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FFNM > SEC Filings for FFNM > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC.

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


14-Aug-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 June 30, 2013 and December 31, 2012, and the results of operations for the three- and six-month periods ended June 30, 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 centers. The deposited funds, together with funds generated from operations and borrowings, are used by the Company to originate loans. The Company's principal lending activity is the origination of mortgage loans for the purchase or refinancing of one-to-four family residential properties. The Company also originates commercial and multi-family real estate loans, construction loans, commercial loans, automobile loans, home equity loans and lines of credit, and a variety of other consumer loans.

For the quarter ended June 30, 2013, the Company reported a net loss of $4,000, or less than $0.01 per basic and diluted share, compared to a net loss of $270,000, or $0.09 per basic and diluted share, for the year prior, an increase of $266,000. Net income was $64,000, or $0.02 per basic and diluted share, for the six months ended June 30, 2013 as compared to $331,000, or $0.11 per share, for the same period ended June 30, 2012.

Total assets increased by $953,000, or 0.5%, from $213.8 million as of December 31, 2012 to $214.8 million as of June 30, 2013. Cash and cash equivalents increased by $3.6 million and investment securities available for sale decreased by $2.4 million while net loans receivable increased $348,000 during this time period. In addition, during the three months ended June 30, 2013 the Company received $509,000 as a return of our unused FDIC insurance premiums as a result of the expiration of the prepaid assessment period which began in 2009. Total deposits increased $3.0 million from December 31, 2012 to June 30, 2013, Federal Home Loan Bank advances decreased by $2.2 million, while REPO sweep accounts increased by $390,000, and equity decreased by $494,000.

CRITICAL ACCOUNTING POLICIES

As of June 30, 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, real estate owned, mortgage servicing rights, valuation of deferred tax assets and impairment of intangible assets.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2013 AND DECEMBER 31, 2012

ASSETS: Total assets increased $953,000, or 0.5%, to $214.8 million at June 30, 2013 from $213.8 million at December 31, 2012. Investment securities available for sale decreased $2.4 million, or 4.7%, as a result of a decline in market value in our portfolio of $845,000 from December 31, 2012 to June 30, 2013. Net loans receivable increased $348,000, or 0.3%, to $139.3 million at June 30, 2013 from $138.9 million at December 31, 2012. The increase in net loans was attributable primarily to increased commercial loan production for the six-month period ended June 30, 2013.

LIABILITIES: Deposits increased by $3.0 million to $161.3 million at June 30, 2013 from $158.4 million at December 31, 2012. However, the composition of our deposits changed during the six-month period. We experienced increases of $2.5 million in statement savings accounts, $1.6 million in money market accounts and $1.5 million in NOW demand deposit accounts during the six-month period. Partially offsetting these increases were decreases of $683,000 in non-interest bearing demand deposit accounts, $511,000 in our traditional certificates of deposit and $1.6 million in our liquid certificates of deposit (from which customers can take a penalty-free withdrawal with seven days advance written notice) as, in general, we were not the market leader in rates on these product during this time period. Total FHLB advances decreased $2.2 million to $24.1 million at June 30, 2013 from $26.4 million at December 31, 2012.

EQUITY: Stockholders' equity decreased by $494,000 to $23.9 million at June 30, 2013 from $24.4 million at December 31, 2012. The decrease was due primarily to a decrease of $558,000, net of tax in the unrealized gain on available-for-sale securities, partially offset by net income for the six-month period of $64,000.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

General: Net income increased by $266,000 to a loss of $4,000 for the three months ended June 30, 2013 from a loss of $270,000 for the same period ended June 30, 2012.

Interest Income: Interest income decreased to $2.1 million for the three months ended June 30, 2013 from $2.4 million for the year earlier period, due mainly to a decrease of 39 basis points in the average yield on interest-earning assets period over period. The yield on our mortgage loans declined to 5.26% for the three months ended June 30, 2013 from 5.54% for same period in 2012. In addition, the yield on non-mortgage loans decreased to 5.23% for the three months ended June 30, 2013 when compared to 5.65% for the three-month period ended June 30, 2012. These declines are a result of continued low interest rates on loan products period over period.

Interest Expense: Interest expense decreased to $285,000 for the three months ended June 30, 2013 from $427,000 for the three months ended June 30, 2012. The decrease in interest expense for the three month period was due primarily to a decrease in our cost of funds related to certificates of deposit and FHLB advances. The average cost of our certificates of deposit decreased from 1.27% for the three months ended June 30, 2012 to 1.02% for the three months ended June 30, 2013 as higher costing deposits matured and either left the Bank as we were not a market leader in rates or were re-priced at a lower rate. In addition, the cost of our FHLB advances decreased 67 basis points from 1.90% for the three months ended June 30, 2012 to 1.23% for the three months ended June 30, 2013 due to decreases in market interest rates.

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

                                         Quarter ended June 30, 2013
                                                 Compared to
                                         Quarter ended June 30, 2012
                                         Increase (Decrease) Due to:
                                      Volume           Rate        Total
                                                (in thousands)
Interest-earning assets:
Loans receivable                     $     (64 )     $    (121 )   $ (185 )
Investment securities                      (13 )           (72 )   $  (85 )
Other investments                           11               2     $   13

Total interest-earning assets              (66 )          (191 )     (257 )

Interest-bearing liabilities:
Money Market/NOW accounts                    2              (1 )        1
Certificates of Deposit                    (14 )           (42 )      (56 )

Deposits                                   (12 )           (43 )      (55 )
Borrowed funds                            (119 )            31        (88 )

Total interest-bearing liabilities        (131 )           (12 )     (143 )

Change in net interest income        $      65       $    (179 )   $ (114 )

Net Interest Income: Net interest income decreased to $1.8 million for the three-month period ended June 30, 2013 from $1.9 million for the same period in 2012. For the three months ended June 30, 2013, average interest-earning assets decreased $5.8 million, or 2.9% when compared to the same period in 2012. Average interest-bearing liabilities decreased $7.7 million, or 4.4%, to $167.0 million for the quarter ended June 30, 2013 from $174.7 million for the quarter ended June 30, 2012. The yield on average interest-earning assets decreased to 4.28% for the three-month period ended June 30, 2013 from 4.68% for the same period ended in 2012 and the cost of average interest-bearing liabilities decreased to 0.69% from 0.98% for the three-month periods ended June 30, 2013 and 2012, respectively. The net interest margin decreased to 3.70% for the three-month period ended June 30, 2013 from 3.82% for same period in 2012.

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

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

The provision for loan losses for the three-month period ended June 30, 2013 was $196,000 as compared to $578,000 for the prior year period. 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. In 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 June 30, 2013, we charged off $193,000 in mortgage loans as compared to $386,000 during the quarter ended June 30, 2012 due in large part to continued declines in residential real estate values in our markets. The direct effect of the decrease in charge-offs quarter over quarter combined with the impact the increased charge-offs had on the general reserve factor applied to the entire pool of mortgage loans for the quarter ended June 30, 2012, was a main cause of the decrease in provision period over period. 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.

Non Interest Income: Non interest income increased $74,000 to $465,000 for the three months ended June 30, 2013 from $391,000 for the three months ended June 30, 2012. In 2013 we experienced a decrease in mortgage banking activities, resulting in a $52,000 decrease in income period over period. The decrease in mortgage banking activities income was offset by a decrease in losses on sale of real estate owned and other repossessed assets of $62,000, an increase of $35,000 in service charge income and $29,000 increase in other income, related to bank owned life insurance income for the three months ended June 30, 2013 as compared to the prior-year.

Non Interest Expense: Non interest expense decreased $60,000 to $2.1 million for the three months ended June 30, 2013 when compared the three months ended June 30, 2012. Salaries and benefits decreased $42,000 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 period over period. In addition, our advertising expenses decreased $21,000, occupancy declined $19,000, amortization of intangible assets decreased by $14,000 period over period as core deposits intangible for certain branches were fully amortized during the three month period ended June 30, 2012, and we experienced a decrease of $41,000 in other expenses related to trouble credits and real estate owned expenses period over period. Partially offsetting these positive factors period over period, professional service expense increased $74,000 as we begin to recognize expenses related to a future upgrade of our core banking software during the three months ended June 30, 2013.

Income Taxes: The Company recorded no federal income tax benefit for the three months ended June 30, 2013 and June 30, 2012.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

General:Net income decreased by $267,000 to $64,000 for the six months ended June 30, 2013 from $331,000 for the same period ended June 30, 2012.

Interest Income: Interest income decreased by $581,000 to $4.2 million for the six-month period ended June 30, 2013 from $4.8 million for the same period in 2012. This decrease was primarily attributed to a decline in the average balance of interest earning assets of $5.2 million to $196.1 million for the six-month period ended June 30, 2013 from $201.3 million for the six-month period ended June 30, 2012. In addition, we experienced a decrease in the yield on our interest earning assets of 46 basis points period over period due mainly to lower market interest rates period over period.

Interest Expense: Interest expense for the six months ended June 30, 2013 decreased to $606,000 from $891,000 for the six months ended June 30, 2012. The decrease in interest expense for the 2013 period was due primarily to a decrease in the cost of our certificates of deposit and FHLB advances. The cost of our certificates of deposit decreased 24 basis points from 1.30% for the six months ended June 30, 2012 to 1.06% for the six months ended June 30, 2013, as higher costing deposits matured and either left the Bank or were re-priced at lower rates. In addition, the cost of our FHLB advances decreased 62 basis points from 1.98% for the six months ended June 30, 2012 to 1.36% for the six months ended June 30, 2013 due primarily to lower market interest rates period over period.

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

                                         Six Months ended June 30, 2013
                                                   Compared to
                                         Six Months ended June 30, 2012
                                           Increase (Decrease) Due to:
                                       Volume            Rate         Total
                                                 (in thousands)
Interest-earning assets:
Loans receivable                     $      (77 )     $     (331 )    $ (408 )
Investment securities                       (39 )           (144 )      (183 )
Other investments                             9                1          10
Total interest-earning assets              (107 )           (474 )      (581 )

Interest-bearing liabilities:
Savings Deposits                              1                -           1
Money Market/NOW accounts                     3               (1 )         2
Certificates of Deposit                     (30 )            (87 )      (117 )
Deposits                                    (26 )            (88 )      (114 )
Borrowed funds                             (218 )             46        (172 )
Total interest-bearing liabilities         (244 )            (42 )      (286 )

Change in net interest income        $      137       $     (432 )    $ (295 )

Net Interest Income: Net interest income decreased by $295,000 for the six-month period ended June 30, 2013 compared to the same period in 2012. For the six months ended June 30, 2013, average interest-earning assets decreased $5.2 million, or 2.6%, when compared to the same period in 2012. Average interest-bearing liabilities decreased $8.4 million, or 4.8%, to $167.6 million for the six-month period ended June 30, 2013 from $176.1 million for the six-month period ended June 30, 2012. The yield on average interest-earning assets decreased to 4.28% for the six month period ended June 30, 2013 from 4.74% for the same period in 2012 while the cost of average interest-bearing liabilities decreased to 0.73% from 1.02% for the six-month periods ended June 30, 2013 and 2012, respectively. The net interest margin decreased to 3.66% for the six-month period ended June 30, 2013 from 3.86% for same period in 2012.

Delinquent Loans and Nonperforming Assets. Nonperforming assets decreased by $811,000 from December 31, 2012 to June 30, 2013 due in large part to returning $257,000 of mortgage and consumer loans to accruing status and sales of $407,000 in real estate owned properties during the six-month period ended June 30, 2013.

The ratio of nonperforming loans to total loans was 3.13% and 3.50% at June 30, 2013 and December 31, 2012, respectively. As a percent of total assets, nonperforming assets decreased to 2.97% at June 30, 2013 from 3.42% at December 31, 2012. The Company experienced a decline in the classified asset ratio from 54.19% as of December 31, 2012 to 37.23% as of June 30, 2013; the decline is attributed to securing a guarantee from the Small Business Administration (SBA) for a classified credit, which resulted in an improved collateral position for the Company and a decrease in the classified balance of the credit. In addition, the Company experience upgrades to other substandard credit relationships based on improved financial performance of the borrowers.

                                                                   June 30,       December 31,
                                                                     2013             2012
                                                                         (in thousands)
Total non-accrual loans                                           $     4,405     $       4,863

Accrual loans delinquent 90 days or more:
One- to four-family residential                                             -                61
Other real estate loans                                                     -                 -
Construction                                                                -                 -
Purchased Out-of-State                                                      -                 -
Commerical                                                                  -                 -
Consumer & other                                                            4                 6
Total accrual loans delinquent 90 days or more                    $         4     $          67

Total nonperforming loans (1)                                           4,409             4,930
Total real estate owned-residential mortgages (2)                         584               957
Total real estate owned-Commercial (2)                                    489               309
Total real estate owned-Consumer & other repossessed assets (2)         1,024             1,121
Total nonperforming assets                                        $     6,506     $       7,317

Total nonperforming loans to loans receivable                           3.13%             3.50%
Total nonperforming assets to total assets                              3.03%             3.42%

(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: For the six-month period ended June 30, 2013, the provision for loan losses was $340,000 as compared to $955,000 for the same period ended June 30, 2012. As discussed above in the discussion for the three-month period ended June 30, 2012, our provision for loan losses is based on a twelve-quarter rolling average of actual net charge-offs adjusted for various environmental factors for each pool of loans in our portfolio. During the six-month period ended June 30, 2013, we added specific reserves of approximately $280,000 on a commercial credit which was reclassified as Troubled Debt Restructuring, maintained the increased general reserve factor applied to the entire portfolio of residential mortgages as a result of increased charge-off history in 2012, and decreased our general reserve pool for special mention and substandard commercial credits by approximately $109,000 based on declining classified loan balances during the six-month period ended June 30, 2013. 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
                                                                   (in thousands)
At June 30, 2013
Real estate loans:
Construction                                      $     1,993     $            -     $         173
One - to four - family                                 63,232                  -             1,597
Commercial Mortgages                                   53,457                  -             2,627
Home equity lines of credit/ Junior liens               9,371                  -                 8
Commercial loans                                       12,052                  -                 -
Consumer loans                                          1,152                  4                 -

Total gross loans                                 $   141,257     $            4     $       4,405
Less:
Net deferred loan fees                                   (306 )                -                (5 )
Allowance for loan losses                              (1,691 )                -                 -
Total loans, net                                  $   139,260     $            4     $       4,400

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 increased from $837,000 for the six months ended June 30, 2012 to $905,000 for the six months ended June 30, 2013, mainly due to a decrease on loss on sale of real estate owned and other repossessed assets of $71,000, an increases of $57,000 in service charge income and $42,000 in other income related to bank owned life insurance income for the six months ended June 30, 2013. These positives are partially offset by a decrease in mortgage banking activities income of $103,000 period over period.

Non Interest Expense.Non interest expense decreased from $4.4 million for the six months ended June 30, 2012 to $4.1 million for the six months ended June 30, 2013. The decrease was primarily due to decreases of $155,000 in salaries and benefit expenses, 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. In addition, the Company reduced other expenses by $165,000 through decreases in expenses related to trouble credits and real estate owned expenses period over period. These decreases were partially offset by an increase in professional service expenses of $52,000, as we begin to recognize expenses associated with a future upgrade of our core banking software during the six months ended June 30, 2013.

Income Taxes: A valuation allowance is provided against deferred tax assets (DTA) when it is more likely than not that some or all of the deferred tax asset will not be realized. At June 30, 2013 the Company did not record any income tax benefit compared to an income tax benefit of $1,022,000 for the six months ended June 30, 2012. The variance of $1,022,000 relates to a partial recovery of $866,000, during the first quarter of 2012, of a valuation allowance for our 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 June 30, 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 . . .

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