First Federal of Northern Michigan Bancorp, Inc. Announces Fourth Quarter 2017 Results

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First Federal of Northern Michigan Bancorp, Inc.

Feb 16, 2018, 01:30 ET

ALPENA, Mich., Feb. 16, 2018 /PRNewswire/ -- First Federal of Northern Michigan Bancorp, Inc. (OTCQX: FFNM) (the "Company") reported a consolidated net loss of $682,000, or $0.18 per basic and diluted share, for the quarter ended December 31, 2017 compared to income of $548,000, or $0.15 per basic and diluted share, for the quarter ended December 31, 2016. The quarterly and year end net earnings above include a reduction of $1.2 million related to the write down of our deferred tax asset (DTA) that resulted from the late December signing of the Tax Cut and Jobs Act. Absent the tax entry referenced above, our quarterly earnings would have been $518,000, or $0.14 per share.

Consolidated net income for the twelve months ended December 31, 2017 was $624,000, or $0.17 per basic and diluted share, compared to $1.3 million, or $0.35 per basic and diluted share for the twelve months ended December 31, 2016. Absent the tax entry referenced above, our twelve month earnings would have been $1.8 million, or $0.49 per share.

Michael W. Mahler, Chief Executive Officer of the Company, commented, "We are pleased with the continued momentum of loan growth achieved in 2017, as we recognized an increase, of $4.0 million in net loans during the fourth quarter and $10.1 million for the year. This level of loan growth as resulted in an increase of 9% in interest income year over year. This growth was the result of our efforts to increase market share in our existing markets and was accomplished without relaxing underwriting standards."

Mahler continued, "The continued improvement to the earnings structure of the balance sheet and the sustained ability to reduce non-interest expenses for the year has allowed us to grow pre-tax, pre-provision income 35% for the quarter and 65% for the year when compared to the prior year period. Embedded in our 2017 results were costs associated with our recently announced plan to merge with Mackinac Financial Corporation along with the one-time costs of selling our branch deposits in Oscoda which closed in early February. Absent these one-time expenses, our performance was even better. We achieved capital growth, increased our loan to asset ratio to 60%, reduced expenses and improved our prospects for future earnings growth with the moves made in 2017."

Mahler furthered, "We are excited with the post year end announced merger with and into Mackinac Financial Corporation. Our shareholders, communities and staff will be well served under this business combination. Our present focus is to work through the various approval processes and ready our Bank, customers and staff for the transition set to occur late spring or early summer."

Performance Highlights

Net loan growth of $4.0 million since September 30, 2017 and $10.1 million since December 31, 2016.
Net interest income increased $379,000 to $2.8 million for the three months ended December 31, 2017 when compared the same period in 2016 and increased $993,000 to $10.3 million for the twelve months ended December 31, 2017 when compared to the twelve months ended December 31, 2016.
Provision for loan loss was $155,000 for the year ended December 31, 2017 compared to $95,000 for the year ended December 31, 2016.
Decreases of $68,000, quarter over quarter, and $105,000, year over year, in the Company's non-interest income.
Federal income tax expense increased to $1.5 million for the twelve months ended December 31, 2017, primarily related to the signing of the Tax Cuts and Jobs Act. A reduction of the deferred tax asset valuation reserve resulted in no tax expense for the twelve months ended December 31, 2016.
Tangible book value per share at December 31, 2017 was $8.67 compared to $8.60 at December 31, 2016.
First Federal of Northern Michigan remains "well-capitalized" for regulatory purposes.

Financial Condition

Total assets of the Company at December 31, 2017 were $321.2 million, a decrease of $23.7 million, or 6.9%, from total assets of $345.0 million at December 31, 2016.

We have experienced an increase in our net loans of $10.1 million:

With a $9.5 million increase in our commercial loan portfolio, we have focused our efforts on growing loans organically in and around our market areas.
We increased our mortgage loan portfolio $1.1 million as we continue to retain high quality adjustable rate mortgages and 10- and 15-year fixed rate loans in our mortgage portfolio. In addition, the consumer loan portfolio decreased $341,000 during the twelve months ended December 31, 2017.

	December 31,	December 31,
	2017	2016

Mortgage Loans	$ 83,167	$ 82,074
Consumer Real Estate	7,059	7,647
Consumer Other	1,604	1,357
Commercial Real Estate	72,114	64,514
Commercial Other	29,392	27,532

Total gross loans	$ 193,336	$ 183,124

Loan Loss Reserve	(1,833)	(1,685)

Net Loans Receivable	$ 191,503	$ 181,439

We experienced a decrease of $1.7 million in our deposits held at other financial institutions during the twelve months ended December 31, 2017.
Investments available for sale decreased $29.3 million to $98.8 million as of December 31, 2017 compared to $128.1 million as of December 31, 2016. This decrease is the result of bond sales to fund loan growth and payoff Federal Home Loan Bank advances during the year.
Deposits decreased $23.1 million to $270.3 million at December 31, 2017. The balance of our Federal Home Loan Bank advances decreased $869,000 to $16.6 million during the same period.
Stockholders' equity remained at $32.9 million for the twelve months ended December 31, 2017 and December 31, 2016.

During 2017, the Company paid $708,000 in shareholder dividends.
We experienced an increase of $21,000 in the unrealized loss on available-for-sale securities, net of tax.
Partially offsetting these decreases is our reported net income of $624,000 for the year ended December 31, 2017.

First Federal of Northern Michigan's regulatory capital remains at levels in excess of regulatory requirements, as shown in the table below.

			Regulatory		Minimum to be
	Actual		Minimum *		Well Capitalized *
	Amount	Ratio	Amount	Ratio	Amount	Ratio
	Dollars in Thousands

Tier 1 Leverage Capital (tier 1 to quarterly average assets):	$ 29,879	9.10%	$ 13,132	4.00%	$ 16,415	5.00%

Common Equity Tier 1 Risk-based Capital ( core capital to risk- weighted assets):	$ 29,879	15.42%	$ 8,720	4.50%	$ 12,595	6.50%

Tier 1 Risk-based Capital (tier 1 to risk-weighted assets):	$ 29,879	15.42%	$ 11,626	6.00%	$ 15,502	8.00%

Total Risk-based Capital (risk-based capital to risk-weighted assets):	$ 31,712	16.37%	$ 15,502	8.00%	$ 19,377	10.00%

Tangible Capital (tangible capital to tangible assets):	$ 29,879	9.06%	$ 6,594	1.50%	$ 16,486	N/A

* The minimum required regulatory ratios do not include the conservation buffer that began on January 1, 2016, which will be fully phased in by January 1, 2019.

Results of Operations

During the three months ended December 31, 2017, interest income increased $374,000 to $3.1 million from $2.7 million for the three months ended December 31, 2016 and increased $936,000 to $11.5 million for the twelve-month period ended December 31, 2017 from $10.6 million for same period in 2016.

During the three months ended December 31, 2017, the yield on our interest-earning assets increased 54 basis points to 3.90% from 3.36% as of December 31, 2016. While the yield on our interest-earning assets increased 22 basis points to 3.57% for the twelve months ended December 31, 2017 from 3.35% for the year ended December 31, 2016. These increases are primarily related to the recovery of interest income on a long standing non-accrual loan that was paid off during the fourth quarter of 2017.

During the three months ended December 31, 2017, interest expense decreased slightly to $313,000 from $318,000 for the three months ended December 31, 2016 and decreased to $1.2 million, as of December 31, 2017, from $1.3 million for the twelve months ended December 31, 2016.

The average cost of our certificates of deposit increased to 1.10% for the three months ended December 31, 2017 from 0.99% during the same period a year earlier. In addition, the cost of these funds increased to 1.04% for the year ended December 31, 2017 from 0.99% for the same period in 2016. The average balance of our certificate of deposits decreased $5.5 million for the twelve months ended December 31, 2017.
The cost of our FHLB advances increased 15 basis points from 1.24% for the three months ended December 31, 2016 to 1.39% for the three months ended December 31, 2017. In addition, the cost of these funds increased 4 basis points from 1.34% for the year ended December 31, 2016 to 1.38% for the year ended December 31, 2017. For the twelve months ended December 31, 2017 the average balance of our FHLB advances decreased $5.3 million.
Interest-bearing core deposit balances decreased $15.5 million for the year ended December 31, 2017.
Net interest margin increased to 3.50% for the three-month period ended December 31, 2017 from 2.96% for the same period in 2016, and increased to 3.19% for the twelve months ended December 31, 2017 from 2.94% for the year in 2016 as a result of the factors mentioned above.

For the twelve months ended December 31, 2017, provision for loan loss was $155,000 as compared to $95,000 for same period in 2016.

For the twelve-month period ended December 31, 2017, we experienced net charge offs of $7,000 compared to net recoveries of $31,000 for the twelve month period ended December 31, 2016.

Non-interest income decreased to $449,000 for the three months ended December 31, 2017 from $517,000 for the three months ended December 31, 2016 with the following period-over-period decreases noted in 2017:

Service charges of $27,000.
Gain on sale of securities of $34,000.

Non-interest income decreased $105,000 to $1.8 million for the twelve months ended December 31, 2017 from $2.0 million for the twelve months ended 2016 with the following activity noted year over year:

Mortgage banking income increased $65,000.
Gain on sale of securities decreased $98,000.
Other income decreased $82,000, primarily related to life insurance proceeds received in 2016.

Non-interest expense increased $120,000, to $2.5 million, for the three months ended December 31, 2017 when compared to $2.3 million for the same period one year earlier. The following are increases noted in the quarter over quarter period ended December 31, 2017 and 2016:

Compensation and employee benefits of $29,000.
Federal Deposit Insurance Corporation (FDIC) premiums of $19,000.
Professional services of $69,000, associated with the sale of our Oscoda branch and merger related fees.

Non-interest expense remained steady at $9.8 million, for the twelve month periods ended December 31, 2017 and 2016.

Selected Performance Ratios

Select Performance and Financial Statistics (unaudited):
in thousands (except share data)
	For the Three Months Ended December 31,		For the Twelve Months Ended December 31,
	2017	2016	2017	2016

Net interest margin	3.50%	2.96%	3.19%	2.94%
Average interest rate spread	3.36%	2.82%	3.06%	2.80%
Total non-performing assets *	$ 2,558	$ 2,375	$ 2,558	$ 2,375
Total non-performing loans *	$ 1,906	$ 1,005	$ 1,906	$ 1,005
Non-performing assets to total assets *	0.80%	0.69%	0.80%	0.69%
Non-performing loans to total loans *	0.99%	0.55%	0.99%	0.55%
Texas ratio * (1)	8.07%	7.90%	8.07%	7.90%
Classified asset ratio * (2)	25.97%	20.41%	25.97%	20.41%
Allowance for loan losses to total loans *	0.96%	0.92%	0.96%	0.92%
Return on average assets * (3)	0.18%	0.39%	0.18%	0.39%
Return on average equity * (3)	1.83%	3.83%	1.83%	3.83%
Efficiency ratio (4)	76.62%	83.00%	81.57%	88.98%
Dividend payout ratio (basic)	-21.87%	20.45%	95.58%	45.37%
Tangible book value per share *	$ 8.67	$ 8.60	$ 8.67	$ 8.60
Earnings per share	$ (0.18)	$ 0.15	$ 0.17	$ 0.35
Total shares outstanding	3,726,925	3,726,925	3,726,925	3,726,925

*	these are measurements as of a point in time, therefore there is no variation between the three-month and six-month periods.
(1)	Texas Ratio is defined by management as total non-performing assets divided by tangible capital plus loan loss reserves.
(2)	Classified asset ratio is calculated by dividing classified assets (substandard assets plus real estate owned & other repossessed assets) by core capital plus loan loss reserves.
(3)	Annualized.
(4)	Non-interest expense divided by net interest income plus non-interest income, excluding any gains or losses.

Safe Harbor Statement

This news release and other releases and reports issued by the Company 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
(in thousands)
	December 31, 2017	December 31, 2016
	(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks	$ 7,862	$ 8,752
Overnight deposits with FHLB	527	55
Total cash and cash equivalents	8,389	8,808

Deposits held in other financial institutions	3,714	5,422
Securities available for sale	98,839	128,134
Securities held to maturity	650	700
Loans held for sale	430	-
Loans receivable, net of allowance for loan losses of $1,833,403 and
$1,685,485 as of December 31, 2017 and December 31, 2016, respectively	191,503	181,439
Foreclosed real estate and other repossessed assets	652	1,370
Federal Home Loan Bank stock, at cost	1,636	1,636
Premises and equipment	5,552	5,939
Accrued interest receivable	1,033	1,026
Intangible assets	635	827
Deferred tax asset	1,691	3,314
Originated mortgage servicing rights	418	473
Bank owned life insurance	5,125	4,998
Other assets	980	855

Total assets	$ 321,247	$ 344,940

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits	$ 270,307	$ 293,428
Advances from Federal Home Loan Bank	16,648	17,517
Accrued expenses and other liabilities	1,350	1,106

Total liabilities	288,305	312,051

Stockholders' equity:
Common stock ($0.01 par value 20,000,000 shares authorized
4,034,675 shares issued)	40	40
Additional paid-in capital	28,264	28,264
Retained earnings	8,612	8,538
Treasury stock at cost (307,750 shares)	(2,964)	(2,964)
Accumulated other comprehensive income	(1,010)	(989)

Total stockholders' equity	32,942	32,889

Total liabilities and stockholders' equity	$ 321,247	$ 344,940

First Federal of Northern Michigan Bancorp, Inc. and Subsidiaries
Consolidated Statement of Income and Comprehensive Income
(in thousands)	For the Three Months		For the Twelve Months
	Ended December 31,		Ended December 31,
	2017	2016	2017	2016
	(Unaudited)		(Unaudited)
Interest income:
Interest and fees on loans	$ 2,455	$ 2,087	$ 8,906	$ 8,133
Interest and dividends on investments
Taxable	379	357	1,586	1,339
Tax-exempt	18	23	78	93
Interest on mortgage-backed securities	219	230	954	1,023
Total interest income	3,071	2,697	11,524	10,588

Interest on deposits	236	236	949	941
Interest on borrowings	77	82	278	343
Total interest expense	313	318	1,227	1,284

Net interest income	2,758	2,379	10,297	9,304
Provision for loan losses	5	3	155	95
Net interest income after provision for loan losses	2,753	2,376	10,142	9,209

Non-interest income:
Service charges and other fees	223	250	959	967
Mortgage banking activities	167	149	565	500
Net gain on sale of securities	1	35	36	134
Net (loss) gain on sale of premises and equipment, real estate owned and other repossessed assets	(10)	34	73	55
Other	68	49	213	295
Total non-interest income	449	517	1,846	1,951

Non-interest expense:
Compensation and employee benefits	1,481	1,452	5,886	5,833
FDIC Insurance Premiums	42	23	170	194
Advertising	38	41	164	184
Occupancy	261	267	1,156	1,172
Amortization of intangible assets	48	54	192	217
Service bureau charges	129	128	517	493
Professional services	195	126	486	462
Collection activity	0	18	39	78
Real estate owned & other repossessed assets	24	12	94	117
Other	247	224	1,112	1,096
Total non-interest expense	2,465	2,345	9,816	9,846

Income before income tax expense	737	548	2,172	1,314
Income tax expense	1,419	-	1,548	-

Net (Loss) Income	$ (682)	$ 548	$ 624	$ 1,314

Other Comprehensive Income:
Unrealized gain (loss) on investment securities - available for sale securities - net of tax	80	(2,122)	(44)	(1,080)
Reclassification adjustment for gains (losses) realized in earnings - net of tax	12	(123)	23	(90)

Comprehensive (Loss) Income	$ (588)	$ (1,699)	$ 603	$ 144

Per share data:
Net Income per share
Basic	$ (0.18)	$ 0.15	$ 0.17	$ 0.35
Diluted	(0.18)	0.15	0.17	0.35

Weighted average number of shares outstanding
Basic	3,726,925	3,726,925	3,726,925	3,726,925
Including dilutive stock options	3,726,925	3,726,925	3,726,925	3,726,925
Dividends per common share	$ 0.04	$ 0.03	$ 0.16	$ 0.16