First Federal of Northern Michigan Bancorp, Inc. (FFNM) Announces First Quarter 2010 Results

ALPENA, Mich., April 30 /PRNewswire-FirstCall/ — First Federal of Northern Michigan Bancorp, Inc. (Nasdaq: FFNM) (the “Company”) reported consolidated net earnings from continuing operations of $202,000, or $0.07 per basic and diluted share, for the quarter ended March 31, 2010 compared to consolidated net earnings from continuing operations of $147,000, or $0.05 per basic and diluted share, for the quarter ended March 31, 2009.

Listed below are several key points relative to the Company’s results for the quarter ended March 31, 2010:

• Significant quarter over quarter improvement in the Company’s net interest margin (from 3.10% to 3.58%) due primarily to a 94 basis point reduction in the cost of funds.
• $3.1 million decrease in non-performing assets since December 31, 2009.
• First Federal of Northern Michigan remains “well-capitalized” for regulatory purposes.
• Provision for loan losses reduced to $11,000 for the quarter due to favorable information received on a large classified credit.

Michael W. Mahler, President and Chief Executive Officer of the Company, commented,

“We are pleased, of course, to be able to report modest earnings for this quarter. We are even more encouraged by the $3.1 million reduction in our non-performing assets since December 31, 2009. Our level of non-performing assets remains higher than what we would consider acceptable, but we continue to aggressively address problem assets as they come to light. The return to strong asset quality is our top priority. We continue to see improvement in our net interest margin, mainly as a result of lowering our cost of funds and also due to maintaining disciplined pricing on the loan side. The core operations of the Company continue to produce income to offset the high cost of FDIC insurance and the holding costs of other real estate owned. Our primary concerns for 2010 remain the Michigan economy, credit quality, and the stability or improvement of the underlying collateral values in our loan portfolio.”

Selected Financial Ratios

Financial Condition

Total assets of the Company at March 31, 2010 were $229.7 million, a decrease of $3.8 million, or 1.6%, from assets of $233.5 million at December 31, 2009. Net loans receivable decreased $2.8 million to $168.4 million at March 31, 2010, due to adjustable-rate or balloon mortgage loans that have paid off or been refinanced and sold into the secondary market, consumer loan balances that have declined due to normal pay-downs, and limited originations of loans to be held in the Company’s portfolio. Investment securities decreased $676,000 from December 31, 2009 to March 31, 2010 due in part to the sale of a $1 million municipal security which was sold because of the perceived credit risk inherent in the security.

Deposits decreased $1.5 million to $156.6 million at March 31, 2010. Most of the decrease in deposits was in non-interest bearing personal and business checking accounts due to usage of funds in customers’ accounts as opposed to closing of accounts. FHLB advances decreased $2.2 million as our asset base shrank during the quarter.

The ratio of total nonperforming assets to total assets was 5.37% at March 31, 2010 compared to 6.58% at December 31, 2009 and 5.71% at March 31, 2009. Non-performing assets decreased by $3.1 million from December 31, 2009 to March 31, 2010. The Company continues to closely monitor non-performing assets and has taken a variety of steps to reduce the level thereof, such as:

• Timely pursuit of foreclosure and/or repossession options coupled with quick and aggressive marketing efforts of repossessed assets;
• Restructuring loans, where feasible, to assist borrowers in working through this financially challenging time;
• Allowing borrowers to structure short-sales of properties, where appropriate and feasible; and
• Working with borrowers to find a means of reducing outstanding debt (such as through sales of collateral).

Stockholders’ equity was $23.3 million at March 31, 2010 compared to $23.1 million at December 31, 2009. The increase was due primarily to net earnings for the three-month period of $202,000. First Federal of Northern Michigan’s regulatory capital remains at levels in excess of regulatory requirements, as shown in the table below.

Results of Operations

Interest income decreased to $ 2.9 million for the three months ended March 31, 2010 from $3.3 million for the year earlier period. The decrease in interest income was due to two factors: a decrease of $17.2 million in the average balance of our interest-earning assets and a decrease of 31 basis points in the yield on interest-earning assets due in part to lower market interest rates period over period.

Interest expense decreased to $956,000 for the three months ended March 31, 2010 from $1.5 million for the three months ended March 31, 2009. The decrease in interest expense for the three-month period was due in part to a $10.8 million decrease in the average balance of our interest-bearing liabilities and a decrease in our overall cost of funds of 94 basis points period over period. Most notably, the average balance of our certificates of deposit decreased $13.3 million from the three-month period ended March 31, 2009 to the same period in 2010 and the cost of our certificates of deposits decreased 119 basis points period over period.

The Company’s net interest margin increased to 3.58% for the three-month period ended March 31, 2010 from 3.10% for the same period in 2009. During this time period, the average yield on interest-earning assets decreased 31 basis points to 5.37% from 5.68%, while the average cost of funds decreased 94 basis points to 2.00% from 2.94%, due mainly to a reduction of 119 basis points on our certificates of deposit.

The provision for loan losses for the three-month period ended March 31, 2010 was $11,000, as compared to $264,000 for the prior year period. The decrease related mainly to one large commercial credit for which we had established a large reserve in 2009 based on known information at that time. In early 2010 we received updated information that led us to reverse approximately $146,000 of the reserve we had established in 2009, resulting in a smaller than anticipated provision for the quarter. The provision was based on management’s review of the components of the overall loan portfolio, the status of non-performing loans and various subjective factors.

Non interest income decreased from $798,000 for the three months ended March 31, 2009 to $578,000 for the three months ended March 31, 2009. The results reflected a decrease in mortgage banking activities income to $248,000 for the three months ended March 31, 2010 as compared to $449,000 for the same period in 2009. During 2009, and continuing into 2010, many homeowners in the Company’s markets took the opportunity to refinance their mortgages due to lower market interest rates. The majority of these loans were sold into the secondary market, generating mortgage banking activities income for the Company.  This refinance activity peaked in March 2009. Mortgage refinances were considerably lower for the three-month period ended March 31, 2010 as compared to the prior year period.

Non interest expense increased slightly from $2.1 million for the three months ended March 31, 2009 to $2.2 million for the three months ended March 31, 2010. Our FDIC premiums increased by $15,000, or 18.4% period over period as the Company’s assessment rate increased and other expenses increased by $29,000, or 10.0% (mostly expenses related to credit quality and repossessed properties).

Federal income tax expense for the three-month period ended March 31, 2010 was based on our pre-tax income for the quarter of $304,000.

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.