UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2014

 

OR

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

For the transition period from_____________________ to_____________________

 

Commission File Number 000-31957

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   32-0135202
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
100 S. Second Avenue, Alpena, Michigan   49707
(Address of principal executive offices)     (Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
(Do not check if a smaller reporting company)    

 

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

 

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

 

Common Stock, Par Value $0.01   Outstanding at August 7, 2014
(Title of Class)   2,884,049 shares

 

 

 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

 

INDEX

 

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

 

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

 

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

 

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

 

2
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheet

 

 

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

 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Operations and Comprehensive Income

 

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

 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

First Federal of Northern Michigan Bancorp Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

 

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

 

See accompanying notes to the consolidated financial statements.

 

5
 

 

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

 

 

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

 

 

See accompanying notes to the consolidated financial statements.

 

6
 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—BASIS OF FINANCIAL STATEMENT PRESENTATION

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q. Accordingly, certain information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements are not included herein. The interim financial statements should be read in conjunction with the financial statements of First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.

 

All adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary for a fair presentation of financial position, results of operations and cash flows, have been made. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

Note 2— PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of First Federal of Northern Michigan Bancorp, Inc., First Federal of Northern Michigan, and the Bank’s wholly owned subsidiaries, Financial Services & Mortgage Corporation (“FSMC”) and FFNM Agency, Inc. FSMC invests in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The main activity of FFNM Agency was to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override to the Grotenhuis Group (as discussed further below). The collection of this stream of income expired in April of 2014. All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Note 3—SECURITIES

 

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

 

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

 

7
 

 

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

 

The amortized cost and estimated market value of securities at June 30, 2014, by contract maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities with no specified maturity date are separately stated.

 

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

 

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

 

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

 

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

 

8
 

 

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

 

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

 

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

 

Note 4—LOANS

 

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

 

9
 

 

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

 

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

 

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

 

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

 

10
 

 

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

 

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

 

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

 

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

 

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

 

Risk Grade 4.5 (Monitored) - Loans are considered “below average” and monitored more closely due to some credit deficiency that poses additional risk but is not considered adverse to the point of being a “classified” credit. Possible reasons for additional monitoring may include characteristics such as temporary negative debt service coverage due to weak economic conditions, borrower may have experienced recent losses from operations, declining equity and/or increasing leverage, or marginal liquidity that may affect long-term sustainability. Loans of this grade have a higher degree of risk and warrant close monitoring to insure against further deterioration. In any tables presented subsequently, Risk Grade 4.5 credits are included with Risk Grade 4 credits.

 

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

 

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

 

11
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

13
 

 

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

 

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

 

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

 

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

 

14
 

 

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

 

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

 

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

 

 

 

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

 

 

 

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

 

 

15
 

 

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

 

 

 

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

 

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

 

Note 5—DIVIDENDS

 

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

 

Note 6—STOCK-BASED COMPENSATION

 

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

 

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

 

16
 

 

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

 

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

 

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

 

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

 

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

 

Note 7—COMMITMENTS TO EXTEND CREDIT

 

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

 

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

 

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

 

Note 8—FAIR VALUE MEASUREMENTS

 

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

 

17
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

18
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

19
 

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

Note 9—SUBSEQUENT EVENTS

 

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

 

20
 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

AND SUBSIDIARIES

 

PART Ι - FINANCIAL INFORMATION

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF

 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

OVERVIEW

 

The Company operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its eight full-service banking centers. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company’s principal lending activity is the origination of mortgage loans for the purchase or refinancing of one-to-four family residential properties. The Company also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit, and a variety of other consumer loans.

 

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

 

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

 

CRITICAL ACCOUNTING POLICIES

 

As of June 30, 2014, there have been no changes in the critical accounting policies as disclosed in the Company’s Form 10-K for the year ended December 31, 2013. The Company’s critical accounting policies are described in the Management’s Discussion and Analysis and financial sections of its 2013 Annual Report. Management believes its critical accounting policies relate to the Company’s allowance for loan losses, real estate owned, mortgage servicing rights, valuation of deferred tax assets and impairment of intangible assets.

 

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

 

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

 

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

 

21
 

 

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

 

RESULTS OF OPERATIONS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

22
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

23
 

 

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

 

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

 

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

 

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

 

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

 

24
 

 

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

 

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

 

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

 

25
 

 

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

 

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

 

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

 

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

 

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

 

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

 

26
 

 

LIQUIDITY

 

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

 

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

 

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

 

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

 

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

 

CAPITAL RESOURCES

 

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

 

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

  

ITEM 3 - QUALITATIVE AND QUANTITIATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

 

ITEM 4 - CONTROLS AND PROCEDURES

 

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

 

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

 

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FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

PART II – OTHER INFORMATION

 

Item 1 - Legal Proceedings:

 

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

 

Item 1A - Risk Factors:

 

Not applicable to smaller reporting companies

 

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

 

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

 

Item 3 - Defaults upon Senior Securities:

Not applicable.

 

Item 4 - Mine Safety Disclosures

 

Not applicable.

 

Item 5 - Other Information:

 

Not applicable

 

Item 6 - Exhibits:

 

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

 

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

 

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

 

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

 

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

 

29
 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2014

 

SIGNATURES

 

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

 

 

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

 

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