EXBIT 13
2011 ANNUAL REPORT TO STOCKHOLDERS
Dear Fellow Shareholder,
Finally a shareholder letter I did not dread having to write! In my first three years as the Chief Executive Officer, I approached this exercise with heartburn. It was nice to finally sit down and put pen to paper and talk about our accomplishments and results without a bottle of TUMS on my desk! As the year began, we had expectations of further improvement in our financial performance compared to the recent past. We managed to navigate our way through a myriad of factors in 2011 including:
| Ø | lingering high levels of domestic unemployment with state and regional unemployment rates higher than the National average |
| Ø | further declines in real estate values in all of our markets |
| Ø | a slowdown in mortgage refinance activity |
| Ø | increasing delinquency trends among homeowners |
| Ø | interest rates at historic lows |
In spite of this backdrop for our operating environment, I am happy to report a significant improvement in our earnings year over year. The story of 2011 is a continuation of the 2010 story. There was steady improvement in many key operating and financial metrics. The results for 2011 were in line with our expectations in terms of earnings and our operating goals. We continued to work on jettisoning our non-performing assets knowing the impact that it would have on our future earnings profile.
2011 Highlights:
| Ø | Income increased to $742,000 from $238,000. An improvement of $504,000 or 212%. |
| Ø | NIM finished the year at 4.02% (all time high) versus 3.78% in 2010. |
| Ø | Texas ratio declined to 28.28% as of December 31, 2011. One year earlier it was 39.66% and two years ago it stood at 64.29%. |
| Ø | Non-Performing Assets decreased from $9.4 million to $6.7 million year over year. This $2.7 million reduction represents a 28.7% decline. |
| Ø | Provision expense declined to $284,000 compared to $1.1 million in 2010; a reduction of $817,000. The 74% decline related to lower net charge offs, improved delinquency trends among commercial borrowers and improving asset quality metrics. |
We believe that the core profitability of the balance sheet has never been stronger. While we recognized the benefit of a lower provision expense in 2011, we still endured significant collection related costs related to foreclosure and collection actions. Additionally the costs to the Bank associated with Bank Owned Property (REO) were onerous once again in 2011. At year end we sold off our largest 2 pieces of REO which will provide the Bank significant future savings in terms of the taxes, insurance and maintenance expenses associated with those two parcels. Not having to insure or pay taxes on these properties will save us approximately $100,000 in 2012.
Looking Ahead:
Rather than spending a lot of time looking in our rear view mirror, the balance of this letter is devoted to looking forward serving to identify our goals and priorities for the year. The compass theme on the cover of this annual report was chosen because of the symbolism between a compass and direction. We felt this theme was appropriate given the fact that we are changing direction. After a period of “hunkering down” and focusing on the problems, we have now set our sights on a new horizon……controlled and measured growth.
The Board and Senior Management held a strategic planning session in late summer. The goal was to prioritize our goals and set the course for a new direction in 2012 and beyond. Late in 2011 we began to take the steps necessary to pursue the following priorities:
| Ø | Grow the Balance Sheet – Margins will be under pressure as we look ahead. The Federal Reserve Board has indicated that they expect to see managed rates remain low into 2014. This is not an absolute certainty, however it is a clear indication of the Federal Reserve’s bias toward maintaining low rates given the anemic housing market and the stubbornly high national unemployment rate. Given this economic backdrop, we expect to see asset yields fall thereby putting downward pressure on our net interest margin in 2012, 2013 and beyond. There is little room to cut deposit rates to offset these declines in asset yields. The only viable way to grow top line revenue is to grow the balance sheet. We have never been in a better position to pursue market share growth. We have the processes and the tools in place to manage this growth in a prudent and conservative manner. Since the start of 2008, the new commercial loans underwritten by the Bank have performed well which speaks to the efficacy of the changes to underwriting and loan approval processes that were implemented in late 2007. There is a grassroots movement underway encouraging depositors and borrowers (retail and commercial) to do business with community banks. We intend on fully leveraging this momentum to gather market share from the regional banks with whom we compete. We believe we can make gains here. |
| Ø | Increase the Level of Core Deposits – Further adding to our core deposit base is key to helping us manage the compression on our margins looking forward. With growth plans and expectations for 2012 and beyond, it is important that we fund these loans with a higher percentage of core deposits. In 2011 we grew core deposits by $4.5 million. Since 2009, the Bank has grown core deposits by $15.5 million while shrinking the size of the Bank at the same time. The core deposit growth helped drive the improvement in the Banks NIM to 4.02% for 2011. In an effort to grow core deposits further, in 2012 we have realigned responsibility and added a new slate of products to facilitate greater market penetration in both the commercial and municipal areas. Once again the “go local” campaign will help in this focus area. |
| Ø | Continue to Clean Up the Balance Sheet – We saw continued improvement in 2011 with the Texas Ratio falling to 28.28% at year end. The mean Texas Ratio for Michigan banks is 40.95% as of December 31, 2011. Our work and dedicated focus on this area helps explain our dramatic improvement over the last two years. We know this is key to helping the Bank return to the profitability levels expected by our shareholders. We have set a target of 10% for this ratio. While setting the target at zero sounds good, in practice it is not viable given the economic challenges and headwinds we will face over the next two to three years. |
| Ø | Restore the Dividend– Maintaining high levels of capital has always been important to our board. The decision to suspend the dividend at the end of 2008 was prudent. Back then we did not realize how bad the economy was going to get and the impact it was going to have on our borrowers. The losses we sustained in 2008 and 2009 were greater than we anticipated. The capital helped sustain us through those tough years. The reestablishment of the dividend has been conditioned upon the following: Consistent quarterly earnings with trends toward improvement, a reduction in quarterly net charge offs and finally a clearer picture of what the regulators expect by way of capital requirements. We have made progress in the first two of these areas. We have made money in seven of the last eight quarters and saw large declines in commercial charge offs. The regulators are considering elevating capital requirements however we presently sit at levels that exceed those being discussed to maintain a “well capitalized” status. |
Final Thoughts:
There is still much to be done here before the board and management are satisfied with our performance. The change in direction is essential to our mission of restoring the value lost during the Great Recession. We were all very disappointed with our trading price at year end. In comparison to our publicly traded Michigan peer banks, we view the discount to tangible book value as unwarranted given the improvement to our asset quality metrics and the underlying improvements to our core profitability. We do not feel that the market price currently reflects the value of our company. The strategic initiatives for 2012 should allow us to focus on our core business of banking and heighten our performance which we hope will translate to a higher stock price. The recovery of value will not happen overnight though. There are extraordinarily complex forces that will play a role in shaping our operating environment thereby impacting the timing for our recovery of the value lost. While we believe in the long term that market forces will return to a more normalized state, in the interim there are questions. The viability of the Greek bailout plan and the impact it will have on the Euro Zone economy, the Arab Spring and Middle East unrest, the United States debt ceiling, a balanced federal budget, government reforms, the housing malaise and the unemployment situation will all play a part in the macro economic picture. The quicker these issues are resolved, the quicker we can expect our own recovery to be complete. In the meantime, we will take advantage of the “go local” movement and work hard to leverage our role as a community bank to grow market share as we set our new course for growth and prosperity.
Michael W. Mahler
President and Chief Executive Officer
Selected Consolidated Financial and Other Data of the Company
Set forth below are selected financial and other data of First Federal of Northern Michigan Bancorp, Inc. (the “Company”). This information is derived in part from and should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto presented elsewhere in this Annual Report. The information at December 31, 2011 and December 31, 2010 and for the years ended December 31, 2011 and 2010 is derived in part from the audited consolidated financial statements of the Company that appear in this Annual Report. The information for the years ended December 31, 2009, 2008, and 2007 is derived in part from audited consolidated financial statements that do not appear in this Annual Report.
Financial condition data: | | For Years Ended December 31, | |
| | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | (In thousands) | | | | | | | |
Total assets | | $ | 217,045 | | | $ | 215,733 | | | $ | 233,506 | | | $ | 247,672 | | | $ | 250,831 | |
Loans receivable, net | | | 140,884 | | | | 157,144 | | | | 171,219 | | | | 192,270 | | | | 201,333 | |
Loans held for sale | | | - | | | | - | | | | 52 | | | | 107 | | | | - | |
Investment securities | | | 55,484 | | | | 37,821 | | | | 37,641 | | | | 29,687 | | | | 23,451 | |
Cash and cash equivalents | | | 2,749 | | | | 1,963 | | | | 3,099 | | | | 3,471 | | | | 5,341 | |
Deposits | | | 150,649 | | | | 155,466 | | | | 158,100 | | | | 165,778 | | | | 157,833 | |
FHLB advances and note payable | | | 34,500 | | | | 29,000 | | | | 45,031 | | | | 40,969 | | | | 52,684 | |
Repo Sweep agreements | | | 5,592 | | | | 6,172 | | | | 5,408 | | | | 9,447 | | | | 6,637 | |
Stockholders' equity | | | 24,568 | | | | 23,236 | | | | 23,052 | | | | 29,419 | | | | 32,503 | |
Operating data: | | At December 31, | |
| | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | (In thousands) | | | | | | | |
Interest income | | $ | 10,390 | | | $ | 11,447 | | | $ | 12,442 | | | $ | 13,967 | | | $ | 16,200 | |
Interest expense | | | 2,262 | | | | 3,447 | | | | 5,088 | | | | 7,130 | | | | 8,437 | |
| | | | | | | | | | | | | | | | | | | | |
Net interest income | | | 8,128 | | | | 8,000 | | | | 7,354 | | | | 6,837 | | | | 7,763 | |
Provision for loan losses | | | 284 | | | | 1,101 | | | | 6,196 | | | | 4,421 | | | | 2,377 | |
| | | | | | | | | | | | | | | | | | | | |
Net interest income after provision for loan losses | | | 7,844 | | | | 6,899 | | | | 1,158 | | | | 2,416 | | | | 5,386 | |
Other income (loss): | | | | | | | | | | | | | | | | | | | | |
Service charges and fees | | | 730 | | | | 804 | | | | 869 | | | | 942 | | | | 911 | |
Mortgage banking activities | | | 969 | | | | 1,438 | | | | 1,414 | | | | 432 | | | | 418 | |
Net gain (loss) on sale of investment securities | | | - | | | | 546 | | | | - | | | | 6 | | | | (97 | ) |
Gain (loss) on sale of real estate | | | (51 | ) | | | (43 | ) | | | 20 | | | | 22 | | | | (40 | ) |
Other non-interest income | | | 126 | | | | 301 | | | | 102 | | | | 95 | | | | 64 | |
Insurance & brokerage commissions | | | 158 | | | | 159 | | | | 170 | | | | 180 | | | | 180 | |
| | | | | | | | | | | | | | | | | | | | |
Total other income | | | 1,932 | | | | 3,205 | | | | 2,575 | | | | 1,677 | | | | 1,436 | |
Other expenses | | | 9,034 | | | | 9,866 | | | | 9,360 | | | | 8,874 | | | | 9,313 | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income tax expense (benefit) | | | 742 | | | | 238 | | | | (5,627 | ) | | | (4,781 | ) | | | (2,491 | ) |
Income tax expense (benefit) from continuing operations | | | - | | | | - | | | | 1,090 | | | | (1,601 | ) | | | (908 | ) |
Net income (loss) from continuing operations | | | 742 | | | | 238 | | | | (6,717 | ) | | | (3,180 | ) | | | (1,583 | ) |
Loss from discontinued operations, net of tax benefit | | | - | | | | - | | | | (46 | ) | | | (61 | ) | | | (17 | ) |
Net income (loss) | | $ | 742 | | | $ | 238 | | | $ | (6,763 | ) | | $ | (3,241 | ) | | $ | (1,600 | ) |
Key Financial Ratios and Other Data: | | | |
| | For Years Ended December 31, | |
| | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
Performance Ratios: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | 0.34 | % | | | 0.10 | % | | | -2.80 | % | | | -1.30 | % | | | -0.60 | % |
Return on average equity | | | 3.07 | % | | | 0.99 | % | | | -23.21 | % | | | -10.05 | % | | | -4.84 | % |
Average interest rate spread | | | 3.88 | % | | | 3.60 | % | | | 2.97 | % | | | 2.51 | % | | | 2.68 | % |
Dividend payout ratio | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | N/M | | | | N/M | |
Dividends per share | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.15 | | | $ | 0.20 | |
Net interest margin | | | 4.02 | % | | | 3.78 | % | | | 3.26 | % | | | 2.93 | % | | | 3.13 | % |
Efficiency ratio (Bank) | | | 90.06 | % | | | 102.76 | % | | | 252.19 | % | | | 104.54 | % | | | 101.18 | % |
Texas ratio (Bank) | | | 28.28 | % | | | 39.66 | % | | | 64.29 | % | | | 45.22 | % | | | 33.22 | % |
Non-interest expense to average total assets | | | 4.14 | % | | | 4.33 | % | | | 3.88 | % | | | 3.56 | % | | | 4.45 | % |
Average interest-earning assets to average | | | | | | | | | | | | | | | | | | | | |
interest-bearing liabilities | | | 112.59 | % | | | 111.20 | % | | | 113.32 | % | | | 113.85 | % | | | 113.65 | % |
| | | | | | | | | | | | | | | | | | | | |
Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Non-performing assets to total assets | | | 3.11 | % | | | 4.37 | % | | | 6.58 | % | | | 5.57 | % | | | 4.15 | % |
Non-performing loans to total loans | | | 2.34 | % | | | 4.13 | % | | | 6.73 | % | | | 6.14 | % | | | 4.54 | % |
Allowance for loan losses to nonperforming loans | | | 45.47 | % | | | 42.85 | % | | | 31.05 | % | | | 46.41 | % | | | 43.93 | % |
Allowance for loan losses to total loans | | | 1.07 | % | | | 1.77 | % | | | 2.09 | % | | | 2.85 | % | | | 1.95 | % |
| | | | | | | | | | | | | | | | | | | | |
Capital Ratios: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Equity to total assets at end of period | | | 11.32 | % | | | 10.77 | % | | | 9.87 | % | | | 11.88 | % | | | 12.96 | % |
Average equity to average assets | | | 11.06 | % | | | 10.47 | % | | | 12.07 | % | | | 12.44 | % | | | 12.38 | % |
Risk-based capital ratio (Bank only) | | | 17.20 | % | | | 15.57 | % | | | 13.58 | % | | | 15.75 | % | | | 16.27 | % |
| | | | | | | | | | | | | | | | | | | | |
Other Data: | | | | | | | | | | | | | | | | | | | | |
Number of full service offices | | | 8 | | | | 8 | | | | 8 | | | | 8 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | |
N/M - Not meaningful | | | | | | | | | | | | | | | | | | | | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
First Federal of Northern Michigan (the “Bank”), the Company’s principal operating subsidiary, is a full-service, community-oriented savings bank whose primary lending activity is the origination of one- to four-family residential real estate mortgages, commercial real estate loans, commercial loans and consumer loans. As of December 31, 2011, $66.6 million, or 46.7%, of our total loan portfolio consisted of one- to four-family residential real estate loans, $54.2 million, or 38.0%, and $7.0 million, or 4.9%, of our total loan portfolio consisted of commercial mortgage loans and commercial loans, respectively, and $14.9 million, or 10.4%, of our total loan portfolio consisted of consumer and other loans. In recent years, commercial mortgage loans and commercial loans have grown as a percentage of our loan portfolio for three reasons. First, we have increased our emphasis on originating these loans, which generally have higher interest rates compared to one- to four-family residential real estate loans. In addition, most of these loans are originated with adjustable interest rates, which assist us in managing interest rate risk. Finally, most of our one- to four-family residential mortgage loan customers prefer fixed-rate loans in the low interest rate environment that has prevailed over the last several years. Since we sell into the secondary mortgage market a majority of the fixed-rate one- to four-family residential mortgage loans that we originate, one- to four-family residential real estate loans have decreased as a percentage of our total loan portfolio.
Our results of operations depend primarily on our net interest income, which is the difference between the interest income we receive on our interest-earning assets, such as loans and securities, and the interest expense we pay on our deposits and borrowings. Our results of operations are also affected by non-interest income and non-interest expense, the provision for loan losses and income tax expense. Non-interest income consists primarily of banking fees, service charges, insurance commissions, mortgage banking activities and security transactions. Our non-interest expense consists primarily of salaries and employee benefits, FDIC insurance premiums, occupancy and office expenses, advertising and promotion expense, data processing expenses and expenses related to troubled credits and repossessed properties.
Our results of operations are significantly affected by general economic and competitive conditions, and particularly changes in market interest rates, government policies and actions of regulatory authorities. Numerous factors that are beyond our control can cause market interest rates to increase or decline. In addition, we are unable to predict future changes in government policies and actions of regulatory authorities that could have a material impact on our financial performance. As a result, we believe that changes in market interest rates, government policies and actions of regulatory authorities represent the primary uncertainties in predicting our future performance.
Business Strategy
Operating as a Community Savings Bank. We are committed to meeting the financial needs of the communities in which we operate. Our branch network of eight offices enhances our ability to serve these communities. We provide a broad range of individualized consumer and business financial services. We believe that we can be more effective in servicing our customers than many of our non-local competitors because our employees and senior management are able to respond promptly to customer needs and inquiries. Our ability to provide these services is enhanced by the experience of our senior management, which has an average of 20 years’ experience in the financial services industry.
Rebuilding our Balance Sheet - Beginning in 2001, we began to increase our originations of commercial real estate and commercial loans, resulting in significant organic loan growth in the years from 2004 - 2006. In 2007 we began participating, on a limited basis, in commercial opportunities outside of our market areas and, in some cases, outside of Michigan to help mitigate the geographic risk of lending only in Michigan. At December 31, 2005 and 2006, respectively, our total assets were $282.8 million and $281.0 million, the highest levels in our history. Beginning in 2008, due to severely deteriorating economic conditions in our market area, we began to see a both decline in loan balances and an increase in loan charge-offs, which began deteriorating our asset base. At December 31, 2011 our total assets were $217.0 million. We are seeing signs of economic recovery in our markets and have devoted staff and resources to begin the process of rebuilding our balance sheet in 2012 and beyond.
Increasing Our Share of Lower-Cost Deposits. In past years our cost of funds has been relatively high as we accepted higher-cost long-term certificates of deposit to fund our long-term assets such as one- to four-family residential mortgage loans. As we have increased our origination of shorter-term commercial real estate and commercial loans, most of which are originated with adjustable interest rates, we have decreased our need for higher-cost long-term certificates of deposit. We intend to continue to lower our cost of funds by increasing our share of lower-cost short-term certificates of deposit and lower-cost money market deposits. We typically are not a market leader in deposit rates, although from time-to-time we do offer higher rates as liquidity needs dictate. We also intend to continue to market our non-interest-bearing checking accounts in conjunction with our focus on commercial business lending. We grew our core deposits by $4.5 million in 2011.
Maintaining High Asset Quality and Capital Strength.We are committed to conservative loan underwriting standards and procedures, and we primarily originate loans secured by real estate. As a result, we have historically experienced low levels of late payments and losses on loans. However, during the economic recession that continued to deepen in 2009 and 2010, we saw delinquency trends increase despite our conservative underwriting practices due to declining economic conditions and increasing unemployment in our market area. In 2011 we began to see a gradual improvement in delinquency patterns as evidenced by improvements in our asset quality ratios. At December 31, 2011, our ratio of non-performing assets to total assets was 3.11% as compared to 4.37% at December 31, 2010. Despite losses over the years from 2007 to 2009, we continue to maintain a strong capital base. At December 31, 2011, our total risk-based capital ratio was 17.20%, an improvement from 15.57% at December 31, 2010 and well in excess of theregulatory requirements to be categorized as “well capitalized.”
Managing Our Interest Rate Risk Exposure by Selling Fixed-Rate Residential Real Estate Loans. Historically, most borrowers have preferred long-term, fixed-rate residential real estate loans when, as now, market interest rates are at relatively low levels. These loans expose us to interest rate risk because our liabilities, consisting primarily of deposits, have relatively short maturities. In order to better match the maturities of our loan portfolio to the maturities of our deposits in the current low interest rate environment, we sell substantially all of the fixed-rate, one- to four-family residential real estate loans with maturities of 15 years or more that we have originated since 2002. Beginning in late 2011 we began placing certain 15 year fixed residential real estate loans into our portfolio in an effort to rebuild our balance sheet and increase net interest income, however we continue to sell most loans with terms longer than 15 years into the secondary market to minimize interest rate risk.
Comparison of Financial Condition at December 31, 2011 and 2010
Total assets increased $1.3 million, or 0.6%, to $217.0 million at December 31, 2011 from $215.7 million at December 31, 2010. Net loans decreased $16.2 million, or 10.3% to $140.9 million at December 31, 2011 from $157.1 million at December 31, 2010. Mortgage loan originations decreased by $9.7 million to $38.1 million in 2011 from $47.8 million in 2010. During that time period, our mortgage loan portfolio decreased $5.1 million, or 7.12%, to $66.6 million. The decrease in the portfolio was due to our continued focus on selling lower rate mortgage loans into the secondary market where possible. The commercial loan portfolio decreased 12.4% to $61.2 million at December 31, 2011 from $69.9 million at December 31, 2010 due in part to normal principal pay downs but also to pay-off of certain commercial loans in 2011. Cash and cash equivalents increased by $787,000, or 40.0%, to $2.7 million at December 31, 2011 from $2.0 million at December 31, 2010. Investment securities increased $17.7 million, or 46.7%, to $55.5 million at December 31, 2011 from $37.8 million at December 31, 2010.
Deposits decreased $4.8 million, or 3.1%, to $150.6 million at December 31, 2011 from $155.5 million at December 31, 2010. This decrease was due in large part to the decrease in our certificate of deposit accounts. As these deposits matured and were set to reprice lower, many of these deposits left the Bank. Our focus in 2011 continued to be on building deposit relationships rather than attracting higher-cost non-core certificate of deposit accounts. REPO Sweep accounts decreased $580,000, or 9.4% to $5.6 million at December 31, 2011 from $6.2 million at December 31, 2010. Borrowings, consisting primarily of FHLB advances, increased $5.5 million, or 19.0%, to $34.5 million at December 31, 2011 from $29.0 million at December 31, 2010.
Stockholders’ equity increased $1.4 million, or 5.7%, to $24.6 million at December 31, 2011 from $23.2 million at December 31, 2010. The increase was mainly a result of our net income for the year of $742,000 and an increase of $522,000 in net unrealized gain on investment securities.
Comparison of Operating Results for the Years Ended December 31, 2011 and 2010
General.Net income increased to $742,000 for the year ended December 31, 2011 from $238,000 for the year ended December 31, 2010. Net interest income before provision for loan losses was $128,000 higher in 2011 than in 2010, due in large part to our improved net interest margin year over year. The provision for loan losses was $817,000 lower in 2011 than in 2010, resulting in net interest income after provision for loan losses which was $945,000 higher in 2011 than in 2010. Non-interest income was $1.3 million lower in 2011 than in 2010, which was partially offset by non-interest expenses which were $832,000 lower in 2011 than in 2010.
Interest Income. Interest income decreased by $1.1 million, or 9.2%, to $10.4 million for the year ended December 31, 2011 from $11.4 million for the year ended December 31, 2010. The decrease was primarily due to a decrease in the average balance of our loan portfolio of $18.7 million, or 11.1%, year over year. The average balance of our non-mortgage loans, principally commercial loans and consumer loans, decreased by $8.9 million, or 9.7%, to $82.6 million for the twelve months ended December 31, 2011 from $91.5 million for the twelve months ended December 31, 2010. The average yield on our commercial loans increased 24 basis points and the average yield on our consumer loans decreased 44 basis points from 2010 to 2011. The average balance of our one- to four-family residential mortgage loans decreased to $67.5 million for the year ended December 31, 2011 from $77.3 million for the year ended December 31, 2010, while the average yield on such loans decreased to 5.94% from 6.22%.
Interest Expense. Interest expense decreased to $2.3 million for the year ended December 31, 2011 from $3.4 million for the year ended December 31, 2010, due primarily to a $10.6 million, or 5.5%, decrease in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits decreased by $3.6 million from 2010 to 2011, while the average cost of those deposits decreased 48 basis points to 1.10% for 2011 from 1.58% for 2010, reflecting a continued decline in market interest rates during 2011. The average balance of FHLB borrowings decreased $7.0 million from 2010 to 2011 while the cost of those borrowings decreased from 2.90% to 2.18% year over year. The average balance of REPO Sweep accounts remained relatively steady at approximately $6.0 million year over year, while the average cost of these accounts decreased 8 basis points from 0.47% for 2010 to 0.39% for 2011.
Net Interest Income. Net interest income increased to $8.1 million for the year ended December 31, 2011 from $8.0 million for the year ended December 31, 2010. The increase was primarily due to an increase of 28 basis points in our average interest rate spread to 3.88% for the year ended December 31, 2011 from 3.60% for the year ended December 31, 2010.
Provision for Loan Losses.We recorded a provision for loan losses of $284,000 for the year ended December 31, 2011 compared to a provision of $1.1 million for the year ended December 31, 2010. We had net charge-offs of $1.6 million and $1.9 million during 2011 and 2010, respectively. Our provision is based on management’s review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors. For 2011, the provision is significantly lower than 2010 due to the following factors: our provision for loan losses is based on an eight-quarter rolling average of actual net charge-offs adjusted for various environmental factors for each pool of loans in our portfolio. As our charge-off history on commercial and consumer loans improved in 2011 as compared to recent prior years, lower loss factors were applied to those pools of loans to establish an adequate reserve, offset in part by an increased reserve factor in 2011 that we applied to our pool of mortgage loans as a result of increased charge-offs in this pool during the year. Additionally, overall loan balances have declined substantially from December 31, 2010 while asset quality metrics have improved. Specifically, the ratio of non-performing assets to total assets decreased from 4.37% at December 31, 2010 to 3.11% at December 31, 2011 and the ratio of non-performing loans to total loans decreased from 4.13% to 2.34% over the same time period. In addition, the Bank’s Texas ratio, which is defined by management as total non-performing assets divided by tangible capital plus allowance for loan losses, decreased from 39.66% at December 31, 2010 to 28.28% at December 31, 2011. See Note 3 to the financial statements for further information.
Non-Interest Income. Non-interest income decreased to $1.9 million for the year ended December 31, 2011 from $3.2 million for the year ended December 31, 2010. The 2010 results reflected a $546,000 gain on sale of investments primarily as a result of a restructuring of the investment portfolio in an effort to reduce credit risk as well as a $200,000 settlement on a lawsuit. In addition, although mortgage banking activities, consisting mostly of homeowner refinances, picked-up in the third quarter of 2011 and continued through the end of the year, we experienced an overall decrease in mortgage banking activities income of $469,000 for the twelve months ended December 31, 2011 as compared to the twelve months ended December 31, 2010. In late 2011 we placed approximately $6.3 million in 15-year fixed residential mortgages in our portfolio, rather than selling them into the secondary market, which, although beneficial in terms of future-period interest income, had a negative impact on mortgage banking activities income.
Non-Interest Expense. Non-interest expense decreased to $9.0 million for the year ended December 31, 2011 from $9.9 million for the year ended December 31, 2010, primarily related to expenses associated with troubled loans and repossessed properties, which decreased from $1.4 million in 2010 to $926,000 in 2011 as our non-performing assets decreased $2.7 million year over year. In addition, FDIC premiums were $142,000 lower in 2011 than in 2010 due to a decrease in our deposits, an improvement in our risk profile and an overall decrease in rates by the FDIC. Despite the addition of staff in the final quarter of the year, compensation and benefits were still lower for 2011 as compared to the period year.
Income Taxes.There was no federal income tax expense recorded in either 2011 or 2010 due to a valuation allowance on the deferred tax asset.
Average Balance Sheet
The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
| | | | | | | | | | | | | | Average Consolidated Statements of Condition For Years Ended December 31, | | | | |
| | As of December 31, 2011 | | | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | | Average | | | | | | | | | Average | | | | | | | | | Average | |
| | | | | Yield / | | | Average | | | | | | Yield / | | | Average | | | | | | Yield / | | | Average | | | | | | Yield / | |
| | Balance | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | | | Balance | | | Interest | | | Rate | |
| | | | | | | | | | | (In thousands) | | | | | | | | | (In thousands) | | | | | | | | | (In thousands) | | | | |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage loans | | | | | | | | | | $ | 67,529 | | | $ | 4,012 | | | | | | | $ | 77,280 | | | $ | 4,806 | | | | | | | $ | 86,015 | | | $ | 5,372 | | | | | |
Non-mortgage loans | | | | | | | | | | | 82,562 | | | | 4,914 | | | | | | | | 91,470 | | | | 5,327 | | | | | | | | 103,134 | | | | 5,732 | | | | | |
Loans | | $ | 140,884 | | | | 5.83 | % | | | 150,091 | | | | 8,926 | | | | 5.95 | % | | | 168,750 | | | | 10,133 | | | | 6.00 | % | | | 189,149 | | | | 11,104 | | | | 5.87 | % |
Mortgage-backed securities | | | 30,909 | | | | 3.81 | % | | | 26,543 | | | | 784 | | | | 2.95 | % | | | 18,973 | | | | 648 | | | | 3.42 | % | | | 13,714 | | | | 577 | | | | 4.21 | % |
Other Investment securities | | | 24,575 | | | | 3.06 | % | | | 19,448 | | | | 573 | | | | 2.95 | % | | | 16,940 | | | | 568 | | | | 3.35 | % | | | 18,316 | | | | 646 | | | | 3.53 | % |
Investment securities | | | 55,484 | | | | 3.48 | % | | | 45,991 | | | | 1,357 | | | | 2.95 | % | | | 35,913 | | | | 1,216 | | | | 3.39 | % | | | 32,030 | | | | 1,223 | | | | 3.82 | % |
Other investments | | | 3,747 | | | | 2.56 | % | | | 6,433 | | | | 107 | | | | 1.66 | % | | | 7,151 | | | | 98 | | | | 1.37 | % | | | 4,784 | | | | 115 | | | | 2.40 | % |
Total interest-earning assets | | | 200,115 | | | | 5.12 | % | | | 202,515 | | | | 10,390 | | | | 5.14 | % | | | 211,814 | | | | 11,447 | | | | 5.41 | % | | | 225,963 | | | | 12,442 | | | | 5.51 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non interest-earning assets | | | 16,930 | | | | | | | | 15,947 | | | | | | | | | | | | 15,809 | | | | | | | | | | | | 15,417 | | | | | | | | | |
Total Assets | | $ | 217,045 | | | | | | | $ | 218,462 | | | | | | | | | | | $ | 227,623 | | | | | | | | | | | $ | 241,380 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Savings Deposits | | $ | 17,873 | | | | 0.05 | % | | $ | 17,507 | | | $ | 9 | | | | 0.06 | % | | $ | 16,053 | | | $ | 8 | | | | 0.06 | % | | $ | 15,123 | | | $ | 17 | | | | 0.12 | % |
Money market/NOW accounts | | | 41,795 | | | | 0.40 | % | | | 43,471 | | | | 158 | | | | 0.35 | % | | | 41,845 | | | | 324 | | | | 0.76 | % | | | 36,558 | | | | 384 | | | | 1.04 | % |
Certificates of deposit | | | 78,372 | | | | 1.94 | % | | | 81,665 | | | | 1,382 | | | | 1.69 | % | | | 88,379 | | | | 1,964 | | | | 2.22 | % | | | 98,772 | | | | 3,056 | | | | 3.09 | % |
Total interest-bearing deposits | | | 138,040 | | | | 1.23 | % | | | 142,643 | | | $ | 1,549 | | | | 1.09 | % | | | 146,277 | | | $ | 2,296 | | | | 1.57 | % | | | 150,453 | | | $ | 3,457 | | | | 2.30 | % |
Borrowed funds | | | 40,092 | | | | 1.82 | % | | | 37,233 | | | | 713 | | | | 1.91 | % | | | 44,211 | | | | 1,151 | | | | 2.60 | % | | | 48,942 | | | | 1,631 | | | | 3.33 | % |
Total interest-bearing liabilities | | | 178,132 | | | | 1.36 | % | | | 179,876 | | | | 2,262 | | | | 1.26 | % | | | 190,488 | | | | 3,447 | | | | 1.81 | % | | | 199,395 | | | | 5,088 | | | | 2.55 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non interest-bearing liabilities | | | 14,345 | | | | | | | | 14,417 | | | | | | | | | | | | 13,312 | | | | | | | | | | | | 12,848 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 192,477 | | | | | | | | 194,293 | | | | | | | | | | | | 203,800 | | | | | | | | | | | | 212,243 | | | | | | | | | |
Stockholders' equity | | | 24,568 | | | | | | | | 24,169 | | | | | | | | | | | | 23,823 | | | | | | | | | | | | 29,137 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities & stockholders' equity | | $ | 217,045 | | | | | | | $ | 218,462 | | | | | | | | | | | $ | 227,623 | | | | | | | | | | | $ | 241,380 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | | | | | | | | | | | | | $ | 8,128 | | | | | | | | | | | $ | 8,000 | | | | | | | | | | | $ | 7,354 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate spread | | | | | | | 3.75 | % | | | | | | | | | | | 3.88 | % | | | | | | | | | | | 3.60 | % | | | | | | | | | | | 2.97 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest-earning assets | | | | | | | | | | $ | 22,639 | | | | | | | | | | | $ | 21,326 | | | | | | | | | | | $ | 26,568 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest margin (1) | | | | | | | 3.90 | % | | | | | | | | | | | 4.02 | % | | | | | | | | | | | 3.78 | % | | | | | | | | | | | 3.26 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Average interest-earning assets to average interest-bearing liabilities | | | | | | | | | | | | | | | | | | | 112.59 | % | | | | | | | | | | | 111.20 | % | | | | | | | | | | | 113.32 | % |
(1) Net interest margin represents net interest income divided by the interest-earning assets.
Rate/Volume Analysis
The following table sets forth certain information regarding changes in interest income and interest expense of the Company during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided in each category with respect to (i) changes attributable to changes in volume (change in volume multiplied by prior rate), (ii) changes in rates (changes in rate multiplied by prior average volume), and (iii) the net change. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
| | Year ended December 31, 2011 | |
| | Compared to | |
| | Year ended December 31, 2010 | |
| | Increase (Decrease) Due to: | |
| | Volume | | | Rate | | | Total | |
| | | | | (In thousands) | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans receivable | | $ | (1,098 | ) | | $ | (109 | ) | | $ | (1,207 | ) |
Investment securities | | | 264 | | | | (122 | ) | | $ | 142 | |
Other investments | | | (11 | ) | | | 20 | | | $ | 9 | |
| | | | | | | | | | | | |
Total interest-earning assets | | | (845 | ) | | | (211 | ) | | | (1,056 | ) |
| | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Savings Deposits | | | 1 | | | | - | | | | 1 | |
Money Market/NOW accounts | | | 13 | | | | (179 | ) | | | (166 | ) |
Certificates of Deposit | | | (173 | ) | | | (409 | ) | | | (582 | ) |
Deposits | | | (159 | ) | | | (588 | ) | | | (747 | ) |
Borrowed funds | | | (253 | ) | | | (185 | ) | | | (438 | ) |
| | | | | | | | | | | | |
Total interest-bearing liabilities | | | (412 | ) | | | (773 | ) | | | (1,185 | ) |
| | | | | | | | | | | | |
Change in net interest income | | $ | (433 | ) | | $ | 562 | | | $ | 129 | |
| | Year ended December 31, 2010 | |
| | Compared to | |
| | Year ended December 31, 2009 | |
| | Increase (Decrease) Due to: | |
| | Volume | | | Rate | | | Total | |
| | | | | (In thousands) | | | | |
Interest-earning assets: | | | | | | | | | | | | |
Loans receivable | | $ | (1,245 | ) | | $ | 274 | | | $ | (971 | ) |
Investment securities | | | 146 | | | | (154 | ) | | $ | (8 | ) |
Other investments | | | 44 | | | | (60 | ) | | $ | (16 | ) |
| | | | | | | | | | | | |
Total interest-earning assets | | | (1,055 | ) | | | 60 | | | | (995 | ) |
| | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Savings Deposits | | | 1 | | | | (10 | ) | | | (9 | ) |
Money Market/NOW accounts | | | 73 | | | | (133 | ) | | | (60 | ) |
Certificates of Deposit | | | (392 | ) | | | (700 | ) | | | (1,092 | ) |
Deposits | | | (318 | ) | | | (843 | ) | | | (1,161 | ) |
Borrowed funds | | | (185 | ) | | | (295 | ) | | | (480 | ) |
| | | | | | | | | | | | |
Total interest-bearing liabilities | | | (503 | ) | | | (1,138 | ) | | | (1,641 | ) |
| | | | | | | | | | | | |
Change in net interest income | | $ | (552 | ) | | $ | 1,198 | | | $ | 646 | |
Management of Interest Rate Risk
Qualitative Analysis. Our most significant form of market risk is interest rate risk. The general objective of our interest rate risk management is to determine the appropriate level of risk given our business strategy, and then manage that risk in a manner that is consistent with our policy to reduce the exposure of our net interest income to changes in market interest rates. First Federal of Northern Michigan’s asset/liability management committee (“ALCO”), which consists of senior management, evaluates the interest rate risk inherent in our assets and liabilities, our operating environment and capital and liquidity requirements, and modifies our lending, investing and deposit-taking strategies accordingly. The Board of Directors reviews the ALCO’s activities and strategies, the effect of those strategies on our net interest margin, and the effect that changes in market interest rates would have on the economic value of our loan and securities portfolios, as well as the intrinsic value of our deposits and borrowings.
We actively evaluate interest rate risk in connection with our lending, investing and deposit-taking activities. Generally, our loans, which represent the significant majority of our assets, have longer-terms to maturity than ourdeposits, which represent the significant majority of our liabilities. As of December 31, 2011, $119.7 million, or 83.9% of our loan portfolio, consisted of loans that mature or reprice after December 31, 2012. In contrast, as of December 31, 2011, $38.5 million, or 49.1% of our time deposits as of that date, consisted of deposits that mature or reprice in less than one year.
In an effort to manage interest rate risk, we have increased our focus on the origination and retention in our portfolio of adjustable-rate residential mortgage loans. In addition, we have increased the origination and retention in our portfolio of commercial real estate and commercial loans, since most of these loans are originated with adjustable interest rates. In the current low interest rate environment, we generally have sold into the secondary mortgage market all of the fixed-rate, longer-term (15 years or more) residential mortgage loans that we originate on a servicing-retained basis. Finally, we have primarily invested in short- and medium-term securities and have maintained high levels of liquid assets, such as cash and cash equivalents. Shortening the average maturity of our interest-earning assets through these strategies helps us to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our net interest income to changes in market interest rates. Maintaining high levels of liquid assets also permits us to invest in higher-yielding securities and loans when market interest rates increase. However, these strategies can be expected to adversely affect net interest income if long-term interest rates remain at low levels. As long-term interest rates rise, as we expect will happen, we will reduce our mortgage-banking operations, and will retain in our portfolio a larger percentage of the one- to four-family loans that we originate.
Quantitative Analysis. The Company uses two primary measurement techniques to identify and manage its interest rate risk:
| · | Net Interest Income (NII) simulation |
| · | Economic Value of Equity (EVE) |
Net Interest Income Simulation Model:The Company uses a NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Company’s financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management’s projections of the future volume and pricing of each of the product lines offered by the Company as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.
The Company’s interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over a 24-month horizons assuming a 100bp, 200bp, 300bp and 400bp parallel ramped increase in interest rates. The Fed Funds interest rate, targeted by the Federal Reserve at a range of 0% to 0.25% is currently set at a level that would be negative in parallel ramped decrease scenarios, therefore those scenarios were omitted from the interest rate risk analysis at December 31, 2011.
At December 31, 2011, the Company’s interest rate risk profile reflects a neutral position. The following table shows the Company’s estimated net interest income sensitivity profile and ALCO policy limits as of December 31, 2011.
Estimated NII Sensitivity Profile at December 31, 2011: |
| | | | | | |
Dynamic Balance Sheet - RAMP | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Rate Changes: | | | 0 BP | | | | + 100 BP | | | | +200 BP | | | | +300 BP | | | | +400 BP | |
$ Change in NII | | $ | 15,424 | | | $ | 15,346 | | | $ | 15,318 | | | $ | 15,305 | | | $ | 15,274 | |
% Change in NII | | | | | | | -0.51 | % | | | -0.69 | % | | | -0.77 | % | | | -0.97 | % |
Policy Limits | | | | | | | +/-5 | % | | | +/-10 | % | | | +/-15 | % | | | +/-20 | % |
The 24-months net interest income at risk reported as of December 31, 2011 for all scenarios presented shows that the Company’s overall risk to changes in interest rates is low. Given that the duration of our assets is longer than that of our liabilities, the scenarios shown illustrate that a rising rate environment has a neutral to slightly negative impact on our net interest income, i.e. our liabilities will reprice upwards faster than our assets will. However, the impact is well within Board set limits.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in net interest income requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The net interest income table presented above assumes that the composition of our interest-rate sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data do not reflect any actions management may undertake in response to changes in interest rates. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Economic Value of Equity:The Company also uses EVE as a measurement tool in managing interest rate risk. Whereas the net interest income simulation model highlights exposure over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The EVE of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the earnings simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving prepayments and the expected changes in balances and pricing of transaction deposit portfolios. The following table shows the Company’s EVE sensitivity profile as of December 31, 2011.
Economic Value of Equity at December 31, 2011
Rate Changes: | | | 0 BP | | | | + 100 BP | | | | +200 BP | | | | +300 BP | | | | +400 BP | |
$ Change in Equity | | $ | 38,226 | | | $ | 37,084 | | | $ | 36,429 | | | $ | 35,938 | | | $ | 35,270 | |
% Change in Equity | | | | | | | -2.99 | % | | | -4.70 | % | | | -5.98 | % | | | -7.73 | % |
Policy Limits | | | | | | | +/-10 | % | | | +/-15 | % | | | +/-20 | % | | | +/-25 | % |
The EVE at risk profile shows slight to moderate asset sensitivity from market rate increases.
Cash Flows
Cash flows provided by operations in 2011 were $2.2 million and $1.1 million in 2011 and 2010, respectfully due in large part to the decrease in mortgage banking activities from 2010 to 2011. Cash flows used in investing activities were $1.6 million in 2011 as compared to cash flows provided by operating activities of $15.7 million in 2010. The primary difference year over year was proceeds from the sale of available for sale securities of $14.4 million in 2010 and proceeds from the maturity of available for sale securities in 2010 which, at $16.0 million, were $3.2 million higher than in 2011. Cash provided by financing activities was $103,000 in 2011 as compared to cash used in financing activities of $17.9 million in 2010 primarily due to the decrease in our outstanding Federal Home Loan Bank (FHLB) advances.
Liquidity and Capital Resources
The overall objective of our liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. We manage liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and, to a lesser extent, borrowings (Federal Home Loan Bank advances), the proceeds from maturing securities and short-term investments, and the proceeds from the sales of loans and securities. The scheduled amortization of loans and securities, as well as proceeds from borrowings, are predictable sources of funds. Other funding sources, however, such as deposit inflows, mortgage prepayments, mortgage loan sales and mortgage-backed securities sales are greatly influenced by market interest rates, economic conditions and competition.
Liquidity represents the amount of our assets that can be quickly and easily converted into cash without significant loss. Our most liquid assets are cash, short-term U.S. Government securities and U.S. Government agency or government-sponsored enterprise securities. We are required to maintain sufficient levels of liquidity as defined by the Office of the Comptroller of the Currency regulations. Current regulations require that we maintain sufficient liquidity to ensure our safe and sound operation. Our current objective is to maintain liquid assets equal to at least 20% of total deposits and Federal Home Loan Bank borrowings due in one year or less. Liquidity as of December 31, 2011 was $44.6 million, or 39.9% of total deposits and Federal Home Loan Bank borrowings due in one year or less, compared to $35.4 million, or 28.5% of this amount at December 31, 2010. The levels of liquidity are dependent on our operating, financing, lending and investing activities during any given period. Our calculation of liquidity includes additional borrowing capacity available with the Federal Home Loan Bank. As of December 31, 2011, we had unused borrowing capacity of $15.0 million. We can pledge additional collateral in the form of investment securities and certain loans to increase our borrowing capacity.
We currently retain in our portfolio all adjustable-rate residential mortgage loans, short-term balloon mortgage loans and fixed-rate residential mortgage loans with maturities of less than 15 years, and generally sell the remainder in the secondary mortgage market, although in 2011 we placed $6.3 million in 15 year fixed-rate residential mortgage loans in our portfolio . We also originate for retention in our loan portfolio, commercial and commercial real estate loans, including real estate development loans. During the year ended December 31, 2011, we originated $38.1 million of one- to four-family residential mortgage loans, of which $9.3 million were retained in our portfolio and the remainder were sold into the secondary mortgage market. This compares to $47.8 million of one- to four-family originations during the year ended December 31, 2010, of which $5.6 million were retained in our portfolio. At December 31, 2011, we had outstanding loan commitments of $24.4 million. These commitments included $5.2 million for permanent one- to four-family residential mortgage loans, $3.6 million for non-residential loans, $483,000 of undisbursed loan proceeds for construction of one- to four-family residences, 4.5 million of undisbursed lines of credit on home equity loans, $944,000 of unused credit card lines, $7.3 million of unused commercial lines of credit, and $532,000 for commercial loans, unused bounce protection.of $1.7 million and letters of credit of $150,000.
Deposits are a primary source of funds for use in lending and for other general business purposes. At December 31, 2011, deposits funded 69.4% of our total assets compared to 72.1% at December 31, 2010. Certificates of deposit scheduled to mature in less than one year at December 31, 2011 totaled $38.5 million. We believe that a significant portion of such deposits will remain with us. We monitor the deposit rates offered by competitors in our market area, and we set rates that take into account the prevailing market conditions along with our liquidity position. As we rebuild our balance sheet in the next few years, the growth in assets may require a more significant in-flow of liquidity than has been necessary over the past few years. As such, we may from time to time be a market leader in rates paid for certain liabilities to fund asset growth.
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 also may be used on a longer-term basis to support increased lending or investment activities. At December 31, 2011, we had $34.5 million in Federal Home Loan Bank advances and no outstanding advances at the Federal Reserve Discount Window. Total borrowings as a percentage of total assets were 15.9% at December 31, 2011 compared to 13.4% at December 31, 2010.
As of December 31, 2011, management was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2011, we had no material commitments for capital expenditures.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statement of Cash Flows included with our Consolidated Financial Statements.
Total stockholders’ equity of the Company was $24.6 million at December 31, 2011 and $23.2 million at December 31, 2010, an increase of $1.4 million year over year. The Company’s ratio of equity to assets increased from 10.77% as of December 31, 2010 to 11.32% as of December 31, 2011. Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These regulatory standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be “well capitalized” if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, the Leverage Capital Ratio is at least 5%, and the Bank is not subject to any written agreements or order issued by the FDIC pursuant to Section 8 of the Federal Deposit Insurance Act.
The following table summarizes the capital ratios of the Company:
| | At December 31, | | | Minimum to be | |
| | 2011 | | | 2010 | | | Well Capitalized | |
| | | | | | | | | | | | |
Tier 1 Leverage Ratio | | | 10.37 | % | | | 9.77 | % | | | 5.00 | % |
| | | | | | | | | | | | |
Tier 1 Risk-Based Capital | | | 16.30 | % | | | 14.32 | % | | | 6.00 | % |
| | | | | | | | | | | | |
Total Risk-Based Capital | | | 17.20 | % | | | 15.57 | % | | | 10.00 | % |
At December 31, 2011 and December 31, 2010, the Bank exceeded the minimum capital requirements to be considered “well capitalized.” See Note 11 to our financial statements for further information.
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 followingaccounting 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 acritical 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.
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, 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. To illustrate, if recent loss experience dictated that the projected loss ratios would be increased by 10% (of the estimate) across all risk ratings, the allocated allowance as of December 31, 2011 would have changed by approximately $125,000. 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 sellto investors a portion of our originated one- to four-family residential real estate mortgage loans. When we acquire mortgage servicing rights through the origination of mortgage loans and sale of those 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 December 31, 2011, we were servicing loans sold to others totaling $143.1 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 servicingportfolio 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 December 31, 2011 included the following:
Annual constant prepayment speed (CPR): | | | 17.5 | % |
Weighted average life remaining (in months): | | | 246 | |
Discount rate used: | | | 8.1 | % |
At the December 31, 2011 valuation, we calculated the value of our mortgage servicing rights to be $1.1 million. The book value of our mortgage servicing rights as of December 31, 2011 was $993,000 which was less than the independent valuation: therefore there was no need to establish a valuation allowance.
Impairment of Intangible Assets.On June 12, 2003, we acquired 100% of the stock of the InsuranCenter of Alpena (ICA). We allocated the excess of the purchase price paid over the fair value of net assets acquired to intangible assets, including goodwill. On February 27, 2009 the Company sold the majority of the assets of ICA. The remaining goodwill on our books of $600,000 related to certain assets of the Company that were not sold in the sale of ICA. We allocated the goodwill between the assets sold and the assets retained and determined a value of the assets that remained of $600,000. Since the $600,000 allocation relates to a finite life asset, we re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March 2009. The intangible asset was analyzed for impairment at December 31, 2011.
We have in the past purchased a branch or branches from other financial institutions. Our analysis of these branch acquisitions led us to conclude that in each case, we acquired a business and therefore, the excess of purchase price over fair value of net assets acquired has been allocated to core deposit intangible assets. Our conclusion was based on the fact that in each case we acquired employees, customers and branch facilities. The expected life for core deposit intangibles is based on the type of products acquired in an acquisition. The amortization periods range from 10 to 15 years and are based on the expected life of the products. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangibles are amortized on a straight line basis. The core deposit intangible is analyzed annually for impairment.
Valuation of Deferred Tax Assets.The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.
At December 31, 2011 and 2010, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2011 and 2010 a valuation allowance of $3.0 million and $3.2 million was recorded, respectively. The net deferred tax asset recorded at December 31, 2011 and 2010 was $387,000 and $659,000. See Note 9 for additional information.
Off-Balance Sheet Arrangements
In the ordinary course of business, First Federal of Northern Michigan is a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. First Federal of Northern Michigan follows the same credit policies in making off-balance sheet commitments as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by First Federal of Northern Michigan, is based on management’s credit evaluation of the customer.
Unfunded commitments under construction lines of credit for residential and commercial properties and commercial lines of credit are commitments for possible future extensions of credit to existing customers, for which funds have not been advanced by First Federal of Northern Michigan.
At December 31, 2011 and December 31, 2010, First Federal of Northern Michigan had $10.3 million and $13.0 million, respectively, of commitments to grant loans, $14.5 million and $14.1 million, respectively, of unfunded commitments under lines of credit and $150,000 and $5,000, respectively, of letters of credit. See Note 11 of the Notes to the Consolidated Financial Statements.
Safe Harbor Statement
When used in this annual report or future filings by First Federal of Northern Michigan Bancorp, Inc. with the Securities and Exchange Commission, 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.
Impact of Inflation and Changing Prices
The financial statements and related notes of First Federal of Northern Michigan Bancorp, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
|
DIRECTORS AND EXECUTIVE OFFICERS OF |
FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP, INC. |
AND FIRST FEDERAL OF NORTHERN MICHIGAN |
|
Directors
Martin A. Thomsonhas been Chairman of the Board of Directors since May 2008. He was President and Chief Executive Officer of the Company and Bank from May 2001. In January 2006, Mr. Thomson relinquished the position of President and in May 2008 relinquished the position of Chief Executive Officer and assumed the role of Chairman of the Board of Directors of the Company and Bank. Mr. Thomson previously held the position of President and Chief Executive Officer of Presque Isle Electric and Gas Co-op., Onaway, Michigan. Mr. Thomson has been a director of the Bank since 1986, and a director of the Company since its formation in November 2000.
James C. Rapin has been a director of the Bank since 1985, and a director of the Company since its formation in November 2000. He was Chairman of the Board of Directors of the Company and the Bank from March 2002 until May 2008. Mr. Rapin retired as a pharmacist with LeFave Pharmacy, Alpena, Michigan in 2004.
Keith D. Wallaceis a senior attorney with the law firm of Isackson, Wallace and Pfiefer, P.C., located in Alpena, Michigan. Mr. Wallace has been a director of the Bank since 1988, and a director of the Company since its formation in November 2000.
Gary C. VanMassenhove is a partner in VanMassenhove, Kearly, Taphouse & Faulman, CPAs. Mr. VanMassenhove has been a Certified Public Accountant for 40 years. He has been a director of the Company and the Bank since September 2001.
Thomas R. Townsend is the President of the R.A. Townsend Co., a plumbing, heating and air conditioning distributor located in Alpena, Michigan, where he has been employed for the past 33 years. Mr. Townsend has been a director of the Company and the Bank since April 2002.
Michael W. Mahlerwas named President and Chief Executive Officer of the Company and the Bank in May 2008. He was named President and Chief Operating Officer of the Company and the Bank in January 2006. Prior to that appointment, since November 2004, Mr. Mahler served as Executive Vice President of the Company and the Bank and had served, since November 2002, as Chief Financial Officer. From September 2000 until November 2002, Mr. Mahler was Corporate Controller at Besser Company, Alpena, Michigan, an international producer of concrete products equipment. From 1990 until 2000, Mr. Mahler was employed at LTV Steel Company, East Chicago, Indiana where he served in financial roles of increasing responsibility and served, from 1997 until 2000, as Controller for a northeast Michigan division. Mr. Mahler has been a Director of the Bank since January 2006 and of the Company since May 2008.
Executive Officers Who Are Not Directors
Amy E. Essexwas named Chief Financial Officer, Treasurer and Corporate Secretary of the Company and the Bank in January 2006. Ms. Essex had served as Chief Financial Officer of the Company and the Bank since November 2004 and prior to that appointment, since March 2003, served as the Internal Auditor and Compliance Officer for Alpena Bancshares, Inc. Prior to March 2003, Ms. Essex spent eight years as the Director of Tax and Risk for Besser Company, Alpena, Michigan. Ms. Essex is a certified public accountant.
Jerome W. Tracey was named Executive Vice President and Chief Lending Officer of the Company and the Bank in January 2006. Mr. Tracey had served as Senior Vice President, Senior Lender of the Company and the Bank since September 2001 and served as Vice President of Commercial Services since joining the Bank in November 1999. Prior to joining the Bank, Mr. Tracey served as Vice President of Commercial Lending for National City Bank, Alpena, Michigan, a position he held since 1996. Mr. Tracey has been in the banking profession since 1981.
Executive Management of the Bank
Michael W. Mahler, Jerome W. Tracey, Amy E. Essex, Gregory S. Matthews
Senior Officers of the Bank
Michael W. Mahler, Jerome W. Tracey, Amy E. Essex, Joseph W. Gentry II, Kathleen R. Brown, Linda K. Sansom, Gregory S. Matthews, Julie A. Curtis, Jerome P. Schmidt, Steven T. Mousseau
The Annual Meeting of Stockholders will be held at 1:00 p.m., May 16, 2012 at the Thunder Bay National Marine Sanctuary, 500 W. Fletcher St., Alpena, MI 49707.
Stock Listing
The Company's common stock is traded on the NASDAQ Capital Market under the symbol “FFNM”.
Price Range of Common Stock
The following sets forth the quarterly high and low closing price per share and cash dividends declared during each of the four quarters in 2011 and 2010.
| | Market Price | | | | |
Quarter Ended | | High | | | Low | | | Cash Dividends Declared | |
| | | | | | | | | |
December 31, 2011 | | $ | 3.66 | | | $ | 2.85 | | | $ | - | |
September 30, 2011 | | $ | 3.90 | | | $ | 3.40 | | | $ | - | |
June 30, 2011 | | $ | 3.80 | | | $ | 3.28 | | | $ | - | |
March 31, 2011 | | $ | 3.93 | | | $ | 2.95 | | | $ | - | |
December 31, 2010 | | $ | 2.99 | | | $ | 2.39 | | | $ | - | |
September 30, 2010 | | $ | 2.75 | | | $ | 2.05 | | | $ | - | |
June 30, 2010 | | $ | 2.44 | | | $ | 1.38 | | | $ | - | |
March 31, 2010 | | $ | 1.80 | | | $ | 1.13 | | | $ | - | |
| |
Special Counsel | Independent Auditor |
| |
Luse Gorman Pomerenk & Schick, PC | Plante & Moran, PLLC |
5335 Wisconsin Avenue, N.W. | 2601 Cambridge Ct. Suite 500 |
Suite 780 | Auburn Hills, Michigan 48326 |
Washington, D.C. 20015 | |
| Transfer Agent |
Market Makers | |
| Registrar and Transfer Company |
Raymond James & Associates, Inc. | 10 Commerce Drive |
222 South Riverside Plaza | Cranford, New Jersey 07016 |
7th Floor 60606 | 800-346-6084 |
Chicago, IL 312-655-3000 | |
| |
Stifel Nicolaus | |
237 Park Avenue | |
8th Floor | |
New York, NY 10017 | |
212-847-6500 | |
| |
Keefe, Bruyette & Woods | |
787 7th Avenue | |
4th Floor | |
New York, NY 10019 | |
212-887-7777 | |
| |
FIG Partners, LLC | |
1175 Peachtree St. NE | |
100 Colony Sq, Suite 2250 | |
Atlanta, GA 30361 | |
866-344-2657 | |
Annual Report on Form 10-K
A copy of the Company's Form 10-K for the year ended December 31, 2011 will be furnished without charge upon written request to: Amy E. Essex, Chief Financial Officer, Treasurer and Corporate Secretary, First Federal of Northern Michigan Bancorp, Inc., 100 S. Second Avenue, Alpena, Michigan 49707.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
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| Contents |
| |
Report Letter | | 2 |
| | |
Consolidated Financial Statements | | |
| | |
Balance Sheet | | 3 |
| | |
Statement of Operations | | 4 |
| | |
Statement of Changes in Stockholders’ Equity | | 5 |
| | |
Statement of Cash Flows | | 6 |
| | |
Notes to Consolidated Financial Statements | | 7 |
Report of Independent Registered Public Accounting Firm
Board of Directors
First Federal of Northern Michigan Bancorp, Inc.
We have audited the consolidated balance sheet of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each year in the two-year period ended December 31,2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Federal of Northern Michigan Bancorp, Inc. as of December 31, 2011 and 2010 and the consolidated results of their operations and their cash flows for each year in the two-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
/s/ Plante & Moran, PLLC
Auburn Hills, Michigan
March 28, 2012
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
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Consolidated Balance Sheet |
(000s omitted, except per share data) |
| | December 31 | |
| | 2011 | | | 2010 | |
Assets | | | | | | | | |
Cash and cash equivalents | | $ | 2,714 | | | $ | 1,890 | |
Overnight deposits with Federal Home Loan Bank | | | 35 | | | | 73 | |
| | | | | | | | |
Total cash and cash equivalents | | | 2,749 | | | | 1,963 | |
| | | | | | | | |
Securities available for sale (Note 2) | | | 53,049 | | | | 35,301 | |
Securities held to maturity (Note 2) | | | 2,435 | | | | 2,520 | |
Loans - Net (Note 3) | | | 140,884 | | | | 157,144 | |
Federal Home Loan Bank stock | | | 3,266 | | | | 3,775 | |
Property and equipment (Note 4) | | | 5,846 | | | | 6,027 | |
Foreclosed real estate | | | 3,408 | | | | 2,818 | |
Accrued interest receivable | | | 1,149 | | | | 1,231 | |
Prepaid FDIC insurance premiums | | | 759 | | | | 967 | |
Intangible assets (Note 6) | | | 335 | | | | 627 | |
Deferred tax asset | | | 387 | | | | 659 | |
Other assets (Note 5) | | | 2,778 | | | | 2,701 | |
Total assets | | $ | 217,045 | | | $ | 215,733 | |
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Liabilities | | | | | | | | |
Non-interest bearing deposits | | $ | 12,609 | | | $ | 10,349 | |
Interest-bearing deposits (Note 7) | | | 138,040 | | | | 145,117 | |
Advances from Federal Home Loan Bank (Note 8) | | | 34,500 | | | | 29,000 | |
REPO sweep accounts | | | 5,592 | | | | 6,172 | |
Accrued expenses and other liabilities (Note 12) | | | 1,736 | | | | 1,859 | |
Total liabilities | | | 192,477 | | | | 192,497 | |
| | | | | | | | |
Stockholders' Equity (Note 11) | | | | | | | | |
Common stock ($0.01 par value 20,000,000 shares authorized 3,191,799 shares issued) | | | 32 | | | | 32 | |
Additional paid-in capital | | | 23,853 | | | | 23,822 | |
Retained earnings | | | 2,980 | | | | 2,238 | |
Treasury stock at cost (307,750 shares) | | | (2,964 | ) | | | (2,964 | ) |
Unearned compensation | | | (1 | ) | | | (38 | ) |
Accumulated other comprehensive income | | | 668 | | | | 146 | |
Total stockholders' equity | | | 24,568 | | | | 23,236 | |
Total liabilities and stockholders' equity | | $ | 217,045 | | | $ | 215,733 | |
See Notes to Consolidated Financial Statements.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
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Consolidated Statement of Operations |
(000s omitted, except per share data) |
| | Year Ended December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Interest Income | | | | | | | | |
Loans, including fees | | $ | 8,926 | | | $ | 10,133 | |
Investments | | | | | | | | |
Taxable | | | 521 | | | | 480 | |
Tax-exempt | | | 159 | | | | 186 | |
Mortgage-backed securities | | | 784 | | | | 648 | |
Total interest income | | | 10,390 | | | | 11,447 | |
Interest Expense | | | | | | | | |
Deposits (Note 7) | | | 1,549 | | | | 2,296 | |
Borrowings | | | 713 | | | | 1,151 | |
Total interest expense | | | 2,262 | | | | 3,447 | |
Net Interest Income - Before provision for loan losses | | | 8,128 | | | | 8,000 | |
Provision for Loan Losses(Note 3) | | | 284 | | | | 1,101 | |
Net Interest Income - After provision for loan losses | | | 7,844 | | | | 6,899 | |
Other Income | | | | | | | | |
Service charges and other fees | | | 730 | | | | 804 | |
Net gain on sale of investments | | | - | | | | 546 | |
Net gain on sale of loans | | | 388 | | | | 597 | |
Loan servicing fees | | | 581 | | | | 841 | |
Insurance and brokerage commissions | | | 158 | | | | 159 | |
Other | | | 75 | | | | 258 | |
Total other income | | | 1,932 | | | | 3,205 | |
Operating Expenses | | | | | | | | |
Compensation and employee benefits (Note 12) | | | 4,622 | | | | 4,682 | |
FDIC insurance premiums | | | 224 | | | | 366 | |
Amortization of intangible assets | | | 292 | | | | 292 | |
Advertising | | | 134 | | | | 136 | |
Occupancy and equipment | | | 1,049 | | | | 1,156 | |
Data processing service bureau | | | 301 | | | | 314 | |
Professional fees | | | 433 | | | | 425 | |
Other | | | 1,979 | | | | 2,495 | |
Total operating expenses | | | 9,034 | | | | 9,866 | |
Income - before federal income tax expense | | | 742 | | | | 238 | |
Income tax expense (Note 9) | | | - | | | | - | |
Net income | | $ | 742 | | | $ | 238 | |
| | | | | | | | |
Per Share Data | | | | | | | | |
Net income per share | | | | | | | | |
Basic | | $ | 0.26 | | | $ | 0.08 | |
Diluted | | $ | 0.26 | | | $ | 0.08 | |
| | | | | | | | |
Dividends per common share | | $ | - | | | $ | - | |
See Notes to Consolidated Financial Statements.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
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Consolidated Statement of Changes in Stockholders’ Equity |
(000s omitted) |
| | Shares | | | Common Stock | | | Treasury Stock | | | Additional Paid-in Capital | | | Unearned Compensation | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total Stockholders' Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance - January 1, 2010 | | | 3,192 | | | $ | 32 | | | $ | (2,964 | ) | | $ | 23,723 | | | $ | (162 | ) | | $ | 2,000 | | | $ | 423 | | | $ | 23,052 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 238 | | | | - | | | | 238 | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized depreciation on available-for-sale securities - Net of tax of ($143) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (277 | ) | | | (277 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (39 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options/MRP shares expensed | | | - | | | | - | | | | - | | | | 99 | | | | 124 | | | | - | | | | - | | | | 223 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance - December 31, 2010 | | | 3,192 | | | | 32 | | | | (2,964 | ) | | | 23,822 | | | | (38 | ) | | | 2,238 | | | | 146 | | | | 23,236 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | 742 | | | | - | | | | 742 | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized appreciation on available-for-sale securities - Net of tax of ($269) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 522 | | | | 522 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options/MRP shares expensed | | | - | | | | - | | | | - | | | | 31 | | | | 37 | | | | - | | | | - | | | | 68 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance - December 31, 2011 | | | 3,192 | | | $ | 32 | | | $ | (2,964 | ) | | $ | 23,853 | | | $ | (1 | ) | | $ | 2,980 | | | $ | 668 | | | $ | 24,568 | |
See Notes to Consolidated Financial Statements.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
|
Consolidated Statement of Cash Flows |
(000s omitted, except per share data) |
| | Year Ended December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Cash Flows from Operating Activities | | | | | | | | |
Net income | | $ | 742 | | | $ | 238 | |
Adjustments to reconcile net income to cash from operating activities: | | | | | | | | |
Depreciation and amortization | | | 684 | | | | 802 | |
Provision for loan losses | | | 284 | | | | 1,101 | |
Amortization and accretion on securities | | | 321 | | | | 143 | |
Gain on sale of investment securities | | | - | | | | (546 | ) |
Stock options/awards | | | 68 | | | | 223 | |
Gain on sale of loans held for sale | | | (388 | ) | | | (597 | ) |
Gain on sale of property and equipment | | | (1 | ) | | | (10 | ) |
Loss on sale of real estate owned and other repossessed assets | | | 48 | | | | 10 | |
Originations of loans held for sale | | | (28,821 | ) | | | (42,151 | ) |
Proceeds from sale of loans held for sale | | | 29,209 | | | | 42,800 | |
Net change in: | | | | | | | | |
Accrued interest receivable | | | 82 | | | | (1 | ) |
Other assets | | | (73 | ) | | | (1,032 | ) |
Prepaid FDIC insurance premiums | | | 208 | | | | 348 | |
Accrued expenses and other liabilities | | | (123 | ) | | | (56 | ) |
Deferred income tax benefit - (Note 9) | | | (3 | ) | | | (202 | ) |
| | | | | | | | |
Net cash provided by operating activities | | | 2,237 | | | | 1,070 | |
| | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | |
Net decrease in loans | | | 12,518 | | | | 12,974 | |
Proceeds from maturity of securities | | | 12,790 | | | | 15,951 | |
Proceeds from sale of securities available-for-sale | | | - | | | | 14,426 | |
Proceeds from sale of property and equipment | | | 2 | | | | 31 | |
Proceeds from sale of of real estate owned and other repossessed assets | | | 2,821 | | | | 2,479 | |
Purchase of securities available for sale | | | (29,982 | ) | | | (30,574 | ) |
Proceeds from sale of Federal Home Loan Bank stock | | | 509 | | | | 422 | |
Purchase of premises and equipment | | | (212 | ) | | | (14 | ) |
| | | | | | | | |
Net cash (used in) provided by investing activities | | | (1,554 | ) | | | 15,695 | |
| | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | |
Net decrease in deposits | | | (4,817 | ) | | | (2,634 | ) |
Net (decrease) increase in Repo Sweep Accts | | | (580 | ) | | | 764 | |
Additions to advances from FHLB and Notes Payable | | | 23,700 | | | | 23,025 | |
Repayments of advances from FHLB and Notes Payable | | | (18,200 | ) | | | (39,056 | ) |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 103 | | | | (17,901 | ) |
| | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 786 | | | | (1,136 | ) |
| | | | | | | | |
Cash and Cash Equivalents- Beginning of year | | | 1,963 | | | | 3,099 | |
| | | | | | | | |
Cash and Cash Equivalents - End of year | | $ | 2,749 | | | $ | 1,963 | |
| | | | | | | | |
Supplemental Cash Flow and Noncash Information | | | | | | | | |
Cash (refunded) for income taxes | | $ | (41 | ) | | $ | (638 | ) |
Cash paid for interest on deposits and borrowings | | | 2,308 | | | | 3,575 | |
Transfer of loans to real estate owned & other repossessed assets | | | 3,459 | | | | 2,080 | |
See Notes to Consolidated Financial Statements.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies
Nature of Operations – First Federal of Northern Michigan Bancorp, Inc. (the “Company”) and its subsidiary, First Federal of Northern Michigan (the “Bank”), conduct operations in the northeastern lower peninsula of Michigan. The Company’s primary services include accepting deposits, making commercial, consumer and mortgage loans, and engaging in mortgage banking activities.
Principles of Consolidation - The consolidated financial statements include the accounts of First Federal of Northern Michigan Bancorp, Inc., First Federal of Northern Michigan, and the Bank’s wholly owned subsidiaries, Financial Services & Mortgage Corporation (“FSMC”) and FFNM Agency. FSMC invests in real estate, which includes leasing, selling, developing, and maintaining real estate properties. The main activity of FFNM Agency is to collect the stream of income associated with the sale of the Blue Cross/Blue Shield override business to an outside party and, to a lesser extent, the collection of commissions for the sale of non-insured investment products. All significant intercompany balances and transactions have been eliminated in the consolidation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of investment securities, intangible and deferred tax assets, and mortgage servicing rights.
Significant Group Concentrations of Credit Risk - Most of the Company’s activities are with customers located within the northeastern lower peninsula of Michigan. Note 2 discusses the types of securities in which the Company invests. Note 3 discusses the types of lending in which the Company engages. The Company does not have any significant concentrations to any one industry or customer.
Cash and Cash Equivalents - For the purpose of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from depository institutions and federal funds sold and interest bearing deposits in other depository institutions which mature within ninety days when purchased.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
Securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income net of applicable income taxes.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Federal Home Loan Bank Stock – Federal Home Loan Bank (FHLB) Stock is carried at cost and is held to allow the Bank to conduct business with the entity. The Federal Home Loan Bank sells and purchases its stock at par; therefore cost approximates fair market value.
Mortgage Banking Activities – The Company routinely sells to investors its originated long-term residential fixed-rate mortgage loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding, also known as rate lock commitments. Rate lock commitments on residential mortgage loans that are intended to be sold are considered to be derivatives. Fair value is based on fees currently charged to enter into similar agreements. The fair value of rate lock commitments was insignificant at December 31, 2011 and 2010.
The Company uses forward contracts as part of its mortgage banking activities. Forward contracts provide for the delivery of financial instruments at a specified future date and at a specified price or yield. The fair value of forward contracts was insignificant at December 31, 2011 and 2010.
Loans - The Company grants mortgage, commercial, and consumer loans to customers. Loans are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual life of the loan.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
All interest accrued but not collected, for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses - The allowance for loan losses is established as losses are estimated to have occurred 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 on 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 allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment includepayment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for impairment. The Company does not separately identify individual consumer and residential loans for impairment disclosures until a loss is imminent.
Loan Servicing – Servicing assets are recognized as separate assets when rights are acquired through the sale of originated residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized against non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or on a valuation model that calculates the present value of estimated future net servicing income using market based assumptions. Temporary impairment is recognized through a valuation allowance for an individual stratum to the extent that fair value is less than the capitalized amount for the stratum. If it is later determined that all or a portion of the temporary impairment no longer exists, the valuation allowance is reduced through a recovery of income. An other-than-temporary impairment results in a permanent reduction to the carrying value of the servicing asset.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
Servicing income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Foreclosed Assets (Including Other Real Estate Owned) -Foreclosed real estate held for sale is carried at the lower of fair value minus estimated costs to sell, or cost. Costs of holding foreclosed real estate are charged to expense in the current period, except for significant property improvements, which are capitalized. Valuations are periodically performed by management and an allowance is established by a charge to non-interest expense if the carrying value exceeds the fair value minus estimated costs to sell. Foreclosed real estate is classified as other real estate owned. The net income from operations of foreclosed real estate held for sale is reported in non-interest income.
Property and Equipment - These assets are recorded at cost, less accumulated depreciation. The Bank uses the straight-line method of recording depreciation for financial reporting. The depreciable lives used by the Company are: land improvements 7-10 years, buildings 7-40 years and equipment 3-10 years. Maintenance and repairs are charged to expense and improvements are capitalized.
Intangible Assets – The Company has in the past purchased a branch or branches from other financial institutions. The analysis of these branch acquisitions led the Company to conclude that in each case, we acquired a business and therefore, the excess of purchase price over fair value of net assets acquired has been allocated to core deposit intangible assets. The conclusion was based on the fact that in each case we acquired employees, customers and branch facilities. The expected life for core deposit intangibles is based on the type of products acquired in an acquisition. The amortization periods range from 10 to 15 years and are based on the expected life of the products. The expected life was determined based on an analysis of the life of similar products within the Company and local competition in the markets where the branches were acquired. The core deposit intangibles are amortized on a straight line basis. The core deposit intangible is analyzed quarterly for impairment.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock of the InsuranCenter of Alpena (ICA).
On February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena.
At the time of the sale, goodwill of $600,000 continued to be recorded related to certain assets of the Company that were not sold in the sale of ICA. The assets retained relate to a future stream of commissions. Under an agreement, the Company will receive a portion of the override commission through April, 2014. Management computed an estimated cash flow on this commission using a 6.0% discount rate and determined a fair value of $600,000. Since the $600,000 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009.
Income Taxes -Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company records a valuation allowance if it believes, based on available evidence, that it is “more likely than not” that the future tax assets recognized will not be realized before their expiration. Realization of the Company’s deferred tax assets is primarily dependent upon the generation of a sufficient level of future taxable income.
At December 31, 2011 and 2010, management did not believe it was more likely than not that all of the deferred tax assets would be realized. Accordingly, at December 31, 2011 and 2010 a valuation allowance of $3.0 million and $3.2 million was recorded, respectively. The net deferred tax asset recorded atDecember 31, 2011 and 2010 was $387,000 and $659,000. See Note 9 for additional information.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
Off Balance Sheet Instruments -In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. For letters of credit, a liability is recorded for the fair value of the obligation undertaken in issuing the guarantee.
Comprehensive Income- Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component in the equity section of the consolidated statement of financial condition. Such items, along with net income, are components of comprehensive income.
Stock-Based Compensation – The Company applies the recognition and measurement of stock-based compensation accounting rules for stock-based compensation which is referred to as the fair value method. Compensation cost is based on the fair value of the equity issued to employees. The Company recognizes compensation expense related to stock-based compensation over the period the services are performed. The Company granted no options in 2011 and 2010. Compensation costs charged to earnings were $68,000 and $223,000 in 2011 and 2010, respectively.
Earnings Per Common Share - Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. As of December 31, 2011 and 2010, respectively, 182,682 and 186,132 options were not considered for based on the options being underwater.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
Earnings per common share have been computed based on the following:
| | December 31, | |
| | 2011 | | | 2010 | |
| | | | | | |
Net income | | $ | 742 | | | $ | 238 | |
| | | | | | | | |
Average number of common shares outstanding | | | 2,884,049 | | | | 2,884,049 | |
Effect of dilutive options | | | - | | | | - | |
Average number of common shares outstanding used to calculate diluted earnings per common share | | | 2,884,049 | | | | 2,884,049 | |
Recent Accounting Pronouncements -ASC Topic 310: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. On April 5, 2011, the FASB issued a final standard to assist creditors in determining whether a modification of the terms of a receivable meets the definition of a troubled debt restructuring (TDR). The final standard, ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” was issued as a result of stakeholders questioning whether additional guidance or clarification was needed to assist creditors with determining whether a modification is a TDR. The final standard does not change the long-standing guidance that a restructuring of a debt constitutes a TDR “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” In other words, the creditor must conclude that both the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011, and has been applied retrospectively to restructurings occurring on or after January 1, 2011. Refer to Note 3, Loans, for additional information.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 1 - Summary of Significant Accounting Policies (Continued)
ASC Topic 220:Comprehensive Income: Presentation of Comprehensive Income.On June 16, 2011, the FASB issued Accounting Standards Update (ASU) 2011-05. This ASU is intended to increase the prominence of other comprehensive income in financial statements. The new guidance does not change whether items are reported in net income or in other comprehensive income or whether and when items of other comprehensive income are reclassified to net income. ASU 2011-05 eliminates the option in current U.S. generally accepted accounting principles that permits the presentation of other comprehensive income in the statement of changes in equity. The new guidance in the ASU requires that an entity report comprehensive income in either a single continuous statement that presents the components of net income or a separate but consecutive statement. The new guidance is to be applied retrospectively and early adoption is permitted. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 2 - Securities
Investment securities have been classified according to management’s intent. The carrying value and estimated fair value of securities are as follows:
| | December 31, 2011 | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Market Value | |
| | | | | | | | | | | | |
Securities Available for Sale | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 14,756 | | | $ | 108 | | | $ | (1 | ) | | $ | 14,863 | |
Municipal notes | | | 6,927 | | | | 361 | | | | (12 | ) | | | 7,276 | |
Mortgage-backed securities | | | 30,350 | | | | 603 | | | | (44 | ) | | | 30,909 | |
Equity securities | | | 3 | | | | - | | | | (2 | ) | | | 1 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 52,036 | | | $ | 1,072 | | | $ | (59 | ) | | $ | 53,049 | |
| | | | | | | | | | | | | | | | |
Securities Held to Maturity | | | | | | | | | | | | | | | | |
Municipal notes | | $ | 2,435 | | | $ | 230 | | | $ | - | | | $ | 2,665 | |
| | December 31, 2010 | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Market Value | |
| | | | | | | | | | | | |
Securities Available for Sale | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 4,518 | | | $ | 44 | | | $ | - | | | $ | 4,562 | |
Municipal notes | | | 4,875 | | | | 171 | | | | - | | | | 5,046 | |
Mortgage-backed securities | | | 25,684 | | | | 83 | | | | (75 | ) | | | 25,692 | |
Equity securities | | | 3 | | | | - | | | | (2 | ) | | | 1 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 35,080 | | | $ | 298 | | | $ | (77 | ) | | $ | 35,301 | |
| | | | | | | | | | | | | | | | |
Securities Held to Maturity | | | | | | | | | | | | | | | | |
Municipal notes | | $ | 2,520 | | | $ | 90 | | | $ | (15 | ) | | $ | 2,595 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 2 - Securities (Continued)
The amortized cost and estimated market value of securities at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | December 31, 2011 | |
| | Amortized Cost | | | Market Value | |
| | | | | | |
Available For Sale: | | | | | | | | |
| | | | | | | | |
Due in one year or less | | $ | 1,490 | | | $ | 1,504 | |
Due after one year through five years | | | 16,295 | | | | 16,502 | |
Due in five year through ten years | | | 3,535 | | | | 3,676 | |
Due after ten years | | | 363 | | | | 457 | |
| | | | | | | | |
Subtotal | | | 21,683 | | | | 22,139 | |
| | | | | | | | |
Equity securities | | | 3 | | | | 1 | |
Mortgage-backed securities | | | 30,350 | | | | 30,909 | |
| | | | | | | | |
Total | | $ | 52,036 | | | $ | 53,049 | |
| | | | | | | | |
Held To Maturity | | | | | | | | |
Due in one year or less | | $ | 90 | | | $ | 92 | |
Due after one year through five years | | | 420 | | | | 451 | |
Due in five year through ten years | | | 645 | | | | 712 | |
Due after ten years | | | 1,280 | | | | 1,410 | |
| | | | | | | | |
Total | | $ | 2,435 | | | $ | 2,665 | |
At December 31, 2011 and 2010, securities with a fair value of $31,085,000 and $27,824,000, respectively, were pledged to secure REPO Sweep accounts, FHLB advances and borrowings from the Federal Reserve discount window.
Gross proceeds from the sale of available-for-sale securities for the years ended December 31, 2011 and 2010 were $0 and $14,426,000, respectively, resulting in gross gains of $0 and $546,000, respectively and gross losses of $0 and $0, respectively. The tax provision applicable to these net realized gains amounted to $0 and $186,000, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 2 - Securities (Continued)
The investment securities portfolio is evaluated for impairment throughout the year. Impairment is recorded against individual securities, unless the decrease in fair value is attributable to interest rates or the lack of an active market, and management determines that the Company has the intent and ability to hold the investment for a period of time sufficient to allow for an anticipated recovery in the market value. The fair values of investments with an amortized cost in excess of their fair values at December 31, 2011 and December 31, 2010 are as follows:
| | December 31, 2011 | | | December 31, 2010 | |
| | | | | Gross Unrealized Losses | | | | | | Gross Unrealized Losses | | | | | | Gross Unrealized Losses | | | | | | Gross Unrealized Losses | |
| | Fair Value | | | <12 months | | | Fair Value | | | >12 months | | | Fair Value | | | <12 months | | | Fair Value | | | >12 months | |
Available For Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 1,999 | | | $ | (1 | ) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Corporate and other securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Municipal notes | | | 646 | | | | (12 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Mortgage-backed securities | | | 8,137 | | | | (27 | ) | | | 1,458 | | | | (17 | ) | | | 12,626 | | | | (75 | ) | | | - | | | | - | |
Equity securities | | | - | | | | - | | | | 1 | | | | (2 | ) | | | 1 | | | | (2 | ) | | | - | | | | - | |
Total Securities available for sale | | $ | 10,782 | | | $ | (40 | ) | | $ | 1,459 | | | $ | (19 | ) | | $ | 12,627 | | | $ | (77 | ) | | $ | - | | | $ | - | |
Held to Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Municipal notes | | | - | | | | - | | | | - | | | | - | | | | 382 | | | | (13 | ) | | | 28 | | | | (2 | ) |
Total Securities held to maturity | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 382 | | | $ | (13 | ) | | $ | 28 | | | $ | (2 | ) |
The unrealized losses on the securities held in the portfolio are not considered other than temporarily impaired (OTTI) and have not been recognized into income. This decision is based on the Company’s ability and intent to hold any potentially impaired security until maturity. The performance of the security is based on the contractual terms of the agreement, the extent of the impairment and the financial condition and credit quality of the issuer. The decline in market value is considered temporary and a result of changes in interest rates and other market variables. The Company has the intent and ability to hold these securities until recovery, which may not be until maturity. The fair value of these securities is expected to recover as the securities approach maturity.
As of December 31, 2011 and 2010, there were 10 and 16 securities in an unrealized loss position, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans
Loans at December 31, 2011 and 2010 are summarized as follows:
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Real estate loans - One- to four-family residential | | $ | 66,599 | | | $ | 71,697 | |
Commercial loans: | | | | | | | | |
Secured by real estate | | | 54,202 | | | | 61,010 | |
Other | | | 7,002 | | | | 8,848 | |
Total commercial loans | | | 61,204 | | | | 69,858 | |
Consumer loans: | | | | | | | | |
Secured by real estate | | | 13,395 | | | | 16,547 | |
Other | | | 1,477 | | | | 2,118 | |
Total consumer loans | | | 14,872 | | | | 18,665 | |
Total gross loans | | | 142,675 | | | | 160,220 | |
Less: | | | | | | | | |
Net deferred loan fees | | | 273 | | | | 245 | |
Allowance for loan losses | | | 1,518 | | | | 2,831 | |
Total loans - net | | $ | 140,884 | | | $ | 157,144 | |
Final loan maturities and rate sensitivity of the loan portfolio are as follows:
| | December 31, 2011 | |
| | Less Than One Year | | | One Year to Five Years | | | After Five Years | | | Total | |
| | | | | | | | | | | | |
Loans at fixed interest rates | | $ | 12,423 | | | $ | 25,394 | | | $ | 40,976 | | | $ | 78,793 | |
Loans at variable interest rates | | | 10,536 | | | | 12,948 | | | | 40,398 | | | | 63,882 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 22,959 | | | $ | 38,342 | | | $ | 81,374 | | | $ | 142,675 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
Certain directors and executive officers of the Company were loan customers during 2011 and 2010. Such loans were made in the ordinary course of business and do not involve more than a normal risk of collectibility. An analysis of aggregate loans outstanding to directors and executive officers for the years ended December 31, 2011 and 2010 are as follows:
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Aggregate balance - Beginning of Period | | $ | 3,357 | | | $ | 3,931 | |
| | | | | | | | |
New loans | | | 771 | | | | 1,010 | |
Repayments | | | (784 | ) | | | (1,584 | ) |
| | | | | | | | |
Aggregate balance - End of Period | | $ | 3,344 | | | $ | 3,357 | |
The following tables illustrate the contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2011 and 2010:
As of December 31, 2011 |
| | | | | | | | | | | | | | | | | | | | Recorded | |
| | | | | | | | | | | | | | | | | | | | Investment > 90 | |
| | 30 - 59 Days | | | 60 - 89 Days | | | Greater than 90 | | | Total | | | | | | Total Financing | | | Days and | |
| | Past Due | | | Past Due | | | Days | | | Past Due | | | Current | | | Receivables | | | Accruing | |
| | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate - construction | | $ | - | | | $ | - | | | $ | 173 | | | $ | 173 | | | $ | 91 | | | $ | 264 | | | $ | - | |
Commercial Real Estate - other | | | 3,808 | | | | 339 | | | | 245 | | | | 4,392 | | | | 49,546 | | | | 53,938 | | | | - | |
Commercial - non real estate | | | 46 | | | | 29 | | | | - | | | | 75 | | | | 6,927 | | | | 7,002 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer - Real Estate | | | 394 | | | | 34 | | | | 128 | | | | 556 | | | | 12,839 | | | | 13,395 | | | | - | |
Consumer - Other | | | 5 | | | | 25 | | | | - | | | | 30 | | | | 1,447 | | | | 1,477 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | | 3,055 | | | | 1,501 | | | | 1,969 | | | | 6,525 | | | | 60,074 | | | | 66,599 | | | | 238 | |
Total | | $ | 7,308 | | | $ | 1,928 | | | $ | 2,515 | | | $ | 11,751 | | | $ | 130,924 | | | $ | 142,675 | | | $ | 238 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
As of December 31, 2010 |
| | | | | | | | | | | | | | | | | | | | Recorded | |
| | | | | | | | | | | | | | | | | | | | Investment > 90 | |
| | 30 - 59 Days | | | 60 - 89 Days | | | Greater than 90 | | | Total | | | | | | Total Financing | | | Days and | |
| | Past Due | | | Past Due | | | Days | | | Past Due | | | Current | | | Receivables | | | Accruing | |
| | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial Real Estate - construction | | $ | - | | | $ | - | | | $ | 1,772 | | | $ | 1,772 | | | $ | 1,498 | | | $ | 3,270 | | | $ | - | |
Commercial Real Estate - other | | | 891 | | | | 488 | | | | 784 | | | | 2,163 | | | | 55,577 | | | | 57,740 | | | | 82 | |
Commercial - non real estate | | | - | | | | 6 | | | | - | | | | 6 | | | | 8,842 | | | | 8,848 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer - Real Estate | | | 650 | | | | 108 | | | | 205 | | | | 963 | | | | 15,584 | | | | 16,547 | | | | - | |
Consumer - Other | | | 27 | | | | 14 | | | | 2 | | | | 43 | | | | 2,075 | | | | 2,118 | | | | 2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential | | | 3,919 | | | | 2,056 | | | | 2,434 | | | | 8,409 | | | | 63,288 | | | | 71,697 | | | | 282 | |
Total | | $ | 5,487 | | | $ | 2,672 | | | $ | 5,197 | | | $ | 13,356 | | | $ | 146,864 | | | $ | 160,220 | | | $ | 366 | |
The Bank uses an eight tier risk rating system to grade its commercial loans. The grade of a loan may change during the life of the loans. The risk ratings are described as follows:
Risk Grade 1 (Excellent) -Prime loans based on liquid collateral, with adequate margin or supported by strong financial statements. Probability of serious financial deterioration is unlikely. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. This classification also includes all loans secured by certificates of deposit or cash equivalents.
Risk Grade 2 (Good) -Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Probability of serious financial deterioration is unlikely. These loans possess a sound repayment source (and/or a secondary source). These loans represent less than the normal degree of risk associated with the type of financing contemplated.
Risk Grade 3 (Satisfactory) -Satisfactory loans of average risk – may have some minor deficiency or vulnerability to changing economic conditions, but still fully collectible. There may be some minor weakness but with offsetting features or other support readily available. These loans present a normal degree of risk associated with the type of financing. Actual and projected indicators and market conditions provide satisfactory assurance that the credit shall perform in accordance with agreed terms.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
Risk Grade 4 (Acceptable) -Loans considered satisfactory, but which are of slightly “below average” credit risk due to financial weaknesses or uncertainty. The loans warrant a somewhat higher than average level of monitoring to insure that weaknesses do not advance. The level of risk is considered acceptable and within normal underwriting guidelines, so long as the loan is given the proper level of management supervision.
Risk Grade 4.5 (Monitored) -Loans are considered “below average” and monitored more closely due to some credit deficiency that poses additional risk but is not considered adverse to the point of being a “classified” credit. Possible reasons for additional monitoring may include characteristics such as temporary negative debt service coverage due to weak economic conditions, borrower may have experienced recent losses from operations, declining equity and/or increasing leverage, or marginal liquidity that may affect long-term sustainability. Loans of this grade have a higher degree of risk and warrant close monitoring to insure against further deterioration.
Risk Grade 5 (Other Assets Especially Mentioned) (OAEM) -Loans which possess some credit deficiency or potential weakness, which deserve close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future.
Risk Grade 6 (Substandard) - Loans are “substandard” whose full, final collectability does not appear to be a matter of serious doubt, but which nevertheless portray some form of well defined weakness that requires close supervision by Bank management. The noted weaknesses involve more than normal banking risk. One or more of the following characteristics may be exhibited in loans classified Substandard: (1) Loans possess a defined credit weakness and the likelihood that the loan shall be paid from the primary source of repayment is uncertain; (2) Loans are not adequately protected by the current net worth and/or paying capacity of the obligor; (3) primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility that the Bank shallsustain some loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) the borrower is not generating enough cash flow to repay loan principal, however, continues to make interest payments; (7) the Bank is forced into a subordinated or unsecured position due to flaws in documentation; (8) loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
Grade 7 (Doubtful) -Loans have all the weaknesses of those classified Substandard. Additionally, however, these weaknesses make collection or liquidation in full, based on existing conditions, improbable. Loans in this category are typically not performing in conformance with established terms and conditions. Full repayment is considered “Doubtful”, but extent of loss is not currently determinable.
Risk Grade 8 (Loss) -Loans are considered uncollectible and of such little value, that continuing to carry them as an asset on the Bank’s financial statements is not feasible.
The following tables present the risk category of loans by class of loans based on the most recent analysis performed as of December 31, 2011 and 2010:
As of December 31, 2011 | |
| | | | | | | | | | |
| | | Commercial Real Estate | | | Commercial Real Estate | | | | |
Loan Grade | | | Construction | | | Other | | | Commercial | |
| | | | | | | | | | |
| 1-2 | | | $ | - | | | $ | - | | | $ | 7 | |
| 3 | | | | - | | | | 10,911 | | | | 2,178 | |
| 4 | | | | 91 | | | | 31,926 | | | | 4,512 | |
| 5 | | | | - | | | | 1,078 | | | | - | |
| 6 | | | | 173 | | | | 10,023 | | | | 305 | |
| 7 | | | | - | | | | - | | | | - | |
| 8 | | | | - | | | | - | | | | - | |
Total | | | $ | 264 | | | $ | 53,938 | | | $ | 7,002 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
As of December 31, 2010 | |
| | | | | | | | | | |
| | | Commercial Real Estate | | | Commercial Real Estate | | | | |
Loan Grade | | | Construction | | | Other | | | Commercial | |
| | | | | | | | | | |
| 1-2 | | | $ | - | | | $ | - | | | $ | 5 | |
| 3 | | | | 70 | | | | 12,411 | | | | 2,958 | |
| 4 | | | | 1,428 | | | | 33,754 | | | | 5,631 | |
| 5 | | | | - | | | | 3,245 | | | | 248 | |
| 6 | | | | 1,772 | | | | 8,330 | | | | 6 | |
| 7 | | | | - | | | | - | | | | - | |
| 8 | | | | - | | | | - | | | | - | |
Total | | $ | 3,270 | | | $ | 57,740 | | | $ | 8,848 | |
For residential real estate and other consumer credit the Company also evaluates credit quality based on the aging status of the loan and by payment activity. Loans 60 or more days past due are monitored by the collection committee.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
The following tables present the risk category of loans by class based on the most recent analysis performed as of December 31, 2011 and 2010.
As of December 31, 2011 |
| | Residential | | |
| | | | | |
Loan Grade: | | | | | |
Pass | | $ | 63,941 | | |
Special Mention | | | - | | |
Substandard | | | 2,658 | | |
Total | | $ | 66,599 | | |
| | Consumer - | | | | |
�� | | Real Estate | | | Consumer - Other | |
| | | | | | |
Performing | | $ | 13,248 | | | $ | 1,473 | |
Nonperforming | | | 147 | | | | 4 | |
Total | | $ | 13,395 | | | $ | 1,477 | |
As of December 31, 2010 |
| | Residential | | |
| | | | |
Loan Grade: | | | | | |
Pass | | $ | 68,301 | | |
Special Mention | | | - | | |
Substandard | | | 3,396 | | |
Total | | $ | 71,697 | | |
| | Consumer - | | | | |
| | Real Estate | | | Consumer - Other | |
| | | | | | | | |
Performing | | $ | 16,341 | | | $ | 2,116 | |
Nonperforming | | | 206 | | | | 2 | |
Total | | $ | 16,547 | | | $ | 2,118 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
The following tables present the recorded investment in non-accrual loans by class as of December 31, 2011 and 2010:
As of December 31, 2011 |
| | | |
Commercial Real Estate: | | | | |
Commercial Real Estate - construction | | $ | 173 | |
Commercial Real Estate - other | | | 356 | |
Commercial | | | - | |
| | | | |
Consumer: | | | | |
Consumer - real estate | | | 152 | |
Consumer - other | | | - | |
| | | | |
Residential: | | | | |
Residential | | | 2,420 | |
| | | | |
Total | | $ | 3,101 | |
As of December 31, 2010 |
| | | |
Commercial Real Estate: | | | | |
Commercial Real Estate - construction | | $ | 1,772 | |
Commercial Real Estate - other | | | 1,148 | |
Commercial | | | - | |
| | | | |
Consumer: | | | | |
Consumer - real estate | | | 206 | |
Consumer - other | | | - | |
| | | | |
Residential: | | | | |
Residential | | | 3,114 | |
| | | | |
Total | | $ | 6,240 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
|
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2011 and 2010:
As of December 31, 2011 |
| | | | | | | | | | | Average | | | Interest | |
| | Unpaid Principal | | | Recorded | | | Related | | | Recorded | | | Income | |
| | Balance | | | Investment | | | Allowance | | | Investment | | | Recognized | |
| | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Real Estate - Construction | | | 1,589 | | | | 173 | | | | - | | | | 258 | | | | - | |
Commercial Real Estate - Other | | | 626 | | | | 626 | | | | - | | | | 632 | | | | - | |
Consumer - Real Estate | | | 171 | | | | 152 | | | | - | | | | 159 | | | | - | |
Consumer - Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential | | | 2,017 | | | | 1,640 | | | | - | | | | 1,656 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
With a specific allowance recorded: Commercial | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial Real Estate - Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial Real Estate - Other | | | 1,337 | | | | 1,128 | | | | 85 | | | | 1,135 | | | | - | |
Consumer - Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer - Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential | | | 813 | | | | 780 | | | | 199 | | | | 763 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Totals: | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Real Estate - Construction | | $ | 1,589 | | | $ | 173 | | | $ | - | | | $ | 258 | | | $ | - | |
Commercial Real Estate - Other | | $ | 1,963 | | | $ | 1,754 | | | $ | 85 | | | $ | 1,767 | | | $ | - | |
Consumer - Real Estate | | $ | 171 | | | $ | 152 | | | $ | - | | | $ | 159 | | | $ | - | |
Consumer - Other | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Residential | | $ | 2,830 | | | $ | 2,420 | | | $ | 199 | | | $ | 2,419 | | | $ | - | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
As of December 31, 2010 |
| | | | | | | | | | | Average | | | Interest | |
| | Unpaid Principal | | | Recorded | | | Related | | | Recorded | | | Income | |
| | Balance | | | Investment | | | Allowance | | | Investment | | | Recognized | |
| | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Real Estate - Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial Real Estate - Other | | | 822 | | | | 674 | | | | - | | | | - | | | | - | |
Consumer - Real Estate | | | 124 | | | | 123 | | | | - | | | | 193 | | | | - | |
Consumer - Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential | | | 1,842 | | | | 1,770 | | | | - | | | | 1,803 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
With a specific allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial Real Estate - Construction | | | 3,449 | | | | 1,772 | | | | 305 | | | | 1,805 | | | | - | |
Commercial Real Estate - Other | | | 586 | | | | 474 | | | | 89 | | | | 1,132 | | | | - | |
Consumer - Real Estate | | | 83 | | | | 83 | | | | 25 | | | | 14 | | | | - | |
Consumer - Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential | | | 1,416 | | | | 1,344 | | | | 165 | | | | 1,330 | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Totals: | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commercial Real Estate - Construction | | $ | 3,449 | | | $ | 1,772 | | | $ | 305 | | | $ | 1,805 | | | $ | - | |
Commercial Real Estate - Other | | $ | 1,408 | | | $ | 1,148 | | | $ | 89 | | | $ | 1,132 | | | $ | - | |
Consumer - Real Estate | | $ | 207 | | | $ | 206 | | | $ | 25 | | | $ | 207 | | | $ | - | |
Consumer - Other | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Residential | | $ | 3,258 | | | $ | 3,114 | | | $ | 165 | | | $ | 3,133 | | | $ | - | |
No additional funds are committed to be advanced in connection with impaired loans.
The Bank may agree to modify the terms of a loan in order to improve the Bank’s ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance. Modifications that are performed due to the debtor’s financial difficulties are considered Troubled Debt Restructurings (TDRs). Loans that were classified as TDRs during the year ended December 31, 2011 are as follows:
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 - Loans (Continued)
| | Troubled Debt Restructurings | | | Troubled Debt Restructurings that Subsequently Defaulted | |
| | For the Year Ended December 31, 2011 | | | For the Year Ended December 31, 2011 | |
| | Number of Loans | | | Pre-modification outstanding recorded investment | | | Post-modification outstanding recorded investment | | | Number of Loans | | | Recorded Investment | |
| | | | | | | | | | | | | | | |
Commercial Loans | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Commerical Real Estate - Construction | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial Real Estate - Other | | | 3 | | | | 1,503 | | | | 1,398 | | | | - | | | | - | |
Consumer - Real Estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Consumer - Other | | | - | | | | - | | | | - | | | | - | | | | - | |
Residential | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | | 3 | | | $ | 1,503 | | | $ | 1,398 | | | | - | | | $ | - | |
For the majority of the Bank’s impaired loans, the Bank will apply the observable market price methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan’s effective rate of interest. To determine observable market price, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated evaluations are received, the Bank may discount the collateral value used.
The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquent, secured consumer loans are charged down to the value of collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial credits are charged down at 90 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-off may be realized as further unsecured positions are recognized.
The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 3 – Loans (Continued)
Activity in the allowance for loan and lease losses was as follows for the years ended December 31, 2011and 2010:
For the Year Ended December 31, 2011 |
| | Commercial | | | Commercial | | | | | | Consumer | | | | | | | | | | | | | |
| | Construction | | | Real Estate | | | Commercial | | | Real Estate | | | Consumer | | | Residential | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 535 | | | $ | 1,281 | | | $ | 192 | | | $ | 228 | | | $ | 59 | | | $ | 536 | | | $ | - | | | $ | 2,831 | |
Charge-offs | | | (93 | ) | | | (334 | ) | | | (6 | ) | | | (166 | ) | | | (26 | ) | | | (1,119 | ) | | | - | | | | (1,744 | ) |
Recoveries | | | - | | | | 79 | | | | 1 | | | | 31 | | | | 11 | | | | 25 | | | | - | | | | 147 | |
Provision | | | (432 | ) | | | (633 | ) | | | (134 | ) | | | 53 | | | | 2 | | | | 1,428 | | | | - | | | | 284 | |
Ending Balance | | $ | 10 | | | $ | 393 | | | $ | 53 | | | $ | 146 | | | $ | 46 | | | $ | 870 | | | $ | - | | | $ | 1,518 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: individually evaluated for impairment | | $ | - | | | $ | 85 | | | $ | - | | | $ | - | | | $ | - | | | $ | 199 | | | $ | - | | | $ | 284 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans collectively evaluated for impairment | | $ | 10 | | | $ | 308 | | | $ | 53 | | | $ | 146 | | | $ | 46 | | | $ | 671 | | | $ | - | | | $ | 1,234 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans acquired with deteriorated credit quality | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financing Receivables: Ending Balance | | $ | 264 | | | $ | 53,938 | | | $ | 7,002 | | | $ | 13,395 | | | $ | 1,477 | | | $ | 66,599 | | | $ | - | | | $ | 142,675 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: individually evaluated for impairment | | $ | 173 | | | $ | 1,754 | | | $ | - | | | $ | 152 | | | $ | - | | | $ | 2,420 | | | $ | - | | | $ | 4,499 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans collectively evaluated for impairment | | $ | 91 | | | $ | 52,184 | | | $ | 7,002 | | | $ | 13,243 | | | $ | 1,477 | | | $ | 64,179 | | | $ | - | | | $ | 138,176 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans acquired with deteriorated credit quality | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
For the Year Ended December 31, 2010 |
| | Commercial | | | Commercial | | | | | | Consumer | | | | | | | | | | | | | |
| | Construction | | | Real Estate | | | Commercial | | | Real Estate | | | Consumer | | | Residential | | | Unallocated | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | 997 | | | $ | 1,513 | | | $ | 245 | | | $ | 211 | | | $ | 45 | | | $ | 649 | | | $ | - | | | $ | 3,660 | |
Charge-offs | | $ | (1,013 | ) | | $ | (512 | ) | | $ | - | | | $ | (220 | ) | | $ | (99 | ) | | $ | (258 | ) | | $ | - | | | $ | (2,102 | ) |
Recoveries | | $ | 60 | | | $ | 85 | | | $ | - | | | $ | 14 | | | $ | 11 | | | $ | 2 | | | $ | - | | | $ | 172 | |
Provision | | | 491 | | | | 195 | | | | (53 | ) | | | 223 | | | | 102 | | | | 143 | | | | - | | | | 1,101 | |
Ending Balance | | $ | 535 | | | $ | 1,281 | | | $ | 192 | | | $ | 228 | | | $ | 59 | | | $ | 536 | | | $ | - | | | $ | 2,831 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: individually evaluated for impairment | | $ | 305 | | | $ | 89 | | | $ | - | | | $ | 25 | | | $ | - | | | $ | 165 | | | $ | - | | | $ | 584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans collectively evaluated for impairment | | $ | 230 | | | $ | 1,192 | | | $ | 192 | | | $ | 203 | | | $ | 59 | | | $ | 371 | | | $ | - | | | $ | 2,247 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans acquired with deteriorated credit quality | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financing Receivables: Ending Balance | | $ | 3,270 | | | $ | 57,740 | | | $ | 8,848 | | | $ | 16,547 | | | $ | 2,118 | | | $ | 71,697 | | | $ | - | | | $ | 160,220 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: individually evaluated for impairment | | $ | 1,772 | | | $ | 1,148 | | | $ | - | | | $ | 206 | | | $ | - | | | $ | 3,114 | | | $ | - | | | $ | 6,240 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans collectively evaluated for impairment | | $ | 1,498 | | | $ | 56,592 | | | $ | 8,848 | | | $ | 16,341 | | | $ | 2,118 | | | $ | 68,583 | | | $ | - | | | $ | 153,980 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending balance: loans acquired with deteriorated credit quality | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 4 - Property and Equipment
A summary of property and equipment is as follows:
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Land | | $ | 1,188 | | | $ | 1,188 | |
Land improvements | | | 214 | | | | 214 | |
Buildings | | | 6,483 | | | | 6,470 | |
Equipment | | | 3,712 | | | | 3,573 | |
| | | | | | | | |
Total property and equipment | | | 11,597 | | | | 11,445 | |
| | | | | | | | |
Accumulated depreciation | | | 5,751 | | | | 5,418 | |
| | | | | | | | |
Net property and equipment | | $ | 5,846 | | | $ | 6,027 | |
Depreciation expense was $392,000 and $509,000 for the periods ended December 31, 2011 and 2010, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 5 - Servicing
Loans serviced for others are not included in the accompanying consolidated statement of financial condition. The unpaid principal balances of mortgage and other loans serviced for others were approximately $143,051,000 and $144,948,000 at December 31, 2011 and 2010, respectively.
The balance of capitalized servicing rights, net of valuation allowance, is included in other assets at December 31, 2011 and 2010.
The key economic assumptions used in determining the fair value of the mortgage servicing rights are as follows:
| | December 31, | |
| | 2011 | | | 2010 | |
Annual constant prepayment speed (CPR) | | | 17.52 | % | | | 15.67 | % |
Weighted average life (in months) | | | 246 | | | | 246 | |
Discount rate | | | 8.13 | % | | | 7.96 | % |
The fair value of our mortgage servicing rights was estimated to be $1,089,000 and $1,251,000 at December 31, 2011 and December 31, 2010, respectively.
The following table summarizes mortgage servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:
| | December 31 | |
| | 2011 | | | 2010 | |
Balance - beginning of period: | | $ | 960 | | | $ | 730 | |
Originated mortgage servicing rights capitalized | | | 362 | | | | 536 | |
Amortization of mortgage servicing rights | | | (329 | ) | | | (306 | ) |
Balance - end of period | | | 993 | | | | 960 | |
| | | | | | | | |
Valuation allowances: | | | | | | | | |
Balance - beginning of period | | | - | | | | - | |
Additions | | | - | | | | - | |
Reductions | | | - | | | | - | |
Write-downs | | | - | | | | - | |
| | | | | | | | |
Balance - end of period (net of allowances) | | $ | 993 | | | $ | 960 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 6 - Intangible Assets
Intangible assets of the Company are summarized as follows:
| | December 31, 2011 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Amortized intangible assets: | | | | | | | | | | | | |
Core deposit | | $ | 3,081 | | | $ | 3,017 | | | $ | 64 | |
Commission residual | | | 600 | | | | 329 | | | | 271 | |
Total | | $ | 3,681 | | | $ | 3,346 | | | $ | 335 | |
| | December 31, 2010 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | |
Amortized intangible assets: | | | | | | | | | | | | |
Core deposit | | $ | 3,081 | | | $ | 2,841 | | | $ | 240 | |
Commission residual | | | 600 | | | | 213 | | | | 387 | |
Total | | $ | 3,681 | | | $ | 3,054 | | | $ | 627 | |
Amortization expense was $293,000 for the periods ended December 31, 2011 and 2010, respectively.
As discussed in Note 1, on February 27, 2009 the Company announced that it had sold the majority of the assets of the InsuranCenter of Alpena. The Company allocated the goodwill between the assets sold and the assets retained.
The assets retained relate to a future stream of commissions related to the override commission discussed earlier. Under an agreement, the Company will receive a portion of the override commission through April, 2014. Management computed an estimated cash flow on this commission and using a 6.0% discount rate determined a fair value of $600,000. Since the $600,000 allocation of fair value relates to a finite life asset, the Company re-characterized the goodwill as an amortizable intangible and began amortizing the asset in March, 2009.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 6 - Intangible Assets (Continued)
The following table sets forth the amount of remaining amortization for intangibles assets:
| | For the Year Ended December 31, | |
| | 2012 | | | 2013 | | | 2014 | |
| | | | | | | | | |
Core deposit | | | 60 | | | | 3 | | | | 1 | |
Commission residual | | | 116 | | | | 116 | | | | 39 | |
Total | | | 176 | | | | 119 | | | | 40 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 7 - Deposits
Deposit accounts, by type and range of rates, consist of the following:
| | December 31 | |
| | 2011 | | | 2010 | |
Account Type | | | | | | | | |
| | | | | | | | |
NOW accounts and MMDA | | $ | 41,795 | | | $ | 44,107 | |
Regular savings accounts | | | 17,873 | | | | 16,785 | |
| | | | | | | | |
Total | | | 59,668 | | | | 60,892 | |
| | | | | | | | |
Certificate of Deposit Rates | | | | | | | | |
| | | | | | | | |
0.50 percent to 0.99 percent | | | 38,802 | | | | 9,852 | |
1.00 percent to 1.99 percent | | | 18,343 | | | | 35,119 | |
2.00 percent to 2.99 percent | | | 16,057 | | | | 26,573 | |
3.00 percent to 3.99 percent | | | 4,078 | | | | 8,718 | |
4.00 percent to 4.99 percent | | | 1,092 | | | | 3,488 | |
5.00 percent to 8.99 percent | | | - | | | | 475 | |
| | | | | | | | |
Total certificate of deposits | | | 78,372 | | | | 84,225 | |
| | | | | | | | |
Total interest-bearing deposits | | $ | 138,040 | | | $ | 145,117 | |
Certificates of deposit $100,000 or greater at December 31, 2011 and 2010 were $25,499,000 and $26,702,000, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 7 – Deposits (Continued)
The following table sets forth the amount and maturities of certificates of deposit:
| | December 31, 2011 | |
| | Amount Due | |
Rate | | Less than 1 Year | | | 1-2 Years | | | 2-3 Years | | | 3-5 Years | | | Greater than 5 Years | | | Total | |
0.50 percent to 0.99 percent | | $ | 26,396 | | | $ | 12,388 | | | $ | 18 | | | $ | - | | | $ | - | | | $ | 38,802 | |
1.00 percent to 1.99 percent | | | 6,068 | | | | 3,640 | | | | 3,623 | | | | 4,936 | | | | 76 | | | | 18,343 | |
2.00 percent to 2.99 percent | | | 4,899 | | | | 3,371 | | | | 1,627 | | | | 4,415 | | | | 1,745 | | | | 16,057 | |
3.00 percent to 3.99 percent | | | 437 | | | | 1,883 | | | | 582 | | | | 599 | | | | 577 | | | | 4,078 | |
4.00 percent to 4.99 percent | | | 703 | | | | 257 | | | | - | | | | 79 | | | | 53 | | | | 1,092 | |
5.00 percent to 8.99 percent | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 38,503 | | | $ | 21,539 | | | $ | 5,850 | | | $ | 10,029 | | | $ | 2,451 | | | $ | 78,372 | |
Interest expense on deposits is summarized as follows:
| | Year Ended December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
NOW and MMDAs | | $ | 159 | | | $ | 324 | |
Regular savings | | | 9 | | | | 8 | |
Certificates of deposit | | | 1,381 | | | | 1,964 | |
| | | | | | | | |
Total | | $ | 1,549 | | | $ | 2,296 | |
Deposits from related parties held by the Bank at December 31, 2011 and 2010 amounted to $698,000 and $989,000, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 8 - Federal Home Loan Bank and Federal Reserve Advances
The Bank has advances from the Federal Home Loan Bank. Interest rates range from 0.78% to 3.81% with a weighted average interest rate of 2.08%. These advances contain varying maturity dates through October 18, 2017 with a weighted average maturity of approximately 23 months. The advances are collateralized by approximately $47,802,000 and $48,338,000 of mortgage loans as of December 31, 2011 and 2010, respectively. Inaddition, at December 31, 2011 and 2010, securities with a carrying value of $19,877,000 and $16,843,000, respectively, were pledged as collateral for Federal Home Loan Bank advances. Available borrowings with the Federal Home Loan Bank at December 31, 2011 totaled $49,561,000, of which $34,500,000 was outstanding.
The advances are subject to prepayment penalties subject to the provisions and conditions of the credit policy of the Federal Home Loan Bank. Future maturities of the advances are as follows:
Years Ending December 31 | | Amount | | | Weighted Average Interest Rate | |
| | | | | | |
2012 | | $ | 17,000 | | | | 2.37 | |
2013 | | | 9,500 | | | | 2.07 | |
2015 | | | 600 | | | | 1.22 | |
2016 | | | 5,000 | | | | 1.28 | |
2017 | | | 2,400 | | | | 2.04 | |
Total | | $ | 34,500 | | | | 2.08 | |
The Bank did not have any variable rate advances as of December 31, 2011 or 2010, respectively.
In 2009, the Bank entered into a discount window loan agreement with the Federal Reserve Bank that allows for advances up to seventy-five percent of the collateral balance. As of December 31, 2011, these advances are secured by investment securities with a fair value of approximately $1,631,000 and are generally due within 28 days from the date of the advance. The interest rate on the advances is based on the quoted federal reserve discount window rate (effective rate of 0.75 percent as of December 31, 2011). At December 31, 2011 and 2010, the Bank had $0 outstanding in advances.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 9 - Federal Income Tax
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. The Company and the Bank file a consolidated Federal income tax return.
The analysis of the consolidated provision for federal income tax is as follows:
| | Year Ended December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Continuing operations: | | | | | | | | |
Current provision | | $ | 3 | | | $ | 201 | |
Deferred benefit | | | (3 | ) | | | (201 | ) |
| | | | | | | | |
Total | | $ | - | | | $ | - | |
A reconciliation of the federal income tax expense and the amount computed by applying the statutory federal income tax rate (34 percent) to income before federal income tax is as follows:
| | Year Ended December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Tax at statutory rate | | $ | 252 | | | $ | 81 | |
Increase (decrease) from: | | | | | | | | |
Change in valuation allowance | | | (177 | ) | | | (167 | ) |
Tax-exempt interest | | | (55 | ) | | | (60 | ) |
Other | | | (20 | ) | | | 146 | |
| | | | | | | | |
Total income tax expense | | $ | - | | | $ | - | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 9 - Federal Income Tax (Continued)
The net deferred tax asset was comprised of the following temporary differences:
| | December 31 | |
| | 2011 | | | 2010 | |
Deferred tax assets: | | | | | | | | |
Allowance for loan losses | | $ | - | | | $ | 327 | |
Valuation allowance for real estate held for sale | | | 185 | | | | 538 | |
Non-accrual loan interest | | | 20 | | | | 87 | |
Directors' benefit plan | | | 279 | | | | 347 | |
Net operating loss carryforward | | | 3,320 | | | | 2,572 | |
Investment in subsidiary | | | 784 | | | | 784 | |
Net deferred loan origination fees | | | 93 | | | | 83 | |
Other | | | 154 | | | | 174 | |
| | | | | | | | |
Total deferred tax assets | | | 4,835 | | | | 4,912 | |
| | | | | | | | |
Less: valuation allowance | | | 3,028 | | | | 3,205 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Allowance for loan losses | | | 143 | | | | - | |
Mortgage servicing rights | | | 338 | | | | 327 | |
Partnership losses | | | 118 | | | | 121 | |
Unrealized gain on available-for-sale securities | | | 344 | | | | 75 | |
Depreciation | | | 287 | | | | 308 | |
Other | | | 190 | | | | 217 | |
| | | | | | | | |
Total deferred tax liabilities | | | 1,420 | | | | 1,048 | |
| | | | | | | | |
Net deferred tax asset | | $ | 387 | | | $ | 659 | |
The Company has net operating loss carryforwards of approximately $9.8 million generated from December 31, 2007 through December 31, 2011 that are available to reduce total taxable income through the years ending December 31, 2031.
For tax years beginning prior to January 1, 1996, a qualified thrift institution was allowed a bad debt deduction for tax purposes based on a percentage of taxable income or on actual experience. The Bank used the percentage of taxable income method through December 31, 1995.
A deferred tax liability has not been recognized for the tax bad debt base year reserves of the Bank. The base year reserves are the balance of reserves as of December 31, 1987. At December 31, 2011 and 2010, the amount of those reserves was approximately $60,000. The amount of the unrecognized deferred tax liability at December 31, 2011 and 2010 was approximately $20,000.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 10 - Off Balance Sheet Risk Commitments and Contingencies
The Bank 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, standby letters of credit, and commercial letters of credit. These financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition.
The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts represent credit risk:
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Commitments to grant loans | | $ | 9,783 | | | $ | 13,019 | |
Unfunded commitments under lines of credit | | | 14,485 | | | | 14,138 | |
Commercial and standby letters of credit | | | 150 | | | | 5 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management's credit evaluation of the customer.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 10 - Off Balance Sheet Risk Commitments and Contingencies (continued)
Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. In most cases, these lines of credit are collateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily used to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. Under ASC 840-10-25-34, fees earned on commercial and standby letters of credit are required to be deferred over the contractual life of the letter of credit. The Company determined that the fair value of guarantees on standby letters of credit has an immaterial effect on the financial results at December 31, 2011 and 2010.
To reduce credit risk related to the use of credit-related financial instruments, the Company generally holds collateral supporting those commitments if deemed necessary. The amount and nature of the collateral obtained is based on the Company's credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant, equipment, and real estate.
If the counterparty does not have the right and ability to redeem the collateral or the Company is permitted to sell or repledge the collateral on short notice, the Company records the collateral in its balance sheet at fair value with a corresponding obligation to return it.
Various legal claims also arise from time to time in the normal course of business, which, in the opinion of management, will have no material effect on the Company’s financial statements.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 11 - Stockholders’ Equity
Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, regulatory limitation on payment of dividends, the Bank’s results of operations and financial condition, tax considerations, and general economic conditions.
The Bank is subject to various regulatory capital requirements which were administered by the Office of Thrift Supervision (OTS) until July 21, 2011. Effective that date, supervisory responsibility for federal savings associations was transferred to the Office of the Comptroller of the Currency (OCC). Failure to meet certain capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk-weightings, and other factors.
During the most recent regulatory examination, the OTS categorized the Bank as “well-capitalized” per definition of 12 CFR Section 565.4(b)(1). To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, tier 1 risk based, and tangible equity ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s categorization. Consolidated data has not been disclosed as the amounts and ratios are not significantly different.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 11 - Stockholders’ Equity (Continued)
| | Actual | | | For Capital Adequacy Purposes | | | To be Categorized as Well-Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| | (Dollars in Thousands) | |
| | | | | | | | | | | | | | | | | | |
December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital (to risk- weighted assets) | | $ | 23,568 | | | | 17.2 | % | | $ | 10,961 | | | | 8.0 | % | | $ | 13,702 | | | | 10.0 | % |
Tier 1 capital (to risk- weighted assets) | | $ | 22,334 | | | | 16.3 | % | | $ | 5,481 | | | | 4.0 | % | | $ | 8,221 | | | | 6.0 | % |
Tangible capital (to tangible assets) | | $ | 22,334 | | | | 10.4 | % | | $ | 3,232 | | | | 1.5 | % | | $ | 4,309 | | | | 2.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
Total capital (to risk- weighted assets) | | $ | 22,763 | | | | 15.6 | % | | $ | 11,693 | | | | 8.0 | % | | $ | 14,617 | | | | 10.0 | % |
Tier 1 capital (to risk- weighted assets) | | $ | 20,931 | | | | 14.3 | % | | $ | 5,847 | | | | 4.0 | % | | $ | 8,770 | | | | 6.0 | % |
Tangible capital (to tangible assets) | | $ | 20,931 | | | | 9.8 | % | | $ | 3,214 | | | | 1.5 | % | | $ | 4,285 | | | | 2.0 | % |
Note 12 - Employee Benefit Plans
Defined Benefit Pension Plan
The Bank is a participant in the multiemployer Financial Institutions Retirement Fund (FIRF or the “Plan”), which covers substantially all of its officers and employees. The defined benefit plan covers all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. Normal retirement age is 65, with reduced benefits available at age 55. The Bank’s contributions are determined by FIRF and generally represent the normal cost of the Plan. Specific Plan assets and accumulated benefit information for the Bank’s portion of the Plan are not available. Under the Employee Retirement Income Security Act of 1974 (ERISA), a contributor to a multiemployer pension plan may be liable in the event of complete or partial withdrawal for the benefit payments guaranteed under ERISA. Effective July 1, 2005 the plan was frozen as to current participants and any new employees hired after July 1, 2004 were excluded from the plan. The expense of the Plan allocated to the Bank was $81,000 and $58,000 for the years ended December 31, 2011 and 2010, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 12 - Employee Benefit Plans (Continued)
401(k) Savings Plan
The Bank has a Section 401(k) savings plan covering substantially all of its employees who meet certain age and service requirements. Contributions to the plan by the Bank are discretionary in nature in such amounts determined by the Board of Directors. The expense under the plan for the years ended December 31, 2011 and 2010 was $167,000 and $0, respectively.
Nonqualified Deferred Compensation Plan
The Bank has a nonqualified deferred compensation plan for certain ofits directors. Through 1998, each eligibledirector could voluntarily defer all or part of his or her director’s fees to participate in the program. The plan is currently unfunded and amounts deferred are unsecured and remain subject to claims of the Bank’s general creditors.
Directors are paid once they reach normal retirement age or sooner for reason of death, total disability, or termination. The Bank may terminate the plan at any time. The amount recorded under the plan totaled approximately $821,000 and $819,000 at December 31, 2011 and 2010, respectively. The expense under the plan for the years ended December 31, 2011 and 2010 was $87,000 and $54,000, respectively.
Employee Stock Ownership Plan
Effective January 1, 1994, the Bank implemented an employee stock ownership plan (ESOP). The ESOP covers substantially all employees who have completed one year of service, attained age 21, and worked at least 1,000 hours during the year. To fund the ESOP, the Bank borrowed $480,000 from an outside party to purchase 48,000 shares of the Company’s common stock at $10 per share. The ESOP note was payable quarterly with interest at the prime rate and was retired in 1999. All of the 1994 shares were allocated as of December 31, 1999. Compensation expense is measured by the fair value of ESOP shares allocated to participants during a fiscal year.
Pursuant to the 2005 second-step conversion and stock offering, the shareholders of the Company approved the purchase of 8% of shares sold in the stock offering by the ESOP. The Company provided a loan to the ESOP, which was used to purchase 138,709 shares of the Company’s common stock in the stock offering at $10 per share. The loan bore interest at a rate equal to the current prime rate, adjustable on January 1 of each year and provided for repayment of principal over the 15 year term of the loan. Since the Company provided the loan to the ESOP, the note receivable was not included in the Company’s balance sheet. Accordingly, the Company did not recognize interest income on the loan.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 12 - Employee Benefit Plans (Continued)
The Company made annual contributions to the ESOP sufficient to support the debt service of the loan. The loan was secured by the shares purchased, which were held in a suspense account for allocation among the participants as the loan is paid. Dividends paid on unallocated shares were not considered dividends for financial reporting purposes and were used to pay principal and interest on the ESOP loan. Dividends on allocated shares are charged to retained earnings.
The loan was paid in full as of December 31, 2009.
Compensation expense is recognized for the ESOP equal to the average fair value of shares committed to be released for allocation to participant accounts. Any difference between the average fair value of shares committed to be released for allocation and the ESOP’s original acquisition cost is charged or credited to stockholders’ equity (additional paid-in capital). During the years ended December 31, 2011 and 2010, respectively, 13,811 and 7,391 shares were sold into the open market. Total compensation expense was $0 for both the years ended December 31, 2011 and 2010.
Shares held by the ESOP include the following:
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Allocated | | | 138,345 | | | | 152,156 | |
Unallocated | | | - | | | | - | |
Total | | | 138,345 | | | | 152,156 | |
There were 8 and 23,023 shares distributed to ESOP participants in 2011 and 2010, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 12 - Employee Benefit Plans (Continued)
Stock-Based Compensation Plans
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). Shares issued under the Plan 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 years ended December 31, 2011 and 2010 is presented below:
| | | | | | | | Weighted-Average | | | | |
| | | | | Weighted- | | | Remaining | | | | |
| | | | | Average | | | Contractual Term | | | Aggregate | |
Options | | Shares | | | Exercise Price | | | (Years) | | | Intrinsic Value | |
| | | | | | | | | | | | |
Outstanding at January 1, 2010 | | | 188,132 | | | $ | 9.47 | | | | 6.3 | | | | - | |
| | | | | | | | | | | | | | | | |
Granted in 2010 | | | - | | | $ | 0.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Exercised in 2010 | | | - | | | $ | 0.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Forfeited or Expired in 2010 | | | (2,000 | ) | | $ | 9.54 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 186,132 | | | $ | 9.47 | | | | 5.3 | | | | - | |
| | | | | | | | | | | | | | | | |
Granted in 2011 | | | - | | | $ | 0.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Exercised in 2011 | | | - | | | $ | 0.00 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Forfeited or expired in 2011 | | | (3,450 | ) | | $ | 9.65 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Oustanding at December 31, 2011 | | | 182,682 | | | $ | 9.47 | | | | 4.3 | | | | - | |
| | | | | | | | | | | | | | | | |
Options Exercisable at December 31, 2011 | | | 181,442 | | | $ | 9.47 | | | | 4.2 | | | | - | |
There were 30,546 shares available for future granting of options as of December 31, 2011.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 12 - Employee Benefit Plans (Continued)
The aggregate intrinsic value of outstanding options shown in the table above represents the total pretax intrinsic value (i.e. the difference between the Company’s closing stock price of $2.86 on December 31, 2011 and the exercise price times the number of shares) that would have been received by the option holder had all option holders exercised their options on December 31, 2011. The amount changes based on the fair market value of the stock.
As of December 31, 2011 there was $1,000 of total unrecognized compensation cost, net of expected forfeitures, related to nonvested options under the Plan. The remaining costs are expected to be recognized by June 30, 2012. The total fair value of shares vested during the year ended December 31, 2011 and 2010 was $137,000 and $70,000, respectively. Compensation expense for 2011 and 2010 related to options granted under this plan was $32,000 and $99,000, respectively.
A summary of the status of the Company’s nonvested options as of December 31, 2011 and 2010 and changes during the years then ended is presented below:
| | | | | Weighted-Average | |
| | | | | Grant-Date | |
Nonvested Shares | | Shares | | | Fair Value | |
| | | | | | |
Nonvested at January 1, 2010 | | | 73,476 | | | $ | 2.11 | |
| | | | | | | | |
Granted | | | - | | | $ | 0.00 | |
| | | | | | | | |
Vested | | | (34,118 | ) | | $ | 2.11 | |
| | | | | | | | |
Forfeited | | | (2,000 | ) | | $ | 2.10 | |
| | | | | | | | |
Nonvested at December 31, 2010 | | | 37,358 | | | $ | 2.11 | |
| | | | | | | | |
Granted | | | - | | | $ | 0.00 | |
| | | | | | | | |
Vested | | | (36,118 | ) | | $ | 2.11 | |
| | | | | | | | |
Forfeited | | | - | | | $ | 0.00 | |
| | | | | | | | |
Nonvested at December 31, 2011 | | | 1,240 | | | $ | 2.06 | |
Restricted Stock Awards – The Company did not grant any award shares during the years ended December 31, 2011 and 2010. Compensation expense for 2011 and 2010 related to awards granted under this plan was $37,000 and $124,000, respectively.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 12 - Employee Benefit Plans (Continued)
The shares vest over a five year service period. As of December 31, 2011 there was $1,000 of unrecognized compensation cost related to nonvested restricted stock awards under the Plan.
The following table summarizes the activity of restricted stock awards under the Plan during the years ended December 31, 2011 and 2010:
| | 2011 | | | 2010 | |
| | | | | | |
Beginning of period | | | 13,050 | | | | 26,000 | |
| | | | | | | | |
Granted | | | - | | | | 0 | |
| | | | | | | | |
Vested | | | (12,750 | ) | | | (12,750 | ) |
| | | | | | | | |
Forfeited | | | - | | | | (200 | ) |
| | | | | | | | |
Nonvested, end of period | | | 300 | | | | 13,050 | |
There were 5,304 shares available for future grants of award shares at December 31, 2011.
Note 13 - Fair Value Measurements
The fair value of financial assets and liabilities recorded at fair value is categorized in three levels. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. These levels are as follows:
Level 1 — Valuations based on quoted prices in active markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 — Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated by, third-party pricing services.
Level 3 — Assets and liabilities with valuations that include methodologies and assumptions that may not be readily observable, including option pricing models, discounted cash flow models, yield curves and similar techniques. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities, but in all cases are corroborated by external data, which may include third-party pricing services.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 13 - Fair Value Measurements (Continued)
The following table presents information about the Corporation’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010, and the valuation techniques used by the Corporation to determine those fair values.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2011
(in Thousands)
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance at December 31, 2011 | |
| | | | | | | | | | | | |
Investment securities - available-for-sale: | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | - | | | $ | 14,863 | | | $ | - | | | $ | 14,863 | |
Municipal notes | | | - | | | | 7,276 | | | | - | | | | 7,276 | |
Mortgage-backed securities | | | - | | | | 30,909 | | | | - | | | | 30,909 | |
Equity securities | | | - | | | | 1 | | | | - | | | | 1 | |
| | | | | | | | | | | | | | | | |
Total investment securities - available-for-sale | | $ | - | | | $ | 53,049 | | | $ | - | | | $ | 53,049 | |
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2010
(in Thousands)
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Balance at December 31, 2010 | |
| | | | | | | | | | | | |
Investment securities - available-for-sale: | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | - | | | $ | 4,562 | | | $ | - | | | $ | 4,562 | |
Municipal notes | | | - | | | | 5,046 | | | | - | | | | 5,046 | |
Mortgage-backed securities | | | - | | | | 25,692 | | | | - | | | | 25,692 | |
Equity securities | | | - | | | | 1 | | | | - | | | | 1 | |
| | | | | | | | | | | | | | | | |
Total investment securities - available-for-sale | | $ | - | | | $ | 35,301 | | | $ | - | | | $ | 35,301 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 13 - Fair Value Measurements (Continued)
Fair value measurements of U.S. Government agencies and mortgage backed securities use pricing models that vary and may consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.
There were no transfers between Levels 1 and 2 of the fair value hierarchy during the years ended December 31, 2011 and 2010. For the available for sale securities, the Company obtains fair value measurements from an independent third-party service.
The Company has assets that, under certain conditions, are subject to measurement at fair value on a nonrecurring basis. At December 31, 2011 and 2010, such assets consist primarily of impaired loans and other real estate owned. The Corporation has estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 13 - Fair Value Measurements (Continued)
The following table presents the balance of assets and liabilities measured at fair value on a nonrecurring basis:
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2011
| | Balance at December 31, 2011 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | |
Impaired loans accounted for under FASB ASC 310-10 | | $ | 1,927 | | | $ | - | | | $ | - | | | $ | 1,927 | |
| | | | | | | | | | | | | | | | |
Other real estate owned -residential mortgages | | $ | 1,087 | | | $ | - | | | $ | - | | | $ | 1,086 | |
| | | | | | | | | | | | | | | | |
Other real estate owned - commercial | | $ | 1,015 | | | $ | - | | | $ | - | | | $ | 1,015 | |
| | | | | | | | | | | | | | | | |
Other repossessed assets | | $ | 1,307 | | | $ | - | | | $ | - | | | $ | 1,307 | |
| | | | | | | | | | | | | | | | |
Total assets at fair value on a non-recurring basis | | | | | | | | | | | | | | $ | 5,335 | |
Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2010
| | Balance at December 31, 2010 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| | | | | | | | | | | | |
Impaired loans accounted for under FASB ASC 310-10 | | $ | 2,920 | | | $ | - | | | $ | - | | | $ | 2,920 | |
| | | | | | | | | | | | | | | | |
Other real estate owned -residential mortgages | | $ | 514 | | | $ | - | | | $ | - | | | $ | 514 | |
| | | | | | | | | | | | | | | | |
Other real estate owned - commercial | | $ | 2,569 | | | $ | - | | | $ | - | | | $ | 2,569 | |
| | | | | | | | | | | | | | | | |
Total assets at fair value on a non-recurring basis | | | | | | | | | | | | | | $ | 6,003 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 13 - Fair Value Measurements (Continued)
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amounts of cash and short-term instruments approximate fair values.
Investment Securities - Fair value for the Bank’s investment securities was determined using the market value in active markets, where available. When not available, fair values are estimated using the fair value hierarchy. In the fair value hierarchy, Level 2 fair values are determined using observable inputs other than Level 1 market prices, such as quoted prices for similar assets. Level 3 values are determined using unobservable inputs, such as discounted cash flow projections.
Loans Receivable -For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one- to four-family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial, and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Federal Home Loan Bank Stock -The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
Deposit Liabilities - The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 13 - Fair Value Measurements (Continued)
Federal Home Loan Bank Advances- The estimated fair value of the fixed and variable rate Federal Home Loan Bank advances are estimated by discounting the related cash flows using the rates currently available for similarly structured borrowings with similar maturities.
REPO Sweep Accounts- The fair values disclosed for REPO Sweeps are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).
Accrued Interest - The carrying amounts of accrued interest approximate fair value.
The estimated fair values and related carrying amounts of the Company’s financial instruments as of December 31, 2011 and 2010 are as follows:
| | December 31, 2011 | | | December 31, 2010 | |
| | Carrying Amounts | | | Estimated Fair Value | | | Carrying Amounts | | | Estimated Fair Value | |
| | | | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 2,749 | | | $ | 2,749 | | | $ | 1,963 | | | $ | 1,963 | |
Securities available for sale | | | 53,049 | | | | 53,049 | | | | 35,301 | | | | 35,301 | |
Securities held to maturity | | | 2,435 | | | | 2,665 | | | | 2,520 | | | | 2,595 | |
Loans - net | | | 140,884 | | | | 146,018 | | | | 157,144 | | | | 157,629 | |
Federal Home Loan Bank stock | | | 3,408 | | | | 3,408 | | | | 3,775 | | | | 3,775 | |
Accrued interest receivable | | | 1,149 | | | | 1,149 | | | | 1,231 | | | | 1,231 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Customer deposits | | | 150,649 | | | | 151,693 | | | | 155,466 | | | | 157,463 | |
Federal Home Loan Bank advances | | | 34,500 | | | | 34,827 | | | | 29,000 | | | | 29,657 | |
REPO sweep accounts | | | 5,592 | | | | 5,592 | | | | 6,172 | | | | 6,172 | |
Accrued interest payable | | | 148 | | | | 148 | | | | 194 | | | | 194 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 14 - Restrictions on Dividends
Dividends paid by the Bank are the primary source of funds available to the Company for payment of dividends to shareholders and for other working capital needs. The payment of dividends by the Bank to the Company is subject to restrictions by the Office of the Comptroller of Currency (OCC). These restrictions generally limit dividends to the current and prior two years’ retained earnings. In addition to these restrictions, as a practical matter, dividend payments cannot reduce regulatory capital levels below the Corporation’s regulatory capital requirements and minimum regulatory guidelines. Future dividend payments by the Company will be based on future earnings and the approval of the OCC.
Note 15 - Parent-Only Financial Statements
The following represents the condensed financial statements of First Federal of Northern Michigan Bancorp, Inc. (“Parent”) only. The Parent-only financial information should be read in conjunction with the Company’s consolidated financial statements.
Condensed parent company financial statements, which include transactions with the subsidiary, are as follows (000s omitted):
Balance Sheets: | | | | | | |
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Assets |
| | | | | | | | |
Cash at subsidiary bank | | $ | 516 | | | $ | 424 | |
Investment in subsidiary | | | 23,734 | | | | 22,272 | |
Deferred tax asset | | | 318 | | | | 318 | |
Other assets | | | - | | | | 222 | |
| | | | | | | | |
Total assets | | $ | 24,568 | | | $ | 23,236 | |
| | | | | | | | |
Liabilities and Stockholders' Equity |
| | | | | | | | |
Liabilities | | $ | - | | | $ | - | |
Stockholders' equity | | | 24,568 | | | | 23,236 | |
| | | | | | | | |
Total liabilities and stockholders' equity | | $ | 24,568 | | | $ | 23,236 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 15 - Parent-Only Financial Statements (continued)
Statements of Operations: | | | | | | |
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Operating income | | $ | - | | | $ | - | |
Operating expense | | | 199 | | | | 192 | |
| | | | | | | | |
Loss before income taxes and equity in undistributed net income of subsidiary bank | | | (199 | ) | | | (192 | ) |
| | | | | | | | |
Income tax benefit | | | - | | | | - | |
| | | | | | | | |
Loss before equity in undistributed loss of subsidiary bank | | | (199 | ) | | | (192 | ) |
| | | | | | | | |
Equity in undistributed net income of subsidiary bank | | | 941 | | | | 430 | |
| | | | | | | | |
Net income | | $ | 742 | | | $ | 238 | |
Statements of Cash Flows: | | | | | | |
| | December 31 | |
| | 2011 | | | 2010 | |
| | | | | | |
Cash Flows from Operating Activities | | | | | | | | |
Net income | | $ | 742 | | | $ | 238 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
Stock options/awards | | | 68 | | | | 223 | |
Equity in undistributed net income of subsidiary bank | | | (941 | ) | | | (430 | ) |
Net change in other assets | | | 223 | | | | (124 | ) |
| | | | | | | | |
Net cash used in operating activities | | | 92 | | | | (93 | ) |
| | | | | | | | |
Net Increase (Decrease) in Cash and Cash Equivalents | | | 92 | | | | (93 | ) |
| | | | | | | | |
Cash and Cash Equivalents- Beginning of year | | | 424 | | | | 517 | |
| | | | | | | | |
Cash and Cash Equivalents- End of year | | $ | 516 | | | $ | 424 | |
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries |
Notes to Consolidated Financial Statements |
December 31, 2011 and 2010 |
(000s omitted, except per share data) |
Note 16 - Quarterly Results of Operations (Unaudited)
The following tables summarize the Company’s quarterly results for the fiscal years ended December 31, 2011 and 2010:
| | For the Three-Month Period Ending | |
| | March 31, 2011 | | | June 30, 2011 | | | September 30, 2011 | | | December 31, 2011 | |
Interest income | | $ | 2,592 | | | $ | 2,691 | | | $ | 2,588 | | | $ | 2,519 | |
Interest expense | | | 605 | | | | 581 | | | | 564 | | | | 512 | |
Net interest income | | | 1,987 | | | | 2,110 | | | | 2,024 | | | | 2,007 | |
Provision for loan losses | | | 67 | | | | (19 | ) | | | (67 | ) | | | 303 | |
Other income | | | 449 | | | | 393 | | | | 469 | | | | 621 | |
Other expenses | | | 2,208 | | | | 2,260 | | | | 2,325 | | | | 2,241 | |
Income - before income tax expense (benefit) | | | 161 | | | | 262 | | | | 235 | | | | 84 | |
Income tax expense | | | - | | | | - | | | | - | | | | - | |
Net income | | $ | 161 | | | $ | 262 | | | $ | 235 | | | $ | 84 | |
| | | | | | | | | | | | | | | | |
Net income per share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.06 | | | $ | 0.09 | | | $ | 0.08 | | | $ | 0.03 | |
Diluted | | $ | 0.06 | | | $ | 0.09 | | | $ | 0.08 | | | $ | 0.03 | |
| | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding - basic and dilutive | | | 2,884 | | | | 2,884 | | | | 2,884 | | | | 2,884 | |
Cash dividends declared per common share | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | For the Three-Month Period Ending | |
| | March 31, 2010 | | | June 30, 2010 | | | September 30, 2010 | | | December 31, 2010 | |
Interest income | | $ | 2,882 | | | $ | 2,884 | | | $ | 2,907 | | | $ | 2,774 | |
Interest expense | | | 956 | | | | 900 | | | | 851 | | | | 740 | |
Net interest income | | | 1,926 | | | | 1,984 | | | | 2,056 | | | | 2,034 | |
Provision for loan losses | | | 11 | | | | 595 | | | | 353 | | | | 142 | |
Other income | | | 578 | | | | 1,265 | | | | 717 | | | | 645 | |
Other expenses | | | 2,189 | | | | 2,437 | | | | 2,348 | | | | 2,892 | |
Income (loss) - before income tax expense (benefit) | | | 304 | | | | 217 | | | | 72 | | | | (355 | ) |
Income tax expense (benefit) | | | 102 | | | | (102 | ) | | | - | | | | - | |
Net income (loss) | | $ | 202 | | | $ | 319 | | | $ | 72 | | | $ | (355 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) per share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.07 | | | $ | 0.11 | | | $ | 0.02 | | | $ | (0.12 | ) |
Diluted | | $ | 0.07 | | | $ | 0.11 | | | $ | 0.02 | | | $ | (0.12 | ) |
| | | | | | | | | | | | | | | | |
Weighted average number of shares outstanding - basic and dilutive | | | 2,884 | | | | 2,884 | | | | 2,884 | | | | 2,884 | |
Cash dividends declared per common share | | $ | - | | | $ | - | | | $ | - | | | $ | - | |