| ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2003
or
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File #000-30521
Pavilion Bancorp, Inc.
(Exact name of registrant as specified in its charter)
|
Michigan (State or other jurisdiction of incorporation or organization) |
38-3088340 (I.R.S. Employer Identification No.) |
135 East Maumee Street, Adrian, Michigan 49221
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (517) 265-5144, Fax (517) 265-3926
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No ý
As of August 4, 2003, there were 810,392 outstanding shares of the registrant’s common stock, no par value.
Page 1
| ITEM NO. |
DESCRIPTION |
PAGE NO. |
|
Item 1. Item 2. Item 3. Item 4. |
Financial Statements (Condensed) (a) Report of Independent Accountants (b) Condensed Consolidated Balance Sheets (c) Condensed Consolidated Statements of Income and Comprehensive Income (d) Condensed Consolidated Statements of Cash Flows (e) Notes to Condensed Consolidated Financial Statements Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Controls and Procedures |
3 4 5 6 7 11 15 16 |
PART II -OTHER INFORMATION
|
Item 1. Item 2. Item 3. Item 4. Item 5. Item 6. |
Legal Proceedings Changes in Securities and Use of Proceeds Defaults Upon Senior Securities Submission of Matters to a Vote of Security Holders Other Information Exhibits and Reports on Form 8-K |
17 17 17 17 18 18 |
|
Signatures Exhibits |
19 20 |
|
Page 2
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of
Directors
Pavilion Bancorp, Inc.
Adrian, Michigan
We have reviewed the condensed consolidated balance sheet of Pavilion Bancorp, Inc. as of June 30, 2003, the related condensed consolidated statements of income and comprehensive income for the quarter and year to date periods ended June 30, 2003 and 2002 and the condensed consolidated statements of cash flows for the year to date periods ended June 30, 2003 and 2002. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Pavilion Bancorp, Inc. as of December 31, 2002, and the related consolidated statement of income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended (not presented herein); and in our report dated February 4, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
| Crowe, Chizek and Company LLP |
Grand Rapids, Michigan
August
4, 2003
Page 3
| (b) | CONDENSED CONSOLIDATED BALANCE SHEETS |
June 30,
In thousands of dollars 2003 December 31,
(unaudited) 2002
----------- ----
ASSETS
Cash and due from banks $ 11,613 $ 11,223
Securities available for sale 19,852 25,216
Federal Home Loan Bank stock, at cost 2,504 2,504
Federal Reserve Bank stock, at cost 572 493
Loans held for sale 4,633 1,473
Loans receivable, net of allowance for loan losses 255,072 233,049
Premises and equipment, net 5,997 6,314
Accrued interest receivable 1,732 1,868
Mortgage servicing asset 2,936 2,715
Other assets 986 2,431
------------ ------------
Total assets $ 305,897 $ 287,286
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 58,144 $ 48,827
Interest bearing 199,572 192,893
------------ ------------
Total deposits 257,716 241,720
Borrowed funds 11,157 8,635
Accrued interest payable 436 507
Other liabilities 2,219 2,255
Trust preferred securities 5,000 5,000
Common stock subject to repurchase obligation in ESOP 3,799 4,100
------------ ------------
Total liabilities 280,327 262,217
Shareholders' equity
Common stock and paid-in capital, no par value 8,999 9,712
Retained earnings 16,590 15,254
Accumulated other comprehensive income (loss),
net of tax (19) 103
------------ ------------
Total shareholders' equity 25,570 25,069
------------ ------------
Total liabilities and shareholders' equity $ 305,897 $ 287,286
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 4
| (c) | CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) |
Three Months Ended Six Months Ended
In thousands of dollars, except per share data June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income
Loans receivable, including fees $ 4,455 $ 4,327 $ 8,786 $ 8,699
Securities available for sale 245 338 528 726
Federal funds sold and other 8 21 26 42
------------ ------------ ------------ ------------
Total interest and dividend income 4,708 4,686 9,340 9,467
Interest expense
Deposits 1,006 1,384 2,065 2,832
Federal Home Loan Bank advances 103 77 149 155
Other 76 85 153 160
------------ ------------ ------------ ------------
Total interest expense 1,185 1,546 2,367 3,147
------------ ------------ ------------ ------------
Net interest income 3,523 3,140 6,973 6,320
Provision for loan losses 295 150 435 256
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 3,228 2,990 6,538 6,064
Noninterest income
Service charges and fees 470 522 941 1,141
Gains on loan sales 2,210 423 3,818 1,099
Loan servicing fees, net of amortization (758) 13 (1,256) 9
Other (34) 1 (117) 57
------------ ------------ ------------ ------------
1,888 959 3,386 2,306
Noninterest expense
Salaries and employee benefits 2,374 1,860 4,489 3,845
Occupancy and equipment 556 598 1,118 1,188
Other 922 666 1,808 1,412
------------ ------------ ------------ ------------
Income before income tax 1,264 825 2,509 1,925
Income tax expense 412 265 801 619
------------ ------------ ------------ ------------
Net income $ 852 $ 560 $ 1,708 $ 1,306
============ ============ ============ ============
Comprehensive income $ 904 $ 750 $ 1,586 $ 1,381
============ ============ ============ ============
Basic earnings per share $ 1.04 $ .66 $ 2.07 $ 1.54
============ ============ ============ ============
Diluted earnings per share $ 1.03 $ .66 $ 2.05 $ 1.53
============ ============ ============ ============
Dividends per share $ .23 $ .22 $ .45 $ .42
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
Page 5
| (d) | CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (unaudited) |
Six Months Ended
In thousands of dollars June 30,
-----------------------------
2003 2002
---- ----
Cash flows from operating activities
Net income $ 1,708 $ 1,306
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 424 447
Provision for loan losses 435 256
Net amortization and accretion on securities
available for sale 170 154
Amortization of mortgage servicing rights 1,635 282
Loans originated for sale (174,753) (59,280)
Proceeds from sale of mortgage loans 173,555 58,976
Net gains on sales of mortgage loans (3,818) (1,099)
Net gains on sales of securities - (9)
Net change in:
Accrued interest receivable 136 43
Other assets 1,645 (948)
Accrued interest payable (71) (235)
Other liabilities 30 499
------------ ------------
Net cash from operating activities 1,096 392
------------ ------------
Cash flows from investing activities
Proceeds from:
Maturities, calls and principal payments on
securities available for sale 10,546 14,139
Sales of securities available for sale - 3,500
Purchases of:
Federal Reserve Bank stock (79) -
Securities available for sale (5,540) (15,105)
Premises and equipment, net (107) (361)
Net increase in loans (22,658) (9,149)
------------ ------------
Net cash from investing activities (17,838) (6,976)
Cash flows from financing activities
Net change in deposits 15,996 1,942
Net change in borrowed funds and capital securities 2,522 588
Change in shareholders' equity (1,386) (835)
------------ ------------
Net cash from financing activities 17,132 1,695
------------ ------------
Net change in cash and cash equivalents 390 (4,889)
Cash and cash equivalents at beginning of period 11,223 24,277
------------ ------------
Cash and cash equivalents at end of period $ 11,613 $ 19,388
============ ============
Cash paid for:
Interest $ 2,438 $ 3,382
Income taxes 345 505
See accompanying notes to condensed consolidated financial statements.
Page 6
| (e) | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT (unaudited) |
The unaudited condensed consolidated financial statements include the accounts of Pavilion Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries, Bank of Lenawee and Bank of Washtenaw (together the “Bank”). The Bank of Lenawee includes its wholly-owned subsidiaries, Pavilion Financial Services and Pavilion Mortgage Company (the “Mortgage Company”). It should be noted that the name changes to Pavilion Bancorp, Inc. and Pavilion Financial Services (previously Lenawee Bancorp, Inc. and Lenawee Financial Services) were approved by the shareholders on April 18, 2002. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company is a two-bank holding company which conducts limited business activities. The Banks perform the majority of the Company’s business activities.
The Banks provide a range of banking services to individuals, commercial businesses, light industries and municipal entities located in their service areas. Each bank maintains a diversified loan portfolio with loans to business enterprises for current operations and expansion and loans to individuals for home mortgages, automobiles and personal expenditures. The Banks offer traditional bank deposit products, including checking, savings, money market savings, individual retirement accounts, certificates of deposit as well as a mobile banking currier service.
The unaudited condensed consolidated financial statements of Pavilion Bancorp, Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10 for the year ended December 31, 2002.
Page 7
A reconciliation of the numerators and denominators of the basic earnings and diluted earnings per share computations for the three and six months ended June 30, 2003 and 2002 is presented below in thousands, except for per share information:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Basic earnings per share
- ------------------------
Net income available to common shareholders $ 852 $ 560 $ 1,708 $ 1,306
============ ============ ============ ============
Weighted average common shares outstanding 819 844 824 847
============ ============ ============ ============
Basic earnings per share $ 1.04 $ .66 $ 2.07 $ 1.54
============ ============ ============ ============
Diluted earnings per share
- --------------------------
Net income available to common shareholders $ 852 $ 560 $ 1,708 $ 1,306
============ ============ ============ ============
Weighted average common shares outstanding 819 844 824 847
Add: Dilutive effects of exercise of stock options 6 7 11 7
------------ ------------ ------------ ------------
Weighted average common and dilutive
potential shares outstanding 825 851 835 854
============ ============ ============ ============
Diluted earnings per share $ 1.03 $ .66 $ 2.05 $ 1.53
============ ============ ============ ============
Page 8
Compensation expense under stock options is reported using the intrinsic value method. The exercise price of stock options is generally equivalent to the market price of the underlying common stock as of the date of grant. No stock-based compensation cost is reflected in net income, for stock options granted with an exercise price equal to or greater than the market price of the underlying common stock at date of grant. For stock options granted below market price, compensation expense is based upon the difference between the market price and the exercise price at the date of grant and is recorded over the vesting period of the options. Compensation expense actually recognized for the three and six months ended June 30, 2003 and 2002 was not significant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 852 $ 560 $ 1,708 $ 1,306
(in thousands, except for per share information)
Less: Stock-based compensation
expense determined under fair value
based method 16 15 33 30
-------------- -------------- -------------- ---------------
Pro forma net income $ 836 $ 545 $ 1,675 $ 1,276
============== ============== ============== ===============
Basic earnings per share as reported $ 1.04 $ .66 $ 2.07 $ 1.54
Page 9
NOTE 4 - ACCOUNTING FOR STOCK BASED COMPENSATION (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Pro forma basic earnings per share 1.02 .65 2.03 1.51
Diluted earnings per share as reported 1.03 .66 2.05 1.53
Pro forma diluted earnings per share 1.01 .64 2.01 1.49
The weighted average fair value of stock options granted during the six months ended June 30, 2003 and 2002 were $10.15 and $16.69. The fair value of options granted during the six months ended June 30, 2003 and 2002 were estimated using an option pricing model with the following weighted average information as of the grant dates:
2003 2002
---- ----
Risk free rate of interest 3.58% 4.78%
Expected option life 8 years 8 years
Expected dividend yield 1.96% 1.38%
Expected volatility 22.74% 22.92%
In future years, as additional options are granted, the proforma effect on net income and earnings per share may increase. Stock options are used to reward directors and certain executive officers and provide them with an additional equity interest. Options are issued for ten year periods and have varying vesting schedules.
Page 10
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
This discussion provides information about the consolidated financial condition and results of operations of the Company as of June 30, 2003 and for the three and six month periods ended June 30, 2003 and 2002.
Securities
The principal balance of our
securities portfolio decreased by $5.4 million during the first half of 2003. Purchases of
securities totaling $5.5 million were offset by principal repayments on mortgage backed
securities and maturities within the portfolio totaling $10.5 million. There were no sales
of securities available for sale during the first six months of 2003. The securities
portfolio has decreased as a result of the additional funds being used to fund loan
growth.
Loans
Loan growth continued through the
first half of 2003. During the first six months of 2003, annualized loan growth was 18.9%.
The diversification of the types of loans in the loan portfolio continues to remain
relatively unchanged from prior periods. Over the long term, the trend continues toward an
increased portion of business loans.
In addition to the increase in portfolio loans, we continued to experience a significant increase in the volume of our residential mortgage loans sold into the secondary market when compared to the first half of 2002. The decrease in national market interest rates during the first half of 2003 has also caused an ongoing decline in mortgage interest rates through the first half of the year.
Credit Quality
We continue to monitor the asset
quality of the loan portfolio utilizing loan review officers who, combined with external
loan review specialists, periodically submit reports to the Chief Lending Officer and to
the Board of Directors regarding the credit quality of each loan portfolio. This review is
independent of the loan approval process. Also, we continue to monitor delinquencies,
nonperforming assets and potential problem loans to assess the continued quality of our
loan portfolios.
Nonperforming loans are comprised of (1) loans accounted for on a nonaccrual basis, (2) loans contractually past due 90 days or more as to interest or principal payments (but not included in the nonaccrual loans in (1) above) and (3) other nonperforming loans (but not included in (1) or (2) above) which consist of loan arrangements under the Business Manager program. The aggregate amount of nonperforming loans, in thousands of dollars, is shown in the table below. Our classifications of nonperforming loans are generally consistent with loans identified as impaired.
Page 11
The chart below shows the makeup of our nonperforming assets by type, in thousands of dollars, as of June 30, 2003 and 2002, and December 31, 2002.
6/30/2003 12/31/2002 6/30/2002
Nonaccrual loans $ 541 $ 648 $ 261
90 days or more past due & still accruing 1,443 949 1,325
----------- ------------ ------------
Total nonperforming loans 1,984 1,597 1,586
Other real estate 472 1,783 1,900
----------- ------------ ------------
Total nonperforming assets $ 2,456 $ 3,380 $ 3,486
=========== ============ ============
Nonperforming loans as a percent of total loans .77% .68% .71%
Nonperforming assets as a percent of total loans .95% 1.43% 1.56%
Nonperforming loans as a percent of the allowance
for loan losses 68.77% 60.05% 68.33%
Total nonperforming assets decreased $924,000 or down 27% during the six months ended June 30, 2003. The decline
is primarily attributable to the sales of real estate properties acquired in foreclosure.
Due to the challenging economic conditions during 2002 and the first half of 2003, we maintained our
verification of the overall quality of the loan portfolio. We increased the provision for loan loss expense
from $256,000 in the first six months of 2002 to $456,000 in 2003. This represents a 70% increase for the six
month period ended June 30, 2003 when compared to the same period of the prior year as a result of the
change in net charge-offs and nonperforming loans. The provision for loan losses provides for probable
incurred losses inherent in the loan portfolio.
Deposits
Total deposit growth for the first half of 2003 was approximately $16 million or approximately 13.2% on an
annualized basis. We believe the cause of the growth to be the impact of current Federal Reserve Monetary Policy
creating a continued effect of the expansion of liquidity in both the local and national market. We also
experienced moderate deposit growth during 2003 as a result of continued expansion into new and existing markets.
Capital Resources
At June 30, 2003 and December 31, 2002, equity capital totaled $25.6 and $25.1 million. This increase is
primarily the result of the Company's net income for the six months ended June 30, 2003 partially offset by
dividends declared during the six months ended June 30, 2003. Management monitors the capital levels of the
Company and the banks to provide for current and future business opportunities and to meet regulatory guidelines
for "well capitalized" institutions. "Well capitalized" institutions are eligible for reduced FDIC premiums, and
also enjoy other reduced regulatory restrictions.
At June 30, 2003 and December 31, 2002, the Company and the banks exceeded all regulatory minimum capital
requirements and are considered to be "well capitalized."
Liquidity
We anticipate that deposit and loan growth will cause continued variation in our short term federal funds
position. We have a number of additional liquidity sources should the need arise, and we are comfortable with
the Company's liquidity position.
Page 12
Our federal funds sold position remained primarily neutral over the course of the first six months of 2003 with a
June 30, 2003 and December 31, 2002 position of zero. The increased deposit funding was used for loan growth.
The Company generally moves in and out of the federal funds market as liquidity needs vary.
Results of Operations
Net Income
Net income increased 30.8%, diluted earnings per share increased from $1.53 to $2.05 and dividends per share
increased from $.42 to $.45 when comparing the results of the six months ended June 30, 2003 to the same period
in 2002. Net income increased 52.1%, diluted earnings per share increased from $.66 to $1.03 and dividends per
share increased from $.22 to $.23 when comparing the results of the three months ended June 30, 2003 to the same
period in 2002.
The increase in net income for the three and six months ended June 30, 2003 when compared to the same periods of
2002, is primarily the result of increased refinancing of consumer mortgage loans and the respective gain on
selling the loans to the secondary market.
Net Interest Income
The yield on interest earning assets decreased for the six months ended June 30, 2003 as compared to
the same period last year primarily as a result of the general decline in industry rates during the
first half of 2003 and the continued repricing of the Company's interest earning assets. The cost of funds on
interest bearing liabilities decreased for the six months ended June 30, 2003 as compared to the same
period during the prior year primarily as a result of the declining interest rate environment and the continued
repricing of customer deposit accounts and borrowings. Despite the economic challenges that were presented
during the past eighteen months, our net interest margin remains quite strong, and the we continue to take steps
to neutralize some portion of this risk.
The following table shows the year to date daily average balances for interest earning assets and interest
bearing liabilities, interest earned or paid, and the annualized effective rate or yield, for the six month
periods ended June 30, 2003 and 2002.
Page 13
Yield Analysis of Consolidated Average Assets and Liabilities
Dollars in thousands 6/30/2003 6/30/2002
--------- ---------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
Interest earning assets:
Loans (1) $ 244,572 $ 8,786 7.18% $ 216,196 $ 8,699 8.05%
Investment securities (2) (3) 23,641 528 4.47% 30,726 726 4.64%
Federal funds sold and other 4,868 26 1.07% 5,926 42 1.42%
----------- ----------- ----------- -----------
Total int. earning assets 273,081 9,340 6.84% 252,848 9,467 7.49%
Interest bearing liabilities:
Interest bearing demand
deposits $ 59,099 $ 257 .87% $ 55,487 $ 355 1.28%
Savings deposits 31,463 108 .69% 26,784 129 .96%
Time deposits 107,447 1,700 3.16% 105,500 2,348 4.45%
Other borrowings 11,715 302 5.16% 12,613 315 4.99%
----------- ----------- ----------- -----------
Total int. bearing liabilities 209,724 2,367 2.26% 200,384 3,147 3.14%
Net interest income (3) $ 6,973 $ 6,320
=========== ===========
Net spread (3) 4.58% 4.35%
===== =====
Net interest margin (3) 5.11% 5.00%
===== =====
Ratio of interest earning assets to
interest bearing liabilities 1.30 1.26
=========== ===========
(1)
Non-accrual loans and overdrafts are included in the average balances of loans.
(2) Includes Federal Home Loan Bank stock.
(3) Interest income on tax-exempt
securities has not been adjusted to a taxable equivalent basis.
Noninterest Income
For the three and six months ended June 30, 2003, total noninterest income had increased 96.9% and 46.8% as
compared to the same periods in 2002. For the three and six months ended June 30, 2003, noninterest income
from gains on mortgage loan sales increased 422.4% and 247.4% as compared to the same periods in 2002 as a result
of record low national market interest rates. The sales of other real estate owned created the net loss in the
category of other noninterest income during the first two quarters of 2003. Net losses on the disposal of other
real estate owned were $109,000. The increased offset to income from loan servicing fees during 2003 is the
result of continued low interest rates and the related impact of the accelerated amortization of mortgage
servicing rights. We continue to recognize value for the servicing rights of new mortgage originations.
Noninterest Expense
Noninterest expense increased during
the three and six months ended June 30, 2003 when compared to the same periods of 2002,
reflecting the Company’s increased mortgage origination cost because of the increased
volumes as well as continued growth and expansion of the traditional banking business.
Federal Income Tax
The Company’s changes in income
tax expense continue to be relatively consistent with the Company’s change in income
before income tax.
Page 14
Critical Accounting Policies
Certain of the Company’s
accounting policies are important to the portrayal of the Company’s financial
condition, since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain. Estimates
associated with these policies are susceptible to material changes as a result of changes
in facts and circumstances. Facts and circumstances which could effect these judgments
include, but without limitation, changes in interest rates, in the performance of the
economy or in the financial condition of borrows. Management believes that its critical
accounting policies include determining the allowance for loan losses, determining the
fair value of securities and other financial instruments and the valuation of mortgage
servicing rights.
Forward-Looking
Statements
This report includes
“forward-looking statements” as that term is used in the securities laws. All
statements regarding our expected financial position, business and strategies are
forward-looking statements. In addition, the words “anticipates,”
“believes,” “estimates,” “seeks,” “expects,”
“plans,” “intends,” and similar expressions, as they relate to us or
our management, are intended to identify forward-looking statements. The presentation and
discussion of the provision and allowance for loan losses and statements concerning future
profitability or future growth or increases, are examples of inherently forward looking
statements in that they involve judgments and statements of belief as to the outcome of
future events. Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse affect on
our operations and our future prospects include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, the quality or composition of the loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial services in our
market area and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further information concerning us and
our business, including additional factors that could materially affect our financial
results, is included in our filings with the Securities and Exchange Commission.
Our primary market risk exposure is interest rate risk and liquidity risk. All of our transactions are denominated in U.S. dollars with no specific foreign exchange exposure. We have a limited exposure to commodity prices related to agricultural loans. Any impacts that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be insignificant.
Interest rate risk (IRR) is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and stockholder value; however, excessive levels of IRR could pose a significant threat to our earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to our safety and soundness.
Page 15
Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization’s quantitative level of exposure. When assessing the IRR management process, we seek to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistence and continuity. Evaluating the quantitative level of IRR exposure requires us to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality.
We have not experienced a material change in our financial instruments that are sensitive to changes in interest rates since December 31, 2002, which information can be located in the Form 10 document.
| (a) | Evaluation of Disclosure Controls and Procedures. The Corporation's Chief Executive Officer
and Chief Financial Officer, after evaluating the effectiveness of the Corporation's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this Form 10-Q Quarterly Report, have concluded that the
Corporation's disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Corporation would be made known to them by others within
the Corporation, particularly during the period in which this Form 10-Quarterly Report was
being prepared. |
| (b) | Changes in Internal Controls. During the period covered by this report, there have been no changes in the Corporation's internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Corporation's internal control over financial reporting. |
Page 16
There are no material legal proceedings pending against the Company. Our wholly-owned subsidiaries, Bank of Lenawee and Bank of Washtenaw, are involved in ordinary routine litigation incident to their business; however, no such proceedings are expected to result in any material adverse effect on the operations or earnings of the Banks. Neither the Banks nor the Company are involved in any proceedings to which any director, principal officer, affiliate thereof, or person who owns of record or beneficially five percent (5%) or more of the outstanding stock of the Company or the Banks, or any associate of the foregoing, is a party or has a material interest adverse to the Company or the Banks.
No changes in the securities of the Company occurred during the quarter ended June 30, 2003.
There have been no defaults upon senior securities relevant to the requirements of this section during the three months ended June 30, 2003.
The annual meeting of our shareholders was held on April 17, 2003. At that meeting, the following matters were submitted to a vote of the shareholders. There were 822,800 voting shares outstanding on April 18, 2002. 615,281 shares or 75% voted as follows:
|
Directors Nominated for Terms Expiring in 2006: Edward J. Engle, Jr. J. David Stutzman |
For 580,162 583,202 |
Against 34,919 31,879 |
Abstain 200 200 |
|
|
Selection of Auditors for 2003 Crowe, Chizek and Company LLC |
For 592,506 |
Against 19,477 |
Abstain 3,298 |
Consideration of shareholder’s proposal relating to executive compensation as described in the proxy statement.
|
Shareholder's Proposal |
For 146,223 |
Against 456,832 |
Abstain 12,226 |
Page 17
ITEM 5 — OTHER INFORMATION
| None. |
ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Listing of Exhibits (numbered as in Item 601 of Regulation S-K): |
|
| 31.1 | Certificate of the Chief Executive Officer of Pavilion Bancorp, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
| 31.2 | Certificate of the Chief Financial Officer of Pavilion Bancorp, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
| 32.1 | Certificate of the Chief Executive Officer of Pavilion Bancorp, Inc. pursuant to 18 U.S.C.
Section 1350 , as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| 32.2 | Certificate of the Chief Financial Officer of Pavilion Bancorp, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| (b) | Report s on Form 8-K during the quarter ended June 30, 2003: Report on Form 8-K dated April 17, 2003, furnishing information on earnings for the quarter ended March 31, 2003 and dividend announcement. Report on Form 8-K dated April 30, 2003, furnishing report to shareholders on the financial results for the quarter ended March 31, 2003. |
|
Page 18
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Pavilion Bancorp, Inc.
|
|
| Date: August 14, 2003 |
/s/ Douglas L. Kapnick Douglas L. Kapnick Chief Executive Officer |
| Date: August 14, 2003 |
/s/ Loren V. Happel Loren V. Happel Chief Financial Officer |
Page 19
EXHIBIT INDEX
| Exhibit | Description |
| 31.1 | Certificate of the Chief Executive Officer of Pavilion Bancorp, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certificate of the Chief Financial Officer of Pavilion Bancorp, Inc. pursuant to 15 U.S.C.
Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certificate of the Chief Executive Officer of Pavilion Bancorp, Inc. pursuant to 18 U.S.C.
Section 1350 , as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certificate of the Chief Financial Officer of Pavilion Bancorp, Inc. pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Page 20
I, Douglas L. Kapnick, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Pavilion Bancorp, Inc.; |
| 2. | Based on my knowledge, this 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 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 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-15(e) and 15d-15(e)) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting; |
Dated: August 14, 2003
|
/s/ Douglas L. Kapnick
Douglas L. Kapnick Chief Executive Officer |
I, Loren V. Happel, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Pavilion Bancorp, Inc.; |
| 2. | Based on my knowledge, this 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 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 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-15(e) and 15d-15(e)) for the registrant and we have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (c) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting; |
Dated: August 14, 2003
|
/s/ Loren V. Happel
Loren V. Happel Chief Financial Officer |
I, Douglas L. Kapnick, Chief Executive Officer of Pavilion Bancorp, Inc. certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 fairly presents, in all material respects, the financial condition and results of operations of Pavilion Bancorp, Inc.. |
Dated: August 14, 2003
|
/s/ Douglas L. Kapnick
Douglas L. Kapnick Chief Executive Officer |
I, Loren V. Happel, Chief Financial Officer of Pavilion Bancorp, Inc. certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 fairly presents, in all material respects, the financial condition and results of operations of Pavilion Bancorp, Inc. |
Dated: August 14, 2003
|
/s/ Loren V. Happel
Loren V. Happel Chief Financial Officer |