March 10, 2008
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-0408
Attention: Mr. Edwin Adames
RE: First Federal of Northern Michigan Bancorp, Inc.
File No. 000-31957
Recent 8-K filing for Sale of Override Business
Dear Mr. Adames:
Per your recent inquiry as to the effect of the planned sale of the Blue Cross
Blue Shield override business to the Grotenhuis Group, we submit the following:
First Federal of Northern Michigan Bancorp, Inc. will collect upon closing
the sales price reflected on the attached confidential exhibit. A gain on
sale equal to the sales price will be recorded.
First Federal of Northern Michigan Bancorp, Inc. has a related intangible
asset associated with that book of business (see attached confidential
exhibit), which will be written off.
The impact of these 2 entries is a net gain (the amount of which is shown
on the attached confidential exhibit), which will be recorded in the
quarter in which the transaction is consummated.
Goodwill
When the Company acquired the InsuranCenter of Alpena ("ICA"), the Company
recorded goodwill, which is tested annually for impairment. As of December 31,
2007, the balance of such goodwill was $1,350,000. Our testing of goodwill
impairment is based upon a valuation methodology that uses a "multiple of net
sales" factor, which is provided to us by an outside firm based upon recent
transactions. As part of the agreement to sell the business to Grotenhuis Group,
we will continue to collect commissions from the buyer for the period specified
in the confidential Exhibit to this letter. Our split over that period will be
the percentage specified in the confidential Exhibit. The proforma models we ran
to test the implications of this deal on goodwill both in 2008 and at the end of
the period (when the commission split ends) indicated that there will be no
goodwill impairment related to the sales transaction. The reason for this
conclusion is that over that period, we are writing down the only remaining
intangible asset (the customer list) which will nearly be fully amortized at the
end of the period, when our commission split from this sale ends. Even though
the net sales will potentially be lower from the reduction in commission income,
this will more than be offset by the lower carrying value of the intangible
assets. This analysis is based on the assumption that the commissions collected
will remain static over time and that the net sales multiple will remain at 1.7,
which approximates where it has been over the last four years.
Confidential Treatment
- ----------------------
In accordance with 5 U.S.C. ss.552(b) and 17 C.F.R. ss.200.83, we hereby
request that the Securities and Exchange Commission (the "SEC") afford
confidential treatment under the Freedom of Information Act to the attached
Exhibit. The Exhibit contains terms of the transaction with the Grotenhuis
Group, including sales price, not otherwise made available to the public. In
addition, the Company believes the disclosure of this information would cause
competitive harm to the Company.
We submit that this information is appropriately held confidential by the
SEC under 5 U.S.C. ss.552(b)(4), as it constitutes "commercial or financial
information obtained from a person and privileged and confidential." In
accordance with SEC Rule 200.83, we request that this information be kept
confidential for a period of five (5) years from the date of this request.
As required by Staff Legal Bulletin No. 1, "Confidential Treatment
Requests," as amended, the Company consents to the furnishing of the
confidential portion to other government agencies, offices or bodies and to the
Congress.
Should you have any questions, please do not hesitate to contact me.
Respectfully submitted,
/s/ Michael W. Mahler
Michael W. Mahler - President
First Federal of Northern Michigan