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 March 31, 1996
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 issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $0.010 par value Outstanding at May 13, 1996
1,250,843 shares
page 1 of 30 pages
Exhibit index on sequentially numbered page 29
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 19
PART II - Other Information
Item 1. Legal Proceedings 24
Item 5. Other Information
Parent Company Condensed
Financial Information 24
Item 6. Exhibits and Reports on Form 8-K 28
Signature 28
Exhibit Index 29
Item 1. Financial Data Schedule 30
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.
3
NEWBERRY BANCORP, INC. AND SUBSIDIARIES 3
CONSOLIDATED BALANCE SHEETS
March 31,1996 and December 31,1995
(Unaudited)
March 31 December 31
1996 1995
ASSETS ----------- -----------
Cash and due from banks $ 1,904,156 $ 578,216
Federal funds sold 4,406,119 1,359,415
------------ ------------
Total cash and cash equivalents 6,310,275 1,937,631
Securities available for sale (note 2) 12,637,163 13,090,547
Loans held for sale 11,085,020 7,983,154
Loans, net 10,382,730 8,953,518
Premises and equipment 1,652,397 1,360,283
Purchased mortgage servicing rights 2,945,872 2,936,703
Investment in and Advances to
Michigan BIDCO 785,447 765,858
Other real estate owned 130,596 130,596
Other assets 1,441,025 1,116,238
------------ ------------
Total other assets 6,955,337 6,309,678
------------ ------------
TOTAL ASSETS $ 47,370,525 $ 38,274,528
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
NEWBERRY BANCORP, INC. AND SUBSIDIARIES 4
Consolidated Balance Sheets
March 31,1996 and December 31,1995
March 31 December 31
1996 1995
LIABILITIES AND STOCKHOLDERS EQUITY ----------- -----------
Deposits:
Demand - non interest bearing $ 1,698,427 $ 1,103,921
Demand - interest bearing 5,182,752 1,642,425
Savings 1,195,823 1,075,328
Time 21,348,871 16,923,492
------------ --------------
Total Deposits 29,425,873 20,745,166
FHLB advances 10,000,000 10,000,000
Mortgage escrow 1,485,539 1,055,337
Note payable 987,500 1,000,000
Deferred Noncompete income 128,329 137,080
Other Liabilities 721,805 484,912
------------ --------------
Total Liabilities 42,749,046 33,422,495
------------ --------------
Minority Interest 198,537 201,135
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
1,288,125 shares in 1996
and 1,276,125 shares in 1995 12,881 12,761
Treasury Stock - 37,282 shares in
1995 and 1996 (139,808) (139,808)
Additional Paid-in-Capital 2,866,286 2,799,656
Retained earnings 1,598,998 1,836,231
Net unrealized gain on securities
available for sale, net of tax
of $43,574 in 1996, and
$73,181 in 1995. 84,585 142,058
------------ --------------
Total Stockholders' equity 4,422,942 4,650,898
------------ --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 47,370,525 $ 38,274,528
============ ==============
The accompanying notes are an integral part of the consolidated
financial statements.
5
NEWBERRY BANCORP, INC. AND SUBSIDIARIES 5
Consolidated Statements of Income
(Unaudited)
For the Three Month
Periods Ended
March 31, March 31,
1996 1995
--------- ---------
Interest income:
Interest and fees on loans $ 403,971 $ 240,438
Interest on securities:
U.S. Treasury Securities 4,611 -
U.S. Government agencies 174,054 262,435
State and political subdivisions - 1,802
Other securities 13,349 1,920
Interest on bank deposits 13,065 8,987
Interest on federal funds 56,044 16,180
------------ -----------
Total interest income 665,094 531,762
------------ -----------
Interest expense:
Interest on deposits:
Demand deposits 45,203 40,614
Savings deposits 23,774 18,565
Time certificates of deposit 302,762 134,651
Bank borrowings 146,231 166,469
Repurchase agreements - 40,054
Interest expense on note payable 26,259 23,425
------------ -----------
Total interest expense 544,229 423,778
------------ -----------
Net interest income 120,865 107,984
Provision for loan losses 12,000 1,200
------------ -----------
Net interest income after
provision for loan losses 108,865 106,784
------------ -----------
Other income:
Net security gains 86,521 23,377
Decrease in market value
of Loans Held for Sale (89,691) -
Service charges and Fees 596 1,163
Foreign exchange income 18,488 12,431
Mortgage banking income 294,059 144,583
Profit from equity investment in
Michigan BIDCO 20,000 46,726
Other 43,767 10,549
------------ -----------
Total other income 373,740 238,829
------------ -----------
The accompanying notes are an integral part of the consolidated financial
statements.
6
NEWBERRY BANCORP, INC. AND SUBSIDIARIES 6
Consolidated Statements of Income (continued)
(Unaudited)
For the Three Month
Periods Ended
March 31, March 31,
1996 1995
------------- ------------
Other expenses:
Salaries and wages $ 370,827 $ 79,132
Employee benefits 58,020 11,321
Occupancy, net 71,246 13,785
Taxes other than income 4,798 2,817
Data processing and equipment expense 72,734 23,700
Correspondent bank service charges 4,179 11,824
Advertising 26,052 10,125
Net expense of other real estate owned 414 3,215
FDIC insurance 500 18,150
Mortgage banking expense 26,340 15,825
Legal and audit expense 57,044 93,466
Other operating expenses 155,326 100,328
------------ -----------
Total other expenses 847,480 383,688
------------ -----------
Income (Loss) before income taxes (364,875) (38,075)
------------ -----------
Income taxes (benefit) (127,642) (24,962)
------------ -----------
Net Income (Loss) $ (237,233) $ (13,113)
============ ===========
Earnings(Loss) per common share
(Note 1) ($0.19) ($0.01)
============ ===========
Weighted average shares outstanding
(Note 1) 1,248,206 1,200,000
============ ===========
Dividends declared per share $ --- $ ---
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
7
NEWBERRY BANCORP, INC. AND SUBSIDIARY 7
Consolidated Statements of Cash Flows
(Unaudited)
For the Three-Month
Periods Ended
March 31,
1996 1995
------------ -------------
Cash flow from operating activities:
Net income (loss) $ (237,233) $ (13,113)
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 114,044 28,975
Provision for loan loss 12,000 1,200
Mortgage loans originated for sale (39,050,115) (8,441,480)
Proceeds from sale of loans 34,552,470 6,643,243
Net loss/(gain) on loan sales (110,983)
Net amortization/accretion on securities (1,852) (4,867)
Gain on sale of available for
sale securities (86,521) (23,377)
Loss/(Gain) on sale of trading account
securities (5,205) 9,427
Proceeds from sales of trading account
securities 1,422,276 984,494
Market adjustment on loans held for sale 89,691 (56,159)
Change in:
Investment in Northern Michigan BIDCO (19,160) (178,726)
Purchased mortgage servicing rights (70,614) (353,386)
Other real estate (4,071)
Increase in other assets (295,609) (162,272)
Increase/(Decrease) in other liabilities 225,544 (873,940)
--------------- ---------------
Net cash from (used in)
operating activities (3,461,267) (2,444,052)
--------------- ---------------
Cash flow from investing activities:
Purchase of available for sale
securities (6,251,453) (2,652,639)
Proceeds from sales of available for
sale securities 5,890,857 1,814,862
Loans granted net of repayments (1,441,212) (3,467,985)
Premises and equipment expenditures (344,713) (21,925)
Principal paydowns on available for
sale securities 815,274 458,580
--------------- ---------------
Net cash from (used in)
investing activities (1,331,247) (3,869,107)
--------------- ---------------
Cash flow from financing activities:
Net increase in repurchase agreements - 2,809,000
Net increase in deposits 8,680,706 2,390,804
Other Bank Borrowings - 1,361,157
Net increase in mortgage escrow accounts 430,202 229,341
Amount due to Broker - (1,288,169)
Principal payment on notes payable (12,500) -
Issuance of common stock 66,750 -
--------------- ---------------
Net cash from
financing activities 9,165,158 5,502,133
--------------- ---------------
Net change in cash and
cash equivalents 4,372,644 (811,026)
Cash and cash equivalents:
Beginning of period 1,937,631 1,514,679
End of period $ 6,310,275 $ 703,653
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 484,759 $ 274,340
Cash paid for income taxes - 852,719
The accompanying notes are an integral part of the financial statements.
8
NEWBERRY BANCORP, INC. AND SUBSIDIARIES 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements incorporated by reference
in the Company's 1995 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 1995 Annual Report on
Form 10-K, 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: 1,248,206 and
1,200,000 for the three months ended March 31, 1996 and 1995, 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 March 31, 1996
had a net unrealized gain of approximately $129,000 as compared with a net
unrealized gain of approximately $215,000 at December 31, 1995, a decrease of
$86,000 mainly due to sales of securities at a profit during the quarter. The
securities were sold to provide for increased loan demand.
Available-for-sale securities
March 31, 1996
----------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
------------------------------------------------------------------------------------
U.S. agency mortgage-backed 11,325 45 (104) 11,266
Other mortgage-backed 181 - 181
U.S. agency equity 842 114 - 956
Other equity 160 74 - 234
------------------------------------------------------------------------------------
Total investment securities
available for sale $12,508 $233 $(104) $12,637
======= ==== ====== =======
9
Available-for-sale securities (continued) 9
December 31, 1995
----------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------
U.S. agency mortgage-backed $10,243 $163 $(63) $10,343
Other mortgage-backed 1,680 29 - 1,709
U.S. agency equity 842 13 - 855
Other equity 111 73 - 184
-----------------------------------------------------------------------------------
Total securities
available for sale $12,876 $278 $(63) $13,091
======= ==== ===== =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SUMMARY
For the three months ended March 31, 1996, a net loss of $237,233 was
realized versus a net loss of $13,113 in the same period in 1995. Net interest
income increased to $120,865 in the 1996 period from $107,984 in the 1995
period, and other income was $373,740 in the 1996 period versus $238,829 in the
1995 period. The increase in net loss was primarily the result of the increase
in operating expenses in the quarter. However, other operating expense
increased to $847,480 in the 1996 period from $383,688 in the 1995 period, as a
result of the start-up of the Ann Arbor main office, the start-up of the
Varsity Mortgage operation during the quarter, and the increased level of
expenses over the prior year related to the acquisition of Midwest Loan
Services and the start-up of Varsity Funding. Income from the equity in
earnings of Michigan BIDCO decreased mainly as a result of a one-time expense
associated with the start-up of the BIDCO's affiliate, Northern Michigan
Foundation.
Net loss per share in the three months ended March 31, 1996 was
($0.19), compared to ($0.01) for the three months ended March 31, 1995.
The following table summarizes the pre-tax income of each profit
center of the Company for the three months ended March 31, 1996 and 1995:
THREE MONTHS ENDED MARCH 31, 1996 PRE-TAX INCOME (LOSS) SUMMARY
Banking & Mortgage Banking $(263,632)
Midwest Loan Services (2,202)
Varsity Funding (35,322)
Varsity Mortgage (35,248)
Equity in earnings of Michigan BIDCO 20,000
Corporate Office ( 48,471)
---------
Total $(364,875)
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10
THREE MONTHS ENDED MARCH 31, 1995 PRE-TAX INCOME (LOSS) SUMMARY
Banking & Mortgage Banking $( 76,766)
Equity in earnings of Michigan BIDCO 46,726
Corporate Office ( 8,035)
---------
Total $( 38,075)
The loss from operations for the three months ended March 31, 1996 was
due to the start-up of new activities at the bank in Ann Arbor and at Varsity
Funding, the commencement of operations at Varsity Mortgage, and an unusual
expense at Michigan BIDCO associated with the start-up of the BIDCO's
affiliate, Northern Michigan Foundation.
The loss of the Company for the three months ended March 31, 1995 was
principally a result of a lack of profitability from the Company's banking
operations following the sale in December 1994 of the bulk of the Bank's retail
deposits and loans, which was only partially offset by the equity in the
earnings of Michigan BIDCO and income from the mortgage banking operation.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income increased to $120,865 for the three months ended
March 31, 1996 from $107,984 for the three months ended March 31, 1995. Net
interest income rose from the year ago period because of an increase in loans
which was only partially offset by an increase in the cost of interest bearing
liabilities. The yield on interest earning assets decreased from 7.04% in the
1995 period to 7.21% in the 1996 period. The cost of interest bearing
liabilities decreased from 6.57% in the 1995 period to 6.12% in the 1996
period. Net interest income increased despite the fact that interest income as
a percentage of total earning assets to decreased from 1.43% to 1.31%, because
of a 22.1% larger interest earning base of assets.
Interest income
Interest income increased from $531,762 in the quarter ended March 31,
1995 to $665,094 in the quarter ended March 31, 1996. The average volume of
interest earning assets increased to $36,896,668 in the 1996 period from
$30,202,189 in the 1995 period, an increase of 22.1%. The increased volume of
earning assets was due to an increase in deposits, partially as a result of the
new Ann Arbor main office. Interest income increased despite a decrease in the
yield on earning assets. The overall yield on the loan portfolio decreased to
9.18% from 10.56%. New loans that the bank is making, have in general, lower
yields than the high yield portfolio that was excluded from the sale of the
bulk of the Bank's loans in December 1994.
The average volume of investment securities in the three months ended
March 31, 1996 decreased 8.6% over the same periods in 1995, as the Bank's
portfolio of adjustable rate agency backed mortgage
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securities was liquidated and the funds repositioned in anticipation of
increased loan demand from the new Ann Arbor main office. The yield on the
securities portfolio decreased from 5.52% in the three month period ended March
31, 1995 to 5.42% in the 1996 period. The decrease in yields was in line with
the general decrease in interest rates between early 1995 and early 1996.
Interest Expense
Interest expense increased to $544,229 in the three months ended March
31, 1996 to $423,778 in the 1995 period. The increase was due to an increase
in interest bearing liabilities as a result of increased deposits, only
partially offset by a decrease in rates paid on deposits and borrowings. A
portion of the decrease in rates was due to generally lower short term interest
rates. The cost of funds decreased to 6.12% in the 1996 period from 6.57% in
the 1995 period. The average volume of interest bearing liabilities increased
37.8% in the 1996 period versus the 1995 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 months ended
March 31, 1996 and 1995.
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12
Three Months Ended March 31,
-----------------------------------------------------------------------------------------
1996 1995
------------------------------------------------ ----------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
ASSETS
Interest Earning Assets:
Short Term Investments:
Interest Bearing Deposits $ 1,058,526 $ 13,065 4.94% $ 701,641 $ 8,987 5.12%
Federal Funds Sold 4,344,644 56,044 5.16% 1,167,884 16,180 5.54%
Investment Securities:
Non-taxable (1) - - - 101,046 1,802 7.13%
Taxable 13,882,675 192,014 5.53% 19,124,392 264,355 5.53%
-------------- ----------- ------- ------------ ---------- -----
Total Investment Securities 19,285,845 261,123 5.42% 21,094,963 291,324 5.52%
-------------- ----------- ------- ------------ ---------- -----
Loans:
Commercial 3,402,917 84,650 9.95% 1,668,210 56,011 13.43%
Real Estate Mortgage 12,960,293 287,208 8.86% 5,884,341 135,965 9.24%
Installment/Consumer 1,247,613 32,113 10.30% 1,554,675 48,462 12.47%
-------------- ----------- ------- ------------ ---------- -----
Total Loans 17,610,823 403,971 9.18% 9,107,226 240,438 10.56%
-------------- ----------- ------- ------------ ---------- -----
Total Interest Bearing Assets 36,896,668 665,094 7.21% 30,202,189 531,762 7.04%
-------------- ----------- ------- ------------ ---------- -----
Less allowance for possible
loan losses & deferred fees (342,177) (354,367)
-------------- ------------
36,554,491 29,847,822
Mortgage servicing rights 2,929,352 1,754,385
Non earning assets 5,392,698 1,930,935
-------------- ------------
Total Assets $ 44,876,541 $ 33,533,142
============== ============
LIABILITIES
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 321,981 $ 4,039 5.02% $ 74,480 $ 479 2.57%
Savings 29,189 183 2.51% 100,273 611 2.44%
Canadian Dollar Savings 1,589,275 23,591 5.94% 1,066, 609 17,954 6.73%
Time 19,632,778 302,762 6.17% 8,329,727 134,651 6.47%
Borrowed Funds 10,000,000 150,340 6.01% 12,466,545 206,523 6.63%
Money Market Accounts 3,004,332 41,164 5.48% 2,776,527 40,135 5.78%
Holding Company Debt 984,000 22,150 9.00% 1,000,000 23,425 9.37%
-------------- ----------- ------- ------------ ---------- -----
Total interest bearing
liabilities $ 35,561,555 544,229 6.12% $ 25,814,161 423,778 6.57%
============== ----------- ------- ============ ---------- -----
Net interest income 120,865 $ 107,984
=========== ==========
Weighted average rate spread 1.09% 0.48%
======= =====
Net yield on average earning
assets 1.31% 1.43%
(1) Actual yields; not adjusted for tax-equivalent yields
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Provision for Loan Losses
Management increased the monthly loan loss provision to a rate of
$6,000 in February 1996 from $400 in the prior-year period. The increase was
the result of management's desire to build reserves, as new loans are
originated in Ann Arbor. The actual loan losses were $2,172 in the three month
period ended March 31, 1996 versus $26,625 in the three month period ended
March 31, 1995.
Three Months Ended
March 31
1996 1995
---------------------------------------------
Provision for loan losses 12,000 1,200
Loan charge-offs 2,172 26,625
Reclassification - (19,736)
Recoveries 3,185 386
------- -------
Net increase (decrease)
in provision 13,013 (44,775)
At At
March 31, 1996 December 31, 1995
----------------------------------------------
Total loans (1) 10,712,927 9,270,703
Reserve for loan losses 330,197 317,185
Reserve/Loans (1), % 3.08% 3.42%
(1) Excludes loans held for sale.
In addition to the general loan loss reserve, the Company had a
Michigan Strategic Fund loan loss reserve balance of $5,306 and $5,212
available at March 31, 1996 and December 31, 1995, respectively, to offset loan
losses on a group of commercial loans amounting to approximately $564,000 at
March 31, 1996 and December 31, 1995. 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.
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14
The following schedule summarizes the Company's nonperforming loans
for the periods indicated:
At At
March 31, 1996 December 31, 1995
----------------------------------------------------------------
Past due 90 days and over
and still accruing:
Real estate 19,585 52,401
Installment 22,705 34,400
Commercial - 9,557
------- -------
Subtotal 42,290 96,358
Nonaccrual loans:
Real estate 85,666 85,666
Installment 1,518 -
Commercial 267,614 326,312
------- -------
Subtotal 354,798 411,978
Other real estate owned 130,596 130,596
------- -------
Total 527,684 638,932
As % of loans (1) 4.93% 6.89%
Ratio of reserve for loan
losses to all loans
90 days and over 83.2% 62.4%
(1) Excluding loans held for sale.
Subsequent to quarter-end, the Bank sold one of its two remaining parcels of
other real estate owned for its net book value of $40,000. Economic conditions
in the Bank's primary market area in Ann Arbor were strong in the period. The
Sault Ste. Marie area appears not to be growing. The Newberry area appears to
be rapidly growing because of the establishment of a major prison complex in the
town by the State Department of Corrections. The sale of the bulk of the Bank's
loan portfolio in December 1994 leaves the Bank with a larger than average loan
loss reserve and a larger than average ratio of underperforming loans. The bulk
of the Bank's non-performing loans enumerated above relate to borrowers in the
Newberry area, with the remainder in the Sault Ste. Marie area.
Management believes that the current reserve level and the ongoing
loan loss reserve for loan losses is adequate to absorb future losses 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.
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Non-Interest Income
Total non-interest income increased to $373,740 for the three months
ended March 31, 1996 from $238,829 for the three months ended March 31, 1995.
The increase was principally a result of a $149,476 increase in the Bank's
mortgage banking income, and an increase in securities gains, which was
partially offset by a decrease in the market value of loans held for sale and a
decrease in the Company's share of the profit from the equity investment in
Michigan BIDCO.
Securities. During the three months ended March 31, 1996, securities
totalling $5,890,857 were sold from the Bank's available-for-sale securities
portfolio with a gross realized gain of $86,521 and no losses. During the
quarter, the Bank sold the bulk of its fixed rate mortgage-backed securities
and a portion of its agency backed CMOs indexed monthly to one year CMT.
During the first quarter of 1996, the yield on the Bank's taxable investment
securities was 5.53%, versus the cost of borrowed funds of 6.01% and CDs of
6.17%. As the rates on the Bank's adjustable rate mortgage-backed securities
adjust upward, there should ultimately be a positive spread between the cost of
funds and the securities portfolio yield.
Foreign Exchange. Foreign exchange revenues increased from $12,431
for the three months ended March 31, 1995 to $18,488 in the 1996 period, as a
result of higher customer activity at the Bank.
Mortgage Banking. Mortgage banking income increased from $144,583 in
the three months ended March 31, 1995 to $294,059 in the three months ended
March 31, 1996. Sharply increased loan purchase and origination volumes during
the 1995 period were offset by a decrease in return from the Bank's investment
in FHLMC single family mortgage loans serviced for others, as a result of
amortization of servicing right assets due to mortgage payoffs. There was also
a lower of cost or market adjustment of $89,691 charged against income in the
1996 period to mark the mortgages held for sale to the lower of cost or market.
No lower of cost or market adjustment was required in the 1995 period. The
result for the 1996 period was also dissimilar from the 1995 period in that it
also included revenue from Midwest Loan Services, Varsity Funding and Varsity
Mortgage
At March 31, 1996, the Bank and its subsidiaries owned the right to
service $274,743,000 of FHLMC mortgages for others, of which $189,103,000 was
owned by the Bank and $85,640,000 was owned by Midwest Loan Services. The
following table summarizes the portfolio by type and mortgage note rate:
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($ in 000s) FIXED RATE - BY MATURITY
-------------------------------------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
9.00 and up 2,190 469 394 6,569
8.50 - 8.99 8,422 860 1,126 22,932
8.00 - 8.49 5,881 993 2,339 38,527
7.50 - 7.99 808 2,451 5,785 76,661
7.00 - 7.49 387 2,871 21,843 35,632
6.50 - 6.99 470 3,689 15,626 10,662
6.00 - 6.49 488 1,347 2,583 1,672
under 6.00 331 627 - 106
------ ------ ------ -------
18,978 13,307 49,695 192,763
Current market
interest rates 6.375 7.75% 7.88% 8.38%
Average annual
servicing fee 0.39% 0.26% 0.28% 0.26%
Lower interest rates in late 1995 were responsible for a surge in
refinancing. If interest rates were to drop back down to those levels,
refinancings and payoffs would likely increase over recent experience since a
significant portion of the fixed rate mortgages being serviced carry interest
rates within 1.0% of the current market rate. 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 $200,000 to $340,000. 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. If
interest rates were to 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
Fourth Quarter 1995 3,675,824
First Quarter 1996 6,303,052
The above figures reflect those of the Bank only and not the payoffs associated
with Midwest Loan Services' servicing rights portfolio.
At March 31, 1996, the Bank had outstanding purchase commitments to
buy single family FHLMC qualifying mortgage loans of $6,698,000 and outstanding
forward commitments to deliver FHLMC mortgage-backed
17
17
securities of $15,240,000, substantially all of which commitments were for
delivery within three months or less, and financial futures used for hedging
available-for-sale mortgage loans of $1,600,000. The following tables
summarize mortgage banking activity for the three months periods ending March
31, 1996 and 1995:
(amounts in $000s) Three Months Ended
March 31
1995 1996
--------------------
Net servicing originated (553) 784
Bulk servicing purchased 29,996 -
------ ------
Net increase in servicing 29,443 784
====== ======
(amounts in $000s) March 31, December 31,
1996 1995
--------------------------------------------
Total servicing (1) 189,103 188,319
Book value of servicing 2,056 2,035
Estimated market value
of servicing:
Management estimate (2) 2,294 2,208
Discounted cash flow (3) 2,361 2,318
Estimated excess of market
over book value (4) 305-238 283-173
(1) Excludes servicing related to FHLMC and FNMA qualified loans held for
delivery, and excludes servicing held by Midwest Loan Services
(2) Assumes a price based upon market transactions at March 31, 1996 of
5.0x (5.0 times the servicing fee) for 30-year servicing, 4.0x for
15-year servicing, 2.5x for Balloon servicing and 2.1x for ARM
servicing, and at December 31, 1995 of 4.7x for 30-year servicing,
4.0x for 15-year servicing, 2.4x for Balloon servicing and 2.3x for
ARM servicing. Excess servicing is discounted from these amounts at a
multiple of one times the servicing fee.
(3) Uses net present value analysis of future cash flows, discounted back
at 13.14% (the original rate used to price the 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. Prices decreased throughout the remainder
of 1995 to a low late in the year, and rose somewhat in early 1996.
Recent origination activity subsequent to quarter-end has increased
and management anticipates that its monthly mortgage origination activity will
increase in the second quarter of 1996 from the levels of the first quarter.
Varsity Mortgage began operations in March 1996.
18
18
Michigan BIDCO. Michigan BIDCO (the "BIDCO") invests in businesses in
Michigan with the objective of fostering job growth and economic development.
As of March 31, 1996, the BIDCO had made fourteen such investments, amounting
to a total of $9,820,000 at original cost (before repayments or participations
sold). At March 31, 1996, the BIDCO had total assets of $6,889,966. For the
three months ended March 31, 1996 and 1995, the Bank's 44.1% equity share in
the earnings of the BIDCO's reported net income was $20,000 and $46,726,
respectively. Income for the 1996 first quarter was negatively impacted by an
unusual expense associated with the start-up of the BIDCO's affiliate, Northern
Michigan Foundation (see below).
The Bank owns 280 shares of common stock in the BIDCO, currently
representing a 44.1% equity interest. The Company's consolidated fully diluted
ownership in the BIDCO is 15.6%, after considering the impact of convertible
bonds.
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:
Michigan BIDCO, investments:
---------------------------
Total Equity
Industry Investment Participation?
#1 ABC-TV affiliate $ 300,000 yes
#2 Adult foster care 40,000 no
#3 Cable TV 545,000 yes
#4 Children's clothing manufacturer 200,000 yes
#5 Environmental engineering 100,000 repurchased
#6 Limited service hotels 738,600 yes
#7 Metal manufacturing 80,000 no
#8 Paper converting 2,662,000 yes
#9 Plastic injection molding 2,000,000 repurchased
#10 Railcar parts manufacturing 125,000 yes
#11 Railroad boxcar leasing 1,300,000 no
#12 Recycled paper pulp mill 780,000 yes
#13 Residential mortgage servicing 450,000 repurchased
#14 Tissue paper mill 500,000 yes
---------
Total $9,820,600
==========
The loans associated with investments #2, 4, 9, and 13 have been
repaid in full. Loan participations have been sold in loans associated with
investments #6, 8, 11, and 12. At March 31, 1996, the BIDCO had no outstanding
conditional commitments to lend.
19
19
Northern Michigan Foundation. In December 1995, the BIDCO donated
$225,000 to capitalize Northern Michigan Foundation (the "Foundation"), and in
early 1996, donated an additional $75,000 to the Foundation. These donations
negatively impacted the BIDCO's and the Company's earnings in the 1996 first
quarter. The BIDCO anticipates that on an ongoing basis a portion of its
overhead will be borne by the Foundation. The BIDCO and the Foundation share
administrative staffs and offices, with the Foundation reimbursing the BIDCO
for these services. As a result of its capitalization by the BIDCO, the
Foundation was able to borrow a total of $2,000,000 from the U.S. Rural
Economic Community Development Service Agency ("U.S. RECDS") at 1% interest
with a 30 year term. As of March 31, 1996, the Foundation had lent $200,000 of
its available funds to two borrowers.
Non-Interest Expense
Non-interest expense increased to $847,480 in the three months ended
March 31, 1996 from $383,688 for the three months ended March 31, 1995. The
increase was primarily the result of the start-up of the Ann Arbor main office,
the start-up of the Varsity Mortgage operation in March 1996, and the increased
level of expenses over the prior year related to Midwest Loan Services (which
was acquired in December 1995) and Varsity Funding (which commenced operations
in October 1995). Operations at the Bank in Ann Arbor reflect a full quarter
of personnel and other expenses, although the revenue from the new main office
did not begin to increase until after the new office opened in early February
1996.
Non-interest operating expense for only the parent company increased
from $10,767 for the three month 1995 period to $33,193 for the 1996 period.
Legal and audit expenses and other miscellaneous expenses were higher.
Liquidity and Capital Resources
Parent Company Liquidity:
At year-end 1995, Newberry Bancorp, Inc. held cash and marketable
equity securities of $400,870. This decreased by $62,143 to $338,727 at March
31, 1996. The decrease in cash and marketable equity securities was due to
operating expenses and payments of principal and interest on the Company's
loan. During the three months ended March 31, 1996 no dividends were paid from
the Bank, as a result of low profitability at the Bank. 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 owing to First Northern
Bank & Trust ("FNB&T"), which amounted to $987,500 and $1,000,000 at March 31,
1996 and at December 31, 1995, respectively. The note matures November 1,
1996, but it is expected to be available for renewal for an additional one
year subject to the Company's compliance with the loan terms. Management
believes that the cash and
20
20
securities on hand together with available unrestricted retained earnings that
University Bank is able to pay the Company in the form of dividends, with
permission of the Company's secured debt lender, is currently sufficient to
cover any required principal reductions during 1996 on the holding company's
loan.
Capital Resources:
The following table sets forth the Bank's risk based assets, and the
capital ratios and risk based capital ratios of the Bank and Company.
21
21
UNIVERSITY BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at March 31, 1996
($ in 000's)
- ----------------------------------------------------------------------------------------
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
- ------------------------------------------------- ----------- ----------- -----------
Cash and Fed Funds 5,655 0% 0
Reserve for Loan Losses (330) 0% 0
U.S. Treasury Securities 2,969 0% 0
U.S. Gov't Agency Mortgage-backed Securities 8,122 20% 1,624
U.S. Gov't Equity Securities 956 20% 191
U.S. Gov't Guaranteed Loans 224 20% 45
Balances at Domestic and Canadian Banks 655 20% 131
Other Mortgage-backed Securities 356 50% 178
1-4 Family Mortgage Loans 16,054 50% 8,027
All Other Loans 5,589 100% 5,589
All Other Securities 23 100% 23
Real Estate Owned 131 100% 131
Premises & Equipment 1,651 100% 1,651
Mortgage Servicing Rights 2,946 100% 2,946
Other Assets 1,876 100% 1,876
- ------------------------------------------------- ----------
TOTAL ASSETS 46,877
==========
Off Balance Sheet Items:
Letters of Credit and Committments 3,111 100.00% 3,111
Foreign Exchange Contracts 1,100 0.50%(1) 6
Interest Rate Contracts 1,600 0.00%(1) 2
FHLMC Loan Purchase Committments 6,698 50.00% 3,349
MBS FHLMC Forward Sell Committments 15,240 0.00%(1) 41
Agency Guaranteed Commercial Loans Sold 203 20.00% 41
---------- --------- --------
TOTAL RISK-ADJUSTED ASSETS 28,962
========
CAPITAL RESOURCES
Shareholders Equity, GAAP 4,844 4,844
Unrealized (Gain) on AFS Securities (36) (36)
Minority interest in consolidated subsidiary 199 199
Mortgage Servicing Rights Limitation (417) (417)
----- -----
Total Equity (Tier 1) 4,590 4,590
Qualifying Loan Loss Reserve (Tier 2) 330 330
----- -----
Regulatory Capital (Tier 1 & Tier 2) 4,920 4,920
===== =====
Primary and Total Capital Ratio (Leverage) 10.50%
=====
Risk-adjusted Capital Ratio (Tier 1) 15.85% 15.85%
===== =====
Risk-adjusted Capital Ratio (Tier 1 & Tier 2) 16.99% 16.99%
===== =====
Newberry Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 9.34%
=====
(1) Plus market value, or replacement cost valuation, as required.
22
22
University Bank Liquidity:
The Bank'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 and borrowings from the Federal Home Loan Bank
secured by securities and residential mortgage loans, and overnight fed funds
credit lines from correspondent banks. In addition, the Bank invests in
overnight Federal Funds. At March 31, 1996, the bank had cash and due from
banks and fed funds on hand of $4,406,119. At March 31, 1996 the Bank had
available overnight fed funds lines of $800,000. Subsequent to quarter-end,
the Bank received a commitment for a $10,000,000 line of credit secured by
mortgage loans for sale to the secondary market. In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Since the assets and liabilities of
the Company are primarily monetary in nature, changes in interest rates have a
more significant impact on the Company's performance than the general effects
of inflation. However, to the extent that inflation affects interest rates, it
also affects the net income of the Company.
Rising long term and short term interest rates tend to increase the
value of the Bank's investment in mortgage servicing rights and improve the
Bank's current return on such rights by lowering required amortization rates on
the rights. However, rising interest rates tends to decrease new mortgage
origination activity, negatively impacting current income from mortgage banking
operations. The table on page 23 details the Bank's asset/liability
sensitivity as of March 31, 1996.
23
UNIVERSITY BANK 23
Asset/Liability Position Analysis 3/31/96
($ in 000's)
Maturing or Repricing in
3 Mos 91 Days to 1 - 5 Over 5 ALL
ASSETS or Less 1 Year Years Years OTHERS TOTAL
------ ------- ------ ----- ------ ------ -----
Fed Funds 4,374 0 0 0 0 4,374
Loans (1) 297 1,080 2,546 1,905 0 5,828
Canadian Investments 32 0 0 0 0 32
Securities Available for Sale 6,253 5,257 10 9 1,425 12,954
Loans held for Sale 11,100 0 0 0 0 11,100
Matured Loans 773 0 0 0 0 773
Variable Rate Loans 3,129 0 0 0 0 3,129
Other Assets 0 0 0 0 6,076 6,076
Cash and Due from Banks 0 0 0 0 1,904 1,904
Overdrafts 149 0 0 0 0 149
Non-Accrual Loans 0 0 0 0 558 558
------ ----- ----- ----- ----- ------
TOTAL ASSETS 26,107 6,337 2,556 1,915 9,963 46,877
LIABILITIES
CD's over $100,000 431 807 300 0 0 1,538
CD's under $100,000 6,449 6,085 7,277 0 0 19,810
MMDA 5,117 0 0 0 0 5,117
NOW 182 0 0 0 0 182
Demand 3,188 0 0 0 0 3,188
Savings 34 0 0 0 0 34
Canadian Savings 1,162 0 0 0 0 1,162
Other Liabilities 0 0 0 0 1,003 1,003
Borrowings 2,500 7,500 0 0 0 10,000
Equity 0 0 0 0 4,844 4,844
------ ------ ----- ---- ----- ------
TOTAL LIABILITIES 19,062 14,392 7,577 0 5,846 46,877
GAP 7,044 (8,054) (5,022) 1,915 4,117 0
CUMULATIVE
GAP 7,044 (1,010) (6,031) (4,116) 0
GAP
PERCENTAGE 15.03% -2.15% -12.87% -8.78% 0.00%
Notes:
(1) Net of bad debt reserves.
24
24
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company
or any of its subsidiaries 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:
25
NEWBERRY BANCORP, INC. (The Parent) 25
Condensed Balance Sheet (Unaudited)
March 31, December 31,
1996 1995
ASSETS --------- -----------
Cash and due from banks $ 127,690 $ 239,868
---------- ------------
Investment in subsidiary 4,843,524 5,023,367
---------- ------------
Due from ESOP 1,000 1,000
Securities available for sale (Note 2) 211,037 161,002
Investment in Northern Michigan BIDCO 202,660 202,780
Federal income tax receivable 58,030 58,030
Furniture, fixtures & equipment 992 1,743
Deferred taxes 8,537 8,537
Prepaid expenses and other assets 9,770 8,865
---------- ------------
Total other assets 492,026 441,957
TOTAL ASSETS 5,463,240 5,705,192
========== ============
March 31, December 31,
1996 1995
LIABILITIES AND SHAREHOLDERS EQUITY ---------- ------------
Note payable 987,500 1,000,000
Accrued interest payable 15,246 24,479
Accounts payable 37,552 29,815
Due to subsidiary - -
---------- ------------
Total Liabilities 1,040,298 1,054,294
Stockholders' equity:
Capital stock and paid in capital 2,739,359 2,672,609
Retained earnings 1,598,998 1,836,231
Net unrealized gain (loss) on
available-for-sale securities 84,585 142,058
---------- ------------
Total Stockholders' equity 4,422,942 4,650,898
---------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $5,463,240 $ 5,705,192
========== ============
26
NEWBERRY BANCORP, INC. (The Parent) 26
Condensed Statement of Operations For the Three-Month
(Unaudited) Periods Ended
March 31
1996 1995
---- ----
Net income from bank subsidiary $(188,762) $ (1,040)
Gain (loss) on sale of investment - 15,330
Interest income 4,400 1,920
Other income 2,472 8,907
--------- ---------
Total income (181,890) 25,117
--------- ---------
Interest expense 22,150 23,425
Legal and Audit Expense 19,205 3,508
Public listing expense 0 1,000
Other expenses 13,988 6,259
--------- ---------
Total expenses 55,343 34,192
--------- ---------
Income before income taxes (237,233) (9,075)
--------- ---------
Income taxes - 4,038
--------- ---------
Net income (237,233) (13,113)
========= =========
Net income per common share ($0.190) ($0.011)
========= =========
Dividends declared per share $ --- $ ---
========= =========
27
NEWBERRY BANCORP, INC. (The Parent) 27
Condensed Statement of Cash Flows
(Unaudited)
For the Three Month
Periods Ended
March 31,
1996 1995
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) $ (237,233) $ (13,113)
Depreciation 751 750
Amortization of Premium on Securities (120) -
Proceeds from sales of trading securities - 74,367
Purchases of trading securities - (44,970)
Loss (gain) on sale of investments - (15,330)
Decrease (increase) in receivable
from affiliate (66,750) 973,211
Decrease (increase) in Other Assets (905) (195,810)
Increase (decrease) in interest payable (9,233) 23,425
Increase (decrease) in Other Liabilities 7,737 (582,260)
Investment in Northern Michigan Bidco - (132,000)
Subsidiary net income 188,763 1,040
------------- ------------
Net cash provided by (used in)
operating activities (116,990) 89,310
------------- ------------
Cash flow from investing activities:
Subsidiary dividends received - -
Contributions of capital to subsidiary - -
Purchase of available for sale securities (49,438) -
Proceeds from sale of available for sale securities - -
Advances to Michigan BIDCO - -
Capital expenditures - -
------------- ------------
Net cash provided by (used in)
investing activities: (49,438) -
------------- ------------
Cash flow from financing activities:
Proceeds from bank financing
Principal payment on notes payable (12,500) -
Proceeds from sale of common stock 66,750 -
Purchase of treasury stock - -
------------- ------------
Net cash provided by (used in)
financing activities: 54,250 -
------------- ------------
Net changes in cash and cash equivalents (112,178) 89,310
Cash:
Beginning of year 239,868 54,151
------------- ------------
End of year $ 127,690 $ 143,461
============= ============
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest $ 20,047 $ (8,907)
Income tax $ - $ (22,281)
28
28
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.15 1995 Stock Plan (as amended, incorporated by reference
to Exhibit A to the Registrant's definitive Proxy Statement
for its 1996 Annual Meeting of Stockholders)
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: May 14, 1996 /s/ Thomas J. Vandermus
-------------------------
Thomas J. Vandermus
Chief Financial Officer
(On behalf of the registrant
and as
Principal Financial Officer)
29
29
Exhibit Index
------------- Sequentially
Numbered
Page
------------
27. Financial Data Schedule 30