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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
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
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 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 May 11, 2007
(Title of Class) 2,883,249 shares
Transitional Small Business Disclosure Format: Yes[ ] No [X].
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FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2007
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1 - UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheet at March 31, 2007 and December 31, 2006......................................... 3
Consolidated Statements of Income for the Three Months Ended March 31, 2007 and March 31, 2006............. 4
Consolidated Statement of Changes in Stockholders' Equity for the Three Months Ended March 31, 2007 ....... 5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and March 31, 2006......... 6
Notes to Unaudited Consolidated Financial Statements....................................................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................................................... 15
ITEM 3 - CONTROLS AND PROCEDURES..................................................................................... 20
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS........................................................................................... 21
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS................................................. 21
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES............................................................................. 21
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... ................................................... 21
ITEM 5 - OTHER INFORMATION........................................................................................... 21
ITEM 6 - EXHIBITS ................................................................................................... 21
Section 302 Certifications
Section 906 Certifications
When used in this Form 10-QSB or future filings by First Federal of Northern
Michigan Bancorp, Inc. (the "Company") with the Securities and Exchange
Commission ("SEC"), in the Company's press releases or other public or
stockholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
2
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2007 December 31, 2006
-------------- -----------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks .................................... $ 3,176,308 $ 4,159,833
Overnight deposits with FHLB ....................................... 1,618,457 832,968
-------------- -----------------
Total cash and cash equivalents .................................... 4,794,765 4,992,801
Securities AFS ..................................................... 34,233,844 43,100,430
Securities HTM ..................................................... 1,750,000 1,750,000
Securities at fair value ........................................... 4,755,925 -
Loans held for sale ................................................ 172,077 72,000
Loans receivable, net of allowance for loan losses of $2,099,662 and
$2,079,069 as of March 31, 2007 and December 31, 2006,
respectively .................................................. 204,829,690 209,518,068
Foreclosed real estate and other repossessed assets ................ 522,438 475,312
Real estate held for investment .................................... 135,543 135,543
Federal Home Loan Bank stock, at cost .............................. 4,196,900 4,196,900
Premises and equipment ............................................. 7,990,850 8,075,238
Accrued interest receivable ........................................ 2,083,798 2,138,667
Intangible assets .................................................. 2,464,583 2,589,463
Goodwill ........................................................... 1,396,854 1,396,854
Other assets ....................................................... 2,540,723 2,517,548
-------------- -----------------
Total assets ....................................................... $ 271,867,990 $ 280,958,824
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ........................................................... $ 173,162,074 $ 177,057,993
Advances from borrowers for taxes and insurance .................... 190,753 44,389
Federal Home Loan Bank advances and Note Payable ................... 50,592,134 66,042,134
Borrowings at fair value ........................................... 10,337,328 -
Accrued expenses and other liabilities ............................. 2,704,966 2,361,573
-------------- -----------------
Total liabilities .................................................. 236,987,255 245,506,089
-------------- -----------------
Stockholders' equity:
Common stock ($0.01 par value 20,000,000 shares authorized
3,190,999 shares issued) ......................................... 31,910 31,910
Additional paid-in capital ......................................... 24,281,938 24,261,737
Retained earnings .................................................. 14,146,690 14,576,468
Treasury stock at cost (194,600 and 156,000 shares,
respectively) .................................................... (1,923,844) (1,565,359)
Unallocated ESOP ................................................... (1,034,216) (1,059,130)
Unearned compensation .............................................. (498,468) (528,987)
Accumulated other comprehensive loss ............................... (123,275) (263,904)
-------------- -----------------
Total stockholders' equity ......................................... 34,880,735 35,452,735
-------------- -----------------
Total liabilities and stockholders' equity ......................... $ 271,867,990 $ 280,958,824
============== =================
See accompanying notes to consolidated financial statements.
3
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Three Months
Ended March 31,
-------------------------
2007 2006
----------- -----------
(Unaudited)
Interest income:
Interest and fees on loans ........................ 3,585,927 3,416,613
Interest and dividends on investments ............. 509,849 561,811
Interest on mortgage-backed securities ............ 47,100 54,975
----------- -----------
Total interest income ............................. 4,142,876 4,033,399
----------- -----------
Interest expense:
Interest on deposits .............................. 1,431,910 1,239,910
Interest on borrowings ............................ 802,086 669,347
----------- -----------
Total interest expense ............................ 2,233,996 1,909,257
----------- -----------
Net interest income ............................... 1,908,880 2,124,141
Provision for loan losses ......................... 85,629 69,500
----------- -----------
Net interest income after provision for
loan losses ..................................... 1,823,251 2,054,641
----------- -----------
Non Interest income:
Service charges and other fees .................... 197,015 237,146
Mortgage banking activities ....................... 87,884 72,803
Net gain (loss) on sale of premises and equipment,
real estate owned and other repossessed assets .. (1,833) 2,256
Other ............................................. 11,929 45,220
Net loss on trading activities .................... (9,624) --
Insurance & Brokerage Commissions ................. 692,819 768,654
----------- -----------
Total other income ................................ 978,190 1,126,079
----------- -----------
Non interest expenses:
Compensation and employee benefits ................ 1,568,828 1,544,900
SAIF Insurance Premiums ........................... 5,500 6,408
Advertising ....................................... 40,519 51,089
Occupancy ......................................... 367,617 369,281
Amortization of intangible assets ................. 124,881 124,881
Service Bureau Charges ............................ 75,945 86,281
Insurance & Brokerage Commission Expense .......... 240,800 268,107
Professional Services ............................. 80,279 85,335
Other ............................................. 285,331 324,860
----------- -----------
Other expenses .................................... 2,789,699 2,861,142
----------- -----------
Income before income tax expense .................. 11,742 319,578
Income tax (benefit) expense ...................... (11,993) 107,370
----------- -----------
Net income ........................................ $ 23,735 $ 212,208
=========== ===========
Per share data:
Basic earnings per share .......................... $ 0.01 $ 0.07
Weighted average number of shares outstanding ..... 3,033,303 3,116,745
Diluted earnings per share ........................ $ 0.01 $ 0.07
Weighted average number of shares outstanding,
including dilutive stock options ................ 3,034,309 3,120,904
Dividends per common share ........................ $ 0.050 $ 0.050
See accompanying notes to consolidated financial statements.
4
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
Accumulated
Additional Other
Common Treasury Paid-in Unearned Retained Unallocated Comprehensive
Stock Stock Capital Compensation Earnings ESOP Income Total
-------- ------------ ------------ ------------ ------------ ----------- ------------- -----------
Balance at December
31, 2006................. $ 31,910 $ (1,565,359) $ 24,261,737 $ (528,987) $ 14,576,468 $ 1,059,130) $ (263,904) $35,452,735
Cumulative effect of
change in accounting
principle (Note 1)....... (303,938) (303,938)
Treasury Stock at
Cost (38,600 shares)..... - (358,485) - - - - - (358,485)
Stock Options/Awards
Expensed................. - - 22,086 30,519 - - - 52,605
Unallocated ESOP......... - - (1,885) - - 24,914 - 23,029
Net income for the
period................... - - - - 23,735 - - 23,735
Changes in unrealized
loss:
on available-for-sale...
securities (net of
tax of $63,505).......... - - - - - - 140,629 140,629
-----------
Total comprehensive
income................... - - - - - - - 164,364
Dividends declared....... - - - - (149,575) - - (149,575)
-------- ------------ ------------ ------------ ------------ ----------- ------------- -----------
Balance at March 31,
2007..................... $ 31,910 $ (1,923,844) $ 24,281,938 $ (498,468) $ 14,146,690 $(1,034,216) $ (123,275) $34,880,735
======== ============ ============ ============ ============ =========== ============= ===========
5
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended
March 31,
---------------------------
2007 2006
------------ ------------
(Unaudited)
Cash flows from operating activities:
Net income ............................................................... $ 23,735 $ 212,208
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization ......................................... 276,520 257,863
Provision for loan .................................................... 85,629 69,500
Amortization and accretion on securities .............................. 10,615 26,573
Originations of loans held for sale ................................... (3,123,990) (2,687,147)
Principal amount of loans ............................................. 3,023,913 2,352,975
Proceeds from sale of real estate held for sale ....................... 74,138 127,220
Gain on sale of real estate held for investment ....................... (937) (1,073)
Change in accrued interest receivable ................................. 54,869 132,131
Change in other assets ................................................ (85,997) 243,234
Net cash provided by operating activities ................................ 891,067 760,754
------------ ------------
Net (increase) decrease in loans ....................................... 4,602,749 (3,389,296)
Proceeds from maturity and sale of available-for-sale securities ....... 4,180,313 615,474
Purchase of securities available for ................................... -- (1,976,205)
Purchase of premises and equipment ..................................... (187,579) (309,588)
------------ ------------
Net cash provided by (used in) investing activities ...................... 8,595,483 (5,059,615)
------------ ------------
Net Increase in deposits ............................................... (3,895,919) (3,112,837)
Dividend paid on common stock .......................................... (149,575) (156,017)
ESOP shares committed to be released ................................... 23,029 21,544
Net increase in advances from borrowers ................................ 146,364 207,180
Additions to advances from Federal Home Loan Bank and notes payable .... 12,500,000 8,430,000
Repayments of Federal Home Loan Bank advances and notes payable ........ (17,950,000) (1,000,000)
Stock retired .......................................................... -- (60,365)
Proceeds from exercise of stock options ................................ -- 60,370
Purchase of treasury ................................................... (358,485) --
------------ ------------
Net cash provided by (used in) financing activities ...................... (9,684,586) 4,389,875
------------ ------------
Net increase (decrease) in cash and cash equivalents ..................... (198,036) 91,014
Cash and cash equivalents at beginning of period ......................... 4,992,801 4,779,194
------------ ------------
Cash and cash equivalents at end of period ............................... $ 4,794,765 $ 4,870,208
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............................. $ -- $ --
============ ============
Cash paid during the period for interest ................................. $ 2,233,311 $ 1,933,984
============ ============
See accompanying notes to the consolidated financial statements
6
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The accompanying consolidated financial statements have been prepared on
an accrual basis of accounting and include the accounts of First Federal of
Northern Michigan Bancorp, Inc. and its wholly owned subsidiary, First Federal
of Northern Michigan (the "Bank") and the Bank's wholly owned subsidiaries
Financial Service and Mortgage Corporation ("FSMC") and the InsuranCenter of
Alpena ("ICA"). FSMC invests in real estate that includes leasing, selling,
developing, and maintaining real estate properties. ICA is a licensed insurance
agency engaged in the business of property, casualty and health insurance. All
significant intercompany balances and transactions have been eliminated in the
consolidation.
These interim financial statements are prepared without audit and reflect
all adjustments, which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company at March 31, 2007, and
its results of operations and statement of cash flows for the periods presented.
All such adjustments are normal and recurring in nature. The accompanying
consolidated financial statements do not purport to contain all the necessary
financial disclosures required by generally accepted accounting principles that
might otherwise be necessary and should be read in conjunction with the
consolidated financial statements and notes thereto of the Company included in
the Annual Report for the year ended December 31, 2006. Results for the three
months ended March 31, 2007 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2007.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are prepared in accordance with
accounting principles generally accepted in the United States of America and
conform to general practices within the banking industry. We consider accounting
policies that require significant judgment and assumptions by management that
have, or could have, a material impact on the carrying value of certain assets
or on income to be critical accounting policies. Changes in underlying factors,
assumptions or estimates could have a material impact on our future financial
condition and results of operations. Based on the size of the item or
significance of the estimate, the following accounting policies are considered
critical to our financial results.
Allowance for Loan Losses. The allowance for loan losses is calculated
with the objective of maintaining an allowance sufficient to absorb estimated
probable loan losses. Management's determination of the adequacy of the
allowance is based on periodic evaluations of the loan portfolio and other
relevant factors. However, this evaluation is inherently subjective, as it
requires an estimate of the loss content for each risk rating and for each
impaired loan, an estimate of the amounts and timing of expected future cash
flows, and an estimate of the value of collateral.
We have established a systematic method of periodically reviewing the
credit quality of the loan portfolio in order to establish an allowance for
losses on loans. The allowance for losses on loans is based on our current
judgments about the credit quality of individual loans and segments of the loan
portfolio. The allowance for losses on loans is established through a provision
for loan losses based on our evaluation of the losses inherent in the loan
portfolio, and considers all known internal and external factors that affect
loan collectibility as of the reporting date. Our evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers among other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions, historical loan loss
experience, our knowledge of inherent losses in the portfolio that are probable
and reasonably estimable and other factors that warrant recognition in providing
an appropriate loan loss allowance. Management believes this is a critical
accounting policy because this evaluation involves a high degree of complexity
and requires us to make subjective judgments that often require assumptions or
estimates about various matters. Historically, we believe our estimates and
assumptions have proven to be relatively accurate.
7
The analysis of the allowance for loan losses has two components: specific
and general allocations. Specific allocations are made for loans that are
determined to be impaired. Impairment is measured by determining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses. The
general allocation is determined by segregating the remaining loans by type of
loan, risk weighting (if applicable) and payment history. We also analyze
delinquency trends, which have remained stable, general economic conditions and
geographic and industry concentrations. This analysis establishes factors that
are applied to the loan groups to determine the amount of the general reserve.
The principal assumption used in deriving the allowance for loan losses is the
estimate of loss content for each risk rating. As an example, if recent loss
experience dictated that the projected loss ratios would be changed by 10% (of
the estimate) across all risk ratings, the allocated allowance as of March 31,
2007 would have changed by approximately $193,000. Actual loan losses may be
significantly more than the allowances we have established, which could have a
material negative effect on our financial results.
Mortgage Servicing Rights. We sell to investors a portion of our originated one-
to four-family residential real estate mortgage loans. When we acquire mortgage
servicing rights through the origination and sale of mortgage loans with
servicing rights retained, we allocate a portion of the total cost of the
mortgage loans to the mortgage servicing rights based on their relative fair
value. As of March 31, 2007, we were servicing loans sold to others totaling
$135.1 million. We amortize capitalized mortgage servicing rights as a reduction
of servicing fee income in proportion to, and over the period of, estimated net
servicing income by use of a method that approximates the level-yield method. We
periodically evaluate capitalized mortgage servicing rights for impairment using
a model that takes into account several variables including expected prepayment
speeds and prevailing interest rates. If we identify impairment, we charge the
amount of the impairment to earnings by establishing a valuation allowance
against the capitalized mortgage servicing rights asset. The primary risk of
material changes to the value of the servicing rights resides in the potential
volatility in the economic assumptions used, particularly the prepayment speed.
We monitor this risk and adjust the valuation allowance as necessary to
adequately record any probable impairment in the portfolio. Management believes
the estimation of these variables makes this a critical accounting policy. For
purposes of measuring impairment, the mortgage servicing rights are stratified
based on financial asset type and interest rates. In addition, we obtain an
independent third-party valuation of the mortgage servicing portfolio on a
quarterly basis. In general, the value of mortgage servicing rights increases as
interest rates rise and decreases as interest rates fall. This is because the
estimated life and estimated income from a loan increase as interest rates rise
and decrease as interest rates fall. The key economic assumptions made in
determining the fair value of the mortgage servicing rights at March 31, 2007
included the following:
Annual constant prepayment speed (CPR): 13.11%
Weighted average life remaining (in months): 246
Discount rate used: 8.50%
At the March 31, 2007 valuation, we calculated the value of our mortgage
servicing rights to be $1.3 million and the weighted average life remaining of
those rights was 44 months. The book value of our mortgage servicing rights as
of March 31, 2007 was $579,000 which was $721,000 less than the independent
valuation, so there was no need to establish a valuation allowance.
Impairment of Intangible Assets. Goodwill arising from business
acquisitions represents the value attributable to unidentifiable intangible
elements in the business acquired. The fair value of goodwill is dependent upon
many factors, including our ability to provide quality, cost-effective services
in the face of competition. Because of these many factors, management believes
this is a critical accounting policy. A decline in earnings as a result of
business or market conditions or a run-off of customers over sustained periods
could lead to an impairment of goodwill that could adversely affect earnings in
future periods.
A significant portion of our intangible assets, including goodwill,
relates to the acquisition premiums recorded with the purchase of the ICA and
certain branches over the last several years. Intangible assets are
8
reviewed periodically for impairment by comparing the fair value of the
intangible asset to the book value of the intangible asset. If the book value is
in excess of the fair value, impairment is indicated and the intangibles must be
written down to their fair value.
In connection with our acquisition in 2003 of ICA, we allocated the excess
of the purchase price paid over the fair value of net assets acquired to
intangible assets, including goodwill. These intangible assets included the ICA
customer list and a third-party contract to which ICA is a party. From the date
of acquisition through April 30, 2005 we amortized the value assigned to the
customer list and contract over a period of 20 years. On May 1, 2005 the former
owner of ICA retired. As a result, the amortization period for these intangible
assets was reduced to a 10 year period beginning May 1, 2005. Effective January
1, 2006, the exclusive third-party contract between ICA and Blue Cross Blue
Shield of Michigan was terminated. Prior to January 1, 2006 the ICA exclusive
agent contract with Blue Cross Blue Shield entitled ICA to an override
commission of 1.9% on all health premiums written through local Chambers of
Commerce in Northeast Michigan. On any health insurance contracts in place as of
December 31, 2005, ICA will continue to receive the 1.9% commission; however,
there will be no new groups added to this program effective January 1, 2006.
Management considered the potential effect this could have on ICA health
insurance commissions in future years and made the decision to reduce the
amortization period of the third-party contract intangible asset to 5 years
effective January 1, 2006.
Goodwill is not amortized. The impairment test of goodwill and identified
intangible assets that have an indefinite useful life, performed as of March 31,
2007 and December 31, 2006 in accordance with SFAS No. 142, did not indicate
that an impairment charge was required. If, through testing, we determine that
there is impairment based, for example, on significant runoff of the customer
list or material changes to the third-party contract, then we may determine to
reduce the recorded value of those intangible assets, which would increase
expense and reduce our earnings.
In connection with branch office acquisitions, we assigned the excess of
the purchase price over the fair value of the assets acquired to a core deposit
intangible. The core deposit intangible is tested periodically for impairment.
Our original estimates for the expected life of the deposits have proven to be
relatively accurate as evidenced by the fact that no impairment has been
recorded. If we determine through testing that a significant portion of the
acquired customers no longer do business with us, then the asset would be deemed
to be impaired thereby requiring a charge to earnings to the extent appropriate
given all of the known factors. We amortize core deposit intangibles over a
period of between 10 and 15 years.
Financial Accounting Standard Number 159 - The Fair Value Option for
Financial Assets and Financial Liabilities. In February 2007, FASB issued FAS
159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS
159 is effective for fiscal years beginning after November 15, 2007. Early
adoption is permitted subject to specific requirements outlined in the new
Statement. Calendar-year companies are able to adopt FAS 159 for their first
quarter 2007 financial statements.
The new Statement allows entities to choose, at specified election dates,
to measure eligible financial assets and liabilities at fair value that are not
otherwise required to be measured at fair value. If a company elects the fair
value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. FAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities.
The Company early adopted FAS 159 and FAS 157 as of January 1, 2007. Upon
adoption of FAS 159, the Company selected the fair value measurement option for
various existing financial assets, including certain "available-for-sale"
securities and putable FHLB advances.
The available-for-sale securities totaled $4.9 million and represented
10.9% of the securities portfolio. The initial fair value measurement of the
securities elected for FAS 159 resulted in a $140,000 pre-tax cumulative-effect
adjustment recorded as a reduction in retained earnings as of January 1, 2007.
Under SFAS
9
159, this one-time charge will not be recognized in current earnings.
As a result of the fair value measurement election for these securities,
the Company recorded gains in first quarter earnings of $7,000. Additionally, we
believe that the adoption of the standard will have a positive impact on our
ability to manage interest rate risk and potentially benefit interest income
during the remainder of 2007 as well as future periods.
The Company also elected the adoption of FAS 159 for $10.0 million in
putable Federal Home Loan Bank advances. The initial fair value measurement of
the advances resulted in a $320,000 pre-tax, charge to retained earnings. In the
first quarter of 2007 the Company recorded $17,000 in pre-tax mark-to-market
losses.
The above investment securities and advances were chosen for the fair
value option based on the desire of the Company to improve its net interest
margin and reduce interest rate risk. Subsequent to the adoption of SFAS 159,
the Company plans on repositioning its balance sheet by obtaining new investment
securities and Federal Home Loan Bank Advances that improve overall interest
rate margin and mitigate future interest rate risk. The Company anticipates that
the replacement of the securities and advances with new instruments will achieve
the reduced interest rate risk since they will be better matched in relation to
maturity. The new investment securities and advances will both be carried at
fair value. The Company anticipates that by the end of the second calendar
quarter approximately $8.0 to 10.0 million of securities and advances will be
carried at fair value on the balance sheet.
The early adoption of SFAS 159 also allows management more flexibility in
mitigating interest rate risk on subsequent transactions. The Company is
considering the use of the fair value option on future investment security
transactions, loan transactions and the related funding instruments.
The Company will continue to separately recognize interest income and
expense in accordance with existing policies for the items selected.
The following table represents all items in which the fair value option
was elected as of January 1, 2007 and the impact on the financial statements.
Impact on
Retained
Earnings Impact on
Effective Net Income
Par Value 1/1/2007 QE 3/31/07
(dollars in thousands) (dollars in thousands)
---------------------- -------------------------
$ 4,856 Investment Securities AFS ($140) $ 7
$10,000 FHLB Advances ($320) ($17)
Total ($460) ($10)
Adjusted for Taxes ($304) ($7)
Financial Accounting Standard Number 157 Fair Value Measurements. In
September 2006, FASB issued FAS 157, Fair Value Measurements. This statement
establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value within that
framework, and
10
expands disclosures about the use of fair value measurements. FAS
157 is effective for fiscal years beginning after November 15, 2007. Upon
adoption of FAS 159, the Company concurrently adopted the provisions of FAS 157
as of January 1, 2007. Accordingly, the Company has developed a framework to
measure the fair value of financial assets and financial liabilities and
expanded disclosures in accordance with the requirements.
The following information pertains to assets and liabilities measured
by fair value on a recurring basis:
Change in fair value Quoted Prices in Significant
recognized in other active markets for Other Significant
Fair Value as of income for the three Indentical Observable Unobservable
January 1, month period ended Fair Value as of Assets/Liabilities Inputs Inputs
Dscription 2007 March 31, 2007 March 31, 2007 (Level 1) (Level 2) (Level 3)
(Dollars in thousands)
----------------------------------------------------------------------------------------------------------
Investments
accounted for
under FVO $ 4,864 $ 7 $ 4,756 $ 4,756
FHLB advances $10,321 ($17) $10,338 $10,338
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 156, Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140. SFAS 156 amends SFAS
Statement No.140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The Statement
addresses the recognition and measurement of separately recognized servicing
assets and liabilities and provides an approach to simplify efforts to obtain
hedge-like (offset) accounting. SFAS 156 was adopted by the Company on January
1, 2007 as required by the statement. The adoption of SFAS 156 did not have a
material effect on the financial position, results of operations, or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in the financial statements
the impact of a tax position if that position is more likely than not to be
sustained on audit based on technical merits of the position. The provisions of
FIN 48 are effective as of the beginning of the Company's 2007 fiscal year, with
the cumulative effect of the change in accounting principle recorded as an
adjustment to operating retained earnings. The adoption of FIN 48 did not have a
material effect on the financial position, results of operations, or cash flows.
NOTE 2--REORGANIZATION.
On April 1, 2005, we consummated the second-step mutual-to-stock
conversion of Alpena Bancshares, M.H.C., in which shares of common stock
representing Alpena Bancshares, M.H.C.'s ownership interest in Alpena
Bancshares, Inc. were sold to investors. As a result of the conversion and stock
offering, Alpena Bancshares, M.H.C. ceased to exist and Alpena Bancshares, Inc.
was succeeded by First Federal of Northern Michigan Bancorp, Inc., a Maryland
corporation and new holding company for First Federal of Northern Michigan.
The plan of conversion and reorganization of Alpena Bancshares, M.H.C. and
the issuance and contribution of cash and common stock to First Federal
Community Foundation, a charitable foundation established by the Company, were
approved by the stockholders of Alpena Bancshares, Inc. and the members of
Alpena Bancshares, M.H.C. on March 23, 2005.
11
First Federal of Northern Michigan Bancorp, Inc. accepted orders to
purchase 1,699,869 shares of common stock at a purchase price of $10.00 per
share. As a part of the conversion, public stockholders of the Company as of the
consummation date received 1.8477 shares of First Federal of Northern Michigan
Bancorp, Inc. common stock in exchange for each of their existing shares of
Company common stock. Cash was issued in lieu of any fractional shares. The
share exchange occurred on April 1, 2005.
NOTE 3--DIVIDENDS.
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions.
On March 13, 2007, the Company declared a cash dividend on its common
stock, payable on or about April 20, 2007, to shareholders of record as of March
31, 2007, equal to $0.05 per share. The dividend on all shares outstanding
totaled $149,820.
NOTE 4--1996 STOCK OPTION PLAN, 1996 RECOGNITION AND RETENTION PLAN AND 2006
STOCK-BASED INCENTIVE PLAN.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123 (Revised) "Shareholder Based Payments", which
requires that the grant-date fair value of awarded stock options be expensed
over the requisite service period. The Company's 1996 Stock Option Plan (the
"1996 Plan"), which was approved by shareholders, permits the grant of share
options to its employees for up to 127,491 shares of common stock (retroactively
adjusted for the exchange ratio applied in the Company's 2005 stock offering and
related second-step conversion). The Company's 2006 Stock-Based Incentive Plan
(the "2006 Plan"), which was approved by the shareholders on May 17, 2006,
permits the award of up to 242,740 shares of common stock of which the maximum
number to be granted as Stock Options is 173,386 and the maximum that can be
granted as Restricted Stock Awards is 69,354. Option awards are granted with an
exercise price equal to the market price of the Company's stock at the date of
grant; those option awards generally vest based on five years of continual
service and have ten year contractual terms. Certain options provide for
accelerated vesting if there is a change in control (as defined in the Plans).
During the three months ended March 31, 2007 the Company awarded no shares
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 Plan during the
three months ended March 31, 2007 is presented below:
Weighted-Average
Weighted- Remaining
Average Contractual Term Aggregate
Options Shares Exercise Price (Years) Intrinsic Value
---------------------------------------- ------- -------------- ---------------- ----------------
Outstanding at January 1, 2007 204,532 $9.50
Granted 0 N/A
Exercised 0 N/A
Forfeited or expired (5,540) $9.53
Outstanding at March 31, 2007 198,992 $9.49 8.98 $ 0
Exercisable at March 31, 2007 13,234 $8.46 7.30 $9,661
12
A summary of the status of the Company's nonvested shares as of March 31,
2007, and changes during the quarter ended March 31, 2007, is presented below:
Weighted-Average
Grant-Date
Nonvested Shares Shares Fair Value
--------------------------------------- ------- ----------------
Nonvested at January 1, 2007 200,099 $2.11
Granted 0 N/A
Vested (8,801) $1.91
Forfeited 0
Nonvested at March 31, 2007 191,298 $2.12
As of March 31, 2007 there was $360,000 of total unrecognized compensation
cost, net of expected forfeitures, related to nonvested options under the Plan.
That cost is expected to be recognized over a weighted-average period of 4.7
years. The total fair value of shares vested during the three months ended March
31, 2007 was $16,810.
RESTRICTED STOCK AWARDS - As of March 31, 2007 there was $498,000 of
unrecognized compensation cost related to nonvested restricted stock awards
under the plan.
NOTE 5 - 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 March 31, 2007, the Company had outstanding commitments to originate
loans of $31.8 million. These commitments included $7.8 million for permanent
one-to-four family dwellings, $6.1 million for non-residential loans, $387,000
of undisbursed loan proceeds for construction of one-to-four family dwellings,
$8.4 million of undisbursed lines of credit on home equity loans, $1.6 million
of unused credit card lines, $7.4 million of unused commercial lines of credit,
$43,000 of undisbursed commercial construction, $60,000 of unused Letters of
Credit and $1.7 million in unused Bounce Protection.
NOTE 6 - SUBSEQUENT EVENTS
On April 19, 2007 the Company completed its stock repurchase plan which
was announced on March 15, 2007. The Company repurchased 151,750 shares at a
total cost of $1.4 million.
NOTE 7 - SEGMENT REPORTING
The Company's principal activities include banking through its wholly
owned subsidiary, First Federal of Northern Michigan, and the sale of insurance
products through its indirect wholly owned subsidiary, ICA, purchased in 2003.
The Bank provides financial products including retail and commercial loans as
well as retail and commercial deposits. ICA receives commissions from the sale
of various insurance products including health, life, and property. The segments
were determined based on the nature of the products provided to customers.
The financial information for each operating segment is reported on the
basis used internally to evaluate performance and allocate resources. The
allocations have been consistently applied for all periods
13
presented. Revenues and expenses between affiliates have been transacted at
rates that unaffiliated parties would pay. The only transaction between the
segments thus far relates 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 are with external customers. The performance
measurement of the operating segments is based on the management structure of
the Company and is not necessarily comparable with similar information for any
other financial institution. The information presented is also not necessarily
indicative of the segment's financial condition and results of operations if
they were independent entities.
For the Three Months Ended
March 31, 2007
(Dollars in Thousands)
-----------------------------------------------
Bank ICA Eliminations Total
--------- -------- ------------ ---------
INTEREST INCOME $ 4,143 $ 6 $ (6) $ 4,143
INTEREST EXPENSE 2,237 3 (6) 2,234
--------- -------- ------------ -----
NET INTEREST INCOME - Before provision for loan losses 1,906 3 - 1,909
PROVISION FOR LOAN LOSSES 86 - - 86
--------- -------- ------------ ---------
NET INTEREST INCOME - After provision for loan losses 1,820 3 - 1,823
OTHER INCOME 284 694 - 978
OPERATING EXPENSES 2,109 681 - 2,790
--------- -------- ------------ ---------
INCOME - Before federal income tax (5) 16 - 12
FEDERAL INCOME TAX (18) 6 - (12)
--------- -------- ------------ ---------
NET INCOME $ 13 $ 10 $ - $ 24
========= ======== ============ =========
DEPRECIATION AND AMORTIZATION $ 191 $ 86 $ - $ 277
========= ======== ============ =========
ASSETS $ 268,006 $ 4,507 $ (645) $ 271,868
========= ======== ============ =========
EXPENDITURES RELATED TO LONG-LIVED ASSETS:
Goodwill $ - $ - $ - $ -
Intangible assets - - - -
Property and equipment 47 16 - 63
--------- -------- ------------ ---------
TOTAL $ 47 $ 16 $ - $ 63
========= ======== ============ =========
For the Three Months Ended
March 31, 2007
(Dollars in Thousands)
-----------------------------------------------
Bank ICA Eliminations Total
--------- -------- ------------ ---------
INTEREST INCOME $ 4,033 $ 4 $ (4) $ 4,033
INTEREST EXPENSE 1,908 5 (4) 1,909
--------- -------- ------------ ---------
NET INTEREST INCOME - Before provision for loan losses 2,125 (1) - 2,124
PROVISION FOR LOAN LOSSES 70 - - 70
--------- -------- ------------ ---------
NET INTEREST INCOME - After provision for loan losses 2,055 (1) - 2,054
OTHER INCOME 356 770 - 1,126
OPERATING EXPENSES 2,239 622 - 2,861
--------- -------- ------------ ---------
INCOME - Before federal income tax 171 147 - 318
FEDERAL INCOME TAX 57 50 - 107
--------- -------- ------------ ---------
NET INCOME $ 114 $ 97 $ - $ 211
========= ======== ============ =========
DEPRECIATION AND AMORTIZATION $ 172 $ 86 $ - $ 258
========= ======== ============ =========
ASSETS $ 283,374 $ 4,460 $ (470) $ 287,364
========= ======== ============ =========
EXPENDITURES RELATED TO LONG-LIVED ASSETS:
Goodwill $ - $ - $ - $ -
Intangible assets - - - -
Property and equipment 292 18 - 310
--------- -------- ------------ ---------
TOTAL $ 292 $ 18 $ - $ 310
========= ======== ============ =========
14
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
AND SUBSIDIARIES
PART E - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
The following discussion compares the consolidated financial condition of the
Company at March 31, 2007 and December 31, 2006, and the results of operations
for the three-month periods ended March 31, 2007 and 2006. This discussion
should be read in conjunction with the interim financial statements and
footnotes included herein.
OVERVIEW
For the quarter ended March 31, 2007, the Company's earnings were $24,000,
or $0.01 per basic and diluted share, compared to earnings of $212,000, or $0.07
per basic and diluted share, for the year earlier period, a decrease of
$188,000.
Total assets decreased by $9.1 million, or 3.2% from December 31, 2006 to
March 31, 2007. Investment securities available for sale decreased by $8.9
million from December 31, 2006 to March 31, 2007, while investment securities
held for trading increased by $4.8 million over the same time period. Net loans
receivable decreased $4.7 million during the quarter ended March 31, 2007. Total
Deposits decreased $3.9 million, or 2.2% from December 31, 2006 to March 31,
2007. Federal Home Loan Bank advances decreased by $15.4 million from December
31, 2006 to March 31, 2007, which included a reclassification of $10.3 million
to a trading account as part of our early adoption of FAS 159. Equity decreased
by $572,000, or 1.6% from December 31, 2006 to March 31, 2007.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31 2007 AND DECEMBER 31, 2006
ASSETS: Total assets decreased $9.1 million, or 3.2%, to $271.9 million at March
31, 2007 from $280.9 million at December 31, 2006. Investment securities
available for sale decreased $8.9 million, or 20.6% and investment securities
held in a trading account increased $4.7 million, from December 31, 2006 to
March 31, 2007, due to the maturity of $4.0 million in AFS investment securities
during the three months ended March 31, 2007, the proceeds of which were used to
pay-down high-cost FHLB advances, and due to the reclassification of $4.7
million in AFS securities to trading securities in connection with our early
adoption of FAS 159 effective January 1, 2007. Net loans receivable decreased
$4.7 million, or 2.2%, to $204.9 million at March 31, 2007 from $209.5 million
at December 31, 2006. The decrease in net loans was attributable primarily to
the payoff of a few large commercial loans.
LIABILITIES: Deposits decreased $3.9 million, or 2.2%, to $173.1 million at
March 31, 2007 from $177.1 million at December 31, 2006. The decrease was
primarily in certificate of deposit balances, reflecting continued competition
for deposits and increased pressure on market deposit rates. Total FHLB advances
decreased $5.2 million to $59.7 million from December 31, 2006 to March 31, 2007
due to the maturity of investment securities, the proceeds of which were used to
pay down advances. At January 1, 2007 we reclassified $10.3 million in FHLB
advances to a trading account in connection with our early adoption of FAS 159.
15
EQUITY: Stockholders' equity decreased by $572,000, or 1.6%, to $34.9 million at
March 31, 2007 from $35.5 million at December 31, 2006. Net earnings for the
quarter of $24,000 were more than offset by a dividend declaration of $150,000,
a loss in value of securities available for sale of $140,000, and a $461,000
charge to retained earnings related to the early adoption of FAS 159. In
addition, during the quarter the Company repurchased 38,600 shares of its common
stock at an aggregate cost of $358,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
GENERAL: Net income decreased by $188,000 to $24,000 for the three months ended
March 31, 2007 from $212,000 for the same period ended March 31, 2006. The major
factors affecting earnings during the quarter were a decrease of $215,000 in net
interest income and a decrease in non interest income of $148,000, partially
offset by a decrease of $71,000 in non interest expense from the quarter ended
March 31, 2006 to the quarter ended March 31, 2007.
INTEREST INCOME: Interest income was $4.1 million for the three months ended
March 31, 2007, compared to $4.0 million for the comparable period in 2006.
While the average balance of interest earning assets decreased by $5.3 million
from $265.1 million for the three months ended March 31, 2006 to $259.8 million
for the three months ended March 31, 2007, the yield on interest earning assets
increased over that same time period from 6.13% to 6.43%. This was primarily
attributable to the non-mortgage loan portfolio which grew $13.3 million in
average balance from March 31, 2006 to March 31, 2007, while the yield grew from
7.53% to 7.56% over that same time period, reflecting our continued emphasis on
commercial lending. In addition, while the average balance of mortgage loans
decreased by $2.8 million from March 31, 2006 to March 31, 2007, the yield on
that portfolio increased from 6.02% to 6.15%.
INTEREST EXPENSE: Interest expense was $2.2 million for the three month period
ended March 31, 2007, compared to $1.9 million for the same period in 2006. The
increase in interest expense was mainly attributable to an increase in the
average balance of FHLB borrowings of $6.6 million for the quarter ended March
31, 2007 as compared to the quarter ended March 31, 2006, and an increase in the
cost of those borrowings of 38 basis points from the quarter ended March 31,
2006 to the quarter ended March 31, 2007 due to market interest rate increases.
In addition, the cost of certificates of deposit increased 81 basis points from
the quarter ended March 31, 2006 to the same period in 2007; however the average
balance of those deposits decreased by $10.5 million from March 31, 2006 to
March 31, 2007.
NET INTEREST INCOME: Net interest income decreased to $1.8 million for the three
month period ended March 31, 2007 compared to $2.2 million for the same period
in 2006. For the three months ended March 31, 2007, average interest-earning
assets decreased $5.3 million, or 2.0%, when compared to the same period in
2006. Average interest-bearing liabilities decreased $4.5 million, or 2.0%, to
$229.6 million for the quarter ended March 31, 2007 from $234.1 million for the
quarter ended March 31, 2006. The yield on average interest-earning assets
increased to 6.43% for the three month period ended March 31, 2007 from 6.13%
for the same period ended in 2006 while the cost of average interest-bearing
liabilities increased to 3.93% from 3.28% for the three month periods ended
March 31, 2007 and 2006, respectively. The net interest margin decreased to
2.96% for the three month period ended March 31, 2007 from 3.23% for same period
in 2006.
16
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.
MARCH 31, DECEMBER 31,
2007 2006
------------- ----------
(Dollars in thousands)
Total non-accrual loans............................. $ 3,180 $ 2,490
------------ ---------
Accrual loans delinquent 90 days or more:
One- to four-family residential.................... 134 645
Other real estate loans............................ 205 221
Consumer/Commercial................................ 90 624
------------ ---------
Total accrual loans delinquent 90 days or more... $ 429 $ 1,490
------------ ---------
Total nonperforming loans (1)....................... 3,609 3,980
Total real estate owned-residential mortgages (2)... 510 437
Total real estate owned-Consumer and other (2)...... 12 38
============ =========
Total nonperforming assets.......................... $ 4,131 $ 4,455
============ =========
Total nonperforming loans to loans receivable....... 1.74% 1.90%
Total nonperforming assets to total assets.......... 1.52% 1.59%
(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 allowance for loan losses is established through
a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available. The
provision for loan losses amounted to $86,000 for the three month period ended
March 31, 2007 and $69,000 for the comparable period in 2006. The ratio of
nonperforming loans to total loans was 174 and 190 basis points at March 31,
2007 and December 31, 2006, respectively As a percent of total assets,
nonperforming loans decreased to 152 basis points at March 31, 2007 from 159
basis points at December 31, 2006. Total nonperforming assets decreased only
slightly by $160,000 from December 31, 2006 to March 31, 2007.
NON INTEREST INCOME: Non interest income was $978,000 for the three month period
ended March 31, 2007, a decrease of $148,000 or 13.1%, from the same period in
2006. The primary reasons for the decrease was a decrease of $76,000 in
Insurance & Brokerage Commission due mainly to a loss in insurance contingency
income quarter over quarter and the loss of a large commercial insurance
customer. In addition, we experienced a $40,000 decrease in Service Charges and
Other Fees, which was due mainly to a decrease in customer usage of our Bounce
protection program and ATM network, and also a reduction in loan late fees
17
related to a change in how we record those fees as income.
NON INTEREST EXPENSE: Non interest expense was $2.8 million for the three month
period ended March 31, 2007, a $71,000 or 2.5% decrease from the same period in
2006. The decrease was primarily due to a decrease of $27,000 in Insurance and
Brokerage commission expense which was a direct result of the decrease in non
interest income related to insurance and brokerage activities. We also
experienced a $10,000 decrease in Service Bureau Charges related to change in
our core processing system vendor in late 2006. The $39,000 decrease in Other
Expenses consisted largely of a decrease in expenses associated with our
repossessed assets.
INCOME TAXES: The Company had a federal income tax benefit of $12,000 for the
three months ended March 31, 2007 due to tax-exempt interest income in excess of
pre-tax income, compared to federal income tax expense of $107,000 for the same
period in 2006.
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 March 31, 2007 was $50.3 million, or 31.5% compared to $52.2
million, or 29.5% at December 31, 2006. 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
the FHLB stock owned by the Bank along with pledged collateral. As of March 31,
2007, the Bank had unused borrowing capacity totaling $24.0 million at the FHLB
based on the FHLB stock ownership.
The Company intends to retain for 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 three month period
ended March 31, 2007 the Company originated $6.2 million in residential mortgage
loans, of which $3.2 million were retained in portfolio while the remainder were
sold in the secondary market or are being held for sale. This compares to $8.2
million in originations during the first three months of 2006 of which $5.7
million were retained in portfolio. The Company also originated $5.1 million of
commercial loans and $2.6 million of consumer loans in the first three months of
2007 compared to $4.6 million of commercial loans and $3.7 million of consumer
loans for the same period in 2006. Of total loans receivable, excluding loans
held for sale, mortgage loans comprised 49.8% and 48.4%, commercial loans 36.1%
and 37.6% and consumer loans 14.1% and 14.0% at March 31, 2007 and March 31,
2006, respectively.
Deposits are a primary source of ;funds for use in lending and for other general
business purposes. At March 31, 2007 deposits funded 63.7% of the Company's
total assets compared to 63.0% at December 31, 2006. Certificates of deposit
scheduled to mature in less than one year at March 31, 2007 totaled $85.3
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
18
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
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 March 31, 2007 the Company had $59.7 million in
FHLB advances. FHLB borrowings as a percentage of total assets were 22.0% at
March 31, 2007 as compared to 15.3% at December 31, 2006. The Company has
sufficient available collateral to obtain additional advances of $15.3 million.
When this is combined with current FHLB stock ownership the Company could obtain
up to an additional $24.0 million in advances from the FHLB.
CAPITAL RESOURCES
Stockholders' equity at March 31, 2007 was $34.7 million, or 12.8% of total
assets, compared to $35.5 million, or 12.6% of total assets, at December 31,
2006 (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 exceeded all regulatory capital requirements at March 31,
2007. 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 March 31, 2007:
Regulatory Minimum to be
Actual Minimum Well Capitalized
------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- -------- ------- ------
Dollars in Thousands
Tangible Capital ( to
tangible assets) $28,053 10.47% $ 4,019 1.50% $ 5,359 2.00%
Tier 1 (Core) capital ( to risk -
weighted assets) $28,053 15.19% $ 7,387 4.00% $11,080 5.00%
Total risk-based capital ( to risk-
weighted assets) $30,219 16.36% $14,774 8.00% $18,467 10.00%
Tier 1 risk-based capital ( to
tangible assets) $28,053 10.47% $10,718 4.00% $13,398 6.00%
19
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2007
PART E - FINANCIAL INFORMATION
ITEM 3 - 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.
20
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2007
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 2 - Unregistered Sales of Equity Securities and Use of Proceeds:
(a) Not applicable
(b) Not applicable
(c) On March 15, 2007 the Company announced a share
repurchase program authorizing the repurchase of up to
151,750 shares of the Company's outstanding common
stock. All repurchases under the Company's share
repurchase program were transacted in the open market
and were within the scope of Rule 10b-18, which provides
a safe harbor for purchases in a given day if an issuer
of equity securities satisfies the manner, timing, price
and volume conditions of the rule when repurchasing its
own common shares in the open market. The following
table summarizes the Company's share repurchase activity
for the three months ended March 31, 2007.
Total Number of
Shares Purchased as Maximum Number of
Total Number of Part of Publicly Shares that May Yet Be
Shares Average Price Paid Announced Plans or Purchased Under the
Period Purchased per Share Programs Plans or Programs
--------------------- ------------------------ ------------------------- ------------------------ ---------------------------
1/1/2007 to 1/31/2007 -- -- -- --
2/1/2007 to 2/28/2007 -- -- -- --
3/1/2007 to 3/31/2007 38,600 9.29 38,600 113,150
Total 38,600 9.29 38,600 113,150
Item 3 - Defaults upon Senior Securities:
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders:
Not applicable
Item 5 - Other Information:
Not applicable
Item 6 - Exhibits
Exhibit 31.1 Certification by Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification by 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
21
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2007
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/ Martin A. Thomson
----------------------------
Martin A. Thomson
Date: May 15, 2007
By: /s/ Amy E. Essex
------------------------------
Amy E. Essex, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 15, 2007
22