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FFNM > SEC Filings for FFNM > Form 10-Q on 14-Nov-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-Nov-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 September 30, 2013 and December 31, 2012, and the results of operations for the three- and nine-month periods ended September 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 September 30, 2013, the Company reported net income of $182,000, or $0.06 per basic and diluted share, compared to $272,000, or $0.09 per basic and diluted share, for the quarter ended September 30, 2012, a decrease of $90,000. For the nine months ended September 30, 2013 net income was $247,000, or $0.09 per basic and diluted share as compared to $604,000, or $0.21 per share, for the same period ended September 30, 2012.

Total assets increased $41,000, or 0.02%, to $213.9 million as of September 30, 2013 from $213.8 million as of December 31, 2012. Investment securities available-for-sale decreased $483,000, or 1.0%, from December 31, 2012 to September 30, 2013. Cash and cash equivalents increased by $785,000, while net loans receivable decreased $907,000 during this time period. In addition, during the nine months ended September 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 decreased $296,000 from December 31, 2012 to September 30, 2013, Federal Home Loan Bank advances decreased $1.3 million, while REPO sweep accounts increased $2.4 million and equity declined $585,000.

CRITICAL ACCOUNTING POLICIES

As of September 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 SEPTEMBER 30, 2013 AND DECEMBER 31, 2012

Assets: Total assets increased $41,000, or 0.02%, to $213.9 million at September 30, 2013 from $213.8 million at December 31, 2012. During the nine-moth period the following changes occurred: investment securities available for sale decreased $483,000, or 1.0%, as a result of a decline of $1.3 million in market value in our portfolio and net loans receivable decreased $907,000, or 0.07%, to $138.0 million at September 30, 2013 from $138.9 million at December 31, 2012. Mortgage loans decreased $2.3 million despite our continued efforts to grow this portfolio by retaining certain high-quality 10- and 15- year fixed rate residential mortgages as opposed to selling them. In addition, our consumer loan portfolio, consisting mainly of home equity loans, decreased by $1.3 million and our commercial loans increased $2.7 million for the nine months ended September 30, 2013.

Liabilities: Deposits decreased $296,000 to $158.1 million at September 30, 2013 from $158.4 million at December 31, 2012. The composition of our deposits changed during the nine-month period ended September 30, 2013. We experienced increases of $2.4 million in statement savings accounts, $583,000 in money market accounts, $721,000 in NOW demand deposit accounts and $744,000 in non-interest bearing demand deposit accounts. Partially offsetting these increases were decreases of $3.6 million in our traditional certificates of deposit and $2.2 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. FHLB advances decreased $1.3 million to $25.0 million at September 30, 2013 from $26.4 million at December 31, 2012. During this same time period, REPO sweep balances increased $2.4 million.

Equity: Stockholders' equity decreased $585,000 to $23.8 million at September 30, 2013 from $24.4 million at December 31, 2012. The decrease was due primarily to a decrease of $832,000, net of tax, in the unrealized gain on available-for-sale securities, partially offset by net income for the nine-month period of $247,000.

RESULTS OF OPERATIONS

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

General: Net income decreased $90,000 to $182,000 for the three months ended September 30, 2013 from $272,000 for the same period ended September 30, 2012.

Interest Income: Interest income was $2.1 million for the three months ended September 30, 2013, compared to $2.3 million for the comparable period in 2012. The decrease in interest income was due to a decrease in the average balance of our interest-earning assets resulting from a decrease in the size of our loan portfolio and a decrease in the yield on interest-earning assets. The average balance of mortgage loans decreased $2.8 million quarter over quarter, as we continued to experience a decline in loan originations despite our continued efforts to retain certain high quality 10- and 15-year mortgages in our loan portfolio. The average balance of non-mortgage loans increased $443,000 period over period. The decline in the loan portfolio was partially offset by an increase in cash and cash equivalents of $785,000 for the three months ended September 30, 2013 when compared to the same period in 2012. As a result of the decline in our loan portfolios, the average yield on our interest-earning assets declined 44 basis points from 4.59% for the three-month period ended September 30, 2012 to 4.15% for the same period in 2013.

Interest Expense: Interest expense was $275,000 for the three-month period ended September 30, 2013, compared to $394,000 for the same period in 2012. The decrease in interest expense for the three-month period was due in part to a $4.0 million decrease in the average balance of our interest-bearing liabilities and a decrease in our overall cost of funds of 26 basis points period over period. Most notably, the average balance of our FHLB advances decreased $6.0 million from the three-month period ended September 30, 2013 when compared to the same period in 2012 and the cost of those borrowings decreased 70 basis points from 1.93% to 1.23%, period over period. In addition, the average balance of our certificate of deposits decreased $5.0 million from the three-month period ended September 30, 2012 as compared to the same period in 2013 and the cost of these deposits decreased 19 basis points period over period. The decrease in certificate of deposit accounts were partially offset by increases of $2.9 million in money market and NOW demand deposit accounts and $3.3 million in savings deposit accounts quarter over quarter.

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

                                               Quarter ended September 30, 2013
                                                          Compared to
                                               Quarter ended September 30, 2012
                                                  Increase (Decrease) Due to:
                                            Volume            Rate            Total
                                                    (dollars in thousands)
      Interest-earning assets:
      Loans receivable                     $     (36 )     $      (173 )     $  (209 )
      Investment securities                        -               (37 )     $   (37 )
      Other investments                           (6 )               5       $    (1 )
      Total interest-earning assets              (42 )            (205 )        (247 )

      Interest-bearing liabilities:
      Savings Deposits                             1                 -             1
      Money Market/NOW accounts                    1                (1 )           -
      Certificates of Deposit                    (17 )             (32 )         (49 )
      Deposits                                   (15 )             (33 )         (48 )
      Borrowed funds                             (44 )             (27 )         (71 )
      Total interest-bearing liabilities         (59 )             (60 )        (119 )

      Change in net interest income        $      17       $      (145 )     $  (128 )

Net Interest Income: Net interest income decreased $128,000 to $1.8 million for the three-month period ended September 30, 2013 as compared to the same period in 2012. For the three months ended September 30, 2013, average interest-earning assets decreased $2.6 million, or 1.3%, to $198.3 million when compared to the same period in 2012. Average interest-bearing liabilities decreased $4.0 million, or 2.3%, to $166.8 million for the quarter ended September 30, 2013 from $170.8 million for the quarter ended September 30, 2012 as we experienced a shift from interest bearing to non-interest bearing deposits during the period. The yield on average interest-earning assets decreased to 4.15% for the three month period ended September 30, 2013 from 4.59% for the same period ended in 2012. The cost of average interest-bearing liabilities decreased to 0.65% from 0.91% for the three-month periods ended September 30, 2013 and September 30, 2012, respectively. The net interest margin decreased 21 basis points to 3.60% for the three-month period ended September 30, 2013 from 3.81% 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 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 September 30, 2013 was $32,000 as compared to $234,000 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 September 30, 2013, we charged off $29,000 in mortgage loans as compared to $166,000 during the quarter ended September 30, 2012. In addition, we recorded no commercial loan charges offs during the three months ended September 30, 2013 in comparison to $138,000 recorded for the three months ended September 30, 2012. The direct effect of the decrease in charge-offs quarter over quarter resulted in a decline in the general reserve factor applied to the entire pool of mortgage and commercial loans for the quarter ended September 30, 2013, which in turn was a main cause of the decrease in provision period over period. In addition, recoveries on charged off mortgage and commercial loans increased $74,000 and $46,000, respectively, for the three-month period ended September 30, 2013 when compared to the same period in 2012. 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 decreased to $459,000 for the three months ended September 30, 2013 from $803,000 for the three months ended September 30, 2012, related primarily to a decrease of $286,000 in mortgage banking activities income period over period as mortgage origination activity declined in the nine-months ended September 30, 2013. Additionally, gain on sale of investments decreased $47,000 period over period as we sold municipal bonds for credit reasons during the quarter ended September 30, 2012. Lastly, other income decreased $45,000 for the three months ended September 30, 2013 compared to the same period in 2012, mainly as the result of a $65,000 settlement of a lawsuit related to a troubled credit that was received during the three months ended September 30, 2012.

Non-Interest Expense: Non-interest expense was $2.0 million for the three-months ended September 30, 2013 as compared to $2.1 million for the same period in 2012. Compensation and employee benefit expense decreased $65,000 period over period as we reduced staffing, suspended our accrual of the elective contribution to our 401(k) plan and reduced health insurance premiums as a result of self insuring deductibles for employee insurance coverage period over period. This decrease is partially offset by an increase of $30,000 in other expenses associated with problem loans and bank-owned properties period over period.

Income Taxes: The Company recorded no federal income tax benefit for the three months ended September 30, 2013 compared to tax expense of $137,000 for the three months ended September 30, 2012.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

General: Net income decreased $357,000 to $247,000 for the nine months ended September 30, 2013 from $604,000 for the same period ended September 30, 2012. This decrease is attributed to a decrease in federal income tax benefit relating to the reversal of a partial recovery of our deferred tax asset valuation allowance that was established in 2009.

Interest Income: Interest income was $6.2 million for the nine months ended September 30, 2013, compared to $7.1 million for the comparable period in 2012. This decrease of $828,000, or 11.7%, in interest income was due in large part to a decrease of 45 basis points in the yield on interest earning assets to 4.25% for the nine-month period ended September 30, 2013 as compared to 4.70% for the same period in 2012. The decrease in yield was a result of a $1.6 million decrease in average balances of mortgage loans and a decrease of $2.0 million in average balance of available-for-sale securities period over period.

Interest Expense: Interest expense was $881,000 for the nine-month period ended September 30, 2013 compared to $1.3 million for the same period in 2012. The decrease in interest expense was due primarily to a period over period increase of $7.5 million in the average balance of core deposits, which serve as a low cost funding source for the Company. In addition, we experienced an $8.0 million decrease in the average balance of FHLB advances for the nine months ended September 30, 2013 when compared to the same period in 2012 with the average rate on those borrowings decreasing 65 basis points to 1.32% for the nine-month period ended September 30, 2013 as compared to the year-earlier period. Lastly, the cost of funds relating to our certificate of deposits decreased 23 basis points to 1.03% nine-month period over nine-month period.

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

                                             Nine Months ended September 30, 2013
                                                          Compared to
                                             Nine Months ended September 30, 2012
                                                  Increase (Decrease) Due to:
                                          Volume             Rate              Total
                                                    (dollars in thousands)
   Interest-earning assets:
   Loans receivable                     $      (112 )     $      (506 )     $      (618 )
   Investment securities                        (36 )            (184 )            (220 )
   Other investments                              4                 6                10
   Total interest-earning assets               (144 )            (684 )            (828 )

   Interest-bearing liabilities:
   Savings Deposits                               1                 -                 1
   Money Market/NOW accounts                      5                (2 )               3
   Certificates of Deposit                      (47 )            (119 )            (166 )
   Deposits                                     (41 )            (121 )            (162 )
   Borrowed funds                              (229 )             (14 )            (243 )
   Total interest-bearing liabilities          (270 )            (135 )            (405 )

   Change in net interest income        $       126       $      (549 )     $      (423 )

Net Interest Income: Net interest income decreased by $423,000 to $5.4 million for the nine-month period ended September 30, 2013 compared to the same period in 2012. For the nine months ended September 30, 2013, average interest-earning assets decreased $4.3 million, or 2.2%, and average interest-bearing liabilities decreased $6.9 million, or 4.0%, when compared to the same period in 2012. The yield on average interest-earning assets decreased to 4.25% for the nine months ended September 30, 2013 from 4.70% for the same period ended in 2012. The average cost of interest-bearing liabilities decreased to 0.71% from 0.98% for the nine month periods ended September 30, 2013 and September 30, 2012, respectively. The net interest margin decreased 20 basis points to 3.64% for the nine-month period ended September 30, 2013, from 3.84% for the same period in 2012.

Delinquent Loans and Nonperforming Assets:Nonperforming assets decreased by $1.6 million from December 31, 2012 to September 30, 2013 due primarily to sales of real estate owned properties during the nine months ended September 30, 2013.

Provision for Loan Losses:The provision for loan losses was $372,000 for the nine-month period ended September 30, 2013 as compared to $1.2 million for the comparable period in 2012. As discussed above in the discussion for the three-month period ended September 30, 2013, 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 nine-month period ended September 30, 2013, we added specific reserves of approximately $190,000 on a commercial credit relationship, that is classified as Troubled Debt Restructuring, and had net charge-offs of approximately $287,000 on mortgage loans. Additionally we reduced the general reserve factor applied to the entire portfolio of residential mortgages and commercial loans as a result of decreased charge-off history in 2013, and increased our general reserve pool for special mention and substandard commercial credits based on the inherent increased risk in those credits. 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 our delinquent and non-accrual loans at the dates indicated:

                                                     September 30,      December 31,
                                                         2013               2012
                                                         (dollars in thousands)
Total non-accrual loans                             $         3,402     $       4,863

Accrual loans delinquent 90 days or more:
One- to four-family residential                                  85                61
Other real estate loans                                           -                 -
Construction                                                      -                 -
Purchased Out-of-State                                            -                 -
Commerical                                                        -                 -
Consumer & other                                                  -                 6
Total accrual loans delinquent 90 days or more      $            85     $          67

Total nonperforming loans (1)                                 3,487             4,930
Total real estate owned-residential mortgages (2)               279               947
Total real estate owned-Commercial (2)                          939               319
Total other repossessed assets (2)                            1,023             1,121
Total nonperforming assets                          $         5,728     $       7,317

Total nonperforming loans to loans receivable                  2.49 %            3.50 %
Total nonperforming assets to total assets                     2.68 %            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.

                                                                  Delinquent
                                                Portfolio            Loans           Non-Accrual
                                                 Balance         Over 90 Days           Loans
                                                                 (in thousands)
At September 30, 2013
Real estate loans:
Construction                                   $      1,598     $             -     $         173
One - to four - family                               62,819                  85             1,071
Commercial Mortgages                                 52,849                   -             2,151
Home equity lines of credit/ Junior liens             9,286                   -                 7
Commercial loans                                     12,429                   -                 -
Consumer loans                                        1,117                   -                 -

Total gross loans                              $    140,098     $            85     $       3,402
Less:
Net deferred loan fees                                 (300 )                (1 )              (6 )
Allowance for loan losses                            (1,793 )                 -              (400 )
Total loans, net                               $    138,005     $            84     $       2,996

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 $1.4 million for the nine-month period ended September 30, 2013, a decrease of $276,000, or 16.9%, from the same period in 2012. The nine-month results in 2013 reflect a decrease of $388,000 in mortgage banking activities due to reduced refinance activity as compared to the prior year period, and a decline of $47,000 in gain on sale of investments as a result of the sale of municipal bond due to credit concerns during the nine months ended September 30, 2012. These decreases were partially offset by an increase of $92,000 in service charges and other fee income mostly related to non-sufficient funds fees and ATM access fees and a $70,000 reduction in loss on sale of Bank owned real estate when comparing the nine-month periods ended September 30, 2013 and September 30, 2012.

Non-Interest Expense: Non-interest expense decreased to $6.1 million for the nine months ended September 30, 2013 from $6.5 million for the nine months ended September 30, 2012. For the nine-months ended September 30, 2013 we reduced other expenses by $135,000 mainly related to lower costs associated with problem loans and bank-owned properties. Period over period we also experienced decreases in occupancy costs of $30,000 due mainly to decreases in depreciation expense and equipment maintenance, amortization of intangible assets of $58,000 and salaries and benefits of $219,000 as we have 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. These decreases were partially offset by an increase in professional services expense of $46,000 as we incurred expenses related to the upgrade of our core banking software during the nine months ended September 30, 2013.

Income Taxes: At September 30, 2013 the Company did not record any income tax expense or benefit compared to an income tax benefit of $885,000 for the nine months ended September 30, 2012. The variance of $885,000 relates to a partial recovery of $866,000, during the first quarter of 2012, of a valuation allowance for our deferred tax asset (DTA) that was established in 2009. The valuation allowance was recorded 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 . . .

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