Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2010
OR
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period
from
to _______________
Commission
File Number 000-31957
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
(Exact name of registrant as
specified in its charter)
Maryland
|
|
32-0135202
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
100
S. Second Avenue, Alpena, Michigan
|
|
49707
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (989) 356-9041
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
|
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
(Do
not check if a smaller reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o Nox.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
Common
Stock, Par Value $0.01
|
|
Outstanding
at August 16, 2010
|
(Title
of Class)
|
|
2,884,249
shares
|
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM
10-Q
Quarter
Ended June 30, 2010
INDEX
PART
I – FINANCIAL INFORMATION
|
|
PAGE
|
ITEM 1 -UNAUDITED FINANCIAL
STATEMENTS
|
|
|
|
Consolidated
Balance Sheet at June 30, 2010 and December 31, 2009
|
|
3
|
|
Consolidated
Statements of Income for the Three and Six Months Ended June 30, 2010 and
June 30, 2009
|
|
4
|
|
Consolidated
Statement of Changes in Stockholders’ Equity for the Six Months Ended June
30, 2010
|
|
5
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2010 and June
30, 2009
|
|
6
|
|
Notes
to Unaudited Consolidated Financial Statements
|
|
7
|
|
|
|
|
ITEM
2 -MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
21
|
ITEM 3 –QUANTITATIVE AND
QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
|
|
28
|
ITEM 4T- CONTROLS AND
PROCEDURES
|
|
28
|
|
|
|
|
Part
II - OTHER INFORMATION
|
ITEM 1 -LEGAL
PROCEEDINGS
|
|
29
|
ITEM 1A - RISK
FACTORS
|
|
29
|
ITEM 2 -UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
29
|
ITEM 3 -DEFAULTS UPON
SENIOR SECURITIES
|
|
29
|
ITEM 4 -(REMOVED AND
RESERVED)
|
|
29
|
ITEM 5 -OTHER
INFORMATION
|
|
29
|
ITEM
6 -EXHIBITS
|
|
29
|
|
Section
302 Certifications
|
|
|
|
Section
906 Certifications
|
|
|
When used
in this Form 10-Q or future filings by First Federal of Northern Michigan
Bancorp, Inc. (the “Company”) with the Securities and Exchange Commission
("SEC"), in the Company's press releases or other public or stockholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "would be," "will allow," "intends to,"
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The
Company does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
PART
I - FINANCIAL INFORMATION
|
|
|
|
ITEM
1 - FINANCIAL STATEMENTS
|
|
|
|
First
Federal of Northern Michigan Bancorp, Inc. and
Subsidiaries
|
Consolidated
Balance Sheet
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
Cash
on hand and due from banks
|
|
$ |
3,113,464 |
|
|
$ |
2,583,131 |
|
Overnight
deposits with FHLB
|
|
|
2,321,978 |
|
|
|
515,927 |
|
Total
cash and cash equivalents
|
|
|
5,435,442 |
|
|
|
3,099,058 |
|
Securities
AFS
|
|
|
34,270,362 |
|
|
|
33,712,724 |
|
Securities
HTM
|
|
|
2,574,383 |
|
|
|
3,928,167 |
|
Loans
held for sale
|
|
|
770,876 |
|
|
|
51,970 |
|
Loans
receivable, net of allowance for loan losses of $3,125,990
and
|
|
|
|
|
|
$3,660,344
as of June 30, 2010 and December 31, 2009, respectively
|
|
|
163,616,758 |
|
|
|
171,219,105 |
|
Foreclosed
real estate and other repossessed assets
|
|
|
2,991,871 |
|
|
|
3,579,895 |
|
Federal
Home Loan Bank stock, at cost
|
|
|
4,196,900 |
|
|
|
4,196,900 |
|
Premises
and equipment
|
|
|
6,288,978 |
|
|
|
6,563,683 |
|
Accrued
interest receivable
|
|
|
1,097,581 |
|
|
|
1,230,287 |
|
Intangible
assets
|
|
|
773,531 |
|
|
|
919,757 |
|
Prepaid
FDIC premiums
|
|
|
1,135,512 |
|
|
|
1,314,850 |
|
Deferred
tax asset
|
|
|
643,428 |
|
|
|
559,235 |
|
Other
assets
|
|
|
3,154,175 |
|
|
|
3,130,063 |
|
Total
assets
|
|
$ |
226,949,797 |
|
|
$ |
233,505,694 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
157,826,584 |
|
|
$ |
158,099,809 |
|
Advances
from borrowers for taxes and insurance
|
|
|
373,714 |
|
|
|
105,419 |
|
Federal
Home Loan Bank Advances
|
|
|
38,000,000 |
|
|
|
44,400,000 |
|
Note
Payable
|
|
|
- |
|
|
|
630,927 |
|
REPO
Sweep Accounts
|
|
|
5,245,624 |
|
|
|
5,407,791 |
|
Accrued
expenses and other liabilities
|
|
|
2,003,573 |
|
|
|
1,809,266 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
203,449,495 |
|
|
|
210,453,212 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock ($0.01 par value 20,000,000 shares authorized
|
|
|
|
|
|
3,191,999
shares issued)
|
|
|
31,920 |
|
|
|
31,920 |
|
Additional
paid-in capital
|
|
|
23,770,323 |
|
|
|
23,722,767 |
|
Retained
earnings
|
|
|
2,521,803 |
|
|
|
2,000,264 |
|
Treasury
stock at cost (307,750 shares)
|
|
|
(2,963,918 |
) |
|
|
(2,963,918 |
) |
Unearned
compensation
|
|
|
(99,805 |
) |
|
|
(161,678 |
) |
Accumulated
other comprehensive income
|
|
|
239,979 |
|
|
|
423,127 |
|
Total
stockholders' equity
|
|
|
23,500,302 |
|
|
|
23,052,482 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
226,949,797 |
|
|
$ |
233,505,694 |
|
See
accompanying notes to consolidated financial
statements.
|
First
Federal of Northern Michigan Bancorp, Inc. and
Subsidiaries
|
|
|
|
Consolidated
Statement of Income
|
|
|
|
|
|
For
the Three Months
|
|
|
For
the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
2,552,986 |
|
|
$ |
2,865,275 |
|
|
$ |
5,093,399 |
|
|
$ |
5,807,615 |
|
Interest
and dividends on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
106,843 |
|
|
|
114,720 |
|
|
|
239,406 |
|
|
|
258,522 |
|
Tax-exempt
|
|
|
58,455 |
|
|
|
60,950 |
|
|
|
111,267 |
|
|
|
114,546 |
|
Interest
on mortgage-backed securities
|
|
|
165,313 |
|
|
|
143,925 |
|
|
|
321,846 |
|
|
|
294,751 |
|
Total
interest income
|
|
|
2,883,597 |
|
|
|
3,184,871 |
|
|
|
5,765,918 |
|
|
|
6,475,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
601,733 |
|
|
|
880,890 |
|
|
|
1,239,557 |
|
|
|
1,941,176 |
|
Interest
on borrowings
|
|
|
298,657 |
|
|
|
427,973 |
|
|
|
617,239 |
|
|
|
856,532 |
|
Total
interest expense
|
|
|
900,390 |
|
|
|
1,308,864 |
|
|
|
1,856,796 |
|
|
|
2,797,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
1,983,207 |
|
|
|
1,876,007 |
|
|
|
3,909,122 |
|
|
|
3,677,726 |
|
Provision
for loan losses
|
|
|
594,840 |
|
|
|
251,839 |
|
|
|
605,928 |
|
|
|
516,069 |
|
Net
interest income after provision for loan losses
|
|
|
1,388,367 |
|
|
|
1,624,168 |
|
|
|
3,303,194 |
|
|
|
3,161,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and other fees
|
|
|
199,340 |
|
|
|
229,457 |
|
|
|
403,514 |
|
|
|
444,329 |
|
Mortgage
banking activities
|
|
|
315,223 |
|
|
|
473,871 |
|
|
|
563,315 |
|
|
|
923,076 |
|
Gain
on sale of investments
|
|
|
447,387 |
|
|
|
1,227 |
|
|
|
496,817 |
|
|
|
1,227 |
|
Net
gain (loss) on sale of premises and equipment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
real
estate owned and other repossessed assets
|
|
|
42,691 |
|
|
|
(44,064 |
) |
|
|
53,867 |
|
|
|
27,478 |
|
Other
|
|
|
260,723 |
|
|
|
103,383 |
|
|
|
326,336 |
|
|
|
166,000 |
|
Total
non-interest income
|
|
|
1,265,364 |
|
|
|
763,874 |
|
|
|
1,843,849 |
|
|
|
1,562,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
1,194,299 |
|
|
|
1,171,455 |
|
|
|
2,365,241 |
|
|
|
2,319,257 |
|
FDIC
Insurance Premiums
|
|
|
94,348 |
|
|
|
191,044 |
|
|
|
188,548 |
|
|
|
270,608 |
|
Advertising
|
|
|
36,103 |
|
|
|
44,321 |
|
|
|
55,992 |
|
|
|
61,871 |
|
Occupancy
|
|
|
288,237 |
|
|
|
300,069 |
|
|
|
600,813 |
|
|
|
602,487 |
|
Amortization
of intangible assets
|
|
|
73,112 |
|
|
|
37,754 |
|
|
|
146,225 |
|
|
|
126,871 |
|
Service
bureau charges
|
|
|
86,114 |
|
|
|
86,552 |
|
|
|
165,696 |
|
|
|
178,511 |
|
Professional
services
|
|
|
149,091 |
|
|
|
163,219 |
|
|
|
252,202 |
|
|
|
266,123 |
|
Other
|
|
|
515,103 |
|
|
|
350,984 |
|
|
|
850,786 |
|
|
|
657,484 |
|
Total
non-interest expense
|
|
|
2,436,407 |
|
|
|
2,345,398 |
|
|
|
4,625,503 |
|
|
|
4,483,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income tax expense
(benefit)
|
|
|
217,324 |
|
|
|
42,646 |
|
|
|
521,540 |
|
|
|
240,555 |
|
Income
tax (benefit) expense from continuing operations
|
|
|
(101,913 |
) |
|
|
328 |
|
|
|
- |
|
|
|
51,740 |
|
Net
income from continuing operations
|
|
|
319,237 |
|
|
|
42,318 |
|
|
|
521,540 |
|
|
|
188,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
of
$0 and $43,209
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(83,875 |
) |
Gain
on sale of discontinued operations, net of income tax
expense
|
|
|
|
|
|
|
|
|
|
of
$0 and $19,585
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
38,017 |
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(45,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
319,237 |
|
|
$ |
42,318 |
|
|
$ |
521,540 |
|
|
$ |
142,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.11 |
|
|
$ |
0.01 |
|
|
$ |
0.18 |
|
|
$ |
0.07 |
|
Diluted
|
|
$ |
0.11 |
|
|
$ |
0.01 |
|
|
$ |
0.18 |
|
|
$ |
0.07 |
|
Loss
per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(0.02 |
) |
Diluted
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(0.02 |
) |
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.11 |
|
|
$ |
0.01 |
|
|
$ |
0.18 |
|
|
$ |
0.05 |
|
Diluted
|
|
$ |
0.11 |
|
|
$ |
0.01 |
|
|
$ |
0.18 |
|
|
$ |
0.05 |
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,884,249 |
|
|
|
2,884,249 |
|
|
|
2,884,249 |
|
|
|
2,884,249 |
|
Including
dilutive stock options
|
|
|
2,884,249 |
|
|
|
2,884,249 |
|
|
|
2,884,249 |
|
|
|
2,884,249 |
|
Dividends
per common share
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
First
Federal of Northern Michigan Bancorp Inc. and
Subsidiaries
|
Consolidated
Statement of Changes in Stockholders' Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Unearned
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income
|
|
|
Total
|
|
Balance
at December 31, 2009
|
|
$ |
31,920 |
|
|
$ |
(2,963,918 |
) |
|
$ |
23,722,767 |
|
|
$ |
(161,678 |
) |
|
$ |
2,000,263 |
|
|
$ |
423,127 |
|
|
$ |
23,052,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
47,556 |
|
|
|
61,873 |
|
|
|
- |
|
|
|
- |
|
|
|
109,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
521,540 |
|
|
|
- |
|
|
|
521,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in unrealized gain: on
available-for-sale securities (net
of tax of $94,349)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(183,148 |
) |
|
|
(183,148 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
338,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2010
|
|
$ |
31,920 |
|
|
$ |
(2,963,918 |
) |
|
$ |
23,770,323 |
|
|
$ |
(99,805 |
) |
|
$ |
2,521,803 |
|
|
$ |
239,979 |
|
|
$ |
23,500,302 |
|
See
accompanying notes to the consolidated financial
statements.
|
First
Federal of Northern Michigan Bancorp, Inc. and
Subsidiaries
|
|
Consolidated
Statement of Cash Flows
|
|
|
|
|
For
Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
521,540 |
|
|
$ |
142,957 |
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
410,565 |
|
|
|
412,010 |
|
Provision
for loan loss
|
|
|
605,928 |
|
|
|
516,069 |
|
Amortization
and accretion on securities
|
|
|
60,794 |
|
|
|
29,327 |
|
Gain
on sale of investment securities
|
|
|
(496,817 |
) |
|
|
(1,227 |
) |
ESOP
contribution
|
|
|
- |
|
|
|
7,722 |
|
Stock-based
compensation
|
|
|
109,429 |
|
|
|
105,605 |
|
Gain
on sale of loans held for sale
|
|
|
(225,014 |
) |
|
|
(410,528 |
) |
Originations
of loans held for sale
|
|
|
(17,133,098 |
) |
|
|
(34,457,881 |
) |
Proceeds
from sale of loans held for sale
|
|
|
16,639,206 |
|
|
|
34,764,009 |
|
Gain
on fixed assets
|
|
|
(9,423 |
) |
|
|
(50,102 |
) |
Net
change in:
|
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
|
132,706 |
|
|
|
252,599 |
|
Other
assets
|
|
|
658,259 |
|
|
|
(487,150 |
) |
Prepaid
FDIC insurance premiums
|
|
|
179,338 |
|
|
|
- |
|
Deferred
income tax benefit
|
|
|
(84,193 |
) |
|
|
(28,116) |
|
Accrued
expenses and other liabilities
|
|
|
194,306 |
|
|
|
322,921 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
1,563,526 |
|
|
|
1,118,215 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Net
decrease in loans
|
|
|
6,996,419 |
|
|
|
6,595,143 |
|
Proceeds
from maturity and sale of available-for-sale securities
|
|
|
19,558,755 |
|
|
|
8,844,225 |
|
Proceeds
from sale of property and equipment
|
|
|
30,874 |
|
|
|
757,050 |
|
Net
change in discontinued operations
|
|
|
- |
|
|
|
1,533,942 |
|
Purchase
of securities
|
|
|
(18,604,083 |
) |
|
|
(10,976,547 |
) |
Purchase
of premises and equipment
|
|
|
(11,086 |
) |
|
|
(111,568 |
) |
Net
cash provided by investing activities
|
|
|
7,970,879 |
|
|
|
6,642,245 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(273,222 |
) |
|
|
(3,524,571 |
) |
Net
decrease in Repo Sweep accounts
|
|
|
(162,167 |
) |
|
|
(3,955,842 |
) |
Net
increase in advances from borrowers
|
|
|
268,295 |
|
|
|
310,078 |
|
Additions
to advances from Federal Home Loan Bank and notes
payable
|
|
|
11,925,000 |
|
|
|
26,550,000 |
|
Repayments
of Federal Home Loan Bank advances and notes payable
|
|
|
(18,955,927 |
) |
|
|
(26,937,724 |
) |
Net
cash used for financing activities
|
|
|
(7,198,021 |
) |
|
|
(7,558,059 |
) |
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,336,384 |
|
|
|
202,401 |
|
Cash
and cash equivalents at beginning of period
|
|
|
3,099,058 |
|
|
|
3,470,311 |
|
Cash
and cash equivalents at end of period
|
|
$ |
5,435,442 |
|
|
$ |
3,672,712 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for income taxes
|
|
$ |
- |
|
|
$ |
- |
|
Cash
paid during the period for interest
|
|
$ |
1,929,931 |
|
|
$ |
2,911,694 |
|
See
accompanying notes to the consolidated financial
statements.
|
|
FIRST
FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1—BASIS OF FINANCIAL STATEMENT PRESENTATION
The
accompanying unaudited condensed consolidated interim financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America and with the instructions to Form 10-Q. Accordingly,
certain information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements are
not included herein. The interim financial statements should be read in
conjunction with the financial statements of First Federal of Northern Michigan
Bancorp, Inc. and Subsidiaries and the notes thereto included in the Company’s
annual report on Form 10-K for the year ended December 31,
2009.
All
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management are necessary for a fair presentation of financial
position, results of operations and cash flows, have been made. The results of
operations for the three and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2010.
Note
2— PRINCIPLES OF CONSOLIDATION AND DISCONTINUED OPERATIONS
The
consolidated financial statements include the accounts of First Federal of
Northern Michigan Bancorp, Inc., First Federal of Northern Michigan, and the
Bank’s wholly owned subsidiaries, Financial Services & Mortgage Corporation
(“FSMC”) and FFNM Agency. FSMC invests in real estate, which includes leasing,
selling, developing, and maintaining real estate properties. The main activity
of FFNM Agency is to collect the stream of income associated with the sale of
the Blue Cross/Blue Shield override business to the Grotenhuis Group (as
discussed further below). All significant intercompany balances and
transactions have been eliminated in the consolidation.
In
accordance with Statement of Financial Accounting Standard No. 144, on February
27, 2009 First Federal of Northern Michigan Bancorp, Inc. announced
that it had sold the InsuranCenter of Alpena (“ICA”) for $1,635,000. In
accordance with the Financial Accounting Standard 144 “Accounting for the
impairment or Disposal of Long-Lived Assets,” which became effective for the
Company on January 1, 2002, the financial position and results of operations of
ICA are “discontinued operations.” For further information, please
refer to Note 15 of the consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009.
As a
result of the transaction, the Company reduced its full-time employees by 14
positions, or 13% of the Company’s workforce. The Company
recorded a gain of approximately $57,000 upon the closing of the
sale. The Company retained the residual income stream associated with
the April 2008 sale of its wholesale Blue Cross/Blue Shield override business to
the Grotenhuis Group.
Note
3—SECURITIES
Investment
securities have been classified according to management’s intent. The
carrying value and estimated fair value of securities are as
follows:
|
|
June 30, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
|
(in
thousands)
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
of
U.S. government corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
8,210 |
|
|
$ |
65 |
|
|
$ |
- |
|
|
$ |
8,275 |
|
Municipal
notes
|
|
|
4,898 |
|
|
|
94 |
|
|
|
- |
|
|
|
4,992 |
|
Corporate
securities
|
|
|
1,000 |
|
|
|
21 |
|
|
|
- |
|
|
|
1,021 |
|
Mortgage-backed
securities
|
|
|
19,797 |
|
|
|
188 |
|
|
|
4 |
|
|
|
19,981 |
|
Other
securities
|
|
|
2 |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
33,907 |
|
|
$ |
368 |
|
|
$ |
5 |
|
|
$ |
34,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
notes
|
|
$ |
2,574 |
|
|
$ |
110 |
|
|
$ |
2 |
|
|
$ |
2,682 |
|
|
|
December 31, 2009
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Market
Value
|
|
|
|
(in
thousands)
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
of
U.S. government corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
8,220 |
|
|
$ |
37 |
|
|
$ |
- |
|
|
$ |
8,257 |
|
Municipal
notes
|
|
|
7,870 |
|
|
|
183 |
|
|
|
- |
|
|
|
8,053 |
|
Corporate
securities
|
|
|
1,000 |
|
|
|
2 |
|
|
|
- |
|
|
|
1,002 |
|
Mortgage-backed
securities
|
|
|
15,979 |
|
|
|
419 |
|
|
|
1 |
|
|
|
16,397 |
|
Other
securities
|
|
|
3 |
|
|
|
1 |
|
|
|
- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
33,072 |
|
|
$ |
642 |
|
|
$ |
1 |
|
|
$ |
33,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
notes
|
|
$ |
3,928 |
|
|
$ |
159 |
|
|
$ |
3 |
|
|
$ |
4,084 |
|
The
amortized cost and estimated market value of securities at June 30, 2010, by
contract maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to call or
prepay obligations with or without call or prepayment penalties. Securities with
no specified maturity date are separately stated.
|
|
June 30, 2010
|
|
|
|
Amortized
Cost
|
|
|
Market
Value
|
|
|
|
(in
thousands)
|
|
Available
For Sale:
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
1,291 |
|
|
$ |
1,316 |
|
Due
after one year through five years
|
|
|
10,479 |
|
|
|
10,612 |
|
Due
in five year through ten years
|
|
|
1,845 |
|
|
|
1,867 |
|
Due
after ten years
|
|
|
493 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
14,108 |
|
|
|
14,288 |
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
2 |
|
|
|
1 |
|
Mortgage-backed
securities
|
|
|
19,797 |
|
|
|
19,981 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
33,907 |
|
|
$ |
34,270 |
|
|
|
|
|
|
|
|
|
|
Held
To Maturity:
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
89 |
|
|
$ |
90 |
|
Due
after one year through five years
|
|
|
365 |
|
|
|
387 |
|
Due
in five year through ten years
|
|
|
630 |
|
|
|
659 |
|
Due
after ten years
|
|
|
1,490 |
|
|
|
1,546 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,574 |
|
|
$ |
2,682 |
|
At June
30, 2010 and December 31, 2009, securities with a carrying value and fair value
of $23,935,000 and $24,265,000, respectively, were pledged to secure certain
deposit accounts, FHLB advances and our line of credit at the Federal
Reserve.
Gross
proceeds from the sale of securities for the six-months ended June 30, 2010 and
2009 were $10,354,000 and $1,000,000, respectively, resulting in gross gains of
$497,000 and $1,000, respectively and gross losses of $0 and $0,
respectively.
During
the three-month period ended June 30, 2010 the Company restructured its
investment portfolio by selling 16 bonds, mostly issued by Freddie
Mac (FHLMC) and Fannie Mae (FNMA). Although these bonds have
government guarantees, they are only implied guarantees, hence the bonds are not
truly backed by the full faith and credit of the United
States. The bonds sold were replaced with GNMA bonds, which are
supported by the full faith and credit of the United States government. By
selling the municipal, FNMA and FHLMC bonds the Company was able to accomplish
two things:
·
|
Reduce
its overall credit risk in the investment
portfolio.
|
·
|
Improve
its risk-based capital position as bonds sold were 20% risk-weighted while
the replacement bonds are 0%
risk-weighted.
|
The
Company concluded this move was prudent and necessary due to the following
reasons:
·
|
Because
of the timing of the restructuring, the Company was able to capture some
previously unrealized gains.
|
·
|
The
Company did forego a higher yield (approximately 10bps), but was able to
minimize the yield loss by buying longer-term GNMA’s, which was possible
because of the minimal level of interest-rate risk inherent in the
Company’s balance sheet.
|
The
following is a summary of temporarily impaired investments that have been
impaired for less than and more than twelve months as of June
30, 2010 and December 31, 2009:
|
|
June 30, 2010
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
|
Fair Value
|
|
|
<12 months
|
|
|
Fair Value
|
|
|
> 12 months
|
|
|
|
(in thousands)
|
|
Available
For Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
of
U.S. government corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Corporate
and other securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal
notes
|
|
|
1,070 |
|
|
|
- |
|
|
|
12 |
|
|
|
- |
|
Mortgage-backed
securities
|
|
|
4,020 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
Equity
securities
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,090 |
|
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
28 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Securities held to maturity
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
28 |
|
|
$ |
2 |
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
|
Fair Value
|
|
|
<12 months
|
|
|
Fair Value
|
|
|
> 12 months
|
|
|
|
(in thousands)
|
|
Available
For Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities and obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
of
U.S. government corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Corporate
and other securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Municipal
notes
|
|
|
- |
|
|
|
- |
|
|
|
13 |
|
|
|
1 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity
securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
13 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
27 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Securities held to maturity
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
27 |
|
|
$ |
3 |
|
The
unrealized losses on the securities held in the portfolio are not considered
other than temporary and have not been recognized into income. This
decision is based on the Company’s ability and intent to hold any potentially
impaired security until maturity. The performance of the security is based on
the contractual terms of the agreement, the extent of the impairment and the
financial condition and credit quality of the issuer. The decline in market
value is considered temporary and a result of changes in interest rates and
other market variables.
Note
4—LOANS
The following table sets forth the
composition of our loan portfolio by loan type at the dates
indicated.
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
Real
estate loans:
|
|
|
|
|
|
|
Residential
mortgage
|
|
$ |
77,326 |
|
|
$ |
81,620 |
|
Commercial
loans:
|
|
|
|
|
|
|
|
|
Secured
by real estate
|
|
|
60,872 |
|
|
|
62,376 |
|
Other
|
|
|
8,824 |
|
|
|
9,873 |
|
Total
commercial loans
|
|
|
69,696 |
|
|
|
72,249 |
|
|
|
|
|
|
|
|
|
|
Consumer
loans:
|
|
|
|
|
|
|
|
|
Secured
by real estate
|
|
|
17,668 |
|
|
|
18,732 |
|
Other
|
|
|
2,314 |
|
|
|
2,553 |
|
|
|
|
|
|
|
|
|
|
Total
consumer loans
|
|
|
19,982 |
|
|
|
21,285 |
|
Total
gross loans
|
|
$ |
167,004 |
|
|
$ |
175,154 |
|
Less:
|
|
|
|
|
|
|
|
|
Net
deferred loan fees
|
|
|
(261 |
) |
|
|
(275 |
) |
Allowance
for loan losses
|
|
|
(3,126 |
) |
|
|
(3,660 |
) |
|
|
|
|
|
|
|
|
|
Total
loans, net
|
|
$ |
163,617 |
|
|
$ |
171,219 |
|
The
following table sets forth the analysis of the allowance for loan losses for the
periods indicated:
|
|
As
of
|
|
|
As
of
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Allowance
at beginning of period
|
|
$ |
3,660 |
|
|
$ |
5,647 |
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Residential
Mortgages
|
|
|
(169 |
) |
|
|
(362 |
) |
Nonresidential
Real Estate:
|
|
|
|
|
|
|
|
|
Commercial
Mortgages
|
|
|
(877 |
) |
|
|
(4,903 |
) |
Purchased
Out-of-State
|
|
|
- |
|
|
|
(2,482 |
) |
Non
Real Estate Loans:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
- |
|
|
|
(246 |
) |
Consumer
and other
|
|
|
(133 |
) |
|
|
(254 |
) |
Total
charge offs
|
|
|
(1,179 |
) |
|
|
(8,247 |
) |
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Residential
Mortgages
|
|
|
2 |
|
|
|
- |
|
Commercial
Mortgages
|
|
|
12 |
|
|
|
- |
|
Non
Real Estate Loans:
|
|
|
|
|
|
|
|
|
Consumer
and other
|
|
|
25 |
|
|
|
64 |
|
Total
recoveries
|
|
|
39 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
Net
(charge offs) recoveries
|
|
|
(1,140 |
) |
|
|
(8,183 |
) |
Provision
for loan losses
|
|
|
606 |
|
|
|
6,196 |
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$ |
3,126 |
|
|
$ |
3,660 |
|
Note
5—DIVIDENDS
We
suspended our quarterly dividend effective for the quarter ended December 31,
2008. We are dependent primarily upon the Bank for earnings and funds to pay
dividends on common stock. The payment of dividends also is subject to legal and
regulatory restrictions. Any reinstatement of dividends in the future will
depend, in large part, on the Bank's earnings, capital requirements, financial
condition and other factors considered by the Board of Directors.
Note
6—STOCK-BASED COMPENSATION
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 123 (Revised) “Shareholder Based Payments”, which requires that the
grant-date fair value of awarded stock options be expensed over the requisite
service period. The Company’s 1996 Stock Option Plan (the “1996 Plan”), which
was approved by shareholders, permits the grant of share options to its
employees for up to 127,491 shares of common stock (adjusted for the exchange
ratio applied in the Company’s 2005 stock offering and related second-step
conversion). The Company’s 2006 Stock-Based Incentive Plan (the “2006 Plan”),
which was approved by the shareholders on May 17, 2006, permits the award of up
to 242,740 shares of common stock of which the maximum number to be granted as
Stock Options is 173,386 and the maximum that can be granted as Restricted Stock
Awards is 69,354. Option awards are granted with an exercise price equal to the
market price of the Company’s stock at the date of grant; those option awards
generally vest based on five years of continual service and have ten year
contractual terms. Certain options provide for accelerated vesting if there is a
change in control (as defined in the Plans).
During
the three and six months ended June 30, 2010, no shares were awarded
under the Recognition and Retention Plan (“RRP”). Shares issued under
the RRP and exercised pursuant to the exercise of the stock option
plan may be either authorized but unissued shares or reacquired shares held by
the Company as treasury stock.
Stock Options - A summary of
option activity under the Plans during the six months ended June 30, 2010 is
presented below:
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
|
|
|
|
Average
|
|
Contractual
Term
|
|
|
Aggregate
|
Options
|
|
Shares
|
|
|
Exercise
Price
|
|
(Years)
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2010
|
|
|
188,132 |
|
|
$ |
9.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(2,000 |
) |
|
$ |
9.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oustanding
at June 30, 2010
|
|
|
186,132 |
|
|
$ |
9.47 |
|
5.82
|
|
$ |
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Exercisable at June 30, 2010
|
|
|
149,534 |
|
|
$ |
9.47 |
|
4.38
|
|
$ |
0
|
A summary
of the status of the Company’s nonvested options as of June 30, 2010, and
changes during the six months ended June 30, 2010, is presented
below:
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2010
|
|
|
73,476 |
|
|
$ |
2.11 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(34,878 |
) |
|
$ |
2.11 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,000 |
) |
|
$ |
2.10 |
|
|
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2010
|
|
|
36,598 |
|
|
$ |
2.10 |
|
As of
June 30, 2010 there was $75,000 of total unrecognized compensation cost, net of
expected forfeitures, related to nonvested options under the Plans. That cost is
expected to be recognized over a weighted-average period of 0.9 years. The total
fair value of options vested during the six months ended June 30, 2010 was
$66,955.
Restricted Stock Awards - As
of June 30, 2010 there was $107,000 of unrecognized compensation cost related to
nonvested restricted stock awards under the Plans. That cost is expected to be
recognized over a weighted-average period of 0.9 years.
Note
7 – COMMITMENTS TO EXTEND CREDIT
The Company is a party to
credit-related financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, stand-by letters of credit,
and commercial lines of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheet. The Company’s exposure to credit loss is
represented by the contracted amount of these commitments. The Company follows
the same credit policies in making commitments as it does for on-balance sheet
instruments.
At June
30, 2010, the Company had outstanding commitments to originate loans of $32.2
million. These commitments included $10.7 million for permanent one-to-four
family dwellings, $5.5 million for non-residential loans, $206,000 of
undisbursed loan proceeds for construction of one-to-four family dwellings,
$4.6 million of
undisbursed lines of credit on home equity loans, $1.2 million of
unused credit card lines, $7.5 million of
unused commercial lines of credit, $837,000 of undisbursed loans for commercial
construction, $5,000 of unused letters of credit and $1.7 million in unused
Overdraft Protection.
Note
8 – SEGMENT REPORTING
The Company’s principal activities
include banking and, prior to February 2009, the sale of insurance products
through its indirect wholly owned subsidiary, ICA. The Company sold the majority
of the assets of ICA on February 27, 2009 (see Note 1). The Bank provides
financial products including retail and commercial loans as well as retail and
commercial deposits. ICA received commissions from the sale of
various insurance products including health, life, and property. The segments
were determined based on the nature of the products provided to
customers.
The
financial information for each operating segment is reported on the basis used
internally to evaluate performance and allocate resources. The allocations have
been consistently applied for all periods presented. Revenues and
expenses between affiliates have been transacted at rates that unaffiliated
parties would pay. The only transaction between the segments related
to a deposit on behalf of ICA included in the Bank. The interest income and
interest expense for this transaction has been eliminated. All other
transactions were with external customers. The information presented
is not necessarily indicative of the segment’s financial condition and results
of operations if they were independent entities.
As noted
above, the majority of the assets of the Company’s segment, ICA, were sold on
February 27, 2009; therefore no segment information is reported for the
three-month period ended June 30, 2009 or for the three- or six-month periods
ended June 30, 2010.
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2009
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Bank
|
|
|
ICA
|
|
|
Eliminations
|
|
|
Total
|
|
Interest
Income
|
|
$ |
6,476 |
|
|
$ |
4 |
|
|
$ |
(4 |
) |
|
$ |
6,476 |
|
Interest
Expense
|
|
|
2,798 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
2,798 |
|
Net Interest Income -
Before provision for loan losses
|
|
|
3,678 |
|
|
|
- |
|
|
|
- |
|
|
|
3,678 |
|
Provision
for Loan Losses
|
|
|
516 |
|
|
|
- |
|
|
|
- |
|
|
|
516 |
|
Net Interest Income -
After provision for loan losses
|
|
|
3,162 |
|
|
|
- |
|
|
|
- |
|
|
|
3,162 |
|
Other
Income
|
|
|
1,520 |
|
|
|
191 |
|
|
|
- |
|
|
|
1,711 |
|
Operating
Expenses
|
|
|
4,469 |
|
|
|
292 |
|
|
|
- |
|
|
|
4,761 |
|
Income (Loss) - Before
federal income tax
|
|
|
213 |
|
|
|
(101 |
) |
|
|
- |
|
|
|
112 |
|
Federal
Income Tax Expense (Benefit)
|
|
|
41 |
|
|
|
(34 |
) |
|
|
- |
|
|
|
28 |
|
Net
Income (Loss)
|
|
$ |
172 |
|
|
$ |
(67 |
) |
|
$ |
- |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$ |
444 |
|
|
$ |
42 |
|
|
$ |
- |
|
|
$ |
486 |
|
Assets
|
|
$ |
240,506 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
240,506 |
|
Expenditures
related to long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Intangible
assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Property
and equipment
|
|
|
184 |
|
|
|
- |
|
|
|
- |
|
|
|
184 |
|
Total
|
|
$ |
184 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
184 |
|
Note
9-FAIR VALUE MEASUREMENTS.
FASB ASC 820-10 – Fair Value
Measurements. The following tables present information about the
Company’s assets and liabilities measured at fair value on a recurring basis at
June 30, 2010, and the valuation techniques used by the Company to determine
those fair values.
In
general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Company has the ability to
access.
Fair
values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly. These Level 2 inputs include quoted prices
for similar assets and liabilities in active markets, and other inputs such as
interest rates and yield curves that are observable at commonly quoted
intervals.
Level 3
inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset
or liability.
In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular inputs to
these fair value measurements requires judgment and considers factors specific
to each asset or liability.
Disclosures
concerning assets and liabilities measured at fair value are as
follows:
Assets
and Liabilities Measured at Fair Value on a Recurring Basis at June 30,
2010
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
Balance
at June 30, 2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities- available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Government & agency obligations
|
|
$ |
- |
|
|
$ |
8,275 |
|
|
$ |
- |
|
|
$ |
8,275 |
|
State
agency & municipal obligations
|
|
|
- |
|
|
|
4,992 |
|
|
|
- |
|
|
|
4,992 |
|
Corporate
bonds & other obligations
|
|
|
- |
|
|
|
1,021 |
|
|
|
- |
|
|
|
1,021 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
19,981 |
|
|
|
- |
|
|
|
19,981 |
|
Equity
investments
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities - available-for-sale
|
|
$ |
- |
|
|
$ |
34,270 |
|
|
$ |
- |
|
|
$ |
34,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
and Liabilities Measured at Fair Value on a Recurring Basis at June 30,
2009
(Dollars
in Thousands)
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
Balance
at June 30, 2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities- available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
US
Government & agency obligations
|
|
$ |
- |
|
|
$ |
5,761 |
|
|
$ |
- |
|
|
$ |
5,761 |
|
State
agency & municipal obligations
|
|
|
- |
|
|
|
7,892 |
|
|
|
- |
|
|
|
7,892 |
|
Corporate
bonds & other obligations
|
|
|
- |
|
|
|
1,012 |
|
|
|
- |
|
|
|
1,012 |
|
Mortgage-backed
securities
|
|
|
- |
|
|
|
12,939 |
|
|
|
- |
|
|
|
12,939 |
|
Equity
investments
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities - available-for-sale
|
|
$ |
- |
|
|
$ |
27,606 |
|
|
$ |
- |
|
|
$ |
27,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also has assets that under
certain conditions are subject to measurement at fair value on a non-recurring
basis. These assets include non-homogenous loans that are considered impaired
and real estate owned. For impaired loans accounted for under FASB ASC 310-10,
the Company has estimated the fair value using Level 3 inputs using discounted
cash flow projections. Other Real Estate Owned consists of property received in
full or partial satisfaction of a receivable. The Company utilizes independent
appraisals or broker price opinions to estimate the fair value of these
properties.
Assets
Measured at Fair Value on a Nonrecurring Basis at June 30,
2010
|
|
|
|
|
|
Balance
at June 30, 2010
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
Change
in fair value for the three-month period ended June 30,
2010
|
|
|
Change
in fair value for the six-month period ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans accounted for under FASB ASC 310-10
|
|
$ |
4,039 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,039 |
|
|
$ |
779 |
|
|
$ |
779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned -residential mortgages
|
|
$ |
503 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
503 |
|
|
$ |
38 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Real estate owned - commercial
|
|
$ |
2,489 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,489 |
|
|
$ |
260 |
|
|
$ |
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
change in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,077 |
|
|
$ |
899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
Measured at Fair Value on a Nonrecurring Basis at June 30,
2009
|
|
|
|
|
|
Balance
at June 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 June 30,
2009
|
|
|
Change
in fair value for the six-month period ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans accounted for under FASB ASC 310-10
|
|
$ |
4,948 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,948 |
|
|
$ |
482 |
|
|
$ |
508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
real estate owned -residential mortgages
|
|
$ |
453 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
453 |
|
|
$ |
75 |
|
|
$ |
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Real estate owned - commercial
|
|
$ |
3,212 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,212 |
|
|
$ |
36 |
|
|
$ |
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
change in fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
137 |
|
|
$ |
665 |
|
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).
Mortgage Servicing Rights:
Mortgage servicing rights represent the value associated with servicing
residential mortgage loans. The value is determined through a discounted cash
flow analysis which uses prepayment speed, interest rate, delinquency level and
other assumptions as inputs. All of these assumptions require a significant
degree of management judgment. Adjustments are only made when the discounted
cash flows are less than the carrying value. As such, the Company classifies
mortgage servicing rights as nonrecurring Level 3.
Mortgage Loans Held For Sale:
Mortgage loans held for sale are recorded at the lower of carrying value or fair
value. The fair value of mortgage loans held for sale is determined through
forward commitments which the Company enters to sell these loans to secondary
market counterparties. As such, the Company classifies mortgage loans
held for sale as nonrecurring Level 2.
The estimated fair values and related
carrying or notional amounts of the Company’s financial instruments are as
follows:
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
Amounts
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amounts
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
5,435 |
|
|
$ |
5,435 |
|
|
$ |
3,099 |
|
|
$ |
3,099 |
|
Securities
available for sale
|
|
|
34,270 |
|
|
|
34,270 |
|
|
|
33,713 |
|
|
|
33,713 |
|
Securities
held to maturity
|
|
|
2,574 |
|
|
|
2,678 |
|
|
|
3,928 |
|
|
|
4,084 |
|
Loans
and loans held for sale - Net
|
|
|
164,388 |
|
|
|
165,624 |
|
|
|
171,271 |
|
|
|
171,544 |
|
Federal
Home Loan Bank stock
|
|
|
4,197 |
|
|
|
4,197 |
|
|
|
4,197 |
|
|
|
4,197 |
|
Accrued
interest receivable
|
|
|
1,098 |
|
|
|
1,098 |
|
|
|
1,230 |
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
deposits
|
|
|
157,827 |
|
|
|
158,952 |
|
|
|
158,100 |
|
|
|
159,081 |
|
Federal
Home Loan Bank advances
|
|
|
38,000 |
|
|
|
38,991 |
|
|
|
44,400 |
|
|
|
45,552 |
|
Note
payable
|
|
|
- |
|
|
|
- |
|
|
|
631 |
|
|
|
634 |
|
REPO
sweep accounts
|
|
|
5,246 |
|
|
|
5,140 |
|
|
|
5,408 |
|
|
|
5,210 |
|
Accrued
interest payable
|
|
|
249 |
|
|
|
249 |
|
|
|
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 8, “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 June 30, 2010 and December 31, 2009, and the results of operations
for the three- and six-month periods ended June 30, 2010 and
2009. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
OVERVIEW
The
Company currently operates as a community-oriented financial institution that
accepts deposits from the general public in the communities surrounding its 8
full-service banking centers. The deposited funds, together with funds generated
from operations and borrowings, are used by the Company to originate loans. The
Company’s principal lending activity is the origination of mortgage loans for
the purchase or refinancing of one-to-four family residential properties. The
Company also originates commercial and multi-family real estate loans,
construction loans, commercial loans, automobile loans, home equity loans and
lines of credit, and a variety of other consumer loans.
For the quarter ended June 30, 2010,
the Company reported net income from continuing operations of $319,000, or $0.11
per basic and diluted share, compared to $42,000, or $0.01 per basic and diluted
share, for the year earlier period, an increase of $277,000. Net
income from continuing operations increased by $333,000 to $522,000, or $0.18
per share, for the six months ended June 30, 2010 from $189,000, or $0.07 per
share, for the same period ended June 30, 2009.
Total assets decreased by $6.6 million,
or 2.8%, from $233.5 million as of December 31, 2009 to $227.0 million as of
June 30, 2010. Cash and cash equivalents increased by $2.3 million while
investment securities available for sale increased by $558,000, investment
securities held to maturity decreased by $1.4 million and net loans receivable
decreased $7.6 million during this time period. Total deposits decreased
$273,000 from December 31, 2009 to June 30, 2010, Federal Home Loan
Bank advances decreased by $6.4 million, notes payable decreased $631,000 and
equity increased by $448,000.
CRITICAL
ACCOUNTING POLICIES
As of
June 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 valuation of
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 June 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 June
30, 2010, the Company had recorded a valuation allowance of $2.9 million related
to its deferred tax assets.
COMPARISON
OF FINANCIAL CONDITION AT JUNE 30, 2010 AND DECEMBER 31, 2009
ASSETS: Total
assets decreased $6.6 million, or 2.8%, to $226.9 million at June 30, 2010 from
$233.5 million at December 31, 2009. Investment securities available
for sale increased $558,000, or 1.7%, and investment securities held to maturity
decreased by $1.4 million, or 34.5%, from December 31, 2009 to June 30, 2010 as
we restructured our securities portfolio to reduce credit risk and improve our
risk-weighted capital ratios. Net loans receivable decreased $7.6
million, or 4.4% to $163.6 million at June 30, 2010 from $171.2 million at
December 31, 2009. The decrease in net loans was attributable primarily to
shrinkage in each of our loan portfolios: the residential mortgage
loan portfolio shrunk by $4.3 million due to portfolio mortgage refinances which
were sold into the secondary market wherever possible due to continued
historically low market interest rates; the commercial loan portfolio shrunk by
$2.6 million due to loan pay-offs and charge-offs; and our consumer
loan portfolio decreased $1.3 million due to slowed origination activity related
to declining property values.
LIABILITIES: Deposits
decreased only slightly by $273,000 to $157.8 million at June 30, 2010 from
$158.1 million at December 31, 2009. However, the composition of our deposits
changed during the six-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 $8.3 million as we were not the market leader in
rates on this product during this time period. The decrease in our
liquid certificate of deposit products was partially offset by increases of $2.4
million in traditional certificate of deposit accounts (which cannot be redeemed
before maturity without penalty), $4.6 million in money market accounts,
$200,000 in non-interest bearing demand deposit accounts and $834,000 in savings
deposit accounts. Total FHLB advances decreased $6.4 million to $38.0 million at
June 30, 2010 from $44.4 million at December 31, 2009 as we paid down advances
primarily with funds from loan payments and loan payoffs. Also, during the
six-month period ended June 30, 2010 we paid off the note payable due to the
former owners of the InsuranCenter in the amount of $631,000.
EQUITY: Stockholders’ equity
increased $448,000 to $23.5 million at June 30, 2010 from $23.1 million at
December 31, 2009. The increase was due primarily to net income for the
six-month period of $522,000. The decrease of $189,000 in the unrealized gain on
available-for-sale securities was partially offset by changes in unearned
compensation related to vesting of previously granted employee stock options and
awards.
RESULTS
OF OPERATIONS
Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009
General: Net income from continuing
operations increased by $277,000 to net income of $319,000 for the three months
ended June 30, 2010 from $42,000 for the same period ended June 30,
2009.
Interest
Income: Interest income decreased to $2.9 million for
the three months ended June 30, 2010 from $3.2 million for the year earlier
period, due to two factors: a decrease of $15.5 million in the average balance
of interest-earning assets to $212.6 million for the three month period ended
June 30, 2010 from $228.1 million for the three month period ended June 30, 2009
and a decrease of 16 basis points in the average yield on these assets period
over period.
Interest
Expense: Interest expense decreased to $900,000 for the
three months ended June 30, 2010 from $1.3 million for the three months ended
June 30, 2009. The decrease in interest expense for the three month period was
due primarily to a decrease in our cost of funds related to certificates of
deposit and FHLB advances. The average cost of our certificates of deposit
decreased from 3.11% for the three months ended June 30, 2009 to 2.31% for the
three months ended June 30, 2010 as higher costing deposits matured and either
left the Bank as we were not a market leader in rates or were re-priced at a
lower rate. In addition, the cost of our FHLB advances decreased 106 basis
points from 4.02% for the three months ended June 30, 2009 to 2.96% for the
three months ended June 30, 2010 due to decreases in market interest
rates.
The
following table sets forth information regarding the changes in interest income
and interest expense of the Bank during the periods indicated.
|
|
Quarter
ended June 30, 2010
|
|
|
|
Compared
to
|
|
|
|
Quarter
ended June 30, 2009
|
|
|
|
Increase (Decrease) Due to:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$ |
(358 |
) |
|
$ |
46 |
|
|
$ |
(312 |
) |
Investment
securities
|
|
|
39 |
|
|
|
(24 |
) |
|
|
15 |
|
Other
investments
|
|
|
11 |
|
|
|
(15 |
) |
|
|
(4 |
) |
Total
interest-earning assets
|
|
|
(308 |
) |
|
|
7 |
|
|
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
- |
|
Savings
Deposits
|
|
|
- |
|
|
|
(4 |
) |
|
|
(4 |
) |
Money
Market/NOW accounts
|
|
|
18 |
|
|
|
(39 |
) |
|
|
(21 |
) |
Certificates
of Deposit
|
|
|
(92 |
) |
|
|
(162 |
) |
|
|
(254 |
) |
Deposits
|
|
|
(74 |
) |
|
|
(205 |
) |
|
|
(279 |
) |
Borrowed
funds
|
|
|
(26 |
) |
|
|
(103 |
) |
|
|
(129 |
) |
Total
interest-bearing liabilities
|
|
|
(100 |
) |
|
|
(308 |
) |
|
|
(408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net interest income
|
|
$ |
(208 |
) |
|
$ |
315 |
|
|
$ |
107 |
|
Net Interest
Income: Net interest income increased to $2.0 million
for the three-month period ended June 30, 2010 from $1.9 million for the same
period in 2009. For the three months ended June 30, 2010, average
interest-earning assets decreased $15.5 million, or 6.8% when compared to the
same period in 2009. Average interest-bearing liabilities decreased $7.0
million, or 3.5%, to $191.8 million for the quarter ended June 30, 2010 from
$198.8 million for the quarter ended June 30, 2009. The yield on
average interest-earning assets decreased to 5.43% for the three-month period
ended June 30, 2010 from 5.62% for the same period ended in 2009 and the cost of
average interest-bearing liabilities decreased to 1.88% from 2.64% for
the three-month periods ended June 30, 2010 and 2009,
respectively. The net interest margin increased to 3.73% for the
three-month period ended June 30, 2010 from 3.32% 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 uncollectibiity 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
$595,000 for the three month period ended June 30, 2010 and $252,000 for the
comparable period in 2009. The increase related mainly to one
previously identified substandard classified commercial credit for which we
received updated information which indicated that an additional reserve of
$751,000 was required, partially offset by the movement of a large commercial
loan from our higher-risk construction pool to the general commercial loan pool
as the construction phase was successfully completed.
The
following table sets forth the details of our loan portfolio at the dates
indicated:
|
|
|
|
|
Delinquent
|
|
|
|
|
|
|
Portfolio
|
|
|
Loans
|
|
|
Non-Accrual
|
|
|
|
Balance
|
|
|
Over 90 Days
|
|
|
Loans
|
|
|
|
(Dollars
in thousands)
|
|
At June 30,
2010
|
|
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$ |
4,378 |
|
|
$ |
- |
|
|
$ |
2,651 |
|
One
- to four - family
|
|
|
76,983 |
|
|
|
- |
|
|
|
2,671 |
|
Commercial
Mortgages
|
|
|
56,837 |
|
|
|
- |
|
|
|
1,317 |
|
Home
equity lines of credit/ Junior liens
|
|
|
17,668 |
|
|
|
- |
|
|
|
263 |
|
Commercial
loans
|
|
|
8,824 |
|
|
|
4 |
|
|
|
71 |
|
Consumer
loans
|
|
|
2,314 |
|
|
|
22 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross loans
|
|
|
167,004 |
|
|
|
26 |
|
|
|
6,973 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred loan fees
|
|
|
(261 |
) |
|
|
1 |
|
|
|
(6 |
) |
Allowance
for loan losses
|
|
|
(3,126 |
) |
|
|
- |
|
|
|
(609 |
) |
Total
loans, net
|
|
$ |
163,617 |
|
|
$ |
27 |
|
|
$ |
6,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
increased to $1.3 million for the three months ended June 30, 2010 from $764,000
for the three months ended June 30, 2009 primarily due to a $447,000 gain on
sale of investments as a result of a restructuring of the investment portfolio
in an effort to reduce credit risk (see Note 3 – Securities for a more expanded
discussion), as well as a $200,000 settlement on a
lawsuit. Offsetting these positive factors was a decrease in mortgage
banking activities income. Despite current historically low interest rates,
mortgage banking activities, consisting mostly of homeowner refinances, peaked
in March 2009. Mortgage refinances were considerably lower for the three-month
period ended June 30, 2010 as compared to the prior year period.
Non Interest
Expense: Non interest expense
increased from $2.3 million for the three months ended June 30, 2009 to $2.4
million for the three months ended June 30, 2010, due primarily to a $185,000
second write-down on a commercial REO property based upon updated valuation
information obtained during the quarter. Partially offsetting the increase in
other expense, our FDIC premiums decreased for the three-month period ended June
30, 2010 due to a FDIC special assessment of $108,000 paid during the second
quarter of 2009.
Income
Taxes: The Company had federal income tax benefit
of $102,000 for the three months ended June 30, 2010 due to a partial
reversal of our deferred tax asset valuation allowance, compared to a federal
income tax expense of less than $1,000 for the same period in 2009.
Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009
General: Net income from continuing
operations increased by $333,000 to net income of $522,000 for the six months
ended June 30, 2010 from $189,000 for the same period ended June 30,
2009.
Interest
Income: Interest income decreased by $710,000 to $5.8
million for the six-month period ended June 30, 2010 from $6.5 million for the
same period in 2009. This decrease was primarily attributed to a decline in the
average balance of interest earning assets of $16.3 million to $214.2 million
for the six-month period ended June 30, 2010 from $230.6 million for the
six-month period ended June 30, 2009. In addition, we experienced a decrease in
the yield on our interest earning assets of 24 basis points period over period
due mainly to lower market interest rates period over period.
Interest
Expense: Interest expense for the six months ended June
30, 2010 decreased to $1.9 million from $2.8 million for the six months ended
June 30, 2009. The decrease in interest expense for the six-month period was due
primarily to a decrease in the cost of our certificates of deposit and FHLB
advances. The cost of our certificates of deposit decreased 100 basis points
from 3.38% for the six months ended June 30, 2009 to 2.38% for the six months
ended June 30, 2010, as higher costing deposits matured and either left the Bank
or were re-priced at lower rates. In addition, the cost of our FHLB advances
decreased 114 basis points from 4.08% for the six months ended June 30, 2009 to
2.94% for the six months ended June 30, 2010 due primarily to lower market
interest rates period over period.
The
following table sets forth information regarding the changes in interest income
and interest expense of the Bank during the periods indicated.
|
|
Six
Months ended June 30, 2010
|
|
|
|
Compared
to
|
|
|
|
Six
Months ended June 30, 2009
|
|
|
|
Increase (Decrease) Due to:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
$ |
(671 |
) |
|
$ |
(44 |
) |
|
$ |
(715 |
) |
Investment
securities
|
|
|
54 |
|
|
|
(40 |
) |
|
|
14 |
|
Other
investments
|
|
|
13 |
|
|
|
(22 |
) |
|
|
(9 |
) |
Total
interest-earning assets
|
|
|
(604 |
) |
|
|
(106 |
) |
|
|
(710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
- |
|
Savings
Deposits
|
|
|
1 |
|
|
|
(8 |
) |
|
|
(7 |
) |
Money
Market/NOW accounts
|
|
|
30 |
|
|
|
(81 |
) |
|
|
(51 |
) |
Certificates
of Deposit
|
|
|
(239 |
) |
|
|
(405 |
) |
|
|
(644 |
) |
Deposits
|
|
|
(208 |
) |
|
|
(494 |
) |
|
|
(702 |
) |
Borrowed
funds
|
|
|
(12 |
) |
|
|
(227 |
) |
|
|
(239 |
) |
Total
interest-bearing liabilities
|
|
|
(220 |
) |
|
|
(721 |
) |
|
|
(941 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net interest income
|
|
$ |
(384 |
) |
|
$ |
615 |
|
|
$ |
231 |
|
Net Interest
Income: Net interest income increased by $231,000 for
the six-month period ended June 30, 2010 compared to the same period in
2009. For the six months ended June 30, 2010, average
interest-earning assets decreased $16.3 million, or 7.1%, when compared to the
same period in 2009. Average interest-bearing liabilities decreased $8.9
million, or 4.4%, to $193.0 million for the six-month period ended June 30, 2010
from $201.9 million for the six-month period ended June 30, 2009. The
yield on average interest-earning assets decreased to 5.40% for the six month
period ended June 30, 2010 from 5.65% for the same period ended in 2009 while
the cost of average interest-bearing liabilities decreased to 1.94% from
2.79% for the six-month periods ended June 30, 2010 and 2009,
respectively. The net interest margin increased to 3.67% for the six
month period ended June 30, 2010 from 3.22% for 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 meaning of SFAS 15.
Nonperforming
assets decreased by $5.4 million from December 31, 2009 to June 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, 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 six-month period ended June 30, 2010, approximately $400,000 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.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Total
non-accrual loans
|
|
$ |
6,973 |
|
|
$ |
8,947 |
|
|
|
|
|
|
|
|
|
|
Accrual
loans delinquent 90 days or more:
|
|
|
|
|
|
|
|
|
One-
to four-family residential
|
|
|
- |
|
|
|
89 |
|
Other
real estate loans
|
|
|
- |
|
|
|
2,696 |
|
Construction
|
|
|
- |
|
|
|
- |
|
Purchased
Out-of-State
|
|
|
- |
|
|
|
- |
|
Commerical
|
|
|
4 |
|
|
|
- |
|
Consumer
& other
|
|
|
22 |
|
|
|
54 |
|
Total
accrual loans delinquent 90 days or more
|
|
$ |
26 |
|
|
$ |
2,839 |
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans (1)
|
|
|
6,999 |
|
|
|
11,786 |
|
Total
real estate owned-residential mortgages (2)
|
|
|
500 |
|
|
|
584 |
|
Total
real estate owned-Commercial (2)
|
|
|
2,489 |
|
|
|
2,985 |
|
Total
real estate owned-Consumer & other repossessed assets
(2)
|
|
|
3 |
|
|
|
11 |
|
Total
nonperforming assets
|
|
$ |
9,991 |
|
|
$ |
15,366 |
|
|
|
|
|
|
|
|
|
|
Total
nonperforming loans to loans receivable
|
|
|
4.20 |
% |
|
|
6.73 |
% |
Total
nonperforming assets to total assets
|
|
|
4.40 |
% |
|
|
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.
|
Provision for
Loan Losses: The provision for loan losses
amounted to $606,000 for the six-month period ended June 30, 2010 and $516,000
for the comparable period in 2009. Both six-month periods included
increases in the provision for charge-downs on commercial credits. The ratio of
nonperforming loans to total loans was 4.20% and 6.73% at June 30, 2010 and
December 31, 2009, respectively. As a percent of total assets,
nonperforming loans decreased to 4.40% at June 30, 2010 from 6.58% at December
31, 2009.
Non Interest
Income: Non interest income increased from $1.6 million for the six
months ended June 30, 2009 to $1.8 million for the six months ended June 30,
2010, mainly due to a $447,000 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. Offsetting these positive
factors was a decrease in mortgage banking activities income for six-month
period, as discussed above in the analysis of results for the three-month period
ended June 30, 2010.
Non Interest
Expense. Non interest expense increased from $4.5 million for the six
months ended June 30, 2009 to $4.6 million for the six months ended June 30,
2010. The increase was primarily due to a $185,000 second write-down on a
commercial REO property based upon updated valuation information obtained,
partially offset by a decrease in our FDIC premiums 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 for the six months ended June 30,
2010 due to the partial reversal of the Company’s deferred tax asset
valuation allowance, compared to $52,000 for the same period in
2009.
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
June 30, 2010 was $35.2 million, or 31.6% 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.
The
Company intends to retain for its portfolio certain originated residential
mortgage loans (primarily adjustable rate 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 six month period ended June 30, 2010, the Company
originated $17.4 million in residential mortgage loans, of which $2.4 million
were retained in portfolio while the remainder were sold in the secondary market
or are being held for sale. This compares to $39.0 million in
originations during the first six months of 2009 of which $4.4 million were
retained in portfolio. The Company also originated $5.4 million of
commercial loans and $2.2 million of consumer loans in the first six
months of 2009 compared to $13.7 million of commercial loans and $2.2 million of
consumer loans for the same period in 2009. Of total loans
receivable, excluding loans held for sale, mortgage loans
comprised 46.3% and 45.5%, commercial loans 41.7% and 41.9% and
consumer loans 12.0% and 12.6% at June 30, 2010 and June 30, 2009,
respectively.
Deposits
are a primary source of ;funds for use in lending and for other general business
purposes. At June 30, 2010 deposits funded 69.5% 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 June 30, 2010 totaled $43.3
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 growth in assets is not
expected to require significant in-flows of liquidity. As such, the
Bank does not expect to be a market leader in rates paid for liabilities,
although we may from time to time offer higher rates than our competitors, as
liquidity needs dictate.
Borrowings
may be used to compensate for seasonal or other reductions in normal sources of
funds or for deposit outflows at more than projected
levels. Borrowings may also be used on a longer-term basis to support
increased lending or investment activities. At June 30, 2010 the
Company had $38.0 million in FHLB advances. FHLB borrowings as a percentage of
total assets were 16.7% at June 30, 2010 as compared to 19.0% at December 31,
2009. At June 30, 2010m the Company has sufficient available
collateral to obtain additional advances of $12.7 million.
CAPITAL
RESOURCES
Stockholders’
equity at June 30, 2010 was $23.5 million, or 10.4% 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 levels in accordance with OTS
regulations. The Bank was considered “well capitalized” under all
capital requirements set forth by the OTS as of June 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 June 30, 2010:
|
|
Actual
|
|
|
Regulatory
Minimum
|
|
|
Minimum
to be
Well
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
Dollars
in Thousands
|
|
Tier
1 (Core) capital (to adjusted assets)
|
|
$ |
20,998 |
|
|
|
9.34 |
% |
|
$ |
8,997 |
|
|
|
4.00 |
% |
|
$ |
11,246 |
|
|
|
5.00 |
% |
Total
risk-based capital (to risk-weighted assets)
|
|
$ |
22,928 |
|
|
|
14.91 |
% |
|
$ |
12,304 |
|
|
|
8.00 |
% |
|
$ |
15,380 |
|
|
|
10.00 |
% |
Tier
1 risk-based capital (to risk weighted assets)
|
|
$ |
20,998 |
|
|
|
13.65 |
% |
|
$ |
6,152 |
|
|
|
4.00 |
% |
|
$ |
9,228 |
|
|
|
6.00 |
% |
Tangible
Capital (to tangible assets)
|
|
$ |
20,998 |
|
|
|
9.34 |
% |
|
$ |
3,374 |
|
|
|
1.50 |
% |
|
$ |
4,499 |
|
|
|
2.00 |
% |
ITEM
3 - QUALITATIVE AND QUANTITIATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable to smaller reporting companies.
ITEM
4 - CONTROLS AND PROCEDURES
Under the
supervision and with the participation of our management, including the
Company’s Chief Executive Officer and 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 (1) is recorded,
processed, summarized and reported, within the time periods specified by the
SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers,
as appropriate, to allow timely decisions regarding required
disclosure.
There has
been no change in the Company’s internal control over the financial reporting
during the Company’s second quarter of fiscal year 2010 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 June 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:
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 June 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:
|
/s/
Michael W. Mahler |
|
|
|
Michael
W. Mahler |
|
|
|
Chief
Executive Officer |
|
|
|
|
|
|
|
Date: August
16, 2010 |
|
|
By:
|
/s/Amy
E. Essex |
|
|
|
Amy
E. Essex, Chief Financial Officer |
|
|
|
(Principal
Financial and Accounting Officer) |
|
|
|
|
|
|
|
Date: August
16, 2010 |
|