A company similar to Chemical Financial Corporation is First Federal of Northern Michigan Bancorp, Inc. (FFNM). It too is a Michigan bank holding company operating. FFNM released its 2012 results last month. Unfortunately, the company had a net loss of $214,000.
Within their financial statements is an Available-for-Sale Securities adjustment for a year-over-year unrealized gain of $79,000. This is interesting because if instead of Available-for-Sale Securities they had been classified as Trading Securities this unrealized gain would have been recorded as earnings. While it would not have fixed their net loss since this was an unusual loss for them (they had net income of $742,000 in 2011), this could have put them in a better position.
In most instances choosing to classify a security as either trading or available-for-sale is subjective. This is because classification depends on the intentions of the company, which only the company really knows. With available-for-sale, securities’ unrealized gains and losses are recorded under Shareholders’ Equity. Trading, however, is recorded within Retained Earnings. By classifying securities as trading a company can increase their earnings by reporting unrealized earnings, which could put them in a better position. Therefore, if FFNM had classified these securities as trading instead of available-for-sale they would have had a smaller loss for 2012. However, it understandably can also have the opposite effect. For if the securities had instead had an unrealized loss then it would have hurt FFNM even more.
For more information, please visit: http://www.marketwatch.com/story/first-federal-of-northern-michigan-bancorp-inc-announces-fourth-quarter-2012-and-full-year-results-2013-03-22.
