UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

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 þ 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 þ
				(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 No þ.

          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 14, 2009
(Title of Class)		2,884,249 shares

 

 

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM 10-Q
Quarter Ended June 30, 2009

INDEX

		PAGE
PART I – FINANCIAL INFORMATION
ITEM 1 — UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet at June 30, 2009 and December 31, 2008			3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and June 30, 2008			4
Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2009			5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and June 30, 2008			6
Notes to Unaudited Consolidated Financial Statements			7
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			16
ITEM 3 — QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK			23
ITEM 4T — CONTROLS AND PROCEDURES			23
Part II — OTHER INFORMATION
ITEM 1 — LEGAL PROCEEDINGS			24
ITEM 1A — RISK FACTORS			24
ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			24
ITEM 3 — DEFAULTS UPON SENIOR SECURITIES			24
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			24
ITEM 5 — OTHER INFORMATION			24
ITEM 6 — EXHIBITS			24
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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, 2009				December 31, 2008
		(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks		$	3,062,708			$	3,097,788
Overnight deposits with FHLB			610,004				372,523
Total cash and cash equivalents			3,672,712				3,470,311
Securities AFS			27,605,970				25,665,178
Securities HTM			4,017,701				4,022,235
Loans held for sale			211,400				107,000
Loans receivable, net of allowance for loan losses of $2,616,242 and $5,647,055 as of June 30, 2009 and December 31, 2008, respectively			182,315,510				192,270,714
Foreclosed real estate and other repossessed assets			3,664,925				1,637,923
Federal Home Loan Bank stock, at cost			4,196,900				4,196,900
Premises and equipment			6,911,216				7,089,746
Accrued interest receivable			1,216,577				1,469,176
Intangible assets			1,065,982				1,192,853
Other assets			5,626,898				4,939,523
Assets of discontinued operation			—				1,610,734
Total assets		$	240,505,791			$	247,672,293
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits		$	162,254,027			$	165,778,598
Advances from borrowers for taxes and insurance			414,553				104,475
Federal Home Loan Bank advances			39,950,000				40,200,000
Note Payable			630,927				768,651
REPO sweep accounts			5,491,573				9,447,415
Accrued expenses and other liabilities			2,200,522				1,877,600
Liabilities of discontinued operation			—				76,792
Total liabilities			210,941,603				218,253,531
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			24,299,106				24,302,102
Retained earnings			8,905,369				8,762,412
Treasury stock at cost (307,750 shares)			(2,963,918	)			(2,963,918	)
Unallocated ESOP			(710,861	)			(764,861	)
Unearned compensation			(224,001	)			(286,324	)
Accumulated other comprehensive income			226,574				337,431
Total stockholders’ equity			29,564,188				29,418,762
Total liabilities and stockholders’ equity		$	240,505,791			$	247,672,293

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,
		2009				2008				2009				2008
		(Unaudited)								(Unaudited)
Interest income:
Interest and fees on loans		$	2,865,276			$	3,143,876			$	5,807,615			$	6,418,423
Interest and dividends on investments			175,670				239,668				373,068				516,245
Interest on mortgage-backed securities			143,925				107,892				294,751				146,292
Total interest income			3,184,870				3,491,436				6,475,434				7,080,960
Interest expense:
Interest on deposits			880,890				1,241,813				1,941,176				2,536,265
Interest on borrowings			427,973				548,412				856,532				1,121,331
Total interest expense			1,308,863				1,790,225				2,797,708				3,657,596
Net interest income			1,876,007				1,701,211				3,677,726				3,423,364
Provision for loan losses			251,839				342,264				516,069				367,234
Net interest income after provision for loan losses			1,624,168				1,358,947				3,161,657				3,056,130
Non Interest income:
Service charges and other fees			229,457				237,110				444,329				463,285
Mortgage banking activities			473,871				125,912				923,076				230,718
Gain on sale of available-for-sale investments			1,227				—				1,227				16,052
Net gain (loss) on sale of premises and equipment, real estate owned and other repossessed assets			(44,064	)			25,894				27,478				23,093
Other			18,765				25,001				51,360				48,031
Insurance & brokerage commissions			84,618				45,000				114,640				90,000
Total non interest income			763,874				458,916				1,562,110				871,178
Non interest expenses:
Compensation and employee benefits			1,171,455				1,224,234				2,319,257				2,451,094
FDIC insurance premiums			191,044				32,607				270,608				51,795
Advertising			44,321				28,656				61,871				58,796
Occupancy			300,069				343,818				602,487				651,336
Amortization of intangible assets			37,754				77,122				126,871				154,244
Service bureau charges			86,551				85,716				178,511				168,085
Professional services			163,219				107,518				266,123				197,174
Other			350,984				273,155				657,484				570,518
Total non interest expenses			2,345,398				2,172,826				4,483,212				4,303,042
Income (loss) from continuing operations before income tax benefit			42,644				(354,963	)			240,555				(375,733	)
Income tax (benefit) or expense from continuing operations			328				(118,763	)			51,740				(125,571	)
Net income (loss) from continuing operations			42,316				(236,199	)			188,815				(250,162	)
Discontinued Operations:
Loss from discontinued operations, net of income tax benefit of $0, $7,619, $43,209, and $16,733, respectively			—				(14,790	)			(83,875	)			(32,483	)
Gain on sale of discontinued operations, net of income tax expense of $0, $0, $19,565 and $0, respectively			—				—				38,017				—
Net Income (Loss)		$	42,316			$	(250,989	)		$	142,957			$	(282,645	)
Per share data:
Income (loss) per share from continuing operations
Basic		$	0.01			$	(0.08	)		$	0.07			$	(0.09	)
Diluted		$	0.01			$	(0.08	)		$	0.07			$	(0.09	)
Income (loss) per share from discontinued operations
Basic		$	—			$	(0.01	)		$	(0.02	)		$	(0.01	)
Diluted		$	—			$	(0.01	)		$	(0.02	)		$	(0.01	)
Net income (loss) per share
Basic		$	0.01			$	(0.09	)		$	0.05			$	(0.10	)
Diluted		$	0.01			$	(0.09	)		$	0.05			$	(0.10	)
Dividends per common share		$	—			$	0.05			$	—			$	0.10

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				Unallocated				Comprehensive
		Stock				Stock				Capital				Compensation				Earnings				ESOP				Income				Total
Balance at December 31, 2008		$	31,920			$	(2,963,918	)		$	24,302,102			$	(286,324	)		$	8,762,412			$	(764,861	)		$	337,431			$	29,418,762
Stock Options/Awards Expensed			—				—				43,282				62,323				—				—				—				105,605
ESOP common stock committed to be released			—				—				(46,278	)			—				—				54,000				—				7,722
Net income for the period			—				—				—				—				142,957				—				—				142,957
Changes in unrealized gain: on available-for-sale securities (net of tax of $57,108)			—				—				—				—				—				—				(110,857	)			(110,857	)
Total comprehensive income			—				—				—				—				—				—				—				32,100
Balance at June 30, 2009		$	31,920			$	(2,963,918	)		$	24,299,106			$	(224,001	)		$	8,905,369			$	(710,861	)		$	226,574			$	29,564,188

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,
		2009				2008
		(Unaudited)
Cash Flows from Operating Activities:
Net income (loss)		$	142,957			$	(282,645	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization			412,010				521,605
Provision for loan loss			516,069				367,234
Amortization and accretion on securities			29,327				24,316
Gain on sale of investment securities			(1,227	)			(16,052	)
ESOP contribution			7,722				35,958
Stock awards/options			105,605				119,808
Gain on sale of loans held for sale			(410,528	)			(70,158	)
Originations of loans held for sale			(34,457,881	)			(7,083,086	)
Proceeds from sale of loans held for sale			34,764,009				7,223,402
Gain on sale of fixed assets			(50,102	)			(23,093	)
Change in accrued interest receivable			252,599				194,729
Change in other assets			(515,266	)			204,854
Change in accrued expenses and other liabilities			322,921				(527,349	)
Net cash provided by operating activities			1,118,215				689,523
Cash Flows from Investing Activities:
Net decrease in loans			6,595,143				5,882,376
Proceeds from maturity and sale of available-for-sale securities			8,844,225				14,253,091
Proceeds from sale of property and equipment			757,050				1,008,079
Net change in discontinued operations			1,533,942				(367,616	)
Purchase of securities			(10,976,547	)			(18,039,713	)
Purchase of premises and equipment			(111,568	)			(127,129	)
Net cash provided by investing activities			6,642,245				2,609,088
Cash Flows from Financing Activities:
Net increase (decrease) in deposits			(3,524,571	)			2,336,767
Dividend paid on common stock			—				(288,425	)
Net increase (decrease) in Repo Sweep accounts			(3,955,842	)			418,739
Net increase in advances from borrowers			310,078				266,966
Additions to advances from Federal Home Loan Bank and notes payable			26,550,000				12,200,000
Repayments of Federal Home Loan Bank advances and notes payable			(26,937,724	)			(16,915,144	)
Net cash used for financing activities			(7,558,059	)			(1,981,097	)
Net increase in cash and cash equivalents			202,401				1,317,514
Cash and cash equivalents at beginning of period			3,470,311				5,340,857
Cash and cash equivalents at end of period		$	3,672,712			$	6,658,371
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes		$	—			$	—
Cash paid during the period for interest		$	2,911,694			$	3,800,874

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, 2008.

     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, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

     In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events, we have evaluated subsequent events though the date of this filing. We do not believe there are any material subsequent events which would require further disclosure.

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.

     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. As a result, the financial position and results of operations of ICA are removed from the detail line items in the Company’s condensed consolidated financial statements and presented separately as “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, 2008.

     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 expects the sale will reduce its non-interest expense by approximately $1.2 million in fiscal year 2009.

     The Company recorded a gain of approximately $42,000 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—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,
		2009				2008
		(in thousands)
Real estate loans:
Residential mortgage		$	84,302			$	92,364
Commercial loans:
Secured by real estate			60,418				49,787
Other			17,176				30,173
Total commercial loans			77,594				79,960
Consumer loans:
Secured by real estate			20,376				22,303
Other			2,942				3,564
Total consumer loans			23,318				25,867
Total gross loans		$	185,214			$	198,191
Less:
Net deferred loan fees			(282	)			(274	)
Allowance for loan losses			(2,616	)			(5,647	)
Total loans, net		$	182,316			$	192,270

Note 4—DIVIDENDS.

     The Company suspended its quarterly dividend effective for the quarter ended December 31, 2008. The Company is 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 of the Company.

Note 5—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 (retroactively adjusted for the exchange ratio applied in the Company’s 2005 stock offering and related second-step conversion). The Company’s 2006 Stock-Based Incentive Plan (the “2006 Plan”), which was approved by the shareholders on May 17, 2006, permits the award of up to 242,740 shares of common stock of which the maximum number to be granted as Stock Options is 173,386 and the maximum that can be granted as Restricted Stock Awards is 69,354. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on five years of continual service and have ten year contractual terms. Certain options provide for accelerated vesting if there is a change in control (as defined in the Plans).

     During the three and six months ended June 30, 2009, the Company awarded no shares or options under the Plans. Shares issued under the Stock-Based Incentive Plan and exercised pursuant to 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, 2009 is presented below:

										Weighted-Average
						Weighted-				Remaining
						Average				Contractual Term				Aggregate
Options		Shares				Exercise Price				(Years)				Intrinsic Value
Outstanding at January 1, 2009			192,132			$	9.48
Granted			0				N/A
Exercised			0				N/A
Forfeited or expired			(2,430	)		$	9.52
Outstanding at June 30, 2009			189,702			$	9.47				6.76			$	0
Options Exercisable at June 30, 2009			115,436			$	9.45				6.67			$	0

     A summary of the status of the Company’s nonvested options as of June 30, 2009, and changes during the six months ended June 30, 2009, is presented below:

						Weighted-Average
						Grant-Date
Nonvested Shares		Shares				Fair Value
Nonvested at January 1, 2009			111,774			$	2.11
Granted			0				N/A
Vested			(35,678	)		$	2.12
Forfeited			(1,830	)		$	2.09
Nonvested at June 30, 2009			74,266			$	2.10

     As of June 30, 2009 there was $161,000 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 1.9 years. The total fair value of options vested during the six months ended June 30, 2009 was $85,409.

     Restricted Stock Awards - As of June 30, 2009 there was $231,000 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 1.9 years.

Note 6 — 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, 2009, the Company had outstanding commitments to originate loans of $25.1 million. These commitments included $9.4 million for permanent one-to-four family dwellings, $600,000 for non-residential loans, $29,000 of undisbursed loan proceeds for construction of one-to-four family dwellings, $4.9 million of undisbursed lines of credit on home equity loans, $1.2 million of unused credit card lines, $6.9 million of unused commercial lines of credit, $1.0 million of undisbursed loans for commercial construction, $5,000 of unused letters of credit and $1.1 million in unused Bounce Protection.

Note 7 — SEGMENT REPORTING

     The Company’s principal activities include banking through its wholly owned subsidiary, First Federal of Northern Michigan, and, prior to its sale on February 27, 2009, the sale of insurance products through its indirect wholly owned subsidiary, ICA, purchased in 2003. The Bank provides financial products including retail and commercial loans as well as retail and commercial deposits. ICA receives 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 performance measurement of the operating segments is based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The information presented is also 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.

		For the Three Months Ended
		June 30, 2008
		(Dollars in Thousands)
		Bank				ICA				Eliminations				Total
Interest Income		$	3,492			$	13			$	(9	)		$	3,496
Interest Expense			1,806				(2	)			(9	)			1,795
Net Interest Income - Before provision for loan losses			1,686				15				—				1,701
Provision for Loan Losses			342				—				—				342
Net Interest Income - After provision for loan losses			1,344				15				—				1,359
Other Income			413				410				—				823
Operating Expenses			2,145				414				—				2,559
Loss - Before federal income tax benefit			(388	)			11				—				(377	)
Federal Income Tax Expense (Benefit)			(130	)			4				—				(126	)
Net Income (Loss)		$	(258	)		$	7			$	—			$	(251	)
Depreciation and amortization		$	187			$	86			$	—			$	273
Assets		$	243,853			$	5,459			$	(1,198	)		$	248,114
Expenditures related to long-lived assets:
Goodwill		$	—			$	—			$	—			$	—
Intangible assets			—				—				—				—
Property and equipment			98				—				—				98
Total		$	98			$	—			$	—			$	98

		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			1,581				191				—				1,772
Operating Expenses			4,471				292				—				4,763
Income (Loss) - Before federal income tax			272				(101	)			—				171
Federal Income Tax Expense (Benefit)			62				(34	)			—				28
Net Income (Loss)		$	210			$	(67	)		$	—			$	143
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

		For the Six Months Ended
		June 30, 2008
		(Dollars in Thousands)
		Bank				ICA				Eliminations				Total
Interest Income		$	7,081			$	22			$	(22	)		$	7,081
Interest Expense			3,680				—				(22	)			3,658
Net Interest Income - Before provision for loan losses			3,401				22				—				3,423
Provision for Loan Losses			367				—				—				367
Net Interest Income - After provision for loan losses			3,034				22				—				3,056
Other Income			779				1,021				—				1,800
Operating Expenses			4,217				1,064				—				5,281
Loss - Before federal income tax benefit			(404	)			(21	)			—				(425	)
Federal Income Tax Benefit			(135	)			(7	)			—				(142	)
Net Loss		$	(269	)		$	(14	)		$	—			$	(283	)
Depreciation and amortization		$	375			$	147			$	—			$	522
Assets		$	243,853			$	5,459			$	(1,198	)		$	248,114
Expenditures related to long-lived assets:
Goodwill		$	—			$	—			$	—			$	—
Intangible assets			—				—				—				—
Property and equipment			127				—				—				127
Total		$	127			$	—			$	—			$	127

Note 8-FAIR VALUE MEASUREMENTS.

     FAS 157 — 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, 2009, 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, 2009
(dollars in thousands)

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Balance at June

(Level 1)

(Level 2)

(Level 3)

30, 2009

Assets:

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 FAS 114, 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
(dollars in thousands)

																		Change in fair
						Quoted Prices in												value for the
						Active Markets				Significant Other				Significant				six-month
		Balance at				for Identical				Observable Inputs				Unobservable				period ended
		June 30, 2009				Assets (Level 1)				(Level 2)				Inputs (Level 3)				June 30, 2009
Impaired loans accounted for under FAS 114		$	4,948			$	—			$	—			$	4,948			$	508
Other real estate owned — residential mortgages		$	453			$	—			$	—			$	453			$	22
Other Real estate owned — commercial		$	3,212			$	—			$	—			$	3,212			$	30

     Mortgage Servicing Rights. Mortgage servicing rights represent the value associated with servicing residential mortgage loans. The value is determined through a discounted cash flow analysis which uses prepayment speed, interest rate, delinquency level and other assumptions as inputs. All of these assumptions require a significant degree of management judgment. Adjustments are only made when the discounted cash flows are less than the carrying value. As such, the Company classifies mortgage servicing rights as nonrecurring Level 3.

     Mortgage Loans Held For Sale. Mortgage loans held for sale are recorded at the lower of carrying value or fair value. The fair value of mortgage loans held for sale is determined through forward commitments which the Company enters to sell these loans to secondary market counterparties. As such, the Company classifies mortgage loans held for sale as nonrecurring Level 2.

     Impaired Loans. The Company does not record loans at fair value on a recurring basis. However, on occasion, a loan is considered impaired and an allowance for loan loss is established. A loan is considered impaired when it is probable that all of the principal and interest due under the original terms of the loan may not be collected. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan.

The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

     Real Estate Owned and Repossessed Assets. These assets are reported in the above nonrecurring table at initial recognition of impairment and on an ongoing basis until recovery or charge-off. At time of foreclosure or repossession, real estate owned and repossessed assets are adjusted to fair value less costs to sell upon transfer of the loans to real estate owned and repossessed assets, establishing a new cost basis. At that time, they are reported in the Company’s fair value disclosures in the above nonrecurring table.

     Investment Securities Held to Maturity. The Company does not record investment securities held to maturity at fair value on a recurring basis. Therefore, when certain securities held to maturity were measured at fair value as discussed below, the Company’s municipal bonds classified as held to maturity are fair valued using a discount rate adjustment technique utilizing an imputed discount rate between current market interest rate spreads and market interest rate spreads at the approximate last date an active market existed for the these securities. Relevant inputs to the model include market spread data in consideration of credit characteristics, collateral type, credit rating and other relevant features. Where quoted prices are not available, fair values are measured using independent matrix pricing models, or other model-based valuation techniques such as the present value of future cash flows, requiring adjustments for factors such as prepayment speeds, liquidity risk, default rates, credit loss and the security’s credit rating. In instances where market action is inactive or inputs to the valuation are more opaque, securities are classified as nonrecurring Level 3 within the valuation hierarchy. Therefore, when management determines the fair value of an impaired held to maturity security through utilization of this type of model, the Company records the impaired security as nonrecurring Level 3

     The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based on quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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

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

Securities — Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

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

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.

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.

REPO Sweep Accounts — The fair values disclosed for REPO Sweeps are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).

Long-term Borrowings — The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

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, 2009								December 31, 2008
		Carrying				Estimated				Carrying				Estimated
		Amounts				Fair Value				Amounts				Fair Value
Financial assets:
Cash and cash equivalents		$	3,673			$	3,673			$	3,471			$	3,471
Securities available for sale			27,606			$	27,606			$	25,665			$	25,665
Securities held to maturity			4,018				3,997				4,022				3,949
Loans and loans held for sale — Net			182,527				183,333				192,377				197,804
Federal Home Loan Bank stock			4,197				4,197				4,197				4,197
Accrued interest receivable			1,217				1,217				1,469				1,469
Financial liabilities:
Customer deposits			162,254				163,378				165,778				166,931
Federal Home Loan Bank advances			39,950				40,812				40,200				41,688
Note payable			631				634				769				773
REPO sweep accounts			5,492				5,488				9,447				9,447
Accrued interest payable			404				404				518				518

Note 9 — RECENT ACCOUNTING PRONOUNCEMENTS.

     In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have any impact on the Company’s results of operations or financial position.

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB Accounting Standard Codification™ (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP). All guidance contained in the Codification carries an equal level of authority. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. On the effective date of SFAS No. 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of SFAS No. 168 will have no impact on the Company’s results of operations or financial position.

FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
AND SUBSIDIARIES

PART I — 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, 2009 and December 31, 2008, and the results of operations for the three- and six-month periods ended June 30, 2009 and 2008. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

     The Company currently operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 8 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, 2009, the Company reported net income from continuing operations of $42,000, or $0.01 per basic and diluted share, compared to a net loss of $236,000, or $0.08 per basic and diluted share, for the year earlier period, an increase of $278,000. Net income from continuing operations increased by $439,000 to net income of $189,000 for the six months ended June 30, 2009 from a net loss of $250,000 for the same period ended June 30, 2008.

     Total assets decreased by $7.2 million, or 2.9%, from $247.7 million as of December 31, 2008 to $240.5 million as of June 30, 2009. Investment securities available for sale increased by $1.9 million and net loans receivable decreased $10.0 million during this time period. Total deposits decreased $3.5 million from December 31, 2008 to June 30, 2009 and Federal Home Loan Bank advances decreased by $250,000 while equity increased by $145,000.

CRITICAL ACCOUNTING POLICIES

     As of June 30, 2009, 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, 2008. The Company’s critical accounting policies are described in the Management’s Discussion and Analysis and financial sections of its 2008 Annual Report. Management believes its critical accounting policies relate to the Company’s securities, allowance for loan losses, mortgage servicing rights and intangibles.

     Management has determined that the valuation of deferred tax assets represented a critical accounting policy at June 30, 2009. Deferred tax assets and liabilities represent differences between when a tax benefit or expense is recognized for financial reporting purposes and on our tax return. Deferred tax assets are periodically assessed for recoverability. The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. The amount of the deferred tax asset recognized and considered realizable could be reduced if projected taxable income is not achieved due to various factors such as unfavorable business conditions. If projected taxable income is not expected to be achieved, the Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes can be realized in its future tax returns. There was no valuation allowance related to deferred tax assets at June 30, 2009.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2009 AND DECEMBER 31, 2008

ASSETS: Total assets decreased $7.2 million, or 2.9%, to $240.5 million at June 30, 2009 from $247.7 million at December 31, 2008. Investment securities available for sale increased $1.9 million, or 7.6% from December 31, 2008 to June 30, 2009. Net loans receivable decreased $10.0 million, or 5.2% to $182.3 million at June 30, 2009 from $192.3 million at December 31, 2008. The decrease in net loans was attributable primarily to shrinkage of the residential mortgage loan portfolio due to portfolio mortgage refinances which were sold into the secondary market wherever possible due to continued historically low market interest rates. We also experienced some decrease in our consumer loan portfolio due to slowed origination activity related to declining property values and also in our commercial portfolio due in part to loan pay-offs and loan charge-offs.

LIABILITIES: Deposits decreased $3.5 million, or 2.1%, to $162.3 million at June 30, 2009 from $165.8 million at December 31, 2008. The decrease in deposits was largely attributable to shrinkage of our traditional certificate of deposit product as we were not the market leader in rates on these products during this time period. The decrease in our certificate of deposit products was partially offset by modest increases of $649,000 in savings accounts, $576,000 in demand deposit accounts and $754,000 in non-interest bearing demand deposit accounts. We also experienced a $3.1 million shift from liquid certificate of deposit products into our money market deposit accounts. Repo sweep accounts decreased $4.0 million as several of our commercial customers reduced the amount on deposit with us due to timing of their expenses, but did not close accounts. Total FHLB advances decreased $250,000 to $40.0 million at June 30, 2009 from December 31, 2008 as we paid down advances with funds from loan payments and payoffs.

EQUITY: Stockholders’ equity increased slightly to $29.6 million at June 30, 2009 from $29.4 million at December 31, 2008. The increase was due primarily to net income for the six-month period of $143,000. The decrease of $111,000 in the unrealized gain on available-for-sale securities was partially offset by changes in unallocated ESOP and unearned compensation related to vesting of previously granted employee stock options and awards.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

General: Net income from continuing operations increased by $278,000 to net income of $42,000 for the three months ended June 30, 2009 from a net loss of $236,000 for the same period ended June 30, 2008.

Interest Income: Interest income decreased to $3.2 million for the three months ended June 30, 2009 from $3.5 million for the year earlier period, due to two factors: a decrease of $5.0 million in the average balance of interest-earning assets to $228.1 million for the three month period ended June 30, 2009 from $233.1 million for the three month period ended June 30, 2008 and a decrease of 38 basis points in the average yield on these assets period over period.

Interest Expense: Interest expense decreased to $1.3 million for the three months ended June 30, 2009 from $1.8 million for the three months ended June 30, 2008. The decrease in interest expense for the three month period 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 from 4.21% for the three months ended June 30, 2008 to 3.11% for the three months ended June 30, 2009 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 49 basis points from 4.51% for the three months ended June 30, 2008 to 4.02% for the three months ended June 30, 2009.

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, 2009
						Compared to
		Quarter ended June 30, 2008
		Increase (Decrease) Due to:
		Volume				Rate				Total
						(In thousands)
Interest-earning assets:
Loans receivable		$	(77	)		$	(202	)		$	(279	)
Investment securities			22				(4	)		$	17
Other investments			(50	)			4			$	(46	)
Total interest-earning assets			(106	)			(202	)			(307	)
Interest-bearing liabilities:											—
Savings Deposits			—				—				—
Money Market/NOW accounts			24				(9	)			15
Certificates of Deposit			(88	)			(263	)			(350	)
Deposits .			(63	)			(272	)			(335	)
Borrowed funds			(40	)			(106	)			(146	)
Total interest-bearing liabilities			(103	)			(378	)			(481	)
Change in net interest income		$	(2	)		$	176			$	174

Net Interest Income: Net interest income increased to $1.9 million for the three month period ended June 30, 2009 from $1.7 million for the same period in 2008. For the three months ended June 30, 2009, average interest-earning assets decreased $5.0 million, or 2.2%, when compared to the same period in 2008. Average interest-bearing liabilities decreased $4.6 million, or 2.3%, to $198.8 million for the quarter ended June 30, 2009 from $203.4 million for the quarter ended June 30, 2008. The yield on average interest-earning assets decreased to 5.62% for the three month period ended June 30, 2009 from 6.00% for the same period ended in 2008 and the cost of average interest-bearing liabilities decreased to 2.64% from 3.51% for the three month periods ended June 30, 2009 and 2008, respectively. The net interest margin increased to 3.32% for the three month period ended June 30, 2009 from 2.93% for same period in 2008.

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 collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The provision for loan losses amounted to $252,000 for the three month period ended June 30, 2009 and $342,000 for the comparable period in 2008.

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
		(Dollars in thousands)
At June 30, 2009
Real estate loans:
Construction		$	16,818			$	—			$	—
One - to four - family			84,151				409				2,711
Commercial Mortgages			43,751				—				3,147
Home equity lines of credit/ Junior liens			20,376				—				190
Commercial loans			17,176				—				1,800
Consumer loans			2,942				12				—
Total gross loans		$	185,214			$	421			$	7,848
Less:
Net deferred loan fees			(282	)			—				—
Allowance for loan losses			(2,616	)			—				—
Total loans, net		$	182,316			$	421			$	7,848
At December 31, 2008
Real estate loans:
Construction		$	19,128			$	—			$	5,449
One - to four - family			91,339				128				1,877
Commercial Mortgages			47,541				72				4,442
Home equity lines of credit/Junior liens			22,303				—				86
Commercial loans			14,316				—				95
Consumer loans			3,564				17				3
Total gross loans		$	198,191			$	217			$	11,952
Less:
Net deferred loan fees			(274	)			—				—
Allowance for loan losses			(5,647	)			—				—
Total loans, net		$	192,270			$	217			$	11,952

Non Interest Income: Non interest income increased from $459,000 for the three months ended June 30, 2008 to $764,000 for the three months ended June 30, 2009, primarily attributable to an increase in mortgage banking activities income. Many homeowners in our markets took the opportunity to refinance mortgages due to lower market interest rates during the first six months of 2009 as compared to the same period in 2008, and we sold the majority of those loans into the secondary market.

Non Interest Expense: Non interest expense increased from $2.2 million for the three months ended June 30, 2008 to $2.3 million for the three months ended June 30, 2009. The change was mainly the result of an increase in our general FDIC assessment, plus the FDIC special assessment of $108,000 which we were required to expense as of the quarter ended June 30, 2009. During the three-month period ended June 30, 2009 we were able to reduce many of our expenses period over period, including compensation and employee benefits, occupancy and amortization of intangible assets. However, during those same periods we experienced an increase in professional services fees related to expenses for strategic planning, additional audit fees and increased OTS assessments and an increase in other expenses which were mainly related to delinquent loans and repossessed properties, including the payment of property taxes totaling approximately $125,000 on one large commercial credit of which the assets were repossessed during the quarter.

Income Taxes: The Company had federal income tax expense of less than $1,000 for the three months ended June 30, 2009 due to permanent book-tax differences, compared to a federal income tax benefit of $119,000 for the same period in 2008 due to a pre-tax loss for that period.

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

General: Net income from continuing operations increased by $439,000 to net income of $189,000 for the six months ended June 30, 2009 from a net loss of $250,000 for the same period ended June 30, 2008.

Interest Income: Interest income decreased by $606,000 million to $6.5 million for the six month period ended June 30, 2009 from $7.1 million for the same six month period in 2008. This decrease was primarily attributed to a decline in the average balance of interest earning assets of $2.1 million to $230.6 million for the six month period ended June 30, 2009 from $232.7 million for the six month period ended June 30, 2008. In addition, we experienced a decrease in the yield on those interest earning assets of 45 basis points to 5.65% period over period. Notably, the yield on non-mortgage loans decreased 83 basis points period over period to 5.64% over an average balance of $107.2 million due in part to declining interest rates and in part to an increase in the amount of non-performing mortgage loans period over period.

Interest Expense: Interest expense for the six months ended June 30, 2009 decreased to $2.8 million from $3.7 million for the six months ended June 30, 2008. The decrease in interest expense for the six month 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 from 4.29% for the six months ended June 30, 2008 to 3.38% for the six months ended June 30, 2009, 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 47 basis points from 4.55% for the six months ended June 30, 2008 to 4.08% for the six months ended June 30, 2009.

Net Interest Income: Net interest income increased by $254,000 for the six-month period ended June 30, 2009 compared to the same period in 2008. For the six months ended June 30, 2009, average interest-earning assets decreased $2.1 million, or 1.0%, when compared to the same period in 2008. Average interest-bearing liabilities decreased $1.7 million, or 1.0%, to $201.9 million for the six-month period ended June 30, 2009 from $203.6 million for the six-month period ended June 30, 2008. The yield on average interest-earning assets decreased to 5.65% for the six month period ended June 30, 2009 from 6.10% for the same period ended in 2008 while the cost of average interest-bearing liabilities decreased to 2.79% from 3.59% for the six-month periods ended June 30, 2009 and 2008, respectively. The net interest margin increased to 3.22% for the six month period ended June 30, 2009 from 2.96% for same period in 2008.

Delinquent Loans and Nonperforming Assets. The following table sets forth information regarding loans delinquent 90 days or more and real estate owned/other repossessed assets of the Bank at the dates indicated. As of the dates indicated, the Bank did not have any material restructured loans within the meaning of SFAS 15.

Non-accrual loans decreased by $4.1 million from December 312, 2008 to June 30, 2009. The majority of this decrease was one large commercial loan relationship totaling approximately $4.3 million which was repossessed, charged-off and recorded as commercial real estate owned at net realizable value during the quarter ended June 30, 2009. That same commercial relationship accounts for the majority of the $2.3 million increase from December 31, 2008 to June 30, 2009 in commercial real-estate owned. In addition, we also recorded partial charge-offs totaling $1.5 million on four other commercial relationships and placed one commercial relationship totaling approximately $1.4 million in non-accrual status during the three months ended June 30, 2009.

		June 30,				December 31,
		2009				2008
		(Dollars in thousands)
Total non-accrual loans		$	7,848			$	11,952
Accrual loans delinquent 90 days or more:
One- to four-family residential			409				128
Other real estate loans			—				72
Consumer/Commercial			12				17
Total accrual loans delinquent 90 days or more		$	421			$	217
Total nonperforming loans (1)			8,269				12,169
Total real estate owned-residential mortgages (2)			453				686
Total real estate owned-Commercial (2)			3,212				882
Total real estate owned-Consumer & other repossessed assets (2)			—				70
Total nonperforming assets		$	11,934			$	13,807
Total nonperforming loans to loans receivable			4.47	%			6.14	%
Total nonperforming assets to total assets			4.96	%			5.57	%

Provision for Loan Losses: The provision for loan losses amounted to $516,000 for the six-month period ended June 30, 2009 and $367,000 for the comparable period in 2008. The increase for the six-month period related to increases in provision on several commercial credits. The ratio of nonperforming loans to total loans was 4.46% and 6.14% at June 30, 2009 and December 31, 2008, respectively. As a percent of total assets, nonperforming loans decreased to 4.96% at June 30, 2009 from 5.57% at December 31, 2008. Total nonperforming assets decreased to $11.9 million at June 30, 2009 from $13.8 million at December 31, 2008, due in part to the charge-off of certain loans and in part to the pay-off of certain non-performing loans.

Non Interest Income: Non interest income increased from $871,000 for the six months ended June 30, 2008 to $1.6 million for the six months ended June 30, 2009, primarily attributable to an increase in mortgage banking activities income, as discussed previously.

Non Interest Expense. Non interest expense increased from $4.3 million for the six months ended June 30, 2008 to $4.5 million for the six months ended June 30, 2009. The increases were mainly the result of an increase in our general FDIC assessment, plus the FDIC special assessment of $108,000 which we were required to expense as of the quarter ended June 30, 2009. During the six-month period ended June 30, 2009 we were able to reduce many of our expenses period over period, including compensation and employee benefits, occupancy and amortization of intangible assets. However, during that same periods we experienced an increase in professional services fees related to expenses for strategic planning, additional audit fees and increased OTS assessments and an increase in other expenses which were mainly related to delinquent loans and repossessed properties.

Income Taxes: The Company had federal income tax expense of $52,000 for the six months ended June 30, 2009 due to permanent book-tax differences, compared to a federal income tax benefit of $126,000, due to a pre-tax loss, for the same period in 2008.