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FFNM > SEC Filings for FFNM > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.


10-May-2013

Quarterly Report


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 March 31, 2013 and December 31, 2012, and the results of operations for the three-month periods ended March 31, 2013 and 2012. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

OVERVIEW

The Company operates as a community-oriented financial institution that accepts deposits from the general public in the communities surrounding its 8 full-service banking offices. 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 March 31, 2013, the Company had net income of $68,000, or $0.02 per basic and diluted share, compared to $601,000, or $0.21 per basic and diluted share, for the year earlier period, a decrease of $533,000. The 2012 quarter was impacted by an $866,000 credit to the valuation allowance on its deferred tax asset to income tax expense. See page 27 for further discussion on income taxes.

Total assets decreased by $975,000, or 0.5%, from $213.8 million as of December 31, 2012 to $212.9 million as of March 31, 2013. Cash and cash equivalents decreased by $770,000 while investment securities available for sale increased by $1.1 million and net loans receivable decreased $1.3 million during the quarter. Total deposits decreased $172,000 from December 31, 2012 to March 31, 2013 while Federal Home Loan Bank advances decreased by $1.5 million and stockholders' equity decreased by $32,000.

CRITICAL ACCOUNTING POLICIES

As of March 31, 2013, 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, 2012. The Company's critical accounting policies are described in the Management's Discussion and Analysis and financial sections of its 2012 Annual Report. Management believes its critical accounting policies relate to the Company's allowance for loan losses, mortgage servicing rights, valuation of deferred tax assets and impairment of intangible assets.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2013 AND DECEMBER 31, 2012

ASSETS: Total assets decreased $975,000, or 0.5%, to $212.9 million at March 31, 2013 from $213.8 million at December 31, 2012. Net loans receivable decreased $1.3 million, or 1.0%, to $137.6 million at March 31, 2013 from $138.9 million at December 31, 2012, resulting primarily from a decrease of $699,000 and $527,000 in our consumer and commercial loan portfolios, respectfully. Our residential mortgage portfolio remained relatively unchanged period over period. Investment securities AFS increased $1.1 million from $50.8 million at December 31, 2012 to $51.9 million at March 31, 2013, due primarily to purchases of mortgage-backed securities during the period. Cash and cash equivalents decreased $772,000, or 28.3% to $2.0 million at March 31, 2013 from $2.7 million at December 31, 2012.

LIABILITIES:Deposits decreased $172,000 to $158.2 million at March 31, 2013 from $158.4 million at December 31, 2012. During this time period, we experienced an increase of $934,000 in our savings, money market and checking accounts, which was more than offset by a decrease of $1.2 million in our certificates of deposit. FHLB advances decreased $1.5 million, or 5.7% to $24.9 million at March 31, 2013 from $26.4 million at December 31, 2012, as proceeds from loan payments and payoffs, as well as cash on hand, were used to pay off maturing advances.

EQUITY: Stockholders' equity decreased slightly and was $24.4 million at March 31, 2013 and December 31, 2012. The decrease was due primarily to net earnings for the three-month period of $68,000 partially offset by a decrease of $100,000 in the unrealized gain on available-for-sale investment securities

RESULTS OF OPERATIONS

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

General:Net income decreased by $533,000 to $68,000 for the three months ended March 31, 2013 from $601,000 for the quarter ended March 31, 2012.

Interest Income: Interest income decreased to $2.1 million for the three months ended March 31, 2013 from $2.4 million for the comparable period in 2012 as the average balance of interest earning assets decreased by $4.6 million from $200.9 million for the three months ended March 31, 2012 to $196.3 million for the three months ended March 31, 2013 and the average yield on interest earning assets decreased 52 basis points over that same time period from 4.80% to 4.28%. The yield on our mortgage loan portfolio decreased by 59 basis points to 5.14% for the three month period ended March 31, 2013 from 5.73% the year-earlier period, while the average balance of that portfolio remained relatively unchanged at $66.7 million period over period. The average balance of our non-mortgage loan portfolio decreased $887,000 to $74.0 million for the three months ended March 31, 2013 from the 2012 quarter, while the yield on this portfolio decreased 56 basis points to 5.25% from 5.81% period over period. The average balance of our investment portfolio decreased $4.2 million from the three months ended March 31, 2012 to the same period in 2013 while the yield on our investments decreased by 57 basis points period over period as agency securities matured and mortgage backed securities were paid off and replaced with securities with lower yields due to market interest rates.

Interest Expense:Interest expense decreased to $321,000 for the three months ended March 31, 2013 from $464,000 for the three months ended March 31, 2012. The decrease was due in part to a $9.1 million decrease in the average balance of our interest-bearing liabilities and a decrease in our overall cost of funds of 27 basis points from 1.05% to 0.78% period over period. Most notably, the average balance of our Federal Home Loan Bank advances decreased $8.2 million for the three-month period ended March 31, 2013 from the same period in 2012. The cost of these advances decreased 59 basis points from 2.06% to 1.47% period over period. In addition, our average balance in certificates of deposit decreased $4.5 million with the cost of these deposits decreasing 24 basis points from 1.33% to 1.09% for the quarter ended March 31, 2012 and March 31, 2013, respectively. For the three month period ended March 31, 2013 the average balance of REPO sweep deposits decreased by $2.0 million when compared to the same period in 2012. These decreases were partially offset by average balance increases of $3.0 million in our money market and NOW accounts and $2.6 million in our savings deposits when comparing the three months ended March 31, 2013 to the same period in 2012.

The following table sets forth information regarding the changes in interest income and interest expense of the Bank during the periods indicated.

                                          Three Months Ended March 31, 2013
                                                     Compared to
                                          Three Months Ended March 31, 2012
                                             Increase (Decrease) Due to:
                                       Volume            Rate            Total
                                                    (In thousands)
Interest-earning assets:
Loans receivable                     $      (14 )     $     (210 )     $     (224 )
Investment securities                       (24 )            (74 )     $      (98 )
Other investments                             2               (4 )     $       (2 )

Total interest-earning assets               (36 )           (288 )           (324 )

Interest-bearing liabilities:
Savings Deposits                              -                -                -
Money Market/NOW accounts                     1                -                1
Certificates of Deposit                     (15 )            (45 )            (60 )
Deposits                                    (14 )            (45 )            (59 )
Borrowed funds                              (91 )              7              (84 )

Total interest-bearing liabilities         (105 )            (38 )           (143 )

Change in net interest income        $       69       $     (250 )     $     (181 )

Net Interest Income:Net interest income decreased by $181,000, to $1.8 million for the three months ended March 31, 2013 from $1.9 million for the prior year period. For the three months ended March 31, 2013, average interest-earning assets decreased $4.6 million, or 2.3%, to $196.3 million when compared to the same period in 2012. Average interest-bearing liabilities decreased $9.1 million, or 5.1%, to $168.3 million for the quarter ended March 31, 2013 from $177.4 million for the quarter ended March 31, 2012. While the average balance of interest-bearing deposits decreased significantly the Company saw an increase of $5.9 million of average balances in non interest-bearing deposits for the quarter ended of March 31, 2013 compared to the year earlier period in 2012. The yield on average interest-earning assets decreased to 4.28% for the three month period ended March 31, 2013 from 4.80% for the same period ended in 2012 as we continued to see a decline in loan rates period over period. In addition, the cost of average interest-bearing liabilities decreased to 0.78% from 1.05% for the three month periods ended March 31, 2013 and 2012, respectively. Our interest rate spread decreased by 25 basis points to 3.50% from 3.75% while our net interest margin decreased by 26 basis points to 3.61% for the three-month period ended March 31, 2013 from 3.87% for same period in 2012. In an effort to offset declining levels of net interest income, the Company continues to pursue loan opportunities in our market area with qualified borrowers in addition to seeking continued growth of low cost core deposits. At March 31, 2013 the Company had outstanding loan commitments of $20.3 million. During the three months ended March 31, 2013 the Company grew average interest bearing core deposits by $3.0 million.

Provision for Loan Losses:The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The provision for loan losses for the three-month period ended March 31, 2013 was $144,000, as compared to $376,000 for the three months ended March 31, 2012. Prior to 2012, our provision for loan losses was based on an eight-quarter rolling average of actual net charge-offs adjusted for environmental factors for each segment of loans in our portfolio. Management has decided that eight quarters is no longer reflective of the inherent loss in the loan portfolios. Beginning with the quarter ended March 31, 2012, we began moving towards a twelve-quarter rolling average of actual net charge-offs by adding an additional quarter of net charge-offs each quarter in 2012. By the end of 2012 we were using a twelve-quarter rolling average. During the quarter ended March 31, 2012, we added specific reserves of approximately $200,000 on two commercial credit relationships which were reclassified as Troubled Debt Restructurings. In addition, we recorded specific reserves of approximately $200,000 on several residential mortgage loans which had progressed in the foreclosure process during the quarter. By comparison, the first quarter of 2013 had fewer loans requiring specific reserves along with lower levels of charge-offs. The provision was based on management's review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors.

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 March 31, 2013
Real estate loans:
Construction                                      $     4,042     $           -     $         173
One - to four - family                                 64,940                97             1,831
Commercial Mortgages                                   50,156                 -             2,506
Home equity lines of credit/ Junior liens               9,813                 -                 -
Commercial loans                                        9,473                 -                 -
Consumer loans                                          1,156                 6                 9

Total gross loans                                 $   139,580     $         103     $       4,519
Less:
Net deferred loan fees                                   (321 )              (2 )              (6 )
Allowance for loan losses                              (1,675 )               -              (246 )
Total loans, net                                  $   137,584     $         101     $       4,267

At December 31, 2012
Real estate loans:
Construction                                      $     3,208     $           -     $         173
One - to four - family                                 65,578                61             1,810
Commercial Mortgages                                   52,427                 -             2,851
Home equity lines of credit/Junior liens               10,409                 -                28
Commercial loans                                        8,102                 -                 -
Consumer loans                                          1,258                 6                 1

Total gross loans                                 $   140,982     $          67     $       4,863
Less:
Net deferred loan fees                                   (320 )               -                (5 )
Allowance for loan losses                              (1,750 )               -              (346 )
Total loans, net                                  $   138,912     $          67     $       4,512

Non Interest Income: Non-interest income was relatively unchanged for the quarters ended March 31, 2013 and 2012. Mortgage banking activities were $50,000 lower for the three months ended March 31, 2013 when compared to the same period a year earlier. This decrease was partially offset by increases of $22,000 in service charge fee income and $19,000 of income related to bank owned life insurance that was purchased during the fourth quarter of 2012.

Non Interest Expense:Non interest expense decreased by $308,000 from $2.3 million for the three months ended March 31, 2012 to $2.0 million for the 2013 period. Most notably, other expenses decreased by $125,000 period over period as we experienced an $111,000 decrease in real estate owned expenses related to troubled credits. In addition, compensation and employee benefits decreased $113,000 period over period as we reduced staffing, suspended our accrual of the elective contribution to the Company's 401(k) plan and reduced health insurance premiums as a result of self insuring deductibles for employee insurance coverage.

Income Taxes: For the quarter ended March 31, 2013, the Company recorded no tax expense. By comparison, during the quarter ended March 31, 2012, the Company recorded an income tax benefit of $886,000. The variance of $886,000 relates to the partial recovery, during the 2012 quarter, of a valuation allowance for our Deferred Tax Asset (DTA) that was established in 2009. The valuation allowance was recorded in 2009 against the DTA because management determined that it was more likely than not that some or all of the DTA would not be realized. At March 31, 2012, management reevaluated the Company's valuation allowance related to its DTA. The analysis of the DTA was made to determine the utilization of those tax benefits based upon projected future taxable income. Based upon management's determination and in accordance with the generally accepted accounting principles, management concluded that the utilization of this asset was "more likely than not." Accordingly, as of March 31, 2012, $866,000 of the valuation allowance was credited to income tax expense. Among the criteria that management considered in evaluating the DTA were: improved core profitability of the Bank in 2010 and 2011; substantial improvement in 2010 and 2011 of non-performing asset levels, which were driving losses in prior years; and positive forecast for taxable income looking forward over the next three years. However, during the fourth quarter of 2012 the $866,000 was reversed as a result of management's reevaluation of the DTA and determination that it was more likely than not that some or all of the DTA would not be realized during the period. Management's decision to reverse the DTA recovery in the fourth quarter of 2012 was influenced by several factors including a higher than anticipated provision expense recorded throughout the year, lower than expected commercial loan demand and lastly placing two large commercial loans into non-accrual status during the fourth quarter. A valuation allowance of $3.2 million remains on our current DTA as of March 31, 2013.

The Company will continue to evaluate the future benefits from these carryforwards and at such time as it becomes "more likely than not" that they would be utilized prior to expiration, the Company will recognize the additional benefits as an adjustment to the valuation allowance. The net operating loss carryforwards expire twenty years from the date they originated. These carryforwards, if not utilized, will fully expire in the year 2032.

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 OCC regulations. This requirement may be varied at the direction of the OCC. Regulations currently in effect require that the Bank 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, 2013 was $55.8 million, or 46.5%, compared to $52.5 million, or 42.5%, at December 31, 2012. The levels of these assets are dependent on the Company's operating, financing, lending and investing activities during any given period. The liquidity calculated by the Company includes additional borrowing capacity available with the FHLB. This borrowing capacity is based on pledged collateral. As of March 31, 2013, the Bank had unused borrowing capacity totaling $35.3 million at the FHLB 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 three month period ended March 31, 2013, the Company originated $6.9 million in residential mortgage loans, of which $2.5 million were retained in portfolio while the remainder were sold in the secondary market or are being held for sale. This compares to $11.7 million in originations during the first three months of 2012 of which $4.0 million were retained in portfolio. The Company also originated $6.2 million of commercial loans and $253,000 of consumer loans in the first three months of 2013 compared to $3.0 million of commercial loans and $179,000 of consumer loans for the same period in 2012. Of total loans receivable, excluding loans held for sale, mortgage loans comprised 47.6% and 47.3%, commercial loans 44.6% and 42.9% and consumer loans 7.9% and 9.8% at March 31, 2013 and March 31, 2012, respectively.

Deposits are a primary source of ;funds for use in lending and for other general business purposes. At March 31, 2013 deposits funded 74.3% of the Company's total assets compared to 69.9% at December 31, 2012. Certificates of deposit scheduled to mature in less than one year at March 31, 2013 totaled $35.5 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. Future liquidity needs are expected to be satisfied through the use of FHLB borrowings, as necessary, and through growth in deposits. Management does not generally plan on paying above-market rates on deposit products, although from time-to-time we may do so 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 March 31, 2013 the Company had $24.9 million in FHLB advances, of which $7.1 million will mature during 2013. FHLB borrowings as a percentage of total assets were 11.7% at March 31, 2013 as compared to 12.3% at December 31, 2012. The Company has sufficient available collateral to obtain additional advances of $35.3 million.

CAPITAL RESOURCES

Stockholders' equity at March 31, 2013 was $24.4 million, or 11.5% of total assets, compared to $24.4 million, or 11.4% of total assets, at December 31, 2012 (See "Consolidated Statement of Changes in Stockholders' Equity"). The Bank is subject to certain capital-to-assets levels in accordance with OCC regulations. The Bank exceeded all regulatory capital requirements at March 31, 2013. 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, 2013:

                                                             Regulatory               Minimum to be
                                     Actual                    Minimum               Well Capitalized
                               Amount       Ratio        Amount       Ratio        Amount        Ratio
                                                         Dollars in Thousands

Tier 1 (Core) capital ( to
adjusted assets)              $ 22,218        10.47 %   $  8,486         4.00 %   $  10,608         5.00 %
Total risk-based capital (
to risk- weighted assets)     $ 23,893        17.66 %   $ 10,824         8.00 %   $  13,530        10.00 %
Tier 1 risk-based capital (
to risk weighted assets)      $ 22,218        16.42 %   $  5,412         4.00 %   $   8,118         6.00 %
Tangible Capital ( to
tangible assets)              $ 22,218        10.47 %   $  3,182         1.50 %   $   4,243         2.00 %

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