<PAGE> 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 June 30, 1995
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 August 10, 1995
1,194,686 shares
page 1 of 34 pages
Exhibit index on sequentially numbered page 33
<PAGE> 2
FORM 10-Q
---------
TABLE OF CONTENTS
-----------------
PART I - Financial Information
------------------------------
<TABLE>
<CAPTION>
Item 1. Financial Statements PAGE
<S> <C>
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 10
Liquidity and Capital Resources 23
PART II - Other Information
---------------------------
Item 1. Legal Proceedings 28
Item 5. Other Information
Parent Company Condensed
Financial Information 28
Item 6. Exhibits and Reports on Form 8-K 32
Signature 32
---------
Exhibit Index 33
Item 1. Financial Data Schedule 34
-------------
</TABLE>
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.
2
<PAGE> 3
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
NEWBERRY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30,1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
At At
June 30 December 31
1995 1994
ASSETS ----------- -----------
<S> <C> <C>
Cash and due from banks $ 574,882 $ 908,257
Federal funds sold 675,825 606,422
----------- -----------
Total cash and cash equivalents 1,250,707 1,514,679
Securities available for sale (Note 2) 18,407,873 18,658,332
Loans held for sale 3,228,161 4,129,321
Loans, net 7,349,520 4,220,633
Premises and equipment 973,750 373,877
Purchased mortgage servicing rights 1,995,203 1,625,889
Investment in Northern Michigan BIDCO 741,802 467,820
Other real estate owned 225,551 130,015
Other assets 760,730 706,018
----------- -----------
Total other assets 4,697,036 3,303,619
----------- -----------
TOTAL ASSETS $34,933,297 $31,826,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30,1995 and December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
At At
June 30 December 31
1995 1994
LIABILITIES AND STOCKHOLDER'S EQUITY ----------- ------------
<S> <C> <C>
Deposits:
Demand - non interest bearing $ 851,515 $ 1,638,101
Demand - interest bearing 2,323,234 3,026,925
Savings 1,039,506 587,370
Time 12,901,758 7,875,499
----------- -----------
Total deposits 17,116,013 13,127,895
FHLB advances 10,000,000 9,800,000
Other Bank Borrowings 560,331 -
Mortgage escrow 1,376,934 1,214,313
Note payable 1,000,000 1,000,000
Due to broker 72,250 1,288,169
Deferred Noncompete income 154,582
Other Liabilities 28,320 1,300,518
----------- -----------
Total Liabilities 30,308,430 27,730,895
----------- -----------
Commitments and contingencies
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
1,194,686 shares in 1995
and 1,172,853 shares in 1994 11,947 12,000
Surplus 2,458,396 2,478,270
Retained earnings 2,101,008 2,131,207
Unrealized gain (loss) on securities
available for sale, net of tax
of $13,979 in 1995, and
$(270,860) in 1994. 53,516 (525,788)
----------- -----------
Total Stockholders' equity 4,624,867 4,095,689
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $34,933,297 $31,826,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
NEWBERRY BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statement of Operations For the Three-Month For the Six-Month
(Unaudited) Periods Ended Periods Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 329,547 $ 840,729 $ 569,985 $1,643,261
Interest on securities:
U.S. Treasury Securities - 19,781 - 28,085
U.S. Government agencies 269,517 155,053 531,952 316,012
State and political subdivisions 1,802 4,563 3,604 9,126
Other securities 5,977 869 7,897 1,775
Interest on bank deposits 11,096 19,064 20,083 37,505
Interest on federal funds 11,383 20,777 27,563 42,461
--------- --------- --------- ---------
Total interest income 629,322 1,060,836 1,161,084 2,078,225
--------- --------- --------- ---------
Interest expense:
Interest on deposits:
Demand deposits 32,721 216,577 73,335 402,098
Savings deposits 21,244 56,310 39,809 108,491
Time certificates of deposit 210,785 124,045 345,436 254,092
Bank borrowings 119,533 68,492 286,002 127,384
Repurchase agreements 42,672 2,837 82,726 5,760
Interest expense on note payable 65,286 45,431 88,711 82,847
--------- --------- --------- ---------
Total interest expense 492,241 513,692 916,019 980,672
--------- --------- --------- ---------
Net interest income 137,081 547,144 245,065 1,097,553
Provision for loan losses 1,200 52,500 2,400 105,000
--------- --------- --------- ---------
Net interest income after
provision for loan losses 135,881 494,644 242,665 992,553
--------- --------- --------- ---------
Other income:
Security gains (losses) 8,720 (16,713) 32,097 (20,172)
Service charges on deposit accounts 4 23,794 105 46,516
Other service charges and fees 1,392 - 2,454 -
Foreign exchange income 20,012 45,661 32,443 93,176
Mortgage banking income 163,272 22,590 307,855 97,441
Profit from equity investment in
Northern Michigan BIDCO 23,756 58,814 70,482 136,500
Other 10,465 8,868 21,014 24,464
--------- --------- --------- ---------
Total other income 227,621 143,014 466,450 377,925
--------- --------- --------- ---------
</TABLE>
The acccompanying notes are an integral part of the financial statements.
5
<PAGE> 6
NEWBERRY BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Operations (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three-Month For the Six-Month
Periods Ended Periods Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Other expenses:
Salaries and wages $ 100,582 $ 223,726 $ 179,714 $ 443,170
Employee benefits 23,408 64,535 34,729 110,363
Occupancy, net 15,290 50,105 29,075 102,006
Taxes other than income 12,084 19,424 14,901 33,824
Data processing and equip. exp. 21,411 93,802 45,111 199,065
Correspondent bank service charges 5,262 21,637 17,086 31,606
Advertising 3,069 33,846 6,194 62,351
Net expense of other real estate owned 4,302 2,144 7,517 5,236
FDIC insurance 17,550 28,388 35,700 56,777
Mortgage banking expense 21,034 19,782 36,859 106,860
Legal and audit expense 117,715 72,746 211,181 108,402
Other operating expenses 63,373 40,223 170,701 83,778
Amortization expense - 3,185 - 6,369
Management fees - 15,000 - 30,000
-------- -------- -------- --------
Total other expenses 405,080 688,543 788,768 1,379,807
-------- -------- -------- --------
Income before income taxes (41,578) (50,885) (79,653) (9,329)
-------- -------- -------- --------
Applicable income taxes (benefit) (24,493) (38,571) (49,455) (43,102)
-------- -------- -------- --------
Net income $ (17,085) $ (12,314) $ (30,198) $ 33,773
======== ======== ======== ========
Earnings per common share (note 1) ($0.014) ($0.010) ($0.025) $0.029
======== ======== ======== ========
Weighted average shares outstanding 1,198,480 1,172,853 1,199,236 1,172,853
======== ======== ======== ========
Dividends declared per share $ --- $ --- $ --- $ ---
======== ======== ======== ========
</TABLE>
The acccompanying notes are an integral part of the financial statements.
6
<PAGE> 7
NEWBERRY BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Unaudited)
For the Six-Month
Periods Ended
June 30,
1995 1994
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ (30,198) $ 33,773
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 58,866 77,604
Equity in unconsolidated subsidiary (70,482) (136,501)
Provision for loan loss 2,400 105,000
Mortgage loans originated for sale (25,268,110) (13,298,451)
Sale of mortgage loans 26,169,270 22,035,498
Net amortization/accretion on securities (9,012) (22,711)
Loss/(Gain) on sale of securities (32,097) 20,172
Proceeds from sales of trading account
securities - 9,799,728
Purchases of trading account securities - (7,960,584)
Change in:
Purchased mortgage servicing rights (408,390) 102,470
Other real estate (95,536) 3,016
Increase in other assets (353,141) (215,426)
Decrease in other liabilities (1,117,616) (133,130)
----------- -----------
Net cash from (used in)
operating activities (1,154,046) 10,410,458
----------- -----------
Cash flow from investing activities:
Purchase of available for sale
securities (5,738,158) (8,986,133)
Proceeds from sales of available for
sale securities 5,759,971 80,000
Loans granted net of repayments (1,228,076) (698,117)
Loans purchased for investment (1,903,211) -
Premises and equipment expenditures (619,663) (182,424)
Principal paydowns on available for
sale securities 943,987 596,328
----------- -----------
Net cash from (used in)
investing activities (2,785,150) (9,190,346)
----------- -----------
Cash flow from financing activities:
Net increase in repurchase agreements - (282,901)
Net increase in deposits 3,988,118 1,900,272
Increase in other bank borrowings 760,331 -
Net increase (decrease) in mortgage
escrow accounts 162,621 (2,235,637)
Amount due to Broker (1,215,919) -
Principal payment on notes payable - (76,000)
Purchase of treasury stock (19,927) -
----------- -----------
Net cash from
financing activities 3,675,224 (694,266)
----------- -----------
Net change in cash and
cash equivalents (263,972) 525,846
Cash and cash equivalents:
Beginning of period 1,514,679 6,455,516
----------- -----------
End of period $ 1,250,707 $ 6,981,362
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 930,119 $ 970,200
Cash paid for income taxes 881,719 (3,849)
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
NEWBERRY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) General
See note 1 of Notes to Financial Statements incorporated by reference
in the Company's 1994 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 1994 Annual Report to
Stockholders, 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: 1,198,480 and
1,199,236 for the three and six months ended June 30, 1995 and 1,172,853 for
the three and six months ended June 30, 1994, 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 June 30, 1995 had a net
unrealized gain of approximately $81,000, as compared with a net unrealized
loss of approximately $296,000 at March 31, 1995 and a net unrealized loss of
approximately $798,000 at December 31, 1994, an improvement during the six
months beginning January 31, 1995 of $879,000 due to an improvement in the
current market value of adjustable-rate U.S. agency guaranteed mortgage-backed
securities.
Available-for-sale securities
<TABLE>
<CAPTION>
June 30, 1995
--------------------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed 17,253 182 (149) 17,286
U.S. agency equity 812 8 - 820
State and municipal 101 - - 101
Other equity 161 40 - 201
-------------------------------------------------------------------------------------------------
Total investment securities
available for sale $18,327 $230 $(149) $18,408
======= ==== ====== =======
</TABLE>
8
<PAGE> 9
Available-for-sale securities (continued)
<TABLE>
<CAPTION>
March 31, 1995
--------------------------------------------------------------------------
Gross Estimated
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed 18,979 143 (492) 18,630
U.S. agency equity 739 14 - 753
State and municipal 101 - 101
Other equity 45 39 - 84
-----------------------------------------------------------------------------------------------
Total investment securities
available for sale $19,864 $196 $(492) $19,568
======= ==== ====== =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-----------------------------------------------------------------------
Gross
Amortized Unrealized Fair
(in thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. agency mortgage-backed $16,818 $10 $(864) $15,964
Other U.S. agency 1,740 3 - 1,743
U.S. agency equity 739 14 - 753
State and municipal 101 - - 101
Other equity 58 39 - 97
-----------------------------------------------------------------------------------------------
Total investment securities
available for sale $19,456 $66 $(864) $18,658
======= === ====== =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
SUMMARY
In the three months ended June 30, 1995, a net loss of $17,085 was
realized versus a net loss of $12,314 in the same period in 1994. Net interest
income decreased from $547,144 in the 1994 period to $137,081 in the 1995
period, and other income was $227,621 in the 1995 period versus $143,014 in the
1994 period. The decline in net income was primarily the result of the decrease
in net interest income in the quarter. The reduction of net interest income was
due principally to the sale of the majority of the Bank's retail deposits and
loan portfolio in December 1994, and also due to decreased spread income from
the bank's securities portfolio. Similarly, other operating expense decreased
to $405,080 in the 1995 period from $688,543 in the 1994 period. Unusual
operating expenses during the three months ended June 30, 1995 were a major
contributing factor to the loss. During the three months ended June 30, 1995
there was an improvement of $248,032 in the FASB 115 value of the securities
available-for-sale.
Net income (loss) per share in the three months ended June 30, 1995 was
($0.014), and in the three months ended June 30, 1994 was
9
<PAGE> 10
($0.011) per share. Net income (loss) per share in the six months ended June
30, 1995 was ($0.025), and in the six months ended June 30, 1994 was $0.029 per
share. The reduction in net income was primarily due to the same factors which
caused the loss in the three month period ending June 30, 1995. During the six
months ended June 30, 1995 there was an improvement of $579,304 in the FASB 115
value of the securities available-for-sale.
The following table summarizes the pre-tax income of each profit center
of the Company for the six months ended June 30, 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995 PRE-TAX INCOME (LOSS) SUMMARY
<S> <C>
Banking & Mortgage Banking ( 95,857)
Equity in earnings of
Northern Michigan BIDCO 70,482
Corporate Office ( 54,278)
---------
Total $(79,653)
</TABLE>
The following table summarizes the pre-tax income of each profit center
of the Company for the six months ended June 30, 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1994 PRE-TAX INCOME SUMMARY
<S> <C>
Community Banking:
Newberry Office: $121,562
Sault Office: (108,240)
Mortgage Banking 39,899
Equity in earnings of
Northern Michigan BIDCO 136,500
Corporate Office (199,050)
---------
Total $ (9,329)
</TABLE>
RECENT DEVELOPMENT
The Bank has applied to its banking regulators to relocate its main
office to Ann Arbor, Michigan, near the University of Michigan's Medical
Center. In connection with the Bank's sale of three branches and associated
loans and deposits in December 1994, the State of Michigan Financial
Institutions Bureau (the "FIB") imposed certain post-closing conditions to
maintain the Bank's charter with the State of Michigan. The FIB determined
that the new location fulfills the post-closing conditions required under the
order.
The Bank changed its name to University Bank from The Newberry State
Bank in July 1995, in anticipation of opening the new Ann Arbor main office
location.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income decreased from $547,144 for the three months ended
June 30, 1994 to $137,081 for the three months ended June 30,
10
<PAGE> 11
1995. Net interest income fell from the year ago period because of a decrease
in loans and an increase in the cost of interest bearing liabilities. The
yield on interest earning assets decreased from 7.62% in the 1994 period to
7.58% in the 1995 period. The cost of interest bearing liabilities increased
from 4.01% in the 1994 period to 6.57% in the 1995 period, causing net interest
income as a percentage of total earning assets to decrease from 3.93% to 1.65%.
For the six month period ended June 30, 1995, net interest income
decreased from $1,097,552 to $245,065 in the 1995 period. The yield on
interest earning assets decreased from 7.45% in the 1994 period to 7.35% in the
1995 period. The cost of interest bearing liabilities increased to 6.53% in the
1995 period from 3.79% in 1994 period, resulting in a decrease in net interest
income as a percent of total average earning assets to 1.55% from 3.94%.
Interest income
Interest income decreased from $1,060,836 in the quarter ended June 30,
1994 to $629,322 in the quarter ended June 30, 1995. The average volume of
interest earning assets decreased from $55,689,967 in the 1994 period to
$33,215,997 in the 1995 period, a decrease of 40.4%. The decreased volume of
earning assets was due to the sale of loans in December 1994, partially offset
by new wholesale money market borrowings. Interest income decreased as a
result of a decrease in earning assets also as a result of the sale. The
overall yield on the loan portfolio increased from 9.51% to 9.78%. The yield
on the loans which the Bank retained was increased to compensate for their
somewhat higher risk profile.
Interest income decreased in the six months ended June 30, 1995 from
$2,078,224 from $1,161,084 in the six months ended June 30, 1994. The volume
of interest earning assets decreased from $55,755,857 in the 1994 period to
$31,607,792 in the 1994 period, a decrease of 43.3%. The decrease in interest
income was primarily attributable to the decrease in the volume of earning
assets. The average yield on the loan portfolio increased as the yield on the
loans which the Bank retained was increased to compensate for their somewhat
higher risk profile.. As a result, the overall yield on the loan portfolio
increased to 10.10% from 8.93%.
The average volume of investments in the three months ended June 30,
1995 decreased 2.9% over the same period in 1994, as the Bank's short term
investments were drawn down, only partially offset by an increase in the
portfolio of adjustable rate agency backed mortgage securities. In the six
month period, the average volume of investments increased 6.7% over the same
period in 1994, as the Bank increased its portfolio of adjustable rate agency
backed mortgage securities.
The yield increased from 4.33% in the three month period ended June 30,
1994 to 6.07% in the 1995 period. The increase in yields was in line with the
general increase in interest rates between 1994 and 1995. In the six month
periods, the yield increased from 4.61% in the
11
<PAGE> 12
1994 period to 5.82% in the 1995 period. The increase in yields was in line
with the general increase in interest rates between 1994 and 1995.
Interest Expense
Interest expense decreased from $513,693 in the three months ended June
30, 1994 to $492,241 in the 1995 period. The decrease was due to a decrease in
interest bearing liabilities as a result of the sale, only partially offset by
an increase in rates paid on deposits and borrowings. A portion of the
increase in rates was due to generally higher short term interest rates. A
shift to more heavy reliance on more expensive wholesale funds was also a
factor. The cost of funds increased from 4.01% in the 1994 period to 6.57% in
the 1995 period. The average volume of interest bearing liabilities decreased
50.6% in the 1995 period versus the 1994 period.
In the six month periods ending June 30, 1995 and 1994, interest
expense decreased from $980,673 in 1994 to $916,019 in the 1995 period. The
decrease was due to the same factors as in the three months periods discussed
above. The cost of funds increased from 3.79% in the 1994 period to 6.53% in
the 1995 period. The average volume of interest bearing liabilities decreased
45.8% in the 1995 period versus the 1994 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 and six month
periods ended June 30, 1995 and 1994.
12
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------
1995 1994
-------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short term investments:
Interest bearing deposits $ 755,077 $ 11,096 5.88% $ 1,527,978 $ 19,064 4.99%
Federal funds sold 757,117 11,383 6.01% 2,156,967 20,777 3.85%
Investment Securities:
Non-taxable(1) 100,634 1,802 7.16% 272,018 4,563 6.71%
Taxable 18,129,524 275,494 6.08% 16,370,499 175,703 4.29%
---------- --------- ----- ---------- --------- -----
Total investment securities 19,742,352 299,775 6.07% 20,327,462 220,107 4.33%
Loans: ---------- --------- ----- ---------- --------- -----
Commercial 2,072,864 60,371 11.65% 7,208,070 154,506 8.57%
Real Estate 9,617,410 229,246 9.53% 17,727,953 422,573 9.53%
Installment/Consumer 1,783,371 39,930 8.96% 10,426,482 263,650 10.11%
---------- --------- ----- ---------- --------- -----
Total Loans 13,473,645 329,547 9.78% 35,362,505 840,729 9.51%
---------- --------- ----- ---------- --------- -----
Total earning assets 33,215,997 629,322 7.58% 55,689,967 1,060,836 7.62%
---------- --------- ----- ---------- --------- -----
Less allowance for possible
loan losses & deferred fees (347,402) (373,828)
---------- ----------
32,868,595 55,316,139
Mortgage servicing rights 1,979,890 1,668,072
Non earning assets 1,572,766 5,970,277
---------- ----------
Total assets $36,421,251 $62,954,488
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 48,972 $ 350 2.86% $ 5,144,942 $ 33,029 2.57%
Savings 86,155 569 2.64% 5,396,172 33,594 2.49%
Canadian Dollar Savings 1,230,570 20,675 6.72% 2,169,280 22,716 4.19%
Time Under $100,000 13,114,522 210,785 6.43% 9,913,514 116,476 4.70%
Time Over $100,000 - - - 533,667 7,568 5.67%
Borrowed Funds 12,221,994 205,819 6.74% 7,102,705 71,329 4.02%
Money Market 2,276,676 32,371 5.69% 18,807,202 183,550 3.90%
Holding company debt 1,000,000 21,672 8.67% 2,214,000 45,431 8.21%
---------- --------- ----- ---------- --------- -----
Total interest bearing
liabilities $29,978,889 492,241 6.57% $51,281,482 513,693 4.01%
---------- --------- ----- ---------- --------- -----
Net interest income $ 137,081 $ 547,143
========= =========
Weighted average rate spread 1.01% 3.61%
==== ====
Net yield on average earning
assets 1.65% 3.93%
</TABLE>
(1) Actual yields; not adjusted for Tax-equivalent yields.
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
13
<PAGE> 14
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------
1995 1994
-------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Short term investments:
Interest bearing deposits $ 693,359 $ 20,083 5.79% $ 1,518,015 $ 37,505 4.94%
Federal funds sold 896,200 27,563 6.15% 2,365,955 42,461 3.59%
Investment Securities:
Non-taxable(1) 100,839 3,604 7.15% 271,072 9,126 6.73%
Taxable 18,626,958 539,849 5.80% 14,895,653 350,025 4.70%
---------- --------- ----- ---------- --------- -----
Total investment securities 20,317,356 591,099 5.82% 19,050,695 439,117 4.61%
Loans: ---------- --------- ----- ---------- --------- -----
Commercial 1,870,537 116,382 12.44% 6,935,890 287,270 8.28%
Real Estate 7,750,876 365,211 9.42% 19,443,556 843,221 8.67%
Installment/Consumer 1,669,023 88,392 10.59% 10,325,716 508,616 9.85%
---------- --------- ----- ---------- --------- -----
Total Loans 11,290,436 569,985 10.10% 36,705,162 1,639,107 8.93%
---------- --------- ----- ---------- --------- -----
Total earning assets 31,607,792 1,161,084 7.35% 55,755,857 2,078,224 7.45%
---------- --------- ----- ---------- --------- -----
Less allowance for possible
loan losses & deferred fees (350,885) (351,570)
---------- ----------
31,256,907 55,404,287
Mortgage servicing rights 1,867,138 1,720,748
Non earning assets 1,864,046 6,725,240
---------- ----------
Total assets $34,988,091 $63,850,275
========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest Bearing Liabilities:
Deposit Accounts:
Now/S-Now $ 67,057 $ 829 2.47% $ 5,385,019 $ 68,555 2.55%
Savings 93,214 1,180 2.53% 5,332,407 66,017 2.48%
Canadian Dollar Savings 1,148,590 38,629 6.73% 2,044,459 42,474 4.16%
Time Under $100,000 10,722,125 345,436 6.44% 10,028,470 238,948 4.77%
Time Over $100,000 - - - 567,583 15,144 5.34%
Borrowed Funds 12,344,270 412,342 6.68% 7,281,377 133,144 3.66%
Money Market 2,675,602 72,506 5.42% 18,924,408 333,544 3.53%
Holding company debt 1,000,000 45,097 9.02% 2,223,600 82,847 7.45%
---------- --------- ----- ---------- --------- -----
Total interest bearing
liabilities $28,050,858 916,019 6.53% $51,787,323 980,673 3.79%
========== --------- ---- ========== --------- ----
Net interest income $ 245,065 $1,097,551
========= =========
Weighted average rate spread 0.82% 3.67%
==== ====
Net yield on average earning
assets 1.55% 3.94%
</TABLE>
(1) Actual yields; not adjusted for Tax-equivalent yields.
(2) For purposes of computing average yields on the loan portfolio as presented
in the above analysis, loans on non-accrual status are included in the
average loan balances.
14
<PAGE> 15
Provision for Loan Losses
Management decreased the monthly loan loss provision to a rate of $400
in the three months ended June 30, 1995 from $17,500 in the prior-year period.
The reduction was made due to management's assessment of the adequacy of the
reserve and the low level of origination of non- guaranteed loans. The actual
loan losses were $16,247 in the three month period ended June 30, 1995 versus
$49,541 in the three month period ended June 30, 1994.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for loan losses $ 1,200 $52,500 $ 2,400 $105,000
Loan charge-offs 16,247 49,541 42,872 52,652
Reclassification - - (19,736) -
Recoveries 10,512 37,573 10,898 44,645
------- ------- ------- -------
Net increase (decrease)
in provision $(4,535) $40,532 $(49,310) $96,993
<CAPTION>
At At At
June 30, March 31, December 31,
1995 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
Total loans(1) $7,662,769 $8,005,202 $4,583,192
Reserve for loan losses 313,249 317,784 362,559
Reserve/Loans, %(1) 4.09% 3.97% 7.91%
</TABLE>
(1) Excludes loans held for sale.
In addition to the general loan loss reserve, the Company had deposits
on hand from a Michigan Strategic Fund of approximately $45,000 at June 30,
1995, March 31, 1995 and December 31, 1994 to offset loan losses on a group of
commercial loans amounting to approximately $564,000 at June 30 and March 31,
1995, and $534,893 at December 31, 1994. 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. An additional amount of
approximately $20,000 in the fund is being transferred to First Northern Bank &
Trust as a final settlement under the loan and branch sale of December 1994. The
Bank expects to recover $35,000 of the prior chargeoffs in the six months ended
June 30, 1995 from the MSF loan loss reserve balance once the division of the
fund with First Northern is finalized.
15
<PAGE> 16
Financial Accounting Standards Board ("FASB") has issued statement
number 114, Accounting by Creditors for Impairment of a Loan, which must be
adopted for fiscal years beginning after December 14, 1994. The Company
believes that the impact of adopting this statement will not be material.
The following schedule summarizes the Company's nonperforming loans for
the periods indicated:
<TABLE>
<CAPTION>
At At At
June 30, March 31, December 31,
1995 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C>
Past due 90 days and over
and still accruing:
Real estate 48,657 77,117 76,576
Installment 60,508 16,463 92,947
Commercial 304,477 135,302 112,219
------- ------- -------
Subtotal 413,642 228,882 281,742
Nonaccrual loans:
Real estate 111,290 108,056 108,056
Installment - - -
Commercial 97,771 8,520 4,893
------- ------- -------
Subtotal 209,061 116,576 112,949
Other real estate owned 225,552 134,086 130,015
------- ------- -------
Total 848,255 479,544 524,706
As % of loans(1) 11.07% 5.99% 11.45%
Ratio of reserve for loan
losses to all loans
90 days and over 36.9% 92.0% 91.9%
</TABLE>
(1) Excluding loans held for sale.
Economic conditions in the Bank's primary market area appear to have
been stable in the period. The growth in the Sault Ste. Marie area appears to
have ceased; however, the Newberry area appears to be growing following as a
result of the construction of a major prison complex in the town by the State
Department of Corrections. The full impact of the prison complex on the local
economy is likely to be felt later in the year, when it is fully staffed. The
sale of the bulk of the Bank's loan portfolio leaves the Bank with a larger
than average loan loss reserve and a larger than average ratio of
underperforming loans.
The $368,711 increase in non-performing assets during the three months
ended June 30, 1995 was primarily the result of the following: a $227,000
commercial loan secured by a mini-warehouse added to loans 90 days late and
still accruing, and the addition of an $88,000 waterfront
16
<PAGE> 17
single family residence in Sault Ste. Marie received in full settlement of a
complex litigation. Excluding its legal fees incurred to date, the Bank does
not expect a loss on the sale of this home.
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.
Non-Interest Income
Total non-interest income increased to $227,621 for the three months
ended June 30, 1995 from $143,014 for the three months ended June 30, 1994.
The increase was principally a result of a $140,682 increase in the Bank's
mortgage banking income, and an increase in securities gains, which was
partially offset by a $35,058 decrease in the Company's share of the profit
from the equity investment in Northern Michigan BIDCO and decreases in other
fee income related to the sale of three branches in December 1994.
For the six month periods, total non-interest income increased from
$377,925 in the 1994 period to $466,450 in the 1995 period. Gains in mortgage
banking income and securities gains more than offset a decrease in the
Company's share of the profit from the equity investment in Northern Michigan
BIDCO and decreases in other fee income.
Securities. During the six months ended June 30, 1995 a realized gain
of $15,330 was booked by the Holding company, with total proceeds of $74,367,
on the sale of a security in the available for sale portfolio. At June 30,
1995, the Holding company had an unrealized gain on its equity portfolio of
$39,968.
During the three months ended June 30, 1995, four securities totalling
$3,936,389 were sold from the Bank's available-for-sale securities portfolio
with a gross realized gains of $84,975 and gross realized losses of $76,255.
During the six months ended June 30, 1995, seven securities totalling
$5,682,904 were sold from the Bank's available-for-sale securities portfolio
with gross realized gains of $93,022 and gross realized losses of $76,255.
During the quarter, the Bank liquidated a portion of its position in monthly
adjusting agency backed CMOs indexed monthly to the 11th District Cost-Of-Funds
Index. In additional to the remainder of these COFI-indexed securities, the
Bank retains a portfolio of agency backed CMOs indexed to the one year CMT
(together, the "ARM Securities Portfolio"). At June 30, 1995, approximately
$16,500,000 of the Bank's portfolio was invested in variable-rate U.S. agency
mortgage backed securities. The decrease in the first half of 1995 in short
term interest rates has increased the
17
<PAGE> 18
market value of the Bank's ARM Securities Portfolio from an unrealized loss of
$851,000 at December 31, 1994 to an unrealized loss of $349,000 as of March 31,
1995, and to an unrealized gain of $an increase in value of $502,000. In the
past month, this positive trend has continued, and at July 31, 1995, the
unrealized loss in the Bank's ARM Securities Portfolio has decreased further to
$221,757.
Management made the decision in December 1994, at the time of the sale,
to hold onto the Bank's ARM Securities Portfolio, although its cost of funds to
carry the portfolio at the time exceeded the yield on the portfolio. During
the first quarter of 1995, the yield on the Bank's taxable investment
securities was 5.49%, versus the cost of borrowed funds of 6.63% and CDs of
6.47%. This negative carry decreased somewhat during the second quarter of
1995, with the yield on the Bank's taxable investment securities being 6.08%,
versus the cost of borrowed funds of 6.74% and CDs of 6.43%. As the rates on
the ARM Securities Portfolio adjust over the next several months, the yield
should increase, and it is expected that the Bank's ARM Securities Portfolio
should ultimately yield between 1.0-2.0% over the Bank's cost of funds, unless
short term interest rates again increase sharply, as they did throughout 1994.
The negative net interest income on the ARM Securities Portfolio had a
substantial negative impact on profitability in the first and second quarters,
however, a portion of the return on these securities over the past six months
was expected by management to be an increase in market value, which was
$502,000 in the first quarter of 1995, and $385,000 in the second quarter of
1995.
Foreign Exchange. Foreign exchange revenues decreased to $20,012 and
$32,443 for the three and six months ended June 30, 1995 from $45,661 and
93,176 in the respective 1994 periods, as a result of the sale of the three
bank branches in December 1994.
Mortgage Banking. Mortgage banking income increased to $163,272 and
$307,855 in the three and six months ended June 30, 1995 from $22,590 and
$97,441 in the three months ended June 30, 1994. Sharply decreased loan
purchase and origination volumes during the 1995 period were offset by an
increase in return from the Bank's investment in FHLMC single family mortgage
loans serviced for others, and a recovery of $118,933 and $60,875 in the six
months and three months ended June 30, 1995, respectively, previously charged
to income on loans held for sale as a result of an increase in the market value
of the loans held for sale.
At June 30, 1995, the Bank serviced $151,155,834 of FHLMC mortgages for
others and owned servicing rights on another $33,834,730 subserviced by an
affiliate of the BIDCO, versus $150,627,733 at December 31, 1994. The
following table summarizes the portfolio by type and mortgage note rate:
18
<PAGE> 19
<TABLE>
<CAPTION>
($ in 000s) FIXED RATE - BY MATURITY
-------------------------------------------------------------
MORTGAGE RATE (%) ARMs UNDER 10 10-25 OVER 25
<S> <C> <C> <C> <C>
9.00 and up 194 189 213 5,551
8.50 - 8.99 1,360 689 1,077 22,016
8.00 - 8.49 254 751 2,182 30,973
7.50 - 7.99 365 596 3,438 47,603
7.00 - 7.49 632 792 14,093 22,953
6.50 - 6.99 4,296 1,094 11,105 6,061
6.00 - 6.49 2,942 658 1,765 472
under 6.00 306 290 80 -
------ ------ ------ -------
10,349 5,059 33,953 135,629
Current market
interest rates 6.25% 7.50% 7.63% 8.17%
Average annual
servicing fee 0.50% 0.30% 0.31% 0.26%
</TABLE>
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
<TABLE>
<S> <C>
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
</TABLE>
If interest rates were to stay at current levels, refinancings and
payoffs would likely increase over recent experience since approximately 20% of
the fixed rate mortgages being serviced carry interest rates within 0.5% of the
current market rate. A recent dip to lower rates, which then reversed, may
increase amortization in the third quarter of 1995 somewhat. 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 $300,000 to $550,000.
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. A portion of the Bank's ARM Securities Portfolio acts as a
hedge against repayments of mortgage servicing rights.
At June 30, 1995, the Bank had outstanding purchase commitments to buy
single family FHLMC qualifying mortgage loans of $938,000 and outstanding
forward commitments to deliver FHLMC mortgage-backed securities of $509,000,
substantially all of which commitments were for delivery within three months or
less. The following tables summarize
19
<PAGE> 20
mortgage banking activity for the three and six months periods ending June 30,
1995 and 1994:
<TABLE>
<CAPTION>
(amounts in $000s) Three Months Ended Six Months Ended
March 31 June 30
1995 1994 1995 1994
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net servicing originated 4,920 1,504 4,367 4,938
Bulk servicing purchased - - 29,996 -
------ ------ ------ ------
Net increase in servicing 4,920 1,504 34,363 4,938
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
(amounts in $000s) June 30, March 31, December 31,
1995 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Total servicing(1) 184,991 180,071 150,628
Book value of servicing 1,995 1,961 1,626
Estimated market value
of servicing:
Management estimate(2) 2,542 2,527 2,162
Discounted cash flow(3) 2,210 2,111 1,910
Estimated excess of market
over book value(4) 215-547 150-566 536-284
</TABLE>
(1) Includes servicing related to FHLMC qualified loans held for delivery of
$2,630,729, $4,989,795 at March 31, 1995, $4,129,321 at December 31, 1994.
(2) Assumes a price based upon market transactions at June 30, 1995 of of 5.7x
(5.7 times the servicing fee) for 30-year production, 4.7x for 15-year
production and 3.0x for Balloon servicing and 3.0x for ARM servicing. A
discount of 1x is subtracted for servicing on California properties.
Assumes a price at March 31, 1995 and December 31, 1994 of 5.8x (5.8 times
the servicing fee) for 30-year production, 4.8x for 15-year production and
3.1x for Balloon servicing and 3.2x for ARM servicing. A discount of 1x
is subtracted for servicing on California properties.
(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. A slight decline was noted in the second quarter of
1995.
In the first quarter, the Bank acquired a $30,000,000 portfolio of low
coupon 1993 servicing on properties located in California for 1.04% of unpaid
principal balance, which is being subserviced by a subservicing firm to which
the BIDCO has a loan investment with equity participation. The Bank has
recently added some new mortgage
20
<PAGE> 21
correspondents. In addition, the Bank recently began selling B and C impaired
credit quality loans to a correspondent. Farmer Mac, the AgFirst Farm Credit
Bank and FNMA began to pool Farmer Mac Guaranteed Rural Housing Loans beginning
August 1, 1995, and the Bank expects to participate as a nationwide seller
under the program. The Bank increased its ownership of Farmer Mac's class C
common stock (NASDAQ/FAMCK) to 2.86% of the outstanding shares. Origination
activity continues to climb slowly from earlier depressed levels, and
indications are that the new and existing programs will increase origation
activity in the third quarter of 1995 from the depressed levels of the first
quarter.
The Company and the Bank are in negotiations to acquire the 70% of the
outstanding shares of the BIDCO's subservicing affiliate owned by third parties
and not owned by BIDCO. The subservicing company is also based in the Upper
Peninsula of Michigan. Such an acquisition, if consummated, would result in
cost savings, because the Bank intends to outsource its servicing portfolio to
the subservicing company. As a subsidiary of the bank, this potential
acquisition would also enhance the subservicing company's ability to market its
services, and also produce economies of scale in its own operation.
In mid-March 1995, the Bank purchased a portfolio of sub-performing
home equity loans with approximately $6,600,000 in unpaid principal balance and
$1,000,000 of unpaid accrued interest from a private investor group for
approximately $1,903,000 (the "Loan Pool"). The investor group had recently
purchased the Loan Pool from the Resolution Trust Corporation, which had not
funded legal collection costs with respect to the loans in the pool since 1990.
The average stated interest rate on the mortgage loans is over 19%.
Approximately 67% of the loans in the pool are currently making payments (up
from 50% at the time of the Bank's acquisition), and based on the collection
experience to date, management expects to amortize the purchase price together
with a 12% return on the investment within two years, leaving additional future
income from the pool which will be split 50/50 with the subservicer of the loan
pool. Based upon its investigation of the loan pool, management believes that
70% of the loans in the pool are backed by first or second mortgages where the
combined loan to value ratio, after taking into account these liens is less
than 100%. The servicer of the loans has provided additional security and
collateral to protect the Bank's investment in the loan pool, including
$250,000 in pledged deposits with the Bank and personal and corporate
guarantees on the Bank's investment in the loan pool.
Northern Michigan BIDCO. Northern Michigan BIDCO (the "BIDCO") invests
in businesses in Northern Michigan with the objective of fostering job growth
and economic development. As of June 30, 1995, the BIDCO had made fourteen
such investments, amounting to a total of $7,525,000 at original cost. At June
30, 1995, the BIDCO had total assets of $6,744,752 (treating three companies of
which the BIDCO maintains a controlling interest on a non-consolidated basis).
For the three and six months ended June 30, 1995 and 1994, the Bank's 44.09%
21
<PAGE> 22
equity share in the earnings of the BIDCO's reported net income was $23,756 and
$70,482, and $58,814 and $136,500, respectively.
The Bank owns 280 shares of common stock in the BIDCO, currently
representing a 44.09% equity interest. In January 1995, the Company purchased
$132,000 principal amount of the BIDCO's 9% convertible debentures at par
value, and in June the Company purchased an additional $65,000 principal amount
for $71,500, thereby increasing the Company's consolidated fully diluted
ownership in the BIDCO to 15.53% from 10.57%.
Northern 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:
<TABLE>
<CAPTION>
Northern Michigan BIDCO, investments:
Equity
Industry Amount Participation?
<S> <C> <C>
ABC-TV affiliate $ 300,000 yes
Adult foster care 40,000 no
Cable TV 350,000 yes
Children's clothing manufacturer 200,000 yes
Environmental engineering 100,000 no (paid-off)
Hotel 300,000 yes
Loan subservicing 450,000 yes
Mining equipment manufacturer 80,000 no
Paper converting plant 1,000,000 yes
Paper recycle pulp mill 780,000 yes
Plastic injection molding 2,000,000 no (paid-off)
Railroad boxcar leasing 1,300,000 no
Railcar equipment manufacturing 125,000 yes
Tissue paper mill 500,000 yes
---------
Total $7,525,000
==========
</TABLE>
At June 30, 1995, the BIDCO had the following outstanding conditional
commitments to lend:
<TABLE>
<S> <C>
Cable TV (add-on) $150,000
-------
Total $150,000
=======
</TABLE>
The BIDCO recently received federal government approval of an
application for $2,000,000 in funding in the form of a 1% 30-year loan to a
non-profit affiliate of the BIDCO, Northern Michigan Foundation (the
"Foundation"). The Foundation will be lent this money at 1% interest for 30
years. The Foundation will relend this money to
22
<PAGE> 23
businesses in Northern Michigan to promote economic development and to create
jobs for low and moderate income individuals. It is anticipated that an
increasing portion of the BIDCO's normal operating expenses will be absorbed by
the Foundation.
In conjunction with the Bank's establishment of a new main office in
Ann Arbor, the BIDCO also plans to set up an office at this location. The
BIDCO plans to expand the area in which it seeks investment opportunity to the
rest of the Lower Peninsula of Michigan.
Non-Interest Expense
Non-interest expense decreased from $688,543 in the three months ended
June 30, 1994 to $405,080 for the three months ended June 30, 1995.
Non-interest expense decreased from $1,379,807 in the six months ended June 30,
1994 to $788,768 for the six months ended June 30, 1995. The decrease in both
periods was primarily the result of the sale of three branches of the Bank in
December 1994.
Certain unusual expenses negatively impacted the 1995 first half.
Legal expenses of the Bank were $106,587 in the 1995 period versus $43,328 in
the 1994 period, resulting from foreclosure expenses and a particularly
expensive lender liability countersuit related to one case, since decided in
the Bank's favor. Approximately $30,000 in extra temporary personnel expenses
were incurred in the 1995 period as a result of short term personnel
requirements following the sale. Unusual expenses directly related to the sale
of $18,132 were charged to earnings in the first half of 1995. Lastly, audit
expenses are estimated to have been approximately $25,000 higher as a result of
the sale and the personnel turnover in the treasury department of the Bank that
resulted from it.
Non-interest operating expense for only the parent company decreased
from $69,697 for the three month 1994 period to $29,596 for the 1995 period.
For the six month periods, non-interest operating expense decreased from
$119,251 in 1994 to $40,363 in 1995. Management fees and goodwill amortization
expense previously incurred at the holding company level were discontinued due
to the sale. Legal and audit expenses were also lower.
Liquidity and Capital Resources
Parent Company Liquidity:
At year-end 1994, Newberry Bancorp, Inc. held cash and marketable
equity securities of $151,922. This increased by $59,030 to $210,952 at June
30, 1995. The increase in cash and marketable equity securities was due to
intercompany tax and dividend transfers. 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 BankOne Milwaukee, N.A.
("BankOne"), which amounted to $1,000,000 at June 30, 1995 and at December 31,
1994. The Company's bank debt currently calls for a balloon maturity on August
15, 1995. The Bank intends to pay a special dividend from
23
<PAGE> 24
retained earnings to pay off the balance. The Company is currently
contemplating the advisability of seeking another parent company loan or
raising additional capital by selling additional shares of common stock in
conjunction with the Bank's opening of its new main office in Ann Arbor.
Capital Resources:
The following table sets forth the Bank's risk based assets, and the
capital ratios and risk based capital ratios of the Bank and Company as of June
30, 1995.
24
<PAGE> 25
NEWBERRY STATE BANK
Risk Adjusted Assets & Risk Adjusted Capital Ratio at June 30, 1995
($ in 000's)
<TABLE>
<CAPTION>
Risk Adj.
Value Risk Asset
Asset (000's) Weight Value
--------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Cash and Fed Funds 657 0% 0
U.S. and Canadian Treasuries 0 0%
U.S. Gov't Agency Securities 812 0% 0
Reserve for Loan Losses (313) 0% 0
U.S. Gov't Sponsored Agency Securities 14,736 20% 2,947
U.S. Gov't Guaranteed Loans 492 20% 98
Balances at Domestic and Canadian Banks 593 20% 119
General Obligation Municipal Securities 101 20% 20
1-4 Family Mortgage Loans 3,907 50% 1,954
Municipal Revenue Bonds 0 50% 0
All Other Loans 6,492 100% 6,492
All Other Securities 2,558 100% 2,558
Real Estate Owned 226 100% 226
Premises & Equipment 971 100% 971
Mortgage Servicing Rights 1,995 100% 1,995
Other Assets 1,104 100% 1,104
--------------------------------------------- ---------
TOTAL ASSETS 34,331
=========
Off Balance Sheet Items:
Letters of Credit and Commitments 728 100.00% 728
Foreign Exchange Contracts 1,450 0.50%(1) 7
Interest Rate Contracts 3,000 0.00%(1) 5
FHLMC Loan Purchase Commitments 938 50.00% 469
MBS FHLMC Forward Sell Commitments 509 0.00%(1) 8
Agency Guaranteed Commercial Loans Sold 209 20.00% 42
--------- --------- ---------
TOTAL RISK-ADJUSTED ASSETS 19,743
=========
CAPITAL RESOURCES
Shareholders Equity, GAAP 5,005 5,005
Unrealized Gain/(Loss) on AFS Securities 27 27
Investment in Unconsolidated Subsidiary 538 538
----- -----
Total Equity (Tier 1) 5,570 5,570
Qualifying Loan Loss Reserve (Tier 2) 247 247
----- -----
Regulatory Capital (Tier 1 & Tier 2) 5,817 5,817
===== =====
Primary and Total Capital Ratio (Leverage) 17.14%
=====
Risk-adjusted Capital Ratio (Tier 1) 28.21% 28.21%
===== =====
Risk-adjusted Capital Ratio (Tier 2) 29.46% 29.46%
====== =====
Newberry Bancorp Consolidated
Total Capital Ratio (Leverage Ratio) 13.24%
======
</TABLE>
(1) Plus market value, or replacement cost valuation, as required.
25
<PAGE> 26
Bank Liquidity:
The Company'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 secured by securities, and overnight fed funds credit
lines from correspondent banks. In addition, the Bank invests in overnight
Federal Funds. At June 30, 1995, the bank had cash and due from banks and fed
funds on hand of approximately $1,250,000. At June 30, 1995 the Bank had
available overnight fed funds lines of $2,600,000. In order to bolster
liquidity, the Bank has also sold brokered CDs from time to time.
Impact of Inflation
The primary impact of inflation on the Company's operations is
reflected in increased operating costs. Because the assets and liabilities of
the Company are primarily monetary in nature, changes in interest rates have a
more significant impact on the Company's performance than the general effects
of inflation. However, to the extent that inflation affects interest rates, it
also affects the net income of the Company.
Rising long term and short term interest rates tends to increase the
value of the Bank's investment in mortgage servicing rights and improve the
Bank's current return on such rights by lowering required amortization rates on
them. However, rising interest rates tends to decrease new mortgage origination
activity, negatively impacting current income from mortgage banking operations.
The table on the next page details the Bank's asset/liability sensitivity as of
June 30, 1995.
26
<PAGE> 27
The Newberry State Bank
Asset/Liability Position Analysis
($ in 000s)
Maturing or Repricing in
<TABLE>
<CAPTION>
-----------------------------------------------------
Under 91 Days- 1-5 Over 5 All Total
3 Months 1 Year Years Years Others
-------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
------
Fed Funds 657 657
Loans (1) 457 865 2,825 4,147
Canadian Inv. 18 18
Securities 6,527 10,755 14 704 703 18,703
Loans held for sale 3,228 3,228
Matured Loans 636 636
Variable Loans 2,357 2,357
Other Assets 3,760 3,760
Cash & Due 575 575
Overdrafts
Non Accrual Loans 209 209
Valuation Adjustment 41 41
------ ------ ------ ------ ------ ------
13,880 11,620 2,839 704 5,288 34,331
LIABILITIES
-----------
Jumbo CDs 200 200
Other CDs 69 2,143 10,490 12,702
MMDA 2,279 2,279
Now & S-Now 48 48
Demand & Escrows 2,234 2,234
Savings 73 73
Can$Savings 967 967
Other Liabilities 236 236
Repos & Borrowings 10,560 10,560
Equity 5,032 5,032
------ ------ ------ ------ ------ ------
13,996 2,143 10,690 - 7,502 34,331
GAP (116) 9,477 (7,851) 704 (2,214)
CUMULATIVE GAP (116) 9,361 1,510 2,214
-0.34% 27.27% 4.40% 6.45%
</TABLE>
NOTES:
(1) Net of bad debt reserve.
27
<PAGE> 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or
its subsidiary 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:
28
<PAGE> 29
NEWBERRY BANCORP, INC. (The Parent)
Condensed Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
ASSETS ------ ------
<S> <C> <C>
Cash and due from banks $ 9,434 $ 54,151
---------- ------------
Investment in subsidiary 5,031,736 4,746,807
---------- ------------
Due from ESOP 1,000 1,000
Available for sale securities (Note 2) 201,518 97,771
Investment in Northern Michigan BIDCO 203,500 -
Federal income tax receivable 173,027 22,281
Furniture, fixtures & equipment 3,244 4,744
Deferred taxes 8,537 8,537
Prepaid expenses and other assets 11,160 973,212
---------- ------------
Total other assets 601,986 1,107,545
TOTAL ASSETS 5,643,156 5,908,503
========== ============
June 30, December 31,
1995 1994
LIABILITIES AND SHAREHOLDERS EQUITY ------ ------
Note payable 1,000,000 1,000,000
Accrued interest payable - 78,798
Accounts payable 18,289 734,017
Payable to bank subsidiary - -
---------- ------------
Total Liabilities 1,018,289 1,812,815
Stockholders' equity:
Net unrealized gain (loss) on
available-for-sale securities 53,516 (525,788)
Capital stock and paid in capital 2,470,343 2,490,270
Retained earnings 2,101,008 2,131,206
---------- ------------
Total Stockholders' equity 4,624,867 4,095,688
---------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $5,643,156 $ 5,908,503
---------- ------------
</TABLE>
29
<PAGE> 30
NEWBERRY BANCORP, INC. (The Parent)
<TABLE>
<CAPTION>
Condensed Statement of Operations For the Three-Month For the Six-Month
(Unaudited) Periods Ended Periods Ended
June 30, June 30,
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest on Securities $ 3,560 $ - $ 5,480 $ -
Net income from bank subsidiary 6,665 62,594 5,625 166,228
Gain (loss) on sale of investment 0 - 15,330 -
Other income 1,465 1,631 10,372 3,049
------ ------ ------ ------
Total income 11,690 64,225 36,807 169,277
------ ------ ------ ------
Interest expense 21,672 45,431 45,097 82,847
Amortization expense 0 3,184 0 6,368
Management fees 0 15,000 0 30,000
Legal and Audit Expense 15,247 34,127 18,755 54,475
Public listing expense 1,000 3,900 2,000 5,026
Other expenses 13,349 13,486 19,608 23,382
------ ------ ------ ------
Total expenses 51,268 115,128 85,460 202,098
------ ------ ------ ------
Income before income taxes (39,578) (50,903) (48,653) (32,821)
------ ------ ------ ------
Income taxes (benefit) (22,493) (38,589) (18,455) (66,594)
------ ------ ------ ------
Net income (17,085) (12,314) (30,198) 33,773
======= ====== ====== ======
Net income per common share ($0.014) $0.010 ($0.025) $0.029
------ ------ ------ ------
Dividends declared per share $ --- $ --- $ --- $ ---
======= ====== ====== ======
</TABLE>
30
<PAGE> 31
NEWBERRY BANCORP, INC. (The Parent)
Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended
June 30,
<S> <C> <C>
1995 1994
Reconciliation of net income (loss)
to net cash used in
operating activities:
Net income (loss) $ (30,198) $ 33,773
Depreciation 1,500 1,501
Amortization - 6,368
Proceeds from sales of trading
securities 74,367 -
Purchases of trading securities (366,284) -
Loss (gain) on sale of investments (15,330) -
Decrease (increase) in receivable
from affiliate 973,211 -
Decrease (increase) in Other Assets (11,161) (23,779)
Decrease (increase) in Income Tax Receivab (150,745) -
Increase (decrease) in interest payable (78,798) 11,504
Increase (decrease) in Income Tax Payable (720,428) -
Increase (decrease) in Other Liabilities 4,701 63,981
Equity from undistributed earnings of subs (5,625) (66,228)
--------- ---------
Net cash provided by (used in)
operating activities (324,790) 27,120
--------- ---------
Cash flow from investing activities:
Subsidiary dividends received 300,000 -
--------- ---------
Net cash provided by (used in)
investing activities: 300,000 -
--------- ---------
Cash flow from financing activities:
Principal payment on notes payable - (76,000)
Purchase of treasury stock (19,927)
--------- ---------
Net cash provided by (used in)
financing activities: (19,927) (76,000)
--------- ---------
Net changes in cash and cash equivalents (44,717) (48,880)
Cash and cash equivalents:
Beginning of year 54,151 105,967
--------- ---------
End of year $ 9,434 $ 57,087
--------- ---------
Supplemental disclosure of cash
flow information:
Cash paid (received) during the year for:
Interest $ 113,543 $ 69,982
Income tax $ (22,281) $ (3,849)
</TABLE>
31
<PAGE> 32
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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: August 10, 1995 /s/ Stephen Lange Ranzini
-----------------------------------
Stephen Lange Ranzini
President, Chief Executive
Officer, and Treasurer
(On behalf of the registrant
and as
Principal Financial Officer
32
<PAGE> 33
Exhibit Index
-------------
Sequentially
Numbered
Exh. No. Description Page
-------- ----------- ------------
27 Financial Data Schedule 34
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 473,533
<INT-BEARING-DEPOSITS> 101,349
<FED-FUNDS-SOLD> 675,825
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,407,873
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 10,890,930
<ALLOWANCE> (313,249)
<TOTAL-ASSETS> 34,933,297
<DEPOSITS> 18,492,947
<SHORT-TERM> 10,560,331
<LIABILITIES-OTHER> 1,225,152
<LONG-TERM> 0
<COMMON> 12,000
0
0
<OTHER-SE> 4,612,867
<TOTAL-LIABILITIES-AND-EQUITY> 34,933,297
<INTEREST-LOAN> 569,985
<INTEREST-INVEST> 591,099
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,161,084
<INTEREST-DEPOSIT> 458,580
<INTEREST-EXPENSE> 916,019
<INTEREST-INCOME-NET> 245,065
<LOAN-LOSSES> 2,400
<SECURITIES-GAINS> 32,097
<EXPENSE-OTHER> 788,768
<INCOME-PRETAX> (79,653)
<INCOME-PRE-EXTRAORDINARY> (30,198)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,198)
<EPS-PRIMARY> (0.025)
<EPS-DILUTED> (0.025)
<YIELD-ACTUAL> 7.35
<LOANS-NON> 209,061
<LOANS-PAST> 413,642
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 363,561
<ALLOWANCE-OPEN> 362,559
<CHARGE-OFFS> 42,872
<RECOVERIES> 10,898
<ALLOWANCE-CLOSE> 313,249
<ALLOWANCE-DOMESTIC> 313,249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
