convertible into shares of the Corporation's common stock at a rate reflecting a price per share of common stock of $0.70, subject to certain customary anti-dilution adjustments. The conversion into common stock will take place automatically upon the approval by the Corporation's shareholders of additional shares of authorized common stock. Until converted into common stock, the Series B Preferred Shares have terms that are substantially identical to the terms applicable to the outstanding common stock with respect to dividends, distributions, voting, and all other matters. For matters submitted to a vote of the holders of the Corporation's common stock, including the proposal to authorize additional shares of common stock, the Series B Preferred Shares will vote with the common stock, as a single class, as if the Series B Preferred Shares were already converted into common stock. At the annual meeting of shareholders scheduled for May 22, 2014, the Corporation intends to ask our shareholders to approve an increase in the authorized number of shares of common stock sufficient to allow the conversion of all outstanding Series B Preferred Shares into shares of our common stock. In addition, the Corporation may, at any time and at its option, and without needing the approval or consent of the holder of a Series B Preferred Share, cause the mandatory conversion of Series B Preferred Shares into common stock to the extent sufficient existing authorized common shares are available.

Given the parity of the rights and limitations and the lack of preferences of the Series B Preferred Shares relative to the Corporation's common stock, the Series B Preferred Shares are, for all purposes, considered a common stock equivalent. However, because the sale of the Series B Preferred Shares was not registered under federal securities laws pursuant to an exemption from such registration requirements, they (and any shares of common stock issued upon conversion of the Series B Preferred Shares) are subject to transfer restrictions, including a minimum holding period of 180 days following the December 11, 2013 issuance date.

On March 27, 2014, the Corporation completed the issuance and sale of new shares of common stock to shareholders of record on January 8, 2014 pursuant to a rights offering that was registered with the SEC. The Corporation conducted the rights offering in an effort to provide an opportunity for its historical shareholder base to make an additional investment in the Corporation at the same terms as were offered in Corporation’s December 2013 private placement offering. To this end, investors in the private placement agreed, as a condition to their participation in the private placement, not to exercise any right to purchase shares in the rights offering, such that the shares of common stock offered in the rights offering would be available for purchase by shareholders who did not participate in the private placement. Each shareholder of record was granted the right to purchase up to six shares of common stock for every one share of common stock held as of the record date, at a price of $0.70 per share. The Corporation issued a total of approximately 2.3 million common shares in the rights offering. The rights offering generated gross proceeds of approximately $1.6 million and provided additional equity to the Corporation of approximately $1.5 million, after offering costs.

On March 28, 2014, the Corporation contributed $550,000 of the net proceeds from the rights offering to the capital of the Bank. The additional capital contribution enabled the Bank to maintain the minimum regulatory capital ratios imposed by the Consent Order at March 31, 2014. The remaining net proceeds from the rights offering that were not contributed to the Bank are being retained at the holding company and are available for holding company operating expenses and/or potential future contribution to the Bank.

9. Net Income per Common Share

Basic earnings per common share is based on the weighted average number of common shares and participating securities outstanding during the period. Diluted earnings per share is the same as basic earnings per share because any additional potential common shares issuable are included in the basic earnings per share calculation. On January 1, 2009, the Corporation adopted new guidance impacting ASC Topic 260, Earnings Per Share, related to determining whether instruments granted in a share-based payment transaction are participating securities. This guidance requires that unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (referred to as “participating securities”), be included in the number of shares outstanding for both basic and diluted earnings per share calculations. There were no participating securities at March 31, 2014 and 2013.

For purposes of determining basic and diluted net income per share for the three months ended March 31, 2014, the Corporation’s 17,510 shares of Series B Preferred Shares issued on December 11, 2013 are considered a common stock equivalent and are converted to common shares at a rate reflecting a price per share of common stock of $0.70.

The following presents basic net income per share:

	Three Months Ended March 31,
	2014		2013
	(dollars in thousands, except per share amounts)
Weighted average basic and diluted common shares outstanding		557,989		457,435
Weighted average common stock equivalent preferred shares outstanding, as converted		25,014,285		-
Total weighted average basic and diluted shares outstanding		25,572,274		457,435

Net income available to shareholders	$	49	$	2,490
Basic and diluted net income per share	$	0.00	$	5.44

10. Income Taxes

For the three months ended March 31, 2014, the Corporation recognized current income tax expense based on its alternative minimum taxable income. No regular income tax expense was recognized during the three months ended March 31, 2014 and 2013 due to the Corporation’s tax loss carryforward position. Reported income tax benefit for the three months ended March 31, 2013 resulted from adjustment of the Corporation’s deferred tax valuation allowance established on previously recorded net deferred tax assets related to the impact of valuation changes in the available for sale investment portfolio.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Corporation, a Michigan business corporation, is a one bank holding company which owns all of the outstanding capital stock of First National Bank in Howell (the Bank) and all of the outstanding stock of HB Realty Co., Inc. The following is a discussion of the Corporation’s regulatory condition, results of operations for the three month periods ended March 31, 2014 and 2013, and financial condition, focusing on its liquidity and capital resources.

The level of regulatory enforcement action taken against the Bank by the Office of the Comptroller of the Currency (OCC) escalated from a formal agreement entered in October 2008 to the issuance of a Consent Order in September 2009, which was subsequently revised and reissued as a new Consent Order in October 2013 (the “Consent Order”). Pursuant to the new Consent Order, the Bank continues to be required to maintain total capital equal to 11% of risk weighted assets and Tier 1 capital equal to at least 8.5% of adjusted total assets. Since December 31, 2013, the Bank has satisfied these required minimum ratios due to receipt of capital infusions from the Corporation of $15.4 million in December 2013 and $550,000 in March 2014, using proceeds from the Corporation’s completion of a private placement transaction in December 2013 and a rights offering completed in March 2014.

However, despite exceeding minimum regulatory capital ratios for a well-capitalized institution at March 31, 2014, the Bank is presently categorized as “adequately capitalized” for purposes of the OCC’s Prompt Corrective Action (“PCA”) enforcement powers because the Bank remains subject to the new Consent Order. As a result of this classification, for purposes of PCA, the Bank is subject to a number of additional restrictions. These include, among other things, (1) restrictions on the payment of dividends, capital distributions and management fees, (2) the requirement that the Bank obtain prior written approval from the OCC before paying any bonus or increase in the compensation of any senior executive officer of the Bank, (3) prohibitions on the acceptance of employee benefit plan deposits, (4) restrictions on interest rates paid on deposits, and (5) restrictions on the acceptance, renewal, or roll-over of brokered deposits. The Bank's capital category is determined solely for purposes of applying PCA; the capital category may not constitute an accurate representation of the Bank's overall financial condition or prospects.

The Consent Order imposes many other requirements on the Bank in addition to the minimum capital ratios. It will be imperative for the Bank to comply with these requirements in order to avoid further regulatory enforcement action. As long as the Bank is subject to the Consent Order, the financial performance of the Corporation will be adversely impacted by elevated FDIC insurance premiums paid by the Bank and ongoing costs incurred to correct deficiencies underlying the requirements of the Consent Order.

The Corporation also remains challenged to a great extent by the economic conditions in Livingston County and the surrounding area. The Corporation has in general experienced a slowing or stagnant economy in Michigan since 2001. In particular, Michigan’s current unemployment rate of approximately 7.5%, although improved from recent highs near 14% during 2009, remains among the worst for all states. Unlike larger banks that are more geographically diversified, we provide banking services to customers primarily in Livingston County. Our loan portfolio, the ability of the borrowers to repay these loans, and the value of the collateral securing these loans is impacted by local economic conditions. The dramatic declines in the housing market in recent years, with falling home prices and elevated levels of foreclosures and unemployment, resulted in and may continue to cause significant write-downs of asset values by us and other financial institutions if borrowers continue to struggle. The continued economic difficulties in Michigan have had and may continue to have many adverse consequences as described below in “Loans”.

At March 31, 2014, our nonperforming assets comprised approximately 34% of our capital plus allowance for loan losses. As described elsewhere in this Form 10-Q, we have established our allowance for loan losses at a level we currently believe, based on the data available to us, is sufficient to absorb expected losses in our loan portfolio. However, this process involves a very significant degree of judgment, is based on numerous different assumptions that are difficult to make and, by its nature, and is inherently uncertain. Moreover, the performance of our existing loan portfolio is, in many respects, dependent on external factors such as our borrowers' ability to repay their loan obligations and the value of collateral securing those obligations, which in turn depend on macro and micro economic conditions including the pace of economic recovery in southeast Michigan. If our loan portfolio performs worse than we currently expect, we may not have sufficient capital to absorb all of the losses and still maintain the minimum capital levels required under the Consent Order.

As fully described in Note 2, “Regulatory Matters and Recovery Initiatives”, of the consolidated financial statements included in the 2013 Annual Report within the Corporation’s Form 10-K filing, management has undertaken various initiatives to address the current challenges facing the Bank. The successful implementation of the various actions being undertaken by management will be difficult in the current economic environment. Even if such actions are successfully implemented, such strategy or results may not be sufficient to sustain the Bank's capital levels at satisfactory levels, return the Bank to profitability, or otherwise avoid further regulatory enforcement action.

In response to these regulatory actions, difficult market conditions and significant losses incurred from 2007 through 2011, we have taken steps or initiated action plans to restore and maintain our capital levels, improve our operations and return to profitability, with the primary objective of fully satisfying all requirements of the Consent Order in as timely a manner as possible.

There can be no assurance that management’s efforts will improve the Bank’s financial condition. Further deterioration of the Bank’s capital position is possible. The current economic environment in southeast Michigan and local real estate market conditions will continue to impose challenges on the Bank.

It is against this backdrop that we discuss our financial condition and results of operations for the three months ended March 31, 2014 compared to the same period in 2013.

Earnings	Three months ended March 31,
	2014		2013
	(dollars in thousands, except per share amounts)

Net income	$	49	$	2,490
Basic and diluted net income per share	$	-	$	5.44

Net income for the three months ended March 31, 2014 decreased $2.4 million compared to the same period last year. In the first quarter of 2014, the Bank recorded no provision for loan losses compared to negative provision expense of $2.3 million in the same period last year. Operating results for the three months ended March 31, 2014 relative to March 31, 2013 were also impacted by a decrease in net interest income of $226,000, a decrease in noninterest income of $127,000 and a decrease in noninterest expense of $209,000.

Net Interest Income	Three months ended March 31,
	2014		2013
	(dollars in thousands)
Interest and dividend income	$	2,493	$	2,746
Interest expense		208		235
Net Interest Income	$	2,285	$	2,511

Interest Yields and Costs

The following shows the daily average balances for major categories of interest earning assets and interest bearing liabilities, interest earned (on a taxable equivalent basis) or paid, and the effective rate or yield as follows:

	Three months ended March 31,
	2014								2013
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
	(in thousands)
Assets:
Interest earning assets:
Short term investments	$	198		$	0.1		0.23	%	$	197		$	0.1		0.23	%
Securities: Taxable		91,877			380.2		1.66	%		83,969			269.6		1.28	%
Tax-exempt⁽¹⁾		1,032			15.5		5.99	%		1,033			15.5		5.98	%
Commercial loans ⁽²⁾⁽³⁾		135,852			1,819.2		5.36	%		148,669			2,184.7		5.88	%
Consumer loans ⁽²⁾⁽³⁾		16,067			183.1		4.62	%		14,438			175.0		4.92	%
Mortgage loans ⁽²⁾⁽³⁾		11,839			104.6		3.53	%		13,316			112.1		3.37	%
Total earning assets and total interest income		256,865		$	2,502.7		3.90	%		261,622		$	2,757.0		4.22	%
Cash and due from banks		56,852								32,932
All other assets		9,197								12,738
Allowance for loan losses		(9,240	)							(11,720	)
Total assets	$	313,674							$	295,572
Liabilities and Shareholders' Equity:
Interest bearing deposits:
NOW	$	30,689		$	2.2		0.03	%	$	30,568		$	1.7		0.02	%
Savings		45,073			2.2		0.02	%		41,313			2.1		0.02	%
MMDA		40,816			38.5		0.38	%		40,545			43.8		0.44	%
Time deposits		78,052			164.9		0.86	%		81,852			187.3		0.93	%
Total interest bearing liabilities and total interest expense		194,630			207.8		0.43	%		194,278			234.9		0.49	%
Noninterest bearing deposits		91,206								91,514
All other liabilities		1,902								2,072
Shareholders' equity		25,936								7,708
Total liabilities and shareholders' equity	$	313,674							$	295,572
Interest spread							3.47	%							3.73	%
Net interest income-FTE				$	2,294.9							$	2,522.1
Net interest margin							3.57	%							3.85	%

	⁽¹⁾	Average yields in the above table have been adjusted to a tax-equivalent basis using a 34% tax rate and exclude the effect of any unrealized market value adjustments included in other comprehensive income recorded under ASC Topic 320, Investments – Debt and Equity Securities.

⁽²⁾

For purposes of the computation above, average non-accruing loans of $11.5 million and $11.9 million for the three months ended March 31, 2014 and 2013 are included in the average daily balance.

⁽³⁾

Interest on loans includes origination fees totaling $23,000 and $22,000 for the three months ended March 31, 2014 and 2013.

Interest Earning Asset/Interest Income

On a tax equivalent basis, interest income decreased $254,000 (9.2%) in the first quarter of 2014 compared to the first quarter of 2013. The decrease was due to a decrease in average earning assets of $4.8 million (1.8%) and a decrease in the yield on average earning assets of 32 basis points.

The average balance of securities increased $7.9 million (9.3%) in the first quarter of 2014 compared to the same period in 2013. The increase was due to $40 million of investment security purchases made in January and February 2014 funded by excess on-balance sheet liquidity, including proceeds from the December 2013 private placement transaction and run-off in the existing investment and loan portfolios. The yield on average security balances increased 36 basis points in the first quarter of 2014 compared to the first quarter of 2013 due to higher yields on new securities acquired.

Loan average balances decreased $12.7 million (7.2%) in the first quarter of 2014 compared to the same period last year and average loan yield decreased 46 basis points. The largest decline in terms of average balances was commercial loans, the majority of our portfolio, which decreased $12.8 million (8.6%) in the first quarter of 2014 compared to 2013. Commercial loan yield decreased 52 basis points compared to the same prior year period primarily due to a decrease in interest income recognized on payoffs of nonaccrual loans. Commercial loans have continued to decrease due to receipt of scheduled payments, pay-offs received from borrowers, pay-offs from borrowers’ refinancing with other financial institutions and limited new loan originations. The renewal of maturing loans and origination of new loans in the current lower rate environment will continue to exert downward pressure on our average loan portfolio yields.

Interest Bearing Liabilities/Interest Expense

Interest expense on deposits for the first quarter of 2014 decreased $27,000 (11.5%) compared to the first quarter of 2013. This was the result of lower interest rates paid on deposits of 6 basis points, primarily resulting from repayment of $1.1 million of brokered deposits in mid-February 2014 which bore interest at 3.50%. This savings was partially offset by higher average deposit balances of $352,000 (0.2%).

Liquidity and Funds Management

Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. Liquidity risk is the risk of the Corporation being unable to meet current and future financial obligations in a timely manner. To manage liquidity risk the Corporation relies primarily on a large, stable core deposit base, excess on-balance sheet cash positions and a readily marketable available for sale investment portfolio. Additionally, the Corporation has access to certain wholesale funding sources (as discussed below) to manage unexpected liquidity needs.

The Corporation identifies, measures and monitors its liquidity profile. The profile is evaluated daily, weekly and monthly by analyzing the composition of all funding sources, reviewing projected liquidity commitments by future month and identifying sources and uses of funds. A contingency funding plan is also prepared that details the potential erosion of funds in the event of a systemic financial market crisis or different levels of institution-specific stress. In addition, the overall management of the Corporation’s liquidity position is integrated into retail deposit pricing policies to ensure a stable core deposit base.

Asset liquidity for financial institutions typically consists of cash and cash equivalents, certificates of deposits and investment securities available for sale. These categories totaled $151.9 million at March 31, 2014 or about 48.1% of total assets. This compares to $145.7 million or about 46.7% of total assets at December 31, 2013. Liquidity is important for financial institutions because of their need to meet loan funding commitments and depositor withdrawal requests. Liquidity can vary significantly on a daily basis based on customer activity.

The core deposit base is the primary source of the Corporation’s liquidity. Management monitors rates at other financial institutions in the area to ascertain that its rates are competitive in the market. Management also attempts to offer a wide variety of products to meet the needs of its customers. The make-up of the Bank’s “Large Certificates”, which are generally considered to be more volatile and sensitive to changes in rates, consists principally of local depositors known to the Bank. The Bank had Large Certificates totaling approximately $28.6 million at March 31, 2014 and $29.1 million at December 31, 2013. The Bank paid off its (non-core) $1.1 million brokered deposit in February 2014. Due to the Bank’s classification as “adequately capitalized” for PCA purposes, it may not renew or issue additional brokered deposits without prior approval of the Federal Deposit Insurance Corporation (“FDIC”). See the “Capital” section of this Management’s Discussion and Analysis for further details.

Of the Corporation’s available liquidity at March 31, 2014 noted above, investment securities with a fair value of approximately $57.6 million were pledged primarily for borrowing availability on a line of credit from the Federal Home Loan Bank of Indianapolis and to secure public deposits, or for other purposes as required or permitted by law.

The Corporation also has available unused wholesale sources of liquidity, including borrowing availability from the Federal Home Loan Bank of Indianapolis (FHLBI) and through the discount window of the Federal Reserve Bank of Chicago. In the past, the Corporation has also issued certificates of deposit through brokers.

The Corporation’s liquidity could be adversely affected by both direct and indirect circumstances. An example of a direct event would be restrictions imposed by regulators due to factors such as deterioration in asset quality, a large charge to earnings, a decline in profitability or other financial measures. Examples of indirect events unrelated to the Corporation that could have an effect on the Corporation’s access to liquidity would be terrorism or war, natural disasters, political events, or the default or bankruptcy of a major corporation, mutual fund or hedge fund. Similarly, market speculation or rumors about the Corporation or the banking industry in general may adversely affect the cost and availability of normal funding sources.

The Corporation maintains a liquidity contingency plan that outlines the process for addressing a potential liquidity crisis. The plan provides for an evaluation of funding sources under various market conditions. It also assigns specific roles and responsibilities for effectively managing liquidity though a problem period.

It is Bank management’s intention to handle unexpected liquidity needs through its cash and cash equivalents, FHLBI borrowings, or Federal Reserve discount borrowings. At March 31, 2014, the Bank had a $26.2 million line of credit available at the FHLBI for which the Bank has pledged investment securities and certain commercial and consumer loans secured by residential real estate as collateral. The Bank also had a $4.4 million line of credit available at the Federal Reserve for which the Bank has pledged certain commercial loans as collateral. At March 31, 2014, the Bank had no borrowings outstanding against these lines of credit. In addition, during the quarter ended March 31, 2014, the Bank had no short-term borrowings on these lines of credit for liquidity needs or other purposes.

Although the Bank has established these lines of credit, because of its regulatory status, any borrowing requests are subject to review (i.e., for purpose and repayment ability) and approval by the FHLBI and Federal Reserve, respectively. Consequently, full borrowing availability under these existing lines may be restricted at the respective lender’s discretion and terms may be limited or restricted. However, in the event the Bank would need additional funding and be unable to access either line of credit facility, management could act to remove the pledge of investment securities presently securing a portion of the FHLBI line of credit, thereby allowing such securities to be liquidated to provide further liquidity. If necessary, the Bank could also satisfy unexpected liquidity needs through liquidation of unpledged securities.

Quantitative and Qualitative Disclosures about Market Risk

The current economic outlook and its potential impact on the Bank and current interest rate forecasts are reviewed monthly to determine the potential impact on the Corporation’s performance. Actual results are compared to budget in terms of growth and income. A yield and cost analysis is done to monitor interest margin. Various ratios are monitored including capital ratios and liquidity. Also, the quality of the loan portfolio is reviewed in light of the current allowance for loan losses, and the Bank’s exposure to market risk is reviewed.

Interest rate risk is the potential for economic losses due to future rate changes and can be reflected as a loss of future net interest income and/or a loss of current market values. The Corporation’s Asset/Liability Management Committee’s (ALCO) objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Tools used by management include the standard GAP report which reflects the repricing schedule for various asset and liability categories and an interest rate shock simulation report. The Bank has no market risk sensitive instruments held for trading purposes. However, the Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit and letters of credit. A commitment or letter of credit is not recorded as an asset until the instrument is exercised.

Below shows the scheduled maturity and repricing of the Corporation’s interest sensitive term assets and liabilities as well as the expected retention terms of non-maturity deposit accounts as of March 31, 2014:

	0-3		4-12		1-5		5+
	Months		Months		Years		Years			Total
	(in thousands)
Assets:
Loans	$	66,175	$	43,617	$	51,237	$	464		$	161,493
Securities		2,675		9,560		54,095		40,268			106,598
Short term investments		198		-		-		-			198
Total assets	$	69,048	$	53,177	$	105,332	$	40,732		$	268,289

Liabilities:
NOW, savings, and MMDA	$	3,532	$	10,594	$	56,502	$	49,814		$	120,442
Time deposits		13,967		39,330		23,136		-			76,433
Total liabilities	$	17,499	$	49,924	$	79,638	$	49,814		$	196,875

Rate sensitivity GAP:
GAP for period	$	51,549	$	3,253	$	25,694	$	(9,082	)
Cumulative GAP		51,549		54,802		80,496		71,414

March 31, 2014 cumulative sensitive ratio		3.95		1.81		1.55		1.36
December 31, 2013 cumulative sensitive ratio		2.94		1.73		1.41		1.22

Core non-maturity deposits such as NOW, savings and MMDA are an important stable source of funding and represent significant value to the Corporation. Although these deposits may re-price earlier than what is shown in the preceding table, they are generally less rate sensitive than other non-core funding sources. Allocations for our core non-maturity deposits are made to time periods based on a core deposit study which was performed by a third-party specialist based on the Corporation’s historical experience.

In the GAP table above, the short term (one year and less) cumulative interest rate sensitivity is 181% asset sensitive at March 31, 2014.

Because of the Bank’s asset sensitive position, if market interest rates increase, this positive GAP position indicates that the interest margin would be positively affected. However, GAP analysis is limited and may not provide an accurate indication of the impact of general interest rate movements on the net interest margin since repricing of various categories of assets and liabilities is subject to the Bank’s needs, competitive pressures, and the needs of the Bank’s customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within the period and at different rate indices. Due to these inherent limitations in the GAP analysis, the Corporation also utilizes simulation modeling, which measures the impact of upward and downward movements of interest rates on interest margin and indicates that a 100 basis point decrease in interest rates would reduce net interest income by approximately 5.1% in the first year, while a 200 basis point increase in interest rates would increase net interest income by approximately 8.0% in the first year. This is influenced by the assumptions regarding how quickly and to what extent liabilities will reprice with a change in interest rates.

Loans

	Three months ended March 31,
	2014		2013
	(in thousands)

Provision for loan losses	$	-	$	(2,250	)

In the first quarter of 2014 the Bank recorded no provision expense compared to negative provision expense of $2.3 million in the same prior year period. In general, the lack of provision expense in the first quarter of 2014 reflects an improved rolling 12 quarter loss history as significant prior quarter losses (from late 2010) exited the ALLL analysis coupled with the continued shrinkage of the overall loan portfolio. These factors, along with further stabilization in the real estate values of certain existing problem credits, served to release sufficient reserve allocations to offset allocations required for new loan originations and/or adjustments to increase reserves on existing and newly identified problem loans. Loan charge offs for the three months ended March 31, 2014 totaled $86,000 compared to $75,000 recognized during the same prior year period. Management considered these factors in conjunction with its quarterly analysis of the loan portfolio to identify and quantify the level of credit risk to estimate losses in its determination that no provision expense was required for the three months ended March 31, 2014 and determination of the adequacy of the $9.2 million allowance for loan losses at March 31, 2014. Absent unforeseen further deterioration in the economy and based on the present trends in the loan portfolio and the anticipated continued improvement in our loss history as significant prior year charge offs continue to exit the rolling 12 quarter look back period, it is reasonably likely that future negative provision expense will be necessary to maintain the directional consistency of the overall level of the allowance with the actual performance of the loan portfolio.

Loan and Asset Quality

The following table reflects the composition of the commercial and consumer loans in the Consolidated Financial Statements. Included in the residential first mortgage totals below are the “real estate mortgage” loans listed in the Consolidated Financial Statements and other loans to customers who pledge their homes as collateral for their borrowings. A portion of the loans listed in residential first mortgages represent commercial loans where the borrower has pledged a 1 – 4 family residential property as collateral. In the majority of the loans to commercial customers, the Bank is relying on the borrower’s cash flow to service the loans.

The following table shows the balance and percentage composition of loans as of:

	March 31, 2014						December 31, 2013
	Balances			Percent			Balances			Percent
	(dollars in thousands)
Secured by real estate:
Residential first mortgage	$	17,036			10.5	%	$	17,596			10.7	%
Residential home equity/other junior liens		10,780			6.7	%		11,236			6.8	%
Construction, land development and other land		5,724			3.5	%		5,826			3.5	%
Commercial (nonfarm, nonresidential)		105,655			65.4	%		109,334			66.1	%
Commercial		16,215			10.0	%		15,019			9.1	%
Consumer and Other		6,242			3.9	%		6,273			3.8	%
Total gross loans		161,652			100.0	%		165,284			100.0	%
Net unearned fees		(159	)					(169	)
Total Loans	$	161,493					$	165,115

The loan portfolio decreased $3.6 million (2.2%) in the three months ended March 31, 2014. The decrease was experienced predominately within the commercial real estate portfolio (i.e., owner occupied and nonowner occupied) which decreased $3.7 million (3.3%), including a $2.1 million payoff of an out-of-market hotel loan refinanced by another financial institution and the transfer of two loans into OREO at $553,000. Other net decreases in this portfolio segment continued to result from receipt of scheduled payments from borrowers in excess of limited new loan originations. Loans secured by residential real estate decreased by $1.0 million (3.5%) during the first quarter of 2014 as residential mortgages continued to run-off given the Bank’s lack of an in-house residential lending program. In addition, the harsh winter conditions experienced during the current period tempered borrowers’ enthusiasm for home renovation projects which suppressed opportunities for new home equity lending. Commercial loans increased $1.2 million (8.0%), reflecting the Bank’s efforts to develop new business outside of its heavily concentrated real estate portfolio. In general, the continued shrinkage of the loan portfolio stems from: limited loan demand from qualified and credit worthy borrowers, intense competition for loans by other financial institutions, and the Bank’s need to adhere to concentration targets outlined in its strategic plan relative to its existing, heavily concentrated real estate portfolio. As such, the future size of the loan portfolio is dependent upon a number of economic, competitive and regulatory factors faced by the Bank. In light of these economic and regulatory challenges currently facing the Bank, we anticipate only prudent and modest loan portfolio growth during the remainder of 2014.

Nonperforming assets consist of loans accounted for on a nonaccrual basis, loans contractually past due 90 days or more as to interest or principal payments (but not included in nonaccrual loans), and other real estate which has been acquired through foreclosure and is actively managed through the time of disposition to minimize loss. Nonperforming loans include troubled debt restructured loans that are on nonaccrual status or past due 90 days or more. At March 31, 2014, December 31, 2013 and March 31, 2013, there were $8.7 million, $7.8 million and $8.6 million of troubled debt restructurings included in nonperforming loans. Troubled debt restructured loans (“TDRs”) that are not past due 90 days or more are excluded from nonperforming loan totals.

The aggregate amount of nonperforming loans and other nonperforming assets are presented below:

Nonperforming Loans and Assets:	March 31, 2014			December 31, 2013			March 31, 2013
	(dollars in thousands)
Nonaccrual loans	$	11,446		$	11,067		$	10,649
Loans past due 90 days and still accruing		-			-			-
Total nonperforming loans		11,446			11,067			10,649
Other real estate		1,032			480			2,382
Total nonperforming assets	$	12,478		$	11,547		$	13,031

Nonperforming loans as a percent of total loans		7.09	%		6.70	%		6.21	%
Allowance for loan losses as a percent of nonperforming loans		80.72	%		83.26	%		89.71	%
Nonperforming assets as a percent of total loans and other real estate		7.68	%		6.97	%		7.49	%

Nonaccrual loans at March 31, 2014 increased $379,000 (3.4%) from December 31, 2013 and $797,000 (7.5%) from March 31, 2013. The net increase from December 31, 2013 resulted from the combination of approximately $1.29 million of loans moved to nonaccrual status partially offset by approximately $336,000 of continued payments and/or payoffs, the transfer of two loans for $553,000 to other real estate owned and $22,000 of charge-offs. Management continues to focus on reducing the level of nonperforming assets and making improvements in asset quality.

As of March 31, 2014, approximately $9.0 million (78.7%) of nonperforming loans are making scheduled payments. Management closely monitors each of these loans to identify opportunities where workout efforts or restructuring may improve borrowers’ credit risk profiles to facilitate a return to accrual status for credits with sustained repayment histories. Any loans categorized as 90 days past due and still accruing are well secured and in the process of collection. All nonperforming loans are reviewed regularly for collectibility and uncollectible balances are promptly charged off.

Management regularly evaluates the condition of problem credits and when reduced cash flows coupled with collateral shortfalls are evident, the loans are placed on nonaccrual. In addition, loans are generally placed on nonaccrual when principal or interest is past due ninety days or more. If management believes there is significant risk of not collecting full principal and interest, we may elect to place the loan on nonaccrual even if the borrower is current. Other real estate owned (“OREO”) is comprised of commercial real estate properties and totaled $1.0 million at March 31, 2014 compared to $480,000 at December 31, 2013. In the first quarter of 2014, two commercial real estate properties totaling $553,000 were transferred into OREO. Nonperforming loans may move into OREO when the foreclosure process is initiated (i.e., as “in substance foreclosure”) through the time in which the foreclosure process is completed and any redemption period expires or from the receipt of deeds in lieu of foreclosure.

Since 2007, the decline in real estate sales and valuations in southeast Michigan has significantly and adversely impacted the quality of the Corporation’s portfolio of loans secured by real estate. In addition, during this time the local economies served by the Corporation have been adversely impacted by the restructuring of the automotive market and related industries which in turn, has caused our borrowers to experience declining revenues, diminished cash flows, and reduced collateral values in their businesses. Due to these factors and the prolonged troubled economy, real estate values in general have remained distressed. Although there has been some recent stabilization in values and increased sales activity for certain real estate, because the Corporation continues to carry a relatively high concentration of loans that are secured by real estate, the Corporation continues to experience elevated levels of nonperforming loans and impaired loans relative to historical levels prior to 2007.

Although management has specific, aggressive remediation plans for a majority of the Bank’s remaining significant classified and criticized loans, execution of such plans will take some time and is, in many respects, dependent on external factors such as the borrowers’ ability to repay their obligations and/or to meet performance criteria and the value of collateral securing those obligations, which in turn depend on macro and micro economic conditions including the pace of an economic recovery in southeast Michigan. Given the extent of the problem loans secured by real estate, these factors may delay remediation efforts and result in the Bank maintaining higher than anticipated balances of nonperforming loans that may adversely impact the level of provision for loan losses in the near future. Management continues to make oversight of these loans a priority.

At March 31, 2014, impaired loans totaled approximately $18.5 million, of which $8.9 million were assigned a specific reserve of $2.0 million. Impaired loans without specific reserve allocations totaled $9.6 million. A loan is considered impaired when it is probable that all or part of the amounts due according to contractual terms of the loan agreement will not be collected on a timely basis or the loan has been restructured and is classified as a TDR. Impairment is measured by comparing the Bank’s recorded investment in the loan to the present value of expected future cash flows at the loan’s effective interest rate, the fair value of the collateral less costs to sell, or the loan’s observable market price.

Of the impaired loans reported at March 31, 2014, $9.0 million were commercial purpose and on nonaccrual status, based on management’s assessment using criteria discussed above. Included in impaired loans at March 31, 2014 were $10.9 million of commercial and commercial real estate loans identified as TDRs. All cash received on nonaccrual loans is applied to principal balance. Loans are considered for return to accrual status on an individual basis when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest income is recognized on TDRs pursuant to the criteria noted below.

A key component of our asset quality improvement initiative includes procedures intended to improve asset quality levels within the loan portfolio. Management develops specific workout strategies on all significant impaired loans to attempt to mitigate the extent of potential future loss by the Bank and to remediate nonperforming assets, where possible. Loan work out strategies may include the Bank’s willingness to modify the terms of a loan to improve our ability to collect amounts due. The modified terms are intended to enable customers to mitigate the risk of foreclosure by creating payment schedules that provide for continued loan payment requirements based on their current cash flow ability. Common modifications utilized by the Bank may include one of more of the following: interest rate reductions, extension of amortization periods, and forbearance of interest and/or principal payments. Management may extend concessions (modifications) to troubled borrowers in exchange for the pledge of additional collateral and/or guarantors. Loan modifications are considered TDRs when the modification includes terms outside of normal lending practices (i.e., concessions) to a borrower who is experiencing financial difficulties.

The following table summarizes the troubled debt restructuring component of impaired loans at:

	March 31, 2014						December 31, 2013
	Accruing Interest		Nonaccrual		Total		Accruing Interest		Nonaccrual		Total
	(in thousands)
Current	$	10,398	$	7,994	$	18,392	$	11,388	$	7,110	$	18,498
Past due 30-89 days		-		203		203		-		682		682
Past due 90 days or more		-		457		457		-		2		2
Total troubled debt restructurings	$	10,398	$	8,654	$	19,052	$	11,388	$	7,794	$	19,182

Troubled debt restructured loans accrue interest if the borrower complies with the revised terms and conditions and has demonstrated sustained payment performance consistent with the modified terms for a minimum of six consecutive payment cycles after the restructuring date and if collection of future payments is reasonably assured.

If the economy weakens further and/or real estate values decline further, the provision for loan losses may be adversely impacted by the Bank’s concentration in real estate secured loans. While we have carefully considered these factors when determining the level of reserves, it is difficult to accurately predict future economic events, especially in the current environment.

The loan portfolio is periodically reviewed by internal and external parties and the results of these reviews are reported to the Bank’s Board of Directors. The purpose of these reviews is to verify proper loan documentation, to provide for the early identification of potential problem loans, to challenge and validate internal risk grades assigned by management, to monitor collateral values and to assist the Bank in evaluating the adequacy of the allowance for loan losses.

Allowance for Loan Losses

The allowance for loan losses was $9.2 million at March 31, 2014 and December 31, 2013 and represented 5.72% and 5.58% of gross loans at March 31, 2014 and December 31, 2013, respectively. The coverage ratio of the ALLL to nonperforming loans was 80.72% and 83.26% at each respective period-end.

Management estimates the required allowance balance based on past loan loss experience, the nature and volume of the portfolio segments and concentrations, information about specific borrower situations, estimated collateral values, economic conditions and trends, and other factors. The impact of actual recent portfolio behavior on the allowance for loan loss calculation and analysis at March 31, 2014, evidenced by successive improving to stable quarterly levels of nonperforming loans, further stabilization of real estate values securing certain problem credits, continued shrinkage in the overall loan portfolio, and continued improvement in our rolling 12 quarter loss history, supported our determination of the overall level of allowance and related provision expense. Should these conditions continue, management believes that it is reasonably likely that future negative provision expense may be required to align the overall level of the allowance with the trending improvement in the underlying credit risk profile of the loan portfolio and the resulting anticipated improvement in the rolling 12 quarter loss history as significant prior year charge offs exit the calculation.

Allocations of the allowance are made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Management continually analyzes portfolio risk to refine the process of effective risk identification and measurement for determination of what it believes is an adequate allowance for loan losses. When all of these factors were considered, management determined that no provision was needed for the first three months of 2014 and the resulting $9.2 million allowance as of March 31, 2014 was adequate.

Given the significant portion of our loans that are secured by real estate, our portfolio continues to be sensitive to the weakened economic conditions in southeast Michigan and the Bank’s market area, and is especially impacted by depressed real estate values. In response, each quarter our portfolio management practices continue to analyze and quantify risk within all segments of our portfolio to ensure effective problem loan identification procedures. Our practice is to obtain updated appraisals on criticized loans secured by real estate and apply appropriate discounting practices based on perceived declines in market value.

Although updated appraisals received during more recent quarters indicated that property values for collateral on our impaired loans continue to be depressed, the appraisals did not reflect the extent of value erosion relative to that experienced in prior quarters. However, at present, the weak Michigan economy and elevated unemployment levels continue to dampen signs of economic recovery in our market area. Consequently, we have continued to allocate reserves for these risks and uncertainties, resulting in reserves above normal levels.

If the economy weakens further and/or real estate values decline further, nonperforming loans may increase in subsequent quarters. Due to the uncertainty of future economic conditions and the decline in real estate values, the provision for loan losses for 2014 may continue to be impacted by the Bank’s concentration in real estate secured loans. While we have considered these factors when determining the level of reserves, it is difficult to accurately predict the future economic events, especially in the current environment.

The allowance consists of specific and general components. The specific component relates to loans that are classified as nonaccrual or renegotiated. 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 are 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 used to reflect changes in the portfolio’s collectability not captured by historical loss data.

The methodology for measuring the appropriate level of allowance and related provision for loan losses relies on several key elements, which include specific allowances for loans considered impaired, general allowances for non-impaired commercial loans based on our internal loan grading system, and general allocations based on historical trends for homogeneous loan groups with similar risk characteristics.

The general allowance allocated to non-impaired commercial loans was based on the internal risk grade of such loans and their assigned portfolio segment, as primarily determined based on underlying collateral; and, if real estate secured, the type of real estate. Each risk grade within a portfolio segment is assigned a loss allocation factor. The higher a risk grade, the greater the assigned loss allocation percentage. Accordingly, changes in the risk grades of loans affect the amount of the allowance allocation.

Our loss factors are determined based on our actual loss history by portfolio segment and loan grade and are adjusted for significant qualitative factors that, in management’s judgment, affect the collectability of the portfolio at the analysis date. We use a rolling 12 quarter net loss history as the base for our computation which is weighted to give emphasis to more recent quarters.

Groups of homogeneous noncommercial loans, such as residential real estate loans, home equity and home equity lines of credit, and consumer loans receive allowance allocations based on the loan type, primarily determined based on historical loss experience rather than by risk grade. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans.

Although management evaluates the adequacy of the allowance for loan losses based on information known at a given point in time, as facts and circumstances change, the provision and resulting allowance may also change. While we believe that our allowance for loan loss analysis has identified all probable losses inherent in the portfolio at March 31, 2014, there can be no assurance that all losses have been identified or that the amount of the allowance is sufficient.

Noninterest Income

Noninterest income for the three months ended March 31, 2014 decreased $127,000 (16.7%) compared to the same period in 2013. The components of noninterest income are shown in the table below:

	Three months ended March 31,
	2014		2013
	(in thousands)
Service charges and fees on deposits	$	306	$	368
Other fees		286		287
Trust income		32		42
Other		9		63
Total	$	633	$	760

For the three months ended March 31, 2014, service charges on deposits and other fee income decreased $63,000 compared to the same period last year. The decrease in service charges and fees on deposit accounts was due to lower NSF fee income resulting from less overall NSF activity. Trust income decreased $10,000 due to continued run-off in the number of customer accounts and lower average customer account balances coupled with limited new business opportunities. We are in the process of closing our trust department, and we do not expect to continue earning any trust income after the quarter ended June 30, 2014. Other income represents rental income from tenants occupying certain other real estate properties owned by the Bank during the respective periods.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2014 decreased $209,000 (6.8%) compared to the same period in 2013. The components of noninterest expense are shown in the table below:

	Three months ended March 31,
	2014		2013
	(in thousands)
Salaries and employee benefits	$	1,502	$	1,476
Occupancy expense		237		250
Equipment expense		92		80
Professional and service fees		407		395
Loan collection and foreclosed property expense		53		83
Computer service fees		129		114
Computer software amortization expense		9		8
FDIC assessment fees		84		256
Insurance expense		126		131
Printing and supplies		50		43
Net loss on sale/writedown of OREO and repossessions		1		44
Other		174		193
Total	$	2,864	$	3,073

The most significant component of our noninterest expense is salaries and employee benefits. In the first three months of 2014, the increase in salaries and employee benefits resulted primarily from additional staffing in our loan and credit departments completed during the second half of 2013 and the hiring of a risk management officer in late 2013. These hires were made to ensure the Bank has appropriate personnel with sufficient experience, training and authority to execute safe and sound banking practices. Compensation expense also increased in the current period due to reinstatement of merit adjustments (for certain eligible staff) which were previously suspended due to the Bank’s financial performance and regulatory condition. Partially offsetting these increases, no incentive compensation or employer 401(k) contribution expense was recognized during the quarter ended March 31, 2014 compared to the same prior year period.

Occupancy expense decreased due to the timing and/or deferral of certain building services expenses incurred in the current period relative to the same prior year period. Partially offsetting this decrease, were elevated building repair costs incurred at a branch facility and higher utility costs. Equipment expense increased due to depreciation of new ATMs and security equipment placed into service during mid-2013.

Loan collection and foreclosed property expense include collection costs related to nonperforming and delinquent loans, including costs incurred to protect the Bank’s interest in collateral securing problem loans prior to taking title to the property, appraisal expenses and carrying costs related to other real estate. The Bank experienced reduced ORE expense and appraisal expense in 2014 due to a fewer number of problem loans and OREO properties relative to the same period in 2013.

Consistent with the Bank’s improved capital position at December 31, 2013, the Bank’s most recent FDIC assessment reflected a lower assessment rate and improved risk profile. The resultant impact of the lower rate, assuming the Bank maintains the improved risk profile and its current level of average tangible assets, is expected to approximate $325,000 in annual savings. Although improved, the Bank’s FDIC premium expense remains elevated due to noncompliance with the outstanding Consent Order. The timing or amount of any additional FDIC premium savings is dependent on various factors including the Bank’s ability to maintain the minimum capital ratios required under the Consent Order and the ability to demonstrate a period of satisfactory performance with other requirements of the Consent Order, as assessed by the OCC.

Federal Income Tax Expense

Capital

The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct, material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s and the Bank’s capital classification are also subject to qualitative judgments by regulators with regard to components, risk weightings, and other factors.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required that the federal regulatory agencies adopt regulations defining five capital tiers for banks:

	Total	Tier 1
	Risk-Based	Risk-Based
	Capital Ratio	Capital Ratio	Leverage Ratio
Well capitalized	10% or above	6% or above	5% or above
Adequately capitalized	8% or above	4% or above	4% or above
Undercapitalized	Less than 8%	Less than 4%	Less than 4%
Significantly undercapitalized	Less than 6%	Less than 3%	Less than 3%
Critically undercapitalized	-	-	A ratio of tangible equity to
			total assets of 2% or less

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The Corporation’s and the Bank’s actual capital amounts and ratios are presented in the following table:

						Minimum for					To be Well Capitalized
						Capital Adequacy					Under Prompt Corrective
	Actual					Purposes					Action Provision
March 31, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
Total Capital (to risk weighted assets)
Bank	$	29,257		14.98	%	$	15,624		8.00	%	$	19,530		10.00	%
FNBH Bancorp		30,734		15.70	%		15,657		8.00	%		N/A		N/A

Tier 1 Capital (to risk weighted assets)
Bank		26,728		13.69	%		7,812		4.00	%		11,718		6.00	%
FNBH Bancorp		28,200		14.41	%		7,828		4.00	%		N/A		N/A

Tier 1 Capital (to average assets)
Bank		26,728		8.55	%		12,507		4.00	%		15,634		5.00	%
FNBH Bancorp		28,200		8.99	%		12,547		4.00	%		N/A		N/A

December 31, 2013	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)
Bank	$	28,593		14.57	%	$	15,705		8.00	%	$	19,631		10.00	%
FNBH Bancorp		29,204		14.86	%		15,724		8.00	%		N/A		N/A

Tier 1 Capital (to risk weighted assets)
Bank		26,052		13.27	%		7,852		4.00	%		11,779		6.00	%
FNBH Bancorp		26,660		13.56	%		7,862		4.00	%		N/A		N/A

Tier 1 Capital (to average assets)
Bank		26,052		8.67	%		12,021		4.00	%		15,026		5.00	%
FNBH Bancorp		26,660		8.82	%		12,097		4.00	%		N/A		N/A

The OCC has established the following minimum capital standards for national banks: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total average assets of 3% for the most highly-rated banks, with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists principally of shareholders’ equity. These capital requirements are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions.

As a result of a new Consent Order issued to the Bank by the OCC on October 31, 2013, the Bank continues to be subject to higher minimum capital ratios than those shown above. Specifically, the Consent Order requires the Bank to maintain a Total risk-based capital ratio of 11% and a Tier 1 leverage ratio of 8.5%. As shown above, the Bank’s actual ratios were in compliance with the minimum ratios for a well-capitalized institution as of March 31, 2014 and December 31, 2013. However, because the Bank is subject to the Consent Order, it does not meet the regulatory determination of a well-capitalized institution. As such, the Bank is considered "adequately capitalized" for purposes of the OCC’s Prompt Corrective Action (“PCA”) enforcement powers. The Bank's capital category is determined solely for purposes of applying PCA; the capital category may not constitute an accurate representation of the Bank's overall financial condition or prospects.

The Corporation’s ability to pay dividends is subject to various regulatory and state law requirements. Due to the Bank’s financial condition, the Bank cannot pay a dividend to the Corporation without the prior approval of the OCC. The Corporation does not anticipate the Bank providing any dividends to the Corporation through at least 2014. The Corporation suspended, indefinitely, the payment of dividends to its shareholders in the third quarter of 2008 due to the Bank’s inability to pay dividends to the holding company and insufficient cash at the holding company to pay the dividends. The Corporation does not anticipate resuming dividend payments to its shareholders in the near future.

As of its most recent examination date, which occurred prior to completion of the Corporation’s December 2013 private placement transaction and March 2014 rights offering, the Corporation is considered a troubled institution due to the critically deficient condition of its subsidiary Bank. However, completion of the aforementioned capital raise transactions enabled the Corporation to take action to support the Bank. Namely, using proceeds from these transactions, the Corporation contributed $15.4 million and $550,000 of additional capital into the Bank in December 2013 and March 2014, respectively. These capital infusions into the Bank by the Corporation enabled the Bank to achieve and maintain the minimum regulatory capital ratios imposed under the Consent Order at year-end 2013 and March 31, 2014. The Corporation is still required to receive prior approval from the Federal Reserve before the payment of dividends, issuance of debt, or redemption of stock. Additional restrictions imposed on the Corporation by the Federal Reserve relate to changes in the composition of the Board of Directors, the employment of senior executive officers or changes in the responsibilities of senior executive officers, and limitations on indemnification and severance payments.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with accounting principles generally accepted within the United States of America and conform to general practices within the banking industry. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of investment securities, determination of the allowance for loan losses and accounting for income taxes, and actual results could differ from those estimates. Management has reviewed these critical accounting policies with the Audit Committee of our Board of Directors.

Contractual Obligations

The Bank had outstanding irrevocable standby letters of credit, which carried a maximum potential commitment of approximately $10,000 at March 31, 2014 and December 31, 2013. These letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The majority of these letters of credit are short-term guarantees of one year or less, although some have maturities which extend as long as two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank primarily holds real estate as collateral supporting those commitments for which collateral is deemed necessary. The extent of collateral held on those commitments at March 31, 2014 and December 31, 2013, where there is collateral, was in excess of the committed amount. A letter of credit is not recorded on the balance sheet unless a customer fails to perform.

New Accounting Standards

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments clarify 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: (a) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) 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. Additional disclosures are required. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The impact of adoption of this ASU by the Corporation is not expected to be material.

FASB has also issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. This update requires an unrecognized tax benefit, or portion of an unrecognized tax benefit, to be presented in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward. However, to the extent that a net operating loss carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit is to be presented in the statement of financial position as a liability. No new recurring disclosures are required. The amendments are effective for public business entities for annual periods beginning after December 15, 2013, and interim periods within those periods. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within those periods. The amendments are to be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date, although retrospective application is permitted. The impact of prospective adoption of this ASU by the Corporation in the first quarter of 2014 was not material.

Recent Legislative Developments

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Uncertainty remains as to the ultimate impact of this law, which could have a material adverse impact either on the financial services industry as a whole or on the Corporation’s and Bank’s business, results of operations and financial condition. This federal law contains a number of provisions that could affect the Corporation and the Bank. For example, the law:

Makes national banks (such as the Bank) and their subsidiaries subject to a number of state laws that were previously preempted by federal laws;

Imposes additional restrictions on how mortgage brokers and loan originators may be compensated;

Establishes a federal consumer protection agency that will have broad authority to develop and implement rules regarding most consumer financial products;

Creates additional rules affecting corporate governance and executive compensation at all publicly traded companies (such as the Corporation);

Broadens the base for FDIC insurance assessments and makes other changes to federal deposit insurance, including permanently increasing FDIC deposit insurance coverage to $250,000; and

Allows depository institutions to pay interest on business checking accounts

Many of these provisions are not yet effective and are subject to implementation by various regulatory agencies. As a result, the actual impact this federal law will have on the Bank's business is not yet known. However, this law and any other changes to laws applicable to the financial industry may impact the profitability of the Bank's business activities or change certain of its business practices and may expose the Corporation and the Bank to additional costs, including increased compliance costs, and require the investment of significant management attention and resources. As a result, this law may negatively affect the business and future financial performance of the Corporation and the Bank.

On April 5, 2012, the Jumpstart Our Business Startups Act (JOBS Act) was signed into law. The JOBS Act is intended to stimulate economic growth by helping smaller and emerging growth companies access the U.S. capital markets. It amends various provisions of, and adds new sections to, the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as provisions of the Sarbanes-Oxley Act of 2002. The SEC has been directed to issue rules implementing certain JOBS Act amendments. For bank holding companies, the JOBS Act increases the statutory threshold for deregistration under the Securities Exchange Act of 1934 from 300 shareholders to 1,200 shareholders of record.

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the “Basel III” capital rules, which set new capital requirements for banking organizations. In July 2013, the Federal Reserve and the OCC each approved final rules that establish an integrated regulatory capital framework implementing the Basel III regulatory capital reforms in the U.S. These new rules impose higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. The new capital requirements will be phased in over time. The U.S. implementation of these standards could have an adverse impact on our financial position and future earnings due to, among other things, the increased minimum Tier 1 capital ratio requirements that will be implemented. However, the ultimate impact of these new rules on the Corporation and the Bank is still being reviewed.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There has been no material change in the market risk faced by the Corporation since December 31, 2013. For information regarding our risk factors, refer to the FNBH Bancorp, Inc. Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporation 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 amended (the “Disclosure Controls”). The Disclosure Controls are designed to allow the Corporation to reach a reasonable level of assurance that information required to be disclosed by the Corporation in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including its principal executive and financial officers to allow timely decisions regarding required disclosure. The evaluation of the Disclosure Controls ("Controls Evaluation") was conducted under the supervision and with the participation of the Corporation’s management, including the chief executive officer and the chief financial officer. Based upon the Controls Evaluation and subsequent discussions, the chief executive officer and chief financial officer have concluded that as of March 31, 2014, the Corporation’s Disclosure Controls were effective at a reasonable assurance level.

(b)

Changes in Internal Control Over Financial Reporting.

During the quarter ended March 31, 2014 there were no changes in the Corporation’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

The Corporation’s management, including the chief executive officer and chief financial officer, does not expect that its Disclosure Controls and/or its internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of equity securities by the Corporation during the three months ended March 31, 2014, that were not registered under the Securities Act of 1933. The Corporation did not repurchase any of its equity securities during the quarter ended March 31, 2014.

Item 6. Exhibits

The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:

31.1	Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certificate of the Chief Executive Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32.2	Certificate of the Chief Financial Officer of FNBH Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

101.INS	Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 to be signed on its behalf by the undersigned hereunto duly authorized.

	FNBH BANCORP, INC.

	/s/Ronald L. Long
	Ronald L. Long, President and Chief Executive Officer
	(Principal Executive Officer)

	/s/Mark J. Huber
	Mark J. Huber, Chief Financial Officer
	(Principal Financial and Accounting Officer)

Date: May 15, 2014