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 MARCH 31, 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 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 preceeding 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
registrant's classes of common stock, as of the latest practicable date.
Common Stock, Par Value $1.00 Outstanding at May 8, 2003
(Title of Class) 1,646,558 shares
Transitional Small Business Disclosure Format: Yes No X .
-------- ---------
1
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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:
ITEM 1 - FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheet at
March 31, 2003 and December 31, 2002.......................... 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2003 and March 31, 2002....................... 4
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended March 31, 2003..................... 5
Consolidated Statements of Cash Flow for the Three Months Ended
March 31, 2003 and March 31, 2002............................. 6
Notes to Consolidated Financial Statements....................... 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION........................ 10
ITEM 3 - CONTROLS AND PROCEDURES............................................. 14
PART II - OTHER INFORMATION
OTHER INFORMATION............................................................ 15
SIGNATURES................................................................... 18
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
December 31,
March 31, 2003 2002
----------------------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash on hand and due from banks $3,297,190 $3,091,216
Overnight deposits with FHLB 12,608,255 12,007,645
--------------------------------------------
Total cash and cash equivalents 15,905,445 15,098,861
Securities available-for-sale 44,359,326 46,944,263
Loans held for sale 3,970,583 541,968
Loans receivable, net of allowance for loan losses of $1,043,103 at
March 31, 2003 and $922,000 at December 31, 2002 146,498,570 151,341,463
Foreclosed real estate and other repossessed assets 79,511 127,800
Real estate held for investment 584,850 490,086
Federal Home Loan Bank stock, at cost 4,293,600 4,293,600
Premises and equipment 5,118,496 4,761,207
Accrued interest receivable 1,320,771 1,323,437
Core deposit intangibles 1,646,667 1,697,920
Other assets 2,315,904 2,187,645
--------------------------------------------
Total assets $226,093,723 $228,808,250
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $153,672,223 $156,092,449
Advances from borrowers for taxes and insurance 135,068 3,872
Federal Home Loan Bank advances 47,413,793 48,413,793
Accrued expenses and other liabilities 2,567,873 1,889,057
Deferred income taxes 626,156 661,731
--------------------------------------------
Total liabilities 204,415,113 207,060,902
--------------------------------------------
Commitments and contingencies - -
Stockholders' equity:
Common stock ($1.00 par value, 20,000,000 shares authorized,
1,646,358 and 1,645,248 shares issued and outstanding at
March 31, 2003 and December 31, 2002, respectively) 1,646,558 1,645,258
Additional paid-in capital 5,228,312 5,216,075
Retained earnings, restricted 4,462,000 4,347,000
Retained earnings 9,351,150 9,471,394
Accumulated other comprehensive income 990,590 1,067,621
--------------------------------------------
Total stockholders' equity 21,678,610 21,747,348
--------------------------------------------
Total liabilities and stockholders' equity $226,093,723 $228,808,250
============================================
See accompanying notes to consolidated financial statements.
3
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Three Months
Ended March 31,
---------------------
2003 2002
---- ----
(Unaudited)
INTEREST INCOME:
Interest and fees on loans ......................... $ 2,821,146 $ 3,294,736
Interest and dividends on investments .............. 501,411 477,151
Interest on mortgage-backed securities ............. 77,724 28,284
----------- -----------
Total interest income .............................. 3,400,281 3,800,171
----------- -----------
INTEREST EXPENSE:
Interest on deposits ............................... 1,029,892 1,566,151
Interest on borrowings ............................. 672,237 733,639
----------- -----------
Total interest expense ............................. 1,702,129 2,299,790
----------- -----------
Net interest income ................................ 1,698,149 1,500,381
Provision for loan losses .......................... 162,500 75,000
----------- -----------
Net interest income after provision for
loan losses ..................................... 1,535,649 1,425,381
----------- -----------
OTHER INCOME:
Service charges and other fees ..................... 160,368 182,483
Mortgage banking activities ........................ 376,115 321,369
Gain on sale of available-for-sale investments ... -- --
Net gain (loss) on sale of premises and equipment,
real estate owned and other repossessed assets.. 2,865 (7,268)
Other .............................................. 43,011 46,534
----------- -----------
Total other income ................................. 582,359 543,118
----------- -----------
OTHER EXPENSES:
Compensation and employee benefits ................. 1,176,168 1,015,737
Federal insurance premiums ....................... 6,682 7,563
Advertising ...................................... 43,735 47,496
Occupancy ........................................ 270,519 259,205
Amortization of core deposit intangible .......... 51,252 51,252
Other .............................................. 445,605 444,078
----------- -----------
Total other expenses ............................... 1,993,961 1,825,331
----------- -----------
Income before income tax expense ................... 124,047 143,168
Income tax expense ................................. 38,470 51,703
----------- -----------
Net income ....................................... $ 85,577 $ 91,465
=========== ===========
Per share data:
Basic earnings per share ......................... $ 0.05 $ 0.06
Weighted average number of shares outstanding .... 1,646,347 1,641,798
Diluted earnings per share ....................... $ 0.05 $ 0.06
Weighted average number of shares outstanding,
including dilutive stock ....................... 1,656,740 1,652,513
Dividends per common share ....................... $ 0.125 $ 0.125
See accompanying notes to consolidated financial statements.
4
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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 (1,100 shares) .......... 1,100 9,488 -- -- 10,588
RRP stock release (200 shares) .... 200 2,750 -- -- 2,950
Net income for the period ......... -- -- 85,577 -- 85,577
Changes in unrealized gain on
available-for-sale securities ... -- -- -- (77,030) (77,030)
Total comprehensive income ........ -- -- -- -- 8,547
Dividends declared ................ -- -- (90,820) -- (90,820)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2003 ......... $ 1,646,558 $ 5,228,312 $ 13,813,150 $ 990,590 $ 21,678,610
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
For the Three Months Ended
March 31,
--------------------------
2003 2002
---------- ---------
(Unaudited)
Cash flows from operating activities:
Net income ................................................................... $ 85,577 $ 91,465
Adjustments to reconcile net income to net cash from operating activities:
Depreciation ............................................................. 114,451 119,106
Amortization of core deposit intangible .................................. 51,252 51,252
Provision for loan losses ................................................ 162,500 75,000
Accretion of discounts, amortization of premiums,
and other deferred yield items, net .................................... 70,343 13,577
(Gain) loss on sale of investment securities available for sale .............. -- --
Originations of loans held for sale ...................................... (19,864,430) (15,272,652)
Principal amount of loans sold ........................................... 16,435,816 14,859,825
(Gain) loss on sale of real estate held for investment ................... -- (4,318)
(Gain) loss on sale of premises and equipment,
real estate owned and other repossessed assets ......................... (2,866) 11,586
(Increase) decrease in accrued interest receivable ....................... 2,666 (5,755)
(Increase) in prepaid expenses and other assets .......................... (128,259) (244,431)
Increase (decrease) in accrued expenses and other liabilities ............ 681,765 (605,265)
Increase in other, net ................................................... 4,105 42,932
------------ ------------
Net cash provided by (used in) operating activities .......................... (2,387,079) (867,678)
------------ ------------
Cash flows from investing activities:
(Increase) decrease in net loans receivable .................................. 4,680,393 13,532,347
Proceeds from sales or maturity of:
Investment securities available-for-sale ................................... 3,245,064 1,550,000
Real estate held for investment ............................................ -- 213,361
Real estate owned, other repossessed assets and premises and equipment ..... 51,155 54,154
Purchases of:
Investment securities available-for-sale ................................... (847,183) (15,876,511)
Real estate held for investment ............................................ (94,764) (88,425)
Premises and equipment ..................................................... (471,740) (104,406)
Principal payments received on:
Investment securities ...................................................... -- --
Mortgage-backed securities ................................................. -- 152,694
------------ ------------
Net cash provided by (used in) investing activities .......................... 6,562,925 (566,786)
------------ ------------
Cash flows from financing activities:
Repayments of Federal Home Loan Bank advances ................................ (1,000,000) (3,000,000)
Increase (decrease) in deposits .............................................. (2,420,226) (1,120,485)
Increase (decrease) in advance payments by borrowers for taxes and insurance.. 131,196 122,408
Dividend paid on common stock ................................................ (90,820) (90,547)
Issuance of common stock ..................................................... 10,588 15,400
------------ ------------
Net cash provided by (used in) financing activities .......................... (3,369,262) (4,073,224)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................... 806,584 (5,507,688)
Cash and cash equivalents at beginning of period ................................... 15,098,861 24,989,901
------------ ------------
Cash and cash equivalents at end of period ......................................... $ 15,905,445 $ 19,482,213
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ....................................... 0 $ 40,000
============ ============
Cash paid during the period for interest ........................................... $ 1,705,754 $ 2,236,845
============ ============
See accompanying notes to consolidated financial statements.
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 subsidiary Financial Service and
Mortgage Corporation ("FSMC"), respectively. FSMC invests in real estate that
includes leasing, selling, developing, and maintaining real estate properties.
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 March 31, 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 three
months ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003.
CRITICAL ACCOUNTING POLICY - The Company's 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 Audit Committee and full Board of Directors.
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 Company 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 Company 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 March 31, 2003 and December 31, 2002,
the Bank was servicing loans sold to others totaling $125.8 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. In general, the
7
value of mortgage service rights increases as interest rates rise and decreases
as interest rates fall. This is because the estimated life and estimated income
from a loan increases as interest rates rise and decrease as interest rates
fall.
The evaluation was last performed as of December 31, 2002. The key economic
assumptions made in determining the fair value of the mortgage servicing rights
included the following:
Annual Constant Prepayment Speed (CPR): 17.55%
Weighted Average Life Remaining (in months): 263.7
Discount Rate used: 7.36%
At the December 31, 2002 valuation, the mortgage servicing rights value was
calculated, based on the above factors, to be $1,094,378. The net book value as
of December 31, 2002 was $868,559. This means that the Bank is conservative in
estimating the value of the asset for book purposes. The Bank chose to not
perform the valuation at March 31, 2003 since the difference exceeded 25% of the
value carried on the Company's books at December 31, 2002.
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.
8
On March 18, 2003, the Company declared a cash dividend on its common stock,
payable on, or about April 25, 2003, to shareholders of record as of March 31,
2003, equal to $0.125 per share. The dividend on all shares outstanding totaled
$206,000, of which $91,000 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 March 31, 2003 the Company had outstanding stock options for 39,933 shares
with a weighted exercise price of $10.37 compared to outstanding options for
41,033 shares at a weighted exercise price of $10.35 at December 31, 2002.
During the three months ended March 31, 2003, the Board of Directors granted no
options. During this same period, options for 1,100 shares were exercised. At
March 31, 2003, options had exercise prices ranging from $9.625 to $13.75 per
share and a weighted average remaining contractual life of 3.83 years.
During the three months ended March 31, 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 quarter ended March 31, 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 (see below).
NOTE 5 - OTHER EXPENSES.
At March 31, 2003 other expenses totaled $445,605. This is comprised of several
larger expenses for the quarter including printing and office supplies of
$41,000, service bureau charges for the bank operating system of $78,000, and
professional services including audit, legal, and regulatory fees of $70,000.
The balance of the total is comprised of expenses lower than $40,000.
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 entire amount of intangible assets reported by the Company
is attributable to core deposit intangible. Therefore, the adoption of FAS 142
has no impact on the Company's financial statements.
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 March
31, 2003; therefore, there is no impact to the Company's financial statements.
9
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 March 31,
2003 and December 31, 2002, and the results of operations for the three month
periods ended March 31, 2003 and 2002. This discussion should be read in
conjunction with the interim financial statements and footnotes included herein.
FINANCIAL CONDITION
ASSETS: Total assets declined $2.7 million, or 1.2%, to $226.1 million at March
31, 2003 from $228.8 million at December 31, 2002. Cash and cash and equivalents
increased by $807,000, or 5.3%, to $15.9 million at March 31, 2003 from $15.1
million at December 31, 2002. Investment securities available for sale decreased
$2.6 million, or 5.5% in the first three months as two bonds matured during the
quarter. Net loans receivable decreased $4.8 million, or 3.2%, to $146.5 million
at March 31, 2003 from $151.3 million at December 31, 2002 primarily as a result
of borrower refinancing of balloon mortgage loans into 15 and 30 year fixed rate
loans, most of which were subsequently sold by the Company in the secondary
market. Such sales totaled $16.4 million for the three months ended March 31,
2003.
LIABILITIES: Deposits decreased $2.4 million, or 1.6% to $153.7 million at March
31, 2003 from $156.1 million at December 31, 2002. This decrease was primarily
attributable to lower interest rates offered on certificate of deposit accounts
which resulted in some of the maturing funds being withdrawn. Borrowings in the
form of Federal Home Loan Bank advances declined $1.0 million, or 2.1%, to $47.4
million at March 31, 2003 from $48.4 million at December 31, 2002.
EQUITY: Stockholders' equity decreased by $69,000, or .3%, to $21.7 million at
March 31, 2003 from $21.8 million at December 31, 2002. The slight decrease in
stockholders' equity was due to a decrease in accumulated other comprehensive
income of $77,000 resulting from slightly lower market values on
available-for-sale securities and a dividend of $91,000 that was declared during
the quarter ended March 31, 2003. These decreases to equity were partially
offset by net income of $86,000.
RESULTS OF OPERATIONS
GENERAL: Net income decreased 6.4% to $86,000 for the three months ended March
31, 2003 from $91,000 for the same period ended March 31, 2002. The decrease for
the three month period was primarily due to an increase in the provision for
loan loss which was increased by $87,500 over the same period one year earlier.
Net interest income was higher compared to the first quarter 2003 but was offset
by an increase in compensation and employee benefits expenses.
INTEREST INCOME: Interest income was $3.4 million for the three months ended
March 31, 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 $26.4 million, or 20.4%, for the three
month period ended March 31, 2003 from the prior year period. This decline was
partially offset by increases in the average balance of non-mortgage loans of
$7.1 million, or 17.1%, and the increase in the
10
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
average balance of other investments of $3.3 million, or 5.9%, for the three
month period ended March 31, 2003, compared to the same period in the prior
year.
INTEREST EXPENSE: Interest expense was $1.7 million for the three month period
ended March 31, 2003 compared to $2.3 million for the same period in 2002. The
26.0% 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 March 31, 2003 compared to the same 2002
period. The average balance of deposits and FHLB borrowings declined in total
from $212.6 million to $194.9 million from the period ended March 31, 2002 to
March 31, 2003. Of this $17.7 million reduction, $14.3 million was related to
deposit, which went from a $161.7 million average balance for the period ended
March 31, 2002 to $147.4 million average balance for the period ended March 31,
2003.
NET INTEREST INCOME: Net interest income increased to $1.7 million for the three
month period ended March 31, 2003 compared to $1.5 million for the same period
in 2002. For the three months ended March 31, 2003, average interest-earning
assets declined $16.0 million, or 7.1% when compared to the same period in 2002.
Average interest-bearing liabilities decreased $17.7 million, or 8.3% for the
same period. The yield on average interest-earning assets declined to 6.50% for
the three month period ended March 31, 2003 from 6.66% for the same period ended
in 2002. The cost of average interest-bearing liabilities declined to 3.52% from
4.37% for the three month period ended March 31, 2003 and March 31, 2002,
respectively. As a result of the decrease in the overall cost of funds, the net
interest rate margin increased to 3.23% for the three month period ended March
31, 2003, from 2.55% for same period in 2002.
DELINQUENT LOANS AND NONPERFORMING ASSETS: The following table sets forth
information regarding loans delinquent 90 days or more and REO/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.
At December 31,
---------------
---------------(In Thousands)----------------
---------------------------------------------
March 31, 2003 2002 2001 2000 1999
-------------- ---- ---- ---- ----
Total non-accrual loans delinquent 90 days or more (3).. $ 581 $ 662 $ -- $ -- $ 626
------ ------ ------ ------ ------
Accrual loans delinquent 90 days or more:
One- to four-family residential ....................... 677 566 475 498 --
Other real estate loans ............................... -- -- -- 39 --
Consumer / Commercial ................................. $1,203 $ 241 $ 201 $ 168 $ 125
------ ------ ------ ------ ------
Total accrual loans delinquent 90 days or more ..... $1,880 $ 807 $ 676 $ 705 $ 751
------ ------ ------ ------ ------
Total nonperforming loans (1) ........................... $2,461 $1,469 $ 676 $ 705 $ 751
Total real estate owned (2) ............................. 80 128 197 150 100
------ ------ ------ ------ ------
Total nonperforming assets .............................. $2,541 $1,597 $ 873 $ 855 $ 851
------ ------ ------ ------ ------
Total nonperforming loans to net loans receivable ....... 1.64% 0.97% 0.38% 0.32% 0.33%
Total nonperforming loans to total assets ............... 1.09% 0.64% 0.28% 0.26% 0.29%
Total nonperforming assets to total assets .............. 1.12% 0.70% 0.36% 0.32% 0.32%
(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 three months ended March 31, 2003 and the twelve months ended
December 31, 2002, the interest that would have been reported was $14,000
and $27,000 respectively were these loans not in non-accrual status.
11
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 uncollectibility 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 collectibility 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 $162,500 for the three month period ended
March 31, 2003 and $75,000 for the comparable period in 2002. The increase in
the reserve allowance relates to the increase in the trend of delinquencies seen
over the last twelve months. At March 31, 2003, the percent of nonperforming
loans increased to 164 basis points from 97 basis points at December 31, 2002.
As a percent of total assets, nonperforming loans increased to 109 basis points
at March 31, 2003 from 64 basis points at December 31, 2002.
NONINTEREST INCOME: Other income was $582,000 for the three month period ended
March 31, 2003, compared to $543,000 for the same period in 2002. This
represented an increase of $39,000 or 7.2% improvement. Service charges and
other fees were $24,000 lower which primarily related to lower NSF fees for the
first three months of 2003 compared to the same period in 2002. Comparing to the
first quarter 2002, mortgage banking activities income was higher by $55,000.
This represented an increase of 17% over the quarter ended March 31 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 same period one year earlier.
NONINTEREST EXPENSE: Other expenses were $2.0 million for the three month period
ended March 31, 2003, compared to $1.8 million for the same period in 2002. The
9.2% increase for the three month period was primarily due to increases in
compensation and employee benefits expenses. These increases for the first
quarter of 2003 related to the compensation and benefits associated with the
additional mortgage and commercial lenders that have been hired since March
2002.
INCOME TAXES: Federal income taxes decreased to $38,000 for the three month
period ended March 31, 2003 compared to $52,000 for the same period in 2002. The
decrease for the three month period was attributable to the lower pre-tax income
along with a lower rate which was more in line with the recently filed 2002
federal tax return.
LIQUIDITY
The Company'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.
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 Company 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 Company must maintain sufficient liquidity to ensure its
safe and sound operation. The Company's objective for liquidity is to be above
6%. Liquidity as of March 31, 2003 was $45.5 million, or 24.0%, compared to
$47.0 million, or 24.4% at December 31, 2002. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period.
The Company 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
Company will from time to time participate in or originate commercial real
estate loans, including real estate development loans. During the three month
period ended March 31, 2003 the
12
Company originated $32.0 million in residential mortgage loans, of which $9.1
million were retained in portfolio while the remainder were sold in the
secondary market or are being held for sale. This compares to $20.2 million in
originations during the first three months of 2002 of which $12.5 million were
retained in portfolio. The Company also originated $4.8 million of commercial
loans and $3.1 million of consumer loans in the first three months of 2003
compared to $6.7 million of commercial loans and $883,000 of consumer loans for
the same period in 2002. Of total loans receivable, excluding loans held for
sale, mortgage loans comprised 67.0% and 68.8%, commercial loans 20.0% and 18.3%
and consumer loans 13.0 % and 12.9% at March 31, 2003 and December 31, 2002,
respectively. At March 31, 2003, the Company had outstanding loan commitments of
$55.2 million. These commitments include $17.6 million for permanent one-to-four
family dwellings, $25.5 million for non-residential loans, $2.7 million of
undisbursed loan proceeds for construction of one-to-four family dwellings, $5.3
million of undisbursed lines of credit on home equity loans, $3.1 million of
unused credit card lines and $1.0 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 March 31, 2003 deposits funded 67.9% of the
Company's total assets compared to 68.2% at December 31, 2002. Certificates of
deposit scheduled to mature in less than one year at March 31, 2003 totaled
$48.2 million. Management believes that a significant portion of such deposits
will remain with the Company. 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 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 March 31, 2003 the
Company had $47.4 million in FHLB advances. Total borrowings as a percentage of
total assets were 21.0% at March 31, 2003 as compared to 21.2% at December 31,
2002. The Company 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.
CAPITAL RESOURCES
Stockholders' equity at March 31, 2003 was $21.7 million, or 9.60% of total
assets, compared to $21.7 million, or 9.50% 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 March 31,
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 March 31, 2003:
Minimum
Regulatory To Be Well
Actual Minimum Capitalized
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Capital Requirements:
Tangible equity capital $18,182 8.18% $3,332 1.50% $4,443 2.00%
Tier 1 (Core) capital $18,182 8.18% $8,886 4.00% $11,108 5.00%
Total risk-based capital $19,172 14.50% $10,575 8.00% $13,219 10.00%
Tier 1 risk-based capital $18,182 13.75% $5,287 4.00% $7,932 6.00%
13
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2003
PART I - FINANCIAL INFORMATION
ITEM 3 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing of this
report, that the Company's disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-14(c)) are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the foregoing evaluation.
14
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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 99.1 Statement of Chief Executive Officer and
Chief Financial Officer furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On March 13, 2003, the Company announced that on February
28, 2003, it entered into a stock purchase agreement to
purchase all of the shares of the InsuranCenter of Alpena
on or about May 1, 2003.
15
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 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: May 15, 2003 /s/ Martin A. Thomson
---------------------
Martin A. Thomson
Title: President and Chief Executive Officer
(Duly Authorized Officer)
Date: May 15, 2003 /s/ Michael W. Mahler
---------------------
Michael W. Mahler
Title: Chief Financial Officer
(Duly Authorized Officer)
18
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Martin A. Thomson, President and Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Alpena
Bancshares, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 15, 2003 /s/ Martin A. Thomson
Date ---------------------
Martin A. Thomson
President and Chief Executive Officer
16
ALPENA BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2003
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael W. Mahler, Chief Financial Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of Alpena
Bancshares, Inc.;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 15, 2003 /s/ Michael W. Mahler
Date ---------------------
Michael W. Mahler
Chief Financial Officer
17
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Statement of Chief Executive Officer and
Chief Financial Officer furnished pursuant to
Section 906 of Sarbanes-Oxley Act of 2002