(202) 274-2011 rpomerenk@luselaw.com
February 7, 2005
VIA EDGAR
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn.: Barry McCarty, Esq.
Senior Counsel
RE: FIRST FEDERAL OF NORTHERN MICHIGAN BANCORP INC.
(REGISTRATION NO. 333-121178)
REGISTRATION STATEMENT ON FORM SB-2
Dear Mr. McCarty:
On behalf of First Federal of Northern Michigan Bancorp, Inc. (the
"Company") and in accordance with Rule 101 of Regulation S-T, we are hereby
transmitting Pre-effective Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (the "Amended SB-2"). Set forth below are the Company's
responses to the Staff's comment letter dated February 3, 2005, a copy of which
is included in the courtesy copy of the Amended SB-2 forwarded under cover of
this letter. The Amended SB-2 has been blacklined to reflect changes from the
Amendment No. 1 filing.
1. The PRO FORMA pricing multiples presented on page 7 are those of
First Federal of Northern Michigan Bancorp, Inc., the Maryland successor to
Alpena Bancshares, Inc. We have not included Alpena Bancshares, Inc.'s
HISTORICAL pricing multiples (which would not include the proceeds of the
offering or the share exchange) because, we believe, such ratios would be
misleading and confusing to investors, who typically use the PRO FORMA (and not
the historical) pricing multiples to evaluate conversion companies versus peer
institutions.
2. The per share price of thrift holding companies is typically
evaluated in relation to per share core earnings and per share book value.
Because the Company has lower per share earnings but higher per share book value
than its peers, ANY selected price will make the Company appear overvalued in
relation to per share earnings and undervalued in relation to per share book
value. Specifically, if the price is increased so that the undervaluation in
relation to per share book value is "corrected," then the overvaluation in
relation to per share earnings
Barry McCarty, Esq.
Senior Counsel
February 7, 2005
Page 2
would be exacerbated. The Board of Directors concurred with the independent
appraiser's conclusion that the selected pricing ratios represented an
appropriate balance between these two pricing approaches. We believe all of the
foregoing is fully explained on page 6. We confirm for the staff that there were
no other reasons for pricing the Company below book value.
3. We have supplemented the disclosure on pages 7 and 8 as
requested in the comment.
4. We have moved the disclosure on benefits to management as
requested in the comment.
5. The net proceeds raised in the offering will not, per se, reduce
earnings, as stated in the comment. The net proceeds WILL reduce the Company's
return on equity ratio, not because of a decrease in earnings, but because of
the increase in equity. We have revised the disclosure on page 21 to clarify
this. We reiterate that while it is the Company's goal to increase its return on
equity as quickly as possible by deploying net proceeds into interest-earning
assets, it would be inappropriate to set artificial time targets since a
significant deployment of net proceeds could occur in the context of an
acquisition, the timing of which is impossible to predict. We note further that
management of the Company has not, in fact, set time targets for the deployment
of net proceeds.
6. We have revised the disclosure on pages 29, 30 and 71 in
response to the comment.
7. We have revised the disclosure on page 30 in response to the
comment.
8. In response to the comment, we have reconsidered the measure
used as evidence of the accuracy of past estimates of losses inherent in the
Company's loan portfolio. The disclosure on page 52 now compares the range of
net charge-offs to average loans outstanding to the range of the provision for
loans losses to average loans outstanding, which we believe provides better
evidence of the relative accuracy of these estimates in the past. However, we
have also added a sentence to caution readers about placing undue reliance on
such estimates for future periods.
9. We have reviewed the disclosure requirements of Section 101(b)
of Regulation SB, and have briefly described on page 85 of the Business section,
to the extent material to an understanding of the Company, certain aspects of
the Company's operations conducted through its subsidiaries. We have also
provided a cross-reference to the fuller discussion of the subsidiary activities
under the heading Subsidiary Activity. It should be noted that the insurance
brokerage activities and the real estate development activities conducted
through subsidiaries of the Company currently comprise a small percentage of the
Company's assets and earnings.
Barry McCarty, Esq.
Senior Counsel
February 7, 2005
Page 3
10. We have revised the disclosure on pages 55 and 56 in response to
the comment and in accordance with our discussions with the staff. The revised
disclosure discusses how maintaining high levels of liquid assets reduces
interest rate risk but also reduces net interest income. The revised disclosure
also makes clear the Company's intention, as long-term interest rates rise, to
reduce its mortgage banking operations and to retain a larger percentage of
originated one- to four-family residential mortgage loans.
11. As requested in the comment, we have added in the Business
section a separate discussion of the Company's mortgage banking activities under
a separate heading on page 85.
12. The Company engages in a limited amount of real estate
development activity. All of this activity is conducted through the Company's
indirect subsidiary, Financial Services & Mortgage Corporation ("FSMC"). The
Company's investment in FSMC at September 30, 2004 is disclosed on page 94.
However, it should be noted that for financial statement purposes, the
activities and financial attributes of FSMC are consolidated with those of the
Company. The Company's reference in its initial filing to its "investment" in
FSMC as "substandard" was an error. Instead, the substandard asset is the
Company's investment in certain real estate developed by and owned through FSMC.
The Company's accounting for this real estate investment complies with SFAS 144
in that the real estate is 1) held for sale and 2) carried at the lower of cost
or market. We have revised the disclosure on pages 81 and 93 consistent with the
foregoing. In addition, as requested in the comment, we have added a paragraph
that discusses the Company's Real Estate Development Activities in the Business
section on page 86. We also have supplemented the disclosure on page 94 to
disclose where the $121,000 adjustment has been recorded and how the amount of
the adjustment was determined. The charge to earnings for the majority of the
reserve was taken in 2000. The ending reserve amount is disclosed in Note 4 of
the Consolidated Financial Statements.
13. We have revised the disclosure on pages 136 and 137 to be
consistent with Luse Gorman Pomerenk & Schick's federal tax opinion. We also
have reviewed the opinion itself but have not revised it, as we believe it
complies with the long-standing SEC staff position on references to and reliance
on others' opinions.
14. As requested in the comment, we have supplemented the disclosure
in Note 18 on pages F-52 and F-53 to include segment reporting for the
operations of ICA.
15. We have supplemented the disclosure on page F-3 to separately
disclose goodwill. We also have revised Note 7 to exclude goodwill as required
in paragraph 43 of SFAS 142.
16. We have supplemented the disclosure in Note 1 to include the
statements required under instruction 2 of Item 310(b) of Regulation S-B.
Barry McCarty, Esq.
Senior Counsel
February 7, 2005
Page 4
17. We have supplemented the disclosure in Note 1 to disclose how we
determined that 20 years was appropriate. In addition, we have disclosed the
terms of the exclusive contract in the same paragraph.
18. We have supplemented the disclosure in Note 1 to disclose how we
determined the expected life of the Company's core deposit intangibles.
19. We have supplemented the disclosure in Note 14, as requested in
the comment.
20. Although it is a public document, there is no regulatory
requirement that the appraisal be made available at the offices of a converting
institution. Accordingly, we have not revised the List of Exhibits.
We trust the foregoing is responsive to the staff's comments. We intend
to file an acceleration request from the Company requesting acceleration of the
registration statement for February 11, 2005, at 12:00 noon, or as soon
thereafter as is practicable. We therefore request that the staff advise the
undersigned at (202) 274-2011 as soon as possible of any additional comments it
may have.
Respectfully,
/s/ Robert B. Pomerenk
Robert B. Pomerenk
Enclosures
cc: David Lyon, Esq.
Rebekah Moore, CPA
Paul Cline, CPA
Martin A. Thomson, President and
Chief Executive Officer
Eric Luse, Esq.
Steve Lanter, Esq.