1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to ____________
Commission File Number 0-16023
NEWBERRY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2929531
(State of incorporation) (IRS Employer Identification Number
209 East Portage Avenue,
Sault Ste. Marie, Michigan 49783
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (906) 635-9794
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issue's
classes of common stock, as of the latest practicable date.
Common Stock, $0.010 par value Outstanding at November 9, 1995
1,172,718 shares
page 1 of 83 pages
Exhibit index on sequentially numbered page 34
2
FORM 10-Q 2
TABLE OF CONTENTS
PART I - Financial Information
- -----------------------------------
Item 1. Financial Statements PAGE
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 7
Notes to the Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Summary 9
Recent Development 10
Results of Operations 11
Liquidity and Capital Resources 25
PART II - Other Information
- -----------------------------------
Item 1. Legal Proceedings 29
Item 5. Other Information
Parent Company Condensed
Financial Information 29
Item 6. Exhibits and Reports on Form 8-K 33
Signature 33
- ---------
Exhibit Index 34
Item 1. Financial Data Schedule 83
- ------------------
The information furnished in these interim statements reflects all
adjustments and accruals which are, in the opinion of management,
necessary for a fair statement of the results for such periods, and
reflect adjustments which are solely of a normal, recurring nature.
The results of operations in the interim statements are not necessarily
indicative of the results that may be expected for the full year.
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements
NEWBERRY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30,1995 and December 31,1994
(Unaudited)
At At
September 30 December 31
1995 1994
ASSETS ---------- ----------
Cash and due from banks $ 1,861,216 $ 908,257
Federal funds sold 1,304,351 606,422
---------- ----------
Total cash and cash equivalents 3,165,567 1,514,679
Securities available for sale (Note 2) 14,576,906 18,658,332
Loans held for sale 5,914,586 4,129,321
Loans, net 7,177,780 4,220,633
Premises and equipment 1,117,085 373,877
Purchased mortgage servicing rights 2,029,431 1,625,889
Investment in Northern Michigan BIDCO 775,174 467,820
Other real estate owned 170,720 130,015
Other assets 988,182 706,018
---------- ----------
Total other assets 5,080,592 3,303,619
---------- ----------
TOTAL ASSETS $35,915,431 $31,826,584
=========== ===========
The accompanying notes are an integral part of the financial statements.
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4
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,1995 and December 31,1994
(Unaudited)
At At
September 30 December 31
1995 1994
LIABILITIES AND STOCKHOLDERS EQUITY ---------- ----------
Deposits:
Demand - non interest bearing $ 288,547 $ 1,638,101
Demand - interest bearing 1,701,332 3,026,925
Savings 820,721 587,370
Time 15,935,897 7,875,499
---------- ----------
Total deposits 18,746,497 13,127,895
FHLB advances 10,000,000 9,800,000
Other Bank Borrowings 0 -
Mortgage escrow 1,063,247 1,214,313
Note payable 1,000,000 1,000,000
Due to broker 0 1,288,169
Deferred Noncompete income 145,831 175,000
Other Liabilities 320,153 1,125,518
---------- ----------
Total Liabilities 31,275,728 27,730,895
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value;
Authorized - 500,000 shares;
issued 0 shares in both 1995 and 1994 - -
Common stock, $0.01 par value;
Authorized - 2,500,000 shares;
issued and outstanding
1,200,000 shares in 1995
and 1,200,000 shares in 1994 12,000 12,000
Treasury Stock - 16,746 shares at
September 30,1995 (50,423) -
Surplus 2,478,270 2,478,270
Retained earnings 2,116,245 2,131,207
Unrealized gain (loss) on securities
available for sale, net of tax
of $43,019 in 1995, and
$(270,860) in 1994. 83,611 (525,788)
---------- ----------
Total Stockholders' equity 4,639,703 4,095,689
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $35,915,431 $31,826,584
========== ==========
The accompanying notes are an integral part of the financial statements.
5
NEWBERRY BANCORP, INC. AND SUBSIDIARY 5
Consolidated Statement of Operations For the Three-Month For the Nine-Month
(Unaudited) Periods Ended Periods Ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
------------ ----------- ------------ -----------
Interest income:
Interest and fees on loans $ 329,437 $ 649,113 $ 899,422 $ 2,242,022
Interest on securities:
U.S. Treasury Securities - 19,998 - 48,083
U.S. Government agencies 259,509 161,366 791,461 477,378
State and political subdivisions 452 4,563 4,056 13,689
Other securities 6,744 33,262 14,641 35,037
Interest on bank deposits 5,836 26,293 25,919 63,798
Interest on federal funds 15,099 33,389 42,662 75,850
------------ ----------- ------------ -----------
Total interest income 617,077 927,984 1,778,161 2,955,857
------------ ----------- ------------ -----------
Interest expense:
Interest on deposits:
Demand deposits 27,536 251,124 100,871 653,222
Savings deposits 19,843 73,244 59,652 181,735
Time certificates of deposit 232,518 120,144 577,954 374,236
Bank borrowings 155,459 85,833 441,461 213,217
Repurchase agreements 9,143 2,136 91,869 7,896
Interest expense on note payable 18,291 51,358 107,002 134,205
------------ ----------- ------------ -----------
Total interest expense 462,790 583,839 1,378,809 1,564,511
------------ ----------- ------------ -----------
Net interest income 154,287 344,145 399,352 1,391,346
Provision for loan losses 1,200 52,500 3,600 157,500
------------ ----------- ------------ -----------
Net interest income after
provision for loan losses 153,087 291,645 395,752 1,233,846
------------ ----------- ------------ -----------
Other income:
Security gains (losses) 19,550 55,351 51,647 35,179
Service charges on deposit accounts 7 22,061 112 68,577
Other service charges and fees 1,048 - 3,502 -
Foreign exchange income 21,879 46,447 54,322 139,623
Mortgage banking income 39,793 111,970 347,648 259,763
Profit from equity investment in
Northern Michigan BIDCO 33,372 39,026 103,854 175,526
Other 1,756 22,607 22,770 47,071
------------ ----------- ------------ -----------
Total other income 117,405 297,462 583,855 725,739
------------ ----------- ------------ -----------
The acccompanying notes are an integral part of the financial statements.
6
NEWBERRY BANCORP, INC. AND SUBSIDIARY 6
Consolidated Statement of Operations (Continued)
(Unaudited)
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September 30, September 30, September 30, September 30,
1995 1994 1995 1994
------------ ----------- ----------- -----------
Other expenses:
Salaries and wages $ 95,858 $ 192,301 $ 275,572 $ 635,471
Employee benefits 16,511 78,657 51,240 189,020
Occupancy, net 29,661 47,100 58,736 149,106
Taxes other than income (41,117) 12,403 (26,216) 46,227
Data processing and equip. exp. 21,299 93,430 66,410 292,495
Correspondent bank service charges 5,390 13,370 22,476 44,976
Advertising 9,207 22,583 15,401 84,934
Net expense of other real estate owned 5,380 5,775 12,897 11,011
FDIC insurance (3,430) 18,543 32,270 75,320
Mortgage banking expense 5,751 27,022 42,610 133,882
Legal and audit expense 56,995 73,912 268,176 182,314
Other operating expenses 57,925 65,268 228,626 149,046
Amortization expense - 3,184 - 9,553
Management fees - 15,000 - 45,000
------------ ----------- ----------- -----------
Total other expenses 259,430 668,548 1,048,198 2,048,355
------------ ----------- ----------- -----------
Income before income taxes 11,062 (79,441) (68,591) (88,770)
------------ ----------- ----------- -----------
Applicable income taxes (benefit) (4,175) (20,202) (53,630) (66,130)
------------ ----------- ----------- -----------
Net income $ 15,237 $ (59,239) $ (14,961) $ (22,640)
============ =========== =========== ===========
Earnings per common share (note 1) $0.013 ($0.049) ($0.013) ($0.019)
============ =========== =========== ===========
Weighted average shares outstanding 1,195,577 1,200,000 1,195,929 1,181,902
============ =========== =========== ===========
Dividends declared per share $ --- $ --- $ --- $ ---
============ =========== =========== ===========
The acccompanying notes are an integral part of the financial statements.
7
NEWBERRY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine-Month
Periods Ended
September 30,
1995 1994
Cash flow from operating activities:
Net income (loss) $ (14,961) $ (22,637)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 100,065 123,560
Equity in unconsolidated subsidiary (103,854) (175,526)
Provision for loan loss 3,600 157,500
Mortgage loans originated for sale (53,461,521) (16,828,793)
Sale of mortgage loans 51,676,291 26,858,932
Net amortization/accretion on securities (9,889) (46,219)
Loss/(Gain) on sale of securities (51,647) (73,067)
Proceeds from sales of trading account
securities - 14,031,695
Purchases of trading account securities - (12,087,630)
Change in:
Purchased mortgage servicing rights (468,002) 98,267
Other real estate (40,705) 74,743
Increase in other assets (596,079) (555,305)
Increase (decrease) in other liabilities (834,534) 266,831
------------ -----------
Net cash from (used in)
operating activities (3,801,236) 11,822,351
------------ -----------
Cash flow from investing activities:
Purchase of available for sale
securities (7,589,160) (9,176,780)
Proceeds from sales of available for
sale securities 10,709,820 80,000
Loans granted net of repayments (1,057,536) 779,396
Loans purchased for investment (1,903,211) -
Premises and equipment expenditures (778,813) (181,492)
Principal paydowns on available for
sale securities 1,742,080 1,242,926
------------ -----------
Net cash from (used in)
investing activities 1,123,180 (7,255,950)
------------ -----------
Cash flow from financing activities:
Net increase in repurchase agreements - (47,125)
Net increase in deposits 5,618,602 356,427
Increase in other bank borrowings 200,000 -
Net increase (decrease) in mortgage
escrow accounts (151,066) (2,230,342)
Amount due to Broker (1,288,169) -
Principal payment on notes payable - (152,000)
Issuance of common stock - 100,000
Purchase of treasury stock (50,423) -
------------ -----------
Net cash from
financing activities 4,328,944 (1,973,040)
------------ -----------
Net change in cash and
cash equivalents 1,650,888 2,593,361
Cash and cash equivalents:
Beginning of period 1,514,679 6,455,516
------------ -----------
End of period $ 3,165,567 $ 9,048,877
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 1,296,288 $ 1,440,831
Cash paid for income taxes 881,719 (3,849)
The accompanying notes are an integral part of the financial statements.
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NEWBERRY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements incorporated by reference
in the Company's 1994 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and
financial position for the interim periods. Such financial statements generally
conform to the presentation reflected in the Company's 1994 Annual Report to
Stockholders, and reflect adjustments which are solely of a normal, recurring
nature. The current interim periods reported herein are included in the fiscal
year subject to independent audit at the end of the year.
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 1,195,577 and
1,198,803 for the three and nine months ended September 30, 1995 and 1,195,929
and 1,181,902 for the three and nine months ended September 30, 1994,
respectively. Stock options are considered not dilutive and therefore, not
included in earnings per share calculations.
(2) Available-for-sale Securities
The Bank's available-for-sale securities portfolio at September 30,
1995 had a net unrealized gain of approximately $127,000, as compared with a
net unrealized gain of approximately $81,000 at June 30, 1995 and a net
unrealized loss of approximately $798,000 at December 31, 1994, an improvement
during the nine months beginning December 31, 1995 of $925,000 due to an
improvement in the current market value of adjustable-rate U.S. agency
guaranteed mortgage-backed securities.
Available-for-sale securities
September 30, 1995
-------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
__________________________________________________________________________________________
U.S. agency mortgage-backed 11,682 125 (94) 11,713
U.S. agency equity 842 14 - 856
Other mortgage securities 1,738 11 (2) 1,747
State and municipal - - - -
Other equity 188 73 - 261
__________________________________________________________________________________________
Total investment securities
available for sale $14,450 $223 $(96) $14,577
======= ==== ===== =======
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Available-for-sale securities (continued)
June 30, 1995
-------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
__________________________________________________________________________________________
U.S. agency mortgage-backed 17,253 182 (149) 17,286
U.S. agency equity 812 8 - 820
State and municipal 101 - - 101
Other equity 161 40 - 201
__________________________________________________________________________________________
Total investment securities
available for sale $18,327 $230 $(149) $18,408
======= ==== ====== =======
December 31, 1994
------------------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
__________________________________________________________________________________________
U.S. agency mortgage-backed $16,818 $10 $(864) $15,964
Other U.S. agency 1,740 3 - 1,743
U.S. agency equity 739 14 - 753
State and municipal 101 - - 101
Other equity 58 39 - 97
__________________________________________________________________________________________
Total investment securities
available for sale $19,456 $66 $(864) $18,658
======= === ====== =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
In the three months ended September 30, 1995, net income of $15,237 was
realized versus a net loss of $59,239 in the same period in 1994. Net interest
income decreased from $344,145 in the 1994 period to $154,287 in the 1995
period, and other income was $117,405 in the 1995 period versus $583,855 in the
1994 period. The increase in net income was primarily the result of the
decrease in expenses, which offset the decrease in net interest income in the
quarter. The reduction of net interest income was due principally to the sale
of the majority of the Bank's retail deposits and loan portfolio in December
1994, and also due to decreased spread income from the Bank's securities
portfolio. Earnings of the Bank during the three months ended September 30,
1995 were negatively impacted by the outsourcing of the Company's servicing
portfolio to Midwest Loan Services in anticipation of the acquisition of 80% of
Midwest Loan Services, Inc. later this year (as more fully described below).
Other operating expense decreased to $259,430 in the 1995 period from $668,548
in the 1994 period. During the three months ended September 30, 1995 there
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was an improvement of $30,095 in the FASB 115 value of the securities
available-for-sale.
For the nine months ended September 30, 1995, a net loss of $14,961 was
realized versus a net loss of $22,640 in the same period in 1994. The lack of
income for the nine months was principally the result of the decrease in net
interest income due principally to the sale of the majority of the Bank's
retail deposits and loan portfolio in December 1994, the decrease in securities
portfolio spread income, and unusual operating expenses of approximately
$200,000 (see below, "Other Expense"). During the nine months ended September
30, 1995 there was an improvement of $609,399 in the FASB 115 value of the
securities available-for-sale, as a result of an increase in the value of the
Bank's adjustable rate mortgage-backed securities portfolio.
Net income (loss) per share in the three months ended September 30,
1995 was $0.013, and in the three months ended September 30, 1994 was ($0.049)
per share. Net income (loss) per share in the nine months ended September 30,
1995 was ($0.013), and in the nine months ended September 30, 1994 was ($0.019)
per share.
The following table summarizes the pre-tax income (loss) of each profit
center of the Company for the nine months ended September 30, 1995:
NINE MONTHS ENDED SEPTEMBER 30, 1995 PRE-TAX INCOME (LOSS) SUMMARY
Banking & Mortgage Banking (156,712)
Equity in earnings of
Northern Michigan BIDCO 103,854
Corporate Office ( 15,733)
---------
Total $(68,591)
The following table summarizes the pre-tax income of each profit center
of the Company for the nine months ended September 30, 1994:
NINE MONTHS ENDED SEPTEMBER 30, 1994 PRE-TAX INCOME SUMMARY
Community Banking:
Newberry Office: $120,610
Sault Office: ( 89,775)
Mortgage Banking ( 12,601)
Equity in earnings of
Northern Michigan BIDCO 175,526
Corporate Office (282,530)
---------
Total $(88,770)
RECENT DEVELOPMENTS
The Bank has received approval from its banking regulators to establish
a new main office in Ann Arbor, Michigan, near the University of Michigan's
Medical Center.
In October 1995, the University of Michigan signed a three year lease
with the Bank covering 2/3 of its Ann Arbor office, which will generate
approximately $90,000 per year in rental income for the Bank.
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In early November 1995, the Bank signed a definitive agreement to
purchase 80% of the outstanding capital stock of Midwest Loan Services, Inc.
("Midwest"), of Houghton, Michigan, a mortgage subservicing company. The price
paid approximated book value. In connection with the acquisition, the Company
agreed to: issue 78,000 shares of common stock of the Company, pay $200,000
cash, and convey the title to certain non-income producing real estate held by
Midwest carried on Midwest's books for $313,000. The closing under the
agreement is expected to take place in the near future. As of the time of the
acquisition Midwest owned or serviced for others a total of 5,200 loans with a
principal balance of approximately $470,000,000, including $190,000,000
serviced for the Bank. The acquisition agreement also calls for the contingent
payment of up to $310,000 based on pre-tax profit above a specified threshold.
Michigan BIDCO, Inc. (see below, "Other Income"), an affiliate of the Company,
which is a 10% shareholder of Midwest, will receive 23,000 shares of the
Company as part to the acquisition.
During October 1995, the Bank established a wholly-owned subsidiary,
Varsity Funding Services, LLC, of Farmington Hills, Michigan. Varsity
originates for its own account and purchases from other mortgage brokers,
subprime residential mortgage loans, for resale to the secondary market.
Future net income from Varsity would be divided pursuant to an operating
agreement among the Bank and Varsity's Co-Managers.
The Company is contemplating the adoption as an incentive measure of a
stock option/award plan for executives and employees which would provide for
the grant of stock options or stock awards covering up to 300,000 shares.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased from $344,145 for the three months ended
September 30, 1994 to $154,287 for the three months ended September 30, 1995.
Net interest income fell from the year ago period because of a decrease in both
loans and investment securities and an increase in the cost of interest bearing
liabilities. The yield on interest earning assets increased from 6.72% in the
1994 period to 8.26% in the 1995 period. The cost of interest bearing
liabilities increased from 4.51% in the 1994 period to 6.31% in the 1995
period, causing net interest income as a percentage of total earning assets to
decrease from 2.49% to 2.07%.
For the nine month period ended September 30, 1995, net interest income
decreased from $1,391,348 to $399,352 in the 1995 period. The yield on
interest earning assets increased from 7.08% in the 1994 period to 7.83% in the
1995 period. The cost of interest bearing liabilities increased to 6.41% in
the 1995 period from 4.03% in 1994 period, resulting in a decrease in net
interest income as a percent of total average earning assets to 1.76% from
3.33%.
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Interest income
Interest income decreased from $927,985 in the quarter ended September
30, 1994 to $617,077 in the quarter ended September 30, 1995. The average
volume of interest earning assets decreased from $55,255,003 in the 1994 period
to $29,868,266 in the 1995 period, a decrease of 45.9%. The decreased volume
of earning assets was due to the sale of loans in December 1994, partially
offset by new wholesale money market borrowings. Interest income decreased as
a result of a decrease in earning assets also as a result of the sale. The
overall yield on the loan portfolio increased from 7.96% to 9.99%. The yield
on the loans which the Bank retained was increased to compensate for their
somewhat higher risk profile.
Interest income decreased in the nine months ended September 30, 1995
to $1,778,161 from $2,955,858 in the nine months ended September 30, 1994. The
volume of interest earning assets decreased from $55,693,598 in the 1994 period
to $30,276,701 in the 1994 period, a decrease of 45.6%. The decrease in
interest income was primarily attributable to the decrease in the volume of
earning assets. The average yield on the loan portfolio increased as the yield
on the loans which the Bank retained was increased to compensate for their
somewhat higher risk profile.. As a result, the overall yield on the loan
portfolio increased to 10.04% from 8.46%.
The average volume of investments in the three months ended September
30, 1995 decreased 26.4% over the same period in 1994, as the Bank shrank its
balance sheet as a result of the sale, and redeployed funds to support mortgage
growth. In the nine month period, the average volume of investments decreased
9.9% over the same period in 1994, as the Bank decreased its portfolio in the
third quarter.
The yield increased from 4.93% in the three month period ended
September 30, 1994 to 6.90% in the 1995 period. The increase in yields was in
line with the general increase in interest rates between 1994 and 1995 and a
repricing of the Bank's adjustable rate securities. In the nine month periods,
the yield increased from 4.68% in the 1994 period to 6.39% in the 1995 period.
The increase in yields was in line with the general increase in interest rates
between 1994 and 1995 and a repricing of the Bank's adjustable rate securities.
Interest Expense
Interest expense decreased from $583,838 in the three months ended
September 30, 1994 to $462,790 in the 1995 period. The decrease was due to a
decrease in interest bearing liabilities as a result of the sale, only
partially offset by an increase in rates paid on deposits and borrowings. A
portion of the increase in rates was due to generally higher short term
interest rates. A shift to more heavy reliance on more expensive wholesale
funds was also a factor. The cost of funds increased from 4.51% in the 1994
period to 6.31% in the 1995 period. The average volume of interest bearing
liabilities decreased 43.3% in the 1995 period versus the 1994 period.
In the nine month periods ending September 30, 1995 and 1994,
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interest expense decreased from $1,564,510 in 1994 to $1,378,809 in the 1995
period. The decrease was due to the same factors as in the three months
periods discussed above. The cost of funds increased from 4.03% in the 1994
period to 6.41% in the 1995 period. The average volume of interest bearing
liabilities decreased 44.6% in the 1995 period versus the 1994 period.
MONTHLY AVERAGE BALANCE SHEET AND
INTEREST MARGIN ANALYSIS
The following tables summarize monthly average balances, revenues from earning
assets, expenses of interest bearing liabilities, their associated yield or
cost and the net return on earning assets for the three and nine month periods
ended September 30, 1995 and 1994.
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Three Months Ended September 30,
---------------------------------------------------------------------
1995 1994
----------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
ASSETS
Interest Earning Assets:
Short term investments:
Interest bearing deposits $ 460,735 $ 5,836 5.07% $ 1,832,011 $ 26,293 5.74%
Federal funds sold 1,023,631 15,099 5.90% 2,918,461 33,389 4.58%
Investment Securities:
Non-taxable(1) 33,848 452 5.34% 269,275 4,563 6.78%
Taxable 15,157,841 266,253 7.03% 17,629,634 214,627 4.87%
---------- --------- ----- ---------- --------- -----
Total investment securities 16,676,055 287,640 6.90% 22,649,381 278,872 4.93%
Loans: ---------- --------- ----- ---------- --------- -----
Commercial 2,092,599 59,484 11.37% 6,821,445 158,043 9.27%
Real Estate 9,541,147 231,022 9.69% 15,904,533 240,571 6.05%
Installment/Consumer 1,558,465 38,931 9.99% 9,879,644 250,499 10.14%
---------- --------- ----- ---------- --------- -----
Total Loans 13,192,211 329,437 9.99% 32,605,622 649,113 7.96%
---------- --------- ----- ---------- --------- -----
Total earning assets 29,868,266 617,077 8.26% 55,255,003 927,985 6.72%
---------- --------- ----- ---------- --------- -----
Less allowance for possible
loan losses & deferred fees (307,206) (419,132)
---------- ----------
29,561,060 54,835,871
Mortgage servicing rights 2,010,774 1,626,902
Non earning assets 3,575,332 6,646,871
---------- ----------
Total assets $35,147,166 $63,109,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 50,361 $ 317 2.52% $ 5,454,460 $ 33,628 2.47%
Savings 43,573 310 2.85% 4,894,841 31,335 2.56%
Canadian Dollar Savings 1,164,039 19,533 6.71% 2,648,259 41,908 6.33%
Time Under $100,000 14,408,888 232,518 6.45% 9,577,974 114,235 4.77%
Time Over $100,000 -- -- -- 500,000 5,909 4.73%
Borrowed Funds 11,166,311 171,289 6.14% 7,260,472 87,969 4.85%
Money Market 1,994,917 27,219 5.46% 19,032,522 217,496 4.57%
Holding company debt 515,120 11,604 9.01% 2,373,413 51,358 8.66%
---------- --------- ----- ---------- --------- -----
Total interest bearing
liabilities $29,343,209 462,790 6.31% $51,741,941 583,838 4.51%
=========== ---------- ----- ========== --------- ----
Net interest income $ 154,287 $ 344,147
========== ========
Weighted average rate spread 1.96% 2.20%
===== =====
Net yield on average earning
assets 2.07% 2.49%
(1) Actual yields; not adjusted for Tax-equivalent yields.
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
15
15
Nine Months Ended September 30,
-------------------------------------------------------------------------
1995 1994
------------------------------------- ----------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
ASSETS
Interest Earning Assets:
Short term investments:
interest bearing deposits $ 674,312 $ 25,919 5.13% $ 1,727,346 $ 63,798 4.92%
Federal funds sold 938,118 42,662 6.06% 2,550,150 75,850 3.97%
Investment Securities:
Non-taxable(1) 78,263 4,056 6.91% 270,473 13,689 6.75%
Taxable 16,646,730 806,102 6.46% 15,806,980 560,499 4.73%
------------------------------------- ----------------------------------
Total investment securities 18,337,423 878,739 6.39% 20,354,949 713,836 4.68%
Loans: ------------------------------------- ----------------------------------
Commercial 1,946,112 175,866 12.05% 6,897,742 455,649 8.81%
Real Estate 8,360,980 596,233 9.51% 18,263,882 1,027,258 7.50%
Installment/Consumer 1,632,186 127,323 10.40% 10,177,025 759,115 9.95%
------------------------------------- ----------------------------------
Total Loans 11,939,278 899,422 10.04% 35,338,649 2,242,022 8.46%
------------------------------------- ----------------------------------
Total earning assets 30,276,701 1,778,161 7.83% 55,693,598 2,955,858 7.08%
------------------------------------- ----------------------------------
Less allowance for possible
loan losses & deferred fees (328,646) (374,091)
------------------ ------------------
29,948,055 55,319,507
Mortgage servicing rights 1,915,910 1,689,466
Non earning assets 3,174,555 6,594,425
------------------ ------------------
Total assets $ 35,038,520 $ 63,603,398
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposit Accounts: $ 61,430 $ 1,146 2.49% $ 5,408,166 $ 102,183 2.52%
Now/S-Now 71,463 1,490 2.78% 5,186,552 97,352 2.50%
Canadian Dollar Savings 1,154,096 58,162 6.72% 2,245,726 84,382 5.01%
Time Under $100,000 11,973,313 577,954 6.44% 9,878,305 353,183 4.77%
Time Over $100,000 -- -- -- 545,055 21,053 5.15%
Bowrrowed Funds 12,148,100 583,631 6.41% 7,274,409 221,113 4.05%
Money Market 2,444,730 99,725 5.44% 18,960,446 551,039 3.88%
Holding company debt 839,105 56,701 9.01% 2,273,538 134,205 7.87%
------------------------------------- ----------------------------------
Total interest bearing
liabilities $ 28,692,237 1,378,809 6.41% $ 51,772,197 1,564,510 4.03%
============= ------------ --------- ============= ------------ ------
Net interest income $ 399,352 $ 1,391,348
================ ===============
Weighted average rate spread 1.42% 3.05%
========= ========
Net yield on average earning
assets 1.76% 3.33%
(1) Actual yields; not adjusted for Tax-equivalent yields.
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
16
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Provision for Loan Losses
Management decreased the monthly loan loss provision to a rate of $400
in the three months ended September 30, 1995 from $17,500 in the prior-year
period. The reduction was made due to management's assessment of the adequacy
of the reserve and the low level of origination of non-guaranteed loans. The
actual loan losses were $10,782 in the three month period ended September 30,
1995 versus $18,823 in the three month period ended September 30, 1994.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1995 1994 1995 1994
-----------------------------------------------------------
Provision for loan losses $ 1,200 $52,500 $ 3,600 $157,500
Loan charge-offs 10,782 18,823 53,654 71,475
Reclassification - - (19,736) -
Recoveries 2,023 1,576 12,921 46,221
------- ------- -------- --------
Net increase (decrease)
in provision $(7,559) $35,253 $(56,869) $132,246
At At At
Sept. 30 June 30, December 31,
1995 1995 1994
-----------------------------------------------------------
Total loans (1) $7,483,470 $7,662,769 $4,583,192
Reserve for loan losses 305,690 313,249 362,559
Reserve/Loans, % (1) 4.08% 4.09% 7.91%
(1) Excludes loans held for sale.
In addition to the general loan loss reserve, the Company had deposits
on hand from the Michigan Strategic Fund of approximately $42,754 at September
30, 1995 and $45,000 at June 30, 1995 and December 31, 1994 to offset loan
losses on a group of commercial loans amounting to approximately $564,000 at
September 30 and June 30, 1995 and $534,893 at December 31, 1994. The Michigan
Strategic Fund (the "MSF") is a State of Michigan sponsored program. Under the
terms of the program, the Bank can assign, at the Bank's sole discretion,
business loans to be covered by MSF guarantees. The funds which are paid to the
Bank by the MSF are held at the Bank in a segregated account to offset such loan
losses. If there are no losses and the loans are all liquidated, the MSF would
retain ownership of the funds in the segregated account.
Financial Accounting Standards Board ("FASB") has issued statement
number 114, Accounting by Creditors for Impairment of a Loan, which must be
adopted for fiscal years beginning after December 14, 1994. The Company
believes that the impact of adopting this statement will not be material.
The following schedule summarizes the Company's nonperforming loans for
the periods indicated:
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17
At At At
Sept. 30, June 30, December 31,
1995 1995 1994
--------------------------------------------------------------
Past due 90 days and over
and still accruing:
Real estate 35,193 48,657 76,576
Installment 41,897 60,508 92,947
Commercial 35,826 304,477 112,219
------- ------- -------
Subtotal 112,916 413,642 281,742
Nonaccrual loans:
Real estate 111,290 111,290 108,056
Installment - - -
Commercial 170,535 97,771 4,893
------- ------- -------
Subtotal 281,825 209,061 112,949
Other real estate owned 170,720 225,552 130,015
------- ------- -------
Total 565,461 848,255 524,706
As % of loans (1) 7.56% 11.07% 11.45%
Ratio of reserve for loan
losses to all loans
90 days and over 54.1% 36.9% 91.9%
(1) Excluding loans held for sale.
Economic conditions in the Bank's primary market area appear to have
been stable in the period. The growth in the Sault Ste. Marie area appears to
have ceased; however, the Newberry area appears to be growing because of the
construction of a major prison complex in the town by the State Department of
Corrections. The full impact of the prison complex on the local economy is
likely to be felt later in the year, when it is fully staffed. The sale of the
bulk of the Bank's loan portfolio leaves the Bank with a larger than average
loan loss reserve and a larger than average ratio of underperforming loans.
The $282,794 decrease in non-performing assets during the three months
ended September 30, 1995 was primarily the result of the following: a $227,000
commercial loan secured by a mini-warehouse was removed from loans 90 days late
and still accruing because the borrower made some payments. However, this loan
and two related loans totalling $315,000 were sent to counsel for foreclosure
subsequent to quarter end. The Bank does not anticipate a loss from the
resolution of these loans. Subsequent to quarter end, four REO properties with
a combined balance of $40,000 were sold at no loss, leaving the Bank with just
two REO properties which are residences on which no loss is expected from the
final disposition of the assets.
Management believes that the current reserve level and the ongoing loan
loss reserve for loan losses is adequate to absorb future losses
18
18
inherent in the loan portfolio, although the ultimate adequacy of the reserve
is dependent upon future economic factors beyond the Company's control. A
downturn in the general nationwide economy will tend to aggravate, for example,
the problems of local loan customers currently facing some difficulties. A
general nationwide business expansion could conversely tend to diminish the
severity of any such difficulties.
Non-Interest Income
Total non-interest income decreased to $117,405 for the three months
ended September 30, 1995 from $297,462 for the three months ended September 30,
1994. The decrease was principally a result of a $72,177 decrease in the
Bank's mortgage banking income, a decrease in securities gains, and decreases
in foreign exchange income and other fee income related to the sale of three
branches in December 1994.
For the nine month periods, total non-interest income decreased from
$725,739 in the 1994 period to $583,855 in the 1995 period. Gains in mortgage
banking income and securities gains were offset by a decrease in the Company's
share of the profit from the equity investment in Northern Michigan BIDCO and
decreases in foreign exchange other fee income.
Securities. During the nine months ended June 30, 1995 realized gains
of $46,243 (including a gain of $30,913 in the three month period) were booked
by the holding company, with total proceeds of $167,690, on the sale of two
securities in the available for sale portfolio. At September 30, 1995, the
holding company had an unrealized gain on its securities portfolio of $126,683.
During the three months ended September 30, 1995, five securities
totalling $4,949,849 were sold from the Bank's available-for-sale securities
portfolio with gross realized gains of $64,893 and gross realized losses of
$76,256. During the nine months ended September 30, 1995, eleven securities
totalling $10,709,820 were sold from the Bank's available-for-sale securities
portfolio with gross realized gains of $157,915 and gross realized losses of
$152,511.
During the quarter, the Bank liquidated an additional portion of its
position in monthly adjusting agency backed CMOs indexed monthly to the 11th
District Cost-Of-Funds Index. In addition to the remaining $1,700,000 of these
COFI-indexed securities, the Bank retains a portfolio of agency backed CMOs
indexed to the one year CMT (together, the "ARM Securities Portfolio"). At
September 30, 1995, approximately $12,250,000 of the Bank's portfolio was
invested in variable-rate U.S. agency mortgage backed securities. The decrease
in the 1995 in short term interest rates has increased the market value of the
Bank's ARM Securities Portfolio from an unrealized loss of $851,000 at December
31, 1994 to an unrealized gain of $36,000 as of June 30, 1995 and $33,000 at
September 30, 1995, an increase in value of $884,000 during 1995.
Management made the decision in December 1994, at the time of the sale,
to hold onto the Bank's ARM Securities Portfolio, despite the fact that the
Bank's cost of funds to carry the portfolio at the time
19
19
exceeded the yield on the portfolio. During the first half of 1995, the yield
on the Bank's taxable investment securities was 5.82%, versus the cost of
borrowed funds of 6.68% and CDs of 6.44%. This negative carry decreased and
then ended during the third quarter of 1995, with the yield on the Bank's
taxable investment securities being 6.90%, versus the cost of borrowed funds of
6.14% and CDs of 6.45%. As the rates on the ARM Securities Portfolio adjust
over the next several months, the positive yield spread should increase
further, and it is expected that the Bank's ARM Securities Portfolio should
ultimately yield between 1.0-2.0% over the Bank's cost of funds, unless short
term interest rates again increase sharply, as they did throughout 1994. The
negative net interest income on the ARM Securities Portfolio had a substantial
negative impact on profitability in the first nine months of 1995; however, a
portion of the return on these securities over the first six months of 1995 was
expected by management to be an increase in market value, which was $502,000 in
the first quarter of 1995, and $385,000 in the second quarter of 1995.
Foreign Exchange. Foreign exchange revenues decreased to $21,879 and
$54,322 for the three and nine months ended September 30, 1995 from $46,447 and
139,623 in the respective 1994 periods, as a result of the sale of the three
bank branches in December 1994.
Mortgage Banking. Mortgage banking income decreased to $39,793 in the
three months ended September 30, 1995 from $111,970 in the three months ended
September 30, 1994. Sharply decreased loan purchase and origination volumes
during the 1995 period (albeit increased from the volume in the first half of
1995), substantial costs associated with the outsourcing of the Bank's FHLMC
single family mortgage loans serviced for others to Midwest Loan Services, and
a decrease in the market value of the loans held for sale (net of hedging
costs) all negatively impacted results for the 1995 period.
For the nine months ended September 30, 1995, mortgage banking income
increased to $347,648 from $259,763 in the 1994 period. Decreased loan
purchase and origination volumes during the 1995 period, were more than offset
by increases in servicing income from the Bank's FHLMC single family mortgage
loans serviced for others, and an increase in the market value of the loans
held for sale.
Financial Accounting Standards Board ("FASB") has issued statement
number 122, Accounting for Originated Mortgage Servicing Rights, which must be
adopted for fiscal years beginning after December 14, 1995. The Company
believes that the adoption of this statement will positively impact the
Company's net income in the short term, although in the long term the
underlying economics of the cash flows from this activity will be unaffected.
At September 30, 1995, the Bank owned servicing rights on $188,673,976
of FHLMC and FNMA mortgages serviced for others which were subserviced by
Midwest Loan Services, versus $150,627,733 at December 31, 1994. Subsequent to
quarter end, the Company signed a definitive agreement to acquire 80% of
Midwest Loan Services (see Recent Developments, above). The following table
summarizes the portfolio by
20
20
type and mortgage note rate:
($ in 000s) FIXED RATE - BY MATURITY
-------------------------------------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 194 188 162 5,034
8.50 - 8.99 2,515 686 1,004 21,845
8.00 - 8.49 848 748 2,188 32,675
7.50 - 7.99 498 1,258 3,613 48,935
7.00 - 7.49 418 1,057 14,448 23,038
6.50 - 6.99 2,678 986 11,396 6,221
6.00 - 6.49 2,320 655 1,687 470
under 6.00 118 708 79 -
------ ------ ------ -------
9,590 6,289 34,577 138,218
Current market
interest rates 6.50% 7.00% 7.13% 7.75%
Average annual
servicing fee 0.50% 0.30% 0.29% 0.26%
If interest rates continue their recent decline to levels briefly seen
during the Summer of 1993, the portfolio would experience significant
refinancings and payoffs, which would hurt income.
Mortgage Payoffs
First Quarter 1994 $5,347,079
Second Quarter 1994 3,358,617
Third Quarter 1994 1,539,680
Fourth Quarter 1994 1,544,922
First Quarter 1995 765,480
Second Quarter 1995 1,239,571
Third Quarter 1995 1,919,412
If interest rates were to stay at current levels, refinancings and
payoffs would likely increase over recent experience since approximately 30% of
the fixed rate mortgages being serviced carry interest rates 0.5% or more over
the current market rate. A recent dip to lower rates, which then reversed, may
increase amortization in the third quarter of 1995 somewhat. Based on recent
comparable sales and indications of market value from industry brokers,
management believes that the current market value of the Bank's portfolio of
mortgage servicing rights exceeds cost by approximately $300,000 to $550,000.
Market interest rate conditions can quickly affect the value of mortgage
servicing rights in a positive or negative fashion, as long term interest rates
rise and fall. A portion of the Bank's ARM Securities Portfolio acts as a hedge
against repayments of mortgage servicing rights.
At September 30, 1995, the Bank had outstanding purchase commitments to
buy single family FHLMC qualifying mortgage loans of
21
21
$1,715,000 and outstanding forward commitments to deliver FHLMC mortgage-backed
securities of $1,008,000, substantially all of which commitments were for
delivery within three months or less. The following tables summarize mortgage
banking activity for the three and nine months periods ending September 30,
1995 and 1994:
(amounts in $000s) Three Months Ended Nine Months Ended
Sept. 31 Sept. 30
1995 1994 1995 1994
------------------------- ----------------------
Net servicing originated 3,683 1,519 8,050 6,457
Bulk servicing purchased - - 29,996 -
------ ------ ------ ------
Net increase in servicing 3,683 1,519 38,046 6,457
====== ====== ====== ======
(amounts in $000s) Sept. 30 June 30, December 31,
1995 1995 1994
-------------------------------------------------------------
Total servicing (1) 188,674 184,991 150,628
Book value of servicing 2,029 1,995 1,626
Estimated market value
of servicing:
Management estimate (2) 2,528 2,542 2,162
Discounted cash flow (3) 2,364 2,210 1,910
Estimated excess of market
over book value (4) 335-499 215-547 536-284
(1) Includes servicing related to FHLMC qualified loans held for delivery of
$5,914,586 at September 30, 1995, $2,630,729 at June 30, 1995, and
$4,129,321 at December 31, 1994.
(2) Assumes a price based upon market transactions using a multiple of the
annual servicing fee (ie. 5.6 x 0.25% = 1.40%):
Sept. 30 June 30, December 31,
1995 1995 1994
--------------------------------------------------------
30-year fixed servicing 5.6x 5.7x 5.8x
15-year fixed servicing 4.5x 4.7x 4.8x
Balloon servicing 3.0x 3.0x 3.1x
ARM servicing 2.9x 3.0x 3.2x
- -------------
A discount of 1x was subtracted for servicing on California properties on
June 30, 1995 and December 31, 1994, and 0.7x on September 1995 (the
relative value of California servicing has improved).
(3) Uses net present value analysis of future cash flows, discounted back at
13.14% (the original rate used to price the initial bulk portfolio
purchased in 1993).
(4) Range based upon the two methods used in (2) and (3), above.
- -----------------------------------------------------------------
During 1994 and early 1995, market transactions for servicing rights
showed a trend to increased prices. A slight decline was noted in the second
quarter of 1995.
22
22
In the first quarter, the Bank acquired a $30,000,000 portfolio of low
coupon 1993 servicing on properties located in California for 1.04% of the
unpaid principal balance.
Origination activity continues to climb slowly from earlier depressed
levels, and indications are that the new and existing programs will increase
origation activity in the fourth quarter of 1995 from the depressed levels of
early 1995.
During the third quarter, the Bank began selling B and C impaired
credit quality loans to correspondents originated through the Bank's own
correspondent network. During October 1995, the Bank established a
wholly-owned subsidiary, Varsity Funding Services, LLC, of Farmington Hills,
Michigan ("Varsity"). Varsity originates for its own account and purchases from
other mortgage brokers, subprime residential mortgage loans, for resale to the
secondary market. Future net income from Varsity would be divided pursuant to
an operating agreement among the Bank and Varsity's Co-Managers, Bill Cook and
Jess Monticello. Bill Cook was formerly the manager of Countrywide Funding
Corp.'s Michigan wholesale office, and Vice President of Retail and Wholesale
Operation for Wellington Mortgage of Madison Heights, Michigan. Jess
Monticello was previously Senior Vice President - Secondary Marketing, for
Republic Bancorp Mortgage, Inc. Both individuals also joined the Bank as Vice
Presidents in the Bank's Mortgage Banking Division. Management anticipates
that the establishment of Varsity will enable the wholesale division of the
Bank to expand its sales and marketing of the Bank's mortgage services to
mortgage bankers throughout southern Michigan. It is anticipated that start-up
expenses from Varsity could negatively impact fourth quarter 1995 earnings by
up to $50,000.
The Bank has recently added some new mortgage correspondents for the
Farmer Mac loan program. Farmer Mac, the AgFirst Farm Credit Bank and FNMA
began to pool Farmer Mac Guaranteed Rural Housing Loans beginning August 1,
1995, and the Bank was the first nationwide seller under the program. During
the 1995 third quarter, the Bank increased its ownership of Farmer Mac's class
C common stock (NASDAQ/FAMCK) to 3.29% of the outstanding shares.
Subsequent to quarter end, the Company and the Bank signed a definitive
agreement to acquire 80% of the outstanding shares of Midwest Loan Services.
The subservicing company is also based in the Upper Peninsula of Michigan.
While in the short run the acquisition has decreased net income, in the near
future it should result in cost savings. As a subsidiary of the bank, this
acquisition would also enhance the subservicing company's ability to market its
services, and also produce economies of scale in its own operation. Indications
are that the subservicing company will shortly receive an additional 1,000
loans for subservicing, increasing its total to 6,200 loans serviced for
others, including 1,900 loans serviced for the Bank, and 800 serviced for its
own portfolio.
In mid-March 1995, the Bank purchased a portfolio of sub-performing
home equity loans with approximately $6,600,000 in unpaid principal balance and
$1,000,000 of unpaid accrued interest from a private investor group for
approximately $1,903,000 (the "Loan Pool").
23
23
The investor group had recently purchased the Loan Pool from the Resolution
Trust Corporation, which had not funded legal collection costs with respect to
the loans in the pool since 1990. The average stated interest rate on the
mortgage loans is over 19%. Approximately 70% of the loans in the pool are
currently making payments (up from 50% at the time of the Bank's acquisition),
and based on the collection experience to date, management expects to amortize
the purchase price together with a 12% return on the investment within two
years, leaving additional future income from the pool which will be split 50/50
with the subservicer of the loan pool. Based upon its investigation of the
loan pool, management believes that 70% of the loans in the pool are backed by
first or second mortgages where the combined loan to value ratio, after taking
into account these liens is less than 100%. The servicer of the loans has
provided additional security, guarantees and collateral to protect the Bank's
investment in the loan pool, including $250,000 in pledged deposits with the
Bank.
A recent appraisal by the servicing company's independent certified
public accountant as of August 31, 1995 indicates that the net present value of
the loans is $4,271,819, which exceeds cost by about $2,615,232. As of
September 30, 1995, the Bank's net investment in the loans was $1,599,156.
Michigan BIDCO. Michigan BIDCO (formerly Northern Michigan BIDCO) (the
"BIDCO") invests in businesses in Northern Michigan with the objective of
fostering job growth and economic development. As of September 30, 1995, the
BIDCO had made fourteen such investments, amounting to a total of $7,625,000 at
original cost. At September 30, 1995, the BIDCO had total assets of $6,779,203
(treating three companies of which the BIDCO maintains a controlling interest
on a non-consolidated basis). For the three and nine months ended September
30, 1995 and 1994, the Bank's 44.09% equity share in the earnings of the
BIDCO's reported net income was $33,372 and $39,026, and $103,854 and $175,526,
respectively.
The Bank owns 280 shares of common stock in the BIDCO, currently
representing a 44.09% equity interest. In January 1995, the Company purchased
$132,000 principal amount of the BIDCO's 9% convertible debentures at par
value, and in June the Company purchased an additional $65,000 principal amount
for $71,500, thereby increasing the Company's consolidated fully diluted
ownership in the BIDCO to 15.53% from 10.57%.
Michigan BIDCO makes its investments in the form of loans or direct
equity investments, or a combination thereof. The BIDCO's limit on its
investment in one borrower is currently $500,000, and the BIDCO arranges
participations for investments in excess of this amount. The Bank is
restricted from investing or lending to a business that the BIDCO finances.
The BIDCO typically receives warrants or participation rights in the companies
in which it invests. To date, investments (at original investment cost) have
been made in the following types of businesses:
24
24
Michigan BIDCO's investments:
Equity
Industry Amount Participation?
ABC-TV affiliate $ 300,000 yes
Adult foster care 40,000 no
Cable TV 350,000 yes
Children's clothing manufacturer 200,000 yes
Environmental engineering 100,000 no (paid-off)
Hotel 300,000 yes
Loan subservicing 450,000 yes
Mining equipment manufacturer 80,000 no
Paper converting plant 1,100,000 yes
Paper recycle pulp mill 780,000 yes
Plastic injection molding 2,000,000 no (paid-off)
Railroad boxcar leasing 1,300,000 no
Railcar equipment manufacturing 125,000 yes
Tissue paper mill 500,000 yes
---------
Total $7,625,000
==========
At September 30, 1995, the BIDCO had the following outstanding conditional
commitments to lend:
Paper converting plant (add-on) $1,000,000
Cable TV (add-on) 150,000
-------
Total $1,150,000
=========
An 80% loan guarantee on $1,600,000 of the BIDCO's investment in the
paper converting plant was recently received from an agency of the federal
government.
The BIDCO received federal government approval of an application for
$2,000,000 in funding in the form of a 1% 30-year loan to a non-profit
affiliate of the BIDCO, Northern Michigan Foundation (the "Foundation"). The
Foundation will be lent this money at 1% interest for 30 years. The Foundation
will relend this money to businesses in Northern Michigan to promote economic
development and to create jobs for low and moderate income individuals. It is
anticipated that an increasing portion of the BIDCO's normal annual operating
expenses will be absorbed by the Foundation.
In conjunction with the Bank's establishment of a new main office in
Ann Arbor, the BIDCO also plans to set up an office at this location. The
BIDCO plans to expand the area in which it seeks investment opportunity to the
rest of the Lower Peninsula of Michigan, hence, the recent change in its name.
Non-Interest Expense
Non-interest expense decreased from $668,548 in the three months ended
September 30, 1994 to $259,430 for the three months ended September 30, 1995.
Non-interest expense decreased from $2,048,355 in
25
25
the nine months ended September 30, 1994 to $1,048,198 for the nine months
ended September 30, 1995. The decrease in both periods was primarily the
result of the sale of three branches of the Bank in December 1994.
Certain unusual expenses negatively impacted the 1995 first nine
months. Legal expenses of the Bank were $137,675 in the 1995 period and
$85,635 in the 1994 period, primarily because of expenses associated with a
particularly expensive lender liability countersuit related to one case, since
decided in the Bank's favor. Approximately $30,000 in extra temporary
personnel expenses were incurred in the 1995 period as a result of short term
personnel requirements following the sale. Unusual expenses directly related
to the sale of $18,132 were charged to earnings in the 1995 period.
Approximately $10,000 of expenses associated with the change of the Bank's
name, and $20,000 in expenses associated with the conversion of the Bank's core
software package and the outsourcing of the Bank's mortgage servicing were
incurred. Lastly, audit expenses are estimated to have been approximately
$25,000 higher as a result of the sale and the personnel turnover in the
treasury department of the Bank that resulted from it.
Non-interest operating expense for only the parent company decreased
from $55,976 for the three month 1994 period to $15,613 for the 1995 period.
For the nine month periods, non-interest operating expense decreased from
$190,663 in 1994 to $55,976 in 1995. Management fees and goodwill amortization
expense previously incurred at the holding company level were discontinued due
to the sale. Legal and audit expenses were also lower.
Liquidity and Capital Resources
Parent Company Liquidity:
At year-end 1994, Newberry Bancorp, Inc. held cash and marketable
equity securities of $151,922. This decreased by $4,326 to $147,596 at
September 30, 1995. The small decrease in cash and marketable equity
securities was due to a number of intercompany tax and dividend transfers which
offset a $50,423 repurchase of Company stock from the ESOP and other cash
flows. Dividends from the Company's bank subsidiary together with earnings
from the cash and marketable equity securities held by the parent company are
the principal sources of income used to fund the parent company's indebtedness.
The Company's bank debt currently calls for a $50,000 annual sinking fund
payments and a balloon maturity on September 30, 1996, renewable annually based
upon performance. The debt carries a restriction on payment of dividends by
the Bank in excess of prior year's net income of the Bank.
Capital Resources:
The following table sets forth the Bank's risk based assets, and the
capital ratios and risk based capital ratios of the Bank and Company as of
September 30, 1995.
26
26
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at September 30, 1995
($ in 000's)
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
- --------------------------------------------- --------- --------- ---------
Cash and Fed Funds 1,712 0% 0
U.S. and Canadian Treasuries 0 0% 0
U.S. Gov't Agency Securities 782 0% 0
Reserve for Loan Losses (306) 0% 0
U.S. Gov't Sponsored Agency Securities 12,678 20% 2,536
U.S. Gov't Guaranteed Loans 503 20% 101
Balances at Domestic and Canadian Banks 1,454 20% 291
General Obligation Municipal Securities 0 20% 0
1-4 Family Mortgage Loans 3,922 50% 1,961
Municipal Revenue Bonds 0 50% 0
All Other Loans 8,973 100% 8,973
All Other Securities 1,528 100% 1,528
Real Estate Owned 171 100% 171
Premises & Equipment 1,115 100% 1,115
Mortgage Servicing Rights 2,029 100% 2,029
Other Assets 679 100% 679
- --------------------------------------------- -------
TOTAL ASSETS 35,240
=======
Off Balance Sheet Items:
Letters of Credit and Committments 543 100.00% 543
Foreign Exchange Contracts 985 0.50%(1) 5
Interest Rate Contracts 3,002 0.00%(1) 5
FHLMC Loan Purchase Committments 1,715 50.00% 857.5
MBS FHLMC Forward Sell Committments 1,008 0.00%(1) 8
Agency Guaranteed Commercial Loans Sold 203 20.00% 41
------- --------- --------
TOTAL RISK-ADJUSTED ASSETS 20,842
======
CAPITAL RESOURCES
Shareholders Equity, GAAP 4,900 4,900
Unrealized Gain/(Loss) on AFS Securities 35 35
Investment in Unconsolidated Subsidiary 572 572
----- -----
Total Equity (Tier 1) 5,507 5,507
Qualifying Loan Loss Reserve (Tier 2) 261 261
----- -----
Regulatory Capital (Tier 1 & Tier 2) 5,768 5,768
===== =====
Primary and Total Capital Ratio (Leverage) 16.50%
=====
Risk-adjusted Capital Ratio (Tier 1) 26.42% 26.42%
===== =====
Risk-adjusted Capital Ratio (Tier 2) 27.67% 27.67%
===== =====
Newberry Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 12.92%
=====
(1) Plus market value, or replacement cost valuation, as required.
27
27
Bank Liquidity:
The Company's primary sources of liquidity are customer deposits,
scheduled amortization and prepayments of loan principal, cash flow from
operations, maturities of various investments, the sale of loans held for sale,
reverse repo credit lines secured by securities, and overnight fed funds credit
lines from correspondent banks. In addition, the Bank invests in overnight
Federal Funds. At September 30, 1995, the bank had cash and due from banks and
fed funds on hand of approximately $3,165,000. At September 30, 1995 the Bank
had available overnight fed funds lines of $1,800,000. In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Because the assets and liabilities of
the Company are primarily monetary in nature, changes in interest rates have a
more significant impact on the Company's performance than the general effects
of inflation. However, to the extent that inflation affects interest rates, it
also affects the net income of the Company.
Rising long term and short term interest rates tends to increase the
value of the Bank's investment in mortgage servicing rights and improve the
Bank's current return on such rights by lowering required amortization rates on
them. However, rising interest rates tends to decrease new mortgage origination
activity, negatively impacting current income from mortgage banking operations.
The table on the next page details the Bank's asset/liability sensitivity as of
September 30, 1995.
28
28
UNIVERSITY BANK
Asset/Liability Position Analysis
($ in 000s)
Maturing or Repricing in
----------------------------------------------------
Under 91 Days- 1-5 Over 5 All Total
3 Months 1 Year Years Years Others
-----------------------------------------------------
ASSETS
Fed Funds 1,287 1,287
Loans(1) 441 760 2,619 177 3,997
Canadian Inv. 17 17
Securities 3,469 9,934 12 656 863 14,934
Loans held for sale 5,915 5,915
Matured Loans 657 657
Variable Loans 2,223 2,223
Other Assets 3,974 3,974
Cash & Due 1,861 1,861
Overdrafts 39 39
Non Accrual Loans 282 282
Valuation Adjustment 54 54
------ ------ ------ ------ ------ ------
14,048 10,694 2,631 833 7,034 35,240
LIABILITIES
Jumbo CDs 200 200
Other CDs 2,111 3,035 10,590 15,736
MMDA 1,736 1,736
Now & S-Now 58 58
Demand & Escrows 1,356 1,356
Savings 26 26
Can$Savings 795 795
Other Liabilities 434 434
Repos & Borrowings 10,000 10,000
Equity 4,899 4,899
------ ------ ------ ------ ------ ------
14,726 3,035 10,790 -- 6,689 35,240
GAP (678) 7,659 (8,159) 833 345
CUMULATIVE GAP (678) 6,981 (1,178) (345)
-1.92% 19.81% -3.34% -0.98%
NOTES:
(1) Net of bad debt reserve.
29
29
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
its subsidiary is party or to which any of their properties are subject.
Item 5. Other information
Parent Company Financial Information
Certain condensed financial information with respect to
Newberry Bancorp, Inc. follows:
30
30
NEWBERRY BANCORP, INC. (The Parent)
Condensed Balance Sheet (Unaudited)
September 30, December 31,
1995 1994
------------ -----------
ASSETS
Cash and due from banks $ 96,173 $ 54,151
---------- ------------
Investment in subsidiary 4,899,734 4,746,807
---------- ------------
Due from ESOP 1,000 1,000
Available for sale securities (Note 2) 161,002 97,771
Investment in Northern Michigan BIDCO 203,500 -
Federal income tax receivable 160,202 22,281
Furniture, fixtures & equipment 2,493 4,744
Deferred taxes 8,537 8,537
Prepaid expenses and other assets 138,926 973,212
---------- ------------
Total other assets 675,660 1,107,545
TOTAL ASSETS $ 5,671,567 $ 5,908,503
=========== ===========
September 30, December 31,
1995 1994
LIABILITIES AND SHAREHOLDERS EQUITY ------------- -----------
Note payable $1,000,000 $1,000,000
Accrued interest payable -- 78,798
Accounts payable 31,864 734,017
Due to subsidiary -- --
---------- ----------
Total Liabilities 1,031,864 1,812,815
Stockholders' equity:
Net unrealized gain (loss) on
available-for-sale securities 83,611 (525,788)
Capital stock and paid in capital 2,439,847 2,490,270
Retained earnings 2,116,245 2,131,206
---------- ----------
Total Stockholders' equity 4,639,703 4,095,688
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $5,671,567 $5,908,503
========== ==========
31
31
NEWBERRY BANCORP, INC. (The Parent)
Condensed Statement of Operations For the Three-Month For the Nine-Month
(Unaudited) Periods Ended Periods Ended
September 30, September 30,
1995 1994 1995 1994
------ ------ ------ ------
Interest on Securities $ 7,371 $ -- $ 12,851 $ --
Net income from bank subsidiary (10,203) 16,369 (4,578) 182,597
Gain (loss) on sale of investment 30,913 -- 46,243 --
Other income 27,198 39,299 37,570 42,349
------ ------ ------ ------
Total income 55,279 55,668 92,086 224,946
------ ------ ------ ------
Interest expense 11,604 51,358 56,701 134,205
Amortization expense 0 3,184 0 9,553
Management fees 0 15,000 0 45,000
Legal and Audit Expense 5,000 21,179 23,755 75,653
Public listing expense 1,000 2,478 3,000 7,505
Other expenses 9,613 29,570 29,221 52,952
------ ------ ------ ------
Total expenses 27,217 122,769 112,677 324,868
------ ------ ------ ------
Income before income taxes 28,062 (67,101) (20,591) (99,922)
------ ------ ------ ------
Income taxes (benefit) 12,825 (7,865) (5,630) (77,285)
------ ------ ------ ------
Net income 15,237 (59,236) (14,961) (22,637)
====== ====== ====== ======
Net income per common share $0.013 ($0.049) ($0.013) ($0.019)
====== ====== ====== ======
Dividends declared per share $ --- $ --- $ --- $ ---
====== ====== ====== ======
32
NEWBERRY BANCORP, INC. (The Parent) 32
Condensed Statement of Cash Flows
(Unaudited)
For the Nine-Month
Periods Ended
September 30,
1995 1994
---- ----
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) $ (14,961) $ (22,637)
Depreciation 2,251 2,251
Amortization -- 9,553
Non-cash stock contribution to ESOP -- 25,015
Proceeds from sales of trading securities 167,690 --
Purchases of trading securities (366,284) --
Loss (gain) on sale of investments (46,243) --
Decrease (increase) in receivable
from affiliate 973,211 (26,907)
Decrease (increase) in Other Assets (138,925) (123,780)
Decrease (increase) in Income Tax Receivable (137,921) --
Increase (decrease) in interest payable (78,798) (16,402)
Increase (decrease) in Income Tax Payable (720,428) --
Increase (decrease) in Other Liabilities 18,275 205,574
Equity from undistributed earnings of subsidiary 4,578 (67,797)
--------- ---------
Net cash provided by (used in)
operating activities (337,555) (15,130)
--------- ---------
Cash flow from investing activities:
Subsidiary dividends received 1,350,000 --
Subsidiary Capital Infusion (920,000)
--------- ---------
Net cash provided by (used in)
investing activities: 430,000 --
--------- ---------
Cash flow from financing activities:
Principal payment on notes payable -- (152,000)
Proceeds from sale of common stock -- 100,000
Purchase of treasury stock (50,423)
--------- ---------
Net cash provided by (used in)
financing activities: (50,423) (52,000)
--------- ---------
Net changes in cash and cash equivalents 42,022 (67,130)
Cash and cash equivalents:
Beginning of year 54,151 105,967
--------- ---------
End of year $ 96,173 $ 38,837
========= =========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 116,637 $ 69,982
Income tax $ (22,281) $ (3,849)
33
33
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.15 Promissory Note dated September 28, 1995
issued by Newberry Bancorp, Inc. to First Northern
Bank & Trust and Related Agreement.
10.16 Net Branch Agreement Establishing Varsity
Funding Services, LLC among University Bank, Jess
Monticello and William Cook, dated September 12,
1995.
10.17 Purchase and Sale Agreement Concerning Common
Stock of Midwest Loan Services dated August 1995
among its shareholders and University Bank and
Newberry Bancorp.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWBERRY BANCORP INC.
Date: November 10, 1995 /s/ Thomas J. Vandermus
-------------------------------
Thomas J. Vandermus
Chief Financial Officer and
Treasurer, University Bank
34
34
Exhibit Index
------------- Sequentially
Numbered
Page
------------
10.15 Promissory Note dated September 28, 1995
issued by Newberry Bancorp, Inc.
to First Northern Bank & Trust
and related Loan Agreement. 35
10.16 Net Branch Agreement Establishing Varsity
Funding Services, LLC among University
Bank, Jess Monticello and William Cook,
dated September 12, 1995. 59
10.17 Purchase and Sale Agreement Concerning Common
Stock of Midwest Loan Services dated
August 1995 among its shareholders
and University Bank and Newberry Bancorp. 65
27. Financial Data Schedule 83