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The consolidated net loss for the twelve months ended December 31, 2008 was $3,241,000, or $1.12 per basic and diluted share, compared to $1,600,000, or $0.56 per basic and diluted share, for the twelve months ended December 31, 2007.
The main factor driving the net losses for the three- and twelve-month periods ended December 31, 2008 was the provision for loan losses of $3.2 million and $4.4 million for the respective periods, which were driven by weak economic conditions in our market area.
The Company took several steps in 2008 to reduce non-interest expenses, including closing an under-performing branch, and reducing compensation cost via staff reductions and benefit cuts. In early 2009, the Company sold the assets of its insurance subsidiary, which will further reduce non-interest expenses and allow the Company to focus on core banking operations.
Michael W. Mahler, President and Chief Executive Officer of the Company, commented, "Our major issue continues to be credit quality, which is driven by very weak economic conditions in our market area. However, while other banks continue to report losses in their investment portfolios and impairment of intangible assets and goodwill, these are issues not affecting us. We have been conservative in our investment decisions and that has paid off for us in the long run. We continue to look for ways to improve earnings. We recently completed the sale of the insurance operations of our insurance subsidiary, the InsuranCenter of Alpena. The sale of this business segment will result in improved earnings going forward. In the months to come, our focus will continue to be on improving asset quality, whether that means foreclosure, repossession and sale of non-performing assets; assisting troubled borrowers in refinancing with other financial institutions; or working with viable borrowers to help them make it through these troubled times. There is no one-size-fits-all answer to working with our troubled borrowers so credit-by-credit we are exploring all avenues to determine which is the best route to take to return the Company to profitability. Despite the significant provision expense which drove our loss for the year, the Company still remains well capitalized with significant cushion to withstand this difficult economic period."
Selected Financial Ratios
For the Twelve Months Ended December 31
---------------------------
2008 2007
---- ----
Performance Ratios:
Net interest margin 2.93% 3.14%
Average interest rate spread 2.51% 2.67%
Return on average assets -1.30% -0.60%
Return on average equity -10.45% -4.64%
As of
-----
December 31, 2008 December 31, 2007
----------------- -----------------
Asset Quality Ratios
Non-performing assets to total
assets 5.57% 4.15%
Non-performing loans to
total loans 6.14% 4.54%
Allowance for loan losses
to non-performing assets 40.90% 38.53%
Allowance for loan losses to
total loans 2.85% 1.95%
Financial Condition
Total assets of the Company at December 31, 2008 were $247.7 million, a decrease of $3.2 million, or 1.26%, from assets of $250.8 million at December 31, 2007. The ratio of nonperforming assets to total assets was 5.57% at December 31, 2008 compared to 4.15% at December 31, 2007. Non-performing assets increased by $3,391,000 from December 31, 2007 to December 31, 2008. The increase in non-performing assets included a $2.0 million increase in non-performing commercial loans, most of which related to two large commercial relationships. The increase in non-performing assets also included a $1.0 million increase in non-performing residential mortgages, of which $857,000 related to one large residential mortgage. The Company has established an aggressive plan to reduce the level of non-performing assets in 2009 and beyond.
Stockholders' equity decreased by $3.1 million from $32.5 million at December 31, 2007 to $29.4 million at December 31, 2008. The decrease in equity was attributable primarily to the net loss for the twelve month period of $3.2 million and dividends of $433,000. In an effort to preserve capital, in December 2008 the Company announced the suspension of its quarterly cash dividend. The Company intends to review this decision on a quarterly basis. First Federal of Northern Michigan's regulatory capital remains at levels in excess of regulatory requirements, as shown in the table below.
Capital Required To
be Categorized as
Well-Capitalized
Capital Required Under Prompt
Actual Capital at For Capital Corrective Action
December 31, 2008 Adequacy Purposes Provisions
---------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
December 31, 2008
Total capital
(to risk-
weighted
assets) $27,079 15.75% $13,757 8.00% $17,197 10.00%
Tier 1 capital
(to risk-
weighted
assets) $24,887 14.47% $6,879 4.00% $10,318 6.00%
Tangible
capital (to
tangible
assets) $24,887 10.31% $3,620 1.50% $4,826 2.00%
Results of Operations
Interest income decreased to $3.4 million for the three months ended December 31, 2008 from $3.9 million for the year earlier period. Interest income decreased by $2.2 million to $14.0 million for the twelve-month period ended December 31, 2008 from $16.2 million for the same period in 2007. The decreases in interest income were due primarily to two factors: a decrease in the average balance of our interest-earning assets due to reductions in the size of our loan portfolio and a decrease in the yield on interest-earning assets due in part to lower market interest rates.
Interest expense decreased to $1.7 million for the three months ended December 31, 2008 from $2.0 million for the three months ended December 31, 2008. Interest expense for the twelve months ended December 31, 2008 decreased to $7.1 million from $8.4 million for the twelve months ended December 31, 2007. The decrease in interest expense for the three- and twelve-month periods was due primarily to decreases in the average balance of and interest rates on our Federal Home Loan Bank advances period over period as well as a decrease in the average balance of certificates of deposit and a decrease in the cost of funds related to higher-costing certificates of deposits which matured and re-priced lower.
The Company's net interest margin decreased to 2.90% for the three-month period ended December 31, 2008 from 3.14% for the same period in 2007. During this time period, the average yield on interest-earning assets decreased 78 basis points to 5.70% from 6.48%, while the cost of funds decreased 63 basis points to 3.17% from 3.80%. For the twelve-month period ended December 31, 2008, the net interest margin decreased to 2.93% from 3.14% for the same period in 2007. During this time period, the average yield on interest-earning assets decreased 57 basis points to 5.96% from 6.53%, while the cost of funds decreased 41 basis points to 3.44% from 3.85%.
The provision for loan losses for the three-month period ended December 31, 2008 was $3.2 million, as compared to $2.1 million for the prior year period. For the twelve-month period ended December 31, 2008, the provision for loan losses was $4.4 million as compared to $2.4 million for the same period ended December 31, 2007. The increase in provision for both the three- and twelve-month periods related primarily to additional provisions for several commercial relationships that continued to deteriorate, and also a large provision on a residential mortgage loan related to one of the commercial credits. The provision was based on management's review of the components of the overall loan portfolio, the status of non-performing loans and various other factors.
Non-interest income decreased from $1.1 million for the three months ended December 31, 2007 to $690,000 for the three months ended December 31, 2008. Non-interest income decreased from $4.0 million for the twelve months ended December 31, 2007 to $3.1 million for the twelve months ended December 31, 2008. The decrease for the three-month period was primarily attributed to a decrease in insurance brokerage commissions due to the sale in April 2008 of the exclusive Blue Cross Blue Shield insurance contract as well as decreases in service charges and other fees and mortgage banking activities income period over period. For the twelve-month period, the decrease was also due to a decrease period over period related to insurance brokerage commissions, but this decrease was offset by a year-over-year increase in service charges and other fee income and mortgage banking activities income.
Non-interest expense decreased from $3.0 million for the three months ended December 31, 2007 to $2.7 million for the three months ended December 31, 2008. Non-interest expense decreased from $11.9 million for the twelve months ended December 31, 2007 to $10.4 million for the twelve months ended December 31, 2008. The decreases period over period were mainly the result of prepayment penalties of $293,000 paid on FHLB advances during the twelve months ended December 31, 2007, reductions in compensation and benefit expenses due to the closure of an under-performing branch and other cost-cutting measures, as well as a reduction in insurance brokerage commission expense due to the sale in April 2008 of the exclusive Blue Cross Blue Shield insurance contract.
Safe Harbor Statement
This news release and other releases and reports issued by the Company, including reports to the Securities and Exchange Commission, may contain "forward-looking statements." The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company is including this statement for purposes of taking advantage of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheet
--------------------------
December 31, 2008 December 31, 2007
----------------- -----------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks $3,097,788 $3,567,858
Overnight deposits with FHLB 372,523 1,772,999
------- ---------
Total cash and cash equivalents 3,470,311 5,340,857
Securities AFS 25,665,178 20,680,913
Securities HTM 4,022,235 2,770,000
Loans held for sale 107,000 -
Loans receivable, net of allowance for
loan losses of $5,647,055 and
$4,013,454 as of December 31, 2008
and December 31, 2007, respectively 192,270,714 201,333,427
Foreclosed real estate and other
repossessed assets 1,637,923 1,279,543
Federal Home Loan Bank stock, at cost 4,196,900 4,196,900
Premises and equipment 7,089,746 7,619,016
Accrued interest receivable 1,469,176 1,699,706
Intangible assets 1,394,983 2,093,735
Goodwill 1,408,604 1,396,854
Other assets 4,939,523 2,420,340
--------- ---------
Total assets $247,672,293 $250,831,292
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $165,778,598 $157,832,584
Advances from borrowers for taxes and
insurance 104,475 729
Federal Home Loan Bank Advances 40,200,000 51,700,000
Note Payable 768,651 983,795
REPO Sweep Accounts 9,447,415 6,637,089
Accrued expenses and other liabilities 1,954,392 1,173,550
--------- ---------
Total liabilities 218,253,531 218,327,747
----------- -----------
Commitments and contingencies - -
Stockholders' equity:
Common stock ($0.01 par value
20,000,000 shares authorized
3,191,999 shares issued) 31,920 31,920
Additional paid-in capital 24,302,102 24,327,466
Retained earnings 8,762,412 12,416,364
Treasury stock at cost (307,750 shares) (2,963,918) (2,963,918)
Unallocated ESOP (764,861) (958,651)
Unearned compensation (286,324) (414,549)
Accumulated other comprehensive income 337,431 64,913
------- ------
Total stockholders' equity 29,418,762 32,503,545
---------- ----------
Total liabilities and
stockholders' equity $247,672,293 $250,831,292
============ ============
First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated Statement of Income
For the Three Months For the Twelve Months
Ended December 31, Ended December 31,
------------------ ------------------
2008 2007 2008 2007
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest income:
Interest and fees
on loans $3,012,497 $3,559,399 $12,587,844 $14,456,297
Interest and dividends
on investments 193,721 300,591 958,351 1,651,268
Interest on
mortgage-backed
securities 155,175 12,760 420,968 92,682
------- ------ ------- ------
Total interest income 3,361,393 3,872,749 13,967,163 16,200,247
--------- --------- ---------- ----------
Interest expense:
Interest on deposits 1,085,239 1,332,039 4,897,194 5,532,959
Interest on borrowings 579,698 665,861 2,233,276 2,913,595
------- ------- --------- ---------
Total interest expense 1,664,937 1,997,901 7,130,470 8,446,554
--------- --------- --------- ---------
Net interest income 1,696,456 1,874,848 6,836,694 7,753,693
Provision for loan
losses 3,177,994 2,067,443 4,420,659 2,377,380
--------- --------- --------- ---------
Net interest (expense)
income after provision
for loan losses (1,481,538) (192,595) 2,416,035 5,376,313
---------- -------- --------- ---------
Non-interest income:
Service charges and
other fees 233,668 261,252 942,115 911,096
Mortgage banking
activities 115,369 140,901 431,752 418,005
(Loss) gain on sale of
available-for-sale
investments (9,990) 46 6,062 (96,609)
Net gain (loss) on sale
of premises and
equipment, real estate
owned and other
repossessed assets (6,696) (21,316) 21,801 (40,425)
Other 29,113 25,792 96,471 63,886
Insurance & Brokerage
Commissions 328,864 682,817 1,644,119 2,726,335
------- ------- --------- ---------
Total non-interest
income 690,328 1,089,492 3,142,319 3,982,288
------- --------- --------- ---------
Non-interest expenses:
Compensation and
employee benefits 1,377,288 1,585,607 5,698,370 6,236,874
SAIF Insurance Premiums 36,681 4,901 121,919 20,837
Advertising 55,798 39,773 184,658 200,396
Occupancy 341,364 403,227 1,395,134 1,505,220
Amortization of
intangible assets 100,162 125,002 425,489 495,728
Service Bureau Charges 79,673 80,721 320,191 317,899
Insurance & Brokerage
Commission Expense - 228,704 309,874 948,095
Professional Services 100,278 77,764 414,067 325,207
Prepayment penalty on
FHLB advances - - - 464,240
Other 611,313 411,004 1,561,918 1,359,957
------- ------- --------- ---------
Total non-interest
expenses 2,702,556 2,956,703 10,431,619 11,874,451
--------- --------- ---------- ----------
Loss before income
tax benefit (3,493,766) (2,059,806) (4,873,265) (2,515,850)
Income tax benefit (1,170,115) (699,140) (1,632,232) (915,893)
---------- -------- ---------- --------
Net loss $(2,323,651) $(1,360,666) $(3,241,033) $(1,599,957)
=========== =========== =========== ===========
Per share data:
Basic loss per share $(0.81) $(0.47) $(1.12) $(0.56)
Weighted average number
of shares outstanding 2,884,249 2,884,249 2,884,249 2,884,249
Diluted loss per share $(0.81) $(0.47) $(1.12) $(0.56)
Weighted average number
of shares outstanding,
including dilutive
stock options 2,884,249 2,884,249 2,884,249 2,884,249
Dividends per common
share $- $0.05 $0.15 $0.20
SOURCE First Federal of Northern Michigan Bancorp, Inc.
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