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 September 30, 2010
OR
¨
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
Commission
File Number 000-31957
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
(Exact name of registrant as
specified in its charter)
Maryland
|
32-0135202
|
(State
or other jurisdiction of
|
(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¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes ¨
No¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
¨
|
Accelerated
filer ¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company 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 ¨ No x.
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 November 15, 2010
|
(Title
of Class)
|
2,884,249
shares
|
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM
10-Q
Quarter
Ended September 30, 2010
INDEX
|
PAGE
|
PART
I – FINANCIAL INFORMATION
|
|
ITEM
1 - UNAUDITED FINANCIAL STATEMENTS
|
|
Consolidated
Balance Sheet at September 30, 2010 and December 31, 2009
|
3
|
Consolidated
Statements of Income for the Three and Nine Months
|
|
Ended
September 30, 2010 and September 30, 2009
|
4
|
Consolidated
Statement of Changes in Stockholders’ Equity
|
|
for
the Nine Months Ended September 30, 2010
|
5
|
Consolidated
Statements of Cash Flows for the Nine Months Ended
|
|
September
30, 2010 and September 30, 2009
|
6
|
Notes
to Unaudited Consolidated Financial Statements
|
7
|
|
|
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
17
|
|
|
ITEM
3 – QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET
RISK
|
24
|
|
|
ITEM
4 - CONTROLS AND PROCEDURES
|
24
|
|
|
Part
II - OTHER INFORMATION
|
|
ITEM
1 - LEGAL PROCEEDINGS
|
25
|
ITEM
1A - RISK FACTORS
|
25
|
ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
25
|
ITEM
3 - DEFAULTS UPON SENIOR SECURITIES
|
25
|
ITEM
4 – (REMOVED AND RESERVED
|
25
|
ITEM
5 - OTHER INFORMATION
|
25
|
ITEM
6 - EXHIBITS
|
25
|
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.
First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated
Balance Sheet
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash
on hand and due from banks
|
|
$ |
4,935,335 |
|
|
$ |
2,583,131 |
|
Overnight
deposits with FHLB
|
|
|
24,354 |
|
|
|
515,927 |
|
Total
cash and cash equivalents
|
|
|
4,959,689 |
|
|
|
3,099,058 |
|
Securities
AFS
|
|
|
34,750,106 |
|
|
|
33,712,724 |
|
Securities
HTM
|
|
|
2,570,000 |
|
|
|
3,928,167 |
|
Loans
held for sale
|
|
|
832,347 |
|
|
|
51,970 |
|
Loans
receivable, net of allowance for loan losses of $3,046,058
and
|
|
|
|
|
|
|
|
|
$3,660,344
as of September 30, 2010 and December 31, 2009,
respectively
|
|
|
161,684,007 |
|
|
|
171,219,105 |
|
Foreclosed
real estate and other repossessed assets
|
|
|
3,591,575 |
|
|
|
3,579,895 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
4,196,900 |
|
|
|
4,196,900 |
|
Premises
and equipment
|
|
|
6,165,192 |
|
|
|
6,563,683 |
|
Accrued
interest receivable
|
|
|
1,213,131 |
|
|
|
1,230,287 |
|
Intangible
assets
|
|
|
700,419 |
|
|
|
919,757 |
|
Prepaid
FDIC premiums
|
|
|
1,051,147 |
|
|
|
1,314,850 |
|
Deferred
tax asset
|
|
|
492,899 |
|
|
|
559,235 |
|
Other
assets
|
|
|
3,461,915 |
|
|
|
3,130,063 |
|
Total
assets
|
|
$ |
225,669,327 |
|
|
$ |
233,505,694 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
156,550,836 |
|
|
$ |
158,099,809 |
|
Advances
from borrowers for taxes and insurance
|
|
|
207,227 |
|
|
|
105,419 |
|
Federal
Home Loan Bank advances
|
|
|
37,000,000 |
|
|
|
44,400,000 |
|
Note
payable
|
|
|
- |
|
|
|
630,927 |
|
REPO
sweep accounts
|
|
|
6,386,899 |
|
|
|
5,407,791 |
|
Accrued
expenses and other liabilities
|
|
|
1,666,751 |
|
|
|
1,809,266 |
|
Total
liabilities
|
|
|
201,811,713 |
|
|
|
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
|
|
|
23,796,238 |
|
|
|
23,722,767 |
|
Retained
earnings
|
|
|
2,593,552 |
|
|
|
2,000,264 |
|
Treasury
stock at cost (307,750 shares
|
|
|
(2,963,918 |
) |
|
|
(2,963,918 |
) |
Unearned
compensation
|
|
|
(69,094 |
) |
|
|
(161,678 |
) |
Accumulated
other comprehensive income
|
|
|
468,916 |
|
|
|
423,127 |
|
Total
stockholders' equity
|
|
|
23,857,614 |
|
|
|
23,052,482 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
225,669,327 |
|
|
$ |
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 Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
2,590,033 |
|
|
$ |
2,762,789 |
|
|
$ |
7,683,432 |
|
|
$ |
8,570,404 |
|
Interest
and dividends on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
107,002 |
|
|
|
154,682 |
|
|
|
346,409 |
|
|
|
413,204 |
|
Tax-exempt
|
|
|
40,739 |
|
|
|
57,038 |
|
|
|
152,005 |
|
|
|
171,584 |
|
Interest
on mortgage-backed securities
|
|
|
168,757 |
|
|
|
136,177 |
|
|
|
490,603 |
|
|
|
430,928 |
|
Total
interest income
|
|
|
2,906,531 |
|
|
|
3,110,686 |
|
|
|
8,672,449 |
|
|
|
9,586,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
560,106 |
|
|
|
795,356 |
|
|
|
1,799,663 |
|
|
|
2,736,532 |
|
Interest
on borrowings
|
|
|
291,228 |
|
|
|
422,715 |
|
|
|
908,467 |
|
|
|
1,279,247 |
|
Total
interest expense
|
|
|
851,334 |
|
|
|
1,218,071 |
|
|
|
2,708,130 |
|
|
|
4,015,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
2,055,197 |
|
|
|
1,892,615 |
|
|
|
5,964,319 |
|
|
|
5,570,341 |
|
Provision
for loan losses
|
|
|
352,711 |
|
|
|
2,976,642 |
|
|
|
958,639 |
|
|
|
3,492,711 |
|
Net
interest income (expense) after provision for loan losses
|
|
|
1,702,486 |
|
|
|
(1,084,027 |
) |
|
|
5,005,680 |
|
|
|
2,077,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
206,024 |
|
|
|
217,159 |
|
|
|
609,538 |
|
|
|
661,488 |
|
Mortgage
banking activities
|
|
|
447,319 |
|
|
|
244,550 |
|
|
|
1,010,634 |
|
|
|
1,167,626 |
|
Gain
on sale of available-for-sale investments
|
|
|
- |
|
|
|
- |
|
|
|
496,817 |
|
|
|
1,227 |
|
Net
gain (loss) on sale of premises and equipment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
real
estate owned and other repossessed assets
|
|
|
(1,146 |
) |
|
|
(2,128 |
) |
|
|
52,720 |
|
|
|
25,350 |
|
Insurance
& brokerage commissions
|
|
|
- |
|
|
|
15,157 |
|
|
|
- |
|
|
|
129,798 |
|
Other
|
|
|
65,267 |
|
|
|
16,637 |
|
|
|
391,603 |
|
|
|
67,997 |
|
Total
non interest income
|
|
|
717,464 |
|
|
|
491,375 |
|
|
|
2,561,312 |
|
|
|
2,053,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
1,203,327 |
|
|
|
1,095,509 |
|
|
|
3,568,567 |
|
|
|
3,414,767 |
|
FDIC
Insurance premiums
|
|
|
88,820 |
|
|
|
106,199 |
|
|
|
277,368 |
|
|
|
376,807 |
|
Advertising
|
|
|
42,320 |
|
|
|
31,784 |
|
|
|
98,312 |
|
|
|
93,655 |
|
Occupancy
|
|
|
277,658 |
|
|
|
294,567 |
|
|
|
878,471 |
|
|
|
897,054 |
|
Amortization
of intangible assets
|
|
|
73,113 |
|
|
|
73,113 |
|
|
|
219,338 |
|
|
|
199,983 |
|
Service
bureau charges
|
|
|
71,230 |
|
|
|
76,533 |
|
|
|
236,926 |
|
|
|
255,043 |
|
Professional
services
|
|
|
79,008 |
|
|
|
93,588 |
|
|
|
331,210 |
|
|
|
359,711 |
|
Other
|
|
|
512,725 |
|
|
|
305,341 |
|
|
|
1,363,511 |
|
|
|
962,826 |
|
Total
non interest expenses
|
|
|
2,348,201 |
|
|
|
2,076,634 |
|
|
|
6,973,703 |
|
|
|
6,559,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income tax
benefit
|
|
|
71,749 |
|
|
|
(2,669,286 |
) |
|
|
593,289 |
|
|
|
(2,428,731 |
) |
Income
tax expense from continuing operations
|
|
|
- |
|
|
|
1,148,845 |
|
|
|
- |
|
|
|
1,200,585 |
|
Net
income (loss) from continuing operations
|
|
|
71,749 |
|
|
|
(3,818,130 |
) |
|
|
593,289 |
|
|
|
(3,629,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$43,209
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(83,875 |
) |
Gain
on sale of discontinued operations, net of income tax
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$19,585
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
38,017 |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(45,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss)
|
|
$ |
71,749 |
|
|
$ |
(3,818,130 |
) |
|
$ |
593,289 |
|
|
$ |
(3,675,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02 |
|
|
$ |
(1.32 |
) |
|
$ |
0.21 |
|
|
$ |
(1.26 |
) |
Diluted
|
|
$ |
0.02 |
|
|
$ |
(1.32 |
) |
|
$ |
0.21 |
|
|
$ |
(1.26 |
) |
Loss
per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(0.02 |
) |
Diluted
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(0.02 |
) |
Net
income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02 |
|
|
$ |
(1.32 |
) |
|
$ |
0.21 |
|
|
$ |
(1.27 |
) |
Diluted
|
|
$ |
0.02 |
|
|
$ |
(1.32 |
) |
|
$ |
0.21 |
|
|
$ |
(1.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
- |
|
|
|
- |
|
|
|
73,471 |
|
|
|
92,584 |
|
|
|
- |
|
|
|
- |
|
|
|
166,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
593,289 |
|
|
|
- |
|
|
|
593,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(net
of tax of $23,588)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
45,789 |
|
|
|
45,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
639,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
$ |
31,920 |
|
|
$ |
(2,963,918 |
) |
|
$ |
23,796,238 |
|
|
$ |
(69,094 |
) |
|
$ |
2,593,552 |
|
|
$ |
468,916 |
|
|
$ |
23,857,614 |
|
See
accompanying notes to the consolidated financial statements.
First
Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated
Statement of Cash Flows
|
|
For
Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
593,289 |
|
|
$ |
(3,675,174 |
) |
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
|
608,538 |
|
|
|
624,223 |
|
Provision for loan loss
|
|
|
958,639 |
|
|
|
3,492,711 |
|
Amortization and accretion on securities
|
|
|
93,265 |
|
|
|
50,224 |
|
Gain on sale of investment securities
|
|
|
(496,817 |
) |
|
|
(1,227 |
) |
ESOP contribution
|
|
|
- |
|
|
|
13,122 |
|
Stock-based compensation
|
|
|
166,055 |
|
|
|
158,409 |
|
Gain on sale of loans held for sale
|
|
|
(436,243 |
) |
|
|
(492,288 |
) |
Originations of loans held for sale
|
|
|
(30,128,868 |
) |
|
|
(42,604,156 |
) |
Proceeds from sale of loans held for sale
|
|
|
29,784,734 |
|
|
|
43,153,444 |
|
Gain on sale of fixed assets
|
|
|
(9,423 |
) |
|
|
(47,974 |
) |
Net
change in
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
|
17,156 |
|
|
|
100,578 |
|
Other assets
|
|
|
(125,559 |
) |
|
|
(814,186 |
) |
Prepaid FDIC insurance premiums
|
|
|
263,703 |
|
|
|
- |
|
Deferred income tax benefit
|
|
|
66,336 |
|
|
|
1,117,022 |
|
Accrued expenses and other liabilities
|
|
|
(384,078 |
) |
|
|
773,590 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
970,727 |
|
|
|
1,848,318 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Net decrease in loans
|
|
|
8,576,460 |
|
|
|
6,694,579 |
|
Proceeds from maturity and sale of securities
|
|
|
22,347,073 |
|
|
|
10,072,221 |
|
Proceeds from sale of property and equipment
|
|
|
30,874 |
|
|
|
1,501,066 |
|
Net change in discontinued operations
|
|
|
- |
|
|
|
1,533,942 |
|
Purchase of securities
|
|
|
(21,553,359 |
) |
|
|
(17,226,243 |
) |
Purchase of premises and equipment
|
|
|
(12,160 |
) |
|
|
(118,810 |
) |
Net
cash provided by investing activities
|
|
|
9,388,888 |
|
|
|
2,456,755 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
|
(1,548,973 |
) |
|
|
(9,420,589 |
) |
Net increase (decrease) in Repo Sweep accounts
|
|
|
979,108 |
|
|
|
(2,574,972 |
) |
Net increase in advances from borrowers
|
|
|
101,808 |
|
|
|
84,490 |
|
Additions to advances from Federal Home Loan Bank and notes payable
.
|
|
|
12,925,000 |
|
|
|
55,560,000 |
|
Repayments of Federal Home Loan Bank advances and notes
payable
|
|
|
(20,955,927 |
) |
|
|
(49,147,724 |
) |
Net
cash used for financing activities
|
|
|
(8,498,984 |
) |
|
|
(5,498,795 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,860,631 |
|
|
|
(1,193,722 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
3,099,058 |
|
|
|
3,470,311 |
|
Cash
and cash equivalents at end of period
|
|
$ |
4,959,689 |
|
|
$ |
2,276,589 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for income taxes
|
|
$ |
- |
|
|
$ |
- |
|
Cash
paid during the period for interest
|
|
$ |
2,796,474 |
|
|
$ |
4,197,740 |
|
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 filed on March
31, 2010 with the Securities and Exchange Commission.
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 nine months ended September 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 (the
“Bank”), 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:
|
|
September 30, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
|
(in thousands)
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
|
$ |
7,524 |
|
|
$ |
109 |
|
|
$ |
- |
|
|
|
7,633 |
|
Municipal
obligations
|
|
|
4,893 |
|
|
|
271 |
|
|
|
- |
|
|
|
5,164 |
|
Corporate
bonds & other obligations
|
|
|
1,000 |
|
|
|
14 |
|
|
|
- |
|
|
|
1,014 |
|
Mortgage-backed
securities
|
|
|
20,621 |
|
|
|
318 |
|
|
|
1 |
|
|
|
20,938 |
|
Equity
investments
|
|
|
2 |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
34,040 |
|
|
$ |
712 |
|
|
$ |
2 |
|
|
$ |
34,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
notes
|
|
$ |
2,570 |
|
|
$ |
191 |
|
|
$ |
- |
|
|
$ |
2,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
|
(in
thousands)
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
|
$ |
8,220 |
|
|
$ |
37 |
|
|
$ |
- |
|
|
|
8,257 |
|
Municipal
obligations
|
|
|
7,870 |
|
|
|
183 |
|
|
|
- |
|
|
|
8,053 |
|
Corporate
bonds & other obligations
|
|
|
1,000 |
|
|
|
2 |
|
|
|
- |
|
|
|
1,002 |
|
Mortgage-backed
securities
|
|
|
15,979 |
|
|
|
419 |
|
|
|
1 |
|
|
|
16,397 |
|
Equity
investments
|
|
|
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 September 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.
|
|
September 30, 2010
|
|
|
|
Amortized
Cost
|
|
|
Market
Value
|
|
|
|
(in thousands)
|
|
Available
For Sale:
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
3,294 |
|
|
$ |
3,347 |
|
Due
after one year through five years
|
|
|
7,795 |
|
|
|
7,942 |
|
Due
in five year through ten years
|
|
|
1,847 |
|
|
|
1,951 |
|
Due
after ten years
|
|
|
481 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
13,417 |
|
|
|
13,811 |
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
2 |
|
|
|
1 |
|
Mortgage-backed
securities
|
|
|
20,621 |
|
|
|
20,938 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
34,040 |
|
|
$ |
34,750 |
|
|
|
|
|
|
|
|
|
|
Held
To Maturity:
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
85 |
|
|
$ |
86 |
|
Due
after one year through five years
|
|
|
365 |
|
|
|
390 |
|
Due
in five year through ten years
|
|
|
630 |
|
|
|
683 |
|
Due
after ten years
|
|
|
1,490 |
|
|
|
1,602 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,570 |
|
|
$ |
2,761 |
|
At
September 30, 2010 and December 31, 2009, securities with a carrying value and
fair value of $28,764,119 and $24,265,000, respectively, were pledged to secure
our REPO sweep accounts, FHLB advances and our line of credit at the Federal
Reserve.
Gross
proceeds from the sale of securities for the nine-months ended September 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 nine-month period ended September 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 explicit
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 10 basis points), but was
able to minimize the yield loss by buying longer-term GNMAs, 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 September 30, 2010 and
December 31, 2009:
|
|
September 30, 2010
|
|
|
|
|
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
Gross
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
<12
months
|
|
|
Fair
Value
|
|
|
> 12
months
|
|
|
|
(in thousands)
|
|
Available
For Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Corporate
bonds and other obligations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal
obligations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Mortgage-backed
securities
|
|
|
1,994 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
Equity
securities
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,994 |
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2009
|
|
|
|
|
|
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
|
Gross
Unrealized
Losses
|
|
|
|
Fair
Value
|
|
|
<12
months
|
|
|
Fair
Value
|
|
|
>
12
months
|
|
|
|
(in
thousands)
|
|
Available
For Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency obligations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Corporate
bonds and other obligations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal
obligations
|
|
|
- |
|
|
|
- |
|
|
|
13 |
|
|
|
1 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
13 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
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 September 30,
|
|
|
At December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Real
estate loans:
|
|
|
|
|
|
|
Residential
mortgage
|
|
$ |
74,261 |
|
|
$ |
81,620 |
|
Commercial
loans:
|
|
|
|
|
|
|
|
|
Secured
by real estate
|
|
|
62,527 |
|
|
|
62,376 |
|
Other
|
|
|
8,574 |
|
|
|
9,873 |
|
Total
commercial loans
|
|
|
71,101 |
|
|
|
72,249 |
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Secured
by real estate
|
|
|
17,425 |
|
|
|
18,732 |
|
Other
|
|
|
2,182 |
|
|
|
2,553 |
|
|
|
|
|
|
|
|
|
|
Total
consumer loans
|
|
|
19,607 |
|
|
|
21,285 |
|
Total
gross loans
|
|
$ |
164,969 |
|
|
$ |
175,154 |
|
Less:
|
|
|
|
|
|
|
|
|
Net
deferred loan fees
|
|
|
(239 |
) |
|
|
(275 |
) |
Allowance
for loan losses
|
|
|
(3,046 |
) |
|
|
(3,660 |
) |
|
|
|
|
|
|
|
|
|
Total
loans, net
|
|
$ |
161,684 |
|
|
$ |
171,219 |
|
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 FASB ASC 718-10, “Shareholder Based
Payments”, which requires that the grant-date fair value of awarded stock
options be expensed over the requisite service period. The Company’s 1996 Stock
Option Plan (the “1996 Plan”), which was approved by shareholders, permits the
grant of share options to its employees for up to 127,491 shares of common stock
(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 shareholders
, 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 to 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 nine months ended September 30, 2010 the Company awarded no shares
under the 2006 Stock-Based Incentive Plan. Shares issued under the 2006
Plan and exercised pursuant to the exercise of stock options 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
Plan during the nine months ended September 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 September 30, 2010
|
|
|
186,132 |
|
|
$ |
9.47 |
|
5.82
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable at September 30, 2010
|
|
|
148,774 |
|
|
$ |
9.46 |
|
4.38
|
|
$0
|
A summary
of the status of the Company’s nonvested options as of September 30, 2010, and
changes during the nine months ended September 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
|
|
|
(34,118 |
) |
|
$ |
2.11 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,000 |
) |
|
$ |
2.10 |
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 30, 2010
|
|
|
37,358 |
|
|
$ |
2.10 |
|
As of
September 30, 2010 there was $45,000 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 0.7 years.
The total fair value of shares vested during the nine months ended September 30,
2010 was $67,608.
Restricted Stock
Awards - As of September 30, 2010 there was $76,000 of unrecognized
compensation cost related to nonvested restricted stock awards under the 2006
Plan. That cost is expected to be recognized over a weighted-average period of
0.7 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,
standby 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
September 30, 2010, the Company had outstanding commitments to originate loans
of $30.6 million. These commitments included $14.9 million for permanent
one-to-four family dwellings, $624,000 for non-residential loans, $276,000 of
undisbursed loan proceeds for construction of one-to-four family dwellings, $4.3
million of undisbursed lines of credit on home equity loans, $1.1 million of
unused credit card lines, $7.0 million of unused commercial lines of credit,
$677,000 of undisbursed commercial construction, $5,000 of unused letters of
credit and $1.7 million in unused bounce 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 September 30, 2009 or for the three- or nine-month
periods ended September 30, 2010.
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2009
|
|
|
|
(in Thousands)
|
|
|
|
Bank
|
|
|
ICA
|
|
|
Eliminations
|
|
|
Total
|
|
Interest
Income
|
|
$ |
9,586 |
|
|
$ |
4 |
|
|
$ |
(4 |
) |
|
$ |
9,586 |
|
Interest
Expense
|
|
|
4,016 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
4,016 |
|
Net Interest Income -
Before provision for loan losses
|
|
|
5,570 |
|
|
|
- |
|
|
|
- |
|
|
|
5,570 |
|
Provision
for Loan Losses
|
|
|
3,493 |
|
|
|
- |
|
|
|
- |
|
|
|
3,493 |
|
Net Interest Income -
After provision for loan losses
|
|
|
2,078 |
|
|
|
- |
|
|
|
- |
|
|
|
2,078 |
|
Other
Income
|
|
|
2,073 |
|
|
|
191 |
|
|
|
- |
|
|
|
2,264 |
|
Operating
Expenses
|
|
|
6,548 |
|
|
|
292 |
|
|
|
- |
|
|
|
6,840 |
|
Loss - Before
federal income tax benefit
|
|
|
(2,397 |
) |
|
|
(101 |
) |
|
|
- |
|
|
|
(2,498 |
) |
Federal
Income Tax expense (benefit)
|
|
|
1,212 |
|
|
|
(34 |
) |
|
|
- |
|
|
|
1,178 |
|
Net
loss
|
|
$ |
(3,609 |
) |
|
$ |
(67 |
) |
|
$ |
- |
|
|
$ |
(3,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
577 |
|
|
$ |
47 |
|
|
$ |
- |
|
|
$ |
624 |
|
Assets
|
|
$ |
239,411 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
239,411 |
|
Expenditures
related to long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Intangible
assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Property
and equipment
|
|
|
119 |
|
|
|
- |
|
|
|
- |
|
|
|
119 |
|
Total
|
|
$ |
119 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
119 |
|
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 September
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 September 30, 2010
|
|
(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
September 30,
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities- available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Government & agency obligations
|
|
$ |
- |
|
|
$ |
7,633 |
|
|
$ |
- |
|
|
$ |
7,633 |
|
Municipal
obligations
|
|
|
- |
|
|
|
5,164 |
|
|
|
- |
|
|
|
5,164 |
|
Corporate
bonds & other obligations
|
|
|
- |
|
|
|
1,014 |
|
|
|
- |
|
|
|
1,014 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
20,938 |
|
|
|
- |
|
|
|
20,938 |
|
Equity
investments
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities - available-for-sale
|
|
$ |
- |
|
|
$ |
34,750 |
|
|
$ |
- |
|
|
$ |
34,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2009
|
|
(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
September 30,
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities- available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Government & agency obligations
|
|
$ |
- |
|
|
$ |
8,257 |
|
|
$ |
- |
|
|
$ |
8,257 |
|
Municipal
obligations
|
|
|
- |
|
|
|
8,053 |
|
|
|
- |
|
|
|
8,053 |
|
Corporate
bonds & other obligations
|
|
|
- |
|
|
|
1,002 |
|
|
|
- |
|
|
|
1,002 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
16,397 |
|
|
|
- |
|
|
|
16,397 |
|
Equity
investments
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities - available-for-sale
|
|
$ |
- |
|
|
$ |
33,713 |
|
|
$ |
- |
|
|
$ |
33,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010
|
|
(in Thousands)
|
|
|
|
Balance at
September 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
September 30,
2010
|
|
|
Change in fair
value for the
nine-month
period ended
September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans accounted for under FASB ASC 310-10
|
|
$ |
3,138 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,138 |
|
|
$ |
267 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned -residential mortgages
|
|
$ |
615 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
615 |
|
|
$ |
16 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned - commercial
|
|
$ |
2,977 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,977 |
|
|
$ |
- |
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
change in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
283 |
|
|
$ |
1,183 |
|
Assets Measured at Fair Value on a Nonrecurring Basis at September 30, 2009
|
|
(in Thousands)
|
|
|
|
Balance at
September 30,
2009
|
|
|
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
September 30,
2009
|
|
|
Change in fair
value for the
nine-month
period ended
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans accounted for under FASB ASC 310-10
|
|
$ |
7,155 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,948 |
|
|
$ |
482 |
|
|
$ |
508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned -residential mortgages
|
|
$ |
512 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
512 |
|
|
$ |
22 |
|
|
$ |
59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned - commercial
|
|
$ |
3,022 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,022 |
|
|
$ |
592 |
|
|
$ |
622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
change in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,096 |
|
|
$ |
1,189 |
|
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 FASB ASC 310-10, 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 FASB ASC 820-10, 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.
Other Real Estate Owned: At the time
of acquisition, other real estate owned is recorded at fair value, less
estimated costs to sell, which becomes the property's new basis. Subsequent
write-downs to reflect declines in value since the time of acquisition may occur
from time to time and are recorded in other expense in the consolidated
statements of operations. The fair value of the property used at and subsequent
to the time of acquisition is typically determined by a third party appraisal of
the property (nonrecurring Level 3).
The
estimated fair values and related carrying or notional amounts of the Company’s
financial instruments are as follows:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(In Thousands)
|
|
|
|
Carrying
Amounts
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amounts
|
|
|
Estimated
Fair Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
4,960 |
|
|
$ |
4,960 |
|
|
$ |
3,099 |
|
|
$ |
3,099 |
|
Securities
available for sale
|
|
|
34,750 |
|
|
|
34,750 |
|
|
|
33,713 |
|
|
|
33,713 |
|
Securities
held to maturity
|
|
|
2,570 |
|
|
|
2,761 |
|
|
|
3,928 |
|
|
|
4,084 |
|
Loans
and loans held for sale - Net
|
|
|
162,516 |
|
|
|
164,031 |
|
|
|
171,271 |
|
|
|
171,544 |
|
Federal
Home Loan Bank stock
|
|
|
4,197 |
|
|
|
4,197 |
|
|
|
4,197 |
|
|
|
4,197 |
|
Accrued
interest receivable
|
|
|
1,213 |
|
|
|
1,213 |
|
|
|
1,230 |
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
deposits
|
|
|
156,551 |
|
|
|
157,779 |
|
|
|
158,100 |
|
|
|
159,081 |
|
Federal
Home Loan Bank advances
|
|
|
37,000 |
|
|
|
37,831 |
|
|
|
44,400 |
|
|
|
45,552 |
|
Note
payable
|
|
|
- |
|
|
|
- |
|
|
|
631 |
|
|
|
634 |
|
REPO
sweep accounts
|
|
|
6,387 |
|
|
|
6,387 |
|
|
|
5,408 |
|
|
|
5,408 |
|
Accrued
interest payable
|
|
|
233 |
|
|
|
233 |
|
|
|
322 |
|
|
|
322 |
|
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. FASB ASC 825-10 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.
Investment Securities Available for
Sale: 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.
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.
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.
Note
10 – RECENT ACCOUNTING PRONOUNCEMENTS
Reserve
for Credit Losses Disclosures: In July 2010, the Financial Accounting Standards
Board (“FASB”) issued guidance that requires companies to provide more
information about the credit risks inherent in its loan and lease portfolios and
how management considers those credit risks in determining the allowance for
credit losses. A company would be required to disclose its accounting policies,
the methods it uses to determine the components of the allowance for credit
losses, and qualitative and quantitative information about the credit quality of
its loan portfolio, such as aging information and credit quality indicators.
Both new and existing disclosures would be required either by portfolio segment
or class, based on how a company develops its allowance for credit losses and
how it manages its credit exposure. The guidance is effective for all financing
receivables, including loans and trade accounts receivables. However, short-term
trade accounts receivables, receivables measured at fair value or lower of cost
or fair value, and debt securities are exempt from these disclosure
requirements. For public companies, any period-end disclosure requirements are
effective for periods ending on or after December 15, 2010. Any disclosures
about activity that occurs during a reporting period are effective for periods
beginning on or after December 15, 2010. As this guidance affects only
disclosures, the adoption of this guidance on December 31, 2010 for period-end
disclosures and January 1, 2011 for intra-period activity is not expected to
impact the Company’s financial position, results of operations, or
liquidity.
Improving
Disclosures about Fair Value Measurements: In January 2010, the FASB issued
accounting guidance that requires new disclosures and clarifies certain existing
disclosure requirements about fair value measurements. The guidance requires
disclosure of fair value measurements by class (rather than by major category)
of assets and liabilities; disclosure of transfers in or out of levels 1, 2, and
3; disclosure of activity in level 3 fair value measurements on a gross, rather
than net, basis; and other disclosures about inputs and valuation techniques.
This guidance is effective for annual and interim reporting periods beginning
after December 15, 2009, except for the disclosure of level 3 activity for
purchases, sales, issuances, and settlements on a gross basis, which is
effective for fiscal years and interim periods beginning after December 15,
2010. As this guidance affects only disclosures, the adoption of this guidance
effective January 1, 2010 did not impact the Company’s financial position,
results of operations, or liquidity. Refer to Note 9, “Fair Value Measurements,”
for the Company’s fair value disclosures.
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
AND
SUBSIDIARIES
PART
Ι - FINANCIAL INFORMATION
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion compares the consolidated financial condition of the
Company at September 30, 2010 and December 31, 2009, and the results of
operations for the three- and nine-month periods ended September 30, 2010 and
2009. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
OVERVIEW
The
Company operates as a community-oriented financial institution that accepts
deposits from the general public in the communities surrounding its 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 September 30, 2010, the Company reported net income from
continuing operations of $72,000 compared to a net loss of $3.8 million for the
year earlier period, an increase in earnings of $3.9 million. For the nine
months ended September 30, 2010, net income from continuing operations was
$593,000 compared to a net loss of $3.6 million for the nine months ended
September 30, 2009.
Total assets decreased by $7.8 million,
or 3.4%, to $225.7 million from December 31, 2009 to September 30, 2010.
Investment securities available for sale increased by $1.0 million or 3.1% from
December 31, 2009 to September 30, 2010. Net loans receivable decreased $9.5
million or 5.6% during that same time period. Total deposits decreased $1.5
million, or 1.0% from December 31, 2009 to September 30, 2010 and REPO sweep
accounts increased by $1.0 million, or 18.1% during that same time period.
Federal Home Loan Bank advances decreased by $7.4 million or 16.7% from December
31, 2009 to September 30, 2010. Equity increased by $805,000, or 3.5% to $23.9
million during the nine-month period ended September 30, 2010.
CRITICAL
ACCOUNTING POLICIES
As of
September 30, 2010, 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,
2009. The Company’s critical accounting policies are described in the
Management’s Discussion and Analysis and financial sections of its 2009 Annual
Report. Management believes its critical accounting policies relate to the
Company’s investment securities, allowance for loan losses, mortgage servicing
rights and intangible assets.
Management
has determined that the valuation of deferred tax assets represented an
additional critical accounting policy at September 30, 2010. 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. As of
September 30, 2010 the Company had recorded a valuation allowance of $2.8
million related to its deferred tax assets.
COMPARISON
OF FINANCIAL CONDITION AT SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
ASSETS: Total
assets decreased $7.8 million, or 3.4%, to $225.7 million at September 30, 2010
from $233.5 million at December 31, 2009. During that nine-month period
the following changes occurred: investment securities available for sale
increased $1.0 million, or 3.1%, to $34.8 million; cash and cash equivalents
increased $1.9 million or 60.0% to $5.0 million; and net loans receivable
decreased $9.5 million, or 5.6%, to $161.7 million. Mortgage loans decreased by
$7.4 million, consumer loans decreased by $1.7 million and commercial loans
decreased by $1.1 million as loan originations declined due to weaker economic
conditions in our primary lending markets and due to our sale of the majority of
our mortgage loans into the secondary market.
LIABILITIES:
Deposits decreased $1.5 million, or 1.0%, to $156.6 million at September
30, 2010 from $158.1 million at December 31, 2009. The composition of our
deposits changed markedly during the nine-month period. Our liquid certificate
of deposit product (from which customers can make a penalty-free withdrawal with
seven days advance written notice) decreased by $8.9 million and our non
interest-bearing checking accounts decreased by $752,000 during this time
period. Partially offsetting those decreases were increases in the
following deposit products: $1.3 million in our traditional certificate of
deposit accounts (which cannot be redeemed before maturity without penalty);
$6.2 million in money market accounts; $933,000 in savings deposit accounts; and
$536,000 in NOW accounts. During this same time
period, Repo sweep accounts increased $979,000 or 18.1% to $6.4 million. FHLB
advances decreased $7.4 million, or 16.7%, to $37.0 million at September 30,
2010 from $44.4 million at December 31, 2009 due to decreases in our
assets.
EQUITY:
Stockholders’ equity increased to $23.9 million at September 30, 2010 from
$23.1 million at December 31, 2009, an increase of $805,000. The increase in
stockholders’ equity was mainly attributable to our net income for the
nine-month period of $593,000. The unrealized gain on available for sale
securities, net of tax, was $469,000 at September 30, 2010 as compared to
$423,000 at December 31, 2009, an increase of $46,000.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009
General: Net income from continuing
operations increased by $3.9 million to $72,000 for the three months ended
September 30, 2010 from a net loss of $3.8 million for the same period ended
September 30, 2009. This increase was attributable to two main factors: a
decrease in provision for loan losses of $2.6 million to $353,000 for the three
months ended September 30, 2010 as compared to $3.0 million for the same period
in 2009 and the establishment of a $2.0 million valuation allowance on our
deferred tax assets during the three-month period ended September 30,
2009.
Interest Income: Interest income was $2.9
million for the three months ended September 30, 2010, compared to $3.1 million
for the comparable period in 2009. The decrease in interest income was due
primarily to two factors: a decrease in the average balance of our
interest-earning assets due to a reduction in the size of our loan portfolios
and a decrease in the yield on interest-earning assets due in part to lower
market interest rates. The average balance of non-mortgage loans
decreased $11.5 million quarter over quarter, as we continued to experience a
decline in loan originations due to economic conditions in our market areas. The
average balance of mortgage loans decreased $7.5 million period over period as
we continued to sell a majority of those loans into the secondary market. The
declines were partially offset by an increase in average balances of AFS
investment securities of $4.3 million. The yield on our interest-earning
assets declined from 5.58% for the three-month period ended September 30, 2009
to 5.53% for the same period in 2010.
Interest Expense: Interest expense was
$851,000 for the three-month period ended September 30, 2010, compared to $1.2
million for the same period in 2009. The decrease in interest expense for
the three-month period was due primarily to a $9.4 million decrease in the
average balances of certificates of deposits period over period and a 75 basis
point decline in average rate on those deposits due mainly to higher-costing
certificates which matured and re-priced lower in the lower market interest rate
environment. In addition, we experienced a $3.3 million decrease in the average
balance of FHLB advances for the three months ended September 30, 2010 when
compared to the same period in 2009. The average rate on those advances
decreased 101 basis points to 2.94% for the three-month period ended September
30, 2010 as compared to the year-earlier period.
The
following table sets forth information regarding the changes in interest income
and interest expense of the Bank during the periods indicated.
|
|
Quarter ended September 30, 2010
|
|
|
|
Compared to
|
|
|
|
Quarter ended September 30, 2009
|
|
|
|
Increase (Decrease) Due to:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$ |
(303 |
) |
|
$ |
130 |
|
|
$ |
(173 |
) |
Investment
securities
|
|
|
- |
|
|
|
8 |
|
|
$ |
8 |
|
Other
investments
|
|
|
14 |
|
|
|
(53 |
) |
|
$ |
(39 |
) |
Total interest-earning assets
|
|
|
(289 |
) |
|
|
85 |
|
|
|
(204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
- |
|
Savings
Deposits
|
|
|
1 |
|
|
|
(3 |
) |
|
|
(2 |
) |
Money
Market/NOW accounts
|
|
|
(14 |
) |
|
|
13 |
|
|
|
(1 |
) |
Certificates
of Deposit
|
|
|
(82 |
) |
|
|
(150 |
) |
|
|
(232 |
) |
Deposits
|
|
|
(95 |
) |
|
|
(140 |
) |
|
|
(235 |
) |
Borrowed
funds
|
|
|
(39 |
) |
|
|
(93 |
) |
|
|
(132 |
) |
Total interest-bearing liabilities
|
|
|
(134 |
) |
|
|
(233 |
) |
|
|
(367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net interest income
|
|
$ |
(155 |
) |
|
$ |
318 |
|
|
$ |
163 |
|
Net Interest Income: Net interest income
increased $163,000 to $2.0 million for the three-month period ended September
30, 2010 as compared to $1.9 million for the same period in 2009. For the
three months ended September 30, 2010, average interest-earning assets decreased
$12.8 million, or 5.8%, to $209.5 million when compared to the same period in
2009. Average interest-bearing liabilities decreased $7.1 million, or 3.6%, to
$190.8 million for the quarter ended September 30, 2010 from $197.9 million for
the quarter ended September 30, 2009. The yield on average
interest-earning assets decreased to 5.53% for the three month period ended
September 30, 2010 from 5.58% for the same period ended in 2009. The cost of
average interest-bearing liabilities decreased to 1.76% from 2.43% for the
three-month periods ended September 30, 2010 and September 30, 2009,
respectively. The decrease in asset yields on interest earning assets,
offset by a greater decrease in our cost of funds resulted in a increase in our
net interest margin of 52 basis points to 3.93% for the three-month period ended
September 30, 2010 from 3.41% for same period in 2009.
Provision for Loan
Losses: The
allowance for loan losses is established through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
The provision for loan losses amounted to $353,000 for the three month
period ended September 30, 2010 and $3.0 million for the comparable period in
2009. The decrease for the three-month period related primarily to three
factors:
|
·
|
During
the quarter ended September 30, 2009, two large commercial relationships
were placed on non-accrual status, resulting in additional provision
totaling almost $1.5 million during that
quarter.
|
|
·
|
During
the quarter ended September 30, 2010, we established approximately
$500,000 in specific reserves on two out-of-state commercial participation
loans due to new information
received.
|
|
·
|
Despite
the $500,000 in specific reserves, our provision for loan losses was only
$353,000 because our history of commercial charge-offs resulted in a
higher estimated loss factor being applied to our entire portfolio of
commercial loans for the quarter ended September 30, 2009 as compared to
the quarter ended September 30, 2010 when a declining commercial
charge-off history resulted in a decrease in the estimated loss factor
applied to the portfolio of commercial
loans.
|
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 September 30, 2010
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
4,067 |
|
|
$ |
- |
|
|
$ |
1,859 |
|
One - to four - family
|
|
|
73,481 |
|
|
|
320 |
|
|
|
2,537 |
|
Commercial Mortgages
|
|
|
59,240 |
|
|
|
- |
|
|
|
1,223 |
|
Home equity lines of credit/ Junior liens
|
|
|
17,425 |
|
|
|
- |
|
|
|
243 |
|
Commercial
loans
|
|
|
8,574 |
|
|
|
- |
|
|
|
56 |
|
Consumer
loans
|
|
|
2,182 |
|
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
164,969 |
|
|
|
326 |
|
|
|
5,924 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
|
(239 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
Allowance for loan losses
|
|
|
(3,046 |
) |
|
|
- |
|
|
|
(573 |
) |
Total loans, net
|
|
$ |
161,684 |
|
|
$ |
324 |
|
|
$ |
5,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
9,019 |
|
|
$ |
- |
|
|
$ |
3,546 |
|
One - to four - family
|
|
|
81,193 |
|
|
|
89 |
|
|
|
2,944 |
|
Commercial Mortgages
|
|
|
53,784 |
|
|
|
2,697 |
|
|
|
2,204 |
|
Home equity lines of credit/Junior liens
|
|
|
18,732 |
|
|
|
21 |
|
|
|
157 |
|
Commercial
loans
|
|
|
9,873 |
|
|
|
- |
|
|
|
96 |
|
Consumer
loans
|
|
|
2,553 |
|
|
|
32 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross loans
|
|
|
175,154 |
|
|
|
2,839 |
|
|
|
8,947 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
|
(275 |
) |
|
|
(1 |
) |
|
|
(11 |
) |
Allowance for loan losses
|
|
|
(3,660 |
) |
|
|
(80 |
) |
|
|
(954 |
) |
Total loans, net
|
|
$ |
171,219 |
|
|
$ |
2,758 |
|
|
$ |
7,982 |
|
Non Interest Income:
Non interest income was $717,000 for the three month period ended
September 30, 2010, an increase of $226,000 or 46.0% from the same period in
2009. This was primarily attributable to an increase in mortgage banking
activities income of $203,000 period over period income as refinance activity
was significantly higher for the quarter ended September 30, 2010 as compared to
the prior year period. We sold the majority of those refinanced mortgage loans
into the secondary market.
Non Interest Expense: Non interest expense
increased to $2.3 million for the three-month period ended September 30, 2010 as
compared to $2.1 million for the same period in 2009. The increase was primarily
due to expenses associated with troubled credits. In addition, our compensation
and benefits increased $108,000 period over period due mainly to an increase in
the cost of funding our frozen defined benefit pension plan and also due to
changes in our staffing structure. Partially offsetting the increase in other
expenses, our FDIC premiums decreased slightly for the three-month period ended
September 30, 2010 due to a decrease in deposits.
Income Taxes: The
Company had no federal income tax expense for the three-month period ended
September 30, 2010 compared to $1.1 million for the same period in 2009. Federal
income tax expense for the three-month period ended September 30, 2009 was
impacted by the valuation allowance on our deferred tax assets of $2.0 million.
The Company recorded this valuation allowance because it concluded, based on
currently available evidence, that it is “more likely than not” that the future
tax assets recognized will be not be realized before their
expiration.
Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
General: Net income from continuing
operations increased $4.2 million to $593,000 for the nine months ended
September 30, 2010 from a net loss of $3.6 million for the same period ended
September 30, 2009. The increase in earnings period over period was
primarily attributable to the following factors: a decrease in provision for
loan losses of $2.5 million to $959,000 for the nine months ended September 30,
2010 as compared to $3.4 million for the same period in 2009 and a valuation
allowance of $2.0 million on our deferred tax assets during the nine-month
period ended September 30, 2009. In addition, non-interest expenses
increased $414,000 period over period, due primarily to expenses related to
troubled credits.
Interest Income:
Interest income was $8.7 million for the nine months ended September 30,
2010, compared to $9.6 million for the comparable period in 2009. This decrease
of $1.0 million, or 9.5%, in interest income was due in large part to decreases
of $8.6 million in average balances of mortgage loans and $13.0 million in
non-mortgage loans period over period. In addition, the over-all yield on
interest earning assets decreased 17 basis points to 5.46% for the nine-month
period ended September 30, 2010 as compared to 5.63% for the same period in
2009.
Interest Expense: Interest expense was $2.7
million for the nine-month period ended September 30, 2010 compared to $4.0
million for the same period in 2009. The decrease in interest expense was due
primarily to decreases in the average balance of and interest rates on our
certificates of deposit period over period. We experienced a $10.8 million
decrease in the average balance of certificates of deposit for the nine months
ended September 30, 2010 when compared to the same period in 2009 and the
average rate on those certificates of deposit decreased 92 basis points to 2.30%
for the nine-month period ended September 30, 2010 as compared to the
year-earlier period. In addition, our cost of funds relating to our Federal Home
Loan Bank (FHLB) advances decreased 109 basis points to 2.94% nine-month period
over nine-month period.
The
following table sets forth information regarding the changes in interest income
and interest expense of the Bank during the periods indicated.
|
|
Nine Months ended September 30, 2010
|
|
|
|
Compared to
|
|
|
|
Nine Months ended September 30, 2009
|
|
|
|
Increase (Decrease) Due to:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$ |
(975 |
) |
|
$ |
88 |
|
|
$ |
(887 |
) |
Investment
securities
|
|
|
72 |
|
|
|
(50 |
) |
|
|
22 |
|
Other
investments
|
|
|
26 |
|
|
|
(75 |
) |
|
|
(49 |
) |
Total interest-earning assets
|
|
|
(877 |
) |
|
|
(37 |
) |
|
|
(914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
- |
|
Savings
Deposits
|
|
|
1 |
|
|
|
(10 |
) |
|
|
(9 |
) |
Money
Market/NOW accounts
|
|
|
45 |
|
|
|
(96 |
) |
|
|
(51 |
) |
Certificates
of Deposit
|
|
|
(319 |
) |
|
|
(558 |
) |
|
|
(877 |
) |
Deposits
|
|
|
(273 |
) |
|
|
(664 |
) |
|
|
(937 |
) |
Borrowed
funds
|
|
|
(50 |
) |
|
|
(321 |
) |
|
|
(371 |
) |
Total interest-bearing liabilities
|
|
|
(323 |
) |
|
|
(985 |
) |
|
|
(1,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net interest income
|
|
$ |
(554 |
) |
|
$ |
948 |
|
|
$ |
394 |
|
Net Interest Income: Net interest income
increased by $394,000 to $6.0 million for the nine-month period ended September
30, 2010 compared to the same period in 2009. For the nine months ended
September 30, 2010, average interest-earning assets decreased $15.1 million, or
6.7%, when compared to the same period in 2009. Average interest-bearing
liabilities decreased $8.3 million, or 4.1% for the same period. The yield
on average interest-earning assets decreased to 5.46% for the nine month period
ended September 30, 2010 from 5.63% for the same period ended in 2009. The cost
of average interest-bearing liabilities decreased to 1.88% from 2.67% for the
nine month periods ended September 30, 2010 and September 30, 2009,
respectively. The net result of the 17 basis point decrease in asset
yields and 79 basis point decrease in the cost of funds was a net interest rate
margin increase of 47 basis points to 3.75% for the nine-month period ended
September 30, 2010, from 3.28% for the same period in 2009.
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 context of SFAS 15.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Total
non-accrual loans
|
|
$ |
5,924 |
|
|
$ |
8,947 |
|
|
|
|
|
|
|
|
|
|
Accrual
loans delinquent 90 days or more:
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
320 |
|
|
|
89 |
|
Other real estate loans
|
|
|
- |
|
|
|
2,696 |
|
Construction
|
|
|
- |
|
|
|
- |
|
Purchased Out-of-State
|
|
|
- |
|
|
|
- |
|
Commerical
|
|
|
- |
|
|
|
- |
|
Consumer & other
|
|
|
6 |
|
|
|
54 |
|
Total accrual loans delinquent 90 days or
more
|
|
$ |
326 |
|
|
$ |
2,839 |
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans (1)
|
|
|
6,250 |
|
|
|
11,786 |
|
Total
real estate owned-residential mortgages (2)
|
|
|
612 |
|
|
|
584 |
|
Total
real estate owned-Commercial (2)
|
|
|
2,976 |
|
|
|
2,985 |
|
Total
real estate owned-Consumer & other repossessed assets
(2)
|
|
|
3 |
|
|
|
11 |
|
Total
nonperforming assets
|
|
$ |
9,841 |
|
|
$ |
15,366 |
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans to loans receivable
|
|
|
3.79 |
% |
|
|
6.73 |
% |
Total
nonperforming assets to total assets
|
|
|
4.36 |
% |
|
|
6.58 |
% |
|
(1)
|
All
of the Bank's loans delinquent more than 90 days are classified as
nonperforming.
|
|
(2)
|
Represents
the net book value of property acquired by the Bank through foreclosure or
deed in lieu of foreclosure. Upon acquisition, this property is recorded
at the lower of its fair market value or the principal balance of the
related loan.
|
Non-accrual
loans decreased by $3.0 million from December 31, 2009 to September 30, 2010.
Nonperforming assets decreased by $5.5 million from December 31, 2009 to
September 30, 2010. A large portion of this decrease related to three commercial
loans totaling $2.7 million which had matured and were 90 or more days
delinquent at December 31, 2009. The Bank has since rewritten these loans at
market terms and rates and obtained additional collateral. These loans have
since maintained current status. Also, during the nine-month period ended
September 30, 2010, a $469,000 commercial loan moved back to accruing status
after more than 12 months of current payments. In addition to these
positive factors which affected the decrease in non-performing assets were a
large non-accrual commercial loan relationship totaling approximately $2.4
million for which we took a $751,000 charge-down to net realizable value during
the nine-month period ended September 30, 2010, approximately $780,000 in other
loan charge-offs and $250,000 in additional write-downs on other real-estate
owned due to receipt of updated information on value.
We have
taken a variety of steps over the past three years to address the credit issues
identified above (elevated levels of non-performing loans and other real estate
and repossessed assets), including the following:
|
·
|
An
enhanced quarterly watch credit review process to proactively manage
higher risk loans;
|
|
·
|
The
addition of a Chief Credit Officer to oversee loan underwriting and
collection processes;
|
|
·
|
The
creation of a Senior Loan Committee to review all commercial loans above
individual lender authority;
|
|
·
|
Annual
third-party commercial loan review function which provides overall
portfolio and individual loan
feedback;
|
|
·
|
Quarterly
review of Criticized Asset Reports for each credit over
$50,000;
|
|
·
|
Developed
quarterly targets for reducing levels of non-performing assets including
an action plan for each non-performing asset;
and
|
|
·
|
Expanded
our Collection Department to enhance our call program for delinquent
loans.
|
Provision for Loan
Losses: The
provision for loan losses amounted to $959,000 for the nine-month period ended
September 30, 2010 and $3.4 million for the comparable period in 2009. The
ratio of nonperforming loans to total loans was 3.79% at September 30, 2010 and
6.73% at December 31, 2009. As a percent of total assets, total
nonperforming assets decreased to 4.36% at September 30, 2010 from 6.58% at
December 31, 2009. Total nonperforming assets decreased by $5.5 million
from December 31, 2009 to September 30, 2010.
Non-Interest Income:
Non-interest income was $2.6 million for the nine-month period ended
September 30, 2010, an increase of $508,000 or 24.7%, from the same period in
2009. The nine-month results reflected a $497,000 gain on sale of investments as
a result of a restructuring of the investment portfolio in an effort to reduce
credit risk as well as a $200,000 settlement on a lawsuit. For the
nine-month period ended September 30, 2010, we experienced a decrease of
$157,000 in mortgage banking activities from the prior year period. While
mortgage banking activities were stronger in the first two quarters of 2009 as
compared to the comparable period in 2010, historically low interest rates
continuing into the third quarter of 2010 have resulted in greater mortgage
banking activities income in that quarter than in the same quarter in
2009. This has resulted in a narrowing of the gap to only a $157,000
difference between 2009 and 2010 year-to-date mortgage banking activities
income.
Non-Interest Expense:
Non-interest expense was $7.0 million for the nine-month period ended
September 30, 2010 as compared to $6.6 million for the nine-month period ended
September 30, 2009. The increase was primarily due to expenses associated
with troubled credits. Partially offsetting the increase in other expense, our
FDIC premiums decreased for the nine-month period ended September 30, 2010 due
to a FDIC special assessment of $108,000 paid during the second quarter of
2009.
Income Taxes: The
Company had no federal income tax expense related to continuing operations for
the nine-month period ended September 30, 2010 compared to $1.2 million for the
same period in 2009. Federal income tax expense for the nine-month period ended
September 30, 2009 was impacted by the valuation allowance on our deferred tax
assets of $2.0 million. The Company recorded this valuation allowance because it
concluded, based on currently available evidence, that it is “more likely than
not” that the future tax assets recognized will be not be realized before their
expiration.
LIQUIDITY
The
Company’s current liquidity position is more than adequate to fund expected
asset growth. The Company’s primary sources of funds are deposits, FHLB
advances, proceeds from principal and interest payments, prepayments on loans
and mortgage-backed and investment securities and sale of long-term fixed-rate
mortgages into the secondary market. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows, mortgage prepayments and sale of mortgage loans into the
secondary market are greatly influenced by general interest rates, economic
conditions and competition.
Liquidity
represents the amount of an institution’s assets that can be quickly and easily
converted into cash without significant loss. The most liquid assets are
cash, short-term U.S. Government securities, U.S. Government agency securities
and certificates of deposit. The Company is required to maintain
sufficient levels of liquidity as defined by OTS regulations. This
requirement may be varied at the direction of the OTS. Regulations currently in
effect require that the Bank must maintain sufficient liquidity to ensure its
safe and sound operation. The Company’s objective for liquidity is to be
above 20%. Liquidity as of September 30, 2010 was $33.4 million, or 29.7%,
compared to $27.5 million, or 22.0%, at December 31, 2009. The levels of
these assets are dependent on the Company’s operating, financing, lending and
investing activities during any given period. The liquidity calculated by the
Company includes additional borrowing capacity available with the FHLB. This
borrowing capacity is based on pledged collateral. As of September 30,
2010, the Bank had unused borrowing capacity totaling $17.5 million at the FHLB
based on the pledged collateral.
The
Company intends to retain in its portfolio certain originated residential
mortgage loans (primarily adjustable rate, balloon and shorter term fixed rate
mortgage loans) and to generally sell the remainder in the secondary
market. The Bank will from time to time participate in or originate
commercial real estate loans, including real estate development loans.
During the nine month period ended September 30, 2010 the Company originated
$33.1 million in residential mortgage loans, of which $5.2 million were retained
in portfolio while the remainder were sold in the secondary market or are being
held for sale. This compares to $50.2 million in originations during the
first nine months of 2009 of which $7.7 million were retained in
portfolio. The Company also originated $8.7 million of commercial loans
and $3.1 million of consumer loans in the first nine months of 2010 compared to
$14.8 million of commercial loans and $3.2 million of consumer loans for the
same period in 2009. Of total loans receivable, excluding loans held for
sale, mortgage loans comprised 45.0% and 45.3%, commercial loans 43.1% and 42.3%
and consumer loans 11.9% and 12.3% at September 30, 2010 and December 31, 2009,
respectively.
Deposits
are a primary source of funds for use in lending and for other general business
purposes. At September 30, 2010 deposits funded 69.4% of the Company’s
total assets compared to 67.7% at December 31, 2009. Certificates of
deposit scheduled to mature in less than one year at September 30, 2010 totaled
$42.3 million. Management believes that a significant portion of such
deposits will remain with the Bank. The Bank monitors the deposit rates
offered by competition in the area and sets rates that take into account the
prevailing market conditions along with the Bank’s liquidity position.
Moreover, management believes that the growth in assets is not expected to
require significant in-flows of liquidity. As such, the Bank does not
expect to be a significant market leader in rates paid for
liabilities.
Borrowings
may be used to compensate for seasonal or other reductions in normal sources of
funds or for deposit outflows at more than projected levels. Borrowings
may also be used on a longer-term basis to support increased lending or
investment activities. At September 30, 2010 the Company had $37.0 million
in FHLB advances. FHLB borrowings as a percentage of total assets were 16.4% at
September 30, 2010 as compared to 19.0% at December 31, 2009. The Company
has sufficient available collateral to obtain additional advances of $17.5
million as of September 30, 2010.
CAPITAL
RESOURCES
Stockholders’
equity at September 30, 2010 was $23.9 million, or 10.6% of total assets,
compared to $23.1 million, or 9.9% of total assets, at December 31, 2009 (See
“Consolidated Statement of Changes in Stockholders’ Equity”). The Bank is
subject to certain capital-to-assets requirements in accordance with OTS
regulations. The Bank exceeded all regulatory capital requirements at
September 30, 2010. The following table summarizes the Bank’s actual
capital with the regulatory capital requirements and with requirements to be
“Well Capitalized” under prompt corrective action provisions, as of September
30, 2010:
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|
|
|
|
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Regulatory
|
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|
Minimum to be
|
|
|
|
Actual
|
|
|
Minimum
|
|
|
Well Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
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|
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Dollars in Thousands
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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Tier
1 (Core) capital ( to
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjusted
assets)
|
|
$ |
21,171 |
|
|
|
9.48 |
% |
|
$ |
8,935 |
|
|
|
4.00 |
% |
|
$ |
11,169 |
|
|
|
5.00 |
% |
Total
risk-based capital ( to risk-
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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weighted
assets)
|
|
$ |
23,098 |
|
|
|
15.00 |
% |
|
$ |
12,319 |
|
|
|
8.00 |
% |
|
$ |
15,399 |
|
|
|
10.00 |
% |
Tier
1 risk-based capital ( to
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|
|
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risk
weighted assets)
|
|
$ |
21,171 |
|
|
|
13.75 |
% |
|
$ |
6,160 |
|
|
|
4.00 |
% |
|
$ |
9,239 |
|
|
|
6.00 |
% |
Tangible
Capital ( to
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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tangible
assets)
|
|
$ |
21,171 |
|
|
|
9.48 |
% |
|
$ |
3,351 |
|
|
|
1.50 |
% |
|
$ |
4,468 |
|
|
|
2.00 |
% |
ITEM
3 - QUANTITATIVE AND QUALITITIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable to smaller reporting companies.
ITEM
4 - CONTROLS AND PROCEDURES
Under the
supervision and with the participation of our management, including the
Company’s Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d–15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
report, the Company’s disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934, is recorded,
processed, summarized and reported, within the time periods specified by the
SEC’s rules and forms and in timely alerting them to material information
relating to the Company (or its consolidated subsidiaries) required to be
included in its periodic SEC filings.
There
were no significant changes made in the Company’s internal control over
financial reporting or in other factors that could significantly affect the
Company’s internal controls over financial reporting during the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM
10-Q
Quarter
Ended September 30, 2010
PART
II – OTHER INFORMATION
Item 1
- Legal
Proceedings:
There are
no material legal proceedings to which the Company is a party or of which any of
its property is subject. From time to time the Company is a party to various
legal proceedings incident to its business.
Item 1A
-
Risk Factors:
Not applicable to smaller
reporting companies
Item 2
- Unregistered
Sales of Equity Securities and Use of Proceeds:
(c)
Not applicable
Item 3
- Defaults
upon Senior Securities:
Not
applicable.
Item 4
- (Removed
and Reserved):
Item 5
-
Other Information:
|
(b)
|
There
was no material change to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors during the period
covered by the Form 10-Q.
|
Item 6
- Exhibits:
Exhibit
31.1 Certification by Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
31.2 Certification by Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit
32.1 Statement of Chief Executive Officer furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit
32.2 Statement of Chief Financial Officer furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM
10-Q
Quarter
Ended September 30, 2010
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP,
INC.
|
|
By:
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/s/Michael W. Mahler
|
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|
Michael
W. Mahler
|
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Chief
Executive Officer
|
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Date: November
15, 2010
|
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By:
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/s/Amy E. Essex
|
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Amy
E. Essex, Chief Financial Officer
|
|
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(Principal
Financial and Accounting Officer)
|
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Date:
November 15, 2010
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