Edgar Filing: First Federal of Northern Michigan Bancorp, Inc.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

o	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		(I.R.S. Employer
incorporation or organization)		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 x No o

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 o No o

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 o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(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 o Nox.

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 16, 2010
(Title of Class)		2,884,249 shares

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

FORM 10-Q

Quarter Ended June 30, 2010

INDEX

PART I – FINANCIAL INFORMATION

		PAGE
ITEM 1 -UNAUDITED FINANCIAL STATEMENTS
	Consolidated Balance Sheet at June 30, 2010 and December 31, 2009	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and June 30, 2009	4
	Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2010	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and June 30, 2009	6
	Notes to Unaudited Consolidated Financial Statements	7

ITEM 2 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		21
ITEM 3 –QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK		28
ITEM 4T- CONTROLS AND PROCEDURES		28

Part II - OTHER INFORMATION
ITEM 1 -LEGAL PROCEEDINGS		29
ITEM 1A - RISK FACTORS		29
ITEM 2 -UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		29
ITEM 3 -DEFAULTS UPON SENIOR SECURITIES		29
ITEM 4 -(REMOVED AND RESERVED)		29
ITEM 5 -OTHER INFORMATION		29
ITEM 6 -EXHIBITS		29
	Section 302 Certifications
	Section 906 Certifications

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.

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet

	June 30, 2010			December 31, 2009
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks	$	3,113,464		$	2,583,131
Overnight deposits with FHLB		2,321,978			515,927
Total cash and cash equivalents		5,435,442			3,099,058
Securities AFS		34,270,362			33,712,724
Securities HTM		2,574,383			3,928,167
Loans held for sale		770,876			51,970
Loans receivable, net of allowance for loan losses of $3,125,990 and
$3,660,344 as of June 30, 2010 and December 31, 2009, respectively		163,616,758			171,219,105
Foreclosed real estate and other repossessed assets		2,991,871			3,579,895
Federal Home Loan Bank stock, at cost		4,196,900			4,196,900
Premises and equipment		6,288,978			6,563,683
Accrued interest receivable		1,097,581			1,230,287
Intangible assets		773,531			919,757
Prepaid FDIC premiums		1,135,512			1,314,850
Deferred tax asset		643,428			559,235
Other assets		3,154,175			3,130,063
Total assets	$	226,949,797		$	233,505,694

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits	$	157,826,584		$	158,099,809
Advances from borrowers for taxes and insurance		373,714			105,419
Federal Home Loan Bank Advances		38,000,000			44,400,000
Note Payable		-			630,927
REPO Sweep Accounts		5,245,624			5,407,791
Accrued expenses and other liabilities		2,003,573			1,809,266

Total liabilities		203,449,495			210,453,212

Stockholders' equity:
Common stock ($0.01 par value 20,000,000 shares authorized
3,191,999 shares issued)		31,920			31,920
Additional paid-in capital		23,770,323			23,722,767
Retained earnings		2,521,803			2,000,264
Treasury stock at cost (307,750 shares)		(2,963,918	)		(2,963,918	)
Unearned compensation		(99,805	)		(161,678	)
Accumulated other comprehensive income		239,979			423,127
Total stockholders' equity		23,500,302			23,052,482

Total liabilities and stockholders' equity	$	226,949,797		$	233,505,694

See accompanying notes to consolidated financial statements.

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated Statement of Income

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2010			2009			2010		2009
	(Unaudited)						(Unaudited)
Interest income:
Interest and fees on loans	$	2,552,986		$	2,865,275		$	5,093,399	$	5,807,615
Interest and dividends on investments
Taxable		106,843			114,720			239,406		258,522
Tax-exempt		58,455			60,950			111,267		114,546
Interest on mortgage-backed securities		165,313			143,925			321,846		294,751
Total interest income		2,883,597			3,184,871			5,765,918		6,475,434

Interest expense:
Interest on deposits		601,733			880,890			1,239,557		1,941,176
Interest on borrowings		298,657			427,973			617,239		856,532
Total interest expense		900,390			1,308,864			1,856,796		2,797,708

Net interest income		1,983,207			1,876,007			3,909,122		3,677,726
Provision for loan losses		594,840			251,839			605,928		516,069
Net interest income after provision for loan losses		1,388,367			1,624,168			3,303,194		3,161,657

Non-interest income:
Service charges and other fees		199,340			229,457			403,514		444,329
Mortgage banking activities		315,223			473,871			563,315		923,076
Gain on sale of investments		447,387			1,227			496,817		1,227
Net gain (loss) on sale of premises and equipment,
real estate owned and other repossessed assets		42,691			(44,064	)		53,867		27,478
Other		260,723			103,383			326,336		166,000
Total non-interest income		1,265,364			763,874			1,843,849		1,562,110

Non-interest expense:
Compensation and employee benefits		1,194,299			1,171,455			2,365,241		2,319,257
FDIC Insurance Premiums		94,348			191,044			188,548		270,608
Advertising		36,103			44,321			55,992		61,871
Occupancy		288,237			300,069			600,813		602,487
Amortization of intangible assets		73,112			37,754			146,225		126,871
Service bureau charges		86,114			86,552			165,696		178,511
Professional services		149,091			163,219			252,202		266,123
Other		515,103			350,984			850,786		657,484
Total non-interest expense		2,436,407			2,345,398			4,625,503		4,483,212

Income from continuing operations before income tax expense (benefit)		217,324			42,646			521,540		240,555
Income tax (benefit) expense from continuing operations		(101,913	)		328			-		51,740
Net income from continuing operations		319,237			42,318			521,540		188,815

Discontinued Operations:
Loss from discontinued operations, net of income tax benefit
of $0 and $43,209		-			-			-		(83,875	)
Gain on sale of discontinued operations, net of income tax expense
of $0 and $19,585		-			-			-		38,017
Loss from discontinued operations		-			-			-		(45,858	)

Net Income	$	319,237		$	42,318		$	521,540	$	142,957

Per share data:
Income per share from continuing operations
Basic	$	0.11		$	0.01		$	0.18	$	0.07
Diluted	$	0.11		$	0.01		$	0.18	$	0.07
Loss per share from discontinued operations
Basic	$	-		$	-		$	-	$	(0.02	)
Diluted	$	-		$	-		$	-	$	(0.02	)
Net income per share
Basic	$	0.11		$	0.01		$	0.18	$	0.05
Diluted	$	0.11		$	0.01		$	0.18	$	0.05
Weighted average number of shares outstanding
Basic		2,884,249			2,884,249			2,884,249		2,884,249
Including dilutive stock options		2,884,249			2,884,249			2,884,249		2,884,249
Dividends per common share	$	-		$	-		$	-	$	-

See accompanying notes to consolidated financial statements.

First Federal of Northern Michigan Bancorp Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity (Unaudited)

													Accumulated
						Additional							Other
	Common		Treasury			Paid-in		Unearned			Retained		Comprehensive
	Stock		Stock			Capital		Compensation			Earnings		Income			Total
Balance at December 31, 2009	$	31,920	$	(2,963,918	)	$	23,722,767	$	(161,678	)	$	2,000,263	$	423,127		$	23,052,481

Stock-based compensation		-		-			47,556		61,873			-		-			109,429

Net income for the period		-		-			-		-			521,540		-			521,540

Change in unrealized gain: on available-for-sale securities (net of tax of $94,349)		-		-			-		-			-		(183,148	)		(183,148	)

Total comprehensive income		-		-			-		-			-		-			338,392

Balance at June 30, 2010	$	31,920	$	(2,963,918	)	$	23,770,323	$	(99,805	)	$	2,521,803	$	239,979		$	23,500,302

See accompanying notes to the consolidated financial statements.

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows

	For Six Months Ended
	June 30,
	2010			2009
	(Unaudited)
Cash Flows from Operating Activities:
Net income	$	521,540		$	142,957
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		410,565			412,010
Provision for loan loss		605,928			516,069
Amortization and accretion on securities		60,794			29,327
Gain on sale of investment securities		(496,817	)		(1,227	)
ESOP contribution		-			7,722
Stock-based compensation		109,429			105,605
Gain on sale of loans held for sale		(225,014	)		(410,528	)
Originations of loans held for sale		(17,133,098	)		(34,457,881	)
Proceeds from sale of loans held for sale		16,639,206			34,764,009
Gain on fixed assets		(9,423	)		(50,102	)
Net change in:
Accrued interest receivable		132,706			252,599
Other assets		658,259			(487,150	)
Prepaid FDIC insurance premiums		179,338			-
Deferred income tax benefit		(84,193	)		(28,116)
Accrued expenses and other liabilities		194,306			322,921

Net cash provided by operating activities		1,563,526			1,118,215

Cash Flows from Investing Activities:
Net decrease in loans		6,996,419			6,595,143
Proceeds from maturity and sale of available-for-sale securities		19,558,755			8,844,225
Proceeds from sale of property and equipment		30,874			757,050
Net change in discontinued operations		-			1,533,942
Purchase of securities		(18,604,083	)		(10,976,547	)
Purchase of premises and equipment		(11,086	)		(111,568	)
Net cash provided by investing activities		7,970,879			6,642,245

Cash Flows from Financing Activities:
Net decrease in deposits		(273,222	)		(3,524,571	)
Net decrease in Repo Sweep accounts		(162,167	)		(3,955,842	)
Net increase in advances from borrowers		268,295			310,078
Additions to advances from Federal Home Loan Bank and notes payable		11,925,000			26,550,000
Repayments of Federal Home Loan Bank advances and notes payable		(18,955,927	)		(26,937,724	)
Net cash used for financing activities		(7,198,021	)		(7,558,059	)

Net increase in cash and cash equivalents		2,336,384			202,401
Cash and cash equivalents at beginning of period		3,099,058			3,470,311
Cash and cash equivalents at end of period	$	5,435,442		$	3,672,712

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	-		$	-
Cash paid during the period for interest	$	1,929,931		$	2,911,694

See accompanying notes to the consolidated financial statements.

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, 2009.

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, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Note 2— PRINCIPLES OF CONSOLIDATION AND DISCONTINUED OPERATIONS

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. FSMC invests in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The main activity of FFNM Agency is to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to the Grotenhuis Group (as discussed further below). All significant intercompany balances and transactions have been eliminated in the consolidation.

In accordance with Statement of Financial Accounting Standard No. 144, on February 27, 2009 First Federal of Northern Michigan Bancorp, Inc. announced that it had sold the InsuranCenter of Alpena (“ICA”) for $1,635,000. In accordance with the Financial Accounting Standard 144 “Accounting for the impairment or Disposal of Long-Lived Assets,” which became effective for the Company on January 1, 2002, the financial position and results of operations of ICA are “discontinued operations.” For further information, please refer to Note 15 of the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

As a result of the transaction, the Company reduced its full-time employees by 14 positions, or 13% of the Company’s workforce. The Company recorded a gain of approximately $57,000 upon the closing of the sale. The Company retained the residual income stream associated with the April 2008 sale of its wholesale Blue Cross/Blue Shield override business to the Grotenhuis Group.

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, 2010
	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	$	8,210	$	65	$	-	$	8,275
Municipal notes		4,898		94		-		4,992
Corporate securities		1,000		21		-		1,021
Mortgage-backed securities		19,797		188		4		19,981
Other securities		2		-		1		1

Total	$	33,907	$	368	$	5	$	34,270

Securities Held to Maturity
Municipal notes	$	2,574	$	110	$	2	$	2,682

	December 31, 2009
	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	$	8,220	$	37	$	-	$	8,257
Municipal notes		7,870		183		-		8,053
Corporate securities		1,000		2		-		1,002
Mortgage-backed securities		15,979		419		1		16,397
Other securities		3		1		-		4

Total	$	33,072	$	642	$	1	$	33,713

Securities Held to Maturity
Municipal notes	$	3,928	$	159	$	3	$	4,084

The amortized cost and estimated market value of securities at June 30, 2010, 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, 2010
	Amortized Cost		Market Value
	(in thousands)
Available For Sale:
Due in one year or less	$	1,291	$	1,316
Due after one year through five years		10,479		10,612
Due in five year through ten years		1,845		1,867
Due after ten years		493		493

Subtotal		14,108		14,288

Equity securities		2		1
Mortgage-backed securities		19,797		19,981

Total	$	33,907	$	34,270

Held To Maturity:
Due in one year or less	$	89	$	90
Due after one year through five years		365		387
Due in five year through ten years		630		659
Due after ten years		1,490		1,546

Total	$	2,574	$	2,682

At June 30, 2010 and December 31, 2009, securities with a carrying value and fair value of $23,935,000 and $24,265,000, respectively, were pledged to secure certain deposit accounts, FHLB advances and our line of credit at the Federal Reserve.

Gross proceeds from the sale of securities for the six-months ended June 30, 2010 and 2009 were $10,354,000 and $1,000,000, respectively, resulting in gross gains of $497,000 and $1,000, respectively and gross losses of $0 and $0, respectively.

During the three-month period ended June 30, 2010 the Company restructured its investment portfolio by selling 16 bonds, mostly issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA). Although these bonds have government guarantees, they are only implied guarantees, hence the bonds are not truly backed by the full faith and credit of the United States. The bonds sold were replaced with GNMA bonds, which are supported by the full faith and credit of the United States government. By selling the municipal, FNMA and FHLMC bonds the Company was able to accomplish two things:

·	Reduce its overall credit risk in the investment portfolio.

·	Improve its risk-based capital position as bonds sold were 20% risk-weighted while the replacement bonds are 0% risk-weighted.

The Company concluded this move was prudent and necessary due to the following reasons:

·	Because of the timing of the restructuring, the Company was able to capture some previously unrealized gains.

·	The Company did forego a higher yield (approximately 10bps), but was able to minimize the yield loss by buying longer-term GNMA’s, which was possible because of the minimal level of interest-rate risk inherent in the Company’s balance sheet.

The following is a summary of temporarily impaired investments that have been impaired for less than and more than twelve months as of June 30, 2010 and December 31, 2009:

	June 30, 2010
			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	$	-	$	-	$	-	$	-
Corporate and other securities		-		-		-		-
Municipal notes		1,070		-		12		-
Mortgage-backed securities		4,020		4		-		-
Equity securities		-		-		2		1

Total	$	5,090	$	4	$	14	$	1

Held to Maturity:
Municipal notes	$	-	$	-	$	28	$	2

Total Securities held to maturity	$	-	$	-	$	28	$	2

	December 31, 2009
			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	$	-	$	-	$	-	$	-
Corporate and other securities		-		-		-		-
Municipal notes		-		-		13		1
Mortgage-backed securities		-		-		-		-
Equity securities		-		-		-		-

Total	$	-	$	-	$	13	$	1

Held to Maturity:
Municipal notes	$	-	$	-	$	27	$	3

Total Securities held to maturity	$	-	$	-	$	27	$	3

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.

	At June 30,			At December 31,
	2010			2009
	(in thousands)
Real estate loans:
Residential mortgage	$	77,326		$	81,620
Commercial loans:
Secured by real estate		60,872			62,376
Other		8,824			9,873
Total commercial loans		69,696			72,249

Consumer loans:
Secured by real estate		17,668			18,732
Other		2,314			2,553

Total consumer loans		19,982			21,285
Total gross loans	$	167,004		$	175,154
Less:
Net deferred loan fees		(261	)		(275	)
Allowance for loan losses		(3,126	)		(3,660	)

Total loans, net	$	163,617		$	171,219

The following table sets forth the analysis of the allowance for loan losses for the periods indicated:

	As of			As of
	June 30,			December 31,
	2010			2009
	(in thousands)

Allowance at beginning of period	$	3,660		$	5,647

Charge-offs:
Real Estate:
Residential Mortgages		(169	)		(362	)
Nonresidential Real Estate:
Commercial Mortgages		(877	)		(4,903	)
Purchased Out-of-State		-			(2,482	)
Non Real Estate Loans:
Commercial		-			(246	)
Consumer and other		(133	)		(254	)
Total charge offs		(1,179	)		(8,247	)

Recoveries:
Real Estate:
Residential Mortgages		2			-
Commercial Mortgages		12			-
Non Real Estate Loans:
Consumer and other		25			64
Total recoveries		39			64

Net (charge offs) recoveries		(1,140	)		(8,183	)
Provision for loan losses		606			6,196

Balance at end of year	$	3,126		$	3,660

Note 5—DIVIDENDS

We suspended our quarterly dividend effective for the quarter ended December 31, 2008. We are dependent primarily upon the Bank for earnings and funds to pay dividends on common stock. The payment of dividends also is subject to legal and regulatory restrictions. Any reinstatement of dividends in the future will depend, in large part, on the Bank's earnings, capital requirements, financial condition and other factors considered by the Board of Directors.

Note 6—STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 123 (Revised) “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, 2010, no shares were awarded under the Recognition and Retention Plan (“RRP”). Shares issued under the RRP and exercised pursuant to the exercise of the stock option plan may be either authorized but unissued shares or reacquired shares held by the Company as treasury stock.

Stock Options - A summary of option activity under the Plans during the six months ended June 30, 2010 is presented below:

						Weighted-Average
				Weighted-		Remaining
				Average		Contractual Term		Aggregate
Options	Shares			Exercise Price		(Years)	Intrinsic Value

Outstanding at January 1, 2010		188,132		$	9.47

Granted		0			N/A

Exercised		0			N/A

Forfeited or expired		(2,000	)	$	9.54

Oustanding at June 30, 2010		186,132		$	9.47	5.82	$	0

Options Exercisable at June 30, 2010		149,534		$	9.47	4.38	$	0

A summary of the status of the Company’s nonvested options as of June 30, 2010, and changes during the six months ended June 30, 2010, is presented below:

				Weighted-Average
				Grant-Date
Nonvested Shares	Shares			Fair Value

Nonvested at January 1, 2010		73,476		$	2.11

Granted		0			N/A

Vested		(34,878	)	$	2.11

Forfeited		(2,000	)	$	2.10

Nonvested at June 30, 2010		36,598		$	2.10

As of June 30, 2010 there was $75,000 of total unrecognized compensation cost, net of expected forfeitures, related to nonvested options under the Plans. That cost is expected to be recognized over a weighted-average period of 0.9 years. The total fair value of options vested during the six months ended June 30, 2010 was $66,955.

Restricted Stock Awards - As of June 30, 2010 there was $107,000 of unrecognized compensation cost related to nonvested restricted stock awards under the Plans. That cost is expected to be recognized over a weighted-average period of 0.9 years.

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, 2010, the Company had outstanding commitments to originate loans of $32.2 million. These commitments included $10.7 million for permanent one-to-four family dwellings, $5.5 million for non-residential loans, $206,000 of undisbursed loan proceeds for construction of one-to-four family dwellings, $4.6 million of undisbursed lines of credit on home equity loans, $1.2 million of unused credit card lines, $7.5 million of unused commercial lines of credit, $837,000 of undisbursed loans for commercial construction, $5,000 of unused letters of credit and $1.7 million in unused Overdraft Protection.

Note 8 – SEGMENT REPORTING

The Company’s principal activities include banking and, prior to February 2009, the sale of insurance products through its indirect wholly owned subsidiary, ICA. The Company sold the majority of the assets of ICA on February 27, 2009 (see Note 1). The Bank provides financial products including retail and commercial loans as well as retail and commercial deposits. ICA received commissions from the sale of various insurance products including health, life, and property. The segments were determined based on the nature of the products provided to customers.

The financial information for each operating segment is reported on the basis used internally to evaluate performance and allocate resources. The allocations have been consistently applied for all periods presented. Revenues and expenses between affiliates have been transacted at rates that unaffiliated parties would pay. The only transaction between the segments related to a deposit on behalf of ICA included in the Bank. The interest income and interest expense for this transaction has been eliminated. All other transactions were with external customers. The information presented is not necessarily indicative of the segment’s financial condition and results of operations if they were independent entities.

As noted above, the majority of the assets of the Company’s segment, ICA, were sold on February 27, 2009; therefore no segment information is reported for the three-month period ended June 30, 2009 or for the three- or six-month periods ended June 30, 2010.

	For the Six Months Ended
	June 30, 2009
	(Dollars in Thousands)
	Bank		ICA			Eliminations			Total
Interest Income	$	6,476	$	4		$	(4	)	$	6,476
Interest Expense		2,798		4			(4	)		2,798
Net Interest Income - Before provision for loan losses		3,678		-			-			3,678
Provision for Loan Losses		516		-			-			516
Net Interest Income - After provision for loan losses		3,162		-			-			3,162
Other Income		1,520		191			-			1,711
Operating Expenses		4,469		292			-			4,761
Income (Loss) - Before federal income tax		213		(101	)		-			112
Federal Income Tax Expense (Benefit)		41		(34	)		-			28
Net Income (Loss)	$	172	$	(67	)	$	-		$	84

Depreciation and amortization	$	444	$	42		$	-		$	486
Assets	$	240,506	$	-		$	-		$	240,506
Expenditures related to long-lived assets:
Goodwill	$	-	$	-		$	-		$	-
Intangible assets		-		-			-			-
Property and equipment		184		-			-			184
Total	$	184	$	-		$	-		$	184

Note 9-FAIR VALUE MEASUREMENTS.

FASB ASC 820-10 – Fair Value Measurements. The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at June 30, 2010, and the valuation techniques used by the Company to determine those fair values.

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

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

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

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

Disclosures concerning assets and liabilities measured at fair value are as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2010
(Dollars in Thousands)

	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, 2010
Assets
Investment securities- available-for-sale:
US Government & agency obligations	$	-	$	8,275	$	-	$	8,275
State agency & municipal obligations		-		4,992		-		4,992
Corporate bonds & other obligations		-		1,021		-		1,021
Mortgage-backed securities		-		19,981		-		19,981
Equity investments		-		1		-		1

Total investment securities - available-for-sale	$	-	$	34,270	$	-	$	34,270

Liabilities
None

Assets and Liabilities Measured at Fair Value on a Recurring Basis at June 30, 2009

(Dollars in Thousands)

	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, 2009
Assets
Investment securities- available-for-sale:
US Government & agency obligations	$	-	$	5,761	$	-	$	5,761
State agency & municipal obligations		-		7,892		-		7,892
Corporate bonds & other obligations		-		1,012		-		1,012
Mortgage-backed securities		-		12,939		-		12,939
Equity investments		-		2		-		2

Total investment securities - available-for-sale	$	-	$	27,606	$	-	$	27,606

Liabilities
None

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include non-homogenous loans that are considered impaired and real estate owned. For impaired loans accounted for under FASB ASC 310-10, the Company has estimated the fair value using Level 3 inputs using discounted cash flow projections. Other Real Estate Owned consists of property received in full or partial satisfaction of a receivable. The Company utilizes independent appraisals or broker price opinions to estimate the fair value of these properties.

Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2010

	Balance at June 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Change in fair value for the three-month period ended June 30, 2010		Change in fair value for the six-month period ended June 30, 2010

Impaired loans accounted for under FASB ASC 310-10	$	4,039	$	-	$	-	$	4,039	$	779	$	779

Other real estate owned -residential mortgages	$	503	$	-	$	-	$	503	$	38	$	38

Other Real estate owned - commercial	$	2,489	$	-	$	-	$	2,489	$	260	$	260