SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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 000-31957
ALPENA BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES 38-3567362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 S. SECOND AVENUE, ALPENA, MICHIGAN 49707
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (989) 356-9041
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, Par Value $1.00 Outstanding at Oct 20, 2003
(Title of Class) 1,657,480 shares
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PART I - FINANCIAL INFORMATION
Interim Financial Information required by Rule 10-01 of Regulation S-X and Item
303 of Regulation S-K is included in this Form 10-QSB as referenced below:
PAGE
----
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheet at
September 30, 2003 and December 31, 2002...................................................................... 3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2003 and September 30, 2002............................................................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months ended September 30, 2003.................................................................. 5
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2003 and September 30,
2002......................................................................................................... 6
Notes to Consolidated Financial Statements...................................................................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................ 11
ITEM 3 - CONTROLS AND PROCEDURES.............................................................................. 18
PART II - OTHER INFORMATION
OTHER INFORMATION............................................................................................... 19
SIGNATURES...................................................................................................... 20
When used in this Form 10-QSB or future filings by Alpena Bancshares, Inc. (the
"Company") with the Securities and Exchange Commission ("SEC"), in the Company's
press releases or other public or stockholder communications, or in oral
statements made with the approval of an authorized executive officer, the words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory factors,
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks .......................................... $ 4,402,855 $ 3,091,216
Overnight deposits with FHLB ............................................. 440,855 12,007,645
------------ ------------
Total cash and cash equivalents .......................................... 4,843,710 15,098,861
Securities available-for-sale ............................................ 44,312,303 46,944,263
Loans held for sale ...................................................... 661,558 541,968
Loans receivable, net of allowance for loan losses of $1,031,570 and
$922,000 as of September 30, 2003 and December 31, 2002 respectively ..... 162,788,991 151,341,463
Foreclosed real estate and other repossessed assets ...................... 43,466 127,800
Real estate held for investment .......................................... 365,952 490,086
Federal Home Loan Bank stock, at cost .................................... 4,404,500 4,293,600
Premises and equipment ................................................... 5,886,782 4,761,207
Accrued interest receivable .............................................. 1,204,482 1,323,437
Intangible Assets ........................................................ 3,628,495 1,697,920
Other assets ............................................................. 2,657,025 2,187,645
------------ ------------
Total assets ............................................................. $230,797,264 $228,808,250
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ................................................................. $151,843,241 $156,092,449
Advances from borrowers for taxes and insurance .......................... 294,355 3,872
Federal Home Loan Bank advances .......................................... 52,413,793 48,413,793
Accrued expenses and other liabilities ................................... 4,057,360 1,889,057
Deferred income taxes .................................................... 377,244 661,731
------------ ------------
Total liabilities ........................................................ 208,985,993 207,060,902
------------ ------------
Commitments and contingencies ............................................ - -
Stockholders' equity:
Common stock ($1.00 par value, 20,000,000 shares authorized, 1,657,480 and
1,645,248 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively) .................. 1,657,480 1,645,258
Additional paid-in capital ............................................... 5,324,889 5,216,075
Retained earnings, restricted ............................................ 4,692,000 4,347,000
Retained earnings ........................................................ 9,643,522 9,471,394
Accumulated other comprehensive income ................................... 493,380 1,067,621
------------ ------------
Total stockholders' equity ............................................... 21,811,271 21,747,348
------------ ------------
Total liabilities and stockholders' equity ............................... $230,797,264 $228,808,250
============ ============
3
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Interest income:
Interest and fees on loans ........................ $ 2,825,548 $ 3,136,753 $ 8,407,558 $ 9,625,990
Interest and dividends on investments ............. 522,944 551,668 1,509,844 $ 1,577,464
Interest on mortgage-backed securities ............ 65,138 97,512 207,423 $ 174,776
------------ ------------ ------------ ------------
Total interest income ............................. 3,413,630 3,785,933 10,124,825 11,378,230
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits .............................. 885,340 1,318,133 2,873,351 4,313,460
Interest on borrowings ............................ 690,797 719,932 2,057,137 2,166,508
------------ ------------ ------------ ------------
Total interest expense ............................ 1,576,137 2,038,065 4,930,488 6,479,968
------------ ------------ ------------ ------------
Net interest income ............................... 1,837,493 1,747,868 5,194,337 4,898,262
Provision for loan losses ......................... 11,000 75,000 238,000 225,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,826,493 1,672,868 4,956,337 4,673,262
------------ ------------ ------------ ------------
Non Interest income:
Service charges and other fees .................... 225,869 213,965 560,039 584,999
Mortgage banking activities ....................... 403,937 368,797 1,291,488 863,804
Gain on sale of available-for-sale investments .... - 64,128 93,005 64,128
Net gain (loss) on sale of premises and equipment,
real estate owned and other repossessed assets .... (2,458) 3,685 28,323 (13,243)
Other (See Note 5) ................................ (5,844) 22,291 178,631 92,442
Insurance & Brokerage Commissions ................. 745,238 - 1,740,215 -
------------ ------------ ------------ ------------
Total other income ................................ 1,366,742 736,994 3,891,701 1,656,258
------------ ------------ ------------ ------------
Non interest expenses:
Compensation and employee benefits ................ 1,521,912 1,099,097 4,241,928 3,052,305
Advertising ....................................... 60,847 47,496 159,789 142,488
Occupancy ......................................... 301,510 259,072 882,642 765,732
Amortization of intangible assets ................. 77,359 51,253 214,408 153,758
Service Bureau Charges ............................ 76,364 70,214 226,100 205,046
Insurance & Brokerage Commission Expense .......... 341,005 - 770,850 -
Professional Services ............................. 36,876 98,437 171,381 289,260
Other (See Note 6) ................................ 357,724 280,142 996,181 845,546
------------ ------------ ------------ ------------
Other expenses .................................... 2,773,597 1,905,711 7,663,279 5,454,135
------------ ------------ ------------ ------------
Income before income tax expense .................. 419,638 440,023 1,184,759 811,257
Income tax expense ................................ 139,650 154,600 393,420 287,424
------------ ------------ ------------ ------------
Net income ........................................ $ 279,988 $ 285,423 $ 791,339 $ 523,833
============ ============ ============ ============
Per share data:
Basic earnings per share .......................... $ 0.17 $ 0.17 $ 0.48 $ 0.32
Weighted average number of shares outstanding ..... 1,654,313 1,644,426 1,648,516 1,643,544
Diluted earnings per share ........................ $ 0.17 $ 0.17 $ 0.48 $ 0.32
Weighted average number of shares outstanding,
including dilutive stock options .................. 1,662,527 1,657,204 1,656,730 1,655,100
Dividends per common share ........................ $ 0.125 $ 0.125 $ 0.375 $ 0.375
4
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
------------ ------------ ------------ ------------- ------------
Balance at December 31, 2002 ........ $ 1,645,258 $ 5,216,075 $ 13,818,394 $ 1,067,620 21,747,347
Stock issued upon exercise of
stock options (12,022 shares) ..... 12,022 105,954 - - 117,976
RRP stock release (200 shares) ...... 200 2,860 - - 3,060
Net income for the period ........... - - 791,339 - 791,339
Changes in unrealized gain
on available-for-sale securities... - - - (574,240) (574,240)
Total comprehensive income .......... - - - - 217,099
Dividends declared .................. - - (274,211) - (274,211)
------------ ------------ ------------ ------------- ------------
Balance at September 30, 2003 ....... $ 1,657,480 $ 5,324,889 $ 14,335,522 $ 493,380 $ 21,811,271
============ ============ ============ ============ ============
5
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended
September 30,
----------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income ................................................................ $ 791,339 $ 523,832
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and Amortization of Core Deposit Intangible ................. 350,444 508,556
Amortization Intangible Assets ........................................... 113,573 -
Provision for loan losses ................................................ 238,000 225,000
Accretion of discounts, amortization of premiums,
and other deferred yield items, net ..................................... 237,877 (84,196)
(Gain) loss on sale of investment securities available for sale .......... (93,005) (64,128)
Principal amount of loans sold ........................................... 71,410,901 39,697,687
Originations of loans held for sale ...................................... (71,530,491) (40,453,115)
(Gain) loss on sale of real estate held for investment ................... (34,546) 592
(Gain) loss on sale of premises and equipment,
real estate owned and other repossessed assets .......................... (28,323) 12,651
Net Changes:
(Increase) decrease in accrued interest receivable and other assets ...... (350,425) (279,008)
Increase (decrease) in accrued interest and other liabilities ............ 999,858 562,139
- -
------------ ------------
Net cash provided by (used in) operating activities ........................ 2,105,202 650,010
------------ ------------
Cash flows from investing activities:
(Increase) decrease in net loans receivable ............................... (11,685,528) 19,162,522
Proceeds from sales or maturity of:
Investment securities available-for-sale ................................. 17,336,016 9,526,504
Real estate held for investment .......................................... 399,415 374,128
Real estate owned, other repossessed assets and premises & equipment ..... 112,657 328,569
Purchases of:
Investment securities available-for-sale ................................. (15,693,425) (32,039,830)
Premises and equipment ................................................... (1,047,017) (213,529)
InsuranCenter of Alpena .................................................. (1,028,453) -
FHLB Stock ............................................................... (110,900) -
Real estate held for investment .......................................... (240,735) (149,065)
- -
------------ ------------
Net cash provided by (used in) investing activities ....................... (11,957,970) (3,010,701)
------------ ------------
Cash flows from financing activities:
Proceeds from Federal Home Loan Bank advances ............................ - -
Repayments of Federal Home Loan Bank advances ............................ 4,000,000 (3,000,000)
Increase (decrease) in deposits .......................................... (4,249,208) (5,717,483)
Dividend paid on common stock ............................................ (274,211) (271,751)
Issuance of common stock ................................................. 121,036 15,400
------------ ------------
Net cash provided by (used in) financing activities ...................... (402,383) (8,625,565)
------------ ------------
Net increase (decrease) in cash and cash equivalents ....................... (10,255,151) (10,986,196)
Cash and cash equivalents at beginning of period ........................... 15,098,861 24,989,901
------------ ------------
Cash and cash equivalents at end of period ................................. $ 4,843,710 $ 14,003,705
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............................... $ 306,318 $ 246,000
============ ============
Cash paid during the period for interest ................................... $ 4,941,740 $ 6,380,899
============ ============
6
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The accompanying consolidated financial statements have been prepared on an
accrual basis of accounting and include the accounts of Alpena Bancshares, Inc.
(the "Company") and its wholly-owned subsidiary, First Federal of Northern
Michigan (the "Bank") and its wholly owned subsidiaries Financial Service and
Mortgage Corporation ("FSMC") and the InsuranCenter of Alpena ("ICA"). FSMC
invests in real estate that includes leasing, selling, developing, and
maintaining real estate properties. ICA is a licensed insurance agency engaged
in the business of property, casualty and health insurance. All significant
intercompany balances and transactions have been eliminated in the
consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments, which, in the opinion of management, are necessary to present
fairly the consolidated financial position of the Company at September 30, 2003,
and its results of operations and statement of cash flows for the periods
presented. All such adjustments are normal and recurring in nature. The
accompanying consolidated financial statements do not purport to contain all the
necessary financial disclosures required by generally accepted accounting
principles that might otherwise be necessary and should be read in conjunction
with the consolidated financial statements and notes thereto of the Company
included in the Annual Report for the year ended December 31, 2002. Results for
the nine months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
On June 12, 2003, First Federal of Northern Michigan acquired 100% of the stock
of the InsuranCenter of Alpena (ICA). The effective date of the transaction was
February 28, 2003. As a result of this effective date, the financial data
reflected herein is based upon the financial activity of ICA starting at March
1, 2003 through September 30, 2003 (7 months). ICA is a licensed insurance
agency engaged in the business of property, casualty and health insurance. The
purchase price was $2,566,400. There is a provision for an earn-out payment for
the former owners, who remain with the organization, of up to $300,000 per year
for three years if specific net sales levels are achieved. The following table
summarizes the estimated fair value of the assets acquired:
At Feb 28, 2003
(000's)
-------
Current Assets $ 151.8
Plant, Property and Equipment $ 438.8
Intangible Assets $ 1,687.0
Goodwill $ 357.1
Total Assets Acquired $ 2,634.7
Current Liabilities $ 68.3
Total Liabilities Assumed $ 68.3
Net Assets Acquired $ 2,566.4
Of the identifiable intangible assets acquired, $890,000 relates to the value of
the existing customer list and $597,000 relates to an exclusive health care
contract. Both of these will be amortized over a 20 year period. The monthly
amortization expense associated with these items will be $6,200. The value
placed on the non-compete agreement is $200,000 which will be amortized over a
10 year period. The monthly amortization for this equates to $1,700 per month.
These amortization expenses will be recorded in non interest expenses on a
monthly basis. The goodwill of $357,000 that was created in the transaction will
not be amortized but tested annually for impairment. Any payments made under the
earn out agreement will be added to goodwill.
7
The purchase was paid for with cash of $1,028,000 plus a note payable (debt) of
$1,357,000 and a non-compete liability (balance to be paid over next nine years)
of $180,000.
CRITICAL ACCOUNTING POLICY - The Company has determined that its only critical
accounting policy relates to the allowance for losses on loans. The Company has
established a systematic method of periodically reviewing the credit quality of
the loan portfolio in order to establish an allowance for losses on loans. The
allowance for losses on loans is based on management's current judgments about
the credit quality of individual loans and segments of the loan portfolio. The
allowance for losses on loans is established through a provision for loan losses
based on management's evaluation of the risk inherent in the loan portfolio, and
considers all known internal and external factors that affect loan
collectability as of the reporting date. Such evaluation, which includes a
review of all loans on which full collectability may not be reasonably assured,
considers among other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions, historical loan loss
experience, management's knowledge of inherent risks in the portfolio that are
probable and reasonably estimable and other factors that warrant recognition in
providing an appropriate loan loss allowance. This evaluation involves a high
degree of complexity and requires management to make subjective judgments that
often require assumptions or estimates about uncertain matters. The Company's
critical accounting policies are periodically reviewed by the management of the
Company.
REAL ESTATE HELD FOR SALE - FSMC is engaged in the development and sale of real
estate. Land held for sale or development is carried at cost, including
development costs, not in excess of fair value less costs to sell determined on
an individual project basis.
MORTGAGE BANKING ACTIVITIES - In 2000, the Bank began selling to investors a
portion of its originated residential mortgage loans. The mortgage loans
serviced for others are not included in the consolidated statements of financial
condition.
When the Bank acquires mortgage servicing rights through the origination of
mortgage loans and sells those loans with servicing rights retained, it
allocates the total cost of the mortgage loans to the mortgage servicing rights
based on their relative fair value. As of September 30, 2003 and December 31,
2002, the Bank was servicing loans sold to others totaling $138.6 million and
$119.7 million respectively. Capitalized mortgage servicing rights are amortized
as a reduction of servicing fee income in proportion to, and over the period of,
estimated net servicing income by use of a method that approximates the
level-yield method. Capitalized mortgage servicing rights are periodically
evaluated for impairment using a model that takes into account several
variables. If impairment is identified, the amount of impairment is charged to
earnings with the establishment of a valuation allowance against the capitalized
mortgage servicing rights asset. In general, the value of mortgage servicing
rights increases as interest rates rise and decreases as interest rates fall.
This is because the estimated life and estimated income from a loan increase as
interest rates rise and decrease as interest rates fall.
The last evaluation was performed as of June 30, 2003. The key economic
assumptions made in determining the fair value of the mortgage servicing rights
included the following:
Annual Constant Prepayment Speed (CPR): 24.00%
Weighted Average Life Remaining (in months): 257.7
Discount Rate used: 7.36%
At the June 30, 2003 valuation, the mortgage servicing rights value was
calculated, based on the above factors, to be $928,763. The book value as of
June 30, 2003 was $957,835. This meant that the Bank had to set up a reserve
allowance against the asset and charged the difference of $29,072 against that
allowance bringing the net book value in line with the valuation.
At September 30, the mortgage servicing rights value was $988,872. Netting the
valuation reserve of $29,072 against this value brings the net value down to
$959,800. The Bank elected to not have the valuation performed this quarter with
interest rates having risen since the last valuation.
8
OTHER COMPREHENSIVE INCOME - Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Certain changes in assets and liabilities, however, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component in
the equity section of the consolidated balance sheet. Such items along with net
income are components of comprehensive income.
INCOME TAXES - The provision for income taxes is based upon the effective tax
rate expected to be applicable for the entire year.
EARNINGS PER SHARE - Basic earnings per share is based on the weighted average
number of shares outstanding in each period. Fully diluted earnings per share is
based on weighted average shares outstanding assuming the exercise of the
dilutive stock options, which are the only potential stock of the Company as
defined in Statement of Financial Accounting Standard No. 128, Earnings per
Share. The Company uses the treasury stock method to compute fully diluted
earnings per share, which assumes proceeds from the assumed exercise of stock
options would be used to purchase common stock at the average market price
during the period.
NOTE 2--REORGANIZATION.
The Company was formed as the Bank's holding company on November 14, 2000
pursuant to a plan of reorganization adopted by the Bank and its stockholders.
Pursuant to the reorganization, each share of the Bank's stock held by existing
stockholders of the Bank was exchanged for a share of common stock of the
Company by operation of law. The reorganization had no financial statement
impact and is reflected for all prior periods presented. Approximately 56% of
the Company's capital stock is owned by Alpena Bancshares M.H.C. ("the M.H.C."),
a mutual holding company. The remaining 44% of the Company's stock is owned by
the general public. The activity of the M.H.C. is not included in these
financial statements.
NOTE 3--DIVIDENDS.
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. The M.H.C. (the majority
shareholder of the Company) filed a notice with the Office of Thrift Supervision
(the "OTS") requesting approval to waive receipt of cash dividends from the
Company for each quarterly dividend to be paid for the year ending December 31,
2003. In a letter dated February 5, 2003, the OTS did not object to the dividend
waiver request for the four quarters ending December 31, 2003.
On Sep 16, 2003, the Company declared a cash dividend on its common stock,
payable on, or about October 25, 2003, to shareholders of record as of September
30, 2003, equal to $0.125 per share. The dividend on all shares outstanding
totaled $207,000, of which $92,000 was paid to shareholders. Because the OTS has
agreed to allow the M.H.C. to waive receipt of its dividend (amounting to
$115,000), this dividend was not paid.
NOTE 4--1996 STOCK OPTION PLAN AND 1996 RECOGNITION AND RETENTION PLAN
At September 30, 2003 the Company had outstanding stock options for 29,011
shares with a weighted exercise price of $10.57 compared to outstanding options
for 41,033 shares at a weighted exercise price of $10.35 at December 31, 2002.
During the nine months ended September 30, 2003, the Board of Directors granted
no options. During this same period, options for 12,022 shares were exercised.
At September 30, 2003, options had exercise prices ranging from $9.625 to $13.75
per share and a weighted average remaining contractual life of 3.60 years.
During the nine months ended September 30, 2003 the Company awarded 200 shares,
which were vested at the time of the award, under the Recognition and Retention
Plan ("RRP"). Shares issued under the RRP and exercised pursuant to the exercise
of stock option plan may be either authorized but unissued shares or reacquired
shares held by the Company as treasury stock.
For the nine months ended September 30, 2003, options for 1,000 shares were
vested. The expense associated with those vested options would have been $1,040
had the company elected to adopt FAS 148.
9
NOTE 5 - OTHER INCOME
At September 30, 2003, other income totaled $178,631. This is primarily
comprised of an insurance settlement received based on a claim filed by the Bank
under an Errors and Omissions policy. The insurance company settled the claim at
the end of the second quarter for $100,000. This amount was recorded as other
income. The balance of other income is comprised of small immaterial items.
RECENT ACCOUNTING PRONOUNCEMENTS - In July 2001, Statement of Financial
Accounting Standards No 142, Goodwill and Other Intangibles (FAS 142), was
issued. SFAS 142 changes the accounting treatment of goodwill effective January
1, 2002. The amount of intangible assets reported by the Company grew during the
first nine months of this year as a result of the purchase of the InsuranCenter
of Alpena in the second quarter. For the nine months ended September 30, 2003,
the intangible assets grew by $1,930,575 to a total of $3,628,495. Of that
amount goodwill represents $357,148. This amount represents the goodwill created
in the purchase of ICA. The adoption of FAS 142 means that the Bank will need to
test this asset for impairment annually. If impairment is determined to exist,
then the goodwill would be reduced to the extent determined in impairment
testing.
In November 2002, FASB issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires disclosures be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires the recognition of
a liability by a guarantor at the inception of certain guarantees that it has
issued and that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 does not have a material effect on the Company's
financial statements since the Company does not issue such guarantees.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-based
Compensation-transition and Disclosure, which amends FASB 123, Accounting for
Stock-Based Compensation. Statement No.148 is effective for fiscal years ending
after December 15, 2002. Statement No. 148 provides alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. In addition, Statement No. 148 amends the
disclosure requirements of Statement No. 123. The Company has not adopted the
fair value-based method of accounting for stock-based compensation as of
September 30, 2003; therefore, there is no impact to the Company's financial
statements.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. Statement No. 149 amends SFAS No.
133 for certain decisions made by the Financial Accounting Standards Board as
part of the Derivatives Implementation Group process and to clarify the
definition of a derivative. This statement is effective for contracts entered
into or modified after June 30, 2003, except for certain specific issues already
addressed by the Derivatives Implementation Group and declared effective that
are included in the statement. The adoption of the provisions of this statement
is not expected to have a material impact on the financial statements of the
Company.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. Statement No.
150 establishes standards for how to classify and measure certain financial
instruments with characteristics of both liabilities and equity. This statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of the provisions of this statement
is not expected to have a material impact on the financial statements of the
Company.
In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities an Interpretation of ARB No. 51 (FIN 46). FIN 46 addresses
consolidation by business enterprises of variable interest entities. The Company
does not have any variable interest entities as defined by this Interpretation
and therefore, the adoption of the provisions of this FASB Interpretation did
not have a significant effect on the financial position or results of operations
of the Company.
10
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion compares the financial condition of the Company
consolidated with its wholly owned direct and indirect subsidiaries at September
30, 2003 and December 31, 2002, and the results of operations for the three and
nine month periods ended September 30, 2003 and 2002. This discussion should be
read in conjunction with the interim financial statements and footnotes included
herein.
FINANCIAL CONDITION
ASSETS: Total assets grew $2.0 million, or .9%, to $230.8 million at September
30, 2003 from $228.8 million at December 31, 2002. Cash and cash and equivalents
decreased by $10.3 million or 67.9%, to $4.8 million at September 30, 2003 from
$15.1 million at December 31, 2002. Investment securities available for sale
decreased $2.6 million, or 5.6% as certain bonds matured and / or were called.
Net loans receivable increased $11.5 million, or 7.6%, to $162.8 million at
September 30, 2003 from $151.3 million at December 31, 2002 primarily as a
result of the Bank's commercial lending activity. While borrower refinancing of
balloon mortgage loans into 15 and 30 year fixed rate loans, most of which were
subsequently sold by the Bank in the secondary market, was heavy in the first
nine months, the amount of the sold portfolio loans were offset by growth in the
commercial loan portfolio. Sales of loans into the secondary market totaled
$71.5 million for the nine months ended September 30, 2003.
LIABILITIES: Deposits decreased $4.3 million or 2.7% to $151.8 million at
September 30, 2003 from $156.1 million at December 31, 2002. This decrease was
primarily attributable to certificates of deposit (CDs) which have decreased
$3.5 million since December 31, 2002. This decrease in CDs relates to the rates
being offered by the bank. See the section on Liquidity for additional details
and discussion on rates offered by the Bank. Borrowings in the form of Federal
Home Loan Bank advances increased $4.0 million, or 8.3%, to $52.4 million at
September 30, 2003 from $48.4 million at December 31, 2002.
EQUITY: Stockholders' equity increased by $64,000, or .3%, to $21.8 million at
September 30, 2003 from $21.7 million at December 31, 2002. The increase in
stockholders' equity was due to an increase in retained earnings of $517,000
plus $117,000 of capital that was added through the issuance of stock related to
the exercising of stock options. These were partially offset by a decline in
other comprehensive income of $574,000 resulting from lower market values on
certain available-for-sale securities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
GENERAL: Net income for the quarter remained flat as compared to the same period
one year earlier. Income for the quarter ended September 30, 2003 was $280,000
compared to $285,000 for the same quarter one year earlier. Non-interest income
was $629,700 higher for the quarter. Within non interest income, increases in
mortgage banking activities and the inclusion of the InsuranCenter of Alpena
insurance and brokerage commissions accounted for the increase. Non-interest
income increased to $1,367,000 for the quarter ended September 30, 2003 compared
to $737,000 for the same period one year earlier. This represented an increase
of 85.4%. While there was a significant increase in non interest income, it was
partially offset by an increase in compensation and employee benefits expenses.
INTEREST INCOME: Interest income was $3.4 million for the three months ended
September 30, 2003, compared to $3.8 million for the comparable period in 2002.
The decrease in interest income for the three month period from the prior year
was primarily due to the sale of longer term fixed rate mortgage loans and the
subsequent reinvestment of these proceeds into lower yielding assets (investment
securities). The sale of these loans resulted in a decline in the average
balance of residential mortgage loans of $16.5 million, or 14.2%, for the three
month period ended September 30, 2003 from the prior year period. This decline
was partially offset by
11
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
increases in the average balance of non-mortgage loans of $13.3 million, or
29.2%. Overall, the composite yield of earning assets was 37 basis points lower
than the same period one year earlier. The overall yield was 6.26% for the
quarter ended September 30, 2003 compared to 6.63% September 30, 2002.
INTEREST EXPENSE: Interest expense was $1.6 million for the three month period
ended September 30, 2003 compared to $2.0 million for the same period in 2002.
The 22.7% decline in interest expense was attributable to lower interest rates
paid on interest-bearing liabilities and lower average balances on these
liabilities for the quarter ended September 30, 2003 compared to the same 2002
period. The average balance of deposits and FHLB borrowings declined in total
from $205.2 million to $195.9 million from the periods ended September 30, 2002
and September 30, 2003 respectively. Of this $9.3 million reduction, $9.2
million was related to interest-bearing deposits, which decreased from a $156.1
million average balance for the quarter ended September 30, 2002 to $146.9
million average balance for the period ended September 30, 2003.
NET INTEREST INCOME: Net interest income improved to $1.8 million for the three
month period ended September 30, 2003 compared to $1.7 million for the same
period one year earlier. For the three months ended September 30, 2003, average
interest-earning assets declined $8.8 million, or 3.9% when compared to the same
period in 2002. Average interest-bearing liabilities decreased $9.3 million, or
4.5% for the same period. The yield on average interest-earning assets declined
to 6.26% for the three month period ended September 30, 2003 from 6.63% at
September 30, 2002. The cost of average interest-bearing liabilities declined 75
basis points to 3.17% from 3.92% for the three month periods ended September 30,
2003 and September 30, 2002, respectively. As a result of the decrease in the
overall cost of funds, the net interest rate margin increased to 3.33% for the
three month period ended September 30, 2003, from 2.98% for same period in 2002.
PROVISION FOR LOAN LOSSES: The allowance for loan losses is established through
a provision for loan losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectability of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available. The
provision for loan losses amounted to $11,000 for the three month period ended
September 30, 2003 and $75,000 for the comparable period in 2002.
NON INTEREST INCOME: Non interest income was $1.4 million for the three month
period ended September 30, 2003, compared to $737,000 for the same period in
2002. This represented an increase of $663,000 or a 90.0% increase. Mortgage
banking activities income for the quarter was higher by $35,000. This
represented an increase of 9.4% over the quarter ended September 30, 2002. This
increase related to the gain on sale of mortgages sold in the secondary market.
This was a function of the increased volume of refinance activity when compared
to the third quarter of 2002. Management has made the decision to sell most
fixed rate mortgage loans given the low interest rate environment. When these
loans are sold into the secondary market, the buyer is paying for the spread
between the rate on the loan and the rate that day in which the loan is
purchased. The premium paid by the buyer for that spread represents gain on sale
income for the Bank. The other major explanation for the increase in non
interest income related to the inclusion of the InsuranCenter of Alpena
insurance and brokerage commissions. Since ICA was purchased during the second
quarter of 2003, this income was not included in the Company statements during
the same quarter last year. The insurance and brokerage commissions amounted to
$745,000 for the period ended September 30, 2003.
12
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
NON INTEREST EXPENSES: Non interest expenses were $2.8 million for the three
month period ended September 30, 2003, compared to $1.9 million for the same
period in 2002. The $900,000 increase represented an increase of 45.6% for the
period. Much of this increase related to the inclusion of the various expenses
associated with the InsuranCenter of Alpena which totaled $686,000 for the
quarter ended September 30, 2003. Overall, the increases were broken down into a
couple of major categories including compensation and benefits along with
brokerage and commission expenses. Compensation and benefits expenses were $1.5
million for the quarter ended September 30, 2003 compared to $1.1 million for
the same period one year earlier. Of this $400,000 increase in compensation and
benefits expenses, $240,000 related to the inclusion of the employees associated
with ICA. Additional mortgage and commercial lending staff have also been hired
by the Bank since September 2002. The other major variance that explains the
increase in non interest expenses relates to the costs associated with the
brokerage and commissions expenses for ICA. These costs totaled $341,000 during
the quarter ended September 30, 2003. Since ICA was purchased during the second
quarter 2003, these costs were not included in the Company statements during the
same quarter last year. The inclusion of ICA costs represents the single biggest
piece of the overall increase in non interest expenses. There is also the
amortization expense associated with the intangible assets created in the
acquisition of ICA which totaled $24,000 for the quarter ended September 30,
2003.
INCOME TAXES: Federal income taxes decreased to $140,000 for the three month
period ended September 30, 2003 compared to $155,000 for the same period in
2002. The effective tax rate for the quarter ended September 30, 2003 was 33.2%
compared to 35.1% for the same period one year earlier.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED JUNE 30, 2002
GENERAL: Net income increased 51.0% to $791,000 for the nine months ended
September 30, 2003 from $524,000 for the same period ended September 30, 2002.
The increase for the nine month period was due to an increase in the net
interest income and increases in non interest income. Within non interest
income, increases in mortgage banking activities and the inclusion of the
InsuranCenter of Alpena insurance and brokerage commissions accounted for most
of the increase. Non interest income increased to $3.9 million for the first
nine months of 2003 compared to $1.7 million for the same period one year
earlier. This represented an increase of 134.9%. While there was a significant
increase in other income, it was partially offset by an increase in compensation
and employee benefits expenses.
INTEREST INCOME: Interest income was $10.1 million for the nine months ended
September 30, 2003, compared to $11.4 million for the comparable period in 2002.
The decrease in interest income for the nine month period from the prior year
was primarily due to the sale of longer term fixed rate mortgage loans and the
subsequent reinvestment of these proceeds into lower yielding assets (investment
securities). The sale of these loans resulted in a decline in the average
balance of residential mortgage loans of $22.1 million, or 18.0%, for the nine
month period ended September 30, 2003 from the prior year period. This decline
was partially offset by increases in the average balance of non-mortgage loans
of $8.9 million, or 20.4%. Overall, the composite yield of earning assets was 28
basis points lower than the same period one year earlier. The overall yield was
6.35% as of September 30, 2003 compared to 6.63% as of September 30, 2002.
INTEREST EXPENSE: Interest expense was $4.9 million for the nine month period
ended September 30, 2003 compared to $6.5 million for the same period in 2002.
The 24.6% decline in interest expense was attributable to lower interest rates
paid on interest-bearing liabilities and to lower average balances on these
liabilities for the period ended September 30, 2003 compared to the same 2002
period. The average balance of deposits and FHLB borrowings declined in total
from $209.2 million to $195.4 million from the period ended September 30, 2002
to September 30, 2003. Of this $13.8 million reduction, $11.8 million was
related to interest-bearing deposits, which decreased from a $159.3 million
average balance for the period ended September 30, 2002 to $147.4 million
average balance for the period ended September 30, 2003.
13
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
NET INTEREST INCOME: Net interest income increased to $5.0 million for the nine
month period ended September 30, 2003 compared to $4.7 million for the same
period in 2002. For the nine months ended September 30, 2003, average
interest-earning assets declined $12.6 million, or 5.6% when compared to the
same period in 2002. Average interest-bearing liabilities decreased $13.8
million, or 6.6% for the same period. The yield on average interest-earning
assets declined to 6.35% for the nine month period ended September 30, 2003 from
6.63% for the nine month period ended September 30, 2002. The cost of average
interest-bearing liabilities declined 76 basis points to 3.36% from 4.12% for
the nine month periods ended September 30, 2003 and September 30, 2002,
respectively. As a result of the decrease in the overall cost of funds, the net
interest rate margin increased to 3.24% for the nine month period ended
September 30, 2003, from 2.77% for same period in 2002.
NON INTEREST INCOME: Non interest income was $3.9 million for the nine month
period ended September 30, 2003, compared to $1.7 million for the same period in
2002. This represented an increase of $2.2 million or 135.0% improvement.
Comparing to the first nine months of 2002, mortgage banking activities income
was higher by $428,000. This represented an increase of 49.5% over the period
ended September 30, 2002. This increase related to the gain on sale of mortgages
sold in the secondary market which was $390,000 higher than the same period one
year earlier. The other major explanation for the increase in non interest
income related to the inclusion of the InsuranCenter of Alpena insurance and
brokerage commissions which are new to the Bank, thus not included in the period
ended September 30, 2002. The insurance and brokerage commissions amounted to
$1.7 million for the period ended September 30, 2003.
NON INTEREST EXPENSES: Other expenses were $7.7 million for the nine month
period ended September 30, 2003, compared to $5.5 million for the same period in
2002. The $2.2 million increase represented an increase of 38.1% for the period.
Much of this increase related to the inclusion of the various expenses
associated with the InsuranCenter of Alpena which totaled $1.5 million for the
period ended September 30, 2003. Overall, the increases were broken down into a
couple of major categories including compensation and benefits and brokerage and
commission expenses. Compensation and benefits expenses were $4.2 million for
the period ended September 30, 2003 compared to $3.1 million for the same period
one year earlier. $540,000 of the compensation and benefit expenses related to
the inclusion of the employees associated with ICA plus the additional mortgage
and commercial lending staff that have been hired by the Bank since September
2002. The InsuranCenter costs associated with the brokerage and commission
expenses were $771,000 as of September 30, 2003. This represents the single
biggest piece of the overall increase in non interest expenses. There is also
the amortization expense associated with the intangible assets created in the
acquisition of ICA which totaled $60,000 for the period ended September 30,
2003.
INCOME TAXES: Federal income taxes increased to $393,000 for the nine month
period ended September 30, 2003 compared to $287,000 for the same period in
2002. The effective tax rate for the nine months ended September 30, 2003 was
33.2% versus 35.4% for the same period one year earlier.
DELINQUENT LOANS AND NONPERFORMING ASSETS. The following table sets forth
information regarding loans that are delinquent 90 days or more and Real Estate
Owned (REO) / Other Repossessed Assets (ORA) by the Bank at the dates indicated.
As of the dates indicated, the Bank did not have any material restructured loans
within the meaning of SFAS 15.
14
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
DECEMBER 31,
9/30/2003 6/30/2003 2002 2001
--------- --------- --------- -----
Total non-accrual loans delinquent 90 days or more (3) ......................... $ 1,362 $ 1,714 $ 662 $ -
--------- --------- --------- -----
Accrual loans delinquent 90 days or more:
One- to four-family residential ................................................ 622 669 566 475
Other real estate loans ........................................................ - - - -
Consumer/Commercial ............................................................ 76 191 241 201
--------- --------- --------- -----
Total accrual loans delinquent 90 days or more ................................. $ 698 $ 860 $ 807 $ 676
--------- --------- --------- -----
Total nonperforming loans (1) .................................................. 2,060 2,574 1,469 676
Total real estate owned (2) .................................................... 43 96 128 197
========= ========= ========= =====
Total nonperforming assets ..................................................... $ 2,103 $ 2,670 $ 1,597 $ 873
========= ========= ========= =====
Total nonperforming loans to net loans receivable .............................. 1.26% 1.68% 0.97% 0.38%
Total nonperforming loans to total assets ...................................... 0.89% 1.11% 0.64% 0.28%
Total nonperforming assets to total assets ..................................... 0.91% 1.15% 0.70% 0.36%
(1) All the Bank's loans delinquent 90 days or more are classified as
nonperforming.
(2) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
is recorded at the lower of its fair market value or the principal balance
of the related loan.
(3) For the Nine months ended September 30, 2003 and the twelve months ended
December 31, 2002, the interest that would have been reported was $ 109,000
and $27,000 respectively were these loans not in non-accrual status.
PROVISION FOR LOAN LOSSES: The provision for loan losses amounted to $238,000
for the nine month period ended September 30, 2003 and $225,000 for the
comparable period in 2002. As of September 30, 2003, the balance of the loan
loss reserve was $1,031,570. The increase in the reserve allowance over the
first nine months of the year related to the increase in the trend of
delinquencies and a large commercial account that was moved to non-accrual
status. Additionally, the increase of commercial loans as a percent of the
overall loan portfolio has also increased the reserve levels for the nine month
period ended September 30, 2003. At September 30, 2003, the percent of non
performing loans increased to 126 basis points from 97 basis points at December
31, 2002. The significant increase in non performing loans related to a single
commercial relationship. Management believes that the collateral position
related to this relationship adequately supports the Bank's position. As a
percent of total assets, non performing loans increased to 89 basis points at
September 30, 2003 from 64 basis points at December 31, 2002. Based on the net
charge-off history, the average quarterly charge-off going back eight quarters
was $43,000 per quarter total for all loan types. Based on this history,
management believes there are adequate reserves as of September 30, 2003.
LIQUIDITY
The Bank's primary sources of funds are deposits, FHLB advances, and proceeds
from principal and interest payments and prepayments on loans and
mortgage-backed and investment securities. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
15
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Liquidity represents the amount of an institution's assets that can be quickly
and easily converted into cash without significant loss. The most liquid assets
are cash, short-term U.S. Government securities, U.S. Government agency
securities and certificates of deposit. The Bank also has the capability of
borrowing from the Federal Home Loan Bank (FHLB) to meet liquidity needs. The
ability to borrow from the FHLB is based upon ownership of FHLB stock. Based on
the Bank's ownership of FHLB stock, there is borrowing capacity which is
considered in this calculation. The Bank is required to maintain sufficient
levels of liquidity as defined by the OTS regulations. This requirement may be
varied at the direction of the OTS. Regulations currently in effect require that
the Bank must maintain sufficient liquidity to ensure its safe and sound
operation. The Bank's objective for liquidity is to be above 20%. Liquidity as
of September 30, 2003 was $89.4 million, or 54.3%, compared to $100.1 million,
or 61.5% at December 31, 2002. The levels of these assets are dependent on the
Bank's operating, financing, lending and investing activities during any given
period.
The Bank intends to retain for the portfolio certain originated residential
mortgage loans (primarily adjustable rate, balloon and shorter term fixed rate
mortgage loans) and to generally sell the remainder in the secondary market. The
Bank will from time to time participate in or originate commercial real estate
loans, including real estate development loans. During the nine month period
ended September 30, 2003 the Bank originated $108.1 million in residential
mortgage loans, of which $44.7 million were retained in portfolio while the
remainder were sold in the secondary market or are being held for sale. This
compares to $62.1 million in originations during the first nine months of 2002
of which $8.8 million were retained in portfolio. The Bank also originated $27.7
million of commercial loans and $14.1 million of consumer loans in the first
nine months of 2003 compared to $17.9 million of commercial loans and $8.8
million of consumer loans for the same period in 2002. Of total loans
receivable, excluding loans held for sale, mortgage loans comprised 61.8% and
68.8%, commercial loans 25.6% and 18.3% and consumer loans 12.6 % and 12.9% at
September 30, 2003 and December 31, 2002, respectively. At September 30, 2003,
the Bank had outstanding loan commitments of $53.2 million. These commitments
included $19.0 million for permanent one-to-four family dwellings, $19.5 million
for non-residential loans, $3.3 million of undisbursed loan proceeds for
construction of one-to-four family dwellings, $5.9 million of undisbursed lines
of credit on home equity loans, $2.2 million of unused credit card lines and
$3.3 million of unused commercial lines of credit.
Deposits are a primary source of ; funds for use in lending and for other
general business purposes. At September 30, 2003 deposits funded 65.8% of the
Bank's total assets compared to 68.2% at December 31, 2002. Certificates of
deposit scheduled to mature in less than one year at September 30, 2003 totaled
$29.1 million. Management believes that a significant portion of such deposits
will remain with the Bank. The Bank monitors the deposit rates offered by
competition in the area and sets rates that take into account the prevailing
market conditions along with the Bank's liquidity position. Moreover, management
believes that the growth in assets is not expected to require significant
in-flows of liquidity. As such, the Bank does not expect to be a market leader
in rates paid for liabilities. Borrowings may be used to compensate for seasonal
or other reductions in normal sources of funds or for deposit outflows at more
than projected levels. Borrowings may also be used on a longer-term basis to
support increased lending or investment activities. At September 30, 2003 the
Bank had $52.4 million in FHLB advances. Total borrowings as a percentage of
total assets were 22.7% at September 30, 2003 as compared to 21.2% at December
31, 2002. The Bank has sufficient available collateral to obtain additional
advances from the FHLB, and, based upon current FHLB stock ownership, could
obtain up to a total of approximately $85 million in such advances.
16
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
CAPITAL RESOURCES
The Company's stockholders' equity at September 30, 2003 was $21.8 million, or
9.45% of total assets, compared to $21.7 million, or 9.48% of total assets, at
December 31, 2002 (See "Consolidated Statement of Changes in Stockholders'
Equity"). The Bank is subject to certain capital-to-assets levels in accordance
with the OTS regulations. The Bank exceeded all regulatory capital requirements
at September 30, 2003. The following table summarizes the Bank's actual capital
with the regulatory capital requirements and with requirements to be "Well
Capitalized" under prompt corrective action provisions, as of September 30,
2003:
Minimum
Regulatory To Be Well
Actual Minimum Capitalized
------ ------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Capital Requirements:
Tangible equity capital $16,830 7.46% $ 3,383 1.50% $ 4,511 2.00%
Tier 1 (Core) capital $16,830 7.46% $ 4,022 4.00% $11,278 5.00%
Total risk-based capital $17,919 11.68% $12,278 8.00% $15,348 10.00%
Tier 1 risk-based capital $16,830 10.97% $ 6,139 4.00% $ 9,209 6.00%
17
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2003
PART E - FINANCIAL INFORMATION
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with participation of our management, including the
Company's Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d - 15(e)
under the Exchange Act) as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms.
(b) Changes in internal controls.
There has been no change in the Company's internal control over financial
reporting in connection with the quarterly evaluation that occurred during the
Company's last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
18
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2003
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
Not applicable.
Item 2 - Changes in Securities:
Not applicable.
Item 3 - Defaults upon Senior Securities:
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders:
Not applicable
Item 5 - Other Information:
Not applicable
Item 6 - Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 31.1 Certification by Chief Executive Officer
Exhibit 31.2 Certification by Chief Financial Officer
Exhibit 32.1 Statement of Chief Executive Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Statement of Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
August 20, 2003, Gary W. Bensinger Director of Alpena
Bancshares Inc. and its Bank subsidiary, First Federal of
Northern Michigan resigned on August 19, 2003.
19
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2003
SIGNATURES
Pursuant to the requirement 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.
ALPENA BANCSHARES, INC.
Registrant
Date: Nov 13, 2003 /s/ Martin A. Thomson
---------------------
Martin A. Thomson
Title: President and Chief Executive Officer
(Duly Authorized Officer)
Date: Nov 13, 2003 /s/ Michael W. Mahler
---------------------
Michael W. Mahler
Title: Chief Financial Officer
(Duly Authorized Officer)
20
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX- 31.1 Certification by Chief Executive Officer
EX- 31.2 Certification by Chief Financial Officer
EX- 32.1 Statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
EX- 32.2 Statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002