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, 2004
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
Check whether the issuer has filed all reports required to be filed
by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
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 October 31, 2004
(Title of Class) 1,659,180 shares
Transitional Small Business Disclosure Format: Yes No X
----- --------
ALPENA BANCSHARES, INC.
FORM 10-QSB
Quarter Ended September 30, 2004
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
September 30, 2004 and December 31, 2003........................3
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2004 and September 30, 2003.................4
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2004....................5
Consolidated Statements of Cash Flow for the Nine Months Ended
September 30, 2004 and September 30, 2003.......................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............................................19
Part II - OTHER INFORMATION
OTHER INFORMATION.............................................................20
SIGNATURES....................................................................21
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, 2004 December 31, 2003
------------------ -----------------
(Unaudited)
ASSETS Cash and cash equivalents:
Cash on hand and due from banks ...................................................... $ 4,726,839 $ 3,379,500
Overnight deposits with FHLB ......................................................... 96,693 3,325,625
------------ ------------
Total cash and cash equivalents ...................................................... 4,823,532 6,705,125
Securities AFS ....................................................................... 41,080,195 34,669,982
Securities HTM ....................................................................... 1,800,000 --
Loans held for sale .................................................................. 655,500 930,525
Loans receivable, net of allowance for loan losses of $1,151,559 and
$1,035,726 as of September 30, 2004 and December 31, 2003, respectively............. 187,099,288 163,460,594
Foreclosed real estate and other repossessed assets .................................. 1,391 198,672
Real estate held for investment ...................................................... 562,228 438,976
Federal Home Loan Bank stock, at cost ................................................ 4,617,000 4,459,800
Premises and equipment ............................................................... 6,431,761 5,816,698
Accrued interest receivable .......................................................... 1,221,667 1,065,924
Intangible assets .................................................................... 3,668,448 3,851,133
Other assets ......................................................................... 2,515,471 2,326,782
------------ ------------
Total assets ......................................................................... $254,476,481 $223,924,211
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits ............................................................................. $182,428,414 $151,702,446
Advances from borrowers for taxes and insurance ...................................... 292,018 96,068
Federal Home Loan Bank advances and Note Payable ..................................... 47,303,031 47,158,408
Accrued expenses and other liabilities ............................................... 2,392,193 2,783,987
Deferred income taxes ................................................................ 124,382 232,258
------------ ------------
Total liabilities .................................................................... 232,540,038 201,973,167
------------ ------------
Commitments and contingencies ........................................................ -- --
Stockholders' equity:
Common stock ($1.00 par value, 20,000,000 shares authorized, 1,659,180 and
1,657,480 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively) .......................... 1,659,180 1,657,480
Additional paid-in capital ........................................................... 5,354,194 5,337,882
Retained earnings, restricted ........................................................ 5,060,000 4,807,000
Retained earnings .................................................................... 9,729,412 9,853,663
Accumulated other comprehensive income .................................. 133,657 295,019
------------ ------------
Total stockholders' equity ........................................................... 21,936,443 21,951,044
------------ ------------
Total liabilities and stockholders' equity ........................................... $254,476,481 $223,924,211
============ ============
------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
Alpena Bancshares, Inc. and Subsidiaries
Consolidated Statement of Income
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Interest income:
Interest and fees on loans ........................ $ 2,996,936 $ 2,825,548 $ 8,447,329 $ 8,407,558
Interest and dividends on investments ............. 396,283 522,944 1,184,959 1,509,844
Interest on mortgage-backed securities ............ 52,593 65,138 166,095 207,423
----------- ----------- ----------- -----------
Total interest income ............................. 3,445,812 3,413,630 9,798,383 10,124,825
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits .............................. 961,131 885,340 2,620,483 2,873,351
Interest on borrowings ............................ 661,266 690,797 1,950,887 2,057,137
----------- ----------- ----------- -----------
Total interest expense ............................ 1,622,397 1,576,137 4,571,370 4,930,488
----------- ----------- ----------- -----------
Net interest income ............................... 1,823,415 1,837,493 5,227,013 5,194,337
Provision for loan losses ......................... 67,600 11,000 213,600 238,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 1,755,815 1,826,493 5,013,413 4,956,337
----------- ----------- ----------- -----------
Non interest income:
Service charges and other fees .................... 259,934 225,869 748,658 560,039
Mortgage banking activities ....................... 210,836 403,937 460,691 1,291,488
Gain on sale of available-for-sale investments .... 6,968 -- 102,637 93,005
Net gain on sale of premises and equipment,
real estate owned and other repossessed assets .. (13,370) (2,458) (19,699) 28,323
Other (See Note 5) ................................ 23,176 (5,844) 73,276 178,631
Insurance and brokerage commissions ............... 764,557 745,238 2,233,607 1,740,215
----------- ----------- ----------- -----------
Total noninterest income .......................... 1,252,101 1,366,742 3,599,170 3,891,701
----------- ----------- ----------- -----------
Non interest expenses:
Compensation and employee benefits ................ 1,474,165 1,521,912 4,460,147 4,241,928
SAIF insurance premiums ........................... 5,618 5,627 20,580 18,991
Advertising ....................................... 52,643 60,847 177,385 159,789
Occupancy ......................................... 309,664 301,510 966,868 882,642
Amortization of intangible assets ................. 74,922 77,359 230,109 214,408
Service Bureau Charges ............................ 88,326 76,364 250,335 226,100
Insurance and brokerage commission expense ........ 335,876 341,005 970,289 770,850
Professional services ............................. 35,728 36,876 155,427 171,381
Other (See Note 6) ................................ 264,649 352,097 882,409 977,190
----------- ----------- ----------- -----------
Other expenses .................................... 2,641,591 2,773,597 8,113,549 7,663,279
----------- ----------- ----------- -----------
Income before income tax expense .................. 366,325 419,638 499,034 1,184,759
Income tax expense ................................ 122,455 139,650 167,060 393,420
----------- ----------- ----------- -----------
Net income ........................................ $ 243,870 $ 279,988 $ 331,974 $ 791,339
=========== =========== =========== ===========
Per share data:
Basic earnings per share .......................... $ 0.15 $ 0.17 $ 0.20 $ 0.48
Weighted average number of shares outstanding ..... 1,659,180 1,654,313 1,658,889 1,648,516
Diluted earnings per share ........................ $ 0.15 $ 0.17 $ 0.20 $ 0.48
Weighted average number of shares outstanding,
including dilutive stock options ................ 1,671,216 1,662,527 1,671,665 1,656,730
Dividends per common share ........................ $ 0.100 $ 0.125 $ 0.275 $ 0.375
----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
Alpena Bancshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2004
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (loss) Total
Balance at December 31, 2003 ..... $ 1,657,480 $ 5,337,882 $ 14,660,663 $ 295,019 21,951,044
Stock issued upon exercise of
stock options (1700 shares) .... 1,700 16,312 -- -- 18,012
Net income for the period ........ -- -- 331,974 -- 331,974
Changes in unrealized gain
on available-for-sale securities -- -- -- (161,362) (161,362)
Total comprehensive income ....... -- -- -- -- 170,612
Dividends declared ............... -- -- (203,225) - (203,225
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2004 .... $ 1,659,180 $ 5,354,194 $ 14,789,412 $ 133,657 $ 21,936,443
============ ============ ============ ============ ============
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
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For the Nine Months Ended
September 30,
2004 2003
------------ ------------
(Unaudited)
Net income ............................................................... $ 331,974 $ 791,339
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization of core deposit intangible ............. 397,210 350,444
Amortization of Intangible Assets .................................... 182,685 113,573
Provision for loan losses ............................................ 197,281 238,000
Accretion of discounts, amortization of premiums,
and other deferred yield items, net ................................ 308,244 237,877
Principal amount of loans sold ....................................... 19,521,972 71,410,901
Originations of loans held for sale .................................. (19,246,947) (71,530,491)
(Gain) loss on sale of real estate held for investment ............... -- (34,546)
real estate owned and other repossessed assets ..................... -- (28,323)
Net Changes:
(Increase) decrease in accrued interest receivable and other assets .. (344,432) (350,425)
Increase (decrease) in accrued interest and other liabilities ........ (416,543) 999,858
------------ ------------
Net cash provided by (used in) operating activities ...................... 931,444 2,105,202
(Increase) decrease in net loans receivable .............................. (23,835,975) (11,685,528)
Proceeds from sales or maturity of:
Investment securities AFS and HTM ...................................... 29,253,390 17,336,016
Real estate held for investment ........................................ -- 399,415
Real estate owned, other repossessed assets and premises & equipment ... 197,281 112,657
Purchases of:
Investment securities AFS and HTM ...................................... (38,016,336) (15,693,425)
Premises and equipment ................................................. (1,012,273) (1,047,017)
FHLB Stock ............................................................. (157,200) (110,900)
Real estate held for investment ........................................ (123,252) (240,735)
------------ ------------
Net cash provided by (used in) investing activities ...................... (33,694,365) (11,957,970)
------------ ------------
Proceeds from Federal Home Loan Bank advances ............................ -- --
Repayments of Federal Home Loan Bank advances ............................ 144,623 4,000,000
Increase (decrease) in deposits .......................................... 30,725,968 (4,249,208)
Advances from borrowers .................................................. 195,950
Dividend paid on common stock ............................................ (203,225) (274,211)
Issuance of common stock ................................................. 18,012 121,036
------------ ------------
Net cash provided by (used in) financing activities ...................... 30,881,328 (402,383)
------------ ------------
Net increase (decrease) in cash and cash equivalents ..................... (1,881,593) (10,255,151)
Cash and cash equivalents at beginning of period ......................... 6,705,125 15,098,861
------------ ------------
Cash and cash equivalents at end of period ............................... $ 4,823,532 $ 4,843,710
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............................. $ -- $ 306,318
============ ============
Cash paid during the period for interest ................................. $ 4,451,898 $ 4,941,740
============ ============
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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 material
intercompany balances and transactions have been eliminated in the
consolidation.
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of American (GAAP) for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
To the extent that information and footnotes required by GAAP for complete
financial staements are contained in or are consistent with the audited
financial statements incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2003, such information and
footnotes have not been duplicated herein.
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, 2004,
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, 2003. Results for
the nine months ended September 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004.
Critical Accounting Policies - The Company's critical accounting policies relate
to the allowance for losses on loans, mortgage servicing rights and impairment
of intangibles.
Allowance for Loan and Lease Losses - 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.
Mortgage Servicing Rights - 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, 2004,
the Bank was servicing loans sold to others totaling $140.4 million. 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
7
as of December 31, 2003. The key economic assumptions made in determining the
fair value of the mortgage servicing rights included the following:
Annual Constant Prepayment Speed (CPR): 13.89%
Weighted Average Life Remaining (in months): 253.3
Discount Rate used: 7.36%
At the December 31, 2003 valuation, the mortgage servicing rights value was
calculated, based on the above assumptions, to be $1,421,175. The book value as
of December 31, 2003 was $993,108. Because the fair value exceeded the book
value, there was no adjustment required. Due to the significant cushion that
existed on December 31, 2003, management elected to not have an independent
valuation performed. The book value of the Mortgage Servicing Rights on
September 30, 2004 was $898,152 which was $94,956 lower than the December 31,
2003 book value.
Impairment of intangibles - In connection with the purchase of the
InsuranCenter of Alpena (ICA), the Company allocated the excess of the purchase
price paid over the fair value of net assets acquired to intangible assets
including goodwill. These intangible assets included the customer list and the
Blue Cross Blue Shield Contract. The unallocated portion of the excess purchase
price became true goodwill. The Company is amortizing the value assigned to the
customer list and the Blue Cross contract over a 20 year period. Additionally,
the Company is testing each of those assets for impairment on an ongoing basis.
If, through testing, it was determined that there was significant runoff of the
customer list or material changes to the Blue Cross contract, then there might
be a need to further write down the value of those intangible assets. Writing
down the assets would create expense to the Company and negatively impact
earnings. In 2003, there was no impairment based upon the testing. The goodwill,
which is not amortized, must also be tested for impairment on an ongoing basis.
Based upon management's review on September 30, 2004, it was determined that
there was no impairment of the customer list, the Blue Cross contract or to the
goodwill.
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.
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. 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.
8
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,
2004. In a letter dated February 26, 2004, the OTS did not object to the
dividend waiver request for the four quarters ending December 31, 2004.
On September 21, 2004, the Company declared a cash dividend on its common stock,
payable on or about October 22, 2004, to shareholders of record as of September
30, 2004, equal to $0.10 per share. The dividend on all shares outstanding
totaled $165,918, of which $73,918 was paid to shareholders. Because the OTS has
agreed to allow the M.H.C. to waive receipt of its dividend (amounting to
$92,000), this dividend was not paid.
Note 4--1996 STOCK OPTION PLAN AND 1996 RECOGNITION AND RETENTION PLAN
At September 30, 2004 the Company had outstanding stock options for 26,711
shares with a weighted average exercise price of $10.48 compared to outstanding
options for 29,011 shares at a weighted exercise price of $10.57 at December 31,
2003. During the nine months ended September 30, 2004, the Board of Directors
granted no options. At September 30, 2004, options had exercise prices ranging
from $9.625 to $13.75 per share and a weighted average remaining contractual
life of 3.47 years.
During the nine months ended September 30, 2004 the Company did not award any
shares under the Recognition and Retention Plan ("RRP"). Shares issued under the
RRP and issued 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, 2004, options for 1,000 shares 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 INCOME
For the nine months ended September 30, 2004, other income totaled $73,000 as
compared to $179,000 for the nine month period ended September 30, 2003. This
was mainly comprised of appreciation of the cash value of the Director Benefit
Plan which was $56,000 for the nine months ended September 30, 2004 compared
to $44,000 for the nine months ended September 30, 2003. For the nine
months ended September 30, 2003 there was also a settlement of an insurance
claim for $100,000.
Note 6 - OTHER EXPENSES
For the nine months ended September 30, 2004 other expenses totaled $882,409.
This was comprised of several larger expenses including printing, computer and
office supplies of $132,000, communication costs of $97,000 and SBT expense of
$76,500. The balance of the total was comprised of expenses lower than $60,000.
Note 7 - RECENT ACCOUNTING PRONOUNCEMENTS
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
9
interim or annual periods ending after December 15, 2002. The adoption of FIN 45
did 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, 2004; therefore, there was 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
did not 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
did not 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 material effect on the financial position or results of operations of
the Company.
In March 2004, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 105, Application of Accounting Principles to loan Commitments. This
Staff Accounting Bulletin summarizes the views of the staff regarding the
application of accounting principles generally accepted in the United States of
America to loan commitments accounted for as derivative instruments. The
provisions of this Staff Accounting Bulletin are effective after March 31, 2004.
The adoption of this Staff Accounting Bulletin did not have a material impact on
the consolidated financial statements of the Company.
10
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
PART E - 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, 2004 and December 31, 2003, and the results of operations for the three and
nine month periods ended September 30, 2004 and 2003. This discussion should be
read in conjunction with the interim financial statements and footnotes included
herein.
OVERVIEW
For the quarter ended September 30, 2004, the Company's earnings were
$244,000 compared to income of $280,000 one year earlier, a decline of $36,000
for the quarter. Year to date 2004, net income was $332,000 compared to the
first nine months of 2003 when net income was $791,000. This represented a
decline of $459,000 or 58.1%. The Bank's return on average assets (ROA) for the
trailing twelve months ended September 30, 2004 was 32 basis points compared to
48 basis points for the same period one year earlier. Management uses ROA as a
tool to measure the performance of the Bank. ROA is reviewed on a trailing
twelve-month basis each month by management and the Board of Directors. The
earnings deterioration can be broken down into two key areas: the decline in Net
Interest Margin (N.I.M.) and the slow down in mortgage banking activities.
Net Interest Margin - The Company's Net Interest Margin (N.I.M.), which
represents net interest income divided by average interest earning assets,
declined from 3.24% for the nine months ended September 30, 2003 to 3.04% for
the nine months ended September 30, 2004. The decline was due to the interest
rate environment that existed in 2003 which resulted in significant net interest
margin compression. Many loans that were in portfolio in 2003 were refinanced
and subsequently sold into the secondary market in 2003 and early 2004 thereby
reducing the overall yield of the Bank's loan portfolio. The yield on interest
earning assets declined from 6.35% at September 30, 2003 to 5.73% at September
30, 2004 due to the lower yield on the mortgage portfolio which fell 103 basis
points from 7.58% at September 30, 2003 to 6.55% at September 30, 2004. Through
the third quarter of 2004, the Bank was able to reduce the overall cost of funds
from 3.36% as of September 30, 2003 to 2.90% as of September 30, 2004. However,
since the reduction in yield exceeded the reduction in the cost of funds, the
NIM declined when compared to the same period one year earlier. The conversion
of cash, a lower yielding asset, into commercial and consumer loans, which carry
higher yields when compared to the overnight rates earned by the cash, has
helped to offset some of the pressure on the NIM.
Mortgage Banking - The Company generated lower income from mortgage
banking activity in the nine months ended September 30, 2004 when compared to
the same period in 2003. In the first quarter of 2003, interest rates began
their descent toward 45 year lows which caused a significant wave of refinance
activity during the first nine months of 2003. This heavy activity in 2003
produced income from loan fees and gains once these loans were sold into the
secondary market. Mortgage banking income declined for the quarter by $193,000
and for the nine month period ended September 30, 2004 was down $831,000.
Management has placed a focus on growth of the balance sheet in 2004 to
get back to the interest earning asset levels that existed before the refinance
boom began. With the pressure on margins created by the existing interest rate
environment, management has focused on measured and controlled growth of
interest earning assets to help offset the lower rates and the slowdown of
mortgage lending activity.
FINANCIAL CONDITION
ASSETS: Total assets have grown $30.6 million, or 13.6%, to $254.5 million at
September 30, 2004 from $223.9 million at December 31, 2003. Cash and cash
equivalents decreased by $1.9 million or 28.1%, to $4.8 million at September 30,
2004 from $6.7 million at December 31, 2003 as excess cash was invested into
bonds which provide higher yields than the overnight rates earned at the Federal
Reserve Bank. Investment securities increased $8.2 million, or 23.7% in the
first nine months. Net loans receivable increased $23.6 million, or 14.5%, to
$187.1 million at September 30, 2004 from $163.5 million at December 31, 2003.
The growth of net loans was attributable to growth across all lending areas. The
mortgage loan portfolio grew primarily as the result of the purchase of $9.1
million in mortgage loans from another Michigan bank of which $7.8 million
remained on our books as of September 30, 2004. All of the loans purchased were
secured by real estate
11
within the state of Michigan except a single loan that was secured by real
estate in Indiana. Growth in both the commercial and consumer loan portfolios
was the result of a concerted effort to further develop the Bank's penetration
into those areas.
LIABILITIES: Deposits increased $30.7 million or 20.3% to $182.4 million as of
September 30, 2004 from $151.7 million at December 31, 2003. This increase was
primarily attributable to the $12.1 million in deposits acquired in the
acquisition of two branches in May 2004 from North Country Bank and Trust. These
acquired branches are located in Mancelona and Alanson, Michigan. The Bank was
also successful in attracting deposit through various time deposit promotions
which provided new funds to the Bank. Borrowings in the form of Federal Home
Loan Bank advances increased $250,000, or 1%, to $46.1 million as of September
30, 2004 from $45.8 million at December 31, 2003.
EQUITY: Stockholders' equity decreased by $15,000 to $21.94 million at September
30, 2004 from $21.95 million at December 31, 2003. The decrease was due to lower
market values on our investment portfolio. Compared to December 31, 2003, the
net unrealized gain on available for sale securities decreased $161,362 as of
September 30, 2004 due to the rise in market interest rates.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
General: Net income for the quarter decreased by $36,000 or 12.9% to $244,000
for the three months ended September 30, 2004 from $280,000 for the same quarter
one year earlier. The decrease for the three month period was primarily due to
the decrease in mortgage lending activity. Net interest income was slightly
lower than the same quarter one year earlier; non-interest income was also lower
as the volume of mortgage refinance deals slowed significantly. Mortgage
refinancing provides income to the Bank in the form of fees and, if the loan is
sold, a gain on sale plus loan servicing income. Compared to the third quarter
of 2003, the volume of mortgage originations has significantly declined from
$39.3 million for the third quarter 2003, of which $20.9 million were sold, to
$18.3 million for the third quarter 2004, of which $8.0 million were sold.
Interest Income: Interest income was $3.45 million for the three months ended
September 30, 2004, compared to $3.41 million for the comparable period in 2003.
The slight increase in interest income for the three month period was primarily
due to the increase in the Company's interest earning assets. The sale of longer
term fixed rate mortgage loans and the subsequent reinvestment of these proceeds
into lower yielding assets (investment securities and shorter duration
non-mortgage loans) caused an overall decline in the yield of the Bank's loan
portfolio. Overall, the total interest earning assets grew by $27.6 million to
$240.4 million at September 30, 2004 compared to $212.8 million at September 30,
2003. The mortgage loan portfolio experienced an increase in the average balance
due to the purchase of $9.1 million in loans in May 2004. Overall the average
balance of the mortgage portfolio grew by $10.3 million or 10.3% for the three
month period ended September 30, 2004 compared to the same period one year
earlier. Non mortgage loans also experienced increases in average balances of
$19.5 million, or 33.2%. This growth was attributed to an increase in lending in
both the consumer and commercial lending areas of the Bank. During this same
period, there was a decrease in the average balance of other investments of $2.3
million, or 4.2%, for the three month period ended September 30, 2004, compared
to the same period in the prior year. This decline in other investments related
to cash and investments which were redeployed to fund the increases in
non-mortgage loans during the quarter. The overall average yield on earning
assets was 5.72% for the quarter ended September 30, 2004 compared to 6.23% for
the quarter 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)
Interest Expense: Interest expense was $1.62 million for the three month period
ended September 30, 2004 compared to $1.58 million for the same period in 2003.
The 2.9% increase in interest expense was attributable to the increase in the
average balances on these liabilities for the quarter ended September 30, 2004
compared to the quarter ended September 30, 2003. The average balance of
deposits and FHLB borrowings increased from $195.9 million to $222.8 million for
the periods ended September 30, 2003 and September 30, 2004, respectively. Of
this $26.9 million increase, $19.2 million related to interest-bearing deposits,
which increased from a $147.0 million average balance for the quarter ended
September 30, 2003 to $166.0 million average balance for the quarter ended
September 30, 2004. This increase in the average balance of interest bearing
deposits can be attributed to the branch acquisition that occurred in May 2004
when the Bank acquired an additional $12.1 million in liabilities from North
Country Bank and Trust. The overall composite cost of deposits fell to 2.30% for
the three months ended September 30, 2004 from 2.40% for the three months ended
September 30, 2003. Total borrowings increased $1.8 million to $56.7 million for
the quarter ended September 30, 2004 compared to $49.0 million for the same
period one year earlier. FHLB advances were used to fund loans and bond
purchases. The overall cost of borrowings for the three months ended September
30, 2004 was 4.56% compared to 5.52% for the three months ended September 30,
2003 due to the repricing of higher cost maturing advances at lower market rates
plus the addition of new borrowings at lower rates during the quarter. Overall
the cost of these borrowings declined 96 basis points when compared to the same
quarter one year earlier.
Net Interest Income: Net interest income decreased slightly by $14,000 or .8% to
$1.82 million for the three month period ended September 30, 2004 from $1.84
million for the three month period ended September 30, 2003. For the three
months ended September 30, 2004, average interest-earning assets increased $27.6
million, or 13.0% when compared to the same period in 2003. Average
interest-bearing liabilities increased $26.9 million, or 13.8% for the same
period. The yield on average interest-earning assets declined 51 basis points to
5.72% for the three month period ended September 30, 2004 from 6.23% for the
three month period ended September 30, 2003. The cost of average
interest-bearing liabilities declined 30 basis points to 2.88% from 3.18% for
the three month periods ended September 30, 2004 and September 30, 2003,
respectively.
As a result of the decrease in the yield exceeding the reduction in cost of
funds, the NIM declined to 3.05% for the three month period ended September 30,
2004, from 3.30% for the same period in 2003. In spite of the reduction of the
overall NIM, the Bank was able to nearly offset this compression through the
growth of the both the investment and loan portfolios.
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 $68,000 for the three month period ended
September 30, 2004 and $11,000 for the comparable period in 2003.
13
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Non Interest Income: Non interest income was $1.3 million for the three month
period ended September 30, 2004, compared to $1.4 million for the same period in
2003. This represented a decrease of $115,000 or 8.4%. The biggest reason for
the decline was in the mortgage lending area. Mortgage banking activities income
for the quarter was lower by $193,000. This represented a decrease of 47.8% over
the quarter ended September 30, 2003. This decrease related to the reduction in
gain on sale of mortgages sold into the secondary market. This was a function of
the decreased volume of refinance activity when compared to the same period one
year earlier. The InsuranCenter of Alpena provided $765,000 of revenue from
insurance and brokerage fees for the quarter ended September 30, 2004 which was
$19,000 higher than the same period last year. Other Income was $29,000 more for
the same time period last year. Service charges and other fees were $34,000
higher. The increase was primarily related to Bounce Protection which generated
$30,000 of additional income for the third quarter of 2004 compared to the same
quarter in 2003.
Non Interest Expenses: Non interest expenses were $2.6 million for the three
month period ended September 30, 2004, compared to $2.8 million for the same
period in 2003. The $132,000 decrease represented a 4.8%, reduction for the
period. Compensation and employee benefits were lower for the quarter ended
September 30, 2004 by $48,000 when compared to the same quarter last year. This
reduction was a result of lower commission expenses associated with mortgage
lending activities. Other expenses were lower by $87,000 for the quarter ended
September 30, 2004 when compared to the same period one year earlier. This
reduction relates to a decrease in professional services and consulting costs.
Insurance and brokerage commission expense associated with the InsuranCenter of
Alpena totaled $336,000 for the quarter ended September 30, 2004 which was
$5,000 lower than the same period last year.
Income Taxes: Federal income taxes decreased to $122,000 for the three month
period ended September 30, 2004 compared to $140,000 for the same period in
2003. The effective tax rate for both time periods was 33.5%. The reduction in
income tax was a reflection of lower pre tax earnings for the quarter.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
General: Net income decreased 58.1% to $332,000 for the nine months ended
September 30, 2004 from $791,000 for the same period ended September 30, 2003.
The decrease for the nine month period was primarily due to the significant
decrease in mortgage lending activity. While net interest income was slightly
higher than the same period one year earlier, non-interest income was lower by
$293,000. Mortgage banking activities were $831,000 lower for the nine months
ended September 30, 2004 when compared to the same period last year due to the
reduction in the volume of mortgage refinance activity. This decrease was
partially offset by the increase in insurance and brokerage commissions of
$493,000 related to ICA. The increase was due to the inclusion of a full nine
months of ICA ownership in 2004 compared to seven months of ownership in 2003.
Interest Income: Interest income was $9.8 million for the nine months ended
September 30, 2004, compared to $10.1 million for the comparable period in 2003.
The decrease of $326,000 (or 3.2%) 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 and shorter duration non-mortgage loans)
which caused an overall decline in the yield of the Bank's loan portfolio. The
mortgage loan portfolio experienced an increase in the average balance for the
nine month period ended September 30, 2004 compared to the same period one year
earlier. The increase was due to the purchase of $9.1 million in mortgage loans
in May 2004. Overall the average mortgage balance increased $4.3 million or 4.3%
for the nine month period ended September 30, 2004 when compared to the period
ended September 30, 2003. While the average balance increased,
14
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
the overall average yield of the mortgage portfolio fell 103 basis points to
6.55% for the nine months ended September 30, 2004. The decline in yield was a
function of the refinance and subsequent sale of loans within the mortgage
portfolio in 2003. The non mortgage loans average balance increased during the
nine month period ended September 30, 2004 by $18.9 million, or 36.0%. This
increase related to commercial and consumer lending which have both seen
increases in loan balances when compared to the same period one year earlier.
The average balance for commercial loans has grown to $48.8 million compared to
$32.9 million for the nine months ended September 30, 2003. This represented an
increase of $16.0 million or 48.6%. The yield for commercial loans over this
same period has declined 21 basis points to 5.75% from 5.96% at September 30,
2003. The consumer loan portfolio has grown by $3.0 million or 15.1% when
compared to the same period one year earlier. The yield of the consumer loan
portfolio has also declined over this same period by 123 basis points to 6.96%
from 8.19% at September 30, 2003. The reason for the decline in yield of this
portfolio can be attributed to the growth which was centered on a home equity
loan promotion which offered a sub prime introductory interest rate. The growth
of these loans with this low rate pulled down the average yield of the consumer
portfolio when compared to the same period one year earlier. Other investments
have decreased by $9.4 million, or 16.0%, for the nine month period ended
September 30, 2004, compared to the same period in the prior year. This decrease
in other investments related to cash which has been redeployed into higher
yielding loans. The overall effect of these changes was a reduction of $326,000
in interest income when compared to the nine month period ended September 30,
2003. Overall, the composite yield of earning assets was 58 basis points lower
than the same period one year earlier. The overall yield was 5.73% for the nine
month period ended September 30, 2004 compared to 6.31% for the same period
ended September 30, 2003.
Interest Expense: Interest expense was $4.6 million for the nine month period
ended September 30, 2004 compared to $4.9 million for the same period in 2003.
The reduction in interest expense was $359,000 or a 7.3% decline. The reduction
was attributable to lower interest rates paid on interest-bearing liabilities
compared to the same 2003 period. The average balance of deposits and borrowings
increased in total from $195.4 million to $209.3 million for the period ended
September 30, 2003 and September 30, 2004, respectively. Of this $13.9 million
increase, $7.0 million was related to FHLB borrowings, which increased from a
$48.0 million average balance for the period ended September 30, 2003 to $55.0
million average balance for the period ended September 30, 2004. The reduction
in the overall interest expense related to the decrease in the cost of the
liabilities. The average cost of deposits for the nine month period ended
September 30, 2004 was 2.27% versus 2.61% for the same period one year earlier.
The average costs of borrowings were 4.66% for the period ended September 30,
2004 versus 5.66% for the same period one year earlier. This 100 basis point
reduction in the cost of these funds was the result of additional shorter term
borrowings at lower rates and the repricing of higher cost advances late in
2003. The overall composite costs of funds declined 46 basis points from 3.36%
at September 30, 2003 to 2.90% at September 30, 2004.
Net Interest Income: Net interest income increased by $33,000 for the nine month
period ended September 30, 2004 compared to the same period in 2003. For the
nine months ended September 30, 2004, average interest-earning assets increased
$13.9 million, or 6.5% when compared to the same period in 2003. Average
interest-bearing liabilities increased $13.1 million, or 7.1% for the same
period. The yield on average interest-earning assets declined 58 basis points to
5.73% for the nine month period ended September 30, 2004 from 6.31% for the nine
month period ended September 30, 2003. The cost of average interest-bearing
liabilities declined 46 basis points to 2.90% from 3.36% for the nine month
periods ended September 30, 2004 and September 30, 2003, respectively. While the
overall net interest margin declined 18 basis points for the nine month period
ended September 30, 2004 from 3.22% to 3.04%, the increase in the amount of
interest earning assets was enough to more than compensate for the overall
decline in N.I.M.
15
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
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.
September 30, December 31,
2004 2003
------ ------
Total non-accrual loans (3) ....................... $ 480 $1,291
------ ------
Accrual loans delinquent 90 days or more:
One- to four-family residential ................. 910 617
Other real estate loans ......................... -- 77
Consumer/Commercial ............................. 370 134
------ ------
Total accrual loans delinquent 90 days or more $1,280 $ 828
------ ------
Total nonperforming loans (1) ..................... 1,760 2,119
Total real estate owned (2) ....................... 1 199
====== ======
Total nonperforming assets ........................ $1,761 $2,318
====== ======
Total nonperforming loans to net loans receivable . 0.94% 1.30%
Total nonperforming loans to total assets ......... 0.69% 0.95%
Total nonperforming assets to total assets ........ 0.69% 1.04%
(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, 2004 and the twelve months ended
December 31, 2003, the interest that would have been reported was $ 62,328
and $181,450 respectively were these loans not in non-accrual status.
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 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 $214,000 for the nine month period ended
September 30, 2004 and $238,000 for the comparable period in 2003. At September
30, 2004, the percent of nonperforming loans decreased to 94 basis points from
130 basis points at December 31, 2003. As a percent of total assets,
nonperforming loans decreased to 69 basis points at September 30, 2004 from 95
basis points at December 31, 2003.
Non Interest Income: Non interest income was $3.6 million for the nine month
period ended September 30, 2004, compared to $3.9 million for the same period in
2003. This represented a decrease of $293,000 or 7.5%. When compared to the same
period of 2003, mortgage banking activities income was lower by $831,000. This
represented a decrease of 64.3% over the nine months ended September 30, 2003.
This decrease related to the gain on sale of mortgages sold in the secondary
market which was $636,000 lower than the same period one year earlier. The
revenue associated with mortgage servicing rights was also $177,000 lower than
last year. This reduction stemmed from fewer loans being sold in 2004 compared
to the first nine months of 2003.
16
These mortgage revenue declines were offset by the inclusion of the
InsuranCenter of Alpena insurance and brokerage commissions which were $2.2
million for the nine-month period ended September 30, 2004 compared $1.7 million
for the same period one year earlier. This is an increase of $493,392 or 28.4%.
This increase for ICA related to nine full months of commissions in 2004
compared to only seven months in 2003. That difference related to the purchase
agreement for ICA which had an effective date for the transaction of March 1,
2003.
Non Interest Expenses: Non interest expenses were $8.1 million for the nine
month period ended September 30, 2004, compared to $7.7 million for the same
period in 2003. The additional $450,000 represented an increase of 5.9% for the
nine month period. The primary issue causing the increase in non interest
expenses related to having an additional two months of expenses associated with
ICA. Insurance and brokerage commission expense for the InsuranCenter of Alpena
totaled $970,000 for the nine months ended September 30, 2004 compared to
$771,000, a $199,000 increase, for the seven months that were included in the
2003 results. Compensation and employee benefits also increased $218,000 over
the same period. This increase was mainly due to the two additional months of
ICA's compensation expense totaling $227,000. In addition, the Bank's Financial
Institutions Retirement Fund (FIRF) expense was increased to make up for a
shortfall in the pension plan funding. This added an additional expense of
$113,000 for the nine month period ended September 30, 2004 when compared to the
same period last year. As of September 30, 2004, the plan was fully funded.
Income Taxes: Federal income taxes decreased to $167,060 for the nine month
period ended September 30, 2004 compared to $393,420 for the same period in
2003. The effective tax rate for both time periods was 33.5%. The reduction in
income tax is a reflection of lower earnings year to date.
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
20%. Liquidity as of September 30, 2004 was $86.0 million, or 46.8%, compared to
$85.4 million, or 54.4% at December 31, 2003. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. The liquidity calculated by the Company
includes additional borrowing capacity available with the Federal Home Loan Bank
(FHLB). This borrowing capacity is limited to the lowest of the capacity
limitations based on the Bank's Board Resolution, FHLB stock owned by the Bank,
or the Bank's pledged collateral. As of September 30, 2004, the Bank had unused
borrowing capacity based on collateral of $20.5 million. The Bank can pledge
additional collateral in the form of investment securities to increase the
borrowing capacity up to the level established by Board resolution.
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 nine month
period ended September 30,
17
ALPENA BANCSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
2004 the Company originated $49.1 million in residential mortgage loans, of
which $29.8 million were retained in portfolio while the remainder were sold in
the secondary market or are being held for sale. This compares to $115.4 million
in originations during the first nine months of 2003 of which $44.6 million were
retained in portfolio. The Company also originated $26.1 million of commercial
loans and $13.1 million of consumer loans in the first nine months of 2004
compared to $27.7 million of commercial loans and $14.4 million of consumer
loans for the same period in 2003. Of total loans receivable, excluding loans
held for sale, mortgage loans comprised 56.9% and 60.9%, commercial loans 29.8%
and 26.4% and consumer loans 13.3% and 12.7% at September 30, 2004 and December
31, 2003, respectively. At September 30, 2004, the Company had outstanding loan
commitments of $43.8 million. These commitments included $12.3 million for
permanent one-to-four family dwellings, $10.6 million for non-residential loans,
$3.9 million of undisbursed loan proceeds for construction of one-to-four family
dwellings, $8.6 million of undisbursed lines of credit on home equity loans,
$1.1 million of unused credit card lines and $6.5 million of unused commercial
lines of credit, $802,000 of undisbursed, Commercial construction.
Deposits are a primary source of ; funds for use in lending and for other
general business purposes. At September 30, 2004 deposits funded 71.6% of the
Company's total assets compared to 67.7% at December 31, 2003. Certificates of
deposit scheduled to mature in less than one year at September 30, 2004 totaled
$28.1 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 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, 2004 the
Company had $49.1 million in FHLB advances. Total borrowings as a percentage of
total assets were 18.6% at September 30, 2004 as compared to 21.06% at December
31, 2003.
CAPITAL RESOURCES
Stockholders' equity at September 30, 2004 was $21.8 million, or 8.65% of total
assets, compared to $22.0 million, or 9.80% of total assets, at December 31,
2003 (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, 2004. 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, 2004:
Minimum
Regulatory To Be Well
Actual Minimum Capitalized
-------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Capital Requirements:
Tangible equity capital $17,376 6.95% $3,748 1.50% $4,997 2.00%
Tier 1 (Core) capital $17,376 6.95% $9,994 4.00% $12,492 5.00%
Total risk-based capital $18,601 11.24% $13,239 8.00% $16,549 10.00%
Tier 1 risk-based capital $17,376 10.50% $6,619 4.00% $9,929 6.00%
18
ALPENA BANCSHARES, INC.
FORM 10-QSB
Quarter Ended September 30, 2004
PART E - FINANCIAL INFORMATION
ITEM 3 - CONTROLS AND PROCEDURES
Under the supervision and with the 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 its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) 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 the Company
files or submits under the Securities Exchange Act of 1934, is recorded,
processed, summarized and reported, within the time periods specified by the
SEC's rules and forms and in timely alerting them to material information
relating to the Company (or its consolidated subsidiaries) required to be
included in its periodic SEC filings.
There has been no change in the Company's internal control over the financial
reporting during the Company's second quarter of fiscal year 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
19
ALPENA BANCSHARES, INC.
FORM 10-QSB
Quarter Ended September 30, 2004
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
Not applicable.
Item 2 - Changes in Securities and Use of Proceeds:
Not applicable.
Item 3 - Defaults upon Senior Securities:
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders:
None
Item 5 - Other Information:
Not applicable
Item 6 - Exhibits:
Exhibits:
Exhibit 31.1 Certification by Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification by Chief Financial Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002
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
20
ALPENA BANCSHARES, INC.
FORM 10-QSB
Quarter Ended September 30, 2004
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /a/Martin A. Thomson
-------------------------------------------
Martin A. Thomson
President and Chief Executive Officer
Date: Nov. 15, 2004
By: /s/Michael W. Mahler
--------------------------------------------
Michael W. Mahler
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: Nov. 15, 2004
21